Transcript: Q&A w/ Sen. Chuck Grassley on the CBO’s 2014-2024 budget & economic outlook

Partial transcript of Q&A with Sen. Chuck Grassley (R-Iowa) on the Congressional Budget Office’s (CBO) 2014-2024 federal budget and economic outlook. The Senate Budget Committee hearing was held on Feb. 11, 2014:

Sen. Chuck Grassley (R-Iowa):
…I want to continue that discussion but I want to look at the macroeconomic impact rather than the specific number of jobs or what’s related to what people can do or not do.

I’d like to ask you about the lackluster economic recovery in the labor market. We already know that the labor force participation rate is at the lowest point since 1975 although I guess last month it ticked up just a hair.

CBO now projects that the Affordable Care Act would reduce the number of full-time equivalent workers by about 2 million by 2017, 2.5 million by 2024. Obviously a result of some people choosing to not work at all or others choosing to work less.

The fact is it is a disincentive for some people to work, resulting in a decrease of labor supply. So, getting to the questions. To grow the economy and increase economic opportunities, we need more workers and ought to encourage people to work. What effect will this have on the economy and GDP growth?

Douglas Elmendorf, Director of the Congressional Budget Office:
So, Senator, the reduction in the supply of labor that we estimate would result in the Affordable Care Act pulls down GDP, pulls down investment, pulls down tax revenues relative to what would be the case otherwise.

Sen. Chuck Grassley (R-Iowa):
So simply put, it is not in our economic interest to shrink the size of the workforce?

Douglas Elmendorf, Director of the Congressional Budget Office:
Well, it’s not in the interest of GDP to reduce the workforce… [Interrupted]

Sen. Chuck Grassley (R-Iowa):
…Well, GDP is more for more people. And if we’re going to have lower GDP, we’re going to have more people in this country and more people are going to have less. You’ve got to expand the economic pie if more people are going to have more. It seems to me like it’s very basic to America to have more for more people.

…Would it be fair to say that discouraging people to work is harmful to our economic growth and diminishes an individual’s economic opportunity?

Douglas Elmendorf, Director of the Congressional Budget Office:
It’s harmful economic growth, Senator. I don’t want to speak to how individuals feel about this because there are pros and cons. But it does reduce the economic growth.

Sen. Chuck Grassley (R-Iowa):
According to CBO, federal revenues are expected to reach $3 trillion this year or 17.5% of the economy, which is just a little bit below our 40-year average. Over the 10-year window, revenues are expected to grow at the same pace as the economy and average about 18.1% of GDP. Conversely, federal spending for 2014 will be 20.5% of GDP, which matches about a 4-year average. CBO projects the outlays will grow faster than the economy over the next decade and will equal 22.5% of GDP by 2024. What is the economic impact of spending that consistently outpaces revenue and secondly, doesn’t this demonstrate that we have a spending problem that’s fiscally unsustainable?

Douglas Elmendorf, Director of the Congressional Budget Office:
Yes, Senator. We think the federal budget is on an unsustainable path. As you understand, when spending outpaces revenues for prolonged periods of time, especially after we get out of this current economic downturn, then that extra – those deficits would lead to an accumulation of federal debt, that debt crowds out some private capital investment, which reduces GDP and wages and incomes relative to what they otherwise would be. In addition, as I noted, the rising debt reduces your and your colleagues flexibility to respond to unexpected challenges that arise and raises the risk of a fiscal crisis down the road.

Sen. Chuck Grassley (R-Iowa):
Since CBO’s previous baseline budget projection in May 2013, you’ve raised the estimate of the cumulative debts between 2014 – 2023 by $1 trillion. According to CBO, most of the increase in projected deficits result from lowered economic growth and thus lowered tax revenue.

First question, can you describe what economic factors have led to the lowered economic growth projections? And secondly, can you describe what the impact the federal debt at 79% of the economy will have on economic growth?

Douglas Elmendorf, Director of the Congressional Budget Office:
So, Senator, the second question first. The high amount of debt – historically high amount of debt – that we project throughout the coming decade will diminish economic growth by the end of the decade by crowding out capital investment and reducing our ability to produce.

The downward revision to our projection of GDP actually stems from a large collection of factors, no one of which was dominate but almost all of which ended up going in the same direction. We looked at revised data from the Bureau of Economic Analysis and the comprehensive revisions of national incomes last year. We reassessed how close we thought actual output would get to potential output in the second half of the decade. Historically in fact there’s been some shortfall there, and we built that into our projection this time. We took a new look at the effects of the Affordable Care Act on the labor force as we’ve been discussing and a number of other factors as well. The collection of those factors brings down our estimate of real GDP – inflation adjusted GDP – by 2% at the end of the 10-year relative to what we thought before. We’ve also brought down price level so that nominal GDP in our projections is 3.5% below what it was before, and that’s the dominant factor in our output revision to projected deficits.

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