Transcript: Q&A w/ Rep. Paul Ryan on the CBO’s 2014 budget & economic outlook

Partial transcript of Q&A with Rep. Paul Ryan (R-Wisconsin) on the Congressional Budget Office’s (CBO) 2014 federal budget and economic outlook. The House Budget Committee hearing was held on Feb. 5, 2014:

Rep. Paul Ryan (R-Wisconsin):
I have a few questions about the health care law and how it’s affecting the labor market. What is your best estimate of the effect that Obamacare will have on the total number hours worked? Which is the issue we’re talking about. I just want to make sure we accurately understand what it is you’re saying.

Douglas Elmendorf, Director of the Congressional Budget Office:
Right. We think that the Affordable Care Act will reduce the total number of hours worked in the economy by between 1.5% and 2% between 2017 and 2024 relative to what would have happened in the absence of that act.

Rep. Paul Ryan (R-Wisconsin):
What is that in equivalent FTEs? Full-time equivalent workers?

Douglas Elmendorf, Director of the Congressional Budget Office:
So that – so, given the fact that the – so the calculation that we’ve done to translate that suggests that’s equivalent to between 2 million and 2.5 million production in full-time equivalent employment.

Rep. Paul Ryan (R-Wisconsin):
So, just to make sure everybody understands this and I think reading the report – 2 million equivalent in 2017, 2.3 million equivalent in 2021, and 2.5 million equivalent in 2024. Right?

Douglas Elmendorf, Director of the Congressional Budget Office:
Yes, Mr. Chairman.

Rep. Paul Ryan (R-Wisconsin):
So, just to understand this. It’s not that employers are laying people off. It’s that people aren’t working in the workforce, aren’t supplying labor to the equivalent of 2.5 million jobs in 2024, and as a result of that lower workforce participation rate, that less labor supply, lowers economic growth.

Douglas Elmendorf, Director of the Congressional Budget Office:
Yes, that’s right, Mr. Chairman.

Rep. Paul Ryan (R-Wisconsin):
So, who are these workers? …Who are the people typically in this category? What kind of worker from an income scale side are being affected by this?

Douglas Elmendorf, Director of the Congressional Budget Office:
So, the effect is principally on the labor supply of lower-wage workers. And the reason is that what the Affordable Care Act does is to provide subsidies focused on lower and lower-middle income people to buy health insurance. And in order to encourage a sufficient number of people to buy an expensive product like health insurance, the subsidies are fairly large in dollar terms. Those subsidies are then withdrawn over time – withdrawn for people as their income rises.

And by providing heavily subsidized health insurance to people with very low-income and in withdrawing those subsidies as income rises, the act creates a disincentive for people to work relative to what would have been the case in the absence of that act.

These subsidies, of course, make those lower-income people better off. This is an implicit tax. Not the sort of tax we normally think about where if the government raise our taxes we are worse off and face a disincentive to work more.

By providing a subsidy, people are better off but they do have less of an incentive to work…[Overlapping audio]

Rep. Paul Ryan (R-Wisconsin):
…I understand better off in the context of health care. But better off in inducing a person not to work who is on the low-income scale, not to get on the ladder of life to begin working, to getting the dignity of work, getting more opportunities, rising their incomes, join the middle-class, this means fewer people will do that. That’s why I’m troubled by this.

In your report, you know, we’re seeing a significant decline in labor force participation rate as the population ages. That’s figure 2.8. And I’ll just make a point here. This is what’s so concerning about this. If I understand your point, you know, a big part of this is something we already knew, which is boomers are retiring. So we’re effectively basically doubling the amount of retirees we have in the country over a generation and far fewer people are following them into the workforce.

I think – just off the top of my head – something like 100% increase in retirees and only like a 17% increase in the workers on the mend. So, that’s already a problem where we’re not prepared for the boomers and their retirement.

But what this is doing is it’s adding insult to injury. You’re saying because of government policies, as the welfare state expands, the incentive to work declines, meaning grow the government, you shrink the economy. Fewer people will be working and the economy will be slower as a result. We have about $1 trillion in less revenues because of slower economic growth from the last forecast, which goes to the deficit, to the debt, and makes us that much less prepared to get ready for the baby boomers and to pay off this debt.

So, that to me is just jaw-dropping.

If you look at this budget – I’m rounding here – Social Security, Medicare nearly doubled over the 10 year window. Medicaid more than doubles. But interest on the debt quadruples. Is that about right?

Douglas Elmendorf, Director of the Congressional Budget Office:
In nominal dollars, yes.

Rep. Paul Ryan (R-Wisconsin):
So, your baseline shows us that adding about $10 trillion to the debt over the next 10 years, which is a 57% increase in the amount of the national debt. At the same time, interest payments, as I mentioned, quadruple to $880 billion by 2024.

Here’s what I’m really worried about. You assume fairly stable interest rates. You assume a normalization of basically no inflation on the horizon over the decade, and the 10-year goes to 4.8% or 5% at the end of the window.

Douglas Elmendorf, Director of the Congressional Budget Office:
Yes, 5%.

Rep. Paul Ryan (R-Wisconsin):
We’ve got a $4 trillion expansion of our monetary base. We are in uncharted territory with the respect to monetary policy and the Federal Reserve. They’ve just begun to normalize. We’re already seeing reverberations in the Third World and the emerging markets, and they’ve only tapered a little bit. What happens if interest rates don’t go as we hope they do? What happens if we have a spike in interest rates, say, for instance, 1%? What if interest rates are just 1% higher than what you’re projecting to these interest payments?

Douglas Elmendorf, Director of the Congressional Budget Office:
So, as you know, Mr. Chairman, we try to set our forecast to be in the middle of a distribution of possible outcomes. We think interest rates could be higher than we project, and we think they can be lower than we project.

Rep. Paul Ryan (R-Wisconsin):
So give me a sense of 1%.

Douglas Elmendorf, Director of the Congressional Budget Office:
We offer in Appendix D of the report, as you know, Mr. Chairman, rules of thumb for how changes in economic conditions would affect the budget. These are meant to be used only roughly. But the rough estimate is that an increase in interest rates of – interest rates being 1% higher than we project for the entire decade would increase the deficit by about $1.5 trillion over that period.

And correspondingly, interest rates that are 1% lower than we project over the entire decade would reduce the deficit by about $1.5 trillion.

I would say, Mr. Chairman, there is upward pressure on interest rates from the large amount of federal debt and we take onboard in our projections. There is downward pressure on interest rates from the aging of the population. Economy would – lower overall economic growth tend to have lower interest rates. We’ve taken that onboard in our projections as well.

And we do not see any sign of [incomprehensible audio…] inflation. Inflation over the past year has been unusually low, and inflation over the last half dozen years has been at or below the Federal Reserve’s goal 2%. So, we do not see inflation as a substantial risk going forward, although macroeconomists learn to never say never.

Rep. Paul Ryan (R-Wisconsin):
Yeah, I mean, especially 10 years out. It’s pretty hard to predict.

Here’s the issue: I think you could make a good case that the Federal Reserve has been basically bailing out fiscal policy for sometime since the crisis by keeping interest rates artificially low and depressing the true fiscal picture that we have.

Unfortunately, Congress did not take advantage of that moment to lock in a real fiscal consolidation, a long-term debt reduction plan, tackle our entitlements, which is what our budget that we passed three years in a row did. Balance the budget, pay off the debt, dealt with the entitlements.

Now, the federal reserve is normalizing. Now, they’re basically pulling back – they’re still very loose because, I think, $65 billion a month…?

Douglas Elmendorf, Director of the Congressional Budget Office:
As they would say, they’re still buying more assets.

Rep. Paul Ryan (R-Wisconsin):
They’re still buying more; they’re still expanding just not as fast as they were before. But they’re showing signs of normalization.

We’ve never been in this territory before. We’ve never had this kind of a balance sheet. It’s all new. If they get it wrong, if unforeseen things happen, it’s a $1.5 trillion increase in deficits.

So, time is running out. We are looking at the fact that we squandered the opportunity in the last five years to do something about this. And in the future, it’s that much more uncertain because monetary policy isn’t going to be bailing us out like it used to be. That’s my big concern.

Let me ask you one point in relation to the driver of this. Figure 1.2 page 15 of your report…It compares where we were in 1974 and where we’re going to be in 2024. We’re on track to increase the deficit 10 fold over the next decade compared to ’74. Meanwhile, if you look at the upper right side of this, we will have cut defense in half, we’re going to be collecting a full percentage of the economy more in revenues, given these facts, what is driving – just so people are clear – what is driving the ten-fold increase in deficits?

Douglas Elmendorf, Director of the Congressional Budget Office:
It’s growth in spending for Social Security, Medicare, and Medicaid above all else driven by the aging of the population, by expansion of health insurance subsidies, and by rising health care costs per person.

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