president and the speaker were this close to a really historic agreement. one could take the depressing view that it fell apart, therefore nothing can happen, or that they started to show way toward working together. but working together is ultimately this week or sometime in the future going to be a balanced package, as the bowles- simpson commission did to put revenue and spending cuts on the table, big enough to get something done, that inspires confidence. it is not going to be done in a lopsided way. over the summer, president obama was willing to do things which were quite painful from the perspective of the democratic presidents. it was willing to enter unchanged changes in the coal -- he was willing to entertain changes in: and payments for various services that there are no payments for medicare. at the end of the day, we had

all wall in july and august, and another story has been told it somehow the president raised the bar. i think we had a wall because ultimately republicans in the house were unwilling to accept revenues as part of the package. if you look at where we were in the summer to now, we put our views before the super committee in a quite comprehensive package at the president sent them in september. they are now struggling with the same thing we were struggling with in july. what is the balance between mandatory entitlement savings and revenues savings that is fair and balanced and protect those who are at the most unfortunate position in life? and i am not sure what the outcome will be this week. i think if one can read in the tea leaves, they are struggling to get to revenue number that is large enough to have democrats move forward with serious and

common changes, and it is still not care whether they can sell that in the republican process. >> you are describing the situation in which a deficit reduction plan up $4 trillion over the next decade in the summer was unsustainable. now we're back up few months later to talk about whether a reduction deficit plan of a $1.2 trillion is even achievable. that sounds like it is walking backwards. >> let's remember what we did over the summer. over the course of the negotiations, we did not accomplish $4 trillion as we hoped. we did like emplace $1 trillion of savings in discretionary spending, the annual appropriation. if someone is putting together a 2013 budget, those caps have real meaning. the measure of doing well and an agency will go from did i grow or did i get frozen at last year's level? frozen will be the new high one.

-- i w closeon of by. billion dollars in savings and the defense. these are serious tradeoffs. we have made clear we think the sequestered, work that happen on defense, would not be a good thing. that should not erase the thing that there are $1 trillion in savings. >> are you arguing -- >> the target for this committee is to get from one $1 trillion to another $1.2 trade and. i think this committee and members of the committee are going back and forth as we did over the summer and in an odd way, it is easier to go bigger than smaller. if you're picking just a few sacred cows, it is very hard.

everyone in it together, it gets easier. i am not sure what number they are shooting for. in some ways, they may get a slightly larger number. they may not succeed at all, but and make it a larger number rather than a smaller number. >> and a desire to inject some optimism here, are you suggesting in its own messy way washington has turned on the spending debate? the significance of the discussion is not whether to cut the spending, but how much and how soon and how fast? >> i think we have started. most americans do not realize that we have already started. it is not reasonable to say the goal was $4 trillion. we did $1 trillion and then we got up for an accomplice. -- then we got nothing accomplished. getting more than half way there would be a very important step.

i have been rooting for success in the super committee. i think it would be hugely important for the country and for confidence, both to get the politics accomplished and to show that washington can work. it was a very bad day to have a display of dysfunction in washington. if you compare the united states to europe, look at the rating agencies have said. we do not have an immediate economic crisis in our deficit. we have a problem that we can see staring us clearly in the face, just a few years down the road. we have time to deal with it. the reason the downgrade happened was not because we did not implement immediate cuts. it was because the rating agency as the american people did, saw washington that was dysfunctional. i think breaking through that would be as important as the economic accomplishments. >> the cynical view of the process at the moment is that the white house would be more

than happy to see failure, because it sets up an election year dynamic of a president who wants to do the right thing against republicans in congress who will not budge. >> i think we i think we have ce debate. a very small number of extreme members of congress were able to hold everyone and the -- at the edge of a cliff. would we be willing to default or would we give in to what were the kinds of policy changes that with an even distribution were unacceptable? we said no to that for a good reason. you cannot deal on those terms. you cannot capitulate. we are not in that situation right now. the reason it was important for the world for us to get

agreement on the debt limit is recreated a window of time to have a more civil debate. i think there has been that kind of conversation. they are struggling. these are hard decisions. to turn it into a political issue is a mistake. it would be better to be done sooner rather than later. it has to be done right. it has to meet the same standards. is everyone being asked to do their part? get something meaningful done. >> you prefer success to failure. you being the obama administration. >> we have been routine for success. we have been trying to strike a balance. this is something congress set up. as you were saying, al simpson, the process is broken.

it does not take a majority to get something done. it takes 60 votes to do routine business. it is almost impossible to do difficult things in that environment. this process was set up to critic congress could function. a lot of people have said where is the administration? we sent a document in september with the detail. we went through a negotiation or the whole world saw what the president was willing to do. i do not think there has been a congressional prague -- process with more transparency than this one. we have been giving the committee some room because they are in the best position to get a majority. one of the things they are focusing on is how to balance short-term actions the economy

moving was medium and long term action to get a definitive amount of deficit reduction. that is the right balance. >> one step back. the thing that would be reassuring to the markets and the people would be a deficit- reduction agreement that was a bipartisan and had the consensus behind it that allows it to endure and lasting. when you look at the budget that you have put together, you are projecting a percentage of gdp for government expenditures. you have republicans talking about expenditures the code down to 18%. that is an enormous gap. hundreds of billions of dollars. is there consensus?

>> there is more consensus on what we need to do to stabilize the medium term. there is a strong consensus that if you look at the beginning of the year, $4 trillion would keep the debt and deficits from going into the danger zone. we would have to take more action. this question of government size, it gets very abstract very quickly. i have to bring it back to what is driving the numbers and are you willing to accept policy. i do not think democrats or republicans are willing to accept the consequences. it would mean a massive reductions in the national defence. a massive reduction in social security and medicare beyond making those programs sound for the next generation.

on an abstract level, it would be attractive on the campaign. i would doubt if they would own the consequences of those policies. it would mean ignoring the fact that we have a new generation retiring that is driving up social security and medicare. that is going to happen. they are getting older. the system was designed to pay for that. we need to deal with the shortfall. doing it as a percentage where it pretends these things happen without consequences is a mistake. we need to balance revenue with expenditure but we cannot pretend that we are willing to drop our guard in the world or eliminate social security and medicare for many of those who

need it. >> you think the consensus will be in the 22% range of gdp? >> i think you have a mixture of issues. on the regulatory stage, if we were where we were in the late 1990's where we were balancing the budget, i do not think you'd be hearing this debate. what has happened is you had a tax cut we could not afford. wars we did not pay for. a recession. we need to get back on track can be honest about what it costs to conduct war. we need to be honest in terms of tax cuts. i think that the issues on the regulatory side are related to the conversation. we have tried -- i do not think

it is well known or understood, to take the regulatory process and bring it into a check. we can show the benefits of regulations and have a better record in terms of out when costs than the clinton or bush should ministrations. the president had stopped regulations he thought we could not handle. we had a debate over health-care reform and wall street reform. these issues are inflated. we're not taking a step back from the fact we need to implement those initiatives. that will involve having rules. the sooner the better. the debate is creating uncertainty that is self fulfilling. a delaying action only adds to uncertainty. we should implement it and settle things down. >> let me ask you one question.

you have seen this process for a long time. i am wondering if you think one of the things that is obscured is the fact there may be a consensus on the need for tax reform. is that correct? when the dust settles, is that going to be a realization? >> prior understand to be the conversation, tax reform has been at the core of dealing with revenue, a balanced approach. i think we need reform on its own. we have a system that has gotten out of shape again. every 30 years you need to clean it up. the tax system should not skew investment or creating disparities of burden that,

apart from being unfair, creates a lack of confidence that the tax system is on low level. you end up with confidence in the basic instrumentalities of the public sector. i think we need tax reform. to potentially lower rates and end up with a more progressive tax system. it has to be connected with dealing with the deficit. then we will be back where we started from. >> let's open this up. alan, do you want to start? the lights are tough. let me ask jack on behalf of the group. there is a strong sentiment in this room, and we heard it again last night, we have heard it

over the last three years that this administration is unfriendly to business. does not understand what drives it and what would be necessary to get to these companies to start creating jobs again. i know you have heard this before. you oversee many of the policies on the budget front and the regulatory front. what is your response to that criticism? >> at the core we >> i think that the core we have totally overlapping interests. we know that the key to the economic future is all the private firms. investing and creating jobs. right now you have an anomalous situation where washington doesn't have the resources and doesn't even have the ability to create the long term engine of economic growth. the private sector is sitting on

resources, lacks the confidence in where the economy is going to make those investments. unlocking that confidence, getting the private sector engaged is critical. my own view in conversations i had with many people in the private sector is issues tend to get conflated. if we saw aggregate demand go up and order books being filled there would be more confidence. i don't think it is because of the last rulemaking that very lack of confidence. if it were really about rulemaking it would be sensitivity to the fact that there are many areas where we rolled back rules, tried to create not just certainty and clarity but lower burden of regulation. >> the latest one that says focus the minds of some people was the decision to delay the keystone pipeline from canada to promote jobs and energy supply. >> the area of energy and departmental policy we have been

trying very hard to balance our core responsibilities to protect the health and safety of americans and make sure that we are planning ahead on the energy security of the united states but doing it and away set gives both have the of the equations. if you look at the rules we have worked through on fuel economy standards kind of a model how to do rulemaking and we had the auto industry and even some of our biggest critics in business organizations acknowledge that that is the way you ought to do regulation. we have been working to do it that way. our record on cost benefits is quite outstanding compared to presidential administration. the fact that the economy has not yet picked up is not because of the regulatory policy. there have been a lot of studies right to left. we started this administration

with an economy that was a much deeper recession than anyone knew at that time. if you look at the pattern of the recovery, it is more similar to other recoveries than not in most regards. it is a long recovery from a deep financial recession. that was under the president's inheritance. the actions he took in the recovery act, i wasn't part of the team that was working on a recovery act in 2009. i think it is responsible for a significant amount of economic growth and billions of jobs. our opponents in washington ridiculed and that is fine in the political process but we have to ask what would a aggregate demand have been like if we had not done the recovery act. what we have had a deeper and longer recession with a double dip, it is not and we don't look -- there is a lot of talk about a double dip but all the projections i see show that we ought to be able to continue to

grow. i think the economy is coming back slowly. not fast enough. the regulatory program is more balanced than it is given credit for broadly and we profoundly understand the need to be a partnership. we have to ask our friends in the business community to understand the financial crisis that caused this recession put an imperative on the public to respond. wall street reform is necessary but we cannot be in a place where we look at the immediate past's problems and have a government intervention to get the economy and financial system back on track as the financial system and not take action to build capital and reduce the need for the government to step in in the future. >> question from one of the members about tax reform. those fair and balanced mean

more and taxing millionaires and billionaires? doesn't glass warfare impede the ability to rebalance the size of government? >> i think the charge of class warfare is overstated. if you look at what the president has said and what we have said no one is criticizing people who are either wealthy or successful. i can tell you in the conversations i have with the e os privately are have yet to meet a ceo who has argued with me that the tax rates should stay where they are and some of you have different views. i'm not saying that the universal view but in a broadly held view among those are talk to that we ought to be talking about the tax rates. political rhetoric is not the core of what i do. it is very hard to talk about fair and balanced and the top rates going up from where they were in the bush did ministration without your critics say is class warfare.

if i could offer anyone in this remote package that would accomplish meaningful deficit reduction that would establish corporate tax system with lower rates and more even playing field, with tax rates that reflect what we can afford in a fair distribution of burden i would get most of the people in this room to sign up to it. i don't think it is class warfare. it is common sense and the best of the american spirit. >> did you have a question? >> good morning. i am ron williams. we heard from the prior panelists about the impact of medicare in the entitlement programs that they are having. we also have the introduction of the health care economic act. i would be curious about how you see the entitlement programs being modified in the context of addressing the issue of the

deficit. on the one hand -- on the other we are messengers with the hope that somewhere in efficiency and productivity we make a balanced episode. >> the affordable care act had very substantial savings in health care. they were scored savings from the congressional budget office perspective. not just the administration. and they were politically validated because in the midterm elections democrats who voted for the affordable care act were accused of cutting medicare because of the savings that were in there. the affordable care act is the largest set of health care savings ever. in addition to the size it put in place a process intended to bend the cost curve. you look at what is driving public sector health care spending, the same thing that is driving health-care spending in all your corporate insurance

plans. it is inflation in the health-care system generally. the public sector isn't growing faster than the private sector. we fundamentally have to address the issues of what is structurally going on in the health care system if we ever get our hands around it. the only decisions we can make in washington not to say an old person or poor person doesn't get care and that is how we save money i don't think that is going to do the job. those people will get sick and they will show up. i used to run in academic hospital. i know what happens when people show up without insurance. it squeezes your bargain and you charge everybody else more. if you look at the affordable care act, it was a meaningful, important change. it is hard and controversial obviously. the supreme court is going to have to make fundamental decisions on it. it hasn't been given the chance. when given a chance it will be important. going forward you look at the kinds of things the president and speaker renegotiating over

the summer it was taking on seriously the provider side and the beneficiary side how to get a balanced package with additional restraint. there was an openness on our part to things that is not that long ago would have been considered heresy in democratic circles. we going to have to get out of our comfort zone and accept some boundaries. i don't think we can go to the place where we say we are going to start cutting off benefits of the poor or disabled or elderly who have nowhere else to go. we have to put more burden on providers and individuals. that is what the system is willing to do. hard to get to the point of an agreement but there has been substantial progress over the year in terms of the debate. the simpson bowles commission held in that and negotiations. >> we are out of time but we will try to take one more quick question. >> i will keep it short.

thompson reuters. speaking with the deficit reduction plan, if the supercommittee is not successful next week do you think it is possible to resurrect simpson bowls and would you recommend to the president that he take the leadership on it since even though we have left congress at the time they would have failed to do something? >> i think that -- is important to succeed. as i said earlier i am routing for success. i think it would be very important to do it now even if you did the same thing now versus a year from now but it is a mistake to think should they fail this issue goes away. if you look at the end of the year, end of 2012 there is a perfect storm at the end of 2012. you have an automatic set of cuts that is triggered now that takes effect in january of 2013. that is an unacceptable set of

policies. most republicans think it is an unacceptable set of policies and democrats think it is an unacceptable set of policies. was designed to be obnoxious to everyone. it was supposed to be an action forcing device that would focus congress on getting its work done. one of the reasons the supercommittee is engaged is they want to avoid those across the board cuts. another thing happens in january of 2013 apart from automatic cuts taking effect. the tax cuts passed during the bush administration are set to expire in january of 2013. we have been of the view that the tax cuts for the middle class should be permanent. the tax cuts for the top two brackets should go away. one way or another i don't think there is going to be a strong sense of that taxes should go up on all americans in january of 2013. , contrary i think there's a lot of pressure on congress to take seriously the president's proposal of payroll tax cut so taxes don't go up in

january 2012 because the economy can sustain that. we need to move this year. should it get to the end of 2012 i think there will be action. if the supercommittee fails and jerry asked if the goal was to have it be the political issue i'm not sure it is the goal but no doubt a consequence of failure is it will become a political issue. political issue and a national election year framed with real consequences at the end will create another window of action. i think it is better for that to happen now. i am not being ambiguous. i'm willing to be optimistic at the risk of being written off as a pollyanna. i think there's lack of desire on members of the supercommittee to fail and they may hold up. it doesn't go away if they fail. >> thank you very much. [applause]

>> in a few moments the head of the congressional budget office, douglas elmendorf on the economy. the senate is back in session at 10:00 eastern. today's agenda includes the spending bill for energy and water projects. several live events to do you about on our companion network c-span3. the house oversight and government reform committee holds a hearing on executive bonuses at fannie mae and freddie mac. at 10:00 eastern. and 2:00 eastern hearing on community banks and economic growth. before the house subcommittee on financial institutions. this includes local bankers and the head of the national association of federal credit

unions. congressional budget office director douglas elmendorf says he expects the unemployment rate to continue to be at around 9% for the end of next year and the country is only about half way through its economic downturn. he testified before the senate budget committee for two hours yesterday. >> i want to welcome everyone to the senate budget committee today particularly our witness congressional budget director douglas elmendorf. thank you very much for being here and your good work. in today's hearing we will focus on the economy and steps that can be taken to strengthen the recovery. and create jobs. last year at my request congressional budget office completed an analysis of the

so-called bang for the buck achieved by a different fiscal policy proposals. cbo has updated that work so we thought it would be useful to have director elmendorf here today to report on his agency's latest conclusions. i am hopeful congress will consider cbo's analysis in developing any near-term economic growth measures that might be passed before the end of the year. i would like to begin by briefly reviewing the economic situation now confronting the nation. it is clear that economic recovery, we are now experiencing, is not what it should be or what we would like it to be. here are some of the factors that i believe are holding back the economy. unemployment remains stubbornly high. the housing crisis that helped spark the downturn is continuing. we have weak consumer confidence and weak consumer demand.

personal debt is still near record levels. businesses and consumers face heightened borrowing standards. state and local budget cutbacks are continuing to create a drag on jobs and economic growth. and our debt is also a challenge to future economic growth. among these factors the continuing housing crisis is particularly notable. we look back at seven previous recoveries we can see that a surging housing market was a driving force behind the return to economic growth. housing starts rose dramatically in every one of those recoveries but in this recovery housing starts have remained low and continue to be. we know some of the drag holding back recovery is caused by the nature of the recession that preceded it. economists have found that following recessions caused by

or accompanied by a severe financial crisis, recoveries tend to be shallower and take much longer. two leading economists, dr. reinhardt and dr. vincent reinhardt found in their research, quote, real per-capita gdp growth rates are significantly lower during the decade following severe financial crisis. in the ten year window following a severe financial crisis unemployment rates are significantly higher than in the decade that preceded the crisis. the decade of relative prosperity prior to the fall was important we fuelled by an expansion in credit and rising leverage that spans ten years. it is followed by all like the period of retrenchment that most often begin only after the crisis and last almost as long as the credits surge. in other words we could see a period of low growth and

relatively high unemployment for some time because we are recovering from a severe financial crisis. the most severe since the great depression. if we look at private sector job growth we see it has improved dramatically from where we were in a recession. january of 2009 the economy lost 800,000 private-sector jobs in one month. private sector job growth returned in march of 2010 and we have now had 20 consecutive quarters of growth for 20 consecutive months of growth. however clearly we have to do better. we need considerably more job growth in order to fuelled a stronger recovery. the unemployment rate remains far too high. as of october the unemployment rate was hovering at 9%. although the recovery is not as strong as we would like it is important to recognize the economic situation would be much worse if we had not had the

federal response to the recession and the financial crisis including both the fed's monetary policy action and the fiscal policy actions taken by congress and the administration. the federal response, i believe, pull the economy back from the brink and likely prevented us from slipping into a depression. it may not have been slipping into a depression. we may have gone head first into a depression. two under leading economists, dr. mark zandy and dr. alan blinder of the federal reserve completed a study last year that measured the impact of federal actions on shoring up the economy. here is a key quote from their report. we find that its effects on real gdp, jobs and inflation are huge and probably averted what could

have been called depression 2.0. when all is said and done the financial and fiscal policies would have cost taxpayers a substantial sum but not nearly as much as most had feared and not nearly as much as policymakers have not acted at all. the comprehensive policy response saved the economy from another depression, we estimate they were well worth their cost. the next chart shows their estimate of the number of jobs we would have had without federal response. it shows we would have had 8.1 million fewer jobs in the second quarter of 2010 if we had not had the federal response. we see a similar picture in the unemployment rate. according to doctors and the and doctor blinder's findings we did not have the federal response in the unemployment rate would have been 15% in the second quarter

of 2010 and would have continued rising to 16.2% in the fourth quarter of 2010. looking forward, it is clear there are further steps that can be taken to help shore up the recovery in the near term. cbo's analysis looks at some of these steps and determines which will provide the greatest bang for the buck in spurring economic growth and job creation. here are cbo's key findings. on the upper end of the scale, policies like extending unemployment insurance and payroll tax cut will give you a higher impact on gdp for each dollar spent. the bottom end of the scale cbo once again found extending the bush era tax cuts provide more impact on gdp for each dollar spent. it also found that repatriation tax holiday provides very little bang for the buck. i look forward to hearing more

about these findings from director elmendorf. to be clear there's nothing contradictory about pursuing near-term economic growth measures at the same time we pursue long-term debt reduction. we can and we must do both. we need to give a near-term boost to the recovery while simultaneously -- simultaneously putting in place policies that will bring down deficits and debt over the long term. the deficit reduction can be phased in after the recovery is on stronger footing but it should be enacted into law now. i want to be very clear about this. on every group research whether the fiscal commission or the group of 6 we adopted that basic strategy. it is clear we must put into law now a long-term deficit reduction plan. i believe that will provide a

significant boost to the confidence in the markets as people see the government finally putting its fiscal house in order. with that we will now turn to senator sessions for his opening remarks. >> thank you, mr. chairman, director elmendorf. we respect the work you do and we rely on it. i am not aware that just reading -- 3 reading alan greenspan's testimony before this committee quoting cbo numbers projecting in 2001 projecting a 30 years of service and we would pay down the entire debt of the united states of america. and anyone knowing what to do with it. we have been wrong before. you predicted 3.1% growth this year. coming and probably half that. dr. zandy predicted 3.9% growth.

known moody's analytics to 1.6. i don't agree that there's no contradiction between borrowing and taxing to spend today and problems that have gotten this country into the fix we are in as i see it. we are in a long term financial difficulty as a result of debt. we have extensive debt for route this system. the government has assumed huge amounts of private debt and i agree we have a ten year or more the leveraging process to go through and we are not going to see the growth we like to see until that is through. i would oppose adding more debt. i think nothing could be more simple. nothing could be more basic. under the plan the president

proposed, $450 billion in borrowing and spending in the near-term plus $450 billion tax increase that i don't believe that is going to be a ten year benefit to the economy. i will be delighted to hear your view, doctor elmendorf. i do appreciate the fact that you predicted when we passed the first eight hundred billion dollars stimulus package. you predicted that in the short run there would be some benefit but over ten years you predicted there would be a net negative because there is a reality of that out there that can't be wished away. all of that was borrowed. all of that added to our debt and i am sure you would agree that after the ten years since we paid none of that we will have paid none of that down, that it will continue to be a drag on the economy for decades

to come long after the short-term sugar high we may have achieved as a result. i am very concerned about where we are going and i am concerned about the committee of 12. mr. zandy told us we have to have $4 trillion in deficit. an absolute minimum as has every other witness and you said and i am not aware that they are moving toward that agreement. we are still in denial it seems to me. if we learned nothing else in the financial crisis of 2008, it is prosperity cannot be built on a foundation of debt. excessive debt, public and private provided the heir to the economy resulting in the first -- surely we know that is not a solution. not more debt and if there's a second lesson we should have

learned it is a healthy skepticism for washington elite. the same people who fell asleep at the switch before the housing bubble did not see it coming to create more debt in the government. government bubble. i called them affectionately sometimes masters of the universe. they are quick to make confident predictions and quicker to explain why the failure of the last prediction should not count against the one they are making today. they say stimulus failed because it wasn't big enough. the explosion in regulation helped the economy. we need more regulation. advocates for more stimulus frequently cite cbo's economic model for cbo projected long-term negative growth. in 2009 cbo's stated in your

report and it certainly appears you have been correct, quote, the increased debt will tend to reduce stock of productive capital and economic parlance the debt will crowd out private investment. cbo projections were that your projections also producing the deficit by $2 trillion would eventually boost economic growth to 1.4%. that tells us what we need to be doing which is reducing debt. we need a long-term plan in a time of crisis, confusion and fear. we should return to basic core principles, tried and true. pay your debt, spend within your means and instead of asking taxpayers for bailout washington must end be dishonest accounting and waste and abuse in our country. what we need is a middle-class

agenda. that means creating jobs through the private sector, producing more american energy, making the government lean and productive, confronting are dangerously rising debt, adopting a globally competitive tax code, upholding the rule of law in trade, commerce and immigration and delivering the good people of this country honest and responsible budget they deserve and have had in 900 days. thank you, mr. chairman. >> thank you. two quick things. we may have a disagreement about short-term but we have an agreement about long term. that is the threat. it would be a huge boost for this country. i think it would be a boost globally if the special committee came back with the ten year plan that reduced the deficit in the range of $4 trillion. i tried to convince the fiscal

commission to do $6 trillion over ten years to balance the budget with that size of deficit adjustment or debt adjustment. it is not that hard to do. i think some people think this is so hard to do it is impossible. >> i showed our colleagues one plan i did that if you added 6% to the revenue that we project now and reduced expenditures to 6% you would save $6 trillion over ten years. call it the 6% solution. we could have a debate and discussion about what the mix should be, revenue and spending. some people want to do all spending or all revenue or some want to do it 2-1 or 3-1 spending the revenue. to me, the real issue is how do

we find a way to come together to get the job done? it is a serious obligation. let me just say on the question of not having a budget we passed the budget control act. that provides a budget for this year and next. we may not like it, but that is the law. it is a lot of the land. the budget control act lays out the budget and provides a special committee that is in effect reconciliation process clear and simple. so we have a budget. we may not particularly like it or agree with it but we have got one. and we got it in the budget control act. >> mr. chairman, to follow up on part of what you were saying. you quoted what do you call it?

reinhardt and reinhardt -- [talking over each other] >> financial crisis takes longer term. that has a little bit of a misconception. they think financial crisis means bank crisis but really it means -- people at the time the bubble burst were saving nothing in the united states. we were drawing down our savings which is really unprecedented in our history so individuals had great personal debt. the government is now running for the third consecutive year trillion dollar debt and we have taken over huge mortgage problems and liabilities from banks and assume the public sector. so it is a simple thing.

you either default on your debt which has immediate short-term pain for ramification or you somehow carry the debt over a longer period of time and try to play it off and reduce it. the problem is that when you do that it is a depression on the economy. money is being spent not to consume but money is being consumed to pay down the debt or interest on the debt. we are not close to paying down the debt as of today so we all need to understand we are going to be in a long-term effort to move ourselves out of this the leveraging period. the first thing you should do is not had more to the debt and acknowledge it is going to be a tough period of time and we need to do everything possible that helps working americans be

successful by creating a climate for long-term growth. we can all disagree and we will agree how to do that but that is where i am on it and where most american people are and look forward to hearing mr. elmendorf. thank you. >> let me say with respect to the reinhart study when they're talking about financial crisis they are talking about not only the circumstances of individual states but also damage to financial institutions including private sector institutions. when you have that kind of dramatic break to the financial markets and damage to the balance sheets of major lending institutions that has an effect on credit going forward. what they found is when you have an explosion of credit as we did before this downturn it in part

fueled by federal reserve policy, interest rates kept abnormally low for extended period, fiscal policy, very loose fiscal policy under congress and the administration running massive deficits even then. that combination coupled with lack of regulation of derivatives and explosion of a ig did enormous damage to the financial structures both private and public and exploded debt both public and private and the result is you have got financial institutions with impaired balance sheets which mean they can't extend credit in the same way they normally would and that is what they find in their study. first you have a credit bubble and then usually ten years in duration and then you have a recovery about the same period

of time. we cooked a real scoop. >> we both can join together and say this is not going to be an easy fix. there is no quick fix out there. how we handle it, we will all have to work together and do what is best for the country. i believe the quick fix days are over and as one of her witnesses said not long ago you get the stimulus benefit from spending today and it is a year or two benefit but if you are in a period of a decade working your way out of this economic difficulty, then the it hits you before the ten years is out and you are out of the recovery. so that is why i don't think we can continue the short-term sugar high stimulus spend and create more debt because it is

going to catch us before the ten years is up and we need to have an honest long-term plan. the president needs to be far more honest with the american people about how difficult this is and do it in the long term view, not short-term. >> the place you and i agree, we clearly have a disagreement short-term. the place we have agreement is longer-term. somehow collectively we have got to find a way to be successful here in unchanging course. when we are bar wing $0.40 of every dollar, revenue the lowest it has been in 60 years, spending the highest in 60 years, certainly i think we can agree we have a serious problem. and we have a collective responsibility to dig out of it. director elmendorf apologized for this early discussion, but

it is important to have. please proceed with your testimony and we will go to questions. >> thank you, chairman conrad and senator sessions. i appreciate the invitation to testify today about the outlook for the economy and the option for increasing output and employment in the next few years. the u.s. economy has struggled to recover from the recession. total output started to expand more than two years ago but the pace of the recovery has been very slow compared to the average recovery since world war ii and the economy remains a severe slump. we expect that under current law growth and output will remain slow and as a result job gains will be limited leaving unemployment rate close to 9% through the end of 2012. given cbo's out look for the economy which is similar to that of many private forecasters a large portion of the economic

and human cost of this downturn remain ahead of us. we think the economy is only about half way through the cumulative shortfall in output relative to the potential level that could be achieved if our labour and capital were more fully employed. the cost of that shortfall are immense in total and they fall disproportionately on people who lose their jobs, who are displaced from their homes or who own businesses that fail. concerns about the economic recovery prompted consideration of fiscal policy action to spur economic growth and increase employment during the next few years. cbo assessed the cost-effectiveness in boosting the economy of a variety of possible changes in tax and spending policies. figure 1 from the testimony reproduced on the back of a single piece of paper summarizes our findings. the figure shows estimated

impact on years of full-time equivalent employment in 2012-2013 per million dollars of budgetary cost. to be sure this measure of cost-effectiveness is only one of the criteria that might be applied in evaluating policy. other criteria are discussed in the written testimony. for each policy we show a range of estimates reflecting the uncertainty that accompanies any analysis of this work. the policies we estimate would have the largest effect on unemployment in 2012-2013 per dollar of budgetary cost. policies that would be targeted toward people most likely to spend the additional income such as increasing aid to the unemployed shown in the top bar in the figure, providing additional tax credit for lower and middle-income households, the next bar down. or policies that would reduce the incremental cost to business of adding employees. such as reducing payroll taxes

which is the top bar in the second bank or reducing employers' payroll taxes only for firms' increasing the payroll which is a bar below that. the policy we estimate would have the smallest effect on unemployment in 2012-2013 per dollar budgetary cost are policies that would affect business cash flow and have little impact on their incremental incentives to save higher. examples include reducing taxes on business income, and reducing taxes on repatriated foreign earnings shown in the bottom two bars in the middle they. despite the near-term economic benefits that would arise from increase in government spending such actions would add to the already large projected budget deficit. unless offsetting actions were taken to reverse the accumulation of additional debt that nation's future output and income would be lower than otherwise would have been.

if policymakers want to boost the economy in that near term and also achieve long-term fiscal sustainability, a combination of policies would be needed namely changes in taxes and spending that would widen the deficit now but reduce it later in the decade. such an approach would work best if future policy changes were sufficiently specific and widely supported so household, business and participant financial markets believe future fiscal restraint would truly take effect. lawmakers could also influence economic growth and employment during the next few years by changing policies apart from taxation and government spending. for example legislation could modify existing or proposed regulation. also the government's role in a particular sector of the economy or change trade relationships with other countries. the near-term economic impact of such changes would depend on how the effective business and hiring decisions, households'

purchasing power and wealth and importantly expectations and uncertainty about future government policies and economic conditions. cbo considered potential changes in policies related to energy and the environment, financial and health-care sector and international trade. but there are few analytic tools for estimating the near-term effect on overall economic activity of such changes. so we did not attempt to quantify the effects of those potential changes without any precision. in our judgment the effect of the specific changes and regulatory policies or other policies apart from fiscal policies that we considered probably would be too small or would affect the economy too slowly to make an important difference in overall output or employment during the next two years. i should emphasize the policy changes that we in salmons where illustrative rather than exhaustive. many other changes with larger

or smaller economic effects are possible. over the analysis has not addressed other critical considerations in evaluating this policy change including the long-term effect on the economy on people's health and the environment. thank you. i am happy to answer any questions you may have. >> thank you for your testimony and your work. let's go back to the conversations senator sessions and i were having as we began this hearing. it is an important conversation. an important debate. the biggest regret i have this year is we didn't have a fuller discussion. the country needs it and this body needs it and let's go back to that conversation we were having. senator sessions and i began this hearing by agreeing on the danger of our longer-term debt situation. i have said many times to my

colleagues that the debt is the threat long-term. do you see danger in our long-term debt situation and if so, what form does that danger take? >> as you know under current policy u.s. fiscal policies on the unsustainable path. federal debt is already very high relative to total output compared with historical experience. it is on a path under current policy to continue to rise. that can't go on indefinitely. the costs are manyfold. rising debt crowds out private capital investment and reduces future output and extra-needs to be serviced. we need to pay interest and that crowds out future government spending or increases future taxes. the run up in debt also means policymakers have less

flexibility responding to unexpected developments leader international crises or crises at home and beyond that there is increasing risk as debt rises of a fiscal crisis in which investors lose confidence in government ability to manage its finances and thereby the government would lose the ability to borrow. when that sort of crisis might hit we cannot predict. depends not just on the level of debt at an important point in time but expectations not just under current law or current policy but the ability of the political system to confront the nation's fiscal challenge and make deliberate choices to stay out of danger. >> you said that very well. i agree with that. senator sessions, won't speak for him but he has made clear how serious he believes this death threat is.

how could it be that there would be any benefit from fiscal measures taken now that would increase our debt? >> i recognize it may seem like a paradox that rising levels of debt are bad for the economy in the long run but nonetheless feud in certain ways as we are talking about an hour testimony could be good for the economy in the short run but it is not really a paradox. simply recognizes the nature of the economic challenge we face as a country is somewhat different over the next few years than it is over the medium run or the long run. over the medium run or long run economists in general agree that the restraint on our income, the capital stock and quantity and quality of the labour force and the level of technology and the way we bring it together in business. but in the short term, most

economists agree the constraint on our output and in comes today and next year and the year after that is principally in weak demand for goods and services. we have factories and equipment to produce more. we have people who would like to work to produce more and the reason they are not fully employed is lack of demand for goods and services. in the short term, what can strengthen the economy in our analysis will strengthen the economy, cut taxes or increase spending to those can either spur public demand for goods and services or lower taxes for private demand for goods and services and that can help in the short term. in the medium term and long term, that would be counterproductive. and even if one does this short-term and gets short term, less 1 offset the extra accumulation of debt one would be a little worse off in long

run than otherwise. areas complicating forces around that. it matters what you spend money on today publicly or privately. it matters how you address the long-term fiscal challenge. as a general rule detriment of debt that would be accumulated under policies of the sort that are analyzed here would be bad for the economy in the interim or long term even though it would provide a boost output in the short term. is not really a paradox. it reflects the nature of the economic challenge which is different in different points in time. >> thank you for that explanation. let me go to some of the specifics of what is in your study because it is important to understand that. let me just say i notice there's a difference between what is in this study and a previous study and that i understand this is looking at a two year effect. the previous study was looking at a five year effect. >> previous study looked at one

or two or five your horizons. we focus on a two year horizon. >> when you look at five year infrastructure was much higher on the list in terms of bang for the buck. here when you're looking at a shorter horizons infrastructure and these other short-term measures, increasing age of the unemployed and providing refundable tax credits and lower-income households lead to reducing employees' payroll taxes, subsidizing interest rates on mortgages that are refinanced, those things move up in relative position. let me make clear my own bias. i tried very hard when we were doing stimulus to have more infrastructure. i argued strenuously for a package of $200 billion of infrastructure largely focused

on transportation. the argument made then against it was from analysis that we are seeing here, that it takes longer to get the infrastructure spending into the bloodstream. my argument was after fiscal crisis you have a downturn that lasts longer. therefore having something that hits later, not a bad thing. maybe i good thing. i wish you had prevailed then because we are in a longer-term period of weakness. so tell me about infrastructure. why in your analysis when you shift from a five your focus to two year infrastructure dropped out? >> you have it just right. if we had shown here the five year effects, infrastructure would have loved relatively better for just the reason you say which is the money takes time to get out the door.

certain projects we know can happen very quickly repaving a road can be done fairly quickly. but more substantial projects generally take years to complete and the money is spent over the course of those years. >> do you know how long it took to build the pentagon? >> it happened rapidly. that with an unusual circumstance as you know. >> that is the argument i made in that circumstance. we were in an unusual circumstance in 2009. the answer to the question is it took nine months to build the pentagon. nine months. now we seem to think we can't do things and in part we have done it to ourselves. i can tell you in my state we are having an energy boom of incredible proportions. we are the fourth largest oil producer in the nation and we are headed for second or third

and i tell you what, we have a need for thousands of people to work in north dakota right now. we need thousands of people to work there. why aren't they their? because they don't have a place to live. we don't have a place -- i was in north dakota, the heart of the oil boom, a "administrator told me she had 14 children who come to school everyday living and their parents vehicles. they don't have a place to live. our unemployment is the lowest in the nation. less than 2.5%. we have the need for thousands of people to work. we need to build roads. it takes over 1,000 truck loads. some tell me 2,000 truckloads to do one well. our roads, people are dying on our roads.

these are two lane roads through the heart of oil country. we need to build a road. that could employ thousands of people. let's get to it. this idea that we can't do anything, we can't get the money out the door, i know in normal times we can't get the money out the door. when do we go to a serious flooding of let's get it done? i believe deeply in my state if somebody would help us get some of the things that we would normally do in normal order of business we get out of the way we could get a lot done. i will let you respond. >> you are right. it depends crucially on what you get out of the way. projects generally require bidding. there are reviews of various sorts for environmental purposes

and others and that takes longer today to complete large projects than when they build the pentagon. you are also right that under our forecasts that most private sector people with the evidence from elmendorf -- reinhart, there would be a shortfall of goods and services and access numbers of unemployed people will be on the two years we focused on in these particular calculations. we have unemployment coming down close to 5% only by 2017 in our august forecast which is six years from now. there can be justification on the priorities of you and other members of congress and macroeconomic justification for continuing to have that impetus to spending for an entire 5 year period. >> senator sessions. >> thank you. with regard to this chart that you provided it is important to

note 2012-2013. on infrastructure improvement, would not be complete so you have some productivity gains. correct? and in one sense this is a misleading thing because you tend to favor immediate expenditure items like reducing payroll taxes or unemployment insurance as the money goes out immediately. so this chart has some misleading characteristics to it. if you're looking at a longer period of time. is that correct? >> the question you asked -- the answer that we can provide for you. the primary difference between what this chart looks like and what they chart over five years will look like is the one the chairman pointed out that infrastructure spending would move up. when one looks at our table from

a report last january most of the other items have roughly the same ranking of cost-effectiveness over the five year span. >> one thing that is really important as you note in your report on page 25, as a result of your ongoing review and relevance and research, cbo has refused to lower into its range of estimates the short-term effects of change in fiscal policy on output and employment while leaving the a range and change. basically your experience with the first stimulus made you less optimistic about how large is the short-term benefit from our wing and spending today. >> not so much our experience

with the recovery act as the economic literature. there is some new research based on the experience of the last few years that most of the research -- actually -- >> some of that research is based on the stimulus i would hope which didn't achieve the goal we hope. i was ever green, alabama. and african-americans and a been a town hall meeting and said as my granddaddy said you can't borrow your way out of debt. we are in deep debt today and making proposals to fix our debt crisis by borrowing more money. the president's proposal did call for a tax increase to pay for this $450 billion increase. did it not?

>> we didn't study the economic effects carefully but you are right about that. >> an increase in taxes affects gdp growth? >> yes. the amount depends on the nature of the tax increase. we didn't study the economic effect. >> with regard to your letter to senator gray that the ten year stimulus package would have a net negative on growth over ten years i recall asking secretary to nightmare --geithner. he didn't see how you could not have improvement over ten years. do you still adhere to the view that there would be a modest gdp reduction as a result of the stimulus package that did pass? >> what our letter said was the effect on the level of gdp at

the end of the ten year window would be negative. >> gdp growth at the end of the window would have been without the bill. >> our estimate of cumulative a growth of gdp over ten years was positive. we said there would be a big boost at a level of gdp in the first three or four years and then what would have happened to gdp without that lost the effect of gdp would go below zero so if it would be a little lower at the end, let me be more careful. level is lower at the end. that is that negative effect on the growth of gdp. >> in the next ten years since you're paying interest on it and stimulus is long since gone it would be a continual negative of some effect. >> drag on the level of gdp beyond that if no other actions

were taken. >> you noted the effectiveness of deficit reduction. you released a report earlier this year, the macroeconomic budgetary effect of an illustrator of policy for reducing budget deficit and concluded that a set of policies that would reduce the deficit by $2 trillion over the next ten years would increase long-term economic growth by 1.4%. is that still your view? >> yes it is. it would raise the level of gnp at the end of the decade by 1.4%. >> it is axiomatic that in the abstract, lower debt helped the economy be more vibrant and would improve gdp. >> that is right.

>> one of the things the united states has worldwide is our currency as a reverse -- reserve currency in the rest of the world. is that an advantage for our economy? >> absolutely. >> i just looked at this week's baron's headline. don't know if you have seen it. the world's next reserve currency. on the cover a chinese rule on -- by 2020, not far off, expect china's you want to be widely used alongside the weakening year-end dollar and international trade as a store of value. would you agree that that is not a positive development for the united states economy? >> i would not make predictions

about how quickly the u.s. dollar might be supplanted as the reserve currency but certainly if the u.s. dollar were supplanted as the reserve currency that would be costly for the economy. >> part of that is a concern of our debt and trade deficits that specifically as to our debt, american debt is a factor in the worldwide concern over the united states dollar and reserve currency. >> absolutely. >> fixing that would help strengthen our economy and reducing our debt would improve our ability of the united states dollar as a reserve currency. >> yes. >> would you share, as senator conrad suggested, some of the

things that benefit the united states economy as a result of the dollar being a reserve currency? >> one thing we have seen very clearly in the last few years is in moments of great worry by investors about the safety of investments they come to the united states with their money as a safe haven. additionally a lot of transactions are conducted in dollars. the demand for our financial assets helps to keep the united states financial system at the center of the global financial system even when the financial system is struggling as it has in the past few years. as you said, we risk losing that advantage if we allow our debt

to continue to rise relative to gdp. >> we have the ability to print more dollars within a limited frame above four adverse impacts but if that goes too far that could be part of the devaluing of the currency and the loss of confidence. >> yes. if our inflation rate returns to the levels it was that beginning in the 1980s, that would also weaken the dollar's role in the national financial transaction. >> thank you. >> and thanks to senator sessions for asking that. very important we get that on the record. the role of america's reserve currency as a reserve currency, senator begich. >> thank you, mr. chairman. i want to -- i appreciate the

debate you had before we started the hearing and i thought was interesting to listen. i will make a couple statements and have specific questions. we can argue the recovery bill added debts and so did two wars and unpaid tax program for millionaires and billionaires added that. we are paying for it forever it seems that the rate we're going. i like debating history but that is irrelevant to where we need to get going here. i appreciate the debate about where we are today is we have an economy that we could argue if the recovery bill doesn't happen what we have more unemployment? would we have -- every month the number is strong enough, but since i have been here in 2009 when i got sworn in a month later, we had positive jobs increase every single month. it could be varied. some are small and some

insignificant but we could argue that without that short-term recovery bill that number could have done the reverse. we don't know that. the great mystery of the work you have to do as an economist who works with these numbers but the fact is i could predict in 2008 we were averaging 600,000 jobs lost the month. now we are in positive territory. we would argue 9% is a rate we don't want which i agree but is somewhat stagnant right now which is a good thing. we could argue 9% stabilized on but the fact is it is not going this way as we move into 2009 and 2010. now is stabilized. we have certain segments. we could argue if this worked or not but i would argue automobile industry was the walking dead

two years ago or driving dead. today the industry was writing. the automobile industry imports jobs from china. that is a reversal. we have more activity in the strongest companies in 1998. we could argue the theory what could have happened or should have happened or whatever but the fact is here we are. employment is more stabilized. gdp is not where we want it to be. the auto industry is one great manufacturing industry moving up, selling more vehicles. we have importation of jobs from china. i can tell you the seafood industry which is important to alaska. some process going on in china moving back to the united states because middle-class growth in china what happens? wage rates go up. fuel costs are high. better to do it here.

if you look at pieces and draw your own conclusions we are where we are. we have to get consumer confidence higher. let me take off on this issue. i agree with the chairman. he hit my issue, energy, recognizing in our robust way the power of energy is the development of energy. you mentioned in your testimony fuel costs have a direct impact consumers but also development of domestic supplies as you just heard had not only affecting jobs and oil states but a ripple effect as you build roads and infrastructure and schools and hospitals and facilities that service this industry. i would love if you add a little bit to your comments around energy. i agree. the pentagon was built in nine months. disneyland in california was built in one year. a whole city when you think about it. can we do this?

when i was mayor of anchorage we build a one hundred million dollars convention center and about 24 months from the date of the idea. not drawn up. the dates of the idea to completion which involved bonding, overland construction, design and everything. everything is possible if we want to do it. give me thoughts on the energy sector and what we can be doing. i am biased. we should be opening and work and hundreds of thousands of opportunities of jobs over the long term. give me your thoughts. >> -- >> we spent a lot of time talking about what could have happened or should have happened. we are where we are. democrats or republicans are to blame on both sides. everyone. is time to get busy and get some stuff done. that is what the american people are saying to me. energy is one of the great

opportunities and one more piece from an economic security, from a national security we have enormous resources overseas to protect or oil float when we could be spending it here in this country building our economy up. >> our focus in this testimony was on the short term in the next few years and the points we know about efforts the federal government might make to encourage investment. energy -- those effects are likely to not have a big impact on the overall economy in the next few years partly because -- and you mentioned this in talking about your experience before coming to be set -- state and local officials have an important role to play in the facilities, what companies are able to do. the federal government can open certain areas that are closed but can't easily sweep away all

the other factors that affect the pace of energy exploration. even if the decision were made and all the approvals were granted to the surge in spot right now, that takes some time to happen. so that at the moment most of the rigs that are designed to drill in deep waters offshore are committed to be somewhere in that near-term and if more states open up oil exploration and drilling and over time that would lead to more drilling in those places but not of a magnitude in the next few years to affect the overall economy. that is not a good or bad to do and other factors can weigh in that decision but the focus was just on short-term impact on the overall economy. >> i would argue with you that the idea of developments, i will tell you in two years since i have been here there has been

renewed interest in the arctic, industries hired well over several hundred employees starting the analysis of what is possible for shell who is in the process of finishing a ship being constructed in the last year and a half. it is build in louisiana and being shipped to seattle. these are hundreds and hundreds of jobs, well paying jobs. i would argue how we define short term we have to be careful that -- do we want energy production to be happening? yes. but three years ago north dakota, i will tell you my mother would drive from minnesota to carson city, nevada, find a place to stay, she went through this summer, she had to keep driving. she is in her 70s and driving late at night ot