U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

28–250 PDF 2007

S. Hrg. 109–906

CONGRESS’ ROLE IN FEDERAL FINANCIAL

MANAGEMENT: IS IT EFFICIENT, ACCOUNTABLE,

AND TRANSPARENT IN THE WAY IT

APPROPRIATES FUNDS?

HEARING

BEFORE THE

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT 

INFORMATION, AND INTERNATIONAL 

SECURITY SUBCOMMITTEE

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MAY 25, 2006

Available via http://www.access.gpo.gov/congress/senate

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs

(

(II)

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL D. BOPP, Staff Director and Chief Counsel 

MICHAEL L. ALEXANDER, Minority Staff Director 

TRINA DRIESSNACK TYRER, Chief Clerk 

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND 

INTERNATIONAL SECURITY SUBCOMMITTEE 

TOM COBURN, Oklahoma, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

THOMAS CARPER, Delaware 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

KATY FRENCH, Staff Director 

SHEILA MURPHY, Minority Staff Director 

JOHN KILVINGTON, Minority Deputy Staff Director 

LIZ SCRANTON, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Coburn ................................................................................................. 1

Senator Carper ................................................................................................. 4

Senator Levin .................................................................................................... 21

WITNESSES 

THURSDAY, MAY 25, 2006

Hon. David M. Walker, Comptroller General, U.S. Government Accountability 

Office ..................................................................................................................... 4

Hon. James C. Miller III, former Director, Office of Management and Budget . 4

Hon. Timothy J. Penny, former Congressman, Senior Fellow, University of 

Minnesota Humphrey Institute .......................................................................... 7

Douglas Holtz-Eakin, former Director, Congressional Budget Office, Director, 

Maurice R. Greenberg Center for Geoeconomic Studies, Paul A. Volcker 

Chair in International Economics Council on foreign Relations ...................... 9

Chris Edwards, Director of Tax Policy Studies, CATO Institute ........................ 26

Maya C. MacGuineas, President, Committee for a Responsible Federal Budget 

and Director, Fiscal Policy Program, New America Foundation ...................... 28

ALPHABETICAL LIST OF WITNESSES

Edwards, Chris: 

Testimony .......................................................................................................... 26

Prepared statement .......................................................................................... 70

Holtz-Eakin, Douglas: 

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 59

MacGuineas, Maya C.: 

Testimony .......................................................................................................... 28

Prepared statement .......................................................................................... 79

Miller, Hon. James C., III: 

Testimony .......................................................................................................... 41

Prepared statement .......................................................................................... 48

Penny, Hon. Timothy J.: 

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 52

Walker, Hon. David M.: 

Testimony .......................................................................................................... 4

Prepared statement .......................................................................................... 31

APPENDIX 

GAO Selected Commissions Summary (5/25/06) chart ......................................... 85

Insert for the record from Wilma W. Broom to Christine E. Bonham ................ 88

‘‘Social Security, Medicare, and Medicaid Spending as a Percentage of GDP,’’ 

chart submitted by Senator Coburn ................................................................... 89

‘‘Supplemental Appropriations as a Percentage of Budget Authority,’’ chart 

submitted by Senator Coburn ............................................................................. 90

Questions and responses for the Record from Senator Levin from: 

Mr. Walker ........................................................................................................ 91

Mr. Holtz-Eakin ................................................................................................ 95

(1)

CONGRESS’ ROLE IN FEDERAL FINANCIAL 

MANAGEMENT: IS IT EFFICIENT, ACCOUNTABLE, AND TRANSPARENT IN THE WAY IT 

APPROPRIATES FUNDS? 

THURSDAY, MAY 25, 2006

U.S. SENATE,

SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT,

GOVERNMENT INFORMATION, AND INTERNATIONAL SECURITY

OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:30 p.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Tom Coburn, Chairman of the Subcommittee, presiding. 

Present: Senators Coburn, Carper, and Levin. 

OPENING STATEMENT OF SENATOR COBURN 

Senator COBURN. The Subcommittee on Federal Financial Management, Government Information, and International Security of 

the Homeland Security and Governmental Affairs Committee will 

come to order. I will give you all notice that we have six stacked 

votes at some time after 3 p.m., so I am going to put my statement 

into the record, just make a short summary, and I am going to ask 

General Walker to start out. 

I have read each of your testimonies. Senator Carper will be here 

sometime before we adjourn. Six stacked votes means about an 

hour and a half, and I am not about to ask anybody to hang around 

for that. What we will try to do is probably pick up our third panel 

at some point in the future. This is not the only hearing. This is 

a big issue; it is the biggest issue that we face. 

We are going to spend $2.7 trillion this year, of which we are 

going to add to the debt between last year and this year $1 trillion. 

When you do real accounting and you say what do we have left 

over and what do we owe at the end of the year, last year we added 

$538 billion to the debt. The debt this year is probably more likely 

$450 billion. 

We are on a truly unsustainable course. The question is, what do 

we do now? What do we do in the near and midterm so that the 

consequences of the solution fix the ultimate problem? I have two 

posters that I want to put up to just show one of the big problems 

2

1The charts referred to by Senator Coburn appears in the Appendix on page 89 and 90 respectively. 

is supplementals.1 Because they are outside of the budget guidelines, the rules that we have do not apply to them, so consequently 

you can see what is happening in terms of total dollar amount and 

as well as percentages for as to what is happening in terms of supplemental spending, net of rescissions, which go completely outside 

of the budget guidelines, completely outside of the authority we 

give ourselves. 

The second poster, if you would, is the total amounts. As a percentage of the total budget deficit, supplementals in the last 3 

years account for 23 or almost 24 percent of the total deficit. So 

just having the budget run on supplementals which is all sorts of 

mannerisms to play games, because now we put things we know 

are needed for legitimate things into supplemental and spend extra 

money inside the budget. So now we have a process going back and 

forth where the supplemental is now used as a tool to expand within the budget frameworks. 

Because of the Federal financial management of our country, 

there are two things going on. One is process and one is people, 

and we have had a diversity of opinion in your statements. One 

says it is all process and it is not leadership related; others say it 

is leadership related, that you can accomplish it within the process. 

The whole purpose of ours is not to debate the leadership question 

today. The question is how do we set a structure to solve the problems and secure that future and meet the unending challenges of 

about $50 trillion of unfunded liability. 

[The prepared statement of Senator Coburn follows:]

PREPARED STATEMENT OF SENATOR COBURN 

Last year, the Federal Government spent $2.5 trillion (OMB). We’re on track to 

spend at least $2.7 trillion this fiscal year. Last year our national debt increased 

a whopping $554 billion and it has already increased another $400 billion so far this 

year. This extra $1 trillion dollars that the Federal Government now owes, on top 

of the more than $7 trillion already owed, occurred because Uncle Sam continues 

to spend beyond his means year after year after year. 

Right now, GAO—Congress’ watchdog agency—estimates that our total debt is 

nearly 70 percent of the size of our entire economy. By the time our grandkids face 

the unenviable task of paying off this mountain of debt, GAO estimates that the 

debt will be almost four times larger than our entire economy. That means that if 

our grandchildren took every dollar of value created by the economy in one year to 

pay off the debt, they would still be left with debt three times larger than the economy. 

Clearly, we are on an unsustainable course. Now the question is what to do about 

it, and that means identifying the source of our fiscal mess. There’s been a lot of 

finger-pointing. Some claim the economy isn’t booming enough to bring in sufficient 

tax revenues. But our unemployment rate of 4.7 percent is lower than the average 

rates from each of the past 4 decades. Over the past 32 months of consecutive job 

creation instead of loss, nearly 5.3 million new jobs have been created. Inflation remains low. Some blame big corporations for jacking up prices and making it harder 

to get as much out of the dollar. But the only thing keeping the equality higher and 

price of goods and services lower in America is less government meddling in private 

markets, not more like we see in Europe. 

Some blame the tax cuts, but most Americans think that their government ought 

to be able to chug along just fine after confiscating 25–40 percent of their hardearned income. Some blame the President for not vetoing enough spending bills. 

That’s like driving drunk, and then blaming the bartender when you wreck your 

car. The Executive Branch is supposed to carry out the spending directions from 

Congress. 

3

The problem is us. Congress holds the power of the purse. The American people 

expect elected officials to run the government the same way to run a household or 

business—exercising the discipline to live within your means, saving some extra for 

emergencies and for long-term needs like retirement income and healthcare. If you 

fail to do that, and you spend beyond your means, the private market will step in 

and limit the amount you can go into debt by lowering your credit score and raising 

your rates. 

Congress operates under no such limits. It’s not because limits have never been 

set. Various budget reforms have passed for decades. But Congress has found ways 

around each and every one. And when the Senate’s budget rules get in the way, the 

Senate just ‘‘waives’’ them by a vote of 60 Senators. 

That’s 60 of us saying ‘‘we don’t have to live by the rules that American families 

and businesses live by.’’ Nobody can take away our credit, because we set our own 

limit. And when we reach that limit, we just vote to raise it. The latest episode a 

few weeks ago raised the debt limit to $9 trillion. 

It’s clear that the answer is not tweaking the rules at the margins. We need radical budget process reforms. But more than that, we need to create an environment—a set of conditions—that helps us live with our rules. It’s easy to break rules 

when there’s no accountability. One of the key conditions to creating accountability 

is transparency. Most people—even politicians—aren’t crooks by nature. But it 

never hurts to have transparency. 

Transparency helps our better natures play by the rules and reduces temptation 

for our lesser natures to cheat. Americans know that if they don’t pay their taxes, 

they might get audited and get caught. With the Enron and other corporate scandals, we saw that a lack of transparency to shareholders can result in bankruptcy 

and legal action. Our witnesses today will be talking about ways to bring transparency, efficiency and accountability to the budget process. I am pleased that our 

panel has several key players in the Federal budget process—both current and 

past—to help us discover weaknesses in the current system, and ways we can improve upon it. 

Most Members are still not ready to swallow the idea of having to make politically 

difficult budget decisions on the floor of the U.S. Senate. The purpose of this hearing 

is to get experts past and present who know the process well—to be able to identify 

what is a true budget reform versus a sham sound bite intended only to make the 

109th Congress look like budget hawks. This can begin an ongoing dialogue about 

what changes are really needed to restrain Congressional spending. The most effective way to discuss possible reforms to the current Congressional budget process is 

to ask the question: ‘‘Is the process efficient, accountable and transparent in the way 

it appropriates funds?’’

Because we’d better figure this our. There’s a rumble growing outside the Beltway. People are fed up with a Congress acting like teenagers who fritter away their 

allowance and then whine about how there isn’t enough money to buy the important 

stuff. The American people want us to start playing by the rules they have to play 

by, especially when it’s their money we’re ‘‘playing’’ with. If we don’t take our responsibility seriously, the rumble may just greet us at the ballot box.

Senator COBURN. And with that, I would like to introduce Hon. 

David Walker. He is Comptroller General of the United States 

since November 1998. He serves as the Nation’s Chief Accountability Officer and head of the U.S. Government Accountability Office. He has extensive executive-level experience in both government and private industry. He is a certified public accountant, has 

a degree in accounting, and he also has a senior management in 

government certificate in public policy from the John F. Kennedy 

School of Government. Mr. Walker, thank you. 

I also want to introduce—and then we will go in this order—the 

Hon. Jim Miller, extensive experience with the Federal budget 

process. He was Chairman of the Federal Trade Commission and 

Budget Director for President Reagan. He was the first Administrator of the Office of Information and Regulatory Affairs and the 

Executive Director of Vice President George Bush’s task force on 

regulatory relief. He is a John M. Olin Distinguished Fellow at the 

Citizens for a Sound Economy Foundation and at the Center for 

Public Choice at George Mason University. He is also a Senior FelVerDate 0ct 09 2002 10:17 Jun 07, 2007 Jkt 028250 PO 00000 Frm 00007 Fmt 6633 Sfmt 6601 C:\DOCS\28250.TXT SAFFAIRS PsN: PAT
4

1The prepared statement of Mr. Walker appears in the Appendix on page 31. 

low at the Hoover Institution at Stanford University. He is currently Chairman of the Capital Analysis Group and was elected by 

the U.S. Postal Service Board of Governors to be its Chairman in 

2005. 

Douglas Holtz-Eakin is the former Director of the Congressional 

Budget Office, Chief Economist of the White House Council of Economic Advisers. He is a leading expert in economics and economic 

policy, tax, entitlement, and health and budget policy, defense 

budgets, domestic and international finance. He was Chairman and 

Trustee Professor of Economics at Maxwell School, Syracuse University, a visiting professor at Princeton University, and a professor at Columbia University. His expertise in the realm of congressional budgeting will be invaluable to our discussion today. 

Also, I am honored to have the Hon. Tim Penny, former Congressman, who co-directs the Humphrey Institute Policy Forum at 

the University of Minnesota. He represented southeastern Minnesota’s 1st Congressional District from 1982 through 1994. While 

in the U.S. House, Mr. Penny served on the Agriculture and Veterans’ Affairs Committee and the Select Committee on Hunger. 

While in Congress, he founded and co-chaired the Democratic 

Budget Group and drafted deficit-cutting initiatives. He is a board 

member of the Committee for a Responsible Federal Budget, the 

Concord Coalition, an advisory board member for a Clean Campaign Project, the Minnesota Compact. He is the co-author of two 

books, ‘‘Common Sense’’ and ‘‘Payment Due.’’ It is a privilege to 

have an insider on the panel today who truly knows that spending 

in Washington is out of control. 

Let me introduce first General Walker, if you would, and I will 

give our Ranking Member, my co-Chair, Senator Carter, an opportunity for an opening statement. I put mine in the record. There 

are six votes coming in. 

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. Let me just say to our Governor, Governor Miller, to Congressman Tim Penny, who is one of my dearest friends 

and someone who—we were both elected to the class of 1982. If you 

ever look up in the dictionary the term ‘‘fiscal hawk’’ or ‘‘budget 

hawk,’’ his picture is right there. He was a great leader on this 

front. 

It is always great to be with General Walker, and to our former 

CBO Director, thank you for being here and for the good work you 

have done. I look forward to your testimonies. Thanks for joining 

us. 

Senator COBURN. General Walker. 

TESTIMONY OF HON. DAVID M. WALKER,1 COMPTROLLER 

GENERAL, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. WALKER. Mr. Chairman, Senator Carper, I would respectfully suggest that the entire statement be included in the record, 

and I am going to give you a quick executive summary so you can 

hear from the others and we can go to Q&A before your votes. 

5

1The prepared statement of Mr. Miller appears in the Appendix on page 48. 

Senator COBURN. All of your statements will be made a part of 

the record. 

Mr. WALKER. Thank you. As you know, Mr. Chairman, I have 

been outspoken in saying that our Nation’s financial condition is 

worse than advertised, and that we face large and growing structural deficits due to known demographic trends, rising health care 

costs, and lower Federal revenues as a percentage of the economy 

than historically has been the case. We are running very large 

structural operating deficits, most of which have nothing to do with 

Iraq, Afghanistan, and incremental Homeland Security costs. This 

must change. 

The process is important, but it is not a panacea. Leadership is 

essential in any event. However, the process can help. In my view, 

we need to reinstitute and strengthen controls to deal with both 

near-term and longer-term deficits, and we need to focus on a process that will help the Congress to tackle the large and growing 

long-term fiscal challenges facing our Nation. Among other things, 

that means improving the transparency of long-term costs of current proposed tax and spending decisions, as well as in all likelihood the formation of a credible and a comprehensive tax and entitlement reform commission that can make recommendations to the 

President and the Congress. 

Specifically, with regard to reimposed and enhanced budget controls; we need to reimpose discretionary spending caps; and reimpose pay-as-you-go rules on both the spending and the tax side of 

the ledger. When the bottom line is bleeding, we cannot afford to 

exempt one side of the ledger. Tax expenditures represent backdoor spending. If we don’t have controls on both sides of the ledger, 

we are not going to control the bottom line. 

We need mandatory spending triggers and appropriate sunset 

provisions for both direct spending programs and tax preferences, 

potentially with specific default mechanisms that would take place. 

And we need to modify the rules dealing with selected items such 

as earmarks and emergency designations. 

Mr. Chairman, I could go on at some length, but let me just say 

again, the process is no panacea, but the process does matter. However, no matter what process is in place, leadership is essential. 

Our long-range imbalance has gone from $20 trillion in 2000 to $46 

trillion at the end of fiscal year 2005. It will likely hit $50 trillion 

plus by the end of this fiscal year, and it is going up every second, 

of every minute of every day, due to continuing deficits, due to 

known demographics trends, and due to compounding interest 

costs. The time for action is now, Mr. Chairman. Thank you. 

Senator COBURN. Governor Miller. 

TESTIMONY OF HON. JAMES C. MILLER III,1 FORMER 

DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET 

Mr. MILLER. Thank you, Mr. Chairman and Senator Carper. 

Thank you for inviting me here today. The budget process is clearly 

dysfunctional. Deadlines are missed; people don’t know what are in 

the budgets. Telephone numbers are written in the side margins. 

I remember one time when the President received a budget that 

6

was so big and so long, it took all the OMB people working through 

the night to try to make sense of it. I told him the next morning, 

‘‘I still don’t know all that is hidden in there.’’ But he had to sign 

it because the government would have to shut down otherwise. 

I think people are important, leadership is important, but the 

main thing is the process needs to be changed. If you have a system, a set of processes that incorporate incentives to do bad things, 

you are going to get a lot of bad things. If you have a system that 

incorporates incentives for people to do the right things, you will 

tend to get the right things. It is sort of like the good man theory 

of regulation. Mr. Holtz-Eakin will probably remember this. Back 

in the 1960s and 1970s, there was a lot of debate over what caused 

the Federal economic regulatory agencies, such as the IC&C and 

the CAB, to do bad things, to get bad results. One idea was it was 

the ‘‘good man theory.’’ If the President would just appoint good 

men and women to these agencies and the Senate would confirm 

them, then everything would be taken care of. 

And another said, well, no, it is the institutions. It is the laws 

that have them do the regulating and make these bad decisions 

that are at fault. President Ford, President Carter, President 

Reagan, and the Congress during those periods of time made 

changes, and in fact we have had, rather universally applauded, 

more competition and greater efficiency in those markets. 

Closer to home, many of us who are very concerned about excessive government and reining in the excesses of government spending and so forth. If you had a Republican House and a Republican 

Senate, all this would be taken care of. If you had a Republican 

President, it would be nirvana, right? But that is not what happened. You did have some changes in the class that came in in 

1994, that was elected in 1994 and 1995, and so for a while you 

had retraction in the growth of spending. The deficit came down to 

zero. You had stimulated economic growth, but then there has been 

a lot of recidivism. And so an academic might legitimately ask the 

question, are there differences between Republicans and Democrats? Are there differences between conservatives, budget hawks, 

and big spenders? It would appear, with respect to the budget, that 

the budget process, the incentives that incorporated in being a Congressman and responding to constituent needs within the confines 

and the contours of the overall process, yield results irrespective of 

political leaning or ideological leaning. And so it is the budget process that really needs to be fixed. 

Since leaving OMB, I have written about some of this. You have 

to applaud the 1974 Budget Act. Its intent was to rein in the excesses by having Congress vote on at least the limits, the total 

spending, the total revenues, etc. But the system is broken down 

because the deadlines are not met. 

Gramm-Rudman-Hollings was a great thing and it worked the 

first year, and then Congress got cold feet and redrew the numbers. 

If you have targets and they do not like them, you change the targets. 

I have recommendations. You ought to make the budget resolution a joint resolution, include the President, make it a law, not 

just a concurrent resolution. I would suggest a new Gramm-Rudman-Hollings law or something like that to limit spending. You 

7

1The prepared statement of Mr. Penny appears in the Appendix on page 52. 

need a line-item veto. Go ahead and approve the President’s lineitem veto. I wrote an op-ed published in yesterday’s Washington 

Times, that talked about the President can actually ‘‘veto’’ most of 

the pork, the vast majority of the earmarks in the budget, because 

they appear in the report language, they don’t appear in the legislation themselves. They don’t meet the Presentment Clause of the 

Constitution, so the President can veto them himself. 

I think you ought to sunset entitlements, not end them necessarily, but to force the process of evaluating them every few 

years. You ought to eliminate ‘‘budget speak.’’ Only in Washington 

can you talk about a rate of spending this year that is less than 

what you might have liked to have seen and call it a cut, when this 

rate of spending for this year may be 10 percent more than it was 

last year. Also, I think you ought to institute a regulatory budget. 

I see my time is up. Thank you, sir. 

Senator COBURN. Congressman Penny. 

TESTIMONY OF HON. TIMOTHY J. PENNY,1 FORMER CONGRESSMAN, SENIOR FELLOW, UNIVERSITY OF MINNESOTA 

HUMPHREY INSTITUTE 

Mr. PENNY. Thank you, Mr. Chairman and Mr. Carper. It is good 

to be with you today. 

Budgets matter. I think it was former Rules Committee Chairman, Richard Bolling, who once said, ‘‘If I give you control over policy and you give me control over process, I will beat you every 

time.’’

Senator COBURN. John Dingell told me that. 

Mr. PENNY. John Dingell was known to say that as well. These 

are the fundamental truths of Washington budgeting, that when 

we have had a budget process, we have done better. Gramm-Rudman-Hollings was violated after the first couple of years, but nonetheless it put the focus on deficit reduction. It forced us to make 

tougher decisions than we otherwise would have made. When we 

replaced that with the Budget Enforcement Act during the 1990s, 

those spending caps and that PAYGO system on entitlement and 

tax policy held the line on spending to a large extent and allowed 

the growth in the economy and the resulting growth in revenue to 

bring us back to a balanced budget for the first time in 30 years. 

So process matters. 

Good process accomplishes several things. It sets the terms for 

the debate. It helps us to set overarching goals. It helps us to set 

priorities within those goals. It ought to give us some increased 

transparency so people understand what is happening and can hold 

folks accountable for what has happened—good, bad, or otherwise. 

A process also ought to help us measure results, because whatever 

we are spending, we ought to be getting value for our dollar. And 

finally, it ought to help us look over the longer term. It ought to 

help us look beyond the horizon into the implications that this 

might have in the next generation. That is what good process can 

do for us. 

We have got a process in place for the past several years, and 

the numbers tell the story. In 2000, spending totaled $1.79 trillion 

8

or 18.4 percent of GDP. In 2006, it is expected to reach $2.7 trillion 

or 20.2 percent of GDP. Going back to 2000, revenues totaled $2 

trillion or 20.9 percent of GDP, and in 2005, revenues were expected to be $2.15 trillion or 17.5 percent of GDP. We have not had 

a budget process that has forced us to look at these two numbers 

and reconcile them in any way. And so without a budget process 

going forward, I think we can only expect more of the same. 

I agree with some of the recommendations that have been made 

by the previous two speakers and will add a few more that will 

probably be repeated and reinforced by other speakers here today. 

Clearly, I think we need a national budget. We never have really 

had one. For many years the President set the terms of the budget 

debate and then the Congressional Budget Act in 1974 brought 

Congress into the act, but we have competed between OMB and 

CBO on budgets every year. Congress has it is own budget resolution that is a concurrent resolution. We really need a joint resolution so that the broad numbers are agreed upon at the front end 

of the process and it becomes a binding law that all parties have 

to abide by. 

I think we need to move toward biennial budgeting. We reinvent 

the wheel every 12 months around here. We sometimes are dealing 

with the next year’s budget at the same time that we are trying 

to implement the current year’s budget. Too much overlap, too 

much duplication of effort. A biennial process would also give us 

more time for reflection. We have Inspectors General reports. We 

have GAO studies. We have CRS studies. We have more information than we know what to do with because we are always caught 

up in this frenzy of annual budgeting. If we had a year to take a 

breather to look at some of these reports and recommendations, we 

could clean up the budget process, find savings, find more efficient 

ways to deliver government services. 

We need to restore the Budget Enforcement Act with its spending caps on the discretionary side of the budget, as well as its 

PAYGO principles on the tax and entitlement side of the budget. 

Frankly, we are getting so badly out of control between revenue 

and expenditures, much of it driven by automatic programs, the 

mandatory entitlement programs, that we may need to take the 

PAYGO process a step further, put it on steroids, and require that 

any tax increase be accompanied by comparable tax cuts. We are 

so far behind the eight ball right now that just holding the line perhaps is no longer enough. 

Next, let me point to a couple of issues that a small in the scale 

of the overall deficit but huge symbolically, and significantly important because if we can’t deal with these, who are we kidding to 

think that we can tackle these longer-term entitlement issues. It 

is pork barrel spending. 

We need something akin to the Byrd rule that denies, unless 

there is a super-majority vote, extraneous matters from being included in the reconciliation bill. We need to apply that to all spending bills so that these extraneous pork barrel items are forced to 

a separate vote in some fashion before they clear the Congress. 

We need to look at what has happened in the last decade or more 

on pork barrel spending. In 1991, there were like 546 pork barrel 

projects in all of the 13 appropriation bills. By 2005, that was 

9

1The prepared statement of Mr. Holtz-Eakin appears in the Appendix on page 59. 

13,997. It went from costing us about $3 billion a year to now $27 

billion a year. It is wildly out of control and needs to be brought 

back into some restraint. And we also need to look at the egregious 

approach to emergency spending in the last several years. 

In the decade on the 1990s, we allowed a loophole of emergency 

spending to take us beyond our current year budget. But it was always very limited, and the bulk of that spending was tied to the 

immediate emergency at hand, averaging maybe $16 billion a year. 

We are now up to about $160 billion with some of our recent emergency spending bills, and they always get larded up with pork barrel items. 

So that is the kind of reform that is sort of a prerequisite to courage. If you can’t gin up the courage to do these things, who are we 

kidding to think we can do the longer-term things and entitlements? And I would also recommend that we authorize the CBO 

to do an intergenerational impact statement on every budget that 

comes through the Congress. 

Senator COBURN. Thank you, Congressman. Dr. Holtz-Eakin. 

TESTIMONY OF DOUGLAS HOLTZ-EAKIN,1 FORMER DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE, DIRECTOR, MAURICE R. 

GREENBERG CENTER FOR GEOECONOMIC STUDIES, PAUL A. 

VOLCKER CHAIR IN INTERNATIONAL ECONOMICS COUNCIL 

ON FOREIGN RELATIONS 

Mr. HOLTZ-EAKIN. Mr. Chairman, Senator Carper, thank you for 

asking me to be here. As I mentioned in my written statement, 

there is a lost list of perceived failings with the current budget 

process. Let’s just stipulate that it is failing and move past that. 

It would be useful to develop a process that will identify the actual decisions Congress has to make and help to implement those 

decisions. In doing so, I think it is important to keep an eye on the 

ball and make sure that the process, whatever it may be, is comprehensive in scope; that there are no opportunities for claiming 

things are off budget or somehow irrelevant when they commit the 

taxpayer to coming up with resources to meet decisions made by 

the Congress. 

It should identify all the decisions, including the ones that currently get passed by on a yearly basis, things which should be 

chopped out of the budget, things which should be renewed. It 

should include enforcement. To have a budget process that does not 

include the enforcement, allows for artificial trade-offs, pretend 

savings in future years for current appropriations stand out at the 

moment. It should be focused on the decisions Congress has to 

make, so it should be oriented around spending decisions, tax policy decisions, not outcomes. Gramm-Rudman-Hollings focused attention, but you can’t control the outcomes. You can only control 

what the Congress does. And it should be tied to the financial management system. It should integrate smoothly with the actual operations of the agencies so that it is transparent, the link between 

what Congress decided and what came out. That will improve the 

accountability in result and help in the oversight process. 

10

I had a fairly long list of potential ways one could go forward, 

ranging from what I think of as small things like Band-aids to the 

rethinking it from scratch. It is important to recognize that there 

is no such thing as the budget process. There has to be a process 

which supports the Congress’ policy decisions. As has been mentioned, it can’t substitute for the Congress making policy decisions 

because a future Congress can always reverse it. So it cannot by 

itself get the right answer, but it can help Congress identify decisions, it can support the decisions that Congress has made. That 

is the obligation of a good budget process. In redoing a budget process for the future, as opposed to the one which we have had so far, 

I think it is important to do at least two things: 

First, to clean up the concepts in the budget. Only in this day 

and age would it be possible to label something an offsetting receipt, call it negative spending, when it accounts to the same thing 

as a tax. On the other side of the budget, we have lots of tax credits which are just vouchers being handed out. They are spending 

programs done through the Tax Code. You can claim they are tax 

cuts; the economics is the same. It really needs to be cleaned up 

so that there is an actual matching between policy objectives and 

the instruments the Congress uses. 

Second, it should be focused around mandatory spending. The big 

issue here is Social Security, Medicare, and Medicaid. That is it for 

the future. Once the decision is made to spend those monies, they 

are going to be paid for one way or another. So I think removing 

the distinction between discretionary and mandatory would be a 

good step. Money is money. The Congress is going to commit to 

spend taxpayers’ money and the big money is in mandatory. So 

every year those programs should be looked at. 

Thank you for the opportunity to be here, and I would be happy 

to answer your questions. 

Senator COBURN. Well, let me thank each of you. Let me just go 

through. Do all of four of you agree that a biennial budgeting process could work better? Does anybody disagree with that? 

Mr. WALKER. I think it deserves serious consideration, and I 

would like to think that Congress would spend the extra year doing 

more oversight and analysis, and if, in fact, they did, it would be 

a plus. I have my doubts as to whether or not they would. 

Mr. HOLTZ-EAKIN. I am skeptical. At the moment we have Appropriations Committees that have to do appropriations every year, 

and authorizing committees which have years to do the oversight 

of the programs they have authorized. It doesn’t happen. I don’t see 

what more time will do besides give them more time to not do the 

oversight. It may work. I mean, no one knows, but it won’t work 

worse. 

Senator COBURN. One of the groups that does oversight is the appropriation process. They do oversight hearings besides authorizing 

committees like this Committee. If you had a 2-year budget cycle, 

would there not be more time available for the appropriators who 

tend to do more oversight than the authorizing—would there not 

be more time for the appropriators to do it? And could you not 

make it mandatory—if you had a budget process change where you 

mandated that, as a function of this Committee, at a minimum 

these programs will be looked at and oversighted every so many 

11

years. Whether you call that sunset or not, the fact is this Committee, myself and Senator Carper, have had more oversight hearings than any committee in Congress. 

Mr. HOLTZ-EAKIN. I think you hit the nail on the head. It is not 

just biennial budgeting. That may, in fact, serve as part of a better 

process. It is what you do along with it to make sure that that time 

is used effectively. Just giving more time I don’t think will do it. 

Senator COBURN. Congressman Penny, you could probably address this more, having had the experience. Can you see a way 

where we could write that obligation into a budget bill that says 

this is a requirement of the committees, both the authorizing committee and the appropriating committee? 

Mr. PENNY. The underlying Budget Act allows an opportunity for 

every committee of Congress to submit its recommendations to the 

Budget Committee before it develops the budget resolution. It 

seems to me that you could amend the budget law to require sort 

of a review and analysis of any and all reports from various agencies as part of the committee’s responsibilities each year, and they 

could report that to the Budget Committee. The Budget Committee 

in turn could report essentially an off year-reconciliation bill to incorporate those changes. I think that there is a way that the budget process could anticipate and instruct that to happen. 

Senator COBURN. Governor Miller. 

Mr. MILLER. I think biennial budgeting is a good idea. One thing 

you would have to worry about or be concerned about is the abuse 

of the supplemental process, because on the off years there would 

be enormous pressure to do a supplemental appropriation which 

could easily get out of hand. You would have to zero sum with the 

existing budget or something of that nature. 

Senator COBURN. Can you imagine a budget process reform that 

said if you have a supplemental bill, you have to have rescissions 

equal to the supplemental? 

Mr. MILLER. Every supplemental I sent up or I prepared for 

President Reagan had that in there. 

Senator COBURN. Let me rephrase that question. Do you think 

the American people could see that? Washington, I know doesn’t 

see that. But if you were to look at everybody else, how they have 

to run their business or run their family, if they have to do a supplemental, they have to rescind somewhere. 

Mr. MILLER. Exactly. 

Senator COBURN. And they don’t get the privilege of printing 

money to make the difference. So answer it in the context: One, is 

it good policy? Two, given your skepticism that I saw in all of your 

faces when I mentioned it, in light of what the American public 

might decide, should we try to do something like that? 

Mr. HOLTZ-EAKIN. I think it is good policy. I think if you are 

going to go this way, the piece you need is a tight definition of 

emergencies, a genuinely tight definition of emergencies, and some 

allowance ex ante, right up front, for emergencies. So, budget for 

the emergencies and stick to it. And then anything above the budgeted, you have just got to deal with an offset. Otherwise, the temptation in circumstances which are genuinely bad to create an emergency and then expand the definition is going to overwhelm that 

process. So that is a key part of doing this. 

12

Senator COBURN. Well, we have a good definition, a pretty good 

definition of ‘‘emergency’’ now and it is totally ignored. I spent a 

lot of time on the floor putting that definition out during the recent 

supplemental, and everybody ignored that part of the debate because it definitely didn’t meet the qualifications. So if we don’t follow the rules of what we say is an emergency, even though you 

tighten the definition, it gets back to the process. 

Mr. PENNY. Well, supplementals are typically driven by emergency situations, natural disasters, and that can be anticipated because we have got decades of history telling us roughly how much 

we spend on that every year. 

Senator COBURN. So we could budget. 

Mr. PENNY. You could budget for it ahead of time, and then deal 

with the overages in a pay-as-you-go fashion. 

Mr. MILLER. What you could also do is supplementals. You have 

the Budget Act requirement for supermajority for certain things. 

So, with 2-year budgeting and you have supplementals, maybe the 

way to police the supplemental would be to require supermajority 

for not zero budgeting or not rescinding as much as you proposed 

to increase spending. And that would also be a measure of emergency. If it is truly an emergency, you would easily get a supermajority. 

Senator COBURN. General Walker. 

Mr. WALKER. Mr. Chairman, I would say that if you are going 

to pursue biennial budgeting, it would be incredibly important to 

be able to link it as part of a package, to more comprehensive reforms, so you are not just going to a biennial budgeting process, 

but you are tightening up on emergencies, tightening up on 

supplementals, and doing something on earmarks as well as increasing the likelihood that the time that will be freed up from the 

normal process will be used productively. 

Candidly, just this morning I was on the House side talking to 

the leadership on one side of the aisle, and bringing them a copy 

of our high-risk list, which you are very familiar with, and our 21st 

Century Challenges document, which you have read more than one 

time. That is a lay-up, an absolute lay-up for constructive oversight 

and yet this Subcommittee and the full Committee and your counterparts in the House are really the only ones that have used them 

to any great extent. I mean, this involves billions and billions of 

dollars every year. 

Senator COBURN. Congressman Penny, you said that there may 

come a point in time when we look at the process of the national 

budget that tax increases would be accompanied by—you said tax 

cuts, but I think you meant——

Mr. PENNY. I meant spending cuts. The nice thing about testifying here is I get a chance to edit those remarks. I thought of that 

after I turned my light off. What I meant is this is so far out of 

whack with the spending lines and the revenue lines going in the 

wrong direction, that simply holding the line is not going to get us 

to a balanced budget anytime soon. And so we may need PAYGO 

on steroids, which is really tax increases matched with a comparable dollar’s worth of spending cuts, so that we really begin to 

move the budget back toward balance. If we don’t get this done beVerDate 0ct 09 2002 10:17 Jun 07, 2007 Jkt 028250 PO 00000 Frm 00016 Fmt 6633 Sfmt 6601 C:\DOCS\28250.TXT SAFFAIRS PsN: PAT
13

fore the baby boomers begin to retire and the cost of Medicare and 

Social Security begin to explode, we are in deep doo-doo. 

Senator COBURN. Before I go to Senator Carper, because I want 

to give him some time, this Subcommittee has had testimony that 

the tax gap is $350 billion. This Subcommittee has already found 

in excess of $200 billion annually in wasted or defrauded payments 

by the Federal Government. That is $550 billion. Now, that solves 

our problem today, but it does not solve our entitlement problem. 

How do we get past the point to where when we say we want 

to do a tax increase—which I have always said if we are efficient 

and we need more money, that is our option or we decrease benefits and that is the hardest thing to do. How do we justify a tax 

increase when we don’t justify the ability to make the government 

run the way it should run? 

Mr. PENNY. Well, and that is why I said this is like PAYGO on 

steroids. This way, if you match it with comparable spending cuts, 

measurable, scorable spending cuts, then you are guaranteeing 

that whatever tax revenue you achieve through cleaning up the 

Tax Code, getting rid of some wasteful loopholes and deductions, 

whatever it might be, you guarantee that all of those revenues go 

to the bottom line and help us reduce this deficit. But if you don’t 

do that, I can understand resistance to do even tax reform for fear 

that the money will just be squandered on higher spending. 

Senator COBURN. Senator Carper. 

Senator CARPER. It is a great panel, isn’t it? 

Senator COBURN. It is. I was just thinking I am going to ask Senator Carper if he would help host a dinner where we could sit down 

and——

Senator CARPER. That is funny. I was thinking the same thing. 

I think Dr. Eakin didn’t put forth his list, but I suspect he had 

a laundry list there of things that we might do. But several of you 

have and they are actually quite good lists. 

Where do you think you agree, where do you think there is consensus just on some of the truly significant steps that we ought to 

consider taking? Where is the consensus among the four of you? 

Mr. WALKER. Reimpose budget controls. I don’t know if we are 

in total agreement as to what that should be, but clearly I think 

all of us are saying that one of the reasons that Congress was able 

to bring back more fiscal discipline was because there were meaningful budget controls in place that forced the Congress to make 

tough choices. Right now they have all expired. If anything, you 

need tougher controls than you had before, because we are in worse 

shape over the long term today than we were then. 

Senator, I would like to mention two examples of what is wrong 

with the current budget rules. They represent poster cases that 

need to be on the table. First, Medicare Part D, with a $8 trillion 

plus price tag. That number was never discussed or debated before 

the bill was enacted into law. It is absolutely critical that Congress 

consider the discounted present value dollar cost of major spending 

and tax proposals before it acts, because we need to understand the 

long-term affordability and sustainability of proposed legistation. 

Second, the recent tax cut extension, the way that was paid for is 

shocking. Short-term, one-time revenue gains through conversion of 

regular IRAs to Roth IRAs, coupled with long-term structural revVerDate 0ct 09 2002 10:17 Jun 07, 2007 Jkt 028250 PO 00000 Frm 00017 Fmt 6633 Sfmt 6601 C:\DOCS\28250.TXT SAFFAIRS PsN: PAT
14

enue losses. The only reason it worked is because the budget rules 

assume the country is going to end in 10 years. And it is not. 

Senator CARPER. If we keep this up, it might. 

Mr. WALKER. No, I think we have got longer than that. 

Senator CARPER. I hope you are right. Again, I am looking for 

consensus. You have mentioned budget controls, budget rules, and 

we have talked about PAYGO on the spending side as well as on 

the tax side. Let me just ask you, is there a consensus on that, that 

PAYGO should be a two-way street? 

Mr. MILLER. I am not all that big a fan of PAYGO because I 

think it did not have as much effect as some people believe it did. 

Tim and I both were saying a joint resolution, make the budget 

resolution a joint resolution. 

Senator CARPER. Is there anybody that doesn’t agree on that? 

Mr. WALKER. Having a budget for the United States, would be 

a good thing. 

Mr. MILLER. The transparency, I think we would all agree making the budget transparent, talking about it in plainer language 

and honestly, with integrity, would be something else that we 

would agree to. But whether it is PAYGO or whether it is GrammRudman-Hollings or it is a constitutional amendment that limits 

spending or something like it, or a rule that spending cuts have to 

accompany every tax increase and things of this nature, those are 

very much needed. We could call those controls, but those kinds of 

institutional controls I think all four of us would agree are needed. 

Senator CARPER. General Walker, go ahead, sir. 

Mr. WALKER. I think that other thing that everyone would agree 

on is there has to be an improved conduct of oversight on both the 

tax and the spending side so that the American public has confidence in the use of their dollars so that when the future comes 

they don’t feel ‘‘gamed,’’ and so that they believe we are doing the 

best we can as a government. 

And the second thing I think we would agree on is we will have 

to scale back the spending in Medicare, Medicaid, and Social Security. We may have to raise taxes as well given the scale of this. 

They are going to have to feel the same way on the tax side. 

So the oversight piece of this is both good government and a nobrainer. It is also essential to the compact between the public and 

the government. 

Mr. WALKER. I think we all also agree that we need to tighten 

what is happening with regard to supplementals, with regard to 

emergencies, and with regard to earmarks. And the last thing I 

would say is, candidly, this country spends over $2.5 trillion a year 

and forgoes between $700 and $800 billion a year in revenues because of tax preferences. In a vast majority of the cases, we have 

no idea whether those programs and tax preferences are working 

or not and who is benefiting from them. And that is just outrageous. We need to figure out what we can do to make sure we 

are coming up with some outcome-based metrics that we can use 

to assess the effectiveness of these programs and policies and to reconsider them as part of a normal structured process over time, because last year we incurred expenses of $1.35 for every $1 in revenue, and it is going to get worse if we don’t do something. 

15

Senator CARPER. General Walker was up in Delaware with some 

folks from the Concord Coalition. Congressman Mike Castle and I 

hosted a forum. We thank you very much for coming, and you were 

well received and made a whole lot of sense. I mentioned to the 

folks that were gathered that day at the riverfront that when I was 

Governor of Delaware, if I had proposed budgets that were hopelessly out of balance and called in the legislature to do the tough 

work of balancing the budget, they would have run me out of town. 

In fact, they would have run me out of the State. 

Congressman Penny and I once had an opportunity to vote on a 

balanced budget amendment to the Constitution that Charlie Stenholm, Larry Craig, and I had worked on for a long time. It was an 

amendment that did not mandate a balanced budget every year, 

but what it said is at a date certain, the President has to propose 

a balanced budget, and at a date certain, the Congress can unbalance the budget but you need a supermajority, three-fifths vote—

to unbalance the budget, you need a supermajority; you need a 

three-fifths vote to raise the debt ceiling. I think we got 280 votes, 

we needed 290. We got pretty close in the House to passing it. 

We also voted on something called statutory line-item veto powers for the President, something that Dick Armey joined me in offering. It was a little different than the one that actually passed 

and got signed into law, because our approach was sort of a 2-year 

test drive. There was a lot on unease about giving the President 

that kind of authority and would he or she use that to intimidate 

others to support his or her proposals in order to make sure that 

some things that we were interested in didn’t get marginalized. 

So we proposed a 2-year test drive on line-item veto powers. It 

said the problem with the President’s rescission powers is Presidents can offer rescissions forever, but unless we vote on them, 

then it may as well not take the time to submit them, and we just 

basically were ignoring the rescissions that were submitted. So we 

said how about an approach where for 2 years we try this: When 

the President submits a rescission, there is an expedited process 

that brings it up for consideration before one body and then the 

other. Either body could literally defeat the rescission with a simple majority vote. 

For programs that were authorized, fully authorized, the President could rescind as much as 25 percent of those; for unauthorized 

programs the President could propose rescission equal to 100 percent of the unauthorized programs. After 2 years, the authority to 

do this would sunset unless it were extended. And I think we had 

about a three-quarters vote in the House, the majority of both parties who voted for it. It got over here to the Senate, and my dear 

friend, who was then the Chairman of the Appropriations Committee, a senior Senator from West Virginia, whose name will go 

unmentioned from these lips, but I am told it got slowed down 

there and ultimately it didn’t pass. 

I am not sure that it would meet constitutional muster. We are 

going to ask CRS, among others, to give us their opinions on that. 

But that was one of the thoughts we had to—and I don’t think the 

line-item veto is the end-all/be-all. I think it is a marginally helpful 

tool but it could be helpful. 

General Walker. 

16

Mr. WALKER. Based on the latest data I have seen, there have 

been no rescissions proposed in a number of years, nor have there 

been any vetoes in a number of years. 

Senator COBURN. The last rescission package was 1996. 

Mr. WALKER. It has been a while. Second, I was in California 

yesterday, and they have a large fiscal challenge on their own, and 

while in the short-term they are better off, in the long-term they 

have serious problems. One of the things they require is for the 

governor to submit a balanced budget proposal. They are not required to have a balanced budget but the Governor is required to 

submit a balanced budget proposal. 

I think one of the things you ought to think about is whether or 

not the President should be required to submit a proposal to move 

toward balance, or if not to balance, then why not and attribute 

dollars to the gap. For example, today, how much money are we 

spending in Iraq and Afghanistan and how much are we going to 

have in one-time costs associated with Hurricane Katrina? One 

might argue that those are extraordinary expenses. On the other 

hand, we should not be running operating deficits in the hundreds 

of billions dollars a year. Companies can’t do it. Not-for-profits 

can’t do it. And countries can’t do it over the long-term either. 

Senator CARPER. It is actually funny you should say that because, Mr. Chairman, when I concluded after years of trying to get 

the balanced budget amendment up for a vote, I concluded that the 

most important provision was not the three-fifths vote to unbalance 

the budget or the three-fifths vote for raising the debt ceiling. I 

concluded the most important provision of our balanced budget 

amendment was a President, at a date certain, would have to propose a balanced budget. And any body that I have been a part of, 

whether governor, legislatures, mayors, city councils, county executives, county councils, was that the leadership on fiscal issues has 

to come from the chief executive and if it doesn’t, it rarely comes 

from the legislative body. Go ahead, Dr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. Just on the line-item veto, given that the 

courts have ruled that it is going to have to be something of a fasttrack rescission authority instead of a pure line-item veto, I think 

one of the things to look at in that is making sure that you can 

just treat it as rescissions and not as a pretend line-item veto. 

What I mean by that is, don’t rush the Administration to, say, in 

5 days you have to send this up, in 10 days you have to send it 

up. The bills that are currently going up, that deserve a lot of scrutiny are a nightmare. We have seen them. Some of these 

supplementals——

Senator COBURN. They are rushed. 

Mr. HOLTZ-EAKIN. And they are rushed. Give them time to go 

through those bills, find the sensible rescissions, then make the decisions, have a fast-track and expedited authority to vote up or 

down. But make sure that the bills get scrubbed. If you turn this 

into a 5-day operation, you haven’t accomplished anything. 

Mr. MILLER. The President has proposed—he calls it a ‘‘legislative line-item veto,’’ which is enhanced rescission. And, Senator 

Carper, let me align myself with the recommendations that you 

just outlined. I thought those were all really quite good. On the 

question of the balanced budget, when I was Budget Director we 

17

did have budget deficits of a couple hundred billion dollars my first 

year and it came down to $150 and was plummeting further, until 

Congress changed its mind on the Gramm-Rudman-Hollings targets. 

But at one point I said, ‘‘OK, I am going to put together a balanced budget,’’ and people in the West Wing were very unhappy 

about that because it is an easy target. If you put together what 

would be required to balance the budget, the President would have 

a field day. 

Senator CARPER. Going back to something the Chairman said 

earlier, if there were the requirement to submit a balanced budget, 

I bet we would do a hell of a lot better job, excuse my French, of 

collecting the revenues that are owed on some of these tax debts 

he was talking about. 

Mr. MILLER. You are right. 

Mr. PENNY. And that gets to my point about an intergenerational 

impact statement, because when you submit a budget but there is 

no requirement to submit a budget that is in the black, then 

whether it is $250 billion of red ink or $300 billion of red ink, it 

all sort of becomes meaningless. It is easy to throw a few extra billion or tens of billions of dollars into the mix because there is no 

bottom line. And yet there is a consequence. We have interest costs 

now, the fourth largest item in the Federal budget, and it is because of the accumulation of deficits year upon year upon year. 

And those interest costs don’t go away. 

An intergenerational impact statement would help us to identify 

those costs as what they really are, a tax on some future taxpayer. 

Without making that a more real and more visible cost item, in not 

only the current budget but perpetually in all future budgets, we 

allow both the White House and the Congress to get off the hook 

by using the deficit as sort of an open-ended ATM card. And it isn’t 

open-ended because the price comes due someday; it is just that today’s taxpayers are not the ones that are going to have to pay it. 

Mr. WALKER. Two things on that: One, arguably, the biggest item 

of waste in the Federal budget today is interest on the Federal debt 

which is the fourth largest item and growing rapidly. Two, we have 

recommended previously that each budget each year that the President submits should have a statement of fiscal exposures and commitments, which is along the lines of what Mr. Penny is talking 

about. It should show these exposures, unfunded commitments and 

liabilities, how they are growing over time, and what the 

intergenerational implications are. 

This morning I appeared before the Federal Accounting Standards Advisory Board, which promulgates accounting and reporting 

standards for the Federal Government, to make a pitch for a fiscal 

sustainability and intergenerational equity statement that we need 

as part of our basil financial statements, because we are running 

up the credit card at record rates and that means you are going 

to pay $1 plus plus plus down the road when you hit the day of 

reckoning. All of these, I think, are positive ideas and could help 

to get us to where we need to be. 

Senator COBURN. Let me hit one other point. The rules for the 

CBO in terms of how things are scored often times don’t reflect reality. The question that I would like to ask is, What do we need 

18

to do in terms of the direction? We can go to CBO right now under 

the rules and say that we want to show this, and with direction 

we can pretty well a lot of times get what we want. How do we 

change the rules for the CBO to accurately reflect future costs, not 

just in 10 years—it is like the debate on the immigration bill right 

now. The only thing they did is because it is after 10 years, they 

said it would cost more than $5 billion. Well, the fact is, if it were 

looked at, we would be astounded at what it is going to cost, but 

yet there is nothing in the rules that says they have to look at that. 

So one of my questions is, How do we change the rules to accurately reflect the financial condition and environment that we are 

in? We use no dynamic scoring. Every business I know looks at inflation-adjusted or net present values to see what they are doing. 

The whole country bases it is finances, outside of the government, 

on what is the net internal rate of return, inflation adjusted, what 

are you really getting for it. So are there suggestions in the things 

we should change in terms of direction for the CBO so that what 

we really get is real numbers upon which to make real decisions? 

Because I think oftentimes, because of the direction that has been 

by law to CBO, we don’t get what we need to make the real decisions. Could you address that? 

Mr. HOLTZ-EAKIN. I think there is no harder problem, quite 

frankly. Obviously you can write any rules you want for the CBO 

and having lots of presentations which show long-term implications 

of current programs and current decisions, I am a big fan of. This 

hearing is about the budget process, which is how, in fact, you will 

make the decision to pull the trigger and spend the taxpayers’ 

money. That is much harder because in the end, I think it is desirable to tie that process to the money you put in the checking account, and that is the annual flow of budget authority and some 

of it is now mandatory. I don’t think that is a good idea. I think 

that is Congress’ call and it should be taken and made discretionary across the board. 

What I am nervous about is anything that would move toward 

actually trying to budget on a present value basis, because I believe 

that will be more damaging than helpful for the Congress. There 

are too many games that could be played. I would say right now 

at this table that under the current law, Medicare, Medicaid, Social 

Security are going to be such large burdens on the U.S. economy 

that ultimately growth will go negative. It is absolutely 

unsustainable in an economic sense. 

So imagine cutting back and scoring a cutback of those programs 

to a sustainable basis. What would be, 50 years from now, the 

growth impact on the U.S. economy? I don’t think the science is up 

to answering that question, and directing the CBO, or anyone for 

that matter, to come up with an answer to that so that the economy grows better, you get the tax revenues, suddenly you have got 

these games 50 years out solving your problem now; terrible place 

to go. 

Know the problem. The problem is that the promises are up here, 

the money is down here. The gap is forever. But deal with what 

we have now, which is the authority to put money in the checking 

account so that agencies can write checks and focus the budget 

process on providing that authority. Know what you are getting 

19

into; lots of supplemental presentations. But I think the process 

should be focused on the financial management system because 

that is what these guys are actually going to do. 

Senator COBURN. But when you do a budget, as I visited with 

Senator Judd Gregg, how the CBO scores it today determines what 

you can do. And so the games that are played today, under the 

rules that we have today, don’t accurately reflect the financial condition of this country. 

Mr. HOLTZ-EAKIN. There is no question about that. But when you 

pick the next process, because we agree that this particular one is 

not working very well, you will set up incentives to game it as well. 

If you put in place trade-offs and enforcement and people don’t 

want to have to make trade-offs, they don’t want to suffer enforcement, the incentives for the game will be there. 

So focus the attention on the big ones, and the big one here really is long-term costs of entitlement programs. Senator Gregg put in 

place a point of order for any programs that raised spending outside the budget window in any 5- or 10-year periods. I thought it 

was a fabulous idea. Very quickly, every piece of legislature this 

Senate considered sunsetted at the end of the 10-year—and that 

was on the spending side. How you get that is the key question. 

Senator COBURN. And the budget point of order has been waived 

every time on it. 

Mr. HOLTZ-EAKIN. Right. So how do you——

Senator COBURN. So it has not done anything. 

Mr. HOLTZ-EAKIN. I don’t know how you beat that. That is the 

key question. 

Mr. WALKER. Mr. Chairman, let me clarify something because I 

want to make sure you understand what we have recommended on 

this. We are not recommending accrual budgeting. 

Senator COBURN. No, I know that. 

Mr. WALKER. We are, however, recommending that as a supplement to reimposing meaningful, substantive budget controls that 

there be disclosures, transparency, that would be required on any 

major spending and tax proposal. Namely, to calculate the discounted present value dollar cost that must be considered as part 

of the legislative process, possible supermajority rules, whatever 

else. That is different. That is critically important. 

The other thing one might reconsider is whether or not CBO 

ought to be required to assume that discretionary spending is going 

to grow by the rate of inflation over the next 10 years. 

The other thing you might want to reconsider is whether or not 

CBO might have the option or be required that, when Administration policy is X, that somehow they have an ability to show what 

the impact would be if that was enacted by the Congress. What the 

Congress looks at and what the CBO is currently required to do for 

the 10 year projection is totally unrealistic and not credible. 

Mr. HOLTZ-EAKIN. As an addendum to that, one of the great advantages to one of the recommendations that you have heard, a 

joint budget resolution, is that the current practice of the Administration’s baseline reflecting one set of assumptions, the CBO’s baseline reflecting a second set of assumptions, the incentives for scoring gimmicks on both sides being different and present, so that no 

20

one in their right mind can figure out whether some budgetary objective has been met. It would eliminate a lot of that. 

Senator COBURN. So you are going to use the same assumptions? 

You would have to come to the same——

Mr. HOLTZ-EAKIN. You would be forced to come—under the 

Budget Enforcement Act, where there were rescissions and sequestration and the enforcement provisions, there was a head-to-head 

with the CBO and the OMB, there was a coming to grips with the 

scoring assumptions. It was an environment in which there was 

more transparency, because both sides had to talk about it. That 

was beneficial. 

Mr. MILLER. In the budget deal of 1987, the Budget Accord, CBO 

and OMB had to agree on major assumptions and things of this nature. And it was kind of interesting because you do have a cadre 

of very devoted civil servants at OMB that think this is the right 

way to do it, and at CBO it is a different way. And you have to 

get them together and talk to each other and get them to agree to 

a system. 

Could I just point out, just think of what Mr. Holtz-Eakin was 

just saying a while ago about the effects of these burgeoning spending demands in 50 years, or whatever, causing economic growth to 

come to a halt, and actually you would have contraction in total 

output. What you are establishing is the predicate for enormous 

intergenerational strife. You have young people 50 years from now 

who are going to be supporting old people and going to be really 

upset, not only with having to support old people, but the pie will 

be shrinking at the same time. 

Senator COBURN. Well, the real manifestation of that is a lower 

standard of living for the next two generations. All you have to do 

is look at Germany today with 11-percent unemployment and 40 

percent of their GDP as an expenditure of the take of their government, and growth that is one-fourth of what ours is. We see it, and 

the question is can we handle it. And the cost of making those decisions late versus the cost of making those decisions now is much 

less than that now. 

Senator CARPER. Mr. Chairman, could I come back with another 

question? I think everybody has said the biggest budgetary challenge that we face is Medicare, Medicaid, and Social Security. The 

President suggested in his State of the Union Address that creating 

a sort of true bipartisan commission that examines, essentially, 

those three programs. It was one part of the State of the Union Address that I actually stood up and kind of saluted, and we haven’t 

heard a whole lot about it since. 

I remember when Congressman Penny and I were just elected to 

the House in 1982, with the brother of Carl Levin, Sandy Levin, 

and we got there and one of the first things that I learned was that 

a commission had been created in 1982 on Social Security reforms 

and was chaired by Alan Greenspan, Robert Dole was on it, Claude 

Pepper, a bunch of others, and Senator Moynihan was on it. 

And they had worked in 1982 and presented to us in 1983 sort 

of a whole range of revenue increases, cost cuts and so forth, and 

this whole package, and they agreed, basically agreed unanimously 

on it, almost unanimously, and said this is what we think we ought 

to do. And they gave it to us, President Reagan signed off on it. 

21

He had assigned part of the Commission—Tip O’Neill—I think 

Robert Byrd had to sign, appointed part of the Commission. They 

signed off on it, and the rest of us kind of drank the Kool-Aid together. 

And when the President said in his budget address or in his 

State of the Union Address that we ought to have a blue-ribbon 

commission to look at Medicare and Social Security—I don’t know 

that he mentioned Medicaid—I thought that sounds like a winner 

to me. 

Your thoughts? We haven’t really talked specifically on what to 

do to rein in the costs of those programs. My sense is that in order 

to take the politics out of it, you need that kind of approach. 

Mr. WALKER. I think you need an entitlement and tax reform 

commission. There is a lot of interrelationship between what is 

going to have to be done with regard to entitlement programs and 

with regard to tax policy. I think from a practical standpoint, in 

order to get the kind of people on the commission and to make it 

meaningful, then you are probably going to have to have that scope 

in order to get it done. I will be happy to provide for you, and the 

other Members of the Subcommittee, an analysis that we just did 

at GAO, analyzing about a half a dozen policy-oriented commissions over the last 25 years and what were the key criteria that 

helped to determine success or failure. And you will find that there 

were only two that were really successful in the last 25 years. One 

was the 1982 Social Security Commission, but also keep in mind 

there was a very real action-forcing event back then. It was called 

the checks weren’t going to go out on time within a matter of time. 

The other one was the 9/11 Commission, where the American 

people were demanding action because of the cataclysmic events of 

September 11, 2001. I do think we need to consider something, but 

broader than what the President suggested. 

[The information follows:] 

Senator CARPER. OK. Thank you. 

Senator COBURN. Welcome, Senator Levin. 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Mr. Chairman, thank you for holding this hearing, again, a very useful hearing, as so many hearings are that this 

Subcommittee under your leadership has had. I think, Mr. Chairman, in your opening statement, you made reference to what is 

called a tax gap. I would like to ask our witnesses about that issue. 

There is approximately a $350 billion tax gap between the 

amount of taxes which are collected and the amount of taxes which 

would be collected if everybody paid the taxes which were intended 

to be paid by them. So there is a gap in the collection of taxes that 

is huge. It obviously would make a big difference. 

I am wondering whether or not—perhaps starting off with you 

Mr. Walker, but also the other witnesses might comment on the 

importance of trying to close that tax gap and any specific proposals that you might have. I know there is going to be a vote coming shortly, but if we could just get the answer perhaps to that 

question, my other questions I would reserve for the record, Mr. 

Chairman. 

22

1The information supplied for the record appears in the Appendix on page 88. 

Mr. WALKER. Senator Levin, I have testified on this on a couple of occasions. It is about $350 billion. If you really want to make significant progress in closing that tax gap, you are going to have to 

authorize additional information returns and additional withholding. I would be happy to provide more information for your and 

the Subcommittee’s consideration, but we do have some specific 

ideas for you. 

Senator LEVIN. Have you given us your proposals on closing the 

loophole or the tax dodging and avoidance which is created through 

the use of offshore tax havens? 

Mr. WALKER. I believe we have done a little work on that and 

we have some other work ongoing right now, but I will double 

check and provide an answer for the record.1

Senator LEVIN. On either of those questions do our other witnesses want to comment? 

Mr. HOLTZ-EAKIN. I think there are two dimensions to the question. One is the numerical objective of collecting the revenue that 

has been identified in the tax gap. There, I would point you to the 

work of Joel Slemrod at the University of Michigan, who is the tax 

policy expert’s tax policy expert, and he would argue that number 

is like the difference between reserves and proven reserves for oil 

companies, that you are not going to get all $350 billion, you are 

going to get something less than that and you ought to be sensible 

in your approaches to doing it. 

But I think the bigger part of the question is making a sincere 

and honest effort to clarify the Tax Code and enforce it so that 

can’t arise again because we have relied so much on voluntary compliance in the past, and what we have done is erode the confidence 

of Americans in our Tax Code, and we are undermining the voluntary compliance of it. I think it is essential to go after that tax 

gap, largely because we need this Tax Code to function better in 

the future, not worse. And that is really what is at stake. 

Senator LEVIN. Any comments on tax havens? 

Mr. HOLTZ-EAKIN. Tax havens are a big issue and are part and 

parcel of the way we have tried to run our international tax rules 

for large multinational corporations. The most important thing is 

to simplify this and clarify the objectives, and then I think the enforcement will be easier too. At the moment there are too many 

conflicting provisions to allow enforcement to proceed with any certainty at all. 

Mr. WALKER. We currently need tax reform, Senator Levin, in 

order to streamline and simplify and in order to help voluntary 

compliance. We need to have credible enforcement as well. But one 

other area that I would give you for consideration: The U.S. Government does business with contractors, and also gives grants to 

entities that are significantly delinquent in their taxes. I think we 

need to consider establishing a date certain, and say that you either get current by the date certain, or we don’t do business with 

you. 

Senator LEVIN. There are a number of provisions which I believe 

are in our defense authorization bill, actually, on that issue, and 

I don’t know whether the Chairman has got legislation along that 

23

line, but I know we do have a provision in the bill which is coming 

to the floor in the Armed Services Committee. 

Mr. PENNY. I know that one of our Senators, Mr. Coleman from 

Minnesota, had some hearings on this a couple of months ago and 

I assume that it is part and parcel——

Senator LEVIN. That is correct. 

Mr. PENNY [continuing]. Of the legislation that is now moving 

forward. 

Senator LEVIN. Thank you for the reminder. It was Senator Coleman, the Chair of another Subcommittee. 

Mr. PENNY. And it is certainly a good place to begin. 

Senator LEVIN. He does have a bill on this which I have cosponsored, as a matter of fact, in addition to the defense authorization. 

Mr. Miller, how are you doing? 

Mr. MILLER. I am doing fine, sir. How are you? First let’s stipulate that you and I have paid the taxes that we have due. 

Senator LEVIN. I would be happy to stipulate that. 

Mr. MILLER. I think it is very important that tax rates be low 

and that taxes be simple, understandable, and that everyone pay 

their fair share of taxes. And I think going after not only tax avoidance—excuse me, tax evasion. Tax avoidance is perfectly legal—tax 

evasion, but also people who owe the Federal Government money, 

people who have borrowed on some of these programs. When I was 

OMB Director, we tried to collect monies that were owed the Federal Government and actually Congress put an estoppel on our efforts to secure this money. I think, and Mr. Walker probably has 

in his own mind—you probably know how much is owed. I don’t 

know what the current figure is. 

Senator LEVIN. Well, we talk about tax avoidance and complicated rules. The Enron Corporation had 400 shell corporations 

in one Caribbean island, the Caymans. Now there are 1,500 other 

shell corporations apparently that they created in other tax havens. 

But do you have any comment, Mr. Miller, on the tax haven issue? 

Mr. MILLER. This is just further evidence that the tax system is 

dysfunctional too, and it needs to be reformed dramatically and 

simplified. 

Senator LEVIN. I have a lot of other questions. If our witnesses 

would be kind enough to answer them for the record, although they 

are not obligated to do so except probably for Mr. Walker. He is always willing to do it even if he weren’t obligated. He does a tremendous job. Thank you all. 

Mr. PENNY. Thank you, Senator. Mr. Chairman, if I could back 

up and respond to the question that Senator Carper asked, because 

my take on this is a bit different than General Walker’s take on 

this. I think in a perfect world, General Walker’s response that we 

need a broad-based entitlement and tax commission to deal with all 

of these issues, Social Security, Medicare and tax policy, because 

there is a lot of interrelationship, in a perfect world that is absolutely right because there are so many pieces, they all do fit together one way or the other and we have to look at the whole picture. 

I think, realistically, if we are going to get a serious commission 

going, it is better to segment this. It needs to be bicameral. It 

needs to be bipartisan. Hopefully it would also include some outVerDate 0ct 09 2002 10:17 Jun 07, 2007 Jkt 028250 PO 00000 Frm 00027 Fmt 6633 Sfmt 6601 C:\DOCS\28250.TXT SAFFAIRS PsN: PAT
24

side experts, as did the Social Security Commission back in 1982–

83 with Alan Greenspan and others. But I think the better construct for a commission today would be a retirement security commission. And the reason I say that is because we have a broken defined benefit system in America. Too many companies are now 

going bankrupt and turning those obligations over to the PBGC, 

and the PBGC is not financed adequately to take care of that. 

Other companies are redefining their defined benefit plans in 

some way; in other words, shortchanging people. After decades of 

telling them they had a certain benefit level, they are now redefining those benefits. They haven’t invested them properly. We 

have also got problems with (402)k and other defined contribution 

plans in the private sector. 

The most easily addressed aspect of that is just enrollment. We 

have people who are not opting in. If we force them to opt out and 

automatically place them in, we would take from about 20 percent 

to 80 percent the number of participants in those programs. It is 

the kind of program that you really ought to be invested in from 

the very first job you take, from the very first paycheck you receive, 

and until we do that we are not going to prepare particularly 

lower- and middle-income Americans for their retirement because 

they are not benefiting from the magic of compound gains. 

And then you tie that together with Social Security because in 

many ways the problems in Social Security mirror the problems in 

these private sector plans. And if you put it all together as a package deal, I think you can get both Democrats and Republicans to 

come to the table for that. Democrats clearly are reluctant to debate Social Security as a free standing issue. But if you make this 

retirement security and show how all these pieces fit together and 

what the end result can be, I think you can get some reform in that 

area. But I think if you load in Medicare and you load in tax reform as a part of that, it just gets too heavy to carry. 

Senator COBURN. And you also might get encouragement in savings, which is one of the things that we lack. 

Mr. WALKER. We had a negative savings rate for the first time 

since 1933, which wasn’t a good year. The only concern that I have 

with that—and, of course, I have longstanding background in pensions, health care, Social Security and Medicare, and there is a 

need to look at this issue. But the problem is health care. That is 

the problem. I mean, of the $46 trillion in exposures, commitments 

and unfunded obligations, about $30 trillion is Medicare. And so we 

need to deal with all these issues, but when you are talking about 

retirement security, health care is as important as anything else. 

Senator COBURN. Would health care be the problem if health 

care was 67 percent of the cost it is today? 

Mr. WALKER. It wouldn’t be as big a problem, but it would still 

be a problem over the longer term. 

Senator COBURN. And the reason I want to put that out is we 

can document that $1 out of every $3 that goes into health care 

isn’t going into health care under the systems that we have today. 

It doesn’t go to help anybody get well. It doesn’t go to help prevent 

the illness. It doesn’t help in the treatment. It is consumed because 

of the way we have designed the health care system. And the $2.2 

trillion that we are going to spend on it, only $1.6 to $1.7 trillion 

25

actually goes to help treat somebody or prevent illness or diagnose 

it. 

Mr. PENNY. There are fundamental problems in the structure of 

our health care system, both the public programs and the private 

sector programs. But it is a much different issue with a lot of moving parts in a way that retirement security reform, Social Security 

and these other plans, are much more straightforward. I think it 

is easier to deal with them as separate issues. I don’t dispute General Walker’s comment that Medicare is a much more immediate 

and a much larger problem, and for that reason it ought to go first. 

But very much the way I have urged action on pork barrel spending as a way of ginning up some courage to deal with the bigger 

challenges, I think the same is true in the entitlement area. If you 

take on, arguably, the easier to fix piece, which is Social Security, 

you might gin up the courage it takes to take the next and larger 

step to deal with Medicare as well. 

Mr. HOLTZ-EAKIN. I really want to echo that because there is a 

big difference between the medical issues and the Social Security 

issues. We can solve Social Security today. Analytically there is 

nothing to it. You can solve it 15 different ways. It is strictly a political issue. And the key with Social Security is it is pure demography, and every year that we wait, another generation, the cohort 

of baby boomers gets grandfathered. And if you grandfather the 

baby-boom generation, you have missed the money. And so my 

bumper sticker on Social Security has always been, ‘‘Get Doug 

Holtz-Eakin.’’ I am the tailing end of the baby-boom generation. If 

you don’t get me, you have missed the problem. 

So that needs to be dealt with and dealt with quickly. And I 

think Mr. Penny is right in that the defined benefit pension system—our private sector experiment with that is over. We are going 

to clean up, but it is going to be defined contribution savings going 

future, that is good. Take care of that problem because it is the 

easy one analytically. Health care reform is just going to have to 

be part of a daily routine. There are so many things going on in 

health care in the United States that needs to be improved that I 

think a big fix is the wrong way to think about it. We need to make 

steady progress. 

Senator COBURN. We don’t really want to get into health care in 

here, even though it is a big segment in terms of Medicare and 

Medicaid. 

Mr. HOLTZ-EAKIN. I think that is right. It is a health care problem. It is not a Medicare and Medicaid problem, where with Social 

Security, it is the structure of the program itself, and that is fixable. 

Senator COBURN. All right. Any other comments? 

[No response.] 

Senator COBURN. Well, let me thank you and I am going to invite 

our other witnesses to come up. Senator Carper and I would very 

much like to have an off-the-record individual discussion with you 

all and if possible, we will be offering some dates that we might 

be able to find common with everybody so that we can sit down and 

talk about how do we do it. We both have a sincere interest in trying to address this issue, and it is my understanding the Majority 

Leader is going to have some time for budget process reform in 

26

1The prepared statement of Mr. Edwards appears in the Appendix on page 70. 

June on the floor. So we would like to maybe be able to do something together to put forward some of these ideas. 

Thank you for your testimony. You will be receiving some written 

questions from us. If you would be so kind as to return those, I 

would appreciate it. Thank you very much. 

Our next panel is Chris Edwards. He is Director of the Tax Policy Studies at the Cato Institute and a member of the Joint Economic Committee. He was a Consultant Manager with PricewaterhouseCoopers, examining fiscal issues being considered by Congress. He holds an M.A. in Economics from George Mason University in Virginia. 

Our next witness is Maya MacGuineas. She is President of the 

Committee for a Responsible Federal Budget and Director of Policy 

Program of the New America Foundation. Her areas of expertise 

include the budget, entitlements, and tax policy. Before coming to 

New America, Ms. MacGuineas worked as a Social Security advisor 

to the McCain Presidential campaign where she helped craft the 

Senator’s Social Security reform proposal and traveled with the 

campaign. Prior to that, she worked at The Brookings Institute, the 

Concord Coalition, and on Wall Street. She received her master’s 

in public policy from the John F. Kennedy School of Government 

at Harvard University. 

Thank you. I am sorry we are running behind. 

Mr. Edwards, if you would, your complete testimony will be made 

part of the record. I have read it, and I want to thank you for it, 

and you are recognized for 5 minutes. 

TESTIMONY OF CHRIS EDWARDS,1 DIRECTOR OF TAX POLICY 

STUDIES, CATO INSTITUTE 

Mr. EDWARDS. Thank you very much, Mr. Chairman. Thank you 

for having me testify on financial management today, and thank 

you, of course, for all your great leadership on fiscal issues the last 

couple of years. You have certainly shown that even a single Senator who is frugal-minded can have a really big impact on the policy debate, and if I had 20 Tom Coburns in the Senate, I think we 

would be moving a long way toward fiscal sanity around here. 

Federal spending, as our previous panel discussed, continues to 

soar. Deficits are running year after year. The cost of entitlement 

programs are going to impose huge unfunded liabilities on young 

Americans. Clearly, current budget procedures don’t work. We need 

to do something new. Let’s experiment and try something new. 

Without tight control of the problem, many members essentially 

just become advocates for narrow special interest causes, and 

broader concerns such as the size of the debt, the size of the burdens we put on the next generation are ignored. Without tight 

budget rules, there essentially becomes a budget anarchy in Congress. 

As was discussed in the prior panel, the States have much tighter budget rules than the Federal Government. Virtually all the 

States have legal requirements to balance their budgets. One good 

idea that I think Senator Carper mentioned and I think Maya 

would agree with is that requiring a President to issue a balanced 

27

budget every year, even as sort of a planning document, I think 

would be a very good and fairly simple step we could take. 

Most State constitutions limit government debt pretty strictly. 

More than half the States have some sort of overall budget cap. 

And also importantly, the States are fiscally constrained by the 

need to make sure that their bond ratings don’t fall, a constraint 

that the Federal Government essentially doesn’t have. So if anything, we need tighter constraints at the Federal level than at the 

State and local level. 

There, of course, have been numerous efforts in the past to put 

tighter budget controls in the Federal budget. Some of them were 

mentioned here: Gramm-Rudman-Hollings and the BEA of 1990. 

But I think a more direct and powerful way to control Federal 

spending is to put a cap on overall budget outlays tied to growth 

and some economic indicators such as GDP or personal income or 

inflation. The BEA of 1990 imposed caps on discretionary spending. 

This time around I think we need to put a cap on overall spending, 

both discretionary and entitlement spending. 

I think we need to put cap ties to some indicator like growth in 

GDP. The principle is that the government should not consume an 

increasing amount of the economy’s resources over time. With an 

overall cap in place, Congress would pass its annual budget resolution to insure that spending came in below the statutory cap. If 

needed, reconciliation instructions could be included to reduce entitlement spending. The OMB, as under GRH, would provide regular 

updates regarding whether Congress was above or below spending 

caps. If the session of Congress ended at the end on the year and 

OMB determined it was above the cap, there would be a sequester 

mechanism in place. Both discretionary and entitlement spending 

would, and I think should, be sequestered. 

There have been numerous bipartisan proposals in the past, especially in the early 1990s, regarding the idea of putting a cap on 

overall entitlement spending. More recently the Republican study 

committees, the Family Budget Protection Act, would have included both a cap on discretionary and entitlement spending. They 

would protect their cap under their plan by both a sequester and 

a two-third supermajority voting requirement in both the House 

and the Senate. 

The idea of capping the overall budget is inspired by budget caps 

in the States. Most noticeably, Colorado has a constitutional limit 

on overall growth in the State’s revenues. Any revenue growth 

above the sum of population plus inflation growth is automatically 

rebated back to taxpayers. Federally, a cap on spending makes a 

lot more sense than a cap on revenues for variety of reasons. For 

one thing, Federal spending fluctuates a lot less than revenues and 

fluctuates a lot less than deficits. One of the problems with GRH 

was that it focused on deficits. Deficits fluctuate a lot and can surprise Congress with big changes. I think a cap on spending would 

allow Congress time to plan and make the reductions that would 

be needed to fit under the cap. 

It is true that Congress could, of course, rewrite a spending cap 

if it was only statutory and not a constitutional cap anytime it 

wanted if it didn’t want to comply with it. But I think if you had 

a simple cap on the overall budget, it would be a very high profile 

28

1The prepared statement of Ms. MacGuineas appears in the Appendix on page 79. 

symbol of fiscal restraint that I think reformist Members of Congress and taxpayer and watchdog groups could rally behind and defend. I think if we put a cap in place now, before the entitlement 

cost explosion hits, we would have a number of years of experience 

with it. Taxpayers and citizens would start to understand that cap 

is there and Congress should live by it, so that when we get into 

further trouble down the road, I think the cap would be a really 

solid way to control spending. 

So, to conclude, I think we need tougher budget rules to ward off 

a financial crisis in the future as entitlement costs soar. A spending cap is not a guarantee that Congress would take proactive 

steps to cut wasteful spending, to follow some of the ideas you have 

expressed earlier, but it would help prevent the type of huge spending orgy I think we have seen over the last few years. And I think 

it would be a very good solid step forward. 

Thanks a lot for having the hearings and I would love to talk 

with you further about these ideas and work with your staff. 

Thank you. 

Senator COBURN. Thank you. Ms. MacGuineas. 

TESTIMONY OF MAYA C. MACGUINEAS,1 PRESIDENT, COMMITTEE FOR A RESPONSIBLE FEDERAL BUDGET AND DIRECTOR, FISCAL POLICY PROGRAM, NEW AMERICA FOUNDATION 

Ms. MACGUINEAS. Thank you. Good afternoon. Thank you for 

holding this hearing and thank you for inviting me to testify. Let 

me begin by saying that even the best budget process cannot serve 

as a replacement for responsible budget decisions and proper oversight. If politicians continue to cut taxes and increase spending, we 

will continue to run budget deficits no matter what the rules. If 

politicians continue to both build programs into the budget and Tax 

Code without sufficiently scrutinizing their effectiveness, we will 

continue to have a budget that is less efficient than it should be 

no matter what the rules. 

And if politicians continue to make and expand promises for 

intergenerational programs such as Social Security and Medicare, 

we will continue to be faced with large unfunded liabilities and a 

highly inflexible budget that does not allow us to respond to important challenges and opportunities no matter what the rules. Ultimately, the most important component of responsible budgeting is 

the people who are involved and the decisions they make. 

But while process cannot do the heavy lifting required to create 

responsible budgets, sensible and balanced rules certainly are important. I would say that I agree with almost everything we have 

heard this afternoon from Mr. Edwards and the previous panel. 

The fact that we are still not moving forward on some of those 

ideas, so that is it is even difficult to move forward on budget process rule reforms as important as they are. 

The Committee for a Responsible Federal Budget, which I run—

the board is made up of many of the past directors of GAO, CBO, 

the Federal Reserve Board, and the Budget Committees. We have 

a number of recommendations which I will just quickly go through. 

29

The first is a joint budget resolution. We do believe that having 

the President and Congress agree on what budget they will be 

working with at the beginning of the process will be much more 

useful. It would also make transparent when Congress ‘‘busts the 

budget’’ during the year. 

Second, expenditure limits, which Mr. Edwards just emphasized. 

In the past statutory limits have proven to be one of the most effective approaches to instilling discipline into the budget process. We 

believe that the budget resolution should include enforceable nominal dollar limits for both discretionary and direct spending. Let me 

just say on that topic, there is disagreement even amongst my 

board members about whether those caps should apply to direct 

spending. But I think it is certainly clear that as more of our budget is mandatory or entitlements, we have to look at how to cap that 

kind of area of the budget or have more oversight or take those 

areas off of automatic pilot. 

Third, pay-as-you-go rules. We believe the pay-as-you-go principle is an important one that helped us in the past. It should be 

applied to the budget on both the spending and the tax side. If it 

is not, there is a huge loophole that is left to put spending programs through the Tax Code in the form of tax expenditures, which 

you see happening more and more often right now. PAYGO is a little bit lopsided; there is some disagreement about it because entitlement programs, when they are sunsetted, they come back in the 

budget without being subject to PAYGO. But they are also not in 

the baseline so you don’t receive savings for that. We might want 

to find ways to even out the treatment of taxes and spending, but 

PAYGO should apply to both. 

Fourth, tracking long-term spending promises. More information 

needs to be made clear and highlighted in budget documents about 

the long-term commitments that we have entered into on the costs 

of these intergenerational programs which are coming to dominate 

the budget. 

Finally, triggers. We don’t have an institutional position on this 

as a committee, but I believe that the use of triggers is something 

we should think about seriously bringing more into the budget 

process; where when we hit marks, whether it is a trigger that is 

triggered by spending, taxes, deficits, debt, unfunded liabilities, we 

have something that—a default that moves into place, either a soft 

default where Congress or the President has to make a recommendation about how to fix whatever problem has triggered the 

trigger, or a hard trigger, something as freezing all indexing on the 

tax side and the spending side until Congress comes up with a solution. 

In addition to those recommendations, we support biennial budgeting with the reservations that were voiced before. There is some 

concern that supplementals would certainly be abused, and I don’t 

know how Members of Congress are, but a lot of us who always 

wait until the last night to study for the exam might under biennial budgeting still not get that much more done even when you 

are given 2 years. 

Senator COBURN. Could supplementals be any worse than what 

they are today? 

30

Ms. MACGUINEAS. Sadly, probably. I mean, certainly that is one 

of the big problems we face right now. We need to find a way to 

fix supplementals, which are actually two of the next recommendations I would support: A very strict limit on what emergency spending is. You are more familiar than almost anybody on this topic 

and how hard it is to get people to stick to it. But we need to buy 

into the notion of an emergency requirement, an emergency definition that we stick to. And certainly rainy-day funds in the budget, 

we need to be budgeting for emergencies in advance. Something 

like Hurricane Katrina might have cost more than we budgeted for, 

but we still would have been in a better fiscal position to contend 

with that challenge. 

Automatic continuing resolutions, and properly distinguishing 

between spending and tax cuts. As Mr. Holtz-Eakin pointed out, we 

have a tremendous problem of mislabeling things and putting them 

on the wrong side of the budget, to the point where we are not even 

sure how big our Federal budget actually is. And that is a real 

problem with transparency and trying to do national budgeting. 

So, again, I will point out that process is no substitute for courageous choices. We can sit here and talk about the need to reform 

entitlements and the need for commissions, and all of those things 

are very true. But what we really have to do is make some tough 

choices on what taxes we will increase and what spending we will 

cut. And there is no way about getting around those choices no 

matter what. But as soon as we have Congress and the President 

willing to make those changes and those tough choices, budget 

rules will be instrumental in enforcing the kinds of agreements 

that we come up to as a country, helping keep us on track once we 

put ourselves on that track. 

Thank you again for holding the hearing today. If we have time 

for questions, I look forward to that. 

Senator COBURN. Thank you. I am going to include you all in our 

dinner because we have really got some good ideas here. This automatic CR is something that takes the pressure off and it also controls spending. Nobody has ever done a study to see how much 

money that is saved by not being able to come to an agreement on 

appropriations. I am sure it is billions of dollars because we did 

CRs. 

We will submit some questions to you. I am probably going to 

miss this next vote because everybody else is gone to it. I want to 

thank you. I apologize for the delay, and I want to thank you for 

your prepared testimony as well as your words here today, and I 

look forward to an off-the-record get-together. 

Ms. MACGUINEAS. I look forward to the dinner. Thank you. 

Mr. EDWARDS. Thank you. 

Senator COBURN. We are adjourned. 

[Whereupon, at 4 p.m., the Subcommittee was adjourned.] 

(31)

A P P E N D I X 


28250.001
32


28250.002
33


28250.003
34


28250.004
35


28250.005
36


28250.006
37


28250.007
38


28250.008
39


28250.009
40


28250.010
41


28250.011
42


28250.012
43


28250.013
44


28250.014
45


28250.015
46


28250.016
47


28250.017
48


28250.018
49


28250.019
50


28250.020
51


28250.021
52


28250.022
53


28250.023
54


28250.024
55


28250.025
56


28250.026
57


28250.027
58


28250.028
59


28250.029
60


28250.030
61


28250.031
62


28250.032
63


28250.033
64


28250.034
65


28250.035
66


28250.036
67


28250.037
68


28250.038
69


28250.039
70


28250.040
71


28250.041
72


28250.042
73


28250.043
74


28250.044
75


28250.045
76


28250.046
77


28250.047
78


28250.048
79


28250.049
80


28250.050
81


28250.051
82


28250.052
83


28250.053
84


28250.054
85


28250.055
86


28250.056
87


28250.057
88


28250.058
89


28250.059
90


28250.060
91


28250.061
92


28250.062
93


28250.063
94


28250.064
95


28250.065
96


28250.066
97


28250.067
98

Æ


28250.068