assigning democrats and republicans the congress truly could not fun#t%og@@g very, very well. i know the people over there are

working, you know, long hours. we want you all to know that we, we respect that, we appreciate it, and we think you're handling yourself in a very professional manner. might have some suggestions on how to model things differently -- [laughter] but i just simply want to say i think you're doing a fantastic job, and we appreciate it. let me turn to our fiscal crisis, now, if i might. when president obama took office, america was in the midst of a crisis that shook our financial situation to its core and eclipsed access to credit markets. the administration exploited this crisis to pursue a relentless increase in federal spending in size and reach of the government. heading in this direction has made manners much worse for our fiscal future. last year congress enacted a trillion dollar surplus, stimulus, excuse me. last year congress enacted a trillion dollar stimulus sold with the promise that it would hold unemployment below 8%, and yet the unemployment rate continues to rise and now stands

at the 25-year high of 10%. we learned that much of this stimulus which was neither targeted, timely, nor temporary, in fact, it was just a down payment on government programs. let's turn over to t.a.r.p.. t.a.r.p. was advertised as an emergency plan to heal financial markets, it has now become washington's latest slush fund. cbo's budget and economic outlook paints a startling picture of both the year we have left behind and the year we face and the time over the next decade. in 2009 congress delivered a $1.4 trillion deficit, the largest in our nation's history, and no doubt because of the recession that was made much worse. estimates for the current year, also, are very staggering, $1.35 trillion deficit. and it will, our debt will reach over 60% of gdp this year. under the current policies of our government, by 2020 cbo projects that our debt will soar to nearly 100% of gross domestic product.

adding to that, yearly interest paid to finance this surge in spending will more than triple in nominal terms from $207 be in 2010 to $723 billion in 2020. more troubling than another over $1 trillion deficit is that there is more to come. cbo figures don't include what is likely to come down the pipeline from requests for the need of war funding to health care entitlement to all the other things that are going to happen. i'm encouraged by the news yesterday that the administration is considering a three-year freeze on certain discretionary spending programs. we need to see the details, and this freeze needs to be enforced with a statutory cap if we're going going to hold -- actually going to hold the line on spending. it is time to get serious about wednesdaying washington's in-- ending washington's insable appetite for the spending. although a step in the right direction is not enough to secure our financial future.

as astounding as our current budget shortfalls are, long-term debt projections are profoundly worse. the peterson pew commission warned that government spending driven by the growth in health care costs in an aging population will almost certainly bring the debt to crisis levels during the next few decades. what is once thought as a scenario that would unfold in the distant future has compounded and become a pressing issue that we must face today. we must reform our largest entitlement programs. we used to think we had ten or so years, but because of the financial crisis, because of the spending binge we've engaged in and because of the massive debts and deficits, this problem is here now, not in ten years. we need to do this. i propose a systemic way to reform our programs, my purpose in putting this legislation out there is not simply to say, you know, we have it all figured out, we have got all the ideas,

our purpose is here's a plan to restore our fiscal future, to pay off our debt, to fulfill the mission of health and retirement and security and make our economy grow so people can have good jobs. the purpose is to encourage others to do the same. bring us your plans to solve our entitlement crisis. bring us your ideas to actually pay off our debt. there is a unique legacy in this country that is about to be receiverred, and that -- severed, and that legacy is each generation takes on its challenges so that the next generation is better off. well, as cbo will tell you, as every objective statistic will tell you, we know for a fact we are consigning the next generation to an inferior standard of living. that is a fact. it's irrefutable. i encourage you to challenge that. we've got to act, and we've got to act now to turn this around so that we can give the next generation this american legacy of having a better future, which they will not unless we act. sorry for getting a little

carried away, mr. chairman, but this is a serious time. we appreciate the work of cbo. we need to get to work. thank you. >> i couldn't agree more. before proceeding, i would like to ask unanimous consent that all members be allowed to submit an opening statement for the record at this point. without objection, so ordered. dr. elmendorf, once again we welcome you to the hearing today. you have prefiled your testimony, and we'll make it part of the record so that you can summarize it, but you're the only witness, and unless you want to call some of your colleagues to answer questions, we may put -- you're the only witness today, and you should take as much time as you feel is necessary to thoroughly explain your testimony. and in that connection, i think it would be useful if you'd also walk through some of the graphs you brought with you. thank you very much for coming today, we look forward to your testimony. >> thank you, mr. chairman and congressman ryan, for your kind words about the work that we at

cbo have been doing during the past year. we very much appreciate the support you both have shown for our work during this past year and in many previous years. to the two of you and all members of the committee, i appreciate the invitation to talk with you about cbo's outlook for the budget and the economy. i will speak fairly briefly, and then i will take your questions with assistance from my colleagues behind me. under current law cbo projects that the budget deficit for this year, fiscal year 2010, will be about $1.35 trillion or more than 9% of the country's total output. that deficit would be only slightly smaller than last year's deficit which was the largest as a share of gdp since world war ii. we expect that revenues will grow modestly this year, primarily because we expect a slow pace of economic recovery. we expect that outlays will be about even with last year's level as a decline in federal aid to the financial sector is offset by increases in spending from the stimulus program and

for other purposes. debt held by the public will reach $8.8 trillion by the end of this fiscal year, or 60% of gdp, the largest burden of debt since the early 1950s. looking beyond this fiscal year can, the budget outlook is daunting. again under current law, cbo projects the deficit will drop to about 3% of gdp by 2013 but remain in that neighborhood through 2020. by that point, interest payments alone would cost more than $700 billion per year. moreover, maintaining the policies embodied in current law that underlie these projections will not be easy. it would mean, for example, allowing all of the tax cuts enacted in 2001 and 2003 to expire in 2011 as scheduled and not extending the temporary changes that have kept the alternative minimum tact, or --

tax from affecting more taxpayers. if instead they extend all of the 2001 and 2003 tax cuts, index the amt for inflation and made no other changes to revenue or spend, the deficit in 2020 would be twice the size of the deficit projected under current law. debts held by the public would equal 87% of gdp and be rising rapidly. the baseline projections also assume the annual appropriations will rise only with inflation. if the instead policymakers increased such spending in line with gdp which is about what actually happened during the past 20 years, the deficit in 2020 would be two-thirds again as large as projected under current law. in sum, the outlook for the federal budget is bleak. to be sure, forecasts of economic and budget outcomes are

highly uncertain. actual deficits could be significantly smaller than we project or significantly larger. we believe that our projection balances those risks. one set of factors contributing to the bleak budget outlook are the financial crisis and severe recession along with the policies implemented and response. analysts define the end of a recession as be point as which output begins to expand again. by that definition, the recession appears to have ended in mid 2009. however, payroll which has fallen by more than seven million, has not yet begun to rise again. and the unemployment rate, as you know, finished last year at 10%, twice its level of two years earlier. unfortunately, cbo expects that the pace of economic recovery will be slow in the next few years. household spending will be restrained by weak income growth, lost wealth and constraints on their ability to borrow.

investment spending will be slowed by the large number of vacant homes and offices. in addition, although aggressive action by the federal reserve and the fiscal stimulus package helped moderate the severity of the recession and shorten its duration, the support to the economy from those sources is expected to wane. employment will almost certainly increase this year can, but it will take considerable time for everyone looking for work to find jobs and project that the reemployment rate will not return to its sustainable level of 5% until 2014. thus, more of the pain of unemployment from this downturn lies ahead of us than behind us. the deep recession and protracted recovery mean under current law lower tax revenues and higher outlays for certain benefit programs. cbo estimates that those automatic stabilizers will increase the budget deficit by more than 2% of gdp in both 2010 and 2011. in addition, cbo projects that

last year's fiscal stimulus package will increase the deficit by roughly 2% of gdp this year and by a smaller amount next year. as the economy recovers and the effects of the automatic stabilizers and legislative policies fade away, the budget deficit will shrink relative to gdp. however, as i have noteed, the projected deficit remains large throughout the decade even under current law, and if the current law is changed in some way that more closely matches current policy -- as most people see it -- the amount of government borrowing relative to gdp would be unprecedented in the post-world war ii period. a large and persistent imbalance between federal spending and revenues is apparent in cbo's projections for the next ten years and will be exacerbated in coming decades by the aging of the population and the rising costs of health care. that imbalance stems from policy choices made over many years. as a result of those choices,

u.s. fiscal policy is on an unsustainable path to an extent that it cannot be solved by minor tic thering. the country faces a fundamental disconnect between the services that people expect the government to provide, particularly in the form of benefits for older americans, and the tax revenues that people are prepared to send to the government to finance those services. that disconnect will will have e addressed if the nation is to avoid serious long-term damage to the economy and to the well being of the population. the chairman asked me to, also, specifically refer to some of the charts in the testimony that we submitted. of course, we've written an outlook of almost 200 pages that i'm sure you're taking home and pouring over in your spare time. but we did have several charts in the testimony that i brought today that i think are worth attention. if one looks at summary figure 1, if you have that in front of

you, there's a picture of debt held by the public and net interest. it's a slightly complicated picture. the amounts are expressed as shares, excuse me -- >> [inaudible] >> very good. the solid line is debt held by the public, the picture ranges from 2005 up through the 2009 the left of that vertical line labeled actual, and then the next 11 years of our projection. debt held by the public, which was running about 40% of gdp before the financial crisis and recession, will jump from that 40% at the end of fiscal year 2008 to basically 60% at the end of this fiscal year, 2010. so in two years we will have

last year despite the large debt because interest rates were quite low. but we and essentially all analysts expect interest rates rise considerably as the economy recovers, and the combination of rising debt and rising interest rates will push debt payments up in nominal dollars. we expect them to triple over the next ten years as a share of gdp to roughly double. the next picture we included in my testimony today is figure 2 shows revenues and outlays of

the government. this picture goes back 40 years into the past and then ten years into the future with our projection. you can see that outlays have spiked up clearly in the last couple of years, are now at their highest level relative tod to fall back but to remain well above by that horizontal dashed line. revenues have fall then very sharply -- fallen very sharply, the lowest share of gdp seen in many decades, and are projected to rise again. again, this is under current law which assumes the expiration of the tax cut cans. under that current law, revenues move up above their historical level. however, if all of the tax provisions that are set to expire under current law were allowed to expire, that's 2001 and 2003 tax cuts, that's the extension of the amt and also

the extense of other expiring provisions, then revenues would remain below their historical average. it would be inching up close to it by the end of the ten years. and i think there's a third picture which is the picture of the unemployment rate. oh. picture of the unemployment rate which i'm not sure where that -- ther-- yeah. that picture. you can see the very sharp rise, of course, the last several years, you can see the decline. this picture of the decline looks fairly steep, the line comes down, but, of course, it is now so far above the sustainable level that even at that pace of decline it takes a number of years to come down. and you can see in that sense that more of the bulk of that peak actually lies in front of us than behind us, to the right side of that projected line. and that's the sense in which i think the pain of unemployment going ahead is likely to be

greater notwithstanding the fact that we, again and essentially all over analysts, will expect gdp to the grow. thank you, mr. chairman. i'm happy to take your questions. >> thank you mr. chairman. last week in preparation we had a panel of witnesses most of whom differentiated between the short-term cyclical debt and the long-term structural deficit. one who was particularly outspoken, as you might imagine, was bob greenstein. and he said, in effect, that the short-term deficits were a necessary encumbrance that had to be undertaken in order to respond to the cyclical downturn in the economy. but the real concern was that these were necessary provisions for the most part, and the real concern had to be the long-term structural deficit as opposed to the short-term countercyclical measures we had taken. would you agree with that, generally speaking?

>> mr. chairman, cbo does not recommend fiscal policies in the way bob greenstein and others do, but i think it is a widely held view among analysts that the danger from the budget deficit arises from its persistent large size, not particularly from having large deficit during this downturn. i've said on a number of occasions that fiscal policy poses two central challenges to macroeconomic stability now, a short-run challenge and a long-run challenge. the short-run challenge is that fiscal stimulus will be withdrawn very rapidly over the next few years under current law. as the stimulus package be, as its effects wane, as tax rates increase under current law, as the automatic stabilizers diminish in importance, deficit falls very sharply in the next few years and that is a withdrawal that private demand will have to overcome to continue to move the economy ahead. the other challenge that fiscal policy poses in the long run is

the fact that fiscal stimulus doesn't really ever go away, that the budget remains very much out of balance for many years to come. so i think it is how one resolves that tension is, of course, a matter for you and your colleagues. i think it is a widely-held view that the principle damage comes from there being large periods when the economy is at full employment and when they really are crowding out investment in plants and equipment. >> let me go back to three points i made in my opening statement and ask you to comment on policies we've taken. a year ago at the end of the fourth quarter 2008, the economy was in deep recession. i think we'd all agree. and that month alone the economy shrank by 5.4% beneath the previous quarter. by contrast, the economy in the third quarter of 2009 grew by 2.2%. nothing to cheer over, but that's some movement in the right direction, for sure, a swing of 7.6 percentage points

out of recession into growth in less than a year. secondly, a year ago end of january 2009, the job market registered a loss of 741,000 jobs in the previous quarter averaged about a job loss of about 600,000. also just from one indication of how all this was impacting individual households, a year ago at the end of the fourth quarter retirement accounts had lost 1.8 trillion, nearly $2 trillion over the previous year. retirement accounts had fallen in value from 8 trillion in the first quarter to 6.2 trillion in the fourth quarter, a fall of 1.8 trillion in one year alone. by contrast, looking over the past year, 2009, retirement the savings have risen from 5.9 trillion to 7.7 trillion at the end of the fourth quarter. all of those are dire

developments that have turned into positive be developments over the last year. one factor in this turn around, surely, to what extent i know is debatable, one factor was the recovery act. $787 billion of countercyclical effort by the government, and it is being shown and appears now from the bottom line of the budget because those outlays had to be made in the previous fiscal year and to some extent the current fiscal year, you say looking at the recovery act, i'm quoting from your testimony, it moderated the severity of the recession and shortened it duration. can you quantify that? can you tell us to what extent the recovery act stimulated this growth in gdp and jobs in this recovery and retirement phase? >> so, mr. chairman, i'm happy to offer our estimate of the effects. as you know, it is a difficult business to judge the effects of a particular piece of legislation or the entire federal budget. because of that, we have reported a range of estimates,

of effects. but we do believe and have said this on a number of occasions, including today's testimony, that as you said the stimulus package did moderate the severity and shorten the duration of the downturn. we estimate that the legislation raised real gdp by 1.3% to 3.5% be, somewhere within that range during the second half of 2009 relative to what it would have been without the stimulus. i think the last estimate that we provided of the employment effects was in a report that we issued required by law in november, and this was based on the effects through the third quarter. our estimate through the third quarter was that employment was boosted by between 600,000 and 1.6 million jobs. >> so the recovery can act has had a positive impact. >> that is our judgment, yes, mr. mr. chairman. >> you also warn in your

testimony that the recession probably ended in the middle of last year, the last calendar year. but that you, but you warn that it's likely to be a slow slog from here to full recovery -- to full employment. in fact, i think the date you've targeted for full employment is 2014, some time away. would you comment on why that is? >> i think there are several factors. one is that we expect overall economic growth to be only moderate in the next few years. in the wake of some past deep recessions, the federal reserve has cut interest rates sharply, and there has been pent-up demand for housing and for other consumer durable goods and for business investment that has propelled the economy on a fast upward trajectory. given the nature of this particular downturn and something in common with some past downturns due to financial

cry cease in our country and others is that that pent-up demand is not there in the same way. we have more houses than there is current demand for. so we think that the economy's likely to grow more slowly, and one direct effect of that is a smaller increase in employment. a second factor is that hours worked for people who have jobs has been on a downward trend for decades, but it declined fairly sharply in this recession, and thus we think as firms need more labor to produce product as demand starts to rise, the first thing they will do is start to increase the hours of people who are already employed rather than to employ new people. that will come later. a third factor is recessions often accelerate restructuring in the economy, it pushes companies that were struggling to the brink or over the brink, pushes companies that were doing well, perhaps, into a dangerous territory, and one way that our

economy tends to grow and to create jobs is if people move. they move to other parts of the country. they, that kind of regional migration has been an important feature in the past, but we think it will be harder to accomplish in this recovery because of the problems in the housing sector. though a significant minority, but a significant minority of people be underwater in their homes, owing more on mortgages than the houses are currently worth, we think they'll have more difficulty going to other locations where jobs are more available. we think that will hamper growth a little bit. but the biggest factor, again, is the first one which is just the slow economic growth. we think there'll be slow growth in employment, and that's a pattern we've mentioned. the past four recessions have had fast employment growth. >> despite the growth in the debt, we've not had what you would normally expect in the way

of an increase in debt service, not yet, because of the low rate of interest, historically low rate of interest. but as that rate rises with the resurgence of the economy, the costs of debt service will go up, and you've got a frightening number, frankly, in your testimony namely that today we're spending -- last year we spent $207 billion for debt service, by 2020 that'll be $723 billion, and that, too, is an entitlement. we tend to think about social security and medicare, medicaid as being the entitlements of great concern to us. interest on the national debt is truly obligatory, it has to be paid, it's an entitlement in the strongest sense of the word. our witnesses last week suggested we need some target thes. we don't need to be out there doing ad hoc things, we need some target to shoot at, and they were suggesting we try to

bring the deficit down to 3% of gdp and bring the debt or at least hold it to no more than 6% of gdp. are those reasonable goals? do you think they're too level, too high, too tight, too strict? >> so, again, mr. chairman, it's not our place at cbo to suggest what your goals should be. economists don't have any analytic basis for saying, this is the crucial point in terms of debts or deficits. it is true that as we push in this country to 60%gdp at the end of this year and beyond that over the next few years, we're moving into territory that most developed countries stay out of. we are moving into territory the that is unusual in our historical experience and in the experience of other countries that we think of with solid economic situations. that raises the risk every step that we go. but what precise point you

should stop at is not something that has an analytic basis for answering. it is true that the numbers you suggest have been discussed fairly widely. i think one thing to note is that our baseline projection is for deficits about 3% of gdp. and the interest payments that you point to are assuming that we have deficits of about 3% of gdp. not in the next couple of years, but beyond that for the rest of the ten-year period -- >> but your baseline is not the worst case scenario by be any means. >> no, and as i said in my opening remarks, many members have discussed making changes that would increase deficits relative to our baseline and in particular extending the expiring tax provisions and indexing the alternative minimum tax. so in some ways relative to what many people, i think, would think of as current policy, sort of policies we have in place, the tax rates we have now, the deficit would be much larger

than our official baseline. and to get to 3% from there would require a good deal of policy change. >> thank you very much for your testimony and for the good workz

in particular, congress adopted a budget resolution last spring based on our march 2009 baseline projections. we've used that for legislation since then even though we updated our outlook for the economy and the budget last august, and we as a general matter continue to estimate based on that baseline until there is a new budget resolution. now, it is also true that we in response to requests like yours try to provide a parallel estimate, if you would, based on a more recent baseline, and we do that particularly when we have reason to believe that the change in the baseline is consequential for the estimate and that an estimate based on the earlier baseline might be misleading in some way.

we have not actually updated the health, the details of the health baseline, so the baseline forecast that we released, of course, but the details we need for recalibration of our models to do estimates off this new baseline is a project itself of several weeks 'duration that we have not had time to undertake. so maybe after doing that we could then proceed to try to estimate some particular bill, and i'm not sure at that point which health bill you would find most interesting. >> i'm not sure exactly what the timeline of the health bill is. i don't even know if the majority knows. you just rescored the stimulus which is an act of law, i understand, but that went up to 862 billion. so you're telling us several weeks meaning we probably won't see a score using the new baseline until after this is done, if this is done within less than several weeks? >> so that's right. again, it takes us several weeks

to recalibrate the models, and these are the same people, i'm afraid -- >> i understand. let me, yeah, we've got a lot coming down the pike. let me ask you this, it's cbo's normal practice to provide estimates of authorization of appropriations. you haven't been able to provide those yet. i think mr. lewis has requested this information, particularly in view of, you know, a freeze when are we going to get the estimates of the appropriations authorized and required in the health care bill? that, i think, is probably easier to achieve before we vote on this. what are the appropriations we're talking about here? can you get that estimate? >> so that is, so we received that request, and we talked with chairman stack, ranking member stack. in our estimate of the health bills, we've included a section that offers a range of what we believe to be the appropriations necessary to finance particular parts of the government that

would be responsible for running the insurance exchanges or making changes in medicare and so son, those ranges so on. ranges from 5-10 billion in some categories. to do a complete estimate of the appropriations that might be required would be, doesn't require doing a new baseline, so it avoids that complexity, but it is itself very complicated. there are a lot of provisions, a couple thousand pages of legislation. that would also take us several weeks. it's a completely legitimate -- >> right. this is the creation of a new -- we haven't created a program like this in a generation, so it would, i think, be helpful if we know the cost of all the government that's being created here. and of all things that i would think would be easier to do is just the discretionary spending. how many new people we have to hire, how many new agencies, what's all this new government which is the biggest in a generation going to cost? that estimate, i would like to think, you could probably get,

hopefully, before we vote on it. >> would the gentleman yield? >> yeah. >> there's a question about whether or not in parts b and c of the house bill is a lot of money that is authorized, but not appropriated. it is subject to appropriation. so it's not an indication what's going to be spent, it's an indication of ideally what we would spend to serve a particular purpose if the funds were available. but we don't want to confuse the number with the -- >> right. >> which are more or less an entitlement. >> yes, mr. chairman. i was going to say, congressman, that we tried in our letter to give, again, these ranges. not very precise, but ranges of the parts that would be critical to implementing the legislation, the things without the mandatory spending that is correct ready occur. >> right. i want to be, i want to be mindful of time. okay. so we're at 60% of gdp now, we're heading north, you know, if you use the alternate fiscal

scenario, i think we're at 85% at the end of the window which i think is a more realistic measure of what's going to happen. we get about half our debt from foreigners. is there a tipping point in your mind using your, you know, your background act dem canically whereby foreign investors start losing confidence in our ability to turn this thing around? i mean, greece is having a problem floating their bonds because of their debt to gdp ratios. where in your mind do we start hitting that nexus, that tipping point? and then just one quick final question i'll have for your. you. >> so, so i don't know. i mean, of all the things economists have trouble predicting, which is almost everything, swings of investor confidence must be pretty high on that list. it is true we sell almost half of our debt as is held now from overseas, that's a large

increase from a decade ago. we've benefited during this financial crisis for all the problems here in this country by investors here and around the world thinking of u.s. treasury securities -- >> yeah, but we were in the high 30s at the time. on our debt to gdp ratio. >> yes, that's right. oh, absolutely. so at the moment during that crisis money came in, interest rates have been quite low, as we said. wide spread view among analysts that that is ending now, that as investors become more willing to take risks again in other investments and as they focus more on the trajectory of u.s. fiscal policy that there will be much less willingness to buy treasury security securities at current low interest rates. but -- so i think analysts widely agree there is an increasing risk over time of some flight from treasury securities or flight from dollar assets. but how large that risk is or what would trigger it or when it would be triggered is just beyond -- >> i think the operative word is

trajectory. if it shows we don't have our fiscal situation under control, it gets much worse, investors flee. if we get this under control by actually reforming government entitlements, the budget, then the trajectory over the long run's going in the right direction, and that would restore confidence. i think that kind of answers itself. okay, one last thing. lots of economists are telling us 2011 is going to be a slowdown year. i see that in a lot of blue chip and private forecasts. i notice that you have it in yours with this new baseline that you're saying we're going to have 2.2% growth this year, and then it's going to slow down next year. why is that, and to what extent is the expiration of the '01 and '03 tax cuts which occur in 2011 a contributing factor to the slowdown in our economy that you're projecting for 2011? >> so the numbers i should say that i focus on most are our fourth quarter to fourth quarter changes. on that basis we expect real gdp

to grow 2.1% this year and 2.4% next year. some pickup, but less than would be the case -- you may be looking at a yearover f over year -- year over year average? >> yeah. [inaudible] >> in term thes of the reason i prefer this is because the tax cuts will expire, and we think that on a calendar date, we think that will then depress economic growth in the first part of 2011. and relative would otherwise occur. >> how much do you shave off growth because of the expiring tax cuts? >> in a very rough sense if we were to take those out of our projection, we would raise gdp growth by about one and a half prosecutor. >> one and a half percent? >> cumulatively. >> if the tax cuts were extended on a permanent basis, we've done a different sort of calculation in the paper we released a week

or two ago about employment and jobs, we looked at a set of temporary policies, temporary extension has less cumulative effect on growth. >> right. i plies if it's permanently extended. >> now, these are for 2010 and 2011. over a longer term the extra borrowing of several trillion that would ensue from that change in policy would tend to damp growth over the back half of the ten-year window and beyond. >> i've got some technical questions i want to ask you about the freeze proposal, questions dealing with unobligated balances and things like that, can i just, in the interest of time the, give you some stuff in writing that you can work back with us? >> even better. >> all right. >> thank you, congressman. >> i yield. >> ms. schwartz. >> thank you, mr. chairman, and thank you for the hearing, and i was going to say welcome to

dr. elmendorf, but -- and you are welcome, but it is, i think, both good news and bad news. i appreciate your comments on where we stand right now and some of the actions that we've taken in the last year that have helped stabilize the financial situation and is beginning to turn the economy around. that is good news to the american people, although as all of us know until we start to see new jobs, expansion of the economy here at home they are really just numbers to people, and we can be more hopeful that we are beginning to regrow this economy, and that is good news. but it is daunting. the numbers that you present in terms of the deficit. again, i think some of this is good news on our part because we're taking it seriously, and i want to just ask a couple questions about, one, you know, how we got here. i think that we, we don't want to go over a lot of history, but i think it does help for us to understand what we inherited in the situation and how we got

here. you did -- and we know that president obama inherited a $1.3 trillion deficit this year. it's just about that now, even with the additional recovery act, the additional 700, $800 billion. that's good news, right? that it's stable at least? didn't go up, there was some anticipation -- >> [inaudible] >> again, i'm not looking to paint a rosy picture here, i want to say we're trying to keep things somewhat stable. but you mentioned quickly that the revenues were down. i mean, when you sort of say that, it makes it sound like how did that hand? that we didn't know that? we actually know why revenues were down in the last 8-10 years, that's because there were dramatic tax cuts for the wealthiest americans, is that right? >> certainly there were very substantial tax cuts, and that is a feature that is holding down revenues relative to what they would have been other side, absolutely. >> right. and if we do maintain the tax

cuts for americans below $200,000 family income but not for the wealthiest americans, would that help in the, to be able to bring some more revenue into the government over the next number of years? >> again, our current law baseline -- >> i understand -- >> tax cuts expire, relative to all of them expiring extending, well, extending all of them costs much more, makes the deficit much worse, as i said. extending only some of them will have a partial effect. >> right. >> i think the lion's share of the money from extend thing those expiring tax provisions would go to people below the income threshold that you suggest, although certainly a significant amount would go to people above those thresholds. >> we, obviously, are looking at that. the other piece of what got us here partly, also, is the extension, the biggest extension under medicare since its beginnings which was part d.

which was the prescription drug benefit. i wasn't here at the time, but certainly as democrats we believe you should extend prescription drug benefits to seniors, but we also believe it should be paid for. so the notion of how we budget this new health care bill is really very important going forward, and appreciate your comments on how we are. you have to look very clearly at the cost to the health care bill, but you in the analysis you've already done in both the house bill and the senate bill and, again, you can't predict exactly what it's going to look like, but in both cases you anticipated a reduction in the deficit if we enact health care reform, comprehensive health care reform. and it may not be going as far as you might like or might expect and, again, you don't create policy, i understand, but in we terms of bringing down the deficit, it actually is a very clear reduction of over $100 billion in your estimates. so would you say that enacting health care reform would have a

positive effect on the deficit? >> yes, congresswoman. we estimated both the bill that passed the house and the bill that passed the senate would reduce deficits over the next ten years by $130 some billion (!a(aey unfolded as written and

paygo which, of course, we have pushed actively in the house, and i assume you also think those are, again, you have to be careful about policy, but could you comment or might want to on how important it is for us to take it seriously by us enacting paygo in both the senate and house and commission? >> i think analysts believe, including those at cbo, that the paygo rules and discretionary spending caps in the 1990s did help to restrain policy arcs that might -- actions that might otherwise have worsened the budget deficit. and they did so particularly during the period when attention of policymakers in both parties was focused on the deficit problem. at the end of the decade as the deficit problem was temporarily going away, then those restraints were widely ignored. but when attention was focused

on that problem, those restraints helped. of course, all they can do is prevent or discourage policy action that would make the deficit worse, they don't create actions to make the deficit better. those actions require difficult decisions, and commission doesn't implement the need for those difficult decisions, it may provide a mechanism for encouraging those decisions to be made. don't have all the evidence about that and, as you say, cbo doesn't have a position on whether that should be pursued or not. >> we are taking it seriously. thank you. >> thank you, congresswoman. >> mr. hander is ring. >> thank you, mr. chairman. first, with all due respect to our vice chairman, i'm find thing it challenging to find any context by which i can call a $1.3 trillion deficit good news. having said that, dr. elmendorf, i thought i awoke to good news yesterday when i read "the

washington post," obama to reduce spending, obama to seek spending freeze to trim the deficits. frankly, i was overwhelmed by the headlines, and then i read the article, and i became underwhelmed. first, do you have an understanding of have you studied the president's proposal? >> i only know what i read in the newspapers, congressman. as you know, the president will release a budget next week, and then we will complete and report -- >> well, dr. elmendorf, let's see if we're reading the same newspapers. the newspapers i read say the president's proposal will exempt 83% of the budget. do the newspapers you read say the same thing? >> so i didn't take notes, congressman. i am loathe to do the instant the analysis of things you're telling me i should remember from reading yesterday's newspaper. what is true, as you know, most spend anything the government is now in these mandatory programs is smaller and one excepts the

defense and security-related pieces -- >> when you have the details of the proposal, i would appreciate your analysis. if you may or may not recall this from the articles. i understand this is not an immediate freeze, something that could take place today, a decision could take place today, but it is a freeze promised to take place in the future for fy-2011. is that your understanding from your reading of the proposal? >> yes, that's my understanding. >> okay. .. >> still has us mired in

double-digit unemployment, and so if you will, indulge me, but, just a little back of the envelope calculation, isn't the president in some way saying, okay, after increasing spending, ten percent one year, 12% the next year, i'm going to freeze it for the next 3, over a five-year budget window... so isn't he really saying, my idea of fiscal responsibility is, i'm going to propose 5% spending growth, a year, in these accounts, when i actually wanted to spend double-digit? is that a fair assessment? >> i cannot speak to the details of the proposal until we have numbers to analyze. like your 83 and 17, may well be right but we cannot do the calculation... >> let me try another set of numbers on you.

we have the president's ten-year spending plan that he submitted last year. starts out almost 3-6 trillion and fy-2010 it ends up in 2019 at 5.2 trillion. now, as i understand the plan, he is proposing a $250 billion savings according to what i understand from the white house. i assume, don't know, that the president will submit another ten-year budget plan. if you take 250 billion savings, over a ten-year period, again using his last year's budget, i don't know what this year's budget but if we apply his proposed so-called freeze, to his last year's budget, what it appears to me is, it is a proposal to raise federal spending 44.3%, as opposed to 45%. again, we don't have his numbers. but, do you at least recall that

the spending trajectory was proposed to go from 3.6 to 5.2 trillion. >> i'm not trying to be difficult. i don't remember the specifics of that calculation but, if -- your points is that, their $250 billion estimate is certainly a small share of the deficits we project under the baseline, which are a good deal smaller than the deficits we projected for the president's budget last year. >> would that qualify as u, i believe, in your testimony, quote-unquote, minor tinkering? >> i think it is a small step. and i doubt there is a single step that can accomplish the deficit reduction that may be -- >> i see my time -- i certainly have high hopes for tonight but i fear the president's plan is a lot more about trying to impact newspaper headlines and not budget baselines and yield back the balance of my time.

>> we'll report back tus with the full analysis of the president's badge when we have the details we need for that. >> thank you, mr. chairman and thank you, dr. elmendorf, to be clear on the last line of questioning during the 8 years the republicans were in power did they enact a freeze on any kind of spending in any one of the 8 years? >> not that i'm aware of. >> not that i'm aware of, either but i think it is appropriate they scrutinize the president's recommendation, but, it needs to be scrutinized against real world history. one of my concerns is that as congress moves forward, to try to encourage job growth, that we may have the effect of producing few jobs and great deficits. and i think that is a potential problem with both -- some of the ideas advanced by democrats and, certainly, the principal idea advanced by republicans to encourage job growth.

you pointed out, i believe, that while the spending was high, relative to gross domestic product, that we have the lowest revenues i believe you said, as a percentage of domestic product of output that we have had coming into the federal government in decades? >> yes. >> and i think the problem is, that most of the questions you have received this morning, doctor, only address half the budget. they focus on the direct spending but ignore the growth in tax end expenditures and the use of the use of the tax code sometimes to advance policies and it may be similar to the objectives, some worthy, some not so worthy that occur through direct spending and in terms of our long term national debt, and all of the negative aspects associated with it with foreign bars and reduced standards of living, in terms of the national debt alone, it doesn't really make any difference whether the

debt is affected by tax expenditures or direct expenditures, they have the same effect on the debt, do they not. >> yes, that's correct. >> and as we look at some ideas that were considered last year bet me go to the democrats first. you have provided us an excellent analysis, this month, in the policies for increasing economic growth, cbo put out, one of the politically popular ideas was what is called bonus depreciation. and i believe your analysis is that if we use the tax code to do that, that for every dollar that we drain from the treasury we'll get back 20 cents to up to maybe the dollar itself. is that right? >> yes, congressman, i think that's correct. >> not really necessarily the best bang for the buck, to go that approach, though it may be politically popular, and, then, last year when we considered the stimulus, one of the popular ideas then was what is called

"lost carry back" and your testimony last january was the effect of this provision on business spending would probably be small. we limited it then to small businesses. but, then, the only way apparently we could get enacted an extension of unemployment and cobra benefits in december was to tell the treasury to write checks for 33 billion dollars this year to businesses, and what's called lost carry back and one of those was is a bond insurer that made bad bets on subprime mortgages and it got about a billion by itself. let me ask you, for the businesses, of various types got those, but, since a defunct business that didn't have a single employee could get lost carry back and a check written by the treasury, if the treasury writes a check to a company that has no employees, does that contribute any more than zero to growth and output? >> doesn't contribute much, congressman. i mean, there is a longstanding

view in the -- not encouraging the tax changes for businesses, that encourage types of behavior, is much more effective than simply changing cash flow. >> let me move in my final seconds to the principal republican idea which this is solution to all of our problems is to extend the bush tax cuts which added so much to our moving from surplus to debt shortly after the bush administration took over. in the final two pages of your report, you indicate that extending for one year the -- all of the bush tax cuts and the amt patch for two years, that that will get us, in output, about ten cents to 40 cents for every dollar that it cost the treasury. isn't that right on page 25? >> that's right, congressman. >> and if we did, since the republicans don't want to do that they want to do it permanently and the final sentence of your report, is that if there were a permanent extension of all of those tax

cuts, we could get much less than the ten to 40 cents per dollar we'd get for doing it for one year, is that right. >> yes, that's right, congressman. >> and that would cost us to do that about another $5 trillion, wouldn't it? >> i think extending -- i think $4.5 trillion is the number i have in my head, yes. >> thank you so much. >> thank you, mr. chairman. and thank you, dr. elmendorf, for your i think accurate and rational and sobering report. in the report you youused the t unsustainable, a number of people use that in terms of the budget deficit track and the term i've used myself. and i assume that is in reference to the cbo baseline which we admit the chairman admitted is actually taking into account political realities probably one of the more optimistic scenarios for the budget deficit going forward. i'm not sure that there is a

complete understanding of the consequences of inaction here in this town. we use the term unsustainable. can you be a little more specific? and describe to us what that -- what happens? we do nothing. we now look at deficits of $500 billion to a trillion-and-a-half dollars as far as the eye can see. what happens? >> i think the particular thing that is unsustainable is to have federal debt constantly rising as a share of gdp, because that requires a larger, ever larger share of investors' portfolios to be occupied by treasury securities and at some point they will refuse to hold them or will insist on much higher interest rates to do so. the thing that is particularly unsustainable, is expecting investors will constantly pile more and more of their portfolios, investors here and abroad and -- into securities

and what can go wrong is interest rates can spike up when there is a crisis of confidence, and there is sentiment about buying thez those securities changes and before you hit the crisis @@!rr

action. >> and i think... i wish it were not true, but i sense that that will not happen until people fully understand that very, very bad thing and how very, very bad it is. >> again -- >> and i know you don't like to alarm people but frankly i think we have to alarm people. so... >> i think we have given the -- an accurate, sobering view and again we are not trying to overly drama ties and not trying to sugar-coat, we are presenting the facts for you and for the american people and it is up to you all to make whatever decisions you choose to make. >> couple more questions if i can in the time i've got. if you said that -- all right. we'll let spending grow with

gdp, stay where it is with gdp and balance the budget on tax increases, entirely, do you have any sense and throw the health care bill in there as a tax increase as well. do you have any sense for what kind of tax increases that would require? in terms of -- >> i can give you one illustrative case. if you look at the budget in 2020, if your goal were to balance the budget in 2020 our baseline projections, a deficit of $700 billion and if you extended the 2001, 2003 tax cuts and index the amt it would be twice that size, as i said, $1.4 trillion. so by comparison, individual income tax revenues in our baseline before you take accounts of the fact the extra cut, are $2.5 trillion, so, if one wanted to narrow a gap of 1.4 trillion dollars by increasing a category, baseline size is $2.4 trillion, that

requires a very substantial increases. and so it is very difficult with those numbers -- can i say also, the number is quite large, doing all of those changes on the spending side. the -- the equivalentsly radical changes on the -- >> i understand that. but i think the point is, if we have -- if you keep spending where it is as a percent of gdp, forget the health care bill, without increasing it potentially it is a 50, 60% increase in every, single federal tax on e every, single human being in this country? >> it would take, i haven't done the percentage calculations, i have done it on some occasions, but it would take a very substantial increase in tax rates. >> thank you. >> thank you, mr. chairman around thank you, dr. elmendorf. this has a very important hearing and i -- if i could follow up on the remarks of ms. schwartz, i think it is important that we all understand how we got into this mess to begin with.

and when i hear my republican friends talk about the importance of trying to rein in spending i would remind them that under the clinton administration, total spending grew at an average annual rate of 3.5%, under the bush administration it grew at an average annual rate of 8.4%. fact is that president obama inherited a mess of an economy, as a result of what i believe are fiscally irresponsible policies, of the previous administration. and, there is no question, that we need to take some strong and bold action, and i will say also, that for all the whining about the reinvestment and recovery act, i can tell you that, from my experience, in massachusetts, that teachers' jobs have been saved, police officers' jobs have been saved, firefighters' jobs have been saved, there is more jobs created in the construction industry and some of the high-tech industries, so we have seen the benefit. has it created as many jobs as i would have liked to have seen?

no. but without it i think we'd be in a much bigger mess than now. so i find it ironic that the same people who drove this economy into a ditch are now complaining about the size of the tow truck, the fact of the matter is, you know, we are in a mess, and some tough measures have to be taken. i want to praise the president, for his announcement in the newspaper. trying to figure out a way to deal with the deficit. and with the debt. so that it's not thrust on the backs of our kids and our grand kids. but, one thing i worry about, is what we're spending on defense, but, specifically, war costs. i mean, we have been fighting wars since 2001. and, they have been expensive. and we have been paying for these wars, funding these wars through emergency supplemental appropriations where there are no offsets. i mean, hundreds of billions of

dollars have been spent but not offset. and, you know, no matter what you think about the war in afghanistan the president is making a mistake by trying to increase troops in afghanistan and we are told there will be another emergency supplemental, 33, $35 billion, and it goes on and on and on... and i think this notion of paying for wars with emergency supplementals are not offsetting, i think is the wrong way to do it but i think it has a devastating impact on our deficits and debt and i appreciate your comments on, you know -- that subject and i'm afraid the wars will bankrupt us. and i appreciates anything you have to add to that. >> well, the point you made earlier about the stimulus package, congressman we agree relative to what would have occurred without the package, there is more gdp and more employment. >> which is a good thing. >> even i'm allowed to say that

is a good thing, yes. on the cost of the wars, again that is a policy choice. we, to date, congress has appropriated $1.1 trillion for fighting in afghanistan and iraq and related activities. >> do you know how much of that was offset, how much did we pay for or all on the credit card. >> well, there's no specific linkage of particular spending decisions and revenue-raising decision and it's true the deficits over that period well exceeded $1.1 trillion. >> i guess my point is if you fight the wars you ought to pay for them. because there are impacts that -- impacts negatively on our deficits and our debts, and the notion we can fight these wars and not even have to talk about how we pay for them i think is a bad way to do business. >> again, that is really a policy choice, and i think the analytic point many economists would make is that if one were undertaking a lasting stream of

spending, without paying for that, there is a lasting stream of deficits which is very damaging. unusual spikes of spending, there is a logic to not bumping up tax rates and bumping them down again -- >> these wars have gone on for quite a long time and will go on for a lot longer and the idea that this is a short-term expenditure -- >> certainly has not been short-term. >> the point i'm trying to make is when you d these things and don't pay for them, you are adding to the -- our debt. and we are talking about trying to control deficit spending and clearly, this issue should be on the table because we have been there since 2001 and we'll probably be there a lot longer than anybody wants to admit. we need to deal with the issue up dpro up front, thank you. >> thank you. >> thank you, congress manage. >> thank you, mr. chairman. director, thanks for being with us today. in retrospect i represent the

largest agriculture and manufacturing district in the state of ohio. our employment numbers came out for the state just the other day and we are not going down, we are going up, we're up to 10.9% statewide. my district is even worse because of the manufacturing we have got. four of my 16 counties now are at 14%. so, when you talk about, you know, a slow growth in job recovery, i can see it. because, every week, that i'm home i try to get out, across my district and my manufacturers are hanging on by their fingernails now and always turn to us and ask what we'll be doing for them and i cannot tell them and it is tough, because when you talk about this plants, we will not see the recovery coming quickly and a lot of these plants are down to 32 hours to try to save their brother and sister next to them on each machine. they've said, you know what? what do we do when they cut down to 32 hours and a lot of them

and you have plant managers cleaning bathrooms and the outside contractors no longer are working at these plants and you have more unemployment. but, you know, when i look at your testimony today, and it is sobering, you know, the question when you look back, or look out to 2020 and look at this massive amount of interest on the debt, of $723 billion, quick math, $2 billion per day, and when you look into your definition of, is that sustainable, for this country to be able to $2 billion a day, in interest on that debt? >> we are a large and rich country. we can get away with a lot. for a while. what the -- at what point we can no longer gets away with it as i've said is difficult to judge analytically. >> well, in going along, i tell my kids this all the time, i'm not that old but started

practicing law in 1981. and when i started practicing law, of course, we were looking at 21.5% interest rates in this country and what was going on. and we were writing a lot of land contracts because people couldn't even go to the bank and get a loan. there wasn't any money to loan and looking at the massive amount of interest that will have to be paid by the federal government, are we looking at what we'll be stared at in the late '70s and early '80s, a lot of the businesses plan for the future and when you talk of jobs not being created, there is no way i'll buy the new machine or add more employees, because i'm looking down the road now, at the federal government, will be spending and how in the name of sense we'll go out and borrow money and now i have companies that cannot get any money now, and actually have no debt. and can't get a loan from a bank. >> as you know, interest rates were particularly elevated in the '80s because inflation was high and so, lenders demand -- want at least as much money back

in real terms as they gave out and want real return on top of that and the nominal reported interest rates were high, because inflation was high. we project that interest rates on the debt will -- government debt and other interest rates on the economy will rise over the next decade, not to anything like the levels in place then. the projection is uncertain but we think it blends the risks. -- balances the risks. so, the burden is growing of making the interest payments but is not impossible, it is just a matter of -- it is in this case analogies to individuals or families actually work pretty well, if you borrow a lot now, and when you payou pay it back it squeezes what you can do later on. as the economy recovers and the financial system strengthens, business as you are talk about should be more able to get credit. small businesses in particular, are having to -- are getting credit now and this is one of

the things we describe in our outlook on economic growth the next few years, but, the healing of the financial system is underway. there has been tremendous improvement over the past year. it's not -- has not yet affected a lot of small businesses but our expectation and that of e many analysts is it will over the next few years. >> and i hope, too, because the thing is, we try to give hope to the folks out there, that, you know, are right on the bubble right now. hopefully they'll be in business in six months. and just briefly, has already been toughed on by the chairman and mr. ryan. i look at these numbers every month, about the amount of foreign holdings out there, or debt and we have gone to $561 billion over the last year, alone and watching it go up, we have almost 3.6 trillion dollars out there owned by someplace outside of this u.s. that is pretty sobering. as the trend goes on, it is a

big question. when are -- one of these other countries will say we will not just borrow the debt and it willful back on the american taxpayer and -- fall back on the american taxpayer and the consumers and businesses and i worry about when the bubble might break we'll see folks finding out there is not -- where will they borrow this money, the federal government has to up the interest rates and we'll be staring at 1981, 1982 again and that is my fear. thank you, i yield back into thank you. >> ms. saunders. >> thank you, mr. chairman and thank you, dr. elmendorf, it is a very sobering testimony we are hearing today but also to look back at a year ago, when we were hearing yet again a very sobering story, from virtually every economist who recommended that the federal government had to act, the debate i felt was more, largely around what the size of the recovery package looked like and what the composition should be, and as a new member to congress i really took a lesson from a city i represent, the city of lowell,

massachusetts, during -- when the industrial revolution began and the textile industry began to move south it had a dramatic impact on the economy of the community, and, government failed to act. and because government failed to act, it took decadesh@l@ñ@ñr

propose a three-year freeze on nondefense discretionary spending and i, like my colleagues, am pleased that he is taking the question of deficit control seriously, and i recognize that we're going to have to make some very painful choices that include spending cuts, to our priorities. but, everything has to be on the table, since nondefense spending is the smallest piece of the spending pie. even if we were to cut nondefense discretionary spending down to zero, we would still face a deficit in the hundreds of billions of dollars. would you agree? >> yes. that's right. >> nondefense spending is also the primary way the government fulfills its responsibilities to

the middle class. nondefense discretionary spending is really just jargon for public schools open to all, affordable college education, save roads and bridges, poison and toxic-free food and toys and so on and as we have this very important debate, i think we in congress will be sure to protect the middle class understanding we do have to address nondiscretionary spending as well as all other forms of spending. but i have another question, that really has to do with the commission: in light of the senate's rejection of the commission yesterday, do you think we're going to see a negative reaction from the markets? >> i would rather not predict financial market reactions. i think among other things, markets tend to react fairly quickly and i think yesterday's -- the set of events over the last day or two, have not been entirely unexpected and some was built in all ready and some has already occurred and it is

difficult to predict. if i could go back to your previous point about discretionary spending i think you are absolutely correct the category of spending that people often object to in general terms but when it comes to specific aspects of it, there often are strong support for pieces of -- and in addition to the ones you mentioned is the category that funds health research and veterans benefits, and the court system, national parks, and specific elements that i think many people believe are an important part of what the government should be doing. and that is why in fact over time, it has proven difficult to reduce that substantially as share of gdp. because in the end, all of the general objections, there are a lot of specific things people want the government to do and that is why the choices that you face are difficult. >> but i agree we have to put everything on the table and be

very -- you know, very careful about how we move forward and yet addressing the long term challenge we face, because it is obviously, as you have said, unsustainable. >> thank you, congresswoman. >> mr. garrett. i have you next. who is next? >> and... thank you, director. for being here today, and, particularly, i also wanted to thank you for -- you and your office, for the work you have done, what i think is this is accurate account for accounting for the gses. government sponsored enterprises. in the latest long-term budget outlook. i'll spend a moment here, first, before i ask you a question, to lay out the history of how they came about and i think probably how you came to that conclusions. it was back in july of 2008 congress passed and the president signed the housing an

economic recovery act of 2008. also known as paulson's bazooka. this legislation gave the treasury secretary the power to buy an unlimited amount of securities, from fannie mae and freddie mac, if the treasury secretary determined a couple things, that such actions are necessary, a, to provide stability, to the financial markets and b, to prevent disruption in this availability of mortgage finance and, c, protect the taxpayer. ultimately, they allowed the government to effectively take control of those companies, if it deemed their losses to be a systemic risk to the u.s. financial system. then, in september, 2008, when the housing market continued to decline, secretary paulson, fired the bazooka and the federal housing finance agency placed fannie mae and freddie mac into a government conservatorship and then, beginning of last year, 2009, cbo concluded fannie mae and freddie mac should now be included -- this is the important point, they should now be included in the federal budget. and accord to a report, you

arrive at the conclusion after considering the following questions, who owns the agency and who supplies the capital, and, who selects the managers, and, who has control over the agency's programs and budget. and, ultimately, cbo, concluded this answer to those question, was... well, the federal government and each one of those. and since then, the treasury continued to purchase preferred shares in the gses, the means to provide them with enough capital to cover their losses. initially, congress put up $200 billion, as one -- 100 billion for each entity and last year the treasury raised the potential commitment to 400 billion and of course, on christmas eve lifted the cap altogether and now it is basically, unlimited. in the latest report, fannie mae said we expect for the foreseeable future the earnings of the company, if any will not be efficient to pay the dividends on the senior preferred stock. as a result, future dividend payments actually will be effectively refunded from the equity drawn from the treasury. which means -- seems to me is the treasury pours money in and

they take the treasuries and send their own money back to us again as dividends. director, your counterparts, however at the office of management and budget, omb and treasury, somehow disagree with you. and, your conclusions about fannie and feel the cost to the taxpayers equals the kots of the actual cash infusions pumped into the gses and do not as you do account for risk to the taxpayer. ness of the losses the gse will continue to sustain in the coming years and the "wall street journal" article, said the administration has no plans to alter how it accounts for fannie mae and freddie mac and the federal budget and i don't anticipate any changes, assistant treasury secretary -- said michael bar and they'll have the same appearance they had before the budget books. and my first question is, is there any possible interpretation of the current relationship between the federal government and the gses that would allow to you change your opinion or for that matter, any reasonable person to concluded that they should not accurately accounted for in our budget? :

>> that was a reasonable conclusion to place them on budget is basically what you're saying? >> absolutely. if the relationship changes over time do we will revisit that conclusion. >> but worry on right now, is

contrary? >> that's correct. >> thank you. this is not an inconsequential decision then as to whether it's on budget or not? >> well, it mattered most for the budget numbers last year, because by our assessment that taking on board, absorbing those companies put the federal government on the hook for the risk that companies were. the biggest difference was actually for last year. looking ahead this year and beyond, the cash infusions and our version of the subsidy cause our tagliatelle. as it turns out at least at the moment, the numerical differences are not that large. by it is potentially important beyond the baseline projections and how one would estimate the effects of very changes in which any every do or that change with the government. we think it's important to continue to score them on the basis we have established.

>> and i guess the last point, in light of your consideration of how it is done in the assumptions you make as time goes along, if things don't turn around over there, your numbers could go up if you are on budget under your interpretation could go up dramatically in light of the literally trillions of dollars that is exposed, correct? >> yes, that is correct. >> thank you, mr. chairman. dr. elmendorf, thank you for being here. appreciate it very much. i'm glad that you've had to say this morning i'm glad to hear that some economic indicators indicate we are beginning to turn around in the economy. however, we all know that job market is critical and it appears those lagging indicators are really hurting. let me tell you what they are is so important to me. especially my state of north coletta. we just reached an all time high of 11-point to 4 percent in the month of december. there are indications we haven't topped out. i've introduced a bill, the

hiring after 2010 to help businesses attacked credit for job creation. to help those folks on the fence. sort of push them off. in your opinion, what do you think the unemployment rate remains high, even in the face of economic growth, you have touched on this some? that's ugly, how do cbo improvement on this front, how do we get there? finally, we intend to the highly act and other bills out there similar, to increase job creation in the short-term, what kind of impact would that have on a projection number that you have over the long-term? >> congressman, i'm not examining your particular bill but in general, we did analyze alternative ways of spurring economic growth and job creation. and we think that one of the more effective ways for policies that are targeted at basically give money to firms in response to increases in the payroll. >> and that's what this one

does. >> that works in two ways really. part of that is just that putting money into the spending stream, giving more money to workers or to firms will incur a certain amount of excess spending. there is an incentive effect. if the program is structured right, and there are a lot of complexities as you know with a, it can create an incentive effect addition. at a policy like that were implemented, we would incorporate -- were tried as make the aspects of it. as was being considered, and we would certainly incorporate its effects in our next round of baseline projections. but i can't say offhand how much difference that makes. >> thank you. i understand it. the larger question on the economy, i agree we need to have commonsense in cooperation to fix the problem. and i think mr. campbell were here, because he said willie are is unsustainable. and that's true. it also is unsustainable last

year and the year before that. and the year before that, and in the years the previous administration was in charge. >> yes, that's right. >> and things have added to the problem we're in. here's some of them. because in 2000, i came here early enough to work on a cooperative way in to send us to the past. policies were put in place shortly thereafter in the first bush years that made the problem even worse because we were told then that we could pay off all our debt. where we are today. but there were those who said, that was not important as a matter for, vice president cheney said, deficits don't matter. if he's listening i want him to understand debt to do matter. and now the consequences of the actions that were taken. debts matter to children. so my question is this, as we look at the rotter road, we need a bipartisan approach.

we don't need a partisan issues that are out there that are going to take everyone working together, making tough decisions, we can go back to that. if we want to get the job done, that will make a difference so that people who live in my district whether they are on main street or on a country road, start enjoying some of the same benefits that the people on wall street are now enjoying and we are getting jobs. so how do we make these things fit from an economic standpoint, so this economy starts to go and everyone is able to sit at the table again rather than sit at the end of the chair and get people on? >> you ask a very important and very difficult question, congressman. and has not been a good period for many american families, and trying to adopt policies to encourage overall growth and to

also ensure, as you like that that growth be shared in certain ways, it's very difficult. rrd it is made more difficult by sions in that area in an informed way. i don't have a cookbook and he was particular to pass you. but i do think that doing that will also taking note as you say, correctly that the debt matters, will be a very great challenge. >> thank you, mr. chairman. i yield back. >> we have seven minutes, 17 seconds. what we can do is let you answer questions and we got to go vote twice. there's a five minute boat following this one.

let's take a was upended will leave here. we will leave you with two minutes to go. the floor is yours. >> thank you, mr. chairman. thanks, mr. elmendorf. so i'm going to go really fast, rapid-fire. if we want to address the structural deficit, which is better for the u.s. economy in the long run? cutting federal government spending, or raising taxes? >> well, so, raising taxes depending on how one raises them, can have important effects on people's incentives to work to say. and if taxes are raised in a way that discourage work and saving, that would have dampening effects of economic growth that would offset the advantages of less debt. similarly, government probe lands on the spending side to have effects on incentives to work and save in the ways those programs are change can have incentive effects as well. so i don't think there really is a clean answer that should be on

one side or the budget with other. it depends much more i think on adopting policies on either side of the budget that take account not just of the overall effect on the deficit, but also the effects on people's incentives to. >> who is better for the economy and the long-term, a a federal government employee, or a private sector employee? >> i will take that personally, congresswoman. [laughter] >> look, we have to decide as side what we want the public sector to do and not to do. and i don't think there's a simple answer to the question. both employees will spend money and they will buy things that will help create jobs for other people. it's really a matter of judgment about what one wants the economy to be like, and how much we want to be in the public sector versus the private sector. which has taken care about health care to some extent. but there isn't a simple economic answer to that question. >> does the private sector

employees taxes help pay for the position of the public sector employee? >> yes. >> thanks. which is worse and longer, crowding out private investment, with government borrowing, or higher taxes that slow private growth of? >> so i think it depends critically on the nature of the taxes and how much they slow private growth. as you understand it will, not every tax increase is the same. not every spending cut is the same. it matters very much what specifically you would do in policy terms of. >> in this economy, if you had to raise taxes, why tax would you raise first? that you believe would have a positive effect or a less negative effect on the economy. >> i'm sorry, congresswoman, i'm not trying to be difficult that i have not thought carefully

about breaking possible tax increases in that way. >> okay. i want to talk a little bit about the hagel bill. you mentioned earlier that the pay go rules of the 1990s helped, and i've heard that also. but i've also heard that the paygo rules that we passed last year had so many loopholes and exemptions that they want the same as the paygo rules that were in effect in the 1990s lex is that true? >> the paygo rules that you passed last year exhibit significant amounts of perspective tax cuts and some spending increases from the paygo requirements. >> so would it be more meaningful if we went back to the paygo rules that were in effect in the 1990s, in terms of trying to address the structural deficit in the long-term? >> yes. if you adopted a paygo rules that did not exempt any prospective policy actions, that

would have a sharper a fact on holding out budget deficits of. >> okay. what if we froze the topline of medicare medicare, medicaid, social security, and the very same discretionary spending that the president announced for tonight's speech for the same time period? how much would that save? >> i can't think of the categories off hand but it would've saved a great deal of money. i think the challenge is to decide what the top line cap on medicare spending, what does that mean to medicare beneficiaries, who is that will not get paid in an amount that would've been paid without that cap. >> okay. let's say that you reduce the benefits to wealthy americans who did pay that money into social security, means tested the payouts and did it that way. >> so on social security side, with picking sort of a dollar amount up front it's easier to

change those rules then want to do this sort of thing as you suggest. exactly how much you'd save depends on just what thresholds you picked and how the testing worked. >> mr. chairman, thanks a million. [inaudible] >> thank you, mr. chairman. >> dr. elmendorf, thank you for being here. i applaud president obama for taking a significant first step toward getting this deficit under control, and i applaud those republicans such as i believe senator mccain and others who said they will support it. it's somewhat disappointing to me that some of my republican colleagues on this committee who had the majority for 12 years and helped, through their partisan budget, passed into law without democratic support led

us from the largest surplus into the largest deficits in american history. and perhaps it's an inside it to why we have the deficit problem have today, with some of my colleagues would suggest it's not significant that we are going through this freeze, be able to reduce the deficit by $250 billion more than it otherwise would be. i'm still hopeful we can build some bipartisan support for deficit reduction programs, short-term, long-term, because i don't think either party has the political will or the political ability to make the tough choices to get us where we need to be. but i do want to go back, not focus on the past, but i do want to be sure we understand how we got into this ditch so we can figure out how to not drive the car into the ditch again. and i'd like to begin with this question. in 2001 when president bush took office, what was the cbo's projected national debt for the

year 200 2000 -- 2010. >> i don't know offhand congressman. i'm sorry. >> wasn't a close to zero national debt? >> that seems plausible. >> so if you could get that for me i would appreciate it, but as i recall in 2001, cbo when president bush took office, cbo was projecting -- at that time we had a body $5 trillion national debt and there was a projection of about $5.5 trillion of surplus. my math tells me that would've been a projection of having the national debt paid off by the year 2010. and if you could verify those numbers i would appreciate that. what is the national debt to a? >> debt held by the public, but into this fiscal year we think will be about $8.8 trillion. >> and the total debt to a? >> if you mean the grows, there

are a lot of measures of debt. on the order of $12 trillion. that includes as you know that held by the public and other parts of the government. >> so instead of the projected situations where we would have no national debt, gross debt by the year 2010, projected when president bush came into office, in fact, we have a gross debt of about $12 trillion. so 12, approximately a 12 trillion-dollar turnaround from what was projected with the policies in place and 2001, is that approximate direct? >> i think, congressman, the numbers you are thinking about for the 2000 projection would have referred to debt held by the public that it was not gross debt that would've gone to zero because that would've been bonds held in social security and trust fund. i think it was debt held by the public. you are correct to focus on because that is what really measures governments in effect on economy. that is the number we think will be about $8.8 trillion. and we think would've been in the neighborhood of zero.

we will check to be sure. >> wasn't a projection there would be about a fight with 5 trillion-dollar surplus over a ten-year period if you go back to cbo's projections and 2001? >> that may well be. i just don't have personal recollection of that. but we will check for you. >> so instead of at the very minimum, instead of having zero public good in the year 2010, we have about $8 trillion? >> yes. >> public debt. the gross debt is actually worse than that, $12 trillion. >> an incredible turnout. >> i just want to get this for the record. during the 12 years that republicans have a majority on this budget committee and pass the budget resolution without democratic votes, and did they ever pass through this committee, or in the house or through the congress, a three-year freeze on nondefense discretionary spending? >> not that i'm aware of, congressman, no.

>> okay. during those 12 years that the republicans had the majority on this committee and passed every budget resolution they passed out of this committee on a partisan basis, did they ever pass on the floor of the house or into law a long-term reform proposal to reduce the cost of entitlement spending? >> not that i'm aware of, no, congressman. >> in fact, the reality is that without democratic votes under the leadership and push of tom delay in the wee hours of the morning, is that correct that the congress under republican leadership passed the largest increase in medicare funding since medicare was created, the medicare rt prescription program? >> that's right. >> was that the largest increase in medicare entitlement spending since medicare had been created to? >> yes, i think that was the largest increase, not is a the number seven increase over time

based on the cost of providing benefits already written into law. in terms of the expansion of benefits, that was a very significant expansion, and it was and acted without any particular means of paying for it being identify. >> in fact, it was asked without being paid for at all, is that correct? >> yes, congressman. >> all that money was borrowed in effect. do you know how much of a tenured -- what does the part d prescription program? >> that's a good question. >> can someone give me a ballpark? 10 years from the time it was passed. what did 10 year cost? [inaudible] >> i'm not sure, congressman. the actual cost is coming below cbo's estimate, even for the below the as that of the office of the actuary at the centers for medicare medicaid services. but still a substantial amount of money.

i don't know what the tenure number would be. >> i've heard between $500,000,000,000.700 billion over a ten-year period. do you think that's approximate range of costs, a ten-year cost of the medicare expansion program that was passed without being paid for by republicans when they controlled the congress? >> those numbers sound a little height to before the decade, but we will check for you, august and. and respond to that question. >> i think it is somewhere in the half a trillion dollar range, none of which was paid for. can you tell you, doctor elmendorf, how much the 2001 and 2003 tax cuts have increased the national debt, as of today? >> i think i'm zero for three for you, congressman. i don't have an assessment of cost of that over the past decade. on a related fact which may be interesting to you, and the

deterioration in the budget outcomes over the last decade, wealth, about two thirds of that deterioration has come from legislative changes in our estimation. and about a third has come from economic and technical factors that are less able than we expected. >> okay. do you think -- you have a ballpark? did the bush tax cuts of 2001 and 2003 on a ten-year basis at more or less than a trillion dollars to the national debt? >> i believe a good deal more than a billion dollars, congressman. >> more than $2 trillion, perhaps? >> so there we go. so we think over the ten-year, the appropriate ten-year window which in this case of the 2002 through 2011, fiscal years, that

the cost of the 2001 tax cut was about one and a half trillion dollars, not including the extra debt service that has resulted from it. >> do you know what the number is with the extra debt service because i don't think we've done that calculation of the debt service. as you know week as to make the effect of the debt as a whole and do a partial estimate for this piece but we have not done that. >> but when you increase the deficit, debt service is a real cost of increasing that deficit, is that correct? >> yes. >> so minimum of $1.5 trillion has been added to the national debt as a result of the 2001 -- 2003 tax cuts that if you add in interest that could be over $2 trillion, perhaps. okay. some of my colleagues in congress, just a few weeks ago, were proposing a complete repeal of the estate tax. in fact, some of my colleagues

and this committee talk a great deal on a regular basis at every opportunity about importance of not adding debt to the next generation and our moral obligation to our children. some of those same members who voted for the budgets that led to the largest deficits in american history, after they inherited the largest surplus, has also supported repealing the tax. to heaven as one of the cost of complete repeal of the estate tax? >> we may. >> i realize you're not the director of the ways and means committee, so i understand you're not having the exact number is on all these questions. i would welcome the follow-up. but some approximate number? >> i think we don't know. i take it back. as you say, it is the ways and means committee, that does those estimates. we can check on what the numbers would be.

>> these are the have a direct budget application, that's why appreciate the answers in writing. i have heard numbers as high as $700 billion being added to the national debt if we had complete repeal. the estate tax. does that sound like a ballpark cost in terms of extra national debt to? >> i'm sorry, congressman. we just don't -- we don't know. we have a lot nubs in our heads, but not every number we have aligned with your questions very well i'm afraid. but we will send that to you. >> i believe that might be the ballpark number for your. if we did what some members of this committee talk about reducing the deficit on a regular basis. if we did what they wanted to do, i think that would add somewhere between half a trillion to an extra $700 billion to the national debt over a period of time. could i just -- why don't we do this then? can i just ask you for the record, in addition to answering the questions i've asked, if you

would also answer the question of what the ten-year cost would be of other tax proposals that had been made, one of them has been reducing the corporate tax rate by perhaps 5%. i'd like to know what the increase in the national debt would be if we reduced the capital gains tax by 5%. and would you happen to know off the top of your head what the amt, complete amt permanent tax fix would cost, how much that would add to the national debt over 10 years? >> that we actually do have, and approximate number reported in our outlook that over the next decade, indexing the amt for inflation, particulars of what one might mean by fix, would add would reduce revenue by $558 billion. and would also have a debt service cost beyond that over

the next decade of $125 billion. >> okay. and we will be able to tell more specifically when you get the numbers, but the bottom line is, by my math, if you were to pass some of these tax proposals that some of the folks who give a lot of deficit hawk speeches but turn into deficit does when it comes to the tough decisions to balance the budget, if they were to pass all the tax cut proposals that they have recommended, you could not only frees the nondefense discretionary budget, you could eliminate the entire discretionary budget and probably including the national defense budget, and still not balance the budget. and i clear, in response to mr. doris questions, you said that if we were to extend all of the 2001 in 2003 tax cuts that were passed on a temporary basis, under the guise of being

able to do that fiscally responsibly, for those who want to extend all of those permanently, did i understand there was a $4.5 trillion cost over 10 years? i was there a different number there? >> yes. so if we were to extend expiring tax provisions that you say from 2001 and 2003 at also index the amt for inflation, those together would add about $4.5 trillion to deficits over the next 10 years. >> okay. >> including the debt service that would result. >> okay. dr. elmendorf, you said earlier is your opinion that no single step, either on the entitlement side or the discretionary side of spending or the tax side, no single step is going to bring us back into a balanced budget, is that correct? >> i think it's very unlikely that a single step would do that because of the magnitude of the gap between spending and revenues is so large that to try to close that gap, if that were

your goal, only through one component of spending or of revenues, would require radical changes. >> would you agree that the proposal that was ever made or passed under republican leadership in the congress over the last decade or so, the proposal that president obama has put forward now to have a three-year spending freeze on nondefense, non-security defense spending, discretionary spending, would you agree that that is a significant substantive step forward toward reducing the national deficit? >> so as i said before, it's a step in the direction of reducing the deficit, according to the newspaper accounts it is a small step relative to the overall deficit that we project over the next 10 years. but beyond that we just need to wait to see the actual proposal and to do our analysis of it. >> do you think it could also, i

think it's a very significant step forward, i can understand you in your position being hesitant to add adjectives to the steps because you're in your position on a nonpartisan basis. and i respect that. but don't you think there's some benefit to their could be some significant benefits to the private markets and the capital markets if they were to begin tuesday congress taking and the president together on a bipartisan basis, taking significant steps, real steps, meaningful steps, to get the deficit under control? >> i certainly think that bipartisan steps that would change the trajectory of the federal deficit could have a very positive effect on financial markets. concerns about where the deficit is headed. >> okay, good. i want to thank you for answering my questions, and the other questions i would just

look forward in writing. in fact, if your staff could look at any of the major tax cut proposals that have been proposed by democrats or republicans over the last six to eight months, if you could put a 10 year cost on those and include that in your answer, i would welcome it. >> we will provide as many answers as we can as quickly as again, congressman. >> thank you, dr. elmendorf. at this time i would like to have the committee recessed subject to call of the chair. >> thank you. [inaudible conversations] [inaudible >> the committee will reconvene, called to order. doctor elmendorf, we will continue with question and answer period, and i would now

like to turn to my colleague from virginia, mr. scott, for his questions. >> thank you. dr. elmendorf, i would like to pull up the first chart. it's this one that you are looking at as you can see, this is a chart of the deficit going back to 1980. and you will notice the blue bar shows the deficit, significant deficit was inherited, eliminated, and we went up to surplus. the projected 10 year surplus after the year, starting in 2001, 10 year surplus was about $5.5 trillion. what happened in 1991 to create that chart, the blue part of the

chart? in 1993, i'm sorry. >> as you know, congressman, during the 1990s there were significant policy actions taken to narrow the deficit. there was also an economic recovery a boom that increase revenues and reduce spending which further narrowed the deficit. >> those were taken in 1993, did the votes in 1993 helped create that chart? >> yes, they did, congressman. >> what happened in 2001? >> well, so as you know, the economy was in recession and also there were legislative actions taken that widen the deficit. >> 2001? >> excuse me? >> wended the recession in 2001 started? >> well, i actually have it. the recession started in march of 2001. that the county a basis. these are probably fiscal year.

>> after the bush administration came in, then the recession started. the bush administration did not quote in here and recession, is that right? >> the national bureau of economic search date business cycle. they dated investing in march i think analysts would agree. >> and instead of a 10 year $5.5 trillion surplus, we ended up with, what, a 3.5% or deficit, additional debt for those just? >> yes. i don't have the numbers in hand but there was, as you know, and as the picture shows, there were significant deficits in this age. >> and not standing the fact the bush administration overspent the budget $9 trillion, can you present the next chart -- the jobs created under the bush administration were about the worst sense when? >> i don't have those facts, but it is i believe true that net

job creation over the past decade has now been essentially zero. >> and that's the worst since the great depression, a.q. >> that very well may be, i'm not sure, congressman. >> we are always in a very challenging situation where we are trying to create jobs. what impact does the fact over the last eight years we've overspent the budget a trillion dollars, and in addition states are cutting back significantly, what does that do to the challenge we have in trying to stimulate the economy to create jobs and? >> makes it harder. there's no doubt that in the late 1990s, there was discussion about the importance of budget surpluses. partly because they put the country in a better position to deal with future needs. and by coming into this financial crisis in a recession with a budget that was already in deficit, with a substantial

amount of outstanding debt, we were not in as good a position to deal with the needs that people felt then as we would have been if there had been less debt than a human in the preceding year's. >> and if we spend part of the stimulus package, was as several hundred billion dollars to the states, in addition to that, they've cut back. as a true that we would almost have to spend $500 billion just to offset what the states have cut back in just to get back up to zero? >> i don't have a specific number, congressman, but certain estimates have been budget shortfalls of the state during this period of several years would be in the hundreds of billions of dollars. this for 20102010 alone, the report states make changes in their budgets, took budget tightening efforts exceeding $100 billion just in that fiscal year. >> so in the first 100 billion which is get us back up to zero

in terms of stimulus? >> so, what happens in the recession as you know is government revenues decline, spending on certain programs tends to go up. that widens budget deficits as his habit at the federal level. at the state level, because the balanced budget rules they can't persist in that way and they take actions to offset the. so essentially, they are forced to take legislative actions that offset a good deal of the automatic stabilizers that would otherwise rise from their budgets. and then that seamless effect is quite small. but the federal government does not have those restrictions. it can run a larger deficits, and we think that one of the channels at which the stimulus package strengthened economic activity was by providing funds to states that they reduced their need to raise other taxes or cut other spending. . .

interesting statistic i would like to share with you, and, your level of knowledge and your acuety with numbers is reknowned but i'm going, i think i will stump you on this one. >> as you've seen, congressman, it is all too easy to stump me. >> you have a moving train.

take prettirage size of about 150 freight cars on this train, traveling at a pretty average speed of about 50 miles an hour. how long does that train travel from the point where the engineer pumps the brakes and says we need to do an emergency stop of this 50 mile-an-hour moving train? >> so stumped me, congressman, so i think it would take some distance. >> by some distance, do you have a sense of measurement? >> i wanted to be a train engineer when i was a kid, but never got to the point figuring out how good the brakes were. it would are as you're saying congressman, it is u.s. government and u.s. economy are, have substantial amount of momentum in what they do and how they perform and to use

policy decisions to turn the government or to turn the economy is very difficult because of the size and momentum they have. >> so the reality is, in good times, we could actually make a few mistakes and still be in pretty good shape because the economy, as a robust engine, will drive that train at 50 miles an hour, whether we want to brake it, or, if we happen to enact policies that would actually take it in the wrong direction? >> yes, that's right. >> would it surprise you know takes about a mile and a half to stop that 50 mile-an-hour traveling train that has about 150 cars loaded on it? >> i didn't know it was that far, interesting. >> a mile and a half. and so, if that 50 mile-an-hour train we call the u.s. economy, is doing very well, as it was in the 1990s when we were creating 22 million jobs, even some

mistakes done bysy makers, that economy could absorb. and so, in the year 2000, at the end of the year 2000, had you been sitting as the director of the aggressional budget office, you would have been telling us, we're looking at budget surpluses for as far as eye can seeing something over 5 trillion dollars, correct? >> yes. i think that's right. >> so with the inauguration of new president in 2001, would you have been advisinging that president, mr. president, looking at 5 trillion dollar deficit over next 10 years. >> surplus. >> that is the train moving in that direction. unfortunately you were not the budget director in the year 2001. you're the budget director in 2010 and rather than looking at a budget surplus, you're advising this congress and the president we're all looking at massive budget deficits.

but those deficits, that are massive, weren't created last night, or even last year, correct? >> that's right. as i said in my remarks there is an effect of the financial crisis and recession and recent policies. there is also very important effect of underlying policies built over a period of many years. >> so, this fast-moving train is now moving in the wrong direction, on the economy and deficits. but somehow we went from a train eight years ago that was heading in the right direction with.$6 trillion in surpluses for 10 years -- 5.6 trillion. to a deficit or budgets looking at deficits that are close to a trillion 1/2 strong in a year, and, somehow that train turned with some bad policies and obviously bad economic conditions along the way. do you think we're beginning to brake that downfall, the

stuck in the ditch situation that we've been in the economy for the last several years? >> certainly, we think that the economy has begun to grow again. the data for the second half of last year show expansion of production, as i said, we think that expansion will be slow, and that, traditionally, employment lags, and we think that will mean a particularly weak performance of the labor market for some time. but the direction we believe, of economic activity is up. and we expect that, at some point in year unemployment rate will start to turn down. number of jobs will turn up. >> when you talk about the labor market, which should concern us perhaps more than anything else if we're serious economists, obviously we all talk about interest rates and gdp but the most important thing beyond, interest rates, gdp, should job and that's what an american wants to know is

that he or she has a job that will bring us in revenues, tax payments so we could have a robust budget. if i could have chart 6 added to, put on the screens. we were seeing massive job loss. a year ago, we were receiving word from you and others we were going to be losing jobs. we found out it was close to 750 or so thousand jobs we lost in a month. that is 24,000 jobs a day americans were losing in this country. we're still losing some jobs. we ally had job growth in november of this past year, couple months ago, but still on the whole we're still losing but nowhere near that number. as the chart reflects, we're beginning to see the end of this trough that, we were in this massive ditch, that we were in which is good, with you we have to generate more economic activity to really

see us to break into the plus, when it comes to jobs, when it comes to our budgets and their deficits turning into surpluses. so it will take some time for us to get out of that ditch, is it not? >> that's right. the crucial point, getting back to zero is not enough because there is very large pool of people who are currently unemployed. >> right. >> other people who are not measured unemployed because they given up looking for work right now and are not counted in the labor force. it will take a tremendous amount of job creation to put everyone back to work, who is look would like to have a job. >> to sort of put graphically, what you just said, if we take a look at the chart, essentially, we saw how were just going deeper and deeper into a ditch. president takes office. 741,000 jobs lost. enough has been done, probably by this big economic engine we call the economy, with or without policy initiatives, to start to turn around on its own

but hopefully some policy initiatives begun to help to turn that around. but whether you're liking the blue bars leading to less job loss and hopefully at some point job gain, those are still jobs lost. so you have to add every single bar, red blue together to calculate the number of americans who are out of work or who have lost a job, and not until we past that zero line, we break that zero line, we can say we offset one of those americans that part of that, any of those bars before we can say we're putting people back to work net? >> i think that is exactly right official statistics more than seven million people have lost jobs. bureau of labor statistics already announced there will be a benchmark revision will add more loss. shortly they will measure 8 million lost jobs. normally in a growing economy with a growing population the number of jobs, increases over time. so the short fall relative to what would have occurred without this recession is

more than eight million lost. it is maybe, or 11 million is the shortfall will need be to made up. >> so we essentially are applying the brakes on that economic train, that was taking us further and further down into that ditch. we have begun to see those policies, brake that fall but it is going to take mile and a half to stop that train. it is not going to happen in one day, one year or in 100 yards. it will take a mile and a half to stop that economic engine we call the u.s. economy that was traveling 50 miles an hour with 150 cars on it, straight to the bottom. now, if i could get chart 4, up. we're seeing the changes. we see the job numbers getting better. and we see the, economic numbers getting better for the gdp. now, let's talk mack economics, the economists numbers, not the american workers numbers and letters.

the gdp is getting better, which simply that we're seeing more economic activity, which then means that there is more, there are more companies in america who are, businesses willing to hire because i'm selling more. i need to continue to see the blue bars showing economic growth, at some point we're going to start to break that line where we're losing jobs and actually start creating jobs, correct? >> yes that's right. we think that might happen soon. >> how soon? if you had, based an estimate. sorry for. >> i think within a few months one might see some positive numbers. as you note in november, has actually been revised to be a very small positive change in employment. i think it is possible within a few months. >> so there are some brakes in breaks in the cloud,

reason to be hopeful. obviously if you're an american who lost their job you will not be hopeful until you have something in front of you. but given, numbers, acronyms up here, economists use, gdp, interest rates, really we can start talking pretty postively about jobs, j, o, about, jobs in the future if we continue in the right direction and get us out of that ditch, break that train that was going fast downward, and start to see the economy, which has its own locomation -- loco motion, apart from what any congress does or president does, let business community and businessmen and women and hard work of productivity of our american workers take hold? >> yes. we think the direction is for improvement. the concerns that i have expressed, i think they're shared by many analysts are the pace of improvement may be slow enough that many people who will be looking for work will still be

looking for work for some time but the direction seems to us to be positive at this point. >> can i have chart 8 as my last chart and i will conclude with this. to me, there's, there's reason for to us try to do whatever we can policiwise to try to move us in the right direction. the last thing we need to do is bicker over what happened in the past. we need to remember what happened in the past. it informs what we do into the future and certainly if that train hadn't been moving at 50 miles an hour with 150 cars on it wouldn't have taken a mile and a half to break that downfall into that economic ditch we were on. but it is important for us to be fiscally responsible as we make policies for the economy, and for americans who wish to work. when you inherit a $1.2 trillion deficit, that's

what president barack obama received when he got the keys to the white house, when you, are sworn in, in january 2009 and are told, that 741,000 americans will lose their job or have lost their job in that month of january 2009, when americans saw 2.7 trillion dollars of their retirement savings erased, when we saw the debt, national debt more than double in eight years we're talking about the great recession for the 21st century. we are now trying to pull ourselves out of that ditch which is the great recession of the 21st century. had we had not some of safety net provisions in place that franklin delano roosevelt helped institute we might have been in a great recession or a great depression of the 21st century. dr. elmendorf, we'll be looking for your wise council over next several months as we formulate the budget for 2011 in this

country. we look forward to working with you and appreciate your patience responding to some of my question. i see the gentleman from virginia, mr. connolly is here, so i will turn to him for his questions. >> thank you congressman. >> here we go. thank you, mr. chairman. and, sorry i'm late, mr. elmendorf. i was at the oversight and government reform committee hearing, listening to secretary geithner, and, you should be glad you're here, not there. i'm going to ask just, some, series of questions, real quickly if i can. first of all, i worked in the senate from 1979 to 1989 for a committee and those were the gramm-rudman hollings days, because we were so concerned about the deficit, growing debt. in retrospect in your opinion, is there empirical evidence that gramm-rudma gramm-rudman-hollings ultimately led to a balanced

budget? >> actually did a little work on, congressman. i was a researcher in economics. i think the evidence is mixed. i think there is a, as you know, of course the particular numerical targets that were chosen proved to be unreachable, political matter. so the particular targets, not just the first version but the second version were not actually adhered to. i think many analysts would say that experience did focus people's attention on the issue. it kept it on front burner of the political discussion. in the end the larger steps were taken in 1990 and 1993 and later. but i wouldn't want to, but i do think there, most analysts say there was value focusing the attention on the issue even though it was not followed exactly. >> paygo was adopted in 1998,

paygo legislation and allowed to laps in 2002? >> the original paygo legislation was adopted as part of 1990 budget agreement. as i mentioned earlier, you were interrogating secretary geithner, was, is viewed by analysts as having helped prevent fiscal actions that would have made the budget situation worse well let me ask the same question about paygo of i just asked about gramm-rudman-hollings. is there empirical evidence that paygo made a difference, empier evidence. >> there is a judgment call which would be the best kind of empirical evidence. most people's assessment, this is position of number of my predecessors of cbo in it did help to restrain policy actions that might have worsened the deficit during a period when people were very focused on deficits at end of 1990s. as the economy was booming, deficits turned into

surpluses then those constraints were widely ignored. but during the period of concern and attention on that problem, most analysts believe that that, those, the paygo rules, did help to restrain policy actions. >> a bipartisan commission with some enforcement mechanism to make decision or recommendations stick, could do you think it could make a difference? and do you believe, i know this is dicey, do you believe this body has the historically, looking at it from a historical point of view the discipline to abide by it? >> i really can't and shouldn't speculate on the actions that you and your colleagues would take, congressman. >> you're no fun at all, mr. elmendorf. >> in another context but i don't think hearings are quite the way to display, that side of me. you know, i think the, having a commission does not avoid the need for difficult decisions. that ultimately you and your

colleagues will have to make. the question, i think the crucial question is whether it creates an environment that encourages such decisions to be put before you and to be made. >> and could, such a commission, again be efficacious in effecting postively the debt, long-term debt only focused on the spending side? >> it is harder to make changes that, it is harder to fix this fundamental disconnect between the level of spending that we're becoming accustomed to and level of taxes that we're paying, if one focuses on only one piece of the budget because the magnitude of the gap that we see ahead is so large, that to close that through one piece of the budget alone, would require radical changes in that particular piece. but again, it is not our place to say whether, what the combination of changes

should be and it's not, there is no economic reason why one can't focus on one piece or another. i just think it is a common judgment that the changes that would be required in a particular piece alone would be very dramatic. >> we had a hearing here last with a panel on the long-term debt and what to do about it and, three out of four witnesses for sure felt you couldn't just do one side of the ledger and not the other. you had to do both if you were going to have meaningful reduction in the long-term debt. thank you so much, mr. elmendorf and thank you, mr. chairman for your indulgence. >> thank the gentleman for his questions. dr. elmendorf you've been gracious as usual with the time. we appreciate that. we will look to you in the future for further testimony and guidance. we look forward to hearing from you,

the committee will come to order. the committee will come to order. good morning. on september the 16, 2008, the wall street giant aig faced immediate bankruptcy. aig was saved from collapse when the american people came to the rescue with an $85 billion bailout. less than two moss later, the american taxpayer was again forced to pay the bill when the federal reserve directed aig to hand out billions of dollars to counterparties, that inclupded the biggest names on wall street. in effect, the taxpayers were propping up the hollow shells of aig. by stuffing it with money, and

the rest of wall street came by and looted the corpse. the circumstances surrounding the payments to the counterparties has created an air of suspicion and distrust among the american people, starting with the new york feds. initial refusal to name the counterparties. the new york fed argued that disclosing these counterparties would somehow injure aig. in fact, when the information was finally released under pressure from congress, nothing happened. in an absolutely no affect on aig's business or financial condition, but it did have an affect on the credibility of the federal reserve and it called into question the fed's pension for secrecy. we need to change the culture on

wall street and the culture among the regulators from the secrecy of transparency recognizing that only true, confidential competitive or consumer information should be protected. as we sit here, a year and a half later, fdig handed out billions in taxpayer dollars because of this secrecy. we still don't know how or why the decision to rescue aig was made or who made the decision to author aig's trading partners 100 cents on the dollar in the so-called counterparty evy day when a company is having financial problems, its creditors have to take less money than they are owed. otherwise, they risk not getting any money at all.

they call this a haircut. in the case of aig, nobody got a haircut. instead, they were given a piggy bank full of taxpayers' dollars, and said, help yourself. let me just say plainly that i think just about every american would say the government should have forced aig's counterparties to take less money evidently major decisions were made by combination of the federal reserve, the federal reserve bank of new york and the bush treasury gept. tod definite. today we will hear from tn