revenues based on diminished job creation when folks like that have to pay a 30% instead of a 15% or a 18% or i guess in mr. buffett's case 11% tax rate, how do you evaluate those two priorities and what kind of an offset should we be thinking about in terms of diminished job growth when the so-called job creators are no longer treated so magnificently under the tax code? >> senator, i think we would be hard pressed to provide any analysis of the effect of a tax change, as narrowly target as the ones you're suggested. the effects of changes in tax rates and other features, the tax code and people's behavior involves broad swathes of the population. you don't get a lot of people who are in the top 400 in the country, so i think as the tax

policy focuses more and more in your example on the smaller, smaller group, then our ability to analyze the economic effects of that become increasingly attenuated. i don't know what we could do on that topic at all. >> as a practical matter, does it make sense to think somebody who is making $270 million a year which was the year number for the last reported year would significantly change their behavior because their tax rate moved from 18% to 30%? >> i don't know. i just don't know, senator. i mean, what's often noted is that some people have a lot of flexibility in how they arrange their financial affairs. so that the taxable income can be more sensitive than underlying work behavior, but it's harder to disentakable the

changes one might see, versus accounting changes. i don't envy our colleagues in the south committee of taxation to estimate the revenue effects. i don't know what we can do beyond that. i'm sorry. >> thank you, chairman. senator sessions? >> thank you. i would yield. i believe senator thune is next. >> thank you. senator thune? >> thank you, mr. chairman. thank you, mr. elmendorf for being with us today. i want to ask you some questions about what perhaps the biggest news on the healthcare was and that's the cbo decision to remove the class program from the january 2012 base line. despite that development, there's no mention of class in your testimony. and as you know in the final cost estimate of the healthcare legislation which was issued in march 20 of 2011, cbo projected that class would save $70 billion in the first decade. those savings represented nearly

60% of the total and 75% of the on-budget deficit reduction show shown in the healthcare law over the ten-year window. the estimate of class and base line updates did not take into account the substantial risk that the program would be insolvent and workable even though a significant amount of evidence would sug g gest that' the likely outcome. you had stood by the original class estimate, that is in august you only assume that the program's immeltation would be delayed by about a year. on september 22, the class office at hhs was closing. on october 14, secretary of hhs kathleen sebelius notified congress there was no viable path forward to implement the program and cbo responded to the announcement by indicating that it removes class from the base line in january. my question is why did it fail

to account for the significant risks that the program could not be made solvent or workable? >> i disagree with the premise of the question. the estimate that we made for the class program and for all the pieces of the healthcare legislation recognize that there was significant uncertainty and in the multiple letters that we wrote about the class program over the course of its evolution into law, we emphasized the uncertainty around that. the challenge for us, when faced with uncertainty is to try to determine whether a reasonable middle point is in the range of possible outcomes. we recognize there was some risk the program would never get off the ground. there was some change the program would get off the ground and would later crumble. there was a chance that the program would get off the ground and not crumble. for us to have said in the estimate, that the effect would be zero on the budget we'd have to have had great confidence, but it would be recognized that it would fail, and i don't think

that was the middle of of the distribution of possible outcomes. now, obviously after the fact it was not a good estimate. after the fact it turned out it could not be made viable. i wish we'd known that going in, but i don't think it's actually reasonable to say we should have known that. the office of the actuary at cms who spoke about the -- spoke about his concern of the viability of the program, it showed $40 billion of net receipts for the government in first decades from the class program. that's less that on 70 something. so they were closer to the ultimate answer of zero. but they didn't put down the zero at this time either. because i don't know. i have not talked with rick about this. i don't want to put words in his mouth but my guess would be they like we weren't sure what was going to happen. since the zero was one end of the possible distribution, that was not the middle of the distribution. we also, as you know, we're very

clear to emphasize that the program would turn over a longer period of time and it would become even if it were working in a sense of the way it was intended to work, it would become a drag on the budget and we emphasized that a number of the colleagues that that process was going on. >> but what was the evidence that cbo used in determining its key assumptions and design in the class model? because i understand what you're saying about it. of course in the early years you're going to show positive perhaps cash flow. but it was abundantly clear from statements of the actuary that when you got into the second decade and beyond that this thing was a sure loser. and he made that very clear. he said in 36 years of actuary experience, i can't come to the conclusion that this will fail. that was foster at the time. so, you know, the score because of the front loading of this, i understand, you know, how you

came up with the score. but it seems to me at least that there should have been some suggestion to the congress that at least that this thing was likely to fail. that's what the actuary was saying. what were your assumptions in determining? >> i don't have them at hand, but i think if you go back to the letters that we wrote to a number of senators over the course of that period, we dlifb r -- deliberately emphasized that it would in fact turn around. we took some pains to explain why that was the case, even in a plan that was actuarily working i. is paid out later. so we took some pains to emphasize that point. when we constructed the estimate, we talked with outside -- we have some expertise in long term care issues a little. but we talked a great deal with other experts i think all of them raised concerns that it

might not work. but as we talked with people, we did not get a -- i don't think we -- we had very few people who were convinced it would so obvious it would not work, but then it would not be started. so we had a range of views. again, we tried in the writing we did to reflect -- to explain that this was a very uncertain part of what we were doing. in retrospect, it was not a good estimate. i'm not trying to -- i'm not saying we had the right number. obviously we did not. but i don't think it's so obvious that we should have known that much better then. i emphasized the actuary not to hold out -- not to try to pull them in necessarily. for all the skepticism that rick foster expressed, and he did that clearly, they themselves didn't view zero as the -- apparently as the best middle ground estimate to provide.

do i wish that we had -- we had known more then? yes. no doubt. i mean, i don't take lightly projections of ours that turn out to be wrong. and -- but i also think that it wasn't so obvious at the time we were making that estimate, that the program would never be launched. >> okay. i see my time has expired. thanks, mr. chairman. >> can i say on this point to my colleague, you know, i the original iteration of the class act, i called it a ponzi scheme. i think senator quoted me on the floor. that i said -- yeah, i remember it quite often those words coming up. and part of my analysis was based on cbo analysis and the actuary's analysis that told me in the early years it was cash flow positive because premiums come in.

but that that worm turned especially when you got to the second ten years. it was very clear to me that it wouldn't work. but i mean, i want to say part of my analysis was based on what cbo provided us a number of us in writing. acknowledging, yes, you get money on the front end, but then that worm turns and the work of the actuary. >> mr. chairman, i congratulate you and thank you for that courageous statement actually. i think it was an important thing for you to say. i also -- my prior colleague here, judd gregg got in line, required the secretary to certify that it would be sound over a long period of time and she couldn't certify it. so hopefully we have avoided this result. i would just say one thing. mr. elmendorf knows this, that there are a lot of very, very skilled people in this town that

know how to read your reports, and if taken out of context improperly allowed the debate to continue on the floor of the senate and the president to assert that this was a program that was going to make money for the government. and that was not accurate. so i felt pretty -- senator thune led the battle on it, to point out that it was not going to make money for the government, but that surplus that you scored was used to reduce the cost of the president's plan. and that -- in short run, maybe it would have been, but in the long run it would have been cost. we do need to figure out how to use your scores more objectively. thank you. >> we work hard to try to explain ourselves and explain our numbers in a way that makes the most possible people understand them and the fewest possible people misuse them. but as you know -- i don't think

that we always get that language just right, but we work very hard at it. and we are at least as bothered as anyone else if we think that the numbers we have done, analysis we have done is being used out of context to convey things that we have not said. >> mr. chairman, i have a bill to repeal that so i'm happy to have you on board on a cosponsor of that. >> i'm interested in the offerings of my colleagues from south carolina. we'll have a hearing on the history of north and south carolina before this hearing. senator wyden? >> thank you. you essentially lay out the two scenarios in your testimony. the first, the congress does nothing to change current law, the bush tax cuts sunset. amt patch collapses and the budget control acts in effect

spending cuts kick in. bad for the economy, good for the deficit is essentially where you. the second one is your alternative scenario. and it blocks most of the spending cuts required by the budget control act. something like this, according to your analysis makes the deficit much worse, but it's better for the economy. so that leaves us with these two scenarios that are singularly unappealing and probably compounded by the fact that if the congress does nothing, you have this kind of meltdown in the lame duck session of 2012, much like the lame duck session in 2010. so it won't surprise you -- i want to ask you about the third scenario, and pick un -- up on senator portman's point with respect to tax reform. on this, i understand your answer and respect it that you couldn't do a full kind of quantitative analysis of a third

approach. so i want to start by picking up on statements you have made that are on the public record that ought on the encouraging for those of us in this kind of third space where we'd like to have progrowth tax reform. for example, i was very pleased in the discussion that came up in connection with the supercommittee that you said it was possible to write a pro growth and progressive tax reform that would generate revenue for the government. you were asked that supercommittee, and again, absent the details that was something that was useful for those of us that have tried to constantly come back to this third path between the sort of parade, you know, of horribles. so let's pick up on that. are there any reasons, for example, that you can give us based on the analyses that you

have done thus far that would suggest that pro growth tax reform would be a problem? i mean, you and i have talked about the outcome in 1986 when a big group of liberal democrats and ronald reagan got together and we created 6.3 million new jobs, you know, in two years. so let me steer clear of you having to give a quantity thaitive analysis of a third patch. let me note you said something that was pretty encouraging the tax reformers in the context of the supercommittee where you said it could actually score a revenue, a view that i share. are there any factors that you know of based on the work you have done thus far that would suggest that the kind of pro growth tax reform, where you clean out the special interests breaks, to hold down rates for everybody and keep progressivity

that that would be problematic if we can muster the support for this third kind of path? >> so of course depending on the specifics, senator, i think analysts would widely agree that reform of the tax code and brought down rates would be a positive force for economic growth, both in the short term and over a longer period. >> and with respect to any kind of warning signals, i mean, it would seem to me, for example, precipitous action chairman conrad and i have talked about this, if you had poorly drafted transition rules, for example, as part of a tax reform and chairman bachus certainly is sensitive to this as is senator hatch, i can't see any kind of warning lights other than those kinds of issues which i think there would be a lot of

sensitivity on both sides of the aisle. i mean, i respect you on the absence of being able to do a quantitative analysis. any warning lights? >> even the qualitative statements depends on the specifics, as i said in the last sentence. it is quite possible to design a reform of the tax code that would have the characteristics of broadening the base and lowering rates with appropriate transition rules. that would make the economy strong. it's possible to do it badly and end up making the economy worse off. but your presumptions seem to be that it would be done in a reasonable fashion. >> my hope is you get asked to do the qualitative analysis, sooner rather than later, because i think this has been very helpful today to have you lay out the two alternatives,

both of whom should strike any reasonable person as unacceptable for the country. unacceptable and given the challenges in europe. these two paths are bad news for america. and there is a path and i have been encouraged about what you have had to say in that -- in the past and i hope you're going to get asked for that quantitative analysis by people whose pay grade is above mine. because i think history and the psychology of the country seeing something big and bipartisan, and by the way, i think senator whitehouse has made a lot of great points with the buffett rule. senator coates and i have a top rate, which is lower than the rate -- excuse me is higher than the rate that senator whitehouse has been talking about. so there's plenty of

opportunities here for some common ground, and i look forward to continuing the discussion. thank you, mr. chairman. >> i want to take this moment to recognize once again the remarkable amount of serious work that senator wyden has produced without the benefit of the chairmanship. on healthcare reform, and i just want to thank him for it. your honor, i think it's an enormous contribution. senator sessions? >> can -- while she's preparing, i would join in that. it is a tremendous amount of effort that it takes and senator wyden i appreciate your leadership and all of us in the senate watching your work and we appreciate it.

>> senator ayotte is recognized. >> i understand that you testified before the house committee yesterday that we can get to 2013 without raising the debt ceiling again, or without additional extraordinary measures. so my question to you is this. we're at a point where we've -- the president has requested and the congress has allowed the debt court of appealing to go to 16.4 trillion. our total debt right now is about 15.3 trillion and surpasses the size of our economy. it's a huge number. you've issued this estimate that we won't have to have another increase of the debt ceiling before 2013. and i simply have this question for you is what could further balloon our debt? and what keeps you awake at night when it comes to the

issues you're most worried about in terms of having our debt get out of control, and also further increasing in a way that you haven't been able to estimate? >> so senator, what i said yesterday was that we think, given our current projections, that the government can get to 2013 without having to raise the debt ceiling. i also emphasized a great deal of uncertainty what will happen in the economy and tax collections and spending over the coming year, as well as actions the congress may take that may lead to additional government borrowing. so i don't want to -- nobody should think that that estimate is somehow cast in stone. it is at the very least conditional on current law and on our current economic outlook a lot of things keep me awake at night worrying about the state of the federal budget. you're paying me partly to do that. i think a particular risk over the coming decade is the interest rates will rise further and more sharply than we have in the projection.

i don't think the risk in interest rates is one-sided. our projection of interest rates over the second half of the decade is actually well above the interest rate that are implicit in the current prices of treasury securities being traded in financial markets. so there is downside risk as well. but i worry about the chance that creditors -- potential creditors of the united states government will become concerned about the trajectory of the debt and concerned about whether policymakers are willing and able to confront the challenges and change course. and i think when you see other countries that have encountered fiscal crises, it is not just that something special happens in the numbers, although sometimes that is the case, but also it can be because people -- investors' perception of the ability of a government to manage its finances can turn very rapidly in ways that are very hard to predict. beyond that, i mean the budget projection we have, even under

either of the scenarios for policy choices could be way off because the economy could rebound more quickly than we think. this has already been a very long downturn by historical standards. progress is being made, we think, in clearing out some of the problems that have been hanging over the economy. things could kind of grow more rapidly. it's also true, though, that in economies that have suffered from financial crises of the sort that ours did that some countries took many more years to finally climb out of the hole that our economies fell into than we have in this projection. so there are uncertainties on both sides. >> can you help me in terms of when we talk about the rise in interest rates, just to give -- give us a sense of a number. so let's say the interest rates, excuse me, increase 1%. what does it do in terms of what we have to pay back? and, you know, i understand that is an estimate. but if you can give me a sense. just so people in the public understand. there is an urgency to us addressing our debt because when

the interest rates rise, what we have to pay back is so much greater. and we have scuffles around here. last march we had a scuffle around here over $60 billion in reductions. and just 1% in increase in interest rates, i think it puts in perspective that our scuffles are really minor compared to the issue we have to address. >> so we do in fact show on the outlook how a table of how certain economic changes might affect the budget. and our estimate is that if interest rates were one percentage point higher throughout the decade, that would add nearly $1 trillion to the cumulative deficit over the decade. >> it really puts into it perspective when we're fighting over cutting, reducing spending by $60 billion, that we've got to do a lot better around here in terms of the decisions that we have to make. >> senator, might i just interrupt and not on your time, but ask the director to repeat that? because i think the question you've asked is so important

that that message be understood by those listening, our colleagues, staffs, and people who might be listening via television. if you would repeat the point. >> so our estimates are that if the treasury interest rates one percentage point higher throughout the coming decade, that would add about a trillion dollars to the cumulative deficit over the decade. >> it's really staggering. and it points out the urgency of us going forward with a debt reduction plan, a bipartisan debt reduction plan that addresses where we are going and the sustainability of our debt. and i've been a supporter of the efforts. and i know the chairman has been as well as to go big and really address this issue head-on. and i want to ask one other quick question, which is what is your view on the impact of what is happening in europe, and how could that impact here in terms of our fiscal health?

>> so the situation in europe, there are some crosscurrents in how it affects our economy. if the european economy suffers from a worse recession than we're projecting, they'll reduce our demand for our goods and services, reduce our exports. it's also true that if their financial system suffers from yet larger problems, that could affect the health of the financial institutions in the united states and thereby affect the flow of credit to private borrowers, businesses an households in the united states. at the same time, though, the concerns of investors about the situation in europe has so far led them to invest more in the united states and in u.s. treasury securities. so one of the factors that has pushed down the interest rates the u.s. treasury is now paying is actually fear of what is happening in europe. and investors' desire to come to a place that they think is in better shape. so if the situation in europe were to worsen, there could be some important factors that would be very bad for our economy there are also some

channels through which our -- in a perverse sort of way, we would be better off because we would be viewed as being a relatively better investment than europe would be. risks to the u.s. economy of worse outcome in europe. i think that is a topic we've discussed a number of times in our panel of economic we built into this projection shallow recession in europe, which is consistent i think with the latest consensus forecasts. we didn't find a way to quantify a particular alternative european scenario. and part of that is it's very -- we're very unsure what the financial connections are. and just how a particular sort of financial debacle in reverbe financial institutions. it's a very hard thing for us to know. >> thank you. >> i thank the senator. senator sessions, and i want to thank senator sessions for his courtesy, knowing that i need to leave here at noon.

i appreciate very much how he held off in his round in case w >> thank you, mr. chairman. mr. elmendorf, i appreciate cbo's work. i think you do very valuable work. you missed the gdp this year. i think you were at 2.7 predicting it and it came in at 1.7. but mr. zandi at the great moody's was at 4%, and it came in at 1.7. so i give you credit for being that more accurate than some of the other experts. i would just say that all of us need to de that the challenges we face with regard to debt and the unsustainable fiscal course we're on is that debt creates risk throughout the system and puts us in a more dangerous area if some

unexpected shock occurs. would you agree with that? >> yes, absolutely, senator. >> things that you can't predict. >> yes. >> you just can't predict them. but periodically, history shows do happen. >> yes. and that's one of the costs of higher debt that we highlighted in our issue brief, as you know, on the risk of a fiscal crisis. >> so i think we need to get that margin down. a larger margin between what the maximum debt this nation can possibly carry and get it well below that so we're in a position to avoid shock. the -- you know, you can't borrow your way out of debt. we're living beyond our means. bill gross at the pimco was quoted recently that we're at a 5 to 15-year period of below normal