here who would not rather have the private sector coming in making investments, creating jobs. that's what we're all trying to figure out how to make that happen. and what environment needs to be in place in order to make that happen from deficits to investments that we make. but the issue really at that point was that there wasn't private investment, correct? in that -- >> yes. there was a very sharp reduction in household spending, consumer goods and housing construction and business investment. and as private demand faltered, part of what happened in response to that was an automatic change in the government budget. tax revenues fall and income falls and spending rises when incomes are down. but also then the government acted through the recovery act and other measures and we think that the recovery act provided some additional demand. some from government purchases but others in ways that boosted

private demand. >> did you run any models on what the world would have looked like had we not passed the stimulus package? you said, wow, if you do a stimulus package, it's $800 billion, if you do one that is $1.5 trillion or if you do nothing, what was the model looking like of the do nothing scenario? >> so we did estimates in the winter of 2009 of the effects of the recovery act as they were being considered. i think we published a chart that showed a decline in the level of gdp that was very severe. and the decline that was still severe but not as severe in the presence of the recovery act. one can take our estimates that we publish now of the effects of the recovery act and subtract off those effects from the realized gdp growth and employment levels to get a sense of what we think would have happened in the absence of the recovery act. >> greatment i want to make that

point. no one here is happy with where we're at today. i represent youngstown, ohio. no one is happy with where we are at. but i think it's important to say, wait a minute, there was no private investment. this had had some significant effect. cbo is telling us millions of jobs, turn around in gdp growth. last quick question. so now we're debating the value judgments of taxes, raising taxes on millionaires, billionaires, whatever, versus federal spending. what increases the gdp more significantly? a tax cut or a millionaire or higher versus a federal investment in say building roads and bridges and fixing the combined sewer overflow problem around the country? >> over the next few years, congressman, we think that higher people spend a small share of the incremental income orwellth they have from a tax cut doesn't provide very much stimulus to the economy relative

to giving money to people in ways who will spend a larger share of that money. that includes infrastructure investment. >> thank you. >> mr. riddle? >> thank you, mr. chairman. i have a couple slides. i'd like to get those brought up. doctor, thank you for being here. i know it's been a long morning already. i appreciate your patience. you've been kind with your time. i want to take a look at two slides very briefly and then just get you to comment on them. this one shows consumer spending dating back to 2001. we can see the recession period in there, the dropoff. but even that dropoff, it dropped off back to about 2007 levels which was at the end of the housing boom, one of the largest growth periods in the nation's economy. and then subsequently it turned around and began to grow again.

and i guess the thing that pops in my mind is we hear a lot about consumer spepding. consumer spending is the ticket to job growth and consumer spepding is up and up fairly dra mat ukly from 2007. i wonder why we don't have jobs. >> so it's the sum of demands for goods and services that drive overall employment. so it's adding up consumer spemding and business investment and housing investment. and the government's federal entity and local governments purchases and business services and net export. >> okay. let me bring another slide up. i'll let you continue. i have one more slide if we can bring that up. all right. we talked a lot and my colleague mr. ryan from ohio just mentioned it, you just mentioned your comment about private investment. you know, i know that you're an economist. i'm going to ask you to put on your psychology hat.

can you possibly tell me, i spent 30 years in the private sector running my own business, creating jobs in this country, i know that the political class here in washington likes to claim they create jobs. i find it a little insulting. i thought actually helped create them myself in my company. private invest sment way oment . why do you suppose that is? >> that is one of the more sensitive parts of the economy. in general, business investment falls sharply in recessions and then rebounds sharply in recoveries. but it is true that in this particular down turn business investment fell to an especially low level. we show a picture of that ourselves in our outlook, i think. and there are a number of factors here. it's hard to disentangle themment we're doing work now trying to -- trying to disentangle various factors that led to the slow recovery. when that work is finished, we'll supply them. >> let me tell what you small

business owners and job creators are telling me. they're telling me that they have absolutely no confidence that the political class in washington, d.c., can solve these problems. and until they have a sense that we can solve the problems, until they have a sense that democrats and republicans can lay down their swords, maybe put aside preconceived impressions of reality, i have to defend this type of economic model. they have to defend their type of economic model. we're going to hold on to it until we die. business isn't going to invest money because they don't trust us. i call on all my colleagues to just lay down the sword and try to fix this thing and inject some confidence back into the economy. because i will tell you, the other thing i hear from them is that the government has gotten too much in the way. they feel that $16 trillion debt, it scares the living day lights out of them. they feel the environment that places thousands of pages and new rules on them every year is

a burden on them. they feel that oppressive tax rates that continue to take from them, money that they could use to create more and more jobs is a risk to them. and i hear this over and over again. i'm going to close with one other comment and question. i'm really pleased that you brought your daughters with you today. i wish my own two children were here with me and my grandchildren were here. did you a wonderful job. i'm sure they're very proud of you. do you think that their future -- >> i'm pretty sure they're bored by now. >> they could be. sorry, ladies. do you feel your daughter's future is brighter today than it was $4 trillion a debt ago? >> a lot has happened in our country, congressman. the sim antics of that have been good for their future and some not. but that's a personal judgment

in any case. a matter of investment, i'm not at all surprised that the uncertainty that future government policies is weighing on businesses. we have a recent paper actually co-written by a member of our panel that shows that uncertainty of government policies is especially high now and given the temporary nature of so many parts of the tax code, so much -- such lack of clarity of what will happen in health care policy, in financial regulatory policy and so on, we think that is weighing on business investment decisions. i would just say quickly that i think the surveys of business suggest that the biggest factor weighing on their hiring and investing is uncertainty about the future demand for their products. and that is sort of circular exercise which is that some businesses spept more and hired more that, would bolster demand for other businesses work and that would have a circle. but i think the biggest source of uncertainty in business and

space is what there sales. >> i completely agree with you. i will tell you -- >> the gentleman's time has expired. >> regulations and taxes are affecting that demand. thank you. >> thank you, mr. chairman. i appreciate your time today. i was looking through the report and on page 36 i actually discuss participation in the labor force. and you note the employment rate in the fourth quarter of 2011 would have been about one quarter percentage point higher than the rate of 8.7%. trying to understand this. when you factor in the number of people who dwit looking for work, our unemployment rate is closer to 10%? >> yes. i guess that's right. i can't find the specific place i think the -- you know, it's a -- it is often the case in down turns that some people who lose jobs keep looking and some stop looking for a while. but i think that effect has been

particularly pronounced in this down turn. and, of course, the rise in unemployment and duration of unemployment is pronounced as well. >> yeah, it's been very difficult. but again, 10% infective unemployment rate, that still doesn't factor in the underemployed? >> i think that's right. >> okay. if we factor those in, what percentage do we have unemployed or underemployed? >> you know, i'm sorry. i don't have -- i think that is a important concept. i don't have those numbers. >> it certainly s i appreciate that and a follow up on. that other question, turning to taxes. you have two scenarios. if congress does nothing, we foresee a $5 trillion tax increase. if the bush-obama tax cuts of '01, '03 and '10, there is that window? >> yes.

>> and the net effect would be positive? negative? >> well, in the short run, we think that tax increase would have a negative effect on the economy. by the end of the decade, we think it will have a positive effect on the economy. the increasing tax rates embody the current law as opposing effects on gdp over the median term and long term. the lower tax rates do encourage additional work effort and saving in a way that we capture in our models and that are good for the economy. but the tremendous amount of extra borrowing crowds out government bet -- crowds out private investment and that is bad for the economy. and in our modelling, there is a range of assumptions. the effects of the extra debt dominates the effects of the lower tax rates by the end of the decade. >> you would say that even in light of mr. bernanke's statement we're going to have massive delay low borrowing cost for the foreseeable future?

doesn't that play a significant role in trying to predict what would occur? that's a question i'll ask mr. bernanke in the next day or so. >> yes. i'm curious to hear his answer. certainly the low borrowing cost is what we have in our baseline projections. but still maybe the case. we think it would be the case relative to what would happen with debt that was this big, having the debt that is this big will raise interest rates. so that increase was coming from a lower baseline level and is often the case. we that i extra demand for credit will still push up the cost of credit. >> and another question, i appreciate that. will the higher deficit figures come in march? another trillion dollars for fourth year in a row just unbelievable. what is your latest estimate of when the federal government will

run out of money without using extraordinary means? >> we don't try to track treasury cash flows on a monthly basis. so we're not the people to come to for a specific prediction at any point of when the date might be -- >> going into the treasury for a specific prediction would be problematic as well? on the day they said they would run out of cash, they ran out of resources. just big picture, we get to 2013 or run out of money before a new president takes office? >> under current law, we think that, yes, the government can get to 2013 without raising the debt ceiling or going to the extraordinary measures that you mentioned. but that is quite uncertain. it depends on our economic projection and depends on the action that's congress takes. >> okay. i appreciate that. lastly, one quick question. last summer we had an exchange about which government created economic growth and went back and forth with your office and that difficult pullout. looking at the unemployment and infective unemployment rate of

10% and the anemic economic projections, is it fair to say that the tremendous runup in government spending of 2009 did not benefit the economy in the long run? >> the extra government spending from the recovery act in 2009 boosts the economy in the short term. but we believe, yes, unless there are offsetting changes made that paid off the extra debt incurred, the economy would be worse off as a result. >> thank you. >> thank you, mr. chairman. doctor, welcome. thank you for being here. you and i always seem to talk about this time of the day. >> happy to be here. >> i heard your testimony with the chairman. i heard you to say it's not

medicare. i want to clear this up. it is not medicare that is causing the unsustainability. we have a mix of policies that need to be worked on. there is a combination of policies. it is the growth of medicare, other federal health programs, social security. put that against taxes that remain close to their historical average. >> so i want to be clear for the record, for my own understanding, mofor the americ people, you are not saying that we have to reform medicare, or are you? if we had to adjust all the other parts of that mix and not touch medicare, is this country okay in the long run? >> so in our pro jeks from last summer for 2035, we have medicare being about 2% of gdp larger than it is today. so that alone can be accommodated through other changes in policy. i don't think medicare has to be

changed over the next 25 years that we focus on here. but something has to be changed. and, again, i'm not recommending that we leave it -- >> so seniors going on medicare now might use it for the next 25 years. so i need a longer term view than. that twint talk about my 2-year-old, 4-year-old. i want to talk about their kids. >> will the gentleman yield for a second? so looking at the cbo's long term budget outlook, to answer your question, we have it right here, medicare, medicaid the health care entitlements plus the interest on debt at that time will equal federal revenues. that means no other program in the federal government outside of the health care programs on the debt will be paid for by any revenues. >> that's right. but as you know, the debt service that we're paying at that point arises from the combination of policy that we've had in the first -- in the

intervening years. >> sure. >> i think it is a judgment that you will all need to make about whether you want to have a country with historical levels of revenues and changes in social security medicare programs to come down to that level. or the programs as they're currently structured and increases in revenues to come up to that level or some combination. >> i know we're talking about a program. >> go ahead. >> i think when you're talking about a program that is going to be 14% of gdp and has no -- no interest in plateauing from there, you have got to, if you're going to have an honest discussion with us and the american people, understand that this is part of -- the centerpiece, perhaps, of the problem. >> rising health care is putting

this unbelievable pressure on the federal budget. but there are different ways to respond to that. and it's not our place to endorse or -- >> i understand that. you said that a few times, too. but when you say mix of current policies, you're endorsing something. you are saying -- that's why i want to be clear that medicare form is part of this mix and that it has to be reformed or not. so that's what i want to get to. >> right. i don't think that any -- that one can say in any single piece has to be reformed. >> okay. >> it is the combination of policies. >> all right. it's on the record. >> we were asking you questions about growing out of this deficit. i want to be clear for the record that you met, you mean to say that we can have policies that create growth, whatever we agree them to be that could help reduce the deficit.

so can you not grow your way out of the debt that we're in and the debt that's coming down the road alone. we cannot -- just by growing the economy, all the dials not touched, can you not grow your way out of this debt. >> so in our -- >> the first mature economy? >> in the baseline, debt continues to rise because we continue that deficits sh as you were saying. it falls slowly relative to gdp because the debt is rising more slowly than gdp. >> if you're not eliminating the deficit, you're'reducing the debt. >> no. >> so growth alone will not do this. regarding the extended payroll tax cut, i understand that the cost of the tax cut, if extended this year, will be about $100 billion? and you indicate that that is better for the near term economy than the bush tax c dollar for dollar, lower payroll

taxes has a stronger stimulative effect than a broad based -- >> and you also would agree of that $100 billion has to be paid for by future generations? >> yes. >> for our near term economic bump, other future generations need to pay for that? >> what do you believe john main yard got right and what don't you subscribe to? >> i think it's a widespread view over the mooem immediaediun economies are classical or neoclassic also that the constraint on output and incomes is the supply of the factors of production. and also, i think, view of most economists who are thinking about business cycles is that in

the short term, then a very important determinant of the level of output and level of employment is the demand for goods and services. the way this is structured has evolved in a tremendous amount. >> evolves or -- >> but that view that in the short run the economy has what people think of is canesian properties. it doesn't have those same properties. i think that is a consensus view that you'll find leading textbooks, not everybody shares that. i don't want to say that. i think it is a consensus view that you'll finding in leading textbooks and a lot of the writings of people over the last few years with a range of political views and a range of views about whether the right way to proceed in a country is to change taxes or spending or so on. >> and my time expired. thank you. >> i'll call the office from time to time. >> please do. >> thank you. mr. woodall. >> thank you, mr. chairman.

thank you, doctor, for staying with us throughout the morning. just so you know, i tremendously appreciate the work you and your team does. i know we're here to talk about your latest body of work. if you were in the bottom 40% of income earners in this country, you actually profit from the american income tax system. that almost half this country, i'm not talking about the refund check you get in april, i'm talking about the tax code, the tax collection system in this country sends you more money than you send to it. the privilege of being american citizen is profitable through the income tax code through the bottom 40% of all american. i don't think we think about that. we all think that we're paying our fair share, somebody else needs to pay a share.

you know, i'm a proponent of the fair tax and abolishes the entire income tax code. and i look to your report that tells me that for 40% of americans, the income tax does not collect taxes. it distributes large assets as ef evidence the income tax code lost its way. i love that publication as well. and what i see and particularly whether i combine it with figure 41 from your economic outlook today, i look back during the carter years, the ford years, the 1970s where the highest ordinary income rate in this country was 70%. i look at your cbo baseline and i see revenues during those times were right there at historical averages, maybe a little lower. i fast forward to 1986 and the income tax reforms that tip

o'neill and ronald reagan put into place. i see the lowest ordinary individual income tax rates on record. then i find out revenues are higher than the average revenues. the higher tax rates lead lower revenues and lower tax rates correspondent to higher revenues. as a freshman, i appreciate you being able to educate me in that way. what's really got me confused is going back to figure 41, i see you have a cbo baseline projection and alternative fiscal scenario. the alternative fiscal scenario assumes that president bush's tax cuts, president obama's tax cuts, all of those tax cuts stay in place. is that correct? >> all the expiring tax provisions are extended with the exception of the payroll tax. >> so according to what i see here in figure 41, if we leave every single tax cut in place, in fact, if we even bring back

the tax cuts that expired in 2011, revenues will still be higher than the 50-year historical mark? we leave every tax cut in place, federal revenues will be higher in this dten-year window than te 5-year norm? >> by the end of the decade, it will be higher, yes. that's right, congressman. >> i heard my colleagues talk about that revenues and important component of our deficit crisis and that the deficit is caused by these tax cuts. so i go to your cbo baseline proposal that assumes all the tax cuts expire. and what i see is that if we allow these tax cuts to expire, federal revenues as percent of gdp will rise to the highest levels in 50 years. is that right? it's the highest level on the chart. is that correct?

>> if the tax cuts expire, as under current law, and you keep to current law in spending, then the debt continues to rise. >> so the highest tax rates over the last 50 years don't pay down any debt. but do they eliminate our annual deficits? >> no. again, if you keep -- the rest of current law remains in place. then we continue in this baseline. so we continue the deficits. >> if we allow all the tax cuts to expire. if we allow federal revenue to rise in the highest level, we don't pay down a penny in debt? we don't want to eliminate our national deficit and we continue to accumulate debt. what that tells me, doctor, is that clearly revenues are not the challenge in this scenario. it's spending that's the problem.

and i know that folks back home are wondering when we allow revenues to rise to the highest levels in 50 years, what they're getting for that money. >> but the short answer to that is there will be far more people collecting social security checks in 2022 than any point in the past 50 years. there will be more people collecting medicare benefits than the preceding 50 years. more elderly people collecting benefits for long term care through medicaid in the preceding 50 years. the american people are receiving benefits. whether you and they view those benefits as worth that cost is the judgment that you and they have to make. >> i guess that goes to my colleague's point. if we can allow revenues to rise to the lie h. high est levels in 50 years and that still doesn't solve the problem, we better focus on the spending part of the ledger. i appreciate you bringing that us to. thank you again for spending so much time with us. >> thank you, congressman. >> thank you. let me conclude by going to the outstanding work you do in your summer long term budget outlook.

and i just want to simply impress upon a point that i think member here are rtrying t make. and in 2034, using your numbers, spending on our entitlement health care programs plus interest exceeds all federal revenues in 2034. in the end of the century, 2085, medicare goes from where it is now approximately 3% of gdp to 14% of gdp. all health karen tiglp health c entitlements exceed our revenue trend. so before the end of the century, before our grandkids are raising their families, all federal revenue that comes into the government won't be enough to cover our health care

entitlements. so i know you can't give us a recommendation or value judgments, it is obvious from your numbers that this package is us sustainable. we can't just be a government that only provides health care benefits. we have national defense. we have education concerns. we have environmental concern. we have social security. and so the sooner we recognize that the path we're on is ruinous which is what you're showing us in these long-term numbers, the tax rates you tell us that we need to have if we want to finance this through income taxes, the bottom tax bracket is 25%, the mid sl 66%. the top tax rate is 88%. we won't have an odel breaks do think in 2027 because of debt burdens. so i think we need to be a little more candid about the absolute unsustainability of it. i