so as many people can ask. the gentleman here in the second row. >> thank you. nick kalman, fox news. i want to ask about reports the marines are planning to close quantico. is this at anyway related to bradley manning and? >> the brig at quantico? >> yes, sir. ..

it is unlikely the marines will fight again without the navy. let the navy have the joint strike fighter and the marine version is expensive and had cost overruns related issues as they all have. i would like you to address this a little more if you don't mind. >> i appreciate that. if you start big and go down to the marine corps at this point from my perspective is what is best for the nation. i can get -- i wear this uniform and have a commandant of the marine corps but what i want to talk about is the united states. the navy has -- our nation has a 22 capital ships. capital ship doesn't mean the cruisers and destroyers and submarines aren't. we are talking nuclear-powered

carriers. we have 11 of those and 11 large ships. those are the ones that look like a smaller carrier. they look exactly like a carrier but they don't have an angle. that is in the gulf of aden. that is off of the coast of libya. during the early part of the no-fly zone enforcement. for the first several days our version of the -- yesterday's version was flying into libya and they were the only airplanes that were flying. for a nation to have 22 carrier type capital ships and send them around the world to do whatever our government decides is important for the nation is a significant capability. we don't have the f 35 b version for short takeoff and vertical landing, our nation basically will be down to 11 ships, 11

capital ships to do our nation's bidding. and any given day it is just like a fleet of trucks. only so many will be available. some will be in maintenance and whatever. for a nation to lose that capability we're losing the carrier right now, in the gulf of aden for a host of different missions. we use them off the coast of pakistan and flying air support into afghanistan. we use them when we crossed the border. we flu are carriers of of the highways. as we look at the joint strike fighter our version not only is it best for the nation but also allows us to operate the way we did when we were in iraq flying off the highways and bombed out runways with saddam hussein, it

is the expeditionary capability. it really will miss an awful lot. we will hamstring our nation in my view if we don't have that. by the way, it is really doing well. i track is like a bird dog. i assumed ownership of that for the united states marine corps. if it fails you can point a finger at me. >> over here please. >> thank you. i am ed browning, retired ambassador. i wonder if the marine corps is aware of a small but vocal minority that is doing a lot of damage with the department of

defense and congress. this is a group that is downgrading their compatriots by saying how much better they are and let me go back a minute to tell you in 1950 i was one of the planners of the china invasion and in order to make that invasion work, we needed an additional position. he went to the chief of staff who is my boss and said where do we get this division? and let me try charles shepard from d m i who is head of the marine forces. he went out and said we have one regiment here of marines in korea. if you get two more we will have a division. we can make this invasion 5.

or succeed. shepherd won out and got the reserves who wanted to come back and made a division and with the help of the army and other forces, in john was a brilliant success. instead of capitalizing on this success, this bothered local minority said that we didn't really need the army. we could have done it all by ourselves. defects are that the army is about 80% and the marine corps' 20% of those forces in those days. >> the question is about the rivalry among the services. if you could pose your thoughts as a question. >> the question is i am wondering if the marine corps is

aware small local minority that is rearing its head and is downgrading -- down mouthing or bad mouthing the army and saying they're doing at all or don't need it. i think this is doing harm to the marine corps. doesn't read -- need any posting or anybody to build up -- its reputation. >> i can tell you first of all i don't know that vocal minority. i have not heard that. historically over the years and you notice there has always been competitive rivalry but i will tell you the relationship right now has never been better than it is today. we fought alongside one another for six years in iraq and are fighting alongside one another, army generals have commanded

marines. have we commanded army brigades and think the relationship is better today than it has been in my 41 years of being a marine. but i have my staff here. i will pull the string on that because if they are active duty, if they are retired much like you are can't reach in and touch you but i can sure reach in and touch -- i intend to do that because that is not the message. this is not a paid political announcement. today's environment requires all of us to work in the joint combined interagency environment. the world is too complicated. are am aware of that but it doesn't sit well with me if true. >> the underlying narrative the general is pointing to is when there's plenty of money to go around the past ten years it was easy for the joint force to go along.

money is going to be tight. i can certainly second what the general said. the whisper campaign not just from worries about others but many of the services about the formerly great partner is we deserve our equity. >> i will tell you being force of the service chiefs so one fourth of the joint chiefs of staff i look around a table. when i meet at 10:00 for this meeting, my fellow service chiefs, and to this day when we go to the tank on friday afternoon and monday or meet the way we are, where is none of that that goes on. none of it. i made a comment over npr last week, bring out the worst behavior in people which is what you are implying but i haven't seen it yet. i will tell you we have a great

chairman. don't know how well you know this but if there's anybody that can keep the tribes together and say we are going to do this together it will be martin dempsey. >> hi endorsement for large challenge. you are on the aisle. >> good morning and thank you. you spoke -- >> speak of the little. >> you spoke earlier about the proposal -- do you think the way to save money for expanding -- expenditure? >> could you repeat the question? may be come up here? canyon come up here a little closer? it is just reality.

>> earlier in the summer you spoke of brookings institute and set your favorable to center web's plan of booking air force base, having spent three months in this process do you think this is still the best way to save money considering camp schwab is expensive? >> thank you. as you know, secretary norman panetta was in japan and is traveling to korea today. the reports that i read in newspapers is i have not talked to anybody is a very encouraging visit in japan and there is strong encouragement from the central government to continue the agreed to implementation plan which eventually is building the runway offshore and moving the marine quarters but what we have done is what i tried to do is be a good partner

in this thing to link some of these things and say i am willing to move some marines to glom so i can relieve some pressure. we're trying to be good neighbors and give the land back. i mentioned that brookings. we want to give the land that we agreed to between our two governments. of that is done with honorable intentions. i am encouraged by what i read by secretary panetta's latest visit and i hope it works and that we can build a runway and stick to a plan that was agreed to. >> i neglected this side of the room. this gentleman here. >> dick cheney with the american security project. a follow-on to mike's question about the v22. the united states lost 405 helicopters and 580 american service members. only one of those 405 was a v22

and we last four service members. it flies a third less cost passenger per mile than any helicopter we own. why is it that it takes such a bad rap when it is probably one of the best aircraft you ever purchased? >> thank you. that is not a set up. i know him like a no other folks but haven't seen him in a couple years. this is not a set up question. the truth is what he did say about cost per passenger mile, we get beat up and airplane is expensive but it holds 22 combat load forces and will take three times this far. it really will and it will take twice as fast. it really will. we just went over six months

over 100,000 -- it goes back through the 90s and 2,000s and the truth of the matter is we are well beyond that right now. anecdotally i throw this out. when that ship pulled off the coast of libya and there was a no-fly zone, v22s were on that ship. they got a call at night. they were sitting 100 miles off the coast of libya. they launched. they picked a pilot up and were back on deck in 90 minutes. so people say why don't you just -- name some other helicopter. i don't want to beat up somebody. flyer another helicopter. we have been negotiating with gadhafi for the release of that pilot because air forces were on

top of that pilot by the time we got there. had we not had the speed to launched. had we not had the ability to get there quickly and get him off the ground and get him back we would have been negotiating until last friday with gaddafi tried to get his release. that is the significance of speed and left. >> those of us who don't follow that closely do recall the dark days of 99-2,000 when the osprey seemed to go down a lot and a lot of people died. was that aren't the problem for pilot error or something you discovered and fixed? why is it working now? >> i think it was a little bit of all of that. you got to remember the airplane was in development and it suffered -- this is a lesson learned from procurement today. i watched the f 35 be very closely. we as a nation and department of

defense and congress and program managers underfunded so instead of going along being developed and you are supposed to do these ten things the program managers had to make a decision. i can only afford to do six of these things so we do the six most critical and then the program continues to move along and we are trying to mitigate risk and make decisions on things so we end up with an airplane in 2000, in march of 2000 and the airplane actually was flying fine but we lost an airplane in march of 2000 have lost an airplane in december on december 13th of 2000 and that is when secretary:wisely said we will stop. one of the findings was let's

not make this a time schedule driven development program. let's make it event driven. serve no wine before it is time. we will fix the airplane and put money in the program and put the right management in the program and put the right parts and everything. now everything is set up the way it should be to bring in a successful program and that is what is happening. the program is not anemic but is funded well and been cared for by congress and we have the fruits of that labour. >> in the front row. >> general, it is great to get a chance to see you. hy want to ask about the human side of this. my impression is when the marines are going to iraq that on their way over they were getting some cultural training. what do you need about learning

about the countries where you are likely to be going and do you have language skill requirements for marines since you spend your time on the ground? >> great question. i talked earlier about lessons learned the last ten years and that is one of them. we have increased in the last year, i think i told double the number of regional officers. >> until you get promoted again. >> we are tracking that. they are getting promoted from major to lieutenant colonel to colonel at a higher rate right now. they didn't used to be. we could send someone for a year-and-a-half to teach them mandarin chinese in monterey, be a great young officer and then terminate him at major. there are several of us that used to be in charge of that program. that is not happening.

it is a recognition that we need more expertise in the regions around world so we are building that. there is irrefutably requirement that we are going to go somewhere to understand the culture and the people and what we call microterrain. if there is anything we learned after ten years is that to include around the world. every lieutenant that goes to basic school we come out of the naval academy officer candidate school. the you get commissioned and spend six months at the nation's school for follow on officer training. every lieutenant is assigned a region of the world and has to be tested on that and for his promotion after tying it to his promotion you have to pass a series of examinations. in your region to become a first lieutenant or capt. or major. it is acknowledgment that that

is one of the greatest lessons learned that we had out of ten years. >> good morning and thank you for this conversation. you mentioned lessons learned coming out of iraq and afghanistan. i wonder whether you have concluded or conclusions you have drawn lessons that you learned at the strategic or operational level pertaining to libya. it may be too early. what lessons have you learned or conclusions have you drawn based on our experience in libya? >> i think as a nation, think of who said this last week, we don't want to overlearn lessons or say that is it and where we are going to do business so as a

nation our government made the decisions it did. what we going to do with libya? a no-fly zone or put forces on the ground? are we going to be in the lead which we were not? nato was in the lead. my sense on this is a lesson as i look at it is service chief somewhere along the line will be asked over a period of the next three years give my best military advice is the lesson i got is we don't always deal with that. don't always jump in. don't always have to be first. we have lots of strategic partners out there that we can rely on. this libya thing for me is a classic case of nato and our allies jumping in and we supported that. that is when i got out of the strategic international policy. >> if i could turn the question around it is true that nato was in command. with a nato mission but it would

have been impossible without the united states. we still remain the essential partner. refueling 100%. the really important intelligence surveillance and reconnaissance and specialized anti-aircraft activity. there is still this requirement for the u.s. to have a lot of skin in the game even for political reasons has to be a nato led mission. >> there are enablers. i don't think there's any question we didn't provide enablers and some local -- more technical and higher level capabilities and others. when the -- i keep going back to that. when the tear sarge pull off of the coast the air wax airplanes and royalties were not u.s. airplanes. they were european airplanes. they belong to nato forces in

nato countries. they just haven't gotten there yet. nothing -- when you are going to do something like this we expect it to be clean and be executed on a precision timeline. the fact is we are dealing with nations. things just don't happen that way in the real world. when they pull off guests who controlled the aerospace? it was the uss kiersarge. controlled all the air space over libya. when areas where flooding in and the tankers that came down were not just u.s. tankers. i can't tell you how many u.s. tankers came down but there was a slug of nato tankers that came from the nato allied conference and they hadn't gotten there yet. they were working their way down. but there were tankers, a lot of them. there are capabilities. we are truly a team on this. we have the capability to

provide technical capabilities that perhaps our nato allies didn't have. they were willing to provide a liquor ship and a big chunk. a lot of those airplanes were flying -- all of them for the most part. i am not offended by that. i think that is the way we do team play as a nation in the future and that is the lesson we learned coming out of libya. this is team support. >> good morning. mike j.d. from aviation week. going back to the overcoming access in the pacific. some of the things you mentioned like stealth or firepower or command and control sound like the attributes -- the program has been truncated but they have been looking at the 1,000 decision. is that something you would

welcome? our import is attributes like that? >> that is really out of my line. i can't talk about that. i can't give you anything worthwhile but i can tell you it had an enormous capability and from the marine corps perspective, they got the command and control we were looking to provide naval surface support which is what the marines were looking at and it has been truncated. but the vdg 51s will help with missile defense around the world. that is the extent of my knowledge on that. >> time for one more question before i take it. let me remind you this is on the record and the last question, please.

>> robert frishney, retired air force. to your assessment of the all volunteer force, benefits and costs and what alternative you might be thinking about because it seems to me that is going to be one basis of the foundation of whatever strategy we evolve. >> in the paper you have seen secretary panetta commenting when he was traveling in japan yesterday and in korea as well, his goal is to protect our all volunteer force and served as chief. we started talking about the budget and how we are going to do this and what the environment will impact the services. secretary panetta has been clear that we have to protect the all volunteer force. sometimes you have to be right in the middle of it to really appreciate the quality of the

young men and women we have today. they are lined up. if you want to join the marine corps i realize i am recruiting but if you want to be a marine today and walk into the recruiting session in dallas or topeka it is going to be eight months before we can send you to boot camp. if you want to be an officer it will be longer. that is the quality of young men and women we have today secretary panetta is adamant. how do you do that? how do you incentivize young men and women to join and remain? in our service, i had to do some homework and only 10% of the young men and women who joined the marine corps stayed 20 years and retired. so the other 90%, some get out after four years and some eight years but only 10% go all the

way to retirement so that is what we are talking about when you talk retirement. we have to keep it in perspective. when we talk about paying benefits we immediately get to 100% but when you talk retirement we are talking 10%. the other services are more than that but not a lot. that is the focus for retirement. the benefits in between, the pay raises, healthcare, co-pays for pharmaceuticals and stuff, most of that affect retirees but basic allowance for housing, current pay, if you take 70% all across the nation and take somebody like a college graduate who is 24 years old and he or

she the average pay for 24-year-old college graduate is x and you add all that up and say what is the pay for a second lieutenant and what you want to do is have the second lieutenant historically paid at whatever is the average is across the country which is 50% you want to be paid 70% of when the market will bear across the nation. we are sitting at 79% for officers and 83% of what the market will bear forward and list. we are doing pretty well. we are paid pretty well. as we look at how we pay this $450 billion, is there room to question? is there real to just inside that to bring that back down a little financial make it more of a level playing field? the answer from the service chiefs is i think there is room. how much i don't know but bending the knee where it begins to affect the all volunteer force, i don't know what that

is. we haven't put that kind of rigor to it and we need to do that as we start looking inside benefits. we are really going to need to look at that to make sure we know what we do and what the effect of. .. [inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations]

[inaudible conversations] >> coming up in just under half an hour here on c-span2, the deficit reduction committee. ç z(

>> and again coming up at 10:00 we'll go live to remarks from the joint deficit reduction committee to hear from douglas elmendorf who is the director of the congressional budget office. and tilden, remarks from a presidential candidate rick perry who unveiled a 20% optional flat tax plan. under that plan taxpayers can choose to continue filing under the current tax code. the texas governor announced his plan in a 30 minute speech from south carolina. >> thank you. john, thank you very much. it is indeed an honor to be with you today, and he and i were talking. he was classmates, high school

classmates with one of the great conservative senators in our country. and that's jim demint. and i want to thank iso films for outline me to come here today, and john, you in particular for opening your businesses. we discussed a plan that will get america were king again. you know, today i lay before the american people my cut, balance and grow plan. it cuts taxes, and it also cuts the spending. and it balances the budget by 2020, and it grows jobs and it grows the economy. it neither reshuffles the status quo nor does it expand the way that washington can reach into your pocket book. it reorders the way they do business in washington by reinventing the tax code and

getting our nation back to fiscal health through balanced budgets and entitlement reform. you know, central to my plan is giving every american the option of throwing out that 3 million words of the current tax code. and i might add, the cost of complying with all of that code, in order to pay a 20% flat tax on their income. you know -- [applause] the you know, the size of the current code is more than 72000 pages. that's represented by this palette right over here and the reams of paper. that's what the current tax code looks like. the best representation in my plan is this postcard.

this is the size of what we are talking about right here. taxpayers will be able to fill this out and file their taxes on that. [applause] and each, each individual taxpayer will have a choice. you can continue to pay your taxes as well as the accounts and the lawyers under the current tax system that we got, or you can fire taxes on this postcard with the deductions on their for interest on your mortgage, your charitable giving, your state and local taxes. and then deduct those and send it in. under my plan you're no longer going to have to worry about paying taxes on social security when you retire. or your family members -- [applause] yeah. or john, your family members

paying a death tax when you're gone. i mean, you can say -- [applause] think about that. he's worked hard. he's going to pass this onto his family one of these days. the idea the federal government can take half of that is nonsense. and i might add you can also wave goodbye to the capital gains tax as well as tax on dividends. [applause] we will increase the standard extension for individuals independence for $12,500. that means that families in the middle and on the lower end of the economic scale will have the opportunity to get ahead. you know, taxes will be cut across income groups in america. and the net benefit will be more money in americans pockets with greater investment in the private economy, instead of the federal government.

you know, now on the corporate tax side i'm offering an equally bold reform. my plan closes those corporate loopholes. it ends the special breaks for special interest, and stops the gravy train of lobbyist and tax lawyers in washington, d.c. that are there as a trough. [applause] in exchange for a corporate free -- or i should say, corporate tax free of carveouts and exclusions, i offer a much lower rate of 20% that represents the average corporate rate among the developed nations. and it'll make our corporations much more competitive on a global scale. we'll shut down the cottage industry of corporate tax evasion i creating a tax that is broad and fair and low.

and my plan also offers incentives for corporations to invest in america again, with two major reforms. [applause] first, we will transition to a territorial tax system on corporate income that earned overseas. what this means is that companies that pay the appropriate taxes in the country where the income was earned, but aren't taxed a second time when the income gets moved back to the united states. and secondly, all corporate profits currently that are languishing overseas, i will offer a one time reduced rate of 5.25% for a limited period of time on those repatriated dollars, to bring those dollars back to the united states. they u.s. chamber of commerce said that this one time tax reduction would bring back over

a billion dollars in capital back to the united states, creating up to 2.9 million jobs, and increase the economic output in this country by $360 billion. in other words, it's the kind of economic stimulus that president obama could have achieved if he wasn't so hell bent on passing big government schemes that have failed american workers. [applause] today's americans combined corporate tax rate of 39.2% is the second highest in the developed world. it's time to overhaul our tax code so that companies like iso poly films can invest more in their people and in their product. tax rates have consequences.

the liberals myopically ignore the realities of human nature. they think raising rates will raise revenue. what they don't understand is that large employers have choices. and i might add, so do wealthy individuals. and that includes moving money offshore. when they try to take, when the federal government tries to take too much, they end up hurting the very people they supposedly seek to help, the working class. we need tax policy that embraces the world as it is, not what some liberal ideologue wishes it to be. the goal of my cut, balance and grow plan is to unleash job creation, to address the current economic crisis while at the

same time generating a stable source of revenue to address our record deficit, put our fiscal house in order. my plan should not be viewed in a vacuum. but in comparison to the continuation of the status quo. it provides employers and investors certainty, which is critical, john, and getting capital back into the economy. the president's plan, it provides temporary tax relief which it does nothing to encourage long-term investment because it doesn't provide the private sector any certainty. the way to stimulate the economy is not to temporary tax relief or government spending. it's to stimulate private spending through permanent tax relief. you see, the flat tax will unleash growth, but growth is not enough.

we must put a stop to this entitlement culture that risks the financial sovereignty, or solvency of this country for future generations. i mean, the red flags are alarming. [applause] our children, our children are born with a $46,000 debt. every young child that is born has a $46,000 debt to the federal government. our credit was downgraded for the first time this past august, in part because of the lack of seriousness about deficit reduction. you know, according to the white house -- white house office of management and budget, by the end of the year our debt will exceed the size of america's economy. for the first time in 65 years.

we are on the road to ruin, paid by state serfdom. bring our children from financial disaster requires the courage to reform entitlement. and my plan establishes firm principles to preserve medicare and social security for today's beneficiaries, while saving it for tomorrow's generations. i am putting forward five principles to save social security for the long term. first, we will protect existing benefits for current retirees. and we will work with congress on the exact age where those nearing retirement are grandfathered out of the changes to the program. secondly, we will end the

current pilfering by washington politicians. [applause] here's the hard fact. the trust fund is full of ious, without a single dime of money left over your from what workers have paid in. the politicians have borrowed against it, for years, and in order to redeem those ious into funds are going to have to either raise your taxes or cut spending on other programs to replenish it. that's the only two choices. now here's the other hard truth. if we don't act, in 25 years benefits will be slashed by 23% overnight. protecting social security begins by protecting the solvency of the fund, and stopping all of the current borrowing from the fund.

just as we done with the highway trust fund. the third principle of reform is to allow young workers to invest a portion of their payroll taxes into private accounts if they so choose. [applause] i'm not naïve. i have an idea that this idea will be attacked, but a couple of facts are worth stating. one, the return on investment and social security is so small, it's kind of like having an interest-bearing savings account at the bank. and over the long-term the markets generate a much higher yield. secondly, opposition to this simple measure is based on a simple supposition. and that is that the people are

not smart enough to look out for themselves. i don't believe that. liberals think the american people can't be trusted to safeguard even a portion of their retirement dollars. i happen to think it is time to end the nanny state and empower our people to exercise greater control over their money. [applause] and the fourth principle is to return to the pre-1983 law and allow state and local governments to newly opt out of social security. and instead, allow their employees to pay solely in two state or locally run programs. and this has been done around the country. and i might add with very good results. we ought to allow it again. and lastly, we should raise the retirement age for those younger

workers, on a graduated basis, to reflect the longer lifespan of today's americans. i'm going to work with congress to determine the right formula to begin at the right age, but this is commonsense. it can help save social security for future generations. you know, we'll also reform medicare to save it for future generations of americans as well. and we will do this by working with congress on several options, including giving patients greater flexibility in choosing the plans that best fit their unique needs through things like bundled premium support payments for the individual, or as a credit against the purchase of health insurance, for instance. a second, we should look at gradually raising the age of

medicare eligibility. and thirdly, we should consider adjusting medicare benefits to be paid on a sliding scale based on the income of the recipient. and lastly, we must tackle the $100 billion in annual waste and fraud, and say this vital program for americans who live longer. [applause] now, my plan also restructures medicaid. now, returning control over the program and the dollars needed to administer it to the states. you know, one size fits all health care doesn't work for people on private lands in the form of obamacare. and it sure doesn't work with public lands, such as medicaid. listen, washington is broken. and they have shown no will to fix it either. we must give the states the

flexibility to fix medicaid, to control those costs. you see, these reforms are essential for balancing the budget. my plan balances the budget as fast as any serious plan has been offered out there. in the year 2020 with reforms to entitlements, rated economic growth, and with cuts to discretionary spending. and i don't take attack with the current president with his arbitrary cuts to defense spending. the question we must ask is not what we can afford to spend on national defense, but what does it cost to keep america secure. [applause] at the same time we are going to reform the way that we spend money in washington so that we

can balance the budget in eight years. but to truly protect taxpayers, we need extra protection of a balanced budget amendment to the united states constitution. [applause] i also reduce the spending in the department of education, the department of energy, the epa, and a whole host of other agencies, returning greater control to the states. [applause] my plan also reduces nondefense discretionary spending by $100 billion in year one. and it builds on those savings in the years to come. i'll also institute several principle reforms to the budgetary process, which are contained in my cut, balance and

grow plan on my website. and you can go there and read it. and it is not the length of the novel war and peace by the way. it is relatively simple and straightforward, but it is a very bold approach. included in my budget reforms are a lamination of baseline budgeting that assumes that the previous expenditures are sacrosanct. and indigent nonemergency spending and emergency bills. who would have thought of that? a permanent stop to the bridge to nowhere projects through the elimination of earmarks. [applause] i couple these budgetary reforms within overhaul of the regulatory process. when federal agencies, like the nlrb, are dictating to companies

where they can create jobs and where they cannot, they have overstepped their bounds and undermined our free market system. [applause] on my first day in office i will freeze all pending federal regulations, and immediately begin a review of all regulations put in place since january 2008. today, the federal register contains 165,000 pages. the index alone is 1100 pages. and somehow, despite not having any of these new regulations for over the first 219 years of this country's history, america not only survived, it thrived. the federal nanny state's heavy-handed regulations are

keeping our economy in the ditch. and it's time to review and to scrap those regulations that are harming jobs and telling growth. that's not telling growth. lastly, one of the greatest impediments to investment, john, you and i were talking about this before we came in, is the dodd-frank banking regulations. and i will lead the charge to eliminate them. [applause] dodd-frank is killing small banks. it is freezing assets to credit just one small business need them most. it in shrines bailouts, and the notion of too big to fail in federal law. it benefits wall street while it is killing main street. it is wrong, it is unfair, and it has got to go. [applause] listen, my plan doesn't trim around the edges, and it doesn't

bow down to the established interests. but it's a kind of bold reform that is needed to jolt this economy out of the doldrums, to renew american prosperity. and those who oppose it, they're going to wrap themselves in the cloak of status quo. america is under a crushing burden of debt, and the president simply offers larger deficits and the politics of class warfare. others simply offer these microwave plans, warmed over reforms based on current ingredients. americans though, they aren't searching for a reshuffling of the status quo, which simply empowers the entrenched interest. this is a change election. and i offer a plan that changes the way that washington does business.

the great issue facing this nation is whether we have the courage to confront the spending, and the vision to get our economy growing again. we need a tax code that unleashes growth instead of preventing it. that promotes fairness, not class warfare. that spark investment in america instead of overseas interest. it's time to create incentives for american companies to invest in american workers. [applause] and it's time to in the corporate loopholes in the special tax breaks for special interests, into the gravy train for lobbyists and tax lawyers but it is time to pass a tax that is flat and fair and that frees our employers and our people to invest and grow and prosper. we will set our employers and our people free by slashing the cost of government, cutting

taxes for the middle-class families, balancing our budget and growing our economy. the future of america is too important to be left to the washington politicians. to get -- [applause] to get america working again, we've got to cut taxes and spending, balance the federal budget and grow our economy and jobs. my plan unleashes american ingenuity for a new american century. restores the hopes and dreams of our people. it renews our great promise, and entrust the fate of this nation in the hands of our people, setting them free. let's be the land of the free again. god bless you and thank you all for being out with us today. [applause] [inaudible

conversations] [inaudible conversations] [inaudible conversations] ♪ ♪ ♪

♪ u. .. ♪ he's not the red, white, blue

hanging on the farm, semper fi tattooed on his left arm. ♪ won't buy nothing that a he can't fix with wd-40 and a wrench. ♪ he's just made in america. , made in america. , made this america. made in america. ♪ yeah, mountain man, traveling man, made in america. ♪ ♪

♪ ♪ ♪ ♪ when you hear a fiddle and a steel guitar, you're listening to the sound of the american heart. ♪ free music on a saturday night, brings a smile to your face and a tear to your eye. ♪ sing a song about the heartland, the only place i feel at home. ♪ sing about the way a good man works until the daylight's gone.

♪ sing the rain on the roof on a summer night when we still know wrong from right. ♪ sing a song about the heartland. >> live, now, to capitol hill, the hart senate office building is where the joint deaf sis reduction committee is meeting this morning. they're holding their fourth public meeting. members will hear from douglas elmendorf, the committee members just file anything this morning, so we expect this to get underway in just a moment. this is live coverage on c-span2.

[inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] >> as we see committee members taking their seats, and, well, it looks like they're about to begin. this is live coverage on c-span2. >> we are the people who are not being heard.

this secret committee. we are the people who are not being heard in this committee. you need to listen to -- [inaudible] the people are not being heard. we need our representatives to hear us. >> this committee will come to order. before we begin, relate me just remind -- let me just remind all our guests that the manifestation of approval or disapproval including the use of signs is a violation of rules which do govern this committee, so i want to thank our guests in advance for maintaining order and decorum. first of all, thank you to my cochair, representative hensarling, all of my fellow committee members and dr. elmendorf for joining us here today as well as the members of the public here in person or watching us at home. this committee has been working very hard over the last few weeks to come together around a balanced and bipartisan plan to reduce the deficit and rein in the debt. we've heard from our colleagues, we have heard there the standing house and senate committees,

from groups around the country and close to 185,000 members of the public through our web site, deficitreduction.gov. we continue our work now today with a hearing on discretionary outlays, security and nonsecurity. and i'm glad we're talking about this today because it's important for us to understand how these policies fit in to our overall deficit and debt. nondefense discretionary spending represents less than one-fifth to of total federal spending. listening to the debates here in d.c. over the last few months, you would think this small piece of pie was a whole lot bigger. as i expect we'll hear more about that from dr. elmendorf today. congress has gone to this relatively small pot with cuts and spending caps again and again while leaving many pieces of the budget essentially untouched, including the law that created this joint committee which cut roughly $800 billion in discretionary

spending. in all the focus on this one area, it's especially striking given we are spending about the same on nondefense discretionary programs in 2011 as we did in 2001. meanwhile, mandatory programs increased, defense spending increased, and revenues plummeted. so if this committee works together on a bipartisan plan to reduce the deficit, we need to keep in mind the cuts that have already been made, the role discretionary spending plays over all deficit and debt problems and the impact irresponsible slashing could have on our economic recovery and middle class tamlys across -- families across the country. as we all know, these aren't just numbers on a page. they effect real people in real ways. when food assistance for women and infants is cut, that means greater challenges for struggling families. when infrastructure investments are shelfed, that means fewer jobs and more crumbling bridges

and roads. and when research, education and student loans are slashed, that means fewer opportunities for our businesses and the next generation of workers. which is really no savings at all since we end up paying for it in the future. so while we should certainly examine every piece of the budget to see where we can responsibly make additional cuts, it doesn't make sense to simply keep going after one small part of the budget that disproportionately affects middle class families and the most vulnerable americans. today dr. elmendorf will be discussing discretionary security spending which has grown significantly in the years since 9/11. this is an area where the states of our nation are high from both the national security as well as the budgetary perspective. we've got to get this right. as many of my colleagues have noted over the past few weeks, it's an area that would be hit especially hard if this committee doesn't come to a deal and we move to sequestration. so i'm looking forward to a robust conversation today with

dr. elmendorf about these critical pieces of our federal budget. and before i turn it over to my cochair, i just want to say that over the last few weeks this committee has been working very hard to find common ground and a path towards a balanced and bipartisan plan that can pass through this committee, through congress and get signed into law. we aren't there yet, but i am confident that we are making progress, and i'm hopeful that we are moving quickly enough to meet our rapidly-approaching deadline. as i said from the start, if this committee is going to work -- and i believe that it must -- we all need to be willing to make some tough decisions and real compromises. i am willing to do that, and i know many of my colleagues are as well. every day we hear more and more about the effects of failure that would be on our nation's long-term fiscal health and creditworthiness, and over the next few weeks it's going to be up to all of us to demonstrate to the american people that we

can deliver the kind of results that they expect and that they deserve. with that, i would like to recognize my co-chair, representative hensarling, for his opening statement. >> well, i thank the co-chair for yielding and want to thank her again for her leadership on this committee. and the spirit of negotiation that she brings. there's no such thing as an unimportant hearing when it comes to dealing with our nation's structural debt crisis. and certainly within our nation's discretionary budget are contained many challenges and, frankly, many important priorities that have to be debated and negotiated. not the least of which is what many of us view is the number one function of our federal government, and that is to protect us from all enemies, foreign and domestic.

and specifically, our national defense budget which continues to shrink as a percentage of our economy, shrink as a percentage of our budget as we continue to live in a dangerous world. when i look at the totality of our discretionary budget, i do again find some common ground with my co-chair. and be, again, although there is no such thing as an unimportant hearing or unimportant section of the budget, in many respects today we may with debating the pennieses, nickels and dimes in a debt crisis that is demanding half dollars and dollar bills. there has been huge runups in our discretionary spending since the president has come to office. this is not the forum to debate the policies, but i think the numbers speak for themselves. without the stimulus program, the commerce department has increased from '08 to '10

102.9%. without the stimulus epa has increased 35.3%. subtracting the stimulus, housing and urban development increased 22.2%. state department without the stimulus up 132.2%, and the list goes on. again, it's not at this forum to debate these particular policies, but it is important to note the numbers that when these particular budgets are growing, the family budget which pays for the federal budget has, unfortunately, contracted. and it is the family budget that has to pay for the federal budget. as an order of magnitude, we know that the discretionary spending of our nation is roughly 40% and shrinking, our entitlement spending is roughly 60% of the budget and growing. we have interest payments on our

national debt that our mandatory spending is principally driven by our health care and retirement programs that are simultaneously starting to disserve their beneficiaries and driving the nation broke as they grow at five and six and seven percent a year where, unfortunately, our nation over the last few years has actually seen negative economic growth. so to put this in even a larger context, under the budget control act we collectively have a goal, a goal of $1.5 trillion in deficit reduction, but we have a duty, a duty to provide recommendations and legislative language that will significantly improve the short-term and long-term fiscal imbalance of the federal government. thus, the challenge before us remains that we must find quality health care solutions, quality retirement security solutions for our nation at a cost that does not compromise our national security, does not

compromise job growth in our economy and does not mortgage our children's future. everything else we do including dealing with the discretionary budget will be helpful. nothing else will solve the structural debt crisis or allow this committee to meet its statutory duty. only these reforms. and so prudent stewardship of our discretionary budget is going to be helpful. it alone cannot solve the crisis. it continues, though, to be an important matter. i look forward to hearing from our witness, and with that, i will yield back, madam chair. >> thank you very much. with that, i will turn it over to director elmendorf for your opening statement. and we all appreciate your taking the time out of what we've given you as a very busy life to take time to come today and answer our questions, so thank you very much, dr. elmendorf. turn it over to you. >> thank you, senator murray, congressman hensarling. i and the other folks at cbo are

happy to be trying to help this committee in a very challenging task. to all the members of the committee, my comments today will focus on four questions that are addressed in the written testimony. first, what does discretionary spending comprise. second, what has been historical trend in discretionary spending. third, how will discretionary spending evolve over the next decade under current law. and fourth, how might the path of discretionary spending be altered. before digging into that substance, though, let me briefly clarify some of the terms i'll use. when i talk about discretionary funding, i'm adding together the budget authority that is appropriated for those programs and the so-called obligation limitations that govern spending for certain transportation programs. those two types of funding provide agencies with the authority to spend money. when the funds are actually dispersed, they become outlays. also through the testimony i will focus on defense and

nondefense discretionary spending rather than security and nonsecurity spending. defense spending is a traditional category that includes all of the spending on military activities over the department of defense plus spending for the departments of energies, atomic energy and defense of related activities of ore agencies -- ore agencies -- other agencies. the budget control act sets caps on discretionary spending for 2012 and 2013 using different categories; security and nonsecurity. security includes most but not all of defense and also includes peeptions for the department of homeland security, the department of vet rapps affairs and the international affairs budget category. however, in 2014 and beyond the budget control act specifies a single cap on discretionary funding. there is an entirely different set of caps in the law that would come into play if legislation from this committee

does not generate sufficient deficit reduction. in that case the further cuts in spending that would be required are based on the traditional defense and nondefense categories. although to make the situation truly confusing, the act labels those security and nonsecurity as well. we thought it would be most useful for this testimony to focus on the familiar defense and nondefense categories. let me now turn to the first substantive question which is what discretionary spending comprises. in fiscal year 2011, total funding for discretionary programs was about $1.3 trillion of which more than half went to defense and less than half went to nondefense programs. if you turn now to the second page of the handout that's in front of you, you'll see a big doughnut that is labeled defense discretionary funding for 2011. of total defense funding for 2011, 43% -- the biggest piece

on the right of the doughnut -- went to operation and maintenance which pays for the day-to-day activities of the military, the training of military units, the majority of costs for the military's health care program and compensation for most of dod's civilian employees. another 22% of defense spending went to compensation of military personnel including pay, housing and food allowances. procurement, representing 18%, funds the upgrade of weapons systems. appropriations for the wars in afghanistan and iraq and related activities accounted for about a quarter of total defense funding. they were distributed across the category shown here or included in the amounts reported. if you turn to the next page of the handout, it shows a comparable picture for nondefense discretionary funding for 2011. seven broad categories accounted for about 80% of the total. education, training, employment and social services programs

together claimed 16%. transportation programs received 15% of the total. with about half of that going to highway programs. income security programs, mostly for housing and nutrition assistance, represented 11%. that amount does not include unemployment compensation, food stamps or temporary aid to needy families because they are all part of mandatory spending. discretionary appropriations for veterans' benefits primarily for the veterans health administration were 10% of total nondefense discretionary funding last year. health was another 10% with about half of that amount devoted to the national institutes of health. international affairs and the administration of justice were each about 9%, and the collection of smaller categories makes up the remaining 20%. looking at nondefense discretionary spending as a whole, about one-third is

dispersed this grants to state and local governments. of those grants about a third are devoted to education and training programs, and a quarter to transportation programs. with the remainder going to mental protection, law enforcement, economic development and various other purposes. let me now turn to the second question in the testimony which is the historical trend in discretionary spending. this is depicted in the next page of the handout. discretionary spending declined noticeably as a share of gdp from the early 1970s to 2000. mostly because defense spending declined relative to gdp from about 8% in 1970 to a low of 3% between 1999 and 2001. defense spending then climbed again. outlays for nondefense discretionary programs have averaged about 4% of gdp during the past 40 years. with considerable variation, as

you can see, but no evident trend. thus, on average such outlays increased during that period roughly in line with the size and income of the population. nondefense discretionary outlays were elevated in the past few years in part, as has been noted, because of funding from the 2009 recovery act. altogether discretionary spending amounted to about 9% of gdp in the past two years, higher than the 6% in 2000, but lower than the 11-12% of the early 1970s. the third question addressed in the testimony is how discretionary spending will evolve over the next decade under current law. to illustrate the potential impact of the caps on discretionary appropriations set in the budget control act and the automatic enforcement procedures contained in that act, we projected appropriations under several different assumptions including the three listed on the next page of the handout.

um, i apologize for those who don't have the handout. i think the members of the committee should have it in front of them. um, for other people i am referring to figures and tables that are in the written testimony, and there are a couple of slides that are words also from the written testimony. nothing i'm saying is new and is not in that testimony. um, the lance armstrongest numbers that -- the largest numbers that we looked at, about $12 trillion over the next decade, would come from extrapolating funding from 2011 adjusted for inflation. that's the way cbo constructed its baseline projections in recent years before the caps in the budget control act. the next set of numbers i'll talk about assumes that funding is equal to the new caps set in law, about $11.3 trillion over the decade. for illustrative purposes, i will focus in a moment on the scenario under which the caps are made through proportional reductions in defense and nondefense spending, but many other combinations are possible,

and the written testimony offers a range of possibilities. and the third and smallest numbers i'll talk about totaling $10.4 trillion incorporate the sequestration and reduction this caps that we estimate would occur if no savings resulted from the work of this committee. the next page of the handout the table 3 from the written testimony and deals with defense spending. i'll focus on just the two rows of numbers near the bottom highlighted in blue. i want to emphasize that the caps on defense spending do not constrain appropriations for the war in afghanistan or for similar activities, and the automatic enforce bement procedures -- enforcement procedures would not affect such purposes either. so you're seeing the numbers for the base defense budget. the upper of those two blue rows show the reduction in defense spending moving from the path where the amount of funding in the 2011 has grown with the rate of inflation to a path of proportional reductions in

defense and nondefense spending, funding to meet the caps. between 2012 and 2021 such reductions would total $445 billion, the number shown at the far right end of the blue bar, or about 7%. the lower of the two blue rows shows the larger reductions in defense funding, and moving from the path where the amount of funding jumped off 2011 to the path that would occur, um, if this committee's work resulted in no savings. between 2012 and 2021, the assumelative -- cumulative reductions on this path would total $882 billion or 14%. in the 2021 alone, defense funding would be $110 billion or 16% lower than it would be if such appropriations kept pace with inflation. if you skip the next page of the handout which is a continuation of the table, the figure beyond

that shows defense spending as a share of gdp. of the light blue line on the left-hand side, shows the history of funding for the base defense budget. the middle line on the right with the short dots shows our ro next assuming proportional cuts in defense and nondefense spending to meet the caps. the lowest line shows our projection if maximum automatic reductions were triggered. under those two assumptions, in 2021 funding for defense excluding war funding would represent 2.7 or 2.5% of gdp compared with an average of 3.4% during the past decade. the next page of the handout is table 4 from the written testimony and deals with nondefense spending. again, i'll focus on just the two rows of numbers highlighted in blue. the upper of the two blue rows shows the reduction in

nondefense funding. again, in moving from the path where 2011 funding grew with the rate of inflation down to the path that would result if caps were met through proportional reductions on the defense and nondefense sides. between 2012 and 2021, such reductions would total $318 billion -- $418 billion or 7%. the lower of the two blue rows again shows the larger reductions in this time nondefense funding and moving from this inflation-adjusted path to the path if no savings result from the work of in this committee. between 2012 and 2021, the cumulative reductions would total $794 billion. in 2021 alone nondefense budget authority would be $99 billion or 15%, lower than it would be if such appropriations kept pace with inflation. the next page of the handout shows nondefense funding as a share of gdp, again, figure 6 from the written testimony.

the line on the left side shows the history of such funding. you can see that nondefense discretionary funding spiked upward in 2009 but then fell back sharply in the past couple of years to roughly its average share of gdp during the preceding decade. the upper line on the right shows our projection assuming proportional cuts in defense and nondefense funding to meet the caps. the lower line shows our projection if maximum automatic cuts are triggered. under those two assumptions in 2021 nondefense funding would represent 2.8 or 2.6% of gdp compared to an average of 4.1% in the past decade. the fourth and last question is how the path of discretionary spending may be altered. let me make two quick points summarized on the last page of the handout. first, for some programs reductions hay be challenging -- may be challenging buzz

funding -- would be necessary to maintain current policies or plans. for example, implementing the administration's multiyear defense plans would require nearly $500 billion more defense funding over the coming decade than would occur if current funding increased at the rate of inflation. other examples where an inflation-adjusted extrapolation of current funding would be insufficient to fund current policies include veterans' health care and pell grants if for higher education. moreover, some observers believe the current policies in some areas are insufficient to meet the nation's future needs. for example, many analysts believe that current national spending on infrastructure is inadequate to provide enough roads, brings and can other capital assets to maintain the current level of services or to fund all of the prompts for which benefits exceed costs. of course, the spending on certain programs is allowed to grow father than -- faster than inflation. secondly, cbo assumes in it baseline projections that

funding subject to the caps will be equal to the amounts currently specified in if law for those caps. that means that legislation that reduced the funds available for particular discretionary activity or that achieve savings in undertaking a particular activity would only reduce projected total appropriations be the legislation also -- if legislation also lowered the caps. without a reduction in the caps, funding for other activities would probably fill the gap created by any specific reduction or savings. i hope this information is helpful to you, and i'm happy to answer any questions that you have. thank you. >> thank you very much, dr. elmendorf. again, thank you for being here today and taking our questions. as you know, this committee is working very hard together to try and find a balanced plan to reduce our deficit and rein in our debt. it is not an easy task. we all believe it's necessary. over the past ten years, domestic discretionary spending has remained essentially flat after adjusting for inflation,

and this spending has remained stagnant despite the growing need to have investments to spur job creation and assistance for those in our country who have been hit the hardest because of this recession. in your testimony you mentioned that discretionary outlays during the past decade increased primarily due to the increase in security spending after 9/11. so let me start by asking you a few questions about the impact of past and potential cuts to discretionary spending on our overall budget picture. would you agree that with the negotiations on the fiscal year 2011 appropriations bills and discretionary spending caps in the recent budget control act that congress has already made significant efforts to reduce discretionary spending? >> yes, senator. the current path of discretionary spending under existing law is a good deal lower than it would have been without the actions you described.

>> and isn't it the case that even if we completely eliminated discretionary funding, everything from nih to elementary and secondary education, military base construction, national parks, processing social security checks, all of it, um, we would still face deficits of hundreds of billions of dollars because we've not addressed entitlements and revenues? >> i've not done that precise calculation, senator, but you're most definitely right that discretionary spending is, as congressman hensarling also noted, a shrinking share of outlays over time and entitlement programs, mandatory programs as a growing share of outlays, in some cases growing rapidly. and without addressing that path of spending, it would be extremely difficult to put the budget on a sustainable path. >> okay. well, given the discretion their spending cuts that congress has already made, can you talk about what the economic impact or effect of further efforts to cut discretionary spending both in

fiscal year 2012 budget process and in this committee's final product? >> so over time cuts in discretionary spending, um, reduce in general the services that the american public receives, services in protection against foreign enemies, services in the highways they can use or the national parks they can visit or other sorts of programs. um, those have a variety of -- those cutbacks can have a variety of human costs. they can also have economic costs depending on the nature of the cutback. even infrastructure spending, for example, where many analysts think that the country should probably spend more. some sorts of projects could have a very high economic return, other projects could have a very low economic return. so the nature of the economic effects depends very much on the particular changes in policy. in addition, in the short term given the large gap between our economy's potential to produce output and the level of goods and services being demanded and

being produced cutbacks in government spending or, we believe, increases in taxes in the near term would reduce the level of economic activity and employment relative to what would otherwise happen. we view that as a separate effect over the medium-term or longer-term effects where the effects, as i said, vary a great deal depending on the nature of the program being cut. >> okay. well, all of us on this committee know we need to address the long-term drivers of our unbalanced federal budget. but i also really believe that we have to take steps to strengthen that economic recovery and address the jobs crisis that we're seeing today. um, now, according to cbo's rule of thumb regarding economic growth and its relationship to budget projections, cbo states, and i quote: stronger economic growth improves the budget's bottom line, weaker growth worsens it. now, cbo's projections for economic growth are now weaker

for 2011 and 2012 that projected earlier this year, correct? >> yes, that's right. if we would do a forecast today, yes, it would be weaker than we wrote in august. >> okay. well, nearly all of the economists are telling us that growth continues to suffer from a significant weakness in demand. and many are warning against pursuing overly aggressive measures of austerity in the short term. and i wanted to ask you, do you agree that a lack of demand is one of the key factors holding back our economic recovery? >> yes. i think it's a widespread view among analysts that lack of demand for goods and services is the key factor holding back the recovery. the further question, of course, is the source of that lack of demand. >> okay. so how does a reduction in government spending generally affect demand on the economy and during an economic downturn? >> reduction in government spending will generally reduce the demand of -- for goods and services either because the government is buying less itself, or because it's providing lower transfers to

individuals to purchase goods themselves. >> does tax increases or spending cuts have a larger impact in reducing that demand and the economic growth? >> depends on the specific tax increase or spending cut that you have in mind, senator. um, certain forms of government spending, we think, have a large bang for the buck in terms of effects on demands, others have lower effects. certain types of tax increases would restrain demand other over kinds. depends on the nature of tax change, often on the recipient on the spending or the payer of the tax. >> okay. thank you very much. i appreciate it. representative hensarling? >> thank you, senator. >> thank you. dr. elmendorf, again, on behalf of the entirety of this committee, i want to thank you and thank your staff. we know that you are sorting through a number of homework assignments, if you will, from various and sundry members here, and again, we want to thank you

with the diligence and professionalism you bring to that task. >> thank you, congressman. >> um, again when i look at the statutory duty as opposed to the statutory goals of this committee, our duty is to, frankly, offer recommendations in statutory language to address both the short-term and long-term imbalance. with respect to the short-term imbalance, um, is it not true that the stimulus bill, um, with interest amounts to over a trillion dollars of spending which accounts for a large temporary growth in our discretionary budget? >> many -- um, yes, although as you know, congressman, only part of the recovery act was about mandatory spending. in total we put it a little over $900 billion, and including

interest, i think you're right about a trillion. and it did lead to a bulge in discretionary funding and then to an attenuated bulge in outlays because not all the money got spent right away. >> i don't know if you have at your finger tips numbers with respect to agency growth. i had quoted a few, and now that i look down, apparently, the source is your office, so i hope i'm quoting your office correctly. >> i don't have those at hand, congressman, but if they're numbers from us, then you certainly can trust them. [laughter] >> well, then i trust when you add in the stimulus, the commerce department has grown 219% from '08 to '10, that with the stimulus epa a has grown 130.8%, the energy department has grown 170.7% with the stimulus, education has grown 190.6% at a time when the

economy has actually seen negative economic growth and family paychecks have. >> rupg. and, unfortunately, again, this is not the forum in which to debate the stimulus, but i think it has to be noted when we're talking about areas of the budget where savings could be had, at least the american people certainly deserve the facts. i want to follow up to some extent a point that my co-chairman was making, and i believe i have in the right. correct me if i'm wrong. under your alternative fiscal scenario which, essentially, is a current policy baseline i believe it is at 2024 that all federal revenues will simply be used to fund the mandatory portion of the budget which is essentially our entitlement and interest. is that correct? >> i'm sorry. again, congressman, you have a better hand around our facts than i have.

but the qualitative point you're making is certainly right, that mandatory spending just dominates the government budget in an increasing way, in a rapidly increasing way over time. >> this actually came up in our earlier hearing with you, and i think i have this correct. under your alternative fiscal scenario, you assume a growing revenue base, do you not? do you not assume revenues increasing to their historic level of roughly 18, 19.5% of gdp? >> yes, that's right. >> and don't you also assume in your alternative fiscal scenario the tax increases that are contained within the patient protection and affordable care act? do you recall if those are assumed in your fiscal -- >> so what we do, as you know, in our extended baseline scenario we try to follow current law. the the alternative fiscal scenario is meant to track closely what people think of as

current policy. we hold them as a historical average share beyond 2021 without trying to specify ourselves what combination of specific tax policies the congress might enact to hold revenues at that level. so there's no specific answer to whether any given tax is in the or out of that alternative scenario beyond 2021. we've just set revenue at the historical average to provide information for the congress of what might happen if that sort of policy, set of policies were continued. >> i have a question about, um, the overseas contingency operation, the oco funding. i believe that you have recently readjusted your baseline, but we all know that the president announced that our military engagement in iraq will end this year. and the president plans to completely reverse the surge in the afghanistan, i believe, by this time next year.

um, but i still think you are showing a pretty hefty sum in the overseas contingency operation line item. so can you explain to us the assumptions underlying this oco number? >> yes, congressman. what cbo does for any part of discretionary spending that is not capped under law is to take the latest funding that has been provided by the congress and to extrapolate that over the decade to grow with inflation. um, so when we estimated the effects of the caps under the budget control act at the end of july and in early august, we compared those caps not with the baseline projections we'd published in march, but with the later level of funding that the congress had enacted at the end of march as part of the deal to get through the rest of the fiscal year. so similarly now, although our latest baseline projection was published in if august, we would

focus estimating any caps that one might impose on overseas contingency operations on the difference between those caps and the level that the latest level that's been appropriated by the congress. and that latest level is about $119 billion on an annual basis. if one extrapolates that $119 billion with growth for inflation, one ends up with about $1.3 trillion over the coming decade. um, and for that as for other components of discretionary spending, we don't make an evaluation about how those numbers compare with the likely demand for funds or with any particular evaluation of the appropriateness of the spending. it's, it's a mechanic aleck traplation. if you thought we would spend less than that over time, one could -- >> if i could, doctor, i see i'm already over my time, but i guess it's fair to say that under your protocols and your rules the president's recent

announcement that this money is, essentially, not going to be spent anyway does not come into your calculation. >> not until the congress enacted a different level -- >> thank you. >> thank you very much. can i just ask, how closely has that extrapolation tracked over the last five years? >> well, the written testimony shows the pattern of funding that congress has provided. um, for the past several years the annual funding was on the order of $160 billion. um, so this new level is about $40 billion below the level that's prevailed in fiscal years 2009, '10 and '11. >> okay, thank you. um, we will now move to each of our committee members for six minutes, and we'll begin with representative becerra. >> dr. elmendorf, thank you very much for being here, and thank you for the work you're helping us do over these last several weeks and hopefully over the next several weeks as well. let me just try to dispose of one question real quickly.

one of our major problems with is the drop in revenues we've seen over the last several years, and we're trying to tackle the issue of how to best increase those revenues. one of the ways you do that is through economic growth. if folks are back at work, unemployment rates go down, that means you're paying less in unemployment benefits which is an outflow of money, and you're also increasing your revenues because people are paying taxes again. my understanding is that be if you increase the level of employment by a certain amount, you'll see a commensurate decrease in the level of deficits and, of course, the commensurate increase in the gdp. can you give us a real quickie knop sis of what happens if we put people back to work? >> so the stronger the economy is, as you say, congressman, the more the federal government and other governments collect in revenue and the less it pays out in benefits of certain sorts. the biggest response is on the revenue side. if one is looking for a rule of thumb, um, people off say that

the federal government's effective tax rate on the margin for an extra dollar earned is collected about 25 cents of that in federal revenue. so an extra dollar of gdp, um, might induce another 25 cents or so of extra revenue. that's, of course, a very, very rough rule of thumb. and the actual number would depend very much on the way in which the economy improved and who received the this many and how it was taxed and so on. >> so the more you put those 15 million americans back to work, even of them earning even if it's only an average american salary, that's thousands of dollars per worker that effect a quarter of that dollar that each one of those dollars workers earns could help us decrease these deficits. >> of course, it depends on what policies one invokes to move the economy back towards full employment. >> and that's why we invite you to be part of this 12-person

panel to help us with those answers. let me move on to discretionary spending. my understanding is your procorrections, and you showed us through some of these charts what you think might happen if reduction in some of these outlays and investments would occur in both defense and nondefense over the next ten years as a result of the caps, and then if we are not able to come to some agreement, as a result of the triggers in sequestration. my understanding is under the caps there are firewalls which separate the savings that we would extract from defense from nondefense, but that a those firewalls exist for only two years. your projections go out for ten years. so are you saying that the savings that you show in defense are guaranteed, or that's what we presume if projections continue forward that half of the savings will come from defense and half of the savings in the caps will come from nonce especially if? >> so what the budget control act does is establish separate

acts for security and nonsecurity funding, and security funding is both defense funding and other pieces of funding as well. but you're right, beyond those first two years there's no cap in overall funding. what we looked at in the written testimony was three alternatives, one in which the reduction from the inflated, former baseline with inflated amounts, one in which that was taken up almost entirely through cuts in defense spending, one in which it was absorbed almost entirely in cuts through nondefense funding and one where it was proportionallal cuts in defense and nondefense spending. we looked at the range because, in fact, it will be up to future congresses to decide. >> and that's the point i was hoping you'd make is that it really depends on what congress does where we'll see the savings occur. >> yes, absolutely. >> another quick question. total up all of discretionary spending whether it's for pentagon, whether it's for education, environmental protection, clean water, clean

air, food safety inspection, total that up. how does it compare to the amount that we spend through the tax code through what are known as tax expenditures, the tax earmarks? >> um, we haven't published an estimate of that, congressman. i've seen estimates, but the sum of tax expendtures is about a trillion dollars a year. um, as i mentioned, the total funding for discretionary purposes last year is about $1.3 trillion. >> so we, we spend almost as much through the tax code for certain constituencies as we spend through the entire appropriations and allocations process through the regular budget tear progress -- budgetary process. that's the type of spending that we're not talking about today, the tax expendtures. but you did discuss it some the last time you were here. >> yes. >> appreciate that very much. >> yes. >> final question. want to thank you for the report you just issued on the distribution of income in america and a comparison over the years. you, i think, highlighted some

pretty startling numbers about the disparity in income and wealth in america today where the top 10%, 20% of americans and actually the top 1% of americans have really seen a concentration of wealth going their direction as opposed to, essentially, the very middle of america. can you give us a quick synopsis of what you found? >> so we found as other researchers have found, congressman, have pronounced widening of the income distribution in this country, um, with reductions in the share of national income going to the bottom four quintiles over the 1979 to 2007 period. and a very large increase, roughly a doubling, in the share of national income going to the top 1% of the population. >> thank you. and i see that my time is about to expire, so i thank you very much for all your assistance. >> thank you, congressman. >> yield back. >> thank you.

senator kyl? >> thank you, dr. elmendorf. let me read to you an e-mail that was sent to interested hill staff by the associate director for legislative affairs at the congressional budget office on october 17th. the subject of the e-mail is hhs class announcement on cbo's baseline. on friday the secretary of hhs announced that the department does not plan to implement the class act, long-term care insurance program, under current law. therefore, in its next baseline budget projections which will be issued in january, cbo will assume that the program will not be ip policemenned. implemented, unless there are changes in law or other actions by the administration that would supersede friday's announcement. furthermore, following longstanding procedures cbo takes new administrative actions into account when analyzing legislation being considered by the congress. even if it's not -- even if it has not published new baseline

projections. beginning immediately, therefore, legislation to repeal the class provisions in current law would be estimated as having no budget tear impact. now, this says that you're longstanding policy is to take new administrative actions into account, and as you testified in response to representative hensarling's question, this would suggest that you wouldn't necessarily wait for congress to act. the president is commander in the chief. his troop announcement that representative hensarling talked about is tantamount, in effect, to a congressional action. he has the ability to withdraw the troops down. what is the difference between his announcement that we will have no presence in iraq after christmas and his previous decision and announcement that we would withdraw in stages the troops from afghanistan over the ensuing year, what's the difference between that

announcement and the class act announcement in terms of cbo baseline decisions? >> i think the difference, senator, is the difference between the treatment of mandatory spending and discretionary spending laid out these by 1985 in the balanced budget and the emergency deficit control act, and, um, followed since then by cbo this in conjunction with the budget committees. for mandatory spending, and the class act falls in this category, a program where congress has established certain rules, parameters within which administrative actions can be taken, we're always trying to provide our latest estimate of the effects of that set of authorizations on the federal budget. and if there is news in the form of a very distinct announcement that some program has been abandoned, then we adjust the scoring base for those mandatory programs. um, but for discretionary spending, um, our projections don't respond to particular sets of programs or objectives, um,

because the congress can choose every year how much to provide for purposes -- >> but, if i could interrupt, this is a distinct without a difference. the president is the one who deploys troops, not congress. so are you saying that that difference requires you to wait until congress acts even though the commander in chief has already made his announcement and begun the program for withdrawals? >> yes, senator. >> in theater they are making plans as we speak on how they're going to withdraw the troops from iraq. >> but, senator, with respect, i think it's a distinction with a difference. we are not equipped to project the, what defense funding the president request in the future or what funding the congress will enact in the future. so this news from the administration is a factor that will presumably effect the funding they request and the funding congress enacts, but not necessarily in a one to one way that we could analyze. >> so this memorandum that was

sent should have distinguished between mandatory and discretionary spending when it talks about, um, cbo's policy, cbo will assume the program will not be implemented unless there are changes in law by the administration that would supersede the announcement. following longstanding procedures, it takes new administrative actions into account. so they should have distinguished between mandatory and discretionary, is that what you're saying? >> i think you're right, senator. i should have put that word in. but just to emphasize, the things i'm describing on both the discretionary and mandatory side are procedures that go back at least a quarter century. >> so then with regard to the so-called oco savings that the president included in his alleged budgetary savings, it all depends upon whether the defense appropriations, um, legislation is passed or when

that legislation is passed as to whether you would change your baseline. is that correct? >> yes. so congress enacts a different level of appropriations, um, at any point, then anything we would do after that point would respond to that new level of enacted appropriations. >> thank you. so if we're able to get the appropriations bills completed before the december 23rd deadline for this committee to act, much to the alleged oco savings would no longer be available because of an adjustment in your baseline projections, would that be correct? >> i don't know, senator. depends what level of appropriations you enacted. >> to the extent they are lower than the previous years, would it not cut -- >> to the extent they're lower than the $119 billion already enacted for this fiscal year, that is a good deal lower from the $159 billion from the last fiscal year. if, in fact, congress decided to enact below $119 billion for overseas contingency operations, then that would bring down our projection of those and the base against which we would estimate

further reductions. >> thank you very much. >> importantly. thank you. >> senator baucus. >> thank you, madam co-chair. i'd like to just focus a little bit on defense spending. um, is it true that current level defense spending including oco, otherwise known as overseas contingency operation, otherwise known as war funding is hiring out in historic terms compared with any other time in american history except for world war ii, that is, is the current level of defense spending including war funding, um, greater now than during the korean war? >> um, yes. i believe that's true, senator.

>> okay. >> as i showed in my testimony as a -- >> no, i'm not talking about -- no, no, i'm not talking about share of gdp. >> in dollars? >> dollars. >> dollars adjusted for inflation? >> dollars. dollars adjusted for inflation. >> yes. so in dollars adjusted for inflation, dod spending was about $240 billion during the korean war, and in 2011 it's nearly $700 billion. >> okay. so the same could be true for the vietnam war, that is we're spending more -- >> yes. >> -- in dollars than we did in vietnam adjusted for inflation. >> yes, sir. >> adjusted for inflation, thank you. and more than we ever did during the reagan administration adjusted for inflation. >> yes, senator. >> and more than the cold war average. >> yes, senator. >> which is the highest since world war ii. is that correct? >> um, so, um, by our -- i think during the reagan administration, yes, that was higher than the vietnam war and be korean war. >> okay. we've already touched on this, but i just want to nail this down. the budget control act, as you

mentioned, had two separate caps for 2000 -- what is it, 20 -- >> '12 and '13. >> but no separate caps for security thereafter? >> yes, senator. >> which means that the appropriations committee through congress could decide to spend more on security than is allowed under the caps in the first two years. >> yes. it can take any allocation -- >> and -- >> [inaudible] >> total caps. >> yeah. if this committee doesn't achieve any additional savings, then the enforcement procedures establish separate caps for defense and nondefense discretionary spending. >> okay. >> but under the basic cap, you're right, senator. >> okay, so the base caps in the act, are there any caps on war spending? >> no, senator. the caps do not constrain war spending. >> there are no caps on war spending. >> no. i think, technically, the caps would be adjusted upward by any

amount of spending that was designated by the congress -- >> that's a technical point. the main point is there are specific caps for security and nonsecurity at least for two years, no caps in the act for subsequent years and no caps whatsoever on oco. >> that's correct, senator. >> nothing. >> yes. >> okay. no caps on oco. now, it's -- has the appropriations committee sometimes gone to oco to spend dollars that are really, arguably, not war funding because that's a kind of extra pot of money to use and there are no caps on it. has that ever happened? >> senator, i can't speak to the motivations or thought process of the appropriations committee. certainly, there will be inevitably some ambiguity in any effort to allocate costs and what costs are truly attributable to these wars and what costs are not will be a

matter of judgment. >> okay. department the center for appropriations committee propose -- i think they actually did -- $9.9 billion of base programs requested by the president to this account? is. >> i think over the past few years, senator, there had been some movement of money designated for oco and i think some movement in the other direction as well. i'm afraid i don't have an overall assessment of all the numbers involved. >> what about there are report that is the committee, obviously, has to be double checked. 100 million was taken out of oco for migration and refugee assistance for places like kenya and pakistan? >> i'm sorry, senator. i don't know. >> but we do know there's no limit on oco account. and let me ask, how is it defined? what are the definitions of what constitutes and does not constitute appropriate spending out of the war account? >> so in our presentations we

follow the, um, the labeling provided by the congress, and it's up to you and your colleagues to decide what you support under various categories. >> but it just kind of sounds like it's what congress wants to do. >> that's our -- yes, senator. >> and -- [laughter] [inaudible] but you're saying there are no rules under the budget control act that would restrict the migration of base defense spending to oco in the future. >> i think that's up to the congress, as i said, to designate what it views as related to those operations and what it views as part of spending that would happen anyway. ..

>> below the level of funding that a space on the extrapolation with increases for inflation from the latest enact appropriations and we would estimate savings from that. >> and you're suggesting by one point, what did you say? >> about $1.3 trillion spent on capps? >> that's not magic. that's $119 billion most recently enacted extrapolated with inflation. >> but if it were to set a cap, then that would be scored? >> would estimate the effects.

>> representative upton? >> thank you, madam chair. and again, dr. elmendorf we appreciate your participating today. i just want to take us back to a question from earlier today, and that is if this committee works to try to get an agreement, a solution, what is the real date that you want us to give you the information that your worker bees can turn out at? at, a reasonable number for us to? >> as you know, congressman, our skilled analysts are working hard for this committee spent did they have time off until now? >> know, congressman, afraid not. have a terrifically hard-working professional. as i said the last time i was here if you have a set of proposals that would make changes across a range of mandatory spending programs, then that would require as some weeks to work with legislative

council and the staff of this committee in refining the legislative language to accomplish the objectives you're setting out to accomplish and then for us to produce a cost estimate. backing up from thanksgiving, that left us looking at the beginning of november, which we are very aware as you are, is not very far away. >> thank you. what is the deficit, the share of gdp today to? >> deficit in fiscal year 2011 just completed was about 8.5% of gdp. >> and if this completely fails and we end up with a sequester, we do the numbers that you suggested here in your testimony for both defense and nondefense, in defense would end up with a sequester up in essence of 882 billion in savings over 10 years, and number of almost the

same, 794 and nondefense over that same 10 years. and nothing on the entitlement side, or nothing on the mandatory side. just those two, where would we go in terms of the debt as a percentage of gdp, 10 years down the road? >> congressman let me be clear. the number is comparison of the sequestered, inflated extrapolations, not the amount of the sequester or the special enforcement it's a. our baseline, remind you, our baseline projections for august incorporated the $1.2 trillion that is under current law to be achieved either through the actions of this committee, or through this enforcement procedures. so whether the committee its $1.2 trillion or hits the remainder is filled in for the enforcement, as long as you don't save more than $1.2 trillion you're putting yourself back to our baseline

projection from the summer. under that rejection, allowing for expiring provisions of the tax code to expire, and medicare payments to doctors to be cut very sharply, and the other features of current law, deficits, by the end of the decade, our one and have percent or so of gdp on debt that is declining relative to gdp. that change is critically on revenues rising above the share of gdp as it would under current law, and discretionary spending falling well below its average share of gdp. in order and essentially to make room for the rate increase in social security and major health care programs. >> i don't know if you saw the gao report that was released earlier this week as related to if this committee fails, or i want to say, the trillion dollars in savings is not sufficient is the words that they used for stability, and they predicted in essence i

believe a credit downgrade. have you had a chance to look at the port? >> i've glanced at it spent do you have any comments? i know just came out this week spent one technical point, which is they offer two scenarios, one of which is close to our alternative scenario but i think current policy. the other which they you closer to current law. nonetheless, what they do in that scenario is to limit the increase in tax revenue as a share of gdp that would happen under current law. our extended baseline scenario incorporates the rising revenues relative to gdp that would persist and go on beyond the next decade. both of their scenarios look worse than our better scenario. it's a difference in policy assumption about tax revenue, tax policy. but we certainly agree very much with their, the underlying point of the analysis that under current policies the u.s.

government is on an unsustainable fiscal path, and that the magnitude of changes that will be needed from current policies is very large. as i said last time i testified, if one wanted to consider extending the expiring tax provisions and limiting the reach of the alternative minimum tax and adjusting medicare payments to doctors, the deficit over the coming decade becomes eight and half trillion dollars rather than the three and have trillion dollars under current law. the debt will be rising relative to gdp to levels with almost never seen in this country. >> thank you. >> representative clyburn. >> thank you very much, madam chair. dr. elmendorf, thank you very much for being here again today. as you may recall in the first hearing, i discussed a little bit of the growing act that

exist. i did that with reference to employment numbers. now, a recent report indicates over the last 28 years, in my estimation that's a generation, of the last generation we have seen an increase in income of 1% of households in america. of 275%. during that same time you are seeing the increase in the top 20% of 65%. but of the bottom 20%, only 18%. now, over that same period of time for the 60%, we have seen income has grown only 40%. that indicates to me that the

middle income is shrinking relative to the rest of the country. now, if you were to extrapolate that out as you talked about, i would assume that we are where we are because of, to the extent of government policy has allowed this gap to exist. if we continue current policy, then it's fair to say that we are going to experience that kind of continued widening of the wealth gap in america. in the united states. >> one of the issues we wrestled with in our projections is the evolution of the income distribution. the study that we did as you know ins with the year 2007,

what's happened during the past few years of the recession, financial crisis is not clear, although if you look at our study past recessions have shown some narrowing of the income gap, particularly because higher income people collect relatively larger share of the income from capital income which tends to be more cyclical. so just where we stand today, i'm not sure. our projections to incorporate some ongoing distribution but whether it's on, whether the events, the last 30 or so years will continue at that pace we don't know. i don't think our projection calls for continuing widening to that extent. but neither do we see forces at hand that would cause that to be reversed in coming years. >> so we don't see anything -- >> no, again except the effects of this recession which we don't have data for. but looking from here on we don't see those underlying factors reversing. >> i would assume then, i've

seen a whole lot in the media in recent days about who is, in fact, paying the taxes in the country. i'm assuming as my dad used to tell me, don't argue about taxes because if you really owe them, that means you admit something. i'm assuming these people are not 10 because they don't owe anything. they don't own anything because they have not made anything. so that's just as option on my part. but let me look at this economic ladder that we talk about, we talk about a lot. if we are going to see a shrinkage in that gap, it would seem to me that we need to start looking at how to prepare people to assume tax paying

responsibilities in our society? if we do that by investing in education, to the extent that things like pell grants, entitlement for disadvantaged people, all of these things are designed to prepare people to earn income and, therefore, pay taxes and not be on the government dole as we like to say down south. am i to believe that if we dramatically reduce that investment, then we will dramatically reduce people's abilities to assume these responsibilities, and to become taxpayer? >> raising important and difficult questions, congressman. the people's ability to earn incomes comes as you know from a whole variety of forces, on their lives. federal government policy is one of those forces. and if federal policy were

changed in a way that provided something less support for people in obtaining educations or getting skills, that could well affect their income in the future. but i don't have a way of quantifying that come in very much on a specific program, there's a very large research literature and a lot of excrement nation in the world about training programs for example. and something to work well in some seem to work better. the ones that work well art typical. sometimes to expand to a more, a larger scale. so just what role particular government programs play is again a much studied question and we do some work in the area. but there isn't a very general and should help important that is as of the factors influencing's ability for earning income as you say and then pay taxes. >> thank you very much, dr. elmendorf. this time goes very fast here. >> thank you, congressman spent my time is expired.

>> senator portman. >> thank you, co-chair, and thank you dr. elmendorf for being with us again and all the work you and your team are doi doing. in responding to our many inquiries. because i said that i expect mine to be prioritized. kidding, ma guys. [laughter] we prioritize everybody first, senator. >> thank you. especially the committee, i hope. because we do have a short period of time and have a lot of work yet to do. you talked a little about jobs and economy earlier, and my collie, congressman clay bridges raise this issue important to jobs which is after all one way to get people paying taxes it to be sure they have the opportunity to earn, i don't know if money to pay those taxes, and you said that you believe that demand was a key issue. and source of that lack of demand was the tough question. and i would just ask you if you

could comment on the unsustainable fiscal path that you've outlined to repeatedly including again today and the fact as you said we are increasing the debt from anywhere from three and a half trillion dollars to $9 trillion over the coming decade, depending on if you use the current policy our current baseline. remind as our commitment here is to reach 1.5 and 1.2 to avoid sequester. that, of course, isn't even close to the increase we're likely to see from the current 14 a half trillion dollars debt. what impact does that have? i'm sure you've looked at studies who have commented on the impact of this unsustainable fiscal situation on our current economy. >> so, i think the unsustainable path matters in the short run for various ways, partly the borrowing of the government has done and in anticipation of government borrowing can crowd out private investment to some extent.

at the moment with investment, private investment week anyway, and magnitude of the crowding out has left clear, effect we see treasury interest rates been very low at the moment. but there can be crowding out of investment. i think beyond that the uncertainty about fiscal policy is probably went on households and businesses. they can recognize that they will have to be as a matter of arithmetic changes in taxes and/or spending relative to current policy. but i don't know what those changes will be. and i think that sort of uncertainty naturally is an inhibiting factor in decisions, particularly commitments of money over time to invest in factories and equipment, to invest by hiring people, to invest in housing and durable goods. that uncertainty is a piece i think of broader uncertainty about government policies. there are a lot of different policies that are i think up in the air in a way.

and that policy a 30 of course is a piece of a much broader uncertainty about the state of the economy, and income to households they will hav have ie future and the demand for the demand of services they will have. >> i appreciate that. as an economist i appreciate your giving us really a sense of the importance of our task. because it's not just about cutting spending. it's about the economy and jobs, and although we are not called the jobs committee, what we do will affect that going forward. and again, substantial ways we would hope, all of us but it will make a difference and take us in the right direction. the alternative of course is to talk about today as well, which is if we don't do our work what impact that could have come even make our prospects for economic growth more negative. i guess and figures you that you may not just because they're from the office of management and budget. and you said earlier that you

trust the cbo figures. but i think they're consistent with yours. let me start by saying i totally agree with what you said earlier, mandatory spending dominates the federal, or mandatory spending dominance federal spending if that was your quote a few minutes ago. co-chairs have made that same point increase ways from different perspective. and i totally agree with it. i think if this committee doesn't get as the issue which is the biggest part of our budget, over 50% of the budget, 60% if you include some of the debt, it's gone from roughly 25% over budget in the 1960s to over 50% today. if we don't get at that, the largest part and the fastest-growing part we will of course not have accomplished our goal. but having said that, let me give you some statistics on the discretion decide since that's the topic of our hearing today. i'll give you some numbers from 1990 until today, nondefense discretionary has risen during that time by 95%.

which by the way is nearly double the 52% growth in defense spending. 52% growth in defense spending from 1990 until today, 95% on nondefense. now admittedly the defense spending is not as i because the increases we've seen have been more recent from 2001 which reflected an increase from the cuts in the 1990s on defense. so if you use just the last decade defense would be higher. but let's look then at 2001-2011 on the nondefense side. outlays on the education side, discretionary spending of 116% in the last 10 years. international spending of 102%. community regional development spending of 117%. health research and regulation spending up 56%. and so on. so i just think we need to keep both these things mind. one, if we don't deal with the spending issues it's tough to get this economy going.

we have seen substantial increases in discretionary spending, understanding the bca has now put those spending levels under more constraints. do you agree with those numbers? >> i don't know those, i would not argue with your numbers. >> again, thank you for all your help to help us achieve the goal we all talked about today, and we look forward to working with you more. >> thank you, senator. >> senator kerry spent dr. elmendorf, thank you very much for being here. thank you for the terrific work and your team are doing. we appreciated. it's my understand that cbo keeps regular estimates on the number of jobs that have been created by the american recovery and reinvestment act, is that correct? >> yes. we are reap is required to publish that once a quarter. >> just quickly, is it not correct that without the policies of the american recovery and reinvestment act that gdp would be lower and unemployment would be higher?

>> yes, senator spent so it has had a positive impact on gdp and in reducing unemployment? >> those are estimates, yes. with respect her work here in the committee, i talk to you last time you hear about going big, about $4 trillion total target if you clued the money already cut, 3 trillion if you don't. it's my understanding that you already have in your baseline and accounting for 1.2 trillion deficit reduction by this committee, is that accurate? >> yes spent if all we do in this committee is 1.2 trillion we in effect are not reducing the deficit below the current level? >> that's right. is because of this automatic enforcement procedures. if you don't take explicit action there is a backup plan which is further cuts in spending that i've outlined. >> with respect to the bigger deal, so to speak, would you tell the committee or share with the committee your perception, assuming you had a $3 trillion

reduction, which included something along the ratios we've all heard about either in simpson-bowles or gang of six, somewhere in the vicinity of three to one or two to one, of cuts to revenue, and assuming that the revenue were to come exclusively from the highest in people, 275% increase in income, can you make a judgment as to what the impact would be on the marketplace and perceptions of deficit reduction our job growth that come from the 3 trillion versus just achieving the 1.2 trillion? >> so, just looking at the aggregate deficit reduction, i think it's clear that larger reduction coming from the work of this committee would have a positive effect on current spending and on current output and employment. and conversely, that failure of

this committee to reach agreement or for congress to enact an agreement reached by the committee would have a negative effect on confidence and thus on spending. >> and if we do simply 1.2 trillion, or 1.5 which is the target goal, and that's all we do, isn't it a fact we're going to be back here in about a year or two or three a maximum dealing with very same issues that are on the plate doubt about the unsustainability of our budget? >> yes center. and i think that is certainly right. >> so in terms of the duty that co-chair hensarling has talked about to provide language to significantly reduce the most important message to the marketplace i am told comes if you achieve a $4 trillion total which is the only way to begin stabilize the gap, is that not accurate? >> yes. the amount that is needed depends very important on how you view the expiring tax provisions and some other provisions of current law that

would take us away from current policies to which people have become accustomed. if one extends all or a large share of the expiring tax provisions over the next few years, then the gap between spending and revenues over the coming decade becomes much larger and much more other action is needed in order to achieve any given objective for the path of debt. >> can you share with the committee what would have a greater negative impact on growth? the failure of the committee to come up with more than 1.2 or 1.5, and the marketplace signals that would send about the continued fiscal plight of the country? or inability to come up with a 3 trillion or $4 trillion level that had that three to one, two to one ratio that i talked about with any revenue coming either from closing tax loopholes or exclusively from the high-end

275% increase income earner? which would have a greater negative impact on our economy? find some revenue from those folks and getting the deal, or having no deal and not having that revenue? >> i'm afraid i can't analyze the sort of policy proposals you're describing in my head. we have not talke -- >> you have told us if we fail to come up with anything that deals with the unsustainability come we are sending a bad message to the market place, aren't we? >> yes. again, i think in terms of the amount of deficit reduction the more that this committee can achieve, over some period of time, the better that would be for current confidence but i can't wait that off against the effects of sort of a hypothetical commendation of specific spending and tax changes. >> leave the hypothetical out. can you tell us what, for

instance, the expiration of top end of the bush tax cut, if it went from 35 to 39.6, and it was part of a $4 trillion deal, would that have a negative impact on growth in our economy? >> we actually did last fall for the senate budget committee provide estimates of the effects on the economy of different ways of extending the expiring tax provisions. and extending them at the positive effect of reducing deficit -- had a negative effect of reducing effects -- keeping rates lower. in our estimates the negative effects of the extra debt was larger than a positive effect of lowering marginal tax rates. for those particular policies that we look at, again over the medium and longer term but that's why the answer depends on specifics. >> thank you very much. appreciate it. >> thank you, coach or.

mr. elmendorf, is there anything in the budget control act that would prevent the congress from changing how the sequestered would affect defense spending? >> i mean, connors could enact a change in law that could override the budget control act. >> so there's nothing in the budget control act that would prevent that? >> no. in general as you know any congress can reverse the actions of the previous congress. >> i appreciate your response to a question by senator murray that you believe that your projections on gdp growth are too generous and that she believed action would be lower which means action our deficits would be worse than you projected in the past. but under your projections, you're assuming a 30% cut to positions in medicare, are you not? and you are some that taxes go up $3.8 trillion everybody taxes go up. certainly would have a detrimental effect on the economy.

and you're assuming that there's a cat to discretion spending. so as you project that in answer to mr. upton's question, they will decline as a percentage of our gdp, it's based on all of these assumptions which frankly what impact that never particularly in one way. >> it's not our assumptions. we are following current law. >> these were baked into your proposals and your testimony today. i just tried to point that out. under either of your long-term fiscal projections, spending on entitlements or mandatory health programs, social security, et cetera, will increase between 15-17% of gdp of our gross domestic product. and net interest costs will increase between four and 9%. and under either of those scenarios, that crowds out discretionary spending, even if assuming the highest levels of revenue this country has ever seen. so, i guess my question is,

under those, under even the best of assumption, the rosiest of assumptions, total discretionary spending under that sort of long-term scenario was about 1% of gdp, versus 9.3% it is today. and i guess i would say to you, does that, your response or your response to that suggestion or those calculations, do they sound correct to? >> again, i don't have our long-term number is at hand. we extrapolate, for our projections over the long-term also we extrapolate discretion spending according to some simple rule of thumb. what the congress ultimately did when it recent unsustainable point we can't predict. >> well, assuming my question then that is under the rosiest of assumptions given those long-term cbo projections that discretion is been is just 1% of gdp, has that ever occurred? >> i mean, i don't know that you know, it has not occurred in

recent history. >> so we have never been at that level. i think the question is could operate a function government at just 1% of discretion spending of gdp? >> nothing like the government that we are now accustomed to on either defense or nondefense programs. >> and again, with your testimony that mandatory spending as you said dominates the government budget i think what you call, you also said it's a growing share of spending. it's growing rapidly. ..

>> remind all of our guests that -- >> you tax the rich in the wars. we spend more on -- >> i would request that the capitol police restore order. >> and the history of this gross restore of war. and the base of this economy is -- you don't have enough money for housing and health care and everything.

stop spending our money. it's very obvious. end the wars and tax the rich. >> thank you, representative. you can continue. >> now i yield it back, madam chair. >> all right. we will turn to representative van hollen. >> thank you. >> is your microphone on? >> thank you, mr. elmendorf, for your testimony. just to be clear if the congress was to take action to repeal the defense portion of the sequester all things being equal that would make the deficit worse, correct? >> yes. >> thank you. let me just go back to, i think, sort of the overall theme. that as a share of gdp, under current law nondefense discretionary spending is

shrinking over the next 20 years is that not the case. >> yes, that's right, carbon monoxide. >> in fact, it goes to below 3% in your chart figure 6 which is a percent of the economy is about the lowest level since the eisenhower administration. now, there have been many questions that relate to the level of nondefense discretionary spending during the 2007-2008 period which was a component of the recovery act. just to be clear in your response to senator kerry's question i think you indicated very clearly that spending as part of the overall affordable care act helped the economy from recovering -- >> the economy act in 2009 and 2010 this year and we believe those cuts in taxes and increases in government spending through that act increased output and employment relative to what would have occurred otherwise. >> that's right. >> and as we look forward in this committee and i received a letter from you -- i think the

calculation of the congressional budget office is that about a little over one-third of the current deficit that we face as a result of the fact that the economy is not at full employment, is that right? >> yes, congressman. >> so even though we prevented things from getting a lot worse more quickly, clearly, we have a long way to go. and i wanted to follow up on a remark you made with respect to infrastructure spending where you said, quote, many analysts think -- the country should spend more in the area of infrastructure. cbo i know has looked at infrastructure investments. do you believe that that is an effective way to try and boost job growth especially given the fact that we have over 14% unemployment in the construction sector? >> yes, congressman. we think a variety of government spending programs have increased or government tax revenues if reduced would spur economic activity in the next few years.

>> and i know cbo has also analyzed different forms of investment to see which would be more effective. there are a lot of folks out there who are unemployed through no fault of their own who are continuing to work for work. as i looked at your analyses. one of the most effective ways to boost consumer demand which, of course, is a big soft spot would be to extend support for people who are out of work through no fault of their own; is that right? >> yes, congressman. >> thank you. and another issue that is looming on the horizon is as of the beginning of next year, the current payroll tax holiday, which is in effect for all working americans will lapse unless the congress takes action. and if that were to lapse and that would mean working people had less disposable income especially at this point in time, that would also dampen demand in the economy, would it not? >> yes, congressman. >> and all that damping of

demand would mean less economic growth and fewer jobs, would it not? >> yes. >> thank you. i'm going to -- a lot of ground has obviously been covered here. i would just want to pick up on the question, comment that our congressman upton made and i think we're all very aware of the fact that the clock is ticking here. and in my view, we have to accomplish an awful lot in a very short period of time especially given your constraint. and i really hope that this committee is able to complete its mission and come up with a package that serves two purposes. one is to try and get the economy moving again and get people back to work and you described some ways that could be done in response to questions. and as you've also indicated that can also help reduce the deficit over a period of time because the sooner you get people back to work the more the economy gets back into gear, the

more revenue that will come in. secondly, we need to act in place a long-term credible deficit reduction plan that does that in a steady way without harming current jobs and economic growth and we need to do it, i believe, in a balanced way like every other bipartisan group that has looked at this challenge recently. and so i hope we can complete that mission as you indicated in your testimony today and before in that long-term picture there's two big components. one there is no doubt we have to get a grip on the increasing costs as a result of the baby boom retirement, rising health care. no doubt about it. and there are smart ways to do it and then there are ways that i think would impose a lot of unnecessary pain on americans. but we need to reform the health care system so that we focus more on the value of care and the volume of care, more on

quality than quality and then we got to deal with the revenue issue. and we all know that in the last -- past decade, when folks at the top were paying a little more, the economy performed just fine. 20 million jobs were created. the economy was booming. and so it seems to me that this is a time for shared responsibility to address our country's needs and i think your testimony made that very clear. so thank you, dr. elmendorf. thank you, madam chairman and mr. chairman. >> a couple quick follow-ups here. first, i know it is your view that the reason the huge increase in spending and the corresponding big deficits have generated more economic growth and more job creation than we would have had in the absence of those things but surely you

would agree it's a counterfactual and impossible to improve. >> yes, that's right, as far. >> i would just urge us to consider there's another theory here which is government can't really create balance. it can create public demand for private demand but its illusory to think that the government can step in and make up for what is perceived to be a shortfall of private sector demand and by the way i would suggest there are governments such as greece and italy and portugal and spain who have created a lot of demand domestically through their excessive spending and it's not working out so well for them. i wanted to follow up on something i might have misunderstood this but i thought i heard someone suggest that nondefense discretionary spending has been essentially flat for about the last decade. and i think we touched on this in various ways. i want to be very clear. in fact, by any reasonable measure nondefense discretionary spending has grown dramatically i would say the numbers i have

are in 2000 we spend about 284 billion in nondefense discretionary spending. 2010 we spent 550 billion. we had a slight reduction in 2011. but this is growing obviously in nominal terms it's growing inflation adjusted terms. it's growing faster than inflation plus population growth. it's growing faster than gdp in fact, isn't that true? >> i think that's correct about outlays senator and i do show that in one of the figures. the issue we're pointing to is that funding, meaning the new budget authority that congress is providing for nondiscretionary purposes is already back down already in fiscal year 2011 as a share of gdp to roughly what it was over the preceding decade and you can see that in the testimony and you're right in terms of nominal dollars or in terms of real inflation adjusted dollars it is certainly up. and right. and it's a share of gdp, there's

sharp distinction between the level of outlays in 2011 which depends on previous year's funding and the level of funding in 2011 which is the jumping off point for future discussions of appropriations. >> my discussion is over this period we've seen huge growth in discretionary spending. the last point i'd just like to ask is, i think it's your view but i'd like to ask is it your view if we were to pursue revenue-neutral tax reform that would have the effect of broadening the base on which taxes are applied, lowering marginal rates, that it is true both with respect to such corporate reform or individual reform that that would have a progrowth effect on the economy which, of course, generate more income for the government. >> the amount would depend on the exclusives of the proposal. >> to the extent we would generating economic growth, therefore, jobs and revenue for the -- for the treasury? >> yes, senator. >> okay, thanks very much.

>> dr. elmendorf, thank you very much for coming today and testifying. and i want to thank all of our members for being short and concise. we have a lot of work to do and shrinkening amount of time to finish it with. dr. elmendorf and your team that we are putting forward to you and i appreciate all of that. i do want members to know they have three business days to submit questions for the record, and i hope the witnesses can respond very quickly to that. so members should submit their questions by the close of business on friday, october 28th. i would also like to inform everyone that we are going to have another hearing on november 1st. the topic will be an overview of previous debt proposals. we'll be hearing from former senator simpson, and former senator pete dominici. without objection this joint committee stands adjourned. >> thank you, senator.

[inaudible conversations] [inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations] [inaudible conversations] >> as this hearing comes to a

close, it's the fourth public meeting of the joint deficit reduction committee and an article in today's roll call discusses some tensions that arose among committee members during a closed door meeting last night. a democratic member was presenting a potential plan when republicans including senators portman and kyl became sharply critical when discussions grew in intensity, cochair jeb hensarling tried to soften the debate. shortly after that presentation and pushback from gop lawmakers staffers were asked to leave the room and leaving the room last night members again declined to outline the nature of their discussions but some were noticeable tense as they rushed through the exits. they have had four meetings so far. we will cover the next meeting here on the c-span networks. that meeting is coming up shortly. again we will have it live for you on the c-span networks. also on our website c-span.org you can eck which out video of

the hearings and you can check out profiles and interviews covering their work. you can find that on c-span.org and on our special page devoted to super committee. that's at c-span/deficit. >> until then some of the headlines and phone calls from this morning's "washington journal." >> host: so if you haven't seen it yet, here it is which appeared yesterday. it's a campaign ad from the herman cain ad. >> mark black here. since january i've had the privilege of being the chief of staff to herman cain and the chief operating officer of herman cain. tomorrow is one day closer to

the white house. i really believe that herman cain will put united back in the united states of america. and if i didn't believe that, i wouldn't be here. we've run a campaign like nobody has ever seen but america has never seen a campaign like herman cain. we need you to get involved 'cause together we can do this. we can take this country back. ♪ >> various blogs weighing in on the ad. this is "the washington post" this morning. blogger conventional wisdom maybe you should use your campaign ads to make a great aid or campaign organization as has herman cain has use his campaign ads to purchase thousands of copies of his own book and they made this ad they tell you not to do it in political ads and

then somebody smokes the only guy endorsing herman cain is his manager. he will i doubt will be offended to say he's not in endo you of a movie star looks. the guardian newspaper this morning has it. i'll just show you the headline now and read it a little bit later herman cain smoking gum the worst ad in the history of politics and if you go to the pages of the weekly standard. all they have a link to the ad. herman cain's campaign released this web ad last night featuring chief of staff democracy block, a cigarette, a smile presidential candidate two pairs of glasses, a catchy patriotic song and a strong dose of reality. we want to get your reaction as well. if you want to give us our call the numbers will be on the screen it's 2 -- in essence, tel

us what you think about it. the message it sends. what you think the way the ad was done. what you think about the smoking aspect which many are highlighting this morning. but, again, our first 45 minutes devoted to that. our first call up is from canfield, ohio. mary on our line for those who support others. mary, go ahead. >> caller: yes, i found the ad insulting especially the smoking part. however, i heard on the radio last night that the chief of staff or his campaign manager, the man in the ad has been thrown out of wisconsin politics for suppressing the black vote so i wonder if anyone would call in and comment on that. >> host: why did you find the ad insulting. >> caller: well, the smoking part for one thing. it's been proven that smoking is

really bad for your health for one thing and they were just sticking it in your eye and they're going to do whatever they wanted. that was my take on it. >> host: little rock, arkansas, dorothy, this morning, our hine who support others. hi dorothy. >> caller: good morning. >> host: go ahead. >> caller: thank you for take my call. i find the smoking insulting and because smoking is against your health and i just think it's a joke. as a matter of fact, i think it's representative of herman cain because i think he's a joke. i don't think he's a sincere candidate and it's just mockery. >> host: if the ad sent a message, what was the message you got from it. >> caller: that they're not just serious. they're kidding around. it's not serious. it's not sincere smile. and the big smile on herman cain's face i just thought -- i

don't know, just didn't make sense. >> host: mclean, virginia, our line for those who support herman cain. lucy is next. good morning. >> caller: good morning. i'm -- i haven't made a final decision about herman cain but he certainly is a attractive candidate. i think there's a lot of hoopla about his campaign manager smoking. but other side of that coin he's getting a lot of airtime for free. and a lot of talk. and the problem with most of these political campaigns people grab on to a superficial element and no one really explores the depth of what any candidate is really saying which is a shame which everything has spun off. i wonder how many people really have the time to investigate the issues well. and the problem i have with president obama he's disenaga

disenagain -- disengenous. >> host: what do you think of the style of the campaign ad? just in its style alone. >> caller: it's really unusual. i guess maybe -- who knows how many what percentage of voters are smokers. perhaps lock them in. i really don't find it all that offensive because as far as i know smoking is legal. and, unfortunately, those who do smoke are demonized. i think it's nice -- it's really intriguing that he's kind of not going -- he's certainly a capable and able man. you know, i'm hoping the best for his campaign. >> host: from the caucus section of the "new york times" recent polling and how in cain stands from that.

the former restaurant executive is riding a wave of support from republican primary voters that has placed him in a statistical dead heat with rival mitt romney, the former massachusetts governor. the poll found mr. cain the highest level of support with 25% of republican primary voters and with mr. romney is 25%. the polls a sample of margining error. we want to get your thoughts primarily by the ad that was released this morning. the numbers off your screen and off twitter.com. it's journal at c-span. email and facebook as well is a way you can weigh in this morning. facebook.com/c-span. willing bone, new jersey, idolla on the line for those who support others. >> caller: yes. thank you very much. i think that jose -- i'm sorry. i think that herman cain's -- i think that herman cain -- oh, shucks. >> host: you're on, man. go ahead. >> caller: yes. thank you very much.

i think herman cain's ad is the same as all of his remarks. nothing is well thought through. if you have to keep apologizing for every single thing you say, at some point people have to realize this man has no depth, no substance and no understanding of what's going on today. and i'd like to make a complaint about c-span. i've been watching for over 30 years. and i noticed whenever the president speaks, we never see the audience or the size of the audience. but when christie spoke at the reagan library, the audience was panned three or four times. just now for rick perry, the audience was panned two or three times so we saw the size of the audience. >> host: that's not always the cases. sometimes we can't control the camera coverage. if you want to get a full sense of how larnl, go to our c-span site on our video library. all of the president's most of his major addresses are there

and you can get a sense of the audience and there as well through the various speeches that he makes. queens, new york, betty, a supporter of herman cain, go ahead. >> caller: hi. can you hear me? >> host: yes. >> caller: about the ads, i don't smoke. i used to smoke. but it's a silly ad. i'm not a herman cain really supporter. but i am a conservative. and also president obama smokes and people are in an uproar. i don't know if he stopped. >> host: tell me why it's a silly ad. >> caller: well, it just doesn't make any sense and about the lady that just called who wants to know about this gentleman suppressing the black vote. and i happen to be biracial this is what starts the conservatives against the progressives. it has nothing to do with race. this poor man, herman cain, has been chastised by the black people and the white people.

he's a person running for president. whether he runs or not. >> host: monty off of twitter says cain has got the smokers vote and support. he finished that with an exclamation point. league city, texas, good morning, gina on our line for those who support others. i'm sorry. mike, are you there? go ahead. >> caller: what i got out of the commercial. i watched it the first time. it's kind of strange. the second time i watched it didn't seem he was blowing much smoke or any smoke out of his mouth maybe herman cain says i don't blow any smoke. >> host: what do you think of the style. and even as a first introduction as a campaign ad, what people think about that. >> caller: it was kind of odd but maybe that was the point. maybe that would make people really think and all the other people are saying it's terrible he's smoking. it's making herman cain stick in

your head. >> host: and the fact that you hear from his campaign manager, does that mean anything to you. >> caller: what? >> host: the fact that you hear from his campaign manager, does that means anything to you? >> caller: gosh, it's a tough one to figure out. [laughter] >> caller: it's got everyone's attention i'm seeing right now. >> host: facebook is also how you can reach out to us this morning. rick bartholomew using the facebook page that c-span has to make his opinions known. here's part of what he has to say. he said i like cain but this ad was a big mistake. i don't want to hear from his coo, his wife or key grip. michael, again when you go to facebook or when you go to twitter whole conversations take place even separate from people watching this show. you can view in on twitter and facebook primarily to see the conversation that's going along especially as we invite you to phone if as well if you want to do it electronically this morning. fayetteville, north carolina, we're talking about herman cain's