teachers hands are tied. they're tied by federal and state regulation. some schools, the teachers cannot teach their kids and their multiplication the old- fashioned way. host: unfortunately we have to leave it there. we are running out of time. guest: it is a problem. we have got to unfreeze this system. some of the regulations are too tight and not allow the teachers to bring out their passion and creativity. you put your finger on something very important. the statistics we have been looking out are far worse across our minority population and in our women. only 1.6% of u.s. women graduating from universities are engineers. this is a field we really have to work on. we have to give the teachers more flexibility in how they

approach their subjects. host: charles vest, president of national academy of engineering. thank you so much. the website is on your screen. thank you for being with us. that does it for today's "washington journal." we want to bring you to the senate budget committee, where they will be hearing testimony from the cbo director, doug elmendorf. "the washington post" -- record u.s. deficit predicted this year by the cbo. caller: -- deficit outlook darkens. >> there are members who will be here who are involved in that process. today's hearing will focus on budget and outlook.

our first guest is doug elmendorf. i want to say the confidence you enjoy on both sides of the aisle is a testimony to you and the entire team at cbo. over and over, you have demonstrated your independence. even when i had a proposal that was important to me, you did not give it good marks. that demonstrates your independence. that is healthy and what we need here. we need an independent scorekeeper who will give us their best assessment of the effect of the policies enacted by congress. you have demonstrated a high degree of professionalism, as has your entire team at the

congressional budget office. you have been a fair umpire calling it as you see it. your reappointment by a democratically controlled senate and a republican controlled house speaks volumes of the trust and respect you and your team have earned on both sides of the aisle. we look forward to your testimony here today. be a redort should light flashing to the nation. our fiscal situation is serious and becoming more self. -- more so. we are at a critical junction. we are borrowing 14 cents -- 40 cents for every dollar we spend. revenue is at its lowest level as a share of the economy in more than 60 years. let me repeat that.

spending as a share of our national income is at the highest level in 60 years. revenue as a share of our national income is at its lowest level in 60 years. no wonder we are headed to the largest deficit ever. this is utterly unsustainable. the sooner we come to the grips of it, the better. this chart projects the baseline. due to the extension of the tax package and the slow economic recovery, cbo is expected to see that this is of more than $1 billion per year continuing into 2012. the deficit will briefly fall before rising again as the bulk of the baby boom generation

begins to retire and health care costs began to decline. gross federal debt is expected to reach 100% of gross domestic product this year and continue rising. it is important to note that many economists regard anything above the 90% threshold as a danger zone. as disturbing as those near term deficit and that our, the long- term outlook is even more dire. it is the deteriorating long- term outlook that is the biggest threat to the country's long- term economic security. the warning signs are as clear as they can be. andier this month, moody's s&p warned that rising s&p -- rising u.s. that could lead to america losing its grip ball -- triple a rating.

in his recent testimony, federal reserve chairman bernanke called for a demonstration of political will to address the long-term fiscal imbalance. he stated, "nobody stated the united states has the incapacity to pay its bills. the question is, do we have the political will to do that. the demonstration of political will is what the markets are watching. is the congress and the administration willing to work together to make progress. at the point where confidence is lost, you can see a relatively quick deterioration in funding to conditions." that all from the chairman of the federal reserve. i hope people are listening. we cannot afford to wait until

the markets lose confidence in the conduct of our financial affairs. we need to act and we need to act this year. that does not mean we need to make steep cuts immediately. all of the bipartisan commissions that have come back with recommendations have recommended that we began modestly because of the continuing economic weakness, but that we put in place a credible plan that convinces markets that we are going to get the result that is required. in acting such a plan now, according to the chairman of the federal reserve and others, will reassure the markets and help boost our near-term economy. i believe the deficit and reduction plan assembled by the death as a commission provides one way forward. i supported the commission

report. i did so proudly. there were things i do not like. but that is not the point. the fiscal commission came back with a plan 11 of the 18 commissioners supported. i can tell you, it is not popular. certainly by the phone calls and letters i have received. we understand that. it is necessary. it would reduce the deficit by some $4 trillion over the next two years and it would get us on a path to take us back from the brink. the commission plan was also important because it showed us how to reduce the deficit and debt in a balanced way. it included substantial cuts in discretionary spending. it included entitlement reform. it included tax reform that broadens the base and lower

rates that help america been more competitive. if you focus on non- discretionary spending, the cuts will not be sustainable. raising revenue also must be part of the plan. the result of this balanced approach was to get the deficit and beat that stabilized and then, over time, bring it down sharply. it will require real compromise and a great deal of political will. we need everyone at the table. that includes the president of the united states. we need to have democrats and republicans willing to move off of their fixed positions and find common ground. we cannot continue to put this off. we need to reach agreement this year. it is time for the

administration and members on both sides in congress to come together to get this done. with that, we will turn to senator crapo, who is going to do the opening statement for the republican side. i want to welcome senator crapo. he served on the fiscal commission as well and was one of the 11 that supported the report. welcome and make whatever statement you choose and then we will go to our witness and welcome questions. >> thank you, mr. chairman. >> we have not formally welcomed the new members of the committee. that will happen in a process later today. we now know who new members are going to be and we want to welcome them here this morning. senator toomey, senator johnson.

we want to extend the courtesy of giving you the chance to ask questions. with that again, thank you, senator crapo. >> thank you. we also welcome our new members. knowing who they are, they bring a high level of new talent to this committee and we appreciate their willingness to support us. i wanted to give senator sessions' apologies. he had a conference that was unavoidable. we look forward to his solid leadership. i agree strongly with the concerns that you have raised as we move forward to deal with america's fiscal dilemma. f, i have worked

with you in the past and i look forward to working with you as congress to develop a proposal that is credible and will get us out of this difficult problem. i want to highlight a couple of points, most of which senator conrad has already made. the time for delay, gridlock, and debate is over. we must take action. one of the strongest messages would assistioinal -- congressional witnesses gave was that the most important factor of developing a plan

would be the most significant thing we could do to give confidence to investors and help rebuild the revenue side of the equation that we are dealing with as we try to build a solution to this problem. we must act and we must act now. we must demonstrate the political will that will require us to make a lot of tough decision. those who voted in favor of this plan -- i do not think a single one of us liked everything in the plant. i think everyone of us would face -- i do not think a single one of us like everything in the plann. there are going to be plenty to pick it apart, whatever we choose to do. we must be prepared to move forward aggressively. i gave my commitment.

i know on your side and on our side there is the will to engage in this issue. we have to move it forward now. i also believe the president must be heavily engaged in this process. to his credit, he established a fiscal commission to deal with the issue. that fiscal commission has now issued a report. the president had an opportunity to either accept or modify that report or propose some other approach and give us a detailed plan to move forward. it will not necessarily be the plan congress adopts. but the president needs to engage. we need to engage. we need to get past the politics of the past and deal with this issue, making the hard decisions that have to be made. as we move forward in that context, i personally believe strongly that all aspects of the

spending and revenue side of the equation must be on the table. they were in the president's fiscal commission's approach. some were too likely treated and some were too heavily treated, but they were all on the table. i strongly believe we must have tax reform. one of the most beneficial development of the president also commission activities was the elevation of the -- of the president's commission activity was the elevation that the tax code was so expensive to comply with and put america in such an anticompetitive position that we have a tremendous difficulty on the revenue side of the solution achieving a solution. we must eliminate those problems

and create a tax code in which americans can thrive in powerful economic activity. i know, dr. elmendorf, you are more focused on the budget numbers. but we need mr. chairman to guide as we engage and put our approach to data. we need to guide this nation in a comprehensive way toward a solution to get a plan that can be put into place today. clearly, this year we have got to act. the last thing i will say is this. any plan for us to get out of this difficult fiscal hole in which we have put ourselves as a nation must be a plan that will be implemented over a period of

years. that will require that more than just this congress participate and more than just this president does dissipate in implementing this plan. because of that, i believe process reforms are as critical as the substance reforms dealing with spending and tax policy. process reforms are going to have to be strong. we need to not only create the plan we were talking about and passed the plan and make it law, but also make it law that congress must follow that plan. and that supermajorities of votes must be achieved. we must send a strong message to our people and the world that we have put a plan on the table and we will implement it. there are a lot of tough parts of the past we have before us. dr. elmendorf, we will be

relying on you for the numbers. we have done it before. nothing can be more important. this is the most critical threat to our nation in my opinion. i include the threat we received from external sources. in fact, the head of the joint chiefs of staff has said the greatest threat to our security is our debts. ./ we have to get the numbers, the policy, and the process rights. . i hope we will be able to build a strong bipartisan solution. >> thank you for your strong statement this morning. thank you for your work on the fiscal commission. thanks to the other members of

the congress who were on the commission. five of the 6 from the senate appointed the commission report. all of us believed that if we would have done it, we would have done a different job, perhaps a better job. at the end of the day, we have to get a result. at the end of the day, we have got to find a way to get a result. >> may i interject a quick point? >> certainly. >> everyone knows the commission's report failed to get the 14 votes that would have forced and vote -- a vote in congress.

>> that is an important point. eleven of eighteen supported the recommendations of the report. with that, we will turn to doug elmendorf. please proceed with your testimony. >> i appreciate your confidence in me and be confident in the analysis that my colleagues and i at cbo have been doing and will continue to do. i want to a knowledge one of my colleagues, who has done a good job for many years. he is retiring at the end of the month. [unintelligible] [laughter] [applause]

>> mr. chairman, i also want to pass on on behalf of me and my colleagues your plans to retire -- my sadnes about your plans to retire. we look forward to working with the other members of the committee throughout this congress. >> i am not going to retire. i am just not going to run again. >> i understand. the united states faces daunting budgetary challenges. the economy has struggled to recover from the recession. the pace of growth and output has been anemic. the unemployment rate has remained quite high. federal budget deficits and debt have surged.

. because of policies implemented in response to the economic problems and an imbalance in revenues than predate the recession -- a return to normal economic conditions will take years. even after the economy has fully recovered, a return to sustainable budget conditions will require significant changes in the tax and spending policies. let me discuss the economic outlook first and turned to the budget outlook. projects that real gdp will increase by about 3% this year and next year, reflecting continued strong growth in business investment and

improvement in business investments, net exports, and consumer spending. we have a long way to go on the employment front. next slide. next one after that, please. again. let's focus on this. payroll employment rose only by 70,000 jobs between june 2009 and december 2010. the recovery in the unemployment has been slowed by structural changes in the labor market such as mismatches in the available jobs and available skills of workers.

we expect the unemployment rate will fall only to 9.2% in the fourth quarter of this year and 8.2% in the fourth quarter of 2012. only by 2016 does the unemployment rate reach 5%. economic development and the government's responses to them have had a big impact on the budget. we estimate that if current laws remain unchanged, the budget deficit will be close to $1.20 trillion, or 9.8% of gdp.

that is the largest deficit relative to the economy since 1945. debt held by the public will jump to nearly 70% at the end of fiscal year 2011. if current laws remain unchanged, as we assume for cbo's baseline projection, budget deficits will drop as a share of output. the darker line shows our current law. as a result, dealt held by the

public will keep rising, -- backed -- debt held by the public will keep rising. suppose that three major aspects of current policy work continued during the coming decade. first, the higher 2011 exemption amounts for the a plaintive -- for the alternative minimum tax is indexed for inflation. second, the other major provisions in the recently enacted tax legislation were extended rather than allowed to expire in january of 2013. third, that medicare's payment

rate for positions were held constant rather than dropping under current law. all of those policies have recently been extended by the congress. if they were extended permanently, that this is from 2012 through 2021 would average 6% of gdp rather than 3.6%. cumulative deficits over the coming decade would total nearly $12 trillion. go to the next slide, please. debt by the public would rise to the highest level since 1946. beyond the 10th year projection. , spending on social security and the government's major

mandatory health care programs and insurance subsidies to be provided to exchanges will increase to 10% of gdp over the next five years. to prevent that from becoming unsupportable, congress would have to restrain the rate of spending or pursue a combination of approaches. the longer the necessary adjustments are made, the greater will be the negative consequences of the mounting debt, more on certain businesses will be and the more drastic the ultimate policy changes will need to be. changes of the magnitude that will ultimately -- that will ultimately be required will be disrupted. congress may wish to implement them gradually to avoid a

negative impact on the economy to give businesses and state and local governments time to adjust. remedying the nation's fiscal imbalance would take longer and a major policy changes would need to be enacted soon to limit a further increase in federal debt. thank you. >> thank you. one of the things we say a lot on this committee is that the current trajectory in our deficit and debt is unsustainable. you have used that language as well. what do you mean by that? >> as the debt rises relative to the size of the economy, so does the burden on the american citizens on making the payments on baghdad -- on that debt.

has that burden rises, it becomes more and difficult to prevent a further -- as that burden rises, it becomes more ethical to prevent further rises in ways that are difficult for the country to absorb. rising debt payments can snowball. one sees that in our projections where the path of debt-gdp can rise sharply. the government needs to find investors willing to purchase government securities, to roll over the existing debt as it matures and to acquire the new debt necessary to finance

ongoing budget deficits. investors are likely to become increasingly nervous about whether the government can manage its budget. that is what we and others have called a fiscal crisis. we have seen other countries encountered a crisis of that sort in which it becomes impossible for the government to finance secret factory of debt it has in mind at affordable interest rates. we have been clear that we do not have and analytical capability of predicting what a tipping point might be and when it might happen. as the debt rises relative to be deeply and the trajectory continues to be upward, the risk of that sort of crisis increases. >> part of your analysis, the

reason for the introductory of our debt being unsustainable -- the trajectory of our debt being unsustainable is that it puts pressure on interest rates in order to satisfy those who loaned us money to take on greater risk. that has been a fact of slowing the economy. is that your analysis? >> yes. as the government needs to work harder to find buyers for its debt, it has to pay higher interest rates over time. more importantly, from an economic point of view, the government's borrowing is crowded out the borrowing a household might do to support investment, equipment, our new housing. it is the crowding out of that investment that makes future incomes lower than they would otherwise be. >> i think that analysis is in

line with what every economist has told this committee. and what the chairman of the federal reserve has told this committee. let me go a bit further. part of your analysis of the trajectory of deficits and debt is tied to the question of interest rate levels. you have a projection of what interest rates are likely to be during the term of this forecast. what would happen if the interest rates were 1% higher than you project. i think you did a sensitivity analysis to determine what would happen to our that if interest rates were just 1% higher than what you project currently. can you tell us what you found? >> yes, mr. chairman. this is in the appendix b.

if interest rates are 1% higher than we project for short-term and long-term rates, we estimate the budget deficit would be $1.25 trillion larger over the coming decade that our projection. >> so you would add another $1.25 trillion if interest rates were just one percentage rate higher than in your forecast? >> yes. that is right. >> the chairman of the federal reserve testified before this committee in recent days. basically, his advice to us on deficit and debt reduction was start modestly and then rode the

effort in a determined way once the economy is on strong ground. his arguments to the committee was that this recovery was still fragile. one in every 6 americans is still unemployed or underemployed. he said we ought to begin the process, but begin fiscal discipline in a modest way, but put in place a plan that goes beyond modest to get the debt stabilize, and then bring it down to more manageable levels. is that your advice to this committee? what is your advice? >> i will not make policy recommendations to you and your colleagues. judging the speed of policy changes you are considering, you and your colleagues face a

difficult trade off. on the one hand, the longer you wait to make the policy changes, the more the debt will amount, the greater the negative consequences of that will be, including the crowding out of other investments, the loss of flexibility to respond to future emergencies that we cannot foresee now, the greater the burden of interest payments, and the greater risk of a fiscal crisis. at the same time, the faster you make policy changes, especially those of the magnitude required to fix a fiscal imbalance of this time -- of this size, those changes can be disruptive to the households that are planning for certain services -- certain sorts of benefits to state and

local governments who are depending on the federal government to continue the relationship they have had in the past. but let me ask you this question. the analysis you have given is in line with what other economists have told this committee. we try to provide a broad range of philosophical input. some are telling us that tax cuts are so beneficial that if we enact tax cuts, they really will not lead to additional deficits because the cost is offset by the economic growth they encourage. what is your analysis with respect to the effect of tax cuts on the budget?

>> so the answer depends, to some extent, on the specific tax cuts one has in mind. reductions in marginal tax rates can encourage work and saving and boost the economy. through that, they can provide some offset to the direct loss in tax revenue from the reduction in rates. from broadbased reductions in taxes, the consensus in the economic professions is that the offset provided through the extra work and savings is significantly smaller than the direct revenue loss. effect is a reduction in revenues. that is the professional

consensus. >> give us an understanding. i supported extending the tax cuts. i supported extending all of them. i believe the economy was in such weak condition that we needed some certainty and we needed the additional lift those tax cuts can get in the short term. isn't the cbo analysis that the tax cuts have a different effect short-term and long-term? >> yes. that is not unique to us either. the report we presented to you about the affects of different ways of extending expiring tax provisions that you and your colleagues were considering, we look at the effects from the next few years and in future decades. in the short term, we think reductions in tax receipts that

put more money in the hands of taxpayers that they can spend can stimulate economic activity. the demand for goods, and employment. that is especially true under current economic conditions where there is unused labor and unused industrial capacity and where the federal reserve has pushed the interest rates that it controls down to their lower rate. as we show in september, reductions in tax revenue that are not matched by reductions in government spending and lead to wider budget deficits tend to reduce the flow of economic activity. the lower tax rates to spur work and saving. we a corporate that in our estimate. at the same time, the larger

deficit -- we used a variety to illustrate the uncertainties. most of the approaches we have taken showed the loss of future output and income out way - outweigh the boost from the tax rate. >> and the tax cuts do add to the deficit and debt? >> yes. that legislation increase budget deficits this year and next and over the entire decade by around $800 billion, i believe. >> let me go to senator crapo. and then we will go to members or questions in the order of our arrival. we use the early bird rule.

given the number of senators, we will do seven minute rounds. senator crapo. >> i describe what the chairman of you were talking about as dynamic scoring of tax policy. i do not know if that is an accurate description of it. do you take into consideration the dynamic impact of tax policy as you provide your numbers? when you do your analysis and come up with the a hundred dollars billion number for the deficit impact, are you calculating the dynamic impact of tax policy on revenues? >> let me distinguish two sets of words and tell you what i mean by them. dynamic scoring, a full range

of micro economic and macro economic responses. the estimates you get are done by the staff of the joint committee on taxation. those estimates incorporate a vast array of micro economic responses that do not include dvd. we and our colleagues at the tax committee do dynamic analyses of various sorts, analyses where we allow the macro economic aggregates to change to these behavioral changes. we report that the dynamic analysis. we do this every year. we have done this for the arizona recovery an investment tax.

we do a variety -- we do it for a variety of circumstances. we only do it for particular pieces of legislation for which we have weeks or months of lead time according to your interests. >> what kind of revenue growth estimates are you using throughout the decade in your projections? >> revenue grows slowly poured this year. >> you are at 3.8% for this year. >> for this year, we have total revenue growing by 3.1%. much faster on average for the remainder of the decade. much of that is from the

expiration of a set of these tax provisions at the end of this year or next year. over the next few years between now and 2014, tax revenue rises by about five percentage points of gdp. 3/4 of that is from the expiring tax provisions. >> do you use projections as to what rate of inflation you expect in the economy? >> yes. the nominal growth rate depends on our level of inflation. we expect inflation to remain low in the next few years and then to move up toward federal reserve's implicit target, which is 2% or a little under. if there were faster reflation, that would lead to more revenue and more spending and higher

interest payments on the debt. in appendix c, one of the experiments we did was to look at what happens -- appendix b -- we look at what happens when interest rates are higher. this will when burden of interest payments would grow even faster. >> i am shifting gears a little bit. are you familiar with the studies comparing debt to gdp of different nations? >> the author is a member of our committee of economic advisers. >> you indicated the debt to gdp

will be approaching the 90% mark at the end of the decade. can you comment on using debt owed to the public as opposed to gross debt, we are rapidly approaching those markers? what do you expect to be the consequences of our failure to change that dynamics of growth and death? -- and debt? >> u.s. debt is already in unfamiliar territory for our country. if the current policies are pushes up and tdebt to 100%, we will be in different territory for all developed countries. some countries have gone there,

but they have been poor. the u.s. is different in a variety of ways that affect how far we can push up debt before we encounter negative consequences. people view the u.s. economy as a viable one. that gives us a little more room. on the other hand, we have a low private savings rates compared to other countries. our government debt cannot be absorbed as much in u.s. savings. it has to rely on the savings of others. >> let me interrupt and moved to this next question. i want to follow up on that in a future round. there are four major housing and banking activities that affect the federal budget to varying degrees, the federal government

obligations to fannie mae and freddie mac, premiums paid by share payments and the federal paymentss emissions of to the treasury. can you explain to me what the budget associated with each of the entities -- these entities actually reflect? are we treating these different aspects differently in our budget analysis? >> the answer to the last part of the question is yes. they are treated differently. the federal budget is primarily a cash flow accounting. money coming in and going out. 20 years ago, there were some changes made to try to better reflect the true cost of some of the government postal financial activities. in fact, that methodology -- 20

years ago, there were some changes made to try to reflect the true cost of some of the government's financial activities. the particular part of the government's activities you mentioned were put in place by different budgetary treatment. t.a.r.p. was put in place to treat it not with government reform basis. we have done that. fannie mae and freddie mac were brought into the government through the conservatorship and the ownership and control the government has demonstrated. there is nothing in the law that specifies how they should be treated in the budget. we are treating them on the same risk adjusted basis that we

are treating tarp. the government still sees them as being outside the government. they've record cash payments to those entities as if they were -- they record cash payments to those entities as if they were outside entities. it is a complicated business. we are in ongoing discussions with budget committees here and in the house to try to think through if there are better ways to communicate to you and your colleagues what is going on. >> i think it is important for members of the committee to know that cbo, when they have a question about how to do these things, consults the chairman

and the ranking member of the house and the senate budget committees. they did consult us on the question of treating fannie mae and freddie mae off the books or on the books. we insisted it be included because we think that is the most accurate reflection of the effect on the federal books. we were unanimous in that deal -- in fact view. congressman ryan was ranking in the house. four of us were consulted and agreed unanimously that it ought to be included. >> thank you. >> i still believe that was the correct decision.

cbo wanted to do it that way and we believe it was the proper way. >> hopefully, omb will follow that lead. >> thank you, doug elmendorf, or your service. i agree that we need a credible plan. the support and enactment of a credible plan would have an incredible impact on our economy. all actors need to be part of the solution. the difficulty is that congress will normally take up issues on a specific matter and then the discipline seems to break down. we will have a true emergency or a natural disaster, a katrina. we will have a security issue that we have to respond to. we say we will take care of that. we do it in a different manner.

we understand that. other matters it characterized as emergencies or urgent issues and we make separate exceptions. i agree that we need to do this in a balanced way. it seems like domestic discretionary spending is the one that takes the brunt of this type of discussion. i was pleased that the president mentioned discretionary spending first. i will try to get the relative impact of what the president said. in your baseline, what projections are you making with regard to discretionary domestic spending? procedures we followed we have followed for years. we take the measures that congress has approved an

increase that for inflation. >> and the president mentioned 3 years. would that be different from what you had in your baseline? >> yes, it would. >> can you tell us what would happen if we did a freeze on discretionary spending over the next five years? >> i do not know precisely what the president is proposing. we did a calculation freezing all non-defense discretionary spending except that that was directed by the appropriations committee. if one reason is that by five years and at the end of the five years, increases it with inflation, the savings over the

decade are about $400 billion. >> thank you. you mentioned three policy issues that are not in your baseline, but are actively being considered by congress. the alternative minimum tax, the extension of the tax issues passed in december, and the physician reimbursement under medicare. let me take them if i could -- let me take them, if i could, separately. can you tell me what a negative impact each of those policies would have on your projections? >> there is a table in our outlook on page 122 that gives the budget it facts of a variety of alternatives. the effect of extending the income tax and the state and give tax provisions is about $2.50 trillion over the decade.

the effect of indexing the amt our inflation is about $700 billion over the decade. -- amt for inflation is about $700 billion over the decade. one does the extension and in texas the -- does the extension and indexes the amt, it at $3 trillion over 10 years. the effect of maintaining medicare payment rates for positions is about $200.- 1539607552. -- $250 billion.

>> part of bringing the budget into balance is that we are going to have to make sacrifices. if we do that, we will bring about savings in the budget. if we talk about the tax issues and say, taxes are different, it pales in comparison to the extra deficits. i have not got into the military at. your baseline assumes what for military spending -- i have not gotten to the military gets -- military yet. you a baseline assumes what for military spending? >> that level would not be a good representation of what your

colleagues would expect for baseline spending. we also provided some alternatives that involve different paths toward defense spending. >> so you are taking a lower projection for the future than using the current. you believe there will be some savings in the next 10 years. >> i am just saying that you and your colleagues have often asked us the question. you think this is hired and what you anticipate. >> so your base line starts with the current level of military action we are participating in? if we bring down military action and do not have to spend as much on our soldiers overseas, we can bring some back, that would give us some savings that are not in our baseline. i understand there will be

trade-offs. >> when secretary gates has talk about savings he would like to implement, the savings he is discussing are from a higher level from our baseline. he is discussing savings relative to the budget plan the defense department has put out. those savings bring down that budget plan in the direction. part of the problem is, depending on where in the year we have done the protection, whether the congress has enacted supplemental appropriations that have gone for overseas contingency operations. it has been and are pingpong. >> my time is up.

i did not have time to go through the analysis, but my point is this -- all of the major areas need to be on the table. i think all of us were proud that the recommendation was balanced. we do have problems with the provisions, but you have to have all at the table. let's not just pick and discretionary domestic spending. >> thank you. i want to welcome senator thune to the committee. i look forward to working with you. let me indicate to members that i try not to interrupt senators when they are questioning, even though they may not -- even though they may be at the end of their time. when i hold up the gavel, i know don't want to tap it on members, but if you try to stick close to the time in fairness to others.

>> thank you, mr. chairman. dr. elmendorf, welcome, and of start out by saying how much i and other members of congress and committee appreciate the professionalism and integrity of your office. i know the numbers you report are often battered around and spun in different ways which must be a source of tremendous frustration to you, but you always seem to keep your cool despite that. it's important we get good numbers and thank you for that. >> thank you, senator, that means a lot. >> unfortunately, we talk about the budget and economic outlook, i feel like mark twain when he said everyone talks about the weather but nobody ever does anything about it. i think congress is guilty of that. that's why i was pleasantly

surprised, mr. chairman, when you and other members of the president's fiscal commission came out with what i thought was a bold and dramatic and a sobering report. i hope we will take the opportunity to deal with this crisis and i do believe it is approaching a crisis. we do not know when the tipping point will come, but we are almost there. we can't just talk about the economic outlook and the budget, we have to do something about it. i believe there is a window for us to do it. i heard you say we have to be careful about the pace of some of the austerity measures because it could further depress the economy. i hear you loud and clear. i think the political reality is we have a short time to do this. if we do not do this within the six-nine months, the opportunity

will be lost. i am anxiously awaiting the president's budget, which will come a week of february 13th, to see whether the president himself is serious about the crisis that was so well documented and explained by his own fiscal commission. i hope that opportunity is not squandered by the same old, same mold sort of thing that seems to happen time and time again. i know we talked a lot about the need to cut, but you alluded to the crowding out effect of more federal government borrowing on private access to private credit. i would like to talk about the importance of not just cutting, but growing the economy because i know when senator portman was the office of management and budget director at the beginning

of 2007, the budget deficit was 1.2%. now it is around 10%. one reason it was low is not because we were spending money, because we were. but the economy was booming. jobs were being created. the federal treasury was getting a lot of money. but for the reasons the chairman mentioned, not only are we continuing our bad habits in terms of spending the amount of money coming in because the economy is hurting, because people are out of work, losing their homes, it is a double clammy. let me ask you -- is a double whammy. you have some economic projections in terms of growth of our gross domestic product. i believe i heard you say, and this appears to say on page 51, in 2011, you are protect -- you

are projecting the gross domestic product to grow at 3.1%. is that correct? >> yes. >> can you tell us how much growth in gross domestic product is required to see a net increase in employment? i assume with new people entering the workforce that there is a level -- i cannot recall the specific number, is it a range of growth we need to see before we see the unemployment rate come down? >> at that pace, we think the unemployment rate will come down, but slowly. we think the potential growth rate of the economy -- i should explain what i mean -- apart from the cyclical issues, as the labor force for almost fully employed and productive capital were fully in use, economic output would grow by up to 2.5%

per year. if economic growth exceeds that rate, we are in the process of closing the gap between the potential level of output and the actual level of output. that means putting equipment and people and plants back to work again. >> ben bernanke testified that by 2012 we would still see unemployment stubbornly high in the 8% range. do you agree with that? >> i do. we think the unemployment rate will be down to about 8.2% by 2012. that's better than today but still well above a level we have seen in strong economic conditions in the past. >> since time is so short, let me conclude on some matters that are of grave concern to me. that has to do with energy costs and some of our policies emanating from washington having

to do with our domestic energy supply. i don't think it's any secret that the moratorium imposed on drilling for oil in the gulf of mexico, and now that the formal moratorium is lifted, what is -ometimes called the permit orium, that is having a dramatic negative impact on employment, particularly in the gulf states, but the ripple effect throughout the economy. we have discovered in the last couple of years as a result of modern technology, a huge amount of natural gas here in america available from shale formations. as i heard the president talk about green jobs, which sounds

very good and certainly we are all for conservation and looking for ways to protect the environment as we develop energy sources, i was concerned and there wasn't a lot of talk about what i would call red, white, and blue jobs -- jobs created from domestic energy sources. let me conclude on this and say what do you see in terms of energy costs, particularly gasoline costs? if we see for dollar and got -- $4 a gallon gasoline costs, will the rising cost of energy due to our economy? >> i don't know offhand what the projection is. for oil prices, which are a very important economic factor, we look to the futures market as our starting point and follow the path of people buying and

selling the right to have oil in the future -- i don't think that calls for further large increases on the price of oil. i am not sure about gasoline prices. oil prices, we have rising -- they are about $90 a barrel. we have them rising to $100 a barrel by 2017 and $110 a barrel by 2020. the price of oil can easily shoot up will be on that and fall well short of that. so you should picture having a very large range around these numbers. but we think this is consistent with what's in the futures market. >> if a conflict broke out in the middle east and people became concerned, those numbers could skyrocket almost immediately. >> yes. >> thank you dr. elmendorf for

all your good work. in the 1980's, democrats and ronald reagan got together on taxes, cut taxes, cap productivity and grew the economy. we found a startling number in the two years at all that bi- partisan work. the economy created 6.3 million non-farm jobs. that's twice as many jobs as were created between 2001 and 2008, when tax policy was partisan. in your analysis, you assume that between now and 2012 there will be no changes and after 2012 we will see what happens. what could you tell us -- and this is a very rough analysis -- what would your fiscal outlook be if in the next two years,

democrats and republicans picked up on the kind of work done in the '80s and grew the economy? can you give any sense of how your fiscal outlook could change? obviously it would change because you are not making any calculations based on anything else be dead -- being done. what would you suggest would be part of a changed fiscal outlook if a tax reform along the lines of what was done in the '80s was enacted? >> mike capacity of analysis usually falls well short of your questions. as a general matter, it's a widely held view among experts that a tax code that had a broader base with fewer special exemptions, deductions, credits and so on, and there by could have lower tax rates to raise

the same revenue, would be more effective tax code in terms of raising revenue while producing less distortion to private economic behavior. all else equal, and there's a lot being swept in to that phrase, a tax cut with a broader base and lower rate is one we would expect to be more conducive to economic growth. >> which would mean the fiscal picture you have painted today would not be quite the bleak when you have offered. >> not quite as bleak. as you understand, the gap between spending and revenue under the extension of these policies has been very large. that's not a gap the economy can grow its way out of, even with the world's best tax system. >> let's talk about the international implications of tax law if we can. i am very interested in seeing

the corporate rate cut considerably and have proposed cutting it from 35% to 24% to encourage manufacturing in the united states. in effect, that would provide us an opportunity to repatriate some of the money that is parked overseas back here in the diet states again to grow the economy. have you all done any analysis with respect to an approach that would promote that kind of repatriation through a tax code that incentivizes job growth in the country? >> we have not started that in particular. we're doing some different approaches on different corporations in work we hope to present to the congress in a few months. i don't think we studied that particular proposal as of yet. >> i will follow-up with your staff on that. i think we know that billions and billions of dollars are

parked offshore right now and we ought to make it more attractive to repatriate that money through tax law and in sent private sector job growth in the country. i'm going to ask you the same question i asked ben bernanke with respect to tax law. the effect of doing just corporate tax law changes rather than individual tax law changes at the same time. my sense is because most businesses pay taxes and is -- as individuals and not as citicorp corporations, -- and c- corp. >> from the perspective of an analyst, tackling all the aspects of a general problem that once seems most effective. it is up to you and your colleagues to judge how many

changes you can think through and agree upon in a finite time. as you understand, both the corporate tax reform and individual tax reform agendas are incredibly long and complicated. from an analytic perspective, trying to think about all the pieces of the tax could together would be most effective and appropriate. >> i think the interactions between what individuals pay and what businesses pay is now so intertwined with sole ,roprietorships, llc's partnerships, to say you're going to split off one piece of the tax code and say you're going to reform there is a vastly oversimplify it and create a lot of distortions. what are the growth implications of doing taxes on a temporary basis? let me read you a sentence from

the "wall street journal." the united states has no permanent tax regime for leverages on capitol gains or family breaks for students and others. in effect, what america has done is to put the tax system on a permanently temporary basis. we are facing things in, taking things out, we have a permanently temporary tax code. what are the growth implications of having something that is now a jury-belt system rather than a look at those 1986 numbers, which are eye-popping. to think when ronald reagan and democrats got together, in two years, they created more jobs than you saw in eight years of partisan tax policy. what would be the benefits of looking beyond a tax approach.

>> the current nature of our tax system is damaging to the economy. we hope and expect businesses and families are planning ahead in making decisions and investments for the future and it's very difficult for them to make those sorts of decisions in an informed and thoughtful way if the tax rates that will apply to them a year or two down the road are so uncertain. resolving that uncertainty would encourage and support household decisions, business decisions, and investment and hiring, probably. >> my time has expired, but because we will be working closely under your leadership under the next two years, i want to touch on a last point that dr. elmendorf made about the nature of a temporary set of tax policies. if we have the same debate in

the lame-duck session of 2012 where we are once again talking about extending the tax law today for two more years, dr. elmendorf has told us that will be damaging for the economy and the country. with your leadership, i hope is that this time over the next two years, we can make permanent, pro-growth changes to tax law, get it done in this congress, and not just real litigate another set of temporary tax law changes in the lame-duck session of the 2012 congress, which dr. elmendorf has just told us would be very damaging. i think the point dr. elmendorf made is especially important. >> senator sessions is now back. he was at another hearing.

i think it is most important we get to him for any additional or opening statement he would want to make and then we will resume questions. >> thank you. [audio difficulties] that is better. fundamentally, you are absolutely correct. a permanent tax policy is better than uncertainty and we have too much uncertainty in our economy and we need more stability and you have come forward with some proposals and ideas i think are worth serious consideration and i look forward to working with you on it. i truly believe you are

attempting to accomplish something in an effective way. i'd like to congratulate you, mr. elmendorf for your real important. you have carried out your duties with honesty and integrity. you have some rather specific controls on how you score and evaluate matters. it is not your fault, they have been established and you follow them, i think objectively, whether we like that are not. the rules are set up mostly by congress. we have the new baseline and the news was not good. the deficit is expected to reach $1.5 trillion this fiscal year as of september 30th as, well above what we were projecting not long ago. our gross debt is expected to reach 100% of gdp, meaning the amount of all the money our nation as will soon be equal to

the value of everything are nation produces. that is above the 90% level that could be calculated in the analysis of nation to default on their debts. the 90% rate is significant. 40 cents of every dollar we spend is borrowed. by the end of the decade, the interest on our debt is expected to rise to $750 billion in one year. that crowds out -- people want spending, people want to spend more on a host of projects and i'd like to do that too, but we have $750 billion less because we have to pay interest on the surging debt we have. alan greenspan said recently that we have almost a 50/50

chance of a bond market crisis in the next two years. that was from a "wall street journal" interview. i thought that was something we should hear. this is a man of wisdom who has been around a long time and he says the only question is will this debt bond crisis be -- these kinds of budget numbers we need be passed before or after the crisis? it would be a lot better, i think we all agree, critical that we do of before the crisis. the path we are on is unsustainable, yet i have to say president obama in his state of the union address, announced fundamentally we would continue as we are. to hear the president's remarks, one would think his speech had been written 10 years ago. they were disconnected from the

reality of the debt crisis we face. earlier this week, i said his state of the union address would be a defining moment for his presidency. i don't think he rose to the occasion. it was a timid speech, it squandered a historic opportunity to rally the american people behind true spending reform. he had the opportunity to look them in the eye, say what the real dangers we are facing our and call on us to meet the challenges that americans will it properly called. it was far short of the standard set by gov. chris christie in new york and david cameron in the uk. no one forced the president to be the president. like my wife says, don't blame me, you asked for the job. he asked for the job and he has a real tough job now and i don't

think he did lead effectively. he proposed instead we continue a five-year plan. this so-called freeze on domestic spending is not a plan to reduce deficits. it's a plan to preserve the deficits, locking in place the very spending levels that have been dramatically increased by president obama in the last two years. the plan is remarkable, not for the strength, but for its weakness. in defense of his proposal, he argued the government spending is the engine of the economy, that the government is the engine of the economy, basically. he had this airplane metaphor backwards. the engine of our economy is the private sector, not the public sector. when the public -- and the private sector grows, it creates new jobs, new industries, new ideas and more tax revenue. but when the public sector grows, it simply consumes more of what the private sector

produces. big government waste is funded on the back of small business thrift. the american people deserve candor and directness from the elected officials. the money to sustain the president's big government vision, the more investments he called for is simply not there. we don't have the money. meaningful spending reductions are not a choice. they are an obligation. there is no serious alternative. we need to take a tougher road, the road that leads to prosperity. reducing the size and cost of government and not be easy, but is the only responsible course, the only one that will lead us to a better future. so i look forward to discussing the issues with you now and as we go forward through the next years. together, i believe we can make some progress. mr. chairman, there is nobody

who has seen this and study this more carefully than you. i look for to seeking your advice as we go forward. >> thank you. it may turn out that it just falls to less in this committee to put forward a plan. if the commission did not give 1418, it may just be that we have to go backed -- go back to a process that worked in this committee when i first came here, which is to have a real markup. "and for this committee to lead. frankly, i never thought on a problem with the dimensions of this one, where we typically do five-year budgets, in this

circumstance, which requires a plan that extends beyond five years, that this was not the forum to sort it out, but i am not sure anymore. i'm not certain it is not going to fall to less to put a plan out there for our colleagues on the floor. i am going to be having discussions with members of the committee on both sides to see what the feeling would be about our taking this on and laying a plan before our colleagues because this is the budget committee. even though we have typically been limited to five-year plans, maybe we are the only ones who are going to have the opportunity to lay out a comprehensive plan absent some kind of summit.

i think the thing that makes the most sense is there is a summit between the white house, leaders in the house and the senate because of the end of the day, the white house has to be at the table. unfortunately, the budget process, the president is left out. the president gives us a budget and congress passes a budget but it never goes to the president for his signature or veto. but if there's not going to be a summit, there's not going to be some kind of negotiation. maybe it's going to fall to us in this committee to put forward a plan. >> let me congratulate you on your reappointment. >> thank you. >> we're glad to see we all agree on something. on health care, you scored health care and you see where we are right now with the bill

being sent over in repeal and i heard the $200 billion for on that. could you elaborate on that and a little bit on what the mandates would do if they were eliminated and from the state's perspective, the medicaid -- i'm not sure if anybody really understood where the governors were coming from, most states do not cover 50% of the people qualify. we'd jump from 50% of all the way to 133, which we have a hard time swallowing. if you could talk about that, i will have one further question. >> you raise a lot of complicated questions. the original legislation enacted last march, a patient protection, affordable care and the reconciliation act set in

place substantial expansion of federal entitlements for health care. it paid for that expansion by the setting in place new tax revenues and trimming money from existing health programs, particularly medicare. by trimming the money for medicare in a way in which the gains to the government budget would increase over time, the rate of increase to payment providers. in our analysis, the combination of the extra tax revenue and the reductions in spending laid out in the legislation exceeded the cost of a new entitlement so the legislation had in our assessment last month -- last march, small positive effect on

the federal budget. in the preliminary analysis, we prepared for the house vote that repealing that legislation would have a small negative affect on the federal budget. we are in the process of constructing a full pullback which we will make available as soon as we have completed it. one of the many questions we were asked along the way during the health debate in addition to the federal budgetary effects was the affect on state budgets. the expansion of medicaid put additional burdens on states, the expansion was set in place in such a way that the federal government pays at -- pay a larger share of the cost of people made eligible for medicaid that it does under the current program. but nonetheless, it would not pay all of that bill and the share the federal government

will pay for the newly eligible people declines overtime. our latest estimate is that the state share of the costs associated with the medicaid cover and much -- coverage expansion will be a little over $60 billion during the time covered by this latest outlook. > that is when the state's -- and that goes into effect? >> yes. we tend to report 10-year numbers. it is principally 2014 and beyond. it is not our place to judge how they can deal with that or whether it is appropriate, but the estimate incorporates our expectation of changes in state behavior in response to the firebird and they will face. our estimates cannot incorporate changes in law that you and your colleagues might incorporate the federal level, but our estimates and corporate responses by family, businesses

and state governments. >> give me, if you could score the reduction of 133 to 100 >> also, the mandates were removed. if there is an offset, we could talk about that. i was very proud of the debt commission. in west virginia, every family sits down and work through their budget. they start a budget and stick with it. most states have a balanced budget amendment. i want to know what your thoughts would be for this federal government because it does not seem we are going to have the will to tackle the problems we have to and the votes that have to be made unless there is a balanced budget amendment that forces us

and it would do it over time because ratification would take some time to do it. in give us a chance to get our financial house in order. the states are going through some very challenging and difficult times of making difficult cuts. they are looking at the federal government was saying why can't you do it? we are taking these cuts and making these tough votes but we don't see anything coming from washington. if i could hear your response on a balanced budget amendment and a constitutional change of how we do business in washington. >> i don't think it's appropriate for me to make a recommendation for or against that sort of change. i will make a few observations. the set of budget rules set in place in 1990 regarding caps on discretionary spending and the pay-as-you-go system for mandatory spending and taxes seemed to have been effective at

helping to guide decisions of the congress as long as there was the focus in the congress on deficit reduction. once the budget improved, and a focus dissipated, those restrictions were no longer effective. >> the focus in the congress, amending the constitution to require that sort of balance rages -- wages -- raises risks. the automatic stabilizers the government has, the fact taxes fall when the economy weakens and that spending programs increases when the economy weakens. existing law -- there's an important stabilizing force for the aggregate economy. state governments need to work against as a fax in their own budget and need to take action to raise taxes or cut spending.

that undoes the automatic stabilizers that the state level. taking as a way at the federal level risks making the economy less stable, which is exacerbating the swings in the business cycles. >> but would you agree we are very unstable right now? >> yes. the automatic stabilizers are not purposefully stabilizing. but taking away would have cost you and your colleagues would have to weigh. that amendment does not suggest how you or your colleagues would change taxes or spending. >> would you be asked to score a balanced budget amendment? >> we do not score amendments to the constitution. >> i would like to you -- like to talk to you further about that, is very important to me, every governor and household in west virginia. they can do it, they think we can do it also. >> i did not ask any questions

and my first comment. can i have two minutes to ask a question? >> >> we have an unusual situation. it is a little unfair to do that. the your the ranking member, so we'll make an exception great >> you are a great chairman, and i thank you. magnanimous. >> with regard to to this core of the health care bill, mr. elmendorf, the money that came in through this bill, with medicare trams and medicare cuts, tax increases, most of which were medicare tax increases, i believe, that money was used to fund the new program.

but two things are important. mr. elmendorf has made it perfectly clear that you can't cut the money twice. cannot increase medicare and it fund the new program. this is a very serious matter we're talking about. thet it true that treasury, new health-care program is in giving money to fund the program, but the money they got and the medicare cuts is borrowed by treasury and treasury oppose that money back when medicare continues to go into default and claims of money back? >> senator sessions is referring to a set of letters we cents in his request in january of 2009 and 2010.

it is done on a unified basis, taking into account all spending and revenue. the net of fact with deficit spending as a whole. the cutbacks in medicare spending, to get with revenue increases more than offset the extra spending on the new health entitlement and expanded health entitlement. it is also the case that the savings in medicare, particularly the savings in the hospital insurance part of medicare then lead to a greater accumulation of bonds in a trust fund. those bonds have important legal meetings. there are real u.s. debt backed by the full faith and credit of the united states government, like the debt sold to the

public. they do not have independent economic meaning in the sense that the trust fund has an accumulation of bonds. that does not give the trust fund a separate way to pay medicare benefits, except by coming back to treasury, redeeming those bonds, and getting that cash in the future. another way to say that is that paying medicare benefits in the future relies on tax revenue that will be raised in the future or borrowing that will be done in the future cannot depend directly on the bonds in the trust fund. >> i think that's fair and all this need to understand that, but i would go a little further. it increased the internal debt of the u.s. treasury because the money extended for the health care program is borrowed from medicare, at least a substantial portion of it. when medicare, since we know is going into default, inevitably will call those bonds, the united states treasury will have

to raise taxes or borrowing on the economy or deflate the currency, which is the three choices governments have, isn't that basically correct? >> the money is being borrowed from the medicare trust fund. >> it increases the internal debt, the gross debt of the united states. >> absolutely. >> i think the senator for making the point because we have the same issue with social security. the hard reality is social security has trillions of dollars of assets. that is true. there is special purpose bonds backed by the full faith and credit of the united states are real assets. the problem is the only way those bonds are redeemed is out of current income. social security is going to go permanently cash-in five years.

i have to say -- and i have received the lash from those who say you should not have to touch social security because there are trillions of dollars of assets. that's true. it is true that there backed by the full faith and credit of the united states, it is also true that the only way those bonds get redeemed is out of the current income of the united states. we are about to see a dramatic shift in the budget circumstance when we go to having hundreds of billions of dollars of surplus and social security the general fund could borrow to having a circumstance in which there are hundreds of billions of dollars of debt that has to be serviced out of current income. senator, i apologize because you got delayed. >> that's okay.

the important thing is getting some of these issues on the table. what you just talked about is of absolute critical importance. you talked about the full faith and credit of the united states and that is what we are dealing with. the chairman held up about moody's and standard time -- moody's and standard and poor's, talking about the aaa rating of the united states. japan was just downgraded to aa. what would a downgrade from triple a to double a of the united states credit rating due to the interest rates and your budget projections? your budget projections in my opinion, i know you try to be conservative, but as we have seen, i think this year you projected a $1.1 trillion deficit. for this year, it turned out to be a $1.5 trillion. some of that was because of the tax policy, but the bottom line

is these things can change radically very quickly. the full faith and credit idea, this idea of of the bond traders downgrade our bonds, if the fed is successful, and a lot of people think they're going to be successful in raising inflation because that's what they're trying to do with the monetary supply, those all lead to higher interest rates, higher than you are projecting. that is the question -- if it goes out to double a, what does that do your projections? for the steps? >> if the federal government's credit rating or to lower, that would push up the interest rates the government would pay and push up the interest rates would have to pay. we would not quantify how much it would affect interest rates, but it would be an adverse

affect. >> it would not be insignificant, it would be significant, would you agree? >> absolutely. >> you talked about this -- the sooner we make these changes -- they are going to be painful, but the sooner we make them, maybe all less painful. as alan greenspan talked about, we're going to have to make these changes, it's just do we do them in the middle of a crisis or do we do it to avoid the crisis? that's a significant part of this. my colleagues mentioned we need presidential leadership right now. the chairman has talked about this committee doing its job. i could not agree more that the president needs to lead right now. these issues we're talking about, and you have been around and seen this, dr. elmendorf,

it's much easier to get reelected by giving money away. none of us want to make these tough political boats. but we have a democratic president -- these political votes. we of democratic president, democratic senate, and republican house. the president would lead come join the parties together, we could do what's right for the american people. but it's up to him to lead. he's the president, he's the only one with the bully pulpit. our little microphones here don't echo through the country. i think he failed on the state of the union, but he has plenty of opportunities. we have the debt ceiling coming up. he has his budget coming up. there are plenty of opportunities for the president to lead. forget our party labels, this is about the future of our country. the-you're talking about, the interest on the debt, you say that's unsustainable. it is.

it is unsustainable. dr. elmendorf, the reason you were reappointed by republicans and democrats is you try to call a fair shot. we don't always agree, because what you do is unbelievably difficult to predict, but you play within the rules you are given and some of the rules aren't necessarily the best rules for making the most accurate deductions as well. but the bottom line is all economists agree, our country is in serious trouble if we do not deal with the debt and deficit problems. $400 billion the president talked about the other night, what percentage is of the debt we are going to accumulate over the next 10 years based on your projections? >> under the based projections, we expect the government will accumulate about $seven trillion in debt over the next decade. $400 billion is a little over

5%. -- about $7 trillion. >> especially the talk about the alternative minimum tax, and all those things we know are going to happen -- >> if we go into all those expiring provisions, we look for debt of $12 trillion over the next decade. $400 billion is a few percent of that. >> as far as total projected spending during that time, what percentage? my back of the napkin calculations are less than 1%. the president has basically said we're going to reduce spending by less than a penny at of every dollar when this country, all economists say it is unsustainable. this country is headed for a financial crisis that we maybe have never seen. for us to sit here -- that's why

it's so important to join together as republicans and democrats with the president to tackle this problem. mr. chairman, i'm willing to join whoever it is, but we have to make such a difficult -- these are going to be painful, politically painful choices to make. we have to have the kind of tax policy because you cannot just cut your way out of this. you have to cut and grow. you have to do them both at the same time. it's the only way you are going to solve this financial crisis that could be looming on our country. the last thing i have this -- the last thing i have this state pensions. moody's is requiring states to put their pensions on their books. you talk about destabilizing factors, what does that do potentially to this whole economic projections going off

into the future? >> we are in the process of completing an issue brief and state pensions which we will release very shortly. it's a very important topic. the issue of stabilization was in the context of year to year behavior during the recession, downturn and recovery. a very important long-term financial issue for states and local governments is the commitments they have made to pay certain benefits to retired government workers and whether they have or have not put aside sufficient money to meet those. >> i realize my time has expired. my last comment is it's not in the future. my state is dealing with this right now. cities and states across the country are dealing with this problem right now. they know most of it is in the future but it is affecting their state budget currently. thank you, mr. chairman. >> thank you and thank you for your courtesy, senator.

>> thank you. with respect to your comment about his the committee becoming a forum for doing some significant debt and deficit work that we may need to do, i can assure you i'm prepared for that work and i think every member of this committee would be prepared for that work. if it is your judgment to proceed in that way, i think you'll find those interested and hard-working senators prepared to engage in that discussion. >> i thank the senator for that. i have thrown this out as an idea and that it's going to take discussion among all members of this committee. personally, i would prefer we have a summit that involves the president and the leadership of the house and senate, but if that is not to occur, as to start somewhere. >> dr. elmendorf, if you have an

insurance company and it collects premium in order to make payments in the insurance program, it builds up reserves that the insurance company holds and there are times when fires take place, katrinas take place, lives that are insured expire and you have to draw on those reserves. in those times, the insurance program may go cash negative. but it remains fully, actuarially sound. as i understand it, our problem with social security is that it is and has been actuarially sound, will be actuarially sound through 2037. but that reserve fund of the incoming premium set aside was not left alone. congress took it, borrowed it,

left an i/o you in its place and spend it on other stuff. i see you nodding. i think it's important to point out that social security as a program is not actuarially at fault for the need we have to fund the cash needs. the problem because the need to fund the cash needs is not that there is an actuarial problem with social security, at least not for a auartererererer-centui suspect with the president's recommendation, you raise the payroll tax cap and it becomes fully solvent indefinitely. what has happened is management went into the reserves and took them out and spend them on something else. if this were a private company and i were an attorney general, i would probably be prosecuting that management. but this is congress and it's all done in the light of day and everyone was in on it and it's

part of the way we have done business. is that a fair description of our social security problem? >> let me just say back to the part i understand and i think i agree with -- social security has sufficient resources, meaning the bonds held by the trust fund that, together with the expected inflow of payroll taxes, it can meet benefits under current law for decades to come. as you are saying and senator sessions and senator conrad have said, the rest of the government in a sense, use the cash, left the trust fund with bonds, which are viable assets that you are running a private security company and had securities in a vault, you would view that as an investment for the company. the problem is the rest of the government use that cast -- use that cash. if the government had run surpluses equal to the savings

of the trust fund over the years, the government would be in better financial shape due to the surpluses. it would be in much better shape to meet those commitments in the future. but the government has not run surpluses commensurate with the increasing balances in the trust fund and the government has not improved its financial condition using that money. it has used that money for other purposes as senator session notes. health legislation enacted last march it essentially does with extra money building up in h.i. trust fund. >> but it's not the flow in the actuarial fund that causes the reserves. it's the fact that the reserves were removed and now need to be replaced. >> i think that is fair, but i 0 looks atthe thatc cb the budget in the underlying sense.

inside the budget -- that's true for the social security trust funds and for the hospital security trust fund in medicare as well. once there is a trust fund, building up assets which is essentially an annual cash flow basis, there is intrinsically a disconnect and the risk of a double counting referred to to emphasize we can't keep the numbers straight, but one has to be careful in thinking and talking about it. >> is it not similar to the difference in a security shortfall and insolvency problem? >> the federal government as a whole, there is a problem that total revenues expected to command are not up to the total spending expected to go out. it's at a level of the overall government i would expect to focus. >> let me go on to another point.

it has been recently said that the product of our debt is the active may president and congress is over many years. i want to single out one president, president clinton. as i recall, under president clinton, the nation saw his first budget surpluses in decades. if my recollection is correct, in january 2001, immediately after president clinton left office and when the bush administration assumed office, it was the finding of the nonpartisan congressional budget office, your operation, that the clinton era trends, if they had been continued forward would have led to a debt-free united states of america by the end of the last decade. is that correct? >> i believe that is correct. >> i think it is fair to exempt president clinton because he left us on track to be a and

actual debt free nation. >> as you know, i don't take sides on president for members of congress. it's worth emphasizing that a number of things happened in 2001 that baseline projections did not anticipate. one was a very important change in tax policy which the bass line is not designed to anticipate. >> but those were not the fault of president clinton. >> i do not talk in president terms. >> they took place after the president left office. >> the other thing that happened was the economy fell into recession, suffered a very large decline in the value of stock prices and -- >> again, after president clinton left office. >> at time, there was some dispute about when the recession started. >> as of january 2001, you were predicting, your organization was predicting a debt-free

nation. >> what i am saying is there were economic developments and changes in the amount of tax revenue forgiven economy adverse to the budget outcomes. i do remember off hand, how much deterioration occurred after that was due to legislation and how much was due to revision to the economic and technical projections. >> senator johnson. >> thank you. i believe this country hummers for leadership. i would suddenly step up to the plate and take lead on this budget and try to restore fiscal

responsibility to this nation. >> high pressure that. >> does the cbo ever go back and studied what estimates had done from the standpoint of revenue and figure out what the actual results were and just compare with your estimates were? >> we certainly do go back and look at our performance as best as we can evaluate it. we do not do the revenue estimates. we do the revenue baseline projections of this report. but the analysis is done by day -- we do look at our economic forecast and report once a year on how accurate they have been appearing every alcor update reports on the revisions from the previous out looks so we can see where we have gone wrong. we also look back when we can to

see how pieces of legislation has worked out on the spending side. many forces are impinging on the outcomes. the fact that the on outcome of stiffens and with the legislation was passed, it may be that we had the wrong estimate the legislation or had a rough estimate on everything else that was going on. but we certainly do try. >> but me 0 a non revenue in particular. -- let me zero in on revenue in particular. if you know of anybody who has done that, i would be interested in seeing that in my office. in terms of the health care bill, do you estimate how many businesses would drop coverage and, as a result, how many individuals would be put into the exchanges and what the cost of that effect would be? >> yes. our estimate of the effects on the legislation for the lawyer -- for the employer-sponsored

coverage, that was the net of a larger gross decline with some offset of additional off insurance by some employers, the estimate with the subsidies and the -- it accounted for the penalties imposed on individuals and businesses and the small business tax credit and so on. we thought that the overall effect of that set of provisions would be that some number of people would not receive insurance through employers who otherwise would have come others would get insurance from employers and would not otherwise, and fewer people was coverage fromsurance their employer. so we estimated that, in 2019, 3 million fewer people would have

employer-sponsored insurance. that reflects a net of 8 million to 9 million who would have had employer coverage under prior law and would not under the legislation that was enacted. 6 million to 7 million would not have been covered under prior law, but would not have coverage under legislation. 1 million to two million people would have an offer of employer-based coverage, but would get exchanges instead. >> can you give my office the details of that? >> of course. >> i would like to talk a little bit -- you talked about automatic stabilizers of a managed budget. would we be allowed to have those automatic stabilizers? >> it might impinge on the

stabilizer's of the spending side of the budget. even apart from an extension or expansion, people would lose benefits. what used to be called food stamps, people now get supplemental substance assistance. -- substance assistance. it would impinge on things like that. we discussed a few minutes ago spending,iscretionary especially the non-defense discretionary spending. that is only one piece of the budget. it is not a large a piece as many people did believe. a lot of the spending goes to social security and medicare/medicaid.

everything apart from those large health programs and social security and defense, the net interest payments and the debt and everything else, it is about a fifth of spending by the end of the decade by our projection. it would require changes across a large swath of the government's spending program. >> if you had a preference to choose from a constitutional amendment to a reduced spending program -- >> i do not come here to set my preferences but the analysis that the cbo has done. >> ok. can you, in layman's terms, describe to a family what a debt crisis will look like? what will be the effect on individuals? >> i will try. if the people we rely upon to

land the federal government money became skeptical that the government manages a budget in a way that they would get repaid and thus would start to demand higher interest rates to compensate them for that extra risk, that could push up interest rates throughout the economy. that would make it harder for households to borrow money. it would make it harder for the businesses for which they work to borrow money to invest and expand. on the federal side, if the government were unable to borrow the money that it was needing to borrow giving the paths of spending revenue, it could result in drastic changes, seventh large changes in the taxes people pay to the government and in the benefits they receive from the government. of the sort that we're seeing in some european nations who have

hit a fiscal crisis. the magnitude and sadness of the changes in what the democrats do in the circumstances combined with the effects in the economy in the rise of that interest-rate would clearly be damaging to people. >> i think the senator. ank the senator. >> i think the idea of a summit is fine. but i believe that the role of the budget committee, as a former mayor -- what we used to do is present our budget to the budget committee. they would spend the time to explain and department would come in and both through it. i know that jurisdiction is used, but it is a budget committee. rather than wait to find out what the role is, we should seize it and do it. i think this is a great year to do it. i am a strong believer in that. i am happy to sit here to go through departments and figure out what the heck they're up to

and give our version, hopefully, in a collective way of how to move this budget forward. the prospect of a vcr is damaging -- of a cr is damaging and disturbing. they are bad. they're not healthy for any type of government to do so. it is in our role and ability to do it. >> if i could just to intercede for a moment, i think of that, at this point -- question not take any of my time. >> i will not take -- >> do not take any of my time. >> i will not take any of your time. number one, we typically only do a five-year budget. almost all the budgets that have been done by congress have been five years. the problem is that the plan that the country needs goes well

beyond five years. the second big problem we have is that we do not determine the specific policies that are adopted by the committees of jurisdiction. we give them a numerical targets. we tell the appropriators from which they can spend. we do not tell them how to spend it. we do not have that authority. we tell the finance committee how much money to raise. we do not tell them how to raise it. and one of the difficulties of the budget committee, being the lead in taking on this task, is that a lot of the compromises that need to occur go to the details. unfortunately, we cannot control the details. we tell the finance committee how much money to raise. we cannot impose on them our views of the policy that ought to be attached to that. that is -- we cannot tell them to broaden the base to raise this money and, simultaneously,

lower the rates. we might make that assumption. on anything we pass, we can state where our assumptions are. but this committee does not have the authority to determine those specifics. so it really puts the budget committee in a very difficult position to reach agreement on a multi-year plan that has many dimensions to it because the specifics become critical. what are the revenue numbers really representing in terms of policy? again, that will not come out of the senator's time. >> also, is easier, too. we do not have to tell exactly. maybe we do have an opportunity to provide a little leadership. >> i agree with both of you on that. if we have those discussions, we may have assumptions we can lay down. but then we at least zero of those numbers will be. i would encourage that. the second thing, before i ask

your question, want to echo what is in the broader sweep. if i was limited to two items that this committee would focus on is, one, the larger budget, and two, the fiscal deficit. they will go to countries who are more stabilized in this element and invest there. the certainty of what our tax policies are will be very critical long term. these two-year fixes are not responsible. we need to look at it longer term. in regards to tax reform, a couple of quick questions.

we hear a regular basis, may be out of your office or the joint tax, but i want to get a good and clear picture. i think and of the answer. who really owns our debt? every time you hear it, you hear "for a country's." and they have a large part of it. -- "foreign countries." and they have a large part of it. >> it is owned largely by people in this country and also by people overseas. it is a combination of both domestic and foreign. >> to know the ratio is roughly? is it about 70/30? >> is about half. >> 50/50. ok. a big chunk of our retirement funds, i can tell you, as a

former mayor, we invested in securities all-time because the state was the -- all the time because the state was the right place to put the money. the family impact would be on the local level. it would impact direct services that local governments can provide because their ability to borrow would diminish in the debt crisis. is that fair? i want to make sure that is on record. >> i think that is fair. if there is a sudden shift of sentiment against buying u.s. treasury debt, we have not seen that in this country nor in the world's most important financial market. we do not know what would happen. >> it is a multilayer affect. >> yes. it would ripple through the financial system in this country and it would make it harder for borrowing for local state governments as well as for

families and businesses. >> very good. it was an interesting question that senator johnson asked. in these reports, which are great reports, what i would love to get if it is possible, and maybe the baseline projections that you utilize as your basic data in projecting -- what i want to see, when i see a chart like this, not that i want to question your track record, but if i look at 2010, it is a flash point. what i want to see its projections that were projected and what happened. that helps me have a better discussion of on an analysis of it. here are some of the things it changed. why is that important for me? then i know that policy we enact has some impact on what you

protected initially. is that available? if we said to you that here for five areas that we -- that here are four or five areas that we focus on, can you show a project just -- can you show us projections? >> yes. >> we will have our staff work with your staff. i believe that information like that, you look back and you can tell if we were the cause. i think that future discussions will be helped. the last thing, as i said on the armed services committee and we will go through process with secretary gates and all the reductions that will take place. do you participate in that in

any level? 95% of every defense department dollar has a u.s. impact because they're very focused upon. have you done any cross analysis on that? they are one of the highest in every department we have that puts money into this economy. have you done anything like that? or are you equipped to do it if you have to? >> i think we have not done it. i think we could do it. we can look at the economic effects of a variety of policy being considered by you and your colleagues, including, about a year ago, we did the analysis of a collection of policies that were being discussed four possible ways of increasing the output of employment, boosting the place of the economy -- the pace of the economy. looking at the number of changes on the tax side and the spending side, we did not look at defense spending separately. we looked at infrastructure

spending and changes in grants for state and local governments. >> my time has expired. the defense is a huge part of our budget. fairlyts recommended are barel significant. but because they have a big impact on jobs, we will talk with you may be through the armed services committee. >> yes, sir, we will have to talk with you. >> thank you. >> it is good to be here. i appreciated working with the congressional budget office when i was in the house budget committee and at omb. i appreciate your testimony today. we find ourselves at a veritable time, doing that? it is a day after you told us that we're facing the base deficit of our country, in

fact, in the history of the world this year. by the way, these projections are notoriously wrong. the unfortunate, this looks more accurate than some -- unfortunately, this looks more accurate than some. we know that projections can be wrong sometimes. but the fact remains that we face a fiscal crisis. i am delighted to be on this committee. i just found out last night that i would be joining senator conrad and sessions and others. as much as i was discouraged by your projections, i was encouraged by what i heard today from my colleagues. what you said earlier, chairman conrad, is significant especially in terms of a five- year budget or a 10-year budget or trying in a bipartisan way to do it.

we can solve this crisis before we have economic repercussions that you talked about earlier. i have a couple questions a wanted to focus on. they really go to any understanding -- to me understanding how you feel about this crisis in your debt. if you were to say what is the largest fiscal crisis or fiscal problem or fiscal issue facing our country, what would you say it is if you had to identify one thing? >> senator, again, i appreciate your confidence in my gut, but i rely on the analysis that we do at cbo. the risk of breast -- the rest of fiscal crisis and our view comes from the imbalance between spending and revenue. that imbalance comes into our projections because spending rises into a share of gdp that

we have not seen before in this country. >> but what is it in the spending side and that troubles you the most? what is the single thing? >> it is not a matter of troubling. it has to be torture center college choice what part you has to beddress -- it i your choice and your colleagues choice what part you want to address. >> i think it is health care and not just as it relates to medicare and medicaid. 7% growth is unsustainable, but it affects the private sector and jobs and the lower revenues we would otherwise have.

what do you think the most some of the interest is in the baseline projections? -- most significant risk in the baseline projections? >> this is a very difficult business. the crucial underlying factor here, as we were just discussing, is the rising number of older americans relative to working americans and the rising cost of health care relative to other things in the economy. those fundamental forces have been foreseen for decades. i think they are in exorable under current policies. although the specifics will not turn out this way, i think there's a reason that, for many, many reports now, cbo and analysts have been looking at a

deteriorating fiscal picture. >> do you think the fiscal rest is in expenditures in medicare? >> that is one thing. >> we talked about it earlier. but when my concerns in your analysis is the risk premium that the private sector is looking at, which is what the blue-chip estimate is of the years, i do not see it embodied in your analysis. you feel you have taken into account the risk premium of these higher debts? >> in fact, our production of long-term interest rates over this coming decade is actually above the interest rates and that you can deduce from the current prices of treasury securities in a financial market. our projection reflects a combination of what we see in financial markets and our all modeling.

our own modeling actually points at interest rates being a little higher than the financial markets have built in, particularly in the latter half of the decade, for the long-term securities. we expected to put some weight on our modeling and into the financial market. but the swings and sentiment that drive fiscal crises are not told well ahead of time. they are often -- they often occur very suddenly. >> that will be a big part of the uncertainty going forward. i think it relates directly to the point made many times today, that we need to focus on what will happen with a rate. because that will affect everybody's everyday lives. we talked about the entitlement side today.

i wish we had more time. i appreciate comments on tax reform. i was you one simple question about the corporate rate. there is recent research that says there is a maximization point in the corporate rate of about 26%. i think that is somewhat obvious that is lower or about the average of the oecd or the developed country rich. have you all looked that? do you think we are leading revenue on the table right now? in other words, by having a relatively high corporate, are we getting less revenue than we would otherwise get? do you think there is a misalignment because of the global economy? what is your view on what the corporate rate ought to be? >> i am aware of that paper, but i cannot answer your question. i am interested, of course, myself, but if your interested,

we can look at that report. >> let's get some views from cbo on that. whether tax relief pays for itself or not depends on the tax relief and this may be one area where we could find consensus. >> thank you. >> senator nelson. >> a big part of the discretionary outlays that grew during 2010 was the stimulus bill. a big portion of the stimulus bill was the money going to the states, the state fiscal stabilization. what do you expect would happen if a lot of that money, for example, such as medicaid money going to the states for two years, if that had not gone to

the states? what you think would have happened? >> we think that states would have had to make larger changes to boost revenues or decrease of a short of spending. that would of had a negative effect on their economies. that is why, in our analysis of the recovery act, we think those provisions and others provided an important boost to output and employment compared to what would have happened in the absence of that legislation. >> florida receive about $4.5 billion just for medicaid over that time. another two $0.2 billion was received for education. -- $2.2 billion was received for education. it was huge. is coming to the end of that time and what do you think is

going to happen? >> the winning of the effects of the recovery act of the economy is one of the reasons that the economy is not growing more rapidly over the next few years in our projection. >> so we see less of a robust recovery as a result of all of going toral money don'not the states. they're not roads and bridges being built. it is medicates and education funding going to the states. as a result of that going away, it will lessen the acceleration of the economic recovery. >> i think that is right, senator. it is analogous to what happens with the automatic stabilizers. in downturns, picture the economy running into a whole. the shot -- the whole is more

shallow. on the way out, the recovery is also more shallow. the trade-off that you and your colleagues in the front is that the accumulation of debt to pay for the recovery act and the automatic stabilizers and all those things in the past few years has pushed debt-to-gp in a way that damages and risks itself. >> that is one consequence. baez not being able to send more money to the states -- by us not being able to send more money to the states, it will slow the economic recovery. us look on the other side. we passed the health care bill. the health care bill, as it is passed right now and as it is law, will roughly save the federal government about a

quarter of $1 trillion over the next 10 years. add your projections for the second 10-year period, that the federal government spending will be saved about $1 trillion. is that correct? >> senator, you're right. we think that, over the next decade, the repeal of the health legislation would increase budget deficits by something in the order of two hundred $30 billion. -- in the order of $230 billion. enacted without any future changes, the effect -- the repeal would widen future

deficits. we think that it is difficult to get a good sense of dollar figures in an economy with rising prices and that is growing. we said that repeal of the legislation would increase federal deficits in the second decade and a broad range of 1.5% of gross domestic product. you want to convert that yourself to dollars as some of the members of the committee have. for our purposes, we think it is more constructive to report the number in that sense. >> ok. but the average american does not understand that percentage of the gdp. in our calculations, has not been, mr. chairman, widely accepted the that it is in the

range of $1 trillion. >> yes. on $0.30 trillion -- $1.30 trillion. so one-half of 1% would translate into $1.30 trillion. >> ok. i think it is pretty clear, as we go forward, we will have a slowed economic recovery because we helped all the states for two years with massive infusion of money into the states that people do not ordinarily see, such as medicaid spending as well as education. we enacted a health care bill that, from a physical standpoint, does help the economy -- from may fiscal standpoint, does help the economy of close to $1 trillion in the next 10 years.

so let me conclude by asking you -- now, if you would -- let's get a fine point on this on social security. we went through a long discussion of that with one of the other senators earlier. what is it that is happening in or about the year 2007 with social security that we need to underscore. -- underscore? >> the social security trust fund will have redeemed all of the bonds that it holds and it will have incoming peril tax receipts that are not sufficient to pay the benefits -- incoming payroll tax receipts that are not sufficient to pay the benefits under current law. the full benefits could not be paid without some action by

congress and to increase the money going into the trust fund or reduce the benefits being paid out. >> ok, that is 26 years down the road. what will happen 10 years down the road with social security? >> there are increasing numbers of beneficiaries. at the end of the decade, there will be about a third as many social security benefits as there are today. that will increase benefit payments. but there will be enough money coming in and money in the trust fund. actually, there is a picture on the back of the outlook shows the path of the social security trust fund. if you want to check, it is on page 123. the trust fund, and our estimate, the trust funds

together will be running a surplus at the end of the decade, including the interest payments they receive from the treasury on the bonds in the trust fund. i should mention perhaps that to disability -- there are two trust funds and are legally separate. the disability trust fund will be exhausted in 2017 and we need further action to pay benefits after that. >> may i just say that we have gone beyond the time? >> i have. as you have been very generous and liberal with other members of congress, may i conclude with this one question? >> go ahead. >> at the end of this 10-year decade, what is the effect of the trust fund of social security on the operating budget deficit of the u.s. government?

>> i am not sure what you mean by operating, senator. >> the budget deficit that we are working on. >> social security, there will be a surplus, as i said, reflecting the direct flows from payroll taxes and benefits, but also interest payments to the rest of the government. including interest payments, social security will be in deficit. the benefit payment will exceed the collection to payroll tax receipts and other courses of revenue. apart from any interest payments from the rest of the government to the social sector a trust fund, it will be in a desperate situation. the dedicated revenues will fall short of the benefit payments promised. >> thank you. we are now past the hour of

12:30 p.m. we promised to get the director out by that time. so that would mean that senator tune would not have time to ask questions. because he is from south dakota and i'm from north dakota, that seems fair. [laughter] at least to this senator. but i am sure it does not sound fair to the senator from south dakota. the senator from south dakota is recognized. >> thank you. i welcome the opportunity to serve on this committee. there are big issues being debated here. i look forward to engaging in that debate. i want to thank you for your service and willingness to take on another stint here in what is, under the best of circumstances, a very difficult job, but, under these circumstances, and even more difficult job. you touched on this a little bit in response to some questions already. chairman greenspan recently said

that the odds of a debt crisis and the next few years is probably 50/50. i know you have trouble when define that, but what is your view? >> i think it is very difficult to make an assessment of that sort. the crisis depends not just on the existing level of debt. i think it depends on the projections of debt. in this case of some countries, it means how much that they had to roll over a short time. it depends on the willingness of foreign investors to hold the assets of this country. and it depends most crucially on investors produce -- investors perception of what legislation is being enacted.

things generally turn out badly unless they correct course. but exactly what the to pinpoint might be is beyond our analytic capacity. >> but the odds were some blogger we wait, correct? >> right. that's relative to the size of the economy and a hired gets -- debts relative to the size of the economy, the greater the fiscal crisis. >> you spoke in response to some questions about the fiscal impact and energy costs. you talked about $100 per barrel of oil, which is what we are approximating now. that is one thing. if it were to go up to $150 per barrel, have you done some sensitivity analysis about how that impacts inflation? how much of the inflationary assumptions that you maker based upon the cost of energy? >> energy is certainly important

for our projections of four overall consumer prices. it -- of overall consumer prices. it matters a little bit because some amount of the increase in oil prices and the price of energy more generally will be passed through to the cost of other goods and services in a way that it could be built into the underlying inflation process of the economy. on a year-to-year basis, the changes in the price of energy affects the household budget. but those movements tend not to become ingrained in the inflation process. over the past two decades, the similar point can be said about the prices. it is important to household, but they do not seem to get built into the air inflation prices as they rise and fall. i don't think it is as large a

risk for inflation over the long run as one might worry. >> perhaps the biggest factor impact on rates, if inflation starts to pick up, the markets will start demanding a premium pour that. and that impacts our barn costs and everything else. how confident are you in your inflation assumptions? based upon what you see globally right now, a lot of european countries and asian countries are experiencing upticks. we saw a little bit in december, probably not as much as other places in the world. but we got to where we started having an issue with inflation. i suspect there's a correlation between inflation and interest rates and will drive borrowing costs. what is your level confidence in your assumptions with regard to

inflation? >> you are right. if inflation goes up, interest rates will go up, too. that would create for the damage for the federal budget. we do not think inflation will get high. it is currently below the rate that the federal reserve seems to view as a system with their mandate for price stability. it is falling -- it has fallen a good deal in the past two years. it has been consistent with a lot of evidence that, with tremendous amount of people are unemployed and a tremendous amount of its secret is not being used, firms restrain price increases and inflation comes down. as the economy recovers, we think that inflation will move back up, but we see no reason why it would move above the range that the federal reserve is aiming for. the fed balance sheet come as a rebuttal understand, is very large and we need to withdraw the liquidity to prevent

inflation from going up. but we see no obstacle to their during that period stems from turbot -- statements -- during that -- but we see no obstacles to their doing that. >> you said that it would include an additional $1.25 quarter. what does a 1% in interest rates add to the borrowing costs that we have today? the number i saw in the 2012 estimate is that interest will be at or exceed the amount that we spend on national security. if we are assuming that number

or thereabouts, you saw a 1% increase in interest rates -- what does that do to the annual finance charges and borrowing costs for the federal government? >> if an increase occurred right now, it would not raise interest costs that much in the near term. much of the debt -- you have a fixed rate. some of the pattern that we show for rising interest rates, it rises over time. by 2015, it would be about $100 billion in that year. >> that is a one percentage point increase annually. >> by the end of the decade, it would be about $200 billion per year. it is growing because the debt is growing rapidly. that is in addition to maturing securities. >> all right. mr. chairman, my time is expired. >> i think the senator.

>> for a moment, like to follow- up on this point. i think it is very important for people to understand. in a forecast, you are trying to give us the best assessment. critical variables, your turn to give us what an assessment on growth, interest rates, rate of inflation, and how that comes together to affect federal expenditures and revenues to give us an assessment of what is happening to the deficit and debt. many economists have told us that they do not believe the economic world is perfectly predictable with respect -- especially at the brakes. when something turns, it can turn rapidly and no forecast

tends to capture that accurately. how would you assess the risk of the basic underlying assumptions in the forecast that you provided to assist your day? on economic growth and inflation and interest rates, of those three, which are you most concerned about in terms of your underlying forecast not coming true or being of some significant variants? >> mr. chairman, i worry about all of them. enters rich or the one that can move around most dramatically -- interest rates are the one that can move around most dramatically.

it is the most terrible. all three are very important to the federal budget -- it is the most variable. all three are very important to the federal budget. those are the three that we examine. i would hate to convey a sense that i am not worried about any of them. but i think the interest rates are the ones that are the most local and, given the government's fiscal position and the fiscal trajectory, they're the ones that are of the greatest risk. >> thank you for that. i think it is important that we have that on the record for the benefit of the committee. senator sessions. >> is it not a fact that the fed is artificially keeping the interest rate low through the quantitative being? there is a limit in some haunts about how much that can utilize.

>> the fed is keeping interest rates low. i wouldn't describe the current situation as any more artificial than what they normally do. they move interest rates up and down to affect inflation and the path of the economy. it is right that they have pushed interest rates down, both the federal fund rate and also the interest rates with a longer maturity they have pushed down through longer processed through quantitative easing. >> someone could interpret your testimony as saying that the health care bill, if eliminated, would raise the deficit. under one method of accounting, perhaps that is so. but, under these circumstances, i have to say, in my view, it is

not accurate. we know that medicare will be going into deficit. and they will call their bonds. it is not as if we do not know what side of this 10-year window what will happen. the united states treasury spends money on a new program and that money is borrowed from medicare and medicare, we know, is heading into default. it increases the debt of the united states. debt.creases the internal tha it increases the overall debt of the united states. >> your correct. it increases the internal debt. i agree that medicare will redeem the bonds at some time in the future. that obligation can only be met by revenues that are available in the future. when i refer to deficit

affects, and refer to my many predecessors. you're correct -- i refer to my many predecessors. you are correct. let me go back one more time to the internal debt, the gross debt. i agree with you on the effects of gross debt. the way that cbo looks at budgets, we focus on the unified budget, the debt held outside of the government and held by the public. the initial projections of spending for medicare and social security and medicaid and so on going forward. we think that the best way to assess the current financial state of the government in terms of the immediate obligation is debt held by the public or debt net financial assets.

the way to look at how the fiv government -- the future medicare payments are not lost. they appear in the projection of the spending revenues that i have shown that lead to that the debt that most of this hearing has been about. i understand that there is different ways of looking ahead pieces of the budget that may be useful to you and others for some purposes. >> is it your policy decision to use a unified shore? is that statutory or congressionally mandated that you use a focused unified budget score? >> that began in the 1960's with the commission on budget concepts. what that commission did was

that, at the time, there were a lot of pieces of the government where money was being kept track of, observe separately. i think most budget experts in the 40 some years have found that it is most effective to look of the budget of the government as a whole and assess the demands on credit markets and the crowding out the private borrowing and assessing the government's fiscal production. it does not mean all those people have been right, but it has been the standard in place. >> it has been standard and you have made clear how you accounted. i am not criticizing you. >> we have a budget responsibility in this committee. we understand that economists look at this and they prefer looking at it on a unified basis. the problem of leads to use,

when you look at this from a budget perspective, that alters your view. the hard reality is that all of this debt has to be serviced. and it has to be serviced out of current income. the frustration that some of us have had and that the press tends to focus on is the unified concept. we understand that. that is what affects overall borrowing by the government. on a unified basis, when you look at everything coming in and everything going out, that is a unified basis. the problem that we run into in a budget context is that those bonds that social security holes that are not real assets, the redemption of those bonds can only occur out of current income. what has been happening from a budget perspective is that the

general fund has been borrowing from social security and we borrowed well over two dollars trillion. that money has to be paid back. how will it be paid back? it will be paid back by the other general expenditures of the federal government being reduced to make way for the payments we have to make on those bonds. so it has a very specific and dramatic impact on budgets. we have been joined, in effect, a subsidy from the social security trust fund of several hundred billion dollars per year. that is about to change. in fact, it will change. i want to correct something i said earlier. alice working on the old forecast that social security -- i was working on the old forecast of the social sure you would go cash-in five years.

but it has gone terminally cash- no negative now. >> yeas. >> instead of having several hundred billion dollars a year coming in from social security that we could send somewhere else, those days are over. those days are over. >> yes. the bonds held in the social to treat trust fund and those in the hospital veterans trust fund are much less than the future obligations. that's why we say that they will swap their resources at some point. so the projections we do for spending for social security and medicare under current law capture all of the benefits that would be paid under current law. in that sense, the gross debt you're talking about is only capturing a subset of the future obligations.

if you look at our projections for total spending and total budget deficit over a decade and beyond, it does not just those for which there are bonds tucked away. and there are things in gross debt that may not reflect future obligations. it is not just social sector across. that is a big part of it. there are two $0.30 trillion held by other government $2.3unts -- there are two 0. trillion held by other government accounts. >> again, we recognize the professional job that cbo does. and we respect that there has to

be an independent scorekeeper in your id. we also know that these things -- >> all we have got. >> yes. we know that these are based on assumptions and up to make assumptions about growth, inflation, an interest-rate. and we know that they will all be wrong. there will be wrong because we can look back in history that they have been wrong in the past and are likely to be wrong going forward. but they're the best and most professional estimates that we can have the time and that really has to be what governs our decisions. let me just conclude by saying that i think we will leaneeded o focus more brilliant talents and their budgetary effects longer- term at some point. i know we do not have the schedule at this point. i will talk with senator

sessions about this. there is so much misunderstanding, i find, in the general public and in the news media with respect to the liabilities of the united states. i think we may need a hearing just on that. a lot of new members that make them understand how these funds flow and how the budgetary impact far, as well as other economic impacts. with that, thank you very much. >> thank you. >> we stand adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010]

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