S. HRG. 107–1087

MID-SESSION HEARINGS ON THE 

BUDGET

HEARINGS

BEFORE THE

COMMITTEE ON THE BUDGET 

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

June 27, 2001--REASSESSING THE ECONOMIC OUTLOOK

June 28, 2001--HOW BIG IS THE REMAINING SURPLUS?

July 12, 2001--ECONOMIC AND BUDGET UPDATE

July 18, 2001--DEFENSE SPENDING AND THE BUDGET OUTLOOK

August 2, 2001--SOCIAL SECURITY: BUDGETARY TRADEOFFS AND 

TRANSITION COST

September 4, 2001--THE BUDGET AND OUTLOOK: AN UPDATE

September 6, 2001--OMB’S MID-SESSION REVIEW AND THE BUDGET 

AND ECONOMIC

October 2, 2001--THE ECONOMIC OUTLOOK

October 25, 2001--ECONOMIC STIMULUS

(

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MID-SESSION HEARINGS ON THE BUDGET

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95–488pdf 2001

S. HRG. 107–1087

MID-SESSION HEARINGS ON THE 

BUDGET

HEARINGS

BEFORE THE

COMMITTEE ON THE BUDGET 

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

June 27, 2001--REASSESSING THE ECONOMIC OUTLOOK

June 28, 2001--HOW BIG IS THE REMAINING SURPLUS?

July 12, 2001--ECONOMIC AND BUDGET UPDATE

July 18, 2001--DEFENSE SPENDING AND THE BUDGET OUTLOOK

August 2, 2001--SOCIAL SECURITY: BUDGETARY TRADEOFFS AND 

TRANSITION COST

September 4, 2001--THE BUDGET AND OUTLOOK: AN UPDATE

September 6, 2001--OMB’S MID-SESSION REVIEW AND THE BUDGET 

AND ECONOMIC

October 2, 2001--THE ECONOMIC OUTLOOK

October 25, 2001--ECONOMIC STIMULUS

(

COMMITTEE ON THE BUDGET

KENT CONRAD, North Dakota, Chairman

PAUL S. SARBANES, Maryland 

PATTY MURRAY, Washington 

RON WYDEN, Oregon 

RUSSELL D. FEINGOLD, Wisconsin 

TIM JOHNSON, South Dakota 

ROBERT C. BYRD, West Virgina 

BILL NELSON, Florida 

DEBBIE STABENOW, Michigan 

HILLARY RODHAM CLINTON, New York 

JON S. CORZINE, New Jersey

PETE V. DOMENICI, New Mexico 

CHARLES E. GRASSLEY, Iowa 

DON NICKLES, Oklahoma 

PHIL GRAMM, Texas 

CHIRSTOPHER S. BOND, Missouri 

JUDD GREGG, New Hampshire 

OLYMPIA J. SNOWE, Maine 

BILL FRIST, Tennessee 

GORDON SMITH, Oregon 

WAYNE ALLARD, Colorodo 

CHUCK HAGEL, Nebreska 

MARY ANN NAYLOR, Majority Staff Director 

G. WILLIAM HOAGLAND, Staff Director 

(II)

iii

C O N T E N T S

Page 

June 27, 2001--Reassessing the Economic Outlook .............................................. 1

June 28, 2001--How Big is the Remaining Surplus? ............................................ 55

July 12, 2001--Economic and Budget Update ........................................................ 135

July 18, 2001--Defense Spending and the Budget Outlook .................................. 179

August 2, 2001--Social Security: Budgetary Tradeoffs and Transition Costs ..... 215

September 4, 2001--The Budget and Economic Outlook; An Update .................. 317

September 6, 2001--OMB’s Mid-Session Review and the Budget and Economic ..................................................................................................................... 371

October 2, 2001--The Economic Outlook ................................................................ 445

October 25, 2001--Economic Stimulus ................................................................... 515

STATEMENTS BY COMMITTEE MEMBERS

Chairman Conrad ............................................. 1, 55, 135, 179, 215, 317, 371, 445, 515

WITNESSES

Baily, Dr. Martin N., Senior Fellow, Institute for International Economics....................................................................................................................... 470, 476

Bixby, Robert, Executive Director, Concord Coalition .......................................... 80, 83

Cox Wait, Carol, Committee for a Responsible Federal Budget ...................... 106, 110

Crippen, Dr. Dan L., Director, Congressional Budget Office ........................... 325, 352

Daniels, Mitchell, Director, Office of Management and Budget (OMB) ......... 143, 174, 

382, 418

Dudley, William C., Managing Director and Director of U.S. Economic Research..................................................................................................................... 21, 24

Gale, William, Pechman Fellow, The Brookings Institute................................ 517, 522

Greenstein, Robert, Executive Director, Center on Budget and Policy Priorities........................................................................................................ 58, 62, 221, 224

Hassett, Kevin A., Resident Scholar, American Enterprise Institute ................. 550

Hubbard, R. Glenn, Chairman, Council of Economic Advisers ............................ 448, 452

Krueger, Dr. Alan, Princeton University ............................................................... 486, 490

Orszag, Dr. Peter, President, Sebago Associates....................................... 233, 237, 547

Schieber, Dr. Sylvester J., Director of Research and Information, Watson 

Wyatt Company ................................................................................................ 249, 253

Wesbury, Brian, Vice President and Chief Economist; Griffin, Kubik, Stephens and Thor..................................................................................................... 29, 32

Wolfowitz, Paul, Deputy Secretary of Defense .......................... 183, 189

(1)

REASSESSING THE ECONOMIC OUTLOOK 

WEDNESDAY, JUNE 27, 2001

U.S. SENATE, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to notice, at 10:01 a.m., in room 

SD–608, Dirksen Senate Office Building, Hon. Kent Conrad, chairman of the committee, presiding. 

Present: Senators Conrad, Sarbanes, Wyden, Nelson, Stabenow, 

Clinton, and Domenici. 

Staff present: Mary Ann Naylor, Majority Staff Director; and G. 

William Hoagland, Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. Why do we not bring this hearing to order. 

First of all, I want to welcome our witnesses. Thank you. I think 

we have a very distinguished panel this morning. We appreciate 

very much your taking time to be with us on an important subject. 

This is the first of two hearings this week to assess the current 

state of the budget. 

Today, we will look at how the economic outlook has changed 

since CBO made its baseline projections in January, with an emphasis on how uncertain that outlook remains, particularly with respect to the long-term trend in productivity. 

Tomorrow, we will focus on the available surplus. We have now, 

in looking back at CBO’s January baseline, we see that there were 

some signs that the economy might be slowing after a period of 

very rapid economic growth. Nevertheless, most economists at the 

time believed that the longest economic expansion on record still 

had plenty of room to run. The CBO baseline budget projected $5.6 

trillion of surpluses between 2002 and 2011, based on a relatively 

favorable short-term and long-term economic outlook. 

In the short-run, CBO assumed the economy would experience a 

mild slowdown in 2001 and a recovery in 2002. Growth in real 

GDP, they indicated, would fall from an estimate 5.1 percent in 

2000 to 2.4 percent in 2001, with a bounce back to 3.4 percent in 

2002. 

CBO’s long-term growth projection reflected an upward revision 

in the estimated rate of potential productivity growth to about 2.7 

percent a year over the 2002 to 2011 period. Taking into account 

the moderation of growth in 2001, actual productivity growth was 

estimated to be somewhat less, but a still robust 2.5 percent per 

year. This projected rate of productivity growth was well above the 

1.5 percent achieved in the 1974 to 1995 period, but a little less 

2

1CHART NOT AVAILABLE AT PRESS TIME.

than the very strong growth we saw from 1996 to 2000. In large 

measure, CBO accepted the view of many economists that trend 

productivity had increased after 1995. 

Subsequent developments: We will hear testimony today that the 

economic situation, in the short run, is certainly looking somewhat 

worse than CBO was projecting in January. Dr. Baily, you have an 

interesting chart in your testimony that shows how the blue chip 

forecast for 2001 has deteriorated over the course of the year. In 

January, the blue chip—and do we have a chart that shows that? 

In January, the blue chip consensus was 2.6 percent, when CBO 

was estimating 2.4 percent, but the June blue chip forecast is now 

down to 1.8 percent, as we can see on the chart.1

A short-term slowdown obviously hurts the surplus for a few 

years, but if the economy bounces back quickly, the long-term impact does not have to be that significant. What matters for the long 

term is the economy’s sustainable growth rate. That is really one 

of the things we want to focus on today, which is based on productivity and labor force growth, with productivity being the key unknown and what we really want to focus on today. 

Back in January, economists seem to be coming around to the 

view that trend productivity had rebounded from two decades of 

rather sluggish growth. Federal Reserve Chairman Greenspan testified before this committee that productivity was holding up remarkably well, even as the economy showed signs of slowing, and 

he was confident of the longer term outlook. I wonder what he 

would have said if he knew that productivity growth was falling as 

he was speaking and that productivity would fall in the first quarter by 1.2 percent at an annual rate. We have a chart that shows 

that as well.

We saw very handsome gains in productivity in the late 1990’s, 

but in the first quarter of 2001, that reversed, and we saw productivity actually fall 1.2 percent. All of us, I think, need to be warned 

that quarter-by-quarter numbers are not all that critical, but this 

may be an indicator that we are seeing a slowing in productivity 

growth. 

The implications for the budget. I think one of the most important things that can come out of this hearing is a renewed respect 

for the uncertainty—I want to put the frame on that—the uncertainty of long-term economic and budget forecasts. This, after all, 


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2 CHART NOT AVAILABLE AT PRESS TIME. 

is a 10-year forecast. The famous CBO fan chart that showed estimates of uncertainty based on CBO’s past forecasting records 

should have warned us that there was nothing certain about a projection of $5.6 trillion of surpluses over the next 10 years. Now, of 

course, the baseline is smaller because we have enacted a tax cut, 

and we have, as a result, updated the CBO fan chart——

Welcome. 

Senator DOMENICI. Thank you. Oh, I am on the wrong side. 

[Laughter.] 

Chairman CONRAD. Welcome, Senator Domenici. We are glad you 

are here. 

Senator DOMENICI. Thank you very much, Mr. Chairman. I am 

glad to be here. 

Chairman CONRAD. We have put up the new fan chart that just 

shows the uncertainty of the CBO forecast. And in the year 2006, 

shows a variance of anywhere from a negative $250 billion to a 

positive $1 trillion in that sixth year alone. The uncertainty in the 

fan chart is based on CBO’s past forecasting record. This is their 

own analysis of what has happened over this period.2

Now, today, we are going to have a chance to hear from a distinguished panel of witnesses, and we really do have I think an outstanding group. We are going to limit opening statements to the 

chairman, our former chairman, and myself, then we are going to 

go to the witnesses. We are going to limit them to 7 minutes each, 

ask them to include their full statements as part of the record. 

Then we will go to a questioning round with each Senator having 

7 minutes for a statement and questions, however they choose to 

divide up the time. 

With that, I just want to, again, acknowledge our witnesses, and 

I will introduce them after our ranking member has a chance to 

make whatever opening statement he would like to. 

We will turn to Senator Domenici, my very able colleague, who 

has served this committee, and the Senate, and the country in a 

very distinguished way over a long period of time. 

Senator Domenici. 

Senator DOMENICI. Thank you, Mr. Chairman. 

Senator Clinton, it is good to be with you. I was sorry I was late. 

I had to be at two places at once and, frankly, you know what? I 

should not have tried because the other event I could not stick 

around long enough to do it, so I just spent my time walking back 

and forth in order to not be too late here. So that is not a very typical senatorial set of events, but I might as well confess it. 

I am glad to have these three distinguished witnesses. The way 

I see it, they are going to make an effort to give us some shortterm evaluations on where things are. I want to, since I hear you 

commented about Alan Greenspan’s thoughts regarding productivity, he just recently spoke last week, and he said when the 2.5 

productivity growth estimate came out, a lot of people thought it 

was overly conservative. What one may readily argue at this stage 

is that it is less conservative than it was at the time that it was 

done, but I do not see anything in the data, per se, at this parVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00009 Fmt 6633 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
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ticular point, which should lead one to make any major revisions 

of the current surpluses. 

So you said you would like to know what he said, and my staff 

remembered that he just said it. So we thought we would—we even 

knew you were going to ask that question. [Laughter.] 

Senator DOMENICI. Anyhow——

Chairman CONRAD. I am glad you did. 

Senator DOMENICI. I would just like to say to the chairman this 

is his first morning presiding as chairman, and I wish him well. 

I cannot say I wish him extreme longevity as chairman—— 

[Laughter.] 

Senator DOMENICI [continuing]. But he understands if that happens to be the fate of the Senate, we could surely do an awful lot 

worse. You will do a good job as chairman, and I look forward, in 

the foreseeable future, working with you. We might disagree on fiscal issues or tax issues, but I believe we do understand, with a 

great deal of civility, and we do have good will between us, and 

that counts for a lot around here. 

Now, having said that, I think it is useful on the record here 

quickly to remind the members of the committee and our witnesses 

that this assessment that we are talking about here this morning 

is already underway at the Congressional Budget Office, as required by the Budget Act, and that their estimates, and those of 

the administration, will be up here on the Hill and publicly consumed and available in July or early August. 

So you all are going to be talking about some things. We are 

going to see how close to what they say—they are a little more official than you, but not necessarily more right than you. I hope you 

know that. And nobody can deny that the economy has slowed 

down in the first half. However, again, I think it is important to 

point out that the budget we worked from assumed a dramatic 

slowdown in the economy from 5 percent growth rate last year to 

2.4 this year. 

That is one of the assumptions that they made, which puts them 

on the side of being pretty observant with reference to what was 

happening. And even with that projected slowdown, and with the 

enactment of the tax cut directed by our budget resolution, and 

even with the technical updates in May, Mr. Chairman, you received a letter from CBO last week that estimates a budget surplus 

of $200 billion for the current fiscal year. And excluding the Social 

Security and Medicare surplus and whatever we have already obligated, there is still a surplus estimated to be over $16 billion this 

year. 

Now, nobody, even these distinguished economists, can predict 

the course of the economy with precision, particularly at this time. 

There is always uncertainties in any economic forecast, and surely 

they would acknowledge that here today. I will not even ask the 

question, I will just assume it. 

So I think this is sort of a short-term review for us. It may be 

helpful. Certainly, it will not be harmful. And in the short term, 

there are some interesting complications for the forecasters, and I 

would just put them forward. What will be the impact on the economy of the $70 billion in tax credits and checks that are going to 

be issued in the next few months? Now, even if one says that canVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00010 Fmt 6633 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
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not have a big macroeconomic impact, I wonder what it will do to 

the consumer confidence issue, which has been turning up a little 

more positive of late and moving in a positive direction. 

How will the Fed’s 250-basis-point reduction in interest rates and 

the possible future reductions affect the economy in the coming 

months? And I note that the interest rates on 3-month T-bills are 

nearly 100 basis points lower today than what we assumed when 

we prepared the resolution, Mr. Chairman. As for me, I believe 

both the monetary and fiscal policy stimuli put in place since the 

CBO economic forecast last winter will have some positive effect. 

How much? Clearly, I am not smart enough to know, but some I 

am certain. 

Clearly, there will be offsets to these economic stimuli, mostly on 

the global front. We cannot do much about that. We try very hard, 

but weakness in Europe, and Asia, and growing trade interventiontype attitude such as the EU blocking a G.E.-Honeywell and a lot 

of other big noises from trading partners, clearly, all of those would 

indicate that things may not be as good as we would like. 

Let me conclude on one last point. Much of today’s discussion I 

assume will be about productivity. That is an interesting subject, 

and I think we both worked on the assumption last year that Alan 

Greenspan was correct, that we had a new economy and productivity was substantially more than it had ever been in the past. 

The chairman of the Fed has repeated twice that he still believes 

that kind of set of differences do apply in this economy and that 

it will come back and the new economy will bring productivity back 

strong. 

It is a volatile statistic that we are talking about. During the last 

period of rapid productivity growth, that is, from 1948 through 

1993, productivity growth averaged 2.9, but was often negative. It 

was 2.9 average, but it was often negative, if we knew what we 

were doing. I am wondering whether we know how to measure productivity. But let us say, to the extent that we are all doing it, we 

kind of think we know. 

So I look forward to the testimony this morning, Mr. Chairman, 

and I look forward to tomorrow’s, and I hope I can be with you for 

the whole session tomorrow also. 

Thank you very much. 

Chairman CONRAD. Thank you very much, Senator Domenici. As 

always, you have observations that are useful to all of us, and we 

appreciate very much your participation. 

We really have two things going on here: One is we know there 

is some slowdown in the economy. It appears now, what the consensus forecast, the economic growth is below that what was projected early by the Congressional Budget Office, and then we have 

this longer term question, the question of productivity growth. 

One of the reasons we thought it was important to have this 

hearing is there was a very thought-provoking article in The Economist, in the May 12th edition, suggesting that the productivity 

growth that undergirds the long-term forecast may be overly optimistic. Certainly, it is a much higher rate of productivity growth 

that is in the forecast, and we saw in the 20 years from 1974 to 

1995, but it is lower than the productivity growth we saw in more 

recent years. 

6

One of the questions that we really need to probe today is what 

can we expect, reasonably expect, in terms of productivity growth 

over the next decade? Because it has enormous implications for the 

Federal budget. About every one-tenth of 1-percent change, onetenth of 1-percent change in productivity growth, alters our projected budget surplus by over $200 billion. So this has enormous 

implications for the budget going forward, and that is the reason 

we thought it would be useful to have this hearing today. 

We have a very distinguished group of witnesses, starting with 

Dr. Baily, who is with the Institute for International Economics in 

Washington. He is the former chairman of the Council of Economic 

Advisers under President Clinton; Dr. Bill Dudley, who is with us, 

as well, who is director of the U.S. Economic Research Group at 

Goldman Sachs and was named the managing director there in 

1996. He is responsible for the economic and interest rate forecasts 

for the United States; and Mr. Wesbury, Brian Wesbury, who is 

vice president and chief economist of Griffin, Kubik, Stephens & 

Thompson. 

We welcome you all. This is a distinguished panel of witnesses, 

and we will start with Dr. Baily. We would ask if you would summarize your testimony in about 7 minutes, and then we will go to 

the other witnesses and then have time for questions. 

STATEMENT OF MARTIN N. BAILY, SENIOR FELLOW, 

INSTITUTE FOR INTERNATIONAL ECONOMICS 

Mr. BAILY. Thank you. Thank you, Mr. Chairman, Senator 

Domenici and members of the committee. It is a great privilege for 

me to have the opportunity to testify here. 

You know, Harry Truman said he did not like two-handed economists—on the one hand, on the other hand—but I am going to be 

one, I am afraid, because I think the theme of my own testimony 

is that there is a tremendous amount of uncertainty, and I am 

echoing, Mr. Chairman, what you said earlier. 

I am basically pretty optimistic about the U.S. economy. I think 

it is going to recover either toward the end of this year or in early 

next year from its cyclical problems. And I am also pretty optimistic about productivity growth going forward, thinking that it 

will probably be in the 2- to 2.5-percent range, which is a bit below 

what we had in the last 5 years, but substantially better than what 

we had over the 20-year period. 

But at the same time—and in the Economic Report of the President that we issued in January 2001, we did talk about a new 

economy—but at the same time, there is a tremendous amount of 

uncertainty around that. And with the benefit of hindsight, I wish 

perhaps in the report we might have been a bit more forceful in 

saying that the term ‘‘new economy’’ really carries no guarantee of 

a continuation of economic growth at the same pace in the years 

to come that we had, and we tried to make that clear, but I am 

perhaps a little concerned that the term ‘‘new economy,’’ that not 

only I use, but obviously a lot of other people, conveyed a little bit 

more certainty than actually exists and certainly more certainty 

that was maybe justified by the evidence or our intention. 

And I note that Chairman Alan Greenspan, while he has indeed 

commented on the strength of productivity and been a supporter of 

7

the new economy, he has also, I think, in his statements, talked 

about the uncertainty and made the same point that we do not 

know how long this rapid rate of productivity growth will go on. 

So why is there so much uncertainty? In my testimony—and I 

would ask that my written testimony be introduced into the record, 

if that is permissible—there was a sort of view of the economy that 

came up I think during the days of Kennedy and Johnson, a mentor of mine, Arthur Okun, developed this notion of potential output. 

And that said we had a fairly predictable view of what the longterm growth of GDP was going to be, and underneath that, of 

course, was a view of productivity growth and labor force growth, 

and some fairly stable view of what kind of unemployment rate the 

economy could operate at. 

And that meant that 10-year budget forecast, you know, maybe 

things were going to be less than you expected this year, but you 

would bounce back and maybe be a bit better than expected next 

year, and you would sort of bounce around this fairly stable trend 

of potential output growth. 

I think, unfortunately, we have learned over the last 25 years or 

so that it ‘‘ain’t’’ that simple, and there is much more uncertainty 

in trying to predict that potential growth than we had ever 

thought. We had this problem in the early 1970’s. The forecasters 

at the time, careful forecasters, kept thinking we were going to go 

back to the period of rapid productivity growth, rapid potential 

GDP growth, and we kept missing the mark. And so there was a 

lot of overoptimism about growth in the 1970’s. 

There was also overoptimism in the 1980’s. I think there were 

some, perhaps, views that the supply side effect of tax cuts were 

going to be larger than those that actually materialized, and so 

again we got some overoptimistic views of growth, and we ended 

up with large deficits in the 1980’s. 

So I think we have learned that the errors can go either way, but 

there is really no such thing as a stable growth of potential output 

that we can count on. That means, I think, from the point of view 

of this committee and from Congress, generally, that you have to 

plan the budget sort of around that uncertainty, recognizing the existence of that uncertainty, and making sure that the plans that 

you make are going to be consistent with either strong growth or, 

perhaps, somewhat weaker growth. 

In my testimony, then, I talk about a sort of good news scenario. 

As I said, I am basically an optimist. I think we will bounce back, 

and I think we will get solid productivity growth, but perhaps the 

bad news about the good news scenario is that it is pretty much 

built into the existing CBO estimates, and you mentioned this already; that they had built in a 2.7-percent potential growth rate or 

a 2.5-percent actual growth rate of productivity and a corresponding pretty strong growth of GDP. Now, that led them to a 

$3.1-trillion estimate of the on-budget surplus over the 10-year period. Now, given that we have passed a tax cut, so that baseline 

would come down to something like $1.7 trillion. 

Now, what I mention in my testimony is supposing, and I think 

I am going to echo something you said earlier, Mr. Chairman, that 

if we even drop to 2-percent productivity growth, which would still 

be pretty good, it would still be a lot better than we had for 20 

8

years, that would take the estimate of the surplus down by about 

a trillion dollars. So just a few tenths, just a half a percentage 

point lower productivity growth would end us up with really much 

lower surplus. 

Now, the other thing that I talk about is, if things, if we don’t 

get the good news scenario, if, in fact, productivity growth does 

slow, perhaps slows a little bit more than 2 percent, there are a 

lot of things that potentially could come unraveled as a result of 

that; that the low unemployment, the low inflation, the strong dollar, the strong stock market, all of those things, in some sense, 

have been the result of this very strong productivity growth performance. So, if that starts to weaken, a lot of those things could 

come unraveled. We could get some return to the stagflation period 

that we had in the 1970’s, when productivity growth slowed down. 

Again, I am more optimistic than that, but I do not think we can 

rule this possibility out at all. After all, we had 1.5-percent growth 

for about 20 years. I certainly do not think we can rule out a return to that. And if that is the case, the whole budget situation 

changes dramatically. 

CBO, in their January forecast, pointed out that a pessimistic 

scenario, which meant in their case a return to 1.5-percent productivity growth and some somewhat more conservative views of the 

revenue collection would take the $3.1-trillion on-budget surplus 

down to a deficit of over $500 billion. Now, given that we have had 

a tax cut, we would get something, $1.8/$1.9-trillion deficit under 

that more pessimistic scenario. 

So, to wind up, and I realize that I am out of time here, in some 

previous testimony that I gave to the House, I outlined my view favoring fiscal discipline over large tax cuts. I think there are a number of reasons that I give that we should look ahead to the problems of the Social Security and Medicare system and the need that 

they will have to deal with the baby boom generation. I mention 

the fact that having a large tax cut at a time when we are running 

a current account deficit of about 4.5-percent of GDP seems to me 

a move in the wrong direction. We need to increase national saving, not to decrease national saving. 

And, after all, the new economy that developed, developed in an 

environment of fiscal discipline. So, you know, if it worked, let us 

kind of keep that fiscal discipline going. 

And, finally, I think some of the surplus projections may not be 

realistic on the spending side, and I know both parties want to 

keep spending under control, but I think there is a question of 

whether the spending projections really are realistic, given the 

need, on the defense side, and for health care, and education, and 

environmental investments. 

So, again, this testimony focuses on the economic uncertainty 

that you drew attention to. I am basically an optimist, but I don’t 

think we can necessarily plan our budget just on the basis of that 

optimism. We have to think of both sides and both possibilities. 

[The prepared statement of Mr. Baily follows:]

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Chairman CONRAD. Thank you, Dr. Baily. We appreciate very 

much your testimony. 

Now we will hear from Dr. Dudley. Welcome. It is good to have 

you here. 

STATEMENT OF WILLIAM C. DUDLEY, CHIEF U.S. ECONOMIST, 

GOLDMAN SACHS & CO 

Mr. DUDLEY. Thank you, Mr. Chairman. 

I certainly agree with Martin that the budget outlook is highly 

uncertain, both over the next year and the next decade. And I 

think I agree with him that the risks are not symmetric. I think 

they are heavily skewed to the side that the budget surpluses fall 

short of projections, even assuming that Congress and the administration maintain tight control of discretionary spending. 

In particular, from my perspective, the revenue estimates appear 

too optimistic for two reasons: 

First, the amount of tax receipts generated for each dollar of economic activity is likely to decline and not only because of the tax 

legislation that was recently enacted. Put simply, the surge in tax 

receipt revenue we got during the latter half of the 1990’s was not 

just a result of faster economic growth, it also reflected the confluence of factors such as increasing inequality in terms of income 

gains, a rise in the profit share of income, and a surge in capital 

gains tax receipts. Most, if not all, of these factors are in the process of reversing course. 

Second, the long-term growth rate of the economy may not be as 

high as anticipated. In particular, if the investment boom of 1990 

and 2000 was based on overly optimistic assumptions of future 

profitability, as appears to be the case, then investment spending 

will not recover quickly. In that event, the pace of capital deepening will slow. That suggests the productivity growth is likely to 

decline from its lofty 1999–2000 pace on a longer term basis. 

Turning, first, to the near-term budget outlook, there are a number of reasons for concern that the current Congressional Budget 

Office revenue projections may be overly optimistic. 

First, it appears that the profit share of income is falling sharply. 

For example, we estimate that the pretax profit share of GDP in 

2001 will be only 8.4 percent, compared to 9.5 percent last year. 

This is important for the budget outlook because a dollar of profit 

income generates more revenue than a dollar of personal income 

because the average tax rate on corporate income is significantly 

higher. 

The profit share of income is declining for three reasons. The 

profit share is cyclical. When the economy slows sharply, profits 

typically bear the brunt of the adjustment. That is happening this 

time. Second, profits are under pressure because compensation 

costs are rising more quickly because of the tightness of the labor 

market and due to rising energy prices. And, third, the investment 

bust is leading to a sharp downturn in profitability among hightech companies. 

The impact of the profit squeeze on Federal tax receipts is already becoming evident. Estimated corporate tax payments for the 

June 15th tax date fell sharply down more than 25 percent from 

just a year ago. We estimate the corporate taxes could fall $15- to 

22

$20 billion short of the CBO’s projections for the current fiscal year 

and $20- to $30 billion short for fiscal year 2002. 

Second, personal income tax receipts could also prove to be disappointing. In recent years, these receipts have been boosted by the 

strength of the U.S. equity market. 

The strong stock market boosted income tax receipts in two 

ways: 

One, through the exercise of stock options which were a significant component of compensation; and, two, through capital gains 

generated by the rapid appreciation of the equity market. Unfortunately, we do not have good, timely data on options in capital gains 

income, but it is interesting to take a look at the projections of the 

State of California. 

The State of California recently estimated that the exercise of stock options contributed more than $80 billion to personal income 

in 2000, up from $50 billion in 1999. This year, they project a 37-

percent decline, and that is based on a NASDAQ that is assumed 

to rise sharply from the current level. The California budget revision statement suggests that there is going to be a sharp drop expected in California from tax receipts from that source. 

If you broaden this out to the country as a whole and assume 

that tax option income for the country as a whole is at least two 

to three times the size registered for California, this could translate 

into a revenue shortfall from this source in the range of $25- to $40 

billion. 

Second, on the capital receipt side, it appears that realizations 

continued to rise very sharply in 2000 in response to prior rapid 

gains in equity prices. The problem is that such strong capital 

gains receipts appear unsustainable. After rising more than 20 percent from 1996 to 2001, according to CBO’s estimates, if the equity 

market doubled, it now appears that capital gains receipts are likely to turn down. I would argued that the Congressional Budget Office’s estimate that there will be only a 3-percent drop in capital 

gains tax receipts next year is quite optimistic in light of the fact 

that the stock market is down more than 20 percent from its peak 

in early 2000. 

If you assume, instead, the capital gains tax receipts fall back to 

the level reached in 1999, the stock market was roughly at the 

same level now as it was then, that would imply a shortfall of 

about $27 billion relative to CBO’s current projections. Taking all 

of these factors together, corporate tax receipts, declines in personal income tax receipts due to options, related income and lower 

capital gains tax receipts, I would anticipate that we will see a 

shortfall in tax receipts in the range of $50- to $75 billion in 2002, 

relative to the CBO’s January projections. 

Obviously, if income tax receipts disappoint in 2002, they will 

have negative consequences for the long-run budget outlook. But 

even apart from what happens in 2002, there are reasons to be concerned that the long-run budget surplus projections are too optimistic. 

Most importantly, the risk is that the long-term growth rate of 

the economy could fall short of expectations. As you know, in recent 

years, productivity growth has risen, and this has caused the CBO 

to raise its long-term growth projections. Unfortunately, our work 

23

suggests that some of that rise in productivity growth is likely to 

be unsustainable. A portion of the productivity gains was due to 

the investment boom which led to a rise in the pace of capital deepening and thereby increased the output per hour worked. 

This can be seen quite clearly in the contrast between the contribution of capital deepening the productivity growth during the 

1950 to 1998 period compared to the boom years of 1999 and 2000. 

In the early period, the contribution to productivity growth from 

capital deepening was only 0.7 percent per year. In 1999 and 2000, 

that spiked up to 1.6 percent a year, more than twice as high. 

In our view, this rise was unsustainable because the investment 

boom itself could not last. It was based on profit expectations that 

were overly optimistic. In essence, firms mistakenly interpreted 

profits associated with the boom for profits that were sustainable 

on a long-term basis. When this error became clear, investment 

spending collapsed, and with it the rapid productivity gains that 

we have seen in 1989 and 2000. 

We estimate that the rate of return on capital is consistent with 

the growth rate of the capital stock of about 3- to 3.5-percent per 

year. This compares to a peak growth rate of about 5 percent in 

2000. In our view, this implies a secular trend of productivity 

growth right in the middle of Martin’s range of 2.25 percent, conveniently, down below the CBO’s estimate, which is sort of in the 

2.5/2.75-percent range. 

Details of our analysis of why the secular of productivity growth 

is only 2.25 percent going forward is contained in this paper, ‘‘U.S. 

Investment Boom Goes Bust,’’ which I have distributed to the committee. 

So what is the bottom line? The bottom line is this: The boom 

of the last few years created a temporary period of climbing profits, 

soaring equity prices, surging productivity growth, and rapid increases in tax revenue. Now that the boom has ended, all of these 

factors are moving in reverse. The result is likely to be a narrowing 

of profit margins, disappointing tax receipts from both the corporate and household sectors, and somewhat slower productivity 

growth. 

The boom exaggerated the good news associated with the improvement in U.S. economic performance. That suggested that the 

surprises over the next year or two, and beyond, on the budget are 

likely to be negative ones as this exuberance wears off. 

Thank you. 

[The prepared statement of Mr. Dudley follows:]

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Chairman CONRAD. Well, thank you, Dr. Dudley, for that sobering testimony. We appreciate your taking the time to be here. 

Mr. Wesbury. 

STATEMENT OF BRIAN WESBURY, VICE PRESIDENT AND 

CHIEF ECONOMIST, GRIFFIN, KUBIK, STEPHENS & THOMPSON, INC. 

Mr. WESBURY. Thank you, Mr. Chairman, Senator Domenici and 

other members of the committee. I will summarize my testimony 

this morning, so if I could submit it for the record, I would appreciate that. 

My belief is that the economy today is in what I would call a typical cyclical slowdown. We have seen many of these over history, 

and this slowdown that we are living through, in my opinion, is 

being caused by three specific factors: 

No. 1, the Federal Reserve, in my opinion, raised interest rates 

too far in late 1999 and early 2000. That is slowing the economy 

in late 2000 and through today. 

No. 2, tax revenues as a share of GDP hit a record level in the 

year 2000. I think that that also helped slow the economy down in 

recent months. 

And then, also, the energy crisis hit. We had much higher natural gas prices, gasoline prices, oil prices. All of these things have 

led to a slowdown today. 

As a result, if those are the three reasons for our economic slowdown, then reversing them should help the economy, and that is 

exactly what I think has happened. The Federal Reserve has cut 

interest rates dramatically this year. They will do so, again, in my 

opinion, this afternoon. Taxes have been cut due to recent legislation, and we will have rebates this year. 

And, finally, energy prices are coming down, and the reason for 

that is very simple. High energy prices attracted producers. We are 

punching many more natural gas wells right now. We are building 

power plants, and as a result, national power prices are coming 

down and have come down dramatically this year. 

As a result of these three things, my belief is that the economy 

will bounce back late this year or early next year and that it will 

bounce back strongly. In fact, I believe that year 2002 growth will 

come back to the 3- to 3.5-percent range, and then as we move into 

2003 and beyond, we will see growth rise back to the 4- to 4.5-percent range, much like what we have seen over the past 4 or 5 

years. 

That is the near-term economic outlook. In terms of the longer 

term, there are two different views, and you are going to hear both 

of them today. The first was from Dr. Dudley here and Martin 

Baily, although Dr. Dudley focused more on the unsustainable nature of investment and the bubble in the stock market over the 

past few years. In this view, we benefited from these bubbles, this 

unsustainable investment, and that it is, as a result of that, 

unsustainable going into the future. 

My belief is that that is not the case; that, in fact, what we have 

done is we have entered into a new era of economic growth in the 

United States, where investment in technology and equipment has 

raised potential growth, increased productivity trends, lowered inVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00035 Fmt 6633 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
30

flation, and as a result the boom in revenues and the surplus that 

we have seen in recent years is coming from very fundamental factors. I, also, believe that these fundamental factors will continue 

for many, many years into the future. These productivity booms, as 

found by Dr. Meyer at the Federal Reserve Board, lasts for 20 to 

25 years. And in a recent speech, he suggested that we are just in 

the beginning of a new wave of productivity increases. 

One thing that is interesting about the debate about productivity 

is that, obviously, we have reached a point where productivity fell 

in the first quarter, and some people suggests that that is leading 

us toward a lower trend in productivity. I disagree with that. I 

think it is a very normal cyclical drop in productivity. In fact, if you 

think about it, it is caused today mainly because we are at full employment or very close to full employment in recent years. Companies had to pay hiring bonuses in order to get employees, they had 

to allow more flexible working hours. In other words, the cost of 

bringing on new employees rose dramatically. And as a result, 

when production slows, when the economy slows, these companies 

are unwilling, at first, to let go of employees. And what happens 

is production falls faster than employment, then productivity falls. 

Unfortunately, now, the labor market is weakening. We are seeing layoffs pick up. That is not ever good news, but it is, in a sense, 

positive news because productivity will look better as we move into 

the quarters ahead just because the labor market has weakened. 

One of the other interesting things is that if you look at the history of the United States, in 1990, in 1987, in the 1979 to 1980 period, and again in 1974, whenever oil prices spiked, and they did 

in each of those periods, productivity fell. When oil prices and energy prices came back down, productivity picked back up. And so, 

again, I believe that this is a cyclical, very short-term drop in productivity. 

Now, the question is where do we go from here? Two problems 

exist. No. 1, we have a very difficult time in measuring productivity. Financial services productivity for basically 20 years was 

never shown to increase at all, and this was with the invention of 

ATMs and Internet banking, and obviously our statistical agencies 

have fixed those numbers, and now we show financial services 

picking up. 

Alan Greenspan recently, back in January, focused on the medical services field. And one of the things that he saw was that productivity trends in medical services had not increased, in fact, had 

declined between 1990 and 1999, and he said, and told this committee, that that was implausible, and I agree with him. 

As we move forward, what we need to focus on is those areas 

where we can see improvements in productivity. Manufacturing 

productivity has accelerated in the past few years. In fact, in my 

measurements, it is growing faster than ever in U.S. economic history, even faster than the industrial revolution. And as we move 

forward, my belief is that investment in high technology equipment 

will continue to raise productivity trends. 

Let me bring up one interesting kind of microeconomic analysis 

point, and that is that the lumber industry today uses lasers and 

CAT scan machines at the beginning of a mill. They look into a log, 

and by looking into that log, they know the best way to cut that 

31

log. What is amazing is that they connect these pictures of that log 

to a computer, and that computer has current prices for two-byfours, one-by-twos, one-by-sixes stored into it, it knows the actual 

inventory of the mill, it knows all of the orders up until the last 

second, and as a result, they are able to maximize the profit from 

every log that comes into that mill. Technology is moving through 

every industry in doing these kinds of things, and we cannot measure the true higher profitability that is taking place today. 

To summarize, I believe that the trends that the CBO has estimated, 2.7 percent per year in gains in productivity over the next 

10 years, are actually low. My belief is that we will see 3-percent 

gains in productivity or higher as we move ahead, and 4-percent 

gains in real GDP or higher as we move ahead into the next few 

decades. And, therefore, I believe that, in fact, some of the estimates that we are hearing about the budget are very conservative, 

and I am very optimistic that those surplus numbers that are forecast will prove to be correct as we move forward. 

Thank you. 

[The prepared statement of Mr. Wesbury follows:]

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Chairman CONRAD. Thank you, Mr. Wesbury. 

We have a vote underway. Senator Clinton is the first one here 

and will have the first chance to question. Is the Senator able to 

stay or what would she prefer, that we take the committee out? 

Senator CLINTON. Well, Mr. Chairman, thank you, but I am 

going to have to leave after I vote. So, once I go to vote, I won’t 

be able to come back. 

Chairman CONRAD. All right. 

Senator CLINTON. So, if I could just maybe ask a few questions——

Chairman CONRAD. Certainly. 

Senator CLINTON [continuing]. And if you could go vote and——

Chairman CONRAD. Yes. Why do we not do that. Why do you 

not—yes, we will. 

Senator SARBANES. Hillary, would you give me just 10 seconds? 

Senator CLINTON. Sure. 

Senator SARBANES. I just want to congratulate Senator Conrad 

on becoming chairman of the committee. We look forward to serving under his leadership. I know that he and Senator Domenici 

have established a working relationship, which I think will prove 

to be positive and constructive for us, but, Mr. Chairman, I am delighted to be able to call you Mr. Chairman. I am very pleased to 

be here. 

And I did want to thank Dr. Baily for his terrific service as the 

chairman of the Council of Economic Advisers——

Mr. BAILY. Thank you. 

Senator SARBANES [continuing]. And for the very high-quality 

professionalism that was reflected by the Council under his very 

able leadership. 

Mr. BAILY. Thank you. 

Chairman CONRAD. I, Thank the Senator, and we will turn it 

over to Senator Clinton. And if we are not back, just recess the 

committee until we return. 

Senator CLINTON [presiding]. Well, I would echo what Senator 

Sarbanes said, both about our new chairman and my great appreciation to Dr. Baily for his service in the prior administration. 

You know, in listening to the testimony, I mean, it is hard I 

think for those of us sitting on this side of the table to know whether we have a new-era economy with new problems or old problems 

or an old economy with new problems or old problems. And to try 

to sort that out, to figure out what direction we should take is obviously something of great concern. Because the optimism, the longterm optimism that each of you expressed, I think is shared by everybody here, but how we get from here to there without causing 

significant damage to our fiscal position, without putting us at risk 

of a return to deficits and increasing debt burden which would 

make at least our optimism tempered by reality is the series of 

questions that are going to be posed by these hearings. 

And before I can certainly make any decision about where I 

think we should go, we are going to have to do a lot of sorting out, 

and that is why I appreciate the committee having these hearings. 

Let me just ask each of you, based on your own assessment of 

where we currently are, what, if any, action would you recommend 

this committee recommend to our colleagues that could be taken in 

38

order to increase the upside of your picture and decrease the downside? If you want to talk short, medium, and long term, that is fine 

as well. 

Dr. Baily. 

Mr. BAILY. Well, the fiscal stimulus that has been put in place 

I think will be helpful in the short term in helping bring us out 

of the current slowdown. So I think that is there, and there certainly was a case for doing that. I think it is more over the longer 

term that I would be concerned. I did not support the tax cut that 

was passed. I think it was not as big as had been proposed, but 

is still larger than one that I would be willing to support. 

And so I think the main action going forward, particularly given 

that there are a lot of, you might say, gimmicks or at least things 

within that tax cut that will have to be resolved as provisions 

phase in and phaseout, and the estate tax is repealed and then 

unrepealed, I would certainly urge you to consider taking the more 

conservative view and limiting the size of the tax cut and making 

sure that we don’t pile on extra tax cuts to boost this even higher. 

So focusing on the fiscal discipline, which I think is a big reason 

we had such good performance in the 1990’s. 

Senator CLINTON. I am sorry, but I have just been told I have 

to leave. They are trying to cut the vote off. And I would very like 

much, though, if we could, perhaps when the committee comes back 

into session, get the answer to my question, Mary, so that I could 

see what the answers are. 

And I very much appreciate all three of you being here and helping us think through this ‘‘on the one hand, this/on the other hand, 

that’’ set of dilemmas. 

Thank you very much. The committee is in recess. 

[Recess.] 

Chairman CONRAD [presiding]. Why do we not come back to 

order. 

I, first, want to apologize to the witnesses for the interruption, 

but——

Mr. BAILY. It was a short break. 

Chairman CONRAD. It was not too bad. 

Mr. DUDLEY. Very efficient. 

Chairman CONRAD. We do have to vote, and the Senate is never 

a predictable schedule. 

I understand Senator Clinton had asked a question and not all 

of you had had a chance yet to answer it. So why do we not go back 

to her question. 

Dr. Dudley, as I understand it, you were answering when she 

had to leave to make the vote. So, if you would like to complete 

your answer, and then the other two witnesses have a chance to 

address it as well. 

Mr. DUDLEY. OK. I had not actually even started, so I will give 

my full answer. 

Chairman CONRAD. OK. 

Mr. DUDLEY. She had asked the question what could the committee do to try to ensure the greater likelihood of the upside, in 

terms of the outcome for the budget and the economy. I think there 

are two things that come to mind, from my perspective: 

39

One, try to increase certainty about tax and spending policy. One 

thing that deters investment is uncertainty. And to the extent that 

Congress and this committee can try to create greater certainty 

about the likely course of Government tax and spending policy, I 

think that would encourage greater investment, which is the source 

of the productivity improvement that we are seeking to try to 

achieve. 

Second, I think it behooves this committee, and the Government, 

generally, to plan for the worst and hope for the best in terms of 

the budget. The reason for that is that if you plan for the worst 

and you get the best, all that happens is you have freed up even 

more resources for the private sector, and so you are going to have 

even a better outcome in terms of economic growth and productivity performance, and I think that is quite a good thing, rather 

than the obverse, which is you hope for the best and get the worst. 

Then I think you are consigning yourself to subpar growth and 

poor productivity performance. 

Chairman CONRAD. All right. 

Mr. Wesbury. 

Mr. WESBURY. Mr. Chairman, I am kind of reminded, and I have 

it in my testimony, a quote from Laurence Meyer, Governor of the 

Federal Reserve Board, where he said that the United States was 

the only country in which the dramatic surge in productivity was 

evident in the time period he was looking at, the late 1990’s. 

This is a question that I, myself, and many of my customers and 

other investors have asked a lot: Why is this surge in productivity 

happening in the United States alone, not in Europe, not in Japan? 

My answer is really very simple, and that is that we have much 

lower tax rates than these other countries; our labor markets are 

less rigid, our Government spending is much lower than theirs as 

a share of GDP. In other words, we have allowed technology and 

entrepreneurial activity, and innovation, and creativity to really 

took root in the United States and for those entrepreneurs to be 

rewarded with low after-tax or high after-tax profits and incomes. 

And so my belief is that as this committee looks at what has 

been a miracle in the U.S. economy in the past 5 years, and really 

in the past 18 years, relative to the rest of the world, is to think 

about those things, that we need to keep tax rates down, we need 

to keep the size of Government, relative to the private sector, low, 

and we need to keep the regulatory environment flexible enough so 

that entrepreneurs can truly work their magic in innovation and 

creativity. 

And what happens when we do that is that we attract capital 

from around the world, we provide the right incentives here in the 

United States, and that is the way we maximize the upside, keep 

productivity strong and make certain that our budget estimates are 

correct or maybe even too low as we move into the future. 

Chairman CONRAD. Dr. Baily. 

Mr. BAILY. Well, I had an opportunity. I will just add a couple 

of other comments. 

Let us keep in mind that the miracle economy of the 1990’s, and 

particularly the acceleration of productivity growth in the latter 

half of the 1990’s, took place with the tax rates that we have. I do 

not like paying taxes, and I think if the opportunity to cut taxes 

40

is there, I am certainly not against it, particularly if we can provide some tax relief for low- and moderate-income families that are 

feeling pressed even in a good economy and are certainly pressed 

now that the economy is a little bit weaker. 

So I am certainly not against tax cuts, as appropriate, but I disagree with Mr. Wesbury that that is the main thing to do to keep 

the expansion going or to—that differentiates us from Japan and 

Europe. I was involved in a number of studies of Europe and 

Japan, and I think what we found is a lot of the reason for the differential has to do with the regulatory environments, that we are 

less regulated as an economy; we allow much more evolution to 

occur in our industries; we allow companies that are no longer successful to fail and new companies that are growing and becoming 

successful to enter; we allow the best productivity/best practice 

companies to expand, even if sometimes that means that there has 

to be change and workers have to change jobs. 

So I think the reason we have done better than Japan and Europe really is because of that openness to innovation and change. 

That is the most important thing. 

Chairman CONRAD. All right. 

Senator Domenici. 

Senator DOMENICI. Thank you, Mr. Chairman. I will be brief. I, 

again, want to thank you, all of you, and to tell you that I learn 

from every one of these discussions. 

Clearly, I want to talk about only one subject and that is what 

you think about productivity. Actually, I can vividly remember 15 

years ago, when we were talking about not knowing how to measure productivity, except for heavy industry, and it was pretty obvious that measuring productivity for General Motors, U.S. Steel, 

Alcoa was pretty easy. Once you put the formula in place, you just 

measured the manhours to produce whatever unit you are going to 

use as your constant unit. Pretty soon you find out less manhours 

producing more of the thing you are manufacturing, and that is 

productivity. 

We did not know much then about the service industry and how 

do you measure productivity. As a matter of fact, I was pleased to 

hear one of you say that you are not quite sure we are even measuring productivity in some of the service industries today in a real 

way, and I would concur wholeheartedly that every industry that 

is using modern equipment versus 15 years ago has reduced the 

manhours that they need to handle X product, whether it be a 

bank, whether it be an insurance company, large or small, just 

keep on going. They are all over the place. 

Now, what I was led to believe was that Dr. Alan Greenspan 

came to a conclusion, as Federal Reserve Board chairman, that we 

had a new economy. New economy did not mean we were at an age 

or at a year that is new; new meant something is happening that 

is different, and it is causing us to become much more productive 

because of high tech, which is applying across-the-board, and innovation, new products. He came to a conclusion that this new technology was, in fact, America, and America for the future. 

We did ask him, before we did our marginal tax rates and other 

things, what he thought about surplus use, and I will not go into 

that at this point. But one of the things he did say is if you put 

41

it on the debt, that would be great, and if you are not going to do 

that, you ought to cut marginal rates. So I am going to ask each 

of you a question about marginal rate cutting. 

Do you still believe, in light of this little downturn, which might 

have lasted longer than we expected, that we are living in a new 

economy in America and can expect return to higher productivity 

rates across-the-board in American business and industry? 

Could you answer that one, first. We will start with you, Dr. 

Baily. 

Mr. BAILY. You want me to just take that question? 

Senator DOMENICI. Just that question. 

Mr. BAILY. Just that question. I think we are in a new economy, 

and I think we will return to stronger productivity growth than we 

experienced for 20 years after 1973, but I do not know for sure 

whether that is right, and I do not think we should—as Bill Dudley 

said, we should hope for the best and plan for the worst. So I think 

that we need to recognize that, as yet, we do not know how long 

this strong productivity growth is going to last. I am hopeful, but 

I do not think we know yet. 

Senator DOMENICI. I thank you, but I am not sure that I heard 

Dr. Dudley say that he does not think we are operating in a new 

economy. 

Could you answer for yourself? 

Mr. BAILY. I did not mean to answer for you, Bill. I am just 

quoting your earlier comment. 

Mr. DUDLEY. I actually do think we are in a new economy, and 

I would characterize the new economy maybe somewhat differently 

than others. It is a new economy that, in my mind, is much less 

cyclical, much less recession prone. We have had two very longlived business expansions in a row, 1982 to 1990, and hopefully 

from 1991 to today, although there is some question of whether we 

are still in a business expansion or not at the current moment. 

This is due to a variety of things, trade liberalization, deregulation of the financial system, just-in-time inventory management, 

and I think it is important that this drop in the cyclicality of the 

economy I think it also may help explain why we have been experiencing higher productivity growth. Because if the economy is less 

cyclical, that reduces the riskiness of new investment, and if you 

get more new investment, that raises productivity growth. 

The key question, though, which I raise is by how much? And 

what I am really arguing is not so much that productivity growth 

has not increased. I think it has. The 2.25 percent that we are looking for the long-term secular trend to be is much higher than what 

we experienced from 1973 to 1975. However, I do not think we are 

going to go back to where we were in 1999 and 2000. I think that 

productivity experience was due, had a cyclical component due to 

very rapid GDP growth. I think it had a component that was also 

unsustainable because it was due to a boom in technology investment that was not sustainable on a long-term basis. 

So I am optimistic that the economy is quite a bit better than 

it was. I am just not willing to quite buy into the idea that 1999–

2000 is where we are going back to. 

Senator DOMENICI. Thank you very much. 

Mr. Wesbury. 

42

Mr. WESBURY. I do believe we are in a new economy. I think 

that, in fact, we can see seeds of it all the way back to the early 

1980’s. The period from 1965 to 1982 was miserable for the economy, high inflation, many recessions. The stock market went nowhere for 17 years, and then all of a sudden, in the early 1980’s, 

things started to improve, and they have slowly accelerated in a 

sense, especially into the late 1990’s. 

My belief is that the reason for that change, from the miserable 

1970’s to the much better 1980’s and 1990’s, was marginal tax rate 

reductions that took place in the early 1980’s, regulatory reform, 

lower Government spending over the time, and also the Federal 

Reserve, with Chairman Volcker and Chairman Greenspan, broke 

the back of inflation. And when you put all of those things together, that is what has led to this boom. 

The other overlaying factor is technology. And the Internet and 

computer technology is much different than any other technology 

we have seen before, and I am sure you have heard about this on 

this committee, but we are now living with increasing returns to 

investment rather than diminishing returns to investment. As we 

add more people to a network, a fax network, a cellular phone network or an Internet network, in fact, productivity accelerates, and 

as a result, I am very optimistic in the future about the direction 

of productivity and, in fact, think we are not only in a new era 

economy, but we are repeating the 40-year kind of cycle that we 

saw in the Industrial Revolution at the turn of the last century. 

Senator DOMENICI. Mr. Chairman, I will not ask another question. I will just close with an observation and another thank you. 

I think, Dr. Dudley, you are correct in your analysis. There are 

a number of things that happened in America because we got this 

new economy, one of which I do believe is that the cyclical nature 

of the downturn will get farther and farther apart, and I think that 

is a direct result of the kind of economy we have that is new. 

I am concerned, today, about two phenomenon: The impact of the 

high dollar, which we are beginning to hear an awful lot about. We 

continue to assume it is great for America, but we are having more 

and more American businesses saying they wonder whether it is. 

I am not going to ask you all about it today, but it is a very important thing. 

And my last observation is that productivity is the key in our 

country, but we do not know the impact of a no-grow world, a 

world that is not growing even with us having high productivity. 

If Japan stays in the sink, and Europe cannot grow, and none of 

those other countries that were big growing centers grow, I am not 

sure even our productivity can carry us along to sustain long-term 

heavy growth. Something has to change in those countries also. 

If I had time, I would ask you both of those questions, but I yield 

at this point. 

Chairman CONRAD. Thank you, Senator Domenici. 

We will go to Senator Stabenow, who is next on the questioning 

list. 

Senator STABENOW. Thank you, Mr. Chairman. 

First, let me just make a statement concerning the new economy. 

I believe, also, we are in a new economy. I think we all understand 

that we are moving to a new economy much more based on techVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00048 Fmt 6633 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
43

nology and information. As we look at the priorities for all of us 

as a country, that is one of the reasons why I support education 

so strongly because we have not talked about it yet today, but 

while we, on the one hand, need to increase and update our technology and investments on the business end, every business owner 

I know is talking to me about a skilled work force as being the 

other half of the pie in order to make sure that we can truly have 

workers that can use the technology and the information. 

And so I do not want to spend time, you are welcome to comment 

on that, but I do want to say that there is more to this picture than 

just what we have talked about so far today in terms of education. 

I would also comment that I think that there have been a number of policy changes that have gotten us where we are today. I 

would question whether tripling the national debt in the 1980’s got 

us to where we are today, and I am concerned about going back 

to that. 

And that raises, I guess, and Mr. Baily, I would like to ask you, 

you talk about, on Page 6 of your Conclusions for Budget Policy, 

you indicate that the tax cut could end up driving up interest rates. 

I wonder if you could speak to that and also to the reality, for most 

working people and families, there has been a tax cut put forward, 

but if interest rates, in fact, go up, could that wipe out any benefit 

for the average person buying a home or a car or putting their children through college and worrying about student loans and so on? 

I am deeply concerned about what happens to my constituents 

when interest rates go up. 

Mr. BAILY. I think you are right to be concerned. I think if we 

undermine the fiscal discipline that we have had, then that will 

have an impact on interest rates and it is bound to make interest 

rates a little higher than they would otherwise have been. And that 

does impact families; those who have student loans, those who 

have auto loans, those who have mortgages and so on. So, the tax 

cuts may help the people who are paying a lot of taxes and they 

get their taxes reduced, but for a lot of families that are not paying 

much tax, they are not going to see a big benefit from the tax cut 

that is being passed. So, for them, perhaps—I do not know exactly 

how the balance would work out. You would have to look case-bycase, but I think there is a danger, yes, that they would be not 

really better off as a result of this tax cut because their interest 

costs would have gone up. 

Senator STABENOW. I am wondering, to followup on that for any 

of the panel, back during the discussion with the tax debate, I 

joined with Senator Evan Bayh from Indiana, Senator Olympia 

Snowe from Maine, to put forward an economic trigger, a budget 

trigger, so that, in fact, if the dollars did not come in as anticipated, any tax cut, any phase of that or spending, would be held 

in suspension until the revenue was available to pay for it. So we 

did not go into that or use Medicare or Social Security Trust Funds 

to pay for the tax cut. 

As we look at the revision that is coming in terms of CBO forecasts and so on, and the anticipation of revenues not being available to the extent that we thought, I would welcome any comments 

about this whole question of our benefit to the country of going into 

debt right now, in terms of impact on interest rates or impact on 

44

other areas of the economy, the use of Medicare and Social Security 

to pay for spending, whether that be a tax cut or other kinds of 

spending, and whether or not any of you would believe that we 

ought to, in a sense, put into place some kind of a trigger or continue to work on that notion, so that we are not going back into 

debt as a country. 

Mr. DUDLEY. If I could just address some of your points; first of 

all, on the point of education, I could not agree more wholeheartedly. Productivity growth is partly due to the quality of the 

labor input, and if you can improve the quality of labor, you are 

going to get more productivity as a result, and education, obviously, 

has a lot to do with the quality of the work force that we have. So 

I agree wholeheartedly with that. 

As far as the issue of interest rates being higher due to the tax 

cuts, I would actually argue that you have already seen the effect 

this year, in terms of interest rates. The Federal Reserve has cut 

short-term interest rates by 250 basis points as we speak, probably 

a little bit more than that later this afternoon, yet mortgage rates 

are at about the same level as they were at the beginning of the 

year; and it is very, very likely that the shift in the budget policy 

is one reason why mortgage rates have not fallen this year. So 

there is no question that change in fiscal policy does have consequences for mortgage rates and the cost of housing. 

Senator STABENOW. If I might just interrupt—excuse me for just 

one moment—to emphasize that point, are you indicating then 

that, in the long-term, that in order to adjust for potential deficits 

down the road, that we are not seeing interest rates, long-term interest rates, going down? 

Mr. DUDLEY. I think it is fair to say that if you had not had the 

tax cut legislation passed, if it had failed or had not happened—

which is obviously a counterfactual that we will never be able to 

test—economists love these things—I think it is fair to say that 

long-term interest rates, mortgage rates, would be considerably 

lower than they are right now. Congress will debate about how 

much lower, but I think that most economists would agree there 

would be some effect. 

Senator STABENOW. If you wanted to proceed further on the question of the triggers. 

Mr. DUDLEY. Turning to the issue of the triggers, I can certainly 

understand the motivation for triggers. You do not want to spend 

money before you actually have it in hand. I think the one thing 

about triggers, though, that scare economists a little bit is that it 

could make fiscal policy pro-cyclical, in the sense that let’s say the 

economy is weak and you do not have tax receipts and so therefore 

your budget surplus declines, maybe turns into a deficit, and then 

you cannot cut taxes because the trigger mechanism comes into 

play. 

Say you are actually constrained from following this fiscal policy 

stimulus that might be appropriate in that environment. I think 

that the idea of triggers makes sense, though, in principle, but I 

would enact it a different way. I think you should not basically 

enact 10-year packages of tax cuts. I think it makes more sense to 

enact tax cuts for the next year or two, and then, when you get 

45

down the road 2 years, you see where the surplus is, yo see if you 

can afford to cut taxes further, and then you do it at that time. 

So it embodies the same idea of triggers, not spending the money 

before you actually realize it. But it does not lock you into a mechanism that could make fiscal policy pro-cyclical, which can be dangerous. 

Senator STABENOW. Sure. I think we are saying the same thing, 

just a different mechanism. 

Mr. WESBURY. Well, if you do not mind, I would like to comment 

on that, Senator, and disagree with some of the statements that 

have been made. The whole argument that the shrinking budget 

debt or total Federal debt or budget deficit is actually reducing interest rates, is based on a theory called crowding out. In other 

words, when the Federal Government borrows, it pushes private 

borrowers out of the market, and therefore it drives up interest 

rates. 

If you look at how we came to surpluses today from deficits just 

a few years ago, though, the real driver of that has been higher tax 

revenues; and when I look at the economy, whether you tax money 

from the private sector or whether you borrow money from the private sector, you have crowded out investors and business people 

and individuals either way. So, in other words, moving from deficit 

to surplus has actually resulted just by shifting from borrowing to 

more tax revenues; and, in fact, it still takes the same amount of 

money out of the private sector. The real way to reduce interest 

rates over time is not to play around within the debt or the deficit 

or even worry about it, but to really focus on the size of the Federal 

Government relative to the economy as a whole, because that is the 

real crowding out, and last year taxes hit a record share of GDP, 

20.6 percent of GDP, and anything that we can do to take less as 

a share of GDP will cause less crowding out in the future. If you 

really want to look for an effect on interest rates, that is where you 

will get it. It is not this idea that the debt or the deficit has a huge 

role in the level of interest rates. 

Senator STABENOW. I realize, Mr. Chairman, my time has run 

out. I would just make a comment and just indicate that I, with 

all due respect, would disagree with the evidence in terms of the 

1990’s and what happened when we paid down the debt and balanced our budget and made investments in education and technology. I think everyone would agree the 1990’s were a pretty good 

time because of—which actually was a very different policy than 

what you are talking about. So I welcome the opportunity to debate 

that more at another time, but I very much appreciate the panel’s 

being here, and, Mr. Chairman, I yield back. 

Chairman CONRAD. Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. I appreciate your 

holding this important hearing. It seems to me the very clear message is that Congress better take seriously the prospect of all this 

uncertainty in the budget planning process. You have made that 

case very well and our witnesses have, also, and I want to ask you 

just a couple of questions with respect to this point. Senator 

Stabenow, I think, highlighted some of the concerns of our constituents, given the uncertainty—and we hear this at town hall meetings. 

46

What would you tell people who come to a town hall meeting in 

Coosbay, Oregon, and say, ‘‘I’m looking at all of this and I really 

do not have a crystal ball. What do you think I ought to do as 

somebody who is trying to think about my kid’s future, facing the 

prospect of paying for long-term care for my parents?’’ What would 

your counsel be to that person trying to find their way through 

some of this uncertainty, making that decision for themselves? 

Mr. BAILY. Well, that is a big question. I will try to give some 

answers, anyway. I basically agree with the point that Bill Dudley 

made earlier, which is that rather than trying to enact a 10-year 

package of taxes, we should look at the budget situation as it 

unfolds, and so the uncertainty will be—even over the next couple 

of years, we will get a better picture of how quickly the economy 

bounces back and the extent to which we get a resumption of 

strong productivity growth. So that letting the economic conditions 

unfold and learning more, and then responding to that over time, 

I think, is the right way to do it. 

There is a tradeoff there, and actually——

Senator WYDEN. I understand the point, and I think you have 

made it very well. I want you to try to tell us what you would say 

to a family trying to cope with the uncertainty that you all have 

addressed this morning. I know that you have made the case to us, 

and I think very persuasively, about some of the tradeoffs we are 

going to have to make. But I would like to try to bring this home 

to people in the way that they bring it to us, and that is they look 

at this uncertainty and they are saying, ‘‘Gosh, Senator, where do 

you think I ought to be going right now, in terms of planning our 

future?’’

Mr. BAILY. Well, I think the answer at the family level in a way 

is the same. If you have a very good year, and many people did last 

year or over the last expansion, I do not think you react to that, 

because your income has gone up, you got a lot of bonuses this 

year, that is not necessarily the right moment to go out and buy 

an expensive new house and an expensive new car. It is probably 

the right time to say let’s save some of this and see if my income 

continues to do well this year. 

Perhaps many of your constituents today are finding that their 

incomes have gone down, and they are having to face some of the 

uncertainties there. I am a believer that government plays a legitimate role in trying to provide a safety net for families that are in 

trouble. I think one of the big problems that families today have 

is if they lose their job, or maybe even sometimes when they keep 

their job, they are facing lack of health-care coverage, they are concerned that if they lose their job, how are they going to get another 

one? 

So anything we can do to provide better access to health-care for 

people who lose their jobs or whose incomes are weak, anything we 

can do to offer training and education so people can acquire the 

skills that they need to deal with an uncertain economy, those are 

some of the things that will help families, I think, that are faced 

with this uncertainty. 

Senator WYDEN. So let’s ask your associates. Families come and 

they read about these reports, what would your advice be? 

47

Mr. DUDLEY. I certainly agree with Martin, that you do want to 

save when times are good for the possibility of that rainy day, 

when times are not good. I think you also need to save because I 

think most people in the U.S. are probably not saving enough to 

generate the retirement that they really hope for. With the stock 

market being so strong over the last 10 years or so, I think it has 

created a bit of an illusion about how high the returns are going 

to be from the stock market on a very long-term basis. They are 

not going to be as high as they have been, in my opinion. 

They are higher because the economy’s performance improved 

dramatically, from 1982 to 1999–2000. That is a onetime deal, and 

I think the big thing that we have to convince people is that they 

need to plan a little bit further ahead for what is going to happen 

when they get older or their parents get older and they need to 

plan for retirement. 

Senator WYDEN. See, that is the central question. It is hard for 

them to plan with all this uncertainty. You have hit the central 

question, is we really would like to start building a new savings 

ethic in this country, and I have introduced legislation a number 

of times over the years to get people to start thinking about purchasing private, long-term care insurance. But what has happened, 

and I think the case that Chairman Conrad has made is it is very 

hard to do that kind of planning with the uncertainty that you 

have documented. 

Mr. DUDLEY. Right. I agree, and obviously people value consumption today quite a bit more than they value consumption five or 10 

years from now. But I think we have to articulate to them why the 

returns that were available in the stock market are probably not 

going to be quite as high, but they still could be very healthy, but 

not quite as high as what we have experienced. We also have to 

recognize, to the extent that we can convince people to save more, 

that generates other benefits for the economy, because it increases 

the amount of capital available to fund private investment. So it 

is good for them, I think. It is also good for the country as a whole, 

because that is one vehicle by which you can actually drive up productivity growth on a longer-term basis. 

Senator WYDEN. Mr. Wesbury, did you want to add anything? 

Mr. WESBURY. Sure, Senator. First of all, I agree with a lot of 

the things that have been said. Savings is very important. Investing in the future is very important, and we have discussed here 

this morning about how important education is, and that is, but 

much of that is under the control of individuals, that they take the 

time and invest the resources that they need in re-educating or 

continuing their education in the future. 

One of the interesting things, and I think very positive things 

that has happened for individuals over the past 10 years, is that 

we have seen—actually, over the past 18 years—is that we have 

seen the number of investors and savers increase dramatically. 

There are 100 million individuals in this country that own stocks 

today, and this is the highest total we have ever seen. It is the 

highest share of citizens in this country that have owned stocks, 

that we have ever seen, and I think that is a very positive development. 

48

So what I think we need to do is to provide the kind of the environment where those resources will continue to grow in the future, 

and that environment, in my opinion, is one with low taxes, small 

government and less regulation that allows companies to become 

more profitable, that allows incomes to go up, and that is the way 

we increase our wealth over time. One last point, and that is that 

we are always uncertain. In the midst of very strong growth, things 

are uncertain. In the midst of very weak growth, they are uncertain. 

But one thing has been very, very consistent in the United States 

for over 200 years, and that is that we have continually increased 

our wealth and our standard of living. Our stock market has continually—not every year, not even over every 15 year period—but 

it has climbed. So by saving and putting resources away and believing in the United States as being a very, very special place, 

with entrepreneurs and with creation and with innovation and investment, we can believe in the future of our country, and I think 

that is what I would suggest people do, believe in the future and 

have faith, even though we will go through cyclical swings every 

once in awhile. 

Senator WYDEN. I see my time is up. I would only say, particularly in response to you, Mr. Wesbury, that if you look at the big 

increase in the number of people who got into the stock market, we 

have seen a big chunk of that in the last eight or 10 years, and 

I think we have had economic policies that have encouraged that. 

I think what the chairman and I and others are concerned about 

is that we have policies that read that kind of certainty in the future, and I am prepared to support a whole host of policies that 

will do that. I voted, for example—I was one of the small number 

of people to have a capital gains tax cut now, because I thought 

that would build on some of what we did over the last 8 years. 

What I am concerned about is the cumulative effect of this 10-

year program, what will happen if the surpluses do not materialize, 

and I think that is causing much of the uncertainty that your two 

colleagues were talking about, and I think the difference of opinion 

on this panel, and that, of course, is raising the possibility that it 

could interrupt the progress that we have made in the past 10 

years, of increasing the investor class. 

So, Chairman Conrad, I think you are making an awfully important point, and I look forward to continuing to explore this with 

you in the future. 

Chairman CONRAD. Thank you, Senator Wyden. Thank you for 

being here and thank you for your excellent questions. I have just 

a few questions I would like to ask the panel before we end this 

hearing, and we are expecting a vote very soon. So, if you do not 

mind, I would just like to go back to the panel, and first let me 

say I think it has really been an excellent panel. Each of you is an 

outstanding witness. I could not be more pleased for my first hearing as chairman to have three such excellent witnesses. I appreciate it very much. 

Mr. Dudley, I would like to go first to you, because you had some 

very specific estimates with respect to the effect on revenue of the 

Federal Government of the short-term economic slowdown. As I 

heard you describing it, looking at corporate profits, looking at indiVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00054 Fmt 6633 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
49

vidual income, looking at capital gains realizations, you were saying that you would anticipate in fiscal year 2002, that the revenue 

that was anticipated in the CBO forecast might be reduced by some 

$50-$75 billion; is that correct? 

Mr. WESBURY. That is correct. 

Chairman CONRAD. Could you just review, for the record and for 

the committee, the individual elements that you had gone through, 

that led you to that conclusion? 

Mr. DUDLEY. There are three elements that really make that up. 

The first is we have had a very sharp contraction in corporate profits this year, which can affect corporate tax receipts both this year 

and next, and we estimate that that shortfall is going to be on the 

order of $20-$30 billion for fiscal 2002, relative to the CBO’s projections. It is due to a weaker economy. It is due to the fact that the 

weaker economy has fallen disproportionately on the corporate sector. 

Second, we think that options income is going to decline, commensurate with the decline that we have seen in the equity market. This is much more difficult to forecast for two reasons: One, 

we do not have good data on options income; and, two, there is an 

offset. To the extent that options realizations fall, it actually could 

tend to boost corporate tax realizations, because options income—

when these options are exercised, it creates a depreciable expense 

at the corporate level. 

But I certainly would expect that this is worth at least another $10-$15 billion at minimum. And last, capital gains tax receipts; 

the CBO is estimating a 3-percent decline in capital gains receipts 

in 2002, from 2001, which to me seems very optimistic, given that 

the equity market now is down more than 20 percent from its peak, 

if you look at the broadest index, the Wilshire 5,000. It seems to 

me that a more reasonable target would be the level of capital 

gains tax receipts in 1999, given the fact that the stock market is 

roughly at the same level as we were then, and the amount of unrealized gains is lower now, because we obviously realized a lot of 

gains in the year 2000. 

So I would guess that that would all contribute to another $20-

$25 billion shortfall in personal income tax receipts, most of that 

occurring probably next spring, when we get the final payments for 

the 2001 tax year. 

Chairman CONRAD. Let me turn to the other two members on 

this question, and ask you if this is something you have analyzed 

and whether you would agree or disagree with what Dr. Dudley 

has just discussed? Dr. Baily? 

Mr. BAILY. I have not done a separate analysis, and I have not 

obviously checked those figures, but I would support what Bill 

Dudley says. I think those are very reasonable estimates of what 

is likely to occur. Certainly, back when I was on the council and 

we were more involved with doing specific budget projections, we 

found, in general, that the January CBO projections were more optimistic than our administration projections, as to the revenue that 

could come from any given set of economic assumptions. So if the 

actual revenue comes in a bit below that, that would not be a surprise. 

Chairman CONRAD. All right. Mr. Wesbury. 

50

Mr. WESBURY. Yes, Mr. Chairman, I am in agreement. I have not 

done a thorough breakdown of every category of revenue estimation 

for the budget in 2002, but my forecast for the economy is for very 

weak growth for the rest of this year. That will reduce tax revenues in April of next year and for the next fiscal year, and I would 

not argue a great deal about Dr. Dudley’s forecasts. I believe that 

they are probably very, very close to what will actually happen. 

Chairman CONRAD. Could I ask you, Mr. Wesbury, what is your 

assessment, prediction, for economic growth for this year, in your 

latest work? 

Mr. WESBURY. Sure. My forecast is that actually we will see a 

decline in real GDP, fourth quarter over fourth quarter of this 

year, of about 0.1 percent, so a very slight decline. If you look at 

a year over a year growth, it comes in a little bit under 1 percent 

growth for the total year. 

Chairman CONRAD. Let me go to the second question that is really the focus of this hearing, because that is kind of the short-term 

side. I appreciate very much your testimony on that. That is helpful to the committee, because we are asked all the time to advise 

our colleagues, what are we looking at for next year, and this will 

be useful in those discussions. In fact, I am going to a meeting of 

all the committee chairmen at 12:30, and I am going to be sharing 

with them what I have heard here this morning, about next year. 

The second question is the longer-term question on productivity. 

Again, Mr. Dudley, I read The Economist piece, and that relied 

heavily on your work that suggested instead of 2.7 percent productivity growth or 2.5, when one factors in the slowdown this year 

over the next 11 years, that you are anticipating that perhaps a 

more realistic assessment—and do not let me put words in your 

mouth. If you disagree with my characterization, please say so. But 

as I read this, you are indicating that your work suggests that a 

more realistic expectation of productivity growth over the forecast 

period is perhaps 2.25 percent. 

Mr. DUDLEY. That is correct. 

Chairman CONRAD. It sounds, I’m sure, to somebody listening, 

‘‘Boy, that’s very, very minor differences.’’ But very small differences here make very large differences with respect to anticipated revenue over the 10-year period. Can you tell the committee 

if I have characterized correctly your conclusion, and give us a little broader view of why you believe that is a more realistic expectation. 

Mr. DUDLEY. That is our conclusion, 2.25 percent, and, obviously, 

that is a point estimate. There is uncertainty around that number. 

Martin Baily used figures of 2.0 to 2.5 percent, and I feel very comfortable with that kind of confidence interval. The logic of why we 

reach that conclusion is as follows. Productivity growth stems from 

three factors, improvements in quality of labor input, more capital, 

and what is called multi-factor productivity, which is the part that 

you really cannot identify the output as being increased by adding 

any identifiable inputs. It is really the good stuff. What happened 

in the late 1990’s is we had a very rapid acceleration in the pace 

of capital depending due to the investment boom. So the contribution to productivity growth from that source went up dramatically. 

Chairman CONRAD. When you say capital deepening——

51

Mr. DUDLEY. More capital per worker, high levels of investment, 

giving workers more capital to work with. Therefore, their output 

goes up. That is great if it is sustainable. But, in our opinion, the 

rate of capital deepening that we had in 1999 and 2000 is not sustainable. It was a boom where we did actually have some overshooting, and the reason why we think that boom was 

unsustainable was that the profit expectations people had when 

they made that investment were unrealistically too optimistic . We 

are going through right now the disappointment with those profit 

expectations, and so investment is coming down very, very sharply. 

The tough thing is estimating, well, where is this all going to settle out in the long run? What rate of capital deepening is sustainable over the long run? If we say that 1999–2000 was too high, and 

it was about 5 percent per year, where are we going to end up over 

the long run? We created a model that is contained in our longer 

paper, ‘‘U.S. Investment Boom Goes Bust,’’ and what it does is try 

to estimate what kind of capital deepening pace is sustainable on 

a long-term basis, and based on the return on capital that we see 

in the economy, we estimate that pace of capital deepening that is 

sustainable on a long-term basis is about 3.0–3.5 percent a year, 

lower than the 5-percent we had in 1999–2000, and that is why we 

have taken down our estimate of long-term secular productivity 

growth to about to 2.25 percent a year. 

Having said that, 2.25 percent a year is not that bad. It is much 

higher than the average productivity growth from 1973 to 1995, 

which was about 1.5 percent a year, and if you think about it in 

terms of how rapidly you double your standard of living, you basically double your standard of living in about 25—you know, about 

30 years. That is not bad when you really think of it in those 

terms, each generation you can double your standard of living. So 

2.25 percent is not bad. It is just not as good as where we were 

in 1999–2000. 

Chairman CONRAD. Final question, and then I am going to ask 

the other two to comment on both parts of your answer: The implications of that lower productivity growth for revenue for the Federal Government is, with the projected on-budget surplus of $3.1 

trillion you are suggesting a third of that would disappear, if this 

productivity growth was as you suggest. 

Mr. DUDLEY. The CBO has projected that potential GDP growth 

over the next 10 years will average 3.3 percent, using a productivity number of a little bit over 2.5. If you use our lower productivity growth number of 2.25, you get potential GDP growth of 

about 3 percent, so three-tenths of a percent difference. If that all 

seeps through to the actual growth rate of how fast the economy 

actual grows, which is a reasonable assumption, if the Federal Reserve does its job properly and pushes us to full employment, that 

would reduce the revenues of the Federal Government, using the 

CBO’s own figures, by somewhat over $700 billion over that 10-

year time horizon. 

So, according to the CBO, for every tenth-of-a-percent reduction 

in growth over a 10-year time horizon, you lose $245 billion of revenue. So even small differences in the growth rate, as you have 

pointed out, Mr. Chairman, lead to fairly large revenue consequences for the Federal Government. 

52

Chairman CONRAD. Dr. Baily, what is your reaction to what Dr. 

Dudley has suggested, both with respect to this productivity growth 

question over the decade and the question of the implications for 

the Federal budget? 

Mr. BAILY. Well, I agree with much of what he said, and as I 

mentioned in my written testimony, the same set of figures, essentially, that if you drop productivity growth down, that feeds into 

lower GDP growth, and I agree with the CBO’s number, that you 

will get about a $245 billion reduction. So if you go from 2.5 to 

2.25, you will be down by $700 billion. 

I certainly would not be surprised, however, and again, I have 

emphasized here the uncertainty as much as being able to say precisely what the number is going to be. If you go down to 2 percent 

productivity growth, and you are losing about $1 trillion from the 

deficit, and as CBO itself points out, if you went down to 1.5, which 

is what we had for 20 years or more, then you are no longer in the 

surplus range. You are really talking about deficits on the on-budget side. 

In terms of being able to estimate what the productivity trend is 

going to be, then I think we all learned the same set of models in 

graduate school, and I think those are good models. But, again, I 

think there is more uncertainty around them. In my own view of 

past history, I think the very close link between capital investment 

and productivity is not quite as close as these models suggest, and 

that if you look over a long period of time, that the trends in labor 

productivity are not always very well-projected by the short-run 

movements or even the medium-term movements of capital investment. 

I think that the effect is right, the more capital you get, the faster productivity grows, but I think there is more uncertainty around 

that arrangement. So, in the current situation, I think a key open 

question is, given the huge investment boom that we had, does that 

mean that companies have enough high-tech capital and can take 

advantage of it, and we can continue to get productivity growth of 

2.5 percent, conceivably even more than that, or I think 2.5 is probably about as high as I want to go, or are we now seeing that the 

strong productivity growth of the 1990’s was in part due to unusually favorable circumstances? 

Quite a bit of this growth occurred in industries like wholesale 

and retail trade. We know that there was a huge spending boom 

in the 1990’s. There was hugh throughput going through all the retail and wholesale establishments, which was one reason they were 

able to increase productivity growth, not the only reason, but it 

helped them to do that. So some of the sort of temporary factors 

that helped us in the latter part of the 1990’s, I think, may be less 

likely to prevail going forward. So my bottom line is very close to 

what Bill Dudley said, 2.0–2.5 percent, I think, is the most likely 

range. But, again, I am not quite as confident that we can exactly 

model what is going to go on, and so that is why I stress the uncertainty in those projections. 

Mr. DUDLEY. I would agree that it is highly uncertain, for the 

record. 

Chairman CONRAD. All right. Mr. Wesbury, on those two questions, if I could get your commentary, in terms of productivity 

53

growth going forward and the implications for the Federal budget, 

and I know you have already spoken to this question, but I think 

it is good to have it as part of a summation here, as well. 

Mr. WESBURY. And I agree. I think that is a good idea. One of 

the things that I have done in the past, July, 1999, the Wall Street 

Journal called the, the newspaper, and one of the reporters on the 

newspaper wanted to know what would happen to Federal budget 

surpluses if the CBO was actually underestimating productivity, 

and at that time the CBO was forecasting productivity growth of 

a little less than 2 percent a year, and I am quoted, and my numbers are in that article, saying that productivity would be much 

higher and the surpluses would be much higher in the future. Fortunately, that forecast proved to be correct, and as a result both 

the OMB and the CBO raised productivity forecasts recently, and 

I believe correctly so. 

Let me comment real quickly on capital deepening. One of the interesting things that we saw during 1999 and the early part of 

2000 had a great deal to do with Y2K. My firm, in particular, an 

investment bank in Chicago, bought a new computer, new servers—a new computer for every single person, new servers, new 

software. We replaced our entire computer system in 1999 to prepare for Y2K. I would suggest that we have not seen the full benefit of that investment in my firm to date, and we will continue to 

benefit from those investments in the future. 

What is interesting is we have not bought new computers this 

year, except piecemeal, when we add a new worker here or there. 

As a result, I believe that the benefits of that technology investment, that capital deepening, still continue to this day, in my firm, 

and, I think, also in the Nation as a whole. In fact, I am more optimistic, and when it really comes down to it, it is a half-a-percent 

maybe per year, but as you have pointed out, that is a great deal 

over a 10-year budget period. I am much more optimistic about productivity as we move into the future. 

I think productivity will actually come in at 3 percent per year, 

possibly even a little bit higher. We are seeing the impact of centuries, millennium of innovation and creativity accelerate today. 

We can go back and look at thousands of years of inventions, and 

see how each one begets new ones, and the pace of innovation continues to quicken. We see innovation in the biotech field, not just 

in the computer field, and we are having massive gains in healthcare and health services productivity today. We are seeing computers on the Internet move to a wireless network, and that will 

also come with massive gains in productivity, and as a result, I am 

very optimistic about the future, and I would argue that these CBO 

and OMB estimates of 2.7 percent growth in productivity are well 

within the realm of possibility and well within the realm of uncertainty that exists. 

One last point, and that is that the CBO forecast that, over the 

next 10 years, Federal Government revenues, even with a 2.7 percent gain in productivity, will increase 4.9 percent per year, on average. That same forecast has nominal GDP growing at a 5.1 percent annual pace. So, in other words, they see revenues growing 

slower than the economy. Just as a point of reference, in history, 

over the last 20 years, revenues have always grown faster than the 

54

economy, and the reason is very simple, and that is people are 

pushed into higher and higher tax brackets as real income grow. 

Even with brackets adjusted for inflation today, we will see that, 

and therefore my forecast is that we will actually see revenues over 

the next 10 years grow faster than real GDP, and that leads me 

to believe that these CBO estimates are actually on the conservative side, estimating that revenues will grow slower than GDP, 

which is not what history has shown us. 

Chairman CONRAD. First of all, I hope you are right. I think all 

of us do. I really very much hope you are right. I do not think we 

can plan our fiscal affairs based on that, I really do not, because 

I used to have to forecast the revenue for my State. That was one 

of my responsibilities. I remember we had one young economist 

here during the budget resolution debate, and he said, ‘‘You know, 

what we have seen is that, when estimates are always wrong on 

the low side, that that tends to continue,’’ and I say to him, ‘‘Yes, 

it tends to continue until it does not,’’ because I remember very 

well the 1980’s. I remember in my State, that is one of the largest 

oil producers, and they were telling us oil prices were going to $100 

a barrel. Well, they did not go to $100 a barrel. They did not go 

to $50 a barrel. They did not go to $40 a barrel. The result was 

a substantial shortfall in what was projected, and I just remember 

that so clearly. It is indelibly linked in my memory with forecast 

uncertainty, and I think we have got to acknowledge forecast uncertainty when we are budgeting around here, and be conservative 

with respect to what we project. 

Let me conclude now and again thank this panel. You have just 

been excellent, and I think we have gotten to the heart of questions 

we wanted to discuss here today; one, the short-term weakening 

that all of you have testified to, and, as I hear you, you have all 

agreed that we should anticipate next year some shortfall from 

forecast, and then a very real difference in terms of the longer-term 

question on productivity growth, which is so central to the longerterm forecast. 

Mr. Dudley, you and Mr. Baily were indicating some skepticism 

about the amount of productivity growth that is forecast, and that 

has significant implications for the budget over the 10 years. 

Mr. Wesbury, if I can characterize what you have said, hopefully 

correctly, that you think this is well within reason, what is in the 

forecast, and that, in fact, you think it may be on the conservative 

side. That is the great thing about our country. We can have three 

outstanding, highly qualified witnesses before this committee and 

have a real difference of opinion, and that is what helps inform the 

work of this committee. I am very much appreciative of your being 

here today and taking time to share your wisdom and knowledge 

with the committee. With that, we will close the hearing. 

[Whereupon, at 11:59 a.m., the committee was adjourned.]

(55)

HOW BIG IS THE REMAINING SURPLUS? 

THURSDAY, JUNE 28, 2001

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The committee met, pursuant to notice, at 10:06 a.m., in room 

SD–608, Dirksen Senate Office Building, Hon. Kent Conrad, chairman of the committee, presiding. 

Present: Senators Conrad, Nelson, Stabenow, and Clinton. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. We will bring this hearing to order. 

There is currently a vote on, on the Senate floor, and I went to 

vote quickly so that I could come and we could start the hearing 

because there is going to be another vote soon. So, hopefully, we 

can get in opening statements and begin testimony before the next 

vote. 

I want to welcome everyone here this morning for our hearing on 

how big is the remaining surplus. We have a distinguished group 

of experts with us today who have all followed the Federal budget 

very closely for many years, and all have played an important role 

in urging the President and Congress to maintain fiscal discipline. 

For that, the country owes you our thanks. 

We have with us this morning: Robert Greenstein, the executive 

director of the Center on Budget and Policy Priorities; Robert 

Bixby, the executive director of the Concord Coalition; and Carol 

Cox Wait, the president of the Committee for a Responsible Federal 

Budget. Welcome to you all. 

I am just going to make a very brief opening statement and then 

go to the witnesses. Let me just start with a chart because the fundamental question before us today is how big is the remaining surplus.


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This chart shows starting with the Congressional Budget Office May surplus projection; that we had $2.7 trillion of non-Social Security, non-Medicare surplus over the next 10 years available to us. 

Of course, since then, we have enacted a tax bill that reduces that 

amount by nearly $1.3 trillion.

We also have a budget resolution that has passed that takes out an additional nearly $500 billion, and then we have the defense request that the President is sending up to us that has a request in 

2002 for over $18 billion, and the 10-year effect of that proposal, 

if you adjust it every year for inflation, is $220 billion. 

Then you have the associated interest costs with those three 

items, and you can see that the non-Social Security, non-Medicare 

surplus is largely gone. In fact, it is gone in 5 years, the years of 

2003, 2004, 2005, 2006, 2007. We are already into the Medicare 

Trust Fund, and by a fairly substantial amount. So it is not good 

enough just to look at 10-year totals. We also have to look at the 

year-by-year effects of what is being proposed and what has already passed. 

Let’s go to the next chart that looks at this in a little different 

way. In this chart, we start with the May budget resolution surplus, which showed $471 billion available. That is after the budget 

resolution. That is after the tax cut, $471 billion available over the 

10 years. But then, if we adjust that by the Bush defense request, 

again, if we take the number he is asking for in 2002 and ramp 

it up simply by inflation, that gives you a 10-year effect of $220 billion.

If you then look at a possible increase for education, because 

there is no new money in the budget for education, we have just 


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passed an authorization bill that says the Congress is prepared to 

pass more than $350 billion of new funding for education. That is 

an authorization bill. 

I think all of us know that is unlikely to all be appropriated, but 

if we just take the IDEA portion of it, the Disabilities Act portion 

of it, which is $154 billion, and then, third, if we adjust the forecast 

because we all know that economic growth was slower than anticipated in CBO’s forecast, if we adjust that by even a low-end adjustment of $165 billion over the next 10 years—and we are hearing 

that CBO may adjust their forecast by $200 billion to $300 billion—if we take just a low-end estimate of $165 billion, you can see 

the result. 

The surplus is gone. The raid on Medicare is in every single year, 

including 2001. Only in 2002 and 2011 is there not a raid on Medicare, but every other year, 2001, 2002, and on through 2009, we 

are raiding the Medicare Trust Fund, and by substantial amounts; 

in fact, so substantial that we also are raiding the Social Security 

Trust Fund in five of the years, 2003, 2004, 2005, 2006, and 2007. 

The first chart I showed was not assumptions. The first chart I 

showed that indicated we are headed into the Medicare Trust Fund 

was based on the budget resolution that has passed, was based on 

the tax bill that is passed, was based on the defense recommendation the President’s people have made. 

This chart goes further and looks at not only the defense add 

that the President is proposing, but also a potential adjustment to 

education. Everybody says it is the top priority, and, yet, there is 

no new money in the budget for education. I think it is reasonable 

to anticipate money will be added, and, also, a revision to the forecast that I think is pretty clearly coming. 

Economic growth in all likelihood is not going to be 2.4 percent 

this year, as was included in the forecast. The blue-chip consensus 

now is 1.8 percent. If those things happen, the results are very 

clear. We have a dramatic and substantial raid on Medicare of over 

$250 billion, and a raid on the Social Security Trust Fund as well 

of over $40 billion. 

This is important information for our colleagues. It is important 

information for the country. It is important information for our colleagues because of the eight reserve funds. Seven of them are tied 

by a requirement that they can only be triggered if we are not invading the Medicare Trust Fund. That is the requirement that is 

tied to seven of the eight reserve funds. 

The only reserve fund that is not so encumbered is the reserve 

fund for the prescription drug benefit. All of the other reserve 

funds have that requirement. So that is the overview of where we 

are and where we think we can reasonably anticipate we are headed. 

It tells me that we are on very thin ice. It tells me that we already have a problem, and that that problem is likely to grow given 

the defense request the President is sending, given the bipartisan 

support and overwhelming support for additional funding for education that is not included in the budget, and given the fact that 

the strong prospect is for a reduction in the forecast given the current economic weakness. 

58

3 CHART NOT AVAILABLE AT PRESS TIME. 

Yesterday, we had a hearing in which we heard from top economists. One of them predicted that 2002 Federal revenue will be reduced by $50 billion to $75 billion below the forecast. That is just 

for 2002. 

Let me put up the chart again that shows our projection under a possible economic revision. We only took out $20 billion in 2002. 

We only took out $20 billion. Mr. Dudley, the chief economist for 

Goldman Sachs, told us yesterday, he believes the revenue next 

year will be reduced by $50 billion to $75 billion.3

The other two economists, including the former chairman of the 

Council of Economic Advisors under President Clinton, agreed with 

that assessment. 

The Republican witness also agreed with that assessment that we could anticipate a reduction in revenue next year of $50 billion 

to $75 billion. 

Again, I want to emphasize we have put in our estimates only a $20-billion reduction. If, instead, we get the kind of lowering of 

revenue that was testified to here yesterday, obviously the situation is much more serious, but we will know better as we get to 

the August reestimate. 

With that, I want to turn to our witnesses and, again, thank 

them each for coming. We will start with Robert Greenstein, the 

executive director of the Center on Budget and Policy Priorities, 

who has been a watch dog on Federal budget affairs for as long as 

I can remember, somebody with deep credibility on these issues. 

Welcome. 

STATEMENT OF ROBERT GREENSTEIN, EXECUTIVE 

DIRECTOR, CENTER ON BUDGET AND POLICY PRIORITIES 

Mr. GREENSTEIN. Thank you, Mr. Chairman. 

Mr. Chairman, you have presented me with an unexpectedly difficult task today now that you have put together this outstanding 

staff. I do not have that much to add to your opening statement, 

but let me try and go through the analysis. 

As you have just indicated, the problem is that when you take 

into account the tax cut and the budget resolution, that little surplus remains after 2002, really not after 2002 until you get toward 

the end of the decade, nothing at all, for example, in 2003 through 

2006. 

It is true——

Chairman CONRAD. Maybe I can ask you to pull the microphone 

a little closer. 

Mr. GREENSTEIN. Certainly. 

Chairman CONRAD. These microphones, as you will recall, are—

you have to speak almost directly into them. 

Mr. GREENSTEIN. We hear some people say, some on the Hill, 

that if you take the Social Security—if you take the surplus—this 

is what our first chart shows. If you take the surpluses, project it 

at $5.6 trillion outside Social Security—$5.6 trillion for the whole 

budget, and you subtract the Social Security and Medicare hospital 

insurance surpluses and you subtract the cost of the tax cut as officially estimated by the Joint Tax Committee and the official estiVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00064 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
59

mates in the budget resolution, it appears that $500 billion remains over 10 years, and that is sometimes cited as evidence that 

there is room for lots more tax cuts and initiatives, but that $500 

billion assumes that all the subsets are honored in the tax cut, that 

there will be no extension of expiring tax credits, not increase in 

defense spending such as just proposed, and that the unrealistic 

levels of non-defense discretionary spending in the budget resolution will be adhered to, also that there will be no natural disasters. 

So, if we begin to move to some more realistic assumptions, the 

first thing we find when we go to the next chart is that more than 

40 percent of this supposed $500 billion occurs in 2011 and is 

largely an artifact of the sunset of the tax bill at the end of 2010. 

Once you take that into account, there appears to be, if you look 

at the middle column on this table, Table 3 in my testimony on 

page 4—there appears to be $287 billion left, but that $287 billion 

is a significant overstatement because it omits the cost of various 

must-pass items and other items very likely or virtually certain to 

pass that are not in the budget resolution. 

Let’s take just one, extending the expiring tax credits, the extenders. This table, Table 4 in the testimony, simply reflects the 

enacted tax cut, the budget resolution, and extending the expiring 

tax credits, nothing else. Nothing else. 

If you look at this table, you see that there already is nothing 

left in 2003 through 2006, nothing at all. A little bit later in the 

decade, but nothing in those years, and this table itself is overly 

optimistic, is unrealistic because it leaves out the following. It has 

none of the new defense requests from Secretary Rumsfeld, $18 billion in budget authority in 2002. A conservative estimate is that 

that will ultimately translate into 200- to $400 billion over 10 years 

in defense. 

Non-defense appropriations. The budget resolution is unrealistic here. It assumes cuts in non-defense discretionary programs of $45 

billion over 10 years below the CBO baseline, below today’s level 

adjusted for inflation. If within that minus $45 billion, areas like 

education and health research are to be increased, the rest of nondefense discretionary would have to be cut more deeply. History 

suggests such reductions are unlikely even in times of budget deficits, and, certainly, in time of budget surplus where neither the 

President nor the congressional leadership is making a public case 

for such cuts. 

As you know, the rhetoric has consistently been that there is 

plenty to meet all needs. A more prudent and realistic assumption 

is that appropriations for non-defense discretionary will at least 

grow with inflation and the U.S. population; that is, stay constant 

in real per-capita terms. That, by the way, is the standard President Bush used as the appropriate standard for measuring changes 

in discretionary spending during the Presidential campaign when 

he was discussing spending changes in Texas during his tenure as 

Governor. 

Even that may be an understatement. Over the last 15 years, appropriations for non-defense discretionary have remained constant 

as a share of the economy, of GDP, which means they have risen 

faster than inflation and population. So I am making the conservative assumption here that even though they stayed even with 

60

GDP and rose in real per-capita terms if years of deficits, that they 

will fall as a share of GDP and only remain constant in real percapita terms in this period of surpluses, and that assumption requires $200 billion more for an NDD that is reflected in the budget 

resolution. 

The budget resolution has no money for natural disasters like 

floods, which you know well in North Dakota, hurricanes, earthquakes, and the like. Those have been averaging 5- to $6 billion a 

year. These figures, which show nothing left in 2003 to 2006, have 

no assumption on the alternative minimum tax, which will push as 

many as 20 million additional tax—the new tax bill will push as 

many as 20 million additional taxpayers under the AMT. As you 

know, there is relief from that through 2004 only, and it then expires. And as I know you are aware, the Joint Tax Committee recently issued an estimate that if the sunsets in the tax bill are not 

applied, if the bill is extended as its supporters say they would like 

it to be, that the additional cost is $386 billion over 10 years. That 

is not reflected in these figures. Prescription drugs, these figures assume $300 billion over 10 

years. That is about the cost of Senator Graham of Florida’s bill. 

Under that bill, beneficiaries would have to pay half of the premiums, and to get coverage that offset about half of the cost of the 

drugs, analysts like Bob Reischauer and others question whether 

Congress ultimately will be able to provide a drug benefit that is 

that limited. I am not questioning that you may not pass an initial 

bill for $300 billion, but as it goes into effect, one can count on the 

public asking for what it views as a more adequate drug benefit. 

These figures have nothing at all for Social Security or Medicare 

solvency. 

Many of us—I think Bob probably shares my view on this—are 

concerned that in the absence of some general revenues as part of 

a Social Security solvency package, if you do not have that, that 

the choices will be so tough, that we will pass no solvency package 

at all and kick the can down the road again. 

The items that are left out of these figures could reach $200 billion in 2003 through 2006 when there is already no money left. 

They could reach close to $2 trillion over the decade as a whole. 

So the bottom line is that unless Congress wishes to borrow from 

the Medicare or Social Security Trust Funds, hardly any of the 

available surplus remains after 2002 to address this range of defense and domestic needs. 

The conclusion I draw from this, the first conclusion, is that the 

policymakers here badly need to adopt and adhere to a policy of 

holding the cost of the tax cuts over 11 years to the $1.35 trillion 

that is in the budget resolution which means that any new tax 

cuts, including repeal of the subsets in the tax law must be paid 

for by scaling back other provisions in the tax cut that haven’t 

taken effect yet, by merely, in my view, people at upper income levels, by other revenue-raising measures such as closing on productive tax breaks, or by a combination of those approaches. 

The principle here is that set forth in a recent New York Times 

editorial. Further tax cuts that exceed the amount Congress allotted for tax cuts in the budget resolution must be paid for either by 

scaling back the new tax cut law or providing offsetting revenues 

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in other ways. Even with that set, excruciating choices would remain, large defense increases, adequate funding for non-defense 

discretionary, funding to help restore Social Security solvency, a 

more adequate drug benefit, and other important domestic and 

international needs will complete for the very limited resources 

that remain. 

To address that problem, Congress probably is going to have to 

either go into the trust fund surpluses, raise still further revenues, 

or cut popular programs, and I think that without additional resources, it will probably be impossible to enact measures to restore 

long-term Social Security and Medicare solvency. 

The bottom line is the tax cut overreached, and the worst thing 

we could do is to overreach further before we start addressing the 

problems that we have already put ourselves in. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Greenstein follows:]

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Chairman CONRAD. Thank you very much. 

Let me just say that the second vote has now started. I think the 

best thing to do is to recess the committee. I will go over to the 

floor to vote and return. That will probably take 10 minutes. So 

let’s anticipate resuming at 10:40. 

[Recess.] 

Chairman CONRAD. We will resume. 

Let me just say that this is one of those mornings. As you know, 

Congress is trying to get out for the July 4th break, and so every 

committee is meeting. There are multiple committee meetings. 

There is a contentious bill on the floor. We just had two votes. I 

have had five colleagues just come to me as we were over in the 

chamber apologizing, saying they are coming at some point during 

this hearing, but we understand all the conflicts the Senators have, 

especially on a day like this. 


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Let me go next to Robert Bixby, the executive director of the 

Concord Coalition. 

Welcome to the committee. Thank you very much for coming. 

Please proceed with your testimony. 

STATEMENT OF ROBERT L. BIXBY, EXECUTIVE DIRECTOR, 

CONCORD COALITION 

Mr. BIXBY. Thank you, Mr. Chairman. Thank you for inviting me 

to appear today to discuss the likely size of the Federal budget surplus in light of the recently passed tax cut and other potential commitments. 

I am here representing the Concord Coalition, a bipartisan organization chaired by your former colleagues, Warren Rudman of 

New Hampshire and Sam Nunn of Georgia. I spoke to both of them 

earlier this week, and they asked me to pass along their bipartisan 

greetings to you and the other Senators. 

As Congress now turns its attention from tax cuts to spending, 

it is an appropriate time to assess the remaining size of the surplus. Aside from the $1.35 trillion, 11-year tax cut, the budget resolution assumes new mandatory spending of about $460 billion, a 

contingency fund of nearly $900 billion, and $2.4 trillion worth of 

debt reduction. It all adds up on paper, but only if today’s longrange economic projections are accurate and only if a number of 

questionable assumptions are made that tend to understate likely 

expenses and overstate likely revenues. 

Spending increases beyond the budget resolution level or additional tax cuts risk dipping into the Social Security and Medicare 

Trust Fund surpluses. Hovering over all of this is the near certainty that the long-range projections on which these decisions are 

based will be wrong, perhaps by several hundred billion dollars in 

either direction. 

The immediate danger is not that the budget will, again, fall 

back into overall deficit, but that in such good times, too many 

commitments will be loaded onto the thin ice of long-term projections. 

With that as background, let me turn to the question at hand, 

which is how big is the remaining surplus. There are really two 

ways of answering this question. It could be answered in a technical sense by looking at the most recent CBO baseline and subtracting the effect of the tax cut, which as of now represents the 

only legislative claim on the surplus. Using this calculation, the remaining 10-year surplus, excluding Social Security and Medicare, 

is $1.08 trillion. 

The second way of answering the question is to look not just at 

the effect of the tax cut, but also at the spending assumptions contained in the budget resolution. The result is what might be called 

the available surplus because it accounts for claims on the surplus 

that have not yet been translated into legislation. Subtracting the 

effect of the budget resolution policy reduces the available surplus 

to about $500 billion. 

It is important to note, however, that almost all of this supposedly available surplus comes in the final 5 years of the 10-year 

projection. There is a small surplus we figure of somewhere around 

$26 billion in 2002, not including the defense increase requested 

81

this week by the President, but the available surplus in fiscal years 

2003 through 2005 is essentially zero. 

Beyond the budget resolution policies, it is also relevant to look 

at the likelihood that certain assumptions made in the baseline 

may prove to be unrealistic. Prominent in this regard are the assumptions that discretionary spending will hold at the level of inflation for 9 years, beyond 2002, and that the various sunset provisions in the tax cut will actually go into effect. 

If discretionary spending grows at 4 percent a year rather than the 2.6 percent assumed in the baseline, then the remaining $500 

billion of available surplus would be consumed. If discretionary 

spending keeps pace with GDP growth by increasing at roughly 5 

percent annually, then the surplus would be reduce by about a trillion dollars. Either of these spending assumptions seems more realistic than the baseline. 

Another questionable assumption is that several expiring tax 

provisions, including the recently passed tax cut, will sunset before 

2011. Adjusting for the effects of the sunsets, including relief from 

the alternative minimum tax, would require an additional $500 billion of the surplus. 

In short, the combined effects of the tax cut adjusted for AMT 

relief and ignoring the sunsets, the budget resolution mandatory 

spending policies, the extension of expiring tax breaks, and figuring 

a 5-percent annual discretionary spending growth would, if all enacted, eliminate the entire available surplus and produce a non-Social Security, non-Medicare deficit of approximately a trillion dollars. This sum would, of course, be covered by the Medicare and Social Security surpluses. So there would still be a total or unified 

surplus under current economic projections even if all of this new 

spending and tax cuts took place. 

What would be lost, however, is the opportunity to use the full 

extent of the trust fund surpluses to better prepare for the demographically driven challenges ahead. 

Let me say a few words about the effect of the tax cut because 

that is the only legislative claim that we have right now on the 

surplus. 

One of the most controversial parts of that, of course, is the sunset provision, to presume that everything will expire in 2010, and, 

of course, there are some mini sunsets that occur before 2010. It 

is unlikely that those would be allowed to go into effect, and so the 

net effect of the sunset provisions is to understate the likely effect 

of the tax cut on the surplus. If all of the sunset provisions are 

taken together, including interest costs, the toll on the surplus is 

probably closer to $2.2 trillion than 1.35. 

The combination of backloading and sunsets makes the ultimate 

fiscal effect of the tax cut difficult to assess, but one thing that I 

would caution you about either in August or for January when the 

next CBO baseline comes out is that they will have to assume that 

all of the sunset provisions go into effect, and that will tend to distort the baseline. In January, it will distort it quite a bit because 

there will be 2 years at the end of the surplus projection which are 

quite large, which will assume that the sunset takes place. So, in 

cumulative, there will be a much bigger surplus, and there will be 

a strong temptation because we all use these 10-year numbers to 

82

say, ‘‘Well, we have got X-trillion to deal with,’’ when, in fact, it is 

heavily backloaded and based almost entirely on an unrealistic assumption that nobody believes is going to happen. 

Another thing that makes it difficult that I mentioned before is 

the effect of discretionary spending. The baseline assumes roughly 

inflation. It is likely, it will have at least 4-percent growth. I think 

it is likely that we may have more. I would like to keep it obviously 

as low as we possibly can. I think we have an obligation to do that, 

but assuming too low a rate of discretionary spending growth, in 

light of all of the increased defense spending and education spending that people want to do, results in a surplus projection that is 

simply inaccurate, and the danger, of course, is that people will 

then want to use that unrealistic baseline to cut taxes or increase 

spending further. 

Let me just sum up by saying, Mr. Chairman, that today’s major 

budgetary decisions must not be viewed through a short-term lens. 

Fiscal discipline is the key to providing for the unmet needs of the 

future. 

Somehow sufficient resources must be set aside to meet the huge 

retirement and health care costs associated with the coming senior 

boom. The time to address this long-term challenge is now while 

the demographics are favorable and the budget is in surplus. The 

surpluses provide an important opportunity to help meet this challenge, but only if we are careful to preserve them. 

Budget surpluses must not be used as an excuse to abandon fiscal discipline. As the recently passed tax cut demonstrates, there 

is great temptation. 

I have attached a surplus scorecard which I want to emphasize 

is not a prediction. It just shows how easily a $5.6-trillion surplus—and it can be eroded—even if we assume that it is all there, 

and you had a hearing yesterday that went into some of the economics. We do not know whether the surplus will be there or not. 

So the bottom line from the Concord Coalition’s perspective is 

that we should be using today’s surplus to help prepare for the 

challenges that we know are coming down the road. So that is why 

we had a lot of skepticism about the tax cut and feel that spending 

needs to be as tightly constrained as possible. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Bixby follows:]

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Chairman CONRAD. Thank you. 

Next, we will hear from Carol Cox Wait, who is the President of 

the Committee for a Responsible Federal Budget. Welcome, Carol. 

We are glad you are here. 

STATEMENT OF CAROL COX WAIT, PRESIDENT, COMMITTEE 

FOR A RESPONSIBLE FEDERAL BUDGET 

Ms. WAIT. Thank you, Mr. Chairman. 

I, too, bring greetings from your former colleagues, Henry Bellman, Bob Chimel, Bill Frenzel, Tim Penny, and the rest of my 

board. 

Before I even turn to my prepared testimony, I have to say I 

spent entirely too much time on the other side of that dais at a 

point in time when we were running very, very large budget deficits, trying to find $8 billion over 3 years for a violent crime prevention trust fund. I wake up at night sometimes wondering how 

we do not think we can somehow, some way, get by with this wonderful largesse that we find facing us today. 

I have to first congratulate both you and the former chairman, 

now Ranking Member, Senator Domenici. I have spent much, much 

too much of my life scolding you not to say something nice when 

you do something good. In the Ranking Member’s case, I think he 

deserves credit for managing to get through a budget. In your case, 

we are enormously The question you ask us today is how big is the 

budget surplus, and not taking anything away from all of the careful analysis that my colleagues here have done and your staff have 

done, we do not know. It is as simple as that, and when we forget 

that fact, we risk making huge mistakes. We know more about the 

near-term numbers than we do about numbers 10 years out, but 

we do not know exactly how big the budget surplus is. 

Quite frankly, we are concerned that you left too much money on 

the table in 2002 after the tax cut relative to the amounts that are 

available in subsequent years. Until about 2006, you never have 

enough money again, the same amount of money again, and it 

would be a very peculiar set of public policies that used up the 

2002 surplus without driving you into the Medicare, Social Security 

Trust Fund surplus in 2003 to 2005. 

In that respect, this summer’s reestimates may help you. If they 

reduce the amount of money that is available in 2002 and produce 

some more normal pattern in 2002 through 2006, it may be good 

for public policy. 

I will say to you that I did talk to Rudy Penner and to Bob 

Reischauer before I came here, and both of them would say that 

the surpluses that we face, even if you assume you could be wrong 

$1 trillion in either direction over the next decade, and that is, 

quite frankly, easily possible, tell you that the economy and the 

country are in really pretty good shape. Even if the budget surplus 

were a trillion dollars less than it is projected to be over the next 

decade, the budget of the United States would be in much better 

shape than it has been for a very long time. 

Reviewing the facts, there are a couple of conclusions that we 

reach and would like to share with you because we keep talking 

about saving surpluses, and we think it is important to use more, 

rather than less money to buy down debt, but Government saved 

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by retiring debt, we do not put money in a piggy bank someplace. 

We do not create budgetary resources to spend in future years by 

doing so except to the extent that we have interest savings in the 

out years, but the extent to which that results is best illustrated 

in Rudy’s paper that we quote at length in our testimony. 

If you actually reduce the deficit by a trillion dollars more or less over the next decade, you would have about a 50-, $60-billion 

change in your interest savings in 2011, and I am the first to say 

that 50-, $60 billion is serious money, but it only goes so far to alleviate the problems that we face several years out. 

It is easy to lose track of the orders of magnitude of the numbers 

that we are throwing around today. If you used only the Social Security Trust Fund surplus to retire debt over the next decade, you 

would retire debt and amounts greater than the total budget of the 

State of California, which is a third larger than the budget of the 

State of New York. It is as much as the total economies of some 

very good-sized countries, and I give you a list of 20 odd of them 

just added to my testimony for information. 

We are concerned that the numbers are so big and the uncertainty is so great that the temptation is to resort to back-of-the-envelope, ad-hoc recalculations. We are concerned that, yes, you need 

a baseline for budget enforcement, but we do not need to redo that 

baseline every other day. 

I confess to having done a little bit of the back-of-the-envelope 

calculations when we did our table that we gave you just showing 

what the surplus is after the tax cut, but I stayed away from assumptions about future political behavior because I do not know 

what you are going to do in the future. 

As a matter of fact, Mr. Chairman, you have more control than 

almost anybody else over what is going to happen in the future because you have so much control over the release of the reserve 

funds in the budget for so many different purposes. 

I have to say that so far this year, the budget resolution has been 

more successful than I would have thought it was going to be. I do 

not like worth a darn the way the tax cut was put together. I 

would have much preferred to seen constant policies constantly implemented over a decade, but the fact of the matter is that the tax 

cutters did what they did to stay within the limits of the budget 

resolution. As much as I abhor the sunset provisions as a technique 

to do so, unlike some other budget gimmicks, they are real. You are 

going to have to pass laws, and the President is going to have to 

sign them, or revenues are going to go up, not down, relative to the 

baseline. 

The supplemental is the first one in I do not know how long that 

follows the budget resolution and so far has not become a Christmas tree full of ornaments. 

The House Ag Committee last week acted within the budget for 

the extra farm money this year. I think we had John Boehner, 

Saxby Chambliss, Charlie Stenholm, and the Democrats on the 

committee to thank for that, and I hope the Senate will follow suit 

when the bill gets over here. 

The budget resolution assumes more than $500 billion in new 

spending, and if I were doing political prognostications, just based 

on the pace of activity in this Congress so far this year, I would 

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be skeptical that you can actually get in place all of those policies 

if you got cracking right now and tried to do so. 

Once again, however, the release of the money for those policies 

is very much subject to the control of the chairman of this committee. 

With respect to surpluses, I would like to comment also that the 

total or unified budget surplus is the number that has economic 

impact. It measures the impact of the Federal Government on the 

balance of the economy. 

The Social Security. The on-budget or non-Social Security surplus has taken on a very important political impact. It has helped 

us to ensure that we are reducing debts by very large amounts of 

money, and that is a very useful thing. Quite frankly, I think the 

party that first thinks and articulates the thought that something 

is more important than saving Social Security for Social Security 

purposes will do so at their peril, I really believe that has become 

a line in the sand. That is at least as completing as the norm of 

budget balance has been for most of our political lives. 

I think the on-budget surplus less HI is a little bit more tenuous. 

It is the new kid on the block. It appears to me to be a proxy for 

those who think we ought to be saving more than we would do if 

we saved only the Social Security Trust Fund surpluses. The budget resolution says you cannot use that money for anything but the 

Medicare prescription drug benefit, and I think using Medicare 

money for Medicare programs actually makes sense indeed. I do 

not think Medicare drug prescription benefits makes sense without 

Medicare reform, and if you do Medicare reform, that actually alleviates the problem that we are going to face when the baby-boom 

generation begins to retire. Spending the Medicare HI Trust Fund 

surplus to do so would be a very good investment, indeed. 

I am going to jump and close by giving you the one bit of advice 

I have for now that I think can actually do something positive 

about the fiscal policy situation now. That is that it seems to us 

urgent for Congress to adopt caps for appropriations sooner rather 

than later. 

For those who say that 661 is a line in the sand and they won’t 

vote for anything more than that, my response is every day you 

wait to vote, you are going to wind up spending more money than 

you otherwise would do. 

For those who say that they did not want to do it on a supplemental in the Senate because it took 60 votes, I say if you do not 

have 60 votes for the catch, you will not be able to enforce them, 

anyway. 

It is really urgent, Mr. Chairman, for you and Senator Domenici 

and Mr. Nussle and Mr. Spratt and whoever else has to be in the 

room to get together and decide how much is too much and write 

those amounts into law. Certainly, for the balance of this Congress, 

I would say for 3 to 5 years. It is the one thing you can do now 

that can help to bring order to this process because it seems, 

against the backdrop of these very large numbers that we are all 

throwing around every day, that the appetite for money is just bottomless. It does not matte whether it is the Defense Department 

or whether it is Bob’s comments about how much more it is going 

to take for a prescription drug benefit. 

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We do not talk anymore about $1 billion or $5 billion or $8 billion or $10 billion. We are talking in multiples of $50 billion. Look 

at how the numbers have gone up from 587 to 630 to 681 to 680 

and change. There is no right level of spending. That is a political 

question, but you all need to resolve it politically in some broad 

sense, write the caps into law, and then enforce them and we will 

all be better off if you do. 

With that, I will stop and take any questions you may have. 

[The prepared statement of Carol Cox Wait follows:]

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Chairman CONRAD. Thank you very much. 

We are going to turn to Members who are here, first Senator 

Stabenow and recognize her for 8 minutes for a statement, questions, and however she chooses to use her time. 

Senator STABENOW. Thank you, Mr. Chairman. Once again, let 

me thank you for holding this important hearing for us as we move 

forward, as numbers continue to adjust. 

As we all know, the estimates on the tax cut that was passed 

have been changed in terms of full cost, and as we look at the 

changes that have been coming forward in terms of the revenues, 

I think it is our responsibility on the Budget Committee to keep 

Members focused on the realities of what we have to deal with. 

I know, Mr. Chairman, that you are strongly committed, as we 

all are, to fiscal responsibility as we move forward on this budget. 

I did want to ask, first of all—well, first of all, make a note that 

yesterday we heard from our Goldman Sachs representative that 

half-a-percent change in labor productivity would be a loss of about 

a trillion dollars to us. When I look at the Concord Coalition surplus excluding Social Security and Medicare Part A after the tax 

cut, basically a half-a-percent difference in labor productivity, it 

wipes out the surplus that you have projected here. 

Mr. GREENSTEIN. Sure. 

Senator STABENOW. So I think that is important for us to note 

as we move forward, and we certainly want to have labor productivity continue. It has really been the back bone of our economy 

and at the growth that we have experienced, but I think it is important to note what just a small deviation can do. 

Also, Mr. Bixby, I think it is important to reemphasize something 

you said in your testimony. When we look at the tax cut and the 

budget resolution, it all adds up on paper, but only if today’s longrange economic projections are accurate, only if a number of questionable assumptions are made that tend to underestimate likely 

expenses and overestimate likely revenues. Certainly, that is the 

position that we find ourselves in at this moment. 

I would like to ask any of you to respond to one of the issues in 

the tax bill, and that is the alternative minimum tax provisions 

which are set to expire in 2004 and also the higher education tax 

deduction which expires in 2005. The higher education deduction 

is, of course, critical to labor productivity and being able to encourage people to go on to receive the skills that they need to be able 

to be productive citizens in the new economy, and also, with the 

AMT expiring, essentially that is a tax increase for citizens. 

Do any of you doubt that these sunset of tax cuts will be renewed 

by Congress or have any comments as to how you believe these 

various tax cuts will be acted upon by the Congress and any likelihood that, in fact, we would truly eliminate the AMT provision in 

2004? 

Mr. Greenstein. 

Mr. GREENSTEIN. We are clearly not going to eliminate the AMT 

provision in 2004. About 1.4 million taxpayers will be under the 

AMT this year. 

Under the tax bill, by 2010, it is 35 million. 

The Joint Tax Committee estimate of the cost of limiting the increase in the number of taxpayers under the AMT to 20 million by 

124

2010 or so—17 million, I think, by 2010, 20 million in 2011, rather 

than 35 million, which is the level it would have gone to under the 

law prior to passage of this tax cut, that alone is 200- to $300 billion over 10 years. 

So I think the question is not will Congress address it. You clearly will, but where is the money going to come from? That is where 

the tax bill as currently passed is a setup, and I think you have 

to respond appropriately. 

It was done as a setup saying that we really want a 1.7-, 1.8- , $2-trillion tax cut, so we will make it look on paper like it is 1.35 

and we will set up these clips of which the biggest is the AMT, 

much bigger than the education one in terms of cost, and we will 

put the gun to the head of Senators like yourselves that if you do 

not extend the AMT relief in the bill, you will get attacked for raising taxes on a lot of people. 

The numbers that we have gone through here today, and the 

chairman’s numbers indicate, there is not any money around unless you want to dip into the trust fund surpluses to deal with that. 

So the conclusion—the conclusion my testimony comes to—the conclusion is, yes, you are going to have to deal with the AMT and the 

other sunsets, but they have to be paid for within the revenue side, 

and the logical way to pay for them is by scaling back some of the 

excesses in that tax bill that have not taken effect yet. Most of the AMT effect will be on people over $100,000 a year. 

Some will be below. Most of the cost is above. We should not be 

lowering their tax rates and making other changes by more than 

we can afford and then recapturing part of that through the AMT. 

We fix the AMT, and it probably means you cannot lower the rates 

quite as much. You do not completely eliminate the itemized deduction phase-out, which is a huge tax cut that neither the House or 

Senate bill out of conference, having not been in either bill, a huge 

additional tax cut for people that make millions of dollars a year. 

That does not even start to take effect until about 6 or 7 years from 

now. 

So there are adjustments that can be made within the bill to pay 

for the AMT issue, but the Congress voted on the budget resolution 

to limit the tax cuts to $1.35 trillion, and your only hope of getting 

through the next number of years, even if the productivity estimate 

does not go down—the only hope of getting through without dipping into the trust fund surpluses is that you have to fix the sunset 

problems in the tax cut bill on the revenue side, redo the tax bill 

right. 

I think $1.35 trillion is still too high, but at a minimum, you 

have got to make the ultimate cost fit within 1.35. 

Mr. BIXBY. Let me just add to underscore something that Bob 

said, which is that even without the tax cut, forget about the tax 

cut, there was still an AMT problem brewing, so that the tax cut 

exacerbated the problem somewhat and as the Joint Committee 

has estimated, it takes about $200 billion over the rest of the tax 

cut to fix that, but that fixes only part of the problem. It gets you 

back to square on. Still, even with that, the number of taxpayers 

subject to the AMT over the next 10 years is going to go from $1.4 

trillion to 20—excuse me—million—I get my trillions, billions, and 

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lion taxpayers, and it is likely that Congress would hear about it 

from your constituents. So you would probably do something about 

that. Anyway, so it may cost more than that. The education extending that one costs about $20 billion, I think, 

according to the Joint Tax Committee over the remainder of the tax 

cut provision, but that is one of the unrealistic assumptions that 

is bandied about right now is that nothing will happen with that. 

Ms. WAIT. If I may, harking back to my comment at the beginning of all of this, I am not nearly as good a prognosticator, I guess, 

but I can suggest to you, one, that it is likely that when the time 

comes, something will be done to extend the AMT and the education deduction. I do not know exactly what. 

If we have far larger surpluses than you all think we are going 

to have right now, we will probably behave one way. If we have a 

lot less money, we will probably behave another way. 

I think that sitting here today and trying to forecast exactly 

what is going to happen, 2, 3, or 4 years from now, I just do not 

know, but I have seen how the Congress behaves in situations 

where you would be, for instance, thrown into using the Social Security Trust Fund surplus to offset the cost of AMT if you did not 

do something else. You will do something else if that is the situation, but since I do not know what the overall economic and surplus situation is going to be, I cannot forecast exactly what you are 

going to do. 

Senator STABENOW. Mr. Chairman, in conclusion—I see the red 

light—let me just say that one of the reasons that Senator Evan 

Bayh and Senator Olympia Snowe and I put forward the idea of 

a budget trigger was to make sure that if revenues did not materialize that actions on phase-in of tax cuts or spending would not 

proceed until the dollars were there, and I am going to continue to 

vigilantly support the chairman’s position of taking actions that 

protect Medicare and Social Security as we go forward with these 

items and the unsurety of the budget. 

Thank you. 

Chairman CONRAD. Senator Clinton. 

Senator CLINTON. Thank you very much. 

First, I would like to thank our chairman for holding this second 

of two extremely important hearings that are beginning to highlight the predicament that we find ourselves in following the passage of the tax bill, and I thank each of our witnesses for their insightful and helpful presentations. 

I think the message is quite clear. It is one that many of us tried 

to make on the Senate floor and back in our States that there is 

a right balance between debt reduction and tax relief and the investments we need, and we do not think that the tax bill that was 

passed and signed into law struck that balance, but we are obliged 

now to figure out how to deal with the situation that we have 

found ourselves in. 

Given what we have heard this morning, I have a couple of questions, and one is what Senator Stabenow raised about the AMT. 

The other, though, is about the concern we have about our national 

savings rate. I think it was Mr. Bixby, if I am not mistaken, in 

your testimony, your written testimony, who highlighted that in 

addition to improved productivity, we have to put the idea of inVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00131 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
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creasing national savings in the center of our thinking. I believe 

you made the point, Mr. Bixby, that increasing national and personal savings is the single most effective policy the Government 

can pursue to promote long-term economic growth and retirement 

security. 

I think we have squandered the opportunity to keep our national 

savings in the right balance, and certainly our personal savings figures are quite distressing. 

So I would like to push each of you on this point. What kind of 

reforms do each of you favor that you believe would help to boost 

our national and personal savings rate and, therefore, our economic 

growth potential? I would like to throw in the point that Bob made 

which had not really struck me, Mr. Chairman, until I heard him 

make it, and that is that we passed a budget resolution that set 

a very specific figure for the tax cut, which we know has been exceeded. Part of our challenge will be, it seems to me, in this budget 

process is not just to set caps and not just to decrease deeply needed non-defense discretionary programs, but to come up with a 

strategy to enforce the budget resolution. That will be quite a challenge, but we certainly have a clear signal. 

As we gain information from various sources about what the true 

cost of this tax cut is, it violates the budget resolution. So part of 

what we will have to be considering is how to get our Congress to 

abide by the budget resolution which it passed. 

Any thoughts you might have on that, I am also obviously very 

interested in, but let me first ask about this whole question of savings. It is something that I know each of you have addressed from 

different perspectives, and I would love to hear any thoughts you 

got. 

Mr. BIXBY. I can start, and I am glad you picked up on the savings comment in the prepared testimony because to the Concord 

Coalition, that really is the key issue here with the surpluses. 

We do not see any particular point in the Government running 

big surpluses just to run up bigger expenditures in the future. 

The economic case for saving surplus is that, for one thing, the 

only way you can pay down debt is for the Government to run a 

surplus. After 30 years of deficits, it is perfectly appropriate to be 

running a surplus, particularly in strong economic times as we 

have in the last couple of years, to pay down some of the debt. That 

is, as I think Carol mentioned, really the only way the Government 

can save, despite trust funds and lockboxes and all that. The only 

way you can translate that into real savings for the future is to be 

paying down debt with it. So that is the economic case for setting 

the bar, so to speak, at the trust fund surpluses and trying to pay 

down debt to do that. 

Another policy that the Concord Coalition has favored is a system of mandatory individual retirement accounts, and the justification for running surpluses and using it for that is it would help individuals save, even if it was through a mandatory program. 

The key question there is do you do it in the context of Social 

Security reform, do you do it outside of Social Security reform. For 

the record, the Concord Coalition thinks it ought to be done within 

the context of Social Security reform. That may be one thing that 

Bob Greenstein and I may disagree upon, but I would rather be 

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having that discussion. I think that discussion of how to use the 

surplus in the context of entitlement reform, savings for the future—because we know we have these demographic challenges 

ahead. We know the personal savings rate is low. I think our time 

would have been more productively spent earlier this year having 

a knock-down, drag-out fight over Social Security reform rather 

than a knock-down, drag-out fight over whether the tax cut should 

be 1.6- or $1.3 trillion. 

Senator CLINTON. You get no argument from——

Mr. BIXBY. So you asked for ideas of savings, and that is really 

the discussion that we are looking forward to having. 

Senator CLINTON. Ms. Wait? 

Ms. WAIT. As with Bob, I think that the value of buying down 

debt held by the public is that we are increasing national saving 

and that there is—I think if there is one thing about which there 

is no dispute in the economics community, it is that increasing saving now will increase growth in productivity and put us in a better 

position to deal with our long-term problems. 

I have to say, however, as I note in our testimony, I only wish 

that the argument today were about whether to save money. It 

really is not. We are going to save the Social Security Trust Fund 

surpluses. I remain fairly confident of that. 

I am much less confident that anything above that amount is 

going to be saved, whether it had gone for tax cuts, whether it is 

going to go for spending programs. My sense down here is that everything else is on the table, and it is going to wind up out the door 

somehow. If I truly believed there were a strategy that would result in the Government retiring more debt, I would say let’s do it. 

I just do not know how we get from here to there. 

Senator CLINTON. Bob. 

Mr. GREENSTEIN. I very much agree with your statement, the 

other witness’, Bob Bixby, statement. We need to promote national 

saving on the public, that we really have control primarily on the 

public side, lots of things Congress does on the tax side, but it says 

our saving incentives simply end up with people shifting money 

from investment A that is not tax-favored to investment B that has 

become tax-favored, without doing that much to increase saving. 

The one sure thing Government can do to increase saving is to pay 

down more debt. 

We know that when the boomers retire in large numbers, we 

have big fiscal problems. Paying down debt gives us a double benefit in dealing with that. To the degree that it promotes some faster economic growth, we have a larger economy to help enable us 

to afford dealing better with those problems when they arise, and 

to the degree that we are not paying $200 billion a year in interest 

payments on the national debt, we have more room in the budget 

to deal with those problems when they arise. 

On your other question on enforcing the budget resolution, one 

thing that adds some complexity here is that the levels of discretionary spending, both defense and non-defense in the budget resolution are not realistic and cannot be really enforced. They cannot 

be met. 

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timately translates into 200- to $400 billion over the 10-year period. 

In a provision, the likes of which I have never seen before, and 

I frankly have to say I find pretty outrageous, the budget resolution gives now-Chairman Conrad the authority to raise the ceiling 

for defense discretionary without giving him the authority to raise 

the ceiling for non-defense discretionary, but the non-defense discretionary level both for 2002 and for the next 10 years is neither 

realistic nor, frankly, probably good policy. 

I will give you one little example. As we sit here today, the 

House is passing the 2002 ag appropriations bill that in a time of 

budget surplus will require 200,000 low-income, pregnant women, 

infants, and young children to be turned away from the single program that probably has the most successful track record in the 

Federal Government, the WIC program. 

There is an editorial on this, this morning, in The Washington 

Post. We have room for massive tax cuts for the top 1 percent, but 

we are going to turn—at the end of the day, Congress is not going 

to do that. I hope it will get fixed in the Senate. I think it will ultimately get addressed, but things like this are not going to be addressed within the unrealistic levels that are in the resolution. 

So I have always favored caps on discretionary spending, realistic 

caps. The fact of the matter is in order to have realistic caps, you 

probably are going to need to make some adjustments on the tax 

side, and much as I do favor new caps, I think they have got to 

be part of a negotiated bipartisan agreement that looks at the 

whole budget again, including the tax side, which probably is not 

going to happen this year, but maybe it could happen in the next 

year’s budget resolution. 

In the interim, I am not worried about a spending spree because 

you have got this political discipline that neither party wants to go 

into the Medicare or Social Security surplus, and having that discipline, I think there is not a lot to be concerned in the short term, 

but, in the long run, we will need new caps, but as part of a resolution that looks at priorities across the budget. 

I would find it very troublesome to say that we are going to go 

at all these tax cuts for the top 1 percent that have not even yet 

started to take effect yet, take effect and use that as an excuse to 

put in caps that start throwing poor children off effective program. 

I do not think that is the right mix. 

Ms. WAIT. Senator Conrad——

Chairman CONRAD. We have got to abide by our time limits here, 

and Senator Nelson has the next——

Senator NELSON. Well, I would certainly defer to the Senator 

from New York if she would like to followup. 

Senator CLINTON. I think Ms. Wait wanted to——

Ms. WAIT. I just wanted to remind you all that—I mean, I do not 

need to remind you that Senator Conrad almost certainly is not 

going to increase the defense cap by goo-gobs of money without 

doing anything on the domestic side, but beyond that, you are 

going to have to do something about caps and the pay-go scorecard 

before you recess at the end of this year or you are going to have 

massive sequesters, the like of which you have never seen. 

129

It is not that you aren’t going to have an opportunity to deal with 

those issues. You are going to be forced to deal with them. My only 

argument is the sooner you do so, the better off everybody is going 

to be. 

Mr. GREENSTEIN. You are not forced to set new 5-year caps this 

year. You are only forced to do the same thing you have done each 

of the last several years, which is to waive the unrealistic caps set 

in 1997, which ultimately should be replaced with new ones, but 

I think, again, as part of a larger look at the whole budget. 

Ms. WAIT. Excuse me, Bob, but we did set a new cap last year 

for 1 year, and even if you do that, it is better than nothing at all. 

Chairman CONRAD. Senator Nelson. 

Senator NELSON. Mr. Chairman, 22 years ago, I found myself 

happily as a freshman Member of the Budget Committee. It was 

22 years later that I find myself happily as a freshman Member of 

the Budget Committee, and from that former experience, 22 years 

ago, I learned some painful lessons. 

First of all, I learned that I had made a mistake when I voted 

for the 1981 tax bill, and we saw the consequence of that; that 

while I was in the Congress, all the way through the decade of the 

1980’s, not only did we have to undo it, we had to undo it three 

times, and a fourth time after I had left the Congress in 1993. 

Thus, you well would have expected that I have voted the way that 

I have voted this year, which I think what has been adopted is a 

highly irresponsible fiscal position to put us in, in a fiscal straightjacket of which we now have some very uncomfortable decisions 

that we have to make. 

So my question that I would direct to you all is given the fact 

of my history and given the fact that because I had some inkling 

of these matters in the course of the campaign and discussed them 

very openly with the people of Florida—and the people of Florida 

instructed me very clearly, they wanted a substantial tax cut, but 

they wanted to pay down the national debt, and they wanted substantial investments in education, in defense, in the environment, 

in a prescription drug benefit to modernize Medicare, and they did 

not want to raid the Social Security and Medicare Trust Funds. 

Now, what has been enacted in this Congress thus far signed by 

the President violates those principles. So what would you recommend to us in order for me to keep faith with the promises that 

I made to the people of Florida and, thus, how I have voted to this 

point of now how to get out of this fiscal straightjacket that is facing us? 

Mr. BIXBY. Senator, sometimes constituents ask for a lot, and 

there are not necessarily consistent desires. 

There is so much money on the table. This is the sort of thing 

that the Concord Coalition has nightmares about. There is so much 

on the table when you look at a 10-year projection, $5.6 trillion, 

that it appears that almost anything is possible. 

The tax cut. Our view on the tax cut was that it should have 

been something that you could phase in over the next couple of 

years. Those provisions, in facta, in 2004 and beyond just shouldn’t 

be there because who knows what the fiscal situation is going to 

be. There is going to be congressional elections and another Presidential election before a lot of this tax cut goes into effect, and we 

130

still could have had a sizable tax cut, but the tax cut is in place. 

I think for purposes of looking ahead to see how much money is 

on the table, you have to assume that it is going to be there, and 

there is no point in going back and redoing the tax cut again this 

year. 

I think now that spending is on the table, I think that there is 

an obligation to hold the line as much as possible, particularly on 

the appropriations bills, and looking to a prescription drug benefit. 

That is going to be a very expensive proposition, no matter how we 

do it. So I think there needs to be important—I mean, I do not 

think we should go whole hog into that, and I agree with what 

Carol said. That probably ought to be done in the context of a 

broader Medicare reform because that is the other big-ticket item 

that is out there. 

We have something that we do with our field staff at Concord, 

and I know Carol has got similar things, where you have constituents come together and sort of look at all the options and how 

much they cost and what the revenue consequences are and debt 

service cost to all these things and tell them you are the budget 

committee and here are your choices. So I would tell your constituents, ‘‘You figure it out. We will get the Concord Coalition to come 

in and do one of these exercises, or the Committee for a Responsible Federal Budget,’’ and so people can see the tradeoffs because, 

quite clearly, despite these big surpluses, there are tradeoffs that 

have to be made between tax cuts, debt reduction, and new spending, and we cannot go into this situation thinking that we could do 

it all because, as you heard yesterday, the economics could take 

away alone without any hard choices being made a big part of the 

projected surplus. 

There is no magic answer, and you probably need to convey that 

message. 

Senator NELSON. Would you agree that had we cut the tax cut 

in the range of about $900 billion over 10 years that we could have 

accommodated most of what the people of Florida instructed me 

that they wanted? 

Mr. BIXBY. Possibly, but you would still have the same problem. 

You would still have tradeoff problems with a big tax cut and a 

prescription drug benefit. In either case, as you know, you have a 

big fiscal problem coming out beyond the 10-year budget window, 

and so you really have to be careful not to make—whether it is 

900- or $1.3 trillion. It would still add up paper, and it would add 

up better on paper. There is no doubt about that. 

Senator NELSON. Well, the problem is it is not $1.3 trillion. 

Mr. BIXBY. No. It is close to $2 trillion. 

Senator NELSON. It is about $1.8 trillion, minimum. 

Mr. BIXBY. Right. 

Mr. GREENSTEIN. Senator, if I could jump in here. 

Senator NELSON. Yes, Mr. Greenstein. 

Mr. GREENSTEIN. What I was about to say was actually the question you just asked, that while Bob is absolutely right that there 

are still difficult tradeoffs no matter what you do and that any 

budget resolution that was passed this year, including one with a 

$900-million tax cut, it does not take away the fact that we still 

have problems down the road when the boomers retire. 

131

Having said that while voters often ask for a combination of 

things that are unrealistic, what your constituents asked for really 

was not that unrealistic. 

Senator NELSON. I agree. 

Mr. GREENSTEIN. It all could have been accommodated with a 

smaller tax cut. 

What do we do about it now that we are where we are? I think 

there are two steps. Step No. 1, that I mentioned earlier this morning, is the budget resolution says $1.35 trillion for the tax cut. That 

is the official cost of the tax cut. The first step is it has got to stay 

within $1.35 trillion, not 1.7, not 1.8, not 1.9, which means that 

any additional tax cuts that Congress takes up and dealing with 

the sunsets which is what adds that extra 4- or $500 billion, AMT, 

the whole bill, they have got to be paid for on the revenue side 

within the bill. 

Fortunately, the one fortunate thing here is since so many of the 

tax cuts that are not the broad middle-class tax cuts, but the very 

high-income tax cuts do not start to take effect for a few years and 

then phase in over many years. You have the possibility of getting 

the money to deal with the sunsets and the other revenue problems 

that if not financed in this way, take the whole cost to 1.7 or 1.8 

or 1.9, to deal with them within the tax bill, so the total stays at 

1.35. 

But even if you do that, it is still very difficult, unless the surpluses continue to grow, which they might not. It is still very difficult, even at 1.35, a real 1.35, to meet the various wishes of your 

constituents. 

If the surplus does not grow, I think ultimately—you are not 

going to do it this year, but, ultimately, that is going to require 

some scaling back of the tax cut below the 1.35. While at the current time that looks politically impossible and is right now, if you 

looked a month after the 1981 tax cut passed and said what are 

the prospects that in the next 3 years with Ronald Reagan still as 

President that 30 percent of the 1981 tax cut will be taken back 

by Congress, anyone would have said that is crazy, it will never 

happen, but when the fiscal tradeoffs had to be made, it did happen. 

Senator NELSON. That is right, and Reagan had to lead the 

charge——

Mr. GREENSTEIN. That is right. 

Senator NELSON [continuing]. Because the country was going 

into economic cardiac arrest. 

Mr. GREENSTEIN. It will be tougher now, because you do not face 

deficits, to face total budget deficits, but, ultimately, the question 

is that the first step, do not let that tax cut get any larger. The 

second step is, ultimately, you all and your colleagues on the other 

party will need to go back to the public, and they will need to be 

asked what do you want, do you want less for education, do you 

not want as much of a drug benefit, whatever it may be, in return 

for letting all the tax cuts take effect, do you want us to scale back 

some of the tax cuts and invest more in education or environment, 

and the voters, if the issue is squarely put to them, I do not know 

exactly what they will decide, but they need to be a part of it. That 

is part of what we have elections for. 

132

Ms. WAIT. Mr. Chairman, may I make a very brief statement? 

Senator NELSON. Yes. 

Chairman CONRAD. Certainly, please. 

Ms. WAIT. First off, I think that Bob would be the first to concede 

that I am not going to sit by quietly and watch people do bad 

things to poor women and children. I think that the Senate will 

certainly step in and keep that from happening in whatever we do. 

We have to protect the most vulnerable populations in this society. 

Second, I would say to you, Senator, you have to concede that the 

straightjacket you are in today is vastly preferable to the one you 

were in 22 years ago. 

Senator NELSON. Oh, indeed. 

Ms. WAIT. I mean, we are in so much better shape than we 

were——

Senator NELSON. Dealing with a surplus is much better than a 

deficit. 

Ms. WAIT. And much more difficult in some respects, but a much 

better situation for the country, for the budget, for the economy. 

Finally, I would say to you, you begin by enforcing the budget. 

We began by congratulating the chairman for his commitment to 

doing that. I have deviated slightly from that myself saying you 

need quickly to put in place realistic caps, and caps, you can enforce. Everybody who knows me knows that I think the Government could probably get by on $661 billion in new budget authority 

next year, but, then, I probably have the lowest spending number 

in down and what I would do does not matter. I do not have an 

election certificate on the wall, and what really matters is what 

you can get, 60 votes in the Senate, and at least 218 votes in the 

House and a Presidential signature for. You need to come to an understanding about that and do something about it sooner rather 

than later. 

Enforcing the budget is the only place you have to start right 

now unless you think you have the votes to go back and re-litigate 

it and start all over again. Going forward, if we knew more about 

what you were going to be facing, we would give you better advice. 

We do not. 

One concern I have not articulated here and I do want to do before it is over is that Bob keeps talking about the longer-term problems that we face. To the extent that we grow the size of Government between now and the time the baby-boom generation retires, 

that gap gets more difficult to close. That mitigates somewhat the 

positions that we have expressed over the last year saying that on 

balance, if you were going to spend the money, anyway, tax cuts 

or not as damaging as you would have described them to be, we 

would have preferred a smaller tax cut. We would have preferred 

retiring more debt, but on balance at this juncture, growing the 

size of Government, unless you have a commitment to a higher tax 

level only makes the problem more difficult when you get to that 

point when the baby-boom generation retires. 

Senator NELSON. Mr. Chairman, thank you, and thanks for holding this hearing because this is something we really need to keep 

locking in, like a laser on. 

Chairman CONRAD. I thank the Senator from Florida. 

133

I would say to the Senator from Florida, I would answer his 

question saying the Senator from Florida has kept full faith with 

the voters of Florida because you supported a budget resolution 

that protected the Social Security and Medicare Trust Funds in 

each and every year. You supported a budget resolution that had 

a $900-billion tax cut, substantial tax cut. You supported a budget 

resolution that reserved resources for improving education, providing a prescription drug benefit, strengthening national defense, 

and you supported a budget resolution that, in addition to that, set 

aside $900 billion to strengthen Social Security for the long term. 

It was the only option before us that did something about the longterm problem facing us, which is we all know the retirement of the 

baby-boom generation. So I would say the Senator has kept full 

faith with the pledges that he made in supporting a budget resolution that did everything single thing that he talked about. 

I would just like to end where I began as reality time. This is 

not projections. This is not what is maybe going to happen. This 

is what has already happened. If we start with the most recent 

forecast of CBO, we take out the tax bill, we take out the budget 

that has passed, and we take out what the President is proposing 

on defense, we are already invading the trust funds of Medicare in 

2003, 2004, 2005, 2006, and 2007. So we are not talking about 

things that might happen or prognostications. We are talking about 

what has already happened in a tax cut, in a budget resolution, 

and in a defense request from the President of the United States. 

Beyond that, we can make some informed judgments about 

where we are likely to go in just a few areas because that first 

chart has nothing with respect to fixing the alternative minimum 

tax which costs over $200 billion to do. It has nothing to do with 

the extenders, which we all know is going to happen, the extension 

of popular tax provisions, like the research and development tax 

credit, that aren’t included in the budget resolution. It does not include any money for natural disasters, and natural disasters have 

already occurred. We already had the head of FEMA call up yesterday and tell the Appropriations Committee, he needs an additional 

billion dollars just to get through September. There is none of that 

in this budget. There is no new money for education in this budget, 

even though the Congress has passed—or the Senate has passed 

and education bill that authorizes over $350 billion, and there is 

no change in the economic forecast in that first chart. 

We know the economic forecast is going to change because economic growth is not meeting what is in the projection. If we just 

on two of those items make a reasonable assumption with respect 

to education funding and a revision in the forecast, we can see the 

results, and the results are clear for anybody to see who has the 

courage to look. The result is deep raids in the Medicare Trust 

Fund and even raiding the Social Security Trust Fund, something 

the vast majority of Congress has voted not to do on both counts. 

We are in trouble. It is just as clear as it can be. We are in trouble. We are in trouble already, and the prospects are the trouble 

is going to get worse, and it is because we have put in place an 

unrealistic budget, one that is based on a forecast that is overly optimistic in my judgment, No. 1; No. 2, that we have passed too 

large a tax cut; No. 3, that the budget did not include items that 

134

are clearly going to happen, including the President’s request for 

increases in national defense, including new money for education, 

including the necessity to fix the alternative minimum tax which 

is otherwise going to at the end of this period affect 35 million taxpayers in this country when today it affects less than 2 million. 

We also know there are going to be natural disasters in this 

country. We have already experienced them. We know, I think beyond a shadow of a doubt, the forecast in the short term is going 

to go down. Economic growth was forecast to be 2.4 percent this 

year. The consensus forecast now is 1.8 percent. That means we 

are going to get less Federal revenue. How much less is an item 

of discussion. 

We had a very distinguished panel here yesterday, two Democratic witnesses, a Republican witness, who agreed that revenue is 

going to be down from what is forecast 50- to $75 billion just next 

year. We are in trouble, and that is a message that has to be clearly delivered to our fellow Members of Congress and to the country 

because it is going to have to guide us in every decision we make. 

It is why I believe the budget resolution must be enforced, but that 

is not enough. That is not good enough. We are also going to have 

to say to our colleagues, no new spending that is not in the budget 

that is not paid for, no additional tax cuts that are not paid for. 

That is a message we need to clearly deliver to our colleagues and 

to the country. 

All those who are out there who think there is this big honey pot, 

the honey pot is gone. The honey pot has been fully committed. In 

fact, it has been overcommitted, and we are into the trust funds 

of Medicare already, and you can see with even reasonable, very 

reasonable and modest and conservative assumptions that we are 

going to be into the Social Security Trust Fund. 

So it is time to face reality, and that is a message that has to 

be delivered over and over and over to colleagues, as unwelcome a 

message as it is and as unwelcome a message as it is to people in 

the country. 

That still is an optimistic outlook for the economic future. That 

is still assuming we have economic recovery next year, good economic recovery, and that we do not have further slow-down this 

year. That is assuming very strong productivity growth, 50-percent 

higher than we saw in the 21 years from 1973 to 1994. Those are 

very, very optimistic outlooks for the economy. We hope they all 

come true, but we also recognize reality, and that is going to require us to make tough decisions. And the sooner we face up to it, 

the better off we will be. 

I want to thank this panel. We appreciate very much your time 

and your taking the opportunity to come here and give us the wisdom of your experience. 

Thank you very much. 

[Whereupon, at 11:47 a.m., the committee was adjourned.]

(135)

ECONOMIC AND BUDGET UPDATE 

THURSDAY, JULY 12, 2001

U.S. SENATE, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to notice, at 10:03 a.m., in room 

SD–608, Dirksen Senate Office Building, Hon. Kent Conrad, chairman of the committee, presiding. 

Present: Senators Conrad, Hollings, Stabenow, Clinton, Corzine, 

Domenici, Nickles, Gramm, Bond, Gregg, and Hagel. 

Staff present: Mary Ann Naylor, Staff Director; and G. William 

Hoagland, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. Good morning. We will bring the hearing to 

order. 

We want to welcome OMB Director, Mr. Daniels. Thank you very 

much for being here. 

Mr. DANIELS. Thank you, Mr. Chairman. 

Chairman CONRAD. As we discussed, we wanted to reciprocate 

for your kind gift to me last time you were here. You will remember the Director at the hearing on the budget brought me a wonderful pie, and he had it divided as to how we might use the surplus. And it was a terrific pie. It was an apple pie, my favorite, and 

it went over very well with my staff. And we thought we should 

reciprocate this morning. 

So we have a pie. It is somewhat smaller. [Laughter.] 

Chairman CONRAD. And it represents the ‘‘Shrinking Surplus.’’ 

So, Mr. Director, I am going to send this pie down to you. I am told 

it is actually rather good pie. 

Senator GREGG. Is there another pie that represents the tax 

cuts? 

Chairman CONRAD. You know, that is part of the shrinking surplus. That is part of the reason of the shrinking surplus. 

So, anyway, I hope your staff enjoy it, and I hope it is taken in 

the good humor that it is intended. 

Mr. DANIELS. Absolutely. 

Chairman CONRAD. We are grateful that you took time out of 

your busy schedule to be here today. We wanted to get your views 

on the current budget situation because, as you know, obviously we 

are faced with changing circumstances, and we are faced with a series of decisions that still must be made this year. And so the best 

information that is possible is important for us. 

136

For example, we have got a request from the administration for 

a substantial increase in defense spending. The question arises: 

How do we pay for that? And we already see warning signs that 

the budget is in some difficulty. 

Let me just put up that first chart. This looks at the year 2001. 

It starts with the surplus, takes out the trust funds of Social Security and Medicare, takes out the tax cut, takes out the budget resolution policies, and the interest associated with that. And we show 

a $6 billion margin for 2001 before any reduction in revenue as a 

result of the economic slowdown.

Mr. Lindsey, the chief economic adviser to the President, indicated in a kind of back-of-the-envelope calculation that we could 

see as much as a $56 billion reduction this year from an earlier 

baseline. When we adjust that for the more recent baseline, that 

would mean about a $23 billion reduction, somewhere in that 

range, which would mean we would be in deficit this year not using 

the trust fund of Medicare. 

Even more serious, I think, is looking ahead to next year. Next 

year we can see, based on testimony that was provided this committee by three eminent economists, their anticipation of reduced 

revenue for next year because of the economic slowdown this year, 

that we could be using all of the Medicare Trust Fund next year 

and even possibly going into the Social Security Trust Fund by a 

small margin. So it strikes me that we have questions to ask and 

to answer. 

And I want to emphasize that these numbers are based on just 

three factors: spending in the budget resolution that has passed, 

the tax cut, and reduced revenue as a result of the economic downturn. This is not a problem caused by increased spending because 

no appropriation bill has yet been passed and signed into law. 

Now, the figures I am using assume only the spending that is 

provided for in the budget resolution that was written and passed 

by our Republican colleagues, by and large, and includes the effects 

of the tax cut and includes reduced revenues as a result of the economic slowdown. 

Now, some have suggested that by reporting these shortfalls, I 

must be advocating a tax increase this year. That is not the case. 

I do not think that would be wise policy. That is not my record. 

I supported a substantial fiscal stimulus this year of $60 billion. I 

did not support shifting $33 billion of corporate revenues by 2 

weeks to make 2002 look better. And that is part of the reason we 

have got a problem in 2001, that shift of corporate revenues by 2 


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137

weeks to try to make 2002 look better. So the issue is not advocating tax increases at a time of economic slowdown. 

But looking ahead to 2002 and beyond, I believe the clear question: Do we use trust fund money from Social Security and Medicare to fund other programs of the Federal Government? Remember, for 2002 and beyond, the administration is forecasting strong 

economic growth. You are not forecasting an economic slowdown 

next year—and you are not alone in this, the Congressional Budget 

Office is not forecasting economic slowdown next year. The blue 

chip forecasters are not. All are projecting fairly strong economic 

growth. 

But we still see deficits in each of the next 4 years if we are not 

using trust fund money from Social Security and Medicare.

Perhaps even more serious is that we see these shortfalls before 

the administration’s request for substantial increases in defense 

spending, before money for natural disasters—and we have just 

had a rather serious natural disaster in West Virginia—before new 

money for education, and the Senate has passed almost unanimously an authorization bill for substantial increases for education. 

And this is before the extension of popular expiring tax provisions, 

for example, the research and development tax credit. And it is before a fix to the alternative minimum tax, when we all know that 

the number of American taxpayers subject to the AMT is going to 

increase dramatically. 

So, I repeat, I think this raises the serious question of how we 

finance the Federal Government going forward. Do we use Social 

Security and Medicare Trust Funds to fund other programs, especially at a time of economic growth? I think that is especially important given the fact the baby-boom generation begins retiring in 

11 years. And we all know at that time—this is from the Social Security Administration—that the surpluses that we now enjoy in the 

trust funds of Social Security and Medicare turn to significant deficits in the next decade. 

Now, I want to conclude by saying some now say that the Medicare Trust Fund surplus does not exist. I would refer them to legislation that every Republican Senator voted for just 4 months ago. 

Just 4 months ago, every single Republican Senator voted for a 

measure that had this statement of findings, and the findings were 

as follows: 

‘‘The Balanced Budget Act of 1997 and strong economic growth 

have ended decades of deficit spending.’’

No. 2, ‘‘The Government is able to meet its current obligations 

without using the Social Security and Medicare surpluses.’’


95488.317
138

4 CHART NOT AVAILABLE AT PRESS TIME. 

No. 3, ‘‘Fiscal pressures will mount as an aging population increases the Government’s obligations to provide retirement income 

and health services.’’

Four, ‘‘Social Security and Medicare Hospital Insurance surpluses should be used to reduce the debt held by the public until 

legislation is enacted that reforms Social Security and Medicare.’’

Five, ‘‘Preserving the Social Security and Medicare Hospital Insurance surpluses would restore confidence in the long-term financial integrity of Social Security and Medicare.’’

And, six, ‘‘Strengthening the Government’s fiscal position 

through debt reduction would increase national savings, promote 

economic growth, and reduce interest payments.’’

I agree with all of those assertions, and I am a little surprised 

people in 4 short months have changed their position and now say 

there are no surpluses. I just direct them to the study. 

Let’s go to those next charts, if we could. I would just direct 

them—well, we hear repeatedly that there are no Medicare surpluses. I just had a debate on the floor, and the assertion was 

made again that there are no Medicare surpluses. OMB’s own reports show that Medicare Part A is in significant surplus and 

Medicare Part B is in rough balance. The CBO reports demonstrate 

the same thing. So I hope we are not debating whether or not there 

are Medicare Trust Fund surpluses or not.4

Let me now turn to my very able colleague, the former chairman 

of this committee, Senator Domenici, for his statement, and I will 

just conclude as I began. I think the real question before us and 

the one we have got to grapple with together is: What is the appropriate means of financing Federal programs going forward? Do we 

want to be using trust fund moneys at a time of economic growth? 

I think that is the fundamental question before us. 

Senator Domenici, welcome. It is always good to have you here. 

Senator DOMENICI. Thank you. I was going to ask, Senator, Mr. 

Chairman, could we on this occasion, if we have a few members 

here, before we start with the Director, could we give them 5 minutes? 

Chairman CONRAD. Well, our intention was that we would do as 

we normally do, that we both make opening statements, and then 

we would go to Mr. Daniels, and then give people a chance during 

their questioning round to make statements and then ask questions. 

Senator DOMENICI. OK. I was asking it as a special favor, but I 

will not ask anymore. 

Well, let me say, Mr. Chairman, I am pleased that you called 

this meeting. I think it is important that we lay before the American people where we are and what has happened. The first thing 

I want to say is we did one thing very, very right, and, actually, 

we had some Democrats helping us, and that was to provide for the 

tax cut that is currently taking place with about $72 billion being 

returned to the American taxpayers through the remainder of this 

year and about 30-some next year. 

Now, frankly, I would challenge anyone to propose to the Congress of the United States, this committee, or the American people 

139

that, because the surplus has gotten smaller because of economic 

shortfalls, we ought to increase taxes now, in the middle of this 

event. And I know the chairman has just said that he is not for 

that, and I listened carefully. He said ‘‘this year’’ he is not for raising taxes. 

Frankly, I want to go back a little bit in history and share with 

you what has happened in the past when we raised taxes when the 

economy was in either in recession or in a downward trend. Let me 

give you a few examples of this. 

First, I think we all remember what happened when Mr. Hoover 

was in charge of economics in the country. We had a recession, a 

deficit, recession, a deficit. We don’t have any deficit. Whatever implication was that there is no surplus, it is wrong. We have the second largest surplus in the history of America right now. Already 

that number is there, and it is the second largest surplus. 

But when Mr. Hoover decided let’s raise taxes to help with the 

deficit, in the midst of an economic downturn, guess what happened to America? We had the biggest, worst depression in the history of American capitalism. 

Now, it is not Keynesian economics, it is not supply economics, 

if you are talking about raising taxes to fill any kind of gaps that 

might exist in this budget. It is pure Herbert Hoover economics. 

I know the chairman is not talking about that, but there are rumors around that it is the tax cut that got us into this problem. 

And let me state unequivocally and as simply as I can: The tax cut 

did not get us in this situation. The budget of the United States 

is in solid shape. It is the economy that is not in such very good 

shape. And the economy is not part of the numbers in this budget 

except for estimates that are either right or not right with reference to what is happening to the economy. 

So my second point I would like to say to you personally, Mr. 

Chairman, while you are saying you are not for increasing taxes 

and while you have not today said that we are using Social Security or Medicare Trust Funds to pay for Government, you are coming perilously close. And I want to tell you and tell everybody here, 

as of right now there is no raid on Social Security or Medicare. 

There are no official estimates that tell us we are going to do that. 

The chairman’s chart has a very large number of assumptions as 

to what we will spend that are not necessarily so, and the economics are developed off of one statement made by an economic adviser 

to the President on the back of a napkin. And from that we are 

pursuing the notion that the budget is what caused this surplus to 

go down somewhat in size. 

Now, let me repeat: The budget is in great shape. The economy 

is not in good shape. And the question is: What do we do under 

those circumstances? 

Now, Mr. Chairman, if you think there is something that your 

side of the aisle could do that is better, I tell you, you have the authority to call a meeting of the Budget Committee. We will be here. 

We will be here and not delay 1 minute. And you can propose a 

budget because that is what the law says. You can do a supplementary budget. I would like to know, if you did that, what you 

would change. It would be very interesting. 

140

Would you, in fact, pick up some surplus by increasing taxes? If 

so, when? Would you really cut programs beyond the amount that 

we put in this base budget? I don’t think so. And that is one point 

for you. 

And the second one is, if we are raising Medicare or going to 

touch Medicare and/or Social Security, then I would like to stand 

up here—and I hope you all can hear me. I would like to say—I 

will talk very loud. I would like to say, Mr. Chairman, you have 

the solution to the problem. You have raised the problem, and you 

singularly have a solution. This is the budget resolution language. 

This is it. And let me read for you what it says down here, after 

first mentioning the following: There are reserve funds in this 

budget. Reserve funds are an invention of the last 7 or 8 years. So 

I was part of bringing them into birth and seeing that we used 

them. But each time we said the chairman can release funds, and 

we put conditions on it. And let me read the conditions on these, 

which amount to $450 billion—$450 billion not yet spent, not in the 

budget, subject to being released by our chairman if he deems it 

appropriate. 

But it says, ‘‘Legislation described may not, when taken together 

with all other previously enacted legislation, except legislation enacted pursuant to section 211, reduce the on-budget surplus’’—and 

these are the operative words—‘‘below the level of Medicare Hospital Insurance Trust Fund surplus in any fiscal year.’’

So if releasing these is going to cause us to touch Medicare, the 

chairman has the prerogative of saying I will not release them. 

And, therefore, the problem that is being discussed by the chairman can be eliminated by a stroke of his own hand in just saying 

we are not going to spend this. 

Now, let me also comment about what is happening. What is 

happening is we have an economy that did not come back as quickly as desired and, in fact, stayed down as compared with the assumptions of the previous administration. They had it higher, higher growth. This administration reduced that and had it at a lower 

rate. And then CBO had it at even a lower rate of growth. What 

happened is it stayed under that, and plain and simple, the receipts from corporate America left, because you read every day corporate America is not making money. When they do not make 

money, they do not have profits. When they do not have profits, 

they do not pay corporate taxes. And I do not think we will ever 

change that. I would hope so. It would be confiscatory if we did. 

So I close by saying I think the budget is in good shape. I think 

the economy is not in such good shape. And I think it is very, very 

important that we do the right thing and send the right signals 

while this economy is still having difficulty. And the worst thing 

we could do is to imply that we are not doing well in terms of paying off the debt, that we are not doing well in terms of our surplus. 

The truth of the matter is this surplus is the second largest surplus 

we have ever had, and we will be paying down the debt more than 

we have ever done in history. And that is pretty good, pretty good 

economics, pretty good message. So I hope we truly are engaged, 

Mr. Chairman, in an objective discussion of what we might do together in changing things, if changes need to take place. 

141

I for one do not know where we would make major changes in 

the budget. If I had some, I would recommend them and we could 

do them together. I just think we ought to be steady on line, stay 

on the same path we are on, and hope the economy will recover 

and start growing. If that happens, senior citizens, whether it is 

Social Security or Medicare, it is the very best thing that could 

happen to you, for you and your family. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you. I will just take a moment to respond, and then we will go to you, Director. 

First of all, the surpluses that we have now are trust fund surpluses. It is money from Social Security and Medicare. And that is 

the issue I am raising. Should we be using Social Security and 

Medicare Trust Fund money to fund other operations of Government? Because that is what we are poised to do this year and next 

year and years beyond. 

The ranking member, our distinguished former chairman, is exactly right. It would be wrong to raise taxes in an economic downturn. And I apply that to this year or next year if we face economic 

downturn next year. But the administration and everybody else is 

not forecasting economic downturn next year. They are forecasting 

strong economic growth. But the numbers show that even in that 

context, we are going to be using trust fund money to finance the 

other programs of Government, and I do not think that is the direction we want to go. 

The ranking member’s suggestion that the tax cut has nothing 

to do with our facing a deficit this year, I just do not think that 

is accurate. 

Put up that first chart, if we can, on this year, on 2001. We started with a $275 billion surplus projected. You take out Medicare 

and Social Security, and you are down to $92 billion. The tax cut 

costs $74 billion. To suggest that has no role here just is not factually accurate; $74 billion came out of the surplus because of the tax 

cut.

And I would remind those who are listening, that was not all fiscal stimulus; $40 billion of it is fiscal stimulus by way of a tax cut 

that went into the pockets of the American people. But $33 billion 

was a paper shuffle, a shift by 2 weeks of corporate revenue from 

this fiscal year to the next fiscal year, because they knew they had 

a problem of dipping into the Medicare Trust Fund in 2002 without 

that shift. I do not think anybody can seriously argue that provided 


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lift to the economy by shifting corporate receipts 2 weeks to mask 

a problem that they had in 2002. 

Finally, the former chairman says to me I can have a markup 

in the committee on a budget. Well, when he was chairman of the 

committee, we had no markup. Now he is saying, OK, we are in 

deficit without counting the trust funds, you have a markup. It is 

a little late, I would say to my dear friend. It is a little late. We 

are well into the appropriations process to try to go back and redo 

what has already been done for this year. 

Finally, on the question of the reserve funds, two-thirds of the 

money is in the prescription drug reserve fund. Is the Senator suggesting that the tax cut was so large that it now crowds out the 

money for prescription drugs? Is he suggesting that we should not 

go forward with providing prescription drugs because the tax cut 

was so big that it crowds out the money that was provided for in 

the budget for prescription drugs? I do not think so. 

It is very clear—and I think it goes back to the question of 

whether there is a Medicare Trust Fund surplus and whether it is 

worth preserving, because seven of the eight reserve funds say I 

cannot release them if the enacted legislation puts us into the 

Medicare Trust Fund. Somebody who wrote that resolution thought 

it mattered that you not invade the Medicare Trust Fund. I still 

think it matters. 

With that——

Senator DOMENICI. Mr. Chairman, could I have a minute? 

Chairman CONRAD. Certainly. 

Senator DOMENICI. I promise I will not use as much time as you 

did in rebuttal. 

Let me first of all say to the members, we had no majority on 

this committee. There were 10 Democrats, 10 Republicans, very 

hard to get anything done. You have a majority now, and that is 

why I alluded to the fact that you could do what you would like. 

If you would like to change things, you can just use your 11 Senators and go ahead and do it. And I would urge, if you have a solution to a problem—which I do not think exists. But if you have one, 

then I think you ought to seriously consider making recommendations to the U.S. Senate and to the people for what you would 

change. 

Now, having said that, I want to make one last observation. 

From my standpoint, this Senator’s standpoint, the tax cut has 

nothing to do with the reduction of the surplus. What had all to 

do with it is economics, and I will lay before you, for somebody to 

work up on a piece of paper and give it to us, what if the economic 

assumptions that are in that budget resolution for these 2 years—

I am not talking about in 10 years, these 2 years, this one and next 

year—were right? The tax cut would have no impact on the surplus 

because we were expecting the revenue to come in that did not 

come in. 

And I repeat, it is the best time to give people tax cuts. It is the 

best time for the Government to say let you have it back, let you 

spend it, let’s hope it is part of whatever else is going on in the 

country that jolts the economy into recovery. And then we will see 

that most of the problems that my friend, the chairman, assumes 

are going to happen—we will see that they will all disappear. 

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Mr. Corzine, I note you there at the end, and I welcome you as 

a ranking member to the committee. I look forward to discussing 

issues with you. 

Senator CORZINE. Thank you. 

Chairman CONRAD. Yes, Senator Corzine has joined us, and he 

is a new member of the committee, and we are delighted to have 

him as a member. He has a very distinguished career in finance, 

perhaps one of the most successful Americans in the world of finance. And so I think he can make a tremendous contribution to 

this committee. 

Senator NICKLES. If he would just make a contribution to the 

shortfall, we would be done. [Laughter.] 

Chairman CONRAD. He will ask you to make, you know, a matching contribution, Senator. 

Senator DOMENICI. Just said in jest, Senator. [Laughter.] 

Chairman CONRAD. Let me say I think one of the most important 

things we can do this year is do no further harm. That is my motto 

for the rest of this year: Do no further harm. 

When the Senator asked me what would I have done differently, 

I presented a budget plan to this committee and to my colleagues 

that would have avoided this problem. We would not be in this position if the budget plan that I had presented had been adopted. 

And I think that was a sound budget plan. 

Let me just say, I think we should now go to the Director. I 

again want to welcome you, Director Daniels, and as I indicated in 

our conversation yesterday, there are some who have suggested we 

are going to have a show trial here. That is not the way we operate 

in this committee. Our distinguished ranking member, when he 

was chairman, did not operate the committee that way, and I am 

certainly not going to operate the committee that way. 

We invite you here to talk about serious issues, ones that we 

have a joint responsibility to grapple with at this point. And so I 

welcome you here with respect. 

STATEMENT OF HON. MITCHELL E. DANIELS, JR., DIRECTOR, 

OFFICE OF MANAGEMENT AND BUDGET 

Mr. DANIELS. Mr. Chairman, thank you, and thank you for convening this hearing. Thank you for your commitment to our common objective of finding that mix of policies that will lead to the 

real end goal, which is prosperity in America and responsibility in 

our stewardship of the public’s and the taxpayers’ funds. 

Let me begin this morning by noting the persistence of two, at 

least to me, striking phenomena that distinguish today’s environment from any we have seen: first, a tremendously positive national fiscal condition, despite a nearly stagnant economy; second, 

a strong bipartisan agreement to preserve very large surpluses as 

a threshold condition of public finance. 

In response to your invitation, I am glad to report that, in stark 

contrast to past economic turndowns, the Nation’s finances are in 

remarkably strong shape. Even in the midst of a year-long slowdown in the economy, we continue to accumulate enormous surpluses and to use the extra receipts to steadily reduce the Nation’s 

outstanding public debt. 

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This is a phenomenon without precedent. The almost invariable 

pattern is for countries to run deficits, often very large ones, during 

economic difficulty. In all modern U.S. slowdowns, the Nation has 

run in the red, often by very large amounts. 

But in the last few years, a unique bipartisan consensus has 

arisen in our country, in large part due to the work of this committee. An agreement has been forged to run very large surpluses 

as a matter of course, in strong economic times or in weak. Both 

parties and both the legislation and executive branches, in this administration and the previous one, have concurred in maintaining 

a surplus at least the size of the Social Security surplus. 

Many would like to set the minimum surplus level even higher, 

using as a target the artificial overage in the Medicare Part A 

Trust Fund. This is a relatively modest difference, amounting to 

whether the minimum surplus should be more like 8 percent or 

more like 9 percent of revenues. Now, between these two figures 

lie some hard disagreements, but that should not obscure the radically different nature of our current situation and the new consensus. 

It is fascinating to me to note how far this consensus departs 

from traditional economic thought. Only yesterday, slowdowns were 

said to call for deficit finance, for governments to take in less in 

all taxes than they spent. The Nation conducted a decades-long, 

spirited debate about the wisdom of a balanced budget amendment 

to the Constitution. Now, suddenly, we find ourselves in strong 

and, I would say, healthy agreement on maintaining a fiscal position vastly stronger than the mere balance such an amendment 

would have required. 

Whatever differences may prove to separate us this morning, I 

hope we can all agree that the matter of most urgency must be the 

resuscitation of economic growth in our country. We are absorbed 

in arcane matters, abstractions about surpluses and what counts 

and what does not. I think for most Americans the question has to 

do with jobs and income and future economic prospects. 

The President and a bipartisan congressional majority agreed to 

utilize a portion of our surpluses to try to stimulate the economy 

through tax relief, and that action came just in time. I am submitting for the record the comments of a host of economists forecasting 

a boost to growth stemming from the tax cut ranging from 3/4 percent to 1–1/4 percent in the second half of this year. Just this week, 

the Blue Chip Consensus of the Nation’s top 50 analysts expressed 

this view, writing, I quote: ‘‘The tax cut effects could not have come 

at a better time...’’

Mr. Chairman, you asked for an update on our fiscal expectations. I can report that we see continued large surpluses at least 

at the size of the Social Security surplus for all years in the budget 

horizon. The President is determined to preserve surpluses at this 

level and to continue using these funds for the steady reduction of 

outstanding national debt, a cause of which you, Mr. Chairman, are 

a leading champion. 

In the 2001 fiscal year now winding down, let us note that we 

are dealing with the budget agreed to by the last Congress and the 

last President. That budget, passed last December, contained the 

largest 1-year spending increase in history. Obviously, a smaller 

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surge in spending would have ensured a larger surplus today. But 

the major reason for a surplus that is merely immense, rather than 

gigantic, is, of course, a shaky economy. 

Due to the dramatic economic slowdown, starting about a year 

ago but not fully measured until the last few months, revenues for 

the current fiscal year will grow more slowly than previously forecast—I stress ‘‘grow’’ but more slowly—on the order of plus 3 percent or a little more rather than the expected plus 5 percent or a 

little more. 

On the other side, because our agency was overly cautious in estimating outlay spending rates, 2001 spending looks to be somewhat lower than expected also, so the net change in the surplus 

will be somewhat less than the drop in revenue. And we simply do 

not know by how much. 

I would also add, parenthetically, we are not sure what the size 

of the Social Security surplus will be. It may also prove to have 

been affected by the economic slowdown. 

The Social Security surplus makes a good target, we say, for several reasons. The best reason for choosing this surplus target 

versus any other arbitrary goal is that, as we apply these amounts 

to debt reduction, which is, of course, what we do with any surplus, 

we achieve with some room to spare the maximum amount of such 

reduction possible. Over the next 10 years, Social Security will take 

in excess funds of some $2.5 trillion, whereas maximum debt 

retirable, without unjustifiable premium expenses, is about $2.2 

trillion. This year, we will eliminate over $100 billion of existing 

debt, marking the fourth year in a row of such reductions, and further shrinkage is scheduled for each succeeding year. This is an 

important accomplishment for which both political parties, both 

branches of Government, and both the last two administrations all 

deserve credit. 

The Nation’s finances are in extremely sound condition. Only 

persistent, long-term economic weakness can threaten this condition, so promoting a return to vigorous growth must be our common objective. The best course forward is clear: first, pass this 

year’s appropriations at the level of the 2002 budget resolution; 

second, work together to continue restraining total spending in the 

next few years. Businesses, States, cities, and families have no hesitation to limit their spending when revenues subside. The 50 State 

governments recently report that collectively they are lowering 

spending growth from nearly 8 percent last year to around 3 percent in fiscal year 2002. Spending in the Federal domestic agencies 

exploded during the last 3 years, including growth of 45 percent at 

HHS and 27 percent at DOT. These Departments can benefit from 

a period of digestion without great growth beyond these expanded 

levels. 

Restraint does not mean paralysis. We can make room for new 

initiatives and for reasonable spending growth in good programs by 

finally becoming serious about the review of antiquated, duplicative, and non-performing programs. Somehow, we must reverse the 

bizarre presumption, which operates nowhere else in life, that the 

burden of proof rests with those who challenge any penny of current spending. As in any business or family, the burden must be 

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ever money is being spent today. Any healthy organization constantly searches for ways to redeploy money from less efficient to 

more efficient purposes; we must weed the garden if new plants are 

to sprout and flourish. 

Finally, we must be prepared to collaborate on additional moves 

to strengthen the economy. The chairman has suggested we should 

do no further harm. I think, on the contrary, we should be in pursuit of doing further good. This might involve approaches unrelated 

to fiscal policy; trade liberalization and the alleviation of paperwork or other regulatory burdens come to mind. 

Mr. Chairman, I commend your concern in calling this hearing 

and your vigilance in seeking to make sure that today’s hardearned fiscal vitality is preserved. I am pleased to be able to report 

the strength of our position, but also to associate with your determination to take nothing for granted and to see that progress continues in both the near and the long terms. 

Chairman CONRAD. Thank you very much for your statement, Director Daniels. 

Under the previous procedures of the committee, the ranking 

member and I will each take 10 minutes for questioning, and then 

we will go to the members, 7 minutes each, according to the precedents that have been previously established here. 

First, if we can put up the chart on 2001 again, maybe if we can 

just briefly talk about 2001 and 2002 and see if there is some 

rough agreement or where there might be disagreement. I think at 

the top there really is not—I mean, those are just factual matters 

in terms of where we started with the surplus in Social Security 

and Medicare.

The thing I want to focus on is the question of what kind of an 

adjustment to the revenue forecast you are anticipating at this 

point. I understand you had some ideas yesterday that you shared 

with people. Do you have a disagreement with the conclusion here 

with respect to a reduction in the revenue forecast this year because of the slowdown in the economy? 

Mr. DANIELS. Mr. Chairman, I cannot disagree because we do not 

have a forecast I think we can rely on yet. I think I can tell you 

it will be modest. Remember, we are dealing with over a $2 trillion 

revenue base, so the reduction up there is about 1 percent. It might 

be 1 percent or 2 percent, I am not sure. It is important, I think, 

for everybody in keeping our heads here to recognize how small a 

miss that is. 


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I have looked back, by the way, at past forecasts, and this year’s 

forecast is going to be much closer than most previous ones. But 

the base of our affairs is so large now that it does produce changes 

on this order. 

I am constrained to say that we do have differences at the top, 

however. You know, the idea, first of all, of arbitrarily dismissing 

the Social Security and Medicare Trust Funds has never been one 

that I understood. It is like saying Tiger Woods had a very mediocre season if you do not count the Master’s, the two Opens, and 

the PGA. These are massive surpluses. 

And, further, let me point out that we have got to be careful 

about our language. Just as it is, I think, utterly inaccurate to even 

use the word ‘‘deficit’’ when we are running surpluses on the order 

of $200 billion, or that neighborhood, I think it is highly inaccurate 

to use phrases like ‘‘go into,’’ ‘‘touch,’’ and ‘‘use’’ these funds when 

we have done that always. The only purpose when you talk about 

using them for other programs, the other program these funds have 

been used for and are today is debt reduction. This is a goal we 

all share. We are only disagreeing about how much debt reduction 

should occur. 

But as we have sometimes said, this money does not go into a 

vault somewhere. There is not a hole in Paul O’Neill’s backyard. 

There is no mattress in the world big enough. These funds always 

and still today, when we are in surplus, are used to reduce our 

debt. A very good thing to do—but not at the expense of a strong 

economy, and that is why we assert that it was a very essential 

and very timely act to balance our policy by returning some of the 

surplus to the taxpayers who sent it in, in order that we might 

have a return to growth and that we might have surpluses next 

year and the next year and as far as possible. 

So that is my response, and I thank you for that opportunity. 

Chairman CONRAD. I am happy to provide that opportunity. I 

would just say to you it is not that we are not counting the trust 

funds. We are counting them. But there has been a bipartisan 

agreement that you alluded to in your statement that it is not appropriate to use Social Security Trust Fund money for other purposes, other than paying down debt. That is a consensus. That is 

something, as you have mentioned, I have strongly advocated. I 

think it is also important to provide the same treatment to the 

Medicare Trust Fund surpluses. 

And so if you set those aside, use them for debt reduction, do not 

use them to fund other programs, that makes sense to me. 

Mr. DANIELS. Well, here, too—excuse me, but——

Chairman CONRAD. If I could just finish. 

Mr. DANIELS. I am sorry. 

Chairman CONRAD. As we look to 2001, I do not think you are 

differing with the numbers here. The numbers lead us to the conclusion that I think is quite clear, that we are poised to run a nontrust fund deficit; that is, if we are not using trust funds for other 

purposes, which is a policy goal that I have, and you have at least 

in part with respect to the Social Security Trust Fund, you can see 

where we wind up. With the economic slowdown and the size of the 

tax cut, we show we are running a deficit in 2001 of $17 billion.

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Let’s go to the 2002 chart, because economic slowdown I think 

is one set of circumstances. What most concerns me is we are looking to a period in which we are forecasting strong economic growth. 

You are forecasting at this point strong economic growth next year. 

I saw Mr. O’Neill saying that he believed we would see robust return to growth next year. And yet when we do the analysis, just 

based on the budget resolution that has passed, the tax cut that 

has passed, and some estimate of economic downturn in 2002 we 

are using all of the Medicare Trust Fund, and even dipping into Social Security by a little bit.

Let me turn to the fundamental question, and that is the third 

chart that shows the multiple years. And you referenced it in 

your—it really goes to the question that we have to face most immediately, which is the administration’s request for $18 billion for 

fiscal year 2002 that is not in the budget. That means we would 

go further into the trust funds if we were to pass the administration’s request without some offset.

And the question I would have for you—this is the larger chart, 

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lieve that should be financed? Should we go further into trust fund 

money or should we offset it by spending cuts in other areas or by 

new revenue? What would be the approach you would advocate? 

Mr. DANIELS. Thank you, Mr. Chairman. I will answer each of 

the questions, I hope, in the order they were asked. 

First, I need to return to the subject—and we have discussed it 

before—of Medicare and whether it is surplus or not. It is not. This 

year, Medicare will, as every year, cost substantially more, in this 

year over $50 billion more than it takes in. Every penny of Medicare benefits will, of course, be delivered. Medicare spending will 

rise by tens of billions of dollars this year to deliver on those commitments. There is no problem doing that. The President’s commitment to doing that is ironclad. This very moment, he is announcing 

principles for Medicare reform that would strengthen this program 

and ensure it delivers better health care to older Americans in the 

future. 

Second, I had hoped by now that the whole idea that these funds 

were being used in any other way had been dispelled, and I will 

submit for the record, I think, the quite excellent and decisive column of Robert Samuelson in this week’s Newsweek and Washington Post in which he speaks very bluntly to this subject. 

I would also like to—I believe you talked about calendar year 

2001. Let me just observe in passing that if President Bush had 

been in office last December, I doubt that the Congress would have 

passed a $57 billion increase, a 1-year increase in spending. If that 

had not occurred, we might not be having this conversation today. 

Today’s surpluses would be larger by some very large amount. 

The defense increase, the amendment to this year’s budget, 

which the administration said from the very outset would be provided as soon as a good accounting of the underfund in defense, of 

the shortfall, particularly in those aspects which most touch our 

young men and women in uniform—we are talking about pay, 

housing, and health care, which makes up the largest portion of 

that amendment. That amendment can be funded while protecting 

the Social Security funds for debt reduction, every penny. This, of 

course, requires that the Congress not breach the other spending 

limits in the resolution, which we will work to see that does not 

occur. 

Chairman CONRAD. Well, honestly, I do not see that. I do not 

know how one can come to that conclusion. Our numbers show, just 

based on the budget resolution that has passed, the tax cut and 

with some acknowledgment of the economic downturn that has occurred this year, that you are into the trust funds of Medicare and 

Social Security next year before the President’s request for $18 billion more for defense. And so the only conclusion one could come 

to is that means you intend to finance that out of taking more 

money from the trust funds. 

Is that your intention? 

Mr. DANIELS. Clearly not. Our intention is—the President had 

made repeatedly clear—to start by ensuring a surplus at least at 

the size of Social Security, retiring debt with that amount. 

Your charts assume certain things not in evidence, specifically, 

additional spending in a variety of areas for which room is made 

in the budget resolution. But there is nothing more changeable or 

150

discretionary than spending the public’s money. And I would be 

happy to point out both as to 2001 and 2002 that the President 

submitted billions of dollars in recommended reductions, which so 

far the Congress has not shown a willingness to support. If we 

want to further strengthen the surplus as we move into 2002, a 

great place to start is by dusting off some of those which have so 

far not met the approval of congressional committees. 

Chairman CONRAD. Well, I would just say to you that the only 

spending assumptions that are in my numbers are the spending directed by the passage of budget resolutions that were written and 

passed by your Republican colleagues here in the House and the 

Senate. And that is what leads us, that combined with the tax cut 

and the economic downturn, to our conclusion that we will be into 

the trust funds next year of both Medicare and Social Security, and 

that your defense request just puts us further into those funds. 

And I think that is a serious question before us. I do not think that 

is the right way to fund increases in defense—increases, by the 

way, which I support. 

I turn now to our——

Mr. DANIELS. May I add just one more response? I would like to 

say that I think one of the most welcome statements made this 

morning, Mr. Chairman, was yours, the comment you made that 

this is no time to be thinking of tax increases that might further 

weaken a struggling economy. I think this is extraordinarily important, and I commend you and I know the President would want to 

commend you for that statement. 

This leads, then, to the implication that to protect ourselves and 

to make sure that next year’s huge surplus is as huge as we would 

all like it to be, we have got to work harder on the spending side 

of the budget. And we stand ready and I have a number of ideas 

that we will be sharing with you this fall, and, of course, as the 

next budget is put together. 

Chairman CONRAD. All right. Senator Domenici? 

Senator DOMENICI. Mr. Chairman, I am going to let some of our 

members go next, and Senator Nickles was next. Actually, Judd 

Gregg was here, but he is gone. I yield to let you go next, and then 

let’s let the next Senator on our side go, and we have three of ours 

and then I will come back. 

Senator NICKLES. Senator Domenici, thank you very much, and, 

Director Daniels, thank you for your testimony. I would just make 

a couple of comments. 

It is interesting. I remember Bill Clinton campaigning on ‘‘It’s 

the economy, Stupid,’’ and I look at the economy, which is the reason why we are really having this meeting today. And I notice that 

the economy in the second quarter of 2000 was growing at 5.6 percent, and in the third quarter of last year at 2.2 percent, the fourth 

quarter at 1 percent, the first quarter of this year at 1.2 percent, 

and still pretty flat. And that is the difference. That is the difference. Except for Director Daniels also mentioned something in 

responding to your question on defense. He said, well, last year, we 

had a spending spurt. We did not have a budget last year. We ignored the budget last year. There was a spending spree, and it was 

not in defense. 

151

Defense spending—correct me if I am wrong—grew at 3 percent, 

nondefense spending grew at 12 percent. And so there was a spending surge last year, but it was not in defense. It was in other areas, 

and I think in a way that was irresponsible. 

I will just mention a couple other things. So the economy is flat. 

I happen to agree with the statement Congress did right by passing 

the tax cut to help give some lift to the economy. We still have 

enormous combined surpluses. Senator Domenici mentioned we are 

still running surpluses over $200 billion, or in that neighborhood. 

That is a lot of surplus, with tax rates at an all-time high. 

And so we made some changes, I think pretty small changes. 

Maybe we should do some more. If we really want to stimulate the 

economy, if we want to help lift the economy, let’s make a capital 

gains reduction. Let’s make the tax cut permanent so people can 

count on it and have, I think, a positive impact. 

So I would just say thank goodness that we did the tax cut. I 

agree with Senator Domenici. It was timely, it was important, it 

was probably too timid. So let’s make it permanent and let’s do 

something on capital gains, let’s do something on depreciation 

schedules to allow people to depreciate property over the real lives. 

And I think that would help the economy. 

Now I will make just a couple comments. I do not worship at this 

shrine of Medicare surplus. That is a facade that is—I do not know 

what it is, a political phony argument. There is not a surplus in 

Medicare. Medicare is spending right now—total Medicare funds 

last year, Part A raised to 150 in taxes, that is your 2.9 percent 

payroll tax, 1.45 on individuals and doubled by employers, Part B 

premiums, 24, for a total of $174 billion. Total Medicare spending 

was $262 billion. That is a cash deficit of $88 billion. So there is 

not a surplus. 

You might say, well, I keep hearing about this HI surplus. Well, 

that was in Congress, President Clinton’s proposal, let’s take home 

health and move it out of Part A and put it into Part B because 

that is subsidized. That is paid for mostly by direct funds. 

Well, if you want to keep the surplus in HI, let’s just say we are 

not going to pay for hospitals. Let’s put that over in general revenues, and then we keep the HI surplus. Or let’s say all the hospitals west of the Mississippi. It made about as much sense as we 

did on home health. It is just a paper accounting gimmick. 

Medicare is paid for by a payroll tax, and it is a big payroll tax. 

It is an enormous payroll tax because of the tax increase passed 

by Bill Clinton and the Democrats in 1993 to make it 2.9 percent 

on all income. It used to be based on Social Security base, and now 

it is on all income. 

You mentioned Tiger Woods. He pays a lot of Medicare. 

Somebody just signed a contract with the Capitals. He is going 

to make $21 million. That is $10 million a year, $10 million a year, 

they are paying $290,000 in Medicare tax. That is a lot of tax. 

So Medicare taxes have gone up, and actually, in spite of the fact 

that Medicare taxes have gone up, the total Medicare payments exceed the taxes coming in. So I do not think it makes a lot of sense. 

We can rewrite the language and say, well, this does not go into 

the—this is not paid for by the trust fund, certain items, and, 

therefore, the trust fund is made solvent. That is what President 

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Clinton did. It makes no sense. That is a paper accounting and 

maybe if it makes politicians feel good, I think so be it. But it does 

not really work. 

I could go on a little bit. I just think ‘‘It is the economy, Stupid.’’ 

The economy’s growth went down to 1 percent, and it was forecast 

by the Clinton administration, it was forecast by others to be at 3 

or 4 percent. And it is our responsibility to do what we can to see 

if we cannot get it back up. And let’s try to do that. And can we 

do it? And I happen to think some changes in policy like capital 

gains reduction, permanent tax cuts, maybe some realistic depreciation schedules would help us do that. I would like to see us do 

that. But I think worshipping at this, trying to protect the $28 billion trust fund that some people are talking about is just a paper 

accounting gimmick that is not real budgeting. So I would just 

make that comment. 

Mr. DANIELS. If I may respond just briefly, Senator, I do not tend 

to associate with that view. To me, there are some very mystifying 

things about the way that Washington has looked at this question—and maybe it helps to be a man from Mars who did not live 

here over these last years. 

For instance, we start with the fact that Medicare is not in surplus, but moving beyond that, I ask myself why this particular surplus achieves sacred status. What about the military retirement 

surplus, the trust fund? What about the Civil Service retirement 

Trust Fund? We have 114 that I can count trust funds in the Federal Government; why are those less important? The answer is 

they are not. We are equally devoted to our civil servants’ security, 

to our military retirees’ security, but we have not arbitrarily said 

that we would add that to every year’s surplus. And if we did, what 

would be the effect? The same as happens now—we would take 

that amount and send it—to whom—to bondholders. 

The implication of some sides to this debate is that instead of 

sharing some of the surplus with the taxpayers at-large in order 

that we might have surpluses in the future, we should have sent 

it to bondholders instead. Who are these people, incidentally? It is 

interesting to me. Thirty-six percent are foreign banks and foreign 

holders. Of the Americans who own these bonds, the famous top 1 

percent own 43 percent. The top 10 percent by income own 86 percent. 

Why it would be better policy to send the amount of Medicare 

Part A to those bondholders here and abroad as opposed to leaving 

that money with the taxpayers who paid it in the interest of a 

stronger economy is, to say the least, unclear. 

Senator NICKLES. I appreciate that. 

I was going to make just one other comment, because I know my 

time is almost up, and that deals with Social Security. I think it 

is a little regressive to say we are going to take the surplus in Social Security and use it just for debt retirement. I would much prefer taking that surplus in Social Security and putting in personal 

savings accounts where individuals own it and control it and invest 

it than to have a regressive tax used as our primary vehicle for 

debt reduction. 

Thank you, Mr. Chairman. 

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Chairman CONRAD. Senator, maybe I could just show you a statement made by Senator Domenici 3 years ago on the question of 

Medicare surpluses——

Senator GRAMM. Mr. Chairman, how many times are you going 

to get to speak before anybody else gets to speak? 

Chairman CONRAD. Everybody is getting a chance to speak, Senator. 

Senator GRAMM. Well, this is the fifth time you have spoken. I 

have not spoken. 

Chairman CONRAD. You will get your chance just as everybody 

does. As you know, the chairman has a right to answer questions 

that are raised as we go forward, and just as Senator Domenici did 

when he was chairman, I will exercise that same prerogative. 

This is what Senator Domenici said 3 years ago: ‘‘For every dollar you divert to some other program, you are hastening the day 

when Medicare falls into bankruptcy, and you are making it more 

and more difficult to solve the Medicare problem in a permanent 

manner into the next millennium.’’

Senator Domenici was right then and was right to have made 

that point. The idea that there are no surpluses in Medicare is contradicted by the reports of the Office of Management and Budget, 

or contradicted by the reports of the Congressional Budget Office. 

They report clearly that we have a surplus in Part A, we have 

rough balance in Part B, and that in fact——

Senator NICKLES. Mr. Chairman——

Chairman CONRAD [continuing]. Let me conclude—Part A is financed by payroll taxes. That is in surplus. Part B, by Congressional action, is financed by 25 percent coming from those who pay 

premiums, 75 percent from the general fund. 

And if we follow the logical argument of our colleagues on the 

other side who are saying there is too little money in Medicare, the 

obvious conclusion is that you would need to save more, not save 

less; and yet what they are suggesting is to save less, which makes 

no earthly sense that I can see. 

Senator HOLLINGS. Senator HOLLINGS. Mr. Daniels, let me first establish some bona 

fides with respect to truth-in-budgeting. Senator Gramm and I 

back in 1985 established just that, a budget process whereby the 

amount appropriated had to conform to the amount of the budget 

resolution. Otherwise, we said it is a request to cut right straight 

across the board. And it was sold on the idea of truth-in-budgeting, 

and very, very, importantly, it was bipartisan. 

I worked the Democratic side because the Democratic majority 

leader, the Democratic whip, and the Democratic chairman of this 

Budget Committee opposed that initiative. Yet we got the majority 

of Democrats up and down on 14 successive votes. 

So we had truth-in-budgeting. And now I am here this morning 

listening to these statements. First, I did not think you would have 

the gall to use the word ‘‘surplus’’—you did not use it in your statement, but in the newspaper here just on Monday, along with your 

picture, it says ‘‘The surplus has declined from being gigantic to 

mainly immense.’’

Then, I heard you say ‘‘enormous surplus’’ and ‘‘preserve the surplus’’ and the ‘‘remarkably strong shape’’ that we are in. And then, 

154

I see where you say ‘‘I can report that we see continued large surpluses for all the years in the budget horizon’’; and then, ‘‘massive 

surpluses’’: and then, to the extreme, you say ‘‘It is dangerous to 

use the word ’deficit’.’’

Well, let us go to your report. Here is your budget, given just a 

couple of months ago, on page 241, and you show that the total 

gross Federal debt goes from $5.6 trillion to $7.1 trillion, or up $1.5 

trillion. That is page 241 of your document, showing the debt increasing. 

You use the expression, too, that the surpluses are used ‘‘to reduce the debt.’’ No. Not under Director Daniels’ document. All of 

the so-called off-budget surpluses, Social Security, Medicare, military retirees, and so on, are computed, and still the gross Federal 

debt goes up. The debt has not been going down in the last few 

months; it has been going up. We had it going down for 8 years, 

and they say they got it in shape. We fought for those votes, and 

we could not get a single Republican vote. 

And yes, we raised taxes. We taxed Social Security; we taxed 

gasoline; we cut the size of Government over 300,000 slots, and we 

cut spending over $380 billion. And we had a good 8-year slide—

do not run back around when they started this tax cut nonsense, 

to have the audacity to cut $74 billion out of revenues and say it 

has no effect. Well, look at the effect it is already having. 

Now, here we go. ‘‘The Debt to the Penny.’’ I want you to look 

this up on your computer. You ought to get in step with the Treasurer of the United States. Under law, he publishes this regularly, 

and it is put on the internet. The debt to the penny has gone up 

since the beginning of the fiscal year $36 billion. 

You say it is dangerous to use the word ‘‘deficit’’; I am saying it 

is dangerous to use the word ‘‘surplus’’. I cannot find any surplus. 

I cannot find any in the actual fact, in the actual document. 

Now there is a game played, and I understand that game, because I have watched it over here on both sides and in the Congress. It says the debt held by the public has gone down $136 billion, but the debt held by the Government has gone up $173 someodd billion, so it comes out to a $36 billion increase in the debt. 

So that counting all the so-called surpluses that we have had a 

yin-yang about up here, whether it is there or it is not there or 

whatever it is, I can tell you the Treasury has spent every bit of 

it and still comes up with an increase in the debt. 

Specifically with respect to Social Security, I am worried about 

your credibility. We had a knock-down, drag-out a little over 10 

years ago, and this committee voted 19-to–1 to put Social Security 

off-budget. We said that under law. It was later signed into law on 

November 5, 1990 by George Walker Herbert Bush. Section 13.301 

said that you could not use—that is you, the executive, the President could not—and the Congress could not use Social Security in 

citing their budgets. 

And you have already seen by this particular figure here that if 

it is $173 billion, the Government debt has gone up, and you have 

already gotten into Social Security as of the 11th of July or whatever today is. And we are talking about what may happen next 

year and what may happen later this year and so on. And has the 

director of the budget come forward to say it is dangerous to use 

155

the word ‘‘deficit’’ when I cannot see any surplus—of course, like 

with two credit cards, you can use your Master Card to pay off your 

VISA, but you still have the same debt. You can play games with 

the American public over this on TV, because they do not understand it, and they have already turned off this program and gone 

to something else, hopefully. 

But in any event, that is a good one to make a record and keep 

talking about the word ‘‘surplus,’’ but all of these surpluses have 

been expended. That is what the Greenspan Commission said on 

Social Security, for example. It is section 21. Look at it back in 

1983—put Social Security off-budget. It was my amendment, and 

I had to fight from 1983 to 1990; it was a 7-year fight, but we finally got it into law, and now we have the director of the budget 

coming up here, talking surpluses. 

And let us talk about taxes——

Chairman CONRAD. Senator, could I just remind the Senator——

Senator HOLLINGS. Let me use some of your time as a former 

chairman, Mr. Chairman. [Laughter.] 

Chairman CONRAD. Let me just say——

Senator HOLLINGS. Let me just complete the thought, and I can 

complete it very quickly and have the gentleman comment. 

With respect to taxes, I was here when we balanced the budget 

last. We paid our way. That is all that I am worried about. We are 

not paying for the Government we spend for, and we are not paying. I was there under President Johnson when the interest cost 

was only $16 billion; it is now $366 billion. That is $350 billion interest taxes. For a sales tax, I get a school; for gas tax, I get a highway; for interest taxes, I get absolutely nothing. And you are talking about this budget being in good shape, when we find that we 

have already gone into the red? 

I would appreciate your comment. 

Mr. DANIELS. I appreciate your question, Senator, and we all recall well your leadership over the years, from the eighties on, in 

pursuit of greater fiscal discipline. 

Once again this morning, you have directed our attention to the 

difference between outstanding debt and the so-called total debt. 

The total debt, which by every other budget convention is not 

viewed as the operative measure of surplus or deficit, as opposed 

to our annual intakes and outflows, but it has a very important 

purpose, and it is important that you frequently bring our attention 

back to it. That purpose is that it reminds us of the currently unfunded promises that the Nation has made, principally in the area 

of Social Security and Medicare, and it is why, for instance, this 

very morning, the President is at the White House urging fundamental Medicare reform. Later, he will be urging fundamental Social Security reform. 

We cannot tax our way to those promises. It will be impossible. 

We need reform to do it, and we need to act quickly so that that 

reform can be timely and moderate in its form. 

And when I say, as I have on some occasions, that to talk in a 

different context of a Medicare surplus as ‘‘dangerous,’’ my principal reason is that I believe that deluding ourselves that Medicare 

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5 CHART NOT AVAILABLE AT PRESS TIME. 

crastination. It is an invitation to put off for years the reforms 

which are fundamentally needed now. 

I will put up just once more for the record a chart that documents more or less what Senator Nickles brought to our attention 

earlier. This is the 10-year outlook for Medicare. Medicare was always designed to draw on the general revenues. This should come 

as no surprise to anybody, but I think it does——5

Senator HOLLINGS. Mr. Chairman, I know my time is up, but I 

never asked you about Medicare. I asked you about the overall 

debt. Is it up or down? Is it in surplus or in deficit? 

Mr. DANIELS. The national debt, on which we pay interest—and 

incidentally, thank you for pointing out the burden of interest 

taxes—that is coming down, and that interest cost that you talked 

about is dropping very quickly. It is one of the things that will help 

us to keep a surplus in years ahead. 

The total debt, which measures our actual outstanding debt plus 

our unfunded promises, remains very high and has even crept up. 

That is not an argument to further punish a struggling economy 

with taxes. Quite the contrary—it is an argument to strengthen 

that economy any way we can and to reform the programs that 

need to stand behind those promises. 

Chairman CONRAD. Senator Gramm. 

Senator GRAMM. Thank you, Mr. Chairman. 

Senator DOMENICI. Senator Gramm, would you give me just 1 

minute? 

Senator GRAMM. Sure. It is your time. 

Senator DOMENICI. I do not know how much longer we will have 

the Senators who are here, but since my chairman used a second 

time through to respond, I want to just take a minute to say that 

if you asked me to summarize why we are here and what we ought 

to be doing, we are here because the economy of the United States 

needs to recover more rapidly and stronger—or, putting it another 

way, we are here because the American economy is faltering. There 

are a lot of reasons—no growth in the world—there are plenty of 

reasons. But the truth of the matter is we ought to be using our 

talent to figure out what we can do to help the recovery grow and 

to do the most for its acceleration and for prosperity. 

I believe the most important issue going is to keep the tax cuts 

in place and maybe to even look at some other tax cut that might 

generate growth. We could have put a chart up here that assumed 

the economics from the budget resolution and those that may be occurring now, and all the difference that we are talking about here 

is the difference in those two numbers—growth predicted and 

growth actual. There would be nothing else different in them. 

So what are we going to do? Are we going to increase taxes to 

do it? Frankly, I think that that is what we should be looking at, 

and I urge that the committee look at it seriously. 

Chairman CONRAD. Senator Gramm. 

Senator GRAMM. Mr. Chairman, thank you. 

First of all, let me congratulate you. You are the only living 

Democrat who has ever presided over the Budget Committee when 

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plus and every penny of the Medicare surplus as you define it. 

That is quite a distinction, and I congratulate you. 

My concern, however, in listening to you is that that is all about 

to change; that every word that you have spoken since you have 

become chairman has been that this is all about change, and we 

are about to spend these things. 

I took the chart that you used the other day on the floor and 

tried to figure out why all this is happening. First of all, you assume a recession and an economic downturn, and we may be in 

one. We will know when we collect the data, and the distinguished 

head of the OMB will tell us his estimate, and the CBO director 

will tell us his. But first, you assume a downturn. We do not have 

a firm fix on it yet. 

Second, you make the extraordinary decision that when we are 

in the midst of providing prescription drugs for seniors, we can use 

any funding source in the world except Medicare; that we have got 

to use every penny of Medicare to pay bondholders, and we cannot 

use any Medicare funding to fund Medicare benefits. 

Now, you will have a hard time explaining to my 88-year-old 

mother why some rich bondholder in Zurich deserves her Medicare 

funds more than she deserves them in prescription drugs. 

But the most startling thing you assume is one of the most massive spending sprees in American history. When you come down 

here to your other assumptions—and notice this says ‘‘possible 

long-term’’ scenarios by Senator Conrad—you then have a list that 

adds up to the whopping total of $1.089 trillion of new uses of 

money that are not in the budget that Senator Domenici presided 

over. 

So that obviously, if you assume a downturn, and you assume a 

new use of $1.089 trillion, you can create one hell of a deficit problem no matter how big the current surplus is. 

I would say that first of all, I urge the chairman to use his unilateral power to just say no. The chairman controls unilaterally 

about $450 billion plus, and by simply saying no, he can stop it 

from being used. And I urge him, if he really believes that, given 

the state of the American economy, paying down more debt is more 

important, I urge him to use that unilateral power. 

Second, if we are really concerned about the level of debt reduction, I cannot understand why we would conduct a policy that 

would use another $1.089 trillion of it. I am afraid that what I 

keep hearing underneath all of this good rhetoric about trust funds 

is that we need smaller tax cuts, and we need more spending. 

It seems to me that in the end, that is the policy that is being 

proposed, and it is an intellectually honest proposal—I just do not 

think people support it in America—but it is something that we are 

going to get to debate. 

Finally, before I run out of time, let me make a point about these 

so-called trust funds. It is the cruelest hoax ever perpetrated to say 

that somehow, we are protecting Social Security money for Social 

Security. Everybody knows it is not true. Not one penny of this surplus has gone to help Social Security—not one penny. Not one 

penny of it has gone to any use that will help us pay benefits in 

the future. 

158

In fact, I have a quote here from Bill Clinton explaining why 

these phony IOUs in West Virginia do not pay benefits, and he 

sums up by saying that, basically, these IOUs ‘‘do not have any impact on the Government’s ability to pay benefits.’’

The cruel hoax is that we are stealing every penny of Social Security surplus, and if you believe there is a Medicare surplus, every 

penny of Medicare surplus to pay down debt, but not the debt of 

Social Security and not the debt of Medicare—the debt of the Federal Government. Is that not pilfery? I say it is. 

What should we be doing? We should be taking that surplus and 

investing it in the name of the people who pay into these programs 

so that we have assets to pay benefits in the future. But it is a 

cruel hoax to claim that by just paying down debt, we somehow 

have the ability to pay claims in the future. 

Let me ask in my final moments here, Director Daniels, the following question. First of all, I assume you believe that, given the 

knowledge we had when we wrote the budget, our decision to follow 

Senator Hollings’ proposal initially to move the tax cut into the 

present was a good decision economically. 

Mr. DANIELS. Oh, yes, sir. 

Senator GRAMM. In fact I would be willing to say—I do not know 

whether you would be—that if I believed—and I may very well believe; the chairman may be right—that we are facing a slowdown 

where we are going to have a bigger revenue shortfall than we anticipated, I would think had I known that that I would have cut 

taxes more, not less. 

Would you have followed that same approach? 

Mr. DANIELS. One can certainly say that the risk that should 

most concern us all and, really, the only risk to our long-term positive surplus, positive fiscal picture, is a prolonged economic downturn. So all measures that might combat that ought to be considered, and in my testimony, I suggest that that is really what 

should absorb us here today. 

Senator Hollings is probably right—anyone so bereft of something better to do than to watch this hearing on television may 

have switched it off by now. 

Senator GRAMM. I hope not. 

Mr. DANIELS. If they did, it might be because we have spent an 

awful lot of time talking about abstractions like surpluses and so 

forth and not enough time talking about jobs and income and the 

economic growth that I think Americans are looking to us all to foster. And that economic growth and that alone gives us a chance to 

enjoy these surpluses in the future and debate how to use them. 

Senator GRAMM. Well, Mr. Chairman, let me say that I intend 

to support you in your effort to control spending. When you raise 

points of order against things that bust the budget—and I assume 

you will do it if people propose to spend more than $300 billion in 

Medicare—count on my support. But I think that when we tell people that we are going to protect all these surpluses, we had better 

be ready to do it, and I think the obvious next question is what are 

we going to do to fix these problems. And I am eager to work with 

you. 

Chairman CONRAD. I thank the Senator. 

I would ask the Senator from Michigan for a minute of her time. 

159

Senator STABENOW. I would be happy to yield. 

Chairman CONRAD. The Senator from Texas holds up one of my 

charts but misrepresents it. This chart shows that we are already 

into the trust funds in the next 4 years only based on the spending 

in the budget resolution written and passed by our colleagues on 

that side of the aisle and with the tax cut and with modest assumptions about the effect of the economic downturn. That is before any additional spending, before any appropriations bills have 

passed; just based on the assumptions of the spending that our Republican colleagues voted for.

Senator GRAMM. What about——

Chairman CONRAD. Let me complete. I did not interrupt the Senator. 

Senator GRAMM. All right. You are right. 

Chairman CONRAD. Then, the Senator adds up a number of other 

items and talks about the trillion dollars of spending and says that 

that is the Senator from North Dakota’s proposal, the Budget Committee chairman’s proposal. This is not my proposal. 

The first item is the Bush defense request. They have asked for $18 billion in 2002 that is not in the budget that would come out 

of the trust funds. That is the question that is being raised here. 

Does that make sense? Is that the way we ought to pay for additional funding for defense? 

The second item is education spending. It is not in the budget, 

but we passed on the Senate floor by an almost unanimous vote an 

authorization for more than $300 billion of new money. It is not in 

the budget. How should it be funded? Should that come out of the 

trust funds? I do not think so. 

The third item is natural disasters. It is not provided for in the budget, but typically, we fund $5 to $6 billion a year for natural 

disasters. Should that come out of the trust funds? I do not think 

so. But that is what we are poised to do. 

The fourth item is the extension of popular expiring tax provisions. Those are tax cuts. It is not a spending item. It is a tax cut. 

It is not in the budget. If we do that, where is the money going 

to come from? Is it going to come out of the trust funds? I do not 

think it should. 

The next item is fixing the alternative minimum tax. That is not 

a spending program. That is to keep people from paying more in 

taxes who are about to find they are in for a big surprise. They are 

going to have their taxes increase. We are going to go to 35 million 

people in this country caught up in the alternative minimum tax, 

and it will cost $200 billion to fix it. 


95488.317
160

Finally, economic revisions. That is not spending. That is a reduction in revenue because of a weakening economy. 

The fact is that if you put it all together and add it up, you see 

that you are deeply into the Medicare Trust Fund—in fact, you 

eliminate it—and you are deeply into the Social Security Trust 

Fund. And the result of doing that is that you hasten the insolvency of those funds. They go broke sooner. 

Now, some apparently do not care about that, but I do. I think 

it really matters to real people. That is the question. The question 

is are we going to do something looking ahead, not in a time of economic slowdown, but at a time when the administration forecasts 

and projects strong economic growth. Are we going to fund other 

programs of the Federal Government out of the trust funds? I do 

not favor it. 

The Senator from Michigan. 

Senator STABENOW. Thank you, Mr. Chairman. 

First, Director Daniels, we appreciate your coming before the 

committee again. 

Mr. DANIELS. Thank you, Senator. 

Senator STABENOW. I appreciate your service, and——

Senator DOMENICI. Would the Senator from Michigan yield for 30 

seconds? 

Senator STABENOW. I would be pleased to do so. 

Senator DOMENICI. I want to say, Mr. Chairman, that Senator 

Bond obviously is next on our side—he is the only one left—and I 

am going to turn the meeting over to him at this point, and he will 

sit here until he is finished and for perhaps as long as you all are 

going to take. 

I thank you for the hearing. I wish we could go through an alternative set of projections, but we will do that the next time you have 

a meeting and show the public why we are where we are. There 

is just no question that the economy is not growing, and anybody 

who says it is anything else is just deceiving the American people. 

With that, I thank you very, very much. 

Chairman CONRAD. Thank you. I do not think anybody is trying 

to deceive anyone. The fact is the weakening economy is absolutely 

a part of it. 

There are three parts. There is the budget resolution that was 

passed, the spending that is contained in that. That was written 

and passed by our friends on the other side of the aisle. 

There is the tax cut that was primarily supported by those on 

the other side of the aisle, and there is the weakening economy. 

Those are the reasons. It is the three of them working together 

that we have a difficulty. 

The Senator FROM MICHIGAN. 

Senator STABENOW. Thank you, Mr. Chairman. 

Obviously, Director Daniels, this is a very important topic for all 

of us. We all feel very strongly about how we proceed for the country. We appreciate your service. I have a different perspective than 

you do, but I think we all care very deeply about making the right 

choices. 

I have a couple of questions for you this morning. First, to followup on the chairman. He listed items not included in the budget 

resolution but ones that we assume will be reported by the adminVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00166 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
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istration, in fact, some put forward by the administration. I would 

ask if you would respond to the chairman’s list, if there are items 

that you disagree with—the President’s defense request, education 

spending, natural disasters, the extensions like the R and D tax 

credit, fixing the AMT, possible economic revisions or interest. Are 

there areas where you would disagree with what the chairman has 

indicated will be additions to the budget? 

Mr. DANIELS. Not in large part, Senator, but I think this illuminates a very important point. There is a reason why those items 

are there; the Congress voted to project these possible increases 

into the future, and that is because most of them represent new 

needs of the country. 

I think the single biggest quarrel I would have with the approach 

that the chairman laid out, the single biggest dubious assumption—or, to me, challengeable assumption—is that the starting 

point is sacrosanct—almost $2 trillion of spending that it will trundle on and in fact grow with inflation, unchallenged, uncorrected, 

and no redeployment to these new purposes. 

This is something that we must all work on very hard together. 

Again, I salute the chairman’s repeated point that it would be folly 

to raise taxes at a time when our biggest problem is a sputtering 

economy. And if we turn our attention, then, to the spending side, 

our common goal ought to be to make room for these items, as 

many of them as can be accommodated, by working harder on the 

embedded base of spending, much of which is encrusted with obsolete, nonperforming, duplicative programs. 

I am sorry, just one last point which I hope is responsive. Nothing is more discretionary in the hands of the Congress and this 

committee than spending the taxpayer’s dollar. As I pointed our 

earlier, if anyone here had been so prescient just 7 months ago to 

be worried about these subjects, there was a remedy at hand. Congress did not have to increase spending by the biggest amount in 

national history—$57 billion. If that growth had only been—pick a 

number—half that size, we would not have this concern this morning. 

So we always have it in our power to make choices that enable 

us to do those new things the Nation needs and still preserve economic growth and fiscal integrity. 

Senator STABENOW. We certainly understand and agree that we 

have choices. I was proud to be here in 1997 when we balanced the 

budget for the first time in many, many years—many decades, actually—and actually have reduced spending as well as taxes overall. I think that that has been very positive and has, frankly, been 

the basis for the economic growth, paying down the debt, and 

bringing interest rates down. 

I will look forward to your offsets. If you are assuming that the 

items the chairman has listed will have offsets in terms of cuts in 

other parts of the budget, we certainly will look forward to your 

recommendations equalling these areas in terms of cuts. 

I have two other points. First, with all due respect, I could not 

disagree more with the notion now of changing what is an over 30-

year policy of designating a Medicare Trust Fund. As we all know, 

Medicare was put in place in 1965. Since that time, at least on a 

yearly basis, there have been reports that have been reported every 

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year to the Congress about the solvency of the Medicare Trust 

Fund. 

I was quite interested that my good friend from Texas now calls 

what is an over 30-year policy of Medicare Trust Fund Part A a 

‘‘cruel hoax.’’ It is interesting to have changed that policy. We have 

had many Presidents; they all talked about the Medicare Part A 

Trust Fund over that 30-year period, and I do not believe any of 

them, Republican or Democrat, believed that they were perpetrating a ‘‘hoax’’ on the American people. 

But now, we find a difference. Rather than putting forward what 

we would like to see, which is protecting Medicare and Social Security and using it only for debt reduction, which strengthens the 

economy and guarantees we then have the capacity in a stronger 

way to be able to meet those obligations, we have seen since the 

beginning of this year the President’s budget come forward and 

talk about Social Security but not Medicare. And I have been deeply concerned that when we looked at the initial budget, it showed 

Medicare basically being transferred into a contingency fund and 

spent on other things—not on debt reduction but on things other 

than Medicare. 

I would also suggest that the Medicare Trust Fund—we certainly 

have many trust funds in the Federal Government, but I am not 

sure there is any that will see such an explosion of costs or people 

coming into it and obligations being incurred in 2011, just 10 years 

away, when we know that those of us baby boomers and other will 

be retiring. We have major commitments and a promise that was 

made to the American people regarding Medicare and the funds 

being available. So we will have great pressure. And if anything, 

with all due respect, your chart shows the deficit if you add Part 

A and Part B. I would suggest that if that is the case and we believe in Medicare and having those services available, the approach 

should be to add to Medicare, not to take away from Medicare. 

When you have a deficit, you do not further create a deficit, which 

is what is happening. Under all the numbers that I have seen, we 

see a dramatic, dramatic moving up of that insolvency date of Part 

A under the plans that we have talked about. 

So I could not disagree more with this approach, and I would just 

ask my question now, which is this. Given all of this debate, how 

at this point would you react to a notion that Senator Evan Bayh 

and Olympia Snowe and myself and others put forward on the Senate floor of an economic trigger that guarantees we do not dip into 

Medicare and Social Security, that we maintain our deficit reduction targets as we proceed with tax reductions or spending. 

It seems to me that an idea that got 49 votes on the Senate floor, 

Mr. Chairman, for some kind of economic trigger and protection 

should be resurrected at this point given the threats to Social Security and Medicare. So I would like to know if the director would 

support us revisiting that issue. 

Mr. DANIELS. Thank you, Senator. 

Let me get to that question by touching on a couple of the other 

points you made. 

I think our starting point here is one of I suppose unanimous 

agreement that Medicare is a sacred trust; that again this year and 

every year that President Bush is here, every penny of Medicare 

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benefits will be delivered, every penny collected for Medicare will 

be spent on Medicare, and of course, in this year, $54 billion more 

from the general taxpayer. So that there, we have total agreement. 

And in fact, this morning, the President is proposing long-term 

Medicare reform which would lead to greater solvency and to better 

health care, most importantly, for today’s and tomorrow’s beneficiaries. 

I think that where we part company is on the notion which sooner or later, I guess I am going to have to read from Rob 

Samuelson’s column where he called this ‘‘Orwellian’’ and talked 

about the image of raids on the trust funds is false, stated bluntly 

for the record that Medicare spending now exceeds Medicare taxes, 

the trust fund covers only 57 percent of Medicare’s total. I really 

think this ought to end this rather curious argument that has gone 

on. 

So the point—and I know it is sincerely held—about fencing off 

this arbitrary amount of Medicare Part A—as I pointed out, why 

not make the same argument for military retirement, civil service 

retirement, any of a number of other important trust funds—those 

funds, of course, we all know do not go into a bank account somewhere. When we choose to fence them off, we send them to bondholders, and we pay down a little bit more debt than we would 

have otherwise. 

And here, I would simply plead for a common search for balance 

in our policies. The President has strongly committed himself to 

steady debt reduction, and as I mentioned in my testimony, we are 

really here talking about the difference this year—shall we devote 

about 8 percent or about 9 percent of $2 trillion of revenue to this 

year’s debt reduction—but debt reduction at all costs as a priority 

above and beyond all others can be very self-defeating. If it prevents economic recovery, we will have shortfalls in future surpluses 

that you will never be able to tax your way out of. 

Senator STABENOW. Let me just correct—no one is suggesting 

debt reduction at all costs. 

Mr. DANIELS. All right, but the notion that we would withdraw 

even more money from the economy at a time when it is in a very 

slow growth mode I think may be well-intentioned but would be 

economic folly. I have characterized this as ‘‘medieval medicine’’ 

where, if the patient was not doing well, we bled him a little more. 

So——

Senator STABENOW. Let me just add one other thing. When 

Chairman Greenspan sat in that chair, he disagreed with the 

amount of debt reduction that you believe can be made quite substantially. His numbers were much more in line with what we are 

talking about in terms of Medicare and Social Security. So there 

is a real difference; there is an honest difference. This is not ‘‘medieval’’—well, you can talk to the chairman about that—but the 

fact is that we heard several different numbers on debt reduction, 

including——

Mr. DANIELS. Actually, Senator, to correct the record, the numbers are all quite close. Now they are closer than before between 

OMB and CBO. And Secretary Greenspan submitted a further letter documenting that he was not talking about the complete 

amount that was, as we would say, unredeemable. But I would be 

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happy to supply that for the record. The estimates are all really 

quite close and leave totally intact the notion that we can do as 

much as is practical—which I think we all agree we should try to 

do—and still have ample funds in search of a purpose. There is 

where we will debate. You might want to spend them; we might 

want to invest them on behalf of a stronger Social Security system 

or perhaps leave them with taxpayers. There is where our honest 

differences will lie. 

Chairman CONRAD. Senator Bond. 

Senator BOND. Thank you very much, Mr. Chairman. 

Welcome, Director Daniels. 

Mr. Chairman, it is a true pleasure to be here in this exciting 

hearing. We only hope that the American public have not turned 

off their television sets now, because there are some very important 

issues being debated here. 

Director Daniels, I recall when Chairman Greenspan was here 

earlier this year, he said that it was very unusual for him that it 

was time for tax reduction along with debt reduction, and I believe 

he made that point very clearly. 

Frankly, it is just in time that we had tax reduction. The economic slowdown that began last fall, the fall of 2000, has gotten 

worse. The markets forecasted in March of 2000; the economy 

started last fall to turn down; and the real bright spot is consumer 

spending. The tax relief that is going out this month is perhaps the 

best measure or the best stimulus to keep the economy growing, 

and I hope that it can help consumers jump-start the rest of the 

economy as well. 

For the first time in recent memory, or that I can recall, we have 

a tax cut which is appropriately timed to serve as fiscal stimulus. 

I have been very leery of saying that we can use tax cuts as 

counter-cyclical, but lo and behold, due to perhaps great foresight—

and I would commend the distinguished former chairman of the 

committee, the Senator from South Carolina, who was very, very 

insistent over the past few months when we passed the budget to 

say we need to give money back to the American people. He was 

saying that, I believe, in February, and it turns out he was right. 

For the rest of us, it may have just been dumb luck. But we have 

in place rebate checks that are going back to people who need them 

now, who can invest them or spend them to reduce debt. 

I think the very worst thing we could do would be to raise taxes 

now. You are talking about a trigger that would raise taxes when 

we go into an economic downturn—probably the worst idea since 

the significant revenue increases of 1932 that helped take an economic downturn or recession into a Great Depression. 

So to say that we should trigger tax increases because the economy is slowing down even under Keynesian terms makes no sense. 

And fortunately, a strong bipartisan majority of the Senate agrees. 

On Tuesday, we had a very enlightening vote on the amendment 

by the Senator from South Carolina to do away with tax rebates, 

and I am very pleased to have been one of the 94 Senators, along 

with our chairman and ranking member, who said do not stick it 

to the consumers, do not give them the jolt this year. And the Senate has spoken loudly and forcefully on the need for the stimulus 

provided by the tax package. 

165

Now, it is true the stimulus has not worked yet. The economy is 

still sputtering, and in the meantime, some back-of-the-envelope 

calculations are getting members worried about the budget picture. 

There is no formal re-estimate yet, no formal midyear review, but 

people scribbling on the backs of envelopes. No one has actually 

thought through all the pluses and minuses that would figure into 

budget baseline, but these back-of-the-envelope scribblings really 

should be taken with a grain of salt—or perhaps I might say a dose 

of salt—until a proper re-estimate has been done taking account of 

all the relevant factors. 

Most important, we should not panic when we have not seen the 

results of the tax stimulus. We knew when we passed the tax bill 

that there would be a lag time before the provisions were implemented, the new tax withholding tables were calculated, rebate 

checks are just being mailed out, and, as 94 Senators said, we 

ought to stay the course, because the main threat—the main 

threat—to our ability to meet our commitments to Medicare and to 

Social Security in the future is the sagging economy right now. 

I will not go back and rehearse the economic lesson given to us 

by the Senator from Texas; I would commend it to my colleagues 

to read it and learn from it. But I would like to do something different in this Q and A session and ask you a couple of questions, 

Mr. Director. 

Mr. DANIELS. I can adapt to that. 

Senator BOND. Have you made a formal re-estimate of the surplus? Are there any official new figures on the OMB numbers for 

the current year? 

Mr. DANIELS. No, I am sorry, there are not. We are working on 

them, and later this summer, probably in the next month, we 

should be able to do that. 

Senator BOND. So that basically,w e are looking at numbers 

scribbled on the backs of envelopes. Mr. Lindsay scribbled some 

numbers on the back of an envelope. We have two envelopes or 

more with numbers scribbled on them, and we have had a committee hearing on this. Is it fair to call this the hearing on the two 

envelopes? 

Mr. DANIELS. I will let you characterize our purpose here today, 

but I for one appreciate the chairman getting us together, as we 

probably should occasionally, to review what is always going to be 

a shifting picture. 

Senator BOND. I always look forward to getting together with our 

distinguished chairman and you, Mr. Director. 

Let us talk about reserve funds. I understand that reserve funds 

are not really money in the bank ready to spend. These are reserve 

funds—and I would like your comment—that the chairman has the 

right to release. All of these deficits assume that all these funds, 

some $442 billion, could be released. But as I see the Budget Act, 

it says ‘‘The chairman of the committee may revise committee allocations to the committee,’’ and under Part B, it says ‘‘Legislation 

described in subsection A may not, when taken together with all 

other previously enacted legislation, reduce the on-budget surplus 

below the level of the Medicare hospital insurance trust fund surplus in any fiscal year covered by this resolution.’’

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Therefore, am I correct in my assumption that if my good friend, 

the tremendous deficit hawk, the chairman of the Budget Committee, wants to keep us out of budget deficits with trust funds, all 

that he has to do is refuse to release these funds? Do you understand that that is how it works? 

Mr. DANIELS. Well, I understand the chairman to be a powerful 

person for many reasons, and I guess that is one. Let me just say, 

however, that I hope—and I think we ought to all work together 

to ensure that, to whatever degree the Congress may decide, the 

chairman, with a clear conscience, fiscal conscience, can release 

funds from those reserves in the future and on schedule so that we 

can address Medicare improvements and enhancements like prescription drugs, for instance. 

I would just like to go back to a thought that occurred when I 

was conversing with the Senator from Michigan. We have got to do 

a much better job, it seems to me, of preventing inertia from being 

the enemy of the new. In my years in business, we fought this all 

the time, but it is a much worse phenomenon here. What I mean 

by that is the failure or the inability to rigorously reexamine old 

spending, to treat it as taken for granted, and thereby to penalize 

the opportunities to act on new needs and to constrain them by 

whatever limit we determine is appropriate in terms of future surpluses. 

So again, I hope that especially as we approach the next budget 

year, we can all come to that discussion with a much more open 

mind and much more of a determination to challenge the installed 

base of $1.863 trillion, more or less, of spending and decide what 

of that has served its purpose and can give way to the new needs 

that, for instance, these reserve funds reflect. 

Chairman CONRAD. Senator Corzine, would you yield a minute to 

me? 

Senator CORZINE. Of course. 

Chairman CONRAD. Can I just try to set the record straight, and 

I will use the Senator from Missouri’s chart, because the power of 

the chairman is, unfortunately, badly overstated here.7

The language that the Senator refers to applies to seven of the eight reserve funds. It does not apply to the biggest one. The $300 

billion that is in the prescription drug reserve fund does not have 

the limitation on the Medicare Trust Fund. 

So the fact is that that limitation only applies to seven of the 

eight reserve funds, and the biggest one, it does not apply to at all. 

The other point that I want to make is that I hope our colleagues 

on the other side are not concluding that because the tax cut was 

so large, it prevents us from going forward with the prescription 

drug program that passed the Congress. I do not think that that 

would be the correct result. 

The other point that I think is important to understand is that 

60 votes can overcome whatever the chairman of the Budget Committee determines with respect to any of these reserve funds, and 

that is appropriately so. Frankly, I thought too much power was 

given to the Budget Committee chairman, especially with respect 

to defense; to have one person in this body determine what the 

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number is for defense I think is too great a grant of power to any 

individual. 

We are left with this question. Since our numbers show, given 

the budget resolution, given the tax cut, given the economic slowdown, that we are already into the trust funds, and the administration comes with a request for significant increases in defense 

spending, should that come out of the trust funds? And we are not 

talking about at a time of economic slowdown, because next year, 

the administration is forecasting economic growth, significant economic growth. 

Yet we see that we are being asked to fund a defense request out 

of the Medicare and possibly Social Security Trust Funds. I do not 

think that that is an appropriate financing mechanism. 

I would recognize——

Senator BOND. Mr. Chairman, would the all-powerful chairman 

cede me just 60 seconds to make a parting farewell and give you 

a compliment that I know you will use your massive powers very 

well. 

We strongly disagree on your conclusion that you do not have the 

power to release the $300 billion including Medicare prescription 

drugs. We believe that that is vitally important, and we hope that 

you will exercise your power to do so. We think that your power 

covers all. We recognize there is a 60-vote point of order, and we 

look forward to your wise usage of the huge powers, the immense 

powers, that you have. [Laughter.] 

Chairman CONRAD. I thank the Senator from Missouri, who is a 

good friend and who was part of our Deficit Reduction Caucus for 

many years when we really faced very, very serious challenges. 

Senator BOND. You know, nobody paid us any attention then. 

Chairman CONRAD. No, they did not. 

Senator BOND. And here you are, the chairman. 

Chairman CONRAD. I thank the Senator. 

I want to make clear that I am not suggesting that the chairman of the Budget Committee does not have a role in releasing the $300 

billion in the prescription drug reserve fund. Certainly the Budget 

Committee chairman does. The point I was trying to make is that 

that is not tied to avoiding using the Medicare Trust Fund for that 

purpose. The other seven trust funds are tied to not invading the 

Medicare Trust Fund. 

The Senator from New Jersey, our new member, Senator 

Corzine. 

Senator CORZINE. Mr. Chairman, I am extraordinarily pleased to 

be here and to be able to work with you on what I think are some 

of the most important issues that face our Nation. How we approach a number of these issues, as this discussion today brings 

out, I think is remarkably important for discussion, debate, and 

conclusion about. 

I will move from the true to the sublime here, talking about 

power. Being number 98 on a food chain of 100, I recognize my 

role, but I would like to raise some questions with the director that 

really maybe even call on some of the private sector background 

that you alluded to. 

We talk about trust funds. When one looks out into future years 

with regard to Social Security and the demographic challenge that 

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we have in front of us, there seems to me to be a reason to believe 

that one might want to set aside money for future calls both on Social Security and Medicare, and that we ought to be disciplined 

about that process as we go forward. 

I ask whether there was a defined benefit plan at Eli Lilly or 

some of the other places where we do set aside money and manage 

it for a purpose, and I think that was the thought that has to do 

with the Social Security Trust Fund and Medicare Part A funds. 

We administer a rate, and there can be a good discussion about 

whether you set these aside and invest them cooperatively or 

whether we do it in private accounts, but you accept the idea that 

we ought to be looking ahead to the demands of our trust fund requirements in future years, and I think we got away from that debate here today while we were talking about the economy. 

Second, I would like to ask a few questions about tax cut structure and efficacy. Being an old University of Chicago graduate and 

believing somewhat in the efficiency of markets, that information 

usually gets into the financial bloodstream and makes a judgment 

about things. We just passed a tax cut that I think was signed 

June 7th, 24 trading days in the world of markets; I think we have 

had 8 up days and 16 down days, and we have seen a decline of 

8 percent in the Dow and 11 percent in the NASDAQ. I wonder 

whether the world is making some assessment about the efficacy 

of the tax cut, and particularly the structure. We have talked about 

whether it should have been larger, but it is whether we frontload 

it for purposes of stimulus in current events or whether we are 

talking about backloading it, which is another issue. 

Then, I just have to ask you whether you agreed with the Senator from Texas with regard to paydown of debt, because I was 

troubled when I heard that we are paying off rich bondholders, 

which lowers interest expense for the Federal Government—I think 

it is about 11 percent. That is kind of an important issue, and since 

money is fungible, and we are not borrowing in capital markets, 

isn’t that money often ‘‘redeployed,’’ to use your term, into other effective capital market investments which may be stimulative to the 

economy? So I am concerned about that theory that somehow, 

when we pay off bondholders, we are transferring money to rich 

folks as opposed to maybe having a more efficient capital market 

as we go forward. 

Then, you talked about redeployment on spending and the concept that we are going to have $18 billion of increase in military 

expenditure. You know, part of that $1.9 trillion that you talked 

about does include expenditures in the military budget. Are there 

things that we think we can do there that do financing in the same 

way that, seemingly, we are putting all that pressure into domestic 

discretionary spending? 

I know that was a whole series of issues, but I am concerned 

about purposes of trust funds, actuarial purity, tax cut structure 

and efficacy as reflected in current economic data, debt paydown, 

efficacy. 

Mr. DANIELS. Senator, you may be number 98 on the seniority 

list, but clearly, you are not number 98 in terms of your thoughtfulness about these issues. Those were great questions, and I am 

going to try to treat each of the four that I caught, if I may. 

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First of all, I very much liked the formulation you ended with in 

your first question as opposed to some that I heard at the beginning. At the end, you talked about should we not be looking ahead 

to the obligations that the trust funds represent. I think that that 

is just the way to think about it, because in the first place, these 

are sacred and also massive obligations that at present, we are not 

on a track to fund without ruinous and really unthinkable tax increases. That is a better way to put it——

Senator CORZINE. I did not question that assumption, but you 

understand the logic. 

Mr. DANIELS. Right. But let me certainly associate with the idea 

of looking ahead to obligations which are sitting out there. That is 

the clear-minded way to think about it, as opposed to talking, 

loosely and inaccurately, about ‘‘going into’’ the trust funds as 

though there were a pile of money somewhere. There is nothing but 

a pile of IOUs, as your question really illuminates. And the fact is 

we always have—and this year again, everyone advocates going 

into the trust funds—everyone—the question is for what purpose. 

And some quite sincerely believe we should go into the trust funds 

more deeply to pay off more debt. This leads to sending those funds 

to bondholders as opposed to perhaps taxpayers at-large or perhaps 

through some other program, some actual operational spending 

program of Government. So let us get away from misleading talk 

about into the trust funds, as thought it is not exactly what happens every year by their very nature and structure. 

So that yes, we should look ahead. The President’s recommendation for looking ahead involves fundamental reform of both Medicare and Social Security, and we will have spirited debates about 

those subjects because he is going to put them on the Nation’s 

agenda, and that is where our differences will come. 

But I certainly appreciate your framing the question that way, 

pointing out that today, the trust funds have only IOUs and commitments which we must meet. 

Senator CORZINE. Can I ask a followup question? IOUs, which I 

think are bonds, if I am not mistaken—we may have different interest rates on them, but they are bonds——

Mr. DANIELS. Right. 

Senator CORZINE [continuing]. And they are assets that people do 

use in pension funds. So to use the word ‘‘IOU’’ I think gets away 

from a choice of assets that are held as opposed to the fact that—

I do not know that we need to make a good or bad judgment. You 

might have a different asset allocation, which I think a lot of people are suggesting. 

Mr. DANIELS. Yes. 

Senator CORZINE. But IOUs are just Treasury debt. 

Mr. DANIELS. Fair enough, but nothing stands behind that debt 

except tomorrow’s taxpayers—my kids, yours, and everyone else’s. 

Not to have the Social Security debate here this morning, but the 

President’s proposal will include in some measure a conversion to 

real assets, real earning assets, owned by the taxpayers who are 

paying into Social Security. You asked about the company pension 

funds. They look like that. They do not look like the Social Security 

structure that we have today. 

170

I think it is too soon for us to know how to read the 18 days of 

market return, to what extent did markets anticipate the tax cut 

before its arrival and bake those numbers in; to what extent, if 

any, while we are speculating, does the distant rumble that maybe 

future tax cuts be taken away moderate any positive market reaction, I certainly defer to you in terms of reading the entrails of 

daily market movements. 

I am going to submit for the record, however, a raft of comments 

from market participants and watchers which I find to be virtually 

unanimous in believing this is a positive effect. 

Chairman CONRAD. Mr. Director, if I might, here is our problem. 

We have a vote on, and we are halfway through the vote, and we 

still have Senator Clinton with her questioning period. 

If you could conclude your answers to Senator Corzine quickly, 

perhaps we could get Senator Clinton in before the vote. 

Mr. DANIELS. I think I can name that tune in 60 seconds. 

Chairman CONRAD. Great. 

Mr. DANIELS. Your third question dealt with debt and the interest on it and so forth. It gives me a chance to say that what I think 

we are really here to discuss is a balance among policies. We all 

agree about debt reduction; the question is how much, the amount 

of Social Security, the amount of Social Security plus Part A or 

some different number. I think the President’s proposals represent 

a healthy balance—debt reduction, the second most this year in 

American history, debt reduction as far and as fast as we can; tax 

relief, to strengthen the long-term economy, without which we will 

not have surpluses to debate about; and spending control at reasonable growth levels to protect those first two pillars. 

So I believe that that is a fair balance and one that recognizes 

current economic reality. 

Finally, on the redeployment of spending, yes, I think it is very 

incumbent on the administration and the Congress to search for redeployment of spending in defense. The whole idea of a top-to-bottom review, a strategic rethink that the President commissioned, is 

that much of our embedded base in defense may no longer meet the 

moment. 

I would point out that Congress has got to help here. We struggle 

with earmarks in the Federal budget, and the single biggest pile 

of them is in defense. It is very hard to run a modern, 21st century 

defense when you are hogtied by a million Lilliputian orders to do 

this, that, or the other, which maybe does not fit the strategy. I cite 

the current debate over the B–1 redeployment also as an example 

that inertia is very tough in this area. 

Chairman CONRAD. Senator Clinton. 

Senator CLINTON. Thank you, Mr. Chairman. 

I would like also, if we could, Mr. Chairman, to ask the director 

perhaps to provide some additional written answers to Senator 

Corzine’s questions. I would be very interested in seeing those answers in more detail than the director had the opportunity to provide today. 

We have had a spirited discussion about a number of issues this 

morning. The fact is that we are all going to have to wait and see 

how this plays out. You made a reference earlier to if we had been 

so prescient 7 months ago, we might have known this or that, but 

171

certainly from the perspective of those of us who are concerned 

about balance, we think that we are heading in a dangerously imbalanced direction. You respectfully disagree. We will see how that 

proceeds. 

What I am concerned about is that the references that are constantly made to old spending rarely come with any specifics. And 

again, we do not have the time, but I would like specifics from the 

OMB as to what you are recommending will be cut and the numbers. 

Second, I would like to know whether the administration in part 

of its defense review process includes requirements that the Department of Defense aim toward a clean audit. 

Third, I would like to know with respect to the questions that 

have been raised about new spending exactly what it is that the 

administration is going to be requesting over and above what we 

read about with respect to defense increases. We do not have any 

specific information, and it makes it quite difficult for us to know 

what the tradeoffs the administration is requesting might be. 

Finally, I would like to know whether the director and the top 

people at the OMB have read ‘‘Triumph of Politics,’’ because you 

act as though we are in an area of uncharted terrain, when I think 

that the clearest example of where we are going is where we have 

been. In 1981, when the Reagan tax cut was passed, the top rate 

was 70 percent on non-wage income. We did a good job keeping tax 

rates down. We have just passed a massive and, from my perspective, fiscally irresponsible tax cut that further lowers rates, but the 

bottom line is that in 1981 going forward, I think you could take 

testimony from the Reagan budget people and lay it next to what 

we have been hearing, and you would see a remarkable, startling, 

and to me troubling, similarity. 

I remember witnesses who sat where the director is sitting when 

we were going through our 16 hearings about the budget, saying 

in very clear, unambiguous language that the tax cuts would lead 

to increased surpluses, that we would not risk going back into deficits, and that despite the clear evidence of an economic slowdown, 

the combination of the large tax cuts and the economic slowdown 

would not have the result that many of us, based on past experience, were concerned about. 

So we will look forward to continuing this dialog, and I think the 

bottom line is that this is not an economic debate, this is not a fiscal debate—this is a political debate. The administration has a different view of our political goals and our mission than many of the 

rest of us do as to how we strike the right balance and how we create the right conditions for economic growth. 

And in fact, let me just conclude with a question. To me, the 

greatest missed opportunity of the last 7 months if one could be so 

prescient is that there is no economic plan. There is a tax cut plan. 

The administration, first and foremost, for ideological reasons, has 

proposed and forced through a large, fiscally irresponsible tax cut 

plan. I have no argument with the political philosophy that drove 

that decision, but what is the economic plan that accompanies that 

tax cut? Could you enlighten me, Mr. Director? 

Mr. DANIELS. Yes. Let me respond to several things that you 

said, beginning with the fact that you asked—and I think it is a 

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perfectly appropriate question—we are all actors in the endeavor—

to look for those reductions that could enable greater increases 

today. And I think it was before you arrived, Senator, but I certainly pointed out that the administration proposed billions of dollars of such cuts which have not yet found favor here, and that is 

a good starting point——

Senator CLINTON. Mr. Director, I am going to have to run to vote. 

Would you mind giving us your responses in writing? It would be 

very helpful—because I do want to hear that. 

Mr. DANIELS. Oh, of course, I will. I will be glad to. 

Senator CLINTON. Thank you. 

Chairman CONRAD. Let me close by thanking the director for 

being here. Let me say that I am somewhat disappointed because 

I do not think we really got to the nub of the issue, which is that 

next year, when you are forecasting economic growth, we believe 

the administration will be using both Medicare and perhaps even 

Social Security Trust Fund money to fund other programs of Government, and that is before the very substantial defense request 

that the administration has made. 

And my fundamental question to you—and I would like an answer in writing—is what do you recommend with respect to that 

request by the administration for $18 billion of additional funding 

next year. Do you believe that should be funded out of trust funds 

of Social Security and Medicare? Do you believe it should be paid 

for by spending cuts? Do you believe it should be paid for by additional revenue—or some combination? 

My own belief and what I have told the Secretary of Defense is 

that I will not support, I will not release the reserve funds without 

it being paid for, without it being offset. And I welcome the administration’s recommendation. I do not think that when you are forecasting strong economic growth, that defense increase the administration has made should be funded out of the trust funds of Medicare and Social Security. I think that that is a profound mistake, 

especially in light of where we are headed in the next decade. 

I would like to put up the CBO chart with respect to Medicare. 

I must say that I find very troubling this notion that there is no 

Medicare Trust Fund surplus, because the records of the Congressional Budget Office say very clearly on page 19 of the Budget Outlook, trust fund surplus, Medicare Part A, dramatic, substantial 

surpluses, nearly $400 billion; Part B in rough balance, in fact 

slight surplus over the period.8

The difference here is that Part B is funded by premiums coming 

from beneficiaries of 25 percent, and 75 percent is general fund 

transfer. And to call that general fund transfer a ‘‘deficit’’ I think 

is misleading. If it is, I wonder if the administration is recommending an increase in premiums on Medicare beneficiaries to offset that deficit. And I would like to know how much premiums 

would have to be increased to offset that deficit. 

And if you are really saying that there is a shortfall in Medicare, 

that suggests to me that we would need to save more—save more. 

But your policy prescription as I have heard it here today is that 

we would save less; we would just forget about Medicare Trust 

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Fund surplus and allow the Congress and the administration to 

use that money for other programs. To me, it defies common sense. 

I unfortunately now have to go and vote, or I will miss it. Again, 

thank you very much for your appearance here today. 

[The prepared statement of Mr. Daniels follows:]

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[Whereupon, at 12:21 p.m., the committee was adjourned.]

(179)

FISCAL YEAR 2002 DEFENSE BUDGET 

WEDNESDAY, JULY 18, 2001

U.S. SENATE, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to notice, at 9:35 a.m., in room 

SD–608, Dirksen Senate Office Building, Hon. Kent Conrad, chairman of the committee, presiding. 

Present: Senators Conrad, Feingold, Nelson, Stabenow, Clinton, 

Corzine, Domenici, Nickles, and Snowe. 

Staff present: Mary Ann Naylor, Staff Director; and G. William 

Hoagland, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. Why don’t we begin and welcome Secretary 

Wolfowitz to the committee and Dr. Zakheim as well. Welcome. Am 

I pronouncing that correctly? 

Mr. ZAKHEIM. Yes. Good enough for Government work, sir. 

[Laughter.] 

Chairman CONRAD. How do you like to have it pronounced? 

Mr. ZAKHEIM. Zakheim. You were very close. 

Chairman CONRAD. Very well. Welcome to you both. 

This hearing is to consider the President’s request for additional 

funding for national defense. I think it is important to put this request into perspective. The President’s defense budget amendment 

asks for an increase of $18.4 billion over and above the April request, which was already $3.3 billion over the baseline. This represents an increase over the 2001 enacted level of $32.2 billion, or 

10.4 percent. This represents the third largest peacetime increase 

since World War II. 

It would also push national defense spending over the cold war average of $331 billion for the first time since 1993, and that is 

putting all of the budgets in the context of 2001 dollars so that we 

have a fair comparison. 

I am pleased the President has now submitted his 2002 defense 

budget, but there remain serious questions to be answered by the 

administration before the Congress can responsibly take action. 

Several of these issues were raised in my letter to the President 

of June 26th, and I hope I will receive a response to that inquiry. 

First, when does the administration intend to submit a full 6-

year Future Years Defense Plan? As I understand it, that is required by law, but we have not received it. In other words, when 

will we have a realistic estimate of future defense spending levels 

from the administration? 

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Second, when will the administration provide an outlay estimate 

for the budget amendment for 2002 and beyond? 

Third, the briefings to Senate staff by Dr. Zakheim have clearly 

suggested that the defense budget amendment may be further 

amended later this year as the defense reviews proceed. Is that a 

correct understanding? 

Fourth, and finally, what are the implications in future years of 

this request for additional funding in 2002? Is there any chance 

that it would not be carried forward to future years? Will DOD 

seek another $18 billion increase over this year’s $18 billion increase, as Secretary Rumsfeld recently suggested before the Armed 

Services Committee? 

Further, we need to know how the administration intends to pay 

for this defense increase. In the budget resolution, defense was set 

for 2002 at the level of the President’s April request. As a result 

of the size of the tax cut and the weakening economy, we face a 

stark choice: fund the administration’s defense request out of the 

Medicare Trust Funds, or possibly even Social Security Trust 

Funds in 2002, or find other spending cuts to offset it, or additional 

revenue. And I am interested: What does the administration propose? What does the administration suggest? Do they believe we 

ought to use trust fund money to pay for additional defense spending? Or do they have a proposal for spending cuts or new revenue? 

What is the advice and the guidance that they would provide the 

Congress with respect to paying for their request? 

Mr. Wolfowitz, I hope here this morning you will address this 

and the other issues that I have highlighted. I want to emphasize 

that the reserve fund that has received so much attention makes 

very clear that it cannot be used if it is invading the Medicare 

Trust Fund. We now believe that would be the case in fiscal year 

2002. And so we need to know how you would propose dealing with 

that problem. 

With that, I will turn to my very able colleague, the distinguished former chairman of this committee, for any comments that 

he would like to make. 

Senator DOMENICI. Thank you very much, Mr. Chairman. 

Mr. Chairman, I notice that tonight some group has invited us 

to honor the Budget Committee. 

Chairman CONRAD. The Historical Society. 

Senator DOMENICI. Does that mean they think we are finished? 

[Laughter.] 

Chairman CONRAD. I don’t know. 

Senator DOMENICI. Historical Society honoring the Budget Committee. Maybe it is because we lasted 25 years. 

Chairman CONRAD. That is pretty good. I guess they actually do 

this for other committees. 

Senator DOMENICI. I understand. First I want to say to the Secretary and to the chairman, this is a very difficult day for me. I 

happen to have a bill on the floor on energy and water that I am 

managing, and there is a very important hearing with reference to 

nuclear power in the future, and I have to try to do both of those 

sometime this morning and be here. So I intend to give my opening 

remarks and then with that to say I am very sorry I cannot be 

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here. If I am needed by you, Mr. Secretary, for any discussions 

after this hearing, I am available. 

I want to first compliment you on taking the job you have taken 

and, second, I want to thank you for the wonderful work you have 

done. I really did not believe we would be this late in the cycle and 

have so few appointees in high positions in the Defense Department. For a long time there were only two of you as appointees, 

and it is kind of a tribute to your leadership and that of the Secretary that you have proceeded as far as you have. And I commend 

you. 

I like what I hear. I like the approaches you are taking, and I 

only hope we can be on the same side, getting those approaches 

funded, so we enter this millennium with a new approach to defending our country and being an important player in the world. 

Having said that, also I want to say to the Comptroller, Mr. 

Zakheim, that we have worked in the past, and it was always a 

pleasure. I think the Secretary is very fortunate to have you on 

board. 

Mr. ZAKHEIM. Thank you. 

Senator DOMENICI. You know what you are talking about and 

where to find things, and if you don’t, you are one of those rare 

people that knows who to ask around this place, and you get the 

right answers. I am hoping you will supply that to the President 

throughout his term. 

Mr. ZAKHEIM. Thank you, sir. 

Mr. WOLFOWITZ. Thank you for those kind remarks, Senator 

Domenici. 

Senator DOMENICI. You are welcome. 

First, let me make it clear: I support the President’s amended 

budget request for the additional $18.4 billion. There is no doubt 

in my mind that this amount of money is needed. Whether each 

specific item that has been requested is of the highest priority or 

whether there has to be some adjustment made can be left for further hearings and later days. I strongly support the objectives that 

this funding will support, such as restoring military morale with 

targeted pay raises and, most importantly, that we finally solve the 

problem of adequately funding military health care. We have always nickled-and-dimed that and put it off, and now we are doing 

that no longer, and I think that is good and we should continue it 

through the new year and on into the future. 

Second, and perhaps more important than that statement, the 

budget resolution that governs today makes room for the additional 

funding. The simple fact is that based on the budget resolution 

guidelines in effect today, there is no reason why the chairman 

should not make this money available to the defense authorizing 

and appropriations committee. In any event, we will have an argument about that at a later date. 

Until and only if the budget resolution is changed by Congress, 

and assuming every policy in that budget resolution is enacted, 

there is a surplus. A surplus. If we were passing the defense request today, there is a surplus of $38 billion, according to the budget resolution and the numbers that we can accept and must use at 

this point. So the 18.4 request clearly is within that limit. 

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I don’t know nor does the chairman know what the economy and 

other factors may or may not portend for the future. But for today, 

and until the budget resolution, the official legislative scorecard for 

how we do business around here, until it is change in an official 

way, we should support the President’s defense amendment and act 

as quickly as possible to make this money available and get on 

with it. 

Obviously, restoring military health programs, providing targeted 

pay raises, transforming our military for the 21st century and the 

threats that we have there, and bolstering our readiness, streamlining our DOD facilities and infrastructure, and, last, reforming 

DOD’s financial management systems—these are all exciting, longoverdue goals that ought to be achieved, and I laud the President, 

the Secretary of Defense, and you, Mr. Secretary, for what you 

have done. 

I will work with the President in whatever way I can to make 

this possible. Again, I apologize that I cannot be here for the remainder of the hearing. 

If, in fact, there is a serious contention that we ought not fund 

the defense number because it is overspending, then I will seriously recommend that every appropriation bill be put up for reductions. Why should we just hold defense hostage? Let’s take every 

appropriation bill and make it bear its share of the concern that 

the chairman has, if there is one, and cut everyone so as to accommodate this 18. Maybe that would be a good amendment to offer 

on the floor and see how the Senators think about defense spending, whether they want to seriously consider not funding the President’s request this year because this economy is in a downturn. I 

don’t believe we can do that. I don’t believe we should do that. In 

fact, I believe we ought to find a way to fund it. The fact that we 

are having a downturn that puts some of the size of the surplus 

in the next budget resolution and the next one after that in some 

kind of jeopardy certainly does not justify spending on everything 

else as usual, fill up their cups, and then say to the defense, you 

are going to get far less because of this factual situation. 

I don’t think the U.S. Senate will do that. I say to my good 

friend, the chairman, I know that you do this in good faith and 

ponder it in good faith, but I cannot imagine the U.S. Congress 

saying we are not going to give the President this 18.4, whatever 

it is, because the United States economy has suffered a downturn. 

I thank you very much. Have a good hearing. 

Chairman CONRAD. Thank you, Senator Domenici. 

We will now turn to our witness, Secretary Wolfowitz. I just 

want to add my voice of respect for Secretary Wolfowitz. I had an 

experience with him many years ago when he was our Ambassador 

to Indonesia. I was extremely impressed at that time with his 

knowledge and his capacity, and I must say I was very encouraged 

when I saw that you were given this high-level responsibility in the 

new administration. 

So, welcome, and we will proceed with your testimony, and then 

it would be the intention of the committee that it will come back 

to me for a round of questions, and then we will go to each of our 

members. And they will have a chance for statements and questions as well. Welcome and proceed. 

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STATEMENT OF PAUL WOLFOWITZ, DEPUTY SECRETARY, 

UNITED STATES DEPARTMENT OF DEFENSE, ACCOMPANIED 

BY DOV S. ZAKHEIM, COMPTROLLER 

Mr. WOLFOWITZ. Thank you very much, Mr. Chairman. I appreciate this opportunity to talk to this important committee about our 

priorities for defense for fiscal year 2002 as reflected in the President’s amended budget. 

The U.S. Armed Forces are unquestionably the world’s best 

trained, best equipped, and most powerful military force in the 

world. They provide the security and stability that make peace and 

prosperity possible through most of the globe. 

However, we spent much of the 1990’s living off the investments 

of the 1980’s. We allowed our military capabilities to be slowly degraded as we overused a shrinking and underfunded force. America’s dedicated servicemen and women dutifully did more with 

less—putting off needed investment in training, infrastructure, 

maintenance, and procurement in order to keep up with the proliferation of missions. 

Many in Congress—and on this committee—worked hard to give 

them more resources. But notwithstanding those efforts, a policy of 

overworking and underfunding our troops continued. 

When President Bush took office, he asked the Defense Department to undertake a comprehensive review of the condition of 

America’s forces. He asked us to engage our brains before we 

opened our wallets, and so Secretary Rumsfeld initiated a broad 

strategy review soon after he took office, and as Senator Domenici 

pointed out, during a period in which he was essentially home 

alone with no confirmed appointees. I was the first one, by the way, 

to arrive, and I didn’t arrive until March, and we are still only 

about a third of the way through our confirmations. 

We have completed the first stage of that strategy review, and 

that forms the basis for the 2002 budget request. We are now starting the second stage, which is being merged with the congressionally mandated Quadrennial Defense Review, and that will form the 

basis for the 2003 budget and the new FYDP. 

From the completion of our initial studies, we have drawn two 

conclusions: The first, with respect to the threat, is that the security environment America will face in the decades ahead will be 

much more dangerous than the one that we faced in the decade 

just past. The other, with respect to the condition of our forces, is 

that it is unfortunately even worse today than we had expected 

going into those studies. 

These preliminary conclusions have formed the basis of the 2002 

budget and a starting point for the second, more formal round in 

the review process—the congressionally mandated Quadrennial Defense Review. 

Over the next several months, that second stage, the QDR, will 

address a number of questions, most importantly, trying to target 

the size and character of our future defense force structure. In 

doing so, Mr. Chairman, we have decided that we need to look beyond the modes of analysis of the past. In the past, we have tended 

to evaluate force structure and the risks associated with that force 

structure exclusively on the basis of our ability to execute existing 

war plans. That leaves out two very important dimensions by 

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which the capacity of the force needs to be measured. One is that 

every day we use our forces not to fight wars or to carry out war 

plans, but we use them around the world in ways many of which 

are unplanned, unbudgeted, and unaccounted for. 

The ongoing operation is Bosnia is a prime example. It was sup- posed to last 1 year and cost $1 billion, but it is now a significant 

ongoing feature of the defense budget. It is a significant strain on 

our defense force structure, and we have in future years to account 

consciously and specifically for those strains. 

At the same time, in addition to look at what the forces do day 

to day and the war plans that they have to be prepared to execute, 

we also have to prepare for a future that is hazy and indistinct, a 

future beyond the war plans, a future into the next decade. 

While that is indeed an unpredictable future, we can discern the 

emergence of new and more formidable threats, threats that we 

have to begin to prepare for now. And I might emphasize a point 

that I am sure this committee understands very well, but that is 

indeed a feature of defense planning that often I think escapes people: A great deal of what we are doing today is to build the forces 

for 10 years from now. A great deal of what we have in the force 

today is the legacy of what we had 10 years ago. It is not like turning a speedboat. It is always analogized, and correctly, to turning 

a supertanker. 

I remember during the Gulf War when I had the privilege of 

serving Secretary of Defense Dick Cheney as his Under Secretary 

of Defense, at the end of the Gulf War he made a point of publicly 

thanking his predecessors, including the Democratic Secretary of 

Defense Harold Brown, for having given us some of the weapons 

systems, specifically, particularly the Stealth aircraft that were so 

decisive in that war. And I say this because of necessity you have 

got to look at this year’s budget. Everybody in Washington tends 

to look at the near term, but I want to emphasize that as we look 

at this year’s budget, we are making decisions that are going to affect not just next year or the year after, but the next decade. And, 

indeed, if I might say so, I think we are not just talking about our 

own security, which, frankly, looks reasonably well taken care of, 

at least at the present, we are talking about the security of our 

children and our grandchildren. 

As we look at that future, and as we look at the strains on the 

present force, we will be trying to develop a force structure that not 

only addresses current war plans but, as I said, the risks imposed 

by our ongoing use of our forces in peacetime and the risks of not 

being prepared for emerging threats in the future. Our intention is 

that by the end of the QDR we will give much more precise advice 

to the President and to the Congress on how to balance those different needs and risks, and to present a defense posture that is 

better suited for ourselves and for those future generations. 

The final results of this strategy review will be incorporated in 

the fiscal year 2003 budget and the fiscal year 2007 Forward Year 

Defense Plan. And I think perhaps indeed I might just pause for 

a moment. I think in answer to a couple of your questions, there 

is no intention to offer you any further amendments this year. This 

is this year’s budget, and, indeed, it is a budget designed to not 

offer you amendments to this budget next year. So it will be the 

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first time in, I believe, 5 or 6 years that we have gotten away from 

this dysfunctional practice of underbudgeting for defense deliberately, or at least consciously, in anticipation of a supplemental 

appropriation. What you are getting now is our full, best, honest 

estimate of what we need for fiscal year 2002. 

What may have confused the picture is reports, correct reports, 

as I just indicated, that we are undertaking additional fundamental review that will be reflected in the 2003 budget and in the 

FYDP 2003–07, but not further revisions to this year. 

While the first stage of our review has focused on the nature of 

threats and the condition of the existing forces that we have, the 

QDR will help us decide the kinds of forces we need to build. But 

it is sufficiently clear that we must urgently begin to repair the 

damage inflicted by the coasting that we did in the 1990’s. 

The 2002 amended budget starts us on a path toward transformation by undertaking urgently needed, immediate repairs to 

our existing force and by investing now in some of the transformational technologies and R&D that we will need for the 21st 

century force. 

Using the 2001 enacted budget of 296.3 as a baseline, the President earlier this year issued a budget blueprint outlining a 2002 

baseline of 310.5. That, as you know, included a $4.4 billion real 

increase to cover certain Presidential initiatives. 

The request before you proposes to raise that investment to a total of $328.9 billion, $18.4 billion more than the President’s February budget blueprint. 

As I explained earlier, the first stage of our strategy review has 

identified where we are today and outlined in broad terms the direction that we have to go to build a 21st century force. The QDR 

we hope will tell us precisely how high that mountain is that we 

need to climb, whether it is 6,000 feet or 12,000 feet or maybe even 

higher. But one thing we do know for sure, Mr. Chairman, and that 

is that we are starting in the hole. We have to start climbing now, 

and that is what the 2002 budget does for us. It begins the work 

of repairing the present force and building the force of the 21st century. 

Consider DOD’s aging infrastructure, which the 2002 proposed 

budget begins to address. One of the phenomena of the last 10 

years is trying to do more than the services had resources for. One 

of the places they would go looking for funds was real property 

maintenance. Those are the kinds of expenditures which you can 

easily defer for a year and not notice, and probably defer them for 

2 years and not notice too much. When you defer a lot of that for 

10 years, you begin to have deteriorating facilities and major repair 

bills. And I passed out for you some of the charts that have come 

from the services indicating the kind of disrepair that we encounter 

in facilities around the country and around the world. And I would 

emphasize it doesn’t mean that all of our facilities are in terrible 

shape, but overall, there is a great deal of work to do, and this 

budget increases funding to begin that work. 

I might say, though, that to give you a sense of the magnitude 

of the problem, under the budget levels of previous years we were 

on a path that would replace our existing infrastructure at a rate 

of 192 years. That doesn’t mean, by the way, that the average age 

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was 193 years. It means that our rate of replacement and repair 

was 192. In the commercial sector, the standard for facilities replacement is more like 57 years. We, averaging over our whole infrastructure, have a target of 67 years. That is a lot less than 192, 

as you can see. 

The 2002 budget proposes to increase funding for facilities from $3.9 billion to $5.9 billion. That $2 billion increase will bring us 

down to 98 years, which is a lot better than 192. It is still not yet 

down to our 67-year target. 

One of the ways we can get closer to 67 years without even further expenditures will be if we can get rid of some of the unneeded 

infrastructure, some of the cold war facilities that we no longer 

need, and that is going to require at some point a major effort on 

the part of the Congress as well as the administration. 

Beyond the facilities, in fact, because the importance of the facilities is in large measure because our people are the key to everything that we do, in addition to starting to repair the facilities that 

they live and work in, this budget will help put us on a path to 

recovery in key areas of military pay, housing allowances, readiness training, and health care, overall quality-of-life investments 

that tell our men and women in uniform that we value their service and their sacrifice. 

But the 2002 budget, Mr. Chairman, moves beyond simply repairing the present force and takes a major step toward transforming that force and building the force of the 21st century. Reflecting the high priority of transformation, the fiscal year 2002 

budget boosts research, development, testing, and engineering by 

14 percent in real terms. That is an increase from $41 billion in 

fiscal year 2001 to $47.4 billion in fiscal year 2002. 

Today’s strategic environment is far different from that of the 

cold war. We have an obligation to plan for the changing circumstances that we face—to make sure that we are organized to 

dissuade rash and reckless aggressors from taking or even threatening action. One of the most disturbing areas of vulnerability, one 

that is frequently identified as an area where our opponents might 

seek to exploit so-called asymmetric approaches, asymmetric warfare against us, is the threat from ballistic missiles, not only those 

armed with weapons of mass destruction but even those armed 

with conventional warheads. And I would point out that this is not 

a threat in the future. Indeed, 10 years ago, during the Gulf War, 

our worst single casualties were inflicted by Iraqi Scud missiles, 

and Iraqi Scud missiles nearly succeeded in expanding that war 

and dragging in Israel. 

This budget invests heavily in efforts to deter and defend against 

existing and projected threats and to dissuade potential adversaries from continuing to invest in their dangerous capabilities. 

The budget advances the President’s commitment and the Congress’ commitment to build effective missile defenses for our territories, for our allies, and for our deployed forces against threats of 

all ranges, based on the best available technologies, deployed at the 

earliest possible date. 

But missile defense is not the only area where we are investing 

heavily in transformation. In addition to that important initiative, 

the budget includes another $13.3 billion of investments in a wide 

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range of potentially transformational capabilities. There is supposed to be a chart attached to my testimony. I am not certain you 

have it, and if you don’t, I would like to submit it for the record. 

It gives some indication of the wide range of transformational programs that we propose to invest in with the $13.3 billion in addition to missile defense that is in this budget. 

Chairman CONRAD. Maybe you could submit that. I don’t have 

that in the materials I have received. 

Mr. WOLFOWITZ. It is what we call a glitch. It is being copied 

right now, and you should have it hopefully even before I finish 

here. 

Chairman CONRAD. All right. Very well. 

Mr. WOLFOWITZ. I will finish quickly, too. 

There are also a number of initiatives in this budget proposal 

that are addressed at streamlining our operations and saving us 

money, many of which require congressional support. In the case 

of Peacekeeper, for example, where we are removing 50 cold war 

missiles with a total by START counting rules of 500 nuclear warheads, a system that is overdue to be retired, we not only need 

funding to do the retirement, we will need the support of the Congress to remove the current restrictions that prohibit us from getting rid of a nuclear system that we no longer need. 

For many important reforms, whether it is reducing our excess 

infrastructure, reallocating functions, or giving the Department the 

ability to manage efficiently, we will need the help of the Congress. 

Mr. Chairman, one of Secretary Rumsfeld’s top priorities is to 

transform the Department’s system of financial management. We 

recognize that we must make fundamental changes that will save 

money and that will assure you, the Members of Congress, and assure the American people that we are allocating and using defense 

funds properly and wisely. 

Finally, and in my view very importantly, this year’s budget 

seeks to apply the principle of honest assessments of what it will 

take to do the job, or what we call realistic costing. One of the unfortunate consequences of asking the military to do more than they 

really have the funds for is not only things like deferring real property maintenance, but underestimating the cost of flying hours in 

the hope that you will get a supplemental, even though the cost of 

flying hours has risen, by the way, even faster than the cost of fuel, 

which is a major input, because as planes get older the cost of repairing them goes up. 

There has been a tendency to underestimate health care costs 

that is not unique to the Defense Department. We have tried in 

this budget, though, to get honest estimates of costs, and a significant part of that $18 billion increase is simply to get us to honest 

budgeting and a budget that does not require a supplemental in 

the year 2002. Indeed, we hope with this 2001 supplemental, which 

I hope is on the verge of being passed, that we will put behind us 

the kind of supplemental budgeting that became a process that was 

not based on true anticipated needs. 

The increase in the 2002 budget is thus a significant historic increase. It gets us started on the road to rehabilitation and transformation. It is a significant increase, but I am reminded, Mr. 

Chairman, of another time in our history when there was a chalVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00193 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
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lenge to making the case for increased defense spending. In 1950, 

General Omar Bradley urged President Truman to ask for $18 billion for defense. The Joint Chiefs had an even higher number, $23 

billion, and the services’ estimate was still higher at $30 billion. 

Some things never change. But the President said we couldn’t afford that much and $15 billion was the most we could afford. Of 

course, those were real dollars back in 1950, but—and that was a 

large chunk of our GNP, by the way. I think $15 billion represented about 5 percent at the time. 

Within 6 months, however, we were suddenly in a war in Korea, 

and just as suddenly, we found we had no choice but to budget 

some $48 billion, a 300-percent increase. How much better it would 

have been to have made the investment earlier. If we had done so, 

Dean Acheson might not have been forced to define Korea as being 

outside the defense perimeter of the United States on the grounds 

that we did not have the forces to defend it. 

If one looks at historical averages, historically we have spent 

about 8 percent of GDP on defense. Today we are more in the 

range of 3 percent of GDP. When thinking about affordability, it 

seems to me to say that we can’t afford an insurance premium of 

roughly 3.5 percent of GDP today to deter the adversaries of tomorrow, to underpin our prosperity, and by extension, to underpin 

peace and stability around the globe, doesn’t make even basic budgetary sense. When you compare the cost of that premium with the 

cost in dollars and lives if we fail to do so, it is cheap at that price. 

So, in conclusion, Mr. Chairman, while much remains to be done, 

we know that fixing and transforming our force is a joint responsibility. It is one that will require close partnership between Congress and the executive branch. 

We look forward to working with you and your colleagues to rehabilitate today’s force and to build the force of the future. We earnestly seek your support in this important and noble mission. 

Thank you. 

[The prepared statement of Paul Wolfowitz follows:]

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Chairman CONRAD. Thank you. Thank you for your testimony, 

and as I said before you began your testimony, we are glad to have 

you before this committee because these are serious issues and 

they deserve serious attention. 

You made a reference to coasting in the 1990’s. I hope you 

weren’t being critical of Secretary Cheney, because when we went 

back and looked at what Secretary Cheney proposed in his final 

Future Years Defense Plan with what actually happened—and it is 

very interesting. Secretary Cheney proposed for fiscal years 1994 

through 1999 $1.57 trillion of defense expenditure. And what Congress actually passed and the previous administration supported 

was $1.56 trillion, less than a 1-percent difference. 

So I know you don’t come here to be critical of our Vice President, former Secretary of Defense, but what was done in the 1990’s 

is almost precisely what Secretary Cheney proposed. 

Let me make——

Mr. WOLFOWITZ. Can I comment on that? Because it is an important point. 

Chairman CONRAD. Yes. 

Mr. WOLFOWITZ. And in case it is—I think you know, but let me 

make it absolutely clear. I was his Under Secretary of Defense for 

Policy, and I had a role in helping to design the drawdown of our 

cold war force. 

By the way, I am a little puzzled at the numbers because I don’t 

remember we ever came up with a 1999 budget estimate back then. 

But I am not trying to quibble. 

I am not trying to criticize anyone in the past. I am trying to describe where we are today and where we have to go. But I think 

when I use the word ‘‘coasting,’’ I would like to explain what I 

think happened. 

We had a big investment in defense in the 1980’s. I think it was 

an investment that has paid off enormously, even in just budgetary 

terms. The fact that we can bring our defense budget down the way 

we can is because the cold war ended, and I believe that that buildup had a big contribution to it. And it was entirely reasonable after 

the Berlin Wall came down to do two things: No. 1, to say we don’t 

need a force that big, we have got to bring it down; and, No. 2, to 

say we don’t have to invest enormous amounts of new equipment, 

we have an awful lot of things in the inventory that are still pretty 

good. 

And that’s why I use the word ‘‘coasting.’’ We needed to come 

down. There was a peace dividend that we were entitled to collect. 

I think two things happened, though. One is that we didn’t—if I 

can keep the coasting metaphor, we didn’t apply the brakes when 

the speed got a little too high; and, second, we encountered a lot 

of unanticipated requirements with names like Kosovo and Bosnia 

and Haiti and a lot of smaller ones that have put a great deal of 

peacetime pressure on the force, have put Optempo rates very high, 

have caused us to use aircraft and other equipment at higher-thanexpected rates. That means faster deterioration, higher maintenance. 

So there were things that weren’t anticipated, and as I said, we 

tended to pay for it by taking money out of those long-term accounts in order to cover short-term accounts. 

197

I am in no way trying to point a finger at anybody. I am trying 

to describe a phenomenon that has left us now with a force that, 

while it is still the most powerful in the world, has very real deficiencies. And it is hard sometimes for people to understand that 

since we are so powerful, we have such a big defense budget, how 

come they are up here ‘‘whining,’’ is the word. And I am trying to 

tell you that when, you know, there are troops living in barracks 

with peeling lead paint, that is something we have got to fix. 

Chairman CONRAD. And I appreciate that, and I hope that it is 

not misinterpreted when I say we have got to pay for these things 

in the context of overall fiscal discipline that is not misinterpreted, 

because I believe we need more funding for defense. I proposed to 

my colleagues a $100 billion increase over the baseline. 

I do think it is important to point out when our ranking member 

was here, he said there is nothing to prevent the chairman from 

releasing the reserve fund for defense today. And that is true. 

Today there is nothing that would prevent that from occurring. But 

we are not acting on the defense bill today. 

And if you go—and I direct your attention to the conference report on the budget, because the conference report on the budget 

makes it very, very clear. On page 24, reserve fund for defense, 

under that article it indicates that the Budget Committee chairman 

has the ability, once the President has made this additional recommendation, to put that money into the budget. But the next article, Article B, says legislation described in subsection (a) may not, 

when taken together with all other previously enacted legislation, 

reduce the on-budget surplus below the level of the Medicare Hospital Insurance Trust Fund surplus in any fiscal year covered by 

this resolution. 

So the Senator was very careful in the language he used. I am 

being very careful in the language I use. When the defense bill 

comes up, I am not going to be at liberty to release that reserve 

fund if, with all previously enacted legislation, it shows that we 

would be using the Medicare Trust Fund surplus. I am legally 

bound. 

Now, let’s look at where we now anticipate we will be in 2002, 

because I think there is a disconnect going on here about the circumstances we find ourselves in. In 2002, the surplus was estimated at $304 billion for 2002, but $172 billion is Social Security 

money, $38 billion is Medicare money. That leaves us with $95 billion. 

Then we take out the cost of the tax bill, $38 billion; other budget resolution policies, $27 billion; the associated interest costs; and 

that leaves us with $25 billion of available surplus in 2002. But 

that is before the next estimate by the Congressional Budget Office 

in the mid-session review. We now anticipate that because of the 

slowdown in the economy this year, they will report to us lower estimated revenue next year. And we have had distinguished economists come before this panel and tell us it will be in the range of 

a $50 to $75 billion reduction because of lower corporate receipts, 

because of lower corporate profits, because of lower capital gains 

realizations, because of lower individual income, and that as a result, we face a circumstance in which next year we may be using 

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all of the Medicare Trust Fund surplus as well as even going into 

the Social Security Trust Fund. 

Now, that is the problem here. And what I am asking you, if this 

develops, what do you think we should do? Should we use trust 

fund money? As I say, I am precluded from doing that. I don’t 

think it is the right thing to do, either. 

What is your proposal on how we would pay for what you are 

asking? Do you have specific spending cuts in other areas? Do you 

have revenue increases? Or do you believe we should just go ahead 

and use the trust funds of Social Security and Medicare? 

Mr. WOLFOWITZ. Mr. Chairman, I will defer most of those questions to Mr. Daniels, who has the responsibility for fitting these 

things into an overall fiscal policy. But I would emphasize, we are 

talking about trust funds. We are not talking about—we are talking about the future health of Social Security and Medicare. What 

we are talking about with the defense budget, I think, is also the 

future health of American security and the safety of our children 

and grandchildren. And I think we are weighing very important 

long-term considerations in all three of those cases. But I would, 

in fact, urge people in thinking about the importance of these defense requests to realize, as I said earlier, that these are investments in our future. They are not just something to get us by from 

year to year. 

Chairman CONRAD. But that still leaves us with the question, 

Mr. Secretary. And the administration has got an obligation here 

to answer this question. How are they going to pay for what they 

request? There are only three alternatives that I know of: one is 

to take it out of the trust funds of Social Security and Medicare; 

a second is raise revenue; a third is cut spending in other areas—

or some combination of those three. And I am asking the administration to give us guidance. They say we need the additional funding for defense. I personally believe we do need more money for defense. 

But you are leaving us in a situation of not having a recommendation of how to pay for it. And if it is not paid for by additional spending cuts or additional revenue, then it is going to come 

out of the trust funds of Medicare and perhaps even Social Security, and the administration has made very clear they do not believe it should come out of the Social Security Trust Fund. 

So I would repeat the question to you. If you don’t have an answer today, can you provide from the administration an answer to 

this question? 

Mr. WOLFOWITZ. Mr. Chairman, it seems to me that it is—economic forecasts have enough uncertainty in them, and you are asking me to comment on a forecast of a forecast. We are working, as 

you indicated with that chart, with the CBO estimates. If the numbers change—and we know they are going to change because my 

impression is they change every few weeks. Sometimes they go up, 

sometimes they go down. They have been going down in the last 

few months, and that causes problems. At some point it is probably 

almost certain that they will go up, and my guess, from what I 

know about economics, is that it will go up before people predict 

it is going up. It will be wrong again. But I don’t know that. 

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If we face the kind of dilemma that you are suggesting—and it 

is entirely possible that we do—I would at least urge the Congress 

to look at some other spending priorities before we immediately say 

that defense is the one that comes last. According to the numbers 

that were given to me—and everyone has different numbers, but 

my understanding is that defense spending, if you look at the 

growth in 2001 with the supplemental over 2000, it is 5 percent. 

We are asking for another 8 percent. That would make a 13-percent increase in defense spending over 2 years. Domestic spending 

in that same period has gone up 18 percent. And that is after a 

decade in which domestic spending increases substantially and defense spending declined substantially in real terms. 

I don’t know where those—I mean, I know all that other money 

is money that serves an important need, and some of it serves crucially important needs. But I really do think there is perhaps no 

need that is more important than ensuring that our children and 

grandchildren can be safe from the prospect of a world war or even 

another cold war. Another cold war will make all of our talk about 

budget surpluses just vanish overnight. 

Chairman CONRAD. Well, we couldn’t be in stronger agreement 

on the question of increased resources for defense. But we are left 

with the question——

Mr. WOLFOWITZ. We like hearing that. 

Chairman CONRAD. We are left with the question of how to pay 

for it, and it is a very serious question. 

I think it would be a serious mistake to pay for it by using trust 

fund moneys of Medicare and Social Security, and that is what we 

are poised to do. 

On the question of forecasts, the forecasts are going down, and 

there cannot be any doubt they will erode further because of continuing weakness in the economy. We all know what is in this forecast. They are assuming an economic growth rate that is not happening. There is no question about that. And so that puts us in this 

perilous position. And I think the administration has got a serious 

obligation to say to us how they intend to pay for their request. 

Let me ask one other question and then go to my colleagues. 

When does the administration intend to submit a full 6-year Future Years Defense Plan that is required by the law? You have told 

us 1 year. We can’t plan—the reason there is a requirement in the 

law that you have to give us the future years as well as 1 year is 

so that we can put into an overall plan. When will you provide that 

Future Years Defense Plan? 

Mr. WOLFOWITZ. Mr. Chairman, it will be part of the fiscal year 

2003 budget request. We will have a Forward Year Defense Plan 

in connection with that request. 

I think the situation——

Chairman CONRAD. Can I just say that——

Mr. WOLFOWITZ. The situation that we are in this year is not at 

all unprecedented. In fact, I think 8 years ago at the start of the 

last administration they had the same problem of submitting an 

amended budget, having to work over time, coming in with something at the last minute. You can’t at the same time then work all 

those amendments through into the outyears. We will have something with the 2003 budget. 

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Chairman CONRAD. Can I just say that that just doesn’t work? 

We need to have from you what the law requires, and the law requires, for a very good reason, that you give us your Future Years 

Defense Plan when you submit your request. And talking about 

what happened in some previous circumstance I don’t think is acceptable. And I would urge the administration to provide us at the 

earliest opportunity the Future Years Defense Plan because it has 

significant implications for doing what you want to accomplish. I 

am trying to be——

Mr. WOLFOWITZ. Mr. Chairman, I assume that in 1993 the law 

required the same thing, and I assume the Congress in its wisdom 

understood that a new administration putting together an amended 

budget would have difficulty presenting you a realistic estimate of 

what outyear numbers are. 

We could get back to the business of pretending that we are giving you a realistic outyear plan, but, quite honestly, I think the 

way to get to what you really need, which is realistic estimates of 

the outyears, is to go through the kind of work that we are doing 

right now in response to the requirement for the Quadrennial Defense Review. And that will appear in the 2003 budget. 

Chairman CONRAD. Is there any chance you would be discontinuing the increase that you have asked for for 2002? Is there 

any possibility you would be suggesting in real terms cuts in the 

future years? 

Mr. WOLFOWITZ. Certainly from what we have seen now, we are 

going to need—unless we come up with savings of—let me put it 

this way: Certainly the needs that we have identified and that we 

begin to fund in this year’s budget are needs that we are going to 

have to fund in next year’s budget and years afterwards. So there 

is a certain—if the question is is this a one-time get well and then 

you go back down to a lower level, the answer is no. In terms of 

what we need to be funding, we think this is at least where we 

need to be. 

As we are finally getting some of our key appointees confirmed—

and I would—again, I hope this doesn’t sound like whining, but we 

didn’t have service Secretaries until late May, early June, and they 

are now working with very limited staffs under them. But we have 

a lot of confidence in the three individuals who have been selected 

to be—have been confirmed as Secretary of the Air Force, Navy, 

and Army now, who come with very strong views about ways in 

which we can manage more efficiently and save money. So it is possible, if we are successful in finding significant savings, that some 

of what we need can come out of savings. That is also part of what 

has to go into figuring out our future year defense program. 

Chairman CONRAD. Senator Snowe. 

Senator SNOWE. Thank you, Mr. Chairman. 

Welcome, Secretary Wolfowitz. I know we could have an endless 

debate here this morning about, you know, what we can and cannot afford. But I think that there are certain realities that obviously we have to acknowledge. And as one who has served on the 

Senate Armed Services for several years, there is no question that 

you inherit an undercapitalized budget. We know we borrowed 

from operations and maintenance to pay for multiple contingency 

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operations abroad, and, you know, we are sort of trying to play 

catch-up. 

I know that we have not made the necessary investments for 

modernization that we need to make in order to prepare for the future. So obviously we are going to have some challenging moments 

depending on what those surplus numbers imply with the re-estimates in August. But I have no doubts about the worthiness of the 

proposals that you are presenting on behalf of the administration 

with respect to what do we need to do in the future. I would like to hear from you, given the $18 billion proposed increase over this fiscal year, what would be the consequences of not 

providing that kind of investment from the standpoint of operations 

and readiness, Persian Gulf missions, our missions abroad in so 

many areas where we are dispersed? Could you give the committee 

an idea of what the impact would be if we could not realize this 

increase for the next fiscal year? 

Mr. WOLFOWITZ. I appreciate the question. I think the consequences would be very serious. I think we would find somewhere 

around the middle of the year that we wouldn’t have the money to 

keep our airplanes flying and to keep our ships operating. We 

would probably be coming up here with another request for a supplemental, which we might or might not get, but if we didn’t get 

it, we would be shutting down operations in key parts of the world. 

We wouldn’t be starting investment in some of the programs that 

take years to come to fruition, and I know people say, well, if it 

is going to take 10 years, what does it matter if you delay it a 

year? Well, my view is if it takes 10 years, you ought to figure out 

how to try to accelerate it. Ten years after we lost people in the 

Gulf War to missile attack, we still haven’t deployed an effective 

defense against the most primitive missile in the old Iraqi inventory, the Scud missile. This budget will start us on the road to getting there by fiscal year 2007. In the meantime, we are in very 

great danger both in the Persian Gulf and Korea from missile attack to our troops. 

But I think the most serious thing is if we don’t get that increase, we are not going to be able to fund the kinds of pay increases, the health benefits, the things that are servicemen and 

women feel directly, and overall we will be sending a message to 

them—and I think it is a very, very dangerous message—that after 

years of doing more with less, they are still going to have to do 

more with less. And I think some of them are on the verge of saying if that is the way the country feels about what we are doing, 

I will find a different line of work. That will be a terrible, terrible 

consequence that we will spend years trying to get back. 

Senator SNOWE. How did the Department come to the number of 

$18 billion? I mean, how was that assessment made? 

Mr. WOLFOWITZ. These are always—a great deal of what we call 

judgment calls are involved. You try to look at what—first identify 

what your needs are, and I will be honest. When we identify what 

our needs are, we could come up with a request that is a lot more 

than $18 billion. So the question is how do you decide of those 

needs which are the highest priority. And we had a process of trying to identify those alternative priorities to the Secretary of Defense, and I would say that as he addressed it, I think the highest 

202

priority was to begin those fundamental things that are key to 

maintaining the morale of our service people, and that includes not 

just direct things like pay, but it also includes things like fixing up 

housing. That really accounts for the largest single piece of that 

$18 billion. 

Second, I don’t think you have much choice in the way you start 

from the point that if you are going to do honest budgeting, you 

have got to start with honest numbers. So you have certain increases for health care that are just unavoidable; $5 billion of that 

increase is to cover what we think will be the real health care cost 

instead of continuing to under-budget them. 

And then there is a very important piece of additional research 

and development money that we considered also very important to 

building that future force. 

So it is sort of a decision at the end of the day that the highest 

priorities are people, but beginning to build that 21st century force 

is not far behind, and you try to balance those at the margin. 

Senator SNOWE. Which has been consistently deferred. I mean, 

it is no secret around here that the way in which we reinforced the 

defense budget was through supplementals. I applaud the administration for taking the approach of trying to avoid that in the future 

by providing an honest and realistic budget with respect to what 

is necessary to support the Defense Department. We did endless 

supplementals and doing end-runs around the budget because it 

was clear that Congress wasn’t prepared to accept the realities of 

the true costs given the contingency operations that we were engaged in abroad. What percentage of that $18 billion would be for pay and health 

care spending for our personnel? 

Mr. WOLFOWITZ. Do you have that number, Dr. Zakheim? 

Senator SNOWE. Because I think that is an important issue. We 

have fought consistently to improve the benefits and the pay for 

our military personnel so that we can continue to retain good people. That is one of the big challenges that we faced in the Defense 

Department and our armed forces, to retain our good people. 

Mr. ZAKHEIM. Well, Senator, in the original February announce- ment that the President made, he talked about an increase of $1.4 

billion for pay and related expenditures, and that was incorporated 

in the amended budget. In fact, the total increase in pay from fiscal 

year 2001 to fiscal year 2002 is about $7 billion. We are now going 

to be spending overall on military personnel $82 billion-plus on 

pay. In terms of defense health, the increase has gone up from $12.1 

billion in 2001 to nearly 18—17.9 in 2002. And I would point out 

that defense health is essentially an entitlement. We are now by 

law committed, for instance, to paying out Tricare for Life for everyone over 65, and we had to provide $3.9 billion in funding for 

that. And, therefore, to deal with your earlier question, whatever 

else we might have had to cut, we would have had to still pay that 

money. 

Senator SNOWE. I might just add, a couple of years ago, I was 

in the Persian Gulf on the U.S.S. Enterprise, and if there was one 

issue that was raised by the crew, it was in the issue of health 

care. So one of the single greatest issues for military personnel is 

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the quality of their health care and being able to have a good program, a good solid health care program for themselves and for their 

families. And these are critical issues because there is a cost benefit involved. We lose good people that we have invested hundreds 

of thousands of dollars in to train, because we are not providing the 

kind of benefits that are competitive with the private sector. Ultimately it is going to cost us that much more, and so I do think it 

is a very critical issue. Thank you. 

Chairman CONRAD. Thank you, Senator. And Senator Feingold is 

next. 

Senator FEINGOLD. Thank you, Mr. Chairman, for holding this 

important hearing, and thank you Secretary Wolfowitz. 

I have long believed that prior to assessing the financial commitment that we will be making to defend this country over the next 

decade that we should first answer the following questions: what 

are the threats to the United States and what should be the strategy to respond to these threats? And I think that it is only after 

you have answered those two fundamental questions that you can 

take the final step of assessing what military forces, equipment 

and infrastructure that will be needed to respond to those threats, 

and then, only then, should we assess how much of our scarce 

budget resources will be needed to implement that strategy. 

It appears to me, and I certainly listen to the chairman on this, 

that the Department of Defense is really putting the cart before the 

horse by asking to increase its already massive budget request by 

18.4 billion, when the long-overdue comprehensive defense strategy 

review has not been completed. So I fear that once again we are 

being asked to increase defense spending before we have assessed 

whether such an increase is appropriate within the context of our 

overall defense strategy, and of course, before we really assessed 

our ability to pay for such an increase. 

Of course a strong national defense is crucial to the peace and 

stability of our Nation, but a strong economy is also essential to national security. I do not think we can focus on one to the detriment 

of the other. Any long-range defense plan should therefore take 

into account both what our strategies should be and how they will 

be paid for. And I would add, since you mentioned some of these 

commitments, which I have opposed over the years, that we should 

consider our commitments abroad. We should know how much they 

will cost and also how long an American military presence will be 

required. I believe that for too long the defense budget has not actually received the same intense scrutiny as other parts of the Federal budget. 

I, for one, am prepared to vote for responsible cuts to domestic 

spending and to support defense spending. In fact, I would like to 

see some of these things you have on your chart here addressed, 

but some of these should be addressed within the Defense Department. I do not think the priorities of the Defense Department are 

always correct. When I have read the information about the Osprey, the Trident, the F–18, Super Hornet, I do not think those 

weapon systems and planes are getting scrutiny, while these needs, 

desperate needs, are being ignored. 

So I guess what I am saying is I am just not prepared to vote 

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partment of Defense would ask for such a large increase in spending when I feel that many in Congress are ready to rubber stamp 

the administration’s request and pile on billions more in 

unrequested spending. 

I am going to continue to argue—and I know the people in my 

state are concerned about this—that we cannot recklessly, and almost automatically increase defense spending without thought to 

priorities within the Defense Department and the cost as well, because in the end, the cost could be our balanced budget and the 

economic well being of our country. 

Let me just ask a couple of questions. I think you have already 

answered this and said it, but I want to be sure. You did say that 

you do not plan to be back here next spring asking for another supplemental appropriations bill; is that right? 

Mr. WOLFOWITZ. That is correct. 

Senator FEINGOLD. What can we expect in terms of the proposed 

increase at least for fiscal year 2003? 

Mr. WOLFOWITZ. Senator, we are working on that, and that is 

something we hope will have an even closer connection with strategy. I say even closer because I have to take exception to the notion 

that what we are up here asking for has no relation to a strategic 

assessment. It has a great deal of relation to it, but you do not 

start from ground zero. You start with a great deal of commitments. You start with a force that is operating around the world. 

You start with Operation Northern Watch over Iraq and Operation 

Southern Watch over Iraq. You have things that you know you 

have to fund. You have facilities that you know are in very bad 

condition, and our current budget levels would only be replaced at 

192-year replacement rate. 

As I indicated in my testimony, we are not basing this budget on 

a notion that we are going to replace all of those facilities. To the 

contrary, we are really basing this budget on an assumption that 

at least 20, 25 percent of those facilities we will determine. And it 

is going to be a difficult process. It is going to involve something 

like, dare I say the four-letter word, BRAC, which usually gets me 

in trouble up here, but there is going to have to be some reduction 

in that base infrastructure, and we in effect are planning on that 

in this budget. 

And by the way, I do want to emphasize too, it is not a budget 

that simply increases. We have a number of savings initiatives, not 

as many as the Secretary and I would like. It is partly the question 

of still not having the people to implement those. But we are taking four Tridents out of the—you mentioned the Trident. I am not 

quite sure what problem you have with it. My problem with it is 

that it is a cold war system with nuclear capability. We are taking 

four of those nuclear Tridents out of the force and converting two 

of them to very valuable conventional capability. We are retiring 

the Peacekeeper missile entirely, and I think would, I assume, applaud that move. It is overdue in my view. 

By the way, one of the unfortunate facts about defense budgeting 

is usually in order to cut something, you have got to spend money 

the first few years to take it out. It is a terrible disincentive for 

savings, and I hope, as an aside, that we might find a way, maybe 

with budget scoring or some other way, to give people something 

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other than a massive disincentive to take anything out of the force, 

because it has to increase their top line next year. 

Senator FEINGOLD. Let me ask you—I appreciate what you are 

saying. It is helpful. But let me ask it another way. The chairman 

and I and others, you know, we want to be able to plan, so can you 

give me a sense, would you expect next year that the amount you 

would ask for would be similar to this here, substantially greater, 

or substantially less? Can we get some sense of where we are heading? 

Mr. WOLFOWITZ. I do not mean to be a smart aleck. I am tempted 

to ask, can you tell me which way these—where these fiscal estimates will be in two or 3 years. I mean, there is a problem. You 

want a precise defense plan. Frankly, I would like a precise defense 

plan. I think we will manage our resources much, much better if 

we have stable defense spending profiles. On the other hand, when 

it encounters economic estimate that go up and down every month, 

I sort of leave this to my betters to sort of figure out how that 

works. I do know that stable spending profiles would be very valuable for the Department. That is why we are working in the QDR 

with this to try to develop an 1903 budget and an out-year defense 

plan. It gives you those sort of stable estimates. I cannot sit here 

now and tell you what they are. As I said to the chairman, I do 

not think that the process of the QDR is going to say that the 

needs we have identified so far are not real needs, and may in fact 

may identify, if anything, more needs. What I hope we will also 

identify though are more savings. So whether that nets out as a 

plus or minus, I cannot tell you today. I wish I could. 

Senator FEINGOLD. Thank you, Mr. Chairman. 

Chairman CONRAD. Senator Nickles. 

Senator NICKLES. Thank you, Mr. Chairman. Did Senator Clinton have a chance to go? 

Chairman CONRAD. She is next, but we are going back and forth. 

Senator NICKLES. Well, thank you. 

Secretary Wolfowitz, one, welcome to the Committee. I see that 

you have a cast on your foot. Is that a service-connected disability 

that you have taken on in your first few months back? 

Mr. WOLFOWITZ. I am afraid it was playing tennis. 

Senator NICKLES. That might be. There is probably a lot of people—I will not touch that. 

I notice in the request—and somebody will complain, somebody 

will complain there is not enough, and somebody from the military—we are seeking significantly more, I understand, or at least 

some people have told me that, and others we have heard said that 

it is too much. I have tried to put this in context of what we have 

done over the last year or so. I noticed in defense last year, before 

we did the supplemental, which we just did, defense spending grew 

at 3 percent. With the supplemental I guess you could say it grew 

at 5 percent in BA. I also compare that to what we did in domestic. 

Last year in domestic, between 2000 and 2001, domestic grew at 

14 percent, 14 percent. And so I look at what you are asking for 

next year as a growth of 8 percent, and domestic is growing again 

at 4 percent. So if you add the two together, in other words, if you 

go back to 2000, 2001, 2002, defense is still behind. So I just make 

those points. 

206

I think there is a lot of catch-up. I think the previous administration and the previous congresses did not adequately fund defense, 

particularly I would say the last few years, because we were hanging on a BA level, right at $300 billion for years. And so you have 

some catching up to do. We were wearing out planes. We maintained a lot of those at Tinker Air Force Base, but we were wearing 

out planes. I want to congratulate the military. I am absolutely 

amazed at the number of missions, the thousands of missions that 

flew over Bosnia, that fly today over Iraq, and have been able to 

do that with such great success, great success in the fact the planes 

are still flying, great success the planes have not been breaking 

down, great success in our pilots have done a fantastic job and 

have not been hit by anti-aircraft fire, which is intensified, I understand, over Iraq and so on. So I just make those comments. There 

has to be some expenses there. We have a lot of dollars that have 

been flowing out, and frankly, I do not believe in the last few years 

we adequately provided for our national defense, and I look at it 

more or less as you are playing catch-up, for years of neglect both 

by the previous administration and by congress, because we are the 

ones who ultimately write the checks and maybe we did not write 

enough. 

Last year we passed the Defense Appropriation Bill. Interestingly enough, we passed it as the first bill. Pretty frugal, about 3 

percent increase. But we did not hold to that when we passed the 

Labor HHS Bill. It grew at a BA level of growth of about 24 percent, because most of the other appropriation bills were pretty 

much in line with lower levels, but when we got to the last couple 

of bills, we got a little carried away. So I just look at the total 

growth of spending, defense and non-defense, and non-defense grew 

quite a bit over the last few years, and defense did not. You have 

got a lot of work to do. You have got a lot of maintenance. You 

have got a lot of operation. You have got a lot of procurement that 

you are way behind. 

And I have not analyzed the entire request that you have made. 

I think that we have that responsibility. We need to analyze. We 

need to make sure that the $18 billion that you are proposing to 

spend is well spent, and scrutinize it, and work with the administration, make sure that it is well spent, make sure that it does get 

to the right place, to where we get the most bang of defense for a 

dollar. I will be happy to work with you and others doing it, but 

I just wanted to put it in context because I have heard some people 

say, ‘‘Oh, there is no way we can afford that. This is invading this 

trust fund,’’ or something like that, and I am, ‘‘Wait a minute, 

where is the criticism on non-defense, that that base was built up 

substantially last year, and no one is talking about cutting that 

and reducing that.’’

So I make those editorial comments and maybe ask you a question, and it is that, defense/non-defense—you probably reviewed it 

over the last several years—has the growth in defense kept up with 

the growth in non-defense over the last few years? 

Mr. WOLFOWITZ. I have, over the last decade, and my impression 

is that in real terms, that non-defense has increased by about 25 

percent, and defense has decreased by about 25 percent. That is a 

50 percent gap right there. And as you point out, Senator, even in 

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the last 2 years when we have I think developed a consensus that 

we have got to start doing some of that repair work, domestic 

spending is still increasing faster than defense spending. I do not 

want to make an enemy out of all the other Cabinet departments, 

Senator Conrad, but I mean if you ask me where to look for money, 

I would say do not look first at defense. 

Senator NICKLES. Well, in some cases non-defense was growing 

at multiples. If last year defense ended up growing—well, without 

the supplemental it was 3 percent versus 14 percent. That is 3–1/

2 times as much. With the supplemental it is 5 to 14, so it is still 

almost 3 times the growth rate of defense. That is a pretty significant change, and you are trying to have defense now grow at a 

somewhat faster rate than non-defense today. I happen to agree 

with you on that, and we will have to fight out the wars, both in 

the budget process and in appropriations, and I appreciate your 

presentation before the Committee today. 

Mr. WOLFOWITZ. Well, thank you, Senator. As you say, even if we 

get this full 8 percent this year, and I certainly hope we will, our 

growth rate over the last 2 years will be lower than the growth 

rate of non-defense spending over the last 2 years. 

Senator NICKLES. Just kind of glancing at the figures, the BA 

level that we had in 1988, the BA levels that we had in 1986—no, 

these are adjusted, those are. I will just stop there. I do not want 

to confuse people. Thank you very much. 

Chairman CONRAD. Thank you, Senator Nickles. And, Senator 

Clinton. 

Senator CLINTON. Thank you very much, Mr. Chairman. And 

thank you, Secretary Wolfowitz, for your service over many years, 

and for being willing to come back to the government and take on 

this responsibility, and I also appreciate Mr. Zakheim being here 

as well. 

I think that you probably are getting a flavor of what I believe 

is the consensus in the Congress, and that is that on both side of 

the aisle, the majority of us want to do whatever is necessary and 

justifiable to provide the appropriate funding levels for defense. I 

do not think that you will see any opposition to well-thought-out 

requests that really do provide a basis for our long-term security 

in meeting both known and perhaps unpredictable threats. The 

real dilemma for those of us sitting on this side of the table is how 

we do that. And I have to echo the chairman’s questions, that we 

really need your help in doing that because we are in a situation 

that will make it very difficult to provide the kind of support that 

is requested. 

You know that I have been honored to visit our troops and facilities literally all over the world, and I have seen our men and 

women in uniform literally on the front lines, doing the work that 

they sign up to do, but that we need them to do for all of us. So 

I am certainly among those who will support the kind of wellthought-out requests that I believe will support our services and 

put us in a good position for the future. 

But I am, as you might guess from the tenor of the questions at 

least on this side of the table, looking for some help. Now, many 

of us have heard estimates ranging anywhere from $18 billion to 

$32 billion from the vice chiefs of staff, to $50 billion from an estiVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00213 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
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mate from former Secretaries of Defense, all the way up to $100 

billion from the Center for Strategic and International Studies. 

That is a very large range, and everyone starts from the same 

premise, that they are looking at our position, looking at what we 

need to do to be ready to confront any of our security needs, and 

we obviously are trying to make sense out of such a broad range 

of defense funding need projections. And I go back to your comments about projections. 

None of us know exactly what will happen in the future, but certainly many of us on the floor voted to increase money for defense 

in the budget and tax cut debate. We were ready to support Chairman Conrad’s alternative that would have provided an additional 

$100 billion over the 10-year window, which is on the high end of 

the estimates that have been projected. Many of us also supported 

other amendments from Senators Landrieu and McCain, that 

would have reduced the tax cut to provide funding for defense. Unfortunately, we got no help from the administration to try to have 

a more balanced approach toward cutting taxes and providing for 

defense. In fact, as you I am sure know, and as I was somewhat 

surprised to read, even publications like the Weekly Standard have 

criticized the administration for fiddling with tax cuts while the 

military burned. And that article goes on to say that the real reason the White House is abandoning the two-war strategy is that 

under the current budget constraints, they cannot afford it. So 

when that budget and tax cut was signed into law on June the 7th, 

I think many of us really were, if not confused, at least concerned, 

that the administration was speaking out of both sides of its 

mouth. On the one hand, you and Secretary Rumsfeld and the 

Chiefs and others were conducting a review that we knew would 

lead to additional requests for funding. On the other hand, there 

was no willingness to make the hard political decision that would 

have provided those dollars in the budget. And in fact, 20 days 

later the President submitted a defense budget amendment that 

did increase the budget authority by the 18.4 billion that we are 

faced with in this hearing. 

Now what I am struck by is whether or not the Department of 

Defense was involved in the overall budget preparation. I know a 

little bit about how budgets are put together in administrations, 

and I would like to know whether the White House knew at the 

time it came forward with its tax cuts and its opposition to those 

of us who were willing to increase defense spending in the budget, 

whether the White House knew the extensive budgetary needs that 

DOD would present, and that were left out of the blueprint and the 

April budget, or were you just left out of the overall budget planning and we are playing some catch-up right now? 

Mr. WOLFOWITZ. I think throughout the process we have been in 

very close, essentially daily contact, with our colleagues in OMB. 

You know, as you mentioned in your comments, there are a range 

of estimates about what defense spending needs are. I think it 

might be worth pointing out—and I do not know whether—most of 

the outside estimates you mentioned are in the range of $50 to 

$100 billion. We are well under them. On the other hand, we are 

above the levels that were in fact considered during the budget debate up here, whether it is the $10 billion that was Senator 

209

Landrieu’s proposal or proposals from the Republicans on the 

Armed Services Committee. We have tried very hard and to work 

with OMB to get these numbers down to ones that we can truly 

fully justified. We have worked hard, and we will continue to work 

hard—you are asking for help—to help in finding savings. We are 

going to need some help from the Congress on that score. We came 

up with a proposal. We have a proposal up here that will get us 

some of the serious bomber capability that we need, but it requires 

taking 30 B–1s out of the force and using that money to upgrade 

the remaining 60. And judging from some of the complaints we 

have had from individual senators and Congressmen, it suggests 

that it may be a tough road forward to get those kinds of savings. 

Peacekeeper is a different kind of example, where we have to ask 

for extra money in this year’s budget in order to retire Peacekeeper. When we eventually retire Peacekeeper, it will take roughly $150 million a year out of the budget. Mind you, it should have 

been done quite a few years ago, but we have to ask for money to 

do it, and we do not—when we are talking about all of these estimates and out-year trust funds and so forth, there is no credit 

given to the fact that out-years there will be $150 million a year 

in perpetuity that we have saved. I do not think the way the current system is set up it creates the right kinds of budgeting mechanisms, scoring mechanisms to encourage the kinds of savings that 

I think you and I and, in fact, every serious observer of the Defense 

Department would like to see. 

Senator CLINTON. So in other words, the administration was well 

aware of the needs that would be required in defense at the time 

that they put forth their budget and the tax cut? 

Mr. WOLFOWITZ. If you mean the time they submitted the blueprint budget last year, we had only just—in fact, I was not confirmed at the time. We certainly were not—I do not know what 

well aware means. We were in no position back then to give you 

the kind of detailed justification of a defense increase of the kind 

we have done now, and in fact, we were working round the clock 

through May and June to come up——

Senator CLINTON. But there was no doubt that there was going 

to be a significant request for increased defense spending, was 

there, Secretary Wolfowitz? 

Mr. WOLFOWITZ. I think that is precisely why they asked in the 

budget resolution to have this discretion for the chairman to put 

a new mark in for defense. I do not think anyone expected that 

mark would be lower. It was expected it would be an increase, and 

that we would, during the course of this work this spring and early 

summer, come up with a specification of that increase. 

Senator CLINTON. Well, you know, Mr. Secretary, I am hoping 

that we are going to be able to work out the very difficult decisionmaking that will be required to do what you are requesting. I 

would certainly add, on my own behalf, to the chairman’s list of 

three alternatives, the alternative of revisiting the tax cut. You 

know, as I sit here and hear what are very serious concerns about 

our defense posture and our security needs, I am just amazed that 

we would be setting ourselves on a fiscal course that I believe will 

lead us back into deficits, that will pose the kind of impossible political choices that the chairman outlined with the Medicare and 

210

Social Security Trust Fund on the one hand, necessary discretionary non-defense spending, whatever you set that level at on the 

other hand, including education and the like, and our defense 

needs. 

And I guess I would just ask you—I know you are a student of 

defense and of our government—as you look down the next 10 

years, what is more in the interest of our country, a huge tax cut 

that puts us into deficits and undermines our ability to meet our 

needs, or funding our defense needs? 

Mr. WOLFOWITZ. Senator Clinton, I think what is most in our interest looking down the road is a healthy economy, and I think a 

lot of this argument about tax cuts comes down to judgments about 

what will produce a healthy economy in the future. I do not think 

you can have a successful defense program without a healthy economy, and that is why I cannot say defense comes first. I do think 

they go together, and I do think that there is nothing more important—no more important responsibility we have as custodians of 

the public trust than to try insure the future peace and safety of—

the peace and safety of future generations. But I think part of that 

involves having an economy that continues to grow. The reason we 

have the surpluses we enjoy today is because the economy has 

grown. The reason we have the problem Senator Conrad is pointing 

out is because our growth is slowing. And I think a major judgment 

behind that tax cut is the judgment that it will contribute to economic growth. 

Senator CLINTON. I could not agree with you more, and I would 

look forward to talking to you in the next 5 to 10 years about what 

does and does not work to create a healthy economy. I mean one 

of the reasons that the prior administration had to make the tough 

choices it made is because it inherited deficits that were growing 

at a rate that was unsustainable, that froze out private capital, and 

I would certainly argue that the fiscal responsibility that the past 

administration and Congresses engaged in made it difficult to fund 

everything that was required, put us on the path to a strong economy, and I regret deeply that we have taken what I consider to be 

an unfortunate detour off that path, which will make the choices 

that you are asking us to make today ever more difficult. 

But, you know, the proof is in the pudding. We will see how it 

plays out, but we are going to have some very tough decisions because we have squandered the opportunity of the accumulated surpluses to do the kinds of things with defense, with our failing infrastructure in other areas that would make us, as a Nation, richer, 

safer, smarter and stronger in the future, and that is what I regret 

deeply. And we will—certainly speaking for myself—do the very 

best we can to meet the legitimate needs that you have presented 

to us today, but it is an unfortunate conclusion that I reach that 

we are faced with this instead of being able to make the kind of 

planning for the future in defense and other areas that a strong, 

secure Nation should be able to in a time of increasing threats. 

And so I look forward to working with you, but it think we all 

have our job cut out for us. 

Mr. WOLFOWITZ. Senator, I might say that I think economizing 

on defense is not a way to deal with long-term——

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Senator CLINTON. I did not say that. I did not say that. I did not 

imply it. I would not support it. I am just saying it is unfortunate 

that at a time when we had surpluses and an opportunity to do the 

long-term planning, instead we have given it away. And I believe 

given it away, that leads us back into deficit that will make it even 

more difficult to meet the balanced kinds of challenges that our 

Nation faces on both the domestic and the international front. 

Thank you very much. 

Chairman CONRAD. Thank you, Senator Clinton. 

I would like to take you, Mr. Secretary, back to where I began. 

I look at 2002, and we start with what the projected surplus was, 

we take out the trust funds, we take out the cost of the tax bill, 

we take out the other budget resolution policies that have passed, 

and then we make an adjustment for the economic downturn based 

on the testimony of three expert witnesses before this Committee, 

all of whom were projecting 50 to $75 billion less in revenue next 

year than is in the underlying budget assumptions. And what that 

left us with is using all of the Medicare Trust Fund surplus next 

year, and even dipping into the Social Security Trust Fund. 

Now, let us go to the next chart, which is the longer years, and 

I have provided to Dr. Zakheim and yourself a hand chart of this 

one so you can study it more clearly. And I would ask you to take 

it back and share it with others in the administration, because this 

goes right to the heart of the problem. 2001 we all know about. 

That is during a time of economic downturn. 2002, the administration is not projecting economic downturn, the administration is projecting strong economic growth, and yet we see that we are using 

Medicare and Social Security Trust Fund money to pay for other 

Government programs. And your defense request only makes that 

circumstance worse unless the administration comes up with a way 

to pay for it. In fact, the forecasts we have now would suggest your 

defense request would have to come out of the Social Security 

Trust Fund, something this administration has pledged not to do.9

Based on your testimony here today, looking at the bow wave effect of your defense request, we see that that is a $200 billion item 

over 10 years. Now, you have indicated you are not going to be asking for less in succeeding years, and I am sure you would not. 

So if we just go through for the period of the 10 years, and we 

start with the projected surpluses, and we take out the trust funds 

of Social Security and Medicare, we take out the cost of the tax bill, 

which is now known. That is passed, that is law. We take out the 

cost of the other budget resolution policies. We know those. Those 

have been passed. We take out the effect of just the increase in defense that you are requesting here. We take out possible economic 

revisions that the Congressional Budget Office has already alerted 

us to, that they will be making in August because of the economic 

slowdown. And then we put the associated interest costs into the 

calculation. What it leaves you with is very clear. It is non-trust 

fund deficits each and every year out through 2008, non-trust fund 

deficits. That means we would be using, if we adopt your defense 

request without offsets, we would be into both Medicare and Social 

Security Trust Funds in 2002, in 2003, in 2004, and we would be 

212

into the Medicare Trust Fund in a substantial way in 2005, 2006, 

2007, and modestly in 2008. That is the problem your request presents us. 

This administration has pledged not to use Social Security Trust 

Fund money for other purposes. Our numbers show not only using 

Social Security Trust Fund money, using Medicare Trust Fund 

money in a very substantial way. 

Now, I believe the administration has done a disservice to defense because they passed a tax cut of significant proportion before 

they had in a whole plan that added up. Now we are left with a 

plan that does not add up. It just does not. This is not your responsibility, but it affects your responsibility because it affects defense. 

And I do not believe it is wise, when the administration is projecting periods of strong economic growth, which they are in the 

succeeding years, to be using trust funds of Social Security and 

Medicare to pay for other programs of the Federal Government. I 

think that is a profound mistake when we all know the baby 

boomers start to retire in 11 years. 

And so what is the way out of this morass? The only way that 

I can see is that anything that is above what is in the budget, and 

that is defense and any other proposal, is going to have to be paid 

for for some way, either additional cuts somewhere else, or additional revenue, or some combination. And I know that is not the 

responsibility that you have. That is at a higher level. But I say 

this to you directly and honestly, I think the administration has 

done a disservice to defense, I think they have done a disservice 

to fiscal responsibility, because they have got a package up here 

that just does not add up. And this is not some forecast or some 

projection other than acknowledge the economic downturn that has 

occurred. This economic downturn is happening. I do not think 

there is anybody that does not understand the economic growth 

rates that are in the forecast are not going to happen this year, and 

so the results for revenue for this year and next year are really 

pretty clear. 

So I would hope that you would take this back to the powers that 

be, and explain to them, we have got a real problem here. I want 

to be helpful. I believe much of what you say is correct. I believe 

we need more resources for defense. I put them in my budget. I 

paid for them. And a failure to pay for them is going to lead, inexorably, I believe, to the administration breaking another of its 

promises, which was they are not going to use Social Security 

Trust Fund money. And I must say I do not for the life of me understand the distinction between not using Social Security Trust 

Fund money and not using Medicare Trust Fund money. I do not 

think either one of them should be used to fund other Government 

programs. We need those funds to pay down debt or to prefund a 

liability if we are to prepare for what is to come. 

So I want to conclude by again thanking you for being here, Dr. 

Zakheim as well. We have high regard for both of you. You are exceptionally able people. Our country is fortunate to have people like 

you willing to serve. I think I know both of you can be making a 

lot more money and have a lot easier lives in the private sector, 

but I have, based on my past experiences with you both, I have 

great respect for you. But that does not take away from the cirVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00218 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
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cumstance we face. I think the administration has really kind of 

handed us a live grenade, if you will, and somehow together, we 

have got to dig out, and the sooner we figure this out, the better. 

I thank you. 

Mr. WOLFOWITZ. Thank you, Mr. Chairman. 

Mr. ZAKHEIM. Thank you, Mr. Chairman. 

[Whereupon, at 11:14 a.m., the committee was adjourned.]

(215)

SOCIAL SECURITY TRANSITION COSTS 

THURSDAY, AUGUST 2, 2001

U.S. SENATE, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to notice, at 10:01 a.m., in room 

SD–608, Dirksen Senate Office Building, Hon. Kent Conrad, chairman of the committee, presiding. 

Present: Senators Conrad, Murray, Feingold, Nelson, Stabenow, 

Clinton, Corzine, Grassley, and Gramm. 

Staff present: Mary Ann Naylor, Majority Staff Director; and G. 

William Hoagland, Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. Good morning. I have just talked to Senator Domenici, and he has had a loss 

in the family and will not be able to be with us this morning. He 

has to return to New Mexico. And I want to express the condolences of the committee to Senator Domenici and his family. We 

certainly grieve with them in their loss. 

I want to indicate that we will proceed as we normally do here. 

I will say to the witnesses that your full statements will be made 

part of the record, and we would ask you to summarize your statements in about 5 minutes. We will not be slavish about that, but 

we would ask you to do that so that there is plenty of time for 

questions. 

Senator Grassley is here. He will serve on the Republican side 

this morning——

Senator GRASSLEY. Thank you. 

Chairman CONRAD [continuing]. In Senator Domenici’s absence. 

I want to begin by welcoming our witnesses this morning. Bob 

Greenstein, who is no stranger to this committee, Dr. Orszag, who 

has provided very valuable testimony to this committee on a prior 

occasion, and Dr. Schieber—am I pronouncing it correctly? 

Mr. SCHIEBER. Correct, yes. 

Chairman CONRAD. Welcome. Good to have you here. 

Mr. SCHIEBER. Thank you very much. 

Chairman CONRAD. We appreciate very much the willingness of 

the witnesses to share their collective wisdom with the Budget 

Committee on what is a very important and somewhat complicated 

subject. 

Earlier this year, the President announced the formation of a 

Commission on Social Security. The President set out certain guiding principles for that commission: no payroll tax increases, no benVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00221 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
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10 CHART NOT AVAILABLE AT PRESS TIME. 

efit changes for current retirees, and the creation of voluntary private accounts. Anybody who has paid attention to the public debate 

over the future of Social Security knows that reforms, particularly 

reforms that include any type of private account, will require substantial new budgetary resources. 

While the President’s commission has yet to make specific recommendations, the President’s guiding principles lead us to believe 

that they will propose reforms which include the creation of individual accounts roughly equivalent to 2 percentage points of payroll 

tax. Social Security experts agree that the 10-year cost of such a 

proposal is about a trillion dollars. The Social Security question 

that most concerns the Budget Committee is are there sufficient 

budgetary resources available to fund the types of reforms envisioned by the President and his commission. 

Before the enactment of the tax cut, the answer to that question 

was clearly yes. And in the wake of the tax cut, I look forward to 

hearing from our witnesses about the continued affordability of this 

type of proposal. But before we hear from our witnesses, about the 

budgetary tradeoffs and the transition costs associated with Social 

Security reform, I would like to remind my colleagues where we 

stood in January of this year versus where we stand today with respect to the surplus and with respect to the options open to us in 

addressing the long-term budgetary needs of our aging society. 

In January of 2001, CBO presented us with projections showing a $5.6-trillion surplus over the next 10 years, $3.1 trillion in trust 

fund surpluses—Social Security and HI Trust Funds—and $2.5 

trillion in non-Social Security and HI surpluses. 

Do we have a chart that shows that?10

As we pondered the options for putting that hard-earned surplus 

to best use, the Budget Committee heard testimony from Controller 

Walker warning us the permanent or open-ended tax cuts and/or 

spending increases would reduce future fiscal flexibility. Mr. Walker also reminded us of our stewardship obligation to future generations, suggesting that today’s budget decisions need to be made 

with the future in mind. 

We also heard important testimony earlier this year from one of 

today’s witnesses, Mr. Orszag, who told us that higher national 

savings offers the most effective available policy response to our 

aging population. Saving the projected Social Security surplus, the 

projected Hospital Insurance surplus, and one-third of the projected 

on-budget surplus between 2002 and 2011, he testified, would raise 

real gross domestic product by roughly $200 billion in 2012. This 

illustrate a real cost to foregoing national savings. That was your 

testimony then, Dr. Orszag, at least in part. 

With this thoughtful advice, I offered an alternative budget that 

set aside all of the Social Security and Medicare Trust Fund surpluses. In addition, my budget resolution set aside $900 billion in 

a reserve fund to strengthen Social Security for the long term. 

Those reserve resources could have been used in a variety of ways 

to strengthen the Social Security program. 

Some of my colleagues support creating TSP-type accounts on top 

of or as part of the Social Security program. TSP refers to the thrift 

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11 CHART NOT AVAILABLE AT PRESS TIME. 

savings plan that all Federal employees have access to. Other colleagues think those resources should be used to collectively invest 

in non-Federal securities, something that we see happening in a 

number of Scandinavian countries. 

The bottom line is that Democrats voted earlier this year to set 

aside the resources necessary to strengthen the Social Security program. Unfortunately, that budget alternative did not pass. Instead, 

the Senate adopted the Republican budget resolution which set 

aside zero resources to address the transition costs associated with 

Social Security reform. Let me repeat, the budget resolution that 

passed set aside nothing, zero, for strengthening Social Security or 

to fund transition costs. Dollars that could have been used to ease 

the transition costs of a Social Security reform plan were instead 

spent on a significant tax cut that, unfortunately, in my judgment, 

disproportionately benefits the wealthiest among us. 

Where does that leave us? We will hear from our witnesses today 

that these lost opportunities will limit our options for dealing with 

Social Security’s unfunded liabilities. The Bush commission may 

now be forced to propose reforms which cause massive on-budget 

deficits, accelerated trust fund insolvency or drastic benefit costs to 

the traditional Social Security benefit. 

Given recent comments from Speaker Hastert and White House 

Spokesman Ari Fleischer against Social Security benefit cuts and 

tax increases, it seems more likely that the Bush commission will 

be forced to make recommendations which use budget gimmicks to 

hide the true transition costs associated with private account plans. 

We, at the Budget Committee, will be watching for those hidden 

costs and for those gimmicks. 

Recently, the Budget Committee put together numbers showing 

the available surplus. Obviously, that is a chart that is hard to see 

from a distance, but we have copies available for anyone who is interested. What this chart shows is that after we consider the surplus lost to the tax bill, other budget resolution policies, potential 

economic revisions, the associated interest costs, the Bush defense 

request, what we find is that there are no budget surpluses left to 

fund an individual accounts plan without using the Social Security 

and Medicare Trust Funds.11

This chart demonstrates that an individual account plan equal to 2 percentage points of payroll will cost about $1.3 trillion between 

fiscal year 2003 and 2011. That cost includes both the 2-percent account and the debt service costs associated with those accounts. Because of our dwindling surpluses, an account plan of this size 

would constitute a raid on the Medicare Trust Fund of $397 billion 

and a raid on the Social Security Trust Fund of an additional $900 

billion. Interestingly, the 10-year cost of an individual accounts 

plan is roughly equivalent to the 10-year revenue loss attributable 

to the tax cut. 

Now, some might argue, including some of my Republican colleagues, that the Social Security Trust Funds should be used to 

fund private accounts, but I would remind them that these Social 

Security Trust Funds have already been committed to pay benefits 

that have already been promised. They cannot now be spent a secVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00223 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
218

ond time on individual accounts. At least in the accounting courses 

I took in getting a master’s degree in business, we were alerted to 

such double counting. That is the kind of thing that leads to real 

fiscal problems. 

Raiding the Social Security Trust Funds to pay for private accounts can mean only one of two things: either they are double 

counting or they are shortening the solvency of the Social Security 

Trust Funds. That is a mathematical certainty. That plan, I believe, is irresponsible and will result in huge benefit cuts or massive tax increases or dramatic increases in public debt. It seems to 

me it is inescapable that that is the result. 

In conclusion, I would like to reiterate that by insisting on such 

a substantial tax cut, the administration already has limited the 

Social Security Commission’s ability to find a workable and financial viable solution. My question to the witnesses will be, and my 

question to this administration will be, where will you find the 

money to pay for these private accounts? 

With that, I will turn to my colleague, Senator Grassley, the very 

distinguished ranking member of the Senate Finance Committee, 

and somebody who has taken a long-term interest in the work of 

this committee and certainly has made significant contributions on 

the issues that are before us today. 

Senator Grassley. 

Senator GRASSLEY. Thank you, Mr. Chairman, and thank you for 

holding this hearing, and bringing a distinguished group of witnesses together, and being very provocative in discussions of very 

important issues that are before us. 

I was not aware of Senator Domenici’s absence. I just recently 

talked to him, and he asked me if I would come, but he did not 

tell me about this problem. I told him, at that time, that I was 

going to have to make a quorum in the Judiciary Committee, so I 

am going to have to absence myself. 

I have had a chance to read Senator Domenici’s opening statement. I will let his staff make a decision if that should be put in 

the record or not. 

Mr. GREENSTEIN. I would like to just make some of my own personal comments in regard to the subject before us. Some of them 

are nothing more than just reminders, Mr. Chairman, that there 

is another side of the story. 

I do not mind hearing you raise questions about whether or not 

we should have had tax cuts or not. I think it is always good in 

our system of Government to have a reminder from anybody about 

the wisdom of what we are doing. Obviously, I think the wisdom 

to have tax cuts was the right wisdom. I voted for it. That is why 

I worked so hard for it. I guess my only thought that I would leave 

with you on that subject before I go on to the issue of Social Security is a couple of points: 

No. 1 is, if Congress did keep the rate of expenditures that we 

had in the last 3 years and kept that up for the next 10 years of 

the decade, we would not have only spent the $1.3-trillion tax cut 

we had, we would have spent additionally on another half-a-trillion-dollar tax cut during that same period of time. And at the end, 

maybe you have a level of expenditure equal to what the income 

of the Federal Treasury is at an historically high level and not susVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00224 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
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tain that level of income over that same period of time, but concomitantly not reduce the level of expenditures, and consequently 

have deficits from high levels of expenditure, as opposed to the possibility of having deficits because of tax reduction. 

I would rather, myself, choose to have a lower level of expenditure of gross national product and have a deficit than have a higher level of expenditure of gross national product with somewhat 

higher taxes, but still a deficit. I think it’s better for the economy 

the more that we run money through the pockets of our taxpayers, 

to let them decide how to—the marketplace to disseminate and divide the goods and services of our country, as opposed to political 

decisions. 

Those are honest differences of opinion between two political philosophies here in Washington and even at the grassroots. 

The second thing I would remind is that, and Senator Domenici 

touches on this, is we guesstimated, over the long haul, including 

last year’s budget, when we had a Democrat President, that we 

were going to have 2.5- to 3-percent growth this year. And even 

under the last President, that growth became flat at 1 to 1.5 percent. It was flat two quarters during the Clinton administration, 

now two quarters in the Bush administration, and it may be flat 

for another two quarters. It is still growing, but not as much as we 

anticipated. But within that growth of the economy, we are still 

going to end up with the highest budget surpluses that we have 

ever had. 

Second, on the issue of Social—no, not second, on a new subject, 

Mr. Chairman—on the issue of Social Security, we have to stimulate discussion, we have to do something about this. It reminds me 

of an older citizen who would come up to me in my State and say, 

‘‘Just leave my Social Security alone.’’ And I can say to that person, 

‘‘Yes, I can leave your Social Security alone, and you are going to 

be able to have certainty of your Social Security as long as you 

live.’’

But I ask, ‘‘Do you not also think that the younger people of 

America ought to have as good of a Social Security that you have?’’ 

And I obviously get the answer, ‘‘Yes.’’ Well, if you just leave Social 

Security alone, that younger person 30 years old will not have as 

good of a Social Security system as people have right now. 

And so I praise President Bush for bringing this issue for discussion. I think it gives us an opportunity to really pick up the ball 

where President Clinton left off. Remember, President Clinton, and 

I praised him at the time, and I still praise him for doing it then 

in January 1998, State of the Union message, he said, ‘‘Save Social 

Security first,’’ and then he started a process of national dialog to 

save Social Security first. 

He had four town meetings—I praised him for that—to start discussion because he knew that he had to get people to understand 

what the problem was if you are going to solve that problem. We 

are in the same place. We have got to get people to understand 

that problem if we are going to solve it. So the President had it. 

He asked Members of Congress to have town meetings. Members 

of Congress had town meetings. I had four in my State, 4- or 500 

people come to them, to have this dialog. He even had personal accounts in it. He supported personal accounts and the investment in 

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the private market. Even people today are supporting investment 

in the private market through railroad retirement, as an example. 

So, you know, that cannot be a system or an idea that is so farfetched that it is wrong for President Bush to propose it. And we 

have in this process then President Clinton doing the right thing 

to have a national dialog. And then all of a sudden the conclusion 

was reached that this personal accounts was too hot of an item, 

and that would not be a political issue that could be used during 

the 2000 election, and it was dropped like a hot potato. 

And then what happens? We change Presidents. This President 

picks up the ball where President Clinton leaves off, starts the national dialog on the issues of should Social Security be just as good 

for the people that are 30 years old as it is for the people that are 

65? And that national dialog is what it is going to take to get it 

done, and we ought to encourage that sort of national dialog. And 

that is what the President is doing, nothing more than what President Clinton did. 

And so I think that we ought to welcome this opportunity and 

forget the salvation, that the salvation of Social Security can be, 

that just the economy grows at 4.5 percent, and you do not have 

to worry about. That ‘‘ain’t’’ going to happen. The other side has 

got to have a better answer than that the economy is going to grow 

for the next 75 years at 4.5 percent. It is not going to happen. 

So I welcome this hearing. I maybe would have chosen other witnesses, but you are doing a very good thing, and I hope that you 

will keep it up because I think that the more that we keep Social 

Security in the front line of public debate, the sooner it is going to 

get done, and the sooner we do it, the less of a problem it is going 

to be for Congress to make the tough political decisions that must 

be done. And remember, there were bipartisan bills introduced as 

a result of President Clinton’s initiatives, and those ideas are still 

around, and we ought to be pursuing that. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Grassley. 

I would just say to you, in terms of budget alternatives, our 

budget alternative did not increase spending. Our budget alternative would have continued to shrink the role of the Federal Government from 18 percent of gross domestic product to 16.4 percent 

of gross domestic product, which has been the lowest level since 

1951. The fundamental difference was we had about half as big a 

tax cut, we had more debt pay-down, and we dedicated this $900 

billion to strengthening Social Security. So you had resources available to deal with this challenge, and that is the challenge we are 

going to hear about from these witnesses this morning. 

Senator GRASSLEY. Would you please give me 15 seconds? Just 

15 seconds. 

Chairman CONRAD. I would be happy to, absolutely. 

Senator GRASSLEY. Remember that at some time during the debate on the tax bill and on the budget, there were at least 48 

Democrats, 48 Democrats that voted for a tax cut of $1.250 trillion. 

That is only $100 trillion less than what Republicans and 12 Democrats voted for that finally became law. So there cannot be a lot of 

difference between your party and my party on the level of tax 

cuts. 

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Chairman CONRAD. Well, I would just say this to you, Senator, that $1.25 trillion- alternative was in comparison to the larger tax 

plan that was before us, but the Democratic budget plan was as I 

described, one that had about half as big a tax cut so that we could 

have more pay-down of debt, so that we could also have money that 

was available to deal with this long-term Social Security challenge, 

and now the resources are gone. Now we are seeing the Treasury 

is borrowing to pay for the tax cut. 

With that, we will go to the witnesses. I think we will just go 

right down the table, if that is OK, if any order is appropriate. 

We will start with Mr. Greenstein. We welcome you here. Please 

proceed. 

STATEMENT OF ROBERT GREENSTEIN, EXECUTIVE 

DIRECTOR, CENTER ON BUDGET AND POLICY PRIORITIES 

Mr. GREENSTEIN. Thank you, Mr. Chairman. 

As we all know, Social Security has long-term financing problems. The problems have several dimensions to them: 

One, Social Security can pay full benefits only until 2038. 

Second, the increase in Social Security and Medicare costs, as the 

population ages, will place pressure on the rest of the budget before 

2038. As a result, restoring long-term solvency to Social Security 

and ensuring a sustainable long-term fiscal policy for the country 

are items of major importance. As part of that, we have just completed an analysis looking at the long-term costs of two items: the 

recently enacted tax cut and the Social Security shortfall. 

According to official estimates of the Social Security actuaries 

and trustees, the estimates everyone uses, the projected long-term 

deficit in Social Security over 75 years equals 1.86 percent of payroll or $3.2 trillion in present value. Present value is the amount 

today that, with interest, would exactly cover the future costs. The 

trustees’ report, the current Social Security trustees’ report, also 

shows that measured as a share of the economy, the Social Security 

shortfall equals seven-tenths of 1 percent of GDP over the next 75 

years. 

To measure the long-term cost of the tax cut, we simply take the 

Joint Tax Committee’s estimate of the cost of the tax cut in 2011 

if all of its provisions are extended and assume these costs remain 

constant as a share of GDP after 2011. Assuming that the cost of 

tax cuts will remain constant as a share of GDP, once the tax cuts 

are fully in effect, is the standard approach that CBO, OMB, and 

GAO all use in making long-term fiscal projections. And in this 

case, the estimate is likely to understate the long-term cost of the 

tax cut because several provisions in the bill, like estate tax repeal 

and 401(k)’s are certain to grow faster than GDP for a number of 

years after 2011. 

As this chart shows, the results show that the projected cost of 

the tax cut over 75 years is 1.6 percent of GDP. Let me repeat that 

that is the Joint Tax Committee’s estimate of the cost in 2011—

1.6 percent of GDP or $7.7 trillion in present value. Thus, the cost 

of the tax cut over 75 years is more than twice as large as the longterm deficit in Social Security. 

Now, an article in this morning’s paper quotes some, although no 

one I think is particularly named in the administration, as saying 

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that the Social Security shortfall is closer to 1 percent of GDP than 

0.7 and that the long-term cost of the tax cut is 1 percent of GDP 

rather than 1.6. 

Even if those numbers are correct—and they are not—even if 

those numbers are correct, by those numbers, the long-term cost of 

the tax cut equals the entire Social Security shortfall over the 75-

year period. The reasons those numbers are not correct are twofold. 

The seven-tenths of 1 percent Social Security shortfall figure, as I 

have mentioned, is directly out of the trustees’ report. The higher 

figure is reached only by acting as though the income from the 

trust fund, the interest on the trust fund, and the trust fund bonds 

do not count. That is not the way the trustees and the actuaries 

do the estimates. It is not the way Social Security works. 

But the more important issue is the tax cut, and this is the only 

way to get the cost of the tax cut down to the 1-percent of GDP 

which, according to the Post, is said to be an internal Treasury estimate. You have to do either of two things, and they are both 

wrong. One percent of GDP is the average cost of the tax cut over 

the next 10 years. Senator, as you know, it phases in over time. 

You cannot compare the average cost of the tax cut over the next 

10 years to the Social Security shortfall over 75 years. Heck, the 

Social Security, if we took the next 10 years, it is in surplus. We 

are comparing 75 years to 75 years, apples to apples. 

There is only one other way they could have gotten the cost of 

the tax cut down to 1.0, on joint taxes it is 1.6, and that would be 

by assuming that while the provisions expiring in 2010 are extended, that the AMT fix that expires in 2004 is not extended. In 

other words, if you assume that the AMT, which hits 1.5 million 

filers today, hits 35 million in 2011, and eventually 50 million, 60 

million, the sky is the limit, you can get the cost of the tax cut 

down to 1 percent, but that is not legitimate. 

This is the joint tax estimate, assuming all of the provisions are 

extended, compared to the trustees’ estimate of Social Security, and 

the result is clear it is nearly twice as large. This means that if 

the tax cut took effect as scheduled and continued after 2010, their 

long-term costs would substantially exceed the long-term benefit to 

the budget of eliminating the entire 75-year deficit in Social Security. It also means that if the tax cut were scaled back so threefifths of it took effect and the other 40 percent of it were dedicated 

instead to strengthening Social Security, the entire long-term deficit in Social Security could be eliminated. 

Now let me emphasize that I am not recommending canceling 40 

percent of the tax cut and devoting all of that to Social Security. 

The Nation faces serious strains when the boomers retire. The 

Medicare hole is bigger than the Social Security shortfall. There 

undoubtedly will be other problems in the future that we cannot 

foresee today. 

I believe a long-term balanced fiscal policy is likely to entail 

some changes in Social Security to reduce its future claims on the 

budget, rather than simply providing it with whatever level of resources are needed to close the entire shortfall. But providing resources from the rest of the budget to close a portion of the Social 

Security shortfall, in conjunction with other Social Security reforms, is likely to be essential if any reform plan is to get anywhere 

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on Capitol Hill. Otherwise the benefit cuts or payroll tax increases 

that would be needed, whether you do individual accounts or not, 

are likely to be too large to make any plan politically acceptable. 

And I would note that most of the partial privatization plans offered on Capitol Hill in recent years, like the Archer-Shaw plan, 

did contain—and Senator Grassley’s plan, I believe—did contain an 

element of general revenue transfer, and part of our problem today 

is that the magnitude of the tax cut precludes a general revenue 

transfer without running deficits outside of Social Security and 

Medicare. 

I think what this indicates, among other things, is that the rhetoric that we often hear, that the tax cut is modest and prudent, 

and the Social Security shortfall is an enormous chasm that threatens the Nation’s future fiscal health cannot both be true, since the 

tax cut is larger than the Social Security shortfall. 

One final point, Mr. Chairman, you have championed the Social 

Security lockbox, and the evidence is that this does help in dealing 

with the long-term Social Security shortfall. We have had this 

question in recent weeks since the report of the Social Security 

Commission, of, given that Social Security can pay full benefits 

after 2016 until 2038, but it does show through income from the 

rest of the budget, in the interest on the bonds and ultimately from 

redeeming the bonds, people ask, ‘‘Where does the rest of the budget get the money from?’’

As this chart shows, if we save the Social Security surpluses, the 

amount the government will save in interest payments on the publicly held debt, more than offsets the increased costs of Social Security benefits for the next couple of decades. And if you look at the 

chart, you will see that between now and 2020, Social Security 

costs rise by 1.5 percent of GDP. If we do successfully lockbox the 

Social Security surpluses, other than in times when the economy 

is weak, and we pay off the publicly held debt to the level that 

Chairman Greenspan has advised, then over that same period interest payments on the publicly held debt come down by 1.9 percent of GDP. In other words, for a while, this covers the additional 

costs, and even when you get out to 2038, if we have essentially 

eliminated the publicly held debt, at least down to that so-called 

irreducible level, then the interest savings on the debt equal, even 

out in 2038, 75 to 80 percent of the increased costs for Social Security between now and then. 

Social Security reforms are needed, but the lockbox definitely 

helps, and given the political difficulties in moving forward on Social Security, is one of the best immediate things that we can do. 

Thank you. 

[The prepared statement of Mr. Greenstein follows:]

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Chairman CONRAD. Thank you. Let me just say to the other witnesses, that in fairness, we will give each of you 8 minutes. 

Senator GRAMM. What about fairness to us? 

Chairman CONRAD. Do you feel you have been treated unfairly 

some way, Senator? 

Senator GRAMM. Well, you said you are going to be fair. I am kidding you. [Laughter.] 

Senator GRAMM. I am learning so much. I would just love to hear 

it. [Laughter.] 

Chairman CONRAD. Would we like to have Mr. Greenstein start 

over and—— [Laughter.] 

Chairman CONRAD. We will certainly go to 8-minute rounds for 

the senators as well. 

Dr. ORSZAG. 

STATEMENT OF PETER R. ORSZAG, PRESIDENT OF SEBAGO 

ASSOCIATES, INC. AND SENIOR FELLOW IN ECONOMIC 

STUDIES AT THE BROOKINGS INSTITUTION, WASHINGTON, 

D.C. 

Mr. ORSZAG. Mr. Chairman, I will try to stay below the 8 minutes, run a surplus to pay for Mr. Greenstein’s deficit. 

Mr. Chairman and members of the committee, it is an honor to 

appear before you to discuss Social Security reform and long-term 

budgetary pressures. My testimony will focus on the interaction between the recently enacted tax cut and the prospects for Social Security reform. 

As you know, the Social Security trustees project a long-term imbalance within the Social Security program, and I should note in 

reference to Senator Grassley’s comments, well, faster economic 

growth is not going to solve this problem. So there is a problem 

there and it does need to be addressed. 

Restoring solvency to Social Security is an important policy goal, 

but the basic problem I want to highlight this morning is that nonSocial Security revenue is a necessary ingredient in the mix that 

would make Social Security reform politically viable. The recently 

enacted tax cut, however, means that non-Social Security revenue 

is not available for this purpose. 

The necessity of general revenue to play some role in a sound Social Security reform plan applies regardless of whether that plan 

includes individual accounts. But since the President’s Commission 

is focusing on individual accounts, let me focus on them also. 

The Commission faces a basic dilemma. It is not possible to finance individual accounts out of the non-Social Security budget 

without creating deficits there. Yet, financing individual accounts 

by diverting funds from the Social Security surplus, the other alternative, would involve politically unappealing reductions in traditional benefits. 

First on the accounts financed outside Social Security. According 

to CBO estimates, the projected surplus over the next 10 years outside of Social Security and the Medicare HI program amounted to 

$2.7 trillion prior to enactment of the new tax legislation. Taking 

into account the new tax law and other initiatives in the congressional budget resolution, the remaining surplus appears on paper 

to be about $500 billion. Over the next 10 years contributions to 

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individual accounts equal to 2 percent of payroll would amount to 

more than $1 trillion without including the interest that would accrue on the higher public debt. So contributions to individual accounts cannot be financed out of the non-Social Security budget 

without creating deficits there. And once you included the interest, 

the point would be even stronger. 

And the situation is even less promising than these figures would 

suggest, because the figures ignore the artificial sunsets in the tax 

law, the cost of expiring tax credits that are routinely extended a 

few years at a time, the additional defense spending needed to finance the administration’s plans, the cost of maintaining non-defense discretionary spending at a more reasonable level than assumed in the baseline, and the effects of the recent economic slowdown on the projected budget surpluses. 

When realistic assumptions are taken into account, there is no 

surplus, let alone enough of a surplus, there is no surplus left to 

finance individual account contributions. 

So the alternative is to create carve-out accounts financed out of 

existing Social Security revenue. By itself, however, diverting revenue from Social Security to individual accounts would exacerbate 

the program’s long-term financial imbalance because it reduces the 

revenue that is available to the system. 

To improve Social Security’s long-term balance, while diverting 

revenue out into individual accounts, requires some combination of 

higher payroll taxes, a higher rate of return on the Social Security 

Trust Fund, transfers to the Social Security system from the rest 

of the budget, or reductions in benefits. Now, the first three of 

those options are ruled out by the administration’s Social Security 

principles, or by the lack of revenue in the non-Social Security 

budget for the transfer. So we are left with reductions in traditional benefits. 

Henry Aaron, Alan Blinder, Alicia Munnell and I have examined 

the size of the benefit reductions that would be required in order 

to reach long-term solvency in Social Security while diverting payroll tax—2 percent of payroll into individual accounts. We found 

that under one plausible approach to doing so, Social Security benefits, the traditional guaranteed benefits, would have to be reduced 

by 29 percent for those who are age 50 in 2002, and by 54 percent 

for those who are age 30 or younger. My written testimony goes 

through the basis intuition for those numbers, and we could go 

through them in the question and answer period, if you are interested. 

Now, to be sure, the income from individual accounts would offset some of these benefit reductions, but a large, overall reduction 

would nonetheless occur. We estimated that the expected combined 

retirement income from Social Security and the individual accounts 

for single young individuals with average earnings, would be 20 

percent below the level they would receive from Social Security 

under the current benefit structure. It is worth noting that these 

figures are, if anything, favorable to individual accounts. They are 

based on assumptions that Professor Martin Feldstein of Harvard 

has used, and we just used his assumptions, even though we think 

they are, if anything, too favorable to individual accounts. 

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So that is the basic dilemma. Individual accounts cannot be financed with non-Social Security revenue without creating deficits 

because there is no money there, and they cannot be financed with 

Social Security revenue because the required reductions in traditional benefits would be so overwhelming, that they are unlikely to 

be politically viable. 

So what to do? To avoid these unappealing choices for financing 

individual accounts in the aftermath of the tax cut, policymakers 

may be tempted to adopt an accounting gimmick. At least three 

such gimmicks could be employed. We have come up with three, 

but presumably there are other ones that clever people will come 

up with, but let me just highlight three possibilities very quickly. 

First, policymakers could credit the same funds to both Social Security and individual accounts. Under this approach, the annual 

Social Security surpluses would be credited to the Social Security 

Trust Fund. Rather than being used to reduce public debt, however, these funds would then also be used to make contributions 

into individual accounts. Indeed, some proponents of individual accounts have recently suggested precisely this approach. They may 

not realize that under current budget rules, the contributions to individual accounts would be scored as expenditures from the non-Social Security part of the budget, so they would bring us back to creating deficits there, and it would require a change in the budget 

scoring rules in order for this gimmick to actually work from the 

perspective of proponents of individual accounts. 

The second accounting gimmick would involve loans from the 

General Fund to the Social Security Trust Fund. The Social Security reform plan proposed by then Representative John Kasich in 

1999, employed such loans. Under current budget scoring rules, 

loans from the General Fund to the Social Security Trust Fund 

would not be scored as non-Social Security expenditures because 

they are loans repaid with interest, and thus would not cause a 

deficit in the non-Social Security budget. But they also would not 

help on Social Security solvency. A loan that is repaid with interest 

does not do anything in present value, and therefore it does not 

solve the long-term problem facing Social Security. Here is where 

the approach could be turned into a gimmick, and this is actually 

what Representative Kasich’s plan did. The loans could be—the repayments could be extended beyond the 75-year window that is traditionally used to evaluate Social Security solvency. So if the loan 

repayments are outside of the window applying to Social Security, 

it makes it look like the Social Security Program is helped, nonSocial Security budget is not harmed, and we get out of the box 

that we would otherwise be in. The problem really is just not taking the loans into account properly within the Social Security system, and my written testimony talks about that. 

A final possible accounting gimmick involves a form of dynamic 

scoring which has been used, for example, by Marty Feldstein of 

Harvard. Feldstein assumes that an individual account plan would 

raise national saving. The higher national saving then boost corporate income and corporate profit taxes. The higher corporate 

taxes are then dedicated to Social Security, and the program appears to pay for itself. The assumption of an increase in national 

saving, however, is implausible, and without that assumption, the 

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whole plan falls apart. The key is, as Mr. Greenstein noted, is that 

given the lockbox, the Social Security surplus is already being used 

to pay down debt and to contribute to national savings—and that 

contributes to national saving. Diverting a dollar from paying down 

debt into an individual account does not raise national saving. 

And I am now going into deficit myself, even though I promised 

I would not. Let me just sum up quickly. 

In conclusion, the large size of the tax cut required policymakers 

to adopt one or some combination of three alternatives for financing individual accounts: a deficit outside Social Security and Medicare; large reductions in traditional Social Security benefits; or an 

accounting gimmick. Since all of these approaches are politically 

problematic, the tax cut considerably weakens the chances that the 

Commission will succeed in designing a credible plan to restore 

long-term Social Security solvency. In a fundamental sense, the tax 

cut undermines the opportunity that we had, and could potentially 

recapture, to use the projected budget surpluses as a substantial 

down payment on the longer-term budgetary pressures facing the 

nation. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Orszag follows:]

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Chairman CONRAD. Thank you, Dr. Orszag. 

And, Dr. Schieber, again, welcome, and please proceed. 

STATEMENT OF SYLVESTER J. SCHIEBER, Ph.D., VICE 

PRESIDENT, WATSON WYATT WORLDWIDE 

Mr. SCHIEBER. Thank you very much. 

Mr. Chairman, members of the committee, thank you for inviting 

me here to testify before you today on the budgetary tradeoff and 

transition issues related to Social Security reform. I think you 


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should be congratulated for taking up this very important issue. It 

is time that the American public began to understand the scope of 

the Social Security financing issues that we face and the mechanics 

of trying to deal with it. 

The Social Security actuaries estimate the present value of the 

under funding of the OASDI benefits defined in current law as approximately $3.2 trillion today. This is a difference in the present 

value of obligations under law and the current trust fund balance, 

plus the present value of future tax collections for the system. It 

is the amount that the trust funds today are short in order to 

maintain the benefits now defined in law, with workers and employers continuing to pay taxes in accordance with current law. 

Delay in addressing this imbalance until 2016 or 2037, and the 

$3.2 trillion shortfall that we are facing today will grow to be much 

larger. We face transition costs no matter what we do. 

The law establishing Social Security, limits the revenue sources 

for the program, primarily due to payroll tax revenues and some 

small amount of revenue collected through taxes on benefits. There 

are no provisions for the system to borrow from the Treasury or 

elsewhere at the current time. Under current law Congress is faced 

with the prospect of either raising payroll taxes or cutting benefits 

or some combination of the two. The magnitude of those adjustments in today’s dollars, if you could do it today, would be $3.2 trillion. If you wait until tomorrow or sometime later, it is going to be 

more. 

The transition cost to a reformed Social Security system that 

would include individual accounts would not be any higher than 

this $3.2 trillion unless the shift increased benefits or somehow 

kept a revenue stream coming into the total reform system. Congress has to pass legislation at some point to resolve the Social Security financing imbalance. We have heard this morning that the 

cost of fixing this imbalance has somehow been affected by the recent adjustment to the tax code. This conclusion is based on two 

assumptions that I think are questionable. 

The first is that the marginal revenue collected under the prior 

law would have been held in the form of a surplus that could be 

devoted to this purpose. The great American philosopher, Yogi 

Berra, has said, quote, ‘‘You can observe a lot by watching.’’ I am 

55-years-old. During my lifetime the Federal Government has run 

a deficit in 44 of those years. On the basis of watching our legislative process over many years, I am skeptical that the projected surpluses under prior law would have been preserved for the purposes 

the other witnesses on this panel have said they would be used for, 

or could be used for. 

The second questionable assumption is that the general revenue 

surpluses would be devoted to Social Security financing. To rely on 

general revenue financing of Social Security to any significant degree would be a very substantial departure from traditional policy. 

This policy has not been an accident. Franklin Roosevelt was adamant that his Social Security program was going to be financed by 

worker and employer contributions. Roosevelt was convinced that 

general revenue financing would change the nature of the program 

to that of a means-tested welfare program. He characterized it as 

‘‘the dole.’’

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The issue of general revenue financing has been raised repeatedly throughout the history of Social Security and has been consistently resisted by Congress for two reasons. The first is that the 

payroll tax financing puts a Governor on the program because of 

the direct linkage between benefit outflow and the taxes that have 

to be collected to provide for them. The second is that if these benefits are thrown into the cauldron of annual budget negotiations on 

our national priorities, they will ultimately become much less secure than they have been under the contributory structure. All we 

have to do is look at the differences in the attitudes about benefit 

rights under Social Security and welfare programs for children to 

see this conclusion writ fairly large. 

The problem with Social Security today is that current contribution rates will not finance the current retirement patterns when 

the baby boomers reach retirement eligibility ages. We have to cut 

benefits or increase contribution rates. There seems to be a tremendous reluctance though in our willingness to do either, or even to 

talk openly with people about the necessity of doing this. I believe 

the solution lies in stimulating higher savings rates, and I think 

in that regard I am in complete agreement with my colleagues here 

this morning. 

If a worker regularly saves from his or her early 20’s and continues to do so until retirement age, by the time they get to retirement age, 60 to 75 percent of the amount that they have accumulated will be interest, interest payments on their contributions. The 

savings in such a system will grow the capital base of the economy, 

improving workers’ productivity, which also is something we talked 

about here this morning. Higher productivity reduces the relative 

burden of providing for a dependent population. Under the current model we have to come up with $3.2 trillion 

to restore financing balance. If we can increase savings as part of 

that solution, the added interest returns will also help to pay off 

a $3.2 trillion burden that was now going to be imposed on workers 

and retirees. The more saving we can generate, the more interest 

returns can help to eliminate this funding deficit. 

Moving from a pay-as-you-go retirement system to one that is 

funded will be akin to changing from renting a home to buying it. 

Early on there may be some added annual payments with buying 

the home, but in the long term the owner is going to end up better 

off by owning than renting. As in buying the home, there may be 

a period at the beginning where some form of mortgage would be 

necessary to facilitate the process. But in the long term the goal 

of reform should be that such a mortgage would be fully paid off. 

When that is accomplished, the ongoing cost of a funded system 

should be considerably lower than the current one. 

Without the Bush Commission specifying any inkling of the plan, 

there has already been a great deal of criticism of the commission 

and its members and where they are heading. Mr. Orszag and 

some of his colleagues published a paper last week, where they concluded that, quote, ‘‘Diverting revenue from Social Security into individual accounts would exacerbate Social Security’s projected longterm deficit by reducing the revenue available to the system.’’ No 

one can possibly know what setting up an individual account program will do to the long-term deficit of Social Security without 

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knowing the details of the plan, and they have not even begun to 

talk about the details of the plan at this juncture. If the use of Social Security funds in the creation of an individual account is exactly offset by adjustments to the residual Social Security benefits, 

then the creation of an account will have absolutely no effect on the 

projected long-term deficit of the system. 

The same analysis concluded, quote, ‘‘Since an individual account 

system would favor people who live longer and would include a 

benefit formula that does not favor lower earners, it would be regressive on a lifetime basis.’’ Once again, a conclusion has been 

drawn about a plan that the Bush Commission might devise, without one iota of information on what the members will propose in 

terms of a plan structure that might actually increase income redistribution. You can look at the plan that Senators Gregg and 

Breaux have worked on in conjunction with Representatives Kolbe 

and Stenholm. I would argue that it is more redistributive than the 

current structure, and that it guarantees anyone who works a full 

career at least a poverty level income. The current system does not 

do that. These systems can be just as redistributive as the current 

system. It is all a part of the reform structure. 

The other witnesses here at the table this morning have assumed 

that a plan drawn in accordance with President Bush’s principles 

for Social Security reform cannot possibly result in added savings. 

I reject that conclusion. In my prepared remarks, I go through a 

possible alternative that would take advantage of our widespread 

experience in this country with 401(k) plans, where we would ask 

people to contribute to a voluntary account over time, and that 

money would be matched through contributions, matching contributions from Social Security. We could generate very substantial 

additional savings into our retirement system through a voluntary 

plan if we really have the will to do so. 

Thank you very much. 

[The prepared statement of Mr. Schieber follows:]

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Chairman CONRAD. Thank you, Dr. Schieber. 

Let me give each of you a chance to respond to something that 

you have heard from one of the other witnesses. Why do we not 

start that way? Mr. Greenstein, if there is some point that you 

were not able to make, or you want to respond to something else 

you heard from another witness, Dr. Orszag, Dr. Schieber, give 

each of you a chance for an additional observation here. 

Dr. GREENSTEIN. 


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Mr. GREENSTEIN. I guess I would just respond to Mr. Schieber’s 

comments about some general revenue financing for Social Security, as though this is something that is unheard of, and were we 

to go in that direction, would inevitably or potentially lead to the 

means testing of benefits and radical changes in the structure of 

the program. In fact, we already have some general revenue financing for Social Security. We do that by taxing a portion of Social Security benefits for higher earners. We collect that as income tax 

revenue, and we then deposit it in the Social Security Trust Fund. 

Some of it goes in the Medicare HI Trust Fund, some of it goes in 

Social Security. That is a piece of general revenue financing we already have. 

Medicare Part B, of course, has 75 percent general revenue financing, and that is not a means-tested program. 

But let me make two more important points here on this issue. 

No. 1: the reason Social Security is a pay-as-you-go system is that 

when it started, policymakers had a decision to make, what do you 

do with the people who were elderly then; they were already old; 

they had not paid payroll taxes, or they retired in a few years and 

they had only paid payroll taxes for a few years? Policy makers of 

that era, in the late 1930’s, 1940’s, made the decision that those 

people would get Social Security benefits. There was no past payroll tax that those people had paid that funded their benefits. That 

made it a pay-as-you-go system. 

One of the wisest budget experts I know, Bob Reischauer, and 

Henry Aaron as well, another one of the best experts, in their book 

on Social Security, make the point that it is a very legitimate use 

of general revenue to help pay off the part of the unfunded Social 

Security liability that was created by the decision made when the 

system began to fund benefits, which was really a general revenue 

responsibility, to fund benefits for the people who were old at that 

point, and obviously had not paid in payroll tax themselves. And 

one can do that and deal with that liability and make a fixed 

amount of payment till you get to the point that you have dealt 

with that liability and then not continue to do it. 

The final point that I would make is Mr. Schieber said we are 

going to have to cut benefits or increase contribution rates. I agree. 

I think all three of us agree. But I think it is inconceivable that 

Congress, at any point, under any party, will do that enough to restore long-term solvency. And therefore, I think the only way to be 

able to look at things like cutting benefits and increasing contribution rates is if they are part of a larger package that gets you all 

the way there because it marries those tough changes with a general revenue contribution, which we would have more room for if 

we did not eliminate the tax cut—I am not suggesting that at all—

or take away anybody’s tax cut in full, but just give some people, 

particularly at higher income levels, a somewhat lesser tax cut 

than they otherwise would get, to help us free up some general revenue, that in combination with some tough measures, could get the 

job done. 

Chairman CONRAD. Dr. Orszag. 

Mr. ORSZAG. Yes, just three quick points. 

First, in response to Dr. Schieber, the logic of Mr. Greenstein’s 

chart and the comparisons, applies to add-on individual accounts 

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just as much as general revenue transfers directly into the Social 

Security Trust Fund. So in other words, lack of non-Social Security 

revenue is a constraint on individual account plans as much as 

non-individual account plans, and if the commission had the revenue available to finance add-on individual accounts, in my opinion, they would have a politically easier job than what they now 

have. So I want to make sure we keep this issue distinct from individual accounts versus non-individual accounts and what you can 

do through the trust fund or not do through the trust fund. The 

key question is: do we have the resources to pay the transition 

costs, or to pay for individual accounts or general revenue transfers 

to the trust fund, regardless of what you are doing within that, and 

the answer, unfortunately, is, given the tax cut, no. 

Second, on some of the quotations from the document that I coauthored with Henry Aaron, Alan Blinder and Alicia Munnell, I 

would just point out that those were selective quotations, and that 

in the following sentence we said things like, ‘‘if no other changes 

were made to the system.’’ The statements are about harming longterm solvency in Social Security by diverting revenue out into individual accounts, really speaks only to if you do nothing else to the 

program while you are diverting revenue out. 

On progressivity and individual accounts, it is true that there 

have been plans, especially the most recent Kolbe-Stenholm plan, 

that pay a lot of attention to how individual accounts treat lower 

earners, and arguably may do a lot to help lower earners. But I 

want to emphasize is an individual account plan does not naturally 

lead to that. You really have to go out of your way to make sure 

it works that way. And what I think the real lesson of the KolbeStenholm plan is, given the political reaction to it, if you do not 

have additional revenue to try to solve part of the Social Security 

problem, the choices that you have to make, especially to make the 

accounts progressive, are so painful that it does not work. So in a 

sense, actually, I think the Kolbe-Stenholm plan illustrates the 

point that both Mr. Greenstein and I are making. Without additional revenue to help solve part of the problem, the choices involved are just politically not viable. 

Chairman CONRAD. Dr. Schieber. 

Mr. SCHIEBER. Well, I would like to take exception with what 

was just described here as the reason we have a pay-as-you-go 

plan. It is just wrong. FDR was adamant that we have a funded 

Social Security system. He went to his grave feeling very strongly 

that we have a funded Social Security system because he was very 

concerned about the unfunded liabilities that would arise in a payas-you-go system. His Secretary of Labor, Frances Perkins, said 

that he described building such a system as immoral. The reason 

we ended up with a pay-as-you-go system is because there was an 

argument broke out right after the law passed over whether or not 

the accumulation of a trust fund was really funding. 

Now, we have seen that argument explode again here in the last 

couple of weeks. Arthur Vandenberg and the Senate Finance Committee and Arthur Altmeyer, the Chairman of the Social Security 

Board during the early days of the system, argued about this year 

in and year out for the first decade of the program. The debate goes 

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on, and it does not make any difference whether you are a commission member or not. 

I would like to read you something here from an exchange between the Social Security Commissioner and a senator on the Senate Finance Committee in 1998, that is, Senator Bob Kerrey. 

The Commissioner said: ‘‘We had to save these surpluses so we 

could secure these benefits in the future.’’

Senator KERREY SAID. ‘‘We are not prefunding. Are we holding 

the money in reserve someplace? We are not prefunding. The idea 

in 1983 was that we would prefund the baby boomers. We began 

to use it immediately for the expenditure of general government. 

We did not prefund anything. What we are doing is asking people 

who get paid by the hour to shoulder a disproportionate share of 

deficit reduction. That is what we are doing. And the beneficiaries, 

on the other hand, they suffer from the illusion inflicted by us very 

often that they have a little savings account back here. They are 

just getting back what they paid in. They don’t understand that it 

is just a transfer from people that are being taxed at 12.4 percent.’’

Now, we did not need to operate this on a pay-as-you-go basis because we wanted to pay people full benefits at the beginning of the 

program. When the program started, we started collecting taxes in 

1937 on 60 percent of the U.S. work force. In 1940, when we started paying benefits, we paid benefits to people who were 65 years 

of age, who had paid into the system for 3 years. All of the people 

who had already retired never got Social Security benefits. In fact, 

we did not reach the portion of the population actually getting benefits, the portion of the population over age 65 getting benefits, to 

equal the portion of the work force paying taxes until the mid 

1970’s, because it took a very long time for that front edge group 

of people to die off. When we started this program, we could have 

paid people full lifetime benefits, the small group that we paid 

them, on the basis of this very large group of people that were paying taxes. The reason we went to a pay-as-you-go system was because this argument broke out, Vandenberg and Altmeyer on the 

one hand, over whether or not this was really funding, and there 

was concern about what the government would do with these funds 

if they grew to be very large, and then also because we wanted to 

keep the payroll tax rates low during the early years. And there 

was repeated—there were repeated bills went through this Congress, year after year, during the 1940’s, that kept the original 

scheduled payroll taxes that Franklin Delano Roosevelt insisted 

upon, from coming to pass, because Congress did not want to impose on people the true charge for the program they were sponsoring. This has got nothing to do with trying to pay people full 

benefits at the beginning. 

Now, many of the issues that this Congress has dealt with over 

the years are still at the heart of this debate. This argument over 

whether these trust funds are trust funds has been going on for almost 70 years now. At some juncture, I would think we would give 

up, and we would go try to find another way, and that is actually 

why I have advocated we ought to have individual accounts, because I think we could use an individual account mechanism, and 

it would not be a totally free account mechanism, that would allow 

us to do some real funding. I think we are going to sit here and 

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we are going to argue until we are all in the grave, about whether 

or not these surpluses are real and whether we can really save 

them for Social Security, and we are never going to resolve this. 

All we are going to do is argue. So we ought to try and find a mechanism where maybe we can actually put some money away somewhere and save it over time. 

Chairman CONRAD. Thank you. 

Senator Gramm. 

Senator GRAMM. Mr. Chairman, let me thank you. I think, since 

I did not get an opening statement, I just would like to make a few 

points. 

First of all, I do not understand why our witnesses, in fact, our 

members of the Budget Committee that are so concerned about the 

tax cut being too big and endangering Social Security, why they are 

silent about the fact that on the floor of the U.S. Senate right now 

we have an ag bill that spends $7.5 billion, when we wrote a budget calling for one that spent $5.5 billion. I hear great outcries. I see 

hurt feelings when we are talking about giving money back to 

working people, but when we are spending it in Washington, the 

silence is deafening, and the hypocrisy is clear everywhere. 

Second, if there is anybody from the press here, and they missed 

it, basically, what the Democrats are saying here, and I have a 

mock-up of this check, what they are saying here is they would like 

to pare this check that you are getting in half, and they wanted 

to keep the other half. So I do not want anybody to be confused. 

Democrats, at least that are presented here, did not want you to 

get your tax cut, and I am not the least bit shy about people knowing it. I want them to know it. 

Now, it seems to me we are down to two questions about Social 

Security, and they are no-brainers in my opinion. One, do you want 

to raise taxes and slash benefits or, two, do you want to take the 

surpluses that we are accumulating today and invest them in real 

assets that will accumulate earnings, and those earnings can then 

be used to pay benefits in the future? That is a no-brainer. 

Like, I assume, all three people here, I have TIAA CREF, college 

teacher retirement. By miracle, I have five times as much money 

in TIAA CREF right now than I ever put in. How did that happen? 

It happened because of what Einstein called the most powerful 

force in the universe, the power of compound interest. We get no 

interest on the so-called Social Security Trust Fund because there 

is no Social Security Trust Fund. It is a fraud, and everybody 

knows it. 

The second question is, do you want Government to own these 

investments and do you want Government to make the investment 

or do you want them in the names of the workers, where they own 

them, and they are part of their Social Security benefit? That, 

again, is an absolute no-brainer. 

Now, I asked myself how is it possible that very intelligent people go around on this subject and make absolutely ridiculous, absurd statements? How is it possible? And I conclude there are only 

two reasons: 

One, they really want to spend this money on Government, and 

therefore they do not want to invest it. But, you know, I think that 

is only partly the reason. I believe that perfectly intelligent people 

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argue that it is better to have meaningless IOUs than to have real 

wealth because they fear the impact of real wealth politically. They 

fear that if seniors have real wealth, they are going to want investment advisers; whereas, when they got Government IOUs, they 

want politicians, and that you are going to change political behavior and that it is going to affect the country politically. 

I just have to conclude, and this is a harsh judgment, but I have 

got to conclude one of two things: One, either people believe unbelievable, ridiculous things or they are fearful that a rational system 

of basing retirement on wealth is going to have a political impact 

that they fear in the country. 

You asked, Dr. Schieber, how is it we continue this debate, we 

continue this debate? We are not having a debate. Nobody really, 

that has the least bit of knowledge of economics, can possibly believe that we ought to be taking these surpluses we are running 

this year—$173 billion, Social Security surplus—and instead of 

running that money in real wealth that can earn a real interest 

and that principal and interest can be spent in the future, that we 

ought to be using money from Social Security to ‘‘pay down’’ the 

general debt of the Federal Government. That is pilfering Social 

Security. 

Let me also say that everybody knows that when the estimates 

from CBO and OMB come out in August, that we are going to be 

spending not only—we are certainly going to be spending by those 

estimates the Medicare surplus, which I do not worry about because we do not have a Medicare Trust Fund. We have got a surplus in one part, in part, because we changed the definition of what 

was in Part A and Part B; and, second, we are putting more general revenue in it than we have got an accumulation in Part B. 

But with Social Security surplus, I am concerned about spending 

it because I hope someday we will invest it on behalf of the working people of this country. But yet, with all of this talk about this 

lockbox business, and I see I have got 1 minute, let me just use 

it on lockbox. What a fraud. What a fraud. There is no lockbox. 

This is a ‘‘crockbox.’’ [Laughter.] 

Senator GRAMM. This idea that we are locking this money 

away—what a fraud. President Clinton said of this so-called Social 

Security surplus in his budget, ‘‘These balances are available to finance future benefit payments and other trust fund expenditures, 

but only in a bookkeeping sense. These funds are not set up to be 

pension funds, like funds from private pensions. They do not consist of real economic assets.’’

Basically, what we are doing is perpetuating a fraud, and I do 

not understand why. I can understand people not understanding it 

doing it, but I do not understand how intelligent people can do it, 

unless they have another goal. There are only two that strike me: 

they want to spend the money or, two, they fear the political consequences of having seniors that are secure in their retirement. 

I am glad that what I want to do helps seniors, and it helps 

America at the same time. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you. 

We turn now to Senator Stabenow for her questions. 

Senator STABENOW. Thank you, Mr. Chairman. 

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First, let me thank you for holding this hearing on an incredibly 

important topic. And if I might say to my good friend from Texas, 

I could not disagree more with what he just said, in terms of what 

is reasonable and how we should proceed in terms of a thoughtful 

discussion about people’s money, in terms of Social Security. 

Let me start by saying that I think there is an important piece 

that we miss when we talk about this subject. Social Security is not 

just retirement, otherwise we would call it a retirement system. Social Security is a disability policy. Any worker on the job today who 

becomes permanently disabled, has minor children, it is a disability 

policy. It is a life insurance policy. If someone loses their life, it is 

a life insurance policy, as well as retirement. 

And from everything that I have seen when we analyze the costs 

of private citizens for disability policies, retirement policies, life insurance policies, the low cost of administration of Social Security 

and the fact that it is invested in a no-risk form of investment, it 

is a good deal. I would consider Social Security a great American 

success story. 

The challenge for us is that we are living longer, which is the 

good news—we are living longer—but the challenges of living 

longer relate to the costs of Medicare and Social Security as we live 

longer, and as there are more people in retirement, and fewer people working. So we have some important challenges. 

I would, to my friend from Texas, who is no longer with us, I 

would just challenge him, first of all, to say we all want people to 

save. We all understand that. I tell my children that who are now 

21 and 25. The miracles of compound interest, if they just put a 

few dollars a year aside. I wish someone had convinced me of that 

when I was 21. That is not what this is about. This is about how 

best to make sure that Social Security and the benefits of that are 

available to our citizens in a changing world, in a changing economy. 

And we all know that when we look at vested interest, there are 

those now who make their living out of investing other people’s 

money who want to be able to invest Social Security dollars. I understand that. It is good business for them to be able to do that, 

to be able to earn dollars from being able to invest in other people’s 

money. I think that is certainly a part of the debate, in terms of 

who supports what. 

I would suggest that when we look at the situation and whether 

or not it is reasonable or foolish to question private investments, 

I guess the first thing that I would ask our witnesses is, when we 

look in a reasonable sense of what is best for all of us, as Americans, and how to proceed, and if you believe that Social Security 

makes sense, how to strengthen that for the future and make sure 

that those investments are available, the Nasdaq has dropped 60 

percent in value in the last 18 months. We certainly want things 

to improve, things are beginning to improve again. But when Congress considers setting up private accounts for Social Security, 

what lessons should we learn from this drop and how should we 

fold that into the discussion? 

Mr. Greenstein. 

Mr. GREENSTEIN. I think one of the key lessons is the mistake 

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efit with individual accounts invested in the stock market. If, for 

example, you have two workers, and they each were average wage 

earners, they each invested the same portion of their earnings each 

year of their career in an index fund that mirrored the S&P 500, 

they each retired at the same age, and they each annuitized their 

account upon retiring, but the difference was that one was 1 year 

older than the other and one retired in March 2000, converted the 

account to an annuity, and one retired in March 2001. The one who 

retired in March 2001 would have a monthly payment one-third 

lower to live on every month for the rest of his or her life. 

In fact, if we began to convert Social Security to accounts that 

had that kind of an effect, I think you would have generations that 

retired when the stock market was done rushing Congress in ways 

that the made the notch babies pale by comparison, demanding 

that Congress fill in the gaps. 

I think the lesson is to go back to our concept that people have 

often talked about of the three-legged stool of savings, and pensions, and Social Security. We do have a serious problem that too 

few workers have private pensions. We do need to fill those gaps. 

And the idea to look at expanding individual accounts, for example, 

on top of Social Security, in the context of pension reform, I think 

makes a lot of sense. 

Given that we probably are going to need some benefit modification on Social Security, that can also help ease the changes in Social Security. But the notion of replacing part of the Social Security 

benefit with a stream of income that is dependent on the fluctuations in the stock market does not make a lot of sense to me. 

Senator STABENOW. So what you are really referring to is what 

we have called Social Security Plus; in other words, Social Security 

as a base and then encouraging people and creating other options 

for people to save, pensions, investments, and so on. 

Mr. GREENSTEIN. In my view, a far wiser use of some of the revenue that was foregone in the tax cut that was just enacted would 

have been to create a system of refundable tax credits that enable 

people who do not have the benefit of private pensions or who do 

not have adequate private pensions to build those individual accounts as a supplement to Social Security. That would have made 

a lot more sense than some of the provisions that are in the tax 

cut that passed. 

Senator STABENOW. Mr. Orszag, I wanted to ask you to expand 

on something additionally when you were speaking about the analysis that you, and Henry Aaron, and others did that related to how 

much benefits would have to be cut if there was a 2-percent setaside of the payroll tax diverted into private accounts. And you indicated that if 2 percent of the payroll taxes were diverted into private accounts and benefits were fully maintained for those 55 and 

older, that there would be anywhere, for people under age 30, anywhere from 20-percent to 54-percent cuts. 

I wonder if you might expand upon that for the committee. 

Mr. ORSZAG. Sure. Thank you for giving me an opportunity to do 

that. 

President Bush has stated that he would like to protect benefits 

for current retirees, near retirees, the disabled and survivors. One 

way of thinking about the implications of diverting payroll revenue 

297

into individual accounts, given those promises, is the following: 

Over the next 75 years, benefit payments are projected to amount 

to 15.4 percent of taxable payroll. And when you subtract off the 

revenue, that is when you get the 1.86 percent of taxable payroll 

deficit that is commonly cited. 

The benefits protected for current retirees, near retirees amount 

to 6 percent of payroll. So the unprotected benefits, the ones that 

could be cut to balance the system, amount to about 9.5 percent of 

payroll. We have got a 2-percent hole already. You divert another 

2 percent out, you have got 4 percent. Four percent over 9.4 percent is about a 40-percent reduction, and that is the basic logic. 

You cannot get around with that without any additional revenue. 

To do that, just 40 percent for everyone, would impose unbelievable reductions for those who are 54 years old today. They have 

been planning their retirement, and all of a sudden you are telling 

them that their Social Security benefits are cut by 40 percent. So 

most plans would phase in the traditional benefit reductions to reflect the time that workers have to buildup their individual accounts. If you do that, younger workers, for example, people who 

are 30 years old today, would have benefit cuts that are much larger than 40 percent, say, under one plausible approach, it is 54 percent. 

They would, however, also have income from their individual accounts. And the income from their individual accounts, under somewhat favorable assumptions for the individual accounts, would 

amount to about 30 percent of their current benefits. So it is basically rounding minus 50 percent on the traditional benefit, and 

then you have the opportunity to earn back 30 percent. And, on average, you would be expected to wind up about minus 20 percent. 

The fundamental logic of my testimony is I do not think that is 

going to be politically viable to say we are going to cut your benefits in half, give you the opportunity to make 30 percent back, you 

know, depending on how the stock market does. 

Senator STABENOW. Thank you. 

Thank you, Mr. Chairman. I am very appreciative and hope you 

will continue to focus on this issue. It is so important to everyone 

in our country, regardless of their age. 

Chairman CONRAD. Let me just take a moment, if I can, to respond to a couple of the things that the Senator from Texas said, 

and I will come back the you. 

The Senator from Texas indicated that the farm bill on the floor 

breaks the budget. That is just a false statement. The budget provides $5.5 billion this year, it provides $7.3 billion next year. The 

bill that is on the floor uses the $5.5 billion that is available this 

year and uses $1.9 billion of the $7.3 billion that is available next 

year. It is entirely within the budget. I would challenge the Senator, if he really believes it breaks the budget, to go and bring a 

budget point of order against this bill. The truth is there is no 

budget point of order against this bill because it does not break the 

budget. 

The second point the Senator made was that we, on our side, opposed the tax cut this year, that we were in favor of cutting it in 

half. That is just a false statement. The fact is the budget resolution that I put before our colleagues had a bigger tax cut this year 

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than what the administration advocated or what passed. In the 

budget resolution I put before our colleagues, we had $60 billion of 

tax cut this year to give lift to the economy. The administration 

proposed a tax cut with less than $5 billion of tax relief this year. 

What passed, provided $40 billion of tax cut this year. 

So, you know, it is good to feel strongly about your views, but I 

do not think you have got a right to your own facts. The facts are 

stubborn things. 

The final point is on Social Security. The Senator is for private 

accounts. I do not rule them out, but where is the money going to 

come from? He voted for a budget plan that took the money that 

could have been available and used it to fund the tax cut. And part 

of the problem that I have with what is going on here is that, to 

me, constitutes double counting. You cannot use this money twice 

or, in some cases, three times. It does not work. 

Dr. Schieber, you wanted to——

Mr. SCHIEBER. The complicated thing about this is keeping your 

eye on the ball, and I would like to talk about two things that we 

just heard here. One is about the 50-percent loss in benefits that 

people are going to incur if you divert 2 percent of the payroll tax 

into individual accounts. 

Dr. Orszag said that that would be the price you would pay in 

terms of benefits and then that the individual accounts would replace about 30 percent. So you come up a net loser of 20 percent. 

Well, the net loss of 20 percent is because we are starting out in 

a 2-percent hole. 

We either have to figure out how to find funding for these benefits or else benefits are going to be cut, by his estimate, about 20 

percent. My estimate is that it is going to be more than that the 

longer we delay because I think it is highly unlikely that if we go 

10 years and then decide we have to cut the benefits, that we are 

not going to cut benefits 20 percent across-the-board. We are not 

going to cut benefits for widows who are 70 or 80 years old by 20 

percent. We are going to have to phase in much more rapidly benefit cuts on people about to retire. 

Now, I would like to also talk about the——

Chairman CONRAD. Let me stop you there if I can because we 

have now got four members here who have not had a shot at their 

questions, and we have been incredibly generous, I think anybody 

will say, we have been incredibly generous to the witnesses. 

Let me suggest that in your answer, that you bring up the other 

point, if we could, and go to Senator Corzine for his questions. 

Senator Corzine. 

Senator CORZINE. I really do appreciate having this hearing, and 

I think we need many of them, because the interaction of budget 

and tax policy, with how we restructure Social Security, is one of 

the most vital issues. It also ties together with our national savings 

rate, which I think is one of the more important issues to make 

sure our economy stays on the right course over the long period of 

time, and then there is truth in actions. 

And I want to start with one of those because I asked Chairman 

Greenspan last week, and this is one of the things that I felt compelled to ask because of the statement of Senator Gramm, but we 

are having this debate about whether trust funds are assets or acVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00304 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
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counting gimmicks or devices. I worked very hard to try to get an 

answer out of Chairman Greenspan. He gave me a long discussion 

about the savings rate. 

But then I came back and asked whether the assets that are in 

the trust fund are really that, are they something that produces 

available resources in the future, regardless of whether they have 

an assigned rate or whether they have market rates. And I think 

his answer was to the crucial question, are they ultimate claims on 

real resources, and the answer is yes. 

I would like to know whether you all believe that the generated 

surpluses of revenues from the payroll tax that go into the Social 

Security Trust Fund, which is really the essence of what a lockbox 

is about, we just happen to be investing them in Government IOUs, 

I think, which are Government bonds or assets, because it gets at 

whether we can do other things with the trust fund over a long period of time. That would be enough just to get that straightened 

out and make sure that people are all talking on the same definitions. 

The second is there seems to be this asymmetric concern. We can 

use Social Security funds for supporting general expenditures out 

of our budget over a period of time, whether it is the interest savings that comes because we have paid down the debt or whether 

it was at another time when we invaded it, and that somehow is 

OK, but we cannot then, in turn, look to shore up Social Security 

from general revenues. 

And I do not understand that asymmetrical argument, and I 

would like to hear, certainly, I know Dr. Schieber is probably 

chomping at the bit to get at that, but I do not understand why 

we have an asymmetrical view. And even if Franklin Delano Roosevelt said that was the way it should be formed, it is now 60/70 

years later, and we have a different set of issues that we need to 

deal with, and we ought to deal with them realistically. 

And, finally, I was going to be cute and tear up a piece of paper 

because, instead of that tax cut which got cut in half, we are talking about cutting benefits or raising taxes in a very serious way if 

we do not deal with this issue appropriately, and part of that is 

making sure we have the general revenues that actually can address this issue. 

Mr. GREENSTEIN. Well, probably all three of us have something 

we would like to say on this front. 

Let me say I completely agree with your point about the asymmetry. I also happen to disagree with Dr. Schieber’s accounting of 

the history, but I do not think we have the time to go into a discussion of what happened in the 1930’s. 

On your point on whether the trust fund has real assets, I do not 

see how there can be any question here. There is a certain amount 

of obfuscation going on. The draft general report of the Social Security Commission had a box of quotes from GAO, CBO, and so forth, 

which purported to show that they agreed the trust fund had no 

real assets. None of the quotes said that. In fact, if you read the 

GAO quote closely, it said the trust fund does have real assets. 

Here is the issue: The trust fund has real assets. They are Treasury bonds. There is no plausible explanation for why if GM has a 

Treasury bond or a foreign investor has a Treasury bond or a Wall 

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Street trader has a Treasury bond, that is a real asset that is the 

safest asset you can have, but if Social Security has a Treasury 

bond, it is a worthless IOU. That is indefensible argument. 

The argument that is really being made is that the trust fund’s 

bonds, which are a real asset to the trust fund, are a liability to 

the rest of the Government. So, for the Government as a whole, 

they are not an asset, and no one disagrees with that, but for the 

trust fund, they are an asset, and of course they will be honored, 

which takes one to the larger question of how we afford everything 

down the road. And your point about building national saving is 

important, and it might be noted that if we had had a smaller tax 

cut and we had saved more of that money, we would be building 

national saving. 

Mr. ORSZAG. I agree with what Bob just said. 

Just to followup, since Senator Gramm had quoted from the Clinton administration’s fiscal year 2000 budget. And as a former Clinton administration official, I feel like I want to correct the record 

a bit. In the subsequent year, fiscal year 2001 budget, let me read 

you the following quotation, which I think exactly characterizes the 

issue appropriately. 

‘‘Increases in trust fund balances do strengthen the ability to pay 

future benefits if the surplus in the trust fund is matched by an 

improvement in the Government’s net financial position. If a trust 

fund surplus is matched by a corresponding reduction in publicly 

held debt, then the Government’s financial position will be improved.’’

The key question, in a fundamental economic sense, is: Are we 

saving those surpluses? If we are using them to reduce publicly 

held debt, we are saving them. And all of the accounting identities 

of the fact that it is an asset to the Social Security system and a 

liability to the rest of the Government, those hold regardless of 

whether we are actually saving the money, and so they do not 

speak to that question. 

The thing we have to keep our eye on is are we contributing to 

national saving. And over the least few years, certainly, there is no 

dispute we are. I would say even during the 1980’s and 1990’s we 

were, at least to some degree. 

Mr. SCHIEBER. Two things. One, as to my interpretation of history, I co-authored a book with John Shovan from Stamford University that was published by Yale University Press in 1999. That 

book received a special certificate of merit in the annual Paul E. 

Samuelson Awards last year. It was reviewed and read by quite a 

number of very prominent economists. If anyone wants a copy of 

that book, I would be happy to provide it for you, and then you can 

judge whether or not our interpretation is correct. It is very well 

documented? 

Now, in the issue of whether or not the trust funds are funds, 

the point I made earlier is that this debate, this argument has 

been going on for a very long period of time, and I do not think 

that the public can sort it out because the people sitting around 

these kinds of tables have not been able to sort it out over a very 

long period of time. 

Absolutely the bonds that are in these funds represent a claim 

that the trust funds can make on the Federal Government stream 

301

of revenue. The point I think other people are making is when you 

get down the line and you really start cashing these on a substantial basis, it is going to put a tremendous demand upon the budget 

of the Federal Government, and at that juncture, you are going to 

have to start sorting out a variety of priorities that we have not 

had to deal with yet. That is the problem. It is not that anybody 

does not want to pay these benefits. It is at some juncture, you are 

either going to have to be willing to go tax the American people at 

much higher rates than we have traditionally, or you are going to 

have to cut in to other things that government does if you are 

going to cash these bonds to deliver the benefits that they imply. 

And I think that is going to put even people who are dedicated to 

this program in a relatively difficult position. 

I think that the plan that Senator Moynihan and Senator Kerrey 

put on the table last year, or a couple of years ago, was extremely 

austere. I would not support it. But it would cut benefits very significantly for a lot of—across the board, low-income people that do 

not have any other resources, and I think in kind of the classical 

definition of liberalism, I think the thing that bothered Senator 

Moynihan was this program, these programs have a potential to 

crowd out everything else that government does, and there is a 

question of whether or not we want to get ourselves into that position. 

It is not an ideological thing. I think it is a very practical thing. 

Chairman CONRAD. Thank you, and thank you, Senator Corzine. 

Senator Feingold. 

Senator FEINGOLD. Thank you, Mr. Chairman. I thank you for 

calling the hearing. 

I would like to use my time to make some comments and share 

a little bit of information that we gathered from my constituents 

on their preferences in this area, and then ask a question. 

At stake is whether our elderly live in comfort or in poverty. Before Social Security most elderly Americans lived in poverty. Before 

Medicare, more than a third of the elderly still lived in poverty, 35 

percent in 1959. Fewer than 10 percent do now. And Social Security and Medicare have been, of course, essential to this achievement. Nearly two-thirds of elderly Americans rely on Social Security for most of their income. Social Security has been one of the 

most successful government undertakings in history. 

Last month the President’s Commission painted what many regarded as an alarmist picture of Social Security’s future. I do not 

agree with its tone, but I am not among those who say that we 

should just do nothing about Social Security’s challenges. As President Kennedy said, ‘‘The time to repair the roof is when the sun 

is shining.’’

The Social Security Trustees’ more sober report, released in 

March, indicated to maintain solvency for 75 years we need to take 

actions equivalent to raising payroll tax receipts by 1.86 percent of 

payroll or making equivalent cuts in benefits. When Social Security 

exhausts its assets in 2038, annual Social Security tax revenues 

will be sufficient to cover 73 percent of annual expenditures. The 

Trustees’ report thus sounds a warning. We can fix Social Security 

for 75 years if we make changes now equal to less than 2 percent 

of our payroll taxes or 13 percent of benefits, but if we wait till 

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2038, we will need payroll tax increases of more than 5 percent or 

benefit cuts of more than 27 percent. 

The President’s Commission seems bent on taking 2 percent of 

the payroll taxes away from the present Social Security system, 

and devoting those funds to private accounts. As Chairman Conrad 

has pointed out, this 2 percent plan could require Social Security 

to come up with another $1.3 trillion in the next 10 years alone. 

And as Clinton economic advisor Gene Sperling pointed out Tuesday, it will move forward the date when payroll taxes no longer 

cover benefits from 2016 to 2007. The 2 percent plan would just 

add to Social Security’s problem. It would take resources away 

from Social Security that we would have to make up either with 

more taxes or more benefit cuts. As The Wall Street Journal reported last month, it would require making huge offsetting benefit 

cuts, averaging 40 percent. 

Now, Congressmen Kolbe and Stenholm have done a service by 

introducing their new bill, because it spells out just how unacceptable the cuts are that this plan would force. Their bill, which largely tracks the President’s 2 percent approach, would also reduce Social Security’s guaranteed benefit, reduce cost of living adjustments, and raise the retirement age. Reducing cost of living adjustments would disproportionately hurt older beneficiaries, particularly women, who have longer life expectancies. And raising the retirement age would disproportionately hurt blue collar workers and 

African-American beneficiaries when African-American men have a 

life expectancy of 68 years. It is therefore not surprising the both 

Speaker Hastert and Leader Gephardt said they could not support 

the bill, and I cannot either. 

We need solutions to Social Security challenges that preserve its 

vital role of combatting poverty. This past year I have had a series 

of discussions with the people of Wisconsin about Social Security 

at town hall listening sessions, through letters to my office, and 

through a special page on my website. Of course, this was not a 

scientific sample, but hundreds of my constituents have expressed 

some clear opinions when given a list of options. Each year I conduct a listening session in each of Wisconsin’s 72 counties. 

Since January of last year, people raise Social Security with me 

at these listening sessions more than 100 times. It was one of 7 

issues that people brought up most frequently last year. Nearly 4 

out of 5 people writing to me about Social Security privatization 

since January of last year have opposed privatization. And in the 

same period, hundreds have also written to support a lockbox for 

Social Security and Medicare. 

And in June of last year, in order to engage Wisconsinites in a 

more detailed discussion of Social Security, I uploaded a section of 

my website that allowed people to choose among various options to 

save Social Security. Respondents rejected most options. The people 

I am hearing from in Wisconsin do not want us to cut Social Security benefits or raise taxes significantly. However, a majority of respondents did support five options, which taken together, would 

keep Social Security solvent for 75 years. They supported President 

Clinton’s plan, including transferring to Social Security general 

revenues equal to the interest savings Social Security generates, 

and having an independent board invest 15 percent of trust fund 

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assets in the stock market. They also supported two other structural changes to the Social Security program: requiring all new 

state and local government employees to participate in Social Security and raising the cap for earnings subject to Social Security 

taxes at a level of salary that a Member of Congress makes. Respondents also rejected a number of other options, many by a resounding majorities. They overwhelmingly opposed across-theboard benefit cuts, COLA cuts, across-the-board payroll tax increases and raising the retirement age. 

So, Mr. Chairman, I would ask unanimous consent that a report 

of the responses to my website be printed in the record of this 

hearing at the close of my remarks. 

Chairman CONRAD. Conrad. That will be done. 

[The report of responses to Senator Feingold’s website follows:] 

Senator FEINGOLD. And I just want to ask one question of Mr. 

Orszag. Would not the kind of reforms endorsed by Wisconsinites 

in this survey be more certain to contribute to Social Security solvency than would privatizing 2 percent of the program? 

Mr. ORSZAG. Well, let me answer that in two ways. First, one of 

the options that your constituents embraced was general revenue 

transfers, as you noted. And as we have noted today, there is no 

revenue left to transfer without creating deficits outside of Social 

Security and Medicare. So partly the answer is: would that it be 

so, that we could do that. That I think would help substantially to 

improve the political viability of any plan to reform Social Security. 

Beyond that there are a series of options. For example, covering 

state and local workers. That was embraced by all three plans that 

were part of the Gramlich Commission in the mid 1990’s. It is politically controversial, but it is something that probably should be 

done. 

There are other things like the Bureau of Labor Statistics will 

be coming out with a new index, price index, a superlative index 

that will be an improvement on the consumer price index. The system could be indexed to that index, rather than the consumer price 

index. 

As you mentioned, earnings to which Social Security taxes are 

applied could also be raised. There are tradeoffs involved. That 

level is somewhat below its historical—let me rephrase it. the percent of earnings that is subject to Social Security taxes is somewhat below its historical level, and it could be raised back up to 

its historical average. One should note that as those taxes accrue, 

in the future workers will get higher benefits as a result. So the 

impact on the actuarial balance is not quite as large as one would 

initially think, but it is certainly something that could be explored. 

But in any case, there are a whole series of options like the ones 

that your constituents have embraced, that in combination with 

general revenue transfers, could form a politically viable plan, but 

without that general revenue piece, you are left with a lot of broccoli, and too much broccoli to make the plan work. 

Senator FEINGOLD. Thank you so much. Thanks, Mr. Chairman. 

Chairman CONRAD. Senator Murray. 

Senator MURRAY. Thank you, Mr. Chairman, and thank you for 

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tremely important, and ones that we need to be having as we work 

toward some difficult decisions. 

I am sorry Senator Gramm left, and I am more sorry actually 

that he ripped up his check. He probably needs it for his heartburn 

medication, and I do not think he is going to have that now. 

But I really appreciate all of you being here and talking about 

this. You know, when I listen to Senator Gramm and I hear these 

discussions about privatization and changing Social Security, I 

think it is really important that we remember why we enacted Social Security in this country to begin with, long before I was born, 

but 50 percent of the women in our country, back in 1935, lived in 

poverty. These were people’s mothers and grandmothers, who did 

not have food on the table and lived in terrible conditions, and this 

country decided that was something that as a country we could not 

live with. I think it is terribly important that we do not forget 

those women now as we look at how we are going to change Social 

Security, and we have to be very careful that whatever changes we 

make, does not impact women in specific ways. 

And I am very concerned when I start hearing about privatization and other proposals that are out there, because of the current 

Social Security system protects women like I am talking about, 

from inflation, and makes sure that their benefits do not run out. 

When you get to privatization it is going to be women who have 

not been in the work force as long, who earned less to begin with, 

who are going to be impacted by those first, and I do not think we 

want to be the Senate or the Congress or the administration that 

turns its back to a point we were at before. So I think it is very 

important to remember those women. 

The other women that I keep in mind in particular are the 

women that are talked about in the book—it is called ‘‘Nickel and 

Diming’’, that was written by—right. If you have not read the book, 

you ought to read that book, and you ought to think about those 

women every single day as we change policies like this. These are 

women who are earning minimum wage, who—the company they 

work for might provide health care coverage, but because it means 

a $25 payment out of their pocket, they do not get health care because they cannot afford that. They are living in motels during the 

week for their minimum wage jobs. They are eating nothing during 

the day as they work at minimum wage jobs, because they are trying to care for kids at home. It is a terribly eye-opening book, and 

I think those are the women we have got to think about when we 

look at any changes to Social Security. 

Now, privatization is not going to help those women. They do not 

have the money for a 401(k). That is even out of the realm of their 

thinking. They are barely making it now. They do not have cars. 

They live in transitional housing. They do not eat well now. And 

to talk to them about a 401(k) is talking about Mars. 

So I think we have to be very careful and we need to keep those 

kinds of women in mind as we propose changes to Social Security 

and privatization. 

And, Dr. Schieber, as you talk about that, and I think about 

these women, and I think about what happens in terms of inflation, guaranteed benefits, and in terms of benefits running out, 

what do you say about——

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Mr. SCHIEBER. In the plan that I devised, working with John 

Shovan, and working on this book, we actually would have raised 

the inside Social Security benefit for those kinds of workers. So I 

think you have to really think about how the whole system is going 

to be restructured before you come to a judgment about whether 

one approach is good and another is bad. Again, I would advise 

that you take a look at this story, because I think it is an important story, and it tries to put the current situation in the context 

of where we have come from, but also where we are. 

This structure, this plan was devised in the 1930’s in the middle 

of the Depression when family structures were very different than 

they are today, when we did not have financial markets, when we 

had very little savvy about what was going on. All I ask is that you 

kind of come at this with an open mind and think about what we 

can do. 

Senator MURRAY. Sure. I could agree with you. And times did 

change. And during the 1980’s we made some changes to Social Security for women in particular, because the divorce rate had 

changed. And I worry again about how privatization plans would 

affect women, whether or not the spousal benefits would remain 

the same. I mean, those things cost money, and we have to look 

at how——

Mr. SCHIEBER. I worry about that also. My grandmother was on 

SSI. I am very worried about low-income older women, believe you 

me. 

Senator MURRAY. OK. Well, I would like to hear what our other 

witnesses have to say as well. 

Mr. GREENSTEIN. If you think of how Social Security works, 

many groups of women get a Social Security benefit that exceeds 

what they would get based on their own earnings alone. Social Security is designed that way. It favors people with lower than average earnings. Women have lower than average earning. It favors 

people who have a longer than average life expectancy. Women 

have a longer than average life expectancy. It has special benefits 

for spouses, widows and divorced women. As a result, women pay 

about 38 percent of the payroll tax and get 53 or 54 percent of the 

Social Security benefit. 

Now, if think of, hypothetically for a moment, replacing all of Social Security with individual accounts, you have an individual account that has a dollar in it. That same dollar cannot simultaneously pay a male worker, pay the spouse after he dies, pay a divorcee from a first marriage. The same dollar can only be used 

once. Individual accounts, by their nature, do not redistribute. Social Security is designed to redistribute to women. 

Now, as Mr. Schieber said, you can on paper design a plan that 

has individual accounts, and that then greatly increases the redistribution within Social Security so that the two together do not 

have less redistribution for women than under the current system, 

but such a system I think is not politically sustainable over time. 

Think of what it would mean. First you would be cutting Social 

Security benefits enough to restore long-term balance. You would 

be cutting Social Security benefits further to make up for the 

money you were diverting from Social Security into the individual 

accounts, and you would be cutting Social Security a third time for 

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middle income workers in order to have more money in Social Security to redistribute to the lower income workers to make up for 

the lack of redistribution in individual accounts. 

The result would be that down the road, not someone like Mr. 

Schieber, I do not doubt that for a moment, but others, the Catos 

and the Heritages of the world, would hold up how the middle income person did in Social Security compared to how they did in the 

individual account, and say, ‘‘Look at what a terrible deal Social 

Security is compared to the individual account.’’ It would put us on 

a slippery slope. I do not think a Social Security system redesigned 

that way can survive. 

The answer is to shore up Social Security as is, and not start to 

replace it with non-redistributive individual accounts, but an even 

greater redistributive burden on Social Security and have Social 

Security collapse politically over time as a result. 

Chairman CONRAD. Senator Clinton is next. 

Senator CLINTON. I am going to echo the thanks to the chairman 

for this hearing, which I believe is so important, and certainly 

helps to highlight the problems, if not come up with solutions. 

I, for one, would like a copy of your book, Dr. Schieber. I read 

you testimony, and I appreciate greatly the thought and concern 

that you have put in over many years in trying to not only design 

a system in the United States, but work with other countries who 

are faced by the same demographic reality of an aging population 

and the implications that that poses for the burdens on taxpayers 

and workers. 

What concerns me about this whole debate though—and I walked 

in in the middle of the Senator from Texas’s peroration, is that it 

is easy to mistrust one another’s words because of the political and 

ideological agendas that are not very well disguised behind the 

rhetoric. And if it is difficult for us, it must be nigh on impossible 

for the American public. And I regret that it appears as though the 

President’s Commission is off on the same footing, and I regret that 

because we know we have a problem that we have to address, but 

the first salvo from the Commission in the form of a report that 

I think rightly could be criticized for its presentation, means that, 

you know, we are back into the swamp again. 

And, Mr. Chairman, I do not have any allusions that we could 

do any better than anyone has ever done, and I know full well that 

fools rush in where angels fear to tread, but I have very high regard for the three gentlemen sitting before us. They bring different 

levels of experience and attitude and perspective. But I think it behooves us on the Budget Committee to come up with specific proposals, you know, not merely to be in the peanut gallery, taking 

shots at people who do venture into this territory, to try as best 

we can to sort out the ideology and the politics from the reality, 

and to get at the economics. 

But it is—I guess it is troubling because many of us believed our 

options would have been much greater had we not done the tax cut. 

We would have been in the same position. We would have had to 

face these issues. They were not new post-tax cut signing. We know 

that. But as several of you have pointed out, the tradeoffs are difficult under any set of circumstances. We have just rendered them 

excruciating, and that seems so unfortunate. 

307

And I also regret that our colleague from Texas—I missed this, 

but Senator Corzine told me in great colorful detail how exciting 

it was to see him tear up the check—but the fact is that you could 

line up all kinds of public investments and tear them up because 

of the tax cut. This is not a one-way street. And we have undermined our capacity to make these difficult political decisions because of this fiscal year responsible tax cut. 

Nevertheless, we are where we are, and we have to try to address the reality. 

Let me ask you something that, you know, I have though about 

a lot, because the savings rate, I think you have to see on both a 

macro, micro, or at least national individual level, and we are deficient in both respects, and I thought we had begun to make some 

progress in the last 8 years on the national level, but it did not 

translate or, shall we say, trickle down to individual savings rates 

as one might have hoped. 

If we were not talking about Social Security, and we were only 

talking about savings rates, do each of you have any ideas as to 

what could be done, what you know might have been tried in other 

countries, what possible options there are, that would increase savings, have a sensible approach toward pensions for lower-income 

workers, because my colleague from Washington is absolutely 

right. I mean, what haunts most of us is the idea that we would 

go back to pre-Social Security poverty. And sometimes I feel like 

maybe we could start with baby steps here and take a look at that. 

Dr. Schieber? 

Mr. SCHIEBER. One of the things I think we need to do is try and 

understand a little bit better what has happened to our personal 

savings rate. And there is a very intriguing paper by a couple of 

fellows at the Federal Reserve Bank that has recently been written. It is on their website. If you cannot find it, the fellows’ names 

are Mackie and Palumbo. 

They segregated the population into income classes, into 

quintiles, five groups, and they looked at what happened in each 

of these quintiles, and it appears that most of the personal—drop 

in the personal savings rate in the United States was attributable 

to the drop in the savings rate in the top quintile during the 

1990’s, that actually savings rates among the bottom two or three 

quintiles increased over this period, but the people in the top are 

such a dominant share of the financial markets, that when they 

quit saving, it dragged the whole personal savings rate down. 

Now, I think probably what was going on, if you go back and 

think about what was going on in the stock market, is these people 

were realizing such tremendous run-ups in the value of their portfolios, that they went on a consumption binge. I think if you look 

at savings rates further down—I mean, they are distressing, it 

would be nice if they were higher—but the universal story is not 

as bad as the aggregate number suggest. My hunch is that a lot 

of the folk, the people that were heavily invested in the Nasdaq exchange, tended to be people with quite a bit of money. My guess 

is some of the consumption habits have started to change, and that 

may help account for why the economy is chugging along a little 

more slowly than we would hope. 

Senator CLINTON. Yes, Peter? 

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Mr. ORSZAG. I have read the same study, and agree that regardless of what has happened to small changes over the 1990’s, the 

key thing is that middle America is not saving sufficiently on their 

own for their retirement and other needs. 

Mr. SCHIEBER. And I agree with that also. 

Mr. ORSZAG. And so the key question then is what can we do 

about that? The fact of the matter is that economists do not have 

such great ideas. Most of the, for example, tax incentives that we 

have come up with for raising private saving, seem to cost just as 

much in terms of reduced government saving as they generate an 

additional private savings, and we are not really doing anything, 

we are not adding to national saving. 

There is some hope that a progressive matched savings program, 

like one that was created in the recent tax legislation, but with a 

key change, could be helpful. When offered a match, even lower income workers seem to participate in a match savings program at 

surprisingly high rates. So, for example, if you offer a 401(k) plan 

to someone earning 10 or $15,000 a year, about half of them will 

participate, which is much higher than one might initially suspect. 

So one promising alternative then would be for—the problem is 

that most of them are not offered the 401(k) in the first place. So 

one promising alternative is, let the government offer the match, 

which would open up a match savings program to a much wider 

array of lower and moderate income workers. 

Ostensibly, that is what the recent tax legislation does. However, 

the credit is not refundable. And the way it is designed basically, 

no one who would benefit from—or a very small number of the people who on paper would benefit from the higher match rate—there 

is a 50 percent match rate—actually would not get anything from 

it because they have no income tax liability. And then the match 

rate phases down so quickly, that it is really not providing much 

of an incentive to anyone. So it looks good on paper, but when you 

actually try to figure out who is going to benefit from it, it falls 

apart. 

If you made that program refundable, it would offer the potential—I think that is the most auspicious approach to raising saving 

among the most vulnerable population that we have. 

Mr. GREENSTEIN. I would very much agree with the comments 

that Peter just made. I add a couple of tales. 

The provision in the tax bill that he referred to is basically a 

pension-related tax credit, that was put in at Senator Baucus’s request, but it was put in at Senator Baucus’s request, but it was a 

desire on those framing the tax bill, not to spend any real money 

on it. So it was designed, as Peter has just suggested, in a way that 

it is both non-refundable and for the people who benefit for it, it 

phases out so quickly and is so small, that it does almost nothing, 

which is why it has almost no cost. 

The model for what Peter is talking about, taking that, making 

it larger, making it refundable, actually would be similar to the 

USA accounts that were in President Clinton’s budget a couple of 

years ago. And the missed opportunity we had was that we could 

have used some of the tax cut for that, and that would have promoted saving, and instead, most of the elements of the tax cut promote consumption rather than savings. 

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I am sounding like a broken record here, but given that there are 

significant elements of the tax cut that only affect small percentages of the population, that are not in effect yet and do not take 

effect for a while, I am hoping there would be some opportunity to 

reconsider some of them, both with regard to needs like Social Security solvency, but also with regards to converting some of those 

provisions that are regressive, badly targeted and consumption oriented, into proposals like the one Peter mentioned, that would promote pensions, help low and moderate income elderly people and 

promote national saving at the same time. 

Senator CLINTON. Thank you very much. 

Chairman CONRAD. Senator Nelson. 

Senator NELSON. Mr. Chairman, I want to thank you for having 

this hearing. I want to recall to mind a day that will live in infamy. 

For it was the day that but for one vote the Senate was denied 

Senator Byrd’s motion to take the reconciliation instructions out of 

the Budget Act. 

And because for one vote Senator Byrd’s motion failed, we were 

forced into an economic straightjacket that caused us to discuss 

and debate with limited ability to amend the most far-reaching tax 

cut for the next decade, perhaps two decades, all within the span 

of a limitation of 20 hours of debate. I felt like that was wrong. I 

think the product that was produced was wrong, and that is why 

I voted against it. 

What we find now is the American people are starting to have 

some surprises. They thought, for example, when it was billed on 

the floor during the debate that they were going to get a rebate of 

$533 per taxpayer and that that was going to occur in the year 

2001. 

What they did not realize but are just beginning to discover is 

the $533 per person is not a rebate, an additional tax reduction. 

But it is merely an advance on the tax rebates that they would get 

next April when they file their tax return for the year 2001. Not 

an additional tax cut of $600 for a couple. But rather an advance 

of the refund that they would have been getting next year. 

I share that with this committee simply to illustrate that there 

were so many sleight of hands in this tax cut that was supposed 

to be conforming to the $1.35 trillion, when in fact it was about 

$1.8 trillion because they suspended the whole tax cut in the tenth 

year and went back to the present tax structure. 

Now I say all of this just preliminarily to say that had we been 

more balanced in our approach with a very substantial tax cut in 

the range of $900 billion over 10 years—indeed, I voted for one 

version of $1.2 trillion over 10 years. But that it was balanced 

against using part of the surplus in the investments that we want 

such as education and a prescription drug benefit, and defense that 

we are clearly going to have to spend more on, and yet reserving 

about a third of the surplus to shore up Social Security, and to 

shore up the Medicare Trust Fund, the subject of which you have 

been discussing today. 

It is just another illustration, and I would love to have the comments. I will make this short, and I thank you for your patience, 

and I thank you for this hearing. 

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Given the constraints that we now have, if we want to exacerbate 

the situation, then create these private investment accounts, transfer $1 trillion out of the Social Security Trust Fund and what is 

left is going to have the inevitable result that you are going to have 

to reduce Social Security benefits, which is exactly the opposite of 

what the American people want. It is just going to cause the crisis 

to worsen. 

So with that as my common sense, country boy approach, knowing full well what our people in the State of Florida feel, I would 

love to have your comments. Let us start with you, Dr. Schieber. 

Mr. SCHIEBER. The problem we have with our current system is 

that we are not contributing enough to support benefits that are 

currently defined. We need some more money to put in there. It 

may have seemed easier to take general revenue taxes and put 

them in there then to go to the American people and tell them, if 

you want to continue to exhibit this kind of behavior, you need to 

be putting more into your retirement system. 

It may have been easier, but there are some issues that this Congress needs to step up to and decide whether or not it really wants 

to take some of this general revenue and put it in there. And then 

think about the implications of taking general revenue and the 

claim that is going to make on other things that you do. 

Senator NELSON. I would only amend what you are saying by 

saying that the plan that the chairman had proffered, of which I 

supported, was that in this unique time in history when we have 

surplus that you take about a third of that surplus and put it 

into—in his case it was about $900 billion. You take that and put 

it into the Social Security Trust Fund, which is going to give you 

additional resources. 

Now what you are claiming is that on down the road you have 

got a train wreck coming and you had better get ready for it. I 

agree with you. But in the meantime, you could certainly shore up 

the Social Security Trust Fund to the extent of $900 billion had we 

followed the chairman’s——

Mr. SCHIEBER. But down the road you are still going to have to 

address these priorities. There was recently an article in the Washington Post about Greece. Greece has decided not to buy new fighters for its air force because of its high pension cost. We are going 

to be in exactly those same situations and maybe we would, on a 

very short term basis, want to use some general revenues. But I 

think we have to be very careful about not getting ourselves into 

a box where 10 years or 15 years from now we have no discretion 

on other things. 

Senator NELSON. I do not disagree with you. Ultimately we are 

going to have to make hard choices. But what the chairman from 

North Dakota’s plan would have done would have extended the solvency of the Social Security Trust Fund from about the year 2032 

all the way up to about the year 2053. 

Mr. SCHIEBER. But there is still a problem of what the flow of 

claims is going to be as the baby boom goes into retirement. That 

is the problem. 

Senator NELSON. Your point is well taken, and I hope you understand my point as well. 

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Mr. SCHIEBER. I understand your point. You are going to make 

a statutory claim on the future budgets by doing what you are 

doing. But you still are going to have a relative priorities issues 

that you are going to have to sort out down the road. You have not 

cheapened the cost of the system. 

Senator NELSON. I understand that. But you know what my position is? My position is the conservative position. Take surplus and 

use it wisely instead of frittering it away. Let us hear Dr. Orszag 

and Mr. Greenstein. 

Mr. ORSZAG. Yes, Senator. Two comments. One is, again moving 

away from just budget accounting to the fundamental economics, 

the key thing is to be raising national saving. Funds that are devoted to reducing publicly held debt and that are credited to the 

trust fund raise national saving. So keeping our eye on that ball, 

which is ultimately the way that we are going to prepare for the 

retirement of the baby boomers, general revenue transfers do contribute to national saving and are important in preparing for the 

retirement of the baby boomers. 

Second, from the perspective of the Social Security reform debate, there is no question that hard choices have to be made. The 

real question is, how many hard choices can all of you afford to 

make and in a politically viable way? There is a limit to how 

much—I used the word broccoli before. There is a limit to how 

many of these painful steps you can take. 

The key point is that general revenue transfers help to grease 

the wheels or make the reform plan as a whole politically viable. 

Without those general revenue transfers you wind up with too 

much pain and it is too much for, in my opinion, the political system to bear. 

Mr. GREENSTEIN. I would agree with Peter. I would just add, 

when you are in a hole, you do not dig it deeper. I cannot help but 

noting that as we are sitting here this morning, the House yesterday passed a tax bill. Without getting into the merits of the energy 

provisions of the bill, that and two other bills the House has recently passed cost another $60 billion over 10 years. There is only 

$20 billion left over 10 years in the budget resolution for tax cuts, 

and that money is only there because of the gimmicks that were 

used in the tax cut that passed to make it look like it fit within 

$1.35 trillion when it ultimately cost much more. 

If our goal is not making the box bigger when the boomers are 

retiring, promoting national saving, doing that by preserving the 

Social Security and Medicare Hospital Insurance Trust Funds, the 

last thing we ought to do be doing is doing further tax cuts beyond 

the budget resolution that are not offset and are not paid for. Yet 

that seems to be where the House is going now and what you will 

be asked to do on a number of bills when you come back in September. I think one of the first things is we do not do any further 

harm on that front. 

Senator NELSON. Mr. Chairman, thank you very much. 

Chairman CONRAD. Thank you, Senator. 

Let me again thank the witnesses. This has really been an excellent panel and I appreciate the participation of all of you. I really 

do. 

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Let me say my own beliefs are, No. 1, that Social Security, 

whether they are real assets or not real assets, I believe they are 

real assets. I believe Treasury instruments are a legal claim on future revenue streams of the Federal Government. To me that is undeniable. 

I also believe there is a real problem. Dr. Schieber, you used a 

couple of sentences I agreed with in terms of describing of problem. 

Because when the liabilities come due, future Congresses are going 

to have to make choices that will entail significant benefit cuts, or 

big tax increases, or additional debt. I think that is undeniable. 

I personally am open to individual accounts, properly structured, 

in a way that holds down administrative cost, that provides protection, and better rates of return. I am open to it. But I raise the 

question with this hearing, where does the money come from? 

Where does the money come from? 

I set aside very specifically in a budget resolution all of the Social Security and Medicare Trust Funds, and in addition to that, 

a third of the non-trust fund surpluses, to strengthen Social Security. To possibly fund transition to individual accounts, to have 

some other means of strengthening by way of Social Security Plus 

plans. But all of them cost money. 

The Senator from Texas, I wish he was still here, because he has 

been somewhat uncharitable in the last 24 hours and repeated instances to what I have proposed. I wish he was here so he would 

hear the response. I think he has engaged in a giant sham. He is 

all for everything. How is he going to pay for it? It is real easy to 

be for individual accounts if you do not have to pay the transition 

costs. That is real easy. 

I know what he is going to do. He is going to say, well, we ought 

to take it out of the Social Security Trust Fund surpluses. If that 

is not double counting. It is either double counting of you are moving up the time of insolvency of the Social Security Trust Fund. 

One of those two things. You cannot use the same dollar twice. 

That is funny money accounting. 

I do have some accounting background, and I am going to resist 

here funny money accounting by any side. We have got folks that 

want to spend the money twice. I was in a meeting yesterday and 

I heard some of the greatest speeches I have ever heard about how 

we can spend the money and it will not matter. We can credit it 

to the trust funds and then we can turn around and spend it. Nonsense. That does have an impact. 

I have heard the same thing about tax cuts. We can take the 

money, credit it to the trust funds, and then take the dollars and 

give it in a tax cut and it does not matter. Nonsense. Of course it 

matters. You cannot use these dollars twice and not have an impact. 

You would hope there would be some integrity to this debate. 

You begin to wonder. But I am hopeful that cooler heads will prevail and that we can fashion something here that would be meaningful for all of the people of this country. But I know there has 

got to be integrity to it. This kind of double counting, use the 

money twice, it is all words and smoke. Because ultimately the 

chicken is going to come home to roost here. 

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We already see it coming home to roost. This tax bill, the truth is I supported a significant tax cut. Had it in my budget, $900 billion. But my $900 billion included the interest cost. The President’s 

proposal on a fair comparison basis was $2 trillion when you include the interest cost. It is too big. It did not add up. 

We talk about crowding out other priorities. Now the President 

comes with a big request for a defense increase and it is going to 

come right out of the trust funds. We have got the memos that 

have been leaked by the Republican side that acknowledge we are 

going to be into the Medicare Trust Fund this year, we are in danger of being in Social Security next year and the year thereafter. 

It is undeniable. 

This whole thing did not add up. It did not add up when it was 

done. It does not add up now. It is a bunch of phoney, funny money 

accounting, and the chickens are coming home to roost. Already 

they have got to go out and borrow to pay for the rebates. 

They have engaged in every kind of trick, accounting trick, to 

make it look as though it added up. They did not include the President’s defense request in the budget. They have included no new 

money for education when everybody says education is the top priority. 

They did not include any money for natural disasters when we 

have already had three. They did not include any money to deal 

with the alternative minimum tax that affects 1.5 million people 

today and is going to affect 35 million, and we are acting as though 

we are not going to do anything about it. It is absurd. They do not 

have any money in there for the expiring tax provisions like the research and development tax credit when everybody here knows it 

is going to happen. 

This is the kind of thing that gets a great nation into big trouble. 

Funny money, phoney budgets. That is exactly what has been done 

here, and the chickens are coming home to roost. And it is not 

going to be the sweet by and by, it is going to be this year. When 

the new numbers come out in August it is going to be crystal clear. 

We are into the Medicare Trust Funds already and we are perilously close to going into the Social Security Trust Funds. 

After all the promises to the contrary, that there was plenty of 

money to do it all. We could have a massive tax cut, we could have 

a big defense buildup, we could fund education. We could do all of 

these things, protect Social Security, and it all added up. Well, it 

did not add up, and now the chickens are coming home to roost. 

We will see who was playing is straight with the American people and who was creating a mirage, because we are going to have 

a chance to see very soon. 

Senator #I21SENATOR NELSON. Mr. Chairman, you caused me to 

have a flashback in your very appropriate and insightful comments 

as to the current budget condition. It is worth noting that there 

was a very similar condition shortly after the 1981 tax bill, which 

was a huge tax cut. I voted for it. I made a mistake. I realized that 

mistake shortly thereafter and so stated in a statement on the floor 

of the House of Representatives. 

But here is the flashback that I just had. There was an admission by someone, either in the Administration of the Reagan Administration or it was a Member of Congress, and I think it was 

314

Jack Kemp of New York who said—and this gave the clue into the 

mind of that Administration, and you may have hit the same thing 

here. The statement was, we do not worship at the shrine of balanced budgets. 

What happened in the decade of the 1980’s was that declaration 

certainly became apparent. Because deficit spending in order to 

fund the Government operations that had far exceeded the tax revenues coming in went, in the course of the decade of the 1980’s all 

the way up to almost $533 billion in deficit. That was $533 billion 

annually of spending more than we had coming in in tax revenue. 

That caused the national debt to almost triple. 

I thought of that statement, we do not worship at the shrine of 

balanced budgets, just as you were stating what you see the projections coming out this year. All of these new demands on spending 

that are going to have to be satisfied, whether it be a direct expenditure for emergency appropriations or whether it be an expenditure through a tax cut extension such as the R&D tax cut. 

That maybe that same philosophy that took us to record national 

debt is being expressed by the same Administration, we do not worship at the shrine of balanced budgets. 

Chairman CONRAD. They certainly did not worship there. Goodness knows we have got some of the same architects of that plan 

sitting at this table. They have come with the same kind of plan 

this time. It did not add up then. It does not add up now. Ultimately it quadrupled the national debt. I hear the same voices, the 

same siren songs all over again. 

I am not part of that crowd. I do not believe in it. I think an 

enormous disservice was done to this country in the 1980’s when 

they exploded the deficits and the debt of this country, and I do not 

want to be a part of a repeat performance. 

I want to be part of those places where we can provide tax relief 

prudently. Let us do it. But goodness, let us recognize where we 

are headed. We know 11 years from now the baby boomers start 

to retire, and we are faced with a very difficult choice, as Dr. 

Schieber described here. 

I personally believe one way to deal with it, one part of dealing 

with it, is to reserve some of the surpluses of today to deal with 

what is to come. Unfortunately, that opportunity which existed, a 

golden opportunity, was squandered this year. 

That did not mean we could not have tax rebates this year. This 

stuff about tearing up the check. I mean, come on. Come on. I had 

in my budget $60 billion of tax cuts for this year. What passed was 

$40 billion. The suggestion that we were against tax cuts this year, 

that is just phony. That is just false. 

What we were not for was transferring $33 billion out of this 

year in a sham transaction by delaying corporate receipts for 2 

weeks, $33 billion worth, to put it into next year to make the tax 

cut look more affordable next year. If it were not for that, made 

very clear at the time when we found out they had engaged in that 

funny money transaction, that that is the exactly the type of thing 

that gets you in financial trouble, because you phoney up the fiscal 

picture for the country. 

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The great thing is this is a democracy. We get to debate these 

things. We all have strong feelings and we get a chance to express 

them. So we are fortunate to live in this country. 

Thanks to the witnesses. 

[Whereupon, at 12:25 p.m., the committee was adjourned.]

(317)

THE BUDGET AND ECONOMIC OUTLOOK: AN 

UPDATE 

TUESDAY, SEPTEMBER 4, 2001

U.S. SENATE, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to notice, at 2 p.m., in room SH–

216, Hart Senate Office Building, Hon. Kent Conrad, chairman of 

the committee, presiding. 

Present: Senators Conrad, Nelson, Stabenow, Clinton, Corzine, 

Domenici, Grassley, Frist, Hagel, and Allard. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. Welcome. 

Director Crippen, it is good to see you. We are especially pleased 

to have you here today to provide us with CBO’s updated budget 

and economic outlook. In January, when we last met on this subject, you were unable to appear because of an accident and an injury, so we are especially delighted that you are able to be with us 

today, and are very much on the mend. We are glad to see that. 

Thank you for coming today, and thank you for all of the work that 

has gone into these revised estimates. 

It is particularly a shame that you were unable to be with us in 

January because then the news was so much better. In January 

CBO was able to project that the unified surplus would total $5.6 

trillion over the next decade. It also projected that there would be 

a non-Social Security surplus of $125 billion in 2001, and that the 

surplus would grow every year through 2011. Now CBO is reporting that the unified surplus projected for the next 10 years has 

shrunk by more than $2.2 trillion to $3.4 trillion, and that instead 

of $125 billion non-Social Security surplus this year, we will have 

a $9 billion deficit. 

But as disturbing as the deterioration of the surplus for this year 

is, what is most troubling is that CBO projects we will have only 

a small non-Social Security surplus in 2002, and that part of the 

Social Security surplus will once again be needed to pay for other 

government operations in 2003 and 2004, despite the fact that CBO 

anticipates the economy will grow at a very healthy rate over the 

next 3 years, 2.6 percent in 2002, 3.3 percent in 2003, and 3.2 percent in 2004. 

The CBO projection that we will run non-Social Security deficits 

in 2003 and 2004, and that $139 billion of the Medicare HI Trust 

Fund surpluses will have to be used to pay for other government 

activities over the next 4 years are also particularly disturbing beVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00323 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
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cause they are based on current policy. That is, they do not assume 

any additional funding for defense that the President has requested, any additional spending for education, when the President 

has indicated that is his top priority, any Medicare prescription 

drug benefit, any changes in the inadequate assistance the Freedom To Farm Act is providing to our hard-pressed farmers. It does 

not provide for an extension of the popular expiring tax provisions, 

or any other changes in policy that the President’s mid-session 

budget included or that were included in the Republican-drafted 

budget resolution. 

So what CBO is telling us is that we are now in a situation 

which after the President and virtually every Member of Congress 

have pledged to protect Social Security and use the Social Security 

surplus to pay down the national debt, that we are poised instead 

to use the Social Security surplus to pay for the other activities of 

government in years in which the economy is growing, even if we 

do not add a penny of new spending or enact new tax cuts. And 

based on CBO’s projections, if we did enact the President’s increase 

in defense spending, and the policies included in the budget resolution, we would need to use more than $200 billion of Social Security Trust Funds and nearly $533 billion of Medicare Trust Funds 

to balance the books over the next 8 years, so nearly $500 billion 

of trust fund money that the budget resolution pledged to protect, 

would be used to cover the shortfalls in the budget.

What happened to the surplus? That is going to be a big part of 

your testimony here today. How did we get into this situation? 

CBO’s report makes it clear that the main reason for the precipitous decline and the projected surplus is the President’s tax cut. Including associated interest costs, the tax cut accounts for nearly 

$1.7 trillion or more than 74 percent of the decline in the projected 

unified surplus over the next decade. Changes in the economic outlook and changes in technical factors that affect the budget account 

for an additional $461 billion or roughly 21 percent of the change. 

And despite the statements of some in the administration and even 

our colleagues, that increases in spending account for the problem, 

in fact, changes in spending account for just 5 percent of the reduction in the surplus, and most of that increase, 95 billion, is from 

the Supplemental Appropriations Bill the President said was absolutely essential. The President also supported the $18 billion increase in domestic spending for disaster assistance to farmers and 


95488.310
319

other purposes. So all of the spending which has occurred has been 

endorsed by the President.


95488.311 95488.312 95488.313
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CBO’s new figures confirm what many of us have been saying for 

months, the President’s budget simply did not add up. They confirm that the President’s claim that we could have it all, that we 

could have a massive tax cut, a big defense buildup, more money 

for education, maximum pay down of the debt, and protect Social 

Security and Medicare were simply wrong. Those promises were 

too good to be true. 

So where do we go from here? Of course one thing that CBO’s 

figures do not tell us is how do we repair the damage? And that 

is not your job. That is our job and the President’s job. How do we 

put our fiscal house back in order? 

But I do hope that CBO’s figures will help us take the first and 

most important step, which is helping the President to understand 

there is a problem. I stand ready to work with the President to implement a rescue plan to put us back on the right path, but that 

process cannot occur until he acknowledges that we have got a 

problem, and that he acknowledges the dimensions of the problem 

that we confront. 

I cannot help but thinking about the stages of grief model Elizabeth Kubler-Ross described in her book on death and dying. She 

said that a dying person goes through five stages: denial, anger, 

bargaining, depression and acceptance. I think the President’s 

budget plan is dying. We need to move on, but we cannot until the 

President reaches the stage of acceptance. The first step is to move 

beyond denial. I hope he skips anger and depression. And I think 

in this case bargaining cannot occur until there is acceptance. But 

the important thing right now is for the President to get beyond 

denial. I think paying attention to the new CBO report could help 

him take that step. 

With that I turn to my very able colleague, the Senator from 

New Mexico, our former distinguished chairman, Senator Domenici. 

Senator DOMENICI. Thank you, Mr. Chairman. Thank you very 

much. 

First of all let me say if the economy was in as good a shape as 

our budget, we would all be singing the praises of the President 

and Congress, because there is nothing wrong with our budget. 


95488.314
321

What is wrong is that the United States and many parts of the 

world, from Japan to countries in Europe, to everywhere you look, 

they are all in an economic slowdown. As a matter of fact, the slowdown in the United States started 6 months before this President 

took office. It has continued unabated for 14 solid months. That is 

a downturn in the economy approaching a recession. The same 

thing is happening in Japan, although worse, happening in almost 

every country that we expected to cause the gross product of their 

countries to grow. 

So my answer to my good friend, the Chairman, is: there is nothing wrong with the budget. There is a lot wrong with the economy. 

And what we had better be focusing on is what do we do or not 

do to help the economy recover, because there is no question that 

what has happened since the President submitted his budget, since 

we passed the tax bill, many provisions of which were bipartisan, 

since we passed a tax bill which was more Democratic than Republican in the first 2 years, because they wanted more rebates and 

more up-front expenditures, which lead to the reduction in the surpluses because you are spending more to get those tax cuts which 

were definitely sought by Democrats. 

So the issue is not what is wrong with the budget. Let us get on 

with it. We do not need a summit, which has been called for by a 

couple of Democrats. What we need is to get on with our business. 

We only have 14 working days left. We have not passed a single 

appropriation bill, and frankly, there is not that much real difference between the appropriations bills that the President wants 

and that Congress wants, when you look at the big picture. 

So thank you very much, Mr. Chairman, for your comments. I totally disagree. I totally disagree that there is an easy fix. I totally 

disagree that we ought to be meeting to discuss this situation with 

the President. We ought to be meeting among ourselves. We ought 

to be getting together and getting it done. There is not much to getting it done. There is just reaching agreement on a few things, and 

we ought to get that and get on with it quickly. And then we had 

better ask ourselves: what do we do to help this economy come 

back? 

Now, as we proceed through with the questions, I will have a few 

very simple questions. I will ask the Congressional Budget Director 

whether George Bush, President of the United States, this President Bush, whether he had anything to do with the slowdown that 

exists in the American economy. I expect the answer to be no. I will 

ask him did Congress have anything to do with the slowdown. I expect the answer from the Director of the CBO will be no. What has 

actually happened is, in the normal cycle of capitalism, we are getting a downturn for a lot of reasons. Some of them are different 

than we have ever had before, and we are suffering from it. And 

the reason that the surpluses are smaller than we had expected are 

not because of the tax cuts in the first two or 3 years, and if they 

are, then most of the Democrats wanted those tax cuts, so they are 

being kind of hypocritical about it. If they have anything to talk 

about, it would be the 8th, 9th, 10th year of this budget package 

that they objected to, but that is not the crisis, that is not the problem. The problem it right now, has much has the surplus gone 

322

down because we have not had the economic growth that we expected. 

Now, this downturn began 14 months ago, as I indicated, nearly 

6 months before the President, and before we are finished we will 

put up some charts that just clearly disclose it. We did not know 

it was as severe as it is, but now we do, because looking back on 

it, we get the proof, we get the proof of what was actually happening in the American economy. With this slowing down, I know 

sometimes when I talk to people it is pretty hard to make the relationship, but all other things being equal, if you have a slowdown 

in the American economy, you lose tax revenues. We have been losing tax revenues by large amounts, not to a tax cut, but because 

the American economy is slowing down. 

Our chairman has referred to current estimates as a sign—he 

has done this heretofore—a big-time physical mismanagement, and 

stew cooked up by the administration that is hard to choke down. 

Well, all very colorful statements, Mr. Chairman, and I am growing 

in respect for you mixing the colorful statements with the other, I 

am growing in respect for you. Nonetheless, I must say, these are 

colorful statements and simply add nothing to the problem. They 

are inflammatory and not one bit helpful. First, no matter what is 

said, the Federal Government’s books—let me repeat—its budget is 

in much better shape than is the American economy. The budget 

is in better shape than the American economy. Whether you go to 

CBO, who today will talk to us about these numbers, whether you 

use the Office of Management and Budget numbers, our budget is 

better than our economy and the world’s economy. We have the 

second largest surplus predicted for next year in the history of 

America. We are here talking about surpluses, and it will be the 

second largest surplus in the history of America. Second only to 

which one? This year’s, this year’s, because we have had such an 

accumulation of surpluses because of the sustained growth in this 

economy. Nothing whatsoever, no impact whatsoever because of the 

taxes. We expected the tax reductions, except they were a little bit 

bigger than we thought in the first 2 years because they became 

bipartisan, and instead of being Republican’s, where they were 

going to be less in the first 2 years, they turn out to be Democratic, 

coming out of conference. 

So now let me move on to one other issue, this whole issue of 

paying down the debt, I say to my colleagues, paying down the 

debt. Now, that is one thing we have to be worried about, paying 

down the debt, but we also ought to be worried about whether we 

are spending enough on education. Paying down the debt, that is 

one thing, but we ought to be worried about whether we are putting enough in defense also, so that it turns out, with these 

changes that have occurred, the CBO Director is going to tell us 

that as far as paying down the debt—now get this—I want to point 

out that in the January and May baseline, the Federal Government 

reduced debt held by the public to the maximum extent, and it will 

continue to be reduced to the maximum extent possible by 2006, 

and after that, the debt continues to decline down to $818 billion 

from more than 4 trillion. 

Now, under the revised budget numbers of CBO, we will reduce 

the debt to the maximum extent possible by 2010, and the debt 

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continues to decline to $876 billion, unheard of, by 2011. That is 

with the current downturn, taking our setback for the tax receipts 

during the current downturn. So is that not interesting? Even with 

$1.3 trillion tax cut over the next decade, despite a slowing of the 

economy, despite some supplemental appropriations and additional 

agricultural spending—which I am sure everyone knows we just 

had a little bit, $5.4 billion worth and we will probably have 

more—but we will approach the maximum debt reduction possible 

under the United States Treasury Bills that are outstanding. The 

fiscal plan adopted earlier this year was the correct one. We adopted it earlier, and it was the correct one for a weakening economy. 

It spent money at a reasonable rate, and it cut taxes. If we had 

followed the Democratic proposals, it is clear that dipping into Social Security, which is now the new word around, and Medicare 

Trust Funds, would have been even greater than estimated by the 

Congressional Budget Office. And whenever I hear that the Republicans are dipping, I would say, the Democratic plans would have 

dipped more. They just did not get passed. The truth of the matter 

is, neither they nor us, expected a 14-month gradual recession that 

has been upon us, and was on this President for many months before he took office. 

So, let me close by saying some of the Democrats favorite—one 

of their favorite witnesses, Robert Greenstein, said, ‘‘Whether or 

not the non-Social Security budget runs a modest deficit would 

have no appreciable effect on either the Social Security Trust Fund 

or the Social Security solvency.’’ And then even the ‘‘Washington 

Post’’, in a lead editorial of a few days ago, stated, and I quote, 

‘‘The tapping of the funds (Social Security) is more than a matter 

of political symbolism. It is more that than it is of substance, and 

more so because not all that much money is likely to be involved. 

The great bulk of Social Security surplus will be used to pay down 

the debt, and the symbolism itself gets a little muddy for Democrats in that the parts of the tax cut taking effect in these early 

years, were to a large extent their ideas.’’ And I agree with that. 

Now, I could go on and explain whey we are in recession, whether Alan Greenspan acted too slowly or did not act sufficiently. We 

are very close to a defined recession. This Senator is not that believes we are going to come out very quickly. I join with some, who 

know much more than I, that say it is going to be slow, we are not 

going to come out of it very quickly. And so I am very concerned 

about what we should do to make sure that we come out of it as 

fast as we can, put thousands of our working people back to work, 

get rid of the atmosphere that is around that is worrying Americans about their jobs and their future. 

So right now I think we ought to go to work on the appropriation 

bills. We ought to decide whether we are going to pass them or not 

or whether we are going to play games with them over a few billion 

dollars. 

I close by saying there was one President who thought, when we 

were in a deep recession, that it was imperative that we balance 

the budget. There was one President, the same President, who 

thought when we were in a deep recession, we ought to cut Federal 

expenditures. We did both and we had the biggest recession in the 

history of America and a worldwide depression, for that man was 

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President Hoover. Most of us have learned since, do not cut spending during a downturn and do not increase taxes. 

Thank you very much, Mr. Chairman. 

Chairman CONRAD. Well, let me just take a moment to respond 

because the Senator said a number of things that deserve a response. I do not know anybody that is saying raise taxes during a 

slowdown. I certainly am not. In fact, the Senator is absolutely correct that this Senator proposed greater fiscal stimulus this year, 

far greater than the President. The President had virtually no fiscal stimulus this year. I proposed $60 billion of fiscal stimulus 

when we had a projection that we had nearly $100 billion of room 

for fiscal stimulus. 

But I think that really misses the point. There is no question we 

have got economic slowdown now. The President is forecasting for 

next year, strong economic growth, as is the Congressional Budget 

Office. And not just next year, but every year for the next 9 years. 

And in that context we see the President’s plan taking $500 billion 

of Social Security and Medicare Trust Fund money to pay for other 

programs. So it is not just at a time of economic downturn. That 

I think would be more forgivable. What is of deep concern to this 

Senator, and I think what ought to be of concern to everyone, is 

that the President’s budget plan and the budget plan that passed 

Congress, has us on course to take $500 billion out of the trust 

funds of Medicare and Social Security, when the President and the 

Congressional Budget Office are forecasting strong economic 

growth. Is that really the course we want to be on? I do not think 

so. I do not think it makes sense to take Social Security and Medicare Trust Fund to pay for other government programs at times of 

strong economic growth. 

So there seems to be a disconnect here, and the truth is, our plan 

had greater fiscal stimulus this year. It is also true we did not support shifting $33 billion out of this year by a 2-week delay in corporate receipts into next year, which made the situation much 

worse. We did not favor that. That was done in the conference committee. And it is also true that over the 10 years our tax cut was 

about half as big as the President’s, and as a result, we would have 

avoided much of the problem that we see. 

With that, Mr. Crippen, again, welcome. 

Senator DOMENICI. Senator, might I just say a comment? It will 

be very brief. 

Chairman CONRAD. Sure, absolutely. 

Senator DOMENICI. If you want to make changes to 2003, 4, 5 

and 6, you will be chairman, I assume—at least people think you 

will for a little while longer—and you can produce a budget that 

does that, why don’t we get on with doing what we ought to do this 

year? You have a chance next year. There will be no changes, and 

I will not be chairman. Following that there will be somebody different on our side because I have reached my—I cannot serve any 

longer. It is probably a righteous decision, full wisdom. In any 

event, you would have ample time to do that. I think we are talking about this year and next year at this point with reference to 

the recession. And I thank you for giving a minute to me. 

Chairman CONRAD. No question. We have got really two sets of 

problems, if I can just conclude. We have got a short-term problem, 

325

one in which we find ourselves in an economic slowdown, and we 

have got a longer-term problem. I think we need to focus on both 

of them, because both have consequences for the country, and both 

of them have consequences for the economy. 

Again, Mr. Crippen, welcome. 

STATEMENT OF DAN L. CRIPPEN, DIRECTOR OF THE 

CONGRESSIONAL BUDGET OFFICE 

Mr. CRIPPEN. Thank you, Mr. Chairman. 

I am most pleased to be here today. As you said, last time 

around I was not able to be, to represent CBO and present our latest report on the status of the Federal budget. 

Before I turn to some of the details of our report, I would like 

to take a look at the nature of budget forecast for just a moment, 

including a slight detour through the past. I will conclude with a 

few comments about where we might be headed after this decade, 

a period that the Chairman has in particular focused on before. 

We at CBO have been taken to task by some observers of the 

budget debate for the inaccuracy of our forecast, and I might say, 

with some justification. But it is also fortunate for our critics that 

they do not have to do what we do, which is make economic forecasts for the next 10 years, incorporate likely demographic changes 

into Federal spending, and work through all the interactions of the 

Federal budget, to produce a single number for each year, the surplus or the deficit, and to do all of this very publicly. 

It is important to remember that what we do is dictated in part 

by the Budget Act, long-established precedents, many of them derived from the 1967 Commission on Budget Concepts, and guidance 

from the Budget Committees in Congress, to—and let me highlight 

this—produce a baseline against which to measure changes in law. 

These are not predictions of budgetary outcomes. They do not include actions yet to be taken by the government, no matter how obvious these actions might seem. But the single biggest unknown in 

all of this is the performance of the economy, not necessarily the 

performance of policymakers. No one has mastered economic modeling and forecasts, and I frankly suspect they never will. CBO is 

as good as most, in part because we have some of the best in the 

country helping us, and better than many, but we miss it sometimes. And economists are notoriously bad at picking turning 

points in the economy. It is certainly cold comfort to the Committee 

that it has always been thus. Slightly more comforting, I hope, is 

the knowledge that there is not a deliberate or systematic bias in 

our estimates. 

Returning a brief bit to the past, in 1981 Dr. Rivlin presented 

the Congress with a CBO report on the Reagan budget, a report 

that did not foresee the coming recession or the development of 

large and persistent deficits. In retrospect, the single biggest mistake in the forecast was the failure to get the economy right. Revenues declined precipitously because of a declining economy, and the 

rapid falloff in inflation, both likely caused by extremely tight monetary policy at the time. 

As recently as 1997, CBO projected continuing deficits, projections that fortunately turned out to be wrong. Here too, as our 

cover of last year’s mid-year update showed, the biggest factor in 

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14 CHART NOT AVAILABLE AT PRESS TIME. 

the change of these forecasts was the unforeseen, in this case, the 

positive developments in the economy. The economy performed better than we or anyone else predicted, and threw off sufficient tax 

revenue to completely reverse the fiscal outlook. The likely reason 

for the change was an increase in productivity and perhaps some 

unmeasured growth in the work force because of immigration. 

Which brings us to the present. The economy slowed significantly 

this year. It barely grew at all in the second quarter. We certainly 

missed it. We did not see it as recently as January, we did not understand the magnitude of this slowdown. Again, it is cold comfort 

that we were closer to reality than many more optimistic forecasters. One of my colleagues put it: when you are collectively 

miles away from reality, the fact that we were a few blocks closer 

did not help much. 

But the result of our changes in the economic forecast and associated technical adjustments is a surplus forecast for this year that 

is 40 billion lower than that of a few months ago. To this shortfall, 

as the Chairman has noted, is added the 80 billion in legislative 

changes, tax rebates, shift in corporate taxes and some additional 

spending. For next year the single largest factor in the changed 

forecast is the performance of the economy again and the associated technical adjustments. And over the next few years, the single 

largest difference between our estimates and those of OMB is how 

quickly the economy recovers over the 10-year period, to be sure, 

the biggest changes obviously the legislation passed since January, 

mostly the tax cut with some additional spending thrown in. But 

current economic weakness, nonetheless, contributes 20 percent, as 

the Chairman said, I guess 21 percent, to the reduced 10-year projections. Nonetheless, we still expect, when the fiscal year closes 

just 1 month from now, to have a fiscal 2001 surplus of over 150 

billion. And even with the economic slowdown we are in and the 

passage of legislation, CBO forecasts continuing surpluses, albeit 

largely from the off-budget accounts. Where we estimated in January that total available debt held by the public would be eliminated 

in 2006, we now estimate that event to occur in 2010. 

But the decade we have under examination in this report does 

not reveal what is likely to be the biggest change in fiscal outlook 

in our Nation’s history, from 2011 to 2030, my generation and 

yours, Mr. Chairman, will retire, virtually doubling the number of 

retirees served by Federal programs. 

As you can see from this poor chart I keep dragging around, the 

changes will be profound. Proportion of the economy necessary to 

fund just the Federal programs for Social Security, Medicare, Medicaid, will more than double from something like 7 percent of GDP 

in 2000 to 15 or 16 percent of GDP in 2030. That rise is the equivalent of $800 billion in today’s economy, and puts in perspective the 

size of the tax increase or additional borrowing that could ultimately be required to finance elderly retirements and other spending if those programs are not changed.14

To maintain government as we know it today, and to fund programs for retirees in the future, we would have to raise taxes or 

increase borrowing by the equivalent of $800 billion a year in toVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00332 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
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day’s dollars. Viewed in this light, there are only two things that 

make a difference, grow the economy more, and/or reduce benefits 

for future retirees. The attention given to what is in the trust 

funds come 2015 or even if the trust fund exists at that point, is 

misplaced. What will matter are these two facts: the size of the 

economy and the amount of transfers to retirees. 

All of this is to say that changes in the performance of the economy, whatever their cause, are the proximate cause of unanticipated changes in our forecast. It has been that way since CBO has 

been in business. It is the economy that generates tax revenues in 

greater or lesser amounts than our forecasts, and ultimately it is 

the size of the economy that will determine the ability of my children to fund my retirement. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Mr. Crippen. And, again, we appreciate your being here today, and we appreciate your testimony. 

I especially appreciate your look to the long term because I think 

we have obviously a short-term responsibility, and economic performance is a key part of that. Also, our budget choices and decisions are a key part of it because they have an impact on what the 

economy of the future will look like. Clearly, we have a special responsibility when it comes to keeping our promises to future generations. When you look at the long-term trend, you can see that 

everything changes when we get to the next decade because of the 

retirement of the baby boom generation, which, as you indicated, 

quickly doubles the number of people eligible for the programs. 

Let me go back, if I could, to your projections. We have gone from 

a projection of a surplus of $5.6 trillion over the next 10 years to 

a projection of roughly $3.4 trillion, a substantial reduction. I think 

it is very important for people to understand what is behind those 

assumptions. Those projections assume no changes in current policies; is that correct? 

Mr. CRIPPEN. That is correct, Mr. Chairman. 

Chairman CONRAD. And those are the rules that govern your 

making these estimates, is that not correct? 

Mr. CRIPPEN. That is correct, yes. 

Chairman CONRAD. It is not as though CBO just goes out and 

says, well, we do not think any changes are going to happen. You 

do not do that. You base your estimates based on what the current 

policy is. That is your responsibility and that is what you do. So 

that means that the projections do not include the President’s request for some $200 billion more in defense spending over the next 

10 years; is that correct? 

Mr. CRIPPEN. That is correct, Mr. Chairman. The only thing that 

is included at this point is the current year appropriation bills, including the supplemental, inflated over the next 10 years. 

Chairman CONRAD. So that additional defense request by the 

President would mean we would be even further into the trust 

funds of Social Security and Medicare if it were adopted; is that 

correct? 

Mr. CRIPPEN. Presumably, yes. 

Chairman CONRAD. The second is there is no increase here, other 

than inflationary increase, for education. 

Mr. CRIPPEN. Correct. 

328

Chairman CONRAD. You have just taken the baseline amount, 

what was done last year. There is no so-called new money for education here, and to the extent that were done, that would mean 

going even further into the trust funds of Medicare and Social Security. The projections do not include the cost of a new prescription 

drug coverage, even though that was in the budget that was passed 

by the Republicans in their budget resolution, that is not included 

in your estimates, is it? 

Mr. CRIPPEN. No, none of the reserve funds are included as part 

of our baseline. 

Chairman CONRAD. And, of course, what was passed in the resolution, passed when the Republicans controlled both houses, was 

$533 billion for a prescription drug benefit over the next 10 years, 

but that is not included because that is not part of current policy; 

is that correct? 

Mr. CRIPPEN. Correct. 

Chairman CONRAD. And the projections do not include the cost 

of extending the popular expiring tax credits. Some have said, gee, 

why does CBO not include that in their projection? 

But you do not include it because those expiring tax provisions, 

including the very popular research and development tax credit 

end, and so you do not include them because they are not part of 

a future year’s law; is that correct? 

Mr. CRIPPEN. That is correct. 

Chairman CONRAD. And that, as I understand it, that is about 

a $140-billion cost if that is put in place. 

Let me go to, and just put up a couple charts quickly, the deal 

with the question of the change in the estimates of debt. 

Do we have the first chart there that shows the increase in—yes, 

that one, that Sue has her hands on. 

Mr. CRIPPEN. Senator Hollings probably has it in his pocket, sir. 

[Laughter.] 

Chairman CONRAD. In your report, you indicate that by the end 

of the year 2006, instead of a publicly held debt of $1.3 trillion, we 

are going to have a publicly held debt of $2.3 trillion; is that correct? 

Mr. CRIPPEN. Yes. 

Chairman CONRAD. So, you know, the Senator from New Mexico 

says it is just a short-term thing and just caused by the economy. 

No, it is not. This is much bigger than a short-term thing. This is 

a long-term thing, and it has got enormous implications for the 

United States. Instead of having at the end of 2006 a $1.3 trillion 

national debt, publicly held debt, we have a $2.3 trillion publicly 

held debt. What difference does that make? Let us go to the chart 

that shows what happens to the interest earnings, the chart that 

you have.

329

Federal interest costs go up dramatically. By our calculation, 

they go up by 91 percent. We go from an interest cost that we were 

told in May would be $621 billion to an interest cost now of approaching $1.2 trillion. So there are real consequences to the fiscal 

choices that have been made.

Let us put up the chart that shows what is the cause of the 

changes. What happened to the surplus, right there. What happened to the surplus? Over the 10 years, what happened to the surplus is largely the tax cut. Seventy-four percent of the reduction is 

the tax cut and the interest costs associated with that tax cut. We 

have the economic slowdown is responsible for about 21 percent. 

Spending, spending as most people would think about it, the new 


95488.294 95488.295
330

spending that has been done, not the tax cut that is considered 

spending, not the interest cost associated with the tax cut, but the 

spending initiatives that have been passed for defense and for agriculture, which is, by and large, where the money has gone, account 

for about 5 percent of the reduction in the surplus.

So those who have gone around saying the problem is spending, 

no, it is not. That is not factually correct. The problem is the size 

of the tax cut. It is too big. the problem is the economic slowdown. 

Those are primary problems that we face here. And, you know, it 

was not that hard to predict because some people were counting on 

every penny of a 10-year forecast coming true. It was highly unlikely to ever happen. I warned of that repeatedly during our budget discussions, during the debates on the floor, and in fact you 

warned of it, Mr. Crippen, did you not? Did you not warn us of the 

uncertainty of a 10-year forecast? 

Mr. CRIPPEN. Yes. In fact, we dedicated an entire chapter of our 

January report to the uncertainty of these kinds of forecasts. 

Chairman CONRAD. And very frankly, one of the problems we 

have got is people did not pay sufficient attention to your warning. 

You alerted us very clearly. You went out of your way to say to us, 

‘‘Be careful. Be cautious because, yes, this is the best, most professional forecast we can make at this point, but the truth is these 

things are unpredictable.’’

Well, I thank you for your answers to that. 

Senator Domenici? 

Senator DOMENICI. Director Crippen, I said in my opening remarks I was going to ask you three or four rather pointed and brief 

questions. Might I ask the first one and ask you did President 

Bush cause the slowdown? 

Mr. CRIPPEN. No. Not in our judgment, no. 

Senator DOMENICI. Did anything the Congress do cause the slowdown? 

Mr. CRIPPEN. No. 

Senator DOMENICI. Will the slowdown have any effect on Social 

Security benefits now or in the future? 

Mr. CRIPPEN. No, it should not. 


95488.311
331

Senator DOMENICI. What impact will the slowdown have on Social Security’s future? 

Mr. CRIPPEN. The trust funds will be as the trust funds were. 

The impact in the long term is that, when my generation retires, 

if the economy is lower, smaller, slower, it will be harder for my 

children to pay my benefits. 

Senator DOMENICI. I am gathering from what you are saying, the 

most important thing is that we have a growing economy——

Mr. CRIPPEN. Yes. 

Senator DOMENICI [continuing]. In terms of whether or not there 

will be checks for the Social Security recipients and whether there 

will have to be any changes in their benefits; is that correct? 

Mr. CRIPPEN. Yes. Shall I say it is a fairly widespread understanding, that the more the economy grows, the easier it will be to 

fund these future benefits. 

Senator DOMENICI. On the question of debt reduction, under the 

revised Congressional Budget Office estimate, what happens to the 

projection of debt held by the public? Is it true that even with the 

reestimates, the maximum amount of debt that can be retired still 

is retired? 

Mr. CRIPPEN. Yes. During this decade, the period of this report, 

as we said, and the chairman’s chart showed, we originally said in 

January we thought it could be retired by around 2006, now it is 

sometime in 2010. So it is a few years longer. But in this 10-year 

period, all debt that can be retired will be from these projections. 

Senator DOMENICI. So, if we are talking about debt reduction, 

taxes and the like here today, you are suggesting that, with what 

you have reestimated with the downturn and with tax policy in 

place, that we will nonetheless be paying the debt down as much 

as we can by 2011; is that correct? 

Mr. CRIPPEN. Yes. 

Senator DOMENICI. Just for the record, I wanted to say the total 

amount of the tax cut that is being implicitly attacked by the chairman was $1.3 trillion spread out over that number of years. I think 

that the Carnahan-Daschle-Conrad tax proposal was also $1.2 trillion. In fact, I believe it was. So it equals—it takes as much out, 

if you are talking about what it costs for a tax cut, as this, as what 

we passed. Would there be any difference, in any event, as to the 

Social Security recipients and whether they will get their money or 

not? 

Mr. CRIPPEN. No, there would not be. 

Senator DOMENICI. Can you explain one more time to those who 

are interested why will it have no impact on Social Security benefits and the recipients. 

Mr. CRIPPEN. Payroll taxes have been unchanged, either by the 

President’s tax bill or, indeed, the economy, largely. There is some 

slight change in payroll tax receipts, but not much. Those receipts 

will be credited to the trust funds. Those trust funds, as has been 

the case forever, will invest in U.S. securities, and therefore be 

used any number of ways by the U.S. Government, including paying down the debt, it could be, as it has been in the past, to fund 

other Government programs, but the point is the trust funds will 

still hold the same amount of Federal bonds, Treasury bonds, that 

332

it did before the tax bill, before the economy deteriorated, before 

any of these things we are now talking about. 

So the trust fund balances remain roughly unchanged, and of 

course the benefits remain totally unchanged for current recipients 

and even those in the near term. 

Senator DOMENICI. My last observation, as well as a question, 

has to do with what should we do now. Actually, by policy, you are 

not supposed to make recommendations, maybe by past precedent. 

Might I ask you, if we are looking out there at our country, and 

we are beginning to get worried about the people that are unemployed, about the people who are getting frightened about others 

being unemployed by some of our major high-tech industries, including Intel and others, beginning to talk about the fact that this 

turnaround is not going to be so quick, and it has an international 

flavor to it, and that, as a matter of fact, it is going to cost us a 

lot more before we get out of it, what recommendation would you 

have as to what we should do? 

Mr. CRIPPEN. Maybe I can——

Senator DOMENICI. Maybe I should put it this way——

Mr. CRIPPEN. Maybe I can duck your question this way. 

Senator DOMENICI. All right. [Laughter.] 

Mr. CRIPPEN. For much of what we are talking about here today, 

that is, the diminishment of the forecasts, particularly the longterm ability to fund the baby boom retirement, clearly, one of the 

more important things is paying attention to our economy and 

making sure that we take whatever actions we can, as limited as 

they may be, to have a robust economy. At that point, we will have 

more Federal tax revenues, as well as a larger pie to share retirees 

and working folks. In that vein, any policy that would promote economic growth would seem to be appropriate at this time. 

Senator DOMENICI. Is it standard assumption on the part of 

economists that cutting taxes and increasing spending would have 

more of a positive impact on the economy than their twin brothers 

going in the opposite direction, raising taxes or cutting spending? 

Mr. CRIPPEN. Certainly, in times of a weakened economy, as we 

are seeing now, the Keynesian view of the world of increasing demand would be one that would say cut taxes and probably increase 

Federal spending. This economy has been kept above, and just 

above, a negative growth rate or a recession because of consumers. 

We are seeing a slightly different kind of slowdown here, in 

which corporations are pulling back on capital investment, but consumers have more than kept their end up. So the tax rebates and 

anything you can do to help consumer demand, along with the Federal Reserve’s obviously active policy in reducing interest rates in 

the short term, should help sustain the economy. 

Senator DOMENICI. I thank you very much. 

Chairman CONRAD. We will go now to Senator Corzine who is 

next and will have 7 minutes—questions, comments, any way you 

choose to your time. 

Senator Corzine. 

Senator CORZINE. Thank you, Mr. Chairman. 

Director Crippen, I appreciate your testimony and candor about 

some of these very important issues. 

333

I have tried to study this book that you passed out on the midyear review, and it is full of charts and all of the other things, but 

I guess my conclusion is that, if I read it right, there is not a lot 

of money around for the kinds of things that we have talked about 

on both sides of the aisle with regard to investing in our future. 

It is pretty clear to me that if you look at that 10-year period, 

that chart that Senator Conrad, the chairman, put up, 74 percent 

of that is because of the tax cut. There is certainly this issue of a 

weakening economy which I think needs to be addressed, as Senator Dominici has talked about. It really lays the basis for a series 

of questions I have. 

Do you think, in a weakening economy, since you talked about 

potential Keynesian kinds of approaches, not that everybody believes they are the appropriate force, that the 8 percent of this socalled tax cut that is put in 2001 and 2002, relative to the overall 

size of it and relative to the overall size of the economy, really is 

a meaningful stimulant going forward? I think let us put it in 

frank terms, $38 billion in rebates, looks like a small pebble in a 

very large pond, when you are looking at the overall size of this 

economy. I would just note that only one-third of this tax cut, not 

taking into consideration the interest expenses, are plowed into the 

first 5 years. 

Does this meet the real test of stimulation? I am sure at the 

margin it moves around GDP a tenth or two-tenths or three-tenths, 

but is this a meaningful package for stimulating the economy? 

I guess I will stop there, and I will come back. 

Mr. CRIPPEN. I think you have obviously framed the question the 

way that I would answer, which is, indeed, relative to the size of 

the economy, any 1 year, in fact, of this tax reduction may not be 

all that significant. Over the 10-year period, we hope and expect 

the economy will generate something like $150 trillion in economic 

output. In that context, the whole tax cut, $1 trillion or $1.5 trillion, whatever number you want to use, and so even in that context, the entire amount is pretty small. As we get to the front end 

of this, as you point out, $38 billion in a $10-trillion economy, in 

a $2-trillion budget is not much. 

I cannot tell you that we have or anybody else has definition of 

what would or would not move the economy. As you say, marginal 

effects can help. All I would suggest is that, given that consumers 

are keeping what is going today alive, anything that is done to help 

that part probably is useful. 

Senator CORZINE. Let me move to some of the assumptions that 

are built in. One of the more troubling assumptions I have, and a 

lot of people have expressed concern about, which there is an enormous debate going on, are productivity numbers. 

First of all, what is sort of the rule of thumb of looking at 1-percent changes in productivity relative—I think you all have those. 

I want to make sure that I am using the right metric. I think it 

is about $800 billion per 1 percent, if I am not mistaken. You can 

encourage me on that—but there are huge, huge debates about 

where we stand with regard to new economies and whether productivity growth numbers are real. It is almost the same as we were 

debating about whether growth was in good stead when we passed 

this tax cut. 

334

Do you have any—I’d love to know the metric—and then why are 

you all a little shorter than where we are in Office of Management 

and Budget and where a number of others might be, which is actually lower, and what are the risks for that over the next 10 years? 

Mr. CRIPPEN. Senator, I think you have highlighted the single 

biggest risk in the forecast; that is, economic growth is a function 

of roughly two pieces. One is the growth in the work force and one 

in productivity. We have been a little on the low side on work force, 

as we see in the census is catching up with some immigrants and 

others who are working that we did not count before, and so we 

have increased our estimate of the work force slightly over the next 

10 years. We have reduced our estimate of productivity equally 

slightly, but because we are having less capital investment now, we 

expect that productivity cannot perform quite as well as we had 

hoped. 

In the larger issue, and my colleagues will look up the metric for 

us here, but the larger issue surely is that if productivity does not 

perform the way we hope and anticipate here, then, clearly, the 

Federal budget will not look nearly as good, nor the economy. I 

would say we have adopted some, perhaps not all, of what some 

new-economy proponents would advocate; that is, we are going to 

be at about 2.5 percent of labor productivity over the next 10 years, 

and they would say 3 or 3.5 may be more like it, but the truth is 

that we waited several years as an institution to kind of let productivity hit us over the head, and we kept saying deficits, deficits, 

and the economy said surpluses. After 3 or 4 years of, frankly, underestimating productivity by pretty big amounts, we decided that 

we would adopt some of the last 4 years of history. 

I would say, and I think, actually, I brought that chart because 

I thought about this a little bit in anticipation of the hearing, what 

we have adopted for productivity is not so out of line of some of 

the better times, of course, that the U.S. had, but it is not, if you 

will, wildly optimistic relative to history or the recent past. 

So, as I started out saying, and as you I think suggested, the 

rate of productivity growth is critical to these forecasts and probably the most unknown piece, in some ways, and certainly highly 

debated of our entire forecast. 

Senator CORZINE. So, if we go back to the baseline that economic 

growth is the most important issue to deal with in resolving a lot 

of these long-run problems, it seems like we are potentially misplaced in the structure of our tax cut for stimulative purposes, and 

we are making a big bet on productivity growth, which is, at least 

by some comparisons to other points in history, fairly substantially 

outside the range of what is expected or what has been our recent 

history. 

Does that give you pause that we ought to think about restructuring in some form, not repealing, but restructuring of tax cuts 

that would be more stimulative to the economy, and therefore economic growth and the size of the economy might be in better shape 

to meet some of these both priorities that have been talked about 

by both sides of the aisle and also our long-term needs in Social 

Security and Medicare? 

Mr. CRIPPEN. You are going to tempt me to say things I should 

not, and therefore will not. 

335

15 CHART NOT AVAILABLE AT PRESS TIME. 16 CHART NOT AVAILABLE AT PRESS TIME. 

Let me return to a safer harbor where I was before, which is, in 

many ways, whether we are talking about Social Security Trust 

Funds or the future over the next 10 years and our outlooks, what 

is most important to those is continuing economy. In most ways, 

the only real trust fund for my generation’s retirement is the size 

of the economy. We cannot stuff the money away. We cannot invest 

it in a way that would do anything other than make the economy 

perform better or worse. 

So I think that the real debate that you see up here, Senator, is 

that what we need to talk about are policies that promote growth, 

whether it is stimulus in the short run or productivity in the long 

run, and that, at least from the point of view of growing the economy, is the debate we need to have. Now whether that means restructuring the tax code, I leave to you, at least for the moment. 

Senator CORZINE. Thank you. 

Chairman CONRAD. Senator Grassley. 

Senator GRASSLEY. Thank you, Mr. Chairman. 

I want to direct your attention to something I am sure you already know, but a couple charts. One that reminds all of us that 

before the tax bill was passed, taxes were at the highest level in 

the history of our country, at least for the period of time since 

World War II, with 20.6 percent of GDP. And the only other times 

that they were much higher is during the Vietnam War—not much 

higher, but higher than the normal 18.5 to 19.5 percent of GDP 

was during the Vietnam War and during the inflations of the late 

1970’s.15

And then a second chart, I want to show you to remind everybody that if you take all sources of income into the Federal Treasury, you find, over the last 10 years, a very steady rate of income 

to the Federal Treasury, with hardly any growth of all levels of taxation except for the income tax. Since 1995/1996, we have seen a 

50-percent rise in income tax coming into the Federal Treasury, 

from about 7.5 percent of GDP to about 10.5 percent of GDP.16

Now, getting to some questions on the issue of taxes and tax 

cuts, I want to say that I disagree with those critics that think, in 

fact, the tax cut was wrong. I think it was needed to correct the 

problem of overtaxation. You can get taxes so high that it does economic harm. 

I would like to get from you a little bit of historical perspective 

on this recently enacted bipartisan tax relief legislation, and I 

would refer to Page 3 of the August CBO budget outlook document. 

In that table, CBO provided projections of individual income taxes 

as a percentage of GDP. According to CBO, over the next 10 years, 

individual income taxes will still average very high at 9.5 percent 

of GDP. 

Now, if you turn to Table F–7, Page 145 of the January 2001 

baseline, when we look back over the period of 1962 through 2000, 

individual income taxes exceeded 9.5 percent only in those late 

years that I have just referred to. As a matter of fact, in addition 

to those years, over the 38-year period, individual income taxes 

336

took 9 percent or more of GDP only in the years 1969, 1981, and 

1982. 

So, Director Crippen, is it not true that, even after the largest 

tax cut in a generation, the level of individual income taxes as a 

percentage of GDP, in terms of the last 40 years, will remain at 

a relatively high level? 

Mr. CRIPPEN. It would appear, Senator, both individual income 

taxes and then, in turn, the total tax revenue of the Federal Government will remain at high levels. 

Senator GRASSLEY. On another point, and referring to the critics 

of the recently enacted bipartisan tax relief passed and charging 

that it constitutes fiscal mismanagement, I, for one, believe that if 

you are going to accuse someone of mismanagement, then I would 

like to refer to the records of the people saying that. 

So I would take a look at the record for the fiscal year and for 

fiscal year 2002. On March 27, 2001, the Senate Democratic leadership introduced legislation entitled, ‘‘The Economic Stimulus Tax 

Act of 2001.’’ That leadership argued that this measure should be 

expedited and President Bush sign it. This tax relief package was 

scored as losing about $100 billion by the Joint Committee on Taxation. That revenue loss compares with a revenue loss of $112 billion for the bipartisan tax relief package. 

Furthermore, 48 out of 49 people on the other side of the aisle, 

including all of the Democratic members of this committee, voted 

for the Democratic alternative tax package, which scored at roughly $100 billion when tax relief was considered by the Senate. 

Now, Director Crippen, when we are considering the record of 

competing tax relief proposals and the fiscal management of the 

fiscal years 2001 and 2002, is it not fair to say that there was not 

much of a difference between the Senate Democratic leadership position and the bipartisan tax relief package that was enacted—$12 

billion, to be exact? 

Mr. CRIPPEN. I have to confess, Senator—I will rely on your numbers—we did not ever estimate or score the Democratic, at that 

time, amendment to the floor bill. The numbers that I am aware 

of are similar to those that you have stated, but we did not independently score it. So it is entirely likely—I will rely on your numbers—and the chairman knows what his proposal was as well. 

Senator GRASSLEY. I assume, though, you would accept the judgment of the Joint Committee on Taxation on issues like that. 

Mr. CRIPPEN. We do, and we must. 

Senator GRASSLEY. OK. Director Crippen, now that we have seen 

that most of the members of this committee agreed on the size of 

a tax cut stimulus for the fiscal year 2001 and 2002, I would like 

to look at where they disagree, that is, over the long term. As I 

stated before, those who oppose the bipartisan tax relief package 

seemed concerned about the long-term impact of the across-theboard rate reductions, even though individual taxes as a percentage of GDP remain at high levels. There is opposition to long-term 

tax reduction because of the effect on the Federal tax base. 

In the August update, the one you just gave last month, Boxes 

2 and 3, Pages 34 and 35, CBO discusses the stimulative impact 

of the bipartisan tax relief legislation. CBO, albeit with some caveats, concludes that if left in place, the tax cuts, especially the marVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00342 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
337

ginal rate reduction, can provide long-term incentive for work and 

savings. The Finance Committee heard much of the same thing 

from witnesses during the spring. 

So, Dr. Crippen, considering the stimulative effect, both short 

term and long term of the lower marginal income tax rates, can 

you see any reason why we should reverse course and repeal those 

marginal rate reductions? Would not repeal of those rate reductions 

result in slowing in an already slowly growing economy? 

Mr. CRIPPEN. If I could, I would like to answer about three questions. That will make it easier for me, at least. 

Senator GRASSLEY. OK. 

Mr. CRIPPEN. One of them is that the current economic slowdown 

is not affected, I think, one way or another by the marginal rate 

reductions. They are very small in these first few years. In fact, I 

think the marginal rate reductions amount to something like $3- 

or $4 billion in 2002, as I recall. So it is really in the last half of 

this decade that those come into play, and so whether you change 

them now will probably have not much effect on either revenues or, 

therefore, the economy. 

In the long run, as you have cited from our box, there are parts 

of the tax bill that most economists would think would help stimulate economic growth—the marginal rate reductions being one of 

them. There are other pieces, however, likewise cited here, that 

might deter economic growth as a result of the tax bill. It really 

depends critically upon your assumptions about where does the 

money come from. 

If the tax cut comes from assumed more Government spending 

in ways that are not productive, then it could be, on net, a boon 

to economic growth over the long run. If, however, those tax cuts 

are coming from or have to be replaced later on, it could be, in net, 

a small deterrent to economic growth. So there are some big assumptions one has to make that we are not in a position to make 

to come to an ultimate conclusion, but clearly taken piece-by-piece, 

there are some parts of the tax bill most economists would agree 

could help economic growth, others that might deter it. 

On net, though, I would say, Senator, in part because just the 

size of the whole tax package is relatively small, it is 1 percent of 

GDP over the 10 years, any effects we see on the economy, plus, 

minus or otherwise, would be quite small. 

Senator GRASSLEY. Thank you, Mr. Chairman. 

Chairman CONRAD. Senator Stabenow. 

Senator STABENOW. Thank you, Mr. Chairman, and thank you 

for holding this very, very important hearing. 

If I might first respond to our esteemed leader on the Finance 

Committee concerning the tax cut for just a moment. As one person 

who supported a version of a tax cut of $1.2 billion, I would just 

like to indicate why I did, and I know many of my colleagues did. 

No. 1, it was additional stimulus that the chairman talked about; 

No. 2, it cut every marginal rate, including the one that 70 percent of the people are in, which is the 15-percent rate. So our tax 

cut focused more for middle-class Americans, which I would gladly 

do again as we focus on tax-cut policy; 

But, third, and in my mind most important, what I supported 

had a trigger in it. It would not mean that we would be here today 

338

talking about the possibility of dipping into Social Security and 

Medicare because the trigger, which was originally put forward by 

Senator Bayh, Senator Snowe, and myself, and others indicated 

that the policy of the Congress would be that any phased-in tax 

cut, any next step would be held in abeyance, if it touched Medicare or Social Security, until enough revenue was there for us to 

be able to make the next step. 

So there were substantial differences, although the numbers may 

have sounded fairly close. I would argue yet today that it is time 

to revisit, Mr. Chairman, the idea of a trigger to guarantee that we 

do not touch Medicare and Social Security. 

On the point of the big surplus, Mr. Crippen, and thank you so 

much for the work of you and your staff, you have a thankless job, 

and we appreciate, whether we at any given point like what you 

say, it is important that you are providing us accurate information 

from a professional staff. So we very much appreciate that. 

We have heard a lot, I hear a lot of numbers about the largest 

surpluses in many, many years and so on. Is it not true that we 

are talking about large Social Security and Medicare Trust Fund 

surpluses; is that correct, Mr. Crippen? 

Mr. CRIPPEN. Yes, and over the next 5 years, it is almost exclusively Social Security Trust Fund surpluses. It is only in the latter 

half of the decade that we see on-budget surpluses redeveloping of 

any amount. 

Senator STABENOW. So what we are seeing right now is hardworking efforts of Americans who have been paying Social Security 

taxes, paying into Medicare Trust Fund, and those are being counted as large surpluses right now when, in fact, those are Social Security funds and Medicare funds. 

Mr. CRIPPEN. Yes, that is true on both scores. We have traditionally, both in terms of the budget and the economy, of course, added 

everything together. The Federal Government’s activities at large, 

how much we take in, how much we spend. So the distinctions between trust fund revenues and others are less important to us, certainly, than they are to you, ultimately. 

Senator STABENOW. Sure. Well, I understand that a number of 

years ago the unified budget approach was put together and that 

there was an effort to put together non-Social Security and Medicare spending along with the dollars coming in from Medicare and 

Social Security. But, in fact, as you have indicated in your report, 

we will be, in fact, dipping into or however we choose to say it, we 

will be spending $9 billion of Social Security Trust Funds in order 

to be able to balance this budget. And, in fact, if we were to go further, if we did not include Medicare, it would be even more; is that 

not correct? 

Mr. CRIPPEN. Yes. 

Senator STABENOW. So we are spending Medicare to the tune of 

over $30 billion, and we are spending $9 billion of Social Security, 

at this point. 

Mr. CRIPPEN. Yes. Using your terms, yes, that is correct. 

Senator STABENOW. Is it not also true, and I appreciated in your 

report you have indicated that about two-thirds of the loss in surpluses, about two-thirds of the decrease in surplus results from 

new legislation, primarily the tax cuts. 

339

Mr. CRIPPEN. Correct. 

Senator STABENOW. One-third comes from a weaker economy and 

other factors. Would you agree that the legislative decisions that 

the Congress has made has made it more difficult in the future to 

pay Social Security and Medicare to those of us who are baby 

boomers that are going to be retiring beyond 10 years? 

Mr. CRIPPEN. It is not at all clear, Senator, because what in the 

main will make it easier or harder for our kids to pay our retirement is going to be the size of the economy. We will be consuming 

what our children produce at the time, and there is no good way 

to really save, in the way that you and I might think of it, to save 

money at the Federal level for that purpose; rather, the economy 

is going to be largely the trust fund. 

So however these fund are used, if they are thought about as 

being down the debt, for example, that may help national savings, 

which might grow the economy. That could be a good thing and 

would help ultimately our children in their obligation to us. 

Senator STABENOW. So, if we are using it to pay down the debt, 

we have more capacity then, we potentially can help interest rates 

continue to go down, we have more capacity to stimulate savings 

and so on. If we are spending it on other purposes, as, in fact, we 

are, and it appears that there is support to continue to do, we are 

making it then more difficult. 

Mr. CRIPPEN. It would depend, Senator, on what you were spending it for and how you viewed those programs, obviously. For example, if you were spending it on, say, education, which might make 

it easier for our children both to produce a better economy and to 

support us, that might be something that would be a pro-growth 

policy you would deem appropriate. I am making that up, and it 

is not my opinion, but it would depend largely on how you use 

those funds. 

Senator STABENOW. Sure, and I would agree that——

Mr. CRIPPEN. You may have programs that you would like and 

that would help economic growth. 

Senator STABENOW. And I would agree that education certainly 

is an important part of the investment to increase labor productivity and increase the economy. But, clearly, we are in a situation 

where we are not adding to the strength of Social Security and 

Medicare during the current situation, certainly, it would appear 

from everything that is seen in your report and your numbers. 

If I might just go now specifically to Medicare. There has been 

a lot of debate about is there a Medicare Trust Fund, where are 

the dollars going on and so on. Your report indicates that Medicare 

is being spent, in fact, at a faster rate than Social Security in the 

current baseline, as we look at the situation. 

When we look at the fact that on Page 1 of Chapter 1, in Table 1.1, you list a Medicare Hospital Insurance Surplus of $206 billion 

from 2002 to 2006. Is it not true that the Federal Government will 

spend much of this on other programs as it currently appears? 

Mr. CRIPPEN. Let me take 10 seconds back and say that for this 

trust fund and others as well, the terms used are correct, certainly, 

that this money will be used openly to fund other programs. But 

I want to note again that the trust fund itself will look the same; 

that is to say, the payroll taxes dedicated to the HI fund will be 

340

accounted for and attributed to that trust fund. The trust fund will 

invest in U.S. securities. That money will go into the U.S. Treasury 

and will be used for other things. What for is, of course, not clear. 

It is all mixed together. 

So I want to say, on behalf of certainly current beneficiaries, but 

even those who are paying in, the trust fund looks the same no 

matter what happens with this accounting system. 

Senator STABENOW. And I agree that we certainly do not want 

to cause concern of current recipients, that there is the trust fund. 

Although I have to say that when your counterpart, the director of 

OMB was sitting there, he indicated there was not a Medicare 

Trust Fund. So it is a very different view. For the first time in 30 

years, they are using a whole new accounting system which concerns me because is it not true that while the receipts are going 

into the trust fund, there is a trust fund that the solvency of the 

trust fund, as you report it, is affected by whether or not we are 

using it for other spending programs? 

Mr. CRIPPEN. The solvency itself would not be affected because 

we will record, as the Treasury and the rest of Government will, 

these receipts as coming into the trust fund whether or not on the 

other side it looks like they might be used for other programs. So 

that the solvency itself, solvency dates will stay the same. 

Again, the question becomes, Senator, more importantly, what 

shape is the economy in, in the future, so that when those obligations are due in the form, in the first instance, of Treasury bonds 

and debt, how easy it is to cash those in. How much do our children have to give us, literally speaking, when what they are producing, either through the tax system or elsewhere? 

Senator STABENOW. That is really another way of saying—what 

I am referring to, in terms of solvency, is the fact that if those receipts, if those dollars are not credited, they are unavailable, we 

create debt in order to meet those obligations. 

Mr. CRIPPEN. Yes. 

Senator STABENOW. Or there are other policy changes that have 

to be made. 

Mr. CRIPPEN. Correct. 

Chairman CONRAD. Senator Hagel. 

Senator HAGEL. Mr. Chairman, thank you. Dr. Crippen, thank 

you. 

Would you explain Part B of Medicare to this committee. My 

question is based partly on the Senator from Michigan’s line of 

questioning, but we seem to act like there is no such thing as Part 

B to Medicare. Would you explain how Part B is financed. 

Mr. CRIPPEN. I will certainly try. Senator Frist probably has a 

better idea, since he was on the other end of this. 

Senator HAGEL. We may ask him. 

Mr. CRIPPEN. Good. 

Senator HAGEL. But right now we are asking you. 

Mr. CRIPPEN. OK. There are, as you suggested, at least two parts 

to Medicare. There is also a Part C, as well, but in point here, 

Parts A and B. A is the hospital trust fund or hospital part of the 

program that pays for those admissions. Part B pays largely for 

physician costs and visits. In one of the grand compromises, when 

341

Medicare was passed in 1965, these two pieces were established 

with a little different financing. 

Part A, in the main, is financed by payroll taxes, a small amount 

on everybody’s income, payroll, wage income; and Part B is supported 25 percent now by the recipients. They pay a premium equal 

to 25 percent. That, originally, by the way, in the history of the 

program, was 50 percent. It was designed to be half of the program 

paid by beneficiaries. The other half, and now three-quarters, is 

paid by the general fund, by taxpayers, you and I, and anyone else 

who happens to be working in general funds. 

Senator HAGEL. Thank you. How much money is coming out of 

the general funds to cover that three-quarters of the amount for 

Part B? 

Mr. CRIPPEN. I am going to rely on my colleagues to make sure 

I get that right. It is a significant amount. They will give me a 

number here in a moment. One thing I wanted——

Senator HAGEL. It is in the tens of billions. 

Mr. CRIPPEN. Yes. 

Senator HAGEL. If you took that amount and applied that to Part 

A so we had a complete accounting, would there, in fact, be a Part 

A surplus? 

Mr. CRIPPEN. If you add Part A and B together, no, the income 

is not enough on payroll taxes to cover the total of the spending. 

Senator HAGEL. So, in fact, the total for Medicare, there is no 

surplus, if you take all three. 

Mr. CRIPPEN. If you add those pieces together. One thing I would 

say, I mean, there are separate trust funds, and we do account for 

them separately. 

A change that was made in 1997 may be suggestive of the kind 

of thing that you are thinking about, and that is the home health 

care provisions were generally funded by hospital insurance by 

Part A. They were transferred, in 1997, to Part B. So it shows, and 

therefore of course the expenditures with them became more onbudget or became more general-revenue financed, only one-quarter 

by beneficiaries, and not out of the payroll tax. So the benefits are 

roughly the same, but were transferred from one part of the system 

to the other. 

Senator HAGEL. So now we are taking Part B to pay for what 

previously had been paid for in the so-called trust fund of Medicare 

Part A. 

Mr. CRIPPEN. Right. 

Senator HAGEL. And you have a number in front of you. I understand your colleagues just gave you a number. 

Mr. CRIPPEN. Federal contributions, $70 billion in 2001. 

Senator HAGEL. That is a significant amount of money. I think 

most of the American public may not be aware of the fact that that 

amount of money comes out of the general Treasury to finance that 

part of Medicare. I just want to make sure we had that on the 

record and it was clear. Thank you. 

Your report, Dr. Crippen, talks about estimating growth revenue 

over the next 10 years, and I believe at about 3 percent. Now that 

is below the 3.8-percent trend from 1961 through 2001. I know we 

are not in a particularly stimulating time economically, but can you 

342

explain why your revenue growth would not match what we have 

seen over the last 40 years. 

Mr. CRIPPEN. There are probably two major reasons: One, of 

course, it gets back into baselines and how you measure them, but 

there were a lot of changes in legislation over that period of time—

some tax increases, some reductions. Probably the single biggest 

change, however, that factors into the two numbers you cite, was 

that in the 1980’s the marginal tax brackets became indexed. Prior 

to then they were not. And so that would give you, on the natural, 

as you know, more bracket creep before the indexation occurred, 

and therefore higher rates of taxation, in some ways, and growth, 

especially with high inflation as we had in the 1970’s. 

So, prior to indexation, the growth rate was probably greater 

than 3.8. It was 4-something—I am making it up, but somewhere 

like that—and since indexation has been lower. So the biggest single change in that time period that would suggest 3 percent is closer than 3.8 is the indexation that occurred in the 1980’s. 

Senator HAGEL. Thank you. May I ask a question about defense 

spending? 

I noted in your figures that defense spending, since I think 1985, 

has been reduced, and in some cases rather dramatically, when almost all other civilian programs’ spending has increased, in some 

cases dramatically. As you know, we are going to have a very stimulating debate up here over the next 2 months about defense 

spending. Would you care to offer any observation on those numbers, especially coming from your perspective on projections and 

what can be sustained and anything that you would like to add? 

Mr. CRIPPEN. We have, Senator, on the record, if you will, from 

the past year or so, a number of studies that we have done that 

are partly responsive to your question; that is, for example, last 

September, we estimated that in order to maintain today’s force 

structure as it exists, it would take approximately another $50 billion a year every year for the next 10 years to sustain it. 

That begs the larger question, however, and presumably part of 

your upcoming debate, in what is the appropriate force structure. 

One has to start first in a place that we are certainly not qualified 

to, which is what is the correct national security strategy? How 

much of that is defense? How much is diplomacy? Given the defense portion of that strategy, what is the force structure necessary 

to support it and sustain it, and then what does that force structure cost? 

It is only in the latter question that we are probably capable of 

helping give you some insight as to what inputs cost. But until you 

answer those important first questions, it is almost impossible to 

say what is the appropriate level of defense spending, one way or 

another. 

Senator HAGEL. It is a bit dramatic to look at those numbers as 

you have laid them out because I am not sure most of the people 

in this country have any appreciation how dramatically we have 

cut defense, and at the same time, to your point, ask our armed 

forces and force structure to do more. That will be something that 

you will be involved in as well. 

My time is up, Dr. Crippen. I appreciate your answers very 

much. Thank you. 

343

Chairman CONRAD. Senator Nelson. 

Senator NELSON. It is exactly the reason that I would like to help 

Senator Hagel on defense spending for 2002, 2003 and years beyond that I find myself in a quandary. And we discussed this in 

this committee in January, and February and March, and we said 

that the figures on the he projection of the surplus was too robust, 

that we ought to be more conservative in our estimations of what 

the surplus was going to be in figuring how much, over the 10-year 

period, we were going to use of that surplus in a tax cut. 

What I had argued at the time, because there were certain 

things that we were going to need to invest more heavily in, such 

as defense, such as education, that we ought to be conservative in 

our approach and do not use up all of the surplus that was going 

to diminish, and surely it did, with the tax cut, but rather be more 

conservative in our approach and set aside not only amounts for 

new investment, such as in defense and education, but set aside 

some for what you might call a rainy day fund and let that pour 

over into the Social Security Trust Fund for the ultimate day when 

the baby boomers start retiring and there is more of a demand on 

that trust fund, given what is coming in, in tax revenue. 

So there have been a lot of points scored around this table today 

on various things like partisan points, and budgetary points and so 

forth, but the truth is, and this would be a question I would ask 

the CBO director, if we had taken part of that projected surplus 

and set it aside so that let us say it was an amount in the range 

of $750 billion over the 10-year period to, say, a trillion, set that 

aside so that it would enure to the benefit of the Social Security 

Trust Fund, over that 10-year period, as compared to where we 

find ourselves today, what would our budgetary outlook look like? 

Mr. CRIPPEN. I do not think I can answer that, Senator, to your 

satisfaction. Let me give it a try, and then maybe we can work 

back and forth a bit. 

It depend, obviously, on what years you took it from and lots of 

things like that, but just in the main we have seen the economic 

downturn, if you will, in these forecasts take about $480- or $490 

billion out. So your $750 billion would certainly leave a positive 

amount if you took all of the economic changes in it. 

It would not do anything, at least from, I think, budgetary and 

economic point of view for, say, Social Security or Medicare because 

those trust funds are, will, and still be counted, both for the financing they are getting, as well as the bonds that are created for them, 

and so on. Indeed, much of, I mean, this forecasts suggests that, 

in the next fiscal year, we will be a few dollars on one side of this 

line or another, relatively speaking, so that the Social Security surpluses, in the main, are still going to go to debt reduction in our 

forecast. 

As I told a group not long ago, I get lost in all of the zeroes on 

these numbers, but if you cut a bunch of the zeroes off, we are talking here, at least the next year, about $8 out of $2,000. Again, 

these are, both the line and which side you are on, are estimates 

on our part. So that, in and of itself, is probably not something to 

be overly concerned about from a budgetary or economic point of 

view. It is, as the chairman and others have said, what you think 

the future looks like and the implications for the future. 

344

So I guess part of my answer to your question is that even with 

a set-aside, we probably would not change the outlook much for 

certainly the trust funds of Social Security and Medicare. It would 

have been a sufficient amount that you cite to absorb the reduction, 

certainly, from the economy that we have just talked about, and in 

that sense would make the future look better. 

Senator NELSON. As well as accelerating the paying down of the 

national debt. 

Mr. CRIPPEN. Yes. 

Senator NELSON. OK. Then that leads me then to ponder, Mr. 

Chairman, what we are going to do about the 2002 budget. Mr. 

Chairman, we are facing the fact that we now have a request by 

the President for an additional $18 billion in budget over and above 

what is projected on defense into the year 2002, and that is going 

to have to come from somewhere if we grant that. 

As I read your figures, there is just about a balance, with regard to the Social Security Trust Fund, some maybe $2 billion plus——

Mr. CRIPPEN. Correct. 

Senator NELSON. So, forgetting education, forgetting all of these 

other things that we are going to have to confront about investment, if we just increase the Defense Department budget in the 

year 2002, the net result in the projections is that it is going to 

have to dip into the Social Security Trust Fund. 

Mr. CRIPPEN. Yes. By your terms, that is right. 

Senator NELSON. Well, that puts a whole bunch of us, as we say 

in the South, in a heck of a fix because we have promised not to 

invade the Social Security Trust Fund, and yet we clearly have the 

Nation’s needs, with regard to defense, education, et cetera, and so 

forth. 

Mr. Chairman, do you have any guidance? 

Chairman CONRAD. We are in a heck of a fix, all of us. 

No question about it. 

Senator NELSON. Thank you, Mr. Chairman. We will contemplate 

the fix together, all of us. 

Chairman CONRAD. Senator Frist. 

Senator FRIST. Thank you, Mr. Chairman. Dr. Crippen, thank 

you for joining us. The debate is clearly focused a lot on the budget 

and the economy, and having this hearing early on, Mr. Chairman, 

I think is a big help, so we can get some of the basic questions outlined and continue the discussion in a way that will allow us to address the important priorities of this Nation, one of which is prescription drugs and Medicare, and we talked a little bit about that 

today. Let me ask a brief question. It is the solvency of the Part 

A Trust Fund in any way affected by the tax relief package of the 

President of the United States? 

Mr. CRIPPEN. No. 

Senator FRIST. Is the solvency of the Social Security Trust Fund 

affected by the tax relief package of the President of the United 

States? 

Mr. CRIPPEN. No. 

Senator FRIST. When we say solvency, we very quickly—you can 

extend that further. Can we extend it? The solvency is not affected 

and thus the benefits, the obligation for benefits—I am thinking of 

Medicare to reassure the American people in part, but also to help 

345

us all understand the difference between the tax relief package and 

the budgeting process and the economy. Does that mean that the 

benefits that seniors and individuals with disabilities can expect 

under Medicare and Social Security are unaffected by the tax relief 

package? 

Mr. CRIPPEN. That is correct, Senator. 

Senator FRIST. The issue of the $533 billion that the Chairman 

mentioned is one that, again, I appreciate him mentioning, because 

it is something we have to understand. The budgeting process is 

very different, and the resolutions we pass are very different than 

what we have to translate in terms of appropriation and in terms 

of policy, and we so need to understand that. Everybody needs to 

understand that as we go forward. 

I think the presentation here made things a lot clearer to me. 

But looking through some of the numbers and comparing CBO to 

OMB, one of the major differences between the baseline, which, 

again, I think your remarks made very clear as to what the baseline really means, between CBO and OMB, is the Medicare program if you actually look at the numbers. Over the next 10 years, 

the CBO estimates total Medicare spending to be nearly $229 billion higher than the amount estimated by OMB. 

The numbers—just looking at it, both CBO and OMB projected 

mandatory Medicare spending in 2001 will total approximately 

$214 billion, but OMB projects a slower rate of growth over the following 10 years. OMB projects an annual rate of growth of 6.1 percent and I believe that you, or CBO, projected growth of 7.5 percent. Because policies, which when we enter prescription drugs, 

will and should, I believe, affect overall growth. Could you, just as 

background, explain the difference between your assumptions, or 

the CBO assumptions and the OMB assumptions, because it is very 

dramatic when you look at that it amounts to over $200 billion over 

a 10-year period? 

Mr. CRIPPEN. As you noted, Senator, the differences are not dramatic when you look at just the two growth rates. There does not 

appear to be, but over 10 years one-and-a-half points make a lot 

difference in a $200 billion program. The difference is an assumption, and that is, we look a ways back in history and note that 

Medicare has grown much more quickly than the economy for 

much of its history. We have had a couple of recent years were that 

is not true, but in the main it is. So we are assuming that Medicare will grow faster than the economy on a per capita basis for 

the foreseeable future, certainly is 10 years. 

OMB assumes the same thing. They assume about 1 percent 

faster than the economy. We assume, as you pointed out, one-anda-half points more than that, between two and 3 percent. The 

HCFA actuaries used to not assume any. They now assume 1 percent. So we are a little higher than both the HCFA actuaries and 

OMB, but certainly lower than much of history. I do not know if 

that has been responsive, but we are assuming that Medicare is 

going to grow a little faster, two-to-three percent faster, than the 

economy grows. 

Senator FRIST. I think it is important for us to understand the 

assumptions, which in one ear, all of these do not look like very 

much, but cumulatively, they have a huge impact. I would also like 

346

to say, because there are a lot of people on this committee who had 

been in the private sector before coming to the U.S. Senate, that 

the relationship between what is going on in the private sector in 

health care and Medicare, we do not all fully understand, but there 

is a relationship there. 

If there is one thing that I learned over the recess, it is that the 

decade of the 1990’s is gone in terms of a slower growth in health 

care today, and that we, for whatever reason, and I cannot explain 

it, are entering a period of time when all the underlying dynamics 

are pushing cost up. I do not know what the right—I have not really studied it—the right assumption is, but there is something different now in health care than it was 2 years ago, 4 years ago, 6 

years ago and 10 years ago, that is driving, internally, these costs 

of health care as they go forward. 

I say all that as a little bit of a preface to say that to do prescription drugs right, I have always argued in the past that we do have 

to modernize Medicare at the same time, that that linkage is critically important as we go forward for all sorts of reasons, really just 

because prescription drugs are a part of health care. But in addition to that, in your assumptions as you predict these baselines, 

the modernization component, or do you score things in such a way 

with your staff, that modernization can give the same benefits, but 

over a period of time have less growth—and, again, it is important 

to me, because we know that one of the problems of Medicare is 

this assumption of growth, internally driven in many ways by the 

elements of modernization that would not affect the benefits in a 

negative way—that you would use and your staff would score in 

order to lower that baseline overtime? 

Mr. CRIPPEN. We do not make, Senator, as you know, policy proposals. We do, however, as you and I have discussed before and 

others of our staff, have to make some assumptions as we score 

real legislation. So the most immediate example I can give you is 

how we look at pharmaceutical benefit outside of Medicare, but you 

might assume some of those same assumptions would apply to the 

program at-large. And that is, if there is some element of more 

than one group offering a benefit, competition of some sense. It 

does not necessarily have to be purely private as we think about 

it, but certainly private competition, and how much that competition can adjust benefits up or down to match patient needs and requirements, how they can adjust, therefore, premiums as well. 

Utilization controls and other things are very important as to 

how much a drug benefit would cost, not only in the first instance, 

but more importantly how fast its cost might grow. So those same 

kinds of elements could be brought to bear, presumably in the 

Medicare program, but it is a very complicated—I do not need to 

tell you—system of how we try to pay for these procedures. As you 

and I have also discussed, we have not spent enough time really 

focusing on where these dollars are going and what they are buying. 

We know they are going to hospitals and doctors. Presumably 

they are buying good health care, but we do not know for what conditions. We do not know what the diseases are, the profiles. We do 

not know what the protocols are that are being applied in different 

parts of the country—there is a lot we do not know that you, as 

347

a physician, would certainly want to know when you are thinking 

about a major reform of this program. Hopefully, we can begin to 

find some of those things out that would suggest ways not only to 

save money, but, perhaps, to better offer the benefit or in a way 

that gives you a better health outcome. 

These things are not mutually exclusive, and I think that is what 

you were asking. Your question of can we provide the same benefit 

and spend less? Probably, but one needs to know a lot more about 

what we are buying now, not the benefit structure, not the 50 percent co-pay, not the hospitalization plus or minus 3 days. What we 

need to know is what we are buying for health care and that I 

think we do not know. 

Senator FRIST. Mr. Chairman, thank you. I do not want to merge 

policy with budgeting and further discussions now, but as you look 

at what the big differences are in OMB and CBO, which we keep 

coming back to, very much is in the Medicare, which again explains 

a lot of the effect overall and those assumptions of growth over 

time. We may have an opportunity in all of this to address that 

head on. 

Chairman CONRAD. Senator Clinton. 

Senator CLINTON. Thank you, Mr. Chairman. Thank you for 

holding this hearing and thank you very much with your entire 

team for being here with us. I was particularly interested in the 

last exchange with Senator Frist about the costs of health care, 

something that I have given a lot of thought to over the years. I 

think it is absolutely appropriate to view what is happening now 

as—both in the private and public systems—as posing increasing 

stresses to the financial capacity of both businesses and government to afford health care. 

I was interested particularly in your comment that we do not 

have enough information. I certainly, for one, believe, Mr. Chairman, we ought to do whatever we can to acquire the information 

that CBO and others would need to advise us, so that we were 

making decisions that were based on the best possible information. 

I would hope that is something that we could look to in the future. 

I also wanted to just make sure I understood the other point that 

Senator Frist was making with you about solvency, because I do 

think that the public and all of us need to understand what it is 

we are concerned about. Is it fair to say that even though the existing system, as you described in your response to those questions 

with respect to Medicare and Social Security are solvent at this 

time, that the potential of any Social Security reform that would 

cause us to incur transitional costs would be an additional expense 

that you have not yet taken into account? I have heard some of the 

Social Security reform proposals with the transition costs ranging 

from $1 to $3 trillion, depending upon the shape of the proposal. 

Are those in your 10-year projections? 

Mr. CRIPPEN. None of the transition costs you referred to would 

be in our projections. In the main, it is current law and the solvency of the Social Security Trust Funds are estimated by the actuaries, which I believe now is to 2038 for Social Security, much closer for health insurance. What we were addressing before was, has 

anything affected them this year, and the answer is no. Those solvency dates remain roughly where they were. 

348

Senator CLINTON. The concern that many of us on this committee 

have spoken about in previous hearings really is focused on the impending demographic effects of the retirement and increasing medical demands of the so-called baby boomer generation, and those 

are expected to begin making claims on the system, I think, in 

2011; so that the projections that we are talking about really have 

more to do with whether or not our country is going to be in strong 

fiscal condition to deal with future demands that we believe, in a 

responsible way, we should be prepared for. 

Similarly, with respect to the solvency of Medicare, that does not 

include a prescription drug benefit because that is not part of the 

Medicare program at this time; is that correct? 

Mr. CRIPPEN. That is correct. 

Senator CLINTON. I am also very interested in Senator Hagel’s 

concerns about defense, which I think all of us share, and Senator 

Nelson also spoke to that. I have not seen the projections that CBO 

made about the $50 billion annual spending with respect to maintaining existing force levels, and could I get a copy of that? I would 

like to see what that is based on and how it is derived. 

Mr. CRIPPEN. Certainly. 

Senator CLINTON. But with respect to defense, the request that the administration has made, the $18 billion request, that is also 

not in your existing analysis; is that right? 

Mr. CRIPPEN. That is right. 

Senator CLINTON. Nor is the very important piece of legislation 

known as the education bill, and the potential costs going forward, 

also included; is that right? 

Mr. CRIPPEN. It is not included. 

Senator CLINTON. I, for one, am a very strong supporter of Senator Hagel’s, I think, brilliant idea to make the Federal Government do what it said it would do, which was to pay for special education, which is something that I hear about everywhere that I 

travel in New York, because of the increasing cost. But forwardlooking special education payments that would be part of the Federal Government assuming the responsibility for special ed, which 

we should have when we started this program 25 years ago, that 

is not in your assessment? 

Mr. CRIPPEN. It is not. 

Senator CLINTON. Similarly, the bill that is working its way 

through the House and will someday, I suppose, come to the floor 

of the Senate, with respect to energy, the kind of tax credits and 

other issues that will be addressed in meeting the energy crisis, 

that may have abated some, but not disappeared; those figures are 

not in your projections? 

Mr. CRIPPEN. They are not. 

Senator CLINTON. Also, with respect to additional tax reform 

measures, many of us are concerned about the alternative minimum tax, which we know will drive many millions of taxpayers 

into a higher bracket, thereby wiping away whatever rate reform 

they might have enjoyed. Those are not in your figures; are they? 

Senator CLINTON. No. Beyond what was provided for in the tax 

bill, no. 

Senator CLINTON. Many of the tax bill’s provisions do not kick in 

until next year at the earliest and 2010 at the latest; is that right? 

349

Mr. CRIPPEN. Yes, some of them do not—for example, estate tax 

repeal does not occur until the end of the period—and then everything is set in legislation to expire in 2011. 

Senator CLINTON. You have referred several times in your testimony to the need for the economy to continue growing. Has the 

CBO done any work over the last 15 to 20 years about those factors 

which contribute to a strong economy? 

Mr. CRIPPEN. Not quite the way I suspect would be useful for 

you. We are better looking at the past than we are looking at the 

future, so we have, of course, done some examination of what has 

happened. Most recently, in these last four or 5 years, the rapid 

economic growth, the good economy, was due to unforeseen increases in productivity, and as Senator Corzine suggested earlier 

today, the question for us is will those productivity increases continue? Clearly, at the moment they are not, but then always in a 

downturn, they diminish. The question is will they come back with 

the economy, and we think they will, at least some. 

So what has caused, certainly in the recent past, good economic 

growth has been good productivity. There are other things that you 

might think help that, whether it is tax policy, as Senator Corzine 

was suggesting, whether it is education or other things, but there 

are really, when it comes down to it, Senator, only two pieces to 

economic growth, in a simplistic way; one is the growth in labor 

force and the other is growth in productivity. So those are the two 

policies or the two ultimate goals you want to pursue with policies. 

Senator CLINTON. Well, that is right. What I am concerned about 

is, given where we are right now, whether there are steps that 

could do either of those effectively, with respect to labor force 

growth and participation in productivity increases, and I know that 

is not your province. That is more of a policy issue. But I think 

many of us are concerned that we do not have an economic plan. 

We have had a tax cut plan, but we do not have an economic plan; 

and looking at what factors could be enhanced or motivated, in 

order to increase labor and productivity numbers, is something 

that, obviously, we take very seriously. 

There are many of us who think that if you are looking at the 

government budget situation right now, we should go back and revisit the idea that was in the Democratic alternative, about some 

kind of trigger, to send a message to the market that we are not 

going to go into a backward-looking posture, where we begin to 

slide back into uncontrolled deficits, the triumph of politics on both 

sides of the aisle takes hold again. So I am wondering whether you 

have any thoughts about the trigger idea, after having, I am sure, 

talked about it with your staff because of the previous questions 

that we have addressed to the CBO? 

Mr. CRIPPEN. I think the only thing we have concluded, Senator, 

is that we do not know; that is to say trigger mechanisms do not 

give anybody much comfort in both how they would be constructed 

and how they would work. As you are suggesting, perhaps capital 

markets would look at them more robustly than we have. Again, 

one has to be careful, of course, and one of the big arguments 

against a constitutional amendment for a balanced budget or something like that is the straitjacket it might put the country in, in 

350

times just as this or worse, whether we are in a recession or a 

weak economy or a war or some other things. 

So one has to think about triggers look awfully good on one side 

of an economy and maybe not on another, or on one side of a debate and not another. But, ultimately, I think it comes down to policymakers to take action, and whether you can foresee what those 

actions should be five or 10 years from now and put a trigger in 

place, I do not know. 

Senator CLINTON. Something to be considered. 

Chairman CONRAD. Thank the Senator. Reflecting on what I 

have heard here, a casual viewer at home might conclude it just 

does not make any difference, does not make any difference if you 

take trust fund money, once it has been credited to the trust fund, 

and use it for some other purpose. Does it make any difference? 

Mr. CRIPPEN. It does not make any difference to the programs or 

to the benefits or to the trust fund. It can make a difference to the 

economy, depending upon how——

Chairman CONRAD. And how can it make a difference to the 

economy? 

Mr. CRIPPEN. Well, in the case of trust funds, as we have been 

talking about here—Social Security, for example—one might think 

about policies, whether it is an amount of money equal to or different than that does not really matter. One can think about policies, however, that would help economic growth. One of them, as 

we have discussed today and elsewhere, is paying down debt might 

help economic growth by making capital more readily available and 

cheaper; others might be spending for education or other programs. 

I do not have a list or a policy recommendation, obviously, but one 

has to think about policies that grow the economy, and not just in 

the confines of a given amount of money that might be attributed 

to a trust fund, because as I have suggested, in my view, ultimately 

the trust fund is the economy and the size of the economy, and it 

is the totality of the Federal budget that may affect that, not just 

the dollars that are involved in the trust fund. 

Chairman CONRAD. I agree with that. Let me just say, from my 

perspective, it makes a difference in the following ways: No. 1, the 

economy. To the extent you do not pay down the debt as much, 

that means less savings, less investment, less economic growth. 

Second, to the extent you do not pay down debt, you have more 

debt for longer. That means higher interest cost. We are seeing 

that in the current circumstance. We are seeing more debt for 

longer. Instead of having $1.3 trillion of publicly held debt by the 

end of 2006, we are going to have 2.3 trillion of debt. It matters 

a lot, because that means additional interest cost to the Federal 

Government, and we have indicated—in your report, you show us 

the difference it makes. 

Instead of $600 billion of interest cost, we are going to have $1.2 

trillion of interest cost. So it matters a lot. Further, what is going 

on now, in part, is that people’s payroll taxes are being taken. The 

vast majority of Americans pay more in payroll taxes than they pay 

in income taxes. We are taking some of people’s payroll taxes and 

using it to give an income tax increase that goes disproportionately 

to the wealthiest among us. To some of us, that strikes us as incredibly unfair. But, more than that, looking ahead, as you have 

351

pointed out on many occasions, we are faced with a circumstance 

in the future where delivering the benefits that we give now with 

these programs, Social Security and Medicare, are in jeopardy. 

They are in jeopardy because of the hard reality the baby 

boomers are going to retire, and as the President of the Social Security Commission has pointed out, we are going to face either 

deep cuts in benefits, big tax increases or massive debt. Some of 

us believe that it is important—it is necessary, but not sufficient, 

to use these trust fund surpluses to help prepare for that day. The 

second thing I wanted to point out, and that is the Medicare Trust 

Fund. Senator Hagel raised the question, on page 20 of this report, 

you indicate the Medicare hospital insurance, Part A, is in surplus 

by $404 billion; is that correct? 

Mr. CRIPPEN. Yes. 

Chairman CONRAD. You indicate that supplementary medical insurance, Part B, is in rough balance over the period, in fact, a 

slight surplus of $14 billion. 

Mr. CRIPPEN. That is because it essentially has to be. The general fund contribution makes it be about zero balance every year. 

[The prepared statement of Mr. Crippen follows:]

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Chairman CONRAD. General funds, that is the way we pay for 

government programs. That is the way we pay for defense. We do 

not say defense is in deficit, because it receives general fund moneys. The anomaly here is that Medicare Part B—Part A is in surplus because there are more payroll taxes coming in than expenses 

going out. Part B is an anomaly in the sense that it has a separate 

income source. It has premium income. We decide—we, right here, 

decide how much comes from premiums, how much comes from 

general fund transfers, just like we do with defense, where we have 

decided all of it comes from general funds, just as we have with 

education and other funds. 

To suggest, I think, that it just does not matter whether we take 

these moneys and use them for other purposes, I think, is flatly 

wrong, and I want the record to reflect that is at least the view of 

this member. With respect to both the Social Security and Medicare Trust Funds, I think if you take the money and use it to pay 

for other programs, that means you pay down less debt. That 

means you do not have the funds available to prefund liability, as 

other countries are doing who face this same circumstance that we 

do. 

Finally, I want to put up this chart to talk about looking at just 

a little bit more than what Congressional Budget Office is able to 

look at, and I want to make it very clear to anybody watching, I 

am not faulting you. You operate under certain rules. You have got 

to look at current policy, but the President is not saying stick with 

current policy on defense. He is saying we are going have a $200 

billion increase. The Congress passed a budget resolution that had 

certain spending in it. It was passed when our friends on the other 


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17 CHART NOT AVAILABLE AT PRESS TIME. 

side controlled the Congress. What this tells us is that when you 

put all of that together, the Republican spending plan, the tax cut, 

the President’s proposal for increased defense, that we are not just 

talking about a short-term, small problem. We are not talking 

about $8 billion out of Social Security this year. We are talking 

about $500 billion out of the trust fund of Social Security and 

Medicare over the next 10 years; this not at a time the administration is forecasting economic slowdown, this at a time the administration is forecasting strong economic growth. They are forecasting 

3.2 percent economic growth next year. They are not forecasting recession. They are not forecasting slowdown. They are forecasting 

strong economic growth, and every year thereafter.17

In that content, we see their budget plan as taking $500 billion 

out of the trust funds of Medicare and Social Security to pay for 

something else. I think that is a mistake. I also think it is terribly 

unfair, because we levied those payroll taxes on people for the purpose of supporting those programs, not to pay for a tax cut for the 

wealthiest among us, not to build bridges, not to construct tanks. 

That was not the basis on which those payroll taxes were levied. 

So this will be an interesting debate as we go forward. I, again, 

want to thank you, Mr. Crippen, for being here today. We are especially happy that you are back up and able to walk under your own 

steam, and we wish you very well as you go through this next process of rehabilitation. Thank you so much. 

[Whereupon, at 3:54 p.m., the hearing was adjourned.]


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OMB’S MID-SESSION REVIEW AND THE 

BUDGET AND ECONOMIC OUTLOOK 

THURSDAY, SEPTEMBER 6, 2001

U.S. SENATE, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to notice, at 9:30 a.m., in room 

SH–216, Hart Senate Office Building, Hon. Kent Conrad, chairman 

of the committee, presiding. 

Present: Senators Conrad, Wyden, Feingold, Byrd, Stabenow, 

Clinton, Corzine, Domenici, Grassley, Bond, Snowe and Hagel. 

Staff present: Mary Ann Naylor, Majority Staff Director; William 

Hoagland, Minority Staff Director. 

OPENING STATEMENT CHAIRMAN CONRAD 

Chairman CONRAD. We bring the committee to order. We thank 

Mr. Daniels for being here this morning and all members of the 

committee. We are going to proceed. We know that there is a joint 

session, and we intend to continue so that members have a chance 

to get their questions answered, but if we are done in time, obviously, members are free to go as they choose. 

Let me just begin by, again, welcoming Director Daniels to the 

committee. We appreciate you being here. This has been an interesting morning already because in the middle of all this, the committee staffs are moving because of renovation that is going on in 

the Dirksen building. So that has delayed us a little bit, and we 

are glad that you have got the easel and we are ready to go. 

Let me just begin with an opening statement, and then we will 

go to Senator Domenici’s opening statement. I think one of the 

things that is most striking to many of us is that the President 

said very clearly to us that he had a budget plan that added up. 

He told us that we could have a significant tax cut and, at the 

same time, accommodate a very large increase in defense spending. 

We could have more money for education, and at the same time, 

he told us we could also protect Social Security and Medicare Trust 

Funds, and that we could have maximum pay-down of the debt. 

With the latest numbers from the Congressional Budget Office, it 

is clear that his analysis was simply not accurate, not correct. 

He told us during the campaign and afterwards that: Social Security and Medicare will get every dollar they need, and every dollar of Social Security and Medicare tax revenue will be reserved for 

Social Security and Medicare. He was not alone in representing 

that position. We also had his top people telling us that everything 

was fine and would all work out, including the Secretary of the 

372

Treasury, who told us that we have dedicated every dollar of Social 

Security and Medicare money to come in to pay down the public 

debt, so that we are honoring the idea that Social Security and 

Medicare money should only be used for those purposes, and we 

can well afford this tax reduction and still take care of Social Security and Medicare. 

Well, with the new numbers that have come out from the Congressional Budget Office, we see a different set of facts. According 

to CBO, in May, we were told that not counting Social Security and 

Medicare, we had a $92 billion surplus for 2001. Now they tell us 

in their August numbers that, no, there is no surplus. In fact, there 

is a $37 billion deficit. That means, of course, that that $37 billion 

will be coming out of the Medicare and Social Security Trust 

Funds.

Let’s go to 2002, because we see an almost identical picture for 

2002. In May, the Congressional Budget Office told us that if we 

were going to keep the President’s promise and not use Social Security and Medicare for other purposes, we had a $95 billion surplus. Now in August, they tell us, no, there is no surplus. Instead, 

there is a $36 billion deficit.


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Of course, the Congressional Budget Office’s numbers are based 

on current policy. They do not have any additional money for education. They do not have the President’s defense buildup. They do 

not have money for the expiring tax provisions. They do not have 

money for prescription drugs. They have none of that in there. 

Let’s go to the next chart. From 2002 to 2006, just the first 5 

years of this budget plan, we see an even more dramatic difference. 

It is not just a matter of the economic slowdown this year. In the 

first 5 years, instead of a $773 billion, non-Social Security, nonMedicare surplus, we have, according to CBO, a $158 billion deficit.

Let’s go to the next chart. One of the things that concerns me 

a good deal is, that although we have a problem in 2001 and 2002, 

we have a much bigger problem than that. As this chart shows, 

looking at the 10 years from 2002 to 2011, and just taking the tax 

cut, the Republican spending plan that is in the budget resolution 

and the President’s request for increased expenditure for national 

defense, what we see is not just a little bit of a hole, not just a few 

billion dollars of deficit, but $500 billion of shortfalls—$500 billion 

coming out of the Medicare and Social Security Trust Funds from 

2002 to 2011. If we include this year, it is even more than that. 

It is over $520 billion being taken from the Medicare and Social Security Trust Fund to pay for other government programs.

Let’s go to the next chart. Some say, well, it does not really matter, this is just a small deal. It is a little blip on the screen. I think 

CBO’s numbers show something quite different. In May, they told 

us that publicly held debt, that portion of the national debt that 

is publicly held, would be down to $1.3 trillion in 2006. Now they 

tell us four or 5 months later that the publicly held debt is not 

going to be $1.3 trillion. It is going to be $2.3 trillion, $1 trillion 

more of debt at the end of the first 5 years of the President’s plan. 

That has real consequences.


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Let’s go to the next chart, which shows what that means to the 

interest costs of the United States. The interest costs go up 91 percent, from $621 billion dollars, that CBO told us in May, to now 

$1,187 million of interest costs to the Federal Government, because 

we have got more debt for a longer period of time than we were 

told just 5 months ago. Some have asked us, well, where did it go? 

What happened to all that surplus? How did we go from a projection of $5.6 trillion of surplus down to $3.4 trillion in just 4 months 

or 5 months?

This shows what CBO is telling us: $1.7 trillion of that $2.2 trillion reduction in the surplus is from the tax cut. The tax cut and 

the associated interest costs are $1.7 trillion. 74 percent of the reduction in the surplus is from the tax cut. Something over $400 billion or 21 percent is because of the economic slowdown; only 5 percent is from spending. Those are the supplemental appropriations 

bills that have the strong support of the President. Most of that 

money, of course, went for national defense. So for those who have 

asserted that this is spending that has done this, I just do not 

think they can make that case, at least not with a straight face.


95488.294 95488.295
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18 CHART NOT AVAILABLE AT PRESS TIME. 19 CHART NOT AVAILABLE AT PRESS TIME. 

Let’s go to the next chart on the question of spending. I was on 

a show over the weekend with one of our colleagues from the committee who said we had this incredible spending binge. He said 

spending went up last year 14 percent. It did not sound right to 

me. I did not remember spending going up 14 percent last year. So 

I went and looked at overall Federal spending from 2000 to 2001, 

and indeed, it did not go up 14 percent. It went up 3.9 percent. 

That is what happened to Federal spending.18

Let’s go to the next chart, because it shows that, in fact, Federal 

spending as a share of our national income, which is the way most 

economists say is the best way to measure it so we are not including inflation, we have gone from 22 percent of the national income 

going to the Federal Government in 1992, to 18.1 percent today, 

and we are headed to 16.1 percent of GDP at the end of this budget 

period, which will be the lowest since 1951. I do not think we have 

got a situation where spending is out of control.19

Now, at our last hearing, some of our colleagues said, ‘‘But you, 

Senator Conrad, were for more stimulus this year than the President,’’ and that is exactly right. I certainly was. I was for substantially more stimulus this year because I thought we needed it to 

give lift to the economy. In fact, there is the comparison. In President Bush’s February budget he had virtually no fiscal stimulus, 

virtually none. I proposed $60 billion this year. The President came 

back in his April budget, he still had no fiscal stimulus or virtually 

none, and what passed was $40 billion of a tax rebate, but there 

was more than that. There was another thing included, a gimmick, 

which I opposed, which shifted $33 billion out of this year by delaying corporate receipts for 2 weeks. It put the money into next fiscal 


95488.173
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year, to make the President’s tax cut look more affordable in the 

next fiscal year. 

So, in the interest of full disclosure, absolutely, I supported more 

of a fiscal stimulus this year, more of a tax cut, far more than the 

President did, because I thought it was necessary to give lift to the 

economy, but I did not support the gimmick of transferring money 

from this year into next by delaying corporate receipts for 2 weeks 

in order to make the tax cut look more affordable. 

The larger truth is that the tax cut I advocated over the 11-year 

period was far smaller than what the President proposed, about 

half as much, because I could see, and I warned at the time that 

his plan was going to inevitably lead us back into deficits and was 

going to take money from the Social Security and Medicare Trust 

Funds to pay for other programs and to pay for his tax cut. I 

thought it was a mistake at the time, and I think now these new 

numbers confirm the warning. 

With that, I will turn to Senator Domenici for his statement. 

Senator Domenici, I think we should indicate, is part of the welcoming committee and the committee that will accompany President Fox and President Bush, and so he will need to leave for that 

joint session. We are certainly pleased he is here now. 

Senator DOMENICI. I will have time to do my opening statement 

and listen to some others, if others are going to give them. First, 

I am very pleased to see the chairman of the Appropriations Committee, Senator Byrd, here today. We have had a very good lesson 

in what one Senator thinks the budget of the United States ought 

to look like and what the tax cuts ought to look like for the next 

10 years, but one Senator only has views. I had views. The budget 

I proposed did not get passed. I am sure many of you had views 

on the tax cut. If I recall, some of you, on your side, in the end, 

were not very energetic about a tax cut, but it got passed. 

The truth of the matter is we have a very short-term problem 

that we ought to solve, and it involves mostly the appropriations 

process of the United States for this year. There are actually only 

12 working days left in this fiscal year, and Senator Byrd and others are trying to put together the Appropriations Committee package. I guess they are anxiously waiting to see what the House 

wants to do, and one waits on the other, and here we sit. From this 

Senator’s standpoint, if the distinguished Senator, Senator Conrad, 

and even 10, 15 or 20 of his Democratic colleagues would like to 

redo years five, six, seven, eight, nine and 10, they have ample 

time to do that. 

They will be before this committee with a budget resolution unless lightning strikes, and God forbid that it would, he will be the 

chairman, he will have a one-vote margin and if he wants to undo 

the tax bill in the outer years, he can do that. But the point is for 

this year, let’s talk about the real issue that has been raised and 

what we ought to do about it. 

First of all, let me say for a few Senators and a few people who 

are listening, let me start by saying we had a leader in the U.S. 

Senate once named Bob Dole. Bob Dole and I, joined by others, 

worked for years to try to get a balanced budget for the U.S. Government. A few years ago we sat down with the President. We got 

a balanced budget. It looked like if we handled things rather well, 

377

we would have a balanced budget for a long, long time. But let me 

remind everybody, if you look at that chart even before it has been 

put before us—would you mind me using it? Would you put your 

finger right there where the green starts up and the green goes 

down, just right there? 

Mr. DANIELS. Would a finger be OK? 

Senator DOMENICI. Yes, a finger would be OK, whichever finger 

you would like, right there. Thank you very much. Now, what has 

happened to our government, because of 10-and-a-half years of sustained economic growth, this balanced budget that Senator Dole 

and everybody worked—and we tried a constitutional amendment 

on a balanced budget—we have gone way beyond it, such that all 

of that green on this side of 1996, 1997, 1998—all of that green on 

this side is excess surplus over and above a balanced budget. 

Never, never, never did we contemplate such an event. It happened 

not because Congress was terribly wise, perhaps we had something 

to do with it, but it happened because the American economy, with 

all the things that happened to it, began to flourish and, Senator 

Byrd, when the economy grows at 5 percent, 4 percent, 7 percent, 

6 percent, the taxes come rumbling in. 

Now, it is a truism that when they come rumbling in in large 

quantities, when you have a growth in the economy, I regret to tell 

everyone, they go rumbling out when you have a recessionary-type 

economy. What has now happened is that $41 billion to $46 billion 

of the surplus predicted for next year, that is, this kind of surplus, 

not the zero surplus, the surplus with all of these extra surplus 

dollars—what happened in our next year’s budget is that the economist do a mid-year review. You have probably read it. It is a very, 

very complicated document, unless you have been around here for 

a long time, and they said the economy started falling 13 months 

ago. It is now in its fourteenth month of falling down. 

It has not reached zero, but it is so close to zero in growth that 

I choose for simplicity of words to call it a recessionary environment, and we have now been there—this is the 14th month. That 

means it started well before George Bush was in office. We have 

already put on the record that President Bush had nothing whatsoever to do with the economy faltering, nor did Congress. It is something that happens, where we fix up the economy through this kind 

of activity about every 5 years in the past. This time, it is 10-anda-half or 11. 

Now, what is being talked about is plain and simple. In a time 

when the economy is falling, even though we have huge surpluses—let me summarize the surpluses. The surplus, with a faltering economy, will be the second-largest in the history of America, the second-largest. That means we will be taking in extra dollars versus current policies, amounting to about $165 billion. We 

are arguing today, and the distinguished Chairman is trying to 

make a case—trying to make a case that we should not use any 

of that surplus for anything other than Medicare or Social Security. 

Frankly, I have now talked to at least 15 economists. None of 

them—none of them—believe that that is good economic policy for 

America, to say that we cannot touch those in an era of declining 

growth. I wish I would have brought the last lockbox I introduced. 

You know, we have not passed a lockbox in the Senate. Did you 

378

know that, Senator Hagel? We have not passed it. There is no 

lockbox. We did not send it to the President. But the lockbox that 

we have seriously discovered has in it provisions that say you 

unlock this impediment of 60 votes called a lockbox. You unlock it 

when you have a recessionary economy—you unlock it when you 

have a recessionary economy. 

I am glad we were already—eight and 10 years ago, we understood this. It is perhaps a simple rule we all should have known 

then and we should know now; that when you have a surplus and 

a recessionary economy, it is the recession that is the problem, not 

the budget. We have a fantastic budget. We have a budget—no 

country in the free industrial world comes close. We have a huge, 

huge surplus with a declining growth pattern, and would that the 

countries suffering great depressions have anything like that during their recessionary times. Plain and simple, plain and simple, it 

appears to me—it appears to me that the reduction in the surplus 

is caused by two things: one—I am talking in the year 2002, which 

I would like to get on with completing this year, 2002. 

The reduction in the surplus is caused by two things: one, a re- cession, about $41 to $46 billion; second, a tax cut in that year. If 

somebody wants to talk about a tax cut 8 years from now, that is 

fine. But in the year 2002, the second ingredient is a tax cut. I say 

to all of you Senators the tax cut is almost more like a Democratic 

tax cut for this year and next year than it is Republican, for when 

we went to conference, we and the House, we came out with heavy 

funding for this year and next year, because some thought we were 

already in a recession. I was not sure, but I thought we ought to 

proceed in that manner anyway. 

So here we are with two things that have caused our surplus to 

get reduced, a recession over which we have no control and a tax 

cut which almost everybody says, for this year and next year, could 

not have been more timely and could not have been more welcome. 

I would conclude today that, had I known that this economy would 

tank as bad as it has and stayed where it is, I would ask for a bigger tax cut. I might have joined you, Kent, in saying in the first 

year it ought to be 60 or 70 or 80, but I would not then be up here 

and say that we cannot spend any money, we cannot do appropriations, we cannot pay for an increase in defense, we cannot pay for 

an increase in education, because the surplus has come down, and, 

therefore, we ought to be worried about applying that whole surplus to the debt—to the debt of the Nation. 

Now, I want to conclude, when you have a surplus of this magnitude, and it will be the second-largest in the history of the country, there is no reason in the world that you should look at that 

debt (sic) for only one purpose, that is, to pay the debt down. What 

is wrong with looking at it for education if you need education 

now? What is wrong with looking at it if you need defense now? 

This would be the right time to do that, but it is not a big thing. 

The amount of money that is at issue in the Appropriations Committee over the budget resolution is very small. It is very small. 

I would guess, Senator Byrd, it is 10 or 15 or $20 billion that is 

at issue in all the appropriation bills, in outlays, including the defense appropriations bill. This one Senator is suggesting that to say 

we must cut those bills back because the current surplus was deVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00384 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
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creased by a downturn in the economy does not make any sense 

at all. 

Thank you. 

Chairman CONRAD. Mr. Chairman, Mr. Former Chairman and 

ranking member, let me just go to this point, because you have 

raised a critically important point. I think it is something we all 

need to focus on. If we look at 2002, the Senator has just said that, 

during a time of recession economists tell him that it is all right 

to take Social Security and Medicare Trust Fund money to use for 

other purposes. But that is not what we are looking at in 2002. 

This administration is not forecasting recession. This administration is forecasting strong economic growth. This administration is 

forecasting 3.2 percent economic growth. 

Yet if we look at their budget for 2002 what do we see? We see 

that if we include the President’s defense request and the spending 

included in the budget resolution that our Republican friends authored coupled with their tax cut, coupled with the President’s request for increased spending for defense, for 2002 there is no surplus. They are going to be taking $38 billion of the Medicare Trust 

Fund money and $28 billion of Social Security Trust Fund money 

to pay for the other operations of government. That is not at a time 

of recession. That is a time when the administration is forecasting 

3.2 percent economic growth. The Congressional Budget Office is 

forecasting 2.6 percent economic growth. 

So what troubles this Senator is that the President’s budget plan, are slated to take all this money, $65 billion, out of the trust 

funds of Social Security and Medicare next year, when they are 

forecasting strong economic growth, to pay for other government 

programs. Finally, on the tax cut, whether it is Democrat or Republican, I would say this to my dear friend. All of you were out waving those rebate checks on the Capitol steps right before the break. 

I know that you would not be out there taking credit for the 

Democrats’ idea. I am sure that would not be the case. But, look, 

Democrats did support a big package of fiscal stimulus in 2001, 

bigger than what was passed. We did not support the gimmick of 

transferring $33 billion to make next year look better. But we, over 

the 10 years, supported a tax cut about half as big because we 

could see that it was going to be taking Social Security and Medicare Trust Fund money to pay for other government programs, and 

we thought that unwise. 

Does the Senator——

Senator DOMENICI. Well, I would make two comments, if you 

would then permit me to be excused for my functions—there will 

be some Senators here. First, Senators, the statements made by 

the Chairman are right, but for this year and next year, we lose 

$100 billion in surplus attributable to the recession. Whatever 

numbers you are going to use, the tax take is down $100 billion 

for this year and next year, the total taxes that are coming in are 

down $100 billion. That precipitates the issue that is being confronted, as to what do you do when you have a $161 billion surplus 

instead of a larger one? Do you indeed restrain spending? Do you 

impose taxes to pay for the new spending? It seems to me you have 

only one alternative. You have to pay the budget that we passed, 

pay it in full, and if there are a few other things that Congress and 

380

the White House says we ought to do, do them and get on with 

waiting three or 4 months to see if we must do more to stimulate 

the American economy. I think that those are the issues. I hope we 

do them. I hope the distinguished chairman and the leadership on 

his side will be ready to confront this issue. 

Let’s have some votes on whether or not, if you need for appro- priations, if you need for defense and education $15 billion more 

than were in the budget, are we going to deny them to you because 

we have less of a surplus? I do not think so, because the surplus 

is big, it is gigantic. It is the second-largest in history. So, Senator, 

I would just say you were right, but imposed on those numbers, regardless of what you are going to assume, is a loss of revenue due 

mostly to business loss, corporate loss, lack of profits by corporations, of $100 billion for this year and next year. 

You did not spend it, Senator, for anybody who says this problem 

is spending. George Bush did not ask to spend it. His tax cut did 

not do that. This is the income tax reduction because of the downward trend in this economy. I think that should make it easy, because the surplus is so big, for us to get our work done. The conclusion that my friend is trying to—and he is my friend—trying to 

suggest to us and to the American people is that every bit of that 

surplus should be used to pay down the debt, every bit of it. None 

of it should be used for spending, none of it should be used to pay 

for the Defense Department if they need $5 billion or $7 billion 

more in outlays. That is essentially the issue, as I see it. Thank 

you for listening. 

Senator BYRD. Mr. Chairman, before the Senator leaves, he has 

addressed some of his comments to me because he was talking 

about appropriations and about my being Appropriations Chairman. A number of times, the distinguished Senator has spoken 

about the huge surplus that we have on hand. That surplus is a 

surplus, not in the non-budget items, but in the Social Security 

budget. There is the surplus. That is the huge surplus which is referred to as the second-largest surplus in the Nation’s history. That 

is the Social Security surplus. 

At the same time, we have a President who says we will not cut 

one dollar out of—we are not going to lower Social Security; we are 

not going to cut a dollar into Social Security, not one dollar. How 

are we going to deal with both of these manifested situations that 

confront us? We have a huge budget surplus in Social Security. We 

are, right down to the dollar almost, $1 billion. Until we dip into 

the Social Security surplus, that is where we are. And the President says we are not going to dip into that surplus. How do we do 

that? How do we avoid dipping into that surplus? The President 

says we are not going to do it. He says we have got the biggest surplus on record, consequently we can afford all these things; we can 

afford more money for defense; we can afford more money for education. How are we going to do it? I just do not get it. I do not get 

it. 

It seems to me we are either going to go into Social Security or 

we are not. Which are we going to do? We cannot continue to claim 

victory on both sides. I am not seeking a controversy with the distinguished Senator from New Mexico, but he knows as much, if not 

more, than any other Senator in the Senate about this budget and 

381

about the process. What concerns me is how can we stand before 

the American people and say we have a tremendous budget surplus, we have the second-largest in history, we can afford all these 

things, and then at the same time say we are not going to dip into 

Social Security? 

Senator DOMENICI. Mr. Chairman, Appropriations Chairman, if, 

in fact, the appropriators in the U.S. Senate want to live within the 

budget that was passed and not touch the fiction of the Social Security Trust Fund, you can do it. You can do it. There will not be 

an awful lot of new money for education. There will be about 8.1 

or 11.1 growth, and you will have to use the outlays on the defense 

spending, if you give the President the 18.3, use the outlays, and 

you will be accomplishing the miraculous. You will have 13 appropriation bills and you will have not touched the Social Security 

part of the surplus. 

But, Mr. Chairman, the Social Security part of the surplus does 

not mean that people are going to get their Social Security checks. 

What is going to get the checks to future generations of American 

citizens is a full-growing American economy. If it fumbles around, 

growing at one-and-a-half percent, 2 percent, then comes down to 

zero and goes back to three, this trust fund will do nothing to protect Social Security recipients in 15, 20, 30 years from now. As a 

matter of fact, the IOUs go into the box regardless of whether you 

spend the money, save the money, or pay down the debt. 

Senator BYRD. Would the Senator yield? 

Senator DOMENICI. Sure. 

Senator BYRD. I know the Senator has to go, and I do not want 

to impose on your time. How can we maintain that the Social Security Trust Fund is a fiction, on the one hand, and then on the other 

hand—do you see where I am going—on the other hand say that 

it is not a fiction, that we can use that surplus, we can get into 

it? We have got the second-largest—the second-largest budget surplus on record. How can we maintain that there is such a fiction 

as the second-largest budget surplus on record? How can we say 

that and then say, on the other hand, but the budget trust fund 

is a fiction? Now, which is true? Is it a fiction or is it not? 

Senator DOMENICI. Mr. Chairman, with reference to what you 

use it for, you do not have to use that money entirely for Social Security. That is the point. The answer to your question is you do not 

have to use all of it to protect Social Security. You do not have to 

leave all of it there. What you will do with it, if you leave it there, 

is pay down the debt. That is all you would do with it. If you spend 

some of it, the IOUs go to the Social Security system from the government of the United States in the same manner as if you had 

not spent the money. 

Senator BYRD. What I cannot understand is how we maintain 

that the Social Security Trust Fund is purely a fiction, on one 

hand, and on the other hand say that we have got the second-largest budget surplus in history. 

Senator DOMENICI. The surplus comes from collecting taxes. We 

are collecting more taxes than we are going to spend out now. The 

Social Security checks are going to get taken care of, it looks like, 

till 2037, regardless of what we do with this account here today or 

next week, till about 2037, and the issue comes what do you do in 

382

a recession when you have that much money accumulated? Is it a 

drag on the American economy? Should you put taxes on to pay for 

the add-ons that you might want? I think the answer to the latter 

is no. The answer to the former is yes. 

Chairman CONRAD. Maybe I can just reach closure on this by 

saying my own judgment is talking about surpluses here is totally 

misleading to the American public. The only way anybody can 

claim surpluses is to jackpot all Federal funds, the trust fund and 

the general fund, put it all together, do not differentiate them. 

That is the real fiction. The real fiction is to talk about surpluses, 

because I think that leaves the American people to conclude there 

is extra money, there is more money for more spending, there is 

more money for more tax cuts. The truth is those surpluses are all 

committed. That is the truth of the matter. That money is all committed to keeping promises that have already been made. 

So I think all this talk about surpluses has totally misled the 

American people. There are no surpluses. All the money has been 

committed, and if we go to the year 2002, the numbers do not lie. 

The numbers do not lie. You go down the list and if you put in 

what our friends across the aisle put in their spending plan for the 

budget, and if you put in the President’s defense request, what you 

see is at a time when they are projecting strong economic growth—

they are not projecting recession—projecting strong economic 

growth, they are going to use every dime of the Medicare Trust 

Fund money, and $28 billion of Social Security Trust Fund money, 

in that year alone. 

Senator BOND. Mr. Chairman. 

Chairman CONRAD. That does not add up. Let me just say this. 

We are going to end this dialog and go to our witness, and then 

everybody will have a chance for their questions. 

Again, Mr. Daniels, just your appearance has triggered this conversation, and it is a healthy conversation. But we are going to go 

to the witness. 

Senator BOND. Thank you, Mr. Chairman. That was going to be 

my suggestion. It has been very enlightening to hear the discussion. I was kind of interested to hear what Director Daniels wanted 

to say. 

Chairman CONRAD. That is what we are going to hear right now. 

Director Daniels, please proceed. 

STATEMENT OF MITCHELL E. DANIELS, DIRECTOR, OFFICE OF 

MANAGEMENT AND BUDGET 

Mr. DANIELS. Thank you, Mr. Chairman. Let me just say I think 

it has been a very successful hearing so far, and I have yet to make 

my first mistake. [Laughter.] 

Chairman CONRAD. Please proceed. 

Mr. DANIELS. I will just be very brief. I did want to draw a couple of, perhaps, just technical matters to the committee’s attention, 

and then draw what I think are the obvious conclusions, and then 

welcome your questions. You had here, I think 2 days ago, Dr. Dan 

Crippen from CBO, and I know he did his usual excellent job. I 

would draw to the committee’s attention really the remarkable coincidence, similarities, as Dan pointed out on several occasions in 

his testimony, between the two reports. 

383

You have two entirely consistent reports here, and I am struck 

by that. Looking back, historically, there probably has rarely, if 

ever, been two independent reports from these two agencies that 

look more like. A few just for instances: The 2002 surplus is estimated within one-third of 1 percent in the two reports, debt outstanding within a fifth of a percent. Over the 10-year time period, 

receipts are within less than a percent; mandatory spending, discretionary spending and the total of those two, all within 1 percent. 

The Social Security surplus, the part of the surplus attributable to 

payroll taxes, is within a tenth of a percent over that time period, 

and many of the underlying assumptions, inflation and long-term 

GDP and several others, happen to be identical. 

Perhaps most important for the immediate deliberations of the 

Congress, particularly the leadership of the Appropriations Committee, is that the receipts forecast for 2002 is identical between 

the two agencies. I think this has escaped some folks’ notice because they only looked at sort of the first order or first level of detail. There is a difference in the first-year growth numbers, but 

that, of course, is just one of several variables that go together to 

help us understand how much money the Congress will have to 

work with, because they are more cautious about growth. We are 

more cautious about the revenue composition, the revenue derived 

from a given amount of growth. 

It turns out that we have exactly the same number, twenty-one 

thirty-five—theirs rounds to 34—those are billions, I am sorry—for 

revenue next year. I just mention this to indicate that I do think 

the Congress can take some confidence, and both forecasts can be 

wrong, of course, but some confidence that two independently arrived at analyses are that consistent and that close together. We 

can start from the same facts, and as the previous discussion illustrated, come to different conclusion. Mine, you will not be surprised 

to know, are about as follows: This is, by any rational definition, 

an enormous surplus. 

If it is wrong to call it a surplus, then we were wrong for all of 

American history until the last couple of years, and no one else outside of Washington I know has any trouble identifying the current 

term to apply to a situation where revenues exceed all expenditures by hundreds of billions of dollars. That surplus, both analyses 

agree, will get bigger, not smaller, in 2002. It will be in excess of 

$3 trillion over the 10-year time period. 

The second conclusion I would draw is that the essential work 

of the Congress the balance of this fall is very straightforward now. 

Within the budget resolution as amended by the President’s request for funds to rebuild national defense, we can honor all of the 

commitments, including that common commitment to set aside and 

use—I stress use for debt reduction—the surplus attributable to 

payroll taxes. Those moneys are always used, as we know. They 

are always tapped. We are only discussing for what purpose, all for 

debt reduction and how much more for debt reduction. 

So my hope and my optimistic aspiration for the next few weeks 

is that, under Senator Byrd’s leadership and others, we will have 

an orderly and cooperative appropriations process that, for the first 

time in awhile, produces—does the public’s business, does the people’s business, apportions the resources available and does so under 

384

the framework of the budget resolution, which at least so far this 

year has not been tossed in the ash can, as so often in the recent 

past. The work of this committee and its House counterpart, ultimately the entire membership of Congress, has produced a budget 

resolution that will allow this to happen. 

This is the President’s first budget proposal. It does, as he intends to do, keep the promise, first of all, to reorder the Nation’s 

priorities along the lines of about which he has spoken for years, 

and, as a part of that, to commit to debt reduction the amount of 

the surplus that comes from Social Security. The budget and the 

fiscal condition of the Federal Government of the United States is 

in astonishingly good shape. Senator Domenici made the important 

point we are running enormous surpluses, growing surpluses, in 

spite of a struggling economy. It is the economy that is not in adequate or acceptable condition, and I hope that that will be the focus 

and the increasing focus of this committee and all Members of Congress. Despite our temptation to imagine otherwise, the government of the United States—not the Congress, not the President—

does not drive economic outcomes in this country, but it can have 

a lot to do with creating the conditions for growth, and it should 

do all it can, within its limitations inside a 10-plus trillion dollar 

economy, to foster that growth, which alone ensures this kind of 

positive fiscal future. 

So we will be asking the Congress to proceed through within the 

rough framework of the budget resolution, lots of give and take—

of course, the Congress finally deciding how to apportion those resources within a total that we think reflects a balanced policy of 

record debt reduction through the use of the surplus for that purpose, but coupled with a stimulus in the short-term, the growthsustaining effects of rate reductions over time that the tax bill provided for, both short and longer-term economic growth, all enabled 

by the strength of spending, not through frozen levels and cut levels and that sort of thing, not to the kind of levels which the Congress, by the way, achieved or was forced to achieve in part in the 

1990’s, but to moderate growth of a few percent a year. 

These are attainable goals, and we suggest we ought to be about 

the business now of achieving them. I need to make then just one 

other point, and it is an appeal to the Chairman to be much more 

careful about the use of words which are inaccurate. Virtually the 

rest of the world has come to understand how this all works, but 

phrases like, ‘‘coming out of trust funds; raid; taken from the trust 

fund,’’ over and over and over again, this is not a matter of misinterpretation. This is a matter of fact. It is not true. No funds 

come out of the trust fund. The trust funds are not one dollar, one 

quarter, one nickel smaller than they would have been. 

It is an easy misunderstanding, but now, with so much focus in 

recent months, there are very, very few people who talk about it 

that way. Even the media of the United States has caught on. And 

it is very important, I think, for people in leadership positions not 

inadvertently, let alone intentionally, to mislead the American people that there is one dollar less in the trust funds than there would 

have been, or if there is any question about paying every penny of 

benefits in Social Security and Medicare. We are paying every 

penny of benefits with 150–60–70 billion left over. There is not an 

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ounce of doubt, and there is not an ounce of truth in the perhaps 

casual comment that the trust funds in some way have been raided 

or reduced. 

So I would appeal for caution and precision in the words we use, 

so that we can work constructively toward the outcomes we all 

seek. Thanks for the opportunity, and I am happy to take questions. 

Chairman CONRAD. Thank you for your testimony, and I would 

like to start where you left off. I believe I have been precisely correct. It is true that when Social Security money comes in, it gets 

credited to the trust fund, no matter how the dollars are used. But 

how the dollars are used really matters to the ultimate disposition 

of the promises that have been made. You know, if you think about 

the private sector, there is no private sector entity in America that 

could take the retirement funds of its employees and use it to pay 

the operating expenses of the company. We should apply the same 

principle here. 

We should not take payroll taxes that have been paid on the 

promise that people will, in the future, get Social Security benefits, 

take the money, credit it to the trust fund, and then go take the 

dollars and use them for something else, because when you do that, 

then you do not pay down the debt to the extent the President has 

promised. We already see that in the CBO numbers, and you have 

less ability to keep the promises that have been made when the 

baby boomers retire. In fact, one of the great disconnects I see 

going on in this town is you sitting there, Mr. Daniels, saying, ‘‘Everything is fine with Social Security, everybody is going to get 

paid,’’ but the President’s own Social Security Commission has 

quite a different take on it. 

Let’s put up what they said. This is the interim report from the 

President’s own Social Security Commission. That is not Kent 

Conrad’s commission. It is the President’s commission. What did 

they say? ‘‘If the current system’s financing is left in place, future 

workers and beneficiaries will experience one or more of the following: one, large tax increases; two, significant benefit cuts; three, 

widespread reductions in other government programs or, four, unprecedented accumulations of debt.’’

Mr. Daniels, you cannot have it all ways here. It is not going to 

work. At least it is not going to work with me. To say on the one 

hand that everything is fine with Social Security, and on the other 

hand to have the President’s own commission say you are facing 

large tax increases, significant benefit cuts, widespread reductions 

in other government programs or unprecedented accumulations of 

public debt, and you at the very same time are here with a budget 

that takes $500 billion of Social Security and Medicare Trust Fund 

money, based on your tax cut, based on the Republican spending 

plan, based on the President’s request for increased defense expenditure, it does not add up. 

How do you reconcile the conflict between what the Social Security Commission says and what you are saying? 

Mr. DANIELS. If there was one, I would reconcile it for you, Senator. Something I said apparently mislead you. All is not fine with 

Social Security. In fact, Social Security long-term does face these 

problems. That is why the President has proposed major reform, 

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the first President to do so, and all those statements made by the 

commission are roughly accurate. So all I said was that in the context we were discussing, the budget this year, next year and so 

forth, sometimes loose talk, untrue statements about the state of 

the trust funds and so forth, could mislead people. One is sometimes tempted to think it is intended to mislead people, to believe 

that somehow their Social Security check is in jeopardy. No, that 

is not the issue. The issue is out there, as was correctly alluded to 

earlier, years ahead of us. 

Chairman CONRAD. Well, that is exactly right. It is ahead of us. 

It is ahead of us, and your own commission has pointed out what 

is going to happen. In the future, people are going to face big tax 

increases, massive cuts in benefits, massive debt, because we have 

not prepared now for what is to come, what we all know is to come. 

We have not done what other countries are doing to prepare for the 

retirement of the baby boom generation, and frankly, when you 

come before this committee and say that we can honor all the commitments for 2002, I tell you I think it defies logic and defies truth. 

We just put up 2002. These are CBO’s numbers. It includes the 

budget resolution that our friends, the Republicans, crafted before 

we gained a majority in the Senate, and the President’s request for 

additional defense spending, and the numbers do not lie. The numbers show that you are going to be taking $38 billion out of the 

Medicare Trust Fund this year, and $28 billion out of the Social Security Trust Fund this year. You are taking those moneys that are 

payroll taxes——

Mr. DANIELS. Excuse me, Senator. Not one dollar comes out—

first of all, there are no dollars in the trust fund. There are never 

any dollars in the trust fund. I think you know this. There are only 

bonds, and not one nickel of those bonds ever comes out. 

Chairman CONRAD. You will get your chance to respond. Let me 

make the point. You are taking $65 billion of payroll tax revenue 

and you are using it for another purpose in 2002, when you say 

there is going to be strong economic growth. You are taking payroll 

tax revenue, $38 billion of Medicare payroll tax money, $28 billion 

of Social Security payroll tax money, you are crediting it to the 

trust fund, I will grant you that. But then you are taking the 

money and you are spending it on something else. You are not paying down the debt with it. You are taking that money to pay for 

other government programs. 

I tell you there is not a private sector firm in America that could 

get away with it. They would be on their way to a Federal institution, but it would not be the Congress of the United States and it 

would not be the White House. It would be a Federal prison, because that is fraud. 

Mr. DANIELS. Well, now, Senator, first of all, if we had ever held 

Social Security to private-sector standards, we would have a jailfull of trustees somewhere right now. There are no assets, other 

than the future promises that future taxpayers will pay off the 

bonds in those trust funds. So there has never been a time when 

Social Security resembled a private sector system. The President 

has suggested that, at least partially, the fundamental reform 

which alone can head off future problems, would go in the direction 

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of making it more like a private sector system, giving retirees ownership, as a private-sector plan might. 

Chairman CONRAD. Where you going to get the money to do that? 

Mr. DANIELS. Of real assets. 

Chairman CONRAD. Where are you going to get the money to do 

that when you have taken all of the Social Security and Medicare 

Trust Fund money and used it for something else? The surpluses 

that you describe, the only surpluses that are left, are Social Security funds. You have blown right through all the Medicare Trust 

Fund. You have taken it and used it for something else. So how are 

you going to fund this transition to the program the President 

wants? Where is that money going to come from? 

Mr. DANIELS. I can ask you the same question, Senator. You 

have used it under your plan for something else. You have used it 

for incrementally more debt reduction, on top of the record debt reduction that the President intends. 

Chairman CONRAD. No, you left out the other element of my 

plan. Not only did I have more debt reduction because I reserved 

all the money of the Social Security and Medicare Trust Fund for 

the purposes intended, but I also set aside $900 billion to strengthen Social Security for the long-term, which could have funded the 

accounts that you seek. Unfortunately, you did not. You did not 

provide a dime. So the result is you have an overall budget plan 

here that does not add up, and that is no longer just my prediction. 

I have been predicting this for months. Now we have the Congressional Budget Office telling us your budget plan does not add up; 

it does not come close to adding up. The result is that you are taking Medicare and Social Security Trust Fund money and using it 

to fund other operations of government right before the baby boom 

generation retires. 

I tell you I think that is most unwise, and the answer has been, 

‘‘Well, we are in a recession.’’ Well, you are not forecasting recession next year. You are forecasting strong economic growth. You 

are forecasting 3.2 percent economic growth. The Treasury Secretary suggested this morning that economic growth could be considerably less than the Bush administration’s official estimate for 

2002. Can you tell us who is right with respect to what the administration’s position is on economic growth for next year? 

Mr. DANIELS. I checked with the Secretary, and he said, but 

someone misunderstood or misheard him, he said private sector 

forecasters are forecasting something somewhat lower. As I mentioned before, our forecast of revenue is just as conservative, if that 

is the right term, as CBO’s, identical. So we are more cautious 

about other variables. Some people simplistically think that from 

the single number of GDP growth, that is sort of all you need to 

know to know how much money the government is likely to take 

in, but members of this committee know that is not right. 

I guess, since we are still having trouble getting to the facts here, 

it is time for America’s favorite game show. So may I have—I guess 

I am supposed to speak into this. In case members of the committee——

Chairman CONRAD. Actually, I do not think you need to hold it. 

I think it will pick you up if you just put it at the edge of the table, 

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so you would not have to—it is directional. So if you pull it up, it 

will pick you up, I think. 

Mr. DANIELS. Well, I will not be here long. But just so everybody 

understands, here was the May estimate, before any decisions were 

made about any additional spending for agriculture or defense, or 

for any rebates and so forth, of $275 billion of projected surplus. 

Take the August estimates, all CBO’s by the way, because that is 

what this committee prefers to use, and assume there had never 

been a Bush tax cut. You would have had 227. There would have 

been shrinkage due to the economy and the spending I referred to. 

After the tax cut, CBO is projecting 153. 

The question is if, in fact, benefits are somehow threatened or 

trust funds have been raided, tapped, used in some way, then, of 

course, those numbers would change. So I am prepared to pay the 

entire amount of the unified Medicare surplus to those who get the 

answer right. Social Security benefits, under the original forecast, 

would have been $426 billion. If there had never been a Bush tax 

cut, we would pay exactly the same about of money—or if there 

had been only the recession—I’m sorry, the downturn Without the 

tax cut, the same amount of money, and perhaps most important, 

have the trust funds been dipped, tapped, raided? Well, the May 

estimate showed a trust fund balance at this point of 1.17 trillion. 

The August estimate, 1.17 trillion. The Bush tax cut, imposed on 

top of the spending and the economic effects, startlingly, 1.17 trillion. 

This is why: Expert after expert, and now non-experts, have all 

come to understand what language is true and what is not. I would 

just take that one away. I have got a partial list here, because we 

only have a few hours. The Comptroller General: ‘‘trust funds will 

not be affected in any way;’’ Newsweek, a Pulitzer prize-winning 

economist, ‘‘The image of raids is false;’’ The Wall Street Journal, 

‘‘Raid on Medicare, the idea is ridiculous;’’ Washington Post, 

‘‘Aren’t we raiding those programs? No.’’

I will just be selective here: The Social Security surplus can be 

put in a bank somewhere? Washington Post editorial, ‘‘It doesn’t 

work that way;’’ former Clinton OMB official Matt Miller, ‘‘Raiding 

Social Security and Medicare, it is not true;’’ President Clinton’s 

Labor Secretary, Dr. Reich, ‘‘It is a fiction. Democrats should stop 

their bellyaching about raids. It is irrelevant.’’ Do we have one 

more? Detroit News, ‘‘No relationship between the budget surplus 

and the trust fund;’’ my CBO colleague, Dan Crippen, in front of 

this committee, ‘‘It does not make any difference to the programs 

or the benefits or the trust fund;’’ Time magazine, ‘‘It does not imperil current recipients. The fact is this, there is no box. There is 

no lock;’’ and advisor to many leading members of your party, Senator, Dr. Kuttner, ‘‘Stop equating the surplus with saving Social 

Security.’’

I am sorry to be tedious, but, in fact, I guess my point is what 

we are debating and what separates us, I think, has been exaggerated. The differences are very narrow, and we have a couple of honest debates. One is what is wise tax policy, and I know that debate 

will continue, and I respect the position of some who think particularly the extended policy of tax reduction was unwise. We have a 

second debate about how much debt reduction. Nobody is against 

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debt reduction. We are going to do it in a record amount. The question is what about that next 10 or 20 billion, whatever, in a given 

year? 

I think the President’s policy calls for one of balance. We can 

have this debate, but I would just urge us to get it onto that plane 

and out of an area in which it is all too easy for people to misunderstand what is really at stake. Finally, as we have that debate 

about the right mix of tax levels and debt reduction and spending 

levels, let’s do it with an eye on economic growth. Surpluses, per 

se, cannot be the end and the sole end of our common endeavor 

here. They are a means to an end, and surpluses do not produce 

economic growth. Economic growth produces surpluses. 

So I honestly think that although good, healthy political to-andfro is part of the recreation of the town and good fun on occasion, 

but I think, especially as we move into the appropriations process, 

we ought to recognize that we have narrower differences than we 

sometimes act like, and that our end objective is less about the 

exact accounting of the Federal fiscal situation and more about how 

that can best optimize our economy over time. Sorry for a long answer. 

Chairman CONRAD. No, that is fine, and this is a very healthy 

debate and an important one. Let me just tell you that you could 

put up a dozen quotes by people who say it does not matter. To me, 

common sense tells almost anyone that it does matter. You can 

credit money to the trust fund all day and night, but if you then 

take that money and do not use it to pay benefits, do not use it 

to pay down debt, which is what we use surpluses in the trust 

funds to do, instead you use it to pay the other operations of government, that has real consequences. 

One of the consequences is exactly what the President of the Social Security Commission described. We are headed for choices that 

mean either large tax increases, significant benefit cuts, unprecedented accumulations of debt. It does not all add up. It does not 

all add up. When you take the Social Security Trust Fund money 

and the Medicare Trust Fund money——

Mr. DANIELS. Revenues, please—Social Security revenues. 

Chairman CONRAD [continuing]. When you take those moneys 

that were credited to the trust fund, payroll taxes, and use them 

for another purpose, you dig the hole deeper in this Senator’s judgment. To me, it is very clear. I believe that is a raid. I do not care 

if you credit it to the trust fund. What you do with it afterwards 

matters a lot; and, in addition to that, what you are saying that 

the President’s promise not to use Medicare and Social Security 

Trust Fund money to pay for other purposes was a hollow promise, 

it meant nothing. I do not think it was a hollow promise. I think 

the American people have a pretty good understanding of what this 

is all about. I think it is why Senators and Congressman in large 

numbers have voted and promised not to take Social Security Trust 

Fund money, not to take Medicare Trust Funds, and use them for 

other purposes, because the American people are pretty smart, just 

like they know in a private-sector setting you cannot take the retirement funds of the employees and go use it to pay operating expenses of the company. 

390

Mr. DANIELS. Well, you cannot use it to pay the interest cost of 

the company, either, which is your recommended policy here. So I 

think the private sector-public sector analogy will never be of any 

value, unless and until we fundamentally restructure Social Security and make it into a true asset-based system. Let me——

Chairman CONRAD. No, wait. I listened at length to your answer. 

I listened at length patiently. I did not interrupt, so I am going to 

ask the same from you. Look, it is abundantly clear the way Social 

Security works, and to the extent our trust funds are in surplus, 

that it is used to pay down the debt. Because you have more debt 

paid down, that means more savings, more investment, stronger 

economic growth; and so we are in a better position to meet the obligations in the future. To the extent that you take that money and 

spend it, you do not have that same positive effect on the economy. 

So, to me it is very clear; taking these funds, using them for other 

purposes what the President expressly promised not to do is being 

done. 

Final point on honoring all the commitments, it just does not add 

up. It just does not add up. If we took at 2002—put up the 2002 

budget—we just take the Republican spending plan, the Republican tax cut, and the President’s defense request, and you are taking Social Security and Medicare money and using it for other purposes, something the President pledged not to do. It is just not accurate to come in here and tell the American people and tell this 

committee you can honor all of those commitments. 

Mr. DANIELS. Thank you, Senator. Three things: First of all, I appreciate the first part of your last question, because I do think you 

frame the argument and the honest debate we have in the right 

way. It is the way that your counterpart, Congressman Spratt, for 

example, in the House is always careful to do. It is not a debate 

about raids and so forth. It is a debate about which way we use 

the extra funds. By the way, let me point out that the year 2000 

is the first year, aside from a few very trivial exceptions in the 

1950’s, the first year in history that we had surplus—that we did 

not use any Social Security extra receipts for anything else, as you 

would say, for anything other than debt reduction. So this is a 

brand-new phenomenon, not some long-time practice. 

Chairman CONRAD. But there is a reason for that. 

Mr. DANIELS. The President’s 2002 budget is the second in history, only the second, after the 2001 proposal, to ever propose setting aside all extra Social Security receipts for debt reduction. In 

2000, when it happened, President Clinton did not propose it. It 

happened because of an enormous gust of revenues coming in from 

a strong economy, further proof that it is the economy that is the 

real driver and our first concern. But in any event——

Chairman CONRAD. Can we just say that one thing we agree on 

is that it is the economy? We need to keep our eye on the ball of 

the economy. Can we go to Senator Grassley? 

Senator GRASSLEY. Mr. Daniels, I do not think you need to be at 

all embarrassed about the fact that something does not add up, because if you would superimpose on this chart the Democratic alternative budget—and you can get it right there, in front of Domenici, 

if you would like to have a copy of what I have got here—if you 

would superimpose the Democratic budget alternative on this and 

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if you would adjust it minus the Medicare health insurance surplus, adjust it minus the CBO economic and technical adjustments, 

take into consideration everything that the Democrats wanted to do 

this spring on defense, on taxes, on additional domestic spending, 

all of that, you would find only this difference for the year 2002, 

between what the Democrats propose and where we are right now. 

The difference would be—the $38 billion would be exactly the 

same. The only place that there would be any difference here would 

be $25 billion, instead of $28 billion. 

Now, that is where they would have taken us, and I am going 

to give this to you so that you know that I got it from the web site 

for the Democratic alternative budget proposal. These are the adjustments that would have been made to your budget by the CBO 

adjustments that are made in August. So if it does not add up, for 

us as Republicans, if it does not add up for the President of the 

United States, then it does not add up for the Democratic alternative budget, either, and whatever you had said about the President’s budget must also be said about—if we had gone your direction last March. 

That includes what you wanted to have in your budget for Social 

Security. It has everything that you had, adjusted accordingly. 

Chairman CONRAD. Let me just say that——

Senator GRASSLEY. So if it does not add up for us, it does not add 

up for you, either. 

Chairman CONRAD. No, there is a very big difference here. We did not support shifting $33 billion out of this year into next year 

to make the President’s tax cut look more affordable next year. 

That is not in your numbers. I specifically opposed it. I said it was 

a gimmick at the time. You delayed corporate receipts by 2 weeks 

to move them from this fiscal year into next fiscal year to make the 

next fiscal year look better. We did not engage in that gimmick. 

Senator GRASSLEY. Well, you are wrong to this standpoint: The 

$33 billion you are talking about does not affect your alternative 

and it does not affect our numbers, either. 

Chairman CONRAD. Well, but certainly it does. 

Senator GRASSLEY. The numbers I have just given you. 

Chairman CONRAD. No, certainly it does, because by transferring 

that money, you dodged right into the bullet. That is why you are 

going to take Social Security Trust Fund money this year and use 

it for another purpose. If you would not have shifted that money, 

you would not have that problem in 2001. 

Senator GRASSLEY. Let me be clear. It does not affect the numbers that I have just given you, that shows if we had adopted your 

budget, you would have ended up just $3 billion short of where we 

are. 

Chairman CONRAD. Look, for the overall period, trying to rewrite 

the history here is not going to work. I warned repeatedly that you 

could not rely on the 10-year forecast, that the tax cut that you 

proposed was twice as big as the tax cut that we proposed, and as 

a result, you have a circumstance in which, over this next 10 years, 

you are going to be taking $500 billion out of Social Security and 

Medicare Trust Fund money and using it to pay for other government expenses. That is not my budget. That is the budget that you 

all passed. 

392

My budget was far different and would have avoided most of 

these problems for the long-term. Look, I have said very clearly we 

favored more fiscal stimulus this year to give lift to this economy. 

But we did not support this transfer of the $33 billion out of this 

year into next. 

Senator GRASSLEY. Well, let me respond. First of all, you end up with a $237 billion raid on Social Security and Medicare. Now, 

those are your words, raid; they were your words that it does not 

add up. If we had done what you wanted to do, whether you are 

right or wrong on your interpretation, of your criticism of Mr. Daniels’ message here, I think it is intellectually correct that you have 

to be saying the same thing about your budget, as well. And so 

what I am calling for is the intellectual honesty of it, as opposed 

to disagreeing with what you said, because in some respects I can 

agree with what you said. But the point is that whatever criticism 

you have of the President’s approach, you have to have the same 

criticism of your approach, because when it is adjusted for the August changes that were brought about, you end up raiding Social 

Security, Medicare, $237 billion. 

Chairman CONRAD. No, that is just not true. I think all of us remember exactly who took what positions on this committee and on 

the floor. I warned repeatedly not to count on a 10-year forecast. 

It was too uncertain. The tax cut that I proposed was half as big 

as the President’s, and we restrained spending in almost the same 

way. We took spending down to 16.4 percent of GDP, the lowest 

level since 195, in the budget that I proposed. If we are going to 

be intellectually honest here, let’s do it. 

My proposal would have had lower deficits and would not have 

raided Social Security. It just would not have. Our budget was far 

more restrained because we had half-as-big a tax cut, because we 

could see that the President’s plan did not add up. 

We will go on this side to Senator Corzine. 

Senator CORZINE. It is great to join the fray. Let me ask a big- picture question, and I want to get back to this $33 billion that was 

transferred from 1 year to the next, which is the ultimate gimmick. 

Do you agree with Senator Domenici’s categorization of the trust 

fund fiction as being a fiction? 

Mr. DANIELS. The trust fund is not a fiction. It has sometimes 

been said that the lock box is a fiction. The notion has certainly 

been written by people of all persuasions, including many who, as 

I illustrated, do not agree with the policies of the administration, 

that the idea of raids is a fiction, that sort of thing. But, no, the 

trust fund itself is real. It is only what it is. It is not a pile of cash, 

as some have imagined. 

Senator CORZINE. Is it an asset? 

Mr. DANIELS. It is an asset in the sense that it is a bond, secured 

in this case only by the ability of future taxpayers to pay it. 

Senator CORZINE. Full faith and credit of the U.S.? 

Mr. DANIELS. Yes, but as the chart the Senator has used a couple 

of times indicated, if the system trundles on without reform, the 

implications in order to pay the full faith and credit obligations are 

enormous, in terms of benefit cuts or massive tax increases. 

Senator CORZINE. Let’s just pursue that 1 second. The way you 

grow the ability to pay for future Social Security benefits is to grow 

393

the economy, and one of the ways to have that done is through national savings, and what this debate is about is whether the moneys that go into the trust funds are actually contributing to national savings. If they are not and they are spent on current consumption, there is a difference. There is a huge difference and a 

huge long-term difference in what the size of the economy will be, 

and therefore the ability of the economy to produce the kind of payroll taxes that will support future Social Security benefits, and you 

get into these kinds of problems. That is one issue. 

The other issue is that about sometime in the mid-1990’s, society 

and politicians, in general, Republicans and Democrats, started 

making the case that ought to set aside these Social Security payroll taxes, which were intended for purposes of paying Social Security and Medicare benefits, and set them aside and use them as 

savings so that we would prepare for the demographic bubble that 

is rapidly approaching us. You do accept that if we save those assets and they grow, purportedly based on the recommendations of 

the administration, you believe that if you wanted to privatize accounts, there are different ways to do that, but there is a belief 

that you want to grow those assets that are in that trust fund, not 

unlike what I think the political argument has moved in the last 

four or 5 years. It seems like we are just denying that when we 

say we are using loose language about raids and invading and taking out of the trust fund. That is not where the debate with the 

American people has been, and I do not think that we are using 

tight language, to use the opposite of the term you are saying, 

when you say we are using loose language when we are talking 

about raiding the trust fund, because the political debate has 

changed. 

People said we wanted to set aside these funds more in the pension fund kind of context, to grow them, and I think the kind of 

language that you saw the President use, that the Chairman cited 

and that most of us have used in our political campaigns, has 

moved to that position. I think it is very dangerous to try to say 

that we are not using payroll tax-generated trust fund moneys for 

general expenditure purposes, because that is going to confuse everyone’s point of view. I think that is, unfortunately, I think, challenging what the Chairman has said here this morning, does just 

that. 

I have a specific question. We moved $33 billion—I think it is actually maybe a larger number, according to CBO—from 2001 to 

2002, from a September 17th payment to an October payment date. 

There was obviously a give-up in interest cost that the American 

public paid. Did corporate America get a revenue transfer from the 

American public to fund this $33 billion movement from one fiscal 

year to another? 

Mr. DANIELS. I guess it depends on how many of them do wait 

the extra days or do not, and we do not know. We anticipate, based 

on history, that many will pay at the original date. This was the 

subject of some dispute in the last couple of weeks, the history, because Congress has done this before. In the previous administration, this same sort of thing was done with different tax, and some 

businesses went ahead and paid, either unknowingly or knowingly, 

394

ahead of time. We will not know until next month how many chose 

to take advantage of the offer to wait. 

Senator CORZINE. There is an implied cost, though, to the Federal Government of some substantial—at least some significant 

millions of dollars—in lost interest expense or, I guess you would 

put it that we paid interest on debt that would not have otherwise 

been paid because of that movement. 

Mr. DANIELS. Yes, it would be very insubstantial in the grand 

context, but I agree with you. 

Senator CORZINE. Would you have recommended that in the private sector? 

Mr. DANIELS. No, and I did not recommend it this time, either. 

You know, the providence of this particular proposal was sort of 

lost to history. No one seems to want to claim it now, and I will 

not either, because it was not the President’s proposal. I do not disagree with the Chairman that there was, in general, an artifice. 

There have been a lot of these, and I guess I just sort of view it 

sort of benignly in a way, because it was entirely a matter of this 

snapshot mentality into which the process has worked itself. No, in 

any commonsense business or other setting, you would not have 

done it. 

Senator CORZINE. I would argue that, about using pension fund 

resources when you have made a commitment to use those for paying out long-term liabilities, and I think that is the kind of conversation we have had here with regard to the trust fund today, 

and I think the conversation with the American people has moved 

substantially with regard to that over the last 5 years. 

Mr. DANIELS. I agree, Senator, and I think your comments were 

very helpful, as were the Chairman’s some minutes ago, before the 

last exchange, during which I observed the wisdom of the African 

proverb, ‘‘When elephants collide, it is the ant who is in most danger.’’ I sat that one out. No, I think there is an honest debate 

about, again, at the margin, how much debt reduction versus any 

other use of the money, of the extra Social Security revenues, is 

wise? 

I believe the commission, on the slide that the Chairman used, 

expresses a view close to that of the administration about the longterm fundamental problems with Social Security, which we do not 

believe can be fixed by simply paying down debt even faster than 

we already will. As you know, it is the President’s intention to pay 

off all the debt that can be practically retired well before the Social 

Security crisis arrives. But paying that off or more or even faster 

does not do anything to increase the asset value of the trust funds. 

It simply gives you more borrowing capacity when the day comes. 

I think that most analysts would agree that we will not be able 

to borrow our way through that problem. If we drive the debt to 

zero and we leave the Social Security system as it is, pay-as-yougo, promises vastly exceeding the ability of the work force at the 

time to pay them, that the fact that we can borrow an extra couple, 

$533 billion, we will go through that in a heartbeat. So I think it 

takes you back to the issue of the need for fundamental reform. 

Again, there will be widely different viewpoints about how that 

ought to happen, but I hope we can all work together on it—again, 

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I think the true issue here—which is how much debt repayment 

how fast. 

Chairman CONRAD. Let me just say Senator Grassley made a 

charge here with respect to my budget, and as I indicated, I did 

not support the artifice of transferring the money, but beyond that 

I supported the Snowe proposal to have a trigger, so that we would 

have protected Social Security and Medicare if we got into the circumstance like the one that we have now. I mean, he just left that 

out. So when somebody comes in here and presents a budget and 

suggests it was mine, and leaves out a key element, to protect Social Security and Medicare, which Senator Snowe and Senators on 

our side proposed, they are not being square here. They are not 

telling the whole story, and I think anybody who is honest, who 

has sat around this table, knows full well I predicted repeatedly 

that the tax cut the President was proposing was too big, that it 

endangered doing precisely what we see happening now; that is, 

the taking of Social Security and Medicare payroll taxes and using 

them to pay for other government operations. 

I think that is unwise, and it is not just a matter of paying down 

debt, because it is true I reserved more money for paying down 

debt than did the President’s budget, but I also reserved $900 billion to prefund the liability or to establish individual accounts. 

Look, we were shooting straight. We provided the resources to 

strengthen Social Security for the long-term, to address the problems that the President’s commission has now described. The President’s budget did not. Now, that is just a fact. 

Senator Hagel. 

Senator HAGEL. Mr. Chairman, thank you. 

Director Daniels, thank you for appearing this morning. We have 

heard a lot this morning about all the downsides of tax cuts. Are 

there any positives to tax cuts? That is to you, sir. 

Mr. DANIELS. I’m just not used to getting a question that friendly. I barely know how to react. Obviously, the President believes 

that there are, and I think so do an overwhelming number—unanimous, as far as I know—economists who have said—I could have 

brought an even more tedious set of quotations on that subject—

who have said that a tax cut was very much in order now, even 

many people who disagree with the idea of sustained predictable 

tax cuts over time very much seem to be united about saying tax 

cuts in a time of economic weakness were a very smart thing to do. 

And then there is some division, although I think most economists 

would agree that predictable rate reductions, in the rates that are 

paid by so many small businesses, as well as individual workers, 

is also very positive for the economy. 

Senator HAGEL. Meaning generally more revenues would flow 

into the Treasury as a result of tax cuts? 

Mr. DANIELS. Well, we do not assume that. 

Senator HAGEL. I know we do not. We budget, I think, in a way 

that the Stone Age budgeting crowd did, talking static versus dynamic, so what we essentially do is we penalize in the budget tax 

cuts. We see tax cuts as essentially deficits taking away from the 

numbers, as we heard this morning, when in fact, and I use the 

term ‘‘fact’’ very deliberately, because I am looking at a CBO report 

from 1987 that says all tax cuts, all tax cuts in the last 50 years 

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have resulted in a net increase in Federal revenues. Do you disagree with that, Mr. Director, or could you enlighten the panel 

more that issue? 

Mr. DANIELS. I think both common sense and the data tells us 

that there is far more than a zero effect. 

Senator HAGEL. A positive effect? 

Mr. DANIELS. Positive effect. 

Senator HAGEL. Bottom line, positive effect, more money coming 

into the Treasury as a result of tax cuts, revenues? 

Mr. DANIELS. Yes, sir. 

Senator HAGEL. Anything else you would like to say about that? 

Mr. DANIELS. I believe in quitting when I am ahead—quitting 

when you are ahead. 

Senator HAGEL. Well, I do not know about that. I am never 

ahead. But I have another point I would like to go to, because we 

brought this up with Dr. Crippen the other morning, and that is 

the so-called Medicare Trust Fund, the surplus that we are running. A couple of issues here. Dr. Crippen gave this panel and 

those listening a very good, explicit, factual representation of Medicare, the total, which I think is the only legitimate, fair way to look 

at this, and he said that there are essentially three parts to Medicare. There is a Part A, which is the so-called trust fund, which we 

hear a lot about, that we are running a surplus when, in fact, according to the CBO numbers, the surplus for the next 10 years, 

Medicare Part A will be about $404 billion, and, in fact, the Part 

B Medicare, which represents almost half of all spending in Medicare, will have a shortfall. Now we are looking at probably $992 

billion. So hardly that represents a surplus for Medicare. Would 

you care to comment on that, Mr. Director? 

Mr. DANIELS. I think that is the only fair and accurate way to 

look at it, and we have discussed this here before. Here is a representation, just for 2002, of the phenomenon that you just illustrated over the longer term, and I have often said that I think 

what is especially dangerous about talking about Medicare having 

a surplus, which it does not have; this year about $50 billion shortfall, which is then taken from general revenues, is—every penny of 

Medicare receipts, in other words, goes to Medicare, and then there 

is this shortfall you referred to. 

I think that what is probably most dangerous about that is it 

could lead the system to delay in addressing Medicare reform. 

Medicare, probably more so than Social Security, is unsustainable 

in its current form. It needs to be updated, and no surprise after 

four decades, almost. So I think it would be very unfortunate if the 

misconception that Medicare has a surplus—and incidentally, to 

correct something in the historical record, the President has never 

talked about sequestering the Part A Trust Fund for debt reduction. Social Security, yes, but not Medicare, because of this, because it is not a true surplus. To set aside the argument about 

that, if it led the system to procrastinate, which the system is all 

too prone to do, this would be, I think, a really unfortunate consequence. So I think it is very valuable for you to illuminate those 

facts. 

Senator HAGEL. You mentioned, I think your words, ‘‘snapshot 

mentality’’ of budgeting. Some of us around this panel were in busiVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00402 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
397

ness before we had the great privilege of representing our States 

in the U.S. Senate, and I have been a bit amused at the budgeting 

process that government uses, in that I do not know of a business—Mr. Corzine might differ with me on this—but I do not know 

of one, and I have run some, where you budget based on quarterly 

numbers or you make long-term investment decisions on quarterly 

numbers, or you really do anything based on quarterly numbers. 

The Wall Street guys, I know, respond to quarterly numbers more 

than the rest of mainstream American business, and they have to 

and I understand that, and I am not critical of that. 

But my question to you is this: Is there a better way to do this? 

We are responding and reacting to the immediacy of these quarterly numbers. We could go back two quarters and find that the 

CBO and OMB numbers were a bit off, and we were responding 

and reacting to quarters ago, and we were responding less than a 

year ago to these projected great surpluses that were going to be 

able to work with when, in fact, a different story now, as we go into 

the third quarter. Could you give us your thoughts on is there a 

better way to do this? 

Mr. DANIELS. Senator, there has to be. I came from a business 

background, too, and I am amused by some of the same things that 

I think strike you. On the central question that we have spent a 

lot of time on here, I think some future conversations about this 

could be helpful. We are dealing with trillions of dollars over time, 

and the Chairman is very correct to keep us focused on the longer 

term and on the ultimate issues of Social Security solvency and so 

forth. It could be that we should be looking at this question of setting aside the surplus for debt reduction on a multi-year basis. 

For instance, we elevate the matter to cosmic importance, what 

the snapshot says on 1 day at the end of September, over an 

amount that comes to a hundredth of a percent of all the Social Security surpluses that we are going to run, and this is somehow lifted up to, as I say, sort of a transcendent meaning and importance, 

when it really is not. So I do not have a specific proposal for you 

this morning, but I do agree that we might well talk about how 

this commitment that we all share, to one degree or another, ought 

to be more reasonably measured. 

Senator HAGEL. Thank you. 

Mr. Chairman, thank you. 

Chairman CONRAD. Thank you, Senator Hagel. 

Mr. Daniels, I just have to say to you that, to me, the lack of 

logic in your position on Medicare was just revealed by this chart. 

You are saying on the one hand that there is a shortfall in Medicare. But under your budget plan, you are taking payroll taxes 

coming from Medicare and using them to pay for other government 

programs. What a bizarre position to take. Medicare is in shortfall, 

so the answer is to take Medicare payroll taxes and go pay other 

bills with it, go pay for a tax cut with it. It makes no sense at all. 

Let me just say this to you. That strikes me like a person who has a bill coming due for $10,000 for college tuition, but they only 

have $2,500. So what do they do? Do they save more? No, under 

your proposal, you would take the $2,500 and go buy a car. It 

makes absolutely no sense, no earthly sense to me. You say there 

is a shortfall in Medicare, and so your answer is to take Medicare 

398

payroll taxes and go use it to pay for a tax cut, go build a tank 

or construct a bridge. What earthly sense does that make? 

Mr. DANIELS. Senator, I thought about asking the Secretary of 

the Treasury if he could start minting money in different colors, so 

that we could gave green for usual purposes, and yellow dollars 

could be Medicare and red ones could be payroll taxes, so that we 

could pretend that these are all different. But, in fact, all the dollars are green, and all this chart plainly shows and the Senator’s 

comment plainly shows is that we take in, in Medicare payroll dollars, vastly less than it costs to run that system. If anybody doubts 

that this is a fiction, I ask you to think back just three or 4 years, 

when the alleged surplus was going away. 

If you want to talk about a gimmick, somebody in Congress said, 

‘‘Home health care is eating up a lot of it, let’s get it out of there,’’ 

It was moved, the yellow bar, from the left side—from Part A, I 

should say, over to Part B, and presto, the so-called surplus came 

back and got bigger. So I guess my answer would be, yes, any extra 

Part A dollars, we spend on Part B, and then we have to go get 

some of those green dollars from the general revenue to cover the 

rest of the difference. I am very careful not to call this a deficit or 

something like that. We fund most of government out of general 

revenues, absolutely. I just do not think it is right to call it a surplus, and that is, I think, the only point here, and again I come 

back to the thought we tell ourselves we have a surplus, we tell 

ourselves we do not have a problem, and we have a huge one, and 

it is probably closer. 

Chairman CONRAD. You have been the one who has been here 

telling us all day that we have huge surpluses. 

Mr. DANIELS. In fact, on the national scale, we do. As a matter 

of Medicare, we do not. 

Chairman CONRAD. Yes, but unfortunately, at the national level, 

it is all payroll taxes. That is the surplus. It is payroll taxes that 

have been taken from people on the basis that it was going to be 

used to support the Social Security program or the Medicare program, and instead, in your budget plan, you are taking a chunk of 

it and using it to pay for other programs. To me, there is an inherent contradiction in your position. 

Senator Stabenow. 

Senator Stabenow? Thank you, Mr. Chairman. First, let me indicate that in your analogy, when you speak about $2,500 for a car, 

if it is American-made from Michigan, I think that would be a 

great idea. 

Thank you, Mr. Daniels, for being here. Let me first say that, in 

stepping back on the whole debate and listening to Dr. Crippen and 

now yourself, Dr. Crippen indicated to us on Tuesday that the 

shortfall in surplus dollars now, the changes in the numbers, have 

come two-thirds from legislative policy changes, one-third from a 

weakening economy. Any it would be my position and that of many 

others that what we are seeing is dramatic change in economic and 

tax policy. 

We have an analogy of the 1990’s, focused on balancing the budget, fiscal restraint, slowing the growth of government, tax cuts 

more geared toward the middle-class, an effort to invest in those 

things that would grow the economy, and labor productivity, such 

399

as education. In the 1980’s, we saw what we see happening now. 

We see a switch coming to what is frequently called supply side economics, tax cuts geared to the top, ask the American public to 

wait, that it will trickle down, except for $533, it will trickle down 

to them, large increases in defense. 

What unfortunately happened in the 1980’s was massive buildup 

of national debt, which is of extreme concern to me and many, 

many others of us in the Congress, who see this dramatic change 

as it relates to economic and tax policy, to a process that unfortunately did not work in the 1980’s. When we talk about where we 

are now, in terms of the numbers and the surpluses, I wonder if 

you might respond. You said that you agreed with Dr. Crippen. 

You were very close in your analysis. On Tuesday, I asked him, 

when we are talking about the largest surpluses in many, many 

years, frequently a characterization from yourself, as well, are not 

we talking about large Social Security and Medicare Trust Fund 

surpluses? Dr. Crippen: ‘‘Yes, over the next 5 years, it is almost exclusively Social Security Trust Fund surpluses.’’

Would you agree with that statement? 

Mr. DANIELS. Yes, the differences between us are pretty minimal 

over that time period and across the whole 10 years. 

Senator STABENOW. So when we are talking on the one hand 

about surpluses and the great economy and all the things that we 

can do with surpluses, at least over the next 5 years what we are 

talking about are payroll taxes paid into Social Security and Medicare, and I had asked Dr. Crippen several different ways. Each 

time, he answered in the very same way. 

I would next ask you, just from a factual standpoint, are the excess revenues from the Medicare Part A Trust Fund being used 

solely to pay down the national debt over the next 5 years, in your 

budget? 

Mr. DANIELS. They are being used to pay Medicare costs. Again, 

these dollars all come in one color, so we do not put a homing device on any one of them, and track it through the Federal Treasury. But it remains true, indisputably true, that the money that 

comes into Medicare payroll taxes covers only a fraction of Medicare’s cost. 

Senator STABENOW. What we are looking at really is a debate 

and a change in accounting for the first time in 30 years. I find it 

so amazing. In fact, I went to the Library of Congress and took a 

look at, since 1965, each year the reports regarding the Medicare 

Part A Trust Fund, and my good friend, Senator Hagel, and I have 

this back and forth discussion, I think, in every Budget Committee, 

as to how that is figured. But the reality is that, since 1965—there 

were too many to bring, so I brought a picture, to bring my own 

chart here. 

If you look at this, and it is about 16 inches of reports on this 

desk, piled up, those are the reports that categorize a Medicare 

Part A Trust Fund, and every year they discuss its solvency and 

that it is, in fact, in surplus. Now we have a new administration 

who is coming in and saying there is no Part A surplus, there is 

no surplus in Medicare, and combining what our two programs, 

Part A, which is paid differently, and Part B, which was designed 

to be paid for out of general revenues. Part B was set up for people 

400

to pay in, if they wanted to sign up. Part B, voluntary, you can sign 

up for it and you can pay premiums, and about 75 percent comes 

from general revenue. 

So, traditionally, since 1965, we have had a Part A Trust Fund, 

and I know that those in our hospitals and nursing homes certainly 

are extremely concerned about what happens there, taking deep 

cuts in the last few years to balance the budget; in my State, services being affected to families that I represent, and Part B, which 

is a separate program—it was set up to be funded with general 

fund revenues. As our Chairman indicated, now we have a situation where you combine them, take the surpluses from Part A, combine them with Part B, which was usually general fund. So you are 

now supplementing the general fund by combining—collapsingthose, and you are taking money that otherwise would be used for 

Medicare and freeing it up for other purposes, which is of great 

concern to me, as much as Social Security, given the needs under 

Medicare and the need to be expanding Medicare, in terms of prescription drug coverage, as well as strengthening it for our teaching 

hospitals, for our nursing homes, for those providing care across 

this country. 

That is the difference that I am extremely concerned about, and 

I would ask you, if you are saying that Medicare Part B, which was 

set up separately—it is a separate program, funded intentionally 

with general fund revenues—if you call that being in deficit, would 

you say national defense is a deficit because that was set up to be 

funded by general fund revenues? 

Mr. DANIELS. Senator, I would be concerned, too, if what you said 

was true. But it is utterly untrue, so we can both be reassured. A 

minute ago, I very plainly said I never use the word ‘‘deficit’’ to 

refer to Medicare for the reason you gave. It is not accurate. It is 

simply another program, like most, that draws on general revenues. I have simply quarreled with what I think is an antique, very 

misleading and untrue, as Senator Hagel pointed out, notion that 

the Medicare program, as it exists in the year 2001, three-and-ahalf decades after its founding in a very different era of healthcare, which was dominated by hospital care, as today is not, is in 

some kind of surplus. 

So please be careful about the notion that Medicare money has 

been taken away. The trust funds are exactly as big as if there had 

been any other set of policies, tax policies or otherwise. The little 

chart I showed for Social Security, there is exactly the same picture 

of things in the Medicare. In fact, we put that chart, a Medicare 

chart, in the mid-session review for this purpose. So absolutely 

share with you the concern about the solvency of Medicare, and 

nothing about the policies put in place so far has done anything 

about that. The future of Medicare depends on two things, two 

things only. Do we or do not we reform the system, because the 

current system is not sustainable? 

By the way—interesting point—one of the biggest, and the very 

few, differences between our report and CBO’s over a 10-year period, over half the difference—there is a difference in terms of the 

total 10-year surplus projection on the order of eight or 10 percent. 

Over half that difference is their belief that Medicare costs will go 

up faster, Medicare costs will go up faster. They might be right. We 

401

believe Social Security costs will go up faster than they do, and 

Medicaid, for instance. So these are all subject to big error bars, 

but I just would say that Medicare must be reformed to become 

sustainable, and we have to have economic growth to pay the bills 

as they escalate and come due. There has been no accounting 

change whatsoever. The trust funds are still accounted for in exactly the same way as always. The amounts in the trust fund, the 

Part A Trust Fund, the amount of bonds there, is just exactly the 

same. 

Senator STABENOW. Mr. Daniels, in conclusion, I might indicate 

that consistently, since the beginning of this year, the Medicare 

Trust Funds have been collapsed and counted as part of the budget, as you have come before us indicating how the tax cuts would 

affect the revenues and looking at the total picture. Clearly, it is 

not in dispute that you are using accounting—you are counting the 

revenues that are paid into Medicare as part of the balancing of 

the budget and the numbers that you are putting before us. 

But I would say one other thing in conclusion. Again, to emphasize what the Chairman had indicated, your logic, your statements, 

make no sense. They are not logical. To say we believe there will 

be more pressure on Medicare, more spending on Medicare, and yet 

we are going to change the way that Medicare has been viewed 

since 1965, in terms of the Part A Trust Fund, instead of strengthening it, instead of putting more dollars aside for Medicare because 

you believe that there will be more expenditures in Medicare, you 

are taking those receipts that are counted toward Medicare and 

turning them around and using them for other budgetary purposes. 

I believe that it is wrong and that it is dangerous, and it is part 

of the deep concern that I have about the direction we are going. 

The CHAIRMAN. Thank you. 

Chairman CONRAD. Senator Snowe. 

Senator SNOWE. Thank you, Mr. Chairman. 

Just to followup on that point on Home Health Care in Part B, 

but the fact is, talking about gimmicks, that was the greatest gimmick of all, by moving Home Health Care from Part A to Part B 

as a way of addressing the solvency question in Part A, obviously 

now having a tremendous impact as well on spending in Part B. 

And in fact, it would be interesting to note what the impact has 

been by shifting Home Health Care to Part B from Part A, and 

that actually would be a number that I certainly would be interested in having, Mr. Daniels. Do you have that offhand? 

Mr. DANIELS. I have at one time or another. I want to say it was 

well over $100 billion, and it might be more than two, but I will 

have it for you maybe by the end of the hearing. 

Senator SNOWE. Thank you. 

Thank you, Mr. Chairman, for having this hearing. I do think it 

is instructive to review where we are and where we have been. I 

could not help but think of the beginning of this year and how we 

began with the first hearing with Chairman Greenspan. In fact, at 

that hearing, much to the surprise of everyone, he advocated a tax 

cut for the very reason that we are facing today economically, that 

in the event that this downturn proved more than an inventory correction, that the effects of the tax cut certainly could mitigate that 

decline. 

402

He also did propose a trigger, which I hope the administration 

would consider, because I do think that that is very timely, frankly, 

as a mechanism. The very reasons why Chairman Greenspan proposed it was for the very reasons we are facing here today: you cannot precisely estimate revenues 1 year to 10 years. It is very difficult. There are many changes in our economy that ultimately 

have an impact on our estimate, so therefore, I do think this would 

be a worthwhile endeavor, and that is something, certainly, I hope 

to pursue again with my colleague—Senator Stabenow and I and 

Chairman—because I do think it is relevant, and I think this debate underscores that. 

But the fact of the matter is, Mr. Chairman, this year we faced 

a Hobson’s Choice. You know, do we do something to affect the 

economy through a tax cut or do we do nothing? Now, some people 

say, well, the reasons why we have a declining surplus is because 

of the tax cut. Others are saying for spending. Others because of 

the economic decline. Well, I say it is all of the above. 

And when the proposal came forward, actually, it was a Democratic idea on the tax rebate. That was not a Republican idea, it 

was a Democratic idea. We thought it was a good idea. Why? Because it provided the stimulus that was necessary to try to rejuvenate this economic decline. The fact is, this is the first time, I understand, that we moved in a timely fashion to affect the current 

economic conditions by passing a tax cut. That was the concern. 

And many expressed it before this committee, that we would never 

pass a tax cut soon enough to have an effect. But we moved heaven 

and earth to do that, and it emanated from a Democratic idea. In 

fact, there were several votes on the floor that I went back to review because I was a little confused by a lot of the discussion that 

has taken place. You know, we had the Hollings Amendment that 

was adopted 94 to 6 that would have increased the tax cut to 85 

billion, 12 billion more than was ultimately enacted. And Senator 

Graham’s Amendment from Florida, which was supported by 35 

members, in fact, many on this committee, that would have cost 60 

billion next year, 22 billion more than ultimately was enacted. 

But there was a reason for all that. There was criticism against 

the President’s tax plan because it was all back loaded to the last 

5 years of his 10-year plan. You all remember that. And in fact, in 

the Finance Committee, when we were marking up the tax bill, I 

said that there was a logical reason for that, that it had to reflect 

the surpluses that were accruing each and every year, and many 

of those surpluses were not accruing until the last 5 years. That 

is why it was back loaded. 

But we changed that premise to the rebate because we saw what 

was happening with the economy, and rightfully so. I mean, consumer confidence is really the equivalent of where we would be in 

a recession today. Unemployment numbers, unemployment claims 

is the highest in 9 years. We have had a million job cuts announced 

for this year, a million job cuts over this last year, so obviously, we 

have to be concerned. So we might say, would things be better now 

if we had not done this tax rebate? Maybe so. Would it have been 

worse? We do not know. The X factor was the economy, and we 

took the risk by putting money in the hands of people. Why? Because two-thirds of consumer spending is what generates economic 

403

growth in America, and that is reality. So, yes, we might not be 

precisely right, but who is to say that we were wrong? 

The question is: what are we going to do about it? And I hope 

this whole political cacophony serves as an ultimate platform for 

solutions to where we are. You know, the beauty of the balanced 

budget has always been it is going to force us to make decisions 

and it is going to force us to make choices. And that is precisely 

where we are today. 

We have to make choices. Just like every family is doing in 

America right now because of this current economic decline, every 

state legislature is making revisions in their budgets because of 

this economic decline, and so must we. I do not think there should 

be any question as to whether or not we are going to preserve the 

surpluses for Social Security or for Medicare. If we have to make 

adjustments, then we ought to honor that commitment, that we all 

pledged to do so on a bipartisan basis. 

So that has been the backdrop as to where we are here today, 

Mr. Chairman, as I have seen it. You know, I look back on even 

how we began this year with spending increases. I mean, I was 

stunned by the $12 billion increase that occurred last year in discretionary spending in our budget, that has had an impact on our 

surpluses of $561 billion over the next 10 years. $12 billion increase has now yielded $561 billion effect on our surpluses over the 

next 10 years. So if you start looking at that, what was the impact 

this year? Well, this year it was $12 billion. We could have had $12 

billion more in the surplus this year if that spending had not occurred, $40 billion more in the year 2002, $46 billion more in the 

year 2003, $51 billion more in 2004. So we would not even have 

any questions about where we are today in terms of declining surpluses or whether or not we are going to Social Security. That has 

all had an effect, and we all share in the responsibilities of what 

has happened. 

The question is how we proceed now. And I hope we can find 

that bipartisan agreement, Mr. Chairman, for that. I really do. And 

I hope it comes in the form of a trigger mechanism and other 

issues, and making adjustments if it is necessary. But I do know 

this, even if half of the assumptions had not changed because of 

this economic decline—I would have you answer this question, Mr. 

Daniels, and it will be my only question, my time has run out—

we still would not change where we are on the Social Security 

Trust Fund. Would it change the solvency question? Would it 

change the long-term issues that we will have to grapple with because the President’s Commission on Social Security said if the current system of financing stays in place? Well, that current financing system has nothing to do with our surpluses. We still will have 

to grapple with that major challenge, even if we saved all the surpluses for the next 10 years for Social Security, whether it is on 

budget or off. 

Mr. DANIELS. You are absolutely correct, Senator, as page after 

page after page of witnesses and observers and analysts now have 

all understood and recognized, today’s surpluses do not have anything to do, either with the long-term problems of Social Security 

or Medicare, or the solvency or our ability to pay those bills as they 

come due. We are only talking about whether one level or another 

404

of debt repayment, a great achievement of both parties that is 

going on right now, is enough, and whether even more would be 

the choice for the next increment of money or some other purpose. 

And I think you are very wise to redirect the committee’s attention 

to the main question, which is: economic health, the economic 

growth, jobs and incomes in this country, vastly more important 

than honest differences at the margin about how much debt to 

repay. 

Chairman CONRAD. Senator Byrd. 

Senator SNOWE. Thank you. 

Senator BYRD. Thank you, Mr. Chairman. 

And thank you, Mr. Director, for your appearance here today and 

the testimony you have given. 

Let me change the focus just a little here, as the chairman of the 

Appropriations Committee. The Budget Act requires the OMB to 

implement a sequester on mandatory programs, including Medicare, at the end of the year if the Congress has passed and the 

President has signed legislation that either increases mandatory 

spending or reduces revenues. 

The latest OMB pay-go report estimates the pay-go balance to be $126 billion. Does the administration propose that Congress enact 

legislation to cancel the sequester and set the pay-go balance back 

to zero? 

Mr. DANIELS. There will be a need, Senator, to bring the Budget 

Enforcement Act current as to its caps, which has occurred in the 

past, and we will need again to occur again. The cap, as it stands 

in the law, of course, is 550 odd billion dollars discretionary spending, and that was antiquated by the budgets of the last few years, 

in which Congress chose to move way beyond those caps, and yes, 

that will have to take an affirmative act of Congress to bring that 

to some new level, and the administration will support that, at 

least up to the level of the budget resolution as amended. 

Senator BYRD. If we are to avoid diverting any more of the Social 

Security surplus to other government programs, the President and 

the Congress must pay for bills that increase mandatory spending 

or further cut revenue. Does the administration support eliminating pay-go, or do you believe that future mandatory and tax legislation should be paid for? 

Mr. DANIELS. We certainly support some ongoing regime, either 

a renewal of the system we have or some modification of it. We 

think it has served well. It has helped to produce, first a balanced 

budget, now a very, very large surplus. And that some form of ongoing structural limitation like it is a good idea, and we want to 

work with the Congress. And we know there are differing views 

about what the best mechanism is, but we do think some mechanism is appropriate. 

Senator BYRD. So the Budget Director is recommending that the 

administration does support that we continue with pay-go, that we 

renew pay-go, or do you believe that future mandatory and tax legislation should be paid for? Do I hear you saying you think it 

should be paid for? 

Mr. DANIELS. Well, the President would say that it should be 

paid for in a way that ensures that we continue to run surpluses 

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405

curity, and that some form of caps, some form of pay-go, some form 

of structural limitation be put in place or renewed to keep that 

pledge. 

Senator BYRD. I was here and attended the meetings at Andrews 

Air Force Base in 1950 (sic) when President Bush the first was 

President and was there, who also prescribed to pay-go. It worked 

well. I discussed this in my office with one of your distinguished 

predecessors. It worked well, until we came to this period of surpluses. Now we have done away with pay-go. And that is the purpose of my question. Pay-go helped us to achieve those surpluses. 

And so as I understand it, you would support some form of paygo again? 

Mr. DANIELS. Yes, Mr. Chairman. Our budgets—each of our 

budget submissions, I think, has made reference to this. Take a 

note that the caps that are in place will need to be adjusted at 

some point and suggest that that was probably the right point at 

which to put some new system in place or renew the current one. 

My guess is that, just as you reminded us, pay-go was put in place 

in a very different era of true deficits, very large ones, and has 

served well, that perhaps some variation of it is better suited to 

this unprecedented era, unprecedented era of very large persistent 

in rising surpluses. But the idea of such a mechanism is a wise 

one. 

Senator BYRD. The budget resolution includes $661.3 billion in 

budget authority for fiscal year 2002. Under the budget resolution, 

the Appropriations Committee can only have the additional $18.4 

billion for the President’s defense request if that additional spending does not result in reducing the Medicare surplus. Based on 

CBO’s estimates the Medicare surplus is gone in fiscal year 2002, 

2003 and 2004. Senator Conrad, the chairman of this committee, 

has said that he cannot provide the Appropriations Committee with 

the additional $18.4 billion. Is the President proposing that we bust 

the budget resolution in order to pay for his defense request? 

Mr. DANIELS. We would not view it as busting the resolution, 

Senator, unless the totals ran beyond the total of the resolution 

plus the amendment, which was anticipated in that resolution. We 

would respect the Chairman’s decision if he chose not to use his 

prerogative or decided that he could not use his prerogative. There 

is a similar situation, not identical, but similar, in the House, pertaining to the chairman of that Budget Committee. So in either 

case it will be necessary, and we think advisable, for each body to 

act to make available at amount up to the level of the budget resolution as amended. I would observe that that was—back to our previous discussion, there is going to be a need for each body to act 

extraordinarily anyway because of the antiquity of the caps that 

are in place, and that might be the moment at which to address 

this problem. 

Senator BYRD. Well, if the Medicare surplus is not real, as the 

administration witnesses have maintained, what do you suppose 

the Budget Committee had in mind when it was under the leadership of Republican members, what did it have in mind when it put 

this provision into the budget resolution? 

Mr. DANIELS. I think it clearly had in mind to aim at an even 

higher surplus than the one we have. When we say that these 

406

funds will be saved or set aside or however we put it, what we really mean is they will be used in a specific way, they will be used 

for debt reduction. Now, actually, a fair amount of it gets used for 

direct loans. A very high amount this year, as just a matter of cash 

management, was taken away, not for debt reduction, taken not for 

debt reduction, but for the direct student loan program, be the biggest single consumer of those funds. But this is a matter of cash 

management at——

Senator BYRD. Mr. Director, the President is also proposing to 

bust the budget resolution on the tax side, is he not? How about 

the administration’s proposals that more than $533 billion more in 

tax cuts, beyond the budget resolution ceiling on tax cuts, be made? 

Mr. DANIELS. I am sorry, sir. The question again? 

Senator BYRD. Well, you said that the Medicare surplus is not 

real, and yet the very august and illustrious members of your 

party, who were in control of this committee when the budget resolution was sent to the floor, without any participation by Democrats on this committee, had a provision to the effect that the additional $18.4 billion for the President’s defense request could be provided only if that additional spending did not result in reducing the 

Medicare surplus. And what I have said to begin with is that Senator Conrad has said that his hands are tied, and I believe they 

are, as far as that provision is concerned. 

That being the case, is the President proposing that the budget 

resolution to pay for this budget request be busted? I did not get 

exactly a clear answer, but I went on to say that the administration is—or at least some people are proposing that there be $533 

billion in additional tax cuts beyond the budget resolution ceiling 

on tax cuts. So is the administration proposing to bust the budget 

resolution on the tax side? 

Mr. DANIELS. With regard to Medicare, Senator, I do not have 

the language in front of me, but it says ‘‘by an amount not less 

than’’, or words to that effect, the trust funds, as we have discussed 

this morning, will be credited with an additional, we estimate, $34 

billion this year, exactly as much as under any other surplus outcome, and so will be unaffected. 

But what I take the committee’s action or the Congress’s action 

or the Senate’s action to have meant here was that at that time, 

they were hoping to ensure a total surplus at least as large as that 

attributable to Social Security’s excess revenues, and the excess 

revenues attributable to Part A. 

Now, the economic downturn alone was substantially more than 

the excess revenues attributable to Part A, and that is a changed 

circumstance that maybe the Senate will take into account if and 

when it decides to legitimize a resolution limit of 679 for your committee to apportion, as opposed to 661. 

Senator BYRD. So you are proposing to exceed the budget resolution on spending by $18 billion, and proposing to cut taxes $314 

billion beyond the Republican budget resolution. I am in a quandary as to how this adds up. 

Mr. DANIELS. Well, from the very beginning the resolution this 

year anticipated, and it was, I think, universally understood that 

there would be a subsequent request for defense, that the amount 

of that was not known or knowable at time of the submission in 

407

April, that Secretary Rumsfeld would have been charged with an 

in-depth look at the nation’s long-term defense needs and possibly 

transformation, and that an amendment would be forthcoming. 

It was. I guess from the administration’s standpoint we view that 

as part and parcel of the request for this year, and we hope it will 

be part and parcel of the budget resolution, not seen as breaking 

it in any way. 

Senator BYRD. Out time is very limited. Let me take up at another juncture. You referred to an orderly process, the need for proceeding with an orderly process. We are rapidly approaching the 

beginning of a new fiscal year. The President is out making statements, according to the press, to the effect that we need to change 

the process on Capitol Hill, we need to get away from the old ways, 

quote, end quote, and Congress needs to send down to the President the appropriation bill for defense, and making appropriation 

bills for education, saying, quite clearly, according to the press, 

that the old ways are what is hindering the action on the defense 

appropriation bill, and that in recent years the defense appropriation bill has been held back to the last or the next to the last. And 

this puzzles me. 

In recent years the Congress has been under the control of Republicans, and it seems to me this is poking a finger right in Ted 

Stevens’s eye, because as the chairman of the Appropriations Committee in the Senate, he worked very hard and very effectively to 

move the appropriation bills, all of them, and last year the defense 

appropriation bill was No. 2. The year before it was No. 6. The year 

before it was No. 3, and the year before that it was No. 4. So it 

seems to me he did yeoman’s work in getting the appropriation bill 

for defense down to the President’s desk. Now, I do not what the 

President has reference to when he talks about the old ways. 

Second, I cannot understand why he is urging that the defense 

appropriation bill be sent down ahead of the other bills. Could you 

comment on that? 

Mr. DANIELS. Yes, Senator. I think the President’s observation is 

a more general one, that the last few years have too often resulted 

in—have gone not just somewhere beyond, as we may well this 

year, but well beyond the end of the fiscal year, have dragged out 

sometimes almost till the end of the calendar year, that far too 

much acrimony about shutdowns and all the rest, that he would 

like to move beyond that. So I think when we speak of an orderly 

process, really, we are talking about restoration of the leadership 

direction of that process by the Appropriations Committees and the 

passage on whatever timetable is possible of each individual bill if 

that is practical. And I think his comments with regard to defense 

really resolve to a more general one also, that he does believe, particularly in this year—I think many would say the national defense 

is the first responsibility of the Federal Government, above and beyond all others, but particularly in this year when he believes, and 

I think most agree, that substantial rebuilding of that defense 

change of that defense is urgently needed, that first priorities 

ought to be agreed on, if not first, at least early, and this may or 

may not involve the final passage of the conference report, but I 

think he was simply asking that he would like to understand what 

the Congress’s will is on the top priority, and not after everything 

408

else has been dealt with, but early on. And so I would give you that 

in response. 

Senator BYRD. Mr. Daniels——

Chairman CONRAD. Might I ask the Senator is he is close to ending, if we could get to Senator Wyden and the Senator from Wisconsin as well, and then we could come back? 

Senator BYRD. But I cannot come back, Mr. Chairman. 

Chairman CONRAD. OK. Go ahead. 

Senator BYRD. And I sat here rather patiently, I think, and my 

questions deal with a matter that is facing this Appropriations 

Committee, right, very soon? 

Chairman CONRAD. Absolutely, go ahead. 

Senator BYRD. It seems to me that if the administration had 

been in all that hurry, it would have gotten its requests up here 

sooner. This budget did not come up until April. And it said that 

there was a hole in that budget, namely the defense amendment, 

that hole would be plugged soon, and it was plugged on June 27, 

and half the year was gone. So here was have the administration, 

for one reason or another, saying because of strategic review, it 

would be late sending up an amendment, but I expressed my support for a defense review, not necessarily for the results, because 

I do not know what the results are. But the administration, for one 

reason or another, did not get its request in until you might say 

half the year was gone. 

And now the President is wanting to do things in an orderly way 

in his view, and get the defense appropriation bill down to him 

first. From my viewpoint, it does not matter what bill gets to the 

President first, so long as we get them all down by the beginning 

of the new fiscal year. That, it seems to me, is the important thing. 

And the administration does not seem to be helping us much along 

that line. 

The House passed nine appropriation bills. My Appropriations 

Committee, due to fileting with the support of Ted Stevens and the 

other members on both sides of the aisle in that committee, reported out nine appropriation bills. The Senate passed five of those 

appropriation bills, the first one being the appropriation bill that 

comes out of my subcommittee on the Department of the Interior. 

That bill was reported out and was acted on in the Senate, and 

conferees were appointed by the Senate on July 12. That will soon 

be 2 months ago. So here are five bills, on four of which conferees 

were appointed by the Senate, and to date not a single one of those 

bills, not on a single one have the House conferees been appointed. 

And I am not criticizing the House. There may have been various 

and sundry reasons. But what I am saying is that the administration, instead of pointing the finger at the Congress and saying, ‘‘It 

ought to send me the defense appropriations bill first,’’ ought to be 

saying, ‘‘Let’s get all the bills down there.’’ I say, let’s get them all 

down. What is the big hurry in getting defense? We do not even 

have the results of the top-down review yet, and not likely to have 

any soon I don’t guess. 

It seems to me that the administration ought to look to the Republican-controlled House and ask questions, ‘‘Why don’t we have 

conferees appointed? Why don’t we get those bills down here?’’

409

The President, as I understand it, won the election on two signature items, one, the tax cut, and changing the tone in Washington. 

And what I have been hearing out of the President, and I respect 

the President, but what I have been hearing out of the President 

is not a change of tone, but the same old finger pointing and making comments—used the phrase a little earlier about using words 

that were misleading, making words such as ‘‘if the Congress 

doesn’t go hog wild overspending.’’ We have kept every one of these 

appropriation bills that have been passed within to the allocations, 

we have kept them within the budgetary resolution limitations. 

When the President’s supplemental came up to the Congress, he asked for $6–1/2 billion supplemental appropriations. We did not 

add one thin dime to that bill. The House had $473 billion in emergency spending—$473 million in emergency spending item. And the 

administration stated that it was against the emergency spending 

item. We stood firm in the Senate, and we took out all the emergency items and we found offsets for them. So we have not spent 

one thin dime over what the President requested. We have not 

spent one thin dime over what has been the allocations that were 

given to us by the Budget Committee. We are trying to work, do 

our job, and do it right, and it does not change the tone for the 

President to make references about Congress going hog wild on 

spending. 

The President is the biggest spender, hands down, in this town. 

The administration, with its tax cut, is the biggest spender, hands 

down. That is money that is being spent. It is going out of the 

Treasury. So you want to talk about spending, big spenders, perhaps the administration ought to look into a mirror. 

Now, what is going to be done here? We are facing a crisis. The 

fiscal year is going to begin in short time, and we want to get our 

work done. We are going to pass four more appropriation bills in 

the Senate soon, and then we are going to get into those last four. 

Now, you talk about, Mr. Director, an orderly process. That is exactly what we are following here, is an orderly process. The orderly 

process is, with respect to defense, that the authorizing committees 

act first. When Sam Nunn was chairman of the authorizing committee, the Armed Services Committee of the Senate, he and I 

stood on the floor and debated this 1 day, and we both agreed that 

the authorizing bill should come first. Mr. Levin is trying to get 

that authorizing bill out and acted upon. That committee, on which 

I also sit, and with reference to which I have been absent this 

morning, is trying to get its work done. The House authorizing 

committee, the authorizing bill on defense will be taken up next 

week. The House appropriations bill on defense will be taken up 

the following week. And so where we are following a quote, ‘‘orderly 

process’’, close quote, namely, that the authorizing measure should 

come first, the Appropriations Committee should have some guidance from the authorizing committee. We are not dragging our feet 

in Appropriations on defense. We are waiting on the authorizing 

committee to act and the Senate to act and the House to act, so 

we will have the benefit of that guidance. So that is our reasons. 

That is our reasons. 

I hope the President will understand that. That is why the defense appropriation bill is not coming down at the head of the line. 

410

They are good reasons. Now, that being the case, we need some 

help. We need some help from the House side. As I said before, I 

want to preface my statement with this, that there may be good 

reasons for the House not having appointed conferees, not having 

gone to conference, but we need some help over there. We are going 

to have a real crunch, and it will not be far off. It is going to be 

soon. So I hope that the Budget Director can get the administration 

to give us some help in getting these bills to conference. We will 

get them all to—we ought to get them all down to the President 

by the first of the fiscal year. We got a late start on our side for 

reasons that are pretty well known, but we need to work together 

and get these bills done. We need to go to conference and get the 

conferences back. And the House needs to appoint conferees. The 

House needs to send its conferees to conference. We stand ready. 

We are waiting. We have been waiting. 

Thank you, Mr. Chairman, for your tolerance, and thank you, 

Mr. Director. 

Mr. DANIELS. May I respond quickly? Thank you, Mr. Chairman. 

Senator those are very fair comments. It is certainly true that, 

for unusual circumstances, the original budget was somewhat delayed. We did the best we could to make up some lost time. 

It is certainly true that the difficulties of the defense review 

made that amendment come in the middle of the year, as you said, 

and that is certainly no fault of the Congress’s. Likewise, it is very 

fair of you to, and I think, in fairness, the President also has been 

very careful to talk about the Congress, House and Senate, calling, 

I hope, in a constructive way, not an adversarial way, for the kind 

of process that you have been trying to restore and implement here 

in the Senate. 

In each of his comments about this, you will find compliments of 

the way the process has gone so far, and simply urging that we all 

work together to see it through. Obviously, the latter stages will be 

difficult. There are not that many business days left. There are 

holidays that further complicate the situation, and the administration understands that completely. 

So the President is very clear in instructing all of us to strive for 

a tone that is constructive, that respects the leadership role of the 

Congress. And I think all that any of us are trying to say is that 

let us do see this through, despite the difficulties, let us try to have 

just the kind of outcome that you just outlined, and we will try to 

be scrupulous in both what we say and how we act. 

Chairman CONRAD. Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. 

Mr. Daniels, I want to ask you about several health care issues, 

and my reason for asking you is that I, and a number of colleagues, 

have tried very hard on a bipartisan basis to see if we can make 

some progress during very difficult times. Our colleague, Senator 

Snowe, is here. She and I have, for 3 years, worked on the prescription drug issue. Senator Smith and I have teamed up and were 

able to get $28 billion in the budget to address the concerns of the 

uninsured, which strike me as particularly pertinent right now, 

given all of the layoffs that we are seeing around the country and 

the need for some way to address this enormous pain. 

411

My reason for asking you this morning questions in both of those 

areas is I am concerned that the administration is staking out 

some positions that are inconsistent with what we are trying to do 

up here on a bipartisan basis to make some progress on the health 

issue, and maybe I am incorrect. 

I want you to set the record straight on it because I want to work 

with you on these issues. 

Prescription drugs are a pretty clear example. I talked to a con- stituent last night who said that his mother spent $1,000 this 

month for 30 days of cancer medicine to deal with a serious cancer 

problem, 30 days, $1,000 for the cost of the medicine. We are trying 

to come up, Senator Snowe and I, with a market-oriented approach 

to this issue. The Congress set aside $533 billion over 10 years to 

try to help us address this. As far as I can tell in the midsession 

review, about a third of the money is gone. 

Now maybe I am not reading that correctly and maybe I am 

missing something, but the reason that I am asking you about this 

is that we want to work with you. Senator Snowe and I think that 

we can come up with a common-ground sort of approach that uses 

marketplace principles, which Republicans have been supportive of, 

but also has a clearly defined benefit package that is part of Medicare that the Democrats have been for. 

It will be very hard to do that, to get the bipartisan approach 

Senator Snowe and I want, if the midsession review is essentially 

where you all are and a third of the money is gone. Now maybe 

we are reading that incorrectly, and if that is the case, I want you 

to enlighten me, but I am concerned about it. 

Mr. DANIELS. Thanks for the question, Senator. I think you are 

reading it incorrectly. Actually, I think our positions are coming 

closer together, and let me tell you why that is the case. The number $533 billion I think is best described as a good-faith 

guess or estimate. It is sort of a placeholder number as we see it. 

It is not associated, to my knowledge, with any specific plan that 

anybody has fully fleshed out, but we take it as $533- over 10 years 

as a good guess by somebody about the kind of plan that you described. 

The President has always supported strongly adding prescription 

drug coverage to Medicare, supports it in the context of Medicare 

reform that makes that program more sustainable over time, and 

believes it would be really a big mistake, a big mistake to bolt on 

prescription drugs to the current system without substantial reform—as some have said, dessert before dinner, and others have 

observed, it might preclude the kind of reform that is essential. 

In the original budget, we had an estimate of $153 billion over 

10 years to do that, and so there was a gap of almost 50 percent, 

sort of an average of 15 a year versus an average of 30 a year. In 

the midsession review, based on the elaboration of Medicare reform 

principles that the President released in July, we have recosted, 

and again these numbers do not proceed from sort of a macro guess 

or guesstimate, but from the principles of a fairly well-articulated 

plan, and we added $37 billion to the original estimate. 

So the midsession review increases the amount proposed for 

Medicare/prescription drugs to $190-, and that is over 8 years. So, 

more or less, $24 billion a year, compared to $30-. So a lot of disVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00417 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
412

tance remains to be covered really, but I think that the boundaries 

of this are not impossible, not impossibly far apart, and they have 

narrowed, as opposed to widened. 

Senator WYDEN. Let us do this because I want to ask about the 

uninsured. I would like to have you send to the subcommittee, the 

bipartisan group, in particular—Senator Snowe and I—this recosting exercise because I will tell you this is something the Congress passed. Yes, we are very much aware that you all wanted to 

spend $150 billion, and we wanted to spend, some of us, substantially more. We came together on a bipartisan basis and said $533- 

is where we are going to be. 

Now you all may disagree with that, and you have got a right 

to any kind of recosting that you choose, but it does trouble me 

that when there is a bipartisan effort up here to try to come up 

with a bill that certainly meets you all halfway, in terms of marketplace kinds of approaches, that we have this sort of behind-thescenes kind of recosting. That is what goes into the midsession review. 

And I want the record to be clear on this, and especially because 

my friend from Maine is here, and she has been such a trooper to 

work with me on this, is I am very troubled with the fact that the 

administration is now saying we are going to look at $190 billion 

for a prescription drug program because we want to make sure that 

we go forward with at least a $533-billion program. On a bipartisan basis, I will look at what you are saying about 8 years versus 

10 years and the like. 

We want to work with you, but get us these numbers with respect to recosting the benefit because that is not going to be of 

much solace to the person last night in Oregon who spent $1,000 

for 30 days of cancer medicine. 

Mr. DANIELS. Why do we not exchange costing because, so far as I know, there is not any costing that leads to $533 billion. I think 

you have a good-faith attempt. Somebody said $533 billion. Now I 

do not think you mean to take a number and then form-fit a plan 

to fit it. The President has a plan, better articulated I think than 

any around, and we have a number that derives from it, and we 

will be glad to show you how we got there. 

Senator WYDEN. Mr. Daniels, with all due respect, the President 

may have a plan, the Congress has a law. This was a budget law 

that said we were going to spend $533 billion. I want to move on 

to the uninsured, but the fact that you are recosting this program 

at a time when people all over this country are being shellacked 

with their medical bills, and you have got Members of Congress, on 

a bipartisan basis, who are trying to meet you halfway, it is pretty 

troubling to me. So send us the recosting data. 

The second question with respect to the uninsured. Again, what 

we have tried to do is get both sides to put down their swords. We 

have got conservatives who would like to go with a tax-credit approach. We have got folks on the liberal side of the spectrum who 

would like to go with the public spending program. The administration has chosen to go with a tax credit approach. I want to ask you 

how this is going to actually work for a typical family. 

The typical family may have monthly premiums of $5- to $600 

a month. Now these are premiums, and I am at a loss to figure out 

413

how they are going to be able to cover those premiums with your 

tax-credit approach, which under the administration’s proposal 

seems to be about $2,000 per family per year. Now, if you could tell 

us how your tax- credit approach would work. Again, I want to 

make it clear, I am willing to meet you halfway. We have said from 

the very beginning that we would have tax credits as a portion of 

the program, but we also feel strongly that there is going to have 

to be some way to help people pay for premiums, and that is why 

there was a role for a public program as well. 

How is your tax-credit approach going to get some meaningful relief to this growing number of uninsured, which was important 

when we, again, had a bipartisan plan, Senator Smith and I, and 

it is a heck of a lot more important now than it was back when 

we put that together? 

Mr. DANIELS. Thank you, Senator. Just like prescription drug 

coverage in Medicare, this is a goal that the President strongly 

shares with you. His proposal, and I will suggest that beyond some 

general comments I will make, this is really a question for our colleagues at HHS, but the—and his proposal, we believe, would be 

as direct as any we could imagine. It would empower individual 

families to pick the coverage best for them, put the money directly 

at their discretion to get that question. 

The question of whether it could completely cover all of the costs, 

all of the premium costs or not is a valid one, but $2,000 a year 

is certainly not to be dismissed as unimportant, in terms of at least 

protection against catastrophic losses and expenses, the things that 

I think worry most Americans the most. It would either do the job 

or come very, very close. 

On both of these counts, by the way, let me say the President 

has not been prepared for us to wait for us to come to some common ground. He had proposed immediate action on prescription 

drugs. That proposal has not met with enthusiasm in Congress. So 

he has acted, as you know—this would be of value to the person 

you were talking to quite possibly in your State—to make available 

to senior citizens discounts that would begin to alleviate the costs 

they are experiencing. 

And likewise, in the case of the uninsured, we have been working 

very hard with Secretary Thompson at HHS, first granting waivers, but more recently constructing a model waiver for Medicaid 

that will allow States, and is allowing States, to cover a lot more 

people. There are, by the Secretary’s calculation, over a million 

Americans have been newly covered since this administration came 

to office because of this more flexible policy in using Medicaid resources. 

So the administration is prepared to act on both fronts, to the extent it can, and definitely to work with you and thank you for your 

leadership on both counts. 

Senator WYDEN. My time is up, and I want to leave it this way. 

First, with respect to the uninsured, I hope that you all will look 

at the actual language in the budget because the language in the 

budget envisaged both the tax credit and the public program part 

of it, and that was the clear bipartisan intent of the Congress. 

And, second, given the fact that it is very significant to me that 

you all have recosted the prescription drug benefit and have gone 

414

from $533 billion to $190 billion, it is really critical that we have 

the actual details behind how you did it, and I appreciate your saying that we will get those up to the chairman and the ranking minority member. 

Again, the reason for asking these questions is this committee, 

under the leadership of Senator Conrad, and Senator Domenici has 

been very interested in this area, is trying to figure out a way to 

get folks to lay down their swords on the prescription issue and the 

uninsured issue. But if we are having things recosted on prescription drugs without knowing the details about it, that is not going 

to make it any easier to get a bipartisan agreement. And on the 

uninsured question, I want to leave it we will support a tax credit 

portion, but Congress, again, passed a law that made it clear that 

we envisaged a public program as part of that. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you. Let me first say, if I could, before 

going to Senator Feingold, how much I appreciate the patience of 

Senator Wyden and Senator Feingold. We have had a very long 

session here this morning, and I also appreciate very much, Mr. 

Daniels, your patience. 

Senator Feingold. 

Senator FEINGOLD. Well, I thank you, too, Mr. Chairman, for 

your leadership on this issue and for having this hearing. 

I thank you, Mr. Daniels, for being here and for your tremendous 

patience. As you know I disagreed with the size of the President’s 

tax cut, I thought it spent too much of the surplus, that debate is 

on the record, and I do not seek to have that fight over again today, 

but I do think it was one of the crucial votes of our time, and I 

think it was truly regrettable, that is, the outcome of it. 

But neither do I believe that we should follow the bad example 

of passing an irresponsibly large tax cut that we could not afford 

by now passing spending bills that we cannot afford. Two fiscal 

wrongs do not make a right, and so I think our course now is plain, 

and that is what we must do is control spending. It should go without saying that we cannot afford more new tax cuts now, as some 

in Congress advocate. 

Between the Presidential campaign, then-Governor Bush promised to put the annual Social Security surplus in a lockbox to be 

preserved solely for Social Security. And Tuesday after meeting 

with President Bush, the majority leader said that he had pressed 

President Bush to promise not to dip into the Social Security program to make ends meet and that the President had agreed to 

that. 

President Bush has been right in these commitments, and let me 

take a moment to explain why I think he was. When the 1983 Social Security Commission set the program on the path to run surpluses, it intended that we would use the Social Security surplus 

to pay down the debt. That idea still makes sense now. By paying 

down the debt now, we reduce our net-interest obligations and free 

up the Government’s ability to borrow in the future to meet the 

needs of Social Security and Medicare that we all know are coming. 

A lot of analogies are used, but the family one is often a good 

one. It is like a family with kids who are headed for college. I have 

got four in college right now as of a couple of days ago. If the famVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00420 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
415

ily pays down the mortgage, then they will be in a better financial 

position later to pay those college bills or to take out a loan to finance them. More spending or tax cuts now would be the fiscal 

equivalent of that family going on a wild vacation and putting it 

on a credit card. 

The experience of the 1990’s demonstrated that fiscal responsibility leads to lower term interest rates and more freedom for the 

Fed to lower short-term interest rates. Those changes generate 

stimulus in the economy must more efficiently than our attempts 

to micromanage fiscal policy. As CBO Director Crippen pointed out 

Tuesday, the stimulus effect of Government spending in the 

amounts we are talking about is negligible at best. So I think we 

will need to control spending. 

We will need to control spending for appropriations and also for 

mandatory spending items like the farm bill. We will need to control appropriation spending both for domestic spending and also for 

what I believe is an overinflated military budget. I commend the 

August 21st statement of the chairman of the Appropriations Committee that the shrinking Federal budget surplus should encourage 

Congress to scale back the President’s proposal to boost military 

spending. 

But I do want to tell you right now, Mr. Daniels, that this is one 

Democrat who may well join with you and the President to sustain 

the President’s veto of swollen spending if he chooses to take that 

course. 

My questions are brief. Will you commit today that, in the absence of a war or a recession, you will recommend to the President 

that he veto any spending bills that would cause the Government 

to spend Social Security surplus funds? 

Mr. DANIELS. The answer is yes, and I would just note that this 

is essentially just like saying that I would recommend vetoes of 

bills that, in the aggregate, exceed the budget resolution because 

those numbers are essentially the same. The size of the surplus is 

essentially the same. So because I think the budget resolution 

ought to be adhered to, I would have given you that answer anyway, but it happens to apply now because bills that break the 

budget will, in fact, break that line. 

Senator FEINGOLD. How about identifying for us areas where you 

think some spending coming down the track is too large in your 

view. 

Mr. DANIELS. It is too soon to say. Our focus has been on the 

total. The President proposed less spending than the budget resolution, as amended by the defense request, would amount to. The 

Congress has between $5- and $6 billion of room for things the 

President has not requested. And some of that I think is going to 

find its way into education and into other of the appropriations 

bills. 

So, as long as the total remains within the limits we just discussed, as long as the major priorities that the President has 

marked off are not short-changed, I think that we will try to take 

as cooperative and flexible an attitude as we can, and at this point, 

there is not a bill in sight that is unacceptably large. 

416

Senator Byrd was quite right to say that, up to this point, no bill 

is exceeding the allocations which the committee has distributed. 

So we really hope that will stay the case. 

Senator FEINGOLD. I appreciate the focus on the aggregate, and 

I do appreciate obviously serious deference to congressional input, 

but I would hope the President would exert leadership with regard 

to areas where he thinks we have gone too far, even if it does not 

violate the aggregate. 

In that spirit, I was very encouraged to hear about a meeting between President Bush and Senator McCain in April of this year, 

where the President and Senator McCain agreed to work together 

to reduce earmarks and pork-barrel spending. Can you give me an 

update on your efforts on that front and what you further hope to 

get done in that regard. 

Mr. DANIELS. Yes. I was going to make mention of your leadership in this area, Senator, which is very, very I think salutary, and 

you deserve to be commended for it. The administration did make 

something of a point that in this area, as in a few others, in recent 

years there have been some excesses. 

There has been a sixfold increase in so-called earmarks or special 

projects, always a feature of the Federal budget, but suddenly a 

much bigger feature than anyone had ever imagined. And we do 

think that this ought to be restrained, and we did designate many 

of those for nonrenewal or much of that money for nonrenewal. 

We have not had a lot of success so far, although I would say, 

in the foreign operations bill, a large number of earmarks were removed. To my knowledge, that is the best example to date of some 

moderation in this area. But thank you for your advocacy about 

this, and as we move to the real business of the appropriations 

process, we do hope that your call, Senator McCain’s and the President’s will be heeded, at least in terms of moderating this trend. 

Senator FEINGOLD. I look forward to working with you on that. 

Finally, do you not agree that even in areas where the President 

wants more spending, that it ought to be offset with cuts from 

somewhere else? 

Mr. DANIELS. Yes; that is to say, the totals are paramount in our 

mind. So the President did propose on the order of $50 billion in 

new spending, much of it for defense, education, medical research 

and so forth. It was offset in his budget proposals by about $24 billion of reductions, at least from baseline, and many of those have 

not yet been accepted by the Congress. We will try to see if we cannot talk the Congress into approving more of those than some committees have so far. 

Senator FEINGOLD. Thank you, Mr. Daniels, and thank you, Mr. 

Chairman. 

Chairman CONRAD. Thank you. Thank you, Senator Feingold. 

Thank you, once again, for your patience. Thanks to all members 

of the committee who were here today, and thank you, Mr. Daniels. 

Mr. DANIELS. Mr. Chairman. 

Chairman CONRAD. You know, the great thing about our country 

is this is a democracy, and we get to debate. And we have got differences of opinion——

Senator FEINGOLD. I think we usually give them a show. 

417

Chairman CONRAD. Yes, we have certainly had the opportunity 

this morning, and we really have genuine differences. 

Let me just say I believe that there are serious contradictions in 

your testimony today. When you say there is no trust fund surplus 

in Medicare, but the budget resolution written by Republicans said 

we could not access reserve funds, including the money for defense, 

if we invaded the Medicare Trust Fund surplus. You know, either 

there is a Medicare Trust Fund surplus or there is not. 

And according to your logic, Republicans in Congress put in a 

condition that was false and misleading. I do not believe it was 

false or misleading. I think there clearly is a Medicare Trust Fund 

surplus, certainly in Part A. It is undeniable there is a trust fund 

surplus. You said it does not really matter, as I heard you discuss, 

how Social Security funds are used once they are credited to the 

trust funds. I just disagree. Of course it matters how the money is 

used once it is credited to the trust funds, and the President promised that he would not use it for any purpose other than Social Security and paying down the debt. And yet we see by the Congressional Budget Office numbers that you are going to be using Social 

Security Trust Fund money this year, you are going to be using it 

in 2003 and 2004, and if the President’s defense request goes forward, and the other budget resolution policies, you are going to be 

deep into both Medicare payroll tax funds, and Social Security payroll tax funds and using them for other purposes in the year 2002. 

When you say you can honor all obligations in 2002, that, to me, 

is fuzzy math. I have got to tell you I do not see how that adds 

up. I have put up the chart, and I do not see any point in putting 

it up again, but as we see it, you are going to be taking $65 billion 

of payroll tax money in 2002 and using it to pay for other Government operations, and that at a time when you are forecasting very 

strong economic growth. 

I believe that is a mistake, and it is a mistake, as I see it, that 

does nothing but grow under the President’s budget plan. In 2003 

and 2004, CBO has told us you are going to be taking Social Security Trust Fund dollars, Social Security payroll tax dollars, as you 

prefer to have it termed, and using it to fund other operations of 

Government. 

Our own conclusion, looking at the next budget cycle, is that 

under the President’s budget plan, by just taking the tax cut, the 

Republican spending plan and the President’s request for additional spending for defense, you will be taking $500 billion of Medicare and Social Security payroll taxes, those receipts, and using it 

to pay for other operations of the Federal Government. I just think 

that is a significant mistake, in light of where we are headed, in 

light of what the President’s own Social Security Commission has 

said and that we are faced with a circumstance when the baby 

boomers start to retire of deep benefit cuts. 

It is like we do not connect the dots around here. Are these 

things related? Does it matter for those difficult choices if you take 

the money that is credited to the trust funds, but then use it for 

some other purpose? I believe it is related. 

[The prepared statement of Mr. Daniels follows:]

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Chairman CONRAD. And with that, again, we thank you very 

much for your appearance today. 

Mr. DANIELS. Thank you. 

[Whereupon, at 12:38 p.m., the committee was adjourned.] 

(445)

THE ECONOMIC OUTLOOK 

TUESDAY, OCTOBER 2, 2001

U.S. SENATE, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to notice, at 10:15 a.m., in room 

SD–562, Dirksen Senate Office Building, Hon. Kent Conrad, chairman of the committee, presiding. 

Present: Senators Conrad, Clinton, Corzine, Domenici, and 

Grassley. 

Staff present: Mary Ann Naylor, Majority Staff Director; and G. 

William Hoagland, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. Why don’t we come to order? First of all, I 

want to apologize to the witnesses. As is frequently the case here, 

we had a vote right at 10 a.m., so a number of our members are 

still at that vote and will be on their way here momentarily, but 

we are going to proceed, because I understand Mr. Hubbard has 

some time constraints. So we want to proceed as expeditiously as 

possible. I first want to thank all of the witnesses for coming. We 

certainly appreciate your being with us today, and this is a difficult 

time. 

The horrific events of September 11th affected our Nation in 

many ways; obviously, one way is the economy, and this morning 

we are going to be having a hearing to discuss the effects on the 

economy, and also talk about what we do from here. Is additional 

stimulus required? If so, how much and of what type? We know the 

economy was already weak at the time of the attack. Growth in 

GDP had been slowing and was only .3 percent in the second quarter. The unemployment rate, which had been close to 4 percent for 

all of 2000, had increased to 4.5 percent in the spring and then to 

4.9 percent in August. 

I think we have charts that show these points. This shows what 

has happened to the growth in real GDP; obviously, very substantial declines. The unemployment rate had come down from 7.8 percent back in the early 1990’s. We had seen a sharp decline, and 

now, in recent months, an uptick there. Standard government statistics on the state of the economy come with a lag, but there was 

plenty of other evidence that economic activity nearly ground to a 

halt after the attack. I was in New York yesterday and over the 

weekend, talking to business leaders there. I think all of us in our 

conversations with private sector leaders have heard the same 

thing; that there was a very steep reduction in business activity 

446

20 CHART NOT AVAILABLE AT PRESS TIME. 

after the attack, and while we see some coming back—very good 

news, we see more people on airplanes, we see people coming back 

into the malls and shops and back into the show rooms—nonetheless, we are not back to where we were before September 11th.20

I think we will also hear testimony that the key to achieving a 

rapid recovery is to bolster business and consumer confidence, but 

that confidence appears quite fragile now. A University of Michigan 

index of consumer sentiment for September was down sharply. You 

can see from this chart very steep declines. The level for the entire 

month did not drop as much as experts were expecting, but the 

reading for the last week of the survey was down very sharply, and 

that is shown by the dot on this chart, because that represents, not 

a monthly reading, but 1 week, and we saw a very steep decline 

in that week. 

If consumers are worried about their jobs and their incomes, they 

will be reluctant to spend. If consumers cut back on their spending, 

businesses will face falling sales and will be reluctant to invest. We 

could face a downward spiral of economic activity. The traditional 

response in those circumstances is economic stimulus. The Federal 

Reserve has been providing monetary stimulus through the year 

with a succession of interest rate cuts. We are now seriously debating whether we should provide additional fiscal stimulus, as well. 

My own judgment is that we will probably need additional fiscal 

stimulus. After the consultations I have made last week and over 

the weekend, and discussions among my colleagues, I think there 

is a growing consensus that we will need additional fiscal stimulus. 

We will know better as we receive additional input on what is happening with consumers. Chairman Greenspan and Secretary Rubin 

have alerted us that we should wait before we make any final decision, until we see this additional data. But I do not think we can 

wait too long, because if we are going to have an effect, we need 

to decide on the size of the stimulus package and the elements of 

the stimulus package. 

Chairman Greenspan mentioned a figure of 1 percent of GDP, or 

$100 billion dollars. It was not entirely clear to me whether he included steps that have already been taken in that $100 billion; but 

in surveying economists, we have received estimates of anywhere 

from a $50 billion additional package to $150 billion, as necessary 

to really give a lift to the economy at this time. That is a broad 

range. I would be interested in the distinguished witnesses here 

this morning, what they sense, not only in terms of the current 

state of the economy, which is what we asked them to talk about 

here today, but also if additional stimulus is required, how much 

stimulus and in what form? 

In thinking about the actions we are going to take, we need to 

keep our eye on two key priorities. First, we have to attend to the 

immediate needs of defending this Nation and promoting economic 

recovery. We are in a position to provide whatever resources are 

necessary to defend this Nation. No adversary should have any 

doubt that the leadership of this country is joined at the shoulder 

in a common commitment to do whatever is necessary to defend 

our country. I have never seen such strong bipartisanship in the 

447

entire 15 years I have been in the U.S. Senate. In public meetings 

and in private, the leadership has been absolutely joined in a commitment to work together and to take this to the next level, and 

to do it in a fully bipartisan way. 

Let me just indicate that I believe, not only is it critically important that we add fiscal stimulus in the short-term, but that we also 

couple that with fiscal discipline for the long-term; that it is critically important that while we are adding fiscal stimulus, we also 

need to be very cognizant of the effect of that package over time. 

We should do nothing that reduces our revenue base in the future, 

because that will have a feedback effect on interest rates today. 

Secretary Rubin made very clear that if you are going to do fiscal 

stimulus, additional fiscal stimulus, it should be temporary in nature. It should not have permanent effects in terms of lowering the 

revenue base when we already face difficult challenges as a result 

of the weakening economy and the attack on September 11th. 

His message is a message that I believe in and share; and that 

is we have got to be very careful that we do not take steps that 

have an adverse effect on interest rates now, and if we would take 

permanent steps, permanent spending as part of a stimulus package, or permanent tax cuts as part of a stimulus package, that 

could adversely affect interest rates now, put upward pressure on 

interest rates, and offset what we are doing in terms of fiscal stimulus by having a reverse effect on the monetary side of the equation. 

So I was very pleased to see the President indicated this morning 

that same thing; the President, as I understand it, indicated he is 

nearing consensus with Congress on a stimulus plan that could 

boost the economy without doing long-term damage, and the longterm damage he was referencing was putting upward pressure on 

interest rates, really this same message that a number of us have 

been trying to deliver as we talk about the need for additional fiscal stimulus. 

We are very fortunate to have with us this morning three distinguished witnesses to help us examine how to meet these obligations, to provide short-term stimulus while protecting long-term 

budget discipline. Dr. Glenn Hubbard, the Chairman of the Council 

of Economic Advisers; Dr. Martin Baily, who is Dr. Hubbard’s immediate predecessor at the Council of Economic Advisers in the 

Clinton administration; and Dr. Alan Krueger who has served as 

Chief Economist at the Labor Department in the Clinton administration. In addition to their government service, I might note that 

each has a very impressive research record in the academic community. 

I think it is interesting there seems to be very little disagreement among them about the current state of the economy and of 

the importance of restoring business and consumer confidence. But 

I expect we will have a lively debate about which policies are best 

for achieving that goal. Before we go to the witnesses, Senator 

Corzine, if you would have any opening statement you would care 

to make, please feel free to do so, and then we will go to the witnesses. 

Senator CORZINE. I will be brief. I appreciate very much your 

holding this hearing, Mr. Chairman. I think it is at the heart of 

448

certainly the second-most-important issue that we have on the 

country’s agenda, and there is a real need, in my view, for us to 

act, I believe, on fiscal stimulus now and fiscal discipline later, and 

I am sure we will get into it, but am anxious to hear the thoughts 

of the distinguished panelists, and I appreciate them being here 

and look forward to the discussion and debate. 

Chairman CONRAD. Well, thank you, and it is good to have you 

here. Let me just say I have been handed another news report. 

President Bush said Tuesday the United States needs an economic 

stimulus package large enough to get economic activity going after 

the attacks of September 11th, but not large enough to push up 

long-term interest rates. Again, I think we are seeing a consensus 

develop, that we need additional short-term stimulus, but we need 

to devise a package that does not adversely affect long-term interest rates, because that could completely offset on the monetary side 

what we are trying to do on the fiscal side. So the more reports we 

see, I think, it is very encouraging that we are very much on the 

same page in terms of how we need to proceed. 

With that, Dr. Hubbard, thank you so much for being here, and 

please proceed with your testimony. 

STATEMENT OF R. GLENN HUBBARD, CHAIRMAN, COUNCIL OF 

ECONOMIC ADVISERS 

Mr. HUBBARD. Thank you, Mr. Chairman, Senator Corzine. I am 

happy to be here today to talk with you today about the outlook 

for the economy and about some of the very important policy issues 

that you raised. It is certainly true, as Senator Corzine was alluding, as well, that the terrible tragedy that is associated with the 

terrorist attacks has exacted an economic toll, as well as the 

human toll. If I may just briefly comment on the outlook prior to 

September 11th, I think it was clear, as you indicated in your remarks, Mr. Chairman, that the U.S. was experiencing a growth 

slowdown. 

I think the probability of an outright recession was low before 

September 11th, but the fact that the economy was growing much 

slower than its potential rate of growth dictated that the unemployment rate was likely to rise in the near-term, some of which 

we have already seen. Even prior to September 11th, growth rates 

this much below their potential levels could not and were not acceptable, so monetary and fiscal policy had already begun moving 

decisively to reverse the pre-September 11th recessionary pressures. 

The economic consequences of the events of September 11th I 

think can be broken down into two parts; the first would be to consider the physical collapse of the World Trade Center and the surrounding buildings, and the attendant damage in human cost as an 

adverse supply shock to the economy; that is, a shock that reduces 

the economy’s ability to provide goods and services. These supply 

shock consequences of the attacks no doubt will reduce the rate of 

growth of GDP during the third and fourth quarters of 2001, and 

I think it is fair to say increase significantly the likelihood that the 

economy is in a recession. 

This first step, though, treats the attacks as if they were a contained physical event. As you indicated, Mr. Chairman, that while 

449

it is horrible in human terms, is perhaps not the greatest economic 

consequence. The second and potentially more important economic 

event is because the acts arose as a result of terrorism, and the 

economic aftermath includes shocks to household and business confidence, as well as an increase in the uncertainty that surrounds 

the atmosphere in which all of us as individuals or as businesses 

must make decisions. 

The effects on confidence and uncertainty give rise to a whole 

host of transactions cost increase in business that reduce output 

growth. On the demand side of the economy, the attacks and their 

repercussions lowered confidence about the future, and along with 

it the willingness of households and businesses to spend and invest. To be more precise about the outlook for consumer confidence, 

I would refer you to the consensus economic forecast of the private 

sector, as reflected in the September 20th special survey of the 

blue-chip economic indicators. 

If one looks at the consensus first in those data, there is an indication of a modest recession fueled by a decline in confidence in equity values. The consensus is for a decline in real GDP of about .5 

percent in the third quarter and .7 percent in the fourth quarter. 

That same consensus estimate predicts a growth rebound in 2002, 

with growth of 1.4 percent in the first quarter, 2.8 percent in the 

second quarter, and 3.7 percent for the remainder of the year. I 

should caution you that even with this recovery, the unemployment 

rate would likely rise throughout 2002. 

What I would really like to focus attention on is not that consensus which has been portrayed repeatedly in the media, but the 

range of estimates that underlies the blue-chip forecast, and that 

range of estimates really is a range of views in the private sector 

about the effects of the terrorist attacks on confidence. I think that 

range suggests the need to think seriously about downside risks to 

the economy’s outlook over the near-term, and, as you noted, Mr. 

Chairman, policies that would address the source of the economy’s 

vulnerability. 

It is nonetheless the case that there are public policies out there 

that will be buffering against the downward pressure on demand. 

On the monetary side, the Federal Reserve reduced the Fed’s fund 

rate target on September 17th by 50 basis points. Interest rates 

were reduced in a coordinated step in Europe and Canada. From 

a fiscal perspective, as you know, the $40 billion general emergency 

appropriation and the aviation disaster relief bill will provide additional stimulus, not only later this year, but throughout 2002. 

Those steps already will be helping the economy’s recovery. 

With that as a quick precursor of where we are, what are the implications for public policy? I think the simple analysis of the shortterm consequences that I just gave you suggests some lessons; one 

is that improvements in confidence themselves, should they be able 

to be obtained, are a potent stimulus. A rapid rebound of household 

and business sentiment will hasten the arrival and pace of the recovery, and a longer decline in confidence could lead to a significant period of retraction. So what should be the framework for policy evaluation if confidences is the emphasis? 

First of all, it is important that policies be forward-looking. As 

terrible as the events were, we should not be trying to replicate the 

450

world as it was of September 10th. Policies should provide consumers and businesses with the confidence that the policy infrastructure is in place to ensure the safe conduct of economic activity. 

As a very good example, I would point you to the response of both 

the administration and the Congress to the immediate problems in 

commercial aviation. I think it is clear that prudent investment in 

aviation security can and is helping to restore confidence in air 

travel, and a more secure infrastructure in aviation will support 

the numerous industries related to the travel and tourism sector. 

On a broader scale, a policy focus on uncertainty, the so-called 

hardening of the American economy against terrorist intrusions, 

will be an important linchpin in the institutional setting for restore 

confidence. This kind of security is not merely physical, it is also 

economic. For example, we need to pay close attention to the need 

for financial insurance against increased risks and how to help private insurance markets work better; another aspect of policies to 

provide support for a transition to new features of the economic environment. Toward that end, it is no accident that the administration early on, along with the Fed and financial regulatory authorities, focused attention on the smooth functioning of securities markets and financial institutions. 

As a caution, I will remind you of something you know well, 

which is it is important to distinguish between forward-looking 

policies that smooth the transition to where we must go, and investments that are backward-looking attempts to compensate industries and activities that may now grow more slowly and contract. A source of great benefits in our economy is market-driven 

restructuring and the reallocation of capital and workers and ideas. 

Bailouts that attempt to preserve a lost status quo are always 

tempting, but will interference with this valuable market function. 

There are also important and controversial, to be frank with you, 

transition issues on the demand side. While I am not here today 

to advocate a specific economic recovery package on behalf of the 

administration, I think some general comments are possible following the President’s remarks this morning. Businesses certainly 

face uncertainty along many dimensions, and among that uncertainty is the overall state of demand, suggesting helpful policy responses. 

As I noted earlier, the key aspect of policies here is not really 

just dollars or the level of spending or a tax cut. For example, to 

some it might be appealing to follow a Japanese-style public works 

program of construction outlays. I think that is a mistake. It does 

not address the key issues of confidence and is likely to harm fiscal 

discipline. On the other hand, I think, as the President noted, prudent supplements to unemployment insurance and health insurance are stabilizing, and the administration looks forward to working with the Congress on activity for displaced workers. 

Augmenting aggregate consumption demand through onetime 

transfers to households I would judge as being less likely to be successful. To draw the distinction more sharply, consider the recently 

enacted tax cut. Despite all the talk about the ‘‘rebates,’’ the 

underpinnings are quite different from a one-time fiscal stimulus 

you might contemplate today. In the previous tax cut, Americans 

received checks that were a down payment on a large, permanent 

451

tax cut. That tax cut is a model for further policies to address transitional shortfalls in consumption demand. For example, accelerating some or all of the tax law changes for individuals would be 

stimulative, as well as good tax policy and long-term budget responsible. 

I think it is fair to say that similar considerations apply on the 

business side, as you indicated, Mr. Chairman. One policy in the 

corporate sector which would be a promising change in business 

taxation would be to lower the cost of capital for investment by 

shifting toward more expensing of fixed capital investment. Partial 

expensing, in which a proportion of investment would be expensed 

and the balanced depreciated, would stimulate fixed-capital investment and would be consistent with many economists’ visions of 

fundamental tax reform. 

Additionally, one could imagine cuts in the corporate income tax 

rate. Cuts in the corporate tax rate would raise corporate tax flow 

for investment, employment and restructuring. If enacted for a significant period of time, any such reduction would reduce the 

present double-taxation of equity, raise equity values, reducing the 

cost of capital for investment and raising household net worth. 

To be effective, should you go this route, tax changes on the business side, where they are—on the expensing side or corporate rate 

cuts, should be accompanied by a reduction in and hopefully elimination of the alternative minimum tax on the corporate side. In the 

non-corporate sector, one could obtain similar benefits from accelerating reductions in the marginal tax rates already enacted. 

Finally, I think it is important to come back to the discussion of 

the budget that you led off with, Mr. Chairman. Any discussion of 

confidence-building proposals is likely to and should stimulate a debate over fiscal responsibility. Proposals for action should be fiscally responsible, in that they should not lead to a deterioration in 

the Federal Government’s long-term budget condition. Here, 

though, I want to sound two notes of caution; one, I think the distinction is not so much between whether a policy is temporary or 

permanent, but whether it has short-term or long-term effects on 

the budget. For example, proposals toward partial expensing or accelerating rate cuts have within them permanent flavors, but shortterm budget impacts. That is a very important point. 

Second, I think it is important to remind ourselves something we 

know, of course, that budget surpluses are the product of a strong 

underlying economy, not the other way around. Our ability to carry 

out all of the priorities of the Nation depends on economic growth. 

To summarize, on going forward, the events of September 11th certainly represent a human disaster. They also represent an economic loss to our Nation and to the world. Going forward, it is obvious that the potential for terrorism raises concerns about the 

economy’s ability to produce goods and services and demand for 

those goods and services. 

I would like to end, though, on an optimistic note, even with 

these terrible circumstances. The private economy of the United 

States is very resilient. With prudent investments in security, public policies to promote confidence, I have little reason and almost 

no reason, to be frank with you, to suspect that the economy’s longVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00457 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
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term fundamentals have been shaken by the tragedy of September 

11th. 

Thank you again, Mr. Chairman, Senator Domenici, Senator 

Corzine, for the opportunity to appear before you today. I would be 

delighted to answer your questions. 

[The prepared statement of Mr. Hubbard follows:]


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Chairman CONRAD. The ranking member has joined us. 

Dr. Hubbard, how long do you have? 

Mr. HUBBARD. I need to be out in about 20 minutes, if it is——

Chairman CONRAD. Well, why don’t we do this, then, and I would 

apologize to the other witnesses, because normally we would go 

ahead with the full panel, but Senator Domenici has opening remarks that he might like to make. We do that at this point, and 

then go back to you for questions, and then proceed with the rest 

of the panel. 

Senator DOMENICI. Thank you, Mr. Chairman, and thank you, 

Senator Corzine, for not objecting to that arrangement. 

First, thank you, all three of you, and good morning. We really 

appreciate your effort to come out here and help us today. I would 

like to welcome our witnesses, especially you, Dr. Hubbard, for 

agreeing to testify. You bring with you a knowledge about what is 

going on in the White House. Whether you are going to be talking 

about that or not, I am certainly not going to ask you. 

First, I would like to make a few points about the economy. 

Given the current economic situation, from my perspective, our decision to cut taxes, at least in the first 2 years, 2001 and 2002, that 

decision looks more prudent every day. Some ask today, ‘‘It didn’t 

look like the stimulus fixed the economy.’’ But it looks to me that 

the answer to that observation would be it would probably be worse 

if we had not put that amount of money into the hands of the taxpayers, most of which is spent as consumers. 

Cutting taxes was the right thing to do and at the right time. 

There is room for taking up the out-year taxes at a later date. 

Some do not think they fit in with the problems we have. But, for 

now, I am very pleased that we are proceeding to talk about stimulus, both on the spending and tax side. The July to September 

quarter looked to be in a recession mode before the terrorist attacks. I will ask you that question, what you think about that, Mr. 

Hubbard, a mild recession, but a recession nonetheless. 

Nobody doubts that the events of September 11th are going to 

deepen and lengthen the recession, which 82 percent of the bluechip economists think we are in today. We lost a great deal of 

human talent, fiscal capital, on that ominous day. The attacks also 

caused widespread disruptions in the production processes, trade at 

the borders of America almost halted for a solid week, unheard of, 

unexpected. For the time being, the attacks have rattled the consumer. 

Consumer confidence was already coming down, starting back 15 

months ago, as this recession crept slowly upon us. And now, with 

the September 11th event, it looks like we have to look at every 

action we take, as does our President, to build back confidence 

among the consumers, and certainly on a micro basis, confidence 

in the commercial airlines of this country. 

Mr. Chairman, I flew over the weekend twice. I assume you did, 

on commercial airlines. Did you fly a commercial airline? 

Chairman CONRAD. [Nodding head up and down.] 

Senator DOMENICI. I noticed that by Saturday and Sunday, there 

were pretty good crowds on the airplanes. I was on two that were 

full, which was not going to be my—was not my expectation when 

I arrived. So, for the time being, we clearly have to work on the 

464

confidence of the American people with legislation that would convince them and convince us that the airlines are safer than they 

were before, and we are doing everything we can, even if there is 

some cause for people to be inconvenienced. 

So clearly to me, the two top priorities must be to protect the 

American people from further attacks and to get the economy 

going. It is not as easy to get the economy going when the people 

of the country are suffering from the trauma of a terrorist attack 

like this, a war. That makes the job of suggesting them—to the 

American people—that we can do better and they can do better, 

that they ought to be good consumers—it makes it more difficult. 

Nonetheless, I think we are on that path. 

I think this committee wants to be helpful, and I am sure the 

President does. The downturn is deeper and probably longer than 

we knew back then. We need to move forward to continue to address the economic slowdown with temporary tax cuts and spending increases. Automatic stabilizers like unemployment insurance, 

at least for those who were involved in this disaster, should kick 

in at some level that we can afford, but it ought to be done. 

The war against terrorism is going to take a lot of Federal resources. So that is another one we are going to have to scrutinize 

what the administration asks for, but be ready and willing to use 

money in that regard. 

Mr. Chairman, I want to just lay before the Senate where we 

think the current surplus is. I think it is going to be agreed upon 

by the people that are going to work on policy, both at OMB and 

here. This is a small chart, but the most important number is 52, 

this little green box, 52. Whatever the surplus was prior to September 11th, and we think it was in excess of $176 billion, we now 

have only $52 billion of that left. That is taking into account the 

spending bills and how much we will spend in the spending bills, 

the tax cuts, and, obviously, the huge amount of money that we are 

losing, to the Treasury, because of the reduction in growth, which 

is the biggest item here. 

Economic and technical changes, about which we had no control, 

but had to do with recession, is an $80 billion reduction in the 

available resources. So what do we look at? This was not worked 

out by me or by us. It was worked out together with the Chairman’s staff and I believe the staff of OMB. Is that correct, Mr. 

Chairman? 

Chairman CONRAD. And the staff of the House. 

Senator DOMENICI. And the staff of the House, Democrats and 

Republicans. This is what they all say the $52 billion is what is 

left, and I will want to find out from each one of you is the recession serious enough and can we do enough about it by cutting taxes 

and targeted spending, that we should go into deficit spending, or 

should we limit ourselves to the $52 billion that is available? 

Thank you, Mr. Chairman. I appreciate your kindness, letting me 

talk later in the hearing. 

Chairman CONRAD. It is always good to have you here, and we 

are pleased to have a chance to hear your opening remarks before 

we go back to the witnesses. I would just confirm what the Senator 

has said. We established a working group of the Chairman and 

ranking members of the Senate and House Budget Committees, 

465

working with the Office of Management and Budget, and together 

we concluded that in 2002, that there would be $52 billion on a 

unified basis left. That is down sharply from what the estimates 

were in August, down much more sharply from where they were 

in January. Then it was over $533 billion. Now it is down to $50 

billion, and that is before any additional stimulus package; that is 

before any additional defense request from the President, which we 

have heard may be forthcoming, as well. 

So that does represent a sharp reduction. It indicates we will be 

using all of the Medicare Trust Fund surplus for other government 

programs. It indicates we will be using a significant majority of the 

Social Security payroll taxes to fund other government operations, 

something many of us feel strongly we should not do; but we recognize our country has been subjected to a sneak attack. On top of 

that, we have had a substantial economic blow, and in that context 

I think we are united that the top priority has to be to defend this 

Nation and to rebuild, and to strengthen the economy. Those are 

the things we must do, and we must do them together. 

I have been very pleased at the way the working group has proceeded, with Senator Domenici and his able staff, and the staffs of 

the House leadership, both the chairman of the House Budget 

Committee and the ranking member there and their staffs, as well 

as the Office of Management and Budget, and we will continue to 

do that. 

I would ask you, Dr. Hubbard, do you believe additional fiscal 

stimulus is necessary? And, if so, what would be a range of the 

amount of fiscal stimulus that might be needed? 

Mr. HUBBARD. Well, I think, Mr. Chairman, to answer your question, we first have to step back and ask fiscal stimulus for what? 

I think, as you and Senator Domenici both indicated, the decline 

in confidence is what we need to be guarding against. The very 

slow rate of growth we will be experiencing in the third and fourth 

quarters is not something one can do much about with current policy. The question is stopping the decline in confidence going forward. With that in mind, I think certainly the consideration of a 

stimulus package is a good idea. The administration wants to work 

with the Congress, as the President already did this morning with 

the leaders in that discussion. 

I think it is not size, per se, that matters, but what is in it. The 

size, of course, will be important, but I think that you should start 

your discussions by thinking of what you want to accomplish and 

which policies, and then tailor the size to fit the desired amount 

for overall long-term budget purposes. 

Chairman CONRAD. Let me just followup and say this to you; 

that as you went through things that you thought might be useful, 

there are things there I strongly agree, some I strongly disagree 

with. Let me just go to the two on the business side. I personally 

strongly believe expensing ought to be a part of this, and it is 

maybe one place where we can have a pretty good bipartisan agreement as you say. I do not agree with permanent corporate income 

tax rate cuts. No. 1, in the meetings that we have had with Secretary Rubin and Chairman Greenspan on the Finance Committee, 

they both dismissed that approach as not having much fiscal stimulus in the short-term, and that it would hurt us on the long-term 

466

side of the equation by reducing the revenue base, when we already 

have a problem, and, as Secretary Rubin so clearly said, putting 

upward pressure on interest rates. 

A number of us have said we could be in a situation where we 

have one foot on the fiscal accelerator, and on the other hand, one 

foot on the monetary brake. It is critically important that we coordinate the policy here, so that we are giving not only fiscal lift 

to the economy, but monetary lift, as well, so that we are putting 

more money into people’s and companies’ pockets that will be 

spent, and, on the other hand, making certain that we do not put 

additional pressure on interest rates. 

Secretary Rubin had an op-ed, I noticed, in The New York Times 

over the weekend making this case. So I was encouraged by what 

the President said this morning; the President saying fiscal stimulus enough to give lift to the economy now, but not do it in a way 

that has an adverse effect on interest rates. So I did want to express that, and you are welcome to respond in any way you would 

like. As I indicate, expensing, to me, and by the way, both Chairman Greenspan and Secretary Rubin, in the closed meeting with 

members of the Finance Committee, both of them listed expensing 

as one of their top choices. Any comment that you would want to 

make on that? 

Mr. HUBBARD. Well, on those two business provisions, Mr. Chairman, I agree with you, of course, the partial expensing—move toward expensing is good tax policy. I would caution you, in your deliberations, to remember that it is good tax policy if it is permanent. I think it is not a good precedent to suggest that we can finetune the economy through temporary investment incentives that 

create uncertainty in the business community. 

Having said that, expensing has an advantage to which you referred quite well, which is it is almost self-undoing. It is moving 

forward depreciation allowances and its long-term budget costs are 

much smaller than its short-term cost. On the corporate rate cuts, 

we probably will have to agree to disagree. I think on pure policy 

grounds, a corporate rate cut is reflationary. It would reflate asset 

values and provide the greatest incentive across all businesses. It 

is important to remember many businesses are not as fixed-capital 

intensive as they once were. 

As to the out-year costs of a corporate rate cut, it would depend 

on the kind of corporate rate cut that one is looking at, but it is 

certainly possible to structure corporate rate cuts that have very 

modest outyear costs. The evidence with which I am familiar with, 

at least, from the Federal Reserve on effects on long-term interest 

rates of fiscal policy, would suggest only a handful of basis points’ 

interest rate response to any of the kinds of policies that have been 

talked about in the past few weeks. But I certainly agree with you 

on your concern for and admiration of an expensing proposal. 

Chairman CONRAD. Senator Domenici. 

Senator DOMENICI. Why don’t yield to Senator Corzine? 

Chairman CONRAD. Senator Corzine. 

Senator CORZINE. I was taken with the comment you had on 

page 3 of your comments, where you talked about reduced output 

growth that follows from the events of September 11th, which I 

think is pretty true, but you related it to enhanced security and 

467

more costly insurance. I am concerned that these things may undermine long-run productivity growth. These do not really address 

some of these costs that will be the ripple effects—do not really 

deal with output. They deal with productivity, because they are expenses that do not lead to greater growth. 

Are you concerned that some of our long-run projections with regard to productivity growth in the economy are permanently 

changed with respect to the events of September 11th? 

Mr. HUBBARD. Well, with respect, Senator, to the examples you 

gave, on the issuance front, I think there are ways to work with 

the insurance industry, as we are already doing in the administration, to work on transactions cost and making sure that insurance 

and reinsurance markets function well. As to your very important 

question about the effects of security expenses on productivity, if 

one were to have to spend $100 billion a year on security forever, 

one might expect a productivity growth decline on the order of a 

tenth of perhaps .15 percent. That is substantial. I do not think 

that is what we are looking at in terms of enhanced security expenditures over the long-term. 

Internally, in the administration, our long-term productivity 

growth rate assumptions have always been modest by the standards of many in the private sector and the Fed. So it would not affect our assumptions underlying the budget. 

Senator CORZINE. I raise this question, because I think this has 

a lot to do with those long-term interest rate intuitions or expectations that are built into the shape of a yield curve, which actually 

has not—at least long-term rates have not basically changed since 

an early move at the first of this year. They have stayed fairly stable, at least as reflected in U.S. Treasury rates, and lead me to 

wonder whether the marketplace, at least as reflected in long-term 

rates, which people are tending to be concerned about, are not reflecting overall fiscal structures that we put in place, and particularly as we look to the outyears, the second decade after the implementation of our tax cut. 

Do you have any reason to think that there is a possibility that 

we ought to be reviewing some elements of the previous tax package? 

Mr. HUBBARD. Generally speaking, no. The one suggestion I 

would suggest, by way of stimulus, would be accelerating rate cuts 

in the tax package. But if your question is as to the outyear costs, 

no, Senator, I do not. Nothing in the events would suggest to me 

that there is a serious decline in the economy’s potential growth 

rate, which is really the heart of your question. 

Senator CORZINE. Do you believe that an inheritance tax cut, as 

we have built into this program, is stimulative to the economy? 

Mr. HUBBARD. Well, are you referring to the timing of the estate 

tax or just the enactment as currently in law? 

Senator CORZINE. We currently have it, and we could obviously 

review the timing. 

Mr. HUBBARD. Well, the estate tax is a capital tax. Let’s be honest. It is a pernicious form of capital tax on top of other layers of 

capital taxation, and there would be very few economists who 

would come before you and suggest that it is great capital tax policy, even if you wanted to have a capital tax. As to whether you 

468

want to accelerate the estate tax into the current environment, I 

do not think that is as apt as accelerating the rate cuts or the business provisions that the Chairman alluded to. 

Senator CORZINE. OK. I think that is good, Mr. Chairman. 

Chairman CONRAD. Senator Domenici. 

Senator DOMENICI. Dr. Hubbard, I have been thinking about 

Japan. They have been in a—while they are a big, powerful economy, second-largest in the world, they have been 10 years, more or 

less, in a recession. They have tried to get out of it. While I do not 

know the details, I know something about it. They have spent a lot 

of money. They started their biggest public works projects. They 

have spent so much money that they have a huge deficit now that 

they never assumed would occur, and the economy has never come 

out of the ditch. 

What did they do wrong, and what did we learn from that, that 

should indicate where we should go? I will just add to that, in your 

discussion, is it better to have a larger stimulus, rather than a 

small one? If we do not know which one is going to work, isn’t it 

better to go ahead and have a large economy if it does not harm 

the economy in the outyears? 

Mr. HUBBARD. Well, to take your two questions in order, taking 

the Japan question first, there have been many policy problems in 

Japan. But I think the one you are referring to is the over-reliance 

on public works spending. Just as when each of us as a household 

makes investment decisions or a business makes an investment decision, it matters what you are going to do with the money, and in 

the case of Japan there was considerable wasteful public works 

spending, instead of reducing regulation and reducing taxes. I 

think that is a lesson that is widely appreciated now by the new 

Japanese government, and I think one lesson for us is not to undertake massive spending programs for their own sake. We should 

make sure we are very careful of what we do with the money. 

As to the question of a larger or smaller stimulus package, I 

think, again, what is centrally important is long-term budget discipline be maintained. I think a stimulus package should be reasonable in the short-term, subject to agreement with the Congress 

and the President. But I think first and foremost the elements of 

that package need to be discussed before any specific numbers. 

Senator DOMENICI. Take it as true that we now figure we have 

$52 billion left of the surplus, instead of the $176 billion just before 

the terrorist attack. Not all of that change is due to the attack. It 

is just that the chickens came home, and we started having to put 

the reality into budgets, of what was occurring in the economy. So 

you know what the economy looks like, you know what the surplus 

looks like. Should the surplus be a limitation on what we do to 

stimulate if, in fact, it is found that we need to stimulate and we 

need to do more, rather than less? 

I will say, so you will not think I am trying to pull you in, I, 

frankly, am willing and have said and have told our chairman that 

I do not think the 52 should be the end-all package, because there 

is a bigger issue than going and spending this and going in the red, 

and that issue is we need to get the economy going again or we lose 

more money each year, and we would not even have 52 to spend. 

469

Mr. HUBBARD. Let me start with where you just ended. Again, 

the surplus position we have on any year’s basis or going forward 

is a reflection of the health of the economy, and I think it is fair 

to say that we should be concerned about the long-term economy 

and about the long-term fiscal position, just as in a household we 

are more concerned with our long-term positions than with our 

year-to-year positions, so I think we should guide ourselves here. 

As to specific numbers, I think it really depends on a package 

that Congress and the President work toward. I think a specific 

number is at the moment a secondary step to figuring out what is 

best. 

Senator DOMENICI. Likewise, we have the issue of defense spending. I think it probably fits in the same category. If we think it is 

a higher priority than paying down the debt or accumulating surplus for a given period of time, then we do that on the basis of that 

being a higher priority for America now and in the future. Is that 

correct? 

Mr. HUBBARD. That is certainly true. 

Senator DOMENICI. My last question has to do with the state of 

the economy now. Where do you think we are in terms of growth 

now? We are all waiting around for another quarter to turn out, 

but are we in recession, if recession is defined as two quarters of 

negative growth? 

Mr. HUBBARD. Well, I think it is too soon to tell. I think the probability of two quarters of negative growth is high, and I think the 

third quarter is likely to be particularly adversely affected, and 

likely the fourth. I think the bigger question to which all of you alluded in your remarks or questions is what about next year or the 

path out? In terms of thinking about public policy, the third quarter or the fourth quarter is less influenceable by decisions we make 

than next year. So I think the short-term outlook is not good. 

But I think I would share the view of most in the private sector, 

that with prudent decisions in the Congress and the administration, there is every reason to believe that a recovery would commence during 2002. 

Senator DOMENICI. You have given kind of how you would encapsulate and define what would be a good stimulus. I am just going 

to quickly tick these off, and you say good or bad: Income tax rebates? 

Mr. HUBBARD. Well, it would depend on the structure, but in 

general onetime tax changes are particularly effective. That is as 

short an answer as an economist can give you. 

Senator DOMENICI. All right. Payroll tax rebate? 

Mr. HUBBARD. Again, it is the rebate issue, something that is 

onetime is less likely to be effective. 

Senator DOMENICI. Well, I am just going to give you the 10 that 

have been bantered around. We will put them in the record. 

Senator DOMENICI. I think they are the same ones that our 

Chairman and his staff would put down. They are just the result 

of what people have talked about, and I would ask you at your convenience to answer—your convenience should, in this case, be very 

quick. [Laughter.] 

Mr. HUBBARD. OK. 

Senator DOMENICI. Thank you. 

470

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, and let me just—I know that you 

have to go. 

Mr. HUBBARD. I apologize, Mr. Chairman. 

Chairman CONRAD. I understand, and we are sort of at the outer 

limits of your time constraint. Let me just leave you with one 

thought, because I think it is very important as we communicate—

and I have said this to the Director of OMB and I have said it to 

the Treasury representative that was at the meeting of the budgeteers, and the meeting of the chairmen of the Fiance and Ways and 

Means Committee, and ranking numbers; as we look at the possible long-term budget outlook, looking not only at 2002 and beyond, what we see now is a sea of red ink at the bottom; that is, 

what we see is hundreds of billions of dollars of payroll taxes being 

used to pay for other government operations—I mean, hundreds of 

billions of dollars. 

So I just say to you, I am going to resist permanent tax reductions as part of a stimulus package. I am also going to resist permanent spending increases for the very same reason, that I think 

we have already got very serious long-term fiscal problems. I think 

we had them before. I think they have become more severe as a 

result of the attack and the economic weakening. So as we calculate what can be done to give fiscal stimulus in the short-term, 

I think it is critically important we keep in mind this long-term circumstance, and that is why Secretary Rubin and others have 

warned us about not doing things that have permanent effect, in 

terms of reducing the revenue base, or permanent spending, because those things will dig the hole deeper and put upward pressure on interest rates. 

Mr. HUBBARD. If I could just——

Chairman CONRAD. Yes, absolutely. 

Mr. HUBBARD. First, to 42-year-old eyes, all I could make out was 

the red and the black, so I will not stipulate——

Chairman CONRAD. You can see there is a lot of red there. 

Mr. HUBBARD. But to your question about temporary and permanent, again, I think the focus that you ought to have is permanent 

and temporary effects on the budget, as opposed to whether a policy is temporary or permanent, and I think that is what you meant, 

and I would certainly agree. 

Chairman CONRAD. Very well. We are going to excuse Dr. Hubbard. Thank you for being here. We appreciate your testimony. We 

are going to go to our other two witnesses now and ask them to 

proceed, and we will handle both their testimony and then go to 

questions, if we could. Welcome. It is very good to have you here, 

Dr. Baily. We appreciate so much your willingness to come and testify once again before the committee. 

STATEMENT OF MARTIN NEIL BAILY, SENIOR FELLOW, 

INSTITUTE FOR INTERNATIONAL ECONOMICS 

Mr. BAILY. Thank you, Mr. Chairman, Senator Domenici, Senator Corzine. It is a pleasure to be here. I do have a written statement that I would ask be entered into the record. I am, unfortunately, sort of trying to stave off a cold here. So if I lose my voice 

once or twice—I feel fine, but I apologize if I am a little hard to 

471

follow. A lot of the things, I think, in my testimony, a lot of the 

things that I was planning to say have already been said here. You 

said many of them, and also Glenn Hubbard and the other Senators made some of the same comments. So I am not going to necessarily go over that same ground again. Let me try to be brief. 

I think we all agree that the economy was weak to start with, 

and this looks as if it has pushed us on the edge of a recession. 

I think two quarters of negative GDP are quite likely. We may escape in the third quarter. I say in my testimony the consensus, and 

I was looking at the survey that was done in the Wall Street Journal, but it was almost the same as the blue-chip one that Glenn 

Hubbard was talking about, was for negative .6 in the third quarter and the fourth quarter. We may escape that negative number 

in the third quarter. The consumption number that just came in 

was positive for August, but it is going to be very small, even if 

it is not negative, and I think the chances are very high that we 

will get a negative number in the fourth quarter. 

The reasons have been given. I think businesses are being very 

cautious in their spending. I think consumers are very naturally 

sort of saying maybe it is time to take a moment before we make 

a major expense. I would urge you not to put too much weight on 

the Consumer Confidence Index. I say that not because I think it 

is not important, but some of the empirical evidence suggests that 

it is not quite as important perhaps as the weight that has been 

given to it right now. But that said, I still agree with the general 

thrust of what has been said here, that we have a weak economy, 

we have a lot of layoffs that have been announced. 

The second comment, and again this is sort of agreeing with 

things that have been said, is we have already done quite a bit to 

try to reverse that; the spending package which has been passed; 

the actions of the Federal Reserve. I want to applaud the fact that 

this has been sort of a worldwide response. We often talk here in 

the United States about U.S. policy as if it affected the rest of the 

world, but that somehow we are immune from impacts from the 

rest of the world, and that is not true. The weakness in Japan, the 

weakness in Europe, does affect us. So I thought it was an excellent move that the European Central Bank cut its own interest 

rates a little bit. 

I think the U.S. has been the locomotive of growth for the world 

for a long time, and it is up to Europe to sort of step up to the plate 

and try to do a bit more. I might hope that Europeans might do 

more than they are doing to help the world economy get going, but 

I mention that in part because we do not always get sort of coordinated downturns around the world. Sometimes one country goes 

up, one other country goes down. 

At the moment, we seem to be in a situation with somewhat of 

a coordinated downturn, and I think that should lead us to be more 

forceful in making sure that we have policies in place to push the 

U.S. economy forward. Now, what are some of the forces that will 

give rise to growth? I think there is a natural pattern to business 

cycles. They do not just depend on what policy we do. As the economy goes down, we get an overhang of too much investment, too 

many inventories, and some of that adjustment has already taken 

place. 

472

There are some forces in place that will help us to come out of 

the recession, even just with the policies that have already been 

passed, the $40 billion of additional Federal spending, of which 

about half should come in this current fiscal year; the money that 

has been given to the airlines and what the Federal Reserve has 

done. Now, is there a downside risk? In other words, might it be 

the case that even if we get a nasty fourth quarter, which we 

might, with a substantial decline in GDP, is there some risk we 

will not bounce back next year? 

Yes, I think there is some substantial risk of that, and in my 

written testimony I talk about the stock market as a potential 

source of that weakness, as it does have an impact on both consumer confidence and on spending. And you can kind of—trying to 

call which way the market is going to go is not something I want 

to do, but certainly there is a possibility that the market will be 

weak going forward, and that will help sort of drag us down into 

a weakened economy. 

There are other possible ways in which the economy could be 

weak. If we did get an increase in oil prices, which we have not 

had so far, that is another thing to be concerned about, that might 

give us a weaker economy. So, given these downside risks, what 

should we do? Well, clearly monetary policy is on the job, and the 

Fed is going to announce today what it is going to do. Most people 

expect it to have some additional cut in interest rates, but certainly 

the Federal Reserve has acted very aggressively to lower rates and 

also to provide liquidity to the banking system, and I think that 

has been a major positive, in terms of getting us out of this economic slowdown. 

I have somewhat mixed feelings about both how much of a fiscal 

stimulus should be given or even if we should sort of give one right 

now. I think, on the one hand, we sort of maybe need an insurance 

policy. We do not want to go downhill. On the other hand, I am 

concerned, as Senator Conrad has described, at some of the red ink 

we look like we may get going out into the future, and I do not 

want to exacerbate that problem. I am a believer in fiscal discipline. I think it stood us in very good stead in the 1990’s and contributed to the very strong economic performance, the low interest 

rates, the high investment that we had, and I would hate to see 

us undermine that long-run fiscal discipline in anything we do now. 

So that also colors my thoughts about what we should sort of 

have either ready to go or at least in our back pockets as a fiscal 

stimulus. First, on the size, well, when Alan Greenspan and Bob 

Rubin say a total package of around $100 billion, I listen to what 

they say. I think that would translate into an additional about $50 

billion. Perhaps we should have ready a little bit more than that, 

somewhere in the $50 billion to $100 billion. If we want to do 

something now, then maybe $50 billion now and have something 

ready to go if things really turn out to be as nasty as we fear, but 

hope is not going to happen. 

So what should be in that package? I do favor temporary tax 

cuts. Now, I understand some of the difficulties of temporary tax 

cuts. If you do something temporary on the household side, the concern would be is if it is not permanent, then people are going to 

save a bigger fraction of it, and that is a perfectly valid argument 

473

and I understand why people say, ‘‘OK, we need something permanent.’’ But it is not, in the end, a decisive argument because people 

do not save all of a temporary tax rebate. A lot of people in our 

society live pretty much from week to week and month to month, 

and if you put a little cash in their pockets they are going to spend 

it, and I think they have spent. I think you saw in the consumption 

numbers for August—you actually saw the effect of the tax rebates 

in boosting consumption a little bit. 

So I think if we did another personal tax rebate, that I would 

run off a payroll tax to make sure that people who are not paying 

Federal income tax would get something, so geared to people who 

pay payroll taxes. I would favor a tax cut given out to households, 

a temporary tax cut given out to households. Now, there is a proposal that has been put forward by Alan Blinder, which was to give 

a temporary sales tax rebate, and that is an example, and I will 

mention another one in a minute, where a temporary tax cut could 

actually be even more effective than a permanent one, because you 

say, ‘‘OK, if you buy now, we are going to give you a break on the 

sales tax; but if you buy later, then you do not get that break.’’ So 

it is an incentive that potentially could be greater in the short run 

than in the long run. 

Now, I am a little bit concerned about logistics in Alan Blinder’s 

proposal. There are a few States that do not have sales taxes, and 

you would have to do something for them, but I think it is something worth thinking about, whether a temporary sales tax would 

be feasible or just too difficult to administer. I am afraid I do not 

know whether it is really feasible or not. I certainly think it is 

something worth looking at. 

So, in summary, though, a temporary tax cut that helps households, either a sales tax cut or putting cash in people’s hands, I 

think should be part of the fiscal stimulus package. The second 

thing that I think should be part of the fiscal stimulus package is 

something on the business side to stimulate investment, and I 

think you could either have a temporary investment tax credit or 

a provision to expense equipment, and that was mentioned and discussed earlier. Again, I do not feel strongly which one you might 

choose. I think either could be structured to give an encouragement 

to business investment. 

But, again, this is a situation which is perhaps counter to conventional wisdom on the tax side. But if you have a temporary tax 

break, you actually encourage people to make the spending now. 

You say, ‘‘If, over the next year or over the next year-and-a-half, 

or however long you want to make it, you make some business investment, we are going to give you a tax break on the business investment you make now.’’ Glenn Hubbard said, ‘‘Well, we do not 

want to do that, because that is fine-tuning the economy.’’ Well, I 

do not know about fine-tuning the economy. I think we do want to 

tune the economy. We are potentially going into recession, and that 

is exactly what we want to do. We want to find a tax break that 

is going to work right now and help encourage spending right now. 

So there are situations where fine-tuning can be a dangerous 

thing to do, but I do not think this is one of them. I think if we 

want to do something to help the economy, now is the time to do 

it. The chances are the U.S. economy is going to be much stronger 

474

a year or so from now than it is right now. So I am not worried 

about the fine-tuning argument. So, again, my first two choices are 

a tax break for households and then some kind of tax break for 

business investment. I think there are other things that I would 

like to see as policies, that if you could get agreement to them and 

work out a bipartisan arrangement, I think would be good to see. 

One is to try to do something to shore up the safety net, the social safety net that we have, which I think has got some holes in 

it at the moment. And Alan Krueger is an expert on a lot of those 

things, and I am going to let him take the lead on some of those, 

which I know he is going to talk about. But let me just say I would 

endorse efforts to sort of shore up the unemployment insurance 

system. There are a lot of people who do not get benefits, and I 

think, like Alan, I would like to see increased eligibility before I 

would like to see extended benefits, because I think the problem at 

the moment is not enough people are getting the benefits, and we 

want to get more benefits out to people who are not getting them. 

The other area of the social safety net which is clearly a problem 

is health insurance, and if workers are going to lose their jobs, I 

think we should take a look at whether the existing COBRA provisions or Medicaid provisions are adequate, and I do not think they 

are. We have 40 million people without health insurance, which 

surely, if we are worried about consumer confidence, losing health 

insurance is certainly not something that is going to add to your 

confidence. 

So, again, these may be things that are difficult to do in a bipartisan and short-term package, but if we could, I would love to see 

us do something on the safety net side. And then the next thing 

on the safety net side, and this is a proposal that has been out 

there for awhile. I am not going to talk about it at length, but 

again I would urge people to take a look at it, and that is a wage 

insurance policy, and that has been proposed recently by Lori 

Kletzer and Bob Litan; Lori Kletzer, who is at the institute where 

I work, and Bob Litan, who is at Brookings, and it is a thing that 

says that workers who lose their jobs and then take another job 

may find that they have lost some wages. And a wage insurance 

plan says the Federal Government steps in and pays a proportion 

of the difference, and the advantage of that program is that it actually encourages workers who get laid off to take new jobs. 

So it is a proposal unlike sort of the social safety net, which 

can—I would not say it always does—but can have the problem of 

encouraging people to remain unemployed. But if you have a proposal with wage insurance, it actually goes in the opposite direction. It says if you get another job, we are going to actually help 

you with that one. I am not going to have time to spell out any details, and it is available in a detailed proposal that they have 

made, but I think again it is worth looking at. 

Let me quickly say, if I have got any time left, things that I do 

not think would be my choices to stimulate the economy. First, I 

do not think a capital gains tax cut would stimulate the economy. 

It is a proposal actually that could backfire on you, because it could 

encourage people who have capital gains to sell their assets, and 

that is not something we particularly want to do right now when 

the market is already weak. I do not think there is much evidence 

475

in the econometric literature, and I cite in my testimony some people who looked at this. I do not think it would do a lot to stimulate 

investment, certainly in the short-run. 

The second proposal that I do not think would be terribly helpful 

would be a cut in the corporate income tax rate. Again, while I do 

not say do nothing, but it is very expensive in terms of bang for 

the buck, that you would lose a lot of revenue and you might lose 

it for a long time if you cut your corporate tax in terms of what 

you get in extra stimulus. And then that take me to the final point, 

and I testified here before your committee not long ago, Senator, 

and I was struck by the fact that my testimony was slightly redundant, since you said a lot of the things already that I was going 

to say. But let me just reinforce what you said earlier and what 

was said by other members earlier about the need to maintain fiscal discipline. 

There is a sign, and I have it in the testimony, that 30-year rates 

went up a bit after the attack, and I think that was an indication 

that markets were concerned about whether fiscal discipline was 

going to be seen. Now rates have subsequently come back down 

and the 10-year does not look as much, but let me stress here that 

when you see interest rates, you are kind of seeing a horse race between a slowing economy, which is bringing rates down on the one 

hand, and then concern about the deficit, which is pushing rates 

up. 

And so we cannot always tell necessarily by looking at what has 

happened to rates exactly what the effects will be. I think there is 

no question that if we undermine fiscal discipline, if we get the sea 

of red ink that you described there, that you held up, and my 56-

year-old eyes were certainly able to see the red ink there, that you 

had up there, that that is going to have an effect on long-term interest rates and is going to undermine a little bit what the Fed is 

doing in terms of stimulating the economy. 

So let’s not lose sight—as you have said—let’s not lose sight of 

the long-term fiscal discipline and the need to make sure that anything we do now, and we certainly should contemplate a fiscal 

stimulus package, but let’s make sure that we do not undermine 

long-term fiscal discipline. And I would revisit the long-term tax 

cuts that we passed. I am not sure we can afford the same level 

of tax cuts as we passed earlier, because things have changed. 

The economic outlook, which we know was uncertain, has turned 

out to be not as favorable. Hopefully, the long-run will come back 

strong, in which case we can go back and pass some of those tax 

cuts again, but we do not know that is going to happen, and I am 

concerned that we are overestimating what growth is going to be, 

and we may be underestimating what the spending needs are going 

to be. You said you want to hold the line on spending, and I support that, but I think we probably are going to have to spend more 

money on national security, defending ourselves against terrorist 

attacks, for a long time. That is going to be expensive. We are 

going to have to pay for that, and we want to pay for that not by 

raising interest rates or undermining long run growth. 

Thank you. 

[The prepared statement of Mr. Baily follows:]

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Chairman CONRAD. Thank you very much. 

Dr. Krueger. 

STATEMENT OF ALAN B. KRUEGER, PRINCETON UNIVERSITY 

Mr. KRUEGER. Thank you. Good morning, Mr. Chairman and 

Senator Grassley, Senator Corzine and Senator Clinton. I appreciate the opportunity to share my views about where the economy 

is at the moment, where it might be headed, and public policies 

that might be appropriate in light of the current situation. Martin 

and Glenn have left me little to add on the current economic situation. I think we see things largely in the same way, and I might 

add, Mr. Chairman, your analysis in your opening statement, I 

think, is very much in line with the way I view economic developments. 

One thing I would mention is that even prior to September 11th, 

economists were surprised that consumption spending had held up 

as well as it had been holding up. Stock market values have declined considerably. One estimate I saw was in the neighborhood 

of $5 trillion in the year preceding September 11th. Ordinarily, one 

expects declines in stock market wealth to lead to declines in consumer spending, and we had not seen the decline that one would 

expect from past relationships. 

So I think there was already a concern that the American consumer was overspent and the consumer might not continue propping up economic growth. The terrorist attacks, I think, are the 

type of destruction that the economy could ordinarily get by, as 

horrific as the attacks were. And if one looks at one-of type events 

of similar magnitude in terms of destruction of human life and 

property and so on, like earthquakes, it is the type of thing that 

an economy usually bounces back from; and, in fact, looking at past 

hurricanes and earthquakes, they often set of an investment boom 

as buildings are rebuilt and so on. 

Chairman CONRAD. Could you pull the microphone a little closer 

to you? You have got to be close. 

Mr. KRUEGER. So I think the reaction of a number of economists 

initially was that the attacks of September 11th would have relatively little effect on the economy. My own sense is that is probably not the right interpretation. I think that the economy was in 

a precarious state before September 11th, as already has been 

mentioned. Economic growth was essentially stagnant. There was 

concerns that consumer spending would fall sharply, anyway, and 

I think there was also some doubt, at least in some people’s minds, 

about whether the remedies that had been used prior to September 

11th were having their intended effect. 

I know some economists have raised questions about whether the 

interest rate cuts were being as effective as one might have hoped, 

and whether they would have been sufficient to prevent the economy from declining further. So, in light of that situation, I think 

the terrorist attacks have caused a sharp decline in consumer confidence, as you showed, Mr. Chairman, a national reaction of fear; 

and I think consumer jitters are the main risk right now to the 

short-term economic outlook. And the fear, as has been mentioned, 

is that consumers will suddenly cut back on spending; that will 

487

cause businesses to reduce investment, to close, lay off workers, 

and that we could have a downward spiral. 

So, to my mind, the main approach that public policy could use 

right now to be helpful is to try to restore consumer confidence. 

And, as I think about what belongs in a stimulus package, I think 

reducing consumer jitters should be the main objective for the 

short-term, and I also share Martin’s view and the view of others 

that one has to be concerned about the long-term budget position. 

But I also agree with what Martin said very well, that now is the 

time to fine-tune the economy. This is the time that one can have 

an impact when it would really help. 

Now, there are some automatic stabilizers that are already in effect. Unemployment insurance is an important one, and that is one 

I will comment on in more detail, but our tax structure also has 

a stimulatory effect. Progressive income taxes lead to lower revenue when the economy slows down, and that will also stimulate 

spending. The same thing that is causing the red on the chart is 

going to have a stimulatory effect without any change in policy. 

There has not been very much data since the September 11th attack, and what data are available does suggest a considerable slowdown, especially in consumer spending. I would also mention that 

unemployment insurance claims went up for the week ending September 19th, to the highest level since December 1991. We will get 

additional information on Friday on the unemployment rate from 

the Bureau of Labor Statistics, except there will be less information 

in those data than one might expect. 

The survey week for the current population survey is the week 

containing the 12th. The attacks occurred on the 11th, so that 

week would also contain Monday the 10th. The way the Bureau of 

Labor Statistics calculates employment and unemployment, if 

someone worked on Monday and was unemployed the rest of the 

week, that person would show up as employed, not unemployed. So 

the numbers that are going to come out on Friday will largely reflect trends that were going on prior to September 11th, so I would 

caution the members of the committee not to make too much out 

of those data. 

One thing that I think is worth looking at in those numbers is 

the hours data, because the hours data are collected in a different 

way and they will reflect cutbacks in that week. But that is quite 

preliminary. It is just the first week after these horrific attacks 

took place. Traditionally, the first line of defense in a slowdown has 

been unemployment insurance, and as Martin said, I think it is important to shore up the unemployment insurance system, and I 

would mention four areas where unemployment insurance could be 

reformed. 

First, fewer than one-third of the unemployed receive benefits. 

The take-up rate for unemployment insurance has been declining 

over time. And one of the real fears I have is welfare reform can 

change the equation quite dramatically. A number of people entered the work force in the late 1990’s because of welfare reform. 

Many of them are concerned about their eligibility for TANF or 

have used up their eligibility for TANF. Many of them, and I have 

to say I and many others were quite surprised by how well they 

were doing in the labor market, but many of them will fail to qualVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00493 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
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ify for unemployment insurance benefits, either because they have 

a short record of work experience or because they have low earnings, or probably most importantly because they are seeking parttime work, and in a majority of States, those who are seeking parttime work are not eligible for benefits. 

So one suggestion I would make is that the States be required 

to extend coverage to those who are seeking part-time work. In addition, period that is used to determine eligibility, the period of 

earnings, can be shortened. We could rely on more recent data, instead of using the first four of the last five calendar quarters of 

earnings. A second area I would recommend is the level of benefits. 

In a number of States, benefits are quite low. California just decided or just—the Governor just signed a bill yesterday to increase 

benefits. 

I think a great concern in a number of States is that the level 

of benefits is probably too low. It is probably too low in ordinary 

circumstances and too low in light of the economic risks we currently face. A third area I would recommend reforms is the area 

of funding. I had written an article in January of 2001, advising 

that the States increase their level of reserves. In a number of 

States, most important, I think, New York, the reserves for the unemployment insurance funds are dangerously low. If the funds become insolvent, then they will borrow from the Federal unemployment insurance fund at market rate. 

The Federal unemployment insurance fund, fortunately, is wellfunded at the moment, but one suggestion I would make is to reduce the rate that they borrow at, perhaps cutting the interest rate 

to zero. Now, one might also ask how did we get into this predicament? Why weren’t the State funds at a higher level of reserves? 

I think part of the reason is that a number of States lowered tax 

rates during the 1990’s and have not maintained very good experience rating. Experience rating is really a quite-unique American 

system that raises the tax rate for companies that have a bad 

record of past layoffs; and our current system subsidizes companies 

if they are in a situation where they have had many layoffs. 

So one thing I would recommend doing is coupling changes in the 

current funding with longer-term changes, to require States to 

maintain a variety of different tax rates, so that companies can be 

taxed a rate which reflects the costs that they impose on society. 

Then the fourth area I would mention is one that has probably received the most attention, is extended benefits. The traditional response in a downturn, by the Federal Government, is to increase 

extended benefits, and the U.S. system of unemployment insurance 

typically pays benefits for 26 weeks. That is short, compared to 

other countries. On the other hand, it seems to work well for us. 

It seems to give people enough time to search for a new job or to 

make different arrangements, to perhaps arrange for job training 

and so on, and it does not leave them in a situation where they are 

complacent about their job search activity. 

Studies have found that when the duration of benefits increases, 

the duration of unemployment increases, as well. Now, I think in 

a prolonged recession, one wants to extend benefits. I think that 

makes a great deal of sense. We do not know yet whether this will 

be a prolonged recession. This could quite possibly be a V-shaped 

489

recession, where we bounce back very quickly because of the actions that the Fed has taken, and the actions that the Congress is 

considering. 

So one suggestion I would have would be to re-examine the trigger for extended unemployment insurance benefits, which was set 

at a time when the natural rate of unemployment was much higher 

than it is currently. I think that rate needs to decline, but at the 

same time I would recommend combining when the trigger for extended benefits takes place with a few months out, or maybe 6 

months from now. So, in other words, I think if our downturn continues into the second quarter of 2002, then the need for extended 

benefits is much greater than it would be if we just had a one-or 

two-quarter downturn, and then we turn around. 

So one suggestion I have is to think about lowering the trigger 

for extended benefits, but at the same time setting that at a point 

a few quarters in the future. So on the margin I would recommend 

using funds to try to expand eligibility for unemployment insurance 

benefits, increase the level of benefits in States where benefits are 

quite low, and only after those main concerns are taken care of, addressing the extended benefits. 

I would also mentioned that if this does turn into a prolonged recession, we need to take another look at dislocated worker training 

programs. 

[The prepared statement of Mr. Krueger follows:]

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Chairman CONRAD. All right. Let me stop you there and go to 

questions, because we are rapidly running out of time. I asked Dr. 

Hubbard the question of do we need stimulus; if so, how much and 

of what type. 

Dr. Baily, you addressed that to some degree, but let me ask you 

very directly, both of you, do you think we need additional stimulus? If you were having to make a decision this week, what would 

be your decision? 

Mr. BAILY. I wish I would have a few more weeks to see what 

the data looks like before making that decision. If it was this week 

or nothing, I would probably go ahead and do a fiscal stimulus. But 

if I had a chance to wait a week or two, get the package ready, negotiate and get the package ready, I would probably prefer to wait 

a week or two. 

Chairman CONRAD. The problem here is very simple. We are running out of legislative time. No. 2, you have got to have a decision 

to go ahead before you get the negotiation on a package, and negotiation of something of this magnitude and this importance is going 

to take some time. A package of whatever amount—we are talking 

about tens of billions of dollars, potentially, maybe as much as 

$100 billion—that is not going to happen just overnight. It is going 

to take some time to work through the process. 

So, in my judgment, a decision is going to have to be made quite 

soon, not necessarily this week, but pretty soon. 

Mr. BAILY. Well, I think in that case, the risks are on the downside, and so I would go ahead. So I would support the stimulus 

package. 

Chairman CONRAD. What level of additional stimulus do you believe would be required in a $10-trillion economy to have some impact? 

Mr. BAILY. Well, remember that I said I think we have already 

done quite a bit, but I would think a $50 billion package would 

help. 

Chairman CONRAD. All right. And if you were designing that $50 

billion, how much would be spending? How much would be tax reduction? 

Mr. BAILY. I think that we have already had a fairly substantial 

spending increase that has already been passed, so I would tend 

to put most of it on tax reduction of one kind or another. 

Chairman CONRAD. All right. 

Dr. Krueger, the same questions, I would put to you. Do we need 

stimulus, in your judgment? We are having to make a decision in 

the next week or so, next week or 10 days. What would be your 

decision? If you think stimulus is necessary, what level of stimulus 

would be important, in terms of making a difference in a $10 trillion economy, and what should the emphasis be on? 

Mr. KRUEGER. Well, I concur that we do need stimulus and am 

quite sympathetic to the issue of timing. I think the sooner, the 

better. I think it makes a great deal of sense to agree upon a total 

amount, and as Glenn and Martin said, of course that total amount 

depends on the form. Not everyone has the same views of the form 

that spending should take. So you might think about a little bit 

larger than what is optimal under each person’s plan, given that 

501

there will be compromise and a number of elements which might 

not all go in the same direction. 

So, given that, I would think something which is on the order of 

1 percent of GDP or a little bit larger makes some sense. 

Chairman CONRAD. So you would be in the $100 billion range? 

Mr. KRUEGER. I would be in the $100 billion range, that is right, 

and I think it is important that it not affect the long-term budget 

position, as you emphasize. In terms of what form it takes, the 

spending or tax cuts, Martin hesitated, because I think that is not 

an easy answer for an economist to give. Of course, it depends on 

the details of the program, and to some extent it really does not 

matter. I mean, you could structure them in a way in which it has 

the same impact on the economy, so to us it is almost an arbitrary 

distinction. 

Chairman CONRAD. Let me stop you there, because I tell you, I 

have got more doubt about the tax side now than I did before, and 

the reason is my observations of what people are doing, even with 

the rebate that I strongly favored that we put out there earlier, an 

awful lot of that did not get spent. I mean, if we have got a demand 

problem, how do you address that in the short-term? My initial inclination was putting money in people’s pockets and companies 

quickly that would be spent. I tell you, after talking to people, I 

have less confidence that it is going to be spent. 

I think people are sufficiently uncertain, because of layoffs, and 

companies are uncertain because of demand, that there is a hesitancy on the part of both to spend whatever we put out there in 

a tax cut, and it tells me that maybe we should be putting more 

emphasis on the spending side, to actually have that money be 

buying things to give stimulus at this time. I would just be interested in your reaction. 

Mr. KRUEGER. Well, that is, in part, why I would turn to unemployment insurance first. The people who are receiving unemployment insurance need the income to survive. 

Chairman CONRAD. And the money would be spent. 

Mr. KRUEGER. I think it is clear that it would be spent, and studies have found that it is spent; even consumption of food, bare essentials, rises in family budgets, if they are eligible for unemployment insurance benefits, compared to other families that do not 

qualify. Now, one of the issues, which I am sure you understand, 

is that the previous tax cut was spread out probably to the middle 

income and above. A payroll tax cut would be focused more on 

lower-income families, which would probably have a higher marginal propensity to spend the money. 

But I think, as Martin pointed out, also, the idea of a retail sales 

tax cut, a temporary sales tax cut, would probably give you the biggest bang for the buck in terms of consumer spending. There is 

some question in my mind—and I am a great fan of Alan Blinder’s 

work—about whether that is the best—distributionally—best way 

of having a tax cut, as opposed to a payroll tax cut. In my prepared 

testimony, I gave one possible idea, which would be to exempt the 

first $5,000 of the Social Security payroll tax. That would be more 

broad-based, more like a rebate. 

Chairman CONRAD. OK. 

Senator Domenici. 

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Senator DOMENICI. Could I yield mine to Senator Grassley? He 

has been here a long time. 

Chairman CONRAD.: Certainly. 

Senator GRASSLEY. Well, our distinguished chairman asked two 

questions that I was interested in, and I appreciate very much the 

answers you gave, and I will not followup on those; but could I go 

to a point that Mr. Krueger made about—well, not a point you 

made, several points you made. But they all seemed to, if I listened 

and heard correctly, fall into fine-tuning or redefining existing programs. You are not suggesting any new spending programs or entitlement programs? 

Mr. KRUEGER. Well, I think the unemployment insurance approach—that is obviously an existing program, and I think making 

that the first priority has a lot to be said for it. It could happen 

quickly. The spending naturally returns to a lower level after the 

economy returns, so in that sense it is temporary. It reaches people 

who are in great need. The payroll tax cut idea is—in some sense, 

that is a new program. It is a new way of structuring a current 

program, and I would also recommend doing it temporarily, not to 

affect the longer-term budget picture, but that is correct. 

Senator GRASSLEY. OK. If you had—I got in late on your testimony, Dr. Baily, but if you were suggesting spending programs and 

you said you thought more ought to be on the tax side, but if you 

suggested any, you would be using existing machinery, not suggesting new programs; right? 

Mr. BAILY. I think, in general, the one area that I did mention 

where I think there would be some benefit to spending, and I think 

you have to be careful if you are going to increase spending, you 

are not just doing it to create jobs; you are doing it in a way that 

is going to be constructive, and one area that I mentioned is in the 

health-care area. There are, after all, around 40 million people 

without health insurance. So if we were to expand the funds available to provide health insurance for families or children, that 

would, I think, help on the consumer confidence side, and I think 

that money would be spent and would be well-spent. 

Senator GRASSLEY. Well, would you take into consideration that, 

for instance, under the existing CHIP program, families up to 

$35,000 can get help under that program for their children? Do you 

mean beyond that, or you would make efforts to make sure that all 

the children that are covered by that would actually be getting the 

program, which is not the case today? 

Mr. BAILY.: Well, it is not the case today. I think the CHIP program is a good program, but it only goes partway to serving the 

uninsured. So expanding coverage through the CHIP program, and 

maybe allowing the parents to get coverage, and things of that 

sort——

Senator GRASSLEY. OK. And then could I go back to you, Dr. 

Krueger, about your point about the first step is to make sure that 

we do everything we can do to enhance confidence? What we have 

done thus far—my question is does this fall into the category of enhancing confidence and having good economic benefits from it—you 

know, like what we did for airlines, what we have done for the 

emergency expenditures because of the disaster in several different 

ways, in fact, in ways yet-undetermined, in the sense that there is 

503

$40 billion out there and that only about six or 7 have been allotted, and also maybe airport security, the things we do along that 

line? 

Mr. KRUEGER. Absolutely. The airline industry, I think, is quite 

unique, in that it was so directly affected by these horrible acts, 

and I think acting quickly on the airline industry made a great 

deal of sense. I think from here forward, looking at specific industries, kind of looking at the ripple of these events, is near-impossible to do in a very sensible way. It is very hard to distinguish the 

direct effects from kind of these ripple effects, and effects that were 

already in motion before September 11th. But I would certainly 

think that the actions that the Congress took already are helping 

to restore confidence. 

Senator GRASSLEY. What you just said, on the difficulty of knowing how far to go, you really do not know where the last domino 

falls then. 

Mr. KRUEGER. I think that is absolutely right. My own personal 

view is at the industry level, I would just stop where you have, and 

then turn more broadly. 

Senator GRASSLEY. And then your point about maybe doing 

something with worker training programs, we already have 12 

worker retraining programs. Would you suggest going beyond that, 

or maybe those that we have do not quite fit the needs? 

Mr. KRUEGER. I do not think it is the number programs. I think 

it is the amount of money to train people in those programs. 

Senator GRASSLEY. So using the existing programs and maybe 

making more resources available. 

Mr. KRUEGER. Exactly. One of the things we have found—I have 

done quite a bit of research on job training. One of the things we 

found is that it is the group of workers that seems to benefit, that 

seems to be the real issue for whether job training works, rather 

than the specific nature of the training program. We have gone 

from CETA to JTPA, and now the Workforce Investment Act, and 

what really, I think, seems to hold up is that youth job training is 

very difficult to do unless it is something which is very expensive, 

like Job Corps. Job Corps does seem to work, but it is a very expensive program, and kind of more shallow programs for youth are not 

very effective. 

On the other hand, when we look to adult workers, community 

colleges training, the training that was available in JTPA, seemed 

to have a reasonable return, and I think those are the kinds of 

workers who are going to be affected by the current downturn. 

Senator GRASSLEY. Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you. 

Senator Corzine. 

Senator CORZINE. Yes. 

Professor Krueger, did you say $100 billion incremental, or were 

you saying including the packages we have already put together? 

Mr. KRUEGER. I was intentionally vague when I answered that, 

so I did not say. I think $100 billion inclusive of what has already 

been spent is probably the minimum, and then I would say up to 

$150 billion. I do not know how much of the $40 billion that has 

already been allocated is going to have a stimulatory effect. 

504

Senator CORZINE. There is a question, I guess, in economic theory about sort of rebuilding and paying for structure, about what 

kind of multiplier that kind of so-called investment would have in 

overall economic growth. I was curious; we have all talked about 

long-term rates seem to be high on people’s minds. What kind of 

rise in long-term rates do we think we have to experience before 

it has meaningful impact on the economy? We are talking about a 

25-basis point—or an order of 1 percent move so far in the timeframe that we have been talking about in September. Is that the 

kind of meaningful movement that you are talking about, or do we 

have to have one-or 2-percentage point moves to really undermine 

the kind of spending and tax proposals that are on table? 

Mr. BAILY. Well, any increase in rates is going to have a small 

negative effect. I may try and give you, if I may, a written response 

to that. Since I am no longer the Chairman of the Council of Economic Advisers, I do not have a staff to get those answers prepared 

for me; but clearly 25 basis points is not going to do serious damage. But if we are talking about when we get to 50 basis points, 

then that does have an effect. If you think about how much even 

25 basis points can do on mortgages, certainly 50 basis points on 

mortgages can make a difference. It makes a difference to the 

monthly payments, and therefore qualifying for a mortgage. 

So I think an increase in interest rates does have an effect, a 

negative effect, on the economy. 

Senator CORZINE. And so if we spent $100 billion, you are of the 

view—incremental dollars—you are of the view that we could erase 

that with less than a 1-percentage-point increase in interest rates? 

Is that the kind of tradeoff that we need to be making? 

Mr. BAILY. The way I would think about it is at the moment we 

are in a situation where demand is weak, the interest rates are 

low, because people are looking at an economy where investment 

demand is low and where spending on consumer durables is low; 

and so the priority is to get money out there for people to spend, 

either with a tax cut or with the spending that we are doing, and 

that is the first priority. And I do not think we have to worry about 

interest rates over the next 6 months, because I think they are 

going to be low. 

What we do have to be concerned about is that the things that 

we do now do not undermine where the budget is going to be 5 

years from now or 10 years from now, because the markets—and 

you are expert on the markets much more so than I—they are 

going to look at that long-run projection for the budget and say, 

‘‘OK, the 10-year rates, mortgage rates, 30-year rates, those are 

going to reflect, not what we do right now or at least only very 

slightly will they affect what we do right now; they will respond 

to what we do over the next five or 10 years.’’

Senator CORZINE. Let me ask—this is always an uncomfortable 

question—but if you were designing a stimulus program today, 

would you design it with the elimination of estate taxes and marginal movements of those in a period ahead? Would you move high 

marginal rates as a means to create stimulus? And I ask this in 

the context that 65 percent of the tax cut that we already implemented hits in 5 years and out, and one might argue that is relatively weak in its stimulative impact today. You could argue that 

505

you need to accelerate it. That would be one step which I think 

Chairman Hubbard talked about, or you could talk about using 

that to protect our long-term fiscal stability by considering reexamining some elements of that and then investing that money in the 

short run. I just wonder if you all would have any commentary on 

that, with respect to our current sort of tradeoff of long-term fiscal 

stability, versus the need for, I think, a recognized stimulus program, generally accepted in people’s minds today. 

Mr. BAILY. I do not think that the estate tax—eliminating the estate tax or reducing estate taxes would do much for you in terms 

of short-term stimulus at all. The cuts in top time marginal income 

tax brackets would have some effect, but as I think I agree with 

where you are sort of heading on this, which is that the effect of 

those tax cuts is to undermine or to take a lot of revenue away 

from the outyears, and not have a huge effect in terms of shortterm stimulus. So they are certainly not the things that I would 

choose as a way of stimulating the economy in the short-run. In 

fact, I would like us to revisit those tax cuts that were passed and 

say can we still afford them, given the long-run situation. 

Mr. KRUEGER. I would add I agree with that completely. What 

everyone thought about the tax bill that passed previously, the new 

situation, I think, has to change one’s view of it, and I think we 

are not in a current situation where changes in marginal rates are 

what is most important. I think what is most important is to maintain consumer confidence and to give people a reason to spend so 

that the economy does not go into a sharp contraction. My own personal view is that effects of marginal rates are a bit overrated by 

many economists. So I agree completely with Martin, that I think 

it is a good time to revisit the outyears in the tax cut; that, I think, 

would help the long-term bond rate. And I would focus more on 

ways to try to stimulate spending in the short-term. 

Senator CORZINE. Thank you. 

Chairman CONRAD. Senator Domenici. 

Senator DOMENICI. Thank you very much. Senator Clinton, do 

you have a schedule problem? 

Senator CLINTON. No. 

Senator DOMENICI. I will not take very long, anyway. Let me just 

talk about a couple of things with you and then ask you about two 

programs. First of all, it is a lot easier to discuss the kind of tax 

package one would put together when you are sitting at those tables and we are at this table in the middle of a recession, as compared with an economy that was booming, that looked as if, for 

some people, it had achieved a spiritual value such that it would 

never die. In the meantime, it did die, and now we are looking at 

how do we give the economy some stimulus to get back where it 

was and proceed at high productivity, low inflation, significant 

growth annually in the gross income of the country? 

So, first, might I ask, are either of you concerned that when we 

get the economy going again, and surely, based on history, it will 

get going again, are you concerned that the economy will not be 

vested with this so-called new economy that everybody talked 

about, which, in fact, produced the qualities that I just enumerated? 

506

Mr. BAILY. I have been a believer in the new economy. I think 

we had a new economy the 1990’s, and new technologies contributed to faster productivity growth. I think those new technologies 

still have a lot to offer the economy, and so I think we can expect 

to see productivity growth going forward that was stronger than we 

had for 20 years, in the 1970’s and 1980’s. At the same time, I 

think there were some temporary factors in the 1990’s, that we had 

really an investment boom of unusual magnitude, that probably is 

not going to last in quite the same way, and that contributed something to that productivity, both because of the making of the equipment and then the installing of the equipment. 

So I have previously testified that I think we can expect a return 

to trend productivity growth of about 2 percent a year, and I think 

that it is a good number. It is a little bit slower than the late 

1990’s, but it is still a good number. 

Senator DOMENICI. How do you feel, Dr. Krueger? 

Mr. KRUEGER. I agree with that. I do not think that the current 

situation affects the long-run productivity growth prospects. I think 

the only sense in which it might is if long-term interest rates increase considerably. That reduces investment. Much of the technological change was conveyed through new equipment and so on, 

but, by and large, I do not think that this should be viewed as affecting the economy’s long-term potential. 

Senator DOMENICI. I want to talk about just two programs. I 

have heard the words ‘‘tax abatement’’ here today. I think you are 

the first to mention it, Dr. Baily. Is that thought of by you and by 

others who have put it in the marketplace these days, that you 

would do that for a short time and give the American consumer a 

real reason to spend, because they are going to get a good break? 

Mr. BAILY. That was the idea, yes. 

Senator DOMENICI.: Would you be thinking about that during a 

Christmas season, as you see it, or would you let the Christmas 

season do its own stimulating and do it at another time; just your 

thoughts? 

Mr. BAILY. I think doing it for the Christmas season, or the holiday season more broadly, that there would be something to be said 

for that, yes. 

Senator DOMENICI. What if we do that? How do we tell our people that it is fair, even though States have varying sales taxes, and 

I mean varying in a big way? Some still have four and some have 

10. 

Chairman CONRAD. Some have none. 

Senator DOMENICI. So would you just address that for the record, 

please? 

Mr. BAILY. I am not going to give you a very good answer on 

that, I am afraid. This is a proposal that I think needs to be looked 

at, but as I mentioned in my testimony, I think there are some 

logistical problems with doing it, given the range of State taxes. 

Remember my first choice was to give an income tax rebate like the 

one we had before, except to people who pay payroll taxes, as well 

as people who pay income taxes, so we do not miss people on that 

score. 

Senator DOMENICI. Dr. Krueger? 

507

Mr. KRUEGER. Well, I think one issue depends upon how big the 

tax cut is, and I do not think there are too many States that have 

zero sales tax rates, but what one could consider doing is some type 

of transfer to those States. One thing I would add about the retail 

tax cut, which is quite appealing, is State and local governments 

are also going to go through a budget crisis, and they can undo 

much of what goes on at the Federal level if they contract. The retail tax cut certainly helps, with the money being provided to the 

State governments—would help the financial position of the States. 

Senator DOMENICI. Last, I want to just talk about the concept of 

loan guarantees in a recession, as compared with grants. It appears 

to me that there is a growing momentum to broaden the scope of 

what we ought to do for people that have been damaged because 

of the terrorists, and some people are saying what about all these 

businesses that went under? And I am sure somebody is introducing a bill, saying let’s take care of them. 

I have come up with the notion that if we are going to do any 

expanding of that type, that for purposes of good fiscal policy, we 

ought to get the biggest bang for the buck, and the littlest cost to 

the Treasury. And it seems to me loan guarantees at a good rate 

of interest, but rather long, would be a better way to do it than 

have a program that just bails people out or gives them money to 

make up their losses. Do either of you have a thought? 

Dr. Krueger. 

Mr. KRUEGER. Well, my initial reaction is that sounds like something well worth considering. I think one question is where would 

you draw the line? 

Senator DOMENICI.: Yes, I understand. 

Mr. KRUEGER.: And I think that is a difficult issue, but otherwise 

it seems to me——

Senator DOMENICI. But we are going to have the same issue if 

we agree to have grants. It is still going to be where do you draw 

the line. 

Mr. KRUEGER.: That is correct. 

Senator DOMENICI.: I am just assuming, before they get out with 

all those, that maybe somebody ought to expand the loan guarantee 

and let that take place under good management so it can go out 

and find out what the scope is and make some decisions on how 

they are going to cover people. I am going to make this suggestion, 

and I thank you both for your comments. I also thank you for taking of your time today. We are in an unordinary situation, in that 

we do not know yet who is going to put this package of stimulus 

together. Is it going to be the committees that have general jurisdiction in the area, or will it be put together by the White House 

and others? 

In any event, I think we have more than a little reason to participate. If nothing else, we ought to bring to the table the criteria 

for which—about which we would agree here, bipartisan, that they 

ought to be looking at this injection of funds. The criteria should 

be certainly that you do not want to invest in a program just to 

take a simple, but profoundly wrong one, that said you are a claimant and we are going to help you, and do not worry, we are going 

to help you in the 10th year, so we have a program to help you in 

508

the 10th year. I do that just to show how ludicrous we might be, 

because that is not imperative. 

What is imperative is that you tell somebody that you are going 

to do something that is needed now and early next year, I would 

assume, and you all seem to be nodding on that, and I have not 

seen anything different from my chairman. I just hope we can have 

an impact on that. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you. 

Senator Clinton. 

Senator CLINTON. Thank you, Mr. Chairman. One of the challenges that I think we face is the new required assessment that we 

are undergoing that is, I guess, loosely referred to as homeland defense or homeland security. I do not believe we yet know what the 

costs will be. We have never faced anything quite like this. 

There is a very long list of concerns that need to be addressed, 

whether it is protecting our water and food supplies, protecting our 

pipelines, protecting our energy infrastructure, protecting our 

transportation infrastructure. There is a very long list that I think 

rightly will demand our attention, and, in some respects, it will be 

long-term commitment. But I believe infrastructure spending will 

have to go up. I do not see any way around it, if we are going to 

be able to protect the American public to the extent we all want. 

And this is probably an unfair question to ask you, because I am 

reminded by Senator Domenici’s comments you are on that side of 

the table and we are on this side of the table. But what is the impact of infrastructure spending in terms of its stimulative effects 

and the speed at which it can be delivered, compared to simply taxcutting stimulus? Is there any research or opinion that you could 

share with us on that? 

Mr. BAILY. Well, I think you can get a tax cut out there more 

quickly. I guess the simple wisdom is that spending has a slightly 

bigger effect, because each dollar gets out there right away; it adds 

to GDP right away and then has some multiplier effect after that. 

Whereas, a tax cut, not all of it gets spent. So I think that was behind Chairman Conrad’s view that maybe some of the stimulus 

should be geared toward the spending side. But, as I say, the offsetting thing there is to make sure that the money is well-spent 

and you can spend it quickly, and I think that is a little bit harder. 

Now, in this particular case, there may be a lot of things that 

we know that we have to do, that we have to go out and do to improve our security, and so that may again affect the decision we 

make. 

Mr. KRUEGER. I would also say I would draw a distinction between security and infrastructure spending, designed to try to improve economic growth in the future. For example, I do think that 

we have a big need in this country to spend more on schools. As 

much as I feel that need, I do not think that that is the answer 

to the current crisis, and especially when one thinks about construction. I think there is going to be a lot of construction, especially in the Northeast, and I think one concern I would have about 

certain types of infrastructure projects would be that they might 

lead to imbalances, might delay construction in some areas, for example. So I would just add that. 

509

Senator CLINTON. One thing that would be helpful, because we 

are reading a lot in the press today about the Japanese experience 

with deflation, and I know we do not have the time left to really 

go into this in any depth. But could you briefly describe, first of all, 

what are the structural problems that they have been coping with 

for a decade without any real success, best we can tell, and what 

is it that is different about our experience and their experience, so 

that the fear that some economists are expressing, that we may be 

going into an entirely different economic situation, closer to deflation, closer to the Japanese experience, which would require different kinds of responses than what we are talking about if we 

think we are in a short-term slowdown or recession that we can 

work our way out of and get back into positive growth? I mean, 

how should we think about that? 

Mr. BAILY. I believe we are in a very different situation than 

Japan. There is a similarity in that there is a wealth effect, so the 

decline in the stock market, and to the extent that that affects 

housing wealth, too, that is going to affect people’s wealth and 

make them a bit more reluctant to spend. So we are seeing that 

in the U.S. economy, and that certainly was a part of the Japanese 

experience, and the loss of stock market wealth in Japan is much 

greater than anything we have seen here, and I hope we do not see 

that value, and they also had a collapse of their real estate market. 

Beyond there, I think there are huge differences. First of all, 

they have never really tackled their financial institutions, and they 

continue to have problems with their financial institutions. I think 

many of their financial institutions are sort of on the verge of collapse, and they have never been able to face up to the bad loan 

problem, to deal with it, to try to close down some of the banks 

that needed to be closed down and to restore confidence in the financial sector. 

Second, their labor market is much less flexible than the U.S. 

Americans are used to changing jobs, and it is not great to lose 

your job, but in the U.S., people, in some sense, the institutions are 

there, people move, people find new jobs. There is much more rigidity in the Japanese labor market. Their investment decisions traditionally were not made on the basis of profitability. They sort of expanded capacity without looking adequately at profitability. 

Their industries—we know their sort of strong, competitive industries, the ones that we compete with, like autos and machine 

tools, but much of their economy was not very competitive, and, 

again, rather rigid. They have a rigid set of regulations, local regulations. So I would be reassuring in the sense of saying I think our 

economy is much better able to handle this kind of shock than is 

Japan’s. So there is a little bit of similarity, but not that much. 

Mr. KRUEGER. I would concur completely. I would also add to 

what Martin said. I think a number of the Japanese problems are 

microeconomic in nature. They just have a very different setup to 

their economy, and I think that makes it much less dynamic, much 

less able to adjust to new circumstances. Another big difference, I 

believe, is that the age structure is different. The Japanese population is older than the American population. They do not have 

very much of a pension system, and when interest rates drop, peoVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00515 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
510

ple there seem to save quite a bit more. It does not seem to stimulate spending. 

So I think we are in a different situation. Japan serves as a reminder that capitalist economists do not always grow and grow, 

but I would not go very far with the parallel. 

Senator CLINTON. So you would not agree with those who suggest 

that the drop-off in consumer confidence and the underlying dropoff in demand that we started seeing a year or so ago, and in an 

accelerated way recently, is not any structural problem—it does not 

reflect a structural problem in the economy? 

Mr. KRUEGER. Well, I would say actually what is quite remarkable is that consumer demand did not drop-off more in the U.S. in 

the last year, and I do think that consumer demand is a major concern, the major concern now, and I would think about elements of 

the stimulus package as trying to address consumer jitters, how do 

we restore confidence. But I do not think that we have a structural 

problem in terms of consumer demand. 

Senator CLINTON. Is there any economic theory or experience 

which suggests—and I know this kind of runs counter to all the 

economic theory that I am aware of—but at some point there is a 

saturation, that demand just hits a wall, that people just cannot 

keep buying, they cannot keep going out there, because for whatever reasons, on a personal or social level, it is just not attractive 

to them anymore? 

Mr. BAILY. I do not think so, in general, but I think the thing 

we did see, we had such a strong boom, both on the investment 

side, as well as on the consumer side, there was a sense in which 

we were kind of overspent, and so some of this downturn we have 

seen was a reaction to the fact that we had bought as many computers as we could possibly use, and that we bought as many SUVs 

as we could drive, and we were in for a correction. 

I do not actually think there is a saturation point. I think Americans know how to spend. That is one thing we know how to do, and 

I think once we have sort of worked our way out of this downturn, 

we will get back. So I do not see it as a long-term structural problem. Can I also clarify, if you will give me 10 seconds, I made a 

comment earlier about sometimes I think consumer confidence is 

overrated as an indicator; and what I meant by that is not that I 

do not think consumer confidence is important. It is very important, but we measure it through a couple of surveys, the conference 

board and the Michigan survey, and those give us a window into 

consumer confidence. I do not think they are 100-percent reliable 

as to what consumers are actually going to do. 

Chairman CONRAD. Very well. I would like to, just before we end, 

ask you about something that Secretary Bentsen told me when he 

was Secretary of the Treasury in the Clinton administration. He 

told me—we had lunch 1 day down at the Treasury, and he told 

me that they had done a calculation at the time, and he indicated 

that for every 1 percent reduction in interest rates, that took a debt 

load off the economy of roughly $120 billion. Have you ever made 

a calculation like that or been aware of a calculation done like 

that? 

The point that he was making to me is the importance of fiscal 

responsibility to the functioning of the economy, and to the extent 

511

that you maintain fiscal responsibility and lower interest rates, you 

actually give more lift to the economy than almost any tax cut that 

anybody is talking about, because in effect that is a tax cut, has 

the effect, has the stimulative effect of a tax cut. Have any of you 

ever done a calculation like that, or does it sound reasonable to you 

that a 1-percent difference in interest rates would mean that much 

in terms of less of a debt load on the economy? 

Mr. BAILY. I think it is reasonable. I mean, we would talk—when 

I was in the administration, we certainly would talk about those 

calculations; and if you basically look at the size of the debt at how 

much interest is paid, and then you see how much a reduction in 

interest rate would do for you in terms of lowering the debt burden, 

that is the kind of number you come out with. So I think that is 

right. 

Now, it just honestly compels me to point out that I am a big believer in fiscal discipline, but lower interest rates do cut two ways. 

There are people in our economy that receive interest, a lot of older 

people who are living on interest. 

Chairman CONRAD. So there is a cross-cutting effect there? 

Mr. BAILY. There is a cross-cutting effect there. 

Chairman CONRAD. But, on balance, that lifting of debt burden——

Mr. BAILY. On balance, I think it is positive, yes. 

Chairman CONRAD. Dr. Krueger. 

Mr. KRUEGER. I would just add there certainly is this mechanical 

help that the budget has because of lower interest payments in the 

future. I suspect, however, that the big boost that we got from 

lower interest rates in the early 1990’s would not be the same 

today. Some of that came from consumer refinance of mortgages. 

A lot of that has taken place already. We were also starting from 

higher interest rates than where we are currently. So I would suspect that the number is probably smaller today. 

Senator CLINTON. Mr. Chairman, could I just ask one other sort 

of speculative question? I mean, I support the chairman’s continuing concern about fiscal responsibility and discipline for the 

long-run, and we are in a position now where this additional stimulus, whatever it is, $50 billion to $100 billion, is certainly going 

to push us back into deficits. I mean, there is no—I do not think—

any way around it; is there? Am I mistaken? So this time next 

year, we are running a deficit. OK. What then? 

Assume that we go forward with this stimulus—I have less confidence, frankly, that this stimulus at this time, given the mood in 

the country, is going to do what people hope it will do. So we put 

it out there holiday season, whatever it is we decide to do, and see 

what happens. But we know one thing that will happen, we will 

be back in deficits. Then what? How do you see us recovering back 

to the extent of moving toward fiscal responsibility again, trying to 

deal with our long-term problems? Do you have any final thoughts 

on that? 

Mr. KRUEGER. Yes, I think your diagnosis is right. I have two responses to it, and it is a lot easier for me to respond from this 

table; one is to revisit the tax cuts that have already been enacted, 

especially the bit cuts in the outyears. The second, which is even 

easier to say from this side than the other side, is to look at some 

512

21 CHART NOT AVAILABLE AT PRESS TIME. 

of the entitlement programs, and to look at Medicare, maybe. And, 

looking at the long-term budget, Medicare, I think, is a much bigger concern than Social Security. How do we restrain the growth 

in cost of Medicare, yet provide sufficient protection for the elderly 

for health-care risks? 

Mr. BAILY. Well, I think as long as the economy recovers, and I 

am optimistic that it will, not in the very short run, but over the 

next year I think it will recover, because I think the fundamentals 

of the economy are strong, then I think we have choices again. But 

I have said what Alan said. I agree with what Alan said. We 

should revisit those tax cuts and see if we can still afford them, because the budget arithmetic has changed. 

Chairman CONRAD. Maybe I can just go to that question as we 

end here. We have been working, actually since the morning after 

the attack, on reassessing our situation and where we are headed; 

and in many ways this chart sums up where I think we are. And 

what this chart does is it looks at our trust funds, it looks at the 

revisions that have been made to defense spending, and to the rebuilding effort. It looks at the airline assistance package, other disaster aid that we have done in previous years. It extends the expiring tax provisions. It looks at the other budget resolution policies 

that have not yet been enacted, but were in the budget that was 

passed earlier this year by both houses of Congress. It looks at a 

possible $60 billion tax and spending stimulus for 2002. It looks at 

an economic adjustment, because we have a sharper downturn 

than was earlier forecast.21

So it looks at all of those changes, and then it looks at, not only 

the effect on 2001, but 2002 out to 2011, and the conclusion is very 

sobering. Now, not only do we see—you know, we have got substantial red ink in this year and next year, and, in fact, that we would 

be in deficit next year—on a unified basis, we would be in deficit. 

But also it shows that we would be using, over this 10-year period, 

$373 billion of payroll taxes for Medicare to fund other government 

programs, and almost $1 trillion of Social Security payroll taxes to 

fund other government operations, for a total of $1.3 trillion being 

used—of payroll taxes—to fund other government operations. 

This is much more than a short-term dip. This is a very fundamental change in policy, taking money from people on the basis 

that it is used to pay benefits and secure the future of those programs, and then taking substantial amounts of it and using it to 

fund tax cuts and other government programs. To me, this is something that requires our very serious attention as we move forward. 

Clearly, we have got to do whatever it takes now in the shortterm to defend this Nation. Obviously, that is a long-term concern, 

as well. But the immediate, urgent need is for these additional defense dollars, to do whatever it takes to defend ourselves, to take 

the attack to those who have perpetrated criminal acts on this 

country, to rebuild. But we have also got to keep our eye on the 

ball, on the long-term fiscal condition of the country. These are my 

calculations, and I am happy to stand by them and have my credibility attached to them. 

513

I believe we have a very serious long-term problem here. I believe it is totally inappropriate, in the long-term, to be taking payroll tax money and using it for other purposes, especially in light 

of the fact the baby boomers start to retire in 10 years. I do not 

know if you would want to react to that, and again I am not attributing these numbers to anybody else. These are numbers that I believe are in the ballpark of what we face, but I would just be interested in your observations. 

Mr. BAILY. Well, I basically agree with you. I think that we do 

have a long-run fiscal problem, which is the baby boom generation, 

Medicare and Social Security. So the long-run fiscal situation of the 

U.S. is not good. I think even now we are borrowing from oversees 

substantially, so that is another sign that we are spending or consuming more than we are producing. So for all those reasons, I 

think it is important to increase national saving and not to decrease it; and that is why saving those Social Security surpluses, 

or even running additional surpluses, is helpful for our economy 

and will stand us in better stead going forward. If we can pay down 

the debt, we will be in a much better position to deal with the baby 

boom generation. So I agree with you. 

Chairman CONRAD. Dr. Krueger. 

Mr. KRUEGER. Well, I agree, also. I think one thing which your 

chart demonstrates is how variable and unpredictable our budget 

forecasts are, and I think it is important to bear that in mind when 

we do budgeting. One small point I would make, though——

Chairman CONRAD. I might just stop you on that point and say, 

you know, I do not know how many times I tried to warn our colleagues, how many times I put up that fan chart from the Congressional Budget Office about the uncertainty of the forecast that we 

were using when we were writing the previous budget. I must have 

used that chart 50 times here in this committee, on the floor of the 

Senate, in the Finance Committee, because I used to be responsible 

for forecasting the revenue of my State, and I used to have to forecast for 30 months, and I knew how uncertain those forecasts are. 

You are talking about 10 years. It is so uncertain, and just very 

small changes now make huge differences over time. That is what 

we are seeing now. So, unfortunately, I believe the budget policy 

we put in place earlier this year was fatally flawed when it was 

done. I thought the tax cut—while I supported a significant tax cut, 

I thought the one that we put in place was simply unaffordable. It 

was too large. It was too risky, and I think that has all proven to 

be the case, unfortunately. None of that helps us now. 

We have got to go back to the drawing boards and reconsider 

previous actions in every part of the budget, and think very carefully about their implications for the economy now. This is not just 

a matter of some green eyeshade concept of, gee, it is important to 

maintain integrity of trust funds. Absolutely, that is important, but 

it has a much bigger significance, and that is the effect on the economy. 

Dr. Krueger, you had additional thoughts. 

Mr. KRUEGER. Well, I had trouble seeing the exact numbers, although I could tell that some of them were red long-out. One small 

comment I was going to recommend is to try to scale them by GDP, 

which might make the situation look at little bit less dire. But I 

514

wanted to conclude by saying I was on CNN last week, and they 

asked, ‘‘Well, what do you see as the bright? What is on the positive side?’’

And I think there are some things on the positive side. One of 

the things on the positive side is that we entered this year with 

a surplus, and the fiscal discipline in the past has put us in a much 

better position to handle this kind of crisis than where we were before. 

Chairman CONRAD. Hopefully, there is a lesson in that going forward; that fiscal discipline in the past really paid enormous dividends now. My God, can you imagine the situation we would have 

been in if we had not gotten our fiscal house in order by the actions 

we took in 1993 and 1997? If we had not taken those actions, what 

kind of circumstance we would be in today? 

Mr. KRUEGER. We would certainly be looking at a lot more red. 

The second issue I would raise on the positive side is that the Federal Reserve Board had already started lowering rates, and the effect of interest rates on the economy take place with a lag. So that 

was already in motion, which is positive, and I think another thing 

that is positive is the Congress is acting quite quickly to respond 

to the current economic downturn. 

In the past, the problem with stimulus packages has been that 

they are enacted after the economy has already begun to recover, 

and I think that the Congress is to be commended for taking such 

quick action in this case. 

Chairman CONRAD.: Thank you very much. Thank you, again, for 

being here. Thank you for your patience. Thank you for all of the 

effort and energy you put into your remarks here today. We appreciate it very much. 

[Whereupon, at 12:30 p.m., the committee was adjourned.] 

(515)

ECONOMIC STIMULUS 

THURSDAY, OCTOBER 25, 2001

U.S. SENATE, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee convened, pursuant to notice, at 9 o’clock a.m., in 

room S–211, United States Capitol, Hon. Kent Conrad, chairman 

of the committee, presiding. 

Present: Senators Conrad, Nelson, Stabenow, Clinton, Corzine, 

Domenici, and Hagel. 

Staff present: Mary Ann Naylor, Chief of Staff and Chief Counsel; and Bill Hoagland, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The committee will come to order. 

These early morning starts are very unlike the Senate. 

I want to thank our witnesses especially for being here today for 

this hearing on the question of an economic stimulus. 

This morning in The Washington Post business section, there is 

a headline that reads: ‘‘Economic Rebound is Weak, Fed Finds.’’ In 

the article, what they are reporting is that the ‘‘beige book’’ which 

the Fed puts out has noted economic weakness across the country, 

a deepening weakness since the attack of September 11. 

The Fed notes very clearly that there was weakness before the 

attack. We all know that that was occurring. If we look at the civilian unemployment rate, which is a good indicator, we had seen 

that that ticked up substantially in August, and it was at the same 

rate in September, at 4.9 percent. I think we all anticipate that 

when the October data is available to us, we will see another surge 

in unemployment. 

On another measure, if we look at economic growth, we see that 

there was already developing weakness before the events of September 11. As we look at the quarter-by-quarter results, we can see 

that 2000 ended on a fairly weak note, and in 2001, we saw continued decline. And in fact we are seeing virtually no growth by the 

third quarter. 

So the circumstance we faced was one in which we had a weakening economy before September 11th; September 11th has been 

another blow to the strength of the economy, and that is why we 

have an important discussion about what we could do by way of fiscal policy to stimulate the economy. And that is really what this 

hearing is about. 

Noting that we face this problem, the leaders of the Budget Committee, Republicans and Democrats, from the House and the SenVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00521 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
516

ate got together and in early October issued a statement of principles to use in measuring any stimulus package. This was bipartisan and bicameral. It involved not only the Senate and House 

Budget Committee leadership on the Democratic side but on the 

Republican side as well. 

We issued this statement of principles, and I would like to just 

briefly review them. The overall principal—‘‘that an economic stimulus package should be based on the recognition that long-term fiscal discipline is essential to sustained economic growth. Measures 

to stimulate the economy should be limited in time so that as the 

economy recovers, the budget regains a surplus that is at least 

equal to the surplus in Social Security. Any short-term economic 

stimulus should not result in higher long-term interest rates.’’

‘‘Objective—An economic stimulus package should restore consumer and business confidence, increase employment and investment, and help those most vulnerable in an economic downturn, 

and do all of the above without converting a cyclical deficit into a 

structural deficit.’’

‘‘Timing—Congress should assemble an economic stimulus package deliberately but with dispatch, aiming for passage within 3 to 

4 weeks, based on the best economic data available.’’

We issued this on October 4th. 

‘‘Rapid impact—A substantial portion of the fiscal impact on the 

economy should be felt within 6 months.’’

‘‘Sunset—All economic stimulus proposals should sunset within 1 

year to the extent practicable.’’

‘‘Targets—Economic stimulus should be broad-based rather than 

industry-specific. Policies should achieve the greatest possible stimulus effect per dollar spent and should be directed to individuals 

who are most likely to spend the additional after-tax income and 

businesses most likely to increase investment spending and employment.’’

‘‘Size—The economic stimulus package should equal approximately 1 percent of GDP, roughly $100 billion, but should count 

the budgetary effects of policies implemented since August which 

at present total roughly $40 billion.’’

‘‘Offsets—To uphold the policy of repaying the greatest amount 

of national debt feasible between 2002 and 2011, outyear offsets 

should make up over time for the cost of near-term economic stimulus.’’

Let me repeat again. This was the statement of principles agreed 

to in a bipartisan manner by the Chairman of the House Budget 

Committee, Congressman Nussle; by the ranking member of the 

House Budget Committee, Congressman Spratt; by myself and Senator Domenici, the ranking member of the Budget Committee here. 

So it was completely bipartisan, bicameral, and it was an agreement that we were able to reach without rancor and without even 

a raised voice. That is truly remarkable in this town. 

I think those principles are the correct principles to judge any 

stimulus package. 

We are going to have a hearing this morning, and we have three 

very distinguished witnesses. The ranking member is joining us, 

and I am going to give him a moment to collect his thoughts. We 

517

would like to hear from him if he is ready; if not, we will turn to 

our colleague from New Jersey for a statement. 

Would you like a moment, Senator Domenici? 

Senator DOMENICI. No. I have a 9:15 meeting with the Republican Leader and about seven Senators. I am going to go there, and 

I would very much like to inquire of our witnesses, so I will come 

back as soon as that is finished. If not, I will give you a prepared 

statement. Nice to see you. 

Chairman CONRAD. Thank you very much. It is good to be with 

Senator Domenici as always; and as he has indicated, he will come 

back to inquire and make whatever statement he feels appropriate 

at that time. 

Given our numbers this morning, I will turn to my colleague 

from New Jersey and ask if he would like to make any opening 

comment. 

Senator CORZINE. First of all, I have a statement that I will put 

in the record, Mr. Chairman. I very much appreciate you holding 

the hearing, because I do not think there is an issue that seemingly 

is going to draw out more debate. Where we are generally in agreement on our national security and homeland defense issues, there 

is certainly a wide difference of views being debated with respect 

to a stimulus package, and I think having the kind of light shed 

that this hearing will hopefully bring on this subject is important. 

I agree with the principles that you and the leadership have 

talked about. I guess I would only add that in a situation where 

the economy has great risk of being weak, that we already understand probably even prior to September 11th, it strikes me that we 

ought to be erring on the side of proactive, aggressive actions, 

maybe slightly larger than we otherwise might take, to ensure economic growth; but I think that ought to be done in the context of 

temporary, and I think most of the kinds of principles that you outlined are very, very important. 

So I look forward to having a dialog with our friends from the 

economic field, and let’s move forward. 

I will just submit my written statement for the record. 

Chairman CONRAD. Very well. Thank you very much. 

Chairman CONRAD. This morning, we have three distinguished 

witnesses—Dr. Gale, Dr. Orszag, and Dr. Hassett. We welcome all 

of you. 

We will start with Dr. Gale, who is Senior Fellow in the Economic Studies Program at the Brookings Institution. His areas of 

expertise include tax policy, budget and fiscal policy, public and 

private savings behavior, pensions, and intergenerational transfers 

of wealth. 

So, Dr. Gale, you come with the right background to discuss the 

issues we have before us when we are considering a stimulus package. 

Welcome, and please proceed. 

STATEMENT OF WILLIAM GALE, SENIOR FELLOW, THE 

BROOKINGS INSTITUTION 

Mr. GALE. Thank you very much, Mr. Chairman, Senator 

Corzine. 

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Before I start to discuss the economics of this, let me just say 

that I applaud the choice to actually have this hearing and to move 

forward in the face of the threats that are all around us. I think 

it is exactly the right thing to do, to continue moving forward. 

Turning to the economics of the situation, I want to basically lay 

out a few principles and then talk about how that applies to the 

current situation. Then, I want to suggest in particular an innovative way of designing a temporary investment incentive that has 

not been discussed so far. 

I think the right place to start is the economic and budget outlook. Currently, we face a slowing short-term economy, but there 

is no argument that long-term prospects are still good. Everyone 

seems to feel that the economy’s long-term strengths are intact. 

In contrast, the long-term budget situation has deteriorated rapidly. Based on data in the bipartisan bicameral statement that the 

chairman referred to, the 10-year budget surplus outside of Social 

Security appears to have shrunk by about $3 trillion in the last 6 

months. It was $3.1 trillion in May, and based on my estimates 

from the bipartisan bicameral statement, it is less than $100 billion and probably around $50 billion now. That is the non-Social 

Security surplus over the next 10 years if Congress does nothing 

else. 

The bipartisan statement listed a whole series of consensus or 

likely spending and tax packages that are likely to move through. 

If those are enacted, the non-Social Security surplus is negative 

$1.5 trillion over the next 10 years; thus, we have a deficit of $1.5 

trillion over the next 10 years even if there is no stimulus package. 

So the economic and the budget outlook suggests that we want 

a short-term boost, and we want to minimize the long-term cost. As 

my colleague, Peter Orszag, and I have written, this goal should be 

to maximize the bang for the buck; that is, we should get the most 

short-term boost for the least long-term cost. 

To do that, we want to do four things. One is encourage new 

household spending; the second is encourage new business investment. Both of those increase aggregate demand; the short-run economic problem is a demand problem, not a supply problem. 

The third thing we want to do is minimize long-term costs, and 

the fourth thing we want to do is keep all of the provisions temporary. 

Let me add that these principles are quite similar to those endorsed by what I wrote in my testimony is a remarkable bipartisan 

statement by the Democratic and Republican leaders of the Senate 

and House Budget Committees. The only difference between what 

I am saying and the bipartisan statement is a matter of emphasis. 

Basically, the principles that Peter and I have laid out in the work 

that we have and that I am talking about now are completely consistent with what the bipartisan statement says. 

Let me emphasize a couple of aspects of that. One is that minimizing long-term costs serves both short-term and long-term purposes. In the short term, lower budget costs translate into smaller 

boosts in interest rates. 

There is a big debate in the economic profession about how big 

this effect is. The point I would like to emphasize, though, is that 

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age will result in a bigger budget deficit, and that will exacerbate 

a long-term budget situation. That is, even if there is no effect on 

interest rates—and I do not think there is no effect; I think there 

is a positive effect, but that is a judgment—even if there is no effect, we are still digging our way rapidly into a long-term budget 

problem. 

I mentioned the potential deficit over the next 10 years. Of 

course, the next 10 to 15 years are supposed to be the good times, 

and then, things turn around in 2015 in a serious way when the 

boomers start retiring. So if we do not accumulate surpluses in the 

next 10 years, the long-term situation is that much worse regardless of the impact on interest rates. 

Keeping all items temporary is critical for several reasons. First, 

it raises the bang for the buck. Temporary business incentives typically have larger short-run impacts than permanent incentives, for 

the same reason that a store that has a sale for a weekend will 

likely have more sales that weekend than a store that permanently 

cuts its prices. In the store example, people know that if they do 

not come in that weekend, they do not get the benefit of the sale. 

Likewise, with a temporary provision, firms know that if they do 

not invest within the time horizon, they will not get the subsidy. 

Research by many scholars—Alan Auerbach at Berkeley, Andrew 

Able at University of Pennsylvania, Ken Judd at Stanford, Glen 

Hubbard, with the Council of Economic Advisers, and my colleague 

and co-witness here, Kevin Hoist—have provided evidence that 

temporary incentives typically have as big and often bigger shortterm impacts than long-term incentives. 

Besides that, the temporary incentives also have a smaller longterm cost, so if the short-term effect is as big or bigger, and the 

long-term cost is lower, a temporary incentive has to be a better 

short-term stimulus and have a bigger bang for the buck than a 

permanent incentive. 

Let me turn to two other issues, in particular the design of a 

temporary incentive. 

The House bill that just passed has a partial expensing for 3 

years. There are three problems with that provision which can 

briefly be categorized into the beginning, the middle, and the end. 

The problem with the beginning is that firms often do not know 

when the subsidy will kick in, so they might actually delay investments right now to be sure that any investments they make are 

made after the qualifying date. That is an easy problem to solve. 

Congress can just announce that any action that is taken will be 

effective date ‘‘X’’ or September 11th, for example. So that problem 

can be minimized. 

The second problem with the House provision is that it is too 

long. Three years is a long time. We do not need to be encouraging 

investment in 2004 right now. We need to be encouraging investment now or in 2002, and the temporary sale effect that I was talking about that comes into effect at the end of the provision would 

get firms to move investment from 2005 to 2004—but that is not 

what we want to do. We want to get them to move it from then 

into 2002 or 2001. 

So I think the temporary provision—the length of the provision 

should be shortened. 

520

The third issue is that when you have a temporary investment 

incentive, and you turn it off at the end, you have raised the price 

of investment, and that causes two things. One, it causes investment to shrink then; and second, it causes firms to lobby Congress 

to extend the provision. 

So we have all these temporary expiring provisions in the tax 

code right now that get extended every time they expire. 

I would like to propose a way to deal with both of those last two 

problems, and that is to first shorten the time period for partial expensing for 15 months—that is, end it at the end of 2002. And second, adopt a sliding scale for the subsidy; so give a 50 percent 

write-off for investments made between now and the end of the calendar year, 40 percent for investments made in the first quarter 

of next year, 30 percent in the second quarter, down to 10 percent 

in the fourth quarter of 2002, and then turn it off. 

That does two things. One, it encourages firms to invest now 

rather than waiting until the end of 2002 to shift up their investments; and second, by ratcheting the subsidy down, Congress both 

shows its credibility in making this a one-time effect—that is, we 

are cutting the subsidy—and Congress is minimizing the air pocket 

at the end, because at the end, you are just turning off the subsidy 

from 10 percent to zero. That is not all that big, and it is much 

less than turning off from 30 percent to zero. 

So I think that shortening the time horizon and adopting a sliding scale would get you more investment and get you more investment now and would make it more likely that the investment 

would stay as a temporary subsidy. 

The reason this is particularly important is that the decline in 

investment right now seems to be that firms are taking projects 

that they were going to do, and they are putting them on the shelf. 

It is not that firms have to design new projects and get them invested—that takes time, and if that were the problem, we would 

need 3 years. But right now, there are studies out that show that 

a lot of firms are just delaying the investment that they had already planned to undertake. 

So if you can get firms to actually go ahead and make those investments instead of putting them off, that will provide an investment boost. That is the reason to give the big incentive now and 

to taper it off at the end. 

Let me conclude with just a couple of other issues regarding a 

stimulus package. 

I do not want to comment on the magnitude of the economic 

downturn. I am not a macroeconomic specialist; I am a tax specialist. But I will say that whatever the magnitude of the shortterm problem, it is worth noting that a lot of stimulus has already 

been provided—the $40 billion in rebates; the $40 billion in spending for defense, rescue and recovery; the airline bailout; the Federal Reserve has cut interest rates nine times and several hundred 

basis points since the beginning of the year; and even if Congress 

does nothing, there is another $70 billion in tax cuts coming as of 

this coming fiscal year because of the tax cut enacted last spring. 

So there already is a lot of stimulus in the pipeline. This is not 

necessarily an argument to do nothing, but it is an argument to 

say that whatever we do should be shaped by the economic and 

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budget outlook that we face, and the stimulus that is already in the 

pipeline is a crucial element to that. 

Let me stop there, and I would be happy to take questions. 

Chairman CONRAD. Thank you very much, Mr. Gale. 

[The prepared statement of Mr. Gale follows:]

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Chairman CONRAD. Also with us today is Dr. Peter Orszag. Dr. 

Orszag is also a distinguished member of the Brookings Institution, 

a Senior Fellow in Economic Studies there. 

His areas of expertise include: aging, budget policy and politics, 

climate change, demographics, education policy, income distribution, financial markets, macroeconomics, pensions, poverty, Social 

Security and tax policy. 

Maybe we should just have you testify. [Laughter.] 

Mr. ORSZAG. I think someone in our communications staff got a 

little overenthusiastic. 

Chairman CONRAD. Well, actually, we have looked to you for advice in virtually every one of those areas, so I do not think it is 

an overstatement. 

Welcome to the committee and please proceed. 

Let me just indicate that we are going to be using the light system. We are asking witnesses to summarize in 7 or 8 minutes if 

you can, and we will do the same thing with members and their 

questioning period. 

This is not the light system that we typically have in the committee; we do not have a yellow warning light here. But we are not 

going to be enslaved to the 7 or 8 minutes, but if we can do it in 

roughly that time—we do have to be out of this room by 11 a.m. 

We apologize for that, but I think you all understand the disruption that we are operating under, and I can say in all the time that 

I have been in the Senate, we have never had a hearing in this 

very historic room. So I think we are part of a ‘‘first,’’ at least for 

the 15 years that I have been in the Senate. 

Dr. Orszag. 

STATEMENT OF PETER R. ORSZAG, SENIOR FELLOW, THE 

BROOKINGS INSTITUTION 

Mr. ORSZAG. Thank you, Mr. Chairman, and thank you for inviting me to discuss short-term economic stimulus proposals. 

In my written testimony, I analyze various stimulus proposals 

using some common sense principles. The principles reflect the idea 

that an effective stimulus package needs to do two things—maximize the extent to which it directly stimulates new economic activity in the short term and minimize the extent to which it indirectly 

restraints new activity and worsens the budget outlook in the long 

term. 

These principles are very similar to the ones that have been endorsed on a bipartisan basis by the leaders of both Budget Committees and that were outlined by the chairman at the beginning of 

this hearing. 

My testimony reaches two main conclusions. First, on the tax 

side, most of the proposals that have been endorsed by the Bush 

Administration and now by the House of Representatives are poorly designed from the perspective of stimulating the economy in the 

short run. 

Let me take one example—repeal of the corporate alternative 

minimum tax or AMT. The corporate AMT applies when corporations owe no regular income tax because of substantial deductions 

or other tax preferences relative to their income. Unlike investment 

tax incentives, which only give tax breaks to firms that are underVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00553 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
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taking new investment, eliminating the corporate AMT would give 

tax cuts to firms regardless of whether they are investing at all. 

In particular, the elimination of the corporate AMT is effectively 

a reduction in the tax rate on corporate income; but the vast majority of such income reflects the return to old investments, not new 

investments. 

For example, the value of outstanding corporate capital amount- ed to more than $10 trillion at the end of 1999. Annual investment 

amounts to roughly $1.3 trillion. So under simple assumptions, 

roughly 90 percent of the benefits from a reduction in corporate 

taxes, like elimination of the corporate AMT, would accrue to old 

investment rather than new investment. 

Furthermore, even supporters of eliminating the AMT acknowledge that any beneficial impact would be limited in the short run. 

They basically talk about it in terms of long run benefits. 

The implication is that regardless of whether or not it would be 

warranted as part of a broader tax reform, elimination of the corporate AMT is an extremely blunt and inefficient approach to encouraging new investment in the short run. It would also cost $24 

billion over the next decade. 

I would similarly point to the Subpart F rule changes that the 

House made, and there is a variety of other permanent corporate 

tax changes that the House of Representatives makes that are basically flawed; they do not maximize their bang for the buck. 

My written testimony provides a chart of the various tax proposals and their consistency with common sense principles similar 

to the ones that Senator Conrad outlined. 

The second focus of my written testimony is on the spending 

side. Here, a distinction should be drawn between transfer programs such as unemployment insurance benefits and Government 

purchases of goods and services such as purchases of military 

equipment or new public construction. 

Transfer programs are basically similar to household tax cuts, 

and the key issue is that they boost spending quickly among their 

recipients. 

On Government purchases, the key issue, at least in terms of 

stimulating the economy in the short run, is simply how quickly we 

can spend the money. 

Given the expected temporary nature of the current economic 

slowdown, the faster that any funds can be injected into the economy, the better. The most recent Blue Chip forecast from private 

economic forecasters suggests that the recession will end in early 

2002, with real GDP growth reaching 4 percent by the fourth quarter of 2002. 

The implication of this forecast is that any stimulus provisions, 

either spending increases or tax cuts, extending well beyond 2002 

would be in effect long after the economic slowdown is expected to 

have ended. Those forecasts are not perfect, but these guys make 

their living trying to do them, and they are probably the best central forecast that we have at this time. 

Based on these considerations, the most promising spending increases involve temporary changes to the unemployment insurance 

system, modifications in other low-income programs, and increased 

Federal support for State governments, all on a temporary basis. 

549

The unemployment insurance system is a particularly important 

automatic stabilizer; it mitigates the severity of any economic 

downturn. For example, according to research by Professor Jonathan Gruber of MIT, the amount that a family spends on food, a 

key part of household living, falls by 7 percent on average when 

the head of the household becomes unemployed, but it would fall 

by 22 percent in the absence of any unemployment benefits. 

Unfortunately, the UI system is not well-prepared for the current 

economic slowdown. The eligibility rules are outdated; some States 

did not accumulate sufficient trust funds during the recent economic boom; and benefit levels are relatively low. 

Temporary changes in the UI system would represent an effective stimulus. Indeed, UI is particularly well-targeted to maximizing its bang for the buck since it is available only to unemployed workers who have experienced a reduction in income from 

the loss of their jobs and whose consumption expectations may 

therefore exceed their current income. 

Unfortunately, the UI proposals put forward by both the Bush 

Administration and what has now passed the House of Representatives are woefully inadequate. 

A variety of other programs for low-income families, including 

the WIC program which would otherwise have to turn away hundreds of thousands of people from its rolls because of inadequate 

funding, could also be temporarily expanded as part of an effective 

stimulus package. 

Finally, States are suffering substantial fiscal stress as a result 

of the economic slowdown. In all States except Vermont, some form 

of a balanced budget rule forces counterproductive fiscal policies. 

When the State enters a recession, revenue naturally falls and 

spending increases, and the balanced budget rules then force the 

States to tighten spending or raise taxes, which is exactly the 

wrong direction from a macroeconomic perspective. 

It is worth noting that the fiscal stress on States could be exacerbated by recent proposals at the Federal level. For example, some 

44 States use Federal depreciation rules for their own corporate income taxes. They would be adversely affected by partial expensing 

of business investment such as is in the House of Representatives’ 

legislation. 

Preliminary estimates from the Center on Budget and Policy Priorities suggests that that legislation would reduce corporate income 

tax received by States by approximately $5 billion a year from 2002 

through 2004. 

To avoid restrictive fiscal policies at the State level in the middle 

of an economic downturn, the Federal Government should provide 

temporary financial assistance to the States. One mechanism for 

doing so would be to create a revenue-sharing mechanism like we 

had in the 1970’s and early 1980’s, but such an approach would 

take time to design and implement. 

A more timely alternative would temporarily increase the Federal matching rate for the Medicaid program. That is the fastest 

way to get money quickly to the States. Federal assistance to State 

governments, regardless of how it is done, would then attenuate 

the restrictive fiscal policies that would otherwise be adopted at the 

550

State level, and therefore, they would represent an effective stimulus also. 

In conclusion, Mr. Chairman, the proposals put forward by the 

Bush Administration and the House of Representatives do not 

maximize their bang for the buck. The final part of my written testimony provides a much more promising alternative—temporary 

partial expensing for capital investments through the end of 2002—

and I would embrace the sliding scale that Dr. Gale suggested for 

the design of that provision; a one-time rebate for low-income 

households, those who were left out of the first round; temporary 

UI expansions; temporary increases in WIC and other low-income 

programs; temporary revenue-sharing for State and local governments, perhaps through an expanded Medicaid match; and freezing 

the top marginal tax rate at 39.6 percent, which would more than 

pay for the entire package—in fact, as my written testimony shows, 

it would save about $30 billion over the next 10 years. 

Thank you very much, Mr. Chairman. 

Chairman CONRAD. Thank you very much. 

Chairman CONRAD. Dr. Hassett, welcome. It is good to have you 

here. 

STATEMENT OF KEVIN A. HASSETT, RESIDENT SCHOLAR, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. HASSETT. Thank you. It is a real honor to be here again, Mr. 

Chairman, and to be sitting next to my close friends from Brookings on this important occasion. 

I would like to say at the outset that I commend the courage of 

each of you in the last weeks. You have been an inspiration to all 

of us, and it is very important that we have such strong leadership 

in Washington at a time of such national need. 

If you look at my testimony, I did not pick a specific policy and 

argue that that is exactly what we should do right now, but rather, 

I tried to present the thing that I think is most important to think 

about right now, and even in my unprepared remarks, which I will 

make now, partially in response to my friends, I would like to say 

that on this particular occasion, the stakes are high enough that 

it is better to just use us as resources. And I would like to lay out 

the things that I think I know about and then encourage you to 

ask questions about specific policies. I do not want to create a ‘‘my 

policy is better than your policy’’ debate at this specific instance, 

because I think there are many good policies that we could adopt 

right now, and that the worst mistake we could make would be to 

do nothing because we cannot agree that A is better than B, when 

both of them are fine. 

The urgency of a stimulus package, I think, is very strong. For 

example, this morning, we got one of the first pictures of what happened in September. We received the durable goods orders. Durable 

goods orders were one of a series that I relied upon very heavily 

when I was doing the forecast at the Federal Reserve before I 

moved to AEI. It is a very good leading indicator because it is an 

order for something that is going to happen next month. So if in 

September, it is weak in orders, that means the shipment, which 

is what really counts for GDP, is going to be bad in October. And 

551

the release we got this morning was just about the worst one I 

have seen. It was terrible. September was an awful, awful month. 

To put that into perspective, it is useful to think of our economic 

world as being two worlds that are quite different—the world on 

September 10th and the world on September 11th. 

On September 10th, if we had met, I would have said to you that 

the odds are that we are going to avoid a traditional recession—

it is not going to be great, but it is not going to be something that 

we would call a recession. And the reason is that the corrections 

to economic activity that were occurring through that date were all 

out-of-phase; we had an inventory correction over the previous 12 

months that looked like it was about done. Consumers had continued to consume, and investment had corrected as well. So we did 

not get everybody deciding they were going to stop doing what they 

were doing, which is what usually happens in a recession. 

The reason that did not happen on September 10th, or we 

thought that that was not going to happen, was that there was not 

a focal point event that signalled to everybody in the country, ‘‘Stop 

what you are doing.’’ If you look at past recessions, very often that 

is what happened. A war in the Middle East has very often historically caused recessions, because people get nervous, ambiguity is 

very high, and folks stop doing what they are doing. 

After September 11th, unfortunately, we have had exactly that 

focal point that we did not have in this recession event up to September 10th. A terrible event that dramatically increased ambiguity and made all economic decisionmakers decide to hold off their 

plans for a little while and see what is going to happen has occurred. And the potential for a very deep and lasting recession I 

think is higher than it has been since I have been watching this, 

which is since the late 1980’s—before that, I was concerned with 

being a young man as opposed to looking at the economy. 

So I think we do need to do something, and I think that——

Chairman CONRAD. Let me just stop you right there and ask you 

what was the durable goods order report? 

Mr. HASSETT. It was minus 8-something percent. I do not remember the exact number; perhaps someone has it—minus 8 percent, 

not on an annual rate basis. So it is just terrible. I think that probably aircraft pulled that number down, and that excluding aircraft, 

which is the number that we always used at the Fed because aircraft was so volatile, was minus 5-something. But those are just 

terrible numbers. 

There have been worse numbers—it is a volatile series—but usually when we have had numbers that bad, they came after a really 

great month, so the average was not so bad. But we did not have 

a series of great months leading up to this, so it is about the worst 

report that we have seen. 

Now, as we think about what to do, given that we have to do 

something, the only thing that I am going to say in my statement 

about business tax cuts—well, I will say two things—is that they 

can definitely be extremely effective. As Mr. Gale mentioned in his 

testimony, that is one of the things I have spent my career working 

on, often with Professor Hubbard, who is now chairman of the 

CEA. We just completed a review of the whole literature for the 

textbook that all the graduate schools use to study business taxVerDate 0ct 09 2002 09:58 Dec 15, 2004 Jkt 095488 PO 00000 Frm 00557 Fmt 6601 Sfmt 6601 C:\DOCS\95488 TISH PsN: LAF
552

ation, and the one lesson that I am sure of from that literature is 

that business tax cuts stimulate activity; they really do. There are 

a lot of valuable things that you can do to the business tax code 

to stimulate things now. 

The one thing from the literature that I think cautions about 

tradeoffs as we choose which business tax cut to adopt is that there 

is a tradeoff as always between temporary and permanent cuts. As 

Mr. Gale said, temporary cuts are often more effective at stimulating activity right now, but they are also more uneven in their 

stimulus compared to permanent cuts. The reason is that if you 

have a big thing that takes a long time to do—think about an electric power plant or something—if you have a 1-year cut, it does not 

really necessarily affect that decision very strongly, but if you have 

a short-term investment like a fax machine, that is something that 

might really respond. 

So when you have a very temporary cut, you are kind of playing 

favorites between long-lived and short-lived equipment. About the 

longest delivery lag for a piece of equipment out there is 18 

months, and that is for an airplane, the last time I checked, so that 

counsels for being a little bit cautious about being so short that you 

are really playing favorites with the tax cut. 

The other thing that I wanted to point out is a concern that has 

been raised often, and it is an intuitive one but one that has not 

been supported by mountains and mountains of economic research. 

That is the view that we need to be really cautious about how aggressive we are in the face of this economic danger because of potential big offsetting interest rate effects, so if we have a really big 

tax cut that we think might have a big effect right now, that could 

be squashed by offsetting interest rate increases. 

That type of relationship would hold if we had just a closed economy and the amount of Government debt that we issued was 

bought by domestic U.S. citizens, and interest rates were not affected by international capital markets. But in an open economy, 

it is sort of a question of is the U.S. big enough to affect things. 

Economists have written a zillion papers on this as they have on 

just about everything, and basically, there is almost no evidence of 

the kind of interest rate effect that should cause us to be wary 

about being aggressive in the face of this economic danger. 

As Professor Paul Evans of Ohio State University pointed out in 

a number of his careful studies between interest rates, even interest rate effects that look at very large deficits during war-time 

spending have found nothing. 

And in my testimony, I provided—I will finish quickly; I see the 

red light—a chart which is meant to make a striking example of 

how powerful this sort of effect is, that it is just not in the data 

that there are big interest rate effects or deficits. Mr. Calamaris 

and I—a colleague at AEI and at Columbia—constructed a chart of 

the real interest rate in the U.S. and in Japan over the last 3 years 

or so, a time period when the Japanese debt-to-GDP ratio was increasing by about 40 percent to levels that we have not really seen 

since Weimar, Germany; it is just a terribly high debt-to-GDP 

ratio, and at a time when the U.S. debt-to-GDP ratio is decreasing—and the interesting thing is that the real interest rate in 

553

Japan and the U.S. was the same at the beginning of this period 

and the same at the end and tracked fairly closely in between. 

Anything that you folks might prudently adopt is going to be 

much smaller relative to GDP than the kind of fluctuation we have 

seen in these charts, so I would encourage you to use your imagination and do what you think is best and not be nervous about the 

short-term interest rate impact of those policies. 

Thank you. 

Chairman CONRAD. Thank you very much, Dr. Hassett. 

Senator Clinton has an obligation in just a few minutes outside 

the hearing room. I am going to give her my slot for her questioning so that she has an opportunity to make whatever statement 

she would like to make and ask whatever questions she would like. 

Then, we will come back to Senator Hagel and go back in the order 

of appearance. 

Please proceed. 

Senator CLINTON. Thank you very much, Mr. Chairman. 

Thank you for rescheduling this important hearing and for allowing me to question at this time. 

I also want to thank each of the witnesses for being here and for 

your very helpful and, in some very stimulating way, the testimony 

about what we should be doing. 

I have a very specific set of concerns that I would like to hear 

your answers on. Others I know will get into the larger issues. But 

my concern is the impact of ‘‘the focal event,’’ in Dr. Hassett’s 

terms, of the attack on September 11 on the New York City and 

New York State economy, which has been dramatic and I am 

afraid, whatever happens, long-term. We can look forward to the 

forecasts that Dr. Orszag referred to and think that by the last 

quarter of 2002, we are back on a positive 4 percent growth rate, 

or Dr. Hassett’s more pessimistic view because of the long-term recessionary impact. 

Whatever does happen, the effects on New York will be more 

long-lasting and deeper than the rest of the Nation. And given the 

engine of economic growth that New York City has been for the entire country, it is a matter that we have to pay particular attention 

to. 

Just a few quick facts, and then I would like your responses. In 

the damaged and destroyed buildings alone, we lost around 850 

businesses and 25 million square feet of office and commercial 

space and nearly 100,000 jobs. If you expand the ground zero impact zone to what is called the ‘‘frozen zone,’’ which includes not 

only buildings that are destroyed but those that are completely 

blocked off because of the crime scene investigation and the cleanup efforts, you are up to 2,600 businesses impacted directly, 35 million square feet of space, and about 140,000 displaced jobs. 

In the immediate downtown area, we had some of the most attractive residential living spaces in the entire country, I think, but 

only 30 percent of the tens of thousands of residents have returned 

to their homes in Battery Park or the financial district or elsewhere in Lower Manhattan, in part because of damage and cleanup challenges, in part because of the fears and anxieties that many 

families have. 

554

I talked to a number of parents who just cannot bring themselves 

to return with their children while this huge pile of still burning 

rubble is outside their windows. And there is a great concern about 

health effects—although we have absolutely no evidence of any adverse health effects, that is something that people are worried 

about. 

We are beginning to hear that if we do not come up with some 

immediate targeted fiscal stimulus for New York in addition to 

whatever we do nationally, we are going to be losing a lot of our 

existing businesses that are considering relocating and expanding 

not just in other places in the country, but now we are hearing 

London, New Delhi moving back office operations, even moving 

other jobs offshore. 

So that most estimates of the financial losses that New York and 

our companies there have suffered exceed $100 billion. No one can 

put too fine a point on it, but probably the best estimate at this 

point is from the comptroller of the city, and it is $105 billion. 

I think a lot of what we have to do is to build confidence, and 

how we stimulate that confidence, we take care of the needs of 

these displaced workers who have to have temporary help, unemployment insurance, COBRA extension, how we organize the charitable contributions, which is about $800 to $900 million, which is 

significant, and make sure they get to the right people, and how 

we send a message to residents and businesses that even though 

in the immediate zone, you are not going to be able to get in there 

any time soon—it is going to take a year to clean it up—we want 

to have it clear that business will be back going and that residents 

can look forward to returning. 

Do you have, just briefly, any specific thoughts about the portion 

of the stimulus package that I hope will be directed to New York’s 

needs? We were looking at a tax credit for employers to keep employees in businesses in the area; residents getting some kind of 

tax incentive—they have absorbed a lot of expense and intangible 

costs; obviously, some more triple tax-exempt authority for rebuilding. Any thoughts you have would be extremely welcome, in any 

order. 

Dr. Gale. 

Mr. GALE. Thanks. 

Brookings was not as generous in listing all my areas of expertise as they were with Peter’s, but one of the things I do is edit 

a journal on urban economics. This is a key issue in how the attack 

is going to affect the demand for agglomeration, the willingness of 

people or businesses to locate in highrise buildings, the cost of increased security, et cetera. So there are a lot of long-term issues 

facing cities in general and New York in particular. All of these 

issues hit with ten times as much force in New York City as in 

other major areas. 

So that is one general issue that is overlaying this. The other 

general issue that is overlaying this is can the Government provide 

a useful role. One of the things that changed immediately after 9–

11 is that people remembered, oh, yes, Government can be part of 

the solution. I think that is a very important lesson for us all to 

remember. 

555

I do not recall all the details of the rescue/recovery package 

passed earlier, but I think it should be a very important Federal 

initiative to rebuild and revitalize New York City both on standard 

economic grounds, the crucial importance to New York City and the 

Nation’s economy, but also on symbolic grounds. Not only was it 

the target of the attack, but in our history, it has also been the 

gateway to the country. 

So I do not have any specific proposals to suggest, but I think 

that on both symbolic and economic grounds, it is a crucial Federal 

need to push ahead. 

Senator CLINTON. Although we passed a very generous appropriation, we have not allocated it yet, so we are in the process of 

allocating the appropriated dollars and looking to see what kind of 

additional stimulus might be particularly suited to New York. 

Mr. ORSZAG. I would just add two or three brief comments. 

Economists are often called ‘‘the dismal scientists.’’ On the response to natural disasters and other things, the literature actually 

if anything is more optimistic than one would think just looking at 

all the destruction that is often so visible. 

When one looks at the responses to earthquakes and other natural disasters here, in Japan, and elsewhere, the response is often 

that economic activity rebounds remarkably rapidly, much more 

rapidly than one would think looking at the destruction. So I would 

just put that in the back of your head to remember that this is obviously different, but what evidence we do have suggests that recoveries are often quite rapid. 

I would also underscore the point that you made about unemployment insurance. New York’s UI Trust Fund is not very high. 

The eligibility rules could be expanded. There is a lot that you can 

do to help in the short run the displaced workers. 

And then, finally, on tax incentives, I guess I would just also introduce a brief note of caution, which is that I think it is unclear 

what that elasticity is, how much activity would actually be encouraged by tax incentives, especially if the tax incentives are temporary. Firms that are thinking about making permanent decisions 

about where they are located may not be all that responsive to temporary incentives. On the tax side, we may therefore be better off 

using the money for direct spending approaches. 

Mr. HASSETT. I would just very quickly add that I think the difference this time—this is something that, oddly, economists have 

studied, too; I guess we can always say that—but there is a difference. Economists make the distinction between circumstances of 

uncertainty, kind of like flipping a coin—you know there is 50–50 

chance that something is going to happen—and a circumstance 

that is ambiguous, where you just know that something might happen, but you do not know what the odds are, and you are not even 

sure what the full set of things that might happen are. 

In circumstances that are ambiguous, if you assume that a person is perfectly rational and then try to model what their behavior 

should be, it turns out that they should do something called a 

‘‘maxi-min’’ strategy. They should make themselves as well-off as 

possible if the worst thing happens. 

556

That is exactly what everybody is doing right now. They are assuming the worst and preparing for that. That is because the ambiguity is so high, and it is especially high in New York. 

So I think that, sadly, New York is going to have very strong 

problems until we have resolved a lot of the ambiguity about this. 

But I would encourage you to think about things, very visible 

things, that you could do to make people feel like they are safe and 

that the sort of odd, unknowable threats are not as severe as they 

might think. I think that things like buying the drugs, as we are 

doing, do that, but also making big public statements about how 

aggressively there is air defense or anything else that defense experts could give you that would resolve the ambiguity and make 

people think they can return to their everyday lives. Then, I think 

we could get what Mr. Orszag said, the kind of response that you 

usually see after a hurricane. 

But if we leave the ambiguity lingering out there, things could 

be bad for a long time. 

Senator CLINTON. Thank you. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Senator Hagel. 

Senator HAGEL. Mr. Chairman, thank you. 

Gentlemen, thank you for being with us this morning. 

It is my opinion, and it has been reinforced to some extent by 

your testimony this morning, that none of us, regardless of how 

wise we perceive ourselves—well, there are certain exceptions—— 

[Laughter.] 

Chairman CONRAD. You can take as much time as you like. 

[Laughter.] 

Senator HAGEL. I am catching on on this committee, I think. 

The enormity of the challenge before us is such that we are grappling with something here that the world has never seen before. 

And when you connect the economic and security challenges and, 

in your words, Dr. Hassett, the ambiguities, and as the three of you 

have laid out this morning, things like the durable goods report 

numbers—yesterday in the Banking Committee, we were dealing 

with the reinsurance issue; we have been dealing with confidence 

issues; we have been dealing with a list of things that not just the 

United States but the world has never, ever seen before in its totality—so if we have some sense of the enormity of this, realizing that 

there are no road maps and not answers that are easily accessible, 

then, we are doing what we must do, and that is starting to come 

at this with the tools that we have. 

But hopefully, we will be wise enough to understand the point 

of the enormity here and that it is all connected and that whatever 

we do in a stimulus package and the airport security package and 

the anti-terrorism package—all are connected—as is connected to 

the military effort in Afghanistan, the coalition we are building, the 

long-term and short-term security relationships and foreign policy 

decisions that we are making now. 

I would be interested in hearing your thoughts on a number—

and I know the ambiguity of trying to frame up a stimulus package 

number is difficult, because nobody knows—should it be $100 billion, should it be $50 billion, should it be $200 billion—but I would 

be interested in your thoughts on maybe a general number and 

557

then how you would break that out, each of you, in particular on 

tax cuts. Should we have any tax cuts? If we should, what should 

those tax cuts be? 

So I would appreciate each of your thoughts on the kind of package that you would like to see, based on what you think would help 

address what we have before us. 

Dr. Gale. 

Chairman CONRAD. Could I say this—in view of the number of 

members we have here and the number of witnesses, let us not be 

bound by the light in your answers to these questions. Give as detailed answers as you think appropriate to Senator Hagel’s 

thoughtful question. 

Senator HAGEL. Thank you, Mr. Chairman. 

Mr. GALE. In the same order? All right. I will lead off again. 

I agree with you about the enormity of the problem and in particular that the nature of the problem here is different from the 

standard recession, downturn type stuff. The economy now is different than it was on September 10 because of all these added concerns. Not only are people to some extent more fearful and less confident, but if we are going to address these issues in the longer 

term, there are a whole bunch of costs that we need to incur in 

terms of adding security, making people safer, that we would not 

have had to incur otherwise. 

Therefore, the spending programs, like on security, can have the 

direct effect that spending programs can have as a stimulus but 

can also have the indirect effect that Kevin was mentioning in 

terms of stimulating confidence, and that indirect effect could be 

even more important than the direct effect. 

So in terms of thinking about your question about tax cuts 

versus spending and how much and what kind, I have a few 

thoughts. One, I do not think that the size of the package—I do not 

think we should blow the budget on this, in part because in some 

sense, we have already blown the budget. But I do not think that 

the size of the package within the range that we are talking about 

is anywhere near as important as what is in it. 

What should not be in it is sort of the same old, same old, tax 

policy—the types of proposals that one was talking about under 

earlier circumstances—there is no reason why they are the most 

natural things to look at now. The nature of the problem is different, so the nature of the solution is different. 

So if we do stimulus on the tax side, I think it should be temporary and aimed at aggregate demand to get the economy 

jumpstarted, to use a phrase of the phase. 

But I think the spending side is equally if not more important, 

and I have hesitated to say much about that because I am mainly 

a tax specialist, but I think that both the economic and the psychological impact on the spending side could have a huge positive effect whereas the tax cuts that we are talking about—even the most 

desirable tax cuts—I would say are likely to have quite a limited 

impact. My testimony goes through some calculations, but basically, the economy’s growth rate falls from 4 percent to about zero, 

or maybe negative. If you look at the impact of the investment incentive that the House passed, that is going to increase investment 

by about two-tenths or three-tenths of a percent of GDP, according 

558

to standard estimates of the response of investment to the cost of 

investment. 

That is in the right direction, but that is not going to fundamentally alter the nature of the economy. Spending programs, particularly ones that reinstill confidence, could fundamentally alter people’s confidence and people’s economic outlook. So I think there is 

a big up-side potential on that side, and I do not see a tremendously big up-side potential on the tax side. 

Senator HAGEL. Could you give me an example of what kind of 

spending program you have just defined? 

Mr. GALE. Generally, in the security, defense area. I do not have 

a specific——

Senator HAGEL. That is for right now? 

Mr. GALE. Yes. I do not have a specific program in mind, but I 

am saying spending that has the potential to alter people’s feelings 

about whether the world really is a scarier place or not has the potential to have a big impact. Tax cuts which let people keep a couple of extra pennies per dollar that they invest do not fundamentally change the nature of the work. 

Let me put it this way——

Senator CORZINE. Are you using homeland defense or national 

security? 

Mr. GALE. Right. 

Senator CORZINE. Homeland or—which one are you using? 

Mr. GALE. Either/or; both. I mean, both have the potential to do 

that. 

I am just saying the reason why people are not flying on airplanes right now is not because of a lack of disposable income. It 

is because of other feelings. And addressing those attitudes and 

those uncertainties I think is the first-order economic effect, and I 

do not feel that aligning tax incentives more exactly is a first-order 

issue—but it just happens that I am a tax expert, so that is what 

I talk about. 

Senator HAGEL. Would you see any benefit to any tax cuts in a 

stimulus package? 

Mr. GALE. If we do tax cuts that are temporary and targeted toward aggregate demand, I think the net effect is positive; it is just 

a question of how big. 

Senator HAGEL. Give me an example. 

Mr. GALE. The temporary investment set-up, particularly the 

sliding scale that I mentioned earlier, I think would have a beneficial effect; a rebate——

Chairman CONRAD. Partial expends? 

Mr. GALE [continuing]. Yes, yes, a partial expends, right—and I 

am not a big fan of rebates in general, but getting the money out 

in the relatively short run to a set of low- and middle-income 

households is likely to have a more stimulative effect than giving 

it to other households. 

So I think it is pretty easy to rank the relative stimulative effects 

of various tax policies. If you want to stimulate demand, and you 

want it to be temporary, on the household side, you want it to go 

to low- or middle-income households because they are more likely 

to spend it. 

559

The bigger issue is are all of these big-effect policies where some 

of are just bigger than the other, or are all of them modest-effect 

policies and some more modest than the other. My view, based on 

what I know about the evidence is that they are all modest-effect 

policies, and some are more modest than others, but I think the 

ranking is pretty uncontroversial. 

Senator HAGEL. Dr. Orszag. 

Mr. ORSZAG. First, I would agree with Dr. Gale that a specific 

amount is very difficult to determine and that it is actually more 

important that it be temporary. It is less important whether it is 

$70 billion or $80 billion or $90 billion this year than that it is not 

very expensive over the long term. I think that is a key point. 

In my written testimony, actually, just to try to step up to the 

plate, I did put down a stimulus package that cost something like 

$70 billion or so in 2002. It included some investment incentives, 

tax incentives, and a one-time rebate for low-income households, 

and then it also included UI expansions, increases in other low-income spending programs that will have a very high bang for the 

buck—the money will be spent—including WIC; there are problems 

with the TANF contingency fund, and a variety of other things we 

could talk about if you are interested in them—and also, trying to 

shore up State governments. Basically, we want to avoid a situation—it is already happening in many States—where they are enacting spending cuts or tax increases to offset the slowdown, and 

that exacerbates the macroeconomic situation. So providing additional dollars to them which would then preclude what they would 

otherwise do or stop them from the cuts they would otherwise 

make is a very effective stimulus measure. 

I also included a measure aimed at long-term fiscal discipline to 

demonstrate the credibility of the Congress in ensuring long-term 

discipline. So I packaged the short-term stimulus with a long-term 

fiscal discipline measure, and together, I think that that is a more 

effective package than, for example, the one that the House recently passed. That would get more bang, and I agree also with Dr. 

Gale that it is not clear exactly how much bang it is and how much 

it would help, but it is more than——

Senator HAGEL. Excuse me, Doctor. Were you the one who referenced matching Medicaid payments as a quicker direct assistance 

to the States, and revenue sharing—you mentioned that as well, 

but that is longer-term. 

Mr. ORSZAG. I did. There is a little bit of debate over how quickly 

revenue-sharing mechanism could be put into place. The people 

who designed the one that existed in the seventies think that it 

could be put in place very quickly, but other budget experts think 

that the fastest way to get money to the States is just to increase 

the Medicaid match. 

Also, Medicaid is a major component of many State budgets and 

also where they often look for cuts, so the extent that the money 

sticks there a little bit, it precludes cuts; to the extent it does not 

stick there, it provides additional resources for State budgets in 

general. Either way, it is an effective way of getting money to them 

quickly. 

Senator HAGEL. Before we go to you, Dr. Hassett, just a quick 

comment on that. I think that that is an area that is going to cause 

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us some big, big problems. Most States, as you all know, are going 

into special session; I know that Nebraska is, and I think most are. 

Their revenues are way down; obviously, expenditures are over the 

top. I think you have locked onto something that is a very key component of whatever we do here that we ought to focus on. 

Thank you. 

Dr. Hassett. 

Mr. HASSETT. I would caution about that, Senator Hagel, before 

I begin talking about the other aspects of this. I think the reason 

why States are having this trouble is that they have adopted a policy that we have long known is a foolish one——

Senator HAGEL. Not Nebraska. [Laughter.] 

Mr. HASSETT [continuing]. Well, I do not know about Nebraska—

but having an amendment that says the budget has to be balanced 

each year means that you have to do policies that exacerbate economic fluctuations. So you want to have a budget balance on average over time, but you do not want to make them do it every year, 

and if you do, then bad things happen. 

I would hope that the States would get rid of those bad policies 

and that that would be one of the things that would come of this; 

and if they feel like the Government is going to bale them out in 

the bad State, maybe they will not do that. 

As far as the size of the stimulus package——

Senator HAGEL. I am glad Senator Domenici is not here to hear 

this; he would probably have a comment. 

Mr. HASSETT. Yes, we could argue about that, I am sure. 

The way I think about the size effect is that about the worst economic year we have had, at least since the war, is in the minus 

2 percent range for a year. And my back-of-the-envelope, old Fed 

model understanding/guess of what we have for monetary stimulus 

and fiscal stimulus already is maybe a percent and a half or a percent, somewhere in there. And usually policy has not been as good. 

I think you folks are to be commended for seeing things coming a 

little bit last spring, and the Fed has been moving aggressively 

early on, so we are in better shape going into this recession than 

we have been historically, so you could almost say, well, if we had 

the worst thing ever, minus 2 percent, then already we are going 

to have a percent or a percent and a half offset of that, and then, 

if we added another $100 billion of stimulus that had bite, that 

means that we would basically not have a negative year, which 

means it would not be a recession. 

I think that that is how the $100 billion number—I think people 

have used that kind of thinking in the White House and elsewhere 

to think about why $100 billion or so is a reasonable number. 

If you are looking for something to do, I think the bill that the 

House passed has some very worthy candidates. The expends provision is designed to help people invest. Investment has been one of 

the things that has gone down the most in the past year or so, and 

investment generally is the source, along with inventories, of about 

three-quarters of the decline in a typical recession, and it has already declined a lot, which is kind of good in the sense that maybe 

it cannot go down much farther—but also if we could stimulate it, 

then we could have a big effect, potentially, on the odds of a recession. 

561

I think that the AMT provision is very poorly understood in the 

public debate. The alternative minimum tax was designed maybe 

to catch tax cheats, people who had too many deductions relative 

to their income. But what we found out in the last recession is that 

one of the odd byproducts of the code is that when times turn bad, 

you can look like you have too many deductions because all of a 

sudden, your income goes way down. So in the last recession, about 

half of firms and assets, by assets, were on the AMT. It is kind of 

like a tax fine, if you like, for being a tax cheat that we are imposing on people because there is a recession, and I think that the repeal of the AMT is a sensible response. We do not want to be increasing people’s taxes and taking away the benefit of tax deductions for investment which happens under the AMT, a large share 

of it. We do not want to be doing that during a recession, and stopping it is a sensible policy. 

One of the more contentious aspects of the AMT repeal in the 

House, or one of the more difficult problems, is that if you ever go 

off the AMT—because again, it is designed to catch tax cheats—you 

can take the AMT that you paid in the past and credit it against 

what you got—you folks understand that—and if we take away the 

credits when we repeal the AMT, to me, it is kind of like saying 

that if we went to expends, and you bought a machine last year 

and still have 60 percent of the depreciation to claim, we are not 

going to let you take that depreciation. It is something that happened in the past that firms are carrying now as an asset that they 

expect to receive when they can claim it. 

So I do not think the AMT is a policy that you would want to 

support in a recess. 

Senator HAGEL. So you generally would support what the House 

did last night? 

Mr. HASSETT. I would generally support what the House did, yes, 

and I think the size agrees with my colleagues here; it is the size 

that they have recommended. I guess the total amount of the package is 86, if I am reading this document right that I have in front 

of me. Maybe that would change the focus some, and I am sure 

that that is something that you folks will be doing. 

But to close on this ambiguity front, I would encourage you—and 

I know that you are uniquely qualified for that, Mr. Conrad—to 

very quickly try to find something that we can all agree on, because one of the things that would be most paralyzing for the economy right now would be the impression that we cannot get things 

done in Washington. We want to show that if something happens, 

we can respond quickly to it and agree on the right thing. 

If I look at the debate and the statements that have been made, 

usually, everybody has something to offer that is kind of an OK 

idea, and there are pluses and minuses on it; and if we took some 

subset of the things that people proposed on all sides, that package 

would be an OK package—it would not make everybody happy, but 

it would probably get the job done. 

Senator HAGEL. Thank you. 

Mr. Chairman, thank you for allowing that to go on. I appreciate 

it. 

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Chairman CONRAD. I think it was very useful. We are going to 

show the same treatment to the other members as well when they 

have their chance to question. 

Let me take my time now to question, if I can. Let me start by 

saying that I believe this economic downturn is more serious than 

has generally been recognized. In talking to business leaders all 

across the country in the last 3 weeks—and I was with a group of 

some of the leading—about 100 high tech company leaders—the 

other night at a dinner in which four of the leaders spoke. And I 

will tell you it was a very sobering discussion. 

We heard from Neil Hendry, who headed Global Crossing; we 

also heard from Craig McCaugh of McCaugh Cellular, who is, as 

you know, deeply involved in a number of high-tech ventures. 

I will tell you, to listen to their description of what has happened 

to business after September 11th and the overcapacity that they 

think existed, especially in telecommunications, prior to that time, 

was a sobering circumstance, and I think we have all got to take 

very seriously what we see happening. 

I think it requires an immediate stimulus of substantial size—

but we have also got to be smart about what the makeup of that 

stimulus is. 

Part of judging what we are doing here I think has to be informed by our overall, long-term budget circumstance. We have 

just done another detailed look at our long-term budget circumstance, and let me just share it with you now. 

We started this year with a forecast from the Congressional Budget Office of $5.6 trillion of unified surplus. That is all funds, 

jackpotted—$5.6 trillion of surplus over the next 10 years. That is 

what we were told. 

Of course, the significant amount of that was trust fund moneys. Nearly $3 trillion was Social Security money. About $600 billion 

was Medicare Trust Fund money. 

Let me just tell you that in the latest look that we did on a bi- partisan basis to establish a new baseline, we were down from $5.6 

trillion to $2.6 trillion. That was done just weeks ago. It had the 

agreement of the budget leaders in the House and the Senate, Republican and Democrat, and the Office of Management and Budget. 

We have now gone back and done another cut, because remember, that baseline does not include budget resolution policies not 

yet enacted. When you take those out, when you take a look at 

major initiatives that have not yet passed one body but have 

passed the other, if you look at those initiatives—for example, the 

education bill that has passed the Senate, railroad retirement that 

has passed the House, the Patient Bill of Rights that has passed 

the Senate, the energy bill that has passed the House—if you add 

those, and on top of that, if you take out an adjustment for the alternative minimum tax problem just created by the last tax bill—

not the whole alternative minimum tax problem, but just the one 

created by the last tax bill—and you make a further adjustment for 

reductions in productivity growth from what was forecast—and a 

very modest adjustment there, I might add, one that I think will 

be made in the January forecast—a modest additional package for 

New York—and by ‘‘modest,’’ I am talking $10 billion over the next 

4 years, and the economic stimulus package at $70 billion this 

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year, what you come down to is only $700 billion left. So $5.6 trillion goes down to $700 billion on a unified basis. Every dime of the 

Medicare Trust Fund surplus is gone, and a very substantial chunk 

of the Social Security money is gone—$1.6 trillion of the Social Security money. 

That money was supposed to be used to pay down the debt. We 

will no longer have maximum paydown of the debt or anything 

close to it. 

Senator NELSON. You will not have anything—$700 billion. 

Chairman CONRAD. Seven hundred billion. 

Senator NELSON. Over 10 years. 

Chairman CONRAD. So a dramatic reduction—and again, I would 

say to you I think these are realistic kinds of looks at where we 

are and where we are headed. And I would say to you that I think 

one of the most important things is that when that January forecast comes in, we are not going to see productivity growth at 2.7 

percent. I do not think we are going to see, regrettably, as strong 

an economy going forward as was earlier anticipated. 

That takes me to the question——

Senator NELSON. May I ask a question? 

Chairman CONRAD. Yes, certainly. 

Senator NELSON. To get from $5.6 trillion down to $2.6 trillion 

over 10 years, we lost $3 trillion in projected unified budget surplus just on the basis of the revisions of the economy. 

Chairman CONRAD. No—about two-thirds of it is actually the tax 

cut. 

Senator NELSON. I see. 

Chairman CONRAD. The tax cut and the interest cost associated 

with the tax cut. We did have substantial reductions as a result of 

weakness in the economy, but most of it was the tax cut. 

Going forward, obviously, we have these other matters out 

there—these budget resolution policies that have not yet been enacted—now, some will say that some of those will never happen—

perhaps not—but this Congress, just earlier this year, thought they 

were going to happen. 

I do not think the pressure on many of these things is going to 

go away, and I would say to my colleagues that I believe spending 

demands on the kinds of matters that Senator Corzine has referenced—national defense, security issues, bioterrorism—does anybody believe we are not going to spend more money on bioterrorism 

this year than is in the budget? I can tell you I was in a meeting 

yesterday where the administration came up and asked for $1.5 billion. That number is now at $4 billion. And the people who are the 

scientists are asking for $30 billion to combat bioterrorism. That is 

the reality of what we confront. 

I would like to just ask the three witnesses this. In economic 

terms, is there any difference between spending and tax cuts—if 

you had the same amount of money, put out in the same period, 

is there a difference in terms of the stimulative effect of tax cuts 

or spending? 

Mr. ORSZAG. Can I mix up the order? 

Chairman CONRAD. Sure. 

Mr. ORSZAG. OK, I will go first. 

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In answering that, you do have to make the distinction within 

the spending category between transfer programs and direct purchases of goods and services. The transfer programs are basically 

sort of a negative tax, and they will have very similar stimulative 

effects to a tax that goes to the same people. On average, transfer 

programs go to lower-income people than many of the tax changes 

that we are talking about, and therefore, one would think that to 

the extent that lower-income people spend more of each additional 

dollar than higher-income people, that transfer programs would be 

more effective. 

On the purchases of goods and services, simple models, the simple sort of Keynesian model that you learn as an undergraduate in 

economics courses would suggest that the spending increase is actually more stimulative than either the tax cut or a transfer program. 

Chairman CONRAD. Why is that? 

Mr. ORSZAG. The reason is that some of the tax cut or the transfer payment will be saved whereas all of the dollar that is spent 

on military equipment or new roads is immediately injected as demand into the economy, whereas part of the dollar that is given as 

a tax cut would be saved rather than consumed and therefore does 

not immediately contribute to the stimulus effort. 

Chairman CONRAD. The problem with spending, just as with tax 

cuts—with spending, I can think of at least two problems. No. 1, 

it is hard to get it out there quickly enough to have an effect. No. 

2, you have got to be concerned that it not be embedded in the base 

for the future, because of our long-term budget outlook as I have 

just described. That is also the problem, as I see it, with tax cuts. 

With tax cuts, you have got to be concerned that they are not embedded in the long-term budget circumstance, again because of 

what we see here as a very seriously diminished long-term situation. 

But what I hear you saying is that on the spending side, if it is 

direct expenditure for goods and services by the Federal Government, to the extent that gets out there quickly, you actually get the 

biggest bang for the buck because none of that is being saved. 

Mr. ORSZAG. That is again what one would think, yes. 

Chairman CONRAD. Does anybody disagree with that? 

Mr. ORSZAG. You could come up with theoretical curiosities under 

which it would not be true, but I think that that should be the 

baseline assumption. 

The uncertainty around the effects is such that I could not make 

a statement that I would want to defend in front of Saint Peter on 

which effect is larger. It depends on which tax cut you are choosing, and so on. 

Mr. GALE. The brunt of my testimony is that different tax cuts 

have different stimulative effects—some of them have none, some 

of them will have some, some will have more. The same is true for 

spending programs, as Peter said. 

I do not think there is anything inherent about a spending program or a tax cut that makes it more—there is nothing about its 

nature as a spending program or its nature as a tax cut that makes 

it stimulus. It is primarily who it goes to and what incentives it 

565

creates. You can create stimulus programs on either side, you can 

create programs that do not stimulate on either side. 

If I can, I do want to add that fixing the real AMT problem, I 

think is another $533 to $400 billion, which pushes us further in 

the hole relative to the numbers that you mentioned. 

Mr. ORSZAG. Individual AMT. 

Mr. GALE. The individual AMT. 

Chairman CONRAD. The individual AMT. I want to make clear 

and let me repeat that I was just talking about fixing the part of 

the individual AMT problem that is directly attributable to the last 

tax package. I am not talking about dealing with the whole problem. You know, we have a very significant problem there going forward that all of us know about that we have not budgeted for. 

Let me go to the question of interest rates, and then I will stop 

and turn to my colleagues. On the question of whether fiscal discipline contributes to a more favorable interest rate climate, this is 

a news report from October 2. ‘‘U.S. Treasuries climbed at midday, 

pushing the 30-year bond yield to 6-month lows after President 

Bush said any economic stimulus package should be big enough to 

get the economy moving, but not so big that it would push up longterm interest rates.’’

The story goes on to report: ‘‘’The long end is rallying pretty 

strongly because Bush showed he was cognizant of the potential 

impact of excessive fiscal stimulus on long-term interest rates,’ said 

the chief market strategist of A.G. Edwards and Sons.’’

I believe there is not only an economic component to this but a 

psychological market component to this and that long-term fiscal 

discipline does matter to interest rates and that it also matters to 

the psychology of markets. 

I would just ask the witnesses for their response. 

Mr. HASSETT. I guess I can respond first, both to mix it up, and 

since I am the one who was talking about interest rates. 

I think there is no question that that statement is one that is 

very calming—the statement of the person who wrote the news article—and indeed, I have a great deal of respect for people who believe in these effects. Often, folks like Mr. Corzine, who have actually functioned in real markets—I trust their intuition more than 

that of economists. But I am disturbed—I could forward to you, Mr. 

Conrad—there have even been attempts by economists to very rigorously go through news accounts and look at events where there 

was obviously significant news about the long run surplus challenges and found almost no scientifically reliable evidence that 

things go the way that that story suggests that they should. 

And let me again point to the Japanese experience. I think it is 

very striking. They went from having a little more than 100 percent debt-to-GDP ratio about 3 years ago to having over 140 percent debt-to-GDP ratio, and that level is the winner of the debt 

Olympics. We would be very upset if we were like that. We have 

gone over the same time period from above 40 to about 30—I cannot quite read it in my chart—maybe 37 debt-to-GDP ratio. And if 

what you say is true—and I have a great deal of faith in your ability to crank numbers accurately—then, the debt-to-GDP ratio 

would still decline over the next 10 years. 

566

I do not want to seem like I am saying that means we should 

not be prudent about our long run challenges—the Social Security 

challenge is a very significant one—but I think that right now, our 

challenge is so great that that should be a secondary consideration, 

that this long run imbalance should not be so significant in your 

thinking that you do not go out and spend lots of money on homeland defense and pursue tax stimuli. 

Chairman CONRAD. I agree with that. Let me just say that very 

early on here, the morning after September 11th when I was asked 

by the President, I said, look, this changes everything. Our country 

has been victimized by a sneak attack. Our No. 1 priority now is 

to defend this Nation. Our second priority is to rebuild that which 

has been destroyed, and in addition, we must strengthen this economy. 

So I think we have a strong consensus on what our priorities are. 

I must say that we have differences. You indicated that you think 

the House package is one that can be endorsed. I do not believe 

that. Applying the principles that we agreed to on a bipartisan 

basis for that package yields these results. On the question of it 

sunsetting within a year, 70 percent of the tax cuts provided there 

are permanent, so it clearly fails that test. And on rapid impact, 

a substantial portion of the money should be out within 6 months—

but nearly 40 percent of the 10-year cost of that package occurs 

after the first year. 

The third test was size, approximately $60 billion, that we had 

then as a floor. This package is $160 billion. 

On targeting, we said that stimulus dollars should go to those 

most likely to spend them and those most vulnerable in an economic downturn. In the first year, the House package has 35 percent of the benefit going to the wealthiest 1 percent; the bottom 60 

percent only get 19 percent of the benefit—the very people who are 

the most likely to spend it. 

And finally, on the long-term assessment—the package should 

not worsen our long-term economic situation and increase interest 

rates—this package, the House package, has a cost of $170 billion 

beyond 2002, when you include the interest cost. 

I would say to my colleagues that whether you believe there is 

a relationship between deficits and interest rates—I do—whether 

you believe that or not, we have a fiscal condition as I have outlined this morning that I think requires us to be prudent going forward and to limit the duration of the stimulus package to the time 

that the administration is forecasting economic weakness. 

Now let me say that my own conclusion is that we need to do 

a bigger package than $60 billion. My own conviction is that this 

situation is sufficiently serious that, from everything that I have 

been able to learn, I believe we need to do a bigger package than 

$60 billion—but I do believe very strongly that we need to give as 

much pop as we can do right now—not 2 years from now, not 3 

years from now, but right now. 

Senator Corzine. 

Senator CORZINE. I wish I could disagree with my chairman on 

a lot of his comments, but I will not. The only comment that I 

would make certain is that the interest cost to the Federal budget 

567

will go up no matter what happens—whether interest rates go up 

or not, the impact on our budgetary policy will be substantial. 

Where shall I start? Isn’t it the common view of most economists 

that we have an overhang of investment that existed in the economy that we have got well beyond productive investment prior to 

September 11th—overcapacity, if you would, was built into the system? 

I was at the same dinner that the chairman attended and heard 

these discussions, and in that light, I have serious concerns about 

why we are so focused on stimulating additional business investment relative to other kinds of investments, particularly high-return public investments on public security, transportation, and 

other issues. I am concerned about how quickly we can put those 

into the economy. That would be the biggest problem I would have 

with those. 

But given what I am hearing here, they seem like they have 

higher return profiles to the economy than additional business investment, which was already falling off dramatically prior to September 11th. 

I would love to hear your comments on that. 

Second, as it deals with blue chip forecasts, which almost everything I hear talked about in the economic world says, well, we have 

a 4 percent growth rate projected in the fourth quarter of next 

year—and we all know that those things have to have a probability 

assigned to them—but just as economists, do you believe that blue 

chip forecasts are based on economic models that were in place 

prior to September 11? Are they the kinds of things that have fully 

accounted for some of these ambiguities that we have talked about, 

and do they reflect the dynamics of what is going on in the economy in an uncertain world? 

Then, I would just add a fact—Senator Clinton was talking about 

New York City—I will give you an example. We sat with the Governor of New York last night, and the projected budget deficit for 

next year in the State of New York is between $9 and $12 billion. 

They got another one of those balanced budget contexts. I know 

that the New Jersey budget deficit is projected at $1.5 billion. 

I am very concerned—even though I would like to see us get 

away from those balanced budget amendments that are there—that 

we could be enormously in contradiction with ourselves and State 

budgeting procedures in just the two States that I know the most 

about, and I know this is happening across the country. 

So I would love to hear your comments on that. I hear where you 

say we ought to go, but it seems to me that infrastructure and 

spending and support for State and Federal Governments—and 

then, I would love to hear your views on this forecasting. 

Mr. GALE. I will go back to my customary spot and start. 

On the business investment side, we are seeing three things happening right now. One is that you are having sort of a long-term 

shakeout in the tech industry and in the telecommunications industry. That would have happened regardless of anything else 

going on. 

Second, you had the slowing of the economy——

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Senator CORZINE. We were in a manufacturing recession before, 

so we were not typically putting a lot of money into steel plants 

and so on. 

Mr. GALE. That is what I am saying. There was a slowing of the 

economy, particularly in the traditional sectors like manufacturing, 

that was going on before September 11. I think manufacturing had 

been declining for 12 months straight or something like that. 

And third, there is the investment response to the attacks on 

September 11. 

So all those things are going on. The shakedown in telecommunications and high-tech is in some sense the way the medicine is supposed to work. The typical life-cycle of industries involves a big period of investment and then some sort of shakedown and consolidation. That is one point. 

The second point is you are right that capacity utilization rates 

are very low right now, so that raises questions about why we 

think we can stimulate new investment and what the best way to 

stimulate new investment is. 

It was precisely those considerations that led me to propose the 

sliding scale with the big increase in the subsidy now, because I 

think the one investment issue that we can deal with is that firms 

have these projects that they develop, they have gotten financing, 

they are on the verge of implementing, and they have decided to 

hold off. Those are the ones that we want to say ‘‘Just do it’’—get 

those things going again. 

There is not anything we can do about the shakedown in hightech. That essentially needs to happen. But we can try to get a 

turnaround on the things that people are postponing. 

So I share your caution, the caveats that you throw up about the 

potential effectiveness of investment incentives at this stage, but if 

they are to be effective, they will be effective precisely in getting 

firms to do the things that they were already planning to do before 

9–11 but chose not to after 9–11. 

On the blue chip forecasts, it is undoubtedly right that the models that underlie the forecasts do not have in them many of the 

things that we think are going on since September 11. I do not 

know how anyone would ever have built those things into the 

model to begin with. 

On the other hand, I am almost certain—not completely certain, 

but almost certain—that any good forecaster applies some judgment rather than simply reporting out the rote model result as 

fact. So I do not know the extent to which the various forecasters 

have adjusted, or what adjustments they have glommed onto the 

formal model, but I would think that any forecaster worth his salt 

would be doing something like that. I just do not know how much 

they have done that. 

On the State issue, it is critical that the Federal Government do 

something at the very least to offset the impact of a Federal stimulus on States. As Peter mentioned, the tax cuts will impact State 

finances. At the very least, the Federal Government ought to be offsetting that impact. 

I think there is a pretty strong case for expanded Federal spending via the States governments also, but—here in D.C. it is easy 

to ignore the States, but all of their economics are working in the 

569

opposite direction right now, so I think there is a good case for the 

Federal Government to subsidize the States on a temporary basis. 

Mr. ORSZAG. I will go in reverse order. First, on the States, as 

I emphasized, I think that some assistance to States is warranted 

in order to avoid counterproductive fiscal policies. 

I share Dr. Hassett’s concern about the balanced budget rules 

themselves—and this is thinking on my feet and therefore dangerous—but one could imagine that a program could be designed 

so that you offer temporary assistance to those States that are willing to do something about the balanced budget rule. So that basically, we would offer temporary assistance, and you would agree to 

get rid of your balanced budget rule, and that would work well. 

Mr. HASSETT. That is a good idea. 

Mr. ORSZAG. Something we agree on; that is great. 

On the blue chip, I agree with Bill that those models generally 

do not—they do not—incorporate the types of other factors that we 

are worried about. Even without incorporating those, the models 

are not very good at predicting turning points in the economy, so 

even without any additional problems, the spread or the uncertainty surrounding the forecast is particularly high at this point. 

Senator CORZINE. The point I am trying to make is that if I hear 

one more time that we are projecting in the fourth quarter of next 

year 4 percent growth, and therefore, we ought to act in certain 

ways—I think it is just hard to imagine that anybody has fully 

factored in all the changes that are occurring in our economy, and 

those forecasts, as risky as they are, as we already found out in the 

last 6 months, have to be enormously probablistic in the world that 

we face in the years ahead. 

Mr. ORSZAG. I agree with that, although I would add that even 

if you look at the—and I do not want to be seen here as defending 

the blue chip forecast—but even if you look at the bottom ten for 

the most pessimistic forecast, the bottom ten are still projected to 

have—I think it is 3 percent—relatively rapid growth. 

Now, I do not think that that is necessarily right, but in a world 

of uncertainty, we need some basis for proceeding, and I think the 

conclusion from that is not ‘‘Do not worry; do nothing.’’ It is ‘‘Be 

careful about doing things that are going to take effect in 2004, because at least the central estimate of private sector forecasters is 

that we will be back on our long-term growth path by then.’’

And I basically agree with what Bill said on overcapacity, so I 

will just leave that. 

Mr. HASSETT. I can go very quickly. On the capital overhang, 

that is one of the things that I have been working on the most to 

try to establish how big an overhang there is, and I am generally 

a fairly optimistic fellow, but my assessments of the capital overhang have been pretty depressing. 

It looks like, for example, things are being scrapped. It is not 

that there is some other business that is buying the thing and 

using it because you did not know how to use it; it is that in fact 

they are just scrapping the thing. And that is a sign that there was 

a lot of extra capital out there. But that would be most concerning 

if capital were all the same and firms were all the same, and the 

way a credit would work would be that there are some businesses 

out there that are doing well that have different types of capital, 

570

and they are going to be the ones that are buying. That is traditionally how it has worked. 

On the blue chip forecast, the thing that came to mind when i 

saw that report—it reminded me of, of all things, the Cuban missile crisis, because they have very high growth coming in at the 

end of the next year. During the Cuban missile crisis, when it was 

first announced that the Soviets had missiles in Cuba, the stock 

market tanked, and it looked like the world was a much worse 

place, and everything stopped for a couple of weeks, kind of like 

things stopped in September. But then, when we resolved it, the 

market celebrated—I mean really celebrated—and it sort of made 

sense, because it seemed like somehow the fact that we could resolve it meant the world was a better place than it was before the 

crisis happened, because we turned it into a positive. 

I think that that scenario is what is in the blue chip forecast. 

That is the only way I could get a number like that in any model 

that I have ever used, and I did this at the Fed, would be that we 

get this big celebration after a clear and decisive victory. Now, we 

are not military experts, but I think that that is what is in the 

forecast. So if you think that that is going to happen, maybe that 

is the kind of growth that we will see. 

Senator NELSON. It is not. 

Chairman CONRAD. Senator Domenici. 

Senator DOMENICI. Mr. Chairman, first, I had a prepared statement; could I just make it a part of the record. 

Chairman CONRAD. Absolutely. 

Senator DOMENICI. And could I thank the three of you for coming 

and apologize for my being here only for a short time now. 

I just want to ask of each of you just two questions. One, what 

is a stimulus in terms of the American economy? What is a growth 

stimulus? Can you describe it in words? 

Mr. GALE. Sure. A growth stimulus I would say is a tool used in 

a situation where the economy has a temporary downturn but is 

basically all right in the long term. The goal of stimulus is to increase short-term activity, and that involves two things. One is getting people to do things that they would not ever do under current 

circumstances, and the other thing it involves them doing is getting 

them to do things that they would have done in the future, but 

having them do it now. 

So it has both an increased economic activity aspect to it, and it 

has a timing aspect to it. 

Senator DOMENICI. And would it be fair to say, Dr. Gale—and 

then I will ask the others—is it fair to say that since I did not hear 

you mention expenditures of money, it is true that not all expenditures of money during a downturn are growth, economic stimulus? 

Mr. GALE. Different ways of inducing spending or different ways 

of reducing tax cuts can have different impacts on their ability to 

stimulate the economy. For example, if you give people money and 

they stick it under their mattress, that is not going to do anything 

to boost aggregate demand, and that can happen in a poorly designed spending or a poorly designed tax cut. 

Senator DOMENICI. Dr. Orszag. 

Mr. ORSZAG. I would describe a stimulus as a measure that is 

undertaken by the Government to try to move the economy back 

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to full utilization of its resources. So we face a situation in which 

firms or factories are not being fully utilized, workers are not being 

fully utilized because the unemployment rate is increasing, and the 

purpose of the stimulus is to increase the demand for the firms’ 

products and move the economy back to full utilization. That could 

include putting more money in people’s pockets to the extent it is 

spent; it could include direct Government expenditures on military 

equipment or roads or whatever, and it could include reductions in 

interest rates by the Federal Reserve which then encourage more 

home purchases, more interest-sensitive consumption, and other 

things. 

Senator DOMENICI. How do we know one when we see it appear—that is, an economic stimulus. You all have said what its 

goal is, but how do we know—do we take each idea and ask a 

group of smart people is that a stimulus or not? 

What I am seeing—and no aspersions on anyone—but there are 

a lot of people who see this as an opportunity to spend money. And 

of course, you can give a whopping speech on the floor that anything you want to spend money on, you can transpose it into this 

argument and say it is great economic stimulus. But we tried that 

in our history, as I recall, principally for public works projects, and 

most economists who studied them told us afterward that they 

were not good economic stimulus because they did not take effect 

soon enough. A new bridge-building program which did not spend 

money because it could not for 18 months and then it took 5 

months to get the money spend would not be a high-priority recommendation as a stimulus expenditure; is that correct? 

Mr. ORSZAG. I would agree with that. What you have been emphasizing is that we want to maximize the bang for the buck that 

we get from any dollars that are used as part of the stimulus, and 

as far as public construction goes, the key issue is does the money 

flow out the door fast enough. That is really the key issue there. 

Senator DOMENICI. Thank you. 

Dr. Hassett. 

Mr. HASSETT. Senator, it is a very good question. I think a stimulus is something that makes the economy go up. And I guess 

there is this attempt now that we are trying to make it go up now. 

I recall a statement about this that was made to me once by a 

former professor who worked as an advisor to President Nixon, and 

Nixon asked him to stimulate the economy before the election, and 

he studied it very carefully and determined there was no way that 

they could get the money spent fast enough to have that effect with 

spending. 

I think that one of the problems with stimulus is that if it is 

something that very clearly and obviously, we are going to have to 

reverse soon—for example, let us say in the Japanese case, they 

borrowed money to build roads to try to stimulate the economy, but 

then they had this debt that they are going to have to pay back—

then the stimulus can turn into a negative stimulus when it is attempted to be offset. 

So I think that that is the risk of short-term things, that if it is 

spending, it might not come quick enough, and if it is something 

that you have to reverse quickly, then, you might make it go back 

down. 

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Senator DOMENICI. One last question. Are we in a recession, and 

is it going to be short-lived or long-lived? 

Mr. GALE. I said earlier, before you came in, that I hesitate to 

forecast the American economy—but I will say that at sort of a concept targeted level that my impression is yes, but that is not an 

expert opinion. That is my impression from reading the papers, not 

from doing detailed——

Senator DOMENICI. Yes, what—we are in a recession? 

Mr. GALE. Yes, we are in a recession. That is my opinion. 

Senator DOMENICI. And what about a short recess or a long recession? 

Mr. GALE. My guess would be relatively short. 

Senator DOMENICI. OK. 

Mr. ORSZAG. I guess the way I would put it is that it is very likely that we are in a recession, and if I were forced to guess, I would 

bet shorter rather than longer, but there is a lot of uncertainty surrounding both of those statements. 

Senator DOMENICI. Dr. Hassett. 

Mr. HASSETT. Yes, this is—I would be shocked if we ended up 

looking back and finding that there was not a recession. I think 

that it will probably be dated as starting in the third quarter and 

that it could go on for a long time, for more than a year, if bad 

things keep happening and disruptions keep occurring. And I do 

not know whether that is true or not. 

Senator DOMENICI. I want to ask one other question, but first, I 

want to ask if Wayne Angell’s testimony can be made a part of the 

record. 

Chairman CONRAD. Absolutely. 

Senator DOMENICI. He was going to testify; he has some very 

good points. If anybody wants to look at them, that is another view. 

Senator DOMENICI. I guess I am going to ask this last question 

because I myself am wondering with reference to what effects our 

economy, and I am quickly coming to the conclusion that we were 

in a recession before the planes hit the World Trade Center and 

the Pentagon, and we were in a recession before we became aware 

that anthrax could be upon us in some way or another. As a result 

of this, I kind of feel that the security and confidence that the 

American people must have to invest in an economy like ours right 

now is put at risk by the conditions that impact on what the people 

think. 

Would each of you tell me whether you think the economy has 

been impacted negatively by either of those two events, and how 

do we stabilize it enough for the American people to do what we 

hope they will do, and that is to invest—and/or spend. 

Mr. GALE. I think that—obviously, this is the key question in all 

this—I think that the economy was weakening beforehand. Clearly, 

it has sort of jolted downward since then. The example I used earlier was that the reason why people are not flying is not because 

of lack of disposable income; it is lack of confidence, or that feeling. 

I think, therefore, that in an environment like that, spending on 

things like homeland security, defense, all these improved security 

measures that can be taken, rebuilding the New York City area, 

et cetera, can have not only the standard direct stimulus effect, but 

it can have a big indirect effect on people’s attitudes and feelings. 

573

And I think that the spending side is much more likely to generate 

those types of changes in confidence and those types of indirect effects than relatively minor alterations on the tax side. 

Mr. ORSZAG. I would also emphasize the role of consumer confidence. Actually, interestingly, when people go to study the impact 

of confidence on economic activity, the relationship between one of 

the measures of consumer confidence, the Michigan one, does not 

seem to be all that important; but another one, the Conference 

Board, does seem to be, and that conforms with our intuition that 

consumer confidence actually does, of course, matter, and therefore, 

the drops in consumer confidence that we have seen are troubling. 

So in addition to what Bill said about trying to underscore or 

buildup consumer confidence, I would just note that there are 

things that are more likely to be spent than others, and part of 

consumer confidence reflects not just security but also economic 

conditions. Consumer confidence is going to be affected even if we 

solve the security problems by a macroeconomic slowdown, and trying to address that macroeconomic slowdown even on traditional 

grounds is important in addition to the security-type concerns that 

Bill had. 

Mr. HASSETT. There clearly has been a big negative effect of the 

events, and I think that reversing that effect requires some kind 

of return to normal for the economy. 

Despite the slowdown that was occurring through August, there 

were still plenty of signs that were very positive. Most importantly, 

productivity stayed high in the first half of the year, and it was 

really quite a miraculous thing that it did. And that meant that the 

new economy arguments had something to them, that people were 

getting a return on those investments. 

So anything that can be done to return us to where we were on 

September 10th, I think can be viewed as being worth the investment, because that was a strong economy. 

I actually disagree with you, Senator. I think we would have 

avoided a recession, because I think that the declines in the different parts of the economy were out of phase—they were not all 

happening at the same time—and some things have pretty much 

corrected already. 

So I think that there is hope from that perspective. 

Senator DOMENICI. Well, if we get a reading soon that the last 

quarter was negative 1.5 to 3.0, you are going to say but for the 

prices, it would have not gotten to 3.0, or 1.5, or 2.0? 

Mr. HASSETT. Do you mean the second quarter or the third quarter? 

Senator DOMENICI. The third quarter. 

Mr. HASSETT. No, I think the third quarter would likely have 

been about minus half a percent. That is where it was running—

that was my third quarter estimate as of September 10. 

Senator DOMENICI. OK, thank you. 

Chairman CONRAD. Senator Nelson. 

Senator NELSON. Mr. Chairman, I like your choice of committee 

rooms, but when are we going to move back into our normal room? 

Chairman CONRAD. That is a decision at a higher level of power 

than I have. 

Senator NELSON. And, Mr. Chairman, how much time do I have? 

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Chairman CONRAD. Take 10 minutes, whatever you would like. 

Senator NELSON. Let me go over a couple of arguments that have 

been made to me, and I would like your reflection on whether or 

not this is worthwhile. 

One of you had mentioned increased investment in telecommunications. What the telecommunications industry is saying is that 

they need to modernize; they need to go to, instead of the old copper wire, the new kind of materials, in order to be competitive, and 

they need the incentives in the tax code to be able to do that, not 

only loss carry back and forward, but the increased depreciation. 

Give me your thoughts on that. 

Mr. ORSZAG. Two thoughts. One, again, what we really want to 

be doing is stimulating investment now, and the telecommunications, the move to broad band—there are a whole bunch of long 

run issues that various different sectors of the economy face and 

that may or may not justify tax incentives in some sense. But the 

focus here should be on short run stimulus, and I think it is easy 

to go astray when we try to solve longer run problems in a short 

run stimulus package. 

So I very much support investment incentive, but it should be 

temporary, and it should really try to target the period of weakness 

that we are seeing, and it should not be specific to particular sectors. It should not apply just to telecommunications, for example. 

That is actually one of the problems I have with the Subpart F 

rules in the House Ways and Means legislation. The Ways and 

Means legislation would provide effectively a substantial tax break 

to firms in the financial services industry and not to others by 

changing the rules that apply to international income. Only about 

a percent and a half of the 10-year cost occurs in 2002. It may or 

may not be justified on other bases, but it is not a stimulus measure, and I would say the same basic response on telecommunications. 

So there should be a general investment incentive, but it should 

be temporary. 

Dr. Hassett. 

Mr. HASSETT. I actually disagree on this one. You must be familiar what Senator Rockfeller is working on right now, which is 

something of a stimulus for the telecom sector. 

One of the things that brought down the high tech sector was a 

kind of logjam in the last mile. There is plenty of long haul, highspeed stuff out there that is sitting dark because we do not have 

broad band connections to our homes, and I think the reasons that 

we do not are many, but one of the key ones is a regulatory failure. 

And I know that people who work on this are trying to find telecommunications tax policies that work to offset those things that 

we have done poorly elsewhere. 

Given the upside potential and network externalities and all the 

other things that can happen, if we could get past that logjam, then 

I would take seriously such efforts as Senator Rockefeller’s. 

Mr. GALE. I understand the nature of the problem of telecommunications that this incentive is designed to address. I think 

almost every major industry has a list of the things they would like 

to see adjusted in the long run. But what keeps coming back to me 

575

is that, yes, there is time and place to deal with this, but it does 

not strike me as an obvious candidate for a stimulus package. 

Senator NELSON. OK. Another item. We want to get people back 

into the airplanes. In a constituency such as mine in Florida, we 

are having devastating effects on hotel rooms, restaurants, tourist 

attractions, etcetera. 

What about a tax incentive to get people back in the airplanes, 

like a $500 tax credit per person, $1,000 for a couple, if you take 

a trip in the next 4 to 6 months, and that money can be used on 

travel and lodging. What does that do, in your opinion? 

Mr. ORSZAG. Well, I suppose I would have two concerns about 

such a proposal. One is what you do about the fact that that credit 

would be much more beneficial to high-income taxpayers who are 

more likely to be traveling anyway. 

The key thing you have to ask is how much of it is going to go 

to events that would have occurred anyway——

Senator NELSON. Yes. You would have to design it such that it 

was not the trip that they were going to take anyway. 

Mr. ORSZAG. Right. So if it were an incremental travel credit, I 

suppose my major concern would become just how complex it would 

be to administer. 

Mr. GALE. This is sort of Exhibit B, I think, and every industry 

would like the solution to sort of come through them. 

On the issue of subsidizing all travel that would have existed 

anyway, plus subsidizing new travel, I think you would find that 

most travel that you subsidized was going to happen anyway. 

Again, I do not think that the reason people are not getting on 

planes is an income effect right now or a price effect, and I think 

that efforts to assure people that the skies are safe, that the streets 

are safe, and that the country is safe will be much more beneficial 

in the long run. 

Senator NELSON. Dr. Hassett. 

Mr. HASSETT. Yes, I concur. Normally, targeting a tax break for 

some specific thing requires some very strong argument about why 

that thing is much more important than some other thing that we 

might want to stimulate, and on that one, for me, it does not meet 

that test. I think there are a lot of other things—folks want to pay 

for dentists for their kids, and that is good, too, so why would we 

want to favor one set of people over another with tax breaks? 

Senator NELSON. OK. We have an existing law that says if you 

have an IRA, and you turn 70–1/2, you have to start taking money 

out of that IRA, and if you do not, you get penalized significantly—

and of course, when you take it out, it is taxable—but if you do not, 

you are significantly penalized. 

But now, a bunch of senior citizens do not want to take it out 

of their IRA because their IRA is significantly depleted in its value. 

What about a change in the law that would give them a little more 

maneuverability and time so that they do not have to take it out 

at the diminished value? What do you think about that? 

Mr. GALE. That is a really interesting question. I have worked—

in fact, Brookings held a conference a year ago on pension regulations—and the early withdrawal rules are a mess and need to be 

rethought more carefully. 

576

Now, interestingly, if you forced people to take the money out, 

that presumably would have a more stimulative effect than letting 

them keep it in there. On the other hand, I certainly understand 

their concern that they got nailed—they basically turned 70–1/2 at 

the wrong time—but I do not buy it as a stimulus package, having 

said all that. One could say, well, they knew they were going to 

turn 70–1/2, and they should have diversified their portfolio in advance to cover that. 

So again, with all these things, you can sympathize with the aggrieved party, but on the other hand, it does not strike me as—not 

only as not a good idea for a stimulus package, but in fact it actually goes in the opposite direction to some of the principles that the 

Budget Committee chair laid out in the bipartisan bicameral statement and that Peter and I have talked about. 

Mr. ORSZAG. And I think the Senator was actually asking about 

the minimum distribution rules and not early withdrawal rules. It 

is important to remember that those rules were put into place in 

order to prevent people from using a retirement savings tax preference for other purposes, so the savings were supposed to go to finance retirement, and that is what those minimum distribution 

rules are going to do. 

I would also note that IRS has recently changed the regulations 

that apply to the minimum distribution rules the way the life 

expectancies are calculated that somewhat loosens them, so people 

still have to take money out, but they do not have to take quite 

as much out as they would have otherwise had to take out. 

I would be concerned about a permanent change, again, as part 

of a stimulus package. It may or may not be a good thing, and we 

can talk about optimal pension policy and all that, but as part of 

a stimulus package, it would not be my highest priority. 

Mr. HASSETT. I agree with my colleagues. 

Senator NELSON. All right. Finally, let us talk about this situation. I was shocked to hear from Jon Corzine or one of you that 

New York is running a deficit in the range of $9 to $12 billion. 

Florida is going to be running a deficit in the range of about $2 

billion. 

What should we think about in a stimulus package, if any, to assist the States? 

Mr. GALE. Broadly speaking, there are two or three things. One 

is that any reduction in economic activity at the State level will 

tend to offset the impact of a Federal stimulus. 

The second is that the Federal stimulus could actually make the 

State situation worse by impacting State budgets—for example, the 

depreciation allowances. Just to be clear, if Federal depreciation allowances were expanded, they would reduce State revenues. Normally, you think, oh, that is good, that is a tax cut, that would be 

stimulative—but the States have these balanced budget rules, so 

they have to cut back their spending or raise other taxes to meet 

that reserve. 

The third thing is just direct Federal subsidy of States via either 

revenue-sharing or the Medicaid idea that Peter talked about or a 

variety of other means. But I think it is a first-order consideration 

in a stimulus package. 

577

Mr. ORSZAG. Again, I would basically say that there are two 

ways of trying to—I think it is important to provide some temporary assistance to States, because otherwise we are partially 

frustrating the effort at the Federal level, or undermining the effort. You could resurrect revenue-sharing on a temporary basis, or 

the more direct and straightforward way of doing this would be to 

just change the Medicaid match rate—raise it—the percent that is 

paid for by the Federal Government in the Medicaid program. And 

Kevin and I after this hearing will have to go to work on how to 

design it so that it is only given to those States that are willing 

to get rid of their balanced budget rules. But I think that in terms 

of getting the money out quickly, the Medicaid match is probably 

the most effective thing to do. 

Mr. HASSETT. Yes, I think they have made a mess with a bad 

policy and that in some sense they have to clean up, and I hope 

to see them doing that. 

Senator NELSON. Thank you. 

Chairman CONRAD. Could I ask each of you as we conclude the 

hearing for your two best ideas to go into a stimulus package. If 

you were in the room when the final decisions are made, what 

would you be most insist be included? 

Mr. GALE. Start with Kevin. [Laughter.] 

Mr. HASSETT. And am I in the Senate, so that I have the House 

bill before me, and I recognize that——

Chairman CONRAD. Yes. 

Mr. HASSETT. OK. From the House bill, the things that I would 

not yield on if we were arguing in a room would be the accelerated 

cost recovery salvage appreciation, or one-third expensing, and the 

AMT repeal. I think that if you do not do something now—again, 

I know you want to compromise on things and so on, and maybe 

you could tinker with it—but the fact is there are going to be tax 

hikes out there for folks because they are hurting, and that is 

wrong. That is why I oppose just letting AMT sit there. 

Chairman CONRAD. OK. Thank you for that. 

Dr. Orszag. 

Mr. ORSZAG. You are forcing me to choose, and it is so difficult. 

But if I were forced to choose two, I would focus on expansions in 

unemployment insurance, which I think will have a very high bang 

for the buck, and in particular changing the eligibility rules so that 

part-time minimum wage workers are more likely to get unemployment insurance benefits than they are now. 

The second thing I would do is some sort of State mechanism, 

support for the States. 

So those would be my two, and if I were in the room with Dr. 

Hassett, I would argue that if we are going to do some sort of AMT 

change, just make it temporary for the period of the downturn—

don’t permanently get rid of the AMT. 

Chairman CONRAD. All right. 

Dr. Gale. 

Mr. GALE. I would focus on the spending side as well, the expanded UI benefits, and revenue-sharing via some mechanism with 

the States. I think that both of those would have bigger bang for 

the buck than anything we can do on the tax side, and I think they 

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address more fundamentally the problems at the fiscal level than 

anything on the tax side. 

Chairman CONRAD. All right. Now let me go back and ask each 

of you what are the two things that you would most aggressively 

oppose. 

Mr. HASSETT. I hate to not answer the question, but in the conversations that I have seen, there have been many good ideas, and 

there are costs and benefits to all of them. We could argue this one 

is a little better than that one. 

But among the set of things that I have seen—for example, the 

tax refund checks being mailed out, so there are good arguments 

that they can be reasonably effective, and I just could not get up 

a lot of steam to oppose that—so there is nothing in the set of 

things, say, in the Ways and Means bill or that I have seen discussed in the newspaper that gives me——

Chairman CONRAD. That you would be adamantly opposed to. 

Mr. HASSETT. That is right. 

Chairman CONRAD. OK. Thank you for that. 

Dr. Orszag. 

Mr. ORSZAG. I am going to cheat and say one is permanent corporate tax changes, so I will include under that both AMT and the 

Subpart F rules, which I know is a little bit of a cheat. 

Then, the second one is the reduction in the capital gains tax 

rate, which I think is just inappropriate. It may or may not be warranted on longer-term grounds, but it is just inappropriate as part 

of the stimulus. 

Chairman CONRAD. Thank you. 

Dr. Gale. 

Mr. GALE. I would put the capital gains cut third, not because 

it is—it is a bad idea, but it is a small bad idea, so I will put it 

as third. 

The one I would put first would be, again, permanent cuts in the 

corporate tax structure. Anything that one can do there on the permanent side makes more sense both in terms of bang for the buck 

and in terms of cost than on a permanent side. 

The other thing, beating out capital gains for second place, is acceleration of the previously enacted tax cuts, and there are several 

reasons to worry about that. One is that it is expensive. Second is 

that most of the benefits are going in the year 2003 and out, rather 

than 2002. Third is that all of those benefits are going to go to 

high-income taxpayers who are not going to be consuming as much 

of it as low-income taxpayers might. 

And the last reason—and this is something that you know, but 

I will mention it anyway—is when all the dust settles on the stimulus package, we are going to wake up and find ourselves in an 

atrocious budget situation; we are going to have to rethink from 

ground zero, including rethink the wisdom of allowing the previously enacted tax cuts to actually go through. If that is the case, 

the last thing we should do now is accelerate those tax cuts. 

Chairman CONRAD. Thank you all. 

Mr. GALE. Thank you, Mr. Chairman. 

Mr. ORSZAG. Thank you. 

Mr. HASSETT. Thank you, sir. 

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Senator NELSON. Mr. Chairman, the revenue-sharing recommendation—was that specifically for State spending, like Medicaid? 

Mr. ORSZAG. One way of implementing revenue-sharing is 

through the Medicaid match. The Federal Government match varies by State, but matches 50 to 70 percent or so of Medicaid spending. If you increase that match rate, then, directly, it looks like you 

are increasing Federal Medicaid spending, but what it really means 

is that the State government does not have to spend as much of 

its own funds on Medicaid, and since money is fungible, it is effectively—fungible at least to some degree—it is in some sense like a 

general revenue-sharing provision. 

Chairman CONRAD. Thank you; a very good question. I am glad 

we got an answer to that. 

I want to thank you very much. This is a hearing that we had 

wanted to hold earlier. Unfortunately, it was right after a series of 

events that obviously closed down other hearing rooms. And here 

we are, in an unusual setting, at an unusual time. 

I just thank you all very much for your help. I think you have 

done a real service here today. I think all of you have been 

thoughtful witnesses, and these ideas are going to help inform 

what I support and what I oppose. 

I think it is critically important that we get together. Senator 

Domenici and I just had a conversation, and one of the reasons 

that we got together on a bipartisan basis, those of us who are responsible for the Budget Committees in the House and the Senate, 

is because we wanted to try to bridge the partisan divide; and we 

did that. We did it with respect to a new financial outlook for the 

country and a new set of projections for our colleagues. We did that 

with respect to a set of principles to apply to a stimulus package. 

We are also very much united in the view that we need to now 

move to form a stimulus package, because that in and of itself will 

provide some boost to confidence. I think Dr. Hassett said it, that 

we are moving, and moving effectively itself is a confidence-building measure. 

So I am very hopeful now that we do not get bogged down. We 

were just having a conversation up here about the danger of that. 

We see that danger growing; we see differences growing. 

I met with a number of colleagues yesterday in the leadership on 

the Republican side and told them I think it is going to require 

Presidential leadership at this time to bring people back together, 

because what has happened unfortunately is that we were on a bipartisan path, and that has gotten interrupted, but that can be just 

a momentary interruption in what has been an incredibly positive 

coming together in light of this vicious attack on our country. 

I think it is terribly important that we find a way to come back 

together and do it quite quickly, and I think it is going to take the 

President calling the combined leadership together and ask them 

to sit down and try to come up with a package that can be enacted 

quickly and effectively. And I just want to say that you have helped 

that process here today. 

So thank you very much. With that, we will adjourn the hearing. 

[Whereupon, at 11:15 a.m., the committee was adjourned.]

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