captioning performed by vitac you with see the huge increases in spending occur and the impact on the economy in the changes and regulatory environment. dr. elmendorf, when the stimulus bill was passed, it was widely believed that unemployment would go down, because of that stimulus program. but here we are three and a half years later and we had a peak to 10% unemployment and about 40 months of employment higher than 8%. the other side of the aisle is proposing to continue -- or to have another round of stimulus, they changed the name to investment, and saying that's

going to be the panacea to solve our deficits and debt problem that we've got in this country that you've done a great job of explaining. can you explain in 30 seconds or less why the stimulus didn't achieve its desired outcomes and what impact it's had on our debt and deficits? >> the economy has performed a good deal worse than we expected. and many forecasters expected a few years ago. in our assessment, and the assessment of most economists, i think, the recovery act create more output and more employment than would have happened without it. but the underlying weakness of the economy, not unusual in c e comparison to other countries that have had financial crisis in reduced recessions, the underlying weakness of the economy has more than offset the efforts of fiscal policymakers and monetary policymakers. >> that takes us to the next question. i've asked this question before.

what is more efficient in terms of causing increasing economic activity? is it public sector spending or private sector spending? in other words, it's a choice between a keystone expenditure or cylinder expenditure? >> we haven't studied those two particular -- >> they're the poster children, so let's talk about it. >> in an economy where the constraint on output in employment is weak demand for business services, which is an economy that we've been living through for the past four and a half years, then additional demand from the private sector or from the government will raise output, raise employment relative to what would otherwise occur. >> what causes that increase demand? i mean, can -- under that thinking that public sector spending can raise demand, i mean, then you would have had a $4 trillion stimulus or $5 trillion stimulus.

but of course, the impact op the economy would have been tragic because of its impact on federal deficits and debt. so isn't it better to rely on private sector spending for economic stimulative activity? wouldn't you want to do things that encourage private sector investment and jobs in our economy, and paychecks, than public sector spending? >> well, we've been clear that the extra debt accumulated through the recovery act would lead to an ongoing level of higher debt that in the long term would be a drag on the economy. so i think policymakers have tried to both stimulate private spending and increase -- >> it would be good to double down on a failed program, to continue -- if the stimulus version 1.0 work, why would stimulus 2.0 work any better? >> i recognize you don't agree with us, but our position that a

recovery act was not a failed program. our position is that it created higher output in employment than without it. we gave testimony to the senate budget committee of proposals, some tax cuts, some spending increases, that we think would spur output in employment. >> if you'd had $700 billion of additional gdp from the private sector versus $700 billion of spending from the public sector, which would have had greater impact on the economy? >> well, over the past few years, congressman, that extra spending, wherever it came from, would have led to more jobs. there's no reason to believe extra spending in the private sector would lead to more jobs. over a longer period of time, the question is, what sorts of goods and services have been purchased? and if the public sector was investing, then that would be good. and if the private sector was

investing, that would be good in the long run. >> time's getting here. i would say to the gentleman from texas, we had the hearing on multiplier effects where there's clearly difference of opinion on the multipliers, and maybe go back to that hearing. we had mr. zandy, who i think represented the cbo's position, and mr. taylor from stanford that represented the alternative. that gives an illustration on this point. miss bonamici? >> thank you. and thank you, dr. elmendorf, for your testimony. frequently mentioned is increased spending, and your testimony certainly reinforces that as well. traditional approaches to addressing rising costs have included cutting people from care, cutting provider rates, cutting services. in my state of oregon we've come together in order to take a new approach, particularly regarding the uninsured in our medicaid

dollars. it was quite refreshing to see business, labor, republicans, democrats, educators all come together and work on this health care transformation that is with a goal of improving care while cutting costs, integrating and coordinating services, including physical and mental and oral health care. the modeling that's taken place involves coordinating physical and behavioral health care, better preventing and managing chronic diseases using patient centered care homes and aligning care for individuals who are dual eligible. so the establishment of these care organizations is projected to actually improve care while reducing costs, and increasing access. in fact, by coordinating services, oregon projects a 4.9% to 5.9% savings in the implementation compared without the transformation to a 10%

increase. and this savings is expected to build over time. and i wonder if you could talk a little bit about how this type of change would impact the federal budget if a similar budget was implemented in other states as well. >> i think, congresswoman, there are a tremendous amount of experimentation going on in different states, different providers of care and private insurers in an effort to get more value for our health care dollars. and i think the ferment of experimentation is a very positive factor. but it's also true that a number of experiments that have been tried over the years have not worked as well as advocates hoped. and those that have worked have proven in some cases more difficult to expand across different provider settings, across different states, health care systems. we did a long and careful review of a collection of medicare

demonstration projects in both value-based payment methods and in disease management care coordination. these were medicare demonstrations. we wrote about this last year. and the set of demonstrations that medicare has tried have found that when there's a direct interaction between a care manager and physicians, and then in-person interaction with patients where there really is a lot of energy being focused on this care coordination, that that sort of models more likely to reduce spending. gross spending. but it also had its own costs m terms of paying for these interactions. in medicare, there's not yet been a model that's been used in any widespread way, that has had the effect people are looking for of higher quality care and lower cost at the same time. it doesn't mean it can't happen. probably it can happen. but people are still trying to

figure out just how to do it. and just how to do it, i said, in different sorts of settings. >> right. >> the affordable care act introduces a lot of different programs, a lot of different -- particularly the center for medicare and medicaid is designed to do more experiments faster to reach conclusions more rapidly, and then to be able to extend the successful programs across the system more rapidly. and we think that will have some positive effects. but how large those effects will be and just what arrangements will turn out to be most effective, we don't know yet. >> well, thank you for your testimony. and i know that we'll all be watching what's happening in my home state, as well as those other states. because until we can increase access and start addressing the high costs of chronic care, we're going to be increasing those costs, and we need to be keeping people out of emergency rooms. i appreciate your testimony. and i yield back my time. >> thank you. mr. lankford? >> thank you. thank you as well for being here. i want to talk about page 35 of

your report. you have an interesting section, something i talked about as well, and that is the effect of government borrowing. and what effect that really has on the economy as a whole. and just this column here, increased government borrowing generally draws money from productive capital, leading to a smaller stock of capital and lower output in the long run that would otherwise be the case. deficits generally have that effect on private investment, pause the portion of people's savings used to buy government securities is not available to finance private investment. the description that you made there, you've spoken about it often as well, that is the effect that the more that we borrow, the more we require of capital that would otherwise be invested into productive things rather than just sovereign debt. that is occurring worldwide currently. this trend, as you say, i don't want this in the center -- we've got that issue happening in

europe, in other parts of the world as well as here. what do you think of the crowding out of investment worldwide based on sovereign debt? >> well, the countries in europe have a collection of overlapping problems, as you know. they have banking crisis, they have a fiscal crisis, they have a growth crisis. and as we wrote in an issue a few years ago about the risk of a fiscal crisis in the united states, once one ends up in that situation, then there are no good options. countries that are unable to borrow at affordable rates feel a need to cut back on their borrowing, at the same time increasing revenues tends to slow the economy, which worsens their budget situation. it really is a vicious circle. we think the european economic situation is weighing on the u.s. economy now and has the potential to be a much more significant negative force. if they don't find a way to keep their system going.

>> but it also is a benefit to us in that it keeps our interest rates low, because people don't invest in their sovereign debt. so it's a double-edged sword, it's actually helping us in keeping our interest rates low in our debt. >> it's pushing down treasury interest rates, because people are engaged in this relative safety. but it's probably weighing on the other parts of our financial system. and if they have a larger collapse in their financial system, their potential of very large negative spillovers to ours. >> you mentioned often as well about tax rates, and marginal rates and such, in that a lower marginal rate tends to increase productivity, or at least activity in the economy and that. can you factor in certainty and uncertainty in the last several years as well? there's been this constant, we don't know what the rate is going to be next year, mentality. that is happening. rates seem to be tweaked out every single year. can you factor in the difference

between certainty and uncertainty in marginal rates? >> it's very difficult to quantify. we think that the uncertainty about federal policies on a whole variety of areas, including a tax code, is weighing on the economy. it's a negative factor in current economic -- >> as we walk through this year, once we get to the end of the year, there's common discussion about all this expiration of all these tax rates from 2001 to 2003. better to resolve those earlier or later? we've got about six months to do either of those. it's not exactly early, even at this point. >> earlier is better, no doubt. >> okay. do you think it's possible to address our national debt burden, or deficits at all without dealing with the major entitlement programs? >> well, congressman, as i said at the beginning, it is possible to maintain social security and medicare and medicaid as they are under current law, but only

by substantially raising taxes on a broad group of americans. similarly, it is possible to maintain taxes at their historical average gdp, but only by making substantial cuts relative to current law in the larger entitlement programs that benefit a broad section of americans at some point in their lives. that's what makes this choice that you and your colleagues face, and that we as american citizens face so difficult. one can pick one -- to hold one part of the budget as it would otherwise be, but given the gap between revenues and spending under the current policies, then one has to make even larger, even more dramatic changes in the other part of the budget. you can see that in our extended baseline scenario here, what happens under current law, which is a very large increase in tax revenue. and one can see an alternative vision in chairman ryan's long-term proposal that we analyzed in march which holds revenues down, but makes very large cuts in a number of

federal programs. >> either way, earlier is better to resolve this? >> certainly. for those longer term issues as well, earlier is much better, because it gives people time to plan and adjust. it gives you a chance to phase in changes gradually, and yet have them take effect in a way that's important in dollar terms pf the debt gets even larger than it is today. >> i yield back. >> ms. mccollum. >> thank you. we talked about the entitlement programs a lot. but i'd like to talk about another program, and in your assumptions on that, in your two scenarios. what were your assumptions for defense spending as a percentage of gdp? >> defense spending? >> defense spending. >> what we do for our long-term scenarios is just take the set of all programs apart from -- >> i understand. i just have a few minutes, if

you could just tell me what it is. >> we don't have an explicit reduction for defense spending. >> okay. >> beyond the ten-year budget window. in the window we have a baseline projection. >> and that is? >> that i'm not sure i -- >> then you'll have to look for that. so maybe you can get back to us if you can't answer this question. mr. romney, who's the republican nominee for president soon-to-be, has proposed to never allow defense spending to go below 4% of gdp. what would be the impact of such a sustained elevated level of spending over the remainder of the decade? and that is, he just said never go below, he didn't put any qualifiers for global security environment. what would that have on the effect of domestic discretionary spending under your two scenarios? >> well, in our baseline, congresswoman, this all-other category is only 7.3% of gdp in

2022. it would leave a little over 3% of gdp for all of the domestic programs apart from this handful of large entitlement programs. that would be a dramatic reduction relative to the historical average. >> so there's a plan on the table for mr. romney, and i mentioned his decision never to allow defense spending to go below 4% of gdp. and he also talks about cutting revenues of $6 trillion over the decade by making the bush tax cuts permanent, cutting the corporate rate from 25% to 30%, eliminating state tax, along with other tax breaks. so when you add the increase to the defense spending, what would be the impact on the deficit with all the other cuts to revenue that he's talking about having?

and what effect would it have on the safety net and entitlements? >> congress woman, i'm sorry, we've not analyzed mr. romney's plan, nor do we ever analyze the plans of candidates for office. >> well, you have two scenarios -- >> there's a collection of things that he -- >> you have two scenarios, one in which you have the tax cuts not -- you know, not having the sequestration happening. mr. romney is talking about undoing that, and then increasing defense spending. what would be the effect on the safety net in the entitlement program? because you do have one scenario which the bush tax cuts expire, the corporate rate doesn't change. he's talking about undoing that. >> right. so if you -- if you extend all the tax policies that are expiring, as we do in our alternative scenario, but then

that by itself would put the debt on the steep upper trajectory. if one wants to maintain the downward trajectory, one needs to cut other parts of the government by trillions of dollars. >> so it would be -- that scenario, plus more for defense -- >> and increase defense spending, then still wanted to keep debt on a downward trajectory, one would have to make comparably larger cutbacks in other domestic programs. >> thank you, mr. chair. >> mr. stutzman. >> thank you, mr. chairman. and thank you, mr. elmendorf, dr. elmendorf for being here. i always enjoy your analysis and your testimony. i'd like to talk about interest rates, and then segway that into taxes. on page 32, one of your points under interest rates says an increase in government debt

tends to raise interest rates by people allocating their savings by crowding out investment capital goods such as computers. can you talk a little bit about, or does your report here touch on why our interest rates are at record low levels right now? >> we don't talk about that here, congressman. we will in our august regular forecast update. the principal factors seem to be weak economy, and thus weak private credit demands, and a flight to relative safety from financial markets, particularly in europe, that are in an especially fragile state right now. >> qe-1, qe-2, is that going to be -- that's obviously playing a part of that. if that expires, are we going to see interest rates increasing in the near future? >> certainly for short-term rates that's important. i was more focused on the

longer-run rates. but if one looks at financial -- one looks at financial markets out beyond the next few years, out, say, later in the decade, they're expecting noticeable increase in interest rates. short-term and long-term interest rates. and the forecast has included in it those short-term and long-term interest rates. longer term in the decade we're looking at 4% and ten-year rate of about 5%. that's roughly consistent with readings in the financial markets. >> on page 43, under the bullet point of the need for higher taxes or less spending on government programs, am i correct from what you had stated earlier, you talked about rates versus base. because there's a lot of rhetoric here in washington that republicans are against revenue increases, when in fact in our

own budget we address the tax policy, and suggest that we go to two tax rates at 10% and 25% tax rate. am i clear, is it clear that you're discussing one scenario versus the other, where there's a tax rate increase, which you are discouraging with the expiration of the tax rates, or in your alternative scenario of broadening of the base? do you discuss any of those in the report? >> no, we don't. we're not trying here particularly to explore the details of alternative tax policies. current law would have certain set of things occur which we tried to capture in the baseline scenario. the alternative scenario tries to capture the broadening expiring positions. it turns out that under the alternative scenario, given the provisions one extends the provisions, that marginal tax rates are kept low, and the base

is not changed really. it also turns out under current law there's some effective broadening of the base, because more and more income would be taxed under the minimum tax. >> so broadening the base would be -- would not hurt the economy the way that raising the rates, current rates would affect the economy, is that correct? >> i think that's generally true. but the effects of broadening the base depends on the nature of the broadening. and particular provisions that might be broadened in, say, a tax reform plan that congress considered. we'd have to look at the specific provisions and we're pred to do that, and talk with you about the economic effects of those. >> okay. thank you. mr. chairman, i yield back. >> thank you. mr. schwartz? i'm sorry, miss castor. my apologies. you were here first. >> thank you, mr. chairman. thank you, dr. elmendorf for being here today. if we had more people working across america, would our debt

and deficit situation be improved? >> yes. absolutely. >> can you tell us if we had -- if the unemployment rate was 1% lower, how much better our debt and deficit situation would be? or 2%? >> i did not bring that magic table. this is the second time i wish i had. we wrote a letter to congressman van hollen a few months ago that talked about the effects on the economy, if the -- if the economy were stronger. i think we said about a third of the current deficit would go away if the economy were somehow immediately put back close to full employment. >> that's one of the frustrations, because there is absolutely no dialogue from my friends on the other side of the aisle as job creation is part of debt reduction and deficit reduction. we could really give a boost to this improving economy if we

could do some things on jobs. i mean, here are the positive sides. we've had 27 straight months of private sector job growth. manufacturing employment continues to trend upwards. consumer confidence is up. the median home price, the sales figures are up. corporate profits are up. so things are trending in the right direction, and here the congress could be really helpful in job creation and in deficit reduction if we could come together to do some things on jobs. but unfortunately, my friends on the other side of the aisle blocked the jobs plan put forth last year that said, you know, let's rebuild schools across america. that would put a lot of people in construction back to work and leave us with better facilities for our -- for students. they have stalled the transportation bill. i mean, look at this transportation pill. when do you have 75 votes out of the united states senate on a

bipartisan bill, and yet that has been stalled for months and months and months. and i heard your earlier comment on when it comes to infrastructure. you said oftentimes benefits -- the benefits outcede the costs, is that right? >> it depends on the particular project. there are projects not being done, in the highways for example, where the benefits to the economy would be a lot greater than the costs. >> and then when you factor in the republican budget that was passed, that's a prescription for disaster when it comes to the future plans for this country, because they so slash the important investments that government and the private sector work on together, whether it's in scientific research, or it's in infrastructure, in education. and i think their one-sided approach will cause great

damage. i think it's causing damage now, because we could come together now to take a good whack at the debt and deficit if we could do some things on jobs. so i'm hopeful we -- there's still time to do it, but i hear your message loud and clear, sooner rather than later. thank you. and i yield back. >> thank you. ms. black? >> thank you, mr. chairman. mr. elmendorf, i always appreciate your reports. i do read those and highlight them and learn so much by them. so thank you for your work. >> thank you. >> i wasn't going to go in this direction, but i just have to address what the gentle lady from florida was talking about, that there are ways to raise revenues. one is to tax people more, and the other is to have those that are employed paying those taxes, which then raises revenue. and i can't let this go by to say, that is i'm visiting with the job creators in my community. they said there's so much uncertainty out there, this is why they're not growing. uncertainty creates paralysis.

so getting them certainty, and certainly looking at what you're saying on the budget and helping us to see where the debt drivers are. we've got 30 pro job creator bills laying there that have not been handled by the senate. so let me just go to the area, though, when we look at those areas that are driving our debt, and the long-term debt of our country, what would you say those significant drivers are? >> well, the feature of the budget that is becoming much different than it was in the past, it is spending on the health care programs and some extent spending on social security, because of the rising costs of health care and the aging population. >> so those two drivers that are most significant that we continue to hear about in the budget forecast that you give to us in other ways are social security, medicare and medicaid, would you say those are the biggest drivers? >> those are the big changers. what you decide to do in response to those is of course

up to you. >> if we could bring up the first chart that is taken from the cbo report, but put into a chart that's i think easy to take a look at, we see historical average versus what the -- if no changes in any of these programs, what will happen under the current law. so we see what has been the historic level of spending on these two areas, mr. elmendorf? what's up here on the -- >> i'd have to check the exact numbers. i could capture the point, congresswoman, which is that social security and health care spending are on track to be much larger shares of the economy than they are today, and a larger share today than over the past several decades. >> so if we just take a look at really these two categories, we see they represent about a quarter -- about 25% of gdp, and then if we look at it historically in where it will go, we'll go up to 60. so we see here our total