are people here who want to destroy the government, that it has no responsibility, and they can't live up to the obligations. now, my question to you is this. in your opinion was the effect of the elimination of thousands of public sector jobs, teachers, police, and firefighters, in overall economic growth to the economy -- >> no, congressman. >> why not? >> loss of public sector jobs is, as i said earlier, part of the overall loss of jobs that we've seen in this very prolonged economic downturn. >> and we've been see that sector shrink. >> out of time. let's let him finish answering. >> correct? >> sorry. >> i said we've seen that sector of the job market shrink. >> thank you. yes, congressman. >> thank you very much. >> thank you, mr. chairman. thank you for joining us today. start out with a caveat to begin with. economic growth is virtually the same as employment growth, right? i mean, if we talk about economic growth we could talk

about more people working. >> move together obviously not perfectly. >> not perfectly but pretty good correlation. so my question starts with this and i would like to keep the answers fairly short. which economic activity provides it, option a is private investment, option b is federal spending. >> congressman, that depends on the nature of the federal spending you have in mind. >> i have a chart. i don't have it with me right now. private investment is the correct answer. private investment trumps federal spending almost every time. which policy option provides greater economic growth, leaving a dollar in the hands of a taxpayer or take that dollar from that taxpayer and increasing federal spending? >> depends on the nature of the federal spending, congressman. i'm not trying to be difficult but it does matter what money is used for. >> okay. let's put it this way then. what would create more jobs, keystone xrks l pipeline or

selndra. how many jobs do we have from that? >> congressman, we have not studied those particular examples. >> not very many. >> companies that fail don't create many jobs. along the way, of course. but try to study the history of that firm or -- >> how many federal dollars is going to take the build the keystone exxon pipeline. >> i don't know, congressman. >> zero. >> and the estimate is very widely. some people say 20,000 temporary jobs. some people say it's in the -- just in the thousands. it doesn't make any difference on one land option a is selendra where we spent half million taxpayer dollars and not go jobs and on the other hand $7 billion of private investment and we get good long-term economic growth out of it, right? >> certainly the shortfall in private investment in the past few years has been a drag on the economy during the past few years and will continue to be a drag on the economy over the decade. part of the reason we say in that report that we marked down

the projection of gdp at the end of the decade relative to what we would have had without the financial crisis and recession is the shortfall in investment. >> takes us to my next collection. what is in your opinion or in your agency's analysis, what is the optimum level of these activities as a percentage of gdp tks rdax tax revenues? which is the optimum level, you're not raising the deficit too high to cause long-term damage but at the same time you're taxing at an appropriate level to fund the government? what percentage of gdp is that? >> i don't think there is the analytic answer to that question, congressman. it's a matter of people's choices. deciding the level of taxes that one thinks is appropriate can't really be done separately from level of spend that one thinks is appropriate. >> that's my next question. one of the things you talked about here is the rub that we have between on one hand you've said that the increase in tax rates that we're going to have on january 1st of next year is going to dampen economic

activity. and it's going to have a pretty big dampening i pact on economic activity. on the other hand, you said that the deficits, which really deficits are just transfer payments -- they represent government spending in excess of revenues so you could call that a giant stimulus bill if you want to. you said those deficits are going to, that stimulus is going to ramp up economic activity. turn it down, it's going to lower economic activity. what i'm trying to get to is what is the optimum percentage of tax revenues versus spenting. in the real world they ought to be the same and i'm trying to get a feel for what that should be. again, as a percentage of gdp. >> can't be too far apart for too long. the thing that can't happen is that the ratio of our debt to our gdp rises indefinitely.

that can't occur because at some point people will stop lend that government money. >> correct. >> let's go to the next one. what was the cost per job created under the stimulus spending, under the ara? >> i'm sorry, congressman. i don't have an answer to that offhand. we can take the estimate we have of the changes of employment and divide that by the $837 billion but i don't know offhand what the answer to that would be. >> okay. it's substantial. it's a lot more than private dollar investment or the number of yobs you get for a private investment, dollar spent. lastly, you noted that in your report the cost of stimulus has increased from $821 billion to $839 billion. what's behind that cost increase. >> i think we made some fall revisions to the cost of some of the refundable tax credits enacted in that legislation and maybe on the unemployment

insurance side as well. some revision of the refundable tax credit. >> we don't have any jobs from it. thank you. >> thank you very much. thank you, mr. chairman. welcome back. >> thank you, congressman. >> i enjoyed our last discussion. and congratulate your daughters watching you work. >> thank you. >> i'm sure they will learn something. one thing i learned being on this budget committee is your job is to be neutral in your responses, respond in ways that are objective and honest in terms of -- and not be shaded by some of our -- the way we would

like to lead our questions or -- and have some sort of response that appears to be favorable or unfavorable. so i appreciate the difficulty of your task at your grasp of your -- of the information that you have, having to respond to different folks here. having said that -- >> now you're going to stump me. you're going to set me up. >> no, i'm trying to just reflect my thinking in that, you know, the kinds of things that we're trying to struggle with here in the budget committee on behalf of the country. i think every member of congress knows that we do have a deficit and a debt problem that deserves our serious attention. and the attention should be looked at in terms of the dynamics of what's happened in the past, what could happen in the future, but how we put together the difference

policies. and the mixture of it so that we try to figure out what's the best outcome in the future. we only disagree, i guess, about the best way of how to solve it. and without that we can really tak take a balanced approach and use a mix of the many tools at our disposal. in your initial gut reaction to a plan that has these kinds of characteristics, what would be your reaction to having a plan that balanced the budget by 2021, make a targeted investments in areas like infrastructure and education and then finance these changes with the progressive tax code, and also overseas military engagements, what would be your gut reaction to a plan that has those kinds of elements in it? >> well, congressman, i mean, we can and do analyze the economic

effects of particular policies that congress is considering. we've done quite a bit of this, for example, in terms of different tax policies, we talked a little bit about today. we've also written about the value of certain sorts of government investments. physical capital of a sort of traditional sorts of highways and other infrastructure and human capital, skills and workers. that's harder to quantify though. we can talk about specific choices of that sort. we have not been asked to analyze the effects of overarching fiscal plan except that we do announce every year and we've done the analysis in this outlook which is not good in the long run. we have to know exactly what it was. but also i want to emphasize that this is not just the reason that cbo doesn't make policy

recommendations is because the policy choices are not just a matter of analogies. it's a matter of value judgments by you and your colleagues, on behalf of me and my fellow citizens about what we want the government to do and not to do. and i think the lesson of this alternative fiscal scenario and the size of the gap in 2022, and the fact that write the historical pattern, what we see there so striking is the rise in the cost of social security and health care programs. the ultimate question will be whether we want to make as country substantial cutbacks in social security and the federal health care programs relative to how they're scheduled to work now or substantial increases in tax revenue relative to that historical experience. we have to pick at least one. we do have combination of those two. we can't do neither. we cannot sustain traditional levels of tax revenue and the current benefits we provide for americans when they become

older. at the same time, given the rising number of older americans and rising costs of health care. any proposal that is set on one side of that or the other has implications for the other side and it's up to you and your colleagues to weigh those and we can provide some analysis that i hope is helpful but ultimately is a matter of value judgments. >> thank you. and in algebra, x exauquals whatever your value system is? >> yes. i'm going to move away from the policy and get down to the weeds of some of the numbers if i can. if i can get that first slide up, that would be great. probably something of just interest of you and me. i was looking at the report last night and noticed something fairly interesting. y'all -- regarding the inflation numbers. it's something that you and i have talked about before. i've talked about with dr. bernan bernanke, a bunch of different folks. and to run through the quick

history in your forecast of last year, y'all expected inflation, talking about the cpi now for urban workers, pick any measure you want but use them across this same analysis. you thought it would be 1.3%. in august you adjusted that up to assumption of 2.8%. finished the year at 3.3%. at the same time that we saw actual rates of inflation that were higher than your estimates you didn't change the assumptions for 2012, roughly the same, 1.3% last january, 1.3% again in august and 1.4% for yesterday. that grabbed my attention and led me to the next slide, which i want to ask you about, which is that we took a look at your projections for cpiu for the next five-year window. the first five-year window and second five-year window. slightly different off by a year because they're a rolling number but let's call the first year the five-year window. you have, despite the fact that inflation turned out to be considerably higher last year

than you expected, you actually revised down your expectations for inflation over the course of the first five-year window and left it the same for the second five-year window. and what we did is went in and looked at the historical data from the bls since 1970 and took a series of five-year rolling averages. it turns out you are using an assumption for the first five-year window in this report that would be the lowest five-year rolling average in recorded history. i'm just wondering how you can justify that. if you take a look at which we've got the average five-year rolling average, which sounds strange but i think you see where we're going, over the last 40 years is almost 4 1/2%. the average five-year rolling average over the last ten years is 2 1/2%. the lowest we could find of any five-year rolling average going back to 1970, was 2006-2010, 2.18%, and the worst as mr. garrett referenced earlier in

his questioning was 1977-1981 when the average was above 10%. what is the justification in taking these unprecedented rates of inflation as your assumption as you look into the future? >> i haven't looked at those precise numbers but i understand your point, i think, congressman. you are certainly correct that our forecast of inflation have errors in them like our forecast of all the economic variables. in terms of last year, there were some particular developments in energy markets and other parts of the economy that pushed inflation above what we think people had been expecting. and a number of people thought at the time most those would likely be transitory developments and the way the information is unfolding is so far consistent with that story. the change in the cpu over the past three months is less than it was in the past six months which is less than the past 12

months. the latest information about inflation suggests that it is, in fact, coming down. now, more broadly i mention two things. one is that relative to years preceding the early 1980s a fundamental change in the behavior of central banks, in this country and around the world, related to a fundamental change in economists understanding the role of central banks and keeping inflation down. so as we look out to the second half of the decade, i think it's very clear that the federal reserve's objective is to keep it at 2% and i think they have the tools to do that. for the next few years i think the crucial thing to realize is that we have a period of unprecedentedly prolonged high unemployment. since the depression. so we are living through a period that is the longest period of excess workers, houses, and so on in the economy than we've had in my lifetime.

and there a systemic relationship in the -- i don't mean to cut you off but i'm running out of time. i understand the relationship between gdp growth and the fact that excess capacity in the labor marketsnd that would allow us to grow the economy. without seeing a lot of inflation. but y'all actually, this is the next slide, actually revised up the gdp estimates over the course of the first five-year window. 3.5% last january to 1.1% today which, again, is well above the historical average and approaching the highest ever actual performance within the gdp growth in a five-year window. i guess my question is, how is it that you're assuming historic rates of growth and historically low rates of inflation? >> the 15-second answer, mr. chairman, if i might, is we're start that growth from a particularly large gap between our actual output and the potential output in the economy. happy to take this up with you additionally, congressman. >> thank you, chairman.

>> ms. mccowan. >> thank you very much, mr. chair. good to have you here. and i have two questions. they're rather brief, so i will give them to you together. many americans get up and go to work every day. more of them would like to be able to get up and go to work every day but americans go up and go to work every day. they work hard and they contribute to the success of our country. for every dollar of income from wages, these working americans, they end up quite often paying double the tax rate, double the tax rate of investors receiving income from dividends or capital gains. so to me this hardly seems fair. since there's such a significant tax benefit, even a bias, i would say, extended to investors

over working americans, is there some equitable, qualifiable benefit to the economy and job creation inherent in every dollar investors receive from dividends or capital gains versus the dollar that's earned in wages? so what's the impact the federal deficit and this tax inequity and the benefits provided to investors who are workers? my second question kind of goes back to -- i'd like you to kind of summarize the different options because people have asked you a lot of questions. so you have some scenarios that you can talk about that you presented to us. again, all the bush tax cuts are allowed to expire at the end of 2012. what is the affect on the economy and the federal deficit if only the upper end bush tax and income earners over a million are allowed to expire, or if all the bush tax cuts were extended for the next ten years,

what is the effect on the economy, what is the effect on the federal deficit? but if you would just kind of -- i've been struggling with this, you know, a worker earns a dollar versus an investor who gets a benefit. >> well, so, congresswoman, as you know, in setting tax rates, congress takes a number of considerations into account. the equity issues are part of that. so are the -- so is the affect on the economy. and the economic affects are not necessarily correlated to what you might view as the justice of the situation. those are really sort of separate issues. i'm not qualified to speak to the equity issues, except for my own personal role. when we do analysis of the effect of changes in tax rates, higher tax rates generally discourage the thing that's being taxed. higher tax rate on work, unbalanced, reduce work effort. higher tax rates on the return

to saving, unbalanced reduces the amount of saving. and we incorporate those effects in the estimates that we do. so there's no, i don't think there's a right answer from an economics perspective of what the relative tax rates should be. because it is a combination of both economic effects and value judgments, again. we can do work about the effects and changes in particular sorts of taxes. as can our colleagues in the staff on taxation for you. but i don't have comparisons to use here. on the second question you asked, the economic effects of extending all the expiring tax provisions would be a little larger than the economic effects of extending all the expiring tax provisions except for the top tax rates. so in the short term, the lower

the taxes are in general and the higher spending is in general, that tends to boost the economy, as i said. in the analysis we've done before, we've said that the effects of lowering the top tax rates is smaller on the economy in the short term than the effects of changes in tax rates in the income distribution because hiring people tend to spe spend a smaller share of the money they have. the effects will be smaller dollar for dollar in the short term. in the longer term, it's more complicated n the longer term, what matters importantly, as i said, is not the demand for spending. it really is the supply of savings by work effort and so on. in the long run, it's more complicated to look at the effects of different sorts of changes.

i did some testimony for the senate budget committee a year and a half ago. but it's more subtle in the longer term. >> thank you. miss black? >> thank you. i want to turn back to the previous questions about trust funds but more specifically about social security. in understanding trust funds, i think you've done a good job in the introduction to this particular section. i want to lift up one paragraph in there on page 121 when you say a trust fund receives catch receipts that are not needed immediately to pay benefits or cover other costs. the treasury uses the extra income to reduce the amount of new federal borrowing that is necessary to finance the government wide deficit. the reverse happens when revenues for trust funds fall

short of the expenses in a given year. so i think that helps us to understand a little bit more about how the trust fund works. and then i want to turn everyone's attention to page 122. and there just above the social security trust fund statement or section, you say without legislative action that there are three trust funds projected to be exhausted during that period and that period is 2013-2022. social security disabilities, insurance trust fund, medicare hospital trust fund and highway trust fund. now looking at social security trust fund, we know that it is running a cash deficit. and payments are going out for benefits that exceed the social security payroll taxes that are coming in. and, of course, if this trend were to continue, we would need to redeem the social security trust fund's assets to make payments. do the social security trust

funds represent real assets that government can draw upon? >> so as we say congresswoman in the para as graph following, the balance in the trust fund is an asset for the individual program but a liability for the rest of the government. the resources to redeem a trust fund security in some future year must be generated through taxes, income from other government sources or borrowing from the public in that year. therefore, trust funds have important legal meaning in that their balances are measured of the amounts the government has the legal support to spend for certain purposesment but they have little relevance in an economic or budgetary sense. >> so then if we -- you say on page 124, by 2022, the trust fund for the old age and survivors insurance will -- is projected to show a deficit. what then? what then do we do? do we go into the securities? or are there actual securities

there that can be redeemed to pay for the benefits? >> well, there are actual securities there. the trust fund, the legal owner of a very large pile of honest to god government securities. but the resources to honor those has to come from some other place, as we discussed. so when the trust fund starts to give securities back to the government, the rest of the government and ask for cash, that cash has to come from somewhere, some source in that year. >> and, again, help me understand where they come from. you menned bo ementioned borrow. >> funds from the government, on unified basis all the time is the revenue collected through tachs or f taxes or fees. >> so at the end of the day, it almost is a shell game where we

just move this money around and it appears that in trying to understand when we tell people they're paying a tax, a payroll tax and at the other end they expect a benefit, the dollars really that are being put in there aren't necessarily the dollars that at the end of the day are going to be redeemed? because there's a lot of shifting and shovimoving of the money? >> how much people get out depends on the congress. as you see in cbo's work, we focus on the unified federal budget. trust funds are, the social security trust fund and others are accounting mechanisms and they have useful role. but in our analysis of the budget situation and our projections of the future budget, we focus on the outlays for programs and collection of money without focusing on which particular account something is

being kept track of in. we do talk about the trust funds. but we think a more useful way for you and your colleagues to think about the fiscal policy choices is not through the trust fund lens as much as in terms of the overall activities of the government in both providing benefits and services and in collecting revenue. >> i think to make a point here -- i know my time is up. i think to make a point here is that at the end of the day, the money's got to come from somewhere. and the money, if it starts to run out, has got to come from somewhere and many times that is borrowing more money. >> thank you. mr. ryan? >> thank you, mr. chairman. thank you for all that you do for us and welcome to your family who's here. >> thank you. >> so how many jobs do you estimate this stimulus bill created? >> to our estimate, in -- over

time, our estimates for 2010, for example, it added between .7 and 3.3 million people to the work employment, in 2011, it added between .5 and 2.6 million people in employment. 2012, that number -- the numbers are smaller because the budgetary effects are waning. >> the kmn is coming out of the economy -- or not going into the economy. >> not going into the economy, yes. >> so what was the change? so we have cbo telling us that the stimulus bill created millions of jobs here on the record. what was the change in gdp growth from that january and february. we know we were bleeding 600, 700,000 jobs a month. what what was the change in gdp

growth from that january and february to now, for example? >> as you know, gdp was falling very sharply at the beginning of 2009. and it reached its trough around the middle of the year. >> which was? >> economists call that end of the recession which is just a technical term that means declining period of when gdp is declining. since then, gdp has been growing. >> by how many points, if from the bottom in that summer to the growth we saw in the last quarter, the swing? >> i'm sorry, i don't know that off hand. >> was it last quarter, 2.8? what was it in that summer? do you remember? the negative? >> i don't remember what it was in the first half. >> okay. so we've had significant change. jobs created and so one of my colleagues said earlier, you know, what's better private investment and private investment trumps federal spdi