commission you included a chart which if we can pull that up now and everyone have a copy of this chart in their packet which showed real gdp per capita under different economic conditions you notice under the alternative fiscal scenario the line stops between 20, 25 and 2030. can you explain that that line stops because economic growth collapsees and can't handle that load that high? is that an accurate statement of what you testified in? >> that is right. we have updated this picture in our long-term projection from this year but similarly, not the same point, the amount of debt under the alternative scenario becomes so large that our models don't know what to do with it. i don't think the economy would get that far off because people will be looking ahead and foreseeing what is happening. in fact much more serious

problems come sooner than we showing these pictures. >> use said the government debt is so high you don't know what to do with it because private investment ceases to function and the economy ceases to function under that scenario. is that correct? >> at some point. the freezing up would come sooner than we show in those pictures because of anticipation of that problem. >> the analysis really does go along with what other analyses have said of the country's debt-gdp ratio when it exceeds 90%. i'm talking total debt to gdp ratio that it reduces economic growth. as others said by about 1% at that level. >> the models we are using are consistent with a consensus approach to estimating the sort of issue. >> am i correct to say the total debt to gdp ratio is 90%?

>> that is right. >> what impact do you think these massive levels of debt relative to gdp have on the economy in general and specific prospects for job creation? >> those levels are a burden on the economy. they reduce our output and income relative to what we would enjoy if we had done less borrowing and more saving. >> this committee has been funding the one$.5 trillion over ten year period. what is the size of the economy over the next ten years? >> for gdp today it is $15 trillion. we think it grows over the coming ten years. if you have done the calculations i would be happy to hear them. >> assuming $150 trillion. we are talking 1% of the economy in terms of rough numbers.

>> the reason i point out this number is you mentioned the impact of less making decisions about spending that might have impact on the economy and i want to put in perspective over the next ten years these reductions we are asked over the next ten years roughly represent 1% of the economy. talking very rough numbers. >> that sounds about right to me. i agree the problem is large by standards of the incremental policy decisions the congress normally makes but it should not be viewed as unsolvable. changes in policy can put us on a different path. in terms of outlay this amount over ten years represent 3% of are all day. senator portman mentioned as well we need to put in perspective, not underplaying how difficult this might be but

in terms of impacting the economic trajectory of the united states economy we are not over the next ten year period insignificant percentages of the economy or outlays. most families and businesses have to do with less and 3%. over ten year period less than that. i realize my time is expired but i want to ask one quick thing. we may come to agreement on impact over the ten year budget window but we have decisions out of the ten year budget window and i want to ask if you would be willing to work with us to find ways to measure the impact of policies outside the traditional budget window and if you would commit to help us do that. >> absolutely. >> i yield back. >> representative van hollen. >> let me start by thanking you

for your testimony. this goes for republicans and democrats alike. we are all entitled to our own opinions, but not to infects. the last time our budget was balanced was in the 2001-2000 time period. factoring that time, revenue as percentage of gdp was 20.6% in 2000 and 19.5% in the year 2001. last time spending was 18% of gdp was about 1967. it has risen since then because we as a nation decided to make sure older americans in their retirement had the security they needed. it is important to keep those

facts in mind as we go forward. you posed the fundamental question to this committee. let me ask you this. if we were to try to continue with current retirement and health care security programs in the future we would need significant changes to revenue beyond current law, would we not? in order to fund and balance our budget assuming we kept the rest of government constant. >> that is right. >> let me ask you this. if we were to continue current revenue policy, without any changes, it would require very deep cuts to those retirement

and security programs, would it not? if we were to try to bring down the deficit. >> if you maintain the rest of the government, yes. >> you point out in your testimony over the next ten years percentage of gdp is going down. >> yes. >> that is the fundamental question. i think we recognize we have to deal with out year issues. we have a demographic challenge. more and more people retiring. as you pointed out, if we want to avoid huge cuts in medicare and social security we also have to deal with revenue. we have to increase revenue beyond current policy if we want to avoid very deep cuts. it is important that we look at the revenue side of the equation right now. you have presented that in your testimony. i think it is time for this committee to get real and

recognize there are spending issues in the out years but there's a revenue issue. as you point out, under current law the ten year cumulative deficit is $3.4 trillion. correct? >> it is $3.5 trillion. >> you point out on page 19 of your testimony if we continue current tax policy and current position payments under medicare that will rise from $3.4 trillion to $8.5 trillion. that is in your testimony. >> dimension those factors together but over $5 trillion, the huge bulk of it has to do with continuing current tax policy. >> yes. in fact by my calculation you get just under $4 trillion revenue. un the debt service associated with that, you are talking

$4.5 trillion of your $5 trillion dealing with current revenue policy. >> that is right. >> if this committee were to adjourn today and congress were to adjourn for the next ten years and go away, we would actually achieve greater deficit reduction than if we took the simpson bolts advice and went big. we would get $4 trillion over that ten year period even if we fixed the reimbursement peace. >> if you extended those tax provisions indexing for inflation it would add to the deficit by $4.5 trillion or so, that would be larger than the amount of savings. >> more than the $4 trillion people talk about. >> that is right.

>> it is important as we look at this to look at both sides of the equation. what we are talking about just so we can translate this into what the american people experience, going back to the same tax rates and tax policy that was in effect during the clinton administration. a period of time twenty million jobs are created and the economy booming. i am not suggesting we go back to that tax policy but if you look at some erskine bowles compared to current law they provide a $2 trillion tax cut compared to current law. the proposal $1 trillion tax cut compared to current law, approximately. if we are really going to address this challenge, let's recognize it. if we don't deal with the revenue piece as dr. elmendorf

said, you are talking about dramatic cuts to health and retirement security for america's seniors. we have to take a balanced approach which is why the bipartisan groups took that approach. >> senator toomey. >> thank you. since my colleagues have raised this issue i want to touch on a couple things that did not make it into the conversation. isn't it true that as recently as 2007 the current tax rate structure yielded revenue that was 18% of gdp? >> that is right. current level is very low because the economy is weak. >> the main reason total revenue as percentage of gdp is so much lower than historical levels is because we have an economy that is in recession. very high unemployment and weak lack of growth. >> that is right. >> as recently as 2007 the

deficit we had that your file remember correctly was less than 1.5% of gdp. if we could get to the point where we consistently had deficits of 1.5% of gdp than our debt as a percentage of the economy would clearly be declining and we would have to a large extent solved this problem. >> that is right. >> to the level of the deficit we had in 2007 with the current tax rate. let me ask a couple other questions if i could. you went through -- i don't think there's any dispute that excess of debt has negative implications. we all acknowledge that including the point where you have a financial crisis and economic freezing up. is an to true that it is impossible to know when you get to that point? >> absolutely.

it is not knowable. >> isn't there a danger that the magnitude of the debt is already impeding economic growth? having a chilling effect on investment and risktaking? >> the level of debt is probably waiting on economic activity. although people -- we wish we had less. the question is how to proceed from here. >> the point i want to make is given it is already weighing on economic growth and given that we acknowledge continuing down this path eventually leads to a crisis and we can't know when, that suggests to me it is dangerous to delay making meaningful reform. and though there's some concern curbing the size of the deficit in the short run impedes economic growth by would argue it is already happening. if the future promised reductions in the deficit weren't credible or at some

point became less credible, then we could discover we are already in that territory where the financial crisis could emerge. isn't that a danger that we would run in delaying this? >> there are disadvantageds as we said in the written testimony and as i repeated here. based on our analysis which is consistent with the consensus of professional opinion, immediate increases in taxes or cuts in spending would slow the economic recovery but that is not meant to imply there are not a variety of factors. it is not meant to imply we are sure we have that right but that is the consensus of professional opinion. >> it might be but there's an alternative point of view with regards to the spending side. even though you and i might disagree on this debate i am sure you would agree that when it comes to impact on economic growth not all government

spending is equal. in your model's it would generate more rather than less. not all tax cuts are comparable. some encourage economic growth more than others. in fact, broadly speaking, spending and tax cuts may have the same impact on the deficit, if you assume they have no other implications they do have other implications. >> when we do economic modeling of the alternative fiscal policies we try to capture that and incorporate the marginal tax rate on labor and capital and the effect on savings. >> on page 33 of your testimony you observe lower marginal rates enhance the incentive to work and save and invest and that has a pro-growth feedback on the economy. one thing we haven't discussed that i would like your reflection on is the possibility of revenue neutral tax reform that broadens the base and lower marginal rate. wouldn't that tend to enhance

growth and therefore enhance revenue to the government? >> that is right. the magnitude of that effect depends on specifics of the policies. >> i wonder if you have a rule of thumb you could share with us. for instance for a given incremental increase in the rate of growth on average what impact does that have on the deficit overextended period of time? >> we offer rules of thumb for that in back of the annual budget and economic outlook. the magnitude of that affect our will offer in one moment. >> what comes to mind that you could confirm or refute is 0.1% of additional growth on average sustained over ten years is roughly $300 billion in

additional revenue. it may not be perfectly linear but it goes in the same direction. >> it is not perfectly linear and we welcome these rules of thumb but we are not sure -- >> small sustained change in growth has the huge impact on the deficit or reducing the deficit. >> that is right. >> thank you. >> thank you very much. we have gone through our first round and i appreciate everyone keeping it concise. i have to make a small change at this time. the house is going to be having votes at approximately 1:00. there are 12 of us and the time is very short. unless somebody throws something that may i will limit each of us to two minutes in the final round. i ask everybody to keep it to that time frame. dr. elmendorf, let me just ask as you have talked about it long

term but reports from january, cbo included an analysis on the impact of lower than expected economic growth on the federal budget. i want to ask you what does cbo estimate the impact on the deficit projections in the near term and over the next ten years if gdp growth continues to weaken beyond what is reflected in the current estimate? >> a weaker economy implies worst outcomes because tax revenues fall and extra spending and entitlement programs we talked about a moment ago. we have not done quantitative estimates of other scenarios beyond what is in these rules of thumb we offer in january. the rules of thumb are rough because a lot of things may not rise and fall with the rest of the economy. we have been surprised that the outcomes of tax revenue given the state of the economy but

there's no doubt a weaker economy works for the budget and stronger economy is a lot better for the budget. the challenge is how to move the economy. is not easy to move $15 trillion economy. >> thank you. i do have a question about sequestration by want to submit for the record. as part of situation as we're looking at we need to understand the impact of that and i appreciate the information you put out on that but the significant impact to sequestration needs to be understood by the committee. i submit that for the record. and will turn it over to mr. hensarling. >> revenues today are roughly at 14% of gdp. doesn't your latest estimate under a policy baseline show that revenues go back to their historic norm of 18% in 2014?

>> a little over 15% today and improvement in the economy and other factors that we push off. >> the alternative fiscal scenario which is the policy baseline shows spending going from historic average of 20.5% to 34% of gdp. is that correct? >> that sounds right. >> with respect to revenue one is episodic related to lack of economic recovery. is that a fair assessment? >> both factors are at work. >> those who have advocated or brought up historically when the budget has been balanced taxes have gone beyond 18% of gdp to closer to 20% of gdp.

and again this is the alternative fiscal scenario showing that spending by 2035 goes to 23.9% in the same alternative fiscal scenario showing taxes already on a path to increase from 18% of gdp to 18.4. following the analysis of those who advocate to achieve a budget balanced that revenues come up where they are rising from 18.4 to 20% of gdp, wouldn't that suggest under a balanced approach that spending has to decrease 14 percentage points and the alternative fiscal scenario to reach a historic norm? >> i would rather not use the word balance given its role in your discussion but you are right that if revenues were at 20% of gdp than balancing the budget -- require a reduction in

spending. >> representative becerra. >> i will start calling you sergeant friday. you are giving us your best interpretation of the facts and we appreciate that. you are not giving us opinions or telling us whether in five years or 10 years we should reduce benefits that we give to seniors under medicare or change to our defense and security needs. you are simply telling us what the numbers show and leaving it to us to come up with a good mix and i appreciate that. i suspect your mother and father and grandmother and grandfather probably also see you are talking numbers and what should be done to them with regard to medicare or social security or anything else. one quick point. with regard to discussion of long-term costs you mentioned medicare and medicaid and social security. medicare and medicaid deal with health care and health care

costs are in a different boat than social security, in terms of long-term costs. >> the increases in spending are greater overtime then for social security. >> and social security starts to stabilize and stays constant in terms of cost to the federal government. >> roughly so. after the baby boom generation retired it roughly levels out. >> because you are dealing with facts -- the reality is medicare and medicaid are reimbursements or financing systems. if we were to cut benefits for seniors that doesn't mean their health care costs will drop. it shifts the cost into the pocket of the senior to pay for that care if medicare reduces what it reverses. >> it depends on the policy.

there are some policies that share costs and reduce overall costs. >> thanks, sergeant friday. >> senator kyl. >> one question in the interests of time. i know you agree with senator toomey that there are other points of view regarding your argument that cuts in spending now can harm economic growth or delay economic recovery. that is true of defense spending as much as other spending. is that correct? >> it is true of all types of spending. there are differences across type but that is more subtle. >> you have high unemployment, returning veterans to begin with and reduction in strength and more people potentially unemployed and making radios and building ships and so on. if those cuts end up reducing

employment in those industries and the amount of money in those industries could delay economic recovery. >> that is right. >> senator baucus. >> if you could discuss what changes in policy will stimulate the economy if you could rank them somehow. >> it turns out the table we're looking at from january 2010 report, we did consider the effects of a set of alternative tax cuts. we have not updated the table. we would be slightly different but probably not fundamentally different. reductions in payroll taxes that we studied here were among the

more powerful. followed by expensing of investment costs and below that broader reductions in income taxes. the reason for that difference is principally that the money saved by employers or employees in payroll taxes translates into comparatively large amount of incremental spending and in the case of cuts to employers pay amounts to a temporary discounts on the cost of hiring workers. >> we have revenue neutral corporate or individual tax reform and on the individual side it broadens the base. how much growth would result

from a simplified tax code? >> tax code with a broader base and lower rates would spur economic growth but the magnitude is something we would have to take specific proposals back to our models and work hard on for while before we have quantitative estimates. >> thank you. >> representative upton. >> i am concerned about the effect of affordable care and education. provided detailed explanation of the methodology to calculate how many employers will drop their health-care coverage? >> we have a model of health-insurance coverage in which employees and employers are trying to obtain coverage at low cost and giving way to the quality of coverage they receive. in our analysis the affordable care act encourages some

employers to provide insurance coverage that would not otherwise because of mandate for insurance coverage and subsidies and it encourages other employers who would have offered coverage not to offer it anymore. and a small reduction in employer sponsored insurance coverage. estimates are very consistent with estimates of other people with large scale models like those at the urban institute. there's tremendous uncertainty around those estimates. there have been some surveys that suggested there would be more employer dropping. at this point based on the things we have seen since we did those estimates we are comfortable with those estimates that they make sense. what we have been asked to explore the sensitivity of the budgetary effects of the griddle alternative outcomes in employer insurance coverage and working on those. >> provide a dial up.

i am not sure what the percentage is. as low as 5% or less. >> that is a small percentage. >> provide an estimate of 10% or 20%. >> it matters a lot for budgetary costs with or without employer sponsored health insurance. we can't do justice in that sense. we have to understand in the model and there are ways to change the assumptions and the model and give different answers but we need to do that because that will affect the budgetary cost. it may not be as large as it seems at first. people will pay -- government will pay more for their coverage but on the other hand employers will have extra money than previously using for health insurance. most economists think the money will turn up as wages for workers. it could turn up as additional corporate profits andy