Hearing of The House Budget Committee - The President's Fiscal Year 2010 Budget

Hearing of The House Budget Committee - The President's Fiscal Year 2010 Budget

HEARING OF THE HOUSE BUDGET COMMITTEE
SUBJECT: THE PRESIDENT'S FISCAL YEAR 2010 BUDGET
CHAIRED BY: REP. JOHN SPRATT JR. (D-SC)
WITNESS: PETER ORSZAG, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET

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REP. JOHN SPRATT JR. (D-SC): I call the committee to order. The committee convenes today to consider the administration's request for a budget for the year, Fiscal Year 2010. President Bush has left President Obama an economy in crisis and a budget in deficit. Spending will overtake revenues by an unprecedented $1.3 billion -- trillion during this fiscal year alone.

President Obama has responded with a budget which shows that he's not flinching, or stalling, but meeting the challenge head on. The president has recognized that we have not one but two deficits. The first is an economy clicking on four cylinders, running at 6.8 percent, or one trillion dollars below its full potential. To move our economy closer to its potential, the president has signed into law a package of stimulus measures totaling $787 billion -- trillion -- billion dollars, we're in the stratosphere. He then turned to the budget and at the White House summit stated his determination to cut the deficit by half by 2013.

It's almost impossible to balance the budget when the economy's in recession, even harder when we do what we must to make the economy better, because it frequently makes the deficit worse, at least through the short run, but here's the stark reality that confronts us this morning. The deficit that President Bush left behind will constitute 12.3 percent of GDP.

To be fair, if you simply take measures that are solely contributable and confined to the Bush administration, it's nine percent of the GDP. In any event, it's a substantial number. And here is President Obama's response. Over the next four years, under his budget, the deficit will be pared down to 3.1 percent, or three percent of GDP for the year 2013. That's an ambitious goal. President Obama's budget slices the deficit by more than half, to $533 billion dollars in five years.

But it's not so committed to deficit reduction that it overlooks other compelling needs. It takes on topics, indeed, that have been ignored by earlier budgets as too tough to tackle: climate change, health care for the 46 million that are uninsured. And it slows down defense spending and fixes the alternative minimum tax. Now critics will single out instances where additional revenue is raised, for example, by allowing certain concessions to upper bracket taxpayers to expire at the end of 2010.

But the bigger picture will show that this budget leaves in place the middle income tax cuts adopted in 2001 and 2003, the ten percent bracket, the child tax credit and marriage penalty relief. The budget index is the alternative minimum tax to keep it from burdening middle income tax payers, for whom it was never intended. It extends the estate tax at 2009 levels, and it helps working families by renewing make work pay. More detail is needed before we can write a budget resolution. And in that connection, it's important to note that some of the President's initiatives must be implemented via reserve funds yet to be funded.

So this is just the beginning. But it's a bold beginning for the 2010 budget process. Many in congress, myself included, are pleased to see the deficit decline through 2013, but we want to see it declining thereafter. So this is not by any means the end of the process. In the weeks ahead, I hope we can improve the budget in this and many other ways. Now before going further with our testimony from Mr. Orszag, let me turn to Mr. Ryan for any statement he wishes to make.

REP. PAUL RYAN (R-WI): Thank you, chairman, and thank you for this hearing. I look forward to having a number of these hearings on this budget. What a week we just had last week. Let's go through it for a second. On Monday we had the fiscal responsibility summit. On Tuesday we witnessed a very eloquent, ambitious and even inspiring speech by the President of the United States echoing those themes of fiscal responsibility. Then on Wednesday congress passed a bloated $410 billion dollar spending bill with 9,000 earmarks.

And on Thursday we received the mother of all budgets; a truly sweeping transformation of the federal government, the likes of which we have not seen since the New Deal. Finally, on Saturday the president threw down the gauntlet. Rather than echoing the theme of changing the tone in Washington, or bringing people together to forge a bipartisan compromise, he essentially said, you're either with me, or you're against me. He claimed opponents of this transformative budget are quote, "tools of special interest and the powerful." This is not changing the tone of Washington, or forging a compromise.

This is staking out an ideological conquest. It's playing the oldest political trick in the book, which is, if someone disagrees with you, impugn their motives. Don't debate the facts. Destroy their credibility, and win the argument by default. This power play strikes me as an incredible gamble with the U.S. economy, and with those principles that built this country. Now, the facts surrounding this budget are disturbing. It proposes to bring the size of our government to its largest level ever since World War II. It doubles the national debt in eight years.

During a recession, it seeks to impose a $1.4 trillion dollar tax on our economy: on work, on savings, investment, energy, on manufacturing. Even with the rosiest of economic assumptions, this budget never even comes close to achieving a balanced budget. During the time, we have an insolvency that goes permanently for Medicare and Social Security.

But what's most distressing about this budget is that it takes a decidedly ideological turn away from the principles that built this country and built this economy for the type of governing system we see in Europe that provides the kind of economic and social stagnation we have not seen here in America. You know, I was asked this past weekend, what can Republicans do about this? Candidly, Republicans, we don't have the votes to really do anything about this. So, I guess the question will become this year; will all Democrats march in lockstep with this vision, with this type of transformation?

Our goal, our role, our job in the minority, is the give the American people the facts, to give the American people the truth, and to give the American people a good vigorous and civilized debate over this budget, and to offer them a real choice and alternatives, how we would do things differently. And that is exactly what we intend to do while we have this vigorous debate, and while we ask the tough questions. Thank you, Mr. Chairman.

REP. SPRATT: Thank you, Mr. Ryan. Our witness this morning is no stranger to this committee. He served ably and well as the Director of the Congressional Budget Office before moving on to bigger things, as the Director of the Office of Management and Budget. Dr. Orszag, Peter.

Welcome, welcome to the hearing today. Before you begin, let me attend to a few housekeeping details. I would ask unanimous consent that all members be allowed to submit an opening statement for the record at this point. Mr. Orszag, we welcome you to the committee today. The written testimony of all witnesses will be made a part of the record. You may summarize yours, but you're the only witness today. So take you time, and walk us slowly through it, so that we can get the major points. Thank you for coming. We look forward to what you have to say.

DR. PETER ORSZAG: Thank you, Chairman Spratt, Mr. Ryan, members of the committee. I come before you at a time of great consequence, both for our economy, and for our fiscal future. When the president took office on January 20th, he inherited an economic crisis more severe than any since the Great Depression. Over the past 13 months, three and a half million jobs have been lost, the greatest number since World War II. In December and January alone, 1.2 million jobs were lost.

The economy contracted at more than six percent on an annualized basis in the fourth quarter of last year, and trillions of dollars in wealth have been destroyed, harming workers and families on the verge of retirement. Why has this happened? A central cause was the collapse in credit and capital markets, itself fueled by inadequate oversight, insufficient disclosure, distorted incentives, and excessive conflict of interest.

But the roots do run deeper.

We have lived through an era of irresponsibility, in which we have failed to address deep problems in energy, education and health care, and in which the primary theory of the case was that the only determinant of economic performance was the marginal tax rate on the wealthy, and that the ways to promote market competition was the channel significant subsidies to corporations.

The result is a pair of trillion dollar deficits. The first is the output gap, shown in my first slide, a gap between how much the economy could produce each year, and how much it is producing each year: one trillion dollars a year, both this year and next year. The purpose of the recovery act was to start filling in that hole, jumpstarting the economy, and returning us to a path of economic growth. The second deficit is the budget deficit. And as the next slide shows, under the policies that we are inheriting, we face trillion dollar deficits out over time. And let me just pause and recognize that the influence of the economic crisis itself, over this year and next year combined, amounts to two trillion dollars for the budget deficit.

That comes from $600 billion dollars that reflects a weaker economy, which drives down revenue and drives up spending on things like unemployment insurance. Six hundred and fifty billion dollars in the deficit have been necessary so far, and that may become necessary to address instability in our financial markets, and the $787 billion dollar recovery act, which, as I already noted, was intended to start filling in that output gap. Looking forward, we must change course.

If we don't adopt the policies that are in this budget, the budget deficit over the next decade will be two trillion dollars higher, and we will not have addressed problems in our energy market, in our educational system, and in our health care system. So let me be a little bit more specific about the budget. First, the budget starts by giving an honest depiction of where we stand.

We do not play the budget games that have been embodied in previous budgets, in which you assume that the nation will never again face a hurricane or disaster, in which you assume this alternative minimum tax will gradually overwhelm the tax code, in which you assume that Medicare physician payments will be reduced by 20 percent, and yet Medicare beneficiaries will still somehow have the opportunity to see their doctors, in which you assume that the cost of a war will immediately disappear.

All in, the budget includes $2.7 trillion dollars in costs over the next decade that would have been excluded from previous budgets. That sets a high bar, but it's an honest bar. With the scope of the problem recognized, the budget then starts the process, the hard process, of reducing those deficits, as the next chart shows. In particular, we cut the deficit in half -- sorry, the previous slide -- we cut the deficit in half by the end of the president's first term. Where does that deficit reduction come from?

It comes from four sources; first, eventually the economy will recover, and that does help to reduce the budget deficit. Second, winding down the war will reduce costs. Third, we do seek, after 2011, to restore some balance in the tax code, and that brings in additional revenue. And finally, we take a variety of steps to improve the efficiency of government. For example, by eliminating unwarranted subsidies to middlemen on educational loans, and by improving program integrity, so that the right person gets the right benefit at the right time.

Those two steps alone reduce the deficit by a hundred billion dollars over the next decade. Contrary to the analysis of many pundits, this budget is not a big spending budget. Unlike what has occurred in the past, we pay for our new initiatives in energy, in education, and in health care. Furthermore, if you look at non- defense discretionary spending, that is the basic operations of the government relative to the economy, which is shown on the next slide, that spending; non-defense discretionary spending as a share of the economy, is projected to be 4.1 percent of the economy this year. Under our budget, it would average 3.6 percent over the next decade, and by the end of the budget window it would reach 3.1 percent of GDP, the lowest since the data begins in 1962. This is simply not a big spending budget.

We do, however, reorient our priorities towards long term economic efficiency and productivity in energy, education, and especially in health care. First on energy; the budget includes $15 billion dollars a year in investments to reduce our dependence on foreign oil, and improve energy efficiency. To finance that, along with tax relief in a fiscally responsible manner, the budget proposes a market-friendly, cap-and-trade program on greenhouse gas emissions, which will not only raise revenue, but also help to address the key threat to our planet.

In education, the budget invests substantial resources in early education, since all of the evidence suggests that that has significant payoffs, and also works to improve college access, both by providing more solid funding for the Pell Grant program, continuing the American Opportunity College Tax Credit, and simplifying the application process so that more students can aspire to college, and not face unwarranted obstacles in obtaining assistance to attend college. Finally, let me turn to health care. As the next slide shows, and as you've probably seen me repeat over and over again, health care is the key to our fiscal future.

I think that chart illustrates it; the light blue area of the curve is Medicare and Medicaid. It's obvious from that graph, that the thing driving our long term fiscal issue is the rate at which health care costs grow. Health care costs, though, are not only a fiscal issue, they also affect workers, reducing workers take home pay already to a degree that, I think, is underappreciated and unnecessarily large, and also imposes burdens on state government.

For example, rising health care costs are crowding out state support for higher education, which in turn is raising tuition and forcing painful cutbacks at public universities. The recovery act starts the process of health care reform, and there are very substantial opportunities to reduce health care costs without harming health outcomes. I want to return to the next slide, which illustrates that point.

We have very substantial variations in how much health care costs across different parts of the United States, with the darker areas of the country having much higher cost per beneficiary than the lighter areas, for reasons that one cannot explain based on the severity of the condition facing patients in those areas, or the cost of building a hospital, or the salaries for doctors. Rather what varies is the intensity of treatment for the same type of conditions across different parts of the United States. And the kicker is that the more intense, higher cost approaches don't seem to generate better outcomes than the least, less intrusive, less costly approaches.

Researchers at Dartmouth College suggest that as much as $700 billion dollars a year in health care costs could be eliminated from the system without harming health outcomes if we could move to parts of the country where medicine is practiced in the higher cost ways, towards the practice norms in the lower cost areas of the country. The recovery act starts the process that will be necessary to capture that opportunity.

It invests heavily in health information technology, in comparative effectiveness, which measures what works and what doesn't, and in prevention and wellness. The budget builds upon that by creating a $634 billion dollar reserve fund as a down payment on further health care reform, half of which comes from efficiencies in the health system itself, including moving to a competitive bidding process, where the private plans, Medicare advantage plans that cover Medicare beneficiaries, and as the evidence suggests costs Medicare one thousand dollars more per beneficiary than covering those same beneficiaries under the traditional Medicare system.

Now some say that health reform is a luxury we can't afford now. As I have been saying for a long time, I say that reducing costs and improving qualities, quality in health care is a necessity that we to act upon this year. None of this is going to be easy, whether it's from in education, in energy, in health care, responsibly reducing the deficit in an honest way over the medium term.

But as the country music singer Toby Keith once put it, "There ain't no right way to do the wrong thing." And this budget reflects that notion. In being honest and reducing our medium-term deficit by two trillion dollars, and investing in education and energy, and in moving toward a more efficient health care system with lower costs and higher quality, I hope you will all work with us to do the right thing. Thank you very much, Mr. Chairman.

REP. SPRATT: Thank you, Director Orszag. There's several, many significant features to the budget request you brought before us. But none more salient than the one you just discussed, namely health care. This budget creates a health care reserve fund, and calls for funding of $634 billion dollars over ten years. Will that amount of money cover the cost of the proposal that the administration has in mind?

MR. ORSZAG: Mr. Chairman, as we've described, the health reserve fund is a down payment, a very significant down payment on funding a health care reform.

REP. SPRATT: Is that 50 percent, 60 percent?

MR. ORSZAG: It's likely to be the majority of the cost, whether it's 50, 60, 70, will depend on the details of whatever is finally done, and we, you will hear more about this on Thursday when we hold our health summit. And you will hear more about it as we move through the legislative process.

But we are trying to avoid the mistakes of the past, in which, you know, we came to Congress, or an administration came to Congress and said, here's the health plan. We want to work with you in an interactive way to get health care reform done this year, and we're putting a significant down payment on the table to get that process started.

REP. SPRATT: Will that include possibly some revenues from auctioning of emissions limits and cap-and-trade?

MR. ORSZAG: The budget does propose that, but that is, that is sort of in the energy area. In health care we do have a revenue proposal, which would return the tax breaks for itemized deductions, where the top will affect 1.2 percent of taxpayers, return that tax break to the level that existed at the end of the Reagan administration, with the revenue debt after 2011, and with the revenue dedicated to health reform.

REP: SPRATT: Can you outline the basic outlines of the health care proposal the administration will send us? Or is it too early to do that?

MR. ORSZAG: Now, well the budget includes key principles on the health reform. But again, you're going to hear more about this on Thursday. We want to work with you interactively. What we wanted to do in this budget is put some money on the table to get the process started, and that's what we did.

REP. SPRATT: The, the stimulus bill has contained a very significant item, over $19 billion dollars as I recall, for information technology. That's a substantial sum of money. When you were at CBO, CBO wrote a critical analysis of a number of information technology claims to astounding sums of money and debunked many of these. Do you think H I, hospital information, health information technology is a source of real revenue that will pay dividends and help fund the cost of health care in the future?

MR. ORSZAG: Health information technology is necessary but not sufficient by itself to more to a more efficient health care system. So remember that map that I put out with huge variation across the United States in how health care is practiced. If you look across regions of the United States you see this. If you look across hospitals within a region, you see this.

If you look across doctors within a hospital you see this. You see very substantial variation in health care practices, with the higher cost approaches not backed by specific evidence that they work any better than less costly approaches. And health information technology is one of the key ways that we need to flesh out and get the information necessary for doctors to figure out how to practice in a more efficient way. Let me give you two examples.

If you look at in the last six months of life for Medicare beneficiaries, if you look at two of our leading medical centers, at one of them the average cost is $25,000 a year, at another $50,000 a year. And the quality indicators, if anything, suggest quality is better at the $25,000 a year medical center. All that we seem to be getting in exchange for $25,000 dollars a year now, that's your tax payer dollars, is more tests, more visits to specialists, more days in the hospital, none of which seems to actually help other than raising costs.

In addition, if you look within a hospital, it has been demonstrated that if you sit doctor's down and say, do you realize -- two groups of doctors -- that you're practicing medicine in much different ways, they will often evolve toward the less intrusive, less costly approach, but they often lack the data to do that. Most of the data that we have today are based on insurance claims. That tells you what happens to a patient, but not what the result is. Health information technology will help you figure out both what is done to a patient, and what the result is, so that medical professionals can figure out more effective ways of practicing medicine.

REP. SPRATT: Now let me turn to defense spending. You showed us what non- defense discretionary will do, mainly come down as a percentage of GDP over the next several years. What happens to defense spending over that period of time, the other half of discretionary spending?

MR. ORSZAG: Defense spending also declines as a share of GDP. In 2009 it's projected to be 4.9 percent of GDP, and on average, over the next decade it's 3.6 percent of GDP. Secretary Gates has stated that it is time for the Defense department to begin the process of reorienting its priorities, and in particular redesigning the procurement and acquisitions system to become more efficient.

And I am deferring to his judgment in terms of how he does that. But he believes that this budget is a healthy budget for the Defense department, both in terms of the funding for the troops and in terms of providing the beginning point for starting to turn the ship towards a more effective, especially procurement and acquisitions systems.

REP. SPRATT: Our analysis shows, I'm not sure we have a chart ready at hand, but our analysis shows that defense spending over the next ten years, under your budget, keeps pace with inflation and then some, barely above -- there we go. The blue bar being the President's budget, the red bar being current services, which would be existing defense adjusted basically for inflation.

MR. ORSZAG: Yes.

REP. SPRATT: And other changes. Basically the president is just a bit ahead of current services. Just a bit ahead of inflation.

MR. ORSZAG: That's correct for the base defense budget.

REP. SPRATT: But we're fixing the level of expenditure at a pretty high level, historically.

MR. ORSZAG: There has been a very significant increase in the defense budget. And this budget, the President's budget, starts the process of improving efficiency in the Defense department again, especially in the procurement area.

REP. SPRATT: Now for supplementals, you're doing away with supplementals but don't have any numbers for the out years other than the $50 billion dollar plug that you put in the budget after next year. When do you expect to refine that forecast so you can give us the actual numbers that fit into the $50 billion dollar plug?

MR. ORSZAG: Well, first let's step back and realize there will be a supplemental submitted this month for this fiscal year on military operations. In the budget you have details on that. It will be slightly in excess of $75 billion. As you go out over time, as you noted, we have in 2011 and thereafter, a $50 billion dollar placeholder for overseas contingency operations.

You've already started to see some of the policy announcements coming out from the administration on troop levels both in Iraq and in Afghanistan and other areas. There will -- it will be ongoing policy development that is done to back up what the out-year cost may be. Again, maybe I should have said this at the beginning. We've had five weeks in office. But the budget process normally takes five to six months. So we're taking our best guess or best shot at a variety of things. And there's going to be a lot more detail to come with the full budget in April.

REP. SPRATT: Along that line, and one last question from me. At least in the outline of the budget we've got here, the blue book, there's not a lot of attention given to the long run sustainability of the major entitlements, particularly Medicare and Social Security. What is the administration's position on those with respect to this budget? Are you looking upon it as something that has to be done outside this budget separately and independently from it?

MR. ORSZAG: I would take a slightly different view, Mr. Chairman. Again, as the chart that I put up shows, the key to our fiscal future, the key entitlement problem, is health care. And this budget is going to; we want to get health care reform done this year. And in doing so, we want to do it in a way that will help to reduce the long term growth rate in health care costs.

Health care reform is entitlement reform. If we bend the curve on health care, it's the single most, on health care cost growth, it's the single most important thing we can do to get our long term entitlements under control. So, to my mind, given that graph that I put up with the rising Medicare and Medicaid cost, it makes sense to start with health care, which is what we want to do. And then, as my testimony points out, after we've dealt with the key to our fiscal future, Social Security also does face an actuarial deficit, and it would be desirable to address that problem after we have dealt with the bigger one, which as you can see in this graph, is Medicare and Medicaid.

REP. SPRATT: Thank you very much. Mr. Ryan.

REP. RYAN: Thank you, chairman. As you've noticed, I have a few -- couple of criticisms with this budget.

MR. ORSZAG: I did notice.

REP. RYAN: But let me first start with a couple of compliments. Number one, I'm glad to see we're finally putting the AMP in the budget, in the baseline. And you ought to be commended for that. Number two, I'm glad to see you're putting a means test on the Part D benefit, that's something we've put in our Republican budget. You did it, and I want to compliment you for that. And number three, I'm glad to see -- it sounds like you guys are serious about agriculture reform.

It's time we stop subsidizing very large interests in agriculture, in my opinion, and I think a lot of us are going to agree with that. So, those are the good parts I see in this budget. And I just want to make sure we establish that there are things that we like.

MR. ORSZAG: I appreciate that, Mr. Ryan. I do.

REP. RYAN: I want to talk about the economic assumptions in this budget. Looking at your, you see it here, but, looking at, your Table S-8 in your budget, the blue chip consensus forecast is about a percentage point lower, meaning your economic assumptions over the first five years are about a full percentage point higher that the blue chip forecast.

Your inflation rate is about a half a percentage point lower over the next five years than the blue chip. Now, have you run the numbers to show what the deficits would look like if the blue chip consensus forecast prevailed? I mean, obviously I hope your forecast prevails. But they seem to be much higher than anyone else's forecasting, CBO or the blue chips. Have you run those numbers and shown what the deficit impact would be if those prevailed?

MR. ORSZAG: Actually, I'm glad that you asked this question, because we like to compare ourselves to CBO, you know, an independent --

REP. RYAN: Sure.

MR. ORSZAG: The CBO analysis was done before the recovery act was enacted. CBO yesterday released a letter on the macroeconomic effects of the recovery act. If you add in their estimated impact from the recovery act to their baseline forecast, which excluded the recovery act, you wind up with a forecast that is right in line with the administration's. They have a high and low impact from the recovery act, and we're right in the middle of it. Now since both of those forecasts were done, the incoming data suggests a more negative economic outlook.

REP. RYAN: That was exactly my next question.

MR. ORSZAG: Fair enough. But we do, we have a process here where the assumptions are locked down at a point in time. And, you know, incoming data can wind up being slightly better or slightly more negative than what was assumed when the assumptions were locked in. I just wanted to point out; we are consistent with CBO once the Recovery Act is included in the analysis.

REP. RYAN: But you won't recalibrate those assumptions given the last, you know, period time of economic turmoil. You're going to stick with these current assumptions, correct?

MR. ORSZAG: As you know, the budget process is based on a set of assumptions that are locked down. I don't think it's productive for us to be chasing our tails; in no small part because we're going to get a lot of different data over the next few weeks and months, and we can obviously reassess the situation at the appropriate time in the process at least for the mid-session review if not before.

REP. RYAN: Yeah, I think it's important to point out that the numbers in this budget are staggeringly high. If these scenarios and this baseline don't play themselves out, then they'll be even higher, and that's just something that I think we all have to keep our minds on. I want to talk to you about this, and the media's talked about all this savings you've achieved, the $2 trillion in savings. Isn't about $1.6 trillion in savings in VA from the fact that you had the deflated war costs where you assume surge-level spending in the war for 10 years, inflate those, and then because of the inevitable drawdown that would have occurred under either administration's plan, you call that savings. Isn't that where the bulk of the savings come from? And then, isn't the rest of that savings not actual spending cuts but tax increases?

MR. ORSZAG: Well, let me break that down into two parts. First in regards to the savings on the war, the traditional way of reflecting discretionary spending is to take the base level and project that out over time, which is exactly what we have done.

REP. RYAN: Okay, can I ask you just right there?

MR. ORSZAG: Sure.

REP. RYAN: But the base level you're projecting over time is the surge levels, correct?

MR. ORSZAG: It's the level from 2008.

REP. RYAN: The surge?

MR. ORSZAG: Correct, the last full year of funding that has been provided.

REP. RYAN: So, you assume in your budget that we were going to have the surge for 10 years, even though a surge by definition is up then back down. You assume we are going to be at the surge level in Iraq for ten years, is that correct?

MR. ORSZAG: That's the traditional way in which budget projections have been done. I would also say, I think it is if you just look at it a simpler way of looking at it. We're going to spend $140 billion this year on the war. The president is going to walk that down or end things more quickly than I think would have been the case if he hadn't won the election, and that saves money. So let me also point out that is not the only source of savings in the budget. The gross savings are much larger than $2 trillion.

We have, as I already mentioned, $50 billion in program integrity savings, $50 billion in savings from eliminating subsidies on the middlemen in educational loans. In the health care area, we have $175 billion in Medicare Advantage subsidy reductions. So you go through the budget and add up all the gross savings, and then some of those are plowed back into different areas, including education, energy, and health care.

REP. RYAN: So to go back, 1.6 trillion (dollars) of the savings is because you're saying we're not going to have a surge for 10 years; we're going to ramp it down.

MR. ORSZAG: About $1.5 trillion is because the war ends more quickly under this budget than we think the alternative would have.

REP. RYAN: And you're certain. Discretionary spending, can you bring up the chart Jose, that your non-defense discretionary is shared EDP please. This one, yeah. And this is something we've been battling no matter what administration, no matter what budget. This is something we're always dealing with. I notice you show a pretty precipitous drop in non-defense discretionary percentage EDP.

In 2010, your request here is for the VA a 10 percentage point increase, and then in 2011 a 2.2 percent increase. In HUD, an 18 percent increase for this upcoming fiscal year and a 2 percent increase the next year, transportation a 2.8 percent increase in their budget, and then followed by a negative, a 11.5 percent decrease, labor 4.7 percent increase, followed by in 2011 a 0.8 percent increase. The Environmental Protection Agency in the stimulus package received an increase of 92 percent in its budget. In fiscal year 2010, you're proposing an additional 35 percent increase, and in Fiscal Year 2011, you want a one percent increase.

And I am assuming this does not include cap-and-trade administrative costs because that hasn't been, sort of, implemented yet. Do you think it's realistic in this, you know, we've seen all of these different administrations use, do you think it's realistic that you're going to have these incredible double-digit increases in these agency budgets, and then you're going to have these incredible decreases the following year?

MR. ORSZAG: Well, it's not decreases, it's slower growth.

REP. RYAN: Okay, so --

MR. ORSZAG: I think the answer is yeah because here's the context. From our perspective, there have been key areas that have been under-invested in or starved of resources. Some reprioritization and then once that's accomplished, it will be sustainable to have slower growth rate. So this budget is not based on, those NED numbers, are not based on just kind of making the numbers up in the out years. It is programmatically based.

For example, in 2019 we build into the Commerce Department additional funding because we know the next census will be coming up. So I think this is a very important question. We think there is some reorienting of priorities that's necessary, some readjustment, and then we think it will be sustainable to perpetuate that over time.

REP. RYAN: Yeah, I think the problem around here is the most permanent thing is a temporary increase, and that's what Congress end up usually do with these budgets, and we will join you in helping you restrain the growth of these programs because I think you're going to have a hard task in hand. I recall the last administration was deeply criticized for doing the same kind of thing.

Then, I don't want to take up all of the time, but this is, you know, this is obviously what all administrations start with. They give us blueprints, sort of a Cliff notes version of the budget. You only had five weeks. So we understand that. You're going to bring the big full budget in April sometime.

MR. ORSZAG: Correct.

REP. RYAN: But I am assuming we're going to have a markup in this committee on the budget query so that means there's lots of questions that we would like to get answers to before we start moving a budget resolution going to the floor. So in the interests of time, I'm going to have a lot of, I have some questions I'd like to submit to you, for the record, to get more details to what you're planning on rolling out in April so that we can make better decisions when this committee begins to markup the budget resolution. If you can respond to me in these in a prompt way before we actually consider our budget resolution, I sure would appreciate that.

REP. SPRATT: Without objection so ordered. Ms. Schwartz.

REP. ALLYSON SCHWARTZ (D-PA): I thank you, Mr. Chairman and thank you for this first hearing on the budget and Peter Orszag, welcome back. We saw a good bit of you over the last few years and congratulations on your new position and your new challenges for this administration. We are certainly appreciate how much you and how well you've laid out the crisis both economically in this nation and for the fiscal demands on and situation that this country faces and the President and you face, all of us face.

And I think you have made clear that this is a very different kind of budget. It's more honest in laying out our expectations for the future and makes very clear that we need to move towards fiscal balance, recognizing that that's going to be hard to do. And it is very clear about the investments that we have to make if we are going to be economically competitive and certainly, if we are going to be able to grow in the future and meet that fiscal balance.

I did want to follow up specifically on health care. The Chairman did very well, but it is a very big part of, as you said, health care is key to the financial future in terms of meeting our obligations as a nation and meeting our budget goals. And it's also very important to families and to businesses. I hear a great deal about the cost of health care, the fact that it has risen in the last eight years about 75 percent for businesses covering health benefits. It means a lot more of those costs passed along to employees. And of course, I hear from families who are deeply worried about the costs, both their cost sharing and the bankruptcies are often causes when they don't have full coverage.

What I wanted to ask you to flesh out a little bit further, some of what we already have set out in the economic recovery package, a major work; I want to congratulate all of us, at least on this side of the aisle. We did not get the bipartisan support we would have liked, and even though I think there is a good bit of agreement on the other side, on health IT in particular, that we ought to be making this kind of very significant investment and what that can mean for us both moving forward in terms of improving quality and saving lives and saving dollars.

Could you flesh out two things? One is what additional policy changes, reforms do you think that we need to be making not only to affect Medicare Medicaid, but also that could have an effect on the cost in the private sector? And I'm talking about the comparative effectiveness. I've gotten a good start in terms of the $1 billion you've set aside. A lot of questions about how that's going to really improve quality.

Payment reform, physician decision support, and really the kind of savings going forward, these raise some questions and concerns. I wonder if you could flesh that out for us. Basically, I'm talking about what else might you be encouraging us to do so that we can actually see the kind of improvement in quality and savings, and secondly, if you could also speak to if we don't do this what effect it might have on our economic competitiveness and our budget if we, in fact, don't tackle health care costs going forward.

MR. ORSZAG: Well, let me start with that question. Again, remind yourself of that graph with Medicare and Medicaid just rising nonstop over time. If we don't act to reduce the growth rate in health care costs, nothing else, from a fiscal perspective, is going to save us from a fiscal crisis eventually. Those rising costs of health care are going to become so burdensome, not just for the federal government but also for state government and for workers, that we simply have to start the hard process of bending the curve on health care costs.

The Recovery Act takes an important step, as you already mentioned. Health information technology, so that we have more data and not only that, let me just also stop for a second and we shouldn't get lost in policy details and also realize that as patients, I mean I am looking forward to a world in which I don't have to fill out medical forms over and over again every time I go to a new doctor because it's a nuisance that none of us need. But in addition to that, it leads to a more efficient health care system in which errors are reduced and higher quality is produced. Comparative effectiveness is about measuring what works, evaluating what works and what doesn't and then having medical professionals evaluate ways of changing practices so that we get the stuff that does work and not the stuff that doesn't.

And then finally, you already mentioned incentive. Right now, we have a health care system that pays for more care rather than better care, and it is not surprising that what we get is more care. What we want is better care, and the budget includes a variety of proposals from bonus eligible organizations to incentives to reduce readmission rates, to incentives for hospitals, to improve quality, and so on and so on and so on that will start to reorient the payment system towards efficiency and quality and not towards just higher cost.

REP. SCHWARTZ: Well, thank you. I think we're going to be seeing a lot more of this -- but you make a very, very important point, and my time is up, but this is actually intended to not only create efficiencies but improve quality and not in fact limit access to care but improve that quality and that will save lives and save money. Thank you.

REP. SPRATT: Thank you, Miss Schwartz. Mr. Hensarling is next. Let me tell everyone the clock is now working. So when we get down to four minutes, you've got one minute to go, I'll tap the gavel. When you've got five minutes, I'll rap the gavel, okay. Mr. Hensarling.

REP. JEB HENSARLING (R-TX): Thank you, Mr. Chairman. Welcome back Dr. Orszag. Since Congress has become under Democrat control, they recently achieved a trifecta of trillions. We have a trillion dollar government stimulus bill that includes a fleet of cars for government employees, more money for the National Endowment for Arts, more subsidies to Amtrak. Then we had about two weeks later, less than two weeks later, a trillion dollar appropriations bill, first time in our nation's history, complete with thousands of pork barrel projects, one being lobster research protection for mouse habitat.

Now we have a trillion dollar budget deficit to boot on top of that now we have the Democrat administration proposing a budget with red ink as far as the eye can see. Two questions Dr. Orszag, and make sure I have my facts right. At 27 percent of GDP, would this be the largest peacetime budget in our nation's history?

MR. ORSZAG: The budget that we are inheriting, yes, for peacetime.

REP. HENSARLING: I'm sorry. Are you inheriting the budget, or are you proposing this budget?

MR. ORSZAG: Twenty seven percent is for a year in which we are in the midst of a severe recession and includes the steps that have been necessary to address the downturn.

REP. HENSARLING: I'm just looking for a simple -- so the answer is yes.

MR. ORSZAG: Yes.

REP. HENSARLING: Thank you. Also with this budget, would this double the national debt in eight years? Is that true?

MR. ORSZAG: Under current policies, the debt increase would be even larger. We reduce the deficit, but there is still significant debt.

REP. HENSARLING: Is it true that in eight years that the debt would be double from this budget?

MR. ORSZAG: Yes, but again, the debt increase is less than if we fail to act.

REP. RYAN: Can I ask one --

REP. HENSARLING: I'd be happy to yield.

REP. RYAN: Is that if you include the surge lasts for ten years?

MR. ORSZAG: That is if you include the traditional way of doing things, yes.

REP. RYAN: Okay.

REP. HENSARLING: You said earlier in your testimony that you wanted to avoid the mistakes of the past. Let me read you a quote from one of our former Secretaries of Treasury.

Quote, "We are spending more than we have ever spent before, and it does not work. We have never made good on our promises, and after eight years of this administration, we have just as much unemployment as when we started and an enormous debt to boot." You probably recognize the quote; it was President Roosevelt's Treasury Secretary, Henry Morgenthau and that quote given in 1939.

I have no doubt, Dr. Orszag, that you would also have studied carefully the lessons of Japan that had a similar real estate bubble that burst, and I am sure you have studied their loss decade. Recently, The New York Times, not exactly a bastion of conservative thought wrote about the experience where it talks about Japan accumulated the largest public debt in the developed world while failing to generate a convincing recovery.

This is coming from The New York Times, quote, "This has led many to conclude that spending did little more than sink Japan deeply into debt leaving an enormous tax burden for future generations. Among ordinary Japanese, the spending is widely disparaged for having turned this nation into a public works based welfare state and making regional economies dependent on Tokyo for jobs," unquote. My question is given our own history, given the Japanese history, what historical precedent is the administration basing this budget on in its belief that they can borrow and spend our way into national prosperity?

MR. ORSZAG: Well, let me take the Japanese example. I think the lesson from the Japanese example is that the failure to deal aggressively and upfront with problems in the financial system ultimately proved to be a big mistake in which the loss decade occurred. I'm going to defer to Secretary Geithner and other members of the administration's economics team in terms of how to address problems in the financial market, but I know that they are motivated by a desire to avoid that mistake. So I think the key to avoiding that outcome is to get at the nub of the problem that occurred in Japan, which was the sort of 'rope a dope' strategy on the banking and financial market problems.

REP. HENSARLING: Okay. Let's move on to taxes in the limited time I have left. Is it not true that under this budget, we are looking at a $636 billion tax increase that would be a tax on carbon- based energy used by almost everyone in our nation and a tax on small businesses since the overwhelming majority of small businesses pay taxes at the top two individual rates, and if so, how is this going to help the family budget? How is it going to help create jobs?

MR. ORSZAG: Let's talk about small businesses. The budget proposes some tax changes starting in 2011 that will affect the top 3 percent of small business owners. The rest will not be affected, and in fact, many of them will receive a net tax cut through other provisions in the budget, including a 0 percent capital gains rate on qualified stock owned in small businesses. But I think more important than any of that, the problem facing most small businesses today is the lack of economic activity and the lack of access to credit.

The most important thing we can do to get small businesses back on their feet is get the economy moving again and get credit flowing. Budget includes $28 billion in loan guarantees to help small businesses, including through the so-called 7(a) program that's been very effective in the past. I think that is the key to getting them back on their feet.

REP. SPRATT: Gentleman's time has expired. Mrs. Kaptur.

REP. MARCY KAPTUR (D-OH): Thank you. Mr. Chairman, I'd like to begin by saying to my colleague from Texas that there isn't a single member on this side of the aisle that belongs to the Democrat Party. We belong to the Democratic Party, so the party that you were referring to doesn't even exist, and I would just appreciate the courtesy when you refer to our party, if you're referring to the Democratic Party, to refer to it as such. We wouldn't say Republic Party in the instance of the party that you belong to, and I think that that really was unnecessary. I wanted to also --

REP. HENSARLING: Will the gentleman yield?

REP. KAPTUR: Not on my time. We'll just wait, but I think the gentleman heard the message. I'd like to thank Director Orszag, Dr. Orszag, for being here today and say that America needs your razor- sharp mind, and we're really happy to have you in the position that you're in. May I ask you, did the Bush administration in its eight years in office ever produce a balanced budget that was submitted to this Congress?

MR. ORSZAG: No.

REP. KAPTUR: No, it did not. May I ask you of the enormous debt that we are facing, do you have the numbers with you, or could you provide to the record, how much of that deficit is due to unpaid war costs in Iraq and Afghanistan and also money for Wall Street bailouts that was not paid for?

MR. ORSZAG: Yeah, we can provide you with that -- (inaudible).

REP. KAPTUR: All right. Would you say that those together constitute over a trillion dollars at this point?

MR. ORSZAG: Again, it depends how you do the accounting, but the cost of the war in Iraq is close to that figure by itself.

REP. KAPTUR: I thank the gentleman very much and will appreciate those figures for the record. Let me move to the topic of the frozen credit lines, which you referenced on the first page of your testimony and the banking system of this country. I am very concerned about the lack of involvement at full measure of the Federal Deposit Insurance Corporation and the Securities and Exchange Commission in helping to resolve this serious credit crunch problem.

Through TARP, which adds to our deficit every day, the U.S. Treasury has replaced less than half of the capital that mark-to- market accounting has destroyed across our banking system. Do you have the ability as the Director of the Budget Office to convene at the executive level the FDIC, the SEC, the Treasury, and the Fed to conduct an overarching policy discussion of mark-to-market accounting and its contribution to the financial crisis that we are facing?

MR. ORSZAG: Congresswoman, I think that that question is probably best directed to Secretary Geithner and that would be the appropriate official with whom to have that conversation.

REP. KAPTUR: I will ask him that tomorrow, but I'm hoping in your role as you look at the budgets for these different agencies, such as FDIC and SEC, that you might play an important role understanding how these accounting practices work, and we can't possibly, through the taxpayers, keep dumping all this money into Treasury without dealing with the accounting side of the ledger, and I thank the gentleman very much.

Let me also ask you, the enormous challenge to our country is the change in psychology of debt to one of savings. And every American family has to participate in that. Could you, as a leader in the new administration, convene principals in the administration to look at the U.S. Savings Bond campaign in a manner that would create an effort in very small denominations, even down to postage stamp size denominations, selling them like stamps to involve large numbers of the American people?

We'd have to change an entire psychology of the nation. I'm just suggesting that to you. These bond campaigns occur every year. I know who manages them inside the government over at Treasury again. But I think in your role, with your intelligence, you could really have an influence inside that administration, and I would ask you to consider that.

MR. ORSZAG: Well, thank you. And let me actually touch upon saving for a second because one of the provisions that has not gotten very much attention in the budget is something that I think maybe we could all work together on to get done very quickly. The evidence strongly suggests that the best way of getting Americans to save for retirement is to make it easy and simple so that they're automatically enrolled in a 401(k), have the opportunity to opt out.

But again, most of us who have kids or busy lives, we don't want to be handed this big binder by our employer say, 'Wade through this, get back to me if you want to sign up.' We would, at least I would prefer, and I think most Americans prefer to know that if they don't take action something good is happening anyway, and if they want to wade through the binder, great. Then they can make their own decisions. But most of us are too busy with other things to spend the time doing this, and the evidence suggests that that has a big impact. The budget, you have all already moved to make automatic enrollment opt out 401(k)s more prevalent among companies, and that has occurred over the past several years.

The budget includes a proposal to move towards universal accounts outside of Social Security by creating an automatic IRA at those firms that don't offer a 401(k) plan. The point would be that whenever someone went to work at a new employer, the worker would be automatically enrolled in some form of savings vehicle unless they opted out. The evidence strongly suggests that is a very effective way of getting people to save, and I'm hoping that we can actually get that done soon.

REP. KAPTUR: I thank the gentleman. I know my time has expired, and I would just ask for the record, could you please provide an estimate of how many homes you expect to be foreclosed this year in the United States and whether that number is above or below last year's level, and where in your analysis do you account for the trillion dollar trade deficit and how that impacts on GDP? Thank you. Thank you, Mr. Chairman.

REP. SPRATT: Thank you, Mrs. Kaptur. Mr. Garrett.

REP. SCOTT GARRETT (R-NJ): Thank you, Mr. Chairman.

Thank you, Director, and thank you for being here. Again, I just want to echo my colleagues in thanking you for enacting some of the reforms that we have supported in the past such as the AMT patch and so-called Doc Fix and the baseline. And while I certainly don't agree with all of the decisions that you and the administration made on accounting aspects, I do agree with those there.

I do have two questions about some of the accounting methods that you had going forward, and to give you an idea of what I'm talking about, I'm referring back to the other day with what the Department of Treasury and the Fed has done with regard to AIG. Under the latest bailout, the Treasury Department will set up a new $30 billion fund that AIG can draw down from as needed in exchange for preferred stock for the federal government. The Treasury will also exchange $40 billion in preferred shares it already has received at AIG for new shares that quote, "More closely resemble common equity," similar to what the administration did on Friday with respect to Citigroup.

Both of these moves greatly increase the risk to taxpayers if the institutions fail. As I am sure you are aware, preferred shares usually are the first in line to be paid when a company liquidates, but the common shares will be last in line, and these shares will not pay a dividend as well, which in the past would be compared to the interest that we were getting. So without this dividend, or interest payment, and with the substantial increase in risk to the taxpayers, these outlays by the Treasury Department appear to be less and less like a loan, and more and more like a direct outlay.

Furthermore, it was announced that the Federal Reserve will reduce a $60 billion credit faculty in exchange for taking a preferred interest in AIG's subsidiaries such as American Life and American International Insurance Company. The Fed's exposure now to AIG now totals something like $93 billion, and this could put it in line for sizeable losses should the value of those stakes deteriorate. Now, this is just one of many, many unusual acts for the Federal Reserve's terminology. They do it during exigent circumstances enacted by the Treasury Department and the Federal Reserve over the last year and a half.

For example, back on February 18th, a week ago, Secretary Geithner announced plans to double the size of U.S. funding commitments to the GSEs, Fannie and Freddie, to $400 billion, and in March of this year, the Federal Reserve set up a special limited liability corporation to hold the portfolio JP Morgan, which was too risky for them to take and has buy or sale pricing.

Now I refer you also over to what's happening in Britain. The British government there has just announced that they intent to classify as Lloyds of London and the Royal Bank of Scotland as public corporations. Their liabilities now will be assumed of $1.5 trillion pounds, and that will be added to the taxpayers' balance sheet. This reclassification will more than double the British national debt.

So in the budget documents here it says, "The budget supports the administration's new financial stability plan as well as the management of the TARP, emphasizing effective, transparent and accounting programs." In addition, it says, "The President's budget includes $250 billion contingent reserves for further efforts to stabilize the financial system, which would support the $700 billion in asset purchase."

So while I appreciate your desire to make some accounting corrections to anticipate future polices that could be enacted to stabilize the financial sector, my first question is. Do you feel that the OMB has done enough to accurately account for all of the actions taken by both the Fed and the Treasury in your baseline? And secondly, as the Fed continues to take riskier and riskier and riskier actions under their 13(3) exigent circumstances charter, is there any way for us to account for this in the budget?

MR. ORSZAG: And again, what I think we need to do is separate Treasury activity from Federal Reserve activity just given the way the federal budget works. The Federal Reserve activities are reflected in the federal budget only through the transmission of net profits from the Federal Reserve back to the federal government. So a lot of what's happening there is not reflected in the federal budget, and that's always been the case.

REP. GARRETT: And if you want an honest budget, should that not be on the line as much as the taxpayer could theoretically be in directing --

MR. ORSZAG: I think there are complicated issues involved in bringing the Federal Reserve full balance sheet on, you know, consolidate --

REP. GARRETT: Complication aside, should it be included?

MR. ORSZAG: I don't know that I would say it should or shouldn't be included. I think I can understand the motivation for looking both at the budget and the Federal Reserve's activities combined. But focusing just on what's covered by the federal budget, this document does reflect, you had mentioned AIG, as you know, that's covered under the existing TARP legislation that's embodied in the budget.

Another way of putting the same point is we are hearing about large numbers, and there are very large numbers that are involved in the financial stabilization effort, even the part that is covered by the federal budget. If you include the placeholder that we hope is not necessary to stabilize the financial markets, but nonetheless is incorporated to be responsible in the budget, there is something like $2 trillion in purchases of financial assets that's reflected in these numbers. As you know, the way the budget is done, it's on a net subsidy basis and so the number that shows up in the budget is smaller than that, but the gross value of financial asset purchases that is consistent with the numbers in this budget is something like two trillion dollars. Obviously, a substantial sum.

REP. GARRETT: That, and so should we be able to move forward on the British system, then to include even the entire risk, though, that is assumed by these, not just the numbers that you're setting out there?

MR. ORSZAG: What I would say is, again, there's some attempt to incorporate risk in the federal budget already, but it's a partial reflection, so across a whole variety of areas. The treatment of risk in the federal budget, I think, is an important topic. It's not just with regard to financial market transactions, but also with regard to a whole variety of other proposals. This came up with regard to social security several years ago, and how risk was reflected in the budget there. It comes up in area after area, and I would say the treatment of risk in the budget is somewhat inconsistent, and that's an area that would be -- it would be beneficial to move towards a more coherent or consistent system of treating risk in the federal budget. It's not currently the case, and that's going to be difficult work and will take time to do.

REP. SPRATT: The gentleman's time has expired. Mr. Becerra.

REP. XAVIER BECERRA (D-CA): Thank you, Mr. Chairman. Dr. Orszag, good to see you again. Thank you for being here, and congratulations on your appointment. We're hearing quite a bit about the deficit and long term debt, much of which the president, as he's indicated he came into office having to live with. And we all inherit things from our families and otherwise, and we make the best we can with that, and I appreciate that the president is trying to make due with the fact that I don't think he wanted to come into office facing a two trillion or 1.4 trillion dollar deficit, and trillions of dollars in added debt over the next several years, but be that as it may, we appreciate very much that he's come out with an honest budget that really does give America the chance to understand how the government will be, not only collecting revenues but also spending that taxpayer money that it collects.

On health care reform, I appreciate that the president, in his budget, articulates the vision for how we will reform a very broken system where we have some of the best technology and some of the best care, and perhaps the best trained professionals, but still have close to 50 million people without health care. I'm wondering if you could give me a sense. I believe you dedicate about 600, and is it 30 or 40 billion dollars to health care reform?

MR. ORSZAG: Correct, 634.

REP. BECERRA: Now, I don't recall seeing that over the last seven or eight years in the previous administration, where we, in a budget presented by a president, had that much money ready to invest in real, meaningful health care reform. Can you give us a comparison; say for example, the cost of the Iraq war? How much have we spent, more or less, on financing the cost of the Iraq war over the last five or so years?

MR. ORSZAG: I'd have to get back to you with an exact number, but I believe the cumulative cost, as I mentioned earlier, is now in the range of a trillion dollars.

REP. BECERRA: So, we could do health care reform to provide universal coverage, make it far more cost effective for people who have insurance, to be able to send their families to a decent doctor or hospital for far less than the cost of what we've paid so far in our involvement in the Iraq war.

MR. ORSZAG: Well, I would say a couple of things. One is clearly that there's a time dimension to this, but more importantly, I do want to make clear that $634 billion dollars is historic and substantial, but it's only a down payment, and more is likely to be necessary to really reform the system, bring down costs and improve quality.

REP. BECERRA: If you take into account the trillion dollars or so that you estimate for the Iraq war so far, plus the money you projected out that we'll continue to spend, even if we are successful as the president hopes to bring that war to a close, we will have spent significant money that could have been used to take us a long way toward resolving this health care crisis that Americans face day in and day out. AMT ruling. Do you have a sense of how much it would cost over the next several years, ten year window, to try to provide the relief to Americans who never believed that they would ever fall within the kinks, the jaws of the alternative minimum tax?

MR. ORSZAG: Yeah, the budget includes $576 billion for budget relief.

REP. BECERRA: Five hundred seventy-six billion. And didn't the president, taking office, have to live with a financial bailout for the financial services industry totaling, what was it, $700 billion?

MR. ORSZAG: Yeah, again, coming back from the point I made earlier, if you look at the situation the president inherited along with the steps that have been necessary to address it so, the impact of the weaker economy on revenue, the imperative for a recovery act to start jumpstarting the economy, and the need for financial stabilization efforts, the total impact on the deficit for this year and next year combined, is $2 trillion.

REP. BECERRA: So if we take a look at what we did in the past, and realize that, had we had different policies, had we done things differently, we could have planned better for this country and its people. There are many things we could do, including, for example, our small business community. More than 91 percent of small businesses have income of less than $250,000. If I recall correctly, with the different initiatives and proposals you have, small business men and women and their employees are likely to receive tax cuts under the president's policies and budgets that you have proposed.

MR. ORSZAG: That's correct. And again, I want to come back to the point I made earlier, which is, in addition to that -- and look; I started and ran a small business. The most important thing for small businesses is economic growth and access to credit, and that is what we are focused on doing over the next year or two. The recovery act is intended to get the economy moving again. There are proposals both as part of the financial stabilization effort and in this budget to get credit flowing again to small businesses so that they can play the role in our economy that they traditionally have played.

REP. BECERRA: I appreciate your being here. Thank you, Mr. Chairman. I yield back.

REP. SPRATT: Mr. Austria? Mr. Harper, excuse me.

REP. GREGG HARPER (R-MS): Thank you, Mr. Chairman. And congratulations and good luck in your job. I noticed with the president, I know it's going to be a lot of fun. I know in the president --

MR. ORSZAG: Everything's relative.

REP. HARPER: That's right. In the president's speech last week, I noticed he started out by saying that we had gone to a new high level with importing foreign oil and then a little bit later on in his speech, I recall that he said we pay a high price for our dependence upon oil. He did not say on foreign oil. And are you anticipating that we getting away from, in this budget, from going after our existing supply of fossil fuels that we do have available? Is there anything in this budget that calls for increased domestic reliance on oil and gas that you see?

MR. ORSZAG: I guess the way I would put it is, given the dependence on foreign oil that exists, we can either try to heavily subsidize and promote to sort of beyond what the market would otherwise produce, domestic production, or we can try to move towards a cleaner energy in the future, in which overall dependence on oil is reduced and that, then, has a very significant benefit of also reducing our dependence on foreign oil. The budget chooses that latter course, because I think that is the more sustainable path to choose.

REP. HARPER: When we talk about, though, the economy and getting it back, you know, the activity that you talked about, you know, in my state, when the gas prices hit $4 a gallon, it killed the small businesses, and I don't know how we can endure another episode of that, because we've done nothing really to try to increase that supply. So if we have another great fluctuation in the price at the pump, it's going to be very hard to sustain that.

One thing that I noticed also, in the president' speech, a question I had is, I looked at the summary here, I didn't see any mention of nuclear energy. I saw some discussion about what to do with nuclear waste but nothing about nuclear energy and of course, that's not considered a renewable, although it's extremely clean. What is the president's budget call for, for the use of nuclear power?

MR. ORSZAG: Well, as you noted, there are proposals in there with regards to the end part of the nuclear fuel cycle. I guess what I would say is, we are going to have a legislative debate over a climate change. Clearly, one of the things that is affected by whether carbon has a price associated with it, carbon emissions has a price associate with it, or not, is nuclear power, and that discussion will occur as we move forward on climate change legislation.

REP. HARPER: From a global warming perspective, nuclear would be good, would it not?

MR. ORSZAG: Evidence suggests that nuclear energy has lower carbon emissions than, for example, coal fired power plants.

REP. HARPER: And, of course, you know, we had a protest yesterday, and I understand that some people couldn't get here because of winter weather for the global warming protest, which is always of some interest there. But aren't the citizens going ultimately be the ones that pay the costs of the cap and trade system?

MR. ORSZAG: Ultimately, one of the things that will happen as part of the cap and trade system is higher energy prices, which will be borne throughout the economy. I want to back up, though, and say two things. One is, we have significant investments in energy efficiency, which will help mitigate any upward pressure on energy prices. If we actually get the battery technology in place, if we actually build the electricity super highway so that wind from North Dakota can reach Chicago, all of the energy price effects are substantially dampened.

And secondly, we do have compensation that's included in the budget through the tax code for middle and moderate income families. The vast majority of families all in are going to be substantially better off under this budget than without it.

REP. HARPER: And, I know time's almost up. One final question dealing with national defense. Of course, in the news was the fact that the president indicated that he was willing to talk about removing maybe missile defense as some part of components talking to Russia and working with Iran. Does this budget call for any continued development of the missile defense system, or is that now off the table?

MR. ORSZAG: Again, I'm going to defer both to Secretary Gates and Secretary Chu with regards to our variety of our defense and related programs, and I think you'll be hearing more from them on those topics.

REP. HARPER: Thank you for your time. Thank you, Mr. Chairman.

REP. SPRATT: Mr. Doggett.

REP. LLOYD DOGGETT (D-TX): Thank you, Mr. Chairman, and thank you, Dr. Orszag, for your excellent testimony and your important work on this budget. Like President Obama's address to the nation last week, your presentation on the budget recognizes that we cannot postpone resolving the dual challenges of both the health care prices and global warming energy challenge. Nor can we expect the American people to share in the burden of climbing out of the giant hole in which failed Republican policies have placed our country unless there is greater tax forbearance. On this latter point, I appreciate your specifically including modification of the economic substance doctrine to avoid transactions that no fool would engage in except to dodge taxes. It's a proposal Republicans have blocked consistently since I first introduced it in 1999.

Your budget outline also refers generally to the thriving business of international tax evasion. I would just ask that as you prepare your more complete budget document, that you consider, as Senator Levin and I have asked you to include the Stock Tax Statement Abuse Act that he, that Congresswoman DeLauro and a number of members of this committee, and last year when I introduced this -- (inaudible) -- and over in the Senate, a senator named Obama joined as co-sponsors of it with --

MR. ORSZAG: Do you think that may mean some favorable --

REP. DOGGETT: Well, I'm just trying to say --

MR. ORSZAG: Reviews by this administration?

REP. DOGGETT: On it because the new evidence out is that over 80 percent of our largest corporations use tax savings subsidiaries, and I think it's long past time to try to stop some of this offshore tax abuse, especially from those who turn to the government for bailout with taxpayer dollars at the same time they have dozens of offshore companies.

But let me turn to the issues you were just discussing about global warming, because I believe that the vote we will take on this budget resolution will be the first major steps of our commitment here in Congress to support President Obama in implementing an effective cap and trade or cap and invest system to place a price on carbon pollution and transition to an economy that is both more energy independent and more carbon independent. Like the testimony of the hearing that you participated in over at the Ways and Means Committee with us last September, we had another hearing on this subject in Ways and Means last week, and unfortunately, the Republican reaction ranged from many old fashioned global warming deniers to those who aggressively attacked any role for government regulation.

I would like you to explain, if you would, why you and our president recommend auctioning 100 percent of pollution allowances, rather than just giving away pollutant free cars to the polluters? I believe that the revenues which you've included, and I think it's conservative, it's kind of the bottom of the revenues through 2019 in this budget outline, is about $650 billion. How is it that the American people are better served by auctioning the revenue instead of just returning the values to the polluters who created the problem?

MR. ORSZAG: The reason is that if you get an auction permit, it would represent the largest corporate welfare program that has ever been enacted in the history of the United States. In particular, all evidence suggests that what would occur is that corporate profits would increase by approximately the value of the permits, so that, whatever that is, $600 billion, $800 billion, whatever the value is, would go, in a sense, almost directly into corporate profits rather than being available to fund energy efficiency investments and to provide a cushion for some compensation to American households. That is why the president, I think, has made absolutely the right choice in saying that the permits should be auctioned.

REP. DOGGETT: Can we in that regard, learn from the misadventure and experience of the Europeans who did give away many of those permits, and the revenues that you get from auctioning off those permits and then letting the free market set the price for carbon, with market reliance, those revenues, $650 billion (dollars) or more, are a very essential part of your budget proposal, are they not?

MR. ORSZAG: They play an important role. There are lots of pieces to the budget, and clearly, again I want to just come back. We need to move to a clean energy future and we need to do it in a fiscally responsible way. This is the way to do that.

REP. DOGGETT: Thank you.

REP. SPRATT: Ms. Lummis.

REP. CYNTHIA M. LUMMIS (R-WY): Thank you, Mr. Chairman. Dr. Orszag, we heard such good things about you when we were looking at the new CBO appointment and what big shoes that person has to fill.

MR. : He's doing a good job.

REP. LUMMIS: It's a pleasure to meet you. My first question is about the cumulative effect of the stimulus and the budget, now the proposed budget. The president has acknowledged the need for program elimination and reductions after a line by line federal budget analysis, but I'm looking at it from the perspective of someone who's been voting on these bills that have been coming before us, and since he took office, he's helped enact a $787 billion Stimulus Bill, and then he now appears to be willing to sign the $410 billion Omnibus Appropriations Bill, that has something like 8500 earmarks. And his budget proposes an increased non-defense spending by over nine percent.

So my first question is this. Did he consider freezing spending for his first budget, so we as Congress and the president could go shoulder to shoulder with the American people who are trying to make ends meet and are trying to hopefully use this stimulus package that's passed to recover the economy? Why would we want to raise discretionary spending in this budget after we just passed a $1.1 trillion stimulus package that by itself should have been able to stimulate economic growth?

MR. ORSZAG: Well, I think, let's come back to non-defense discretionary spending. That graph that I put up shows that over time, this budget does reduce non-defense discretionary spending and indeed the lowest share of GDP, the lowest share of the economy on record by the end of the budget window. But as I said earlier, there are certain areas that -- there's the graph -- that require some reprioritization, and that's what's occurring. I mean, I'll give you an example.

One of the problems that we have in, that's occurred over the past several years, if you look at government contracting and procurement is that the contracts have more than doubled, acquisitions have more than doubled over the last eight years, the number of contract officers has stayed flat. The result is then significant cost overruns and problems in administering those contracts. We need to address that problem. Once you sort of start to address it, you don't need to keep growing thereafter. It's just, this is a one-time fix that's necessary and that's why, that's one reflection, this little microcosm of what we're trying to do in this budget. Address some of the problems that have arisen and then put us on a path to a sustainable spending level, and again, that graph just shows you, this is not a big spending budget.

REP. LUMMIS: Mr. Chairman, did the president consider, though, freezing spending for this very first budget, in order to give you all time to incorporate the big spending that we've been doing in the last two months into the American recovery effort?

MR. ORSZAG: Well, let me, let me --

REP. LUMMIS: The question is, did he consider, did he consider freezing spending?

MR. ORSZAG: I'm not positive, I don't remember whether that proposal was discussed with the president or not, but let me just talk about it for a second. I mean, as one example, take the defense budget, which came up earlier. The budget includes a 2.9 percent increase in pay for our soldiers and other military personnel. If you have a flat-line zero growth, either you're not going to finance their health care, or you're not going to provide them a pay raise, or it's going to be implausible that you're going to turn the ship so quickly that you can get all of the necessary funding out of procurement in other parts of the defense budget. That's just one example of, it's the kind of thing that I think it would be nice if it worked, but, especially after years in which problems have arisen, it's not the standard, that, you know, the defense budget, for example, should be helping.

REP. LUMMIS: Mr. Chairman, I'm going to mention something that I'm tremendously concerned about in this budget, and then go on to another question, and that's the abandoned land mine money. You're proposing that you change the law in this budget that was passed in 2006, to ensure that states that produce coal, receive their abandoned land mine dollars over a 15 year period. And now you're using this budget to reverse the law. And I'm curious about what your justification is for doing that.

MR. ORSZAG: I was actually just confirming that you were either from Wyoming or Montana, so got -- I did check that. But this provision, this is the kind of thing that I think, as you go through the budget, there's not a single line in the budget that doesn't have some backer or someone who cares a lot about that line. But we can talk specifically about the abandoned mine land payment system.

There was a program put in place to clean up abandoned mines. As part of legislation a couple years ago, it was decided that we would provide payment to states for cleaning up mines even after they had finished cleaning up their mines. What we are proposing is that we would no longer continue providing funding for cleaning up mines after the mines had been cleaned up, and that's what that provision does. Now I understand that nothing is easy in this life, but if we want an example of what is involved in changing the course of our budget, that is an example.

REP. LUMMIS: And one more question, Mr. Chairman. Speaking of changing the course of our budget, the president as a candidate, went over and over and over his commitment to end pork barrel spending, and yet he's going to sign a bill that has 8,500 earmarks, when he said he was opposed to earmarks. So when can we expect him to put out an earmark policy and what will it look like?

MR. ORSZAG: Let me comment on that, because I know this has received a lot of attention. Are the level of earmarks in the omnibus bill larger than the president would like? Yes. Are they reduced relative to the peak in 2006? Yes. Does the president want to reduce them further and move towards a more transparent system for earmarks? Yes. I think you will be seeing, in the very near future, a statement of principle from the president, working with the Congress, how to address earmarks.

But we also face this question, which is, this is a deal that was done by, basically, the past Congress, and unless we're going to, you know, upend the government and not continue to provide FBI protection and homeland security protection and what have you, we do need to move past this. So this is, again -- I know I've been criticized for saying this -- but this was the deal that was done last year. It is last year's business. Does it contain more provisions like that, beyond what the president would like? Yes. But we need to move on, and part of moving on will be to move to a new system in which earmarks are yet more transparent, there's been progress that's been made, yet more transparent, and further reduced.

REP. LUMMIS: Thank you very much. I yield back.

REP. EARLY BLUMENAUER (D-OR): Thank you, Mr. Chairman, and I appreciate, Mr. Orszag your point. We have, I think, a quarter of the earmarks as opposed to what the Republicans had when they were last in charge. So, I think putting that in perspective is important. I agree with my friend, Mr. Ryan. There are areas of agreement. I think it's important to acknowledge them.

I agree with him about the point about agricultural reform. There are a number of people that have been working on this for a number of years. You've identified items in this budget. If we could've gotten actually an up or down vote on the floor last time, that probably would've been enacted into law. For example, agreeing with President Bush and a bipartisan group to take it down to a quarter million dollars a year.

What I would like would be to have your assistance in framing for us what the impact is going to be on the typical farmer in America. Not rich sugar and rice farmers on a large basis, but focus on the average farmer and the benefits that they're going to get from health care, from energy, from the opportunity for the tax cuts. The vast majority of farmers don't get a half million dollars a year, but they're going to be getting tax cuts. If you could help us frame a picture of that, would that be possible?

MR. ORSZAG: Absolutely. Under Secretary Vilsack's leadership, the budget includes substantial benefits for family farms, not only with regards to micro enterprise provisions, not only with regard to moving towards green farming, not only with regard to a dramatic expansion in rural broadband.

REP. BLUMENAUER: I would like your help in bringing it forward.

MR. ORSZAG: I see.

REP. BLUMENAUER: I don't have much time. I have two others items I want to put on the table, but if you --

MR. ORSZAG: Fair enough.

REP. BLUMENAUER: Could help us frame this in terms of how many farmers there are, how many would be affected, how many would get benefits from the tax, health care and energy, I think it would help us move forward. I just want to note one area of transportation. I don't want -- this is not your area, you know -- but we are going to have, the chairman indicated, a hearing on transportation. The budget, as I think Mr. Ryan pointed, drives off the cliff because of the structural deficits in the highway trust fund going forward. We're going to have a hearing on transportation.

We wonder if we could work with you to have the appropriate people in the administration who could be a part of the discussion with us. We have a large and growing consensus out in the real world that from the chamber to organized labor to environmentalists, local government, a whole array of businesses that we need to put more resource money in the transportation trust fund. Would you be able to work with us to get a team to help us flesh out how the administration would work with us on solving that problem?

MR. ORSZAG: There's really only one answer to that question, right? Yes.

REP. BLUMENAUER: Super.

MR. ORSZAG: (Laughing).

REP. BLUMENAUER: Super, thank you. I would like to conclude on the area of Medicare reform, because I deeply appreciated what you put on the graph there, that there are lots of opportunities in this proposed budget for reform that aren't Draconian, that just take a little bit away from coal mines that have already been cleaned up, for heaven's sakes, and go to parts of the country where they aren't, or reducing burdens on some.

I want to focus on Medicare for a second, because you've identified it's a huge opportunity for savings, and your past research, I think, has been terrific. I've actually got some legislation introduced modeled on some of your prior research in this area, but you soft pedaled one point, that it looks like in some cases, there are actually negative results correlated to all these tests. Well, with that as the context, is it possible, as we're looking at Medicare Advantage, that we could consider one reform alternative, that had people competing for what is the national average right now, or for the national average for Medicare, and use that to allow people to compete with standards and performance-based measures, so you don't penalize states like Wisconsin, Oregon, Wisconsin and you help encourage people to change their practices. Could we consider that as an alternative?

MR. ORSZAG: I would never want to be accused of soft-pedaling anything. So let me first say, I've clearly -- in many cases the more intensive approaches are not only more costly but actually harmful to health.

With regards to Medicare Advantage, we think the proposal we have, which is competitive bidding, with the benchmarks being sent based on bids in the local area is a preferable way. But we can talk to you about --

REP. BLUMENAUER: But doesn't that wire in these extraordinarily high-cost areas. If it's Medicare advantage, which was supposed to provide lower costs. Why can't we move towards more of a national --

MR. ORSZAG: Well actually, we believe that the competitive bidding process will lead to the largest cost reductions in Medicare Advantage, precisely in those high-cost areas, like in Florida.

REP. BLUMENAUER: But can't we superimpose the two?

MR. ORSZAG: There are lots of ways of doing this. We've put forward a proposal that we think works well.

REP. BLUMENAUER: Thank you. Thank you.

REP. SPRATT: (Off mike.)

REP. MARIO DIAZ-BALART (R-FL): Thank you, Mr. Chairman.

Good to see you sir. This is the largest budget ever submitted and the largest share of the economy since World War II. And I really want to learn a little bit more about how you developed this. The president has been talking about transparency and openness. So I'm going to ask you a series of questions and I might have to ask you some more in writing.

MR. ORSZAG: Let me just, though, you know preface it, obviously the discussions we had with the president I'm going to now fully answer, just to protect our internal discussions. But go ahead.

REP. DIAZ-BALART: Well I just want to know if you personally met with people outside the government to develop proposals that are reflected in this budget, and who would those individuals be?

MR. ORSZAG: To my knowledge, I did personally meet with outside representatives while this budget was being discussed, but we could get a fuller answer to make sure --

REP. DIAZ-BALART: Yes, e-mails, correspondence, phones, that kind of thing, from outside entities.

MR. ORSZAG: I don't live entirely inside a bubble, so inevitably there are people who contact me through e-mail and other means as budget proposals are being developed.

REP. DIAZ-BALART: I ask this because in the budgets of the presidents states quoted. "It's no coincidence that the policy failures of the past eight years by unprecedented government secrecy and unprecedented access by lobbyists and the well-connected." The New York Times recently reminded us that now, according to them, quote, liberal groups are flexing new muscle in lobby wars, so there's no secret that on the right and the left, there are interest groups that want to have import.

The president himself in this budget that that was horrible, and he's talked about transparency and openness and that's why I'm asking these questions. It's important that we follow the President's own words. Because he's the one who's been talking about transparency and openness.

So, yes, I would like to know e-mails, faxes, any other contacts that you had from interest groups outside. Will you provide those for us?

MR. ORSZAG: As you know there is a long history of discussion between the Congress and the White House as to a balance between transparency and also not revealing -- we would not want the internal discussions, with especially the president, to be undermined in terms of their frankness, from, well, period.

REP. DIAZ-BALART: You're starting to sound a lot like the previous administration; I just thought I'd mention that. Which is not a bad thing, necessarily, I'm just telling you that you're sounding a lot like the previous administration.

MR. ORSZAG: I didn't intend to and I hope that's not the case.

REP. DIAZ-BALART: Well, you clearly are.

MR. ORSZAG: Let me just say, in terms of transparency, we are taking several steps to improve transparency. I'll give you one example. When I was CBO Director, folks didn't like the fact that I had a blog to be able to talk about what we were doing. I have started a blog at OMB and you'll see a lot of outcome on that blog so that we can provide more transparency about what we're doing.

REP. DIAZ-BALART: I understand your concern about contacts between staff and the president. How about did the president meet, or call, or e-mail anyone outside regarding this budget proposal?

MR. ORSZAG: Again, I understand the road you're trying to take me down here. I'm going to just -- if you want to submit questions in writing we'll get the appropriate White House counsel and other ethics officers to provide the answers.

REP. DIAZ-BALART: Well, again -- and I'm not trying to put you on the spot, but the reason is that I'm actually reading from the President's own words in his budget that was submitted, where he talks about that being a problem.

MR. ORSZAG: I think this administration is happy to be held to a historic level of transparency and accountability. And again I just don't want to, given the questions you're asking, make a mistake with regard to the law or existing procedures. So I'll defer to questions.

REP. DIAZ-BALART: And I understand that and that's right, but again since the President has talked about his historic level of transparency, let me ask you a couple of questions. Did those White House staffers consult with or receive input from any outside interest groups, before giving you instructions regarding this budget?

MR. ORSZAG: I guess we're going to play this game for a couple more minutes.

REP. SPRATT: Will the gentleman suspend? I think the witness has stated his position, stated it correctly, and stands thereon. So I think you're just harassing the witness by continuing to pursue this line of inquiry. He's given you an answer.

REP. DIAZ-BALART: Thank you, Mr. Chairman, let me just clarify something. I'm not trying to do that. The witness right now just said that they're trying to have unprecedented transparency. I just want to see what that means. What does unprecedented transparency mean? Does it mean the same standards that the previous administration used or different standards? What I'm hearing right now, Mr. Chairman -- and I understand what he's saying -- is that it's basically the same standards that the previous administration used and I just wanted to see if there was any difference. I have not heard any difference, Mr. Chairman. So I will yield back.

MR. ORSZAG: I think you will see a difference, but again I'm going to defer to the appropriate officials to get back to you in writing.

REP. DIAZ-BALART: Thank you.

REP. SPRATT: The gentleman yields back. Mr. Boyd.

REP. ALLEN BOYD (D-FL): Thank you, Mr. Chairman. I appreciate the end of that line of questioning. My friend, from Florida, I agree with so many things that have been said here in complimenting Director Orszag about the budget particularly in the fact that for the first time in many, many years, the first time maybe in eight years, we have been presented an honest budget, and Mr. Ryan and others have acknowledged that and shown their gratitude to the director.

MR. ORSZAG: Only in a few places. (Laughter).

REP. BOYD: And what do I mean by that? Simply I mean that the administration has brought a budget that accounts for all the spending that government's going to be doing including the war cost, including AMT, including the Medicare doc fix. Those things which we have traditionally over the last eight years, said "No, that's really going to happen, we'll deal with it later," and I am quite confident that Mr. Ryan and his colleagues are quite happy they don't have to defend that system anymore.

So, I want to join them in complimenting you Mr. Orszag for what you have done. It's difficult for me to believe that we sit today, looking back to where we were eight years ago. Eight years ago, we asked the president to do three things, pay down debt -- remember where we were eight years ago, surplus was as far as the eye can see -- pay down debt, reform broken entitlement programs, and reduce taxes. Number one, pay down debt -- number two, reform broken entitlement programs -- and number three, reduce taxes in a way that would as much as possible ensure the economic prosperity and the continued growth of middle class of this nation.

Number one, we didn't pay down any debt; we doubled the debt. Number two, we didn't reform broken entitlement programs; we've actually expanded entitlement programs in a way that makes them more broken. And number three, even though we reduced taxes, we didn't do it in a way that would expand economic prosperity and actually narrowed the middle class, rather than expand it. So the policies that we've been dealing with over the last eight years have gotten it all wrong. And this team is trying to fix it.

Now I want to ask you a very simple question. One that we've actually had some discussion about before. And I'm sorry that my friend, Mr. Blumenauer went right before me and banged about agriculture, but do you, Mr. Orszag, how you answer those that say that a health care reform initiative should save money, in the long- run, and not be an additional cost pressure? And number two is, are you aware that taking on too many issues in this budget reform and this economic recovery plan might sink the whole ship?

(Cross talk).

MR. ORSZAG: Let me deal with the second questions first. It's unfortunately the case that too many problems have been left. We have not addressed the problems in our educational system, we have not addressed the need to move to clean energy, we have not addressed the huge inefficiencies in our health care system which drive up costs for American workers, and for the Federal Government and for state government. So, would I like it if we didn't have so many things that needed to be done? Sure. But that's not the situation that we face. Given, what we do face, what the alternative rather than trying to address these key problems?

Now with regard to health care, the proposals that you see both in the recovery act and in the budget will reduce health care costs over the long-term. And not only that, but we are committed to a self-financing health care reform so that it doesn't add to the budget deficit even over the next five or ten years, while those investments are bearing fruit and the curve is being bent.

But I think that we need to remember the rate at which health care costs grow, the power of compound interest is so strong, that that becomes a dominant force. Just as an example, health care costs have grown a little bit more than two percentage point per year faster than income per capita over the last four decades. If that were reduced to one percentage point faster -- still a significant amount -- from two percent to one percent a year, the last fifty years, health care costs are twenty percent lower as a share of GDP -- twenty percent of GDP lower -- that's the whole ball game, that's the entire size of the federal government today, just in reduced health care expenditures out after fifty years. That's what we've got to keep out eye on. I know I keep repeating myself, but that is the key to our fiscal future.

REP. BOYD: Okay, I like that answer. Fifty years at two percent a year. Pretty soon you take a the whole gross domestic product for health care. But the thing that I wanted to say to you is that in the end this is a political process here in the House of Representatives and the Senate. And you need to be careful about taking on too many issues because we really do want to pass a budget, and we want to pass a good budget, and we think you've got the basics for a food one. But it probably needs some tweaks.

REP. SPRATT: Time has expired. Mr. McGovern.

REP. JAMES P. MCGOVERN (D-MA): Thank you, Mr. Chairman. And Director Orszag, congratulations, and you have inherited a mess. The worst economy in my lifetime and the biggest debt in the history of the United States of America. So you have a tough job ahead of you. But I want to state for the record, that I have confidence in you, and I have confidence in this new president and the team he has put together to help dig us out of this ditch the previous administration got us into. And I think that the budget that you presented here today reflects the priorities I think most people in the United States want the Federal Government to advocate. I wish you success and I do have confidence in this administration.

I want to talk about an issue that does not get talked about a lot, and that is the issue of hunger, which is getting worse in this country and around the world. Currently, in the United States one in every eight Americans struggle with some form of hunger, or food insecurity as the Bush administration relabeled it. That's 12.2 percent of our people.

This figure includes close to 700,000 children, and I should add that this hunger issues adds significantly to our health care costs and if we want to get health care costs under control, we need to deal with the issue of food and nutrition for all of our people.

Now, globally, nearly one billion suffer from hunger and malnutrition and of these over 400 million are children. So, I was very glad to see that President Obama has made for hunger on his plate of priorities. He has stated that he will eliminate child hunger in America by 2015. And that he will work with the international community and provide the necessary resources to cut global hunger in half by the year 2015. So, like the President, I believe that this is doable. I also believe it requires a White House-led, government- wide, comprehensive strategy on hunger and food security to make achieving these goals a reality.

Now most of our domestic hunger programs, especially those focused on children, fall under the U.S. Department of Agriculture and Health and Human Services.

Addressing global hunger and food security is not a simple matter either. Here programs are spread throughout a number of agencies and jurisdictions including the Departments of Agriculture, State, Treasury, Energy and Labor, and agencies such as USAID, the Millennium Challenge Corporation, the Peace Corps, and USTR. I think this is one of the moral challenges or our time, and I'll be honest, I'm in the United States Congress and I'm ashamed that there are so many people in our country -- 35 million plus -- who don't get enough to eat. And we're the richest country, the most prosperous country in the world. And we need to do something about this.

So, can you please tell me and the committee, more specifically, how the President, FY 2010 budget and his five- and ten-year projected budgets will achieve these goals.

MR. ORSZAG: Yes, and I think you've identified a very important issues. First, let's start with what's happened. The recovery act, for example, includes a significant increase in food stamp benefits or SNAP, as the program has been renamed, to help reduce the cost of purchasing food for moderate and low-income households. In addition to that, the budget includes $1 billion annually for the Women, Infants, and Children program so that that program can serve 9.8 million women and infants and provide needed nutrition to them, and also to support the child nutrition programs that are part of this budget, including the School Lunch program and other initiatives.

And one of the things that we are very interested in doing, is moving toward not just providing adequate funding, but also healthier options as part of those programs so that we are addressing as you mentioned, not only the need for calories but the need for nutrition, frankly, which was the underlying rationale for the programs in the first place.

REP. MCGOVERN: Well, I appreciate the answer and this in not under your jurisdiction, but let me just make a pitch anyways since you're here. As I mentioned, the programs that actually respond to the issue of hunger and food insecurity fall under the jurisdiction of many different committees. And what I'm concerned about is that there is a lack of coordination and I would urge very strongly that somebody in the White House be appointed or be charged with coordinating the different agencies to respond more effectively to domestic hunger and also to global hunger. I mean, look, I think this is a national security issue. And one that I think we play a very positive role in. But it's not just about funding this program and that program, but it's about coordinating all the different departments, and I really do think there needs to be a point person in the administration to do this.

MR. ORSZAG: I would just add that in addition to the nutrition side, better integration of our food safety efforts would also be warranted as something that the administration is looking into, with the split responsibility between FDA and the Department of Agriculture for food safety.

REP. MCGOVERN: Finally, the President's goals of ending child hunger by 2015 is a laudable goal, and one that we all want to make sure he achieves. It's a good benchmark.

And I want to make sure we reach that goal. But I think it's going to require, I think the budget response, in large part to move us in that direction, but I do think that there needs to be a coordinated effort, a comprehensive plan.

I don't know what the plan is, and I expect it will developed -- you've only been in an office for a few weeks. But I think this is a moral challenge of our time. And I appreciate all your work on this.

REP. SPRATT: Gentleman, time has expired. Ms. Tsongas.

REP. NIKI TSONGAS (D-MA): Thank you, Mr. Chairman and thank you, Dr. Orszag. I have to say that I applaud our new president for presenting us with a budget that does focus on the challenges of health care, education, and energy independence and global warming. When I go about my district, there is a common-sense understanding that these are the great failures of the past decade, and not looking at these and beginning to put in place forward-looking approaches to it.

But I'd like to ask you a question on something slightly different, and that is individual savings. I think it's great, what you've included in the budget, really beginning to look at ways to encourage people to save in retirement. But as we now, retirement savings really are only one piece of the pie, and especially for those who have been dependent upon home equity, to borrow against the value of their homes in the case of a personal emergency that no longer is a resource. So, I'm wondering if the administration is looking ahead at all at ways to encourage individual savings aside from retirement.

MR. ORSZAG: Well, I think there are a variety of discussions going on. Some focused on financial education, which is one mechanism that people have put forward to encourage savings. We've already discussed retirement savings. So, the short answer is "yes," I think a lot of that activity is focused in the Treasury Department, because at least part of the answer involves the tax codes. Part of the effort is surrounding the Department of Education and financial education efforts, and I know this is something that the Vice President feels strongly about, and has already come up frankly in our first task force meeting of the Middle Class Task Force. That's one of the topics that was done.

REP. TSONGAS: It's really an issue of low to middle-income families. I represent two cities in which the average income is well below the norm, and where much of the sub-prime lending crisis originated. And we see what happens when we don't put in place incentives to encourage saving, so that people can being to get ahead.

MR. ORSZAG: Well, let me actually raise on other topic, that is included in the budget. Which is one of the things that doesn't make a lot of sense in my mind, is we encourage saving on the one hand, and then for people who do save, if a recession -- if a crisis like we are currently facing comes along and they need assistance under Food Stamps or other means-test benefit programs, we have very outdated asset tests that apply. So, we are basically saying, please go save, and then we hit you over the head if you do -- should you ever need assistance in the future, in ways that even conservative economists have identified as being a very high implicit tax on savings. The budget includes a set of proposals to start modernizing those asset caps. So that we're achieving a better balance between targeting the benefits on those who most need them, but not discouraging people so much from saving in the first place.

REP. TSONGAS: Well, I welcome hearing that, and I look forward to reading the particulars -- thank you very much.

REP. SPRATT: Ms. McCollum.

REP. BETTY MCCOLLUM (D-MN): Thank you, Mr. Chair. I am going to quote President Obama here. "Government has failed to fully confront the deep systematic problems that year after year have only become a larger and larger drag on our economy. From the rising cost of health care to the state of our schools, and the need to revolutionize how we power our economy, to our crumbling infrastructure, policy-makers in Washington have chosen temporary fixes over lasting solutions."

It goes on to say "the time has come to usher in a new era." And, then I'll conclude with "to lay a new foundation of growth upon which can renew the promise of America."

So, we've heard some discussions about the recent past and our failures to really build a stronger economy -- look at where we are today. So we don't Congress in this administration to repeat the mistakes in the future. Can you maybe contrast three of four major choices or decisions that took place putting this budget together, that when you look at the past eight years that contributed to the financial nightmare we find ourselves in, what are some of the lessons learned of the Obama administration in putting this budget together you'd like to share with Congress, so that we don't repeat the mistakes in the future, but instead take one dollar, invest it wisely, to benefit a child, community, our country, to make stronger, healthier, and more prosperous.

MR. ORSZAG: Let me highlight three. The first is, previous budget would present a picture of the future that was unrealistic because they excluded lots of things that everyone in this room knew were going to happen. I've already picked through the list. But again, you know, excluded the alternative minimum tax, let it take over the tax code, when everyone knew that wouldn't happen.

Assume that Medicare position payments would be reduced by twenty percent, when year after year Congress would act to prevent that from occurring. So, one choice that was made, we're not going to do that, even if the reported number is higher deficit. I could make the deficit look a lot smaller, but playing those games. The President decided, and I fully support this, "let's be grown-ups here," and be real about the situation that we face and start working our way out of it. That was the first choice.

The second choice was to take a variety of inefficient subsidies and eliminate them. Subsidies to Medicare advantage plans that are overpaid by 14 percent relative to traditional Medicare, according to estimates from CBO, and GAO, and MedPac and others. Subsidies to middle men on education loans that add $50 billion in costs without helping students at all. And you can keep going down the list, so I think there's a series of changes that were targeted at eliminating inefficient subsidies.

And then, finally, I would just again focus on health care. Previous budgets did not put on the table a significant down payment and a focus on health care like the President has done, that will help bend the curve on health care costs over the long-term and thereby, make working families better-off because their take home pay will go up, right now it's burdened by the weight of health care costs, and also address the key to our fiscal future.

I think that's the single most important thing we could do to put the nation on a sounder long-term fiscal path, and also help working families and states governments.

REP. MCCOLLUM: (Off mike) -- to point how, by investing a dollar in education, or investing a dollar in IT technology how we're going to see the fruits of that.

MR. ORSZAG: Let me give a few examples across a variety of areas. Let's take the government's own operations.

There is credible evidence that shows that investing a dollar in combating health care fraud, that is making sure that under Medicare, money only goes to the providers that should receive it, saves a $1.60 in health care costs. We have under-invested in program integrity. This budget corrects course and saves $50 billion in erroneous payments, that would otherwise have occurred.

And actually, I think that might be, perhaps, the most compelling example. But you can keep going down the list: early education, the evidence is very clear that high-quality early education programs help to produce better life outcomes for the individuals that go through those programs, but also help to reduce crime and other things that as a society have a cost.

In health information technology, we've already discussed, that's one of the key, necessary, but not sufficient -- by itself it won't solve the problem -- but it's a key step on the road to a more efficient health care system. The analogy that people have drawn is it's like plugging the toaster into the wall. By itself, the toast doesn't come out just because you plugged the toaster in. You also have to put the bread in and press the button down, and what have you. But if you don't plug the toaster in, you're not going to get any toast out of the toaster.

REP. SPRATT: Mr. Edwards of Texas.

REP. CHET EDWARDS (D-TX): Thank you, Mr. Chairman. Dr. Orszag, if I could borrow on the words of my colleague Mr. Hensarling, I think what the administration is inherited is a trifecta. Trifecta: it is the result of eight years of Republican trickle-down, de-regulation ideology, that led to first the largest deficits in American history, second to the worst job losses since World War II, and thirdly to potentially the largest, longest, deepest recession we've had since the 1930s. I salute you and President Obama for putting together a budget that is honest in its assumptions and once again tries to show real respect to American middle-class working families, that have lost, I believe, $22,000 a year in real income, over the last eight years of policies of our republican colleagues. I would ask American citizens who watch these debates, to just take into account that some of the loudest, most vociferous critics to the Obama proposals were the architects of the disastrous economic trifecta that has hurt millions, and millions, and millions of American working families, senior citizens who've lost their savings, families wondering how they'll make the next mortgage payment because they just lost their jobs.

I also want, as chairman of the Appropriations Committee, to fund veterans. I want to salute President Obama for something that the press has paid very little attention to. In this budget, President Obama proposes the largest increase in veteran's health care and benefits funding ever proposed by any president -- the largest ever. For far too long, we have had administrations who have paid respects -- genuine respects -- to our veterans on Veteran's Day and Memorial Day, but yet did not fully respect them with their budget proposals. I salute President Obama for keeping his promise to those who have kept their promise to serve our nation, and because of the $25 billion increase over the base line over the next five years, proposed by the President, more veterans will receive VA care, including a lot of middle-income veterans and lower-income who have been locked out of our VA hospitals because the previous administration's arbitrary cap on income eligibility for VA care. The veterans, the 5.5 million veterans receiving care every year, going to get better care, get quality care, with shorter times for physician's appointments.

I could go on and on. But the bottom line is this budget shows a historic level of respect to America's past servicemen and women. And I think that deserves the attention of the American people. I know that there are 25 million and there are millions of dependents who will greatly respect the President's initiative in this area.

The one question I would like to ask is this -- I was very critical of Republican budgets over the last decade, because they assume constant economic growth with no potential recession over a ten-year timeline and then they follow policy based on those unrealistic assumptions -- what is the policy of the policy of President, if either Congress refuses to bring about the savings proposed by the President or economic growth doesn't meet the projected growth -- I think 2.6 percent the last four or five in the decade, proposed -- will you adjust spending downward of will the spending be committed and we will just increase the deficit, in that case?

MR. ORSZAG: Well again, I think in those out-year projections, the assumptions are actually lower than the blue chip economic growth forecast, so the whole point of putting together -- addressing the long term challenges we face is to generate that economic growth, and that's the whole point of the budget.

REP. EDWARDS: If those numbers turn out for 2010, '11, '12, even in the short run, turn out to be a little optimistic because nobody can predict the future with absolute certainty.

MR. ORSZAG: Look, I mean --

REP. EDWARDS: Republicans, certainly --

MR. ORSZAG: We could wind up --

REP. EDWARDS: Projecting a balanced budget for the next decade.

MR. ORSZAG: Right. We could wind up being too high. We could wind up being too low. There is significant uncertainty. Of course, we will revisit things as the world evolves and we'll have a budget next year and we'll have one thereafter and part of the policymaking process is to readjust to reality as it occurs. That's what we will do.

REP. EDWARDS: Thank you.

REP. SPRATT: I now recognize Mr. Scott and after that, Mr. Langevin if he's here, Mr. Larsen if he returns, Ms. DeLauro of Connecticut and Mr. Melancon. Now, Mr. Etheridge.

REP. BOB ETHERIDGE (D-NC): Thank you, Mr. Chairman and thank you, Dr. Orszag for being here to discuss the 2010 Budget. And I appreciate your efforts and your staff and the administration to really put out, I think, a clear view of our current economy and not try to hide the costs of those policies and have them omitted from the budget. I think it's critical to have that because to budget is to govern and we certainly have to do that.

Let me ask you a question though as having served as a former state superintendent of schools, there's an issue and I have a question about because I do believe education is the key and the foundation for future growth and I'm pleased that this budget really invests in that high priority of education.

But I'm concerned about the proposal to end the federal Family Education Loan Program and to have all those loans originate through federal Direct Loan Program. And for the past 40 years, the College Education Foundation of North Carolina has assisted over half a million North Carolina students and families with college loans.

Could you comment on the eliminated savings the budget has associated with these through that program? And is the Department of Education ready to scale up to deal with these programs? And the budget assumes a $4 (billion) to $6 billion savings, which directed expect to increase the deficit -- my numbers say $100 billion. How are these savings calculated? And is OMB assuming that these savings on the basis of current low interests.

And might this change in the future?

MR. ORSZAG: Well, let me first say all of the estimates from OMB, from the Congressional Budget Office and elsewhere suggest that the direct lending program is a more efficient system than providing subsidies, basically, to middle men in the education loan process.

Now, let me also say --

REP. ETHERIDGE: But North Carolina is a non-profit run by --

MR. ORSZAG: I understand that and there are obviously some more efficient and less efficient intermediaries, but as part of this expanded direct lending program there would be substantial opportunities for both private sector entities and others to service the loans, which is part of our proposal.

So this an area where the current system contains an inefficiency. We're trying to move towards a more efficient system and there would be still be activity for servicers to service direct loans.

You had also asked about the ability of the federal government to ramp up and that is something that we had considered and evaluated. And the short answer is I'm confident that the federal government could ramp up the direct lending program in a timely and effective manner under this proposal.

REP. ETHERIDGE: I look forward to talking to you more on that because I know how ours works and that would be moving those jobs from North Carolina to Washington, and I'm not so sure that's efficient.

MR. ORSZAG: No, we're not doing that.

REP. ETHERIDGE: Okay, but I'd like to talk to you about it.

Let me move to another one if I may because you also -- I'm excited about the investment that this budget has in health care because I think that's a critical area that everyone is affected by. And the president is seriously thinking about making some real reform in this critical sector of our economy and I appreciate his bold call for curing cancer and other serious diseases and the money that's being placed as an investment in health research at NIH and through the SRIB and other initiatives as part of keeping America globally connected and competitive.

Can you discuss the mixture though of public and private scientific investments in the president's budget and how such research will create jobs, public and private sector and puts the nation on a sounder foot financially? Because I think this is a critical piece as we move forward.

MR. ORSZAG: And now we're outside of health care, we're talking about science writ large.

REP. ETHERIDGE: Absolutely, which will reflect on health care somewhat.

MR. ORSZAG: Absolutely. The Recovery Act included historic investments in science, the budget instills in that with very significant investments in the National Science Foundation, in other parts of our scientific community because we need to remain at the forefront of scientific knowledge if we're going to have a high performance economy.

So the evidence strongly suggests that by having the federal government focus not just on basic research, but some aspects of applied research, there are very significant spillover effects that help boost economic performance. So even when the research is done or funded through the National Science Foundation and done at a university, the impact and the benefit spill over into the economy. And -- for example, you do have significant growth clusters that arise around research universities, which is one manifestation, but the effects -- you know, the evidence suggests are even broader than that and technological progress is one of the keys to our long-term economic performance, which is why we're investing in science, not only in the Recovery Act, but in the budget.

REP. ETHERIDGE: I couldn't agree more. And you can look at spots in North Carolina and around the country where that's absolutely true.

Thank you, Mr. Chairman, and I yield back.

REP. SPRATT: Thank you, Mr. Etheridge.

Mr. Scott of Virginia.

REP. BOBBY SCOTT (D-VA): Thank you. Thank you, Mr. Chairman.

Dr. Orszag, thank you for coming and you've been faced with kind of the national debate with two competing theories, economic theories, one of which was put into effect in 1993 and one in 2001. And the debate sounds like you ought to receive these with equal credibility when, in fact, the '93 plan created record numbers of jobs, median income up substantially, Dow Jones Industrial Average more than tripled. If we had kept going at the rate we were going, we would have paid off the entire debt held by the public by last year.

On the other hand, the 2001 budget went into effect, the worst job performance since the Great Depression, median income went down when adjusted for inflation, while health care costs, college tuition and housing costs actually went up. The Dow Jones Industrial Average was worse than it started and we overspent the budget by eliminating $5 trillion worth of surplus and overspending it by another $3 (trillion) or $4 trillion, overspending the budget by $9 trillion.

Now, the Republicans want some credit for this because they took over the House and Senate in 1995, but you will remember that their contribution to the economic theory was producing budgets that President Clinton vetoed and refused to sign; in fact, the government closed down because he kept vetoing their budgets.

Now, you are faced with this. Now do you think that the '93 theory -- what is in this budget that is closer to the '93 budget than the 2001 budget?

MR. ORSZAG: This budget is clearly more spiritually aligned with the 1993 budget than anything resembling the 2001 budget. But I'd also say that it goes beyond what was done in the 1990s in many key areas, but I think what you're really getting at is a very important point, which is there are two theories of the case here. The theory of the case that the only thing that drives economic performance is the top marginal tax rate or the top two marginal tax rates that affect a very small share of people and that the way we are going to get markets to work well is funneling lots of subsidies to corporations has been tested. It does not work.

REP. SCOTT: Thank you. Now, you also mentioned honesty in budgeting. When the 2001 and 2003 tax cuts passed, the AMT was not mentioned when everybody knew that we would adjust it every year. Is it true that about two-thirds of the total costs of those tax cuts was in the annual fixing of the AMT?

MR. ORSZAG: It is an important interaction, so it's a very large share. Exactly what the share is depends on how you do the calculation, but a very significant share. And in a sense, to be more precise about that, the cost of the 2001 and 2003 tax legislation was artificially reduced or made to look low by assuming that the AMT gradually took back a growing share of those tax cuts.

That is not what is done in this budget and that's a very significant change.

REP. SCOTT: Now, you have a placeholder for over $600 billion in health care. What can we expect with that?

MR. ORSZAG: What you can expect from that is not only efficiency improvements on the providers' side, but also funding to get overall health care reform done this year, which is what we want to do.

REP. SCOTT: Now, interest on the national debt; had we paid off the national debt, we would have by 2013, in fact, not only paid off the debt held by the public, but also restored the money to the trust funds.

How much money are we going to spend every year in interest on the national debt going out?

MR. ORSZAG: You always ask me that question --

REP. SCOTT: Which would have been zero.

MR. ORSZAG: Yes, we would have been zero.

Under the policy path that we are on, without the budget intervention, total net interest is almost $5 trillion over the next ten years.

REP. SCOTT: And for about one-tenth of that, you're going to be making profound changes in health care?

MR. ORSZAG: We believe that the health care could be made much more efficient and that we need to do that this year. Yes.

REP. SCOTT: We've heard complaints about earmarks compared to earmarks when the Republicans had total control two years ago.

Is it true that the number of earmarks in the bill we just passed under the appropriations, the number is substantially lower than anything that passed when the Republicans had total control of Congress and the White House?

MR. ORSZAG: Yes. In particular, the number has been reduced from something like 15,000 to something like 8,000 or 9,000; still higher than the president would like, but a significant reduction.

REP. SCOTT: Thank you, Mr. Chairman.

REP. SPRATT: Mr. Schrader.

REP. KURT SCHRADER (D-OR): Thank you, Mr. Chairman.

A series of hopefully quick questions --

MR. ORSZAG: Okay.

REP. SCHRADER: The Blue Chip forecast that was alluded to earlier, did it take into account the beneficial effects of the Recovery Reinvestment Act?

MR. ORSZAG: The long term one, no; the short term one, to varying degrees.

I think the folks who pay the most attention to lining up with our fiscal year projections and what have you is the Congressional Budget Office and on that basis, at the time the forecasts were locked in, we're right in line with them once the Recovery Act is included in the analysis.

REP. SCHRADER: A lot has been made over this is a fairly large -- the largest -- peace time budget maybe in recent American history or for quite a while.

How many other administrations have had the vision to take on health care, independent energy dependence, education for the 21st century, besides President Obama?

MR. ORSZAG: I think it's clear that this is a bold and new direction for the country.

REP. SCHRADER: And I assume that the administration feels that this is the direction that people want to go?

MR. ORSZAG: The direction people want to go and the direction we need to go, if we're going to have the future that all of us desire.

REP. SCHRADER: A lot's been made over tax increases or revenue increases in this budget.

Is it true that if you balanced out the tax breaks, the efficiencies that are actually getting to almost $2 trillion reduction in revenues on the American tax payer?

MR. ORSZAG: There is a tax reduction for 95 percent of working families on this budget.

REP. SCHRADER: And AMT and numerous others, I believe.

MR. ORSZAG: And we provide -- and we make sure that AMT does not take over the tax code and we continue the middle class tax provisions that were provided as part of the 2001 and 2003 legislation.

REP. SCHRADER: I'm surprised at some of my Republican colleagues' dismissal of the some of the business aspect of this budget, particularly in the small business arena.

Could you elaborate on what's in this budget and what was in the Recovery Act that's going to really free up -- you alluded to it a little bit before -- the credit markets and small business recovery?

MR. ORSZAG: Let me again -- most small businesses now are struggling because of the collapse in demand of their products and because they are having trouble getting credit from their banks.

The key thing that we can do over the next six months, a year, to get small business back on its feet is to get the economy back on its feet and to get credit flowing to those small businesses. The budget includes $28 billion in loan guarantees, the majority of which is provided through a well known and effective program to get credit to small businesses.

The Recovery Act was intended to get the economy back on its feet. In addition to that, there are a variety of other targeted provisions; for example, a zero capital gains rate on stocks that are held in qualified small businesses for more than five years, zero percent capital gains rate.

But I think rather than getting focused on the wrong thing, the right thing to focus on with regard to small business is getting economic growth back on track and getting credit flowing.

REP. SCHRADER: Last but not least, not a lot's been made of the Performance Outcome Reporting that's been suggested in this budget and a chief performance officer.

I think that's huge. Has there been discussion about getting away from counting inputs and outputs and reports and all that stuff that gets in the way of good use of some of the tax payer dollars at our local, state and private enterprise level; maybe going to a more performance based criteria.

I guess I'd urge administration to go down that road vigorously, work with states that are already doing this and frankly, some of the congressional delegation that might be interested in doing that.

MR. ORSZAG: Absolutely.

Again, I just want to emphasize the way that the federal government has measured performance has been focused on, as you put it, input processes, to take the tax gap, $350 billion. The performance matrix system that we have, the -- (inaudible) -- focuses on audit rates, if you will, and how many audits are done.

That's great, but that's an input. What we really care about is getting the tax gap down. So, rather than saying our target is to get the tax gap down to some dollar value, or some percentage of GDP, or something like that and there are many mechanisms for doing that, we've focused just on input. That needs to change and we will be adopting a new system -- it's going to take some time to develop the new system -- but we're going to adopt a new system that will be based not only on consultation with you, but with agencies and it will be more outcome focused.

REP. SCHRADER: Thank you very much.

I yield my time.

REP. SPRATT: Thank you, gentleman. Ms. DeLauro.

REP. ROSA DELAURO (D-CT): Thank you very much, Mr. Chairman. Thank you, Dr. Orszag.

I'm looking around at the Treasurer and myself, so my apologies for popping in and out. Let me just say thank you to you for your honesty, your clarity and for your candor in this budget and I think that it's a remarkable document, which demonstrates a clear commitment to priorities, but also demonstrates a clear commitment to values and to what are the issues that are most pressing on the people of this nation and how we're trying to address them.

I'll make just a very quick thank you to the president and to yourself with regard to the child tax credit; not only part of the Recovery Program and changing the income level to $12,000, but to $3,000, but now a permanent part of this budget. I think that will go a long way as refundable tax credits can do to really assist families.

I'm going to move to an area that you've heard me talk about for a long time and that's infrastructure.

The budget proposes to expand and enhance existing federal infrastructure investments through a national infrastructure bank that will deliver financial resources to priority infrastructure projects; those that have significant national or regional economic benefits.

What you propose is $5 billion in each of the next five years, as I understand it, for a total of $25 billion for the bank and another $25.2 billion over the following five years for Fiscal Year 2019. I'm going to be introducing legislation very shortly which would create an infrastructure bank very, very much like the European Investment Bank. It's got a similar amount of money authorized annual for appropriation.

The bank would function like a development bank; make loans, loan guarantees, issue bonds, purchase, pool infrastructure securities in the global market, leverage investment and so on. Now, when the president was Senator Obama, he supported an effort which was a bit different, which created an entity that would similarly depoliticize the process and focus on projects of national interest, but not necessarily have all of these functions.

Adjust the authority to prioritize funding for projects and to issue bonds -- that was the limit.

At this juncture, can you provide any further details as to how you envision this structure of this entity and critically, what financial and other functions it will have? What we're going to try to do in the legislation that I'm going to propose is on transportation, environment, energy, telecommunications projects.

A further question is how you define infrastructure in your vision of the bank.

MR. ORSZAG: Well, let me first say one of the motivations for an infrastructure bank reflects a concern about the way we select infrastructure projects currently and whether they are based on efficiency and what will most benefit the economy.

I think we need to be moving more towards type of selection process, which a bank will help do. As I said before, there's going to be a lot more details coming from us in April and the full budget. I know that you've been very focused on this topic and Senator Dodd, your colleague from Connecticut, has been. There's a lot of congressional interest.

I would, at this point, just say we look forward to working with you to flesh out the details as we move into the full budget in April and as you move forward with the legislative process.

REP. DELAURO: I thank you for that and I will look forward to working with you and fleshing out the details.

Given the -- well, at least the success that I understand that has come through the European Development Banks is that I would hope that that's the kind of model that we are looking at, which we would absolutely be creating a bank in which we can do that that gets you to both processes which is to depoliticize the way in which the projects are determined and what the common good is -- the public interest, as well as allowing for there to be really a critical public/private partnership.

MR. ORSZAG: I remember one weekend -- spending the weekend reading a binder on the European Investment Bank because of your references to it. So thank you for that.

REP. DELAURO: I have a quick 16 seconds.

Early childhood education; we did $142 billion in the Reinvestment and -- the Recovery Package. Just tell me, with the current budget, what kind of a commitment are we going to be able to keep in serving all eligible children in this regard and to look to those kids and their providers -- or those programs and providers to meet the standards that were laid out in the Recovery Package?

MR. ORSZAG: In early education?

REP. DELAURO: In early education.

MR. ORSZAG: Yeah. Again, the president's budget includes very significant increases, puts us doubles early Head Start; there are significant investments in early education because evidence suggests that it works.

REP. DELAURO: Thank you very much. Thank you, Dr. Orszag. Thank you, Mr. Chairman.

REP. SPRATT: Mr. Langevin.

REP. LANGEVIN: Thank you Mr. Chairman. Director, thank you for being here and your testimony; I know you have a tough job and we appreciate the job you're doing and also the credentials that you bring to the new post.

I'm particularly pleased, first of all by the way that President Obama has made health care reform such a priority, and he's willing to tackle it now looking forward to the future and really it's one of the key components of how we're going to truly balance the budget and fix the economy for the long term, helping us to be competitive.

Let me just say this, Dr. Orszag. The president's budget obviously sets for an ambitious policy agenda while simultaneously adhering to an honest and sober accounting standard that realizes incredible fiscal challenges. And it's become clear that in order to rebuild our economy, we are going to have to make significant investments in key priorities like energy, education and health care while sacrificing in other areas.

One of the priorities that he highlighted in the budget outline is a reserve fund of more than $630 billion over 10 years to finance health care reform, which I mentioned and -- he certainly is a strong advocate for health care reform. I'm very interested in hearing more about this initiative in particular and so, my question is, it's stated that the reserve fund will be financed in part by new revenue and in part by savings proposals that promote efficiency and accountability, so on this point, can you please elaborate on that for me and what specific and budgetary policy changes need to be made to fully fund this reserve.

MR. ORSZAG: Okay, first, let's just again point out we want to get health care reform done this year and the reason we want to do that is not only to put the nation on a sounder fiscal path -- since health care costs are the key driver of our long term fiscal gap -- but also to help working families because their take-home pay is being reduced by excessively large health care costs and state governments that are facing problems financing their health programs and are having to starve other parts of their budget in order to finance health care.

The budget puts down $634 billion as a significant downpayment on getting health care reform done this year. It's split roughly half and half -- half additional revenue and half savings in Medicare and Medicaid that are focused on making those programs more efficient.

So, as one example, $177 billion in moving to a competitive bidding program for the private insurance firms that offer Medicare coverage; currently, they are paid $1,000 more per beneficiary than covering the same beneficiary under traditional Medicare because of artificial rules that were written to provide them the excessive payments. What we're saying is bid for the business and that's what you'll get paid; it saves $177 billion.

Similarly, there are changes in almost 20 percent -- I think it's 18 percent of patients are readmitted to a hospital within 30 days after being discharged. We are trying to provide incentives to reduce that. MedPAC and other experts have suggested significant efficiency improvements could come from better management of patients after they are discharged from a hospital to avoid those readmissions.

And by the way, its not only a cost thing, but who wants to go through getting admitted to a hospital, go through all of that, get discharged and then have to wind up back in the hospital. If you can avoid that, it's not only a costs saver, but it also makes people's lives better off. So we're trying to provide stronger incentives to hospitals to do a better job of avoiding the need for readmission.

We can continue this conversation, but basically I've given you some flavor for the types of things that are already in that significant downpayment and we want to work with the Congress to provide the full health reform package and get it done this year.

REP. LANGEVIN: And so that -- the new account that you're setting up, that's going to be a set aside in a sense as a down payment that we can draw on to achieve a form of universal health care as a starting point?

MR. ORSZAG: Yes. Correct.

REP. LANGEVIN: Can you tell me at this point, is it the president's vision that the health care reform that we hope to achieve would be mandatory-type universal health care, where we would include everybody as opposed to doing this piecemeal.

You know, I want to be on record as saying that I believe the only way we're going to achieve universal health care is to have it mandatory, that everyone has to be in the system. It's not necessarily going to be a one-size-fits-all but everyone has to be in the system. So you give me kind of a glimpse into where you're going.

MR. ORSZAG: Well, I think the goal is to move towards universal coverage and there are lots of ways of doing that.

You're going to see more details on Thursday at the Health Summit and you're going to see more forthcoming thereafter, but I think we're all clear that the goal is to move towards universal coverage.

REP. LANGEVIN: Okay. One of the things that I've also looked at -- two things I hoped you looked at.

One of the things that I've tried to do to achieve universal health care and move the debate forward is introduce a bill that achieves universal health care by using the Federal Employees Health Benefits Plan as the template. Again, it's not the big government run program, but it is government negotiated and what it does is it has the federal government negotiating a variety of different health care plans for the almost 9 million federal employees, dependents and retirees. I think it's an outstanding model for getting us closer to universal health care.

The other thing that I would hope that you would look at as we move in this direction is looking at places like the New America Foundation that have estimated that we already spend about 80 (billion dollars) to $120 billion each year on uncompensated care. Now, obviously that's a, you know, big gap between whether its 80 (billion dollars) or 120 billion (dollars), but it is a significant pool of money that we're, again, already spending on the uninsured. We are just spending it in the most inefficient way possible and we can achieve -- again, get closer to universal health care and achieve better outcomes and lower costs by spending that money upfront more wisely.

I don't know if you had any comment on that on compensated care and how we're spending it right now.

MR. ORSZAG: Clearly one of the issues involved in the existing health care system is that there's a lot of cost shifting that occurs from -- like a game of hot potato -- and uncompensated care is one manifestation of that phenomenon.

Moving to a more efficient health care system will mitigate that and that's one of the benefits of getting this health reform done.

REP. LANGEVIN: Is that -- my time -- it says zero on the clock, so --

REP. SPRATT: You're past, but go ahead if you have one more question please.

REP. LANGEVIN: President Obama's reserve fund, obviously, represents very -- obviously, you talked about a path to long-term reform. I guess what I'd like to do -- I'd appreciate it if you could highlight some of the other, maybe immediate funding investments that is made in the president's budget to address health care for 2010, specifically. And I want to talk about community health centers and the role they plan in -- over the short-term in providing health care access to the uninsured and underinsured and also how will their role in funding change as we move toward a system of universal health care? And by the way, I'm a big supporter of primary care, particularly primary care physicians. And I hope as you look at overall health care reform -- in addition to health centers, that we also put more money into incentivizing doctors or people going through medical school to go into primary care. The statistics are very clear that in those regions that have predominately primary care versus specialty care, you have better outcome and lower costs, and the other is true -- the reverse is true if you have more -- a higher percentage of specialty care versus primary care docs. So health centers and then primary care, if you could comment on those.

MR. ORSZAG: Again, I agree with your reading of the literature on primary care physicians and that map that I put up with the significant variation in health care costs is highly correlated with the ratio of specialists and primary care physicians, with a higher ratio generating higher costs without apparently better outcomes. But with regard to community health centers, as you know, there was a very substantial investment as made as part of the Recovery Act in community health centers. The evidence suggests they do provide quality care especially into populations that have trouble getting access to other parts of the health care system. And that raises a broader concern.

We've heard a lot about income inequality in the United States. There's also a degree of inequality in health outcomes that is growing over time. So for example, if you look at life expectancy, the gap between better educated and less educated families or people in life expectancy has been growing very rapidly. Part of that has to do with health behavior and part of it has to do with access to health care.

REP. LANGEVIN: Very good. Well, thank you for that and I think the health centers have been a real godsend in the sense of meeting a demand for health care that's out there that we're not getting anywhere else. And -- anyway, thank you for your answers and I look forward to working with you on all these issues.

Thank you, Mr. Chairman.

REP. SPRATT: Mrs. Moore.

REP. GWEN MOORE (D-WI): Thank you.

Dr. Orszag, I'm very impressed with the president's effort to cut the budget deficit in half within five years, but I'm concerned about that because balancing the budget as a primary budget outcome can somehow ignore other sorts of things that we need to do.

I'm reminded of FDR's pledge to balance the budget when he was running against Herbert Hoover and then, of course, when he got into office he had initiated the New Deal. And even though the budget deficit was 100 percent of GDP at the end of 1945, after a war, after the Depression, our economy was stronger because we, in fact, had made the investments -- used deficit spending as an investment.

So I'm concerned. So I say all that to say, -- number one, I'm concerned about whether, you know, about the complete absence of any discussion of there being a safety net outside of health care benefits and temporary increases in food stamps and I'm also concerned that you didn't mention at all how we're going to deal with the trade deficit. As long as we have a trade deficit, isn't it inevitable that we're going to have a budget deficit?

MR. ORSZAG: Well, let me deal with those in turn. This budget includes very important investments, not only in health care, not only in education, but in a safety net, including -- we discussed earlier some of the nutrition programs -- for example, the WIC program, which is a very important program for moderate- and low-income mothers and infants to provide them with nutritious food and other related materials and healthy nutrition; I'm just repeating myself. Sorry, it's already becoming a long hearing.

Secondly, the budget perpetuates or continues very important changes that were made as part of the Recovery Act and will provide significant assistance to low and moderate income working families, for example, the child tax credit that Representative DeLauro mentioned --

REP. MOORE: I just wanted to interrupt because I don't have much time.

MR. ORSZAG: Okay.

REP. MOORE: That's the whole point. You got to be working in order for this to benefit you. You know, those women for example -- receive ADFC. I mean, if you're unemployed, you're one of the people who, you know, doesn't qualify for unemployment compensation -- those are the people that I'm worried about.

MR. ORSZAG: Okay. And again, even on unemployment insurance, one of the important things that occurred in the Recovery Act and that we proposed as part of the budget is to expand eligibility for unemployment insurance. The rules were written on unemployment insurance 70 or 80 years ago in a different era, and as a result of outdated rules, lots of workers are excluded from being eligible for unemployment insurance when they should be eligible. So as a result, only -- fewer than half of unemployed workers receive unemployment insurance. We're trying to rectify part of those problems and the Recovery Act started us on that road, the budget will follow up on that.

REP. MOORE: Okay. And then the other part, how do we get to a -- cutting the budget deficit in half without dealing with the trade deficit?

MR. ORSZAG: Well, one of the reasons we have to get the budget deficit down over time is precisely because if we don't, we will continue to borrow from foreigners to a degree that is not sustainable.

So one of the effects of moving towards a reduced budget deficit and then also increasing household savings like through the automatic IRA is that gradually the trade deficit will improve.

REP. MOORE: Okay. Well, thank you. I yield back 29 seconds.

REP. SPRATT: Mr. Director. Well done. You not only get an A for presentation, but for endurance and forbearance as well.

Well done, indeed, and we look forward to working with you in the weeks ahead.

MR. ORSZAG: Thank you very much, Mr. Chairman.

REP. SPRATT: Thank you.

One final housekeeping detail. I would ask unanimous consent that all members who have a statement who were unable to present questions today be allowed seven days in which to file questions for the record. So ordered.

END.

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