Congressional Budget Office The Economic Outlook and Fiscal

Congressional Budget Office The Economic Outlook and Fiscal Policy Choices Testimony before the Committee on the Budget United States Senate September 28, 2010 Douglas W. Elmendorf Director

Labor Force Participation and Unemployment Rates Percent 2

History and Projection of the Unemployment Rate Percent 3

Policy Options § Policymakers cannot reverse all of the effects of the housing and credit boom, the subsequent bust and financial crisis, and the deep recession. However, in CBO’s judgment, there are both monetary and fiscal policy options that, if applied at a sufficient scale, would increase output and employment during the next few years. § Those same fiscal policy options would increase federal debt, which is currently larger relative to the size of the economy than it has been in more than 50 years—and is headed higher. § If policymakers wanted to achieve both stimulus and sustainability, a combination of policies would be required: changes in taxes and spending that would widen the deficit now but reduce it relative to baseline projections after a few years. 4

Cumulative Effects of Policy Options on Employment in 2010 and 2011, Range of Low to High Estimates Note: Assumes enactment early in 2010. 5

Effects of Four Tax Policy Options on Real GNP in 2011 and 2012, Range of Low to High Estimates 6

Effects of Four Tax Policy Options on Real GNP in 2020 7

Rising Burden of Federal Debt Held by the Public Percentage of GDP 8

Additional Slides 9

Unemployment Rate, for Men and for Women, 1980 to 2010 Percent 10

Unemployment Rate by State, August 2010 11

Effects of Policy Options on Output and Employment in 2010 to 2015, Assuming Enactment in Early 2010 Cumulative Effects on Employment GDP, 2010– 2015 (Years of full-time-equivalent employment (Dollars per dollar of per million dollars of total budgetary cost) 2010– 2011 2010– 2015 Low High Policy Options with a Substantial Proportion of Impacts Beginning in 2010 Increasing Aid to the Unemployed Reducing Employers' Payroll Taxes for Firms That Increase Their Payroll Reducing Employees' Payroll Taxes Providing an Additional One-Time Social Security Payment Allowing Full or Partial Expensing of Investment Costs 0. 7 0. 4 1. 9 1. 2 4 3 7 5 8 5 19 13 6 4 15 11 0. 4 0. 3 1. 3 0. 9 5 2 9 4 8 3 18 9 7 2 16 7 0. 3 0. 9 2 6 3 9 2 8 0. 2 1. 0 1 3 2 9 1 8 Policy Options with a Substantial Proportion of Impacts Beginning in 2011 Investing in Infrastructure Providing Aid to States for Purposes Other Than Infrastructure Providing Additional Refundable Tax Credits for Lower- and Middle-Income Households in 2011 Extending Higher Exemption Amounts for the Alternative Minimum Tax Reducing Income Taxes in 2011 0. 5 1. 2 * 1 2 4 4 10 0. 4 1. 1 1 1 3 7 3 9 0. 3 0. 9 * * 3 6 3 7 0. 1 0. 4 * * 1 1 4 3 1 1 4 4 12

Effect of Four Tax Policy Options on Federal Revenues and Marginal Tax Rates, 2011, 2012, and 2020 Impact on Revenues (Percentage of Gross National Product) Full Extension, Permanent Partial Extension, Permanent Full Extension, Through 2012 Partial Extension, Through 2012 Impact on Effective Federal Marginal Tax Rate on Capital Income (Percentage points) Impact on Effective Federal Marginal Tax Rate on Labor Income (Percentage points) -1. 2 -0. 9 2011 -2. 0 -0. 4 -2. 6 -2. 0 -1. 7 -1. 4 2012 -2. 1 -0. 4 -2. 7 -2. 0 -2. 1 -1. 6 * * 2020 -2. 3 -0. 4 0 0 -3. 0 -2. 1 0 0 13

Effect of Four Tax Policy Options on Macroeconomic Outcomes in 2011 and 2012 Full Extension, Permanent Partial Extension, Permanent Full Extension, Through 2012 Partial Extension, Through 2012 Real GNP Unemployment Rate Employment Full-Time. Equivalent Employment (Percent) Low High Estimate (Percentage points) Low High Estimate 2011 (Millions) Low High Estimate 0. 5 1. 4 -0. 2 -0. 5 0. 4 1. 0 0. 6 1. 4 0. 4 1. 1 -0. 2 -0. 4 0. 3 0. 8 0. 5 1. 2 0. 3 0. 9 -0. 1 -0. 3 0. 2 0. 6 0. 3 0. 9 0. 2 0. 7 -0. 1 -0. 3 0. 2 0. 5 0. 3 0. 7 2012 0. 6 1. 9 -0. 3 -1. 0 0. 7 1. 9 0. 9 2. 7 0. 5 1. 5 -0. 3 -0. 8 0. 5 1. 6 0. 8 2. 3 0. 3 1. 1 -0. 2 -0. 6 0. 3 1. 1 0. 5 1. 7 0. 3 0. 9 -0. 2 -0. 5 0. 3 1. 0 0. 4 14

Effects of Four Tax Policy Options on Real GNP in 2020 and the Long Term Effects Without Additional Policy Changes Weak Strong Labor Response Full Extension, Permanent Partial Extension, Permanent Full Extension, Through 2012 Partial Extension, Through 2012 Effects with Additional Policy Changes Needed to Put Fiscal Policy on a Sustainable Path Government Spending Tax Rates Increased Reduced After 2020 Weak Strong Labor Response -1. 6 -1. 3 -0. 3 -1. 1 -0. 9 -0. 3 -1. 4 -1. 6 -0. 3 -0. 2 n. a. 2020 -0. 9 -1. 8 -0. 3 -0. 8 -1. 1 -0. 3 0. 1 -0. 9 -0. 3 -0. 2 -0. 3 n. a. Long Term -2. 9 -2. 3 -2. 9 -3. 5 -0. 6 -8. 4 -7. 8 -0. 7 -10. 5 -11. 2 -0. 8 n. a. -0. 5 -0. 6 -0. 7 -0. 6 15

Long-Term Unemployment Rate Percent Note: The long-term unemployment rate is the percentage of people in the labor force who have been unemployed for longer than 26 weeks. 16

Projected Federal Revenue and Spending in 2020 Current Law (Baseline) With Tax Cuts Extended and AMT Indexed 17

Shares of Federal Spending Projected for 2020 in CBO’s August Baseline “Other Health Programs” includes: Health insurance subsidies, exchanges, and related spending; Department of Defense Medicare-Eligible Retiree Health Care Fund (including TRICARE for Life); Children’s Health Insurance Program, and other programs. 18

Share of Federal Revenues Projected for 2020 in CBO’s August Baseline 19