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94–065pdf 2004

S. HRG. 108–521

CONCURRENT RESOLUTION ON THE 

BUDGET FOR FISCAL YEAR 2005

HEARINGS

BEFORE THE

COMMITTEE ON THE BUDGET 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

January 27, 2004—CBO BUDGET AND ECONOMIC OUTLOOK

February 5, 2004—THE PRESIDENT’S BUDGET PROPOSAL

February 12, 2004—THE PRESIDENT’S FISCAL YEAR 2005 BUDGET 

PROPOSAL

February 13, 2004—THE PRESIDENT’S FISCAL YEAR 2005 BUDGET 

PROPOSAL

February 25, 2004—THE PRESIDENT’S HOMELAND SECURITY

(

Printed for the use of the Committee on the Budget 

COMMITTEE ON THE BUDGET 

DON NICKLES, Oklahoma, Chairman 

PETE V. DOMENICI, New Mexico 

CHARLES E. GRASSLEY, Iowa 

JUDD GREGG, New Hampshire 

WAYNE ALLARD, Colorado 

CONRAD BURNS, Montana 

MICHAEL ENZI, Wyoming 

JEFF SESSIONS, Alabama 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN ENSIGN, Neveda 

JOHN CORNYN, Texas 

KENT CONRAD, North Dakota 

ERNEST F. HOLLINGS, South Carolina 

PAUL S. SARBANES, Maryland 

PATTY MURRAY, Washington 

RON WYDEN, Oregon 

RUSSELL D. FEINGOLD, Wisconsin 

TIM JOHNSON, South Dakota 

ROBERT C. BYRD, West Virginia 

BILL NELSON, Florida 

DEBBIE STABENOW, Michigan 

JON S. CORZINE, New Jersey 

HAZEN MARSHALL, Majority Staff Director 

MARY ANN NAYLOR, Staff Director 

(II) 

iii

C O N T E N T S 

HEARINGS 

Page 

January 27, 2004—CBO Budget and Economic Outlook ..................................... 1

February 5, 2004—The President’s Budget Proposal ........................................... 71

February 12, 2004—The President’s Fiscal Year 2005 Budget Proposal ............ 123

February 13, 2004—The President’s Fiscal Year 2005 Budget Proposals .......... 203

February 25, 2004—The President’s Homeland Security .................................... 263

February 26, 2004—The President’s International Affairs Budget ..................... 331

STATEMENTS BY COMMITTEE MEMBERS 

Chairman Nickles...................................................................... 1, 71, 123, 203, 263, 331

Senator Bunning.................................................................................. 161, 242, 301, 370

Senator Conrad.......................................................................... 2, 71, 124, 207, 264, 332

Senator Domenici................................................................................. 162, 242, 340, 367

Senator Enzi ......................................................................................................... 136, 115

Senator Feingold .......................................................................................... 167, 113, 299

Senator Johnson ........................................................................................................... 192 

WITNESSES 

Bolten, Joshua, Director, Office of Management and Budget .............................. 83

Holtz-Eakin, Douglas, Director, Congressional Budget Office ............................. 22

Powell, Hon. Colin L., Secretary, United States Department of State ............... 355

Ridge, Tom, Secretary, Department of Homeland Security ................................. 291

Snow, John, Secretary, United States Department of the Treasury ................... 211

Thompson, Hon. Tommy G., Secretary, United States Department of Health 

and Human Services ............................................................................................ 167

QUESTIONS AND ANSWERS

Questions and Answers....................................................................... 116, 243, 303, 381

ADDITIONAL MATERIALS AND CHARTS SUBMITTED 

Testimony, charts, and graphics submitted................................. 371

(1)

THE CONGRESSIONAL BUDGET OFFICE 

BUDGET AND ECONOMIC OUTLOOK 

TUESDAY, JANUARY 27, 2004

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

The committee met, pursuant to notice, at 10:07 a.m., in room 

SD–608, Dirksen Senate Office Building, Hon. Don Nickles (chairman of the committee) presiding. 

Present: Senators Nickles, Domenici, Gregg, Allard, Enzi, Sessions, Bunning, Crapo, Ensign, Conrad, Hollings, Sarbanes, Wyden, 

Nelson, and Stabenow. 

Staff present: Hazen Marshall, majority staff director; and Cheri 

Reidy, senior analyst for budget review/revenues. 

For the minority: Mary Ann Naylor, staff director; and Jim 

Horney, deputy staff director. 

OPENING STATEMENT OF CHAIRMAN NICKLES 

Chairman NICKLES. Good morning. This morning, we will hear 

testimony on CBO’s budget and economic outlook for the years 

2005–2014. We are delighted that Dr. Holtz-Eakin is with us again. 

We look forward to his presentation before the committee. 

For the information of our members, we have scheduled several 

hearings in a rather aggressive schedule, trying to comply with our 

statutory deadline of completing the budget resolution conference 

agreement by April 15th. The House is going to be in recess for 2 

weeks prior to that. We are going to be in recess 1 week prior to 

that. So we are going to have a fairly aggressive schedule, about 

a week faster than we did last year, to complete our work by the 

deadline. We actually have to be—for the Senate, we have to complete by April the 9th because we are in recess on April the 12th. 

So we are going to have a fairly aggressive schedule. 

Next week, we will have OMB testify on Tuesday. Then we also 

have a hearing scheduled a week from tomorrow with Secretary 

Snow. And then following that, we have a hearing scheduled with 

Secretary Thompson, Secretary Colin Powell, and we also hope to 

have Defense and Homeland Security hearings scheduled. 

So we are going to have a fairly busy couple of months to have 

this completed really by the end of March, and I want to thank my 

colleagues for their cooperation in that. I also want to thank colleagues for the tenor and the tone of the hearings that we had last 

year as well as the markup in committee and debate on the floor. 

I think we were able to proceed senatorially, and I thank my colleagues, especially my colleague from North Dakota. And I will call 

2

upon him for his opening remarks as well, and then I might make 

a few remarks afterwards. 

Senator Conrad. 

OPENING STATEMENT OF SENATOR CONRAD 

Senator CONRAD. Thank you, Mr. Chairman, and thank you for 

the many courtesies that you and your staff have extended to our 

side of the aisle. I do think we can have differences, very serious 

policy differences, but do it in a way that is in the spirit of cooperation, and I think we have done that, and that is much to your credit. 

I would also like to welcome the Director here today. As a native 

of Syracuse, I am not surprised you were able to make it. It is 

amazing what happens in this town with a little bit of snow. All 

of a sudden, everything shuts down. But I am glad to see that you 

are here. 

Mr. Director, I very much appreciate the analysis that you have 

put before us because I think it is important to the work of this 

committee and important to the work of the Congress. 

This was the headline this morning in the Washington Post: 

CBO says the deficit will reach $477 billion this year. Pretty stunning. That is $100 billion more than the biggest deficit we have 

ever had in this country. And the sub-headline says, ‘‘Extending 

Tax Cuts Could Double Debt.’’ The President is fond of saying it 

is the people’s money, we ought to give it back to the people. It is 

also the people’s debt. And, in effect, what the President is doing 

is borrowing money from the people in order to give it back to some 

people and dramatically increased the debt. And I think we have 

to question very carefully whether this set of policies that is exploding the deficit and debt, not just in the short term—I want to 

make clear, I am much less concerned about the short term than 

I am the long term. I think it is the long-term implications of deficits and debt that is growing geometrically that we have to worry 

about.

3

Let’s go to the next. 

In the last year of the Clinton administration, we enjoyed a $236 

billion surplus. Now, in the third year of President Bush’s term, we 

have a $477 billion deficit, by far the largest in dollar terms we 

have ever had. But it is not just in dollar terms that we see a large 

deficit. Some have said, well, the deficit is relatively small as a percentage of GDP. I think when fairly judged, one does not see that. 

One sees, in fact, that the deficit as a percentage of gross domestic 

product, excluding Social Security, looking at it on an operating 

basis, is extremely high by that measure as well—5.5 percent of 

GDP, a level that has only been exceeded once since World War II, 

and that was in 1983.


94065.003
4

But it is not just the short-term deficits that alarm me. The 

thing that is of much greater concern is that we face an unending 

flood of red ink, massive budget deficits for as far as the eye can 

see. This result comes from building on your CBO baseline, making 

permanent the tax cuts that the President advocates, and fixing 

the alternative minimum tax, just making those two changes, no 

other changes—making the tax cuts permanent, which the President advocates, and fixing the alternative minimum tax, which will 

apply to over 40 million taxpayers by the end of this decade if we 

do not take action. And what you can see is deficits that are massive throughout the 10-year period. 

Let’s go to the next chart. 

Some have said, well, it is because of spending, it is a spending 

explosion that has created the problem. First of all, I think all of 

us have to acknowledge spending has gone up. But, most of the 

spending increase has been for defense and homeland security. 

That is where the big increases have occurred. 

But if you look, the red line is total outlays of the Federal Government since 1980. The trend on spending as a share of gross doVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF

94065.004
5

mestic product has actually been sharply downward. Yes, there has 

been a substantial uptick as a result of September 11th, the increased expenditures for defense and homeland security being the 

primary culprits. But you can see, even with those increases, we 

are well below the levels of the 1980’s and 1990’s. 

Let’s go to the next chart that shows where the increase has occurred. The increase in spending, 92 percent of it has been in just 

these categories: defense, of course, by far the biggest, which all of 

us supported as a response to September 11th and the other events 

that have transpired. The next biggest increase is homeland security. The third category is rebuilding New York, the airline bailout, 

and increased international spending. That is where the increases 

have been.

6

Let’s go to the next chart. The President is now focused on domestic spending, which is a very small part of Federal spending. 

He says he is going to restrain the growth of domestic non-homeland security spending. The fact is there has been very little 

growth in domestic spending. Not discretionary spending. Many of 

us talk about discretionary spending that would include all four of 

these categories. But you see that domestic spending has been almost flat in real terms—in real terms there has been very little 


94065.008
7

growth. In real terms, the growth has been in defense, international, and homeland security.

Let’s go to the next chart. 

It is the revenue side of the equation where we have really seen 

things fall out. As a share of GDP, we now anticipate, with CBO’s 

numbers, that revenue as a share of gross domestic product will 

reach its lowest level since 1950. So we have clearly got a serious 

revenue problem.


94065.009
8

The President tells us not to worry, that he will cut the deficit 

in half. But if we look back on what he has told us every year, it 

turned out to be wrong. He told us in 2001, ‘‘We can proceed with 

tax relief without fear of budget deficits.’’ That was wrong. In 2002, 

he told us, ‘‘Our budget will run a deficit that will be small and 

short term.’’ He was wrong again. Last year, he told us, ‘‘Our current deficit is not large by historical standards.’’ He was wrong 

again.


94065.010
9

Now he tells us, ‘‘The deficit will be cut in half over the next 5 

years.’’ Will he be wrong again? Well, I don’t know. But I think it 

really misses the point because the larger truth is, whatever happens in the near term is dwarfed by the long-term implications of 

his budget policies. 

We can see the dollar has declined precipitously against the euro, 

which confirms a warning that has just been made. Let’s go to the 

next chart, and I am going to conclude on this. This was in the 

Washington Post of yesterday. ‘‘Currency traders, fretting over that 

dependency’’—referring to our need to borrow money—‘‘have been 

selling dollars fast and buying euros furiously. The fear is that foreigners will tire of financing America’s appetites. Foreign investors 

will dump U.S. assets, especially stocks and bonds, sending financial markets plummeting. Interest rates will shoot up to entice 

them back. Heavily indebted Americans will not be able to keep up 

with rising interest payments. Inflation, bankruptcies, and economic malaise will follow.’’


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Now, none of us know when that line is crossed, when these twin 

deficits, the budget and trade deficits, will lead to the kind of results that were being discussed by economists yesterday in the 

Washington Post. But goodness knows we have lots of warnings: 

the Comptroller General of the United States, warning us of the 

growth of deficits and debt; the International Monetary Fund, saying the growth of deficits and debt in this country threaten not 

only our own economic security but global economic security. 

Mr. Chairman, these are serious questions and really require serious responses by this committee, the Congress, and the administration. 

Chairman NICKLES. Senator Conrad, thank you very much. 

Would you mind repeating for Senator Ensign and others the 

growth rate on non-defense? It might help us on our side. 

I pointed out to some of our colleagues, my good friend Senator 

Conrad used real growth, which is adjusted for inflation—correct 

me if I am wrong—and it showed not too much real growth in nondefense, non-homeland security spending for last year, and that is 

correct. I just wanted that to be known because we have heard otherwise, mainly because a lot of people, Heritage and others, were 

using growth in outlays rather than growth in budget authority, 

which, frankly, goes back to 2001, 2002, and 2003, things that were 

in progress, and so on. 

Let me just make a couple of comments, and I very much appreciate my colleague. One, we did pass a stimulus package last year. 

I supported it. Actually, I think Democrats had a stimulus package; 

we had a stimulus package. We passed a stimulus package, and it 

worked. I have a couple of charts to show that. 


94065.013
11

The stock market is up by several trillion, from about $11 trillion 

to over $15 trillion since February of last year. That is a very significant increase. I believe the New York Stock Exchange is up 

about 25 percent and Nasdaq up about 50 percent, and combined, 

a total of about 35 percent. Our tax changes that we made where 

we cut the rates on dividends and capital gains worked. It did stimulate the economy.

The gross domestic product, which had its first decline in 2000 

and then went further down in 2001, has shown significant appreciation, particularly the last couple quarters. And so the economy 

is starting to move, and that is very positive.


94065.016
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The unemployment rate has declined. It has declined from a high 

of about 6.3 percent to 5.7 percent, so that is positive. Total employment has improved, and improved dramatically. If you use the 

household survey, which includes self-employed and others, the 

total employed has risen rather dramatically, particularly in the 

last three quarters. So we are seeing some positive signs.


94065.017 94065.018
13

I also agree with Senator Conrad; there are two reasons for this 

big deficit. One is that revenues have gone down, and you might 

show that chart. The revenues are in the green. Revenues in the 

year 2000 were over $2 trillion. Now, last year, the year completed, 

2003, they are at $1.78 trillion. That is about a $240 billion reduction, a reduction every year, the first time in history that has happened. That did not happen solely because of the tax cuts. It happened primarily because the economy really did drop—tank—in the 

year 2000. Nasdaq declined by about 50 percent in the year 2000. 

It is kind of interesting reading these articles. When did the recession start? Well, if you look at the stock market, the recession 

started in March of 2000 because Nasdaq was about 4,000 and 

Nasdaq was at 2,000 in December. So that has caused a precipitous 

decline in revenue.


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And then Senator Conrad is also correct, we have had a lot of 

new spending primarily to fight the war on terrorism. We have had 

a total of $242 billion in supplemental appropriations to fight the 

war on terrorism. Between the aid for New York and the Pentagon 

as a direct result of September 11, that was about $40 billion, and 

then we have had a supplemental last year of $87 billion, the year 

before that I think $91 billion to fight the war in Afghanistan and 

Iraq. So a total of $242 billion. 

Now, there are some other things that were added to that. We 

had about $30 billion in emergency unemployment benefits and so 

on, but a very significant increase in spending, I believe one-time 

spending. Now, correct me if I am wrong, Mr. Director, but under 

your proposal—or under your snapshot, you assume that the $87 

billion that was in the supplemental last year would be ongoing 

throughout the next 10 years. That is not going to happen. We may 

have some additional supplemental spending for our efforts in Iraq 

and Afghanistan, but I do not believe they will be anywhere near 

the $87 billion. So that is inflated in the baseline and will be reduced. 

Also, the assumption that, well, all tax cuts that were enacted 

will be extended is false. I do not believe that is intended by this 

Senator. We had some things that were done temporarily to stimulate the economy: the accelerated bonus depreciation, which most 

people supported. It had strong bipartisan support, but the policy 

was for a short period of time to encourage investment in the next 

year or so, to get the economy going, to break out of that doldrum, 

to get some economic activity, to create some jobs. And so we did 

that. 

I think you can paint lots of scenarios that are very bad, but I 

do not think that is going to happen. And will we get the deficit 

down in half? It is very much this Senator’s intention to do that 

and more. And so we will see if we cannot work together to do it. 


94065.020
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I also want to agree with Senator Conrad, long term there are 

serious problems, and particularly demographically when you look 

at Medicare, and we added to that last year when we passed the 

prescription drug bill. My guess is the cost of that will greatly exceed expectations, and I will ask Director Holtz-Eakin about that 

in a little bit. But long term, that is a big, big, big challenge, and 

we need to be able to address it. 

But I might mention that was supported by members of both 

parties, and I might mention, too, that there were amendments on 

the floor that would have had a much more expensive proposal 

than what we ended up enacting. I believe 50 percent more was 

supported by a majority of members on the Democrat side. 

So long term, we have big challenges, and we need to work together. They will never be solved by one party or another. We need 

to work together to solve those, and I look forward to working with 

any of my colleagues that show an interest in trying to do that. 

And this Senator for one is willing to bite off as much as we can 

bite off this year. I realize it is an election year, but I am more 

than happy to work with my colleagues to try and fashion a package. I would love to have a bipartisan budget this year, and I 

would love to see us work together to solve some of these problems, 

both short term and long term. So I thank my colleagues. 

Unless colleagues are just dying to make an opening statement, 

I would like to call upon Dr. Holtz-Eakin to make his remarks, and 

then we will alternate back and forth according to time of appearance for colleagues to ask questions. Is that agreeable? 

Dr. Holtz-Eakin, thank you very much for your appearance this 

morning. 

Senator SARBANES. Will the chairman appropriately note that 

many of us gave up making opening statements and keep that in 

his ledger book? 

Chairman NICKLES. We will always give the Senator from Maryland great points for that, and I would ask Dr. Holtz-Eakin if he 

could keep his remarks to 10 or 12 minutes, and then ask my colleagues to try to keep their questions to a 5- or 6-minutes per 

round. 

Dr. Holtz-Eakin? 

STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. HOLTZ-EAKIN. Mr. Chairman, Senator Conrad, members of 

the committee, thank you for the opportunity to appear today. You 

have our report outlining the economic and budget outlook for fiscal years 2005–2014. We have also submitted an abbreviated 

version of that report as written testimony for the record. I will 

provide an even more abbreviated version in my oral remarks so 

that we can turn to any questions that might remain. 

Let me begin with the numbers. The CBO projects that the Federal Government will experience a deficit of $477 billion in fiscal 

year 2004. This will decline over the budget window. In 2005, we 

project $362 billion; in 2006, it would be down to $269 billion and 

would steadily diminish thereafter, until the budget reaches balance in the years, roughly speaking, after 2011. In particular, the 

$477 billion, as noted, is a record dollar deficit for the Federal GovVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
16

ernment. As a fraction of GDP, or national income, and a measure 

of our resources to service all commitments, it is 4.2 percent, and 

the projections are that it will diminish first to 3 percent and then 

down to 2.1 percent.

Another measure of the fiscal condition is the debt-to-GDP ratio, 

and these projections have a debt-to-GDP ratio that rises from 

about 38 percent, reaches between 40 and 41 percent, and plateaus 

there until after 2011, at which point it begins to diminish down 

to about 35 percent. 

Now, as has been noted, the CBO projections are built on several 

pieces. The first pieces are economic forecasts, which I will touch 

on briefly. They are also built on the baseline concept of a neutral 

benchmark against which further legislation can be measured. 

That neutral benchmark requires us to extend current law in the 

course of the projection period. 

In this particular context, that has implications on both sides of 

the budget. On the receipt side, we assume that the tax cuts 

passed in 2001 and 2003 sunset on schedule, as written in law. 

And on the spending side, we assume not only that current mandatory programs will evolve according to the demographics and structure of those programs, but that all discretionary spending currently on the books, inclusive of the $87 billion supplemental, will 

remain on the books over the 10-year projection window and that 

the spending will rise only at the rate of inflation. So our assumptions in this baseline show discretionary spending rising at 2.5 percent per year, and they include the $87 billion supplemental. 

Now, in terms of changes in the budget outlook since we last reported in August, there are really two major developments. The 

first is the economy, which has grown even faster than we had projected in August. Our August projection included a fairly robust cyclical recovery. In the third quarter of this year, we saw GDP 

growth really much stronger than we had projected. And, indeed, 

it may be the case that the fourth quarter turns out to be stronger 


94065.021
17

than even this projection anticipated. We had something on the 

order of a little below 4 percent built into this projection, and there 

are estimates that range north of that, perhaps nearer 5 percent, 

depending on how things play out. 

So one change since August has been the economy. That has 

near-term benefits, not dramatic because we had a fairly strong recovery in there to begin with, but it has improved the picture from 

an economic point of view. 

A second major development is legislative. The laws passed by Congress since our August update have contributed about $680 billion to the deficit over the 10-year window. That is in contrast to 

a total of about $300 billion, in round numbers, attributed to economic and technical revisions. 

And so those are the two big changes. I think the lesson there 

is that, from the point of view of the path going forward, it will be 

policy choices that largely dictate the condition of the budget, as 

opposed to the economic future, at least to the extent it can be anticipated. 

Now, I will go briefly over economic forecasts. This one chart is 

meant to summarize the entire forecast; we do the best we can on 

that. What we see is an economy that is currently operating below 

potential. We have had a recession. Our forecast is that the economy will grow rapidly, at 4.8 percent this year, 4.2 percent next 

year. As a result of that, we will see unemployment decline from 

something that averages around 5.8 percent this year down to 5.3 

percent next year. And that cyclical recovery will close the gap between the light-blue line at the bottom and the dark-blue line 

which represents the capacity of our economy to produce.

Over the long term, however, it is that capacity which is central 

to the amount of income in the economy. So closing the gap more 

rapidly——being wrong in the fourth quarter or having a bit faster 

growth than we anticipate next quarter——really just serves to 

close more quickly and does not change the long-run budgetary picVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF

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ture very much. Instead, the large uncertainty from an economic 

point of view, in terms of the long-term budget outlook, is how fast 

that potential will grow, and there the major issue is how one 

thinks about the productive capacity and particularly the labor productivity growth that we have seen recently. 

As is discussed at length in the report, we have experienced very 

rapid productivity growth in this recession and recovery, comparable only to that during a brief period in the 1950’s. And it has 

raised lots of questions in the minds of analysts about the future 

path of productivity. What we have done in our projections is to acknowledge that rapid productivity growth by raising our estimate 

of the productive capacity of our economy, moving it up, but not 

dramatically changing our growth rate of that productive capacity. 

So there is some benefit to that, but it is not something we have 

extrapolated beyond the historical increase, largely on the grounds 

that we cannot in our digging through the numbers find a solid 

case that there has really been a change in the trend in the economy. But from the economic point of view, that is the central piece 

of the forecast. It is our expectation that we will continue to operate in a rapidly growing, low inflationary environment. Interest 

rates will begin to move up, but not dramatically so, until a couple 

years from now. 

Now, built on top of that economic forecast are projections for receipts and outlays. Revenues here are shown in the dark-blue line. 

Over the 10-year projection period, revenues are projected to grow 

overall at about 7.2 percent per year. That is in contrast to the average rate of growth of nominal GDP, which is 4.7 percent. So as 

a consequence, receipts will rise as a fraction of GDP from their 

low in 2004 of 15.8 percent to a total of 20.1 percent in 2014.

Shown in a dotted line at the bottom is the average receipts collected out of our national income of about 18 percent over the period since 1962. We will start below that and rise above. The increase in receipts in our baseline is largely due to the action of the 


94065.023
19

individual income tax. The remainder of the tax bases, with the exception of the expiration of the partial expensing at the end of this 

year, do not show a great deal of action. 

The rise in the individual income tax comes from two sources. 

First is the sunsets of the tax cuts in 2001 and 2003, which are 

shown in our baseline. Of the 4.3-percentage-point rise in revenues 

as a fraction of GDP, about 2.3 percent comes from that source. 

However, the remainder, the remaining 2 percentage points of increase in receipts, comes from a variety of other sources. 

The first is the fact that with a growing economy, people will become better off in real terms, and they will move into higher tax 

brackets and pay more in income taxes. 

The second is that we anticipate a resumption in the realization 

and taxation of capital gains closer to historic norms. We have seen 

a large drop-off in the capital gains component. We anticipate that 

to rise in our projection period. 

The third is the beginning of the retirement of the baby-boom 

population that carries with it the taxation of tax-deferred savings 

accounts, IRAs, 401(k)’s. Some of those revenues will appear in the 

Federal budget. 

And, finally, included in our projections is a rise in the importance of the alternative minimum tax. The alternative minimum 

tax is not indexed for inflation, and even given the low inflation 

outlook that we have in our projections, we will see an increasing 

number of taxpayers become subject to the alternative minimum 

tax. At present, about 3 million taxpayers are subject to the AMT. 

Over the period to 2014, that could rise to as high as 30 million 

taxpayers. 

So those are all sources of increase in receipts in this baseline 

under current law. 

On the outlay side, we have built this to be inclusive of the legislation just passed by the Congress, signed by the President. So we 

have the omnibus built into our baseline, and it correctly captures 

all the appropriations therein. As I mentioned earlier, it includes 

the $87 billion supplemental appropriation and essentially puts 

that in for every year and raises it with the rate of inflation. Ten 

times 87 gives you $870 billion to begin with. With debt service, 

that contributes about $1.1 trillion to the 10-year deficit number in 

our projections. 

On the mandatory side, we have mandatory spending rising at 

an average rate of 5.5 percent per year. That is driven largely by 

the entitlement programs—Social Security, Medicare, and Medicaid. And, indeed, in those programs, the rate of growth will rise 

over the course of the projection period. By 2014, those programs 

are rising at 6.5 percent per year, and that is the beginning of 

what one would anticipate to be a large increase in the demand for 

budgetary resources by those programs. The combination of an 

aging population, the retirement of the baby-boom generation, and 

rising health care costs in particular place those entitlement programs on track to demand ever larger fractions of our national income. 

The last point that I will note before turning to the closing slide 

is that there has been a great deal of discussion in the preparation 

of this report and even in the opening remarks by the Chairman 

20

and Senator Conrad about the growth rate of different discretionary spending categories. I will simply note—and we can return 

to this in questions—that there is a large divergence between 

growth measured as outlays versus growth measured in budgetary 

resources, particularly on a program-by-program basis. And that is 

built into our baseline as well. 

Finally, in an effort to give the Congress some sense of the degree to which the budget outlook depends on choices made by Congress and the administration, we outlined a series of variations 

from the statutory baseline and their implications for the long-run 

budget outlook. These are intended to give you orders of magnitude 

and stylized notions of the kinds of budgetary resources that are 

at stake. 

The top panel shows those that would reduce any surplus that 

might emerge or increase the deficit. There the first policy alternative that is shown is to extend all expiring tax provisions. There 

are really three classes of expiring tax provisions, which we have 

tried to lay out in a table in Chapter 4 of the report. One type is 

the tax cuts in 2001 and 2003, EGTRRA and JEGTRRA. The second is the partial expensing, which has been scheduled to end at 

the end of 2004. And the third is a variety of smaller individual 

items that collectively contribute to this estimate. But if one were 

to make all those tax provisions permanent and not allow them to 

sunset, the total impact on the budget would be $2.2 trillion over 

the 10-year window. 

A second tax item that has gotten attention, as I mentioned earlier, is the alternative minimum tax. To give you a sense of the 

magnitude involved, we included a reform of the alternative minimum tax, which is very simple. It is a plain-vanilla reform in 

which the AMT is indexed for inflation so that no one moves from 

the individual income tax to the AMT strictly due to inflation 

alone. Instead, to have the AMT apply, you have to really be richer, 

have your income rise in real terms. That reform of the AMT would 

cost about $470 billion over the 10-year window. I would point out 

there are many different possibilities for changes in the AMT, and 

the particular cost would depend on the proposal itself. 

Then, finally, you can see that, instead of assuming a fairly stringent policy baseline of 2.5 percent growth in discretionary spending 

a year, we could have spending essentially remain constant as a 

share of GDP, in which case it would rise about 4.7 percent per 

year; that would cost $1.6 trillion in increased outlays over the 10-

year window. And then the final alternative is increasing spending 

at the rate that has occurred in the past 5 years, which is 6.9 percent; spending increases over the 10-year window at that rate 

would add $3.2 trillion. 

The bottom panel goes the other direction. You could exclude the 

supplemental. As I mentioned, that is worth about $1.1 trillion. 

One might imagine a freeze in total discretionary spending, so declining in real terms. That would raise the budget surplus or reduce the deficit by $1.3 trillion. 

And I think the hope is that that will provide Congress with 

some information about the kinds of things that would be on the 

table in terms of policy options. And given the CBO forecast of a 

solid cyclical recovery and an economy that is reaching its producVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
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tive capacity and then growing at a healthy rate thereafter, such 

figures suggest that in terms of budgetary outcomes, it will be policy decisions made by the Congress and the administration much 

more than the anticipated path of the economy at this point which 

will be central. 

So, with that, I will close, and I would be happy to answer your 

questions. 

[The prepared statement of Dr. Hotltz-Eakin follows:]


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Chairman NICKLES. Thank you very much. I have just one comment. 

CBO and OMB and all the economists missed the revenue projections greatly in 2000, or I guess when testimony was made in 2001. 

They greatly overestimated revenues. Senator Conrad and I have 

wrestled around—well, President Clinton gave us a $5.6 trillion 

surplus. That was the projection in 2001, but way off the mark, 

greatly underestimating what the decline in the stock market bubble did to revenues. Just look at NASDAQ in 2000—now it has 


94065.032
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started to come up, but the revenues really dropped as a result of 

that, and not just that year, but frankly for a couple of years, because you had capital losses. 

Now we have had just in this year alone an enormous increase 

in stock market values. Just as an editorial comment, I hope you 

are greatly missing it again. I cannot help but think if you have 

$4 trillion of new equity, those capital gains, even though we are 

taxing them at a lower rate, we should collect more revenue. Every 

time we reduce capital gains rates and we have had an increase 

in turnover in sales and so on, there has been a lot of new revenue—just an editorial comment. It was missed greatly going 

down, and I hope it is missed greatly going up. There is a lot of 

economic activity out there to create that kind of robust increase 

in market value. Thank goodness there is. I am hopeful that you 

greatly underestimate it again. Maybe not. I do not know. That is 

just my hope. 

As a matter of fact, I am disappointed. Because we enacted the 

growth package, and we have had more robust growth than most, 

I was leading the charge saying let us have zero tax on dividends, 

and we ought to have 10,000 Dow Jones index, and we have exceeded that at a 15 percent rate. So I am thinking there should 

really be some real positive revenues. Yet you came out and said, 

well, we have done economic assumptions, and between our economic assumptions and our technical assumptions, we think it is 

about $350 billion worse over the 10-year period. We think inflation is lower and so on. I find that kind of hard to deal with. I understand you said that short-term, we get a little bump, but longterm, it does not make any difference. And then I look at your 10-

year projections, and with the two of them combined, a $171 billion 

increase in deficit due to economic factors. The economic factors are 

all positive. And then, technical revisions to your baseline are another $134 billion. I do not know. There may be too much pessimism for me. I cannot understand it. If you want to comment on 

that, you can, but let me make just two other points that are very 

critical. 

The legislative changes that were enacted since the August baseline, $681 billion over 10 years, all that was on the outlay side; is 

that correct? 

Mr. HOLTZ-EAKIN. Yes, sir. 

Chairman NICKLES. And that was primarily the Medicare bill, 

adding prescription drugs and the other Medicare changes, and 

what else? 

Mr. HOLTZ-EAKIN. The Medicare bill is a little under 70 percent 

of that, and then there is the increase in appropriations above and 

beyond last year’s, the difference in the supplementals (between 

$87 billion and $79 billion), carried out over 10 years. And there 

is some debt service attached to that number as well. 

Chairman NICKLES. OK. I would appreciate a breakdown of that 

if you could give me a breakdown. 

Mr. HOLTZ-EAKIN. We can get you all those figures. 

Chairman NICKLES. And maybe it is in your figures, and I have 

not had a chance to review it. 

The Medicare bill—Senator Conrad and I both alluded to the 

long-term problems that we are going to have in entitlement proVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
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grams, primarily Medicare. Medicare Part D—correct me if I am 

wrong; I am looking at page 13 of our Budget Outlook—it says the 

total cost of Part D, the new Medicare prescription benefit, is $771 

billion; offsets, some changes, but basically, the increase in outlays 

is $758 billion; receipts from beneficiaries, $134 billion; and receipts that we get back from the States, $88 billion, for a net of 

$535 billion. And then, we expect savings on Medicaid, since we are 

assuming Medicaid, $138 billion. That is how you get to your net 

of $395 billion over the 10-year period of time. But gross outlays, you are talking about $771 billion. 

Mr. HOLTZ-EAKIN. Yes. 

Chairman NICKLES. What is your estimate on the cost of the program over the next 10 years? 

Mr. HOLTZ-EAKIN. Over the years 2004 to 2013, if you just take 

the bottom line impact, $395 billion. But dropping fiscal year 2004, 

where there are essentially no outlays because the program has not 

started up yet and then adding the last year, where it will cost 

about $80 billion on net, moves the cost from $395 billion to something on the order of $475 billion over this 10-year budget window. 

Chairman NICKLES. OK. What about the next 10 years; have you 

done a guesstimate on that? 

Mr. HOLTZ-EAKIN. In preparation for House testimony last year 

in August, we did take a look at the second 10 years of any such 

program. We did not examine the particulars of this bill as passed. 

It was preliminary at that time. We simply extrapolated the final 

year net cost, something on the order of $70 or $80 billion, looking 

at growth rates and costs of prescription drugs. Doing that kind of 

calculation leads one to a second 10 years that is somewhere in the 

vicinity of $1 to $2 trillion, depending on the range of uncertainty 

on the growth rate of drug prices. 

Chairman NICKLES. So, for the next 20 years, you think the cost of the bill would be pretty close to $2 trillion? 

Mr. HOLTZ-EAKIN. If you do 20 years, yes—within the range of 

possibilities. 

Chairman NICKLES. Well, I read your comment, and I just wanted to clarify it, because it is on a ramp like this, and people should 

be aware of it. A lot of people will say, well, over 10 years, if it is 

$400 billion, that is $40 billion a year—that is not what we passed. 

We passed something that has very little cost the first couple 

years, and then it increases rather dramatically in the outyears 

and continues to escalate. I saw your comment where you thought 

it might be a couple of trillion dollars. 

This is not paid for. This is outside the beneficiaries’ contributions, so it would be paid for out of general revenues. I might make 

mention of that. 

One other comment. I notice your letter to Senator Frist dealing 

with non-interference, or having the Government negotiate drug 

prices—would you care to comment on that? Would removing that 

language in the bill have any significant impact on the cost of the 

program or on drug prices? 

Mr. HOLTZ-EAKIN. Our view of the private prescription drug delivery in the bill is that those at-risk private firms will have tremendous incentives to drive very good bargains with pharmaceutical companies, and as a result, removing the language prohibVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
31

iting the Secretary from negotiating would have negligible impact 

on the overall cost of the bill. There are already plenty of incentives 

for cost control. 

Chairman NICKLES. I appreciate your comments. 

Senator Conrad. 

Senator CONRAD. Thank you, Mr. Chairman. 

Again, thank you, Dr. Holtz-Eakin, for your testimony. 

Your analysis shows that the debt will increase by how much 

over the next 10 years? 

Mr. HOLTZ-EAKIN. The debt-to-GDP ratio will rise——

Senator CONRAD. No—I am talking now the debt in dollar terms. 

How much will the debt in dollar terms increase over the next decade if there are no additional tax changes or spending changes? 

Mr. HOLTZ-EAKIN. Between 2005 and 2014, debt held by the public will rise from $4.8 trillion to about $6.4 trillion——so $1.6 trillion. 

Senator CONRAD. One-point-six trillion. And debt held by the 

public now is $4.8 trillion? 

Mr. HOLTZ-EAKIN. That’s the fiscal year 2005 projection. 

Senator CONRAD. OK. How much would it add to the debt if the 

tax cuts were to be made permanent? How much would it add to 

the debt over this period? 

Mr. HOLTZ-EAKIN. I have not done a specific calculation of the 

debt outstanding if the 2001 and 2003 tax cuts alone were made 

permanent, but we could certainly do that calculation and would be 

happy to get it to you. 

Senator CONRAD. I notice on your chart, you have ‘‘Extending the 

expiring tax provisions.’’ How much would that add to the debt? 

Mr. HOLTZ-EAKIN. Well, there is a cumulative deficit of $2.2 trillion, but because of the variety of financing mechanisms, that does 

not map directly into debt outstanding. Again, it is a calculation we 

would be happy to provide to you. 

Senator CONRAD. Can you give us a rough—would it be more than the $2.2 trillion or somewhat less than the $2.2 trillion? 

Mr. HOLTZ-EAKIN. It is as good a guess as we have. We do not 

know if there is a particular bias one way or the other on the timing. 

Senator CONRAD. So roughly, making the tax cuts permanent would add another $2 trillion to the debt over the next 10 years? 

Mr. HOLTZ-EAKIN. Ballpark, yes. 

Senator CONRAD. So then, we would have a debt of $8.4 trillion 

instead of the $4.8 trillion we expect at the end of this year. 

Mr. HOLTZ-EAKIN. Right. 

Senator CONRAD. You know, there has been a lot of talk by some 

that deficits do not matter, that this buildup of debt and these deficits do not matter. In your judgment, do deficits matter? 

Mr. HOLTZ-EAKIN. Yes, I do think deficits matter. On balance, 

deficits shift national resources away from saving toward current 

consumption, and the impact of deficit spending as a result differs 

depending on the state of the economy. In those situations where 

the economy is weak, and there is very little spending demand 

from private sources, that shift from saving to consumption will 

bolster demand, and looking back, we have seen that. At times 

when the economy is already fully employed and there is plenty of 

32

private-sector demand, that shift from saving to consumption has 

not the same benefits of supporting the economy. Instead, it affects 

the supply side and the accumulation of saving and national investment and the growth in the capacity of the economy to produce. In 

both cases, deficits matter, and their impacts differ. 

Senator CONRAD. Well, you have made a very good point here. 

You have really differentiated the effect of deficits depending on 

the state of the economy. As I hear you saying it, when the economy is weak, deficits can give lift to the economy; when the economy has recovered, then running deficits will actually hurt longterm economic growth. Is that correct? 

Mr. HOLTZ-EAKIN. Running sustained large deficits in the face of 

a full employment economy will have negative economic growth 

consequences. 

Senator CONRAD. So as you look at these deficits going forward, and you say there is going to be $1.6 trillion of added debt if we 

do nothing, we will approximately double the debt if we make the 

tax cuts permanent and address the alternative minimum tax problem that you have described as growing geometrically, so you 

would take that to be negative for the economy if we run these 

deficits going forward and the economy is growing as you project 

it to? 

Mr. HOLTZ-EAKIN. We incorporate into our baseline projection, 

including the economic forecast, the deficit and its consequences. In 

our forecast, that shows up mechanically in the degree to which 

there is capital accumulation in the economy, and as a result, the 

rate at which labor productivity grows. Those impacts are not very 

large in the near term, but they build over time. 

Senator CONRAD. Actually, you are quoted in The Washington 

Post, and I want to see if that is a correct quote. ‘‘The cumulative 

corrosive impacts of sustained deficits in the face of a full employment economy would on balance make the extension of the tax cuts 

a ‘modestly negative policy choice,’ Holtz-Eakin said.’’


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Is that a correct——

Mr. HOLTZ-EAKIN. I will assume that it is a correct quote. The 

context in which the question arose is exactly the question you are 

raising. But in terms of the budget projections over a 10-year window, the impact of the tax cuts sunsetting in 2011 in the near term 

has negative impacts when marginal tax rates go up for labor supply and thus GDP growth, and we lay those out in the report. The 

other impacts of either making them permanent or letting them 

sunset take longer, and they go outside the budget window. So this 

sort of trade-off is really one that has to be framed carefully in 

terms of the time period over which you want to do the analysis. 

Senator CONRAD. OK. Let me ask you this. Spending—spending 

and revenue—that relationship is what leads to deficits. When we 

spend more—and right now, we are spending $900,000 a minute 

more than we are taking in—it is kind of stunning—this year, we 

are spending $900,000 more a minute than we are taking in. What 

is the relationship of spending now as a share of our gross domestic 

product to what spending was in the eighties and nineties? Is 

spending more now or lower now? 

Mr. HOLTZ-EAKIN. In these projections, spending averages about 

20 percent of GDP, which is close to the post-war historical average. 

Senator CONRAD. Close to the post-war historical average. Let me 

put up—here is what my chart shows, that spending, which has 

picked up now because of increases in defense and homeland security, is still quite a bit below where it was in the eighties and nineties. You were talking about post-war. I was asking eighties and 

nineties, spending as a share of GDP. This chart shows that spending now is below where it was in the eighties and nineties. Is that 

correct?

Mr. HOLTZ-EAKIN. I will assume it is correct. There have been 

variations over the post-war, certainly. 

Senator CONRAD. And in terms of revenue, what do you anticipate revenue as a share of GDP being this year in relationship to 

where it has been since World War II? 


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Mr. HOLTZ-EAKIN. It is 15.8 percent in 2004 in these baseline 

projections. The average is about 18 percent, as I mentioned in my 

remarks. 

The Chairman also raised the question of the path of receipts in 

these projections. The amount in 2004 is low for several reasons, 

some understood, some not well understood. Certainly, policy has 

lowered receipts in 2004, and some of that policy will go away—

the partial expensing provision. 

There has also been economic performance which is now turning 

around, and we are seeing faster growth. But in contrast to the 

rapid rise in GDP, production, we have not yet seen evidence of a 

comparable rapid rise in taxable incomes, so that economic growth 

really has not translated as much into the tax base as one might 

have expected. 

We have data at this point only through tax returns filed in 

2001, so we cannot fully diagnose the relationship between what is 

going on in the economy and what we are seeing in taxable incomes as well as we would like to, and some of these mysteries will 

be resolved with time, and some, I think we will get a better handle on sooner than that, as we see what happens to measured wage 

compensation, for example, in the economy as measured by the 

BEA over the next year. 

So in terms of the revenue picture, we expect 2004 to be 

transitorily low for a variety of reasons and then to pick up thereafter. 

Senator CONRAD. And our numbers show the revenue as a share 

of gross domestic product being the lowest since 1950. Do you agree 

with that? 

Mr. HOLTZ-EAKIN. That’s right. 

Senator CONRAD. I thank the Chairman. 

Chairman NICKLES. Senator Conrad, thank you very much. 

Senator Enzi. 

I might note for the interest of our colleagues that Senator Crapo 

was actually here first. He beat me here, and then he left, so I 

might have to put him back in the queue when he returns. 

Senator Enzi. 

Senator ENZI. Thank you, Mr. Chairman. 

Mr. Holtz-Eakin, I particularly thank you for being here and the 

difficulty of your job. It always occurs to me that making these predictions is very difficult—but only when we are talking about the 

future. 

I can see from the material that I have been through why it is 

easy to miss on the projections whether you are the director of 

CBO or the President of the United States or one of the Senators, 

or even somebody from the House or somebody from the public. 

There are just so many interacting things. 

First of all, I would like to ask that my entire statement be made 

a part of the record. 

Chairman NICKLES. Certainly. 

[The prepared statement of Senator Enzi follows:]

35


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Senator ENZI. I notice that CBO kind of isolated some things and 

said that the economy and technicals put about 40 percent into the 

deficit in spending increases, 37 percent, and the tax cuts, 23 percent. Is that a figure from——

Mr. HOLTZ-EAKIN. That is a historical analysis, and we have 

done a variety of——

Senator ENZI. And 2002 to 2011 was actually the baseline that 

you were doing that on. And I appreciate Senator Conrad’s chart 

that shows where the bulk of this spending came from—the war 

and national security, and the bailouts we did to take care of the 

damages that were done as a result of September 11, and I think 

we also had some that we did for all of the States that were having 

some difficulties. I think you said that in your projections, you continued about an $87 billion expense through each of the years? 

Mr. HOLTZ-EAKIN. That is correct. 

Senator ENZI. There are a lot of things that we cannot do anything about. Spending, we can, I think. The average rate of increased spending for the last 6 years was 6.9 percent when you 

take all those things into consideration. I think that that is 

unsustainable. We have to continually and fully support the troops 

in Iraq and Afghanistan and all the other places in the world. 

There are certain domestic priorities that we are going to have to 

fund. But we still have to look at the areas of spending. And people 

say, well, that is a pretty small part of what there is out there, but 

that is all that we can work with, so that is what we have to work 

with. 

I am reminded of that old phrase, ‘‘A billion here, a billion there, 

and pretty quickly, it runs into money.’’ We are not very good at 

cutting anything. We are not even good at slightly reducing things. 

What we go into—particularly in an election year, and this is a 

Presidential election year, so I think it might even be worse—is a 

phase of trying to outbid each other on every program that comes 

along. 

Now, business out there is not given the same options that we 

are given. They have a revenue that they project, and they budget 

against that, and somehow they have to make it come out. I 

haveten to look at some of those private business budget plans, and 

I am amazed at the minute detail that they go into making extremely small cuts but realizing that the extremely small cuts add 

up to something much bigger that actually helps them to balance 

or get close to or to follow their business plan. So I am going to 

encourage everybody to look for ineffective programs that we can 

reduce—I am not going to even suggest eliminate, because I know 

that that is an impossibility. There is a huge constituency out there 

for every program that we have developed, and those people are 

making some money out of the program, and they will spend some 

money to make sure that we do not eliminate their program. But 

we should be able to take a look at and at least reduce some of 

those that are out there. 

When we are debating our economic policies, I mentioned that 

from 2002 to 2011, we had the 40 percent drop in the economy. Do 

you think the tax cuts have had a positive side on the economy? 

It appears to be reflected in your numbers. 

39

Mr. HOLTZ-EAKIN. Well, certainly, looking back, the swing—both 

as a matter of policy and the fact that the budget response to the 

economy has supported an economy that has been hit with a wide 

variety of adverse economic shocks, if one goes through the list—

it has been quite dramatic: between war in the Middle East, terrorism events, equity market decline, and a large fall-off in business, fixed investment. It has been a period of lots of downward 

economic shocks, and the fiscal policy has served to support the 

economy in that period. 

Senator ENZI. I think you also mentioned that during the year, 

there was a tremendous increase, at least in the third quarter. 

Now, that would not be reflected through all of your projections; 

you are not allowed to do that, are you? 

Mr. HOLTZ-EAKIN. We did in fact include the information from 

the third quarter in our projections for the entire period. The 

fourth quarter data have not yet been released, and we had to 

project that in doing our forecast. 

Senator ENZI. I guess the point that I am trying to make is that 

if we increase the gross domestic product, everything looks a lot 

better; taxes probably come in a little bit higher. So I appreciate 

all the effort that you put into those numbers. I recognize the difficulty of predicting, and you have been a tremendous help. 

Thank you. 

Chairman NICKLES. Thank you, Senator Enzi. 

Next, I call upon Senator Hollings. I might note that both Senator Hollings and I are having our last year on this Committee. I 

have only been on it for 24 years, which pales compared to Senator 

Hollings’ 30 years on this Committee, and I compliment him for 

that and recognize Senator Hollings. 

Senator HOLLINGS. You are might generous, Mr. Chairman, and 

I appreciate it very much. I particularly appreciate us having a Director of the Congressional Budget Office who believes that deficits 

count. 

Otherwise, in all sincerity, we have just heard from the distinguished Senator from North Dakota, our ranking member, the true 

state of the Union, and I am going to make a public request, and 

if he will not, I will. I want that printed up what Senator Conrad 

in his opening comment stated. If we can get that printed up and 

mailed to all the Members, you will have a true state of the Union 

message. And thank you—I know that Senator Conrad has to go 

to an Agriculture meeting, but I cannot thank him enough, because 

he covered our true situation. 

Mr. Chairman, you have been very generous. We both work together. But I could not help but smile when you were talking about 

how the stimulus worked. I would hope so. I would hope the stimulus of tax cuts worked some, for the main and simple reason that 

last year, we ended up with a deficit of $562 billion—$562 billion—

I do not want anybody to question the accuracy of that. 

Otherwise, we had approximately a current account deficit and 

balance of trade of around $480 billion. So in the last year, we have 

goosed the economy, we have infused the economy one trillion 

bucks. Tax cuts—come on—that little tax cut was just a minor part 

of it. We have put in 562 plus 480—we have put in over $1 trillion 

40

into the economy, and it is still limping along. They are wanting 

more tax cuts. 

I do not think they would ever mention more tax cuts if they understood the exact situation that we are in, and that is why I ask 

that the comments of the Senator from North Dakota be printed up 

and sent around—because Mr. Chairman, I remember you were 

hearkening the days—you were talking about stimulus—Senator 

Sam Ervin of North Carolina and I were trying to stimulate the 

economy about 25 years ago with $5 billion in highway spending. 

It had already been approved at the Highway Administration, but 

we had to go out, and we were trying, and it took us 3 days to persuade our colleagues to approve borrowing $5 billion to get the 

economy going and to get jobs created. Now, here we are stimulating over $1 trillion in a year’s time, 

which brings me to my hope and mission this morning, which is to 

get truth in budgeting. And I am not playing games, Mr. Director, 

and I am not trying to be cute, but as between the word ‘‘gross’’ 

and the word ‘‘total,’’ do you find a difference? 

I will be specific with you. I had to just pull out my little Webster’s Collegiate Dictionary, and ‘‘total’’ was ‘‘gross,’’ and ‘‘gross’’ 

was ‘‘total’’—in fact, the exact definition in Webster’s. ‘‘Gross’’ is 

‘‘an overall total exclusive of deductions.’’

Do you find a difference when you use the word ‘‘total’’ and when 

you use the word ‘‘gross’’? 

Mr. HOLTZ-EAKIN. Off the top of my head, they sound like similar concepts. I do not know if there is a technical definition involved. I think it is about the context. 

Senator HOLLINGS. The reason I ask that—if you take the first 

page of the—well, let me get to what the people understand. Here 

you go. I had some of this this morning. Total is 100 percent. That 

is the headline, right? That is 100 percent Total. Now, if Total is 

100 percent in the public’s understanding and your understanding 

and my understanding, I notice on page 1 of the summary, you say 

‘‘Total budget deficit of $477 billion.’’ That is really only 68 percent; 

that is not 100 percent, because if you turn to page 19 of the regular budget report that you have here, you can see that the debt 

in 2003 actual—you use the word ‘‘actual,’’ which I like—‘‘total,’’ 

‘‘actual,’’ ‘‘gross,’’ so everybody is singing from the same page—the 

actual debt in 2003 was $6,760,000,000, and you project the debt 

in 2004—in 8 months’ time, now—next year, it is going up, in 2004, 

which is the fiscal year—to $7,459,000,000. So you have an ‘‘actual’’ 

or ‘‘total’’ or ‘‘gross’’ deficit of $699 billion; isn’t that correct? 

Mr. HOLTZ-EAKIN. That is not the concept that was on page 1. 

Senator HOLLINGS. I did not ask about the concept. What is the 

fact? 

Mr. HOLTZ-EAKIN. The fact is that the total borrowing by the 

Federal Government from the economy will be $477 billion in 2004. 

Senator HOLLINGS. I didn’t ask about the borrowing. I asked 

about the deficit. You and I have to not run around with the percent of GDP. When I go to pay my bill on the house payment, or 

when I go to pay the car payment, or when I go to pay the washing 

machine bill, they do not ask me what is the percent of my GDP. 

They want the money. They want the money. And we have to talk 

sense, and we have to talk facts and not theory—in 10 years, in 

41

50 years, what we did 10 years ago and all—because we only have 

8 months. And that is the duty of this Committee is to propound 

a budget. Within that, do you find the budget different than $699 billion? 

Mr. HOLTZ-EAKIN. I do. If you count the dollars coming in and 

then count the dollars going out, the difference, which is what you 

would have to go to the bank—and in this case, the ‘‘bank’’ is the 

entire economy—that difference is $477 billion. 

Senator HOLLINGS. Oh, you are borrowing from Social Security, 

and you know—according to the budget law—in fact, Mr. Chairman, we were here in the Budget Committee, and we got a vote 

20-to-1 to make sure that the Greenspan Commission was carried 

out—namely, that Social Security be put off-budget in Section 

13.301, signed by George Herbert Walker Bush, Sr., on November 

5, 1990, by a vote of 98-to-2 in the U.S. Senate. President Bush 

signed that into law, Section 13.301 of the Budget Act, not to use 

Social Security. And here you are trying to deduct it, and trying 

to answer the question what is total and what is actual. The total deficit or the actual deficit is $699 billion; isn’t that correct? 

Mr. HOLTZ-EAKIN. With all due respect, Senator, this document 

is meant to provide an accounting of the congressional actions. The 

exchange of payroll taxes and debt and Social Security Trust Fund 

is an intergovernmental transfer and would not be reflected in the 

total budget deficit, which shows the borrowing requirements by 

the Federal Government. 

Senator HOLLINGS. Why do you say on page 19—let us all turn 

to page 19, and you will see down there, ‘‘The gross Federal debt’’—

why did you use that rationale or whatever—that is where the debt 

is going up from 6,760 to 7,459—I mean, it is going up $699 billion. 

That is all the dollars in and all the dollars out; isn’t that the case? 

Mr. HOLTZ-EAKIN. It is certainly our desire to inform the Congress of all the budgetary consequences of its actions, and certainly 

as the Federal Treasury issues securities to the Social Security 

Trust Fund——

Senator HOLLINGS. I am not asking how to issue and borrow. 

That is the whole thing. They are going to have to borrow. If they 

wanted to actually put the Government in the black, they would 

have to actually borrow $699 billion; isn’t that correct? 

Mr. HOLTZ-EAKIN. No, that is not correct. 

Senator HOLLINGS. Well, how is it incorrect? If it goes from 

$6,760 trillion to $7,459 trillion—that is where I get the arithmetic 

$699 billion. 

Mr. HOLTZ-EAKIN. The point at which the Social Security benefits are paid in the future will be the point at which the Federal 

Government will be required——

Senator HOLLINGS. You are talking about the future. I am talking about your listing on page 19, the gross Federal debt. 

Mr. HOLTZ-EAKIN. That figure includes those securities issued 

not only to the public but also to the Social Security—the Social Security Trust Fund—— and other such Federal entities. 

Senator HOLLINGS. That is right, and it should not include Social 

Security, because under 13.301—I can read 13.301 to you; I have 

it; I have the Greenspan Commission report, I have the Budget Act 

42

right here, and we can read it to you so you will understand 

13.301. 

But Mr. Chairman, I am not trying to belabor the good witness 

here. I am trying to get us all to speak the truth in budgeting, and 

by gosh, it says here, as you can read it, that Social Security—‘‘exclusion of Social Security from all budgets.’’ This is the thing you 

are administering. This is the Budget Act, 13.301. ‘‘The congressional budget shall not include Social Security.’’

And when I ask you the difference between ‘‘total’’ and ‘‘gross,’’ 

you run around and try to talk about the borrowing and borrowing. 

The actual deficit is $699 billion, not $477 billion. 

You have only given us on page 1 the 68 percent, not the 100 

percent total, and that is the trouble. We around here are talking 

10 years, and if we do not have to account for $222 billion of the 

deficit, then we can say, oh, well, let us have another tax cut. 

If the American people understand that we are going in the hole, 

in the red, according to your projection, $700 billion by September 

30, within 8 months, this year, I would not want to go home; they 

would run me back up here. 

Chairman NICKLES. Senator Hollings, thank you very much. You 

only ran about 12 minutes, and that is all right. You are entitled 

to do that since you have been on this Committee for 30 years. 

I will ask the rest of my colleagues if they could keep their comments or questions limited closer to 5 or 6 minutes so we will be 

able to get to everybody at a decent time. 

Senator HOLLINGS. Thank you very much, Mr. Chairman. 

Chairman NICKLES. I also want to say that you have raised the 

distinction between gross debt and debt held by the public for the 

last 20 years that I can remember and have done that very consistently. I almost look forward to your speech, because I know it is 

coming. 

Senator SESSIONS. 

Senator SESSIONS. Thank you, Mr. Chairman. 

Mr. Holtz-Eakin, this projection includes no dynamic scoring—

that debate we have had that by reducing taxes, it increases the 

economy—your projections do not have any factor in them to show 

an increase in revenue that might arise from a reduction in taxes, 

do they? 

Mr. HOLTZ-EAKIN. That is not quite right. The baseline projections are done with an economic forecast that includes the impact 

of those policies that are currently in place, and indeed, one of the 

difficult issues that any analyst in this area faces is that, in particular, on the tax side, with the legislated sunsets of the tax cuts 

in 2001 and 2003, one has to make a judgment about how the private sector perceives those legislative sunsets. 

If members of the private sector believe, for example, that all the 

tax cuts will be made permanent, they will act differently than 

they will if they believe that they will sunset on schedule. 

What we have done in trying to guess what the private sector believes is simply to build an economic baseline that is consistent 

with the budgetary baseline, so we have constructed our economic 

forecast under the assumption that the private sector believes that 

these tax cuts will sunset as scheduled. 

43

So, for example, if you will allow me, if you allow the partial expensing to expire at the end of this year, there are clear incentives 

for businesses to try to move their investment into 2004 as opposed 

to waiting until after the tax provision expires. We have built that 

into our forecast. It does not drive our forecast for 2004, but it contributes to more rapid investment in 2004, and there are myriad 

examples of that type. So the baseline forecast for the budget and 

the baseline forecast for the economy are a consistent pair. 

Senator SESSIONS. Looking at your statement, the quote that you 

were given, I do not know if Senator Conrad’s staff has that 

chart—maybe it is still there—but really, that chart was an inaccurate statement of the comment you made in the New York 

Times. As I read it, reading from the New York times article, it 

says: ‘‘Mr. Holtz-Eakin said the initial impact of the Bush tax cuts 

was positive because the cuts lowered marginal tax rates and gave 

people more incentive to work and produce.’’

To the extent that rates remain low, that will continue for as 

long as those rates remain low and incentive to work and produce, 

will they not? 

Mr. HOLTZ-EAKIN. That is absolutely correct. 

Senator SESSIONS. That incentive remains there constantly. 

Then, you went on to say, to be accurate: ‘‘But to the extent that 

tax cuts lead to higher deficits’’—you did not say this, because it 

is not in quotes—but it says, ‘‘But to the extent that tax cuts lead 

to higher deficits and greater government borrowing, he warned, 

they could have ‘a cumulative corrosive effect on capital accumulation, on national saving and productivity.’’’

So that was your statement in context. 

Mr. HOLTZ-EAKIN. That is correct. 

Senator SESSIONS. And then the New York Times went on to add 

in the next paragraph: ‘‘Economists prefer’’—economists, not politicians—‘‘to look at budget deficits in relation to the size of the overall economy rather than to the absolute dollar amounts.’’

So it is a legitimate economic consideration to consider the deficit 

we have as a percentage of the overall economy; isn’t that correct? 

Mr. HOLTZ-EAKIN. Indeed, I think it is appropriate. As I have 

mentioned in other places, if one goes to get a car loan or a mortgage, the first thing they ask you is, ‘‘What is your income?’’ They 

want to know what is your ability to repay, and it is appropriate 

to look at borrowing as a fraction of that ability. 

Senator SESSIONS. So the President’s commitment, which I think 

we can exceed, of reducing the debt as a percentage of GDP by onehalf is a good step, I believe. 

You noted that if we were to keep discretionary appropriations 

at the rate of inflation after 2004, we would save from the 2005–

2014 timeframe $1 trillion plus. Is that how I interpret that chart 

that you have given us. ‘‘Policy alternative that reduce the deficit 

or increase surplus’’—No. 1 that you list is ‘‘increase discretionary 

appropriations, excluding supplemental appropriations for 2004, by 

the rate of inflation after 2004.’’

Mr. HOLTZ-EAKIN. That is the impact of excluding the supplemental, not the impact of the growth rate that we assume; that 

just moves from a lower starting point. 

44

Senator SESSIONS. All right—and keeping it at the rate of inflation. 

Mr. HOLTZ-EAKIN. Keeping it at the rate of inflation. 

Senator SESSIONS. So if we came in under the rate of inflation, 

that would be even more savings. So you are considering in your 

deficit numbers an $81 billion supplemental every year? 

Mr. HOLTZ-EAKIN. It is actually an $87 billion, and it goes up 

with the rate of inflation. It is in all 10 years. 

Senator SESSIONS. And that amounts to over $1 trillion, which is 

half of what you projected the deficit to be; is that not correct? 

Mr. HOLTZ-EAKIN. That is correct. 

Senator SESSIONS. Now, in this economy, it seems to me tax revenues seem to be more volatile than the GDP. If the GDP remains 

up, sometimes the tax revenues exceed the GDP growth, and if it 

drops, tax revenues drop below the GDP, faster than GDP drops. 

I think that is because we tax higher-income people significantly 

and because when people sell stocks after the stock market has 

dropped, they are taking losses, but when the stock market is up, 

they have to pay capital gains taxes on their profits. 

Aren’t those some of the things than make for volatility in revenue coming in to the Federal Government? 

Mr. HOLTZ-EAKIN. Those are certainly factors that have contributed to it. We tax not just the flow of current income that is measured by GDP; we tax asset sales. Capital gains and capital losses 

affect tax receipts. It is also the case that not every income flow 

is even across the entire population, and shifts in the income distribution have impacts. 

Senator SESSIONS. We took the hit with September 11, and airlines and hotels are in trouble, and these corporations, instead of 

paying corporate taxes, were having losses and were not paying 

taxes; is that correct? 

Mr. HOLTZ-EAKIN. That is correct. 

Senator SESSIONS. Some of the executives who make big salaries 

were not getting bonuses, which they pay very large income tax on, 

perhaps, because their companies did not show a profit that year. 

That makes some of the volatility occur, does it not? 

Mr. HOLTZ-EAKIN. Those are pieces that are in what we refer to 

as our ‘‘technicals.’’ They sound economic, but given the way we divide things, those are part of the technical revisions we have experienced in the past and going forward. 

Senator SESSIONS. And I guess my question—and I know the 

Chairman is worried about how optimistic we ought to be—but if 

growth holds in the stock market at a steady, modest rate, and if 

GDP holds at the rates you are projecting, isn’t it likely that profits 

will begin to increase, that people will begin to sell more assets 

that now have gained in value, so they are beginning to pay more 

capital gains taxes instead of offsetting income by taking capital 

gains losses to the extent they can, and that we might show a more 

volatile increase in revenue than you have projected? 

Mr. HOLTZ-EAKIN. It is certainly the case that we have built exactly those phenomena into our baseline forecast—increasing capital gains taxes, increasing profitability by the business sector, and 

tax receipts to go with that. It is also the case that there is a lot 

of the forecast that is simply unknowable, and we have tried to 

45

document the degree to which that kind of uncertainty can affect 

budgetary outcomes. It is in an appendix to our report, and you can 

see that as you move further out in time, as you go out to 2009, 

there is a wide range of possible impacts on the bottom line budget 

deficit that come from economic and technical uncertainty—exactly 

the factors you have discussed. 

Senator SESSIONS. Mr. Chairman, I would offer this New York 

Times article and ask that Senator Conrad, to the extent to which 

his chart may be in error, correct that. 

Chairman NICKLES. Thank you, Senator Sessions. 

Senator SESSIONS. There is—is that The Washington Post? OK. 

Chairman NICKLES. Thank you very much. 

Senator Stabenow. 

Senator SESSIONS. Mr. Chairman, let me just correct that; it is 

unfair to Senator Conrad. I was looking at the New York Times, 

and he had The Washington Post article, which does appear to be—

I do not have any information on that, so he may be correct on 

that. 

Chairman NICKLES. Well, I am sure The Washington Post is always as accurate as the New York Times is. 

Senator SARBANES. Can we get that in writing? 

Chairman NICKLES. No, no. Certainly that is off the record. Cut 

that off the record. 

Senator SARBANES. Can we print out the record on that comment? 

Chairman NICKLES. No. 

Senator Stabenow. 

Senator STABENOW. Thank you, Mr. Chairman. 

First, I want to congratulate you on your last year chairing the 

Committee. While we do not always agree on policy issues or votes, 

I have very much appreciated your graciousness and fairness with 

the Committee and look forward to a process where we can openly 

debate all the issues and very critical policy differences that are before us. 

When we look at these numbers—I was looking at the total that 

is being projected this year, for 2004, on the deficit, and depending 

on whether $477 billion, or if we exclude Social Security, as we all 

say we want to do, and remove that from the numbers, $631 billion, what I find extremely interesting is that when we look at domestic spending, non-defense domestic spending, we see that if we 

were to eliminate every penny of spending this year for education, 

innovation, non-Medicare health programs, environmental protection, and all the other things that are domestic spending including 

homeland security, if we were to eliminate it—$445 billion, according to your numbers—we could not wipe out our debt this year. 

I think that is very important, Mr. Chairman, to put in context 

for us. Just as you, Mr. Chairman, and Senator Conrad agreed that 

92 percent of the increase in spending in the last number of years 

has been defense, homeland security, rebuilding New York and the 

Pentagon, other issues related to 9/11—92 percent—I think it is 

very important to put in context that if we did nothing in terms 

of the defense and domestic spending, if we did nothing but defense 

and wiped out every penny of everything else the American people 

have asked us to invest in to promote education, innovation and 

46

help drive the economy, we would not eliminate this year’s debt. I 

think that is pretty astounding, actually. 

When I came to the Committee, we were debating 3 years ago 

what to do about the largest surpluses in the history of the country. We are now talking about what to do about the largest deficits 

in the history of the country, and we can debate whether deficits 

matter—I believe that deficits matter. I believe that anyone looking 

at this in the public believes that deficits matter. And if we go back 

and look at comments that we all have made over the last many 

years, I believe that at many, many different points in debates, we 

have all acknowledged that deficits matter. 

I think that what I would like to do is take my few moments and 

talk about the economy and what is happening in terms of jobs. 

There are lots of things I would love to ask you, and I certainly 

have comments about Medicare, and I will save those, Mr. Chairman, for another time in terms of what really happened under that 

bill and what will happen in the future. 

But when I look at it from Michigan’s standpoint, even though 

we see many of the numbers going up in terms of the stock market 

and what is happening, positive indicators happening, that is not 

being translated in terms of jobs in Michigan and where the rubber 

meets the road. When we look at the fact that we have seen about 

1,000 jobs, I believe, created in the last month or so, I certainly 

question the numbers in terms of being able to see this economy 

turn around. But I would like to have you speak for just a moment 

about the difference between the macroeconomic statistics and 

what is happening in manufacturing in places like Michigan. 

We have an unemployment rate of 7.2 percent this year. We have 

people who have been employed all their lives and have invested 

in education, have done all the things that we have asked them to 

do, losing their jobs right and left. And literally every day, I could 

show you headlines in the paper right now of jobs that are not coming back. 

This gets to a whole range of policy issues that we need to address, and I will just mention one situation that occurred in the 

last couple of weeks that has been so shocking to people in Michigan—a plant in a small town, Greenville, Michigan. Nine thousand 

people live there, and Electrolux, which builds refrigerators, announced 2,700 jobs going to Mexico, not because they could not 

make a profit—they say they make a profit in the United States—

but they could make a bigger profit if they paid people $2.50 an 

hour and no health care. 

So we have a lot of challenges, and we are not seeing the jobs 

being created even though we are focused on high-tech manufacturing and focusing on increasing skills and so on. 

I wonder if you could speak to what you have seen in manufacturing versus the larger macroeconomic numbers as it relates to 

employment. 

Mr. HOLTZ-EAKIN. I would be happy to. There are a variety of 

factors that have influenced the manufacturing employment picture, and if we back up to the long-term trends, the most pronounced feature of the manufacturing sector is that it has managed 

to maintain growth rates and total production that are comparable 

to the economy as a whole. So it is not shrinking compared to our 

47

economy in production, but it has been shrinking in terms of total 

employment on a steady basis for quite a while. The gap is filled 

by the very rapid productivity gains in manufacturing, and it is a 

reflection of the fact that in the face of the ability of manufacturers 

to innovate and produce their goods in a more productive fashion. 

Even when price declines are a result of that, consumers do not 

choose to continue buying as much in manufacturing goods as they 

used to; they tend to shift the mix of their purchases toward services and other items. 

So we have seen a migration of employment from the manufacturing to the nonmanufacturing sector. It is a long-term trend. It 

has been in the data, and it is augmented by a statistical phenomenon, which is that many jobs that used to be classified as 

manufacturing are now essentially outsourced by manufacturers. 

They hire janitorial services, and the employee is still in the same 

facility but employed outside the manufacturing sector. That has 

been a piece of what has gone on as well. 

A third has been a recession. No question—manufacturing is 

typically highly cyclical. Recessions hurt manufacturing more than 

some other sectors of the economy, and in this recession, it has 

been quite pronounced. We have seen that happen. And even more 

so than in other recessions, there has been a difference in the demand for manufacturing, and it comes from the sharp decline of 

business investment in this recession, really much more than a 

typical recession. That decline in business investment has hurt the 

demand for manufacturing goods, and to the extent that turns 

around, we would expect part of the manufacturing problems to be 

diminished to some extent. 

And in the international sector, we have seen a decline in not 

only the demand for traded investment goods, which is a big part 

of our exports, but also manufactured consumer goods. 

So one of the really striking features of the performance over this 

business cycle, the recession and recovery, has been that we have 

imported sort of a typical pattern of manufactured goods, but we 

have exported way below what you would expect at this point in 

a recovery. That has to do with weak foreign demand for these 

products and the status of the dollar. We have seen the dollar 

weaken somewhat, and, other things equal, that might help, but 

certainly weak foreign economic performance has been a big part 

of it. The U.S. has been one of the few engines of growth internationally. To the extent that foreign demand turns around, that 

also should contribute. 

Then, finally, there is the mixture of locations of production, both 

domestically and internationally. We have just seen a growth in 

trade, and this has raised the usual issues in the impact of dislocations from international trade. On the whole, international trade 

betters all parties, but there are particular workers who typically 

bear the brunt of the adjustment, and that becomes an issue for 

policy concern. 

So it has been a wide array of things that have all impinged on 

manufacturing employment, especially through this recession and 

recovery. 

Senator STABENOW. Mr. Chairman, just in conclusion, I will say 

that manufacturing has been a backbone of the middle class in 

48

America, and I would agree with you that what we are seeing is 

fewer exports—what we are doing is exporting the jobs. The plants 

are going to China as opposed to the product going to China. I believe that there are a number of things, including addressing currency manipulation, smarter trade policies, more incentives to remain in the United States and create those jobs, and that that is 

very much a part of any sustained, long-term recovery for us, because of the importance of manufacturing to the economy of the 

country. 

Thank you. 

Chairman NICKLES. Senator Stabenow, thank you very much. 

Senator Allard? 

Senator ALLARD. Thank you, Mr. Chairman. 

I would like to followup a little bit on Senator Hollings’ question, 

because I think he muddied the waters, and I would like to help 

clarify those waters and clear them up if I might. 

I guess the best thing to do is think of this in terms of as though 

you were if you were a business. If you have a profit and loss statement on a business, you want to take the total expenses, you want 

to take the total revenue coming into the business, and you come 

up with your net, whether it is a loss or a gain, and that is what 

your figure reflects; it is total cost and total revenue. Is that correct? 

Mr. HOLTZ-EAKIN. That is right. 

Senator ALLARD. But if I transfer money from the sales department in my business to employee benefits in my business, it does 

not affect the bottom line, but as a manager, I may want to know 

that that is happening, because I want to know which areas are 

producing and which ones are showing a profit—just like we have 

here in the Federal Government. As managers, I think we need to 

be very much aware that Social Security contributes to that net figure. Whether we want to ignore that figure or not, the Social Security is part of the total. 

Now, to take a transfer from Social Security to the general fund 

as managers, it is kind of good policy for us as Members of Congress to know that, because eventually, it is going to have an impact on the general fund unless we do something about it. 

So I appreciate your figures. I think they truly reflect what is 

happening this year as far as the bottom line is concerned. I think 

that is important. I think it is in line with what we would expect 

from a legitimate cost and profit statement that you would get from 

a company, and I do think it is 100 percent accurate, and I just 

want to thank you for making that point to the Committee. 

Also, I do not know whether you had an opportunity to look at 

the chart called ‘‘Source of Change in Deficit Surplus Outlook Since 

March 2003.’’ It has been put out by the Senate Budget Committee. 

If you have not had a chance to look at that, I would like to have 

you look at it and send me a letter or something as to whether you 

agree with the figures that are in that or not, because I think it 

tells a definite story, and I would like to get those figures confirmed by your office if we might. 

Mr. HOLTZ-EAKIN. I am happy to do that. 

Senator ALLARD. Also, looking at non-defense discretionary 

spending, I agree that it is up at record high levels, whether we 

49

look at it in nominal terms or just as a share of gross domestic 

product. My question is do you believe it is necessary to reduce 

Government consumption in order to attain a balanced budget? 

Mr. HOLTZ-EAKIN. In the end, you can balance the budget as a 

matter of the math by either cutting what goes out or raising what 

goes in, and it will be a policy decision about which route the Congress will choose to go. 

Senator ALLARD. But you would agree that from a practical matter, it is pretty hard for us to balance the budget without holding 

down spending. 

Mr. HOLTZ-EAKIN. Certainly, if you look at our baseline, by historic standards, that is a fairly stringent spending path, 2.5 percent, and you see a diminishing profile of budget deficits over the 

course of the 10 years. 

Senator ALLARD. Well, I look at this chart that was provided to 

the Committee, and since March of 2001, the new spending is 61 

percent, tax cuts are 9 percent. It is hard to say that if we are 

going to get around to balancing the budget, we certainly have to 

show some—we have to be aware of the spending that is going on 

in this budget and the impact that it is having on the deficit, and 

I do not see how we could ignore the impact of spending on our 

deficits. 

Mr. HOLTZ-EAKIN. I think it is certainly the case that the threshold decision is the decision to spend money by any enterprise, especially the Federal Government, and at that point, the issue becomes how it is financed. But having made the decision to spend 

it, it will have to be financed either by taxes or borrowing, and the 

issue of the deficit is a finance issue. The first issue is what do the 

Congress and the administration choose to do in the way of programs and for public policy purposes, necessarily so. 

Senator ALLARD. Now I have a question related to marginal tax 

rates. Some have argued that the marginal tax rates should be 

raised to reduce the budget deficit—instead of looking at the spending side, they are looking at the revenue side. And I want you to 

look at this as an economist—would raising marginal tax rates 

likely reduce the labor supply? 

Mr. HOLTZ-EAKIN. If one were to increase marginal tax rates, 

there would be clear disincentives to supply labor. And more broadly, the economics literature documents the distortion to effort, occupational choice, and a wide variety of aspects of labor supply. 

Senator ALLARD. So by doing that, we would have an impact on 

jobs. 

Mr. HOLTZ-EAKIN. You would certainly have an impact on the efficiency with which the economy operated, and that would be one 

of the costs of high marginal tax rates. A flexible economy like the 

U.S. economy will in the end find ways in the form of lower real 

wages or some other mechanism to employ people, but there is a 

cost associated with high marginal tax rates that is a distortion 

cost in the economy, not measured well by jobs. 

Senator ALLARD. Mr. Chairman, I believe my time has expired. 

Thank you. 

Chairman NICKLES. Senator Allard, thank you very much. 

Senator Nelson? 

Senator NELSON. Thank you, Mr. Chairman. 

50

You know, back in 1979 when I went to the House, I had the 

privilege of going on the House Budget Committee, and over two 

decades later, as another freshman member of a legislative body on 

the Budget Committee again, this Committee is where the action 

is, but there is too much ‘‘Gotcha’’ politics, Mr. Chairman, in this 

Committee. It seems to be endemic to the nature of this Committee, because it was so back in the late seventies and the 

eighties, so that the budget does not become an economic document, it becomes a political document. So we have all of these various interpretations as to what is going to help each side’s political 

interest, and it is hard to get focused on what the real truth is. 

Let me just on that note ask a question here. Last year’s budget, 

August 2003 forecast, had a 10-year projected surplus or deficit, 

and it came out right at $1.4 trillion. If you take those same years, 

2004 to 2013, it is $2.4 trillion, so that is an increase of $1 trillion 

in the deficit over that decade. 

Help us understand why we shot up $1 trillion in the deficit. 

Mr. HOLTZ-EAKIN. It comes in three pieces. Piece No. 1 is about 

$680 billion as a result of new legislation: Medicare prescription 

drug legislation plus other appropriations. 

The second piece is a combination of economic and technical factors, as the Chairman mentioned earlier. Within the economics, we 

have three effects—faster near-term growth and impacts of higher 

productivity that allow us to have greater economic prosperity. And 

then, especially in the out-years, we anticipate that higher health 

and other benefits costs will lower the fraction of compensation 

that shows up in taxable wages. 

We also anticipate lower inflation, which has a modestly negative 

effect on the budget. 

So given the good news in the near term and the bad news in 

the long term, the net effect on the economics is negative by, with 

the technicals, a total of about $300 billion. So that is where the 

trillion dollars comes from—legislative, about $700 billion; economics and technicals, about $300 billion. 

Senator NELSON. OK. Now, when we ask questions for the average American on the street, and they are trying to understand 

what is happening to the economy, we see right now that the economy is going up, there has been this stimulative nature of the cash 

that has gone into circulation through additional spending, through 

some of the tax cuts and so forth, but on the basis of what you just 

said, with a huge deficit increase over the next 10 years by these 

figures over the decade, $2.4 trillion of additional deficit, at some 

point, just from a common sense standpoint, if you have to go out 

and borrow an additional $2.4 trillion over the decade, the demand 

for that additional money is going to cause the cost of that money 

to rise, which is the interest rate, and are we not going to see interest rates start to rise? 

Mr. HOLTZ-EAKIN. As I mentioned earlier, we have built into our 

economic forecast the budgetary projections, so these are part and 

parcel of the same forecast. Built into our economic projections is 

a rise in interest rates—for example, short-term rates will rise over 

the next 2 years to something like 3 percent, and we will see the 

10-year rates go up as well. 

51

One would expect that to happen both as part of the cyclical recovery and as the Fed perhaps moves its policy instruments closer 

to neutral. 

Senator NELSON. Well, when the interest rates rise, will we not 

see, then, a stalling of the recovery because interest rates being 

higher, particularly if they go much higher, aren’t we going to see 

a replay of history, that we suddenly have the recovery stalled, and 

we start slipping back into recession? 

Mr. HOLTZ-EAKIN. We certainly do not anticipate that. As I mentioned, we have a robust cyclical recovery; we think the other factors that influence in particular business investments, which are 

central to a sustained cyclical recovery, might outweigh any movement of real interest rates back toward their more historical alignments. 

Senator NELSON. Well, I can just give you some country boy common sense predictions, and this country boy has gone out and 

talked to several noted economists in the country as well as chief 

economists of some of the major financial institutions in this country, and the near unanimous feeling among these economists is 

that we are going to see the economic stimulus through the end of 

this year, and then watch out when we get into 2005—it starts 

slowly going down, and then it starts accelerating toward the end 

of 2005 as the interest rates go higher because the deficit keeps 

going more and more up, and we have to borrow more and more, 

and suddenly you get into a vicious downward spiral that will 

cause the economy to slip into that recession. 

I would like to have the optimistic outlook that you have, but 

when I have had that on the Budget Committee before, it did not 

happen that way. 

So, Mr. Chairman, I wanted to bring you the thoughts of this 

country boy. 

Chairman NICKLES. Well, Senator Nelson, thank you very much, 

and I do not know that I would characterize Dr. Holtz-Eakin’s comments as being ‘‘optimistic.’’ We have had a great, robust last couple of quarters, and yet the reestimate calculates an additional 

$700 billion of spending that Congress is responsible for, that most 

people voted for, and then he came up with some pessimism, or reestimates, technical adjustments and so on, that cost or added to 

the deficit projections of about $300 billion. 

So I do not know that I would characterize his statement, but I 

will tell you that in talking to our colleagues, knowing of your interest in the space program and knowing that we have to make 

some cuts, there have been significant discussions of funding the 

space program adequate to get you to the moon, but not enough to 

get you back. 

Senator NELSON. And that is the one you want to send me on; 

is that right? 

Chairman NICKLES. That was the one that you were supposed to 

attend—just kidding. 

Senator DOMENICI. You were asking about it. 

Senator NELSON. Mr. Chairman, I would just say that the witness has said 2.4 trillion additional dollars of deficit over the next 

10 years, and that is bound to have an effect dampening any kind 

of optimism, any kind of reenergizing of the economy. 

52

Chairman NICKLES. Senator Nelson, thank you very much. 

Next is Senator Domenici. 

Senator DOMENICI. Thank you very much, Mr. Chairman, and 

first let me compliment you on your superb work and wish you 

well. I hope you can get a budget this year. We have not seen the 

President’s yet, but I imagine it is going to be as difficult as last 

year or more so. 

But to those who complain about the deficit, it is going to be 

pretty obvious they are going to be given an opportunity to put 

their mouths where their money is also, and also for those who 

look at the President, I have heard candidates running around the 

country saying, ‘‘We are looking at him, that is the guy who did 

it’’—well, we are going to check on how many things they voted for 

that would have been more than the President. We can start with 

the proposition that the President does not spend any money and 

then see how much did Congress spend and then look at each candidate and see how much would you have spent more than the 

President—and of course, they are going to say none—but then we 

can look at the budget. I think we had about eight points of order 

that many Democrats voted for that was $50, $60 billion a year, 

wasn’t it, since you have been Chairman? 

Chairman NICKLES. A lot; there was a lot. 

Senator DOMENICI. Yes. 

First of all, let me say to you, Mr. Congressional Budget Office 

Director, that I hope you are enjoying your job. 

Mr. HOLTZ-EAKIN. I am. 

Senator DOMENICI. Good. It is pretty hard to tell, because you 

have gloomy eyes. Your eyes do not smile. 

Mr. HOLTZ-EAKIN. My wife will be disappointed to learn this. 

Senator DOMENICI. But there is nothing we can do about that. 

You know, mine smile too much. 

In any event, I do want to tell you that you keep trying, and people keep wanting it to disappear—not that we love deficits, but if 

we are looking at it from the standpoint of how risky it is, we have 

had a couple times when the debt of the Nation was bigger than 

it is now in proportion to gross domestic product. I think I was 

here, and I do not think I was very happy, but I had to produce 

the budget that met the times. 

Do you recall the years that it was higher? My staff gives me a 

number of 1993. Anyway, we do not have to waste a lot of time, 

but if you could find that—OK, I have it. Do you think these are 

correct if I read them into the record: In 1993, the highest ever, 

the percent of GDP was 49.5 percent; 1994 was 49.4 percent; and 

now, we have 2003, which is 36 percent. Is that correct? 

Mr. HOLTZ-EAKIN. Those sound to be in the ballpark, but we can 

check them. 

Senator DOMENICI. Well, when you worry about the U.S. Government and the debt’s impact upon society, this is a pretty relevant 

fact, the relationship of the debt to the gross domestic product. It 

is not exclusively conclusive, but it is pretty important. And I want 

to repeat what you have said—we have had higher ones than this 

year—again, not that we like to run around and have them always, 

but that is the truth. 

53

Second, I am impressed and confused about a couple of things, 

and maybe you have some answers, maybe you can tell us where 

to look. First, we have a terrific growth pattern in the immediate 

past. For a year and a half or so, if you look at the productivity, 

it is incredible. We had some growth quarters that looked like we 

were China. I just noticed that last year, their composite was 9.1 

percent. Sometimes it is 9.8, sometimes 8.9, but 9.1. Well, we have 

had productivity growth in the area of 6 and 7 percent and GDP 

growth that exceeded 5, right, during this period of time. 

Now, I have a very perplexing question. When you woke up yesterday morning, you did not have to ask your people what the reality was that there were more people employed in the United 

States that day than ever in history—not in proportion to, but just 

more Americans were at work. 

Now, two things—how come we are not having more employment 

with this fantastic GDP growth and this rather enormous productivity growth—maybe the productivity growth has something to do 

with why there are fewer jobs—but nonetheless, we have those, 

and we have the highest number of jobs ever, and yet we are running around talking about the fact that we have lost jobs. 

First, is it very relevant that we have lost jobs in light of what 

I am talking about? And second, is it very important that we have 

more workers than we have ever had in the past? And third, when 

and how are we going to have a big impact on employment, since 

we keep talking about this being a Hoover-type situation with no 

new jobs? 

Before you answer, let me tell you that I now understand, just 

from the practical standpoint, this very, very phenomenal thing 

happening in America, that is, the almost enormous, proportionately, productivity growth. It is incredible, and people wonder how 

and why, and I think I know, I think I understand. When you look 

at everybody who uses a computer or a new electronic gadget, you 

ask how many people did it replace, and clearly, they are replacing 

people all over, and you are still getting more production. 

Now, you cannot expect to tell Americans not to do that, right? 

I think you would destroy everybody if you said you cannot be efficient, you cannot rent a new IBM machine, you have to keep 20 

people employed. 

So, having listened to me carry on here, talk about jobs in the 

context that I have talked to you here about it. 

Mr. HOLTZ-EAKIN. Thank you. 

Let me begin with productivity and turn to jobs. Certainly, longrun productivity growth is central to increasing the standards of 

living in any society, so it is something that is a good thing and 

something that we should pursue as part of our economic policies. 

The productivity performance in this recession and recovery has 

been quite remarkable by historical standards, and the most recent 

data are in fact really quite impressive as well. 

The first thing to note is that productivity often shows some 

quite dramatic one-quarter increases coming out of a recession. It 

is a highly volatile series, and for that reason, it is important not 

to take any single quarter at face value as an indicator of things 

to come. 

54

The second thing to note is that, as a matter of national statistics, these are data that are revised often. That is a second reason 

to be cautious in interpreting the most recent data and taking 

them at face value. 

But, nevertheless, as I mentioned earlier, since 1995, there has 

been an increased rate of productivity growth in the United States 

that economists puzzled about and wondered if it was permanent, 

real, and what the durability of this acceleration in productivity 

would be. 

The recession and recovery marked essentially a litmus test for 

that, and it has continued, and that is good news. However, we do 

not fully understand the roots of this. In the report, we lay out 

what are some of the most common hypotheses about this. Is it reflective merely of business caution in adding new workers, and as 

a result, you get more stuff going out but not more people coming 

in; and productivity is simply the division of those two things. Or 

is it the fact that in the late nineties, businesses purchased a lot 

of computers and other IT goods and really undertook a massive 

expansion and then just slowly adjusted to using those and that we 

are now seeing the productivity gains with a lag—some sort of adjustment period. Or, finally, is it the fact that the gains that used 

to be concentrated narrowly in faster chip times and things concentrated in computing and then shipped—sort of physically embodied in those—is now diffusing into business practice and the 

economy more widely? 

There are lots of tantalizing pieces of evidence on all of those. 

There is no definitive case to be made and certainly in our view 

not enough statistical evidence to start picking a dramatically big 

difference for our productivity future. So we have acknowledged the 

history, raised our productivity level to some extent, but we have 

not really changed our growth rate. 

Our productivity puzzle will be an ongoing area of investigation 

not only for us but for many people. 

If one turns to employment——

Senator DOMENICI. Could I ask you, just because you do not 

know its roots, is it fair to say nonetheless it is good? 

Mr. HOLTZ-EAKIN. Productivity growth is very good. If productivity growth occurred evenly in all sectors of the economy, employment would move evenly in all sectors of the economy, and people 

would buy that stuff. It is the fact that we do not have even productivity growth and even purchases of the output of that productivity growth, which causes us to have to shift the employment mix 

in the economy. And that is an ongoing trend; in this economy, it 

happens all the time. 

Senator DOMENICI. But we have had many decades in America 

where we would have loved to have this kind of productivity increase; right? 

Mr. HOLTZ-EAKIN. Certainly, beginning in the seventies and up 

to the mid-nineties, the productivity puzzle in that era was, ‘‘Where 

did it go? Why did we not have productivity growth?’’ Now we have 

a puzzle in the other direction. 

On the employment front, I can say with I think complete honesty that we do not really understand the cyclical pattern of employment growth, and the labor market has been a bit puzzling. 

55

People have pointed to the December payroll employment survey: 

up 1,000 jobs. The same caveats apply. You do not want to read 

too much into any single month’s data. These are very noisy series. 

There is some tantalizing evidence that the seasonable adjustment 

to the December survey may have influenced it. 

But more generally, there has been relatively slow growth in 

payroll employment in this recovery that we cannot fully explain. 

There has been a mismatch between the household survey that the 

Chairman mentioned and the payroll employment survey. 

We have looked at the different stories that these two surveys 

tell. They often tell different stories. They are never as far apart 

as we are experiencing right now. They are about 600,000 jobs different since July. We can explain about 100,000 of that difference 

through different statistical samples and different coverage issues. 

The rest, we do not fully understand. We believe still that the payroll survey, which is larger and which we think is probably a better 

indicator of the status of the labor market on average, is one that 

we will continue to look at. But we do know that around turning 

points, it will miss startup businesses and things like that. So 

there is an element of truth to both of the surveys. 

But in terms of when this economy will begin to generate 

100,000, 150,000, 200,000 payroll jobs per month, a capacity that 

it is capable of doing, I do not have a firm answer to that, and I 

will not pretend to. 

Senator DOMENICI. I just want to make one last observation and 

thank the Chairman for giving me time. 

I was going to bring, Mr. Chairman, and article, and I apologize, 

but with your permission, can I put it in the record? 

Chairman NICKLES. Certainly. 

Senator DOMENICI. I was reading a recent article, no longer than 

2 days old, wherein a gentleman in business said, ‘‘I have the answer as to why there are no more people being employed in America as we come through this enormous growth period.’’ He said, ‘‘I 

am the answer.’’

Somebody said, ‘‘Who are you?’’

He said, ‘‘I am a business, and I have three employees, and I do 

enough business where 15 years ago, I would have had to employ 

15 people.’’

Then they went on with the questioning. He said, ‘‘Just last 

week, I needed a specialist for something. I did not hire him and 

put him on my payroll. I ran an ad. And there was a person more 

equipped than I could ever afford who said he would come and do 

the job for 1 month, that it would take him 1 month to do it. I paid 

him heavily. He got employed for 1 month, and my business is 

rocking along, and a $50,000-a-year person is not on my payroll.’’ 

And he said, ‘‘I think there is a lot of that going on in the United 

States.’’

Now, I do not think that that is bad. I think you have to be able 

to do what the marketplace demands of you. But I might just ask 

you if you have come in contact with that as something of significance with some name that is affixed to it. 

Mr. HOLTZ-EAKIN. There are a couple of parts to that story that 

ring true. The first is that if you indeed get output growth, if business is rocking along, eventually, you will require more labor from 

56

some source to continue to do business. Will that come internally, 

adding jobs within the company, or will it be temporary help that 

you hire from outside the company either in the form of a temporary help agency—and that shows up in the data and is one of 

the things you look for as an indicator of an upturn in the labor 

market—or in the form of this gentleman who may be a consultant, 

essentially a self-employed individual, in which case it will not 

show up immediately in the data but subsequently would be caught 

by the payroll employment. 

So those are issues in our trying to understand the labor market. 

I would say that what the CBO anticipates in its forecast and what 

most people would say is that you cannot continue to grow at the 

pace that we did in the third and likely did in the fourth and as 

fast as we expect in the future without eventually beginning to create jobs. I quite frankly would have thought we would have seen 

more by now, but we have not. 

Senator DOMENICI. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Domenici, thank you very much. 

Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman. 

I want to focus on the issue of health care costs. I think it is obvious that there are no costs in America going up like medical bills. 

That is true with respect to both the public and private sectors. 

Last week, the country saw that we are going to spend $1.6 trillion 

on health. If we divide the number of Americans into $1.6 trillion, 

it comes to something like $16,000 for a family of four. 

So that obviously, we need the strongest possible set of cost containment tools, and I want to talk to you about the non-interference provision in the Medicare legislation specifically. I voted for 

the bill—I still have the welts on my back to show for it—and one 

of the reasons that I did is that it seemed to me it allowed more 

choices and more alternatives with respect to the delivery of health 

care in America, and that would be a plus for senior citizens. That 

would be an opportunity with more choices and more alternatives 

to serve as a force for cost restraint and competition and a tool to 

hold down the bills. 

But what I want to ask you about is wouldn’t the removal of the 

non-interference provision allow for Congress to move toward the 

kind of cost containment program that Members of Congress have? 

Wouldn’t the removal of the non-interference provision allow the 

Congress to move to a Federal Employee Health Benefits-style approach, which so far seems to have been the best cost containment 

vehicle? And I want to know particularly in connection with your 

letter to the majority leader whether you examined that issue in 

particular. 

Mr. HOLTZ-EAKIN. Well, the letter we wrote to the majority leader examined that language in the context of the Medicare bill as 

passed, and in our scoring of the Medicare legislation, we certainly 

looked at lots and lots of pieces of evidence, including the limited 

data that we could get out of the FEHB program. 

But on the language in particular, what we looked for in the bill 

was both the ability and the incentive to control costs. Private entities who bear cost risk have an incentive to cut a good deal with 

57

pharmaceutical companies, and if we give them the tools to manage 

their costs and pick formularies and choose preferred drugs, they 

will have the ability. And given the incentive and ability, it was 

our reading of the legislation that the ability of the Secretary to negotiate a better deal than the private plans that already had lots 

of incentive and lots of ability to negotiate that same deal would 

be negligible, and as a result, removing the language should not 

have big budgetary consequences. 

Senator WYDEN. You see, what I think is flawed in that argument is that if you believe in private sector cost containment—and 

I do; that was one of the factors in my supporting the legislation—

the reality is now that Medicare faces a statutory bar to cost containment that is not faced in the Federal Employee Health Benefits 

Plan that is available to Members of Congress. Any way you slice 

this, colleagues, that is where we are on a key cost containment 

issue. If you believe in the private sector, the fact is Medicare now 

has a statutory bar, a statutory restriction, that is not applicable 

when you are talking about cost containment for Members of Congress and their families. 

So what I would like to ask you today is to go back and do some 

more analysis with respect to FEHBP, because I do not quarrel 

with the idea that the private sector is of value—that is not at 

issue here. What is at issue is if you believe in the private sector, 

why should there be any statutory restrictions in terms of what 

you can do in terms of tough, hard-nosed bargaining, and any way 

you slice it now, we have restrictions in terms of what Medicare 

can do that is not faced when you are talking about negotiating for 

Members of Congress and their families. 

Is that something that you would be willing to do, to look further 

at the FEHBP-style model and particularly whether removing the 

statutory restriction would allow Congress to move more aggressively toward a model that is used to protect our families? 

Mr. HOLTZ-EAKIN. I would certainly be happy to go back and look 

at that. I will not pretend to be intimately familiar with all the details——

Senator WYDEN. I understand. 

Mr. HOLTZ-EAKIN [continuing]. But my recollection was that access to data, hard data, on what happened in FEHBP was one of 

the limitations. We can look into that for you. 

Senator WYDEN. I think what has happened in particular is that 

there was such a rush with respect to this legislation on the bargaining power issue that not enough time was spent, so you had 

a set of very powerful interests who said, look we will just put this 

in there and say that everything is going to go to the private sector, and then it is going to come out hunky-dory. That seems to me 

to be overly simplistic. 

I will stipulate to the kind of argument that you are making as 

being of real value. There is no question to me that the private sector choices—because we have seen it in my home town—can be 

useful. But it also seems to me that if you believe in the private 

sector, you should not have the restraints. And the reality today is 

that when it comes to containing costs for senior citizens under 

Medicare, there are legal prohibitions that do not apply to what is 

done with respect to private sector cost containment for Members 

58

of Congress, and I do not think that is right. You have always been 

very gracious to me, and when you say you will look at something, 

you are always fair and responsive, and I would like to see that as 

soon as possible, because I think that is going to be an issue that 

we are going to be dealing with on the floor of the U.S. Senate 

probably within a matter of weeks. 

Mr. Chairman, thank you. 

Chairman NICKLES. Senator Wyden, thank you very much. 

I touched on this in my opening remarks. Let me just ask a related question—and I apologize to Dr. Holtz-Eakin who also has to 

testify in the House, and I was trying to get him out of here by 

12. But if Congress mandated that the Government interfere in the 

negotiations, do you think there would be any savings? 

Mr. HOLTZ-EAKIN. If you put a provision and language into the 

bill as passed which said the Secretary ‘‘should’’ or ‘‘must’’ negotiate, we think there is the potential for savings on some drugs, 

presumably the nonpreferred drugs, where the pharmaceutical 

company is really aggressively trying to take its preferred drugs, 

give the best deal on those, and get them into the prescription drug 

plans. On the others, we think there might be the potential for 

some saving. But given bottom lines, to the extent that you move 

down the prices on one drug, you probably move up the prices on 

the preferred drugs, and on balance, you could raise costs. Certainly, we would have to look at the details of any particular legislation and look at any other models of this kind of thing in practice, but in our thinking about the language, that is the kind of 

issue that arises. 

Senator WYDEN. Mr. Chairman, if I could just very briefly, I 

want it understood that I am not talking about mandating some 

kind of cumbersome interference plan. With respect to the FEHBP 

plan, there is no language on this point. Now it is essentially discretionary, and that is what is wrong about the current law. We 

are not giving Medicare the discretion to go to bat for seniors the 

way we are giving our health plan the discretion to go to bat for 

us. 

That is what is wrong, and that is what I am going to try to 

change. 

Chairman NICKLES. I understand. We do not need to debate this 

now, but I think your letter stated that if we removed that language, you do not think there would be any appreciable savings. 

Mr. HOLTZ-EAKIN. That is right. 

Chairman NICKLES. I appreciate that. 

Dr. Holtz-Eakin, I am going to have to run. 

Just for the information and for the record, our next hearing will 

be next Tuesday, when we will have the Director of OMB. They 

will present their budget on Monday, and we will have their hearing on Tuesday. 

I will leave it to Senator Conrad. 

Thank you very much, Dr. Holtz-Eakin, for your appearance before the Committee today. 

Mr. HOLTZ-EAKIN. Thank you. 

Senator CONRAD. I will be very brief. 

I just wanted to indicate that our former Chairman was talking 

about deficits as a percentage of gross domestic product and was 

59

talking about these as being smaller than they have been in the 

past. 

I have a different view, and it is expressed in this chart that 

looks at deficits as a percentage of GDP, if you take out Social Security, you get a different picture. The last time we had deficits as 

a percentage of GDP that were anywhere close to this was in 1983. 

There, we had a deficit that was 6 percent of GDP, but there was 

a fundamental difference. There was almost no Social Security surplus at that time. 

Now the Social Security surplus is $160 billion, or very close to 

it. And if you take out the Social Security surplus and look on an 

operating basis, our deficits as a percentage of GDP are the biggest 

they have been since World War II with the exception of 1983.

So I just want to provide that alternative view. 

One other thing——

Mr. HOLTZ-EAKIN. If I may, I think you and I concur on those 

facts. 

Senator CONRAD. Excuse me? 

Mr. HOLTZ-EAKIN. I think you and I concur on those facts. I 

think Senator Domenici was talking about debt as opposed to deficit. We can check. 

Senator CONRAD. I have heard many describe deficits as relatively small as a percentage of our GDP. I think that historically, 

that is not the case when properly viewed. 

Senator Domenici also mentioned what he thinks is happening in 

the work force, and the front page of the business section in today’s 

Washington Post has the story he was just telling of the gentleman 

who says he is running a small business, he has only three fulltime employees, and when he wants to hire somebody—when he 

needs a computer programmer, or a speech writer, or a web designer—he just puts the project out to bid on the internet. And 

Senator Domenici was describing that he just had a problem with 


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a computer program he needed done, he put it on the internet, and 

he paid $118 to a gentleman in the Ukraine to write his computer 

program. He said it would have cost $1,000 to employ somebody 

here. 

I think Senator Domenici is onto something in terms of productivity growth. You can see it in construction as well. We are able 

to put up a Class A building now in a year. It used to take sometimes 3 years. And what is happening with computer-assisted design, all of the computer ordering—it is a productivity gain that is 

occurring in terms of more efficiency. 

Again, thank you, Director, for being here today. 

Mr. HOLTZ-EAKIN. Thank you. 

Senator CONRAD. The hearing is adjourned. 

[Whereupon, at 12:17 p.m., the Committee was adjourned.]

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94065.047
(69)

THE PRESIDENT’S BUDGET PROPOSAL 

THURSDAY, FEBRUARY 5, 2004

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

The committee met, pursuant to notice, at 10:02 a.m., in room 

210, Cannon House Office Building, Hon. Don Nickles (chairman of 

the committee) presiding. 

Present: Senators Nickles, Domenici, Gregg, Allard, Burns, Enzi, 

Sessions, Crapo, Conrad, Murray, Byrd, Nelson, Stabenow, and 

Corzine. 

Staff present: Hazen Marshall, majority staff director; and Jim 

Hearn, senior analyst for government finance and management. 

For the minority: Mary Ann Naylor, staff director; and Jim 

Horney, deputy staff director. 

OPENING STATMENT OF CHAIRMAN NICKLES 

Chairman NICKLES. Good morning. The Committee on the Budget will come to order. First I want to acknowledge our friends from 

the House, Chairman Nussle and the entire Budget Committee of 

the House. They have been very cooperative, very supportive. As a 

matter of fact, when it was announced that the Senate office buildings would be closed, Chairman Nussle notified me immediately 

that he would be more than happy to cooperate and allow us to use 

not only the hearing room but also offices and space. They have 

been very generous, very cooperative, and I am very grateful that 

they have accommodated us in our hearing this morning. 

For this morning’s hearing, we have Director Bolten, Director of 

the Office of Management and Budget, to present testimony before 

the committee. We welcome him to this committee. We welcome 

him to his position that he has now had for, I guess, about half a 

year. He has got one of the most challenging jobs in Government 

to try to manage a budget of now $2.4 trillion. It is a job just to 

develop one and to propose it, and we look forward to hearing his 

testimony as well. 

I welcome my colleagues that are with us this morning, and following my tradition, I will call upon the ranking member, my 

friend, Senator Conrad. 

OPENING STATEMENT OF SENATOR CONRAD 

Senator CONRAD. Thank you, Mr. Chairman. 

I also want to thank our colleagues on the House Budget committee. Certainly the chairman and the ranking member, Congressman Spratt, they could not have been more gracious. They have 

70

opened their space to us. They have allowed us to use their equipment. And it has been enormously helpful, and we very much appreciate their graciousness. 

Mr. Chairman, I also want to welcome Director Bolten to the 

committee. This is a challenging time, certainly for you, for the administration, and for the Congress, as we address what I believe 

are deficits that are far too large and growing geometrically. Certainly as we look ahead past the 5-year window, I think we have 

to be most concerned about the direction, the fiscal direction of the 

country. 

When I look at past statements by the administration, I remember very well in 2001 they told us we could have massive tax cuts 

and there would be no deficits, even with an economic downturn. 

And that proved to be wrong. 

Then the next year, they told us that the deficits would be small 

and short term. That also proved to be wrong. The deficits have 

been large and long term. 

Then in 2003, they told us that the deficits were small by historical standards. That, too, proved to be wrong. These deficits are 

record deficits. 

And now this year, we are being told that they are going to cut 

the deficit in half over the next 5 years. And I think we have to 

ask the question: Will that, too, be wrong? 

Let me go to just a back-of-the-envelope analysis that tells me 

that will be wrong as well.

The President says in the fifth year the deficit will be $237 billion, but he is not counting the $259 billion he is going to be taking 

of Social Security surplus funds, every dime of which has got to be 

paid back. He is not counting the $23 billion from the Medicare 

Trust Fund. He is not counting the $55 billion it would take to deal 

with the alternative minimum tax problem, which he is paying for 

for 1 year but not beyond. And he has no costs for the residual war 

cost, the war on terror, Afghanistan, Iraq, which the Congressional 

Budget Office says in that year will be another $30 billion. That 

is over $600 billion being added to the debt.


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Just a reality check. I went to the President’s budget document 

and looked at 2009, and what one sees is the President himself 

says he is going to add $633 billion to the debt in that year.

So how is it that we have much larger accumulations of debt 

than the deficit picture that the President asserts would provide? 

Well, first of all, he is taking all the Social Security Trust Fund 

surpluses over the next decade, $2.4 trillion, and not accounting for 

it—not accounting for it at least with respect to deficits.


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In addition, the tax cut the President is proposing explodes outside the 5-year budget window. He is only looking at 5 years, when 

we all know much of the effect of his additional tax cuts occur beyond the 5-year budget window. This is the cost of the tax cuts, including the associated interest cost.


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And the same is true of the alternative minimum tax that was 

the old millionaire’s tax that now is going to be a middle-class tax 

because we have two or three million people affected by it today. 

It is going to be 40 million people by the end of the budget period, 

40 million people and it costs $658 billion to fix. The President has 

counted 1 year of that cost, but does not have a dime beyond that 

time.


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The same is true of war costs. The Congressional Budget Office 

says in the 10-year period, $280 billion of cost for the President’s 

defense policies, war on terror, and yet the President has no money 

provided beyond September 30th of this year. They tell us we do 

not know what the cost will be, but we know the right answer is 

not zero.


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The thing that most concerns me is the long-term trajectory because what we see is that right now we are in the good times, in 

effect, even though the deficits are at record levels, because we 

have these substantial trust fund surpluses. But look what happens when the trust funds—the green bar is Social Security, the 

blue is Medicare—when they go cash negative, at that very time 

the cost of the tax cuts explodes.


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And I will just end with this chart that shows the President’s 

own analysis of the long-term budget circumstance. This shows 

that the current situation, record deficits, is the good times; that 

when the baby boomers retire and the President’s tax cuts go fully 

into effect, these deficits go right off the cliff. And so I think we 

have to alert the American people that we are on a course that is 

simply not sustainable, that fundamentally threatens the economic 

security of the country, and the biggest way it does is upward pressure on interest rates and the biggest way it does is people deciding they don’t want to hold dollar-denominated assets.


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And I would just conclude with an article that is in the Washington Post this morning saying, ‘‘Asian central bank consider alternatives to big dollar holdings.’’ Already we have seen the dollar 

go down almost 30 percent against the euro in the last 18 months. 

I think we have to get very, very serious about the fiscal condition 

of the country.


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Thank you. 

Chairman NICKLES. Senator Conrad, thank you very much. 

I would just make a couple of comments, and then we will recognize Director Bolten. A couple of comments. 

One, we had a big challenge last year to pass last year’s budget. 

It was not easy. Last year we were facing still the end, I guess, of 

a very soft economy. The stock market was still very, very weak. 

And we were fighting a war. Our budget we passed last year funded both of those. We did pass a growth package, and the growth 

package worked. The stock market is up substantially. We did fund 

the war. 

If you look at the chart, it shows that actually the economy started declining in the year 2000. Some people want to say, well, it was 

the Bush recession. But if you actually notice, it started declining 

substantially in the year 2000. The Nasdaq declined by 50 percent 

in the year 2000. And we had a very soft economy. 

insert chart 

So we needed to do some things that would change it. The stimulus package that we passed—and I might mention that the Democrats had a stimulus package and we had a stimulus package, and 

ours was supported by a bipartisan majority. It became law, and 

it did work. 

If you look at the next chart, the stock market has grown by over 

$4 trillion since last February. We did cut the tax on dividends in 

half. Maybe some people want to double the tax on dividends 

again, but we made the tax on dividends 15 percent. We made the 

tax on cap gains at 15 percent, and I think both greatly helped our 

economy, as evidenced by the significant appreciation we have seen 

in the stock market. I think the Dow Jones is up 25 percent, 


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Nasdaq up 50 percent. That is a big change, and I think in large 

part because of the changes that we made and that we proposed.

If you look at the next chart, there was a significant appreciation 

in jobs. You keep hearing about the jobs. The household survey 

shows that we are at an all-time high in employment. There is a 

difference between the household survey and the wage survey, and 

I do not need to debate that. But it shows, at least if you look at 

this trend, the employment situation has improved rather substantially.

But I do not disagree with Senator Conrad. I think the challenges are very great before us. We are spending a lot more than 

we are taking in, and the deficits are way too high. And I will tell 

my friend and colleague Senator Conrad, I will work with him to 

get them down. I will work with anybody, Democrat or Republican, 

to reduce these deficits. I think they are way too high. 

If you look at the next chart, it kind of shows just the history 

of where we are. The green on the chart shows the revenues, and 

you can revenues have actually declined. That has never happened 

before. We had 3 years in a row really where revenues did not 

grow. Actually, they declined. 

If you look at the history, Senator Byrd, revenues over history 

in the United States almost always had some growth. But we actually have had a very significant reduction, not because of the tax 

cut, mostly because of the recession. The tax cut had some play in 

it, but the recession was the biggest reason why you had such a 

significant drop from over $2 trillion to about $1.78 trillion. I noVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00087 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF

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tice, Senator, from the figures estimated by both CBO and OMB, 

very little revenue growth between 2003 and 2004. I hope the 2004 

revenues are underestimated, and my guess is they are. I will just 

say that. We will find out 10 months from now, but I think they 

underestimated the amount of revenue that we are going to receive 

in 2004. I am not sure about your 2005 number, but we will talk 

about that. 

But you notice in the red line, expenditures have gone up every 

single year. So we had a reduction in revenues, mostly because of 

the recession, somewhat because of the tax cut, but we had an increase in the red line that is outlays.

Most of the outlay growth, if you look at the next chart, you will 

see is kind of divided up between all other spending, domestic discretionary spending. DOD is the red line, defense. You will notice 

the last couple years, if you add the war, the war being the big 

delta, we had supplementals of $79 and $87 billion in 2003 and 

2004. That is that top delta that shows a big increase of spending 

because we had to fight the war. The yellow lines are new spending. That is homeland security. So that is where most of the new 

money went. 

So I just make mention of those facts, and the fact that we have 

a big challenge. We are spending more than we are taking in. We 

have to close that gap. And it will not be easy, and it probably will 

not be done unless we all work together to make it happen. 

We have to have a budget. The administration has proposed a 

budget. We will work to pass a budget this year. It was not easy 

last year. It will not be easy this year. But I think it would be irresponsible of Congress if we do not pass a budget. 

And so I applaud the administration. They have given us a challenge, and they said they think we should reduce the deficit by half 

in 5 years. I believe strongly that we should do that. I hope that 


94065.020
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we can accelerate that. I hope that we can cut the deficit in half—

did I say balance the budget or cut it in half? The administration 

wants us to cut the deficit in half in 5 years. I hope we can meet 

or exceed that level. I hope we can do it 2 or 3 years. I cannot 

stand the idea of having deficits at the $400 and $500 billion level. 

It bothers me daily. And I am very serious about that. 

So I hope we can aggressively try and get our deficit, whether 

you are talking about GDP or you are talking about dollar-wise, get 

it to a much smaller, more sustainable figure, at the $200 billion 

level in the next year or so. And I will work aggressively to do that. 

And that may mean taking on some popular programs, like a highway bill that my colleague from Oklahoma is in the process of passing, and others. I want that highway bill to be paid for, and presently it is not paid for satisfactorily, and certainly not entirely. 

I want to thank my friend, Senator Conrad, because he was of 

great assistance in our markup in the Finance Committee on that 

bill on Monday. 

So we have many, many big challenges before us. We look forward to the administration presenting their budget to us. And just 

for the information of our colleagues, we were scheduled to have 

Secretary Snow testify yesterday and could not because of the loss 

of the hearing room in Dirksen. We are trying to reschedule him 

for as soon as possible. I was hoping that we would be able to get 

Secretary Snow Tuesday or Wednesday. We have not confirmed 

that yet, but we will notify members as soon as we can have Secretary Snow scheduled. 

We have Secretary Thompson scheduled for next Thursday, and 

that will be in the Senate. And then we have a couple of others 

lined up, and we will notify all members as soon as possible on 

that. 

We do expect to work through the entire budget process in the 

next 2 months, and so we have a lot of work to do, and we will 

have hearings basically throughout this month, and then the 

month of March we will begin committee markup, floor markup, 

and conference. 

I told Senator Byrd I wanted to talk to him about it. I do want 

to tell all members I would like to improve the process that we consider the budget on the floor. I have been embarrassed with our 

vote marathons, vote-a-thons, whatever you want to call them. It 

is not a good way to legislate, and I think we all recognize that. 

Maybe we can see if we cannot together, collectively, bipartisanly, 

improve the procedure on the floor, and, frankly, add more respect 

and dignity to the Senate in consideration of a budget of the magnitude somewhere in the range of $2.4 trillion. We need to do a better job in managing the floor in that effort. So I am going to work 

with our colleagues and see if we cannot come up with some other 

improvements, and I appreciate very much Senator Conrad’s willingness to consider some changes that might be an improvement, 

not just this year but, frankly, in future years. 

And, with that, Director Bolten, we will recognize you for your 

comments. Welcome to the Budget Committee. 

84

STATEMENT OF JOSHUA B. BOLTEN, DIRECTOR, OFFICE OF 

MANAGEMENT AND BUDGET 

Mr. BOLTEN. Thank you, Mr. Chairman, and thank you, Senator 

Conrad and other distinguished members of the committee. It is a 

privilege to have the opportunity to appear before you this morning. 

The 2005 budget that was transmitted earlier this week continues to support the President’s three overriding national priorities: winning the war on terror, protecting the homeland, and 

strengthening the economy. The President is committed to spending what is necessary to provide for our security and restraining 

spending elsewhere. 

Since September 11, 2001, as you have emphasized, Mr. Chairman, more than three-quarters of the increase in the Federal Government’s discretionary spending has been directly related to our 

response to the attacks, enhanced homeland security, and the war 

on terror. The President’s 2005 budget continues this spending 

trend. That means significant increases in essential funding for our 

security programs, combined with a dramatic reduction in the 

growth of discretionary spending unrelated to security. With your 

support in enacting this budget into law, we will be well on the 

path to cutting the deficit in half over the next 5 years. 

If I could have the first chart up, please. 

Mr. Chairman, at OMB we have found it useful to try to divide 

the discretionary budget into three categories, similar to the chart 

that you just showed. On the left is defense, which is basically the 

Defense Department. In the center is homeland security, which is 

not congruent with the Department of Homeland Security; about 

two-thirds of that Department spending we characterize as homeland security spending. But there are a number of other elements 

from other departments that are included within that category, 

particularly from Health and Human Services, the Department of 

Justice, some from the Department of Agriculture, and others. And 

then on the right is everything else, which we label non-defense, 

non-homeland spending. 

The President’s—yes? 

Chairman NICKLES. Excuse me. Does that include all the 

supplementals? That includes all spending? 

Mr. BOLTEN. No, it does not. We have another chart that includes supplementals, but this one is just base discretionary spending. 

The yellow bars represent the President’s proposals for 2005. 

What that reflects is, on the left, an increase in defense spending 

by 7 percent to support our men and women in uniform and transform our military; in the center, an increase in homeland security 

spending by nearly 10 percent to strengthen our capability to prevent future attacks; and on the far right, holding the rest of discretionary spending to half-of-1-percent growth, well below the rate of 

inflation, while continuing to increase funding for key priorities 

such as the President’s No Child Left Behind education reforms. 

The President’s budget is built on the sensible premise that Government spending should grow no faster than the average increase 

in average American family incomes, which is approximately 4 percent. This budget, the 2005 budget, proposes to hold the growth in 

85

total discretionary spending to 3.9 percent overall and, again, to reduce the growth in non-defense, non-homeland security spending to 

half of 1 percent, below the rate of inflation. 

Mr. Chairman, in the last budget year of the previous administration, 2001—that is reflected in the green bars on this chart—discretionary spending unrelated to defense or homeland security 

soared by 15 percent. With the adoption of the President’s first 

budget in 2002, that growth rate was reduced to 6 percent, then 

5 percent the following year, then 4 percent for the current fiscal 

year that we are now in, fiscal year 2004; and as I have just emphasized, down below 1 percent in the President’s proposal for 

2005. 

The President’s budget builds on the pro-growth economic policies that have laid the foundation for the economic recovery now 

under way and for sustained growth and job creation in the years 

ahead. 

The tax cuts that you and the Congress enacted have been critical to strengthening the economy and to creating jobs. Perhaps the 

best timed in American history, these tax cuts deserve much credit 

for today’s brightening economic picture, which includes nine consecutive quarters of positive growth, the highest quarterly growth 

in 20 years in the third quarter of last year at 8.2 percent, ongoing 

extraordinary productivity growth, continued strength in housing 

starts and retail sales, and encouraging signs of renewed business 

investment. These indicators suggest that job growth, which typically lags recovery, should continue to strengthen in the months 

ahead. 

Mr. Chairman, the President will not be satisfied, however, until 

every American who wants a job can find a job. So this budget supports the President’s six-point plan for economic and jobs growth, 

including making permanent the tax relief that has fueled our economic recovery. 

The sustained growth that this budget supports will be good 

news for our budget picture as well. As the economy improves, 

Treasury revenues will as well. 

Like America itself, the Federal budget has faced extraordinary 

challenges in recent years: a stock market collapse that began in 

early 2000; a recession that was fully under way in early 2001; revelation of corporate scandals, years in the making; and, of course, 

the September 11th attacks and the ensuing war on terror. 

With Treasury receipts only beginning to reflect a recovering 

economy and major ongoing expenditures in Iraq, Afghanistan, and 

elsewhere in the war on terror, we still face a projected $521 billion 

deficit for the 2004 fiscal year. That size deficit at 4.5 percent of 

GDP is not historically out of range. Deficits have been this large 

or larger in 6 of the last 25 years, including a peak of 6 percent 

in 1983. 

Under the circumstances that created it, today’s deficit is certainly understandable, but that deficit is also undesirable and unwelcome. And with enactment of this budget, we will bring it down. 

With continuation of the President’s economic growth policies 

and sound spending restraint reflected in the budget I have just 

outlined, our projections show the deficit will be cut by more than 

half over the next 5 years. This dramatic reduction begins in the 

86

fiscal year of this budget, 2005, for which we are projecting a deficit of $364 billion, roughly 3 percent of GDP. The rapid deficit reductions continue in subsequent years, with our projections showing the deficit falling to 1.6 percent of GDP by 2009. This is not 

only well below half its current 4.5-percent level; it is also well 

below the 2.2-percent average deficit during the last 40 years. And 

you will see on that chart a black line across the middle of the 

chart. That reflects the 2.2-percent, 40-year historical average deficit for the Federal Government. It is also roughly a line that reflects cutting our current deficit in half. 

This deficit reduction is the combined effect of economic growth 

and spending restraint. As the economy recovers, tax receipts as a 

percent of GDP will rise to historic levels by the end of the budget 

window, while spending restraint keeps outlays flat or slightly declining as a share of GDP. 

The spending restraint reflected in this budget is not automatic, 

so we are also proposing new statutory budget enforcement mechanisms, establishing in law limits on both discretionary and mandatory spending, and requiring that any increases in spending be 

paid for by spending offsets. 

We plan to transmit legislation to the Congress that has three 

elements: one, reinstate the caps on discretionary spending for 5 

years through 2009; two, a pay-as-you-go requirement limited to 

new mandatory spending—any proposed increase in mandatory 

spending would have to be offset by a reduction in mandatory 

spending, tax increases could not be used as an offset, and PAYGO 

would not apply to tax legislation. Three, measure the long-term 

unfunded obligations of major entitlement programs and include a 

60-vote hurdle in the Senate for legislation that would expand 

these obligations. 

I look forward to working with this committee to gain enactment 

of these proposals to restrain spending. 

Finally, the President is keeping this administration focused on 

what the American people care most about: results. The measure 

of the Government’s success is not how much we spend but, rather, 

how much we accomplish. This budget includes a scorecard that 

measures the progress agencies are making in achieving results so 

that the Government continues to be accountable to the taxpayers. 

Since President Bush took office, our Nation has confronted a 

cascading set of challenges. The President and Congress responded 

on all fronts, with tax relief to get the economy going, the largest 

reorganization of the Federal Government in 50 years to create a 

new Department of Homeland Security, and the largest increases 

in the defense budget since the Reagan administration. 

The President’s 2005 budget builds on this record of accomplishment. With renewed economic growth and the Congress’ cooperation in restraining spending, and focusing it on our most critical 

priorities, we can accomplish the great goals the President has set 

for the country while dramatically improving our budget situation. 

Mr. Chairman, I look forward to taking your questions. 

[The prepared statement of Mr. Bolten follows:]

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Chairman NICKLES. Director Bolten, thank you very much. I 

have a lot of questions, but I also have a lot of colleagues, and I 

want to recognize them. 

I am going to ask all of our colleagues that they try and keep 

their questions and remarks in the order of 5, 6, 7 minutes. That 

would be appreciated, and I think by others. 

I will withhold many of my questions until the second round. I 

think I will still be here. I doubt that others will be. I will ask you 

one question, if you could help explain the difference in scoring beVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00095 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF

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tween CBO and OMB or CMS on the cost of the prescription drug 

benefit. When we passed a budget last year, we set up a budget 

that said we would spent up to $400 billion over the next 10 years 

to strengthen, enhance, and improve Medicare, including prescription drugs. The bill that we passed was scored by CBO to be at 

$395 billion. Under your budget submission, CMS, HHS, OMB, 

your actuaries have determined that it was in excess of $520 billion. 

Could you give us a brief explanation of the differences between 

the scoring between CBO and CMS? 

Mr. BOLTEN. Mr. Chairman, there is a substantial difference between the actuaries. CBO, at the time the bill was being considered 

and enacted, scored the cost at $395 billion. The estimate that the 

HHS actuaries put out, I believe at the end of December, was $534 

billion. So a substantial difference there. 

The reasons for the difference are highly technical. I am not sure 

I am the best person to explain it, but I know that Secretary 

Thompson has had an opportunity to address the issue in some detail, and I know that the actuaries are working together to try to 

resolve their differences. 

The CBO and HHS actuaries have had differences for some time 

about fundamental assumptions related to the Medicare bill. Those 

include how quickly the prescription drug costs would likely come 

down because of volume buying. They include different assumptions about level of participation rates. They include different assumptions about the level of participation by private plans in the 

program. All of this in an area that is inherently hard to estimate, 

but made especially difficult in this case because of the novelty of 

so many of the programs involved. 

The important part of this is that I think this is an honest disagreement between experts, both of whom in my eyes have a great 

deal of credibility. We in the administration are under some constraint to carry the HHS estimate in our budgets, which we have 

done. So we are reflecting and carrying in our budget the higher 

estimate. But I know the actuaries are working together to try to 

figure out how to close their differences. 

At the time you adopted the legislation, that you considered the 

legislation, what was relevant, as it always is with legislation, was 

and is the CBO score. My expectation is that as we submit our 

budget, CBO will in the ordinary course of things rescore our budget. And I expect that they will reflect their original score, because 

I understand that Director Holtz-Eakin as recently as this week 

has reaffirmed their intention to stay with their $395 billion score. 

Chairman NICKLES. Thank you very much. 

Senator Conrad. 

Senator CONRAD. Director Bolten, when did you know that there 

was a difference, a substantial, dramatic difference, between the 

estimates of the cost of the prescription drug bill between CMS and 

your agency? 

Mr. BOLTEN. I think all of those who were involved in the Medicare discussions were aware that there were differences between 

the assumptions of the CBO and the HHS actuaries. My understanding is that that was true all the way through the Medicare 

considerations. 

91

Senator CONRAD. And did you ever feel that you had an obligation to tell Members of Congress that you thought the bill was 

going to cost much more? 

Mr. BOLTEN. I wasn’t directly engaged with the Members of Congress on the bill, but I know that Secretary Thompson, who was, 

did discuss with members some differences in the assumptions. But 

within the administration, we were also aware on this legislation, 

as in all legislation, that what counts as the legislation is being 

considered is the CBO score. 

Senator CONRAD. Well, when you say you were not engaged with 

members, you were engaged with me. You came up here and told 

me that you thought additional steps needed to be taken to rein in 

spending, but you never once said to me that you had a belief that 

the cost was going to be far in excess of what was before the Congress. 

Mr. BOLTEN. Senator, yes, I did. I did engage with you and several other members on the long-term outlook here. And you will recall that our conversation was about our interest in creating a unified trust fund, which I think would most accurately reflect the 

overall cost. But on the details of the bill, I was not engaged with 

the members, but I do not think that is what is really relevant 

here. What is relevant here is that at the time that you all were 

considering the bill, it was the CBO score that counted, and that 

is what everybody was operating on. 

Senator CONRAD. Yes, but I would say this to you: I think you 

had an obligation, if you believed that the cost was going to be far 

in excess of what CBO was telling us, to say so. I will not go further with it. I just tell you I am personally disappointed that somebody in the administration did not send up a very clear signal that, 

in their judgment, this bill was going to cost a third again as much 

as what we were told at the time. 

You keep saying you are going to cut the deficit in half 5 years 

from now. The only way you are going to cut the deficit in half 5 

years from now is just not to count things. 

Let me ask you this: When you say you are going to cut the deficit in half, you say it is going to be $237 billion. Are you counting 

the $259 billion you are going to take from Social Security in that 

year that you have to pay back? Is that in that? 

Mr. BOLTEN. Senator, this administration, as all previous administrations, at least in recent decades, and CBO, looks at the deficit 

picture on a unified basis. So what counts for deficit purposes is 

the unified budget deficit or surplus, as the case may be——

Senator CONRAD. But isn’t this going to add—isn’t that $259 billion going to add to the debt of the United States? The money that 

is being taken from Social Security in 2009 you have to pay back, 

don’t you? 

Mr. BOLTEN. Sure. It is a Government obligation. But what——

Senator CONRAD. And that adds to the debt. 

Mr. BOLTEN. It does not—it adds to the overall debt of the Government, but it does not add to the debt held by the public. 

Senator CONRAD. Not the debt held by the public, but it adds to 

the gross debt of the United States, and it has got to be paid back. 

Now, let me just say why I am concerned about this, because 

back in the 1980’s there was virtually no Social Security surplus 

92

to be concerned about. In 1983, the last time as a percentage of 

GDP we had a deficit as big as this one, there was virtually no Social Security surplus. 

In this year alone, your estimates are the Social Security surplus is going to be $259 billion, and you are taking it all. You are not 

taking it all just for that year. You are taking it all for the next 

decade. That is $2.4 trillion—$2.4 trillion—and you are not letting 

the American people understand all that has got to be paid back. 

But it does not end there. The same thing is true with Medicare. 

The alternative minimum tax, which you are paying for for 1 year, 

has a cost in 2009 of $55 billion. It is nowhere. You have, in addition to that, no calculation of residual war costs. CBO tells us it 

is going to be $30 billion that year. You add all that up, that is 

over $600 billion of added debt when you are telling the people it 

is going to be a deficit of $237 billion. 

I think that is misleading to people, and all of this right before 

the baby boomers retire. 

Mr. BOLTEN. If you can hold the chart up for just 1 second? 

Senator CONRAD. Yes. 

Mr. BOLTEN. Senator, we disagree—not about the problem with 

Social Security—I share very much your concern about the longterm unfunded liability in Social Security. But in terms of correctly 

describing what our deficit situation is, I think the right way to 

look at it is on a unified basis, because it is what the Government 

needs to borrow today from the private sector or tomorrow from the 

private sector that is relevant in the concern you expressed at the 

end of your remarks, which was: Is private capital being crowded 

out? What is going on with interest rates? 

Right now we do not see the deficits we are running today putting pressure on interest rates, but I think you are right to be concerned about it. But the right way to look at it is what does the 

Government need to borrow today or tomorrow in order to meet 

that obligation. 

Let me move on to the other elements. On the Medicare surplus——

Senator CONRAD. Let me just respond to that for a moment. I tell 

you, I think we have a fundamentally different circumstance than 

we faced in the 1980’s because the baby boomers are about to retire. And the hard reality is debt held by the public is a different 

metric than the gross debt of the United States. The gross debt of 

the United States matters a lot more when the baby boomers are 

about to retire. And it is why, if you look back at the 1980’s, there 

was virtually no Social Security surplus. Now there are huge Social 

Security revenues coming in, growing dramatically—it produces a 

$150 billion Social Security surplus this year. It is going to be $250 

billion by your calculation in just 5 years. And you are not counting 

it as part of the deficit, when, in fact, it has all got to be paid back. 

It is adding to the debt. And what we have here is a gross debt 

that is spinning totally out of control at the worst possible time. 

Mr. BOLTEN. I do want to emphasize that I completely share your 

concern about the long-term unfunded liability of Social Security, 

which begins to bite within the next 10 or 15 years very badly, 

when Social Security itself will start taking in less money than it 

is putting out. So I do not want to minimize concern about Social 

93

Security. I do want to say we have a disagreement about the right 

way to characterize deficits today. 

Looking at some of the other elements on your chart, I think to 

suggest that there is a Medicare surplus does not tell the actual 

story, that Medicare is divided into two parts, part of which has a 

trust fund, which is in surplus, but the other half of Medicare is 

running a large cash deficit. 

Senator CONRAD. That is true, but we have made a decision 

around here, made it long ago, that we are going to fund Medicare 

in different ways. Some of it was by a premium. Some was by a 

general fund transfer. We do have a trust fund and it is in surplus, 

and it is being taken and used for other things. And the point is 

it has got to be paid back. 

That is the fundamental problem I have with telling people the 

deficit is going to be cut in half, because the hard reality is that 

the debt in 2009 is not going to be increased by $230 billion. The 

debt, according to your own calculation, if you go to your own budget documents, the debt is going to be increased by $633 billion in 

2009. I think the American people need to know that. 

My time is up. 

Chairman NICKLES. Senator Conrad, thank you. I am very interested in this subject, and you and I have a little difference of philosophy, and maybe we can hash this out. 

Senator Conrad and I have basically decided to do a hearing on 

long-term cost implications of some of the Federal programs, which 

will certainly include Social Security and Medicare, but also other 

pension liabilities and long-term liabilities. And I may want to 

have a portion of that or maybe a separate hearing devoted to trust 

funds and what I would say is the false assumption of trust funds, 

but that would let you know where I am coming from. And maybe 

we could really hash this out. I would enjoy doing that. I think it 

would be a good, educational, intellectual exercise. But we will save 

that for another day. 

We go by order of appearance, and I might ask my colleagues, 

Senator Domenici is here. Senator Allard, would you mind deferring to the former chairman, since he has only been chairman of 

this committee or ranking member for 25 years or something. But 

we are asking all of our colleagues to try and keep their comments 

to 5, 6, 7 minutes. That would be appreciated. 

Senator Domenici? And thank you, Senator Allard. 

Senator DOMENICI. I will try to be brief. 

There is one item of kind of a parochial nature that bothers me, 

and parochial only in the sense that the subcommittee that I chair 

has to pay for this. That has to do with Yucca Mountain, Mr. Director. There is something very difficult about what your budget is 

doing on Yucca Mountain. 

First of all, you propose that there be a Yucca Mountain fee. 

There has always been a fee accumulating for that. We use it even 

when we are not making any headway, but the President proposes 

$749 million as a legislative proposal related to Yucca Mountain 

that would change mandatory receipts related to the nuclear waste 

to discretionary receipts. Is that correct so far? 

Mr. BOLTEN. I believe it is, Senator. 

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Senator DOMENICI. OK. In the budget request, the revenue from 

this change is assumed up front, and it is the means to maintain 

the schedule of 2010 opening of Yucca. 

Now, I do not know that Yucca is going to be opened by 2010, 

so I do not want to act like I am agreeing with that date. But you 

all are and everybody else is telling the world we are. 

Now, what happens if this legislative proposal is not enacted? 

Will we still stay on a path that assumes a 2010 opening? 

Mr. BOLTEN. My expectation, Senator, is that unless we are able 

to find some other way to make sure that the funding for this 

project is adequate that it would cause a delay in the 2010 date. 

Senator DOMENICI. Well, it would seem to me that is the right 

answer, but also I would like you to know that very few proposals 

for a user fee of this size gets enacted around here. And when you 

have something as controversial as Yucca, whose schedule has been 

all over, to come along and say, well, now is the time to ask for 

$750 million as a new fee, there are going to be a lot of people complaining because they have been putting up a fee, Mr. Chairman, 

for a long time. And you have been asking me, ‘‘Where is the fee?’’ 

And I say, ‘‘It is sitting out there.’’ And then you say to me, ‘‘No, 

it isn’t sitting out there. You are using it.’’ Right? ‘‘Except you are 

not using it for Yucca.’’

Well, now, I personally want everybody to know that I will do 

what I can on Yucca, but I cannot keep it on schedule with $750 

million left out that we assume we are going to get when I do not 

know how we are going to get it. 

Mr. BOLTEN. Senator, one comment. I am advised that the fees 

we are talking about are not new fees. It is a shifting of fees from 

the mandatory over to the discretionary side. I realize that that 

still involves some difficult legislative machinations, but——

Senator DOMENICI. Yes, sir. But, you see, I already told you that, 

and I thought you were not getting it. But, you know, I already 

made that statement about the discretionary, this change. I note 

your marvelous assistant just whispered it in your ear. 

Mr. BOLTEN. Senator, you are both far more astute about this 

than I am, sir. 

Senator DOMENICI. You are right. He is pretty good, too. He 

worked for us for 20 years. 

Let me talk about the defense environmental management, if I 

could. The fiscal year 2005 requests $350 million to be made available only to the extent that legal uncertainty concerning certain reprocessing is satisfactorily resolved pending litigation or by new 

legislation. What does that mean? 

Mr. BOLTEN. I am not familiar with that, Senator. 

Senator DOMENICI. Well, it is a bunch of money. I do not know 

that you have to be, but somebody has to be. Do you want to ask 

somebody to tell us—

Mr. BOLTEN. Can we give you the answers for the record? 

Senator DOMENICI. Absolutely. Thank you very much. 

The rest of that is: When do you intend to obligate that $350 million? And we will wait for that answer, too. 

Mr. BOLTEN. We will provide that for the record, Senator. 

Senator DOMENICI. Thank you very much. 

95

Corps of Engineers. Everybody around here knows, and probably 

Senator Byrd knows the best, that every year Presidents submit 

budgets on the Corps of Engineers that ask for projects and then 

do not pay for them, or cut the projects so much knowing full well 

that you cannot live with them. 

Now, I do not accuse you of it. You are too new. But you are following in the footpaths, it would seem, of those that came before 

you. 

The Corps of Engineers fiscal year 2005 request, if enacted as is, 

underfunds the Corps so much that I question whether it could be 

effectively carried out and that it could do its mandated work. The 

fiscal year 2005 budget documents relating to the Corps state a 

concern about the growing construction backlog. Can you explain how if we cut the construction budget by $300 

million we are reducing the current construction backlog for 2005? 

Would you like to answer that for the record, too? 

Mr. BOLTEN. I might, but I would just say, Senator, that when 

we have gone in and looked at that budget, what we have tried to 

do is focus on the priority projects, those already under way. I 

think the Corps does a pretty good job of trying to figure out exactly where the resources ought to be allocated. We have tried to 

continue doing that in this budget. 

Senator DOMENICI. OK. I have three more Corps questions. I will 

submit them. But let me say to the Senators, there is no series of 

projects that the Senators want more than the Corps of Engineers. 

If anybody served on that subcommittee, it gets the biggest list, 

short of maybe Interior, which you chaired, Senator Byrd. We get 

lists of requests for Corps, and if I look at your numbers, it is—

you know, you have submitted to us an impossibility. We cannot 

do what you have suggested here because the Senate Members and 

House Members will not let us. 

Now, on a very big issue, I would like you to talk with us a 

minute. It seems to me the American economy is changing or something has happened that we have not yet put our finger on. The 

easy attack on this administration is that two million jobs have 

been lost, and I see a candidate saying, ‘‘Wait until I get President 

Bush, I will point right in his forehead and say, ‘That is what you 

have done, lost two million jobs.’’’

Well, Mr. Bolten, it seems to me that with the fiscal facts, everything is right on course for this to be a very strong economy. Normally a strong economy means more jobs. Is that not right? 

Mr. BOLTEN. Yes, sir. 

Senator DOMENICI. What has happened? Why do we have all 

these good acts on the economy? We have a few things that are 

strange, and that is this enormous, enormous increase in productivity, consistent and so high that 15 years ago if you had told Alan 

Greenspan we are going to have it that big, you know, he would 

have said it is impossible. A couple other things have happened. Do 

you have your version on behalf of this President as to why all the 

growth and other positive things and so few new jobs as they are 

talking about? 

Mr. BOLTEN. Well, a couple of points. First of all, I think the 

macroeconomic policy has been very well designed to address the 

recessionary situation that the President encountered when he enVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00101 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
96

tered office. There has been an accommodative monetary policy 

from the Fed, and on the fiscal side, you all have done exactly the 

right thing in enacting what may be the best timed tax cuts in 

American history. 

CEA estimates that those tax cuts are responsible for two million 

more jobs. The Council of Economic Advisers, the professional 

economists within the White House, estimate that between 2001 

and 2003, there were two million more jobs in the economy as a 

result of the tax cuts than there otherwise would have been. 

Now, job growth has been too slow, and it has been, as you know, 

a great concern of the President. One of the reasons is routine, and 

that is that job growth typically lags recovery, and it takes some 

time, once the recovery is under way, for job growth to come back. 

But a huge factor is the one you mentioned, which is that productivity growth has been unprecedented, far beyond anything that 

any of the economists projected, which is good news for the economy overall. It means we are going to remain competitive. It means 

that we are going to have higher real wage rates. But it also means 

in the short run, when you are coming out of a recovery, that there 

aren’t as many jobs created because high productivity means you 

are creating more products with fewer people. 

We expect that the trend of low job growth is now moving to sustained job growth. We need to see what the numbers will be going 

forward, but I know that our economists are very optimistic that 

we will see strong job growth in the years ahead. 

Chairman NICKLES. Senator Domenici, thank you very much. 

I am going to urge our colleagues, we have a tool that we did not 

have in the Senate, and there is a little clock up there to give us 

a little guidance. 

Senator Murray. 

Senator MURRAY. Mr. Chairman, thank you very much, and I appreciate the accommodation of the House in being here. I would 

ask, Mr. Chairman, since many of our offices are not open and we 

are going to have difficulty getting things to you, if we could hold 

the record open of this committee hearing to submit our questions 

once our staffs get back int our office to be able to do that. 

Chairman NICKLES. Certainly. That is an excellent suggestion. 

Thank you. 

Senator MURRAY. Thank you, Mr. Chairman. 

I just have to say that I am really concerned about the budget 

that has been presented to us by the President. I go home every 

weekend to Washington State. We have had the first or second 

highest unemployment since September 11th. We are now fourth 

highest, you know, so that feels a little better. But it is not good, 

and what people in my State are really worried about is health 

care, the cost of health care. They are concerned about jobs. They 

are concerned about an investment in transportation. They are especially concerned about security. And what I see in this budget, 

which is a statement of priorities, is a real lack of investment in 

those, and I want to get to that in just a second. 

But I just got your opening statement this morning and listened 

to you give it, and I was kind of befuddled by what you were presenting to us because, as Senator Conrad has pointed out, you are 

telling us all that the deficit will be reduced by half, and you are 

97

sending over legislation to kind of make that happen. You talked 

about reinstating caps, the pay-as-you-go requirements, but you are 

saying tax increases, pay-as-you-go would not apply. 

Well, I do not understand how that works when the tax cuts take 

money out of the budget. And I know what you are going to go to 

is that, well, they will create jobs. But what I think we have seen 

and part of what Senator Domenici was talking about is that the 

jobs are not being created here. Many of the corporations who are 

taking advantage of tax cuts are having jobs go overseas, and we 

are not seeing people here, as you predict, create a better revenue 

forecast in the future by increasing taxes because they are not 

being paid here. 

Now, I am a supporter of trade agreements, but I think we have 

to ask the question: If tax cuts are put in place permanently and 

the jobs are not created here, how are we ever going to get to a 

deficit that is cut in half that is being promised by this budget and 

by the White House? 

Mr. BOLTEN. Senator, first, the tax cuts that we are talking 

about and the ones we are proposing be made permanent in the 

Code are not corporate tax cuts. These are individual taxes that we 

are talking about. 

Senator MURRAY. But I would assume that you are saying that 

these people will invest back in this economy. That is not what we 

are seeing. 

Mr. BOLTEN. They will invest, and in particular with respect to 

the top rates, many of the small businesses of America, Subchapter 

S corporations, pay their taxes through the top income tax rates. 

And these are not people typically who are sending their jobs overseas. These are people who are investing, buying plant and equipment here in America. They are the real engines of job growth. 

Senator MURRAY. I think we are all very concerned that where 

we are seeing job growth is not here in this country, and I do not 

want to get into an agreement on that. Just an observation that 

we are not going to cut the deficit in half if we continue to give 

tax cuts out. We see no job growth here, and it is a dynamic that 

we are going to have to deal with as a country. 

But let me ask you a specific question, because it is one I am 

deeply concerned about. You said one of the priorities of this budget was protecting the homeland. I do not think any of us disagrees 

with that. I think all of us realize that this last week three Senate 

office buildings were shut down because of a small bit of ricin. I 

would let all of you know that if one container comes into any one 

of our seaports in this country, we now understand the dramatic 

impact to this economy if those seaports were to be shut down and 

the products that could not get to stores in the middle of the country, let alone the jobs that are lost immediately on our ports, and, 

of course, the lives that would be involved in that. 

I was really disappointed to see that this administration identified $1.7 billion for Coast Guard port, waterway, and coastal security activities, including $100 million for the implementation of the 

Maritime Transportation Security Act as a port security initiative. 

First of all, Mr. Chairman, I want to point out that the Coast 

Guard commandant testified last September that it would take approximately $7.3 billion over 10 years to implement the Maritime 

98

Transportation Security Act, including $1.5 billion for the first 

year. So this program is woefully underfunded, and that $1.7 billion figure represents 90 percent of the administration’s proposed 

port security budget, and about half of the Coast Guard’s discretionary budget for its traditional missions of port, waterway, coastal security. 

The Coast Guard is doing an excellent job. Any of us who live 

on coastal States will tell you that. But they are stretched to the 

max. They are working overtime, long hours, and I do not think 

this budget offers any relief. 

I want to know how this administration expects the Coast Guard, 

which is already stretched thin, to accomplish its traditional missions, including fisheries enforcement, search and rescue, all of 

those, take on 90 percent of the homeland security duties, and implement MTSA with only 7 percent—that is $100 million of the 

$1.5 billion—of what the commandant has told us they need. 

Mr. BOLTEN. Senator, we have the Coast Guard very substantially funded. I agree completely. They have taken on a great burden. They do a terrific job. The Coast Guard funding over the 

course of this administration has been dramatically increased. We 

are proposing in this budget——

Senator MURRAY. At the behest of Congress, I would add, not——

Mr. BOLTEN. Yes, with the cooperation of Congress. I think we 

agree that that is an area that has needed a great deal of strengthening in this country. The overall budget for the Coast Guard in 

our 2005 submission increased by 9 percent in total. The port security program you referred to, I think we have baked into our figures full over the course of the 10-year period. But we need to focus 

our money where we think we can do the most good most quickly. 

Senator MURRAY. Well, I would just disagree with the priorities, 

and I would say eliminating Operation Safe Commerce, which is a 

project that is ongoing in our largest ports right now to determine 

what is the best way to provide port security, eliminating that and 

underfunding this is going to cost us in the future. And it makes 

it very hard to believe that homeland security is one of the primary 

missions of this budget. 

Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Murray, thank you very much. 

Senator Allard. 

Senator ALLARD. Thank you, Mr. Chairman. I would have to disagree with my colleague from Washington in that what I am seeing 

now is that we are starting to have some job growth. But I would 

also point out, in visiting with economists, it seems as though there 

has been a loss of manufacturing jobs for almost two decades. 

Whether we have gone through periods of recession or unprecedented growth like we did in the 1990’s, the trend has been a loss 

of manufacturing jobs in this country. 

It has brought up a discussion among a number of colleagues 

that I have been visiting with as to just how significant is the 

household survey as compared to, I guess, we call it the payroll 

survey, where we do the—where most of the figures are coming out 

of, historically I think it has been out of the payroll survey. What 

we have noticed recently, there has been a huge increase in household survey that reflects small business jobs. And I have talked to 

99

a number of individuals, a number of economists and people sort 

of in the various industries. They seem to think that with the recession that we had, people were given bonuses to leave their jobs 

voluntarily, and they took this money and set up their own businesses. Many of them were home businesses, the household. They 

operated a computer and they had a good printer, and they ran a 

business right out of their home. 

Do you have any explanation for the discrepancy in the household figures as opposed to the payroll figures? 

Mr. BOLTEN. Senator, for a truly expert answer, I will ask the 

Chairman of the Council of Economic Advisers to give you something for the record. But I think the difference is exactly the one 

you identified, and that is that the payroll survey tends to go 

around and get the big businesses and survey their employment. 

The household survey actually asks individuals who is doing what, 

and that is the one that reflects much more accurately small businesses, and as has been typical in many recoveries, the real robust 

growth in the economy, and the real job creation comes from the 

small businesses. 

Senator SESSIONS. Thank you, Mr. Chairman. I think it is critical 

that we take firm and decisive steps to demonstrate our commitment as a Congress to contain the growth in spending. The American people expect that. The financial community is watching us, 

and I think the world community is watching us. 

We can sustain the deficits we had this year. I was glad to see 

that it came in, what, $50 billion below one of the estimates as late 

as June because of the growth in the economy, and it does appear 

to me that income to the Government from tax revenues is more 

volatile than the economy itself. It tends to go up faster and drop 

faster than the economy itself. But one of the things we have not 

talked about generally is the discretionary and entitlement accounts. We have focused mostly on discretionary. 

Mr. Bolten, what percentage of our expenditures in this unified 

budget from which you are drawing the deficit number, what percentage of that is discretionary and what percentage is entitlement 

programs? 

Mr. BOLTEN. It is about a one-third/two-thirds relationship, and 

then the interest is the rest of the budget. 

Senator SESSIONS. So two-thirds of the expenditures other than 

interest would be entitlement programs, Social Security, Medicare 

and those expenditure items? 

Mr. BOLTEN. I think it is a little bit less than two-thirds, yes. 

Senator SESSIONS. And we do not appropriate that money as we 

have set that system up, but every single American who reaches 

a certain age or has certain income levels become entitled automatically to the check or the benefit from the Government regardless of the state of the government’s budget and income; is that correct? 

Mr. BOLTEN. That is true. 

Senator SESSIONS. Will the entitlement program growth exceed 

the growth projected by the President for the discretionary accounts this year? 

Mr. BOLTEN. This year actually I think entitlement growth has 

been relatively restrained after a number of years of large growth, 

100

but it is not a path we can expect to continue in the future. But 

if you look out into the future and if you look out farther beyond 

10 years into the future, as Senator Conrad did with his charts, 

and I know a number of members are interested in, you see in the 

entitlement growth far outstripping not just the growth in the rest 

of the budget, but the growth in the economy which is what makes 

that situation particularly dangerous. 

Senator SESSIONS. I think it is important. So the answer is on 

Social Security, we know it is time for us in this Congress to get 

serious about it. We do not need to wait till 2018 when the thing 

goes into deficit. We need to be thinking ahead now. I think the 

President has had the courage to discuss that openly, and I believe 

he will move forward, and I hope the Congress will meet him halfway instead of politicizing the issue. 

Now, one matter we need to deal with—and I am glad the Chairman raised it—and that is the prescription drug cost estimates 

that we had. Chairman Nickles, to his credit, told us on the floor 

of the Senate and in Committee and privately, that the numbers 

were probably going to exceed the $400 billion. Nobody else particularly was saying that, but Chairman Nickles did warn us of it. 

I told the people of my State that I believe we needed a prescription drug plan, I believe and know that there are seniors in our 

State who literally, whose health is compromised because they cannot afford prescription drugs. And I thought and was certain we 

could do it for the amount we budgeted last year, $400 billion, and 

I ran for reelection and that is what I said. So I have to tell you, 

I am very disturbed and concerned that we now have another Government agency saying it is going to be $534 billion which is $134 

billion more. That is $13 billion a year. I do not know where in this 

Government we can save $13 billion a year. And this is a program 

going from zero to 400 billion and now it is going up to there. 

I will just say a couple of things. Do you know which number is 

correct, and do you have an opinion? Is it 400 or 534? 

Mr. BOLTEN. I do not know, Senator. I think even people who are 

expert in this area have legitimate disagreements. I know that the 

CBO actuaries are very professional. The HHS actuaries are very 

professional. And they are working together to try to resolve their 

differences. 

Senator SESSIONS. I do not think we know either, and I have 

been talking to a number of Senators about this, and others in trying to figure out what the truth is, and the truth is we do not 

know. The truth is we passed a bill that we said was a $400 billion 

bill and now we have an authoritative agency saying it is going to 

be $134 billion more than that. So I think before this thing gets 

implemented, before we go down this road, Mr. Chairman, we need 

to confront this question. I believe that is what the Congress was 

intending. I know I would not have voted for a $534 billion bill, 

and I know other Senators would not have voted that big a bill. 

So my question to you is, would you be willing to support, and 

do you think the administration would support a plan to contain 

the growth of this new entitlement program to the 400 billion we 

contemplated from the beginning, and would not that be good public policy, so if Congress felt they needed to put more money in it 

to drive it up, they could make that decision, but that we ought to 

101

have a budget that we enforce and we ought to have an expenditure plan that is consistent with what we expected when we passed 

the bill? 

Mr. BOLTEN. Senator, I cannot give you an administration position off the top of my head on that. I can tell you that, the administration remains very interested in ensuring that costs be contained 

at the same time that we are providing these new and improved 

benefits through Medicare. So there will always be an interest in 

that. 

And I would just come back to one point, which is that as we 

submit this budget, I expect it will be rescored by CBO, and my 

understanding is that they will stay with their $395 billion estimate. So as the budget is in front of you, it will be at the same 

cost for the Medicare program that you voted on. 

Senator SESSIONS. I think that could be helpful to us, Mr. Chairman, as we confront the question of can we contain this cost to the 

amount we intended to. I believe we can do that. We do not know 

what it is going to be. In fact, you have indicated, I think, we do 

not know to the extent it could be more than $534 billion, and I 

just think we have a responsibility to see what we can do to make 

this program come in at the level we want it to. The idea that entitlement program is just a machine let loose and it runs amuck and 

can never be altered should not be our way of thinking. 

Chairman NICKLES. Senator Sessions, thank you. I welcome any 

suggestions that you have. I might say that during the conference 

I tried with others to come up with different methods of containing 

the cost, and we came up with a reporting mechanism if spending 

exceeds a certain amount of GDP or something, but it was not anything satisfactory as far as this Senator is concerned. 

Senator SESSIONS. I would just say that of all the conferees, you 

are by far the most committed to maintaining integrity in that figure, and perhaps the growing concern over the deficit in recent 

weeks might cause some of our colleagues to rethink where we are 

on this particular question. If we can come up with a good sound 

approach, and I believe we can, we need to do it. 

Chairman NICKLES. I appreciate your suggestion, and the administration has made several recommendations as far as budgetary 

changes. Either they would be made as part of the budget resolution or they would be made as a separate bill as part of amending 

the Budget Act. I am certainly willing to consider recommendations 

from any member of the Committee, any member of the Senate. So 

if you have some suggestions you think that we should be considering, I am more than willing to work with Senator Conrad to see 

what we can do. 

Senator SESSIONS. And I do intend to be working on that, Mr. 

Chairman. 

Chairman NICKLES. I appreciate that. 

Next, the Senator from Michigan, Senator Stabenow. 

Senator STABENOW. Thank you, Mr. Chairman, Mr. Ranking 

Member, and welcome, Mr. Bolten. 

I am looking forward to a broader discussion on Medicare myself. 

I will not spend a lot of time on it today, but just to say what I 

would really like to talk about is how this is not a good benefit for 

seniors, how it lacks in the highest possible prices for people under 

102

Medicare, and in over 10 years will begin to unravel Medicare as 

we know it. So I hope we are not only talking about the numbers 

but it is really happening and what will be happening under this 

Medicare bill which I am deeply concerned about for the seniors of 

the country. 

There is a lot in this budget bill. It is difficult to spend just a 

few moments talking about it, so, Mr. Chairman, I would like to 

talk in big picture numbers. As I said in the last meeting that we 

had, last hearing, I think it is very important to note that with all 

this sea of red ink, that if we were to eliminate every penny of nondefense discretionary domestic spending this year, every penny of 

$445 billion this year, that would not eliminate the deficit for this 

year of $521 billion; is that not correct? 

Mr. BOLTEN. That is true, Senator. 

Senator STABENOW. This is huge. So we can debate around the 

margins about whether or not we should have a half a percent increase in non-defense discretionary spending or a percent or 2 percent. But you could eliminate every penny and it would not equal 

the deficit for this 1 year. So obviously, there are broader issues 

that we need to address, Mr. Chairman, and I hope we will. 

The other thing I think is important to put in perspective is of 

the 65 programs that we are talking about being eliminated, and 

I have some questions about those, they equal 5 billion which is 

what we spend a month in Iraq and Afghanistan. So we are talking 

about and trumpeting 65 programs that eliminate $5 billion, and 

we can debate whether they should be or not, and I am all for 

eliminating things that do not work and doing new things, but that 

is what—we are spending $5 billion a month in Iraq and Afghanistan, and this budget does not include the funding at this point for 

those important issues of Iraq and Afghanistan. So this budget is 

not complete, which is one of the big concerns as we look at all of 

this. 

Is it true, when I look at what you are proposing to eliminate, we are looking at eliminating in education $1.412, basically a billion dollars in education, as I have it, education programs, and I 

assume these numbers are correct that we have received from you, 

$1.412 billion. And adding back $1 billion in Title I. So we are looking at overall there would be a cut there in terms of dollars to education. That concerns me. 

The other thing, coming from a manufacturing State, right now, 

where our world is very different than the world, with all due respect, that you are describing in terms of jobs. We are losing jobs 

and we are losing them permanently, middle class family wage 

jobs, and we are desperately concerned about it. Everyone is 

agreed. The President has said, and Members of Congress obviously have said, we need to focus on education and innovation. We 

see programs being cut as it relates to technology, regional technology in education programs, as well as vocational education, as 

well as other kinds of tech prep education, those kinds of things. 

Then we see being proposed for cuts the Advanced Technology Program, which frankly, has been a wonderful partnership in Michigan between the universities, the big three auto makers, other 

manufacturers to increase our applied technologies in terms of research and being able to raise that level of innovation that we all 

103

know that we need to compete. So I am very concerned about the 

choices being made here that will undercut our ability to in fact invest in education, innovation and jobs. 

I would add just one other thing on jobs, and that is I would comment—I do not usually commend a program on television—but Lou 

Dobbs has been doing a wonderful ongoing series on exporting of 

American jobs, ‘‘Exporting of America’’ I believe is what he calls it, 

in which he really, I believe the other night got into the whole 

question of how we look at productivity now. Part of the reason 

that productivity numbers look as high as they are is because we 

are taking out of the equation the numbers of jobs that are being 

outsourced overseas so that the numbers change, and there is some 

very interesting things that I thought came forward in this program. 

So I am more specking, Mr. Chairman, than I am asking questions, except to say I am very concerned about the choices being 

made here in terms of education innovation, the choices in terms 

of keeping us safe and the cuts in first responders and bioterrorism. And I would ask simply a question as we look at these 

things. We all understand that Social Security and Medicare is 

being included in the numbers that we see in terms of the deficit, 

correct? 

Mr. BOLTEN. Correct. 

Senator STABENOW. Unified budget. Would you also agree with 

a chart that our ranking member has showed us in the past regarding borrowing, the top 10 countries holding our national debt, 

China, Japan. By the way, China is where our jobs are going is one 

of the places, and then manipulating their currency which makes 

it worse. Japan, China, United Kingdom, Hong Kong, Germany, 

OPEC and so on. Would you agree with the fact that we are borrowing, that we are taking Social Security and Medicare money, 

and on top of that we are borrowing from other countries in order 

to take care of this debt at this time? 

Mr. BOLTEN. Oh, it is certainly true that a fair amount of the 

U.S. debt is held overseas, yes, and that is one reason why it is especially important that we show ourselves to be fiscally responsible 

today because we need to be assuring not only our own markets 

but international markets as well. 

Senator STABENOW. Absolutely. So when we look at this budget 

and the fact that you could eliminate all education funding and 

homeland security and technology innovation and law enforcement 

and everything, and not equal the deficit this year, and you look 

at the fact that we are taking all of Social Security and Medicare 

and borrowing from China and Japan, Mr. Chairman, what I find 

of great concern is that that money is not going back into paying 

our bills. For the most part, that has gone as a conscious choice to 

give tax cuts that you want to extend to people who are doing very, 

very well in our country. So we are taking money from Social Security and Medicare, borrowing from China and Japan and other 

countries, giving it to millionaires in our country, and then not 

being able to pay our debt on the war, not being able to invest in 

education innovation. 

These are choices that are being made right now in this budget 

and in the past several budgets, and I disagree with those choices. 

104

I believe that this budget is about values and priorities, and I do 

not believe that right now this budget reflects priorities. Thank 

you. 

Mr. BOLTEN. Mr. Chairman, may I take a moment for a comment 

or would you like to move on? 

Chairman NICKLES. Yes, go ahead. 

Mr. BOLTEN. I agree completely with the Senator, that that is exactly what these budgets are about, setting priorities. I imagine we 

will have some substantial disagreements about where the priorities belong. 

Let me make one point about the tax cuts that you raised because I think there is a misconception about the effect of those tax 

cuts. This chart shows basically who pays what in our income tax 

system. Right now, let us take the top 5 percent of income earners 

in this country. That is the second set of bars from the left. Without the tax cuts, that group, those people making more than 

$135,000 a year, pay 50 percent of the income tax in this country. 

As a result of the income tax cuts, that same group pays 53 percent 

of the income tax take in this country. The result of the tax cuts 

that you all enacted was to make the tax code more progressive 

rather than less. 

I would also come back to the point that a substantial portion of 

the money that is labeled as going to the rich is for the small businesses of America, which are, as Senator Allard was pointing out, 

the job creators in this economy. 

Can I mention a couple more things? 

Chairman NICKLES. I have two additional Senators and I am trying to get this out pretty close to 12 o’clock. 

Mr. BOLTEN. All right, sir. I will be glad to engage the Senator 

separately. 

Senator STABENOW. Mr. Chairman, if I can just make one response with two points. First of all, income tax is not the only 

thing paid in this country. 

Mr. BOLTEN. Absolutely. 

Senator STABENOW. Everyone is paying payroll taxes. 

Mr. BOLTEN. Yes. 

Senator STABENOW. The majority of Americans are paying payroll taxes which is Social Security and Medicare that we are now 

using to help pay for these income tax cuts as well as other things. 

But second, the majority of this income tax cut went to those at 

the very top of our income. Child credit, terrific; eliminating the 

marriage penalty, I care about that more now, the last year, than 

I did the year before. 

[Laughter.] 

Senator STABENOW. And I certainly appreciate what you are saying about small business, but we all know where the majority of 

this went, and in fact, if you would be willing to work with us, we 

could eliminate what happened to those at the very top who have 

not been asked to sacrifice during this time of war, and reinvest 

it back into helping our homeland security first responders keep us 

safe, and I think we could have some common ground. 

Chairman NICKLES. Senator Stabenow, thank you very much. 

The Senator from Idaho, Senator Crapo. 

Senator CRAPO. Thank you very much, Mr. Chairman. 

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I want to first add my voice to those who are raising a high level 

of concern about the level of deficits that our country is facing now. 

There is a tremendous debate starting in this country about why 

we are facing these deficits, where the responsibility lies, and I am 

sure that given the fact that it is a Presidential election year and 

there is a battle for control of the Senate and the House, that there 

is going to be a tremendous amount of rhetoric about these deficits. 

I want to commend you, Mr. Bolten, and the President for submitting a budget that focuses on trying to reduce the level of these 

deficits and get us on to a glide path back toward balance. My efforts in this Committee are probably going to be to help increase 

the pace at which we engage in those efforts, but I appreciate that 

this budget recognizes that need. 

Second, and I want to use my time here, I want to commend you 

and the President for recognizing that procedure, as we adopt 

budgets, is critical. 

Mr. Chairman, could you help me on my information here, Senator Nickles? Last year when we brought our 2004 budget resolution to the Senate floor, did we not consider something like 80 or 

81 admendments and were not the vast majority of those efforts to 

increase the level of spending assumed by the resolution? 

Chairman NICKLES. The Senator is correct. 81 amendments, 

most of those were to increase spending. I am trying to remember 

if there was one or two to cut spending, but most all those were 

significant increases, most of which were defeated. 

Senator CRAPO. And when you say ‘‘most’’ we are talking like 95 

to 100 percent almost of those 81 votes were votes to try to increase the spending level of the budget. 

Chairman NICKLES. The Senator is correct. 

Senator CRAPO. The reason I say that is—and I appreciate you 

pointing out that we were successful in all but one of them in defeating them. The reason we were successful in defeating them is 

we had some budget protection measures in place that required 60 

votes to increase the budget rather than 50. If we had not had 

those budget protections in place, it is hard to imagine what the 

spending levels we would be dealing with today might have been. 

The reason I go into that is because it is my understanding that 

in addition to the proposals for the actual numbers of this year’s 

budget, that the administration is recommending a number of specific statutory budget process changes to help us control spending. 

I want to just go over a few of those to get those clarified. 

The first is, I understand that you are proposing that we reinstate caps on discretionary spending for five full years; is that correct? 

Mr. BOLTEN. That is correct, Senator. 

Senator CRAPO. Second, I understand that you are proposing a 

pay-as-you-go requirement similar to that that we have used in the 

past for new mandatory spending, and that this proposal would require that any increases in mandatory spending would have to be 

offset by reductions in mandatory spending, and that tax increases 

could not be utilized for that offset; is that correct? 

Mr. BOLTEN. Also correct, Senator. 

Senator CRAPO. I know that earlier in the hearing there was 

some argument with that notion, namely the notion that tax inVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00111 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
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creases should not be allowed. I want to first of all weigh in on 

your side on that and ask you to explain it a little more, because 

it seems to me that there are two, at least two major objectives 

here that we want to achieve. One is we want to balance our budget, but the second is—and I think this is sort of an age-old battle 

that we have here in Washington—is that we want to try to restrain the growth of the Federal budget and the growth of the Federal Government. There are those who I think believe that we need 

to have a large all-powerful centralized economy controlled by the 

Federal Government. I am not in that group. There are others who 

believe that we ought to have the Federal Government performing 

those limited functions contemplated by the Constitution, and that 

we should try to do all we can while we are trying to maintain a 

balanced budget, to also obtain the second objective, which is a restrained growth of the Federal Government. I mean you can easily 

balance a budget. Just pass a tax increase. Every time you want 

to spend more money, tax more, keep the budget balanced and just 

watch the Government grow. But we want to control growth as 

well as achieve balance. I assume that that was the principle behind your proposal to not allow tax increases to be utilized as the 

mechanism. Am I correct? 

Mr. BOLTEN. Yes, Senator, I think that is very well stated. In 

fact, it is better stated than I did in my last hearing, so I am going 

to go back to the transcript and borrow from that. 

But there is one other point as well, and that is that the economists will tell us that a spending cut and a tax increase are not 

equal in their effect on the economy, that a spending cut will reduce deficits basically one for one, maybe even a little bit more 

with the interest expense added in. A tax increase poses the prospect of undermining the economy. There is at a minimum a small—

though some economists believe a very large-feedback effect from 

keeping that money in the economy, keeping economic growth robust, which keeps Treasury revenues robust. Those are the elements that I think also mitigate very strongly in favor of biasing 

the rules in favor of keeping spending down, rather than just focusing on increasing taxes. 

Senator CRAPO. Thank you. In fact, I think that analysis is very 

appropriate. I am going to add that to my explanations of this issue 

as we go forward. 

I would also say just quickly with regard to this proposal, I wish 

it was applicable to mandatory and discretionary spending and not 

just increases. But I will leave that to some further battles that we 

have here in the Budget Committee. 

One last quick question. Among a number of other procedural 

proposals you are making, one of them is to reinstitute the lineitem veto. As we all know that was stricken by the court recently 

when we tried it last time. How are you proposing to do it differently now to avoid successful court challenges? 

Mr. BOLTEN. Senator, I am not able to go into the legal detail 

with you now but I know our lawyers are confident that a renewed 

line item proposal could be crafted that would withstand Constitutional attack in the courts. We will be glad to give you that detailed 

legal analysis. 

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Senator CRAPO. If you could submit some further analysis on 

that I would be very interested in that. 

I see my time is up. Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Crapo, thank you very much. Next 

our colleague from Florida, Senator Nelson. 

Senator NELSON. Mr. Chairman, you are a biblical scholar and 

given the fact that Senator Byrd had made note of the magnificent 

biblical name of our witness, Joshua, and the fact that—by the 

way, what great name, Joshua Nehemiah, and I got Bill. Yet, it is 

interesting to note about the great leader that Joshua was when 

he led the people into the promised land and had one victory after 

another until deceit, deception and untruth entered the camp, and 

then he lost his first battle when he tried to take the city of Ai. 

And not until he exorcized the untruths did the favorable hand of 

the Lord turn back on him to continue his victories in the promised 

land. 

Now I want to point out one little subtle change here. Would you 

all put back up that chart that you just had up there? This chart 

would lead us to believe that of the top 1 percent, 5 percent or 10 

percent, they are paying the huge share of income taxes. That is 

what the chart basically says. Technically, that is correct. But that 

does not give the whole picture about where the burden is upon the 

American taxpayer, for we know that of the American taxpayer, 

three-quarters of them are paying more in payroll taxes than they 

are in income taxes. Is that not approximately true? 

Mr. BOLTEN. I do not know the exact numbers but the general 

concept is right. There are a huge number of, especially lower and 

middle-income taxpayers for whom the tax burden is greatest 

through the payroll tax rather than the income tax. 

Senator NELSON. So as we try to craft an economic document, 

and this is not particularly an economic document—it is a political 

document—we need to tell the whole story of where the tax burden 

is and how, if we are going to provide relief, who that relief is being 

provided to. 

I would submit that this is a political document of a budget—and 

I do this respectfully—that would offer an additional tax cut for the 

people at the higher end of the income scale paid for by borrowing. 

And where do we borrow from? We borrow from the Social Security 

Trust Fund, and as others have pointed out here we borrow from—

you think we borrow from individual American citizens but a good 

part of the borrowing comes from countries like China and Japan. 

So we have a document in front of us that is increasing the deficits, and what I would like for you to educate me on is, with this 

kind of deficit now in excess of $500 billion dollars in 1 year, is it 

not the law of physics applied to economics that as you go out and 

try to accumulate and borrow more and more, and the competition 

gets greater for the available dollars, that the cost of that money 

goes up, which is the interest rate? Are we not going to see with 

this budget, if implemented, later on at the end of this year interest rates start to rise, and is that not going to cause the economy 

to stall and ultimately go off the cliff? I would love to have your 

comments on that. 

Mr. BOLTEN. Senator, we have not seen it so far, that interest 

rates remain at historic low levels, but I think you, Senator Conrad 

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and Senator Nickles, are right to be concerned about that and that 

is why we want to have as restrained a budget as we possibly can, 

even in the short run. The number that the economists tell us is 

actually most relevant for what you are concerned about, that is 

putting upward pressure on interest rates, is the debt to GDP 

ratio. That is the total corpus of the debt that is being built up in 

this country. 

You will see in our tables that we show that debt to GDP ratio 

has been rising. I believe with a great deal of credibility our budget 

will put us on the right path. In the President’s Budget that number peaks in 2004 at around 4.5 percent of GDP. This is below the 

average of the last several decades. It then will begin to slowly to 

decline. I think you are right to focus on that question because we 

do need to be concerned about putting upward pressure on our interest rates. But I think if we pursue strong pro-growth economic 

policies and if we exercise responsible fiscal restraint, we will see 

that path of the debt to GDP ratio coming slowly back down, which 

is where it needs to be. 

We have a disagreement about tax cuts. I think you are right to 

focus exactly there. In putting this chart up, I do not suggest that 

everybody in America’s principal tax burden is income taxes. In 

fact you are absolutely right, it is not. But if the tax cuts that you 

all enacted are attacked as having made the tax code less progressive, I put this chart up to show that in fact the tax cuts have 

made the tax code more progressive. That does not mean we should 

ignore the burden that remains on lower and middle-income people. 

Those are the people we want to support and why it is especially 

important I think that this year you all extend the child credit, the 

marriage benefit relief, and the expansion of the 10 percent bracket. 

But I think the actual picture of the tax cuts is well-reflected in 

this chart. I am comfortable not having undermined the beauty of 

my namesake’s biblical name in that respect. 

Let me make one other comment, and that is that the tax cuts 

as an explanation for how we got into this deficit picture I think 

are greatly exaggerated. I think the Chairman had it exactly right 

in the early charts he put up. The tax cuts have reduced somewhat 

our revenue in these last few years and will continue to reduce 

somewhat our revenue. But by far the reason for the big change 

in our deficit picture over the last few years has been flagging economic growth. The tax cuts deserve a lot of the credit for restoring 

that economic growth, and the Administration takes a strong view 

that this would be exactly the wrong time to contemplate raising 

those taxes back up again. 

Senator NELSON. Mr. Chairman, I want to take the liberty of just 

adding another sentence or two. I am just a country boy from Florida, but I understand basic economics. That if you have a deficit 

that is created because there is more spending than there is coming in revenue, that if you are going to get that deficit eliminated 

and instead are going to get it to where the budget is in balance 

you either have to cut spending or you have to stop tax cuts before 

they go into effect, and therefore the effect of the revenue is higher, 

and that brings you more into balance. 

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Now where I think you have miscalculated, I would grant you 

that the tax cuts and the additional spending that has occurred in 

this past year with regard to the war have generated more dollars 

in the economy and we have seen the economy start to rise. Not 

with the effects of the jobs that we would like to see increased. 

However, I think at some point there comes the moment of truth. 

Not bringing that budget into balance and instead, with the huge 

deficits, more spending than you have coming in in revenue, that 

the chickens come home to roost by the interest rate suddenly surging upwards, the economy constricting and us starting to go off the 

economic cliff. 

That is what I am afraid is going to happen starting early next 

year, and only compounded, as has been expressed by several Senators here, by the fact that this monstrosity that we enacted called 

a prescription drug benefit is now nowhere near the level of $400 

billion. Indeed, is only going to go higher over time. You add that 

to the fact of the $5 billion a month to take care of the war, which 

I was one of the ones that support the war, and obviously now that 

we are there, despite the fact of the misinformation that we had, 

we have to be successful. You add all of that and the budget deficit 

is going absolutely out of control. That is where I think, respectfully I say to you, with a great biblical name, that I think your 

budget document is flawed. 

Thank you, Mr. Chairman. 

Chairman NICKLES. Thank you, Senator Nelson. 

Senator CONRAD. Senator CONRAD. Thank you, Mr. Chairman. Thank you again for 

holding this hearing. Thanks again to our House colleagues. Thank 

you, Director Bolten, for being here. 

Let me just say in conclusion, I think you are a good and decent 

person. I think the budget that you have put before us is a total 

fiction. As I look ahead, you just leave out things that are critically 

important for the American people to know. 

This is what I think is a closer approximation to the truth because this includes the long-term effect of the President’s tax cuts 

that he advocates, this includes dealing with the alternative minimum tax problem which is supposed to be a millionaires’ tax that 

is about to turn into a middle-class tax increase, and this deals 

with Social Security. When you do that and you look ahead what 

you see is the deficits are not going down. The additions to the debt 

are going up, up and away. And these are the good times. These 

are the good times before the full effect of the President’s tax cuts 

take effect and before the full impact of the retirement of the baby 

boom generation takes effect. 

So I believe this budget, and frankly your presentation, badly understates how serious the fiscal condition of the country is. In that 

way I think it is an enormous disservice to the American people. 

I am sad to say that but I believe that is the truth. 

The biggest thing you have left out is you folks after promising—

in fact we looked at the White House web site and the President 

has this statement on his web site. ‘‘We are going to keep the 

promise of Social Security and keep the Government from raiding 

the Social Security surplus.’’ It is interesting, it is not prominently 

displayed on the web site, and well it should not be because you 

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are taking every penny of Social Security surplus, not just this 

year, not just next year, but every year for the next 10 years. Every 

penny of Social Security surplus, and throwing that into the pot to 

pay for tax cuts and other things. Those chickens are going to come 

home to roost because that money has got to be repaid. 

How is it going to be repaid when the baby boomers start to retire, and the full effect of making the tax cuts permanent takes 

hold? We already have record deficits and the President’s plan has 

increased the spending and cut the revenue. He is restraining the 

growth of spending in a small part of the Federal budget, but most 

of the budget is increasing. The overall budget is increasing. The 

spending is increasing and we have record deficits now and he 

says, increase the overall spending, cut the revenue. 

It does not add up. We are honest. We know it does not add up. 

It does not come close to adding up. He has got us headed for the 

fiscal cliff. That is my belief. 

I thank the Chairman again for his many courtesies, and I would 

say on the question of tax cuts and Social Security, the Center on 

Budget and Policy priorities has told us, you take the tax cuts for 

75 years and the Social Security shortfall for 75 years, the tax cuts 

are three times as big as the Social Security shortfall over the 75-

year period that the analysts examined. So we do need to get serious. Getting serious, I believe means, no more tax cuts unless they 

are paid for, and get real tough on the spending side as well. Unless we acknowledge the reality of our fiscal condition we will do 

neither and that is a huge mistake, because the faster we get on 

this problem the less draconian the solutions will have to be. 

I again thank you, Mr. Director, for being here today. 

Chairman NICKLES. Senator Conrad, thank you very much. 

Director Bolten, we do appreciate your appearance before the 

Committee. I would just make a couple of comments. 

My very good friend Senator Conrad mentioned the fact, in the 

budget you are using the Social Security surplus. I alluded to the 

fact I do not think there is a Social Security surplus because the 

difference or the surplus is basically used to pay for Medicare. People should note that. I also might note that all the Democratic 

budgets, ones produced by Democratic majorities, also used the Social Security surplus. So a little something there. The AMT fix that is assumed in some of these charts is $500-

some billion over 10 years. I certainly think we can fix the tax code 

and solve a lot of our AMT problems concurrently without that 

kind of expenditure. And on the assumption that all the tax cuts 

are all going to be extended permanently, I hope that is not the 

case. Some of the tax cuts were temporary, designed to stimulate 

the economy. They will not be extended, or at least it is not my intention to extend them. 

Also, future extensions of tax cuts require an act of this or a future Congress. If somebody does not want to extend the tax cuts 

they can vote, they can change. And some of those will not happen 

for years, may not happen for years. So they have ample opportunity to be able to make that decision. 

Of the current tax cuts, the biggest bulk of them do not expire 

until 2011. I want to underline my belief that certain of the tax 

cuts should be extended: for example, the individual marginal tax 

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rates and 15 percent rate on capital gains and dividends. I think 

if you increase those, as some people are advocating, you are going 

to send the stock market and the economy down significantly. I 

also think the same thing on individual rates. I hope you do not 

take the 25 percent rate and make it 28 again. I hope you do not 

take the 35 percent rate and make it 39.6 again. That would be a 

mistake in my opinion. But a future Congress is going to have to 

deal with those things. 

And the war cost is not going to be any $87 billion for the next 

10 years. Some people are making that assumption. CBO had to 

build that into their baseline. I think that over estimates baseline 

spending and deficits to the tune of about $1.1 trillion over the 

next 10 years. I hope it is a whole lot less than that. I hope that 

the figures are much, much, much, much less that. I cannot imagine spending that kind of money in Iraq for the next 10 years. 

So I just make those editorial comments. I do not think things 

are quite as bleak as some. I do think the deficits are far too high, 

and it is very much my intention to work with members of the 

Committee and the Administration to more than meet the goal of 

the Administration to get the deficits in half, and I believe a lot 

quicker than in 5 years. That is my intention. 

Director Bolten, thank you very much. I know several of our 

Committee members requested that you would answer questions 

for them, most of whom do not have access to their offices and to 

their staffs, so I appreciate their cooperation in meeting with us in 

the House. Again, I want to thank our colleagues, Chairman 

Nussle and Ranking Member Spratt for their hospitality and cooperation with us. They have been a big assistance to us and I appreciate that. 

The Committee is adjourned. 

[Whereupon, at 12:18 p.m., the Committee was adjourned.]

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THE PRESIDENT’S FISCAL YEAR 2005 BUDGET 

PROPOSALS 

THURSDAY, FEBRUARY 12, 2004

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. Don Nickles (chairman of the committee) presiding. 

Present: Senators Nickles, Enzi, Ensign, Sessions, Conrad, 

Wyden, Byrd, Nelson, and Stabenow. 

Staff present: Hazen Marshall, majority staff director; and Stacey 

Hughes, deputy staff and policy director, Don Dempsey, health policy director. 

For the minority: Mary Ann Naylor, staff director; and Jim 

Esquea, analyst for income security and medicaid. 

OPENING STATEMENT OF CHAIRMAN NICKLES 

Chairman NICKLES. Good morning. I want to thank everybody for 

coming, and particularly, Secretary Thompson, we welcome you before this committee. 

Everyone, I think, knows Secretary Thompson. Governor Thompson, who was Governor of the great State of Wisconsin for 14 years, 

has now served 3 years at Secretary of HHS, and he will make his 

budget presentation to us today. 

I notice that your budget is 41 percent of the entire Federal 

budget. You have enormous responsibilities. I have had the pleasure of working with you both in your previous capacity as Governor 

and as one of the leading Governors on welfare reform. I compliment you for that monumental task and, frankly, very good success. Because of your leadership and the cooperation of Democrats 

and Republicans, we passed historic welfare reform. That needs to 

be reauthorized this year, so we might hear your comments on 

that. 

Also, you have been a very active participant in enacting the 

Medicare changes, which include the prescription drug proposal. 

You were very active throughout the conference. I appreciate your 

leadership on that as well. 

We have some big challenges, needless to say. With the scope of 

your Department being as broad, as large, as comprehensive, as extensive, and as important as it is, I value very much your leadership. 

I might tell my colleagues, I mentioned this when Secretary 

Thompson was testifying before the Finance Committee, but I had 

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the pleasure of traveling with Secretary Thompson. He led a very 

large delegation, a very prestigious delegation throughout Africa to 

not only learn more, but also to assist in the worldwide battle on 

AIDS. And I compliment you for your leadership in that global 

fight. 

I will recognize my friend and colleague, Senator Conrad. 

Senator CONRAD. Thank you, Mr. Chairman. 

Welcome, Mr. Secretary. 

Secretary THOMPSON. Thank you, Senator. 

OPENING STATEMENT SENATOR CONRAD 

Senator CONRAD. Let me start by talking about the concerns I 

have about where we are headed with Social Security. I have similar concerns with respect to Medicare, but let me just put up something the President said when he was putting out his 2002 budget. 

He said that none of the Social Security surplus will be used to 

fund other spending initiatives or tax relief.

Let’s go to the next chart. But that is not what is happening. Despite those words, which were the right words, instead what we see 

is the President’s taking every penny of Social Security surplus to 

pay for other things, and not just for this year but every year for 

the next 10 years, $2.4 trillion of Social Security surplus funds. 

And they are really not surplus. They are surplus for the moment. 

They are needed for when the baby-boom generation retires. And 

the President is taking every dime over the next 10 years to pay 

for other things.


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The President is also telling us, telling the American people that 

he is going to cut the deficit in half over the next 5 years. I wish 

that were so. But when I examine the President’s plans, I see the 

only way he accomplishes cutting the deficit in half is he just 

leaves out things. He leaves out the fact that he is going to take 

in that fifth year $259 billion of Social Security money, every penny 

of which he has got to pay back, but he is not accounting for that 

when he claims he cuts the deficit in half. He says the deficit will 

be $237 billion in that fifth year. But in addition to that, he is taking $259 billion of Social Security money. 

He also leaves out the money that he will be taking from the 

Medicare Trust Fund, $23 billion, also money he has got to pay 

back. He leaves out the $55 billion he would need in that fifth year 

to address the alternative minimum tax problem. He funds it in 

the first year, but the alternative minimum tax that was designed 

to be a millionaire’s tax is turning into a middle-class tax increase. 

And 3 million people are affected now. By the end of this budget 

period, 40 million people will be affected. And yet the President 

provides no funding.


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In addition, he provides no funding past September 30th for the 

war effort. The Congressional Budget Office says that in the fifth 

year the residual war cost is $30 billion. You add up all those 

things, and you don’t have a deficit or an addition to the debt of 

$237 billion. You have an addition to the debt of over $600 billion, 

and right before the baby boomers retire. 

Now, that flows through to this budget as well. And what we 

have, Mr. Secretary, in the budget that the administration has submitted for your Department is the magic asterisk, the suggestion 

that there is going to be expansion of health care coverage, but 

there is no funding for it. It says from the President’s Analytical 

Perspectives: ‘‘In the case of the President’s proposed health care 

credit, the budget includes contingent offsets that would cover the 

estimated increases in mandatory spending that would result from 

this proposal. When the Congress moves legislation to implement 

the President’s health care credit, the administration will work 

with the Congress to offset this additional spending.’’


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Now, Mr. Secretary, you were a Governor, a distinguished Governor, one with a very good reputation for being responsible fiscally. I doubt very much you ever submitted a budget that says you 

are going to do something and then says we will somehow come up 

with the money at the time that we move forward. That is not a 

budget. 

Let me just put up the next one. So what we have is the President advocating a $65 billion cost for a refundable health care tax 

credit, and he offsets it with nothing. It is just words. And so the 

real amount provided is zero. That is what is wrong with this 

whole budget. It is just filled with things where they are just left 

out. And so then the President says he is cutting the deficit in half. 

I am surprised he did not make the claim he is balancing the budget and just leave out some more things.


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Let’s go to the next one. The thing that really concerns me is 

where we are headed in the long term, because as this chart shows, 

the green parts of these bars are the Social Security Trust Fund, 

the blue is the Medicare Trust Fund, the red is the cost of the tax 

cut proposals by the President. And what we see is right now the 

trust funds are in substantial surplus, and they are offsetting much 

of the effect of the tax cuts. But as we go forward, when the trust 

funds turn cash negative, at that very time the tax cuts explode in 

cost, driving us right over the fiscal cliff.


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And I would conclude with the next chart. This is from the President’s own Analytical Perspectives. This is his long-term outlook 

for the deficit if his tax and spending proposals are adopted. And 

what it shows is we are in the good times now with the trust funds 

running substantial cash surpluses. But look what happens when 

the baby boomers retire and the President’s tax cuts go fully into 

effect: deficits that are massive, unsustainable, and unprecedented. 

That cannot be the trajectory.


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Let me just conclude by making one other point. I was very disturbed to see this campaign that is being run, some $20 million of 

advertising, which is really a propaganda effort. It is, I think, 

clearly a political effort to sell the Medicare plan. I voted for that 

plan, but I think it is totally inappropriate for public money to be 

spent in a propaganda campaign. That is not an educational campaign. I have read the words of the ads. That is not an educational 

campaign. It is a political campaign. 

And I was even more stunned to learn that the firm who is conducting it is the same firm that is handling the President’s re-election account. Now, that just cannot be. 

If this isn’t stopped—and I will ask the Secretary today to stop 

this campaign—I will offer legislation to make it illegal for public 

money to be used in a propaganda campaign about legislation. 

That is a totally inappropriate use of taxpayer money. 

With that, Mr. Chairman, thank you. 

Chairman NICKLES. Senator Conrad, thank you very much. 

I want to make just a few comments, and then we will turn it 

over to the Secretary. 

I share many of Senator Conrad’s concerns about the long-term 

sustainability of paying for programs, particularly in Social Security and Medicare. Medicare spending is growing, and growing substantially, and it is going to grow faster now as a result of the legislation we passed last year. 

I will also show a couple of charts, but I do have a difference of 

at least outcome. I am concerned about the long-term health of 

both, and I might just show a couple of those. That is a chart of 

Medicare spending. It basically shows that, you know, we were 

spending, Medicare in 1990, $105 billion, and today it is $271 billion. So that is 2.7 times as much in a period of 14 years. If you 

look at Medicaid, Medicaid spending, we were spending about $40 


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billion in 1990, and today we are spending $180 billion. That is 

about 4.5 times. An enormous increase in Medicaid. 

The unfunded liabilities, if you look at the debt held by the public, it is $3.9 trillion; Social Security shortfall—and this is estimated over a 75-year period of time—is $4.9 trillion; and Medicare 

is $15.8 trillion. So the unfunded liabilities that we have projected 

in Medicare are three times as much as they are in Social Security. 

That is troubling. 

And, incidentally, for our colleagues, we plan on having a hearing where we are really going to get into this in depth. We are 

going to look at the long-term fiscal challenges that we face in this 

country and try and figure out if there are some things that can 

be done or should be done.

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Just a quick chart on the HI trust fund. The Medicaid HI trust 

fund—the trust funds I think are a little bogus, and I might talk 

about that. We are going to have one meeting just on trust funds. 

But it shows that we have big challenges in the future years. And 

the Secretary is one of the trustees of that trust fund. So I mention 

that. Social Security has a chart that looks just like it. But I have 

a difference of my opinion with my colleague, Senator Conrad, on 

are we raiding the Social Security Trust Funds. I might mention 

that almost every budget, including the Senator from North Dakota’s budget, used Social Security Trust Fund. But people ignore the 

fact that we use Social Security Trust Funds to pay—or I will say 

we use Social Security Trust Fund to pay Medicare Part B. General 

revenue funds subsidize Medicare Part B three to one. Three to 

one. And I put together a chart—and I will give this to our colleagues so they can see it. All the money coming into Social Security and Medicare is paid for by a payroll tax, Senator Byrd, 15.3 

percent of all payroll. And, actually, on Medicare it is 2.9 percent 

on all payroll. Of the 15.3, 12.4 is Social Security and limited to 

$87,000, in 2003, of income. And then Medicare is unlimited, 2.9 

percent on all payroll.

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So this chart is busy, and I will give it to my collegues—this is 

not for people to read. It is complicated, but it shows all the money 

coming in from taxes, including the tax on Social Security and 

Medicare, so the receipts coming into the fund and the outlays coming out of the fund to pay Medicare and Social Security. And, actually, the Government, if you could say it is raiding Social Security, 

it is raiding Social Security to pay Medicare Part B premiums. And 

it will be raiding Social Security to pay Part B, and to pay the prescription drug benefits. It actually shows that more money is going 

out for these two programs than coming in. And so we are not raiding Social Security to pay for defense or to pay for non-defense. It 

is basically used to pay for Medicare. 

The two combined, if you add all the taxes combined coming in—

and I will just give you one outlay year for 2004, projected, or 

maybe I could use 2003 because it would be actual, but I will use 

2004. Total amount of money coming in is $753 billion, and the 

total amount of money going out is $784 billion, for basically a deficit of $31 billion. 

So I just make that point. I think there is a lot of misunderstanding on trust funds, and maybe we have a more thorough debate. That is not the purpose of the hearing today. Our purpose 

today is to welcome Secretary Thompson since he has control or responsibility over 41 percent of the budget and a very significantly 

growing part of the budget. I believe his proposal is for a 5.6-percent increase in his total domain. We look forward to hearing him 

present the budget to us. 

I might mention, Senator Byrd, most all of Secretary Thompson’s 

growth is in entitlement programs. Very little is on discretionary. 

Mr. Secretary and Senator Byrd, I would be very interested, since 

we only appropriate about one-third of the budget, I would be very 

interested in seeing if some of these programs that are already set 

on automatic pilot as entitlements, maybe they should be considered and scored and written as discretionary subject to appropriations. I used to be on the Appropriations Committee. I used to be 

very chagrined, feeling that we only had one-third of the budget 

under real control and the other two-thirds growing almost out of 

control. 

This committee can work with the Finance Committee to control 

the two-thirds. But a lot of that control has been growing the programs, not controlling them. Maybe we will take a little different 

approach this year in light of the deficit challenges that we have. 

But there are a lot of programs in your domain, and maybe some 

of those should be subject to appropriation, instead of set up as entitlement. 

I am happy to consider those, either as part of the budget resolution or as changes that we might want to make free-standing, either through budget and/or the appropriations process. We have 

members on both committees on this committee, and maybe with 

some cooperation we could make some adjustments. 

Mr. Secretary, welcome to the committee. 

136

STATEMENT OF HON. TOMMY G. THOMPSON, SECRETARY, U.S. 

DEPARTMENT OF HEALTH AND HUMAN SERVICES 

Secretary THOMPSON. Thank you, Mr. Chairman. It is an honor 

for me to appear in front of you and, Senator Conrad and the other 

distinguished members of this Budget Committee. 

First, let me thank you, Senator Nickles, for going to Africa with 

me. I think it was one of those life-transforming trips. It was for 

me, and I think for most of the people on the trip, and I appreciate 

your participation. 

I thank all of you for inviting me to discuss the President’s fiscal 

year 2005 budget for the Department of Health and Human Services. In my first 3 years at the Department, we have made, I believe, tremendous progress in improving the health, the safety, and 

the independence of the American people. We continue to advance 

in providing health care to seniors and to lower-income Americans 

and improving the well-being of children and strengthening families and protecting the homeland. We are building a new public 

health infrastructure to give doctors and hospitals the tools they 

need to be able to respond to any public health emergency. 

We have re-energized the fight against AIDS at home and 

abroad. We increased access to quality health care, especially for 

minorities, the uninsured, and the underinsured. And with your 

help, 2 months ago President Bush signed the most comprehensive 

improvements to Medicare since it was created nearly four decades 

ago. To expand on our achievements, the President proposes $580 bil- lion for HHS for fiscal year 2005, an increase of $32 billion, or 6 

percent over fiscal year 2004. Our discretionary budget authority 

is $67 billion, an increase of $819 million, or 1.2 percent over fiscal 

year 2004, but an increase of 26 percent since 2001. 

We look forward to working with this committee and Governors 

to improve and modernize Medicaid as well as SCHIP and by giving State governments flexibility to use consumer-directed services 

and to coordinate with free-market providers. 

We propose promoting home and community-based care as an alternative to institutionalization for disabled Americans through the 

President’s New Freedom Initiative which my Department worked 

on for several months. I look forward to working on a bipartisan 

basis to get this important legislation introduced, passed, and 

signed into law this year. 

President Bush seeks to build on the success of the 1996 welfare 

reform law by reauthorizing the successful TANF program to help 

more welfare recipients achieve independence through work and be 

able to protect children and strengthen families. I hope that this 

Congress will take the next step in welfare reform and complete 

the TANF reauthorization. We can and we should accomplish this 

critical goal this year. 

We are also working to protect our most vulnerable children. The Federal Government will spend nearly $5 billion this year for foster 

care. We would fund existing adoption bonuses as well as the new 

bonuses that Congress approved last year for older children, with 

$35 million for 2004 and $32 million for 2005, and to be able to 

support our commitment to helping families in crisis and to protecting children from abuse and neglect, President Bush has reVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00142 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
137

quested full funding, $505 million, for the promotion of the Safe 

and Stable Families Program. 

Working with Governors, we have made tremendous progress in 

providing millions of children with needed health coverage. I am 

delighted to announce today that about 5.3 million children who 

would not have had health coverage were enrolled in the State 

Children’s Health Insurance Program at some point during 2003, 

a 9-percent increase from 2002. And over the past 3 years, we have 

approved Medicaid waivers and State plan amendments to allow 

the States to expand access to health coverage for more than 2.6 

million people and to expand the range of benefits offered to 6.5 

million other Americans. 

And, of course, the new Medicare Modernization Act is a significant accomplishment for our Department. Adding these benefits 

and choices and educating seniors about them will be a significant 

challenge. You and your fellow lawmakers were right to follow the 

CBO score in making decisions, and when CBO scores the budget 

we submitted last week, it is going to be and we expect and anticipate that their estimate would reflect their original score of $395 

billion, or close to that number. 

As you know by now, in late December—December 24th, to be 

exact—our actuaries came out with a final score showing they believe the Medicare bill will cost $534 billion. I thought it might be 

helpful to break down the differences between the CBO projections 

and the HHS projections to explain why we differ by $139 billion. 

I have instructed our actuaries to make it a top priority to fully examine why their estimates differ from those set forth by the Congressional Budget Office and then to begin to work to reconcile 

those differences. That project is just beginning, but here is what 

we know so far. 

A hundred billion dollars, all those in blue, are the difference for 

what we call the Title I or Title D of the Medicare Modernization 

Act, Chapter 1 of the Act. The first one is the eligibility. We 

learned from our actuaries because of the tremendous benefits for 

low-income Americans, which the total is about 11 million people—

and you have talked about that in the conference committee, Senator Nickles. We believe that more low-income Americans will participate and will use the subsidies to a larger degree than what 

CBO says, and that accounts for $47 billion of difference. 

The next one is higher participation, totaling $32 billion. This is 

for those individuals, 100 percent of the universe, all those that are 

eligible to participate in Part D. CBO believes that because 9 percent of those individuals do not participate in Part B, if they don’t 

participate in Part B, more than likely they will not participate in 

Part D. So that reduces the universe down to 91 percent. Then they 

subtracted an additional 4 percent and saying only 87 percent, according to their calculations, will avail themselves of Part D, the 

drug benefit. Our actuaries——

Chairman NICKLES. You estimate what percent will participate? 

Secretary THOMPSON. They believe 87 percent. 

Chairman NICKLES. And you believe? 

Secretary THOMPSON. We believe 94. Our universe is 100 percent. We believe that 5 percent are still actively employed and will 

be insured by their employers, and our actuaries believe it will be 

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94. The difference between 94 and 87 percent is a difference of $32 

billion. 

The next one is what we call the Medicaid savings and woodwork 

effect. We believe that is a difference of $18 billion. We believe that 

when people come and hear about the Part D, they are going to 

also find out that they are also eligible for additional Medicaid benefits, and they also will be using more of that, and, therefore, there 

is a difference of $18 billion. 

The next one is $3 billion. That is in regards to what we call the 

stabilization fund. CBO does not believe it will be utilized, our actuaries do, and that’s a difference of $3 billion. That is $100 billion 

of Part D. The second one is the plan. That is Chapter 2 of the 

Medicare Modernization Act. We believe that there will be 33 percent of the Medicare eligibles that will participate in the plan, and 

right now it is 11.8 percent. CBO believes that is going to go up 

to 14 percent, and only 14 percent. That difference is a huge difference, and that makes up $30 billion. 

The other $7 billion is basically all differences in the other ten 

chapters in the Medicare Modernization due to some pluses and 

some minuses, but a total difference of $7 billion. That is the total 

of the $139 billion. 

As you know, Mr. Chairman, seniors can begin enrolling in the 

drug discount card by June of this year. We will add transparency 

to the prescription drug market by making available the price of 

drugs under each card. Competition among the cards will drive 

down drug prices, probably very significantly, as people compare 

the prices that each card offers for the drugs they typically take. 

So a senior citizen, let’s call her Mrs. Jones, can sit down with all 

of her prescriptions in front of her and call 1-800-Medicare. Our 

representatives will review with Mrs. Jones the discount cards in 

her area and tell her the exact price that she will pay for her prescriptions under each card. Mrs. Jones then can choose the card 

that will give her the best deal for the prescriptions that she is taking. If Mrs. Jones has a computer, she will be able to go to our 

website and get the exact same information. 

We are also currently reviewing the new benefit proposals which 

were submitted by health plans. It appears that more than half of 

current enrollees that are currently on the health plans will see 

better benefits and that almost one-half will see reduced premiums 

or out-of-pocket savings. The average premium may decrease by as 

much as a third. The bottom line is that the extra payments are 

providing more to beneficiaries, just as was intended by the Medicare Modernization Act. 

We look forward to working with Congress, the medical community, and all Americans as we implement the new Medicare law 

and carry out the initiatives that President Bush is proposing to 

build a healthier, safer, and stronger America. 

Thank you very much, Mr. Chairman. 

Chairman NICKLES. Secretary Thompson, thank you very much. 

I appreciate your going over the differences between CBO and CMS 

on the cost of that. Some people were aware that there was a significant difference. Others were not. Some were surprised. And so 

I was going to ask you to do that. I appreciate your doing that. 

139

Let me ask you a couple of quick questions. You mentioned the 

drug card is a new benefit, passed under the bill. That is going to 

begin in June? 

Secretary THOMPSON. That is correct. 

Chairman NICKLES. That is going to be provided for by private 

companies; is that correct? 

Secretary THOMPSON. That is correct. 

Chairman NICKLES. Is there interest from private companies? 

What is this looking like? Is it going to happen? 

Secretary THOMPSON. We were absolutely amazed. We thought 

there would probably be 40 to 50, possibly 60 applications. There 

are 106 applications. We have them, we are now reviewing them, 

and we will be making recommendations by March 23rd as to 

which ones of those we feel are going to meet the requirements set 

out by the law and also the requirements set out by CMS. And we 

will make those known. We will also start putting the information 

out so we can start enrolling in April and May, and we will also 

put on our website a comparison so that individuals across America 

will be able to really have the most up-to-date, accurate information, transparent information, on every drug that is being purchased. And this is going to help a senior pick the right card, and 

it should drive down the cost of drugs for seniors very much. 

Chairman NICKLES. So all seniors will be able to enroll in May 

and June? 

Secretary THOMPSON. That is correct. We want to kick it off on 

June 1st. 

Chairman NICKLES. By June 1st, so they would be able to enroll 

April and May? 

Secretary THOMPSON. We are going to start enrolling in May. 

Chairman NICKLES. OK. And then——

Secretary THOMPSON. I am trying to push that up, though. We 

are moving very rapidly, and we are hoping to actually get it out 

sooner. But that is what our intention is right now. 

Chairman NICKLES. Then will the various providers determine 

what kind of discount they will receive? And will all seniors receive 

the discount? 

Secretary THOMPSON. All the companies will be negotiating with 

the pharmaceutical companies and will be putting those discounts 

out to a formulary, and those formularies will be made available 

to every senior in America. We will be putting it on our website, 

and our representatives will have the most up-to-date information. 

And you will be able to compare the cards in your area. So if you 

are taking Lipitor, and if you have 15 cards in your area, you will 

be able to determine which individual issuer of that card is going 

to give you the best price for Lipitor. And so as with competition, 

it is going to drive down the market and give the best market to 

the seniors. 

Chairman NICKLES. And then low-income seniors have—the card 

also entitles them to a $600 benefit? 

Secretary THOMPSON. We are already working on that. We are 

working with Treasury and Social Security. We are meshing together the computer systems from Treasury, from the Social Security Department, and CMS, plus all the States. All those individual 

States that have individuals on Medicaid, we have to take in and 

140

go through all of those computer runs to find out who is eligible. 

Every senior that is under 135 percent of poverty is going to be 

able to get a credit of $600. 

Chairman NICKLES. OK. Then one final thing. A large part of the 

difference in the estimates between your Department, CMS actuaries, and CBO is the value of the low-income drug benefit, which 

I stated unsuccessfully during negotiations, was too generous. But 

would you give just a brief description of that? Am I correct in saying the low-income benefit, this would be for people with—I want 

to say 36 percent of Medicare beneficiaries, but people less than 

150 percent of poverty, and for those less than 100 percent of poverty, basically their copay is $1 and $3. Is that correct? 

Secretary THOMPSON. That is the only out-of-pocket expense they 

have to pay. The deductible will be waived. The doughnut hole is 

going to be waived and the copays, except for the $1 for generics 

and $3 for brand prescription drugs. That is all those under 100 

percent of poverty will have to pay. We believe that is going to be 

a subsidy of somewhere in the neighborhood of 95 percent to 97 

percent of those individuals under 100 percent. 

Those between 100 and 135 percent of poverty, the copay is the 

only thing they have to pay, and it will be $2 for generic drugs and 

$5 for brand prescription drugs. They will not have to pay a deductible, and they do not have the doughnut hole. 

The third one is those between 135 percent and 150 percent of 

poverty will have to pay a $50 deductible, and they will pay approximately 85 percent of the balance. And that is going to be a 

subsidy of somewhere around 75 to 80 to 85 percent. 

Chairman NICKLES. I am familiar with what you are saying 

when you say there is not a doughnut hole. But basically, for an 

audience——

Secretary THOMPSON. All those under 150 percent of poverty, 

there is no doughnut hole, no gap between 2,250 and 3,600 dollars, 

where those above 150 percent of poverty will have a gap in which 

they will have to pay 100 percent. All those below 150 percent of 

poverty, all that doughnut hole has been filled up completely. 

Chairman NICKLES. OK. Still, to get out of Washington 

vernacular and Washington discussion, those below 150 percent of 

poverty—and that would be for a couple—would be, what, about 

$20,000, $19,000? 

Secretary THOMPSON. It is approximately $22,000. 

Chairman NICKLES. Wherever that is, that sounds a little high. 

But at that point——

Secretary THOMPSON. That is the last—it would be about 

$14,000, 150 percent of poverty. 

Chairman NICKLES. I think it is pretty close to $19,000, is my 

guess. I was talking about couples, for two. 

Secretary THOMPSON. It is $20,000 for a couple. It will be 

$20,000 for a couple in 2006, Senator. 

Chairman NICKLES. So in the year 2006, for a couple that has 

less than——

Secretary THOMPSON. When it starts. 

Chairman NICKLES. Oh, that is correct. I was looking at the 2003 level. I think you are correct. It would be $22,000 by the year 2006 

when that is available. So for a couple with less income than that, 

141

they are on Medicare, they are on Social Security, they will basically have a drug program that they don’t even have to pay monthly premiums. For the most part, they would be paying their drug 

copay of maybe $2, $5, or $1 and $3. And that is all they pay with 

no limit. 

Secretary THOMPSON. That is correct. 

Chairman NICKLES. No limit. 

Secretary THOMPSON. That is correct. 

Chairman NICKLES. Not up just to the first $2,000, not up just to the first $5,000, but, frankly, no limit whatsoever. And that is 

a very generous benefit. You happen to score it higher than CBO 

does. I happen to guess that you are going to be more correct. I 

think utilization will go up substantially when people realize that 

is a very, very generous proposal. 

Secretary THOMPSON. It is. 

Chairman NICKLES. I am a little concerned maybe it is too generous, but I did not prevail. I tried but I did not prevail. 

Senator Conrad. 

Senator CONRAD. Mr. Chairman, could we put up this chart that 

you put up? 

Chairman NICKLES. Yes. Don’t take apart my chart. 

Senator CONRAD. Well, I have to take apart your chart a little 

bit. 

The chairman put up this chart, and the issue that I take with 

this chart is what it has done is it has lumped Medicare and Social 

Security together as though they are one program. They are not 

one program. They are two separate programs. 

There is no question, if you look at Social Security alone, that Social Security surplus funds every year for the next 10 years are 

being taken to pay for other things, $2.4 trillion worth, something 

the President pledged not to do. And it is being done. And nobody 

here can say whether that money is going to pay for Medicare or 

tax cuts or parks or recreation or any other part of the Federal 

budget. 

What we do know absolutely is every penny of Social Security 

Trust Fund surplus—and I want to make sure that people understand. When I use the word ‘‘surplus,’’ it is not because it is more 

money than you need. It is more money than you need right now. 

But it is money we are going to need when the baby boomers retire, and they are going to start retiring in 2008. And this is right 

at the heart of what is wrong with the President’s budget in my 

judgment. 

The fact is Medicare has been funded in part by payroll taxes. 

This chart assumes it is all payroll taxes. Medicare has also been 

funded in part by general fund. That has been the way Medicare 

has been funded since its inception. 

So I do not want to leave the impression that somehow Social Security money is being taken just to pay for Medicare. Nobody can 

tell you what the Social Security money is being used for, except 

we know it is not being used for paying down the debt or prepaying 

the liability. I think those would have been appropriate uses. 

With respect to budgets that I have submitted, after the hole 

that has been dug, there is no way in the short term to write a 

budget that does not continue this practice. But I have submitted 

142

budgets that would use at least $1.2 trillion less of Social Security 

funds for other purposes, and as much as $1.6 trillion left, depending on our defense needs. 

So I do not want to leave the impression that Social Security 

money is not being taken for other purposes. It is, and it is going 

to be taken to the tune of $2.4 trillion. I think that is a profound 

mistake. 

Mr. Secretary, I want to turn to this ad campaign because, I 

must say, I find it very troubling. I supported that bill. I thought 

it was the right thing to do. But I do not think it is the right thing 

to do to run an ad campaign extolling its virtues using taxpayer 

money to run, in effect, a political campaign. And I was especially 

disturbed to find out that the firm that has been hired is also doing 

work for the President’s re-election campaign. 

You know, I do not think taxpayer money should be used to promote a political agenda. I do not think taxpayer money ought to be 

used to, in essence, propagandize taxpayers about the merits of a 

program. I mean, I could not use and would not use my Senate 

budget to go out and run a campaign telling people about how good 

my voting record is. That would be illegal. And I believe it should 

be illegal for taxpayer funds to be used to sell a position on an 

issue. I just think that is totally inappropriate. I suspect it is illegal. 

And I want to ask the Secretary: Do you intend to continue with 

this campaign? Or would you consider ending this campaign in respect to those who believe it is just inappropriate? 

Secretary THOMPSON. Senator, let me correct some impressions 

that I think are erroneous. 

First off, the Medicare bill requires me to do certain things. The 

conferees expect—and this is direct language out of the report. The 

conferees expect, in carrying out the annual dissemination of information requirements, that the Secretary will conduct a significant 

public information campaign to educate beneficiaries about the new 

Medicare drug benefit to ensure the broad dissemination of accurate and timely information. 

Second, we put out an RFP in 2003 in order to find out—in 2003, 

in order to find the best person and the best group to do our ad 

programs for Medicare, in 2003, 2004, and that is what we did. 

Senator CONRAD. Who is doing the ads? 

Secretary THOMPSON. Ketchum Public Relations, since 2003, is 

still doing them. The chief executive of Ketchum Public Relations 

is Chuck Dolan, who is part of the team. They are the overall contractor, and Mr. Chuck Dolan is a financial supporter of John 

Kerry and is one of his biggest supporters. John Kerry. He is the 

chief—that is the chief person. They put together the subcontractors. The subcontractors are Campbell Ewald. They did the creative 

work. They are out of Detroit. They have done all of our ads since 

2001. And Ketchum Public Relations, who won the RFP in 2003, 

kept them on. They do the creative work. National Media, which 

is the one you are talking about, are the subcontractors. They have 

been purchasing for CMS since 2001. Ketchum Public Relations 

kept National Media because they worked together. 

Senator CONRAD. Is National Media doing the President’s campaign or part of the President’s campaign? 

143

Secretary THOMPSON. I understand that they are, but they have 

been doing work at CMS since 2001, and they were retained by 

Ketchum Public Relations, who won the contract, and I am telling 

you that. And then they——

Senator CONRAD. But do you know how bad that looks, honestly? 

I mean, I am being very direct with you. I have great respect for 

you. I tell you, that really looks bad. And I think it more than looks 

bad. I think it is bad for a campaign to be run with taxpayer 

money to promote a program that has enormous political implications and to use as a major part of that campaign a firm that is 

helping to run the President’s re-election campaign. 

Secretary THOMPSON. If I could just finish. National Media is not 

doing the creative work. All they are doing is purchasing it. And 

they were hired by Ketchum Public Relations, and one of the chief 

individuals happens to be Chuck Dolan, who is a Democrat who is 

supporting John Kerry. 

Senator CONRAD. Well, I am for taking the money away from 

both of them. I tell you——

Secretary THOMPSON. Some Republicans are saying that, you 

know, we are wrong for having Chuck Dolan do it, I am sure. 

But——

Senator CONRAD. Well, let me join them. I think you are wrong 

doing it at all. I think we ought to stop this. I think we ought to 

stop using public money, taxpayer money, to run what has all the 

earmarks of a political campaign. I have read the—and I have it 

here, the TV ad script. I must say, I saw this TV ad. I never knew 

about this campaign until I saw the television ad. And it reads like 

a political ad. It is just inappropriate to use public money to do 

that. And if you guys are not going to stop it, then I am going to 

introduce legislation to make it illegal to do it, because it is not 

right. It would not be right if a Democratic administration were 

doing it, and it is not right with this administration doing it. 

Secretary THOMPSON. Senator, I would like to be able to respond. 

I do not want to argue with you. I understand your concerns. I am 

telling you, the law requires me to put out information. In 

1996——

Senator CONRAD. Well, wait a minute. The law does not require 

to run——

Secretary THOMPSON. Well, let me finish——

Senator CONRAD. No, let me just say, the law does not require 

to run television spots that read like political spots. Now, the law 

does not require that. 

Secretary THOMPSON. In 1996, the Democrat administration put 

out a 30-page bulletin——

Senator CONRAD. Did they run television ads that are television 

spots? 

Secretary THOMPSON. They did not, but they——

Senator CONRAD. I tell you, I do not argue with putting out written material like that. That is fine. This has all the earmarks of 

a political campaign, and it is not right. 

Secretary THOMPSON. Well, GAO, as I understand it, is going to 

review it, and if they say that it is political, it will be pulled immediately. Maybe for the GAO——

144

Senator CONRAD. I would not wait for somebody else to tell me 

it is political. I can see it is political——

Secretary THOMPSON. I do not think it is political. 

Senator CONRAD. Well, I do, and I tell you something——

Secretary THOMPSON. That is a difference of opinion, Senator. 

Senator CONRAD [continuing]. If you guys—well, I tell you, I have 

been in a lot of political campaigns, as have you——

Secretary THOMPSON. And so have I. 

Senator CONRAD. This reads like a political spot. 

Secretary THOMPSON. Well, I am sorry to tell you, I do not believe it is political at all, and that is a difference of opinion. I did 

not put it out. Creative people did on a contract basis. It was reviewed by a lot of different people. They came back, and we are obligated, I think, under the law to do as much information as possible. 

Senator CONRAD. Well——

Secretary THOMPSON. And I am sorry that you feel that it is political. I do not believe it is. 

Senator CONRAD. I not only——

Secretary THOMPSON. And I do not believe that Chuck Dolan 

would put out a political statement when he is in charge of the responsibility of putting out the ad. 

Senator CONRAD. Well, he is under contract to do something. 

Look, there is nothing in the law that requires you to run what 

are, in effect—look just like a political spot to me and have hired, 

whether it is a subcontractor or the contractor, people who are 

helping run the President’s campaign. 

Now, goodness, if that does not smack of inappropriate use of 

taxpayer money, I do not know what would. 

Secretary THOMPSON. I am absolutely sorry that you feel that 

way. This was a contract that was put out in 2003, a long time before the election ever started, the one that——

Senator CONRAD. Well, but it is for the election period. We are 

in an election period right now, and these ads are running now, 

and these ads are equivalent to political ads in my judgment. And 

now it goes even further. The people who are helping do it are involved in the re-election campaign of the President. That is wrong. 

It is inappropriate and it ought to stop. And I am going to offer legislation to make it illegal to do so under whatever administration. 

I tell you, it would be wrong if a Democratic administration were 

doing it. It is wrong for this administration to be doing it. 

Chairman NICKLES. Senator Conrad, thank you very much. The 

statute, just looking at it, doesn’t say whether it should be TV or 

not. It just says, ‘‘The Secretary shall provide for activities under 

this subsection to broadly disseminate information to discount card 

eligible individuals and prospective individuals regarding enrollment.’’

I mention, one of the reasons why my opening comments on the 

card and the low-income benefit, one, because a lot of people are 

not aware of the fact this card is a benefit that is coming in a couple months. And so I want to get that information out. I was using 

the hearing to do it. 

But this is a benefit that is going to be available to 40 million 

Americans, and a lot of them are not aware of it. And so we have 

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to get it out. This did not say what method, and obviously you are 

certainly entitled to your opinion. You are entitled to your right to 

offer amendments. 

Next we have Senator Enzi. 

Senator ENZI. Thank you, Mr. Chairman, for having this hearing 

and, Mr. Secretary, for coming. I have had my curiosity piqued a 

little bit. Are you just using television for the ads or are the other 

media being used as well? 

Secretary THOMPSON. We are sending out a mailer. We are putting out other information. We are putting it out in other languages so that we get to other communities that do not have 

English as the first language. And we have set up programs with 

the Aging Commission called SHIPs, and we are doubling the number of individuals in SHIPs, which two-thirds of those come from 

the Commission on Aging, which are going out and helping individuals in their own homes or in senior centers to pick the best card. 

We are forming an organization with 28 different associations 

that have been over to meet with me that are going to be using 

their organizational strength, including AARP who was one of 

those, to get the information out to seniors all across America. So 

we are hitting this with a whole plethora of different groups, different ways to contact seniors to tell them about the Medicare 

changes as well as the new drug card that is coming. 

Senator ENZI. So I anticipate then that the expenditures are approximately in proportion to where people get their information, 

and probably a large amount of seniors get theirs from television. 

Secretary THOMPSON. That is true, and actually we are spending 

more on mailers than we are on television. 

Senator ENZI. Thank you. I appreciate the job that is being done 

on that. I think that it is important for seniors to get information 

about what this program is. I know that there are a lot of misconceptions out there; probably many of them came from our debate. 

Secretary THOMPSON. That is true. 

Senator ENZI. And the debates where we argue about the 20 percent that we are never going to agree on, and there is some confusion out there, so I appreciate your taking some efforts on that. 

Along those lines, I guess, on the new Medicare prescription drug 

law, there is $1 billion for spending to startup the administrative 

costs. And I was kind of curious. I assume—we have already talked 

a little bit about how those are being spent, what those are being 

spent for, but I am just as curious as to why that has been decided 

to be counted as discretionary spending instead of mandatory 

spending. 

Secretary THOMPSON. It always has been the tradition that administrative costs have been on the discretionary side of the budget. The $1 billion is—we had requested more because we believe 

this is going to be a huge, monumental thing. 

Our computers systems, I just would like to point this out. Some 

of our software is older than the technicians that are hired to 

maintain it. We have software that is running some of the Medicare program that is over 30 years old, and from your vast experience before you became a Senator, you know how difficult it is to 

146

run a large company—and this is the largest insurance company in 

the world, 42 million subscribers—with 30-year-old software. 

So we have to upgrade our computers. We also have to collaborate with the computers with Treasury, with the State Medicaid 

programs, and with Social Security in order to find out the low-income recipients. 

We are also taking over the Medicaid program as far as drugs 

are concerned. It is a huge undertaking. And so we also have to 

get people, contractors and vendors, involved. And it is going to be 

a tremendous undertaking by the Department in order to implement all the provisions of the bill and make sure that it is up and 

running on January 1, 2006, for the drug portion. But before that, 

in 2005, we have to set up the programs for the free induction 

physical for those people that are coming in, which I think is 

maybe the most important part of the Medicare bill, as far as prevention is concerned and managing diseases. And then we have to 

have the card up and running by June 1st of this year. 

A huge undertaking from my Department, and that is where the 

bulk of the $1 billion is going to go, for staffing, for computers, for 

contracting out, for getting all the computers to run successfully 

and be able to intermingle and have interoperability. 

Senator ENZI. I appreciate that. Could you provide me with a 

breakdown of——

Secretary THOMPSON. Absolutely. But we have not——

Senator ENZI [continuing]. Anticipated and also the additional 

needs that you mentioned? 

Secretary THOMPSON. Thank you very much. The computer system is really—when I came in, we had over 200 different computer 

systems in the Department. And now we are trying to get it down 

to one computer system. 

Senator ENZI. I appreciate that. It sounds like you are doing 

some good management there. 

Now, one other, what I hope will be a quick question. In rural 

places like Wyoming, the choices in health service providers are 

limited. On Indian reservations, the health service selection is even 

more limited, and they have to contract off the reservation sometimes in order to have, particularly for emergency purposes, health 

care for those on the reservation. And despite this common use of 

contract health services at both hospitals, IHS does not always adequately or evenly supply doctors in those areas. So it is my understanding the problem is both fiscal and administrative. 

I am pleased that the HHS budget begins to address this fiscal 

problem, increasing the contract health services by $18 million. But 

I am wondering whether or not IHS plans to review the management policies of doctors to ensure that the Native Americans have 

equal access to quality care hospitals serving large populations. 

Secretary THOMPSON. We are reviewing all of the Indian Health 

Service programs and projects, and one of the biggest problems we 

have is being able to get enough medical personnel to be able to 

go to areas that are hard to get individuals to go into. Indian reservations in some areas of the country have a real serious problem 

of getting the proper medical people there, and we are expanding 

the National Health Service Corps so that we can get more people, 

147

use the service portion and get more doctors and nurses to go to 

Indian reservations throughout. 

This is a high priority of the Indian Health Service, and especially a high priority of mine because I travel to a lot of Indian reservations, see the tremendous need. I go every year to Alaska and 

tour the Alaskan settlements up there, and I know the tremendous 

problem we have of getting proper medical treatment but, more importantly, proper medical personnel to these underserved area. 

Senator ENZI. Thank you very much. My time is up. 

Chairman NICKLES. Senator Enzi, thank you very much. 

Senator Wyden. 

Senator WYDEN. Mr. Chairman, just a clarification. These are 10-

minute rounds? 

Chairman NICKLES. I have asked people to try and limit it to 5 

or 6 minutes, 7 minutes, but I have not been strict in enforcement. 

Senator WYDEN. OK. Mr. Secretary, Senator Snowe and I have 

introduced the first bipartisan effort to try to address some of the 

concerns in the prescription drug bill. Our legislation, for example, 

does exactly what AARP has called for. You just invoked them. The 

Snowe-Wyden legislation makes sure that the Department has adequate authority to negotiate to try to get the best deal on prices 

for seniors, and addresses the reimportation issue. 

I am not going to ask you to address the merits of this bill and 

to announce your position on it, but I would like your views on one 

key point. Given the fact that we have these two projections out 

there with respect to the cost of the bill, the CBO appraisal and 

your actuaries’ appraisal, wouldn’t it make sense to try to work immediately to get the maximum amount of cost containment that we 

can so as to not hit that $530 billion-plus level or possibly exceed 

it? In other words, I think there was a good case for the SnoweWyden bill a month ago, but I think there is an even better case 

today. So I would like your views on the question of: Wouldn’t it 

make sense to work right now to try to push additional cost containment so as to not hit that $534 billion spending level? 

Secretary THOMPSON. Without a doubt. I think every one of us, 

Democrats, Independents, Republicans, have to take a look at how 

we are going to be able to contain the expenditures. I was very impressed by both Senator Conrad’s and Senator Nickles’ charts. I 

happen to be a trustee of both Social Security and Medicare. I am 

very concerned about that, and I will work with you and Senator 

Snowe. 

I also know that your proposal has something to do with discrimination in regards to pricing. I think this is something that we 

should look at, and I will be more than happy to work with you, 

as I have on many different occasions, Senator Wyden, in any way 

I possibly can to further the cost containments. 

I appreciate your offer, and I will reciprocate whatever way possible that I can make it work. 

Senator WYDEN. Well, that is very constructive, Mr. Secretary. I 

did not want to get you into the specific provisions of the bill, but 

to know that you are on record as being interested in trying to get 

additional cost containment so we do not hit that $534 billion level 

is helpful. 

148

I would also like, just with respect to the policy aspects of it, for 

you to state your current position on the reimportation of medicines that are safe. As you know, there is considerable debate with 

respect to where FDA is on this now. I will tell you, as somebody 

who has tried to specialize in health over the years, I am very troubled by the evidence that indicates that FDA cannot find cases indicating problems with health and safety consequences with respect to reimportation, and at the same time we have thousands 

of cases out there of people who have suffered as a result of adverse reactions on medicines. 

So could you tell us your current views with respect to reimportation? It is part of our legislation, but I am more interested 

in your policy position on it as of today? 

Secretary THOMPSON. The law requires me to certify that the 

drugs coming in from another country are safe. This is a hurdle 

that I cannot meet because I cannot certify that they are safe, because by immediately certifying that drugs from other places that 

are not supervised or regulated by FDA are safe puts the Federal 

Government in complete financial responsibility for liability if they 

are not safe. 

We had two actions that were taken by FDA, Senator Wyden. 

The first was in Miami and New York between July 29th and 31st 

in 2003, and in San Francisco and Carson, California, from August 

5th to the 7th. During those 3-days, approximately 100 parcels per 

day that were suspected of containing drugs were pulled, and out 

of those, about 85 percent were found to be mislabeled, were counterfeit, and had other safety problems. 

The second action was conducted in the same manner as the first 

in November in Buffalo, Dallas, Chicago, and Seattle. The first one 

had 1,153 imported products to examine; 1,019, or 88 percent, were 

unapproved prescription drugs. The remain 12 percent represented 

dietary supplements and other products. The drugs were from the 

following countries: Canada, India, Thailand, Philippines, and the 

remaining from other countries. 

On the second stop, out of the 1,982 parcels, 1,728, or 85 percent, 

of unapproved drugs were found. So both of them were in the high 

80’s. Both actions were taken with interdiction of drugs coming in 

which were mislabeled. That doesn’t mean that they were wrong. 

They were just mislabeled, mispackaged. Several were counterfeit. 

And, therefore, based upon that information, I cannot certify that 

drugs coming into America are safe. 

Senator WYDEN. I just hope you will stay at this question, Mr. 

Secretary, because I have been in a number of hearings where the 

FDA literally cannot give any cases that document injury, and you 

juxtapose that by the thousands and thousands that have been injured that have been documented. I hope that you will stay at it. 

A couple of other areas I do want to get into. As you and I have 

talked about before, the country is headed for a demographic tsunami. We have millions of baby boomers retiring, and the health 

care system is completely unprepared for this. 

Secretary THOMPSON. It is. 

Senator WYDEN. We are completely unprepared for what is coming in 2010 and 2011. Senator Hatch and I have been able to win 

passage of the Health Care That Works for All Americans Act, legVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00154 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
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islation that would give us a chance to have a plan to get those 

people covered, to get everybody under the tent for the basic affordable health care services, and to do it in a responsible way, building on the kinds of things that we have done in Oregon and that 

Wisconsin and other States have done. 

What is your position on that? Obviously, we are going to be trying to get the appropriation this year. Senator Byrd has been enormously helpful on this, and I am so glad that he is here. I would 

like to just have you state for the record your assessment of this 

bill that Senator Hatch and I have written that has been passed. 

Secretary THOMPSON. My reaction is that anything we can do to 

move health policy and health insurance to forefront and get more 

people involved is a net plus. Your commission idea is a positive 

one. It is going to allow for a commission. The only question I had 

is all of the commissioners have to become employees of the Senate, 

and I am one of those that are designated. And it is going to be 

funded by the Senate Appropriations. I don’t know. So I think 

there has got to be some interpretations done in order for me to 

qualify to be on the commission. 

I think it is a giant step forward. I think that there are other 

ways that we can approach it. But anything we can do to get more 

people involved in talking about how we solve the health insurance 

problems in America, I am all for it. 

Senator WYDEN. We will work with you on that. It is a per diem 

arrangement, Mr. Secretary, and, of course, we very much want 

your involvement in it. It just seems to me that we have tried the 

same thing now, literally going back to Harry Truman in 1941, in 

terms of trying to get everybody covered. You write these bills in 

Washington, D.C. The American people find them incomprehensible. The interest groups attack it, and it all falls apart. What 

Senator Hatch and I have done is essentially say let’s go 180 degrees the other way. Let’s get the American people involved early 

on in terms of some of the difficult kinds of choices and then force 

congressional action. 

So we will work with you to make sure that it is clear on that 

point that you appropriately raise, that this is per diem for these 

kind of people, and it is not all——

Secretary THOMPSON. The idea, the concept is great. I think just 

the mechanics have to be worked out a little bit. 

Senator WYDEN. I appreciate that. One last question, if I might, 

Mr. Secretary. As you know, Senator Smith and I have been very 

concerned about Oregon’s TANF waiver, the Temporary Assistance 

to Needy Families, and we have a situation where States like ours 

are performing particularly well, and you have—and we have 

talked about it—often been a champion of this question of making 

sure that the States have the flexibility so that what you do in Oregon is not necessarily what you do in Tallahassee or what you do 

in the Bronx. And we would just like to—and I ask this on behalf 

of Senator Smith and myself, because we have both been very interested in it, what you can do to help us nail down that waiver 

and get the Oregon program protected. 

Secretary THOMPSON. Let me respond, because we have worked 

very closely with Oregon, as you know. When the TANF bill expired, it took away my authority to grant any waivers in this area 

150

whatsoever. So my waiver authority expired with the termination 

of the TANF law. So I have no authority to do that. 

Second, we have examined—we have worked with Oregon, in 

fact, I think we worked with them this past week. 

Third, we have examined Oregon’s law. We think you have a 

good law. We want it to continue. We want it to have as much 

flexibility as possible. We are under the impression, in looking at 

it through our professionals, Senator Wyden, that Oregon has nothing to fear whatsoever, that Oregon’s all-family participation rate, 

if the finance bill was passed, would be over 60 percent and would 

qualify, more than quality for all of the requirements under it, and 

TANF in Oregon, Oregon-style, would be able to continue, with or 

without the waiver. 

Senator WYDEN. We will work with you on that, Mr. Secretary, 

and you will also be getting an effort from the State to deal with 

the Oregon Health Plan. As you know, because of our difficult economy, we are trying to figure out how to make the best use of those 

resources, and given the State budget situation, they are going to 

have to turn this around in sort of land-speed record time. And if 

Senator Smith and I could work with you on both the TANF waiver 

and the Oregon Health Plan——

Secretary THOMPSON. The door is always open for you, Senator 

Wyden. 

Senator WYDEN. Next time we have a chance to visit and I have 

given you more time to prepare, we will talk more about the specifics of the Snowe-Wyden legislation on prescription drugs. 

Secretary THOMPSON. Thank you. 

Senator WYDEN. But both of the principles embodied in this—and 

we are two, as you know, who voted for the legislation—would 

allow you to keep in place the basic configuration of the legislation. 

Both policies have been endorsed by AARP. I am hopeful that we 

can win additional support for it in the administration, and given 

these projections that you lay out—we are going to need every cost 

containment tool that we can use. As of now, the fact is the Medicare program faces a statutory bar to going to bat for the beneficiaries that the Federal Employee Plan doesn’t face when you are 

going to bat for Members of Congress. Just having come off the 

town hall meeting circuit at home, that just doesn’t pass the smell 

test. And I want to work with you on that. 

Secretary THOMPSON. Thank you. 

Senator WYDEN. Thank you for your cooperation. 

Secretary THOMPSON. Thank you very much, Senator Wyden. 

Senator CONRAD [presiding]. Mr. Secretary, we have a vote on, 

just a few minutes left, so I am going to have to leave momentarily. 

We are trying to make it so that Senator Nickles can be back in 

time so the hearing can continue. 

Secretary THOMPSON. Good. 

Senator CONRAD. Let me just go back to what I was asking you 

about before. I have now been told that some 70 members of the 

House and Senate have written to you to ask that you suspend this 

Medicare campaign until the GAO determines whether or not it is 

an illegal use of taxpayer money. Would you be willing to suspend 

the campaign until GAO determines whether it is illegal? 

151

Secretary THOMPSON. I will consider it, but I am not going to 

make a commitment at this point in time. I just heard about the 

individuals that have written to me. I would like to see what they 

have to say. I know your concerns. I differ with you, Senator 

Conrad, but as you know, I try to be bipartisan, I try to reach 

across. I will take your complaints, and I will go back to the office 

and review it again, and I will get back to you with a definite answer. 

Senator CONRAD. I would appreciate that. And I say to you, I 

think it would be wrong if the other party were doing it. If my 

party were doing it, I think it would be wrong. I just think it is 

wrong. I think this way lies a lot of grief if we start going down 

this trail. 

Let me turn to another issue, and that is in CBO’s letter to us, 

Chairman Nickles and the Committee, with respect to the differences in the estimates, one of the major differences, $32 billion, 

is that CMS assumes higher participation in Medicare Advantage, 

32 percent versus 9 percent in the CBO estimate in low density, 

low cost areas where payments to these plans would be much higher than the cost of traditional Medicare. The whole idea of Medicare Advantage is that it is going to save money. How can it be 

that your actuaries are telling us that these plans cost more than 

traditional Medicare? 

Secretary THOMPSON. Because our actuaries and the proposal 

that we had advanced limited, Senator Conrad, the bids to the lowest three bidders. 

Senator CONRAD. Say that again for me. You would have? 

Secretary THOMPSON. We requested that the Medicare Advantage, the bidders, would be limited to the three lowest bids. 

Senator CONRAD. OK. 

Secretary THOMPSON. The conferees said no, and they said if we 

are going to go this way, it has to be expanded to anybody that 

wants to bid. By having the three lowest bids, you would force the 

marketplace to come in with the lowest bids. Our actuaries at that 

time projected they would be at 98 percent, but if you took——

Senator CONRAD. 98 percent? 

Secretary THOMPSON. Of fee for service. 

Senator CONRAD. So the cost of Medicare Advantage would be 98 

percent of traditional fee for service? 

Secretary THOMPSON. That is correct. 

Senator CONRAD. OK. 

Secretary THOMPSON. But when they took off the cap, our actuaries projected that that would go to 105 percent as an average. 

Senator CONRAD. And the reason for that is, because, frankly, I 

think given the fact we have now had this dramatic change in the 

estimate from $400 billion of cost to $530 billion in just a few 

months, that we have to go back in and figure out how we can save 

some money here. Maybe this is one place we could save some 

money. 

You had taken the position before that we ought to restrict access to the three lowest bidders. Is that the basic concept? 

Secretary THOMPSON. That is correct. 

Senator CONRAD. Does the lowest bidder always win or not? 

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Secretary THOMPSON. The three lowest bidders would always 

win. 

Senator CONRAD. Under that scenario the three lowest bidders 

would win. And under this scenario somebody that is not among 

the three lowest bidders could win? 

Secretary THOMPSON. Everybody will be eligible, anybody that 

bids. 

Senator CONRAD. Anybody that bids can be in even if they are 

much higher than the three lowest bidders? 

Secretary THOMPSON. That is correct, and that is why our actuaries say if anybody can be in, there is no reason to sharpen your 

pencil and be below. 

Senator CONRAD. That is really—why did they do that? 

Secretary THOMPSON. Well, that was an argument we made in 

the—I made the argument, so I lost, I lost——

Senator CONRAD. Can you tell us what the argument was on the 

other side for doing it the other way? I find it hard to understand 

what their rationale was. 

Secretary THOMPSON. Senator Nickles I think was the only person in that conference——

Senator CONRAD. That agreed with you. 

Secretary THOMPSON. That agreed with me. 

Senator CONRAD. Do you think we should at least reopen the bill 

for the purpose of revisiting at least that item? Frankly, I think we 

have to revisit other items too. We went from $400 billion to $530 

billion in 3 months. 

Secretary THOMPSON. We want to get the bill up and running. 

We are fearful that opening it up is just going to delay the implementation of it. I understand your arguments, and I think they are 

sound, Senator Conrad. The argument on the other side, you asked 

what it was. They said that this is a competitive model. Let us 

allow competition to work. So let us let anybody that wants to bid, 

bid. 

Senator CONRAD. But your actuaries say by not restricting it to 

the lowest bidders, just saying open sesame, everybody can participate, the marketplace will give us higher cost than traditional 

Medicare. That makes absolutely no sense. 

Secretary THOMPSON. That is not the motive to keep the prices 

down. 

Senator CONRAD. Certainly. Let me ask you on another issue if 

I can. This $65 billion that is in the President’s budget, I know you 

were Governor of a State for a long time, Governor of Wisconsin. 

You had a very distinguished record there. You led reform of welfare. You were more fiscally responsible as a Governor. You are 

close to being a neighbor, so I have followed what you did there. 

I find it very troubling that the President’s budget says we are 

going to have $65 billion for health care credit, but then provides 

no money for it. I do not think you budgeted that way when you 

were Governor. 

Secretary THOMPSON. There are a lot of things, Senator, that I 

have found different in the Federal budgeting process than what 

we were able to do. I still find it somewhat hard to believe that you 

do not have amortization accounts, you do not have capital accounts. 

153

Senator CONRAD. I will tell you, you know I come from a financial background, and I must say, when I first came here, and to 

this day, the way the Federal Government accounts for things 

makes no earthly sense, and I think it fundamentally misleads people. 

Secretary THOMPSON. It does. 

Senator CONRAD. And I think it even misleads our colleagues. 

That is why I think the Social Security reference I was making earlier is so important. We talk about surplus. There are no surpluses. 

We need that money when the baby-boomers retire. I think the 

misuse of language confuses people. 

I am going to go vote. 

Chairman NICKLES [presiding]. Senator Conrad, thank you very 

much for chairing. They are holding the vote for you, and I am sure 

they will. 

Senator MURRAY. 

Senator MURRAY. Mr. Chairman, thank you very much. 

And thank you, Mr. Secretary, for being here today to talk about 

the HHS budget for this year. You oversee an agency that impacts 

all of us, and I know it has a tremendous impact on a lot of people 

across this country, so I appreciate the job you do. 

I am concerned about a number of issues in the budget, some of 

the proposed cuts in CDC and the Community Access Program, 

which I think is really critical. I am concerned about the FDA, particularly in light of the mad cow disease that surfaced in my home 

State, and I want to ask you about that, and a number of things. 

But before I do that, I do want to ask you, since you are here 

today, about a story that is out today that I find extremely troubling, and that is the announced efforts by Attorney General 

Ashcroft and the Department of Justice to subpoena private medical records of doctors and hospitals who are currently challenging 

the Federal Partial Birth Abortion Ban. It is reported in the New 

York Times today and a number of outlets that the Department of 

Justice is demanding that at least six hospitals in New York City, 

Philadelphia and elsewhere turn over hundreds of patient medical 

records on certain abortions that are performed there, and it does 

not appear that the Department of Justice has made any distinction between different procedures. They are simply demanding private medical records of women who have no idea that their identities would be turned over to Attorney General Ashcroft. 

Mr. Secretary, I find this kind of intimidation very, very troubling, and I also believe that it is a clear violation of the intent of 

HIPAA, which you oversee in your division. I know there are some 

exceptions in HIPAA, but clearly, releasing private medical information to the Department of Justice about any reproductive health 

procedure just is not acceptable. 

Has the Department of Justice asked for any opinion of your office since HHS was the lead agency on implementing and enforcing 

HIPAA standards, on this action? 

Secretary THOMPSON. To the best of my knowledge, no. I was not 

contacted. This is the first time I have heard about it, Senator 

Murray. 

Senator MURRAY. I find that troubling as well since it is your office that oversees the Health Information Privacy Act. 

154

Secretary THOMPSON. That is correct. 

Senator MURRAY. It would seem to me that it would be extremely 

important that they get an opinion from you. Since they have not, 

then I would ask you to give this Committee an opinion, and simply ask you the question: are women who seek abortions or reproductive health care denied protections under HIPAA, and can doctors be compelled to release this kind of information at the request 

of the administration? 

Secretary THOMPSON. Why don’t you send me these questions 

and I will get back to you. The Department of Justice could have 

contacted our General Counsel or could have contacted some of our 

legal staff. I do not know, but this is the first time this issue has 

come to my attention, Senator. 

Senator MURRAY. I will give that to you in writing, but I think 

it is extremely critical that we get an answer from your agency as 

quickly as possible since you do oversee HIPAA. I, like many 

women, are very, very troubled that someone can go to a doctor 

and completely, unbeknownst to them, have their records subpoenaed by the Department of Justice over an action they have nothing to do with, and clearly, prying through medical records or second guessing doctors’ advice to their patients is the kind of Government intrusion that many Americans are very, very troubled by. 

Since you oversee HIPAA, I would really request that you do it and 

do it expeditiously because I think the question needs to be answered. 

If it is that the DOJ can go on a fishing expedition to hospitals 

and doctors and seek medical records, I think we have an obligation to make sure that the privacy acts that we have worked so 

hard on protect their rights. I certainly think any woman or anybody who has a daughter or anybody who may have sought health 

care protections or decisions that are very, very private and part 

of their own family and their own religious decisions, should not be 

worried that this Department of Justice can ask for their records. 

So I would ask that you expeditiously get a response back and tell 

us what HIPAA will allow under that. 

I would hope, really, that DOJ take a quick second thought here 

and realizes they should have sought your opinion before going on 

this expedition as well. 

Secretary THOMPSON. Thank you. 

Senator MURRAY. Thank you. I will ask you also a question about 

the prescription drug bill, but I hope you can get that back to us 

because I am deeply troubled. I think many, many people are by 

that. 

On the prescription drug bill, you are going to be tasked with determining different regions of the country, and as you know, under 

that bill, the country’s going to be divided up into as many as 50 

regions. PPOs will be offered within these regions, HMOs within 

the entire State, and the products that these PPOs and HMOs offer 

will really determine the kind of access that seniors will have to 

qualify affordable prescription drug coverage. 

As we experienced in my home State and others with the Medicare Plus Choice program, senior can be facing a new Medicare 

program every year, and many seniors within a State do not have 

access to those choices. That was the experience we had under 

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Medicare Plus Choice. In fact, in Washington State we had two 

very different Medicare options for seniors, and every year there 

were changes to the plan. Some increased premiums, reduced coverage, limited coverage, or even closed for new enrollees. 

So I am really concerned as we move forward on this that my 

State could be divided up into more than on region or even two regions with a fall-back region. That would mean that access to coverage would depend on where you lived for the first time in the history of Medicare and could force health care providers to compete 

for preferred provider status. 

I would like to know from you what efforts you are going to undertake to ensure that stability within a State and with States will 

be there, and whether you know States like Washington, that are 

large and diverse, will see a number of different regions that could 

mean different choices for different seniors who live within the 

same State? 

Secretary THOMPSON. As you can well imagine, we have not been 

able to get to that particular portion of the law because our attention had to go to the drug card first and to get that up and running. We are looking at all of the provisions. 

I would like to point out that there is a tremendous, enthusiasm 

for the new Medicare Modernization Act. There are people that 

were on Medicare Plus Choice and are now coming back into it. 

You are going to see a lot more plans coming to the forefront. You 

are going to see a reduction in copays. You are going to see enhanced benefits, and you are going to see a lot more people in the 

market. 

In regards to the State of Washington, I cannot imagine any scenario, just listening to you, Senator Murray, in which you would 

divide the State of Washington up into more than one region. I 

suppose it is possible, but I do not know any reason why you would 

do that. The law says we have to have a minimum of 10 regions 

up to a maximum of 50. We are looking at the potential of around 

15, but in all of the regions that we have even speculated on, 

States are held together, and every State is held together in a region. I cannot imagine any way in which we would divide it up at 

this particular point in time unless it might be a huge city that 

would be overlapping into another region. But I cannot imagine 

that would take place in the State of Washington. 

Senator MURRAY. As you know, we have regions like Portland, 

Oregon that is right across the border from a——

Secretary THOMPSON. Yes, but I would think that Washington 

and Oregon would probably be in the same region. 

Senator MURRAY. We will be following this very carefully because——

Secretary THOMPSON. Listen, before we make final decisions—

this is going to be a very controversial as to how the States are 

placed in the regions. I will be working with everybody on a bipartisan basis as long as I am Secretary. 

Senator MURRAY. All right. Let me ask you quickly then about 

mad cow because I know you are working with FDA to address a 

lot of the issues of the gaps in safety, and FDA has moved forward 

on a number of initiatives to deal with this. 

Secretary THOMPSON. Yes, we have. 

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Senator MURRAY. As a member of this Committee and the Health 

Committee, I am really concerned that FDA may need some kind 

of legislative authority to continue to move forward, and I wanted 

to ask you if you felt that that would be necessary, or is there anything more we should be doing to providing you the authority you 

need to provide the protections that are citizens are looking for? 

Secretary THOMPSON. As you know, we have expanded our rules 

as it relates to the composition of feed. That is a big area that we 

have complete control over. We have strengthened the oversight. 

We are going to increase the number of inspections by a great deal, 

and we are also prohibiting the use of downer and dead cattle into 

human consumption products. So we are doing a lot. 

We are continuing to address this. Les Crawford is the individual 

I have tasked to do this. He negotiated this week with the Canadians, and we are negotiating with the Japanese as far as opening 

up the market, and we are looking at scientific things. We want to 

base our decisions upon science. At this point in time we have not 

found a place where we cannot go statutorily, but if we do, I will 

be more than happy to sit down with you. 

Senator MURRAY. You know that there are many of us who stand 

ready to work with you in case you do need that authority. 

Secretary THOMPSON. This is very much a concern of mine being 

a beef grower myself. 

Senator MURRAY. Mr. Secretary, I appreciate that. Let me just 

say, Mr. Secretary, we will get the question to you on whether or 

not women who seek reproductive health care protections are denied privacy under HIPAA. We will get that to you today. Can I 

ask you how long it will take your decision to come back to us? 

Secretary THOMPSON. I would hope that my attorneys would be 

able to turn it around the beginning of next week. 

Senator MURRAY. OK. 

Chairman NICKLES. Senator Murray, Thank you very much. 

Senator SESSIONS. Senator SESSIONS. Thank you, Mr. Chairman. You know, on the 

medical issue that Senator Murray raised, as a prosecutor, I have 

been amazed in recent years the shock people have that they think 

you cannot subpoena library records. You can subpoena bank 

records. You can subpoena medical records. You can subpoena library records. There is no privilege for those things under certain 

circumstances. 

Now, if somebody objects, they can file a motion to quash a subpoena, but Congress did vote to eliminate the practice of partial 

birth abortion, and I think we meant that. It was an overwhelming 

vote. The investigations surely are focused on the physicians who 

may be performing those procedures if they are ongoing. So I think 

you have at some point, any investigation to determine whether or 

not a physician is performing partial birth abortion contrary to the 

overwhelming vote of this Congress should be investigated and you 

will have to get some records. if there is an objection, they can be 

objected to through the court system. 

Senator MURRAY. Mr. Chairman, let me just say that women 

were not party to the suit, to the——

Senator SESSIONS. But it is the records. You say they are taking 

their records, but it is really the doctors’, physicians’ files to deterVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00162 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
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mine whether or not he is performing that procedure, and he would 

have her history of whether or not that procedure was performed 

on her. 

Your chart here showing your higher estimate on the prescription drug bill is more than troubling to me. I respect you though. 

We knew, and many of us were worried it may be higher than the 

$400 billion that was estimated. I know Chairman Nickles raised 

that concern. I am glad you brought it out. I am glad we have your 

estimate here. I think it is true that nobody knows exactly how 

much is this going to cost. Would you agree? 

Secretary THOMPSON. That is true. 

Senator SESSIONS. Could be more or less than the 534 you have 

estimated. I believe that Congress wanted to make a sizable historic step toward meeting the needs of those seniors who cannot afford drugs, and we authorized, this Budget Committee did, $400 

billion for that purpose. I am just very distressed that we passed 

a bill that it pretty clearly appears now is going to go well above 

that. I think it is important for us, if we care about financial responsibility and sanity, that we come back and look at this bill, and 

perhaps as part of this budget procedure, to say that we want only 

that much money spent, and that if we have to have some higher 

copays instead of the 3 percent copays that are being paid now, 

maybe that could help keep it within the amount. 

So I am frustrated that the numbers came out higher and disturbed by that, but I thank you for doing it because we need to 

know the truth and act on the best information that we can have. 

Secretary THOMPSON. Senator, could I just clarify? 

Senator SESSIONS. Yes. 

Secretary THOMPSON. CBO still swears by the fact that it is only 

going to be $395 billion in its projections. CBO has experts that are 

projecting on drugs that we do not have as actuaries. So I do not 

think you can truthfully say that our figures are correct and CBO 

is wrong because they are not. These are our estimates. 

For instance, on the first one—and this is something Senator 

Nickles argued quite strongly against—is the fact that the low income, where everybody wanted to help, is really wide open. It is a 

huge subsidized benefit for low income, those under 150 percent of 

poverty. That makes a difference of $47 billion. We cannot say for 

sure if it is going to be $47 billion more or $47 billion less. 

For instance, the Balanced Budget Act of 1997, which is not 

nearly as complex as this law, our actuaries were $50 billion off 

from CBO and both of them were wrong. Both of them were wrong, 

in fact it came in at a different amount. And the second one, the 

higher participation, the next big tranche of $32 billion, this is the 

difference between 87 percent—CBO believes only 87 percent of the 

people that are eligible will participate. Our actuaries think it is 

going to be higher, they think it is going to be 94 percent. But you 

have to remember that in Part B only 91 percent participate, and 

that is what CBO is counting on. CBO is saying if you did not participate in Part B, why would you ever then participate in Part D? 

And so they have a solid argument for saying it is going to be less 

than 91 percent. 

So it is just projection and expertise. 

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Senator SESSIONS. My simple view about it is you have raised—

your official estimates raise the possibility that it would be higher. 

Hopefully it will not, but I think as a prudent Congress and as a 

Committee that is concerned about maintaining the integrity of the 

budget process, we ought to be thrilled that we were able to find 

and appropriate $400 billion, but I think we have every right to tell 

the administrators or the Finance Committee or others to keep the 

figure at $400 billion, and I think even if your numbers are correct, 

we are going to have the most historic increase in drugs for seniors 

ever. We have four people in my State whose drug bill exceeds 

their Social Security bill in thousands. My mother’s drug bill does. 

I see that. It is $400 plus every month. It will be a help for people. 

There is no doubt about it, but we need to be responsible. 

Mr. Secretary, you have a reputation for being a good manager 

and cutting waste and abuse. I have information that on the Children’s Hospitals Graduate Medical Education program—thank you 

also for supporting full funding for that and not cutting that program. Level funding is what you propose. But there was a 5 percent increase, I believe, last year, and we now find that all but 

267,000 of that 5 million went to administrative overhead. It is not 

getting out to the hospitals. I do not know if you are aware of that 

or not, but that is the information I have. I do not know if that 

is a one-time cost or just a rise in administrative cost. I would ask 

that if you are not familiar with it, I would understand it——

Secretary THOMPSON. Senator Sessions, it better not be that way. 

If it is, some heads are going to roll. 

Senator SESSIONS. I appreciate your approach to it. That has 

been my impression of your approach to management. 

Secretary THOMPSON. That is absolutely ridiculous. 

Senator SESSIONS. I was disturbed to hear those numbers. Perhaps they are not correct, but I think they come from a good 

source. 

Secretary THOMPSON. I will look into it before the end of the day. 

Senator SESSIONS. Mr. Secretary, I appreciate your interest and 

work in dealing with AIDS, particularly internationally. And working with you and the Department we confronted this question of 

whether or not, or at least how large an impact unsafe health care 

has in the spread of AIDS in Africa in particular. Some studies 

came out and showed rather shocking numbers there based on 

studies that were in existence. So we asked your Department to review that and come up with a figure which they believe was accurate. You have contracted with somebody. We have preliminary 

numbers on that, and I was unhappy, frankly, that they did not 

come forward with a figure, they simply repeated really the language that WHO has been using which is: the reusing of needles 

is not a major part of the problem. I think even WHO estimates 

2–1/2 percent of AIDS infections in Africa comes from reusing needles, and 7 percent of more comes from unsafe blood transfusions. 

The good news is, Mr. Tobias and the money we funded is immediately going out, some money earmarked to focus on this unsafe 

health care, but I still believe it is important for us to have good 

numbers. What I do not understand from this study is that they 

are saying that the studies relied on by Dr. Gisselquist and others 

to say the figure is much higher were not good studies. Therefore, 

159

they conclude that they are not accurate and that is it not a major 

cause, needle reuse. But I think you could take that other way too. 

If the study is not good it does not say anything. Maybe we need 

more studies to get an accurate number. We need a number here, 

and I have been frustrated by the stiff-arming of WHO, and even 

some in your bureaucracy on this question because I think it is a 

big one. Would you comment on that? 

Secretary THOMPSON. Absolutely. Before I comment on that, I 

just wanted to point out that the Medicare Modernization Act has 

some real cost containments for the first time. Part B premiums, 

those with incomes over $80,000, are going to pay more, it is going 

to be indexed, and also the Part B deductible is going to be indexed 

for the first time, and there is a trigger for 45 percent. When Medicare gets to 45 percent of the general purpose revenue dollars going 

in to fund Medicare, there is a trigger indicating that we have to 

come back with reports to the President as members of the Trustees, which I am one, and to Congress, making suggestions on how 

we might be able to improve. 

Senator SESSIONS. That is true, and Senator Nickles fought to 

get that in there. I would just say that overall Medicare is going 

to be difficult to deal with. We have not started this prescription 

drug program. We ought not to let it get out of control before it 

starts. 

Secretary THOMPSON. I happen to agree with you, Senator Sessions. I also agree with Senator Nickles and Senator Conrad on the 

questioning, and I think we should continue to observe this and 

find ways in which we can enhance cost containment. 

In regards to your issue, you have talked to me about it. I happen to agree with you. I think it is a higher percentage, and I think 

we do need an accurate figure. I was somewhat nonplussed by the 

fact that it came back with—after we contracted out. I think we do 

need further studies. 

I happen to be very much involved, as you know, as Chairman 

of the World Global AIDS Fund, trying to make sure that our programs and our funding goes the right direction. And we also have 

just received a grant from the $15 billion special appropriation to 

ensure the safety of blood. This is going to be done by my Department. We have been awarded the contract to ensure the safety of 

blood. Needles are an absolutely integral part of that, so we are addressing this, and I would be more than happy to sit down with 

you and give you more information as we go along and set up our 

program on good reliable blood for Africa. But I also agree with 

you. I cannot disagree with you on the report as far as the percentage of people that are getting HIV positive transmitted by dirty 

needles. 

Senator SESSIONS. We can take the transfusion infection rate to 

zero virtually. I think about 60 percent of the transfusions of Africa 

are checked now. 40 percent are not. And according to WHO’s numbers, that represents maybe 7 percent of all infections in Africa. So 

we could take that to zero like we have done in the United States. 

Chairman NICKLES. Senator Sessions, thank you. 

Senator SESSIONS. My time is up. The Chairman is correct to call 

my hand. Thank you for your interest in that, and I look forward 

to working with you. 

160

Secretary THOMPSON. Thank you, Senator Sessions. Appreciate 

it. 

Chairman NICKLES. Senator Sessions, thank you very much. 

Senator STABENOW. Senator STABENOW. Thank you, Mr. Chairman. 

Welcome, Mr. Secretary. I have many questions I would like to 

pursue, but I will ask only two different subjects, and one I know 

that was pursued earlier, but I want to revisit it because I was so 

shocked, frankly, by it, and that is the $20 million ad blitz that has 

been started with taxpayers money, touting the new Medicare law, 

when in fact, other than the discount cards, no one will have the 

opportunity to sign up for it until 2006. 

I have to say, when I saw the first television ad, and just 

watched it as it went through, I expected a tag line of ‘‘paid for by 

the National Republican Committee,’’ and was very surprised to see 

that taxpayers were paying for it, given the fact that it went beyond what I believe are accurate statements. I have joined with 

others in requesting the GAO investigation that they are doing, 

which we appreciate, and have joined in writing you a letter asking 

that you stop the advertising until we know from the GAO whether 

or not this is legal. So I would ask, first of all, if that is something 

that you would do? 

Secretary THOMPSON. I answered the same question from Senator Conrad. I told him I would go back and review all the things. 

I also wanted to correct some things, that I do not believe it is political. I think it is informational, and I am responsibe under the 

Act. I read the Medicare Conference Report language which says 

that I have to get out information on this new Medicare law and 

the money has been appropriated to do so. The best ways to do that 

is through TV, but we are also doing it through literature. We are 

also doing it through expanding the SHIPs program, voluntary programs in the community, through the Aging Commissions. We are 

also putting information out in more than one language so that especially Hispanics are able to understand the new law. GAO is 

going to review it. I am confident that they are going to come back 

and say that it is not political, but if they do, it certainly is going 

to be stopped immediately. 

Senator Conrad had a subsequent, if I would go back and review 

the ad again, and I will this afternoon, and take a look at it, and 

that is as far as I am willing to go at this point in time. 

Senator STABENOW. I appreciate your comments. I would like to 

share with you from my perspective in looking at this. There is no 

question that we need to educate people. Frankly, this is very complicated. 

Secretary THOMPSON. Very complicated. 

Senator STABENOW. What is going to happen for people in 2006 

is very complicated because if they have at least one private insurance company and one HMO in their area, they would not be able 

to go through the traditional Medicare mechanism. Would you 

agree that they will be choosing between a private insurance company and an HMO if those are available in their area, is that not 

correct? 

Secretary THOMPSON. No. They will also be able to maintain 

their current fee for service. 

161

Senator STABENOW. They will be choosing. If they have at least 

one private insurance company and one HMO in their area for prescription drug coverage, they will go through one of those two and 

only have Medicare as a fall-back. 

Secretary THOMPSON. That is correct. 

Senator STABENOW. So it is a complicated system. There is no 

question about it. 

Secretary THOMPSON. Very complicated. 

Senator STABENOW. That people are going to have to know they 

are going to get a lot more information, a lot more paperwork. 

What others have called choices I would call a lot of paperwork, 

and I am not hearing from people, from seniors, that they want a 

lot more paperwork. They just want help with their prescription 

drugs. But we will have that. But I would like just a couple of comments——

Secretary THOMPSON. Could I just respond quickly to that? I 

would like to point out that the enthusiasm and the interest in the 

Medicare Modernization Act been overwhelming. At the 1-800-

Medicare line. We have 106 companies and individuals and entities 

who want to put out the card. We have had a lot of companies that 

were in Medicare Plus Choice and want to come back, they want 

to expand and increase benefits and reduce premiums. So there is 

a great deal of enthusiasm. We want to get the right information 

out. I do not want to be political on this, and I pointed out that 

the head individual that won the request for advertising happens 

to be an individual that is a Democrat. 

Senator STABENOW. But, Mr. Secretary, if I might, I understand 

the enthusiasm. Certainly from the pharmaceutical industry that is 

projected to gain $139 billion from this bill, and I understand the 

enthusiasm from those who will now be subsidized in the insurance 

industry and the HMOs so that they have a more favorable position in which to compete against Medicare. I understand their enthusiasm. We know that because of that enthusiasm and those subsidies, that down the road in 2010 we will begin to see, because of 

the change, fundamental change in Medicare, that will be experimented with at that time, CBO says we will see a 25 percent increase in cost for average Medicare, for those who stay in Medicare. 

So I understand the enthusiasm of those who will make money off 

of this bill. 

I would just share with you I do not see the same enthusiasm 

among those who will be paying the bill and of those who want prescription drug coverage in my State. We have been overwhelmed 

with seniors and with families who are outraged by what has been 

done. And my concern—and I will move on to one other topic—my 

concern is that when we talk about advertising, we have a full page 

ad in Roll Call, and my staff reads that every day, not one of them 

is even close to being able to qualify for Medicare. I do not know 

why we run ads in Roll Call when we are trying to educate seniors 

around the country. This is a propaganda item, but it certainly is 

not educating folks, and I think any lobbyist or senior official reading Roll Call certainly has other opportunities to find out information about how this works. I would finally just say that——

Secretary THOMPSON. I did not know that it was in Roll Call. 

162

Senator STABENOW. It is Roll Call. It has been in Roll Call, and 

that is certainly not where my constituents are reading about 

Medicare, so that is a concern of mine. 

Then finally, I would simply say that in looking at the television 

and the print, when we say, ‘‘So, how is Medicare changing? Same 

Medicare, more benefits.’’ I would strongly object to that statement. 

Same Medicare? For those on Medicaid who are now going on 

Medicare, if they want a brand name drug they are going to pay 

more. Their formularies may be different and they may have fewer 

choices on prescription drugs. For the people in my State that are 

on private retiree insurance today, the anticipation is that one out 

of four of them will lose their coverage. This is not accurate. And 

so I would strongly support efforts to accurately educate people 

about the complexities and about the choices, and for those that 

will benefit, we certainly want them to know about it. For those 

who will pay more, we certainly want them to know that as well. 

I just have great concern. 

Secretary THOMPSON. Senator, I would just like to quickly respond if I might. I do not want to argue with you. Your interpretation is different than mine. I think that the ads that we are doing 

are very informative. I think the information—I wish you could listen in to the seniors that are calling in at 1-800-Medicare, they are 

overwhelmingly enthused about this opportunity. It is the same. 

You can stay in the same Medicare program like you always have, 

and you can get added benefits. That is the truth of the law. 

Now, you and I differ on that, but that happens to be our interpretation of the law. 

Senator STABENOW. Mr. Secretary, in 2010 in the six demonstration areas around the country, will Medicare remain the same? 

Secretary THOMPSON. In 2010——

Senator STABENOW. 2010 with the demonstration projects, will 

Medicare remain the same? 

Secretary THOMPSON. I do not think anybody around this table 

can say whether or not it will. It probably will not. In 2010 there 

is going to be two more Presidential elections, there is going to be 

three congressional elections——

Senator STABENOW. That is not what I am asking. I am asking 

if the law——

Secretary THOMPSON. I am just telling you, I do not know, I do 

not know, I do not know. 

Senator STABENOW [continuing]. That we passed, Mr. Secretary——

Secretary THOMPSON. And I do not think you do either. I do not 

think it will be. 

Senator STABENOW. Mr. Secretary, I do know under the law we 

passed that in the six demonstration areas around this country, 

starting in 2010 Medicare is not the same. It essentially moves 

from a defined benefit to a defined contribution, and it has been 

touted by Mr. Scully, by others, as a positive change, and I am not 

asking us to debate whether or not it is positive or not. I would 

argue it is not, but there are those that believe it is. 

But my question is: is it a change? Is it different? In 2010 if you 

are in one of the areas with the six demonstration projects under 

Medicare, will it be different? 

163

Secretary THOMPSON. In those six different areas in 2010, unless 

Congress changes it, there will be competition, yes. 

Senator STABENOW. So it is different. So when we say ‘‘same 

Medicare, more benefits,’’ this is not accurate, and if you change it 

so that it is accurate, that is fine. But it is not accurate to say it 

is the same because for many people it will not be the same. 

Secretary THOMPSON. Yes, it will be, Senator, because seniors 

will still be able to get fee for service if they so desire. 

Senator STABENOW. And it will cost more, up to 25 percent more 

under CBO. 

Secretary THOMPSON. But the seniors will still be able to get 

their system if they want to. 

Senator STABENOW. It would be great if it said that in here, that, 

‘‘by the way, it will cost you more.’’

One other quick point—and I realize, Mr. Chairman, I know I am 

pressing. 

Chairman NICKLES. We do need to run. 

Senator STABENOW. Actually, I will wait. Thank you very much. 

You have been patient, and I will wait and do the additional question in writing. Thank you so very much. 

Chairman NICKLES. I appreciate that so much because I am trying to get the Secretary out by 12 o’clock, and I have an additional 

question I want to ask him. But first we are joined by former 

Chairman and the most senior person on the Committee, Senator 

Domenici. 

Senator DOMENICI. Can you hear me? 

Secretary THOMPSON. Yes, I can, Senator. How are you? 

Senator DOMENICI. Fine. Nice to see you. You got a haircut, huh? 

Secretary THOMPSON. I hope so. 

Senator DOMENICI. Looks good. I have to go get mine cut. Nickles 

does not have to cut his very often because——

[Laughter.] 

Chairman NICKLES. I am well aware of that. 

[Laughter.] 

Senator DOMENICI. His is disappearing. 

Chairman NICKLES. Mine does not cost as much as yours or it 

should not. 

Senator DOMENICI. You get half price. 

Mr. Secretary, I have about five or six questions that I am going 

to submit, and I would greatly appreciate it if you would answer 

them. 

Secretary THOMPSON. Absolutely. 

Senator DOMENICI. They are very important, and I just got 

through with a hearing where we had a Secretary who was letting, 

because of OMB or some reason was letting mail from Senators go 

very much unattended, and I do not want to get in that position 

with reference to you. You have a great staff and they ought to consider a Senator’s question as being something important enough to 

be answered. 

Secretary THOMPSON. If they do not, they will not be with me. 

Senator DOMENICI. That is what I suggested to her, that they 

should not be. 

In any event, let me ad lib for a minute, and then get to some 

written ones. First, Mr. Secretary, last year our President made a 

164

little trip to New Mexico. It was probably one of the most exciting 

trips that he has ever taken to our part of the country, and he 

came to meet with a group of doctors and health professionals on 

the subject of insurance parity for the mentally ill. 

Now, Mr. Secretary, I think that you know what parity is, and 

I think you probably know that this had resulted in a discrimination of coverage for families with a member who has one of the serious mental illnesses. I am not talking about need for counseling. 

I am talking about schizophrenia and bipolar and the like. It is 

growing more and more obvious that millions of families have no 

insurance, but do cover all the other things, cover heart conditions, 

cover tuberculosis, cover diabetes, but not somebody who is egregiously ill with depression. 

As a result, the facilities that should be built and the excitement 

of the careers in research are not what they are in the other fields. 

Just think with me what has happened to heart. The heart has always been covered since they wrote insurance policies. Just think 

if they would have exempted hearts, said, we are not going to do 

anything under insurance policies for the heart. I would think we 

would have invented none of the great techniques. 

So here we sit, and the President of the United States said, ‘‘I 

do not have to be convinced that the big mental illnesses are diseases.’’ He said he had a personal experience with a friend on severe depression. You might know about that. 

Now, let me ask you, because we are about to get a bill reported 

out of Health Committee, you support the President’s position on 

this, do you not? 

Secretary THOMPSON. Without a doubt. It is the right thing to do. 

I supported it when I was Governor of the State of Wisconsin. My 

family is very much involved in this thing. I compliment you for 

your leadership for years. It is time for us to get something done. 

I also talked to Congressman Ramstad yesterday, the day before. 

He tells me that you have reworked a bill and it is able to come 

out. 

Senator DOMENICI. Yes, sir. 

Secretary THOMPSON. I said I would like to read it, but the concept I fully endorse. 

Senator DOMENICI. Mr. Secretary, there is going to be a meeting 

of everybody, including your Departments and others, so that when 

it gets beyond our Committee, which is going to report it out, all 

of that work will have been done. 

Secretary THOMPSON. Good. I would like to be included in that 

meeting. 

Senator DOMENICI. You will be, and the only reason I raise it 

with you strongly today, I do not want staffers going there assuming that they have to go through the whole business of whether you 

are for it or not. I would assume administration——

Secretary THOMPSON. You do not have to go through. I have stated it publicly before, Senator. 

Senator DOMENICI. OK. And I am for arranging it any way that 

we can be helpful to Senator Nickles on his budget, and I am also 

for limiting the amount, Senator, the percent, the cost, et cetera. 

Now, that is about all my big questions, but I have one with reference to New Mexico. 

165

As it currently exists, the Medicare reimbursement system for 

health care provides and contains some inequities. We all know 

that. Some are intentional because you could not do it any other 

way. Some we are finding out about. But the reimbursement for 

health care providers nationwide vary greatly from region to region 

and from State to State. My home State, New Mexico, we are reimbursed less by Medicare for services provided than other States. 

Some of this started way back when we first did HMOs and the 

like, and you are aware of that. Although certain costs of providing 

care are more expensive in some areas than others, and that accounted to some extent in the disparity between reimbursement. 

But it is my theory that New Mexico is being punished for its 

own efficiency. New Mexico was foresighted enough to allow health 

maintenance organizations to penetrate our market, while most 

States remained involved with fee for service providers, and you 

know better than I, were squabbling and arguing and litigating 

about issues. However, because New Mexico was efficient, they are 

now rewarded with artificially low Medicare reimbursement rates. 

What would you recommend be done to address geographic payment inequities that currently exist in the system, and what if anything is HHS doing to address the geographic payment inequities 

that currently exist in the system? 

Secretary THOMPSON. Mr. Chairman and members, we are doing 

a lot. The new Medicare law is making changes, and wage disparities, for instance, have gone down from 72 percent to 62 percent 

in the law, something that I think is badly needed. It is going to 

benefit the State of New Mexico, the State of Wisconsin, the State 

of Oklahoma and the State of North Dakota. There is $26 billion 

of new programs for rural areas which is going to benefit the 

States of New Mexico, all the four States that are here. We have 

been discriminated against for a long time, Senator Domenici, and 

I would have to say that the Medicare law is a giant step forward 

in creating some equity as far as reimbursement, and it is going 

to benefit a great deal for the States that are up there, as well as 

my home State of Wisconsin, something that I have been for for a 

long time, and I thank you for bringing it to my attention. 

Senator DOMENICI. Well, Mr. Secretary—incidentally, you called 

me Mr. Chairman a minute ago, and that is OK if you were in another Committee, but in this Committee you should call me ‘‘used 

to be Chairman.’’

[Laughter.] 

Secretary THOMPSON. You have been Chairman of this Committee for so long, you are a Chairman——

Senator DOMENICI. Emeritus. 

Secretary THOMPSON. —Emeritus, and I think you should wear 

that as a badge of honor. 

Senator DOMENICI. Now, Mr. Secretary, I want to tell you, my 

friends here on this Committee that worked on another Committee 

that produced Medicare, have just informed me that the fix for the 

rural disparities versus the other more occupied States, that is the 

biggest fix we have ever had. 

Secretary THOMPSON. It is. 

Senator DOMENICI. I am looking forward to seeing the numbers 

because, Senators, I want to tell you—you probably know—but 

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when you have a State as poor as ours, and you have doctors and 

neurologists and neurosurgeons leaving, when you do not have 

enough to begin with, and they say, ‘‘Well, we are going over here 

to Texas because we get paid, reimbursed differently under the 

same law,’’ you know, pretty soon you have riot sounding meetings 

with people wondering what the hell is the Federal Government 

doing? They know with Chuck Grassley and some of them, we have 

made some fixes, but we did not fix it enough. Now we might have. 

Secretary THOMPSON. I think you are going to be very appreciative. This has been an issue for Senator Conrad and myself for 

a long time. He and I have been fighting it. Senator Grassley, Senator Nickles, I mean anybody that represents rural areas, this 

Medicare bill, that portion of the law was enough to vote for it. 

Senator DOMENICI. Thank you very much.

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Senator Nickles, I will submit my own questions, and I assume 

he will answer them under your rules. 

Chairman NICKLES. Senator Domenici, thank you very much. 

And Secretary Thompson, it was almost enough to get some people to vote for it. 

[Laughter.] 

Secretary THOMPSON. I stand corrected, Mr. Chairman. 

Chairman NICKLES. But I do stand by your statement, and I told 

Senator Domenici the improvements that we made in the resolving 


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or trying to fix some of the rural inequities was the most significant step since I have been working on it for many years. 

I know you need to leave. I want to raise one other issue very 

quickly. Do you have four or 5 minutes? 

Secretary THOMPSON. Sure. 

Chairman NICKLES. Four minutes. Medicaid spending, we have 

not touched on Medicaid. It is an enormous program under your 

watch. It is $180 billion program. The last 4 years it has grown at 

9.7 percent, 13.9 percent, 9.1 percent, and estimated to grow 10.3 

percent this year. There is some abuse in the system. 

Secretary THOMPSON. That is right. 

Chairman NICKLES. Part of the abuse is what many of us call improper intergovernmental transfers. I have been concerned about 

it. Sometimes in the past we have called it upper payment limits, 

but some States, a lot of State actually, have developed what I 

would call a scheme to greatly enhance the reimbursements on 

Medicaid to where basically the Federal Government pays not their 

stated share, 60/40 or 50/50 or something like that, but in many 

cases it becomes a case where the Federal Government pays all of 

it, or pays a much greater share than frankly what it is supposed 

to do. Would you care to comment on it, maybe explain it, or give 

us 1 minute? I know you are pressed for time, and so I will not 

pursue it too long. 

Secretary THOMPSON. Thank you for asking me the question. 

This has been something that needs to be corrected. The law allows 

for local participation with the State in order to get matching 

funds. Usually it is a 50/50 match. Some States are different. Mine 

is 57/43. I do not know what North Dakota and Oklahoma is, but 

it is probably somewhere around 57/43. But so many States have 

taken advantage of the failure to supervise, the failure to actually 

audit some of these accounts. 

Let me just go through some examples of what we’re finding. 

This State made upper payment limit, quarterly payments were 

being electronically transferred to the nursing home bank account. 

The State then immediately withdrew the amount of the payment 

from the provider’s account less a $2,500 participation fee. The approximate amount of Federal Medicaid payment, what should have 

gone to the local, that went back to the State, was $191 million. 

That was one State. 

Another State made supplemental——

Chairman NICKLES. Say that again. I am trying to get these figures. 

Secretary THOMPSON. We found $191 million in this particular——

Chairman NICKLES. One State? 

Secretary THOMPSON. One State. 

Chairman NICKLES. So basically overpayment to one State of 191 

million? 

Secretary THOMPSON. It was a wrong payment because it was 

sent to the State. Then the State has got to send it down to a county hospital. But the State, instead of leaving the money to the 

county hospital, gave the county hospital $2,500 and took the 

money back to the State and used it for general purpose revenue. 

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Second example. Made supplemental payments to nursing facilities. Upon receipt of the payments, the nursing facilities, which are 

eligible for the funds, are required to return 99.5 percent of the 

payments to the State. 

Chairman NICKLES. Wow. 

Secretary THOMPSON. That was $938 million. 

Chairman NICKLES. Just one State or is that nationally? 

Secretary THOMPSON. One State. 

Chairman NICKLES. One State. 

Senator CONRAD. Can you tell us what State that is? 

Secretary THOMPSON. I cannot at this point in time. In private, 

I will be more than happy to, but I do not want to—we are auditing 

these. This is what we are finding. 

Third example. State makes payments to county nursing facilities. As a condition of receiving those payments, nursing homes 

must sign a participation agreement in which the nursing home 

agrees to return all but $10,000 of the payment. Those nursing 

homes are allowed to keep the $10,000 as a participation fee. The 

rest of the money goes back to the State to be used for whatever, 

and that accounted for $181 million. 

The next one makes a payment to county home nursing facilities. 

Upon receipt of those payments, the nursing homes are required by 

State law to return the majority of the payments back to the State. 

This is accomplished by an electronic transfer of fund. That example is $18 million. 

The next one makes a pro-share to county owned nursing facilities. Upon receipt of those payments, the nursing facilities are required by contract to return the majority, over 90 percent of the 

payments back to the State within three working days of the receipt. They traditionally remit portions of the payments to the 

State. That was 40 million. 

The next one is $1.5 billion. So this one——

Chairman NICKLES. Can you explain that $1.5 billion? 

Secretary THOMPSON. Yes. Make supplemental payments—this is 

a larger State—to large county nursing facilities. In order to receive the payments the county facilities borrow a total of $1.5 billion. Within 1 day these funds are transferred into the county nursing home bank accounts; from there to the State bank account; and 

then back into the county nursing home bank accounts as a Medicaid payment. The counties then repay the loan to the bank. At 

the close of the banking, the State claims the borrowed funds as 

an expenditure for nursing facility services of $1.5 billion and 

draws down $859 million in Federal Medicaid matching funds. 

Chairman NICKLES. That 1.5 is that——

Secretary THOMPSON. Turns into a match from us of $859 million. 

Chairman NICKLES. That really should not be allowed? 

Secretary THOMPSON. Absolutely not. 

Chairman NICKLES. We may want to have a hearing just on this 

issue, and I apologize maybe for bringing it up late. I knew there 

was a lot of interest on the card, on prescription drugs, the cost 

and so on, and I thought that was maybe primary, but I am outraged at this, and I think it needs to be stopped. I want to stop 

it. Frankly, when we are running these kind of deficits and when 

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I look at these double digit compounding growths of Medicaid, it 

just has to be stopped. We cannot afford this. I know that you have 

a proposal. 

Secretary THOMPSON. We do. 

Chairman NICKLES. That will require legislation to go through 

the Finance Committee, so Senator Conrad and I are both interested in that, but I wish to learn more about it. I want to fully understand it. I have heard about county hospitals and so on. 

Secretary THOMPSON. Can we put up the chart? You have just a 

second? 

Chairman NICKLES. Sure, I do. I know that you have to be—you 

have a commitment at 12:15 so I am trying to be quick. 

Secretary THOMPSON. Dennis, you want to come up? Quickly go 

through it, Dennis. 

Chairman NICKLES. Dennis, welcome back to the Committee. 

Mr. SMITH. Thank you, Mr. Chairman. Through an intergovernmental transfer, this illustrates the process for which the county 

shares part of the match rate with the State which is permissible. 

But under this example—and this would have been allowed 

through upper payment limits—that the county provided $10 as a 

match to the State, the county provider. Any time you have a public entity, you have a potential for an intergovernmental transfer, 

be it a county hospital, county nursing home, but counties are providers for a wide range of other services as well. 

Under this, the county provider had a claim for $100. The State, 

however, a claim-back was for $250. This is a State with a 50/50 

match. The Federal Government, seeing a claim for $250, says, 

‘‘OK, here is our share, $125.’’

Secretary THOMPSON. So the Federal Government pays more 

than the total claim. 

Mr. SMITH. The reimbursement is made, and then the county 

provider transfers $150 back to the State. So the State has made 

$150. 

Senator CONRAD. That is a scam. 

Chairman NICKLES. So the Federal Government pays more than 

the original cost, and the State makes money on the procedure. 

Secretary THOMPSON. Correct. 

Mr. SMITH. The true cost was $100, but a claim for $250. 

Chairman NICKLES. How prevalent is this? 

Secretary THOMPSON. We think about 5 percent. We think it is 

going to be—it is growing. There are drummers out there selling 

this service to the States in order to get a percentage, and we think 

it would be about $6 billion. 

Chairman NICKLES. $6 billion per what? 

Secretary THOMPSON. Annually. 

Chairman NICKLES. Per year. I am very interested in trying to 

stop this, and I look forward to reviewing your legislative proposal, 

and we will work with you. I would appreciate it if you could provide us more example that would help highlight the problem and 

help us get our hands on the reason why this change is needed so 

we can sell it to our colleagues. 

I will tell you, regrettably, most of our colleagues do not have a 

clue about this. I mention intergovernmental transfers, and most 

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people do not know what we are talking about, so I think we will 

have to work to educate people first to make the legislative change. 

I want to thank you and also I want to thank Jennifer Young, 

because I know that she has helped expose this. You have some excellent staff. I want to compliment Dennis, who I guess is now acting at CMS, who has done an outstanding job, both for the Finance 

Committee, and also in working in your Department. You have a 

great team, and we appreciate your bringing this to our attention. 

Senator CONRAD. Senator CONRAD. Mr. Chairman, I would just add my voice and 

say that is a scam, that is a pure scam on the Federal Government 

and the Treasury. That is tapping into the Federal Treasury in a 

way that is totally inappropriate and has got to be stopped. I would 

be very interested in finding out what States are involved. 

Can you tell us how many States are engaged in this kind of activity? 

Secretary THOMPSON. 34. 

Senator CONRAD. 34 of the States. We have to call a screeching 

halt to this because that is totally beyond the pale. 

One final point I wanted to make, Mr. Chairman, is on the Medicare Advantage, CBO tells us that the private plans cost more than 

traditional fee for service even outside of this bidding question, so 

I do not know if there is a disagreement between CBO and CMS 

on this. 

Secretary THOMPSON. There is. 

Senator CONRAD. There is apparently. 

Secretary THOMPSON. There is a disagreement. 

Senator CONRAD. CBO says that it costs more——

Secretary THOMPSON. CBO still believes that. 

Senator CONRAD [continuing]. To do the private plans than traditional fee for service Medicare. The whole rationale for the private 

plans was to save money, so obviously that is a problem. Hopefully 

we can get to the bottom of that as we go forward. 

I just conclude by saying I hope very much, Mr. Chairman, that 

we go back in and find places where we can save money out of this 

bill that has been passed. When we go to $530 billion and it was 

supposed to be $400 billion, that is what people thought they were 

voting on. We have an obligation to go back and try to save money. 

We have a runaway freight train here in terms of the Federal deficits. We have to find ways to save money wherever we can, and I 

hope very much this Committee plays a role in that. 

I thank the Chairman for the hearing this morning. 

Chairman NICKLES. Senator Conrad, thank you very much. 

I want to make one final comment. Senator Conrad was trying 

to get your attention about some of the ads that were running advertising Medicare and Medicare changes. I will tell you that I was 

a participant—attended a football game. This is when Scully was 

still head of CMS. And I saw a blimp that was advertising 1-800-

Medicare. I was embarrassed. I did not see too many people writing 

the number down. I am not sure. I think you do need to look at 

the ad campaign. I think people do need to be educated, and it 

probably will take TV, radio and print to get it out. I do not know 

about a blimp at a football game. Maybe I am missing the—I know 

in sales you have to consider a lot of different venues, but I was 

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kind of surprised about that and did not think it was the best use 

of taxpayer money. 

Secretary THOMPSON. I agree with you. 

[The prepared statement of Secretary Thompson follows:]


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Chairman NICKLES. Thank you very much. I appreciate your testimony before the Committee. The Committee is adjourned. 

[Whereupon, at 12:12 p.m., the Committee was adjourned.]


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THE PRESIDENT’S FISCAL YEAR 2005 BUDGET 

PROPOSALS 

FRIDAY, FEBRUARY 13, 2004

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The committee met, pursuant to notice, at 10:05 a.m., in room 

SD–106, Dirksen Senate Office Building, Hon. Don Nickles (chairman of the committee) presiding. 

Present: Senators Nickles, Domenici, Allard, Bunning, Crapo, 

Cornyn, Conrad, Byrd, and Stabenow. 

Staff present: Hazen Marshall, majority staff director; and Cheri 

Reidy, senior analyst for budget review/revenues. 

For the minority: Mary Ann Naylor, staff director; and Jim 

Klumpner, chief economist, Steve Bailey, senior analyst for revenues. 

OPENING STATEMENT OF CHAIRMAN NICKLES 

Chairman NICKLES. The committee will come to order. I want to 

thank Secretary Snow for being with us today and thank all of our 

colleagues. We appreciate their willingness and cooperation to 

change rooms. 

Let me just make a couple comments. I am delighted that Secretary Snow is with us today. A year ago, Secretary Snow assumed 

office, and he did so at a very difficult and challenging and troubling time. The economy had been in a slide, revenues had declined 

for 3 years in a row, and the economy was still very, very slow. I 

met with Secretary Snow, and others did, and he and the President 

proposed an economic package to grow the economy. 

And, Mr. Secretary, but you made a proposal to grow the economy and you succeeded. And I want to compliment you for that, 

and I will show a couple of charts to give some evidence to that. 

The first chart is gross domestic product, and it shows very significant growth in the last year, I think in large part because of 

some of the changes that we have enacted.

202

Look at the next chart, and it shows the unemployment situation 

has actually improved. Now, this is a chart of the household survey 

figures, and, granted, there is a difference between the household 

survey and the payroll survey. But the chart shows all-time record 

employment, and it is significant and it is real.

The next would be the unemployment rate, and that shows, 

again, we have had a significant reduction in the unemployment 

rate, and that is positive. It was, I think, something like 6.3 percent; now it down to 5.7 percent. So it is certainly moving in the 

right direction.


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The stock market has risen, as a result, greatly, I think, because 

of the tax changes that we made, cutting the dividend rate about 

in half and cutting the cap gains rate from 20 to 15 percent, which 

we did in last year’s bill. It is up from $11 trillion to over $15 trillion in assets in the market. That is a $4 trillion increase, that is 

about a 40-percent increase. That is a very significant increase. So 

our tax changes made a difference.

I would also just show the top marginal rate as a result of some 

of our efforts. It was 28 percent at the end of Ronald Reagan’s 

term. It was 31 percent at the end of President Bush I’s term. It 

was 39.6 percent at the end of President Clinton’s term. And we 

reduced it 35 percent. I might note we did not take it all the way 

down to 31 percent; we took it to 35 percent. Again, I think as a 

result of some of those changes, we have made significant positive 

improvement in the economy.


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Mr. Secretary, you came in a year ago. You had a significant 

challenge that you presented to us to make changes in tax policy 

to help grow the economy. We did that, in large part following the 

outlines that you gave us a year ago, a big challenge. And I think 

we have had some very good results. So I compliment you for that. 

We have big challenges now. The deficits are unacceptable. They 

need to be brought down. The administration says they want to reduce them by half in 5 years. I hope that we can beat that. I would 

like to accelerate that goal as much as possible, and that will not 

be easy. So I am going to be asking you some tough questions on 

how we can get the deficit down. The tax code that you have charge 

over has a lot of tax revenue in it, but it also has a lot of expenditures in it. And I want to examine both. I want to be working with 

your Department to find loopholes. I want to be working to find tax 

shelters. I want to be working to find things that lead to unreported income. 

I happen to think—and Senator Conrad has mentioned it to 

me—there is a lot of income that is not taxed, that is not reported, 

that is underground. We need to find it. We need to be aggressive. 

We need to stop programs that have significant expenditures to 

them that have very large error rates. I am talking about the 

earned income credit program. We need to fix it. We need to make 

sure the money goes to those people who deserve it, but not to people who don’t deserve it. 

There are billions of dollars at stake, so we have a very aggressive challenge. We have to get our fiscal house in order. Four or 

five hundred billion dollar deficits are not acceptable. And I plan 

on doing everything I can in this year, in this budget, working with 

you, maybe in- or outside of a reconciliation package, but I want 

to do as much as we can to get our fiscal house restored. I look forward to working with you, but, again, I want to compliment you 

for your first year in service. I think you have had a remarkable, 

successful tenure as Secretary of the Treasury, and I compliment 

you and the President for the results that I have just illustrated. 

I call on my colleague and friend, Senator Conrad. 

OPENING STATEMENT OF SENATOR CONRAD 

Senator CONRAD. Thank you, Mr. Chairman, and let me just 

start by saying how welcome this discussion has been from you this 

morning with respect to the need to get deficits down. You have 

said this at a number of our meetings, and I agree with you entirely. These deficits are too large. They are unacceptable and we 

need to make far more progress than is being suggested. 

We have to look on the spending side of the equation, and we 

have to look on the revenue side of the equation. I agree with you 

entirely that one of the areas we need to look at on the revenue 

side of the equation is this tax gap, the difference between what 

is being paid and what is being owed. The Revenue Service now 

says that is over $250 billion a year. That is a stunning amount 

of leakage in the system. 

There is one thing the chairman did not mention, and let me just 

put it up in terms of—and that is the growth of the deficit. And 

it has been dramatic, and it is of record proportion. The deficit now 

206

in dollar terms is by far the biggest it has ever been. Last year was 

a record, and this year surpassed it by more than $100 billion. 

Mr. Secretary, I mentioned to you when I greeted you that I 

wanted to recall some of my favorite Secretary Snow quotes from 

before you were Secretary. This is my all-time favorite: ‘‘A balanced 

Federal budget is the best choice to ensure a bright future for the 

Nation’s economy.’’ Yesterday you were talking in the Finance 

Committee about how we have to pay attention to the economy. 

That is what creates jobs. And I entirely agree. And the question 

is how threatening the pile-up of deficits and debt are to a vibrant 

economy.

Let’s go to the next. I also remember well this ad that appeared 

in major newspapers that you were a signatory to. I very much applauded you at the time. The headline was: ‘‘Without a balanced 

budget the party’s over, no matter which party you’re in.’’ And I 

agree with that sentiment as well. We have to get back to balance 

as quickly as possible, given especially the baby-boom generation 

which is about to retire.


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But when I look at the President’s budget proposal and the suggestion that he is going to cut the deficit in half, it is simply not 

credible to me and I do not think it is credible to anybody that 

takes a hard look at what the assumptions are, because the President has achieved a reduction by largely leaving out substantial 

parts of the budget.


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The President is saying that the deficit 5 years from now will be 

cut in half to $237 billion. But in that same year, he will be taking 

under his plan $259 billion from the Social Security Trust Fund, 

every penny of which has to be paid back. In addition, he will be 

taking $23 billion from the Medicare Trust Fund. And if we are 

going to continue to address the problem with the alternative minimum tax, which is rapidly growing into a crisis. Three million people affected now by what is supposed to be a millionaire’s tax, there 

are going to be 40 million people affected by the end of this budget 


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period. It is becoming a middle-class tax increase. That costs $55 

billion to fix. The President just left it out. And it costs $30 billion, 

according to the CBO, for residual work costs in that year. All of 

these things are left out, and so you have an increase in debt in 

that year not of $237 billion but of over $600 billion. 

Let me go to the next, because the President’s own budget shows 

in the fifth year that the debt is going to increase not by $237 billion, but the debt is going to increase by $633 billion.

Let’s go to the next. Here is the problem that I see. If we adjust 

what the President is saying for the effect of his tax cuts beyond 

the 5 years, the alternative minimum tax problem, and his defense 

policies—not, you know, this idea that defense costs will not grow 

for the war after September 30th, but put in what CBO tells us is 

going to happen. We don’t see the deficits being reduced for the 

next 10 years. We see an ocean of red ink. 

Let’s go to the next one. Here are part of the reasons why. One, 

we are not accounting for the $2.4 trillion of Social Security money 

that is going to be taken—$2.4 trillion during this next 10 years, 

every penny of which has to be paid back. The President just shows 

the effect of the first 5 years of his tax cut proposal, and what you 

can see is this dotted line is the fifth year. The cost of the tax cut 

explodes beyond the 5-year window. We have to account for that if 

we are going to be accurate with people.


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Let’s go to the next one. The alternative minimum tax, the same 

kind of pattern. The President pays for it in the first year, but the 

cost of fixing it, according to the Congressional Budget Office, explodes in these outer years. 

And, of course, war costs. The President says no war costs past 

September 30th. The Congressional Budget Office tells us $280 billion of costs, none of this accounted for in the President’s budget. 


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The result is we have a debt that is not under control, but a debt 

that is skyrocketing, and at the worst possible time—right before 

the baby boomers start to retire.


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So, Mr. Secretary, I think we have a lot of work to do to get serious about the growth of deficits and debt and the risk that that 

growth poses for our economic security. 

Chairman NICKLES. Senator Conrad, thank you very much. 

Mr. Secretary, we are delighted to have you with us, and please 

make your presentation, and then we will have a few questions. 

STATEMENT OF HON. JOHN SNOW, SECRETARY, U.S. 

DEPARTMENT OF THE TREASURY 

Secretary SNOW. I think I am on here. I am not sure. 

Chairman NICKLES. You are. 

Secretary SNOW. Thank you very much, Mr. Chairman, Senator 

Conrad, members of the Senate Budget Committee. It is an honor 

to be before you, and I appreciate, Mr. Chairman, your opening 

comments and those of Senator Conrad as well. 

The budget that is before you reflects basically four priorities: 

One, winning the war on terror. That has to be at the center of 

everything that we are engaged in today. It has to be a national 

priority of the highest rank, as the President said in his State of 

the Union message, and protecting the homeland that goes hand in 

hand with that. And the budget reflects that with some 7-percent 

increase in defense spending and some 10-percent increase in the 

homeland security budget, which isn’t found just in the Department of Homeland Security but throughout many other agencies as 

well. 

And the budget reflects the President’s commitment to continuing to keep the economy on a path of creating jobs, growing 

and expanding, because a bigger economy is good to deal with the 

problems of the future, the problems of how we are going to pay 

for the Social Security and the Medicare responsibilities of the future, fund those unfunded commitments. 


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But it also reflects a commitment, Mr. Chairman, in line with 

your suggestion, that we really have to get serious about the deficit, and those of Senator Conrad as well. The President’s budget 

seeks to cut the deficit in half within 5 years. If we can do better 

than that, that is terrific. We really ought to be pointing toward 

a convergence to zero. That is where we need to do. We need to get 

on a path to truly balanced budgets. But you can only do it through 

two ways. There aren’t a lot of avenues open to us. One is growing 

the economy because that creates more governmental revenues, 

and, of course, back in the late 1990’s, when the surpluses developed, 2000, we had extraordinarily high governmental revenues 

coming in: receipts from the good stock market, from capital gains, 

from a full-employment economy, and from high profitability. 

We had the recession. Government receipts fell down. Now they 

are at quite low levels, but we project them to go back up toward 

the 18-percent average that they have been historically, 18 percent 

of GDP as they historically have been, down to 16 today, 15.7. 

The other thing to do, though, in addition to growing the economy, you have to cut spending, and spending cuts have to be at the 

forefront of achieving that objective. That is why the highway bill 

is so important to the President and to many of you, because it represents spending levels that, if embraced in the actions of the Congress, will make it difficult ever to hit those targets, important as 

and good as much that is in that bill is. Actually, I would acknowledge it, but it has to be done within restraints of a fiscal balance. 

I appreciated very much your comments on where the economy 

is today. It is really in a tremendously different and better posture 

today than when I appeared before you a year ago. There was a 

lot of talk of a double-dip recession. Then there was talk of deflation—deflation that could become destabilizing. Even those who 

were fairly optimistic a year ago about the economy acknowledged 

that it was on a wobbly path; it was an anemic pickup. Today, nobody says that. I think today everybody acknowledges that the 

economy is on a strong growth path, with the numbers you showed, 

extraordinary growth—for the year as a whole, 4.4 percent; third 

quarter, over 8 percent, with projections for over 4 percent for this 

year. If we can sustain that—and I think we can—we are going to 

create a lot of jobs in this economy, as Chairman Greenspan has 

said, as the private forecasters say, as the administration says. 

I think it is important to recognize where we have come from. 

These deficits are large. They are unwelcome. They are unacceptable. And they must be brought in line. They have to be reduced. 

But they are understandable, too. They are understandable in 

the context of the President having inherited a recession that took 

a tremendous amount of revenue out of the Government receipts, 

and a recession that was made worse by corporate scandals, by the 

meltdown of the stock market that took $7 trillion out of the household wealth of the country, by 9/11, the war in Afghanistan, the 

war in Iraq. All of those things have had significant effects on the 

economy. 

When I talk to business people from other parts of the world, 

they are astonished that the American economy has sustained 

itself as well as it has through all this period, and that is, I think, 

a compliment to the resourcefulness of the American people and to 

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the adept ability of our institutions, including the Congress, which 

responded with the tax bill last year. 

Let me close by saying that without the tax bill last year, Mr. 

Chairman, members of the committee, the economy would not be 

where it is today. Without that tax bill we never would have had 

growth rates of 8.2 percent in the third quarter and 4.4 for the 

year. 

I will remind you, we started the year with a growth rate of 1.4 

percent for the first quarter, a stock market that over the course 

of the year gained something well over 20 percent, creating, as you 

said, nearly $4 trillion of additional value from then until now. The 

reductions you made in dividend taxes and the reductions you 

made in capital gains taxes, the lowering of marginal tax rates 

across the board have had a profound effect on this economy and 

have created a strong upward movement in the economy that otherwise simply would not have existed. 

We regret the deficits. We are going to go after the deficits. They 

have to be reduced. They do threaten long-term prosperity. But 

working together, I think we can manage our way through that 

problem. 

I thank you very much for the opportunity to appear before you. 

[The prepared statement of John Snow follows:]

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Chairman NICKLES. Mr. Secretary, thank you very much for your 

opening remarks. 

I will ask all of my colleagues—we do not have strict time limit, 

but I am going to assume the Secretary needs to get out around 

12. So if people could try and keep their remarks to 7 or 8 minutes, 

we ought to be able to accommodate that, and we will have some 

flexibility if necessary. 

A couple comments. I mentioned to you and Senator Conrad that 

there might be $250 billion of leakage or uncollected receipts that 


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might be out there, underground economy, you name it. I will just 

ask you a couple questions. Is that figure close to being accurate? 

Are there some things we could do that we are not doing to help 

close that leakage or to collect taxes that are due but not paid? 

Secretary SNOW. Mr. Chairman, that number I think is a number 

that goes back some years. There clearly is a tax gap. There is an 

underground economy. There are people who should be paying 

taxes who aren’t paying taxes. There are people paying taxes who 

should be paying more taxes. There clearly is a tax gap. I don’t know that the $250 billion number is accurate anymore, 

but it is a large number, whatever it is, and the IRS is doing a 

study with the help of Treasury, the assistance of Treasury, to try 

and get a better handle on it. 

We do know there are some programs that do not work well. The 

one you mentioned, the earned income tax credit, will require some 

improvements because there are both underpayments and overpayments there. 

The IRS budget this year, Mr. Chairman, reflects a very large in- crease—I think it some $300 million, roughly—primarily devoted to 

greater enforcement. We think we need to put more energy into 

compliance, more effort into compliance across the board, for business, small business, large business, but taxpayers generally in all 

income categories. And I hope we will see that significant enhancement of the IRS budget for enforcement carry the day. 

Chairman NICKLES. Mr. Secretary, just a couple comments. One, 

I would appreciate it if you and/or the IRS, which is under your 

domain, would give us a list of, I am going to say, loopholes, for 

lack of a better word. I will just mention a couple. I mentioned the 

earned income credit. In 1999, IRS estimated that between 27 and 

31.7 percent of claims were in error, should not have been made. 

That was an estimate of $8.5 to $9.9 billion. That was in 1999, and 

we were spending $31 billion on the program. We now are spending 

almost $35 billion. This is a program, keep in mind, that cost about 

$7.5 billion in 1990 and now costs $35 billion. People wonder how 

spending has grown. That program has gone up by a multiple of 

about 5 times, 500 percent in the last 14 years. 

But it is not acceptable to have a program that has an error rate 

of 30 percent. Senator Sessions has suggested maybe we should 

make those payments on a monthly basis instead of an annual 

basis and take out some of the incentives for corruption and fraud. 

That is a proposal. 

Anyway, I would solicit from you and from your outstanding staff 

some possible ways to address fraud—some of this is going to require legislation. So give us some recommendations, if you would, 

and if you would also give us a list of other abuses. 

There is one that I will ask about in my second round—the salein lease-out transactions that I think your Department has identified. But this is a loophole, an abuse of the system that is costing 

billions, maybe as much as $28 or $30 billion over 10 years. It 

needs to be stopped. It is growing dramatically, Senator Conrad 

said so. 

I will get on to that one in the second round, but I mentioned 

earned income credit because I think most people are more familiar 

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ing in the tax code, and we have some abuses of the tax code that 

at least this Senator wants to stop. I am not really interested in 

having the IRS chasing down babysitters and lawn mowers to 

make sure they pay taxes on, you know, the $30 they have ten. I 

am interested in stopping a corporation buying a non-taxable entity’s assets and then getting a lot of tax benefits and leasing them 

back to the city and have it be a shell game. 

Senator Conrad and I yesterday, when we had Secretary Thompson up, we found out that a lot of States were doing a shell game 

and costing taxpayers billions and billions of dollars. And we hope 

to close that loophole, and I hope that we can close this. And 

maybe if we can discover some other things that are really an 

abuse of the system, we should shut them down earlier rather than 

later. So if you and/or your staff would provide us some abuse list, 

we will be happy to work with you to do what needs to be done 

legislatively. You may be able to do a lot of these things administratively. 

Senator Conrad. 

Senator CONRAD. Thank you, Mr. Chairman——

Senator DOMENICI. Would you yield for one observation? 

Senator CONRAD. Certainly I would yield to the former chairman. 

Senator DOMENICI. Senator Nickles, as I listened to you, if I were 

the Secretary, I would be a little bit confused as to what you want. 

So maybe I could ask you for a minute. 

One thing is loopholes. People have a lot of arguments of what 

loopholes are. One man’s loophole is another man’s necessity. But 

what you spoke of were abuses and places where the laws were 

being used to cheat. But there also are tax expenditures that this 

committee and the tax committee might want to look at and say 

these used to be pretty good, but they aren’t any good anymore. 

And I would assume you want him to give you both of those lists. 

Chairman NICKLES. Absolutely, and I appreciate your clarification. 

Senator DOMENICI. Thank you. 

Chairman NICKLES. Senator Conrad. 

Senator CONRAD. I want to again thank the chairman for introducing these subjects because I think they are hugely important as 

we go forward. 

Let me just say on the tax gap calculation, your IRS Commissioner was just on—I think it was CNN I saw him, and he referenced the $250 billion, which, as you correctly point out, I think 

is a result of an analysis that was done in the mid-1990’s. 

Secretary SNOW. Yes. 

Senator CONRAD. I think we all know that number has done 

nothing but grow. And we have to go after—it is utterly unfair to 

the vast majority of Americans, American taxpayers, American corporations that pay what they legitimately owe, to have some escape. That is just not fair. And I believe that number is much bigger. 

I, frankly, have concluded we need to consider fundamental tax 

reform. I don’t think using our current system and just increasing 

audit and enforcement will ever capture perhaps even an insignificant part of this tax leakage. So I think we need to consider fundamental tax reform in conjunction with increased enforcement. 

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Let me just go to this question of revenue as a share of GDP because it really does jump out at one what has happened here. We 

did have in 2000 revenue as a share of GDP that was at a very 

high level historically. Now we have revenue at a very low level 

historically, the lowest as a percentage of GDP, which you referenced, Mr. Secretary, since 1950. 

reuvenue as a share 

When revenue was high as a share of GDP, the President said 

we need tax cuts to rebalance. Now that it is low as a share of 

GDP, he says we need more tax cuts. Frankly, I do not think that 

squares with the reality that we confront. 

I would say that a tax increase should not be the first place we 

look. I think the first place we look ought to be this tax gap, because there is an enormous amount of money that could be recovered. 

Let’s go to the next one. This shows spending as a share of GDP, 

and it is very interesting. This goes back to 1980. We see spending 

got up to 23.5 percent of GDP. It came down steadily until 2000 

to 18.4 percent of GDP. We have now had a substantial uptick, and 

we see that leveling out.

So we do have a spending problem, but I hasten to point out that 

92 percent of this increase has been in just three areas: defense, 

homeland security, and response to 9/11. So the spending side of 

the equation is going to be very tough, but it simply has to be attended to. 

Let me put up—this is my question. This was in the Washington 

Post on January 26th with an article headlined, ‘‘Weak dollar helps 

U.S. firms for now.’’ The article said in part, ‘‘Currency traders 

fretting over that dependency’’—and the dependency they were 

talking about are these massive deficits, both budget and trade—

‘‘have been selling dollars fast and buying euros furiously. The fear 


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is that foreigners will tire of financing Americans’ appetites. Foreign investors will dump U.S. assets, especially stocks and bonds, 

sending financial markets plummeting. Interest rates will shoot up 

to entice them back. Heavily indebted Americans will not be able 

to keep up with rising interest payments. Inflation, bankruptcies, 

and economic malaise will follow.’’

Let me just top it off with this. This is what has happened to the 

value of the dollar against the euro, which you are intimately familiar with after meeting with your G–7 partners. I am sure they 

were talking to you about this—what has happened to the value of 

the dollar in the last 18 months.

My question to you is this: Are you concerned about what the 

IMF warned us about, what the Comptroller General of the United 

States has warned us about, what these economists are warning us 

about: that this pile-up of deficits and debt could threaten to put 


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upward pressure on interest rates which would threaten to reduce 

economic activity and that an early warning sign is what is happening to the value of the dollar? 

Secretary SNOW. Well, Senator, clearly the deficits, —unless 

dealt with—pose a threat to the long-term well-being of this country and they, therefore, must be dealt with and have to be dealt 

with. I think virtually all the economists agree that if deficits become embedded in the financial structure of a country and financial 

markets view the deficits as entrenched and rising, there will be 

a perfectly predictable reaction in the marketplace. Lenders will 

demand higher premiums, which mean higher interest rates. And 

that would be extraordinarily unfortunate. 

One of the great boons to the American economy today is the low 

interest rates we have. They have helped create a very strong 

housing market, a very strong construction market, strong demand 

for any number of credit-based consumer products—automobiles. 

So I share your concern that we must deal with the deficit and 

that the deficit represents national dissavings. And we have the 

Government dissaving through deficits. We have an extraordinarily 

low savings rate on the part of households today at 2 percent or 

so versus 7 or 8 in the past. And we do have a large current account deficit, which is really the difference between our domestic 

investment and our domestic savings. And since our domestic investments, thanks to the strong economy, are high—we have lots 

of good investment opportunities in America. We want to keep that 

up. But we don’t have adequate savings to fund it. We need to call 

on other nations of the world. And the current account deficit reflects our own national dissavings. I certainly agree with you. 

Senator CONRAD. Let me just conclude by saying that the problem that I see is that the President’s plan does not deal with the 

deficits. Here is what we see happening under the President’s plan 

with the growth of the accumulated deficits, which is the debt, and 

the gross debt is just going through the roof under this plan. 

So to me the President has not given us a plan that deals with 

the deficits. I would just ask you—I know it is very difficult for the 

President, once he set up his budget, to reconsider, but I think as 

we work through this, we have to be much more serious about 

where this is all headed. 

Secretary SNOW. Senator, I cannot see the chart in terms of the 

out years. That goes out to? 

Senator CONRAD. 2014. 

Secretary SNOW. This would be too long an answer, but I think 

your debt numbers include a good deal of intra-governmental debt 

too. 

Senator CONRAD. Oh, yes. This is the gross debt. But remember, 

we have a totally different situation than we faced before. That different situation is we have the baby-boomers that are about to retire, and we have been ramping up Social Security dramatically, 

$160 billion of surplus this year, $260 billion in the fifth year of 

Social Security surplus, and under the President’s plan every dime 

of it is being taken for other things. 

Secretary SNOW. As you and I had the exchange yesterday, I 

think we are in agreement that we need to find a way to deal with 

those long-term unfunded commitments represented through Social 

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Security and Medicare where—demographics are really destiny, as 

they say, and the demographics are just about to hit us. I am in 

full agreement that we absolutely have to confront the issue of our 

baby-boomers retiring and the consequences of the demographics 

on these very large systems which will require us to take actions 

on a number of fronts, to do things like hold down health care 

costs. 

Senator CONRAD. Let me just conclude by saying to you I agree 

with that, but I will tell you, you have to look on the revenue side 

as well. But the 75-year costs of the President’s tax cuts are three 

times the shortfall in Social Security. So we have to look at both. 

Chairman NICKLES. Senator Conrad, thank you very much. 

Next call on the Chairman Emeritus, Senator Domenici. 

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

Mr. Secretary, it is good to be with you. 

Secretary SNOW. Thank you, Senator. 

Senator DOMENICI. My first question will be of great interest to 

the distinguished former Chairman of Appropriations, who sits 

over here on my left. Could I ask you, if you know, what percent 

of this budget is appropriated? 

Secretary SNOW. Not offhand, I do not. 

Senator DOMENICI. I should know it like that, but I do not. 

Senator BYRD. About a third. 

Senator DOMENICI. About one third? 

Senator BYRD. About a third. When I came to Congress more 

than 51 years ago, the percentage was somewhere in the high 80’s 

or 90. Today it is less than a third, less than a third. 

And one other thing we need to remember, when we are talking 

about Government spending, we are also talking about for the military, spending for the military and for homeland security. But to 

hear these witnesses, you would think it is all domestic discretionary. You just think it because they do not stop to say that. 

Excuse me, Mr. Chairman. 

Senator DOMENICI. That is fine. Just so I get my chance to do 

a couple of questions, I am very pleased. 

I wanted to amplify that by saying not too long ago, when President Kennedy was President, 59 percent of the entire budget of the 

United States was for the defense of our country, and that much 

was all discretionary, if you can imagine. 

The reason I raise the question, I know our Chairman works 

very, very hard on trying to get the discretionary accounts of our 

Government down, and I commend him for it, but I really think 

every now and then we have to be realistic when we try to look at 

how big that deficit and how we get it down. We have to be realistic as to how much of this budget is domestic. I mean you cannot 

take 10, 15 percent of this budget is appropriated. You cannot take 

10, 15, 20 percent of it each year. The kind of money that is needed 

to get into balance is 10, 15, 20 percent of the budget of the United 

States. 

I really think it is nice to go through this exercise, and he will 

produce a budget that ratchets down this appropriated account and 

we will struggle terribly, and when we are through, if we are lucky, 

if we are lucky, we will save 1 percent or 2. So I want to make sure 

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ture, and you must know the overall picture is a lot more than the 

appropriated accounts. 

Having said that, I want to suggest something to you. There is 

an old tax code sitting around your shop that one of your men 

there knows a lot about. It is called the USA tax. You have heard 

of it. 

Secretary SNOW. I sure have. 

Senator DOMENICI. It is the only reform measure that is an entire tax code, done by Senator Nunn and I with great help from the 

business community, and USA stands for Unlimited Savings Accounts. It was going to change our tax code so that you paid money 

on what—excuse me—taxes on what you spent, not on what you 

saved. But I would tell you there is a separate section on corporations, and it might be worthwhile to look at it. It very well might 

work by itself. It completely changes corporate taxes. It starts with 

the premise you are going to get as much money as you do now, 

but believe it or not, if you were in business, how do you think it 

would be for business to have no depreciation schedules? Would 

that not be exciting? Everything they purchased is on a cash basis. 

That is the premise of the USA. It is just a phenomenal way to 

change and put some energy into that. 

I do not want any long answer, because I have some things, and 

I want to proceed. 

Secretary SNOW. Senator, I am aware of those proposals back in 

the mid 1990’s. Former Secretary O’Neill, Leonard Alcoa and I and 

others were engaged——

Senator DOMENICI. You all raised the money to put it together. 

Secretary SNOW. Yes. And it had an extraordinary amount of 

promise and merit to it. 

Senator DOMENICI. Mr. Secretary, I remember back in the day—

obviously, I was not here, but I remember reading that President 

Dwight Eisenhower used to say—and lots of people did not understand it and did not much care—but he used to say the greatest 

thing for America is to have low inflation. A lot of leaders have 

said that. You remember when we used to struggle because inflation would go up and down just like a roller coaster? And everybody was trying to figure out why, and some people would say, 

well, labor contracts are all up this year. We are going to have inflation. 

The great thing that is happening to America is lack of inflation. 

Is that not correct? 

Secretary SNOW. Absolutely. 

Senator DOMENICI. Second, everybody, including Greenspan, for 

years used to say, Americans will be healthy. There will be plenty 

of jobs if we increase productivity. I just noticed, Mr. Secretary, 

and fellow Senators, that productivity in the third quarter of last 

year was 9.3, second quarter was 7.1, and third was 2.2. Then it 

went along at 5.6 average for 2 years. The fastest rate of growth 

in any 2-year period since 1950. 

Mr. Secretary, I am very perplexed and I do not understand any 

more. How could you have the two most important things for a 

healthy economy, inflation under control and productivity humming at the highest rate we have ever had, and somehow people 

229

are running around saying this is a bad economy, No. 1, and second, that we do not have enough people employed? 

Mr. Secretary, either these things are no longer relevant, inflation low and productivity high, that is one possibility; or we do not 

know what we are talking about in terms of what productivity 

means any more. I believe it is the second one. I do not think we 

understand productivity. I do not think we know how to measure 

it very well. But I would like you to do two things quickly, to comment on what I have said, and then second, would you produce for 

this Committee, if the Chairman agrees, an analysis of productivity 

and what it is, how we measure it, who measures it, and how much 

confidence you have in it? 

Secretary SNOW. Senator, yes, we will be delighted to do the latter, produce that assessment for you. 

Senator DOMENICI. All right. 

Secretary SNOW. On the question of inflation, I agree with you. 

We are blessed with extraordinarily low inflation rates today. That 

is a reflection of high productivity. It is a reflection of global competition. It is a reflection of some excess capacity that is hanging 

over from over investment back in the late 1990’s, and it shows up 

in the fact that businesses do not have any pricing power. Business 

after business after business will tell you they simply cannot raise 

prices. 

Productivity is also a terrific thing for the economy in the aggregate because productivity means you got more output, and that 

means more potentially to share with everybody. Right now productivity is probably having a somewhat negative effect on job creation 

because businesses are finding they can produce more with less, so 

a given level of output can be done with fewer workers or now a 

larger level of output can be done with the same old level of workers. But productivity will show up as higher profits in corporations 

and businesses and hire-free cash-flows. That will get competed 

away, as it always does, marketplace competition. Then the employers will need to expand their businesses, they will be led to expand their businesses by the profits, and as they do, then the labor 

share will go up. 

I think if we look at our national income statistics, we will be 

in a period here where the share to capital will be higher temporarily, and then it sets in place a healthy process where the share 

of the capital shifts and it moves more to labor. 

The labor markets are pretty strong, but given this high productivity, Senator, there has been a slower pickup in jobs than economists would have expected from growth rates as high as they are, 

but of course, as the Chairman said, we have some differing interpretations of labor markets given the fact that the household survey is showing the creation of quite a few jobs, a lot of jobs, and 

the establishment survey, payroll survey, is showing a much, much 

less fast rebound in jobs. There should be a convergence there because they end up measuring the same thing, but right now they 

are showing different results. 

Senator DOMENICI. You would not like to be running for President and answer the issue about less jobs having been produced by 

saying we had too high a productivity, would you? Would that not 

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be a nice answer out there? Who would understand that and would 

that——

Secretary SNOW. I was trying to explain why the job pickup rate 

in this recovery is a little slower than the economists would have 

predicted. 

Senator DOMENICI. Yes, I understand. But you think it is going 

to get better in due course? 

Secretary SNOW. Oh, absolutely. I think all our forecasts, the private sector forecasts, are for a good job pickup over this year, over 

1904. 

Senator DOMENICI. Thank you. 

Chairman NICKLES. Senator Domenici, thank you very much. 

Senator STABENOW. 

Senator STABENOW. Thank you, Mr. Chairman. 

Welcome Mr. Secretary. We thank you for your service. 

To followup on what I thought were very excellent points of my 

friend and esteemed Senator, Senator Domenici, on two points I 

guess, two points that I was going to ask about. First of all, when 

we look at how we bring this budget back into balance—and it is 

astounding the red ink that we have now. I was privileged to be 

in the U.S. House in 1997 when we balanced the budget for the 

first time in 30 years and were focusing on paying down the debt, 

and it was a time of great economic growth for us. But Senator 

Domenici spoke about the fact that to only look at the discretionary 

spending side would not be to look at the largest way in which to 

bring down the deficit. In fact, I have said before the Committee 

at earlier times this year, this year’s nondefense domestic budget, 

discretionary budget, everything but defense. Homeland security, 

education, health care, non-Medicare health care, the environment, 

law enforcement, everything, adds up to $445 billion, which is less 

than this year’s debt. 

So if you eliminated every penny of everything we did in domestic spending and only funded the military, you would not eliminate 

this year’s debt. So we can debate whether domestic spending, discretionary, should go up, Mr. Chairman, a half a percent or a percent or 2 percent, but I share Senator Domenici’s position that that 

is really moving around the edges when we look at the huge debt 

that we have. In fact, when we look at this as shared GDP, 24 percent of what we are looking at in terms of the debt and revenue 

losses comes from spending as shared GDP, 76 percent is revenue 

losses and about half of that is the tax cut, which leads to what 

I feel is a very important debate, and it goes back to what you are 

talking about in terms of productivity and really world view economically of how we look at things today. 

We had an economic report released earlier this week that said 

basically if you can get it cheaper in another country, it is good 

business to do that, that on balance outsourcing or exporting jobs 

is a net plus for us. That is a different view, and when we look in 

the context of what we are seeing now, we really have a world view 

that says focus on wealth creation. Those who have wealth, hoping 

it will trickle down, focusing on wealth in terms of tax policy and 

trade policy and so on, versus focusing on work and the value of 

work in America. How do we get there? How do we get to the work 

part? 

231

When Chairman Greenspan came in yesterday to the Banking 

Committee, talking to us about the fact that it was surprising that 

with the economic growth we have not seen the job creation, but 

one question I would ask is we are beginning to hear theories about 

productivity that look at this larger issue of exporting jobs. One 

theory would say it used to take a hundred people, let us say, for 

a job in the United States. Now it takes 80 people in the United 

States, but 20 in India or 20 in China and 20 in Mexico, and that 

we are not looking at productivity in a way that would measure 

that. So that when we look—I had asked CRS to look at minimum 

wage rates around the world if they were converted to hourly rates 

for U.S. dollars. In China the minimum wage rate, compared to 

ours, is 33 cents, 33 cents in Mexico. So there is a major push, even 

as you talk about more dollars coming; you indicated more productivity, higher profits and then reinvestment. The question is, where 

in a world economy are they going to invest? It may not be in this 

country. 

We have Electrolux, which is a plant that makes refrigerators in 

Greenville, Michigan, a community of 9,000 people, 2,700 jobs. 

Electrolux makes a profit in the United States. They have added 

a third shift. They admit they make a profit, but they could make 

a bigger profit by paying 2.50 an hour and no health benefits in 

Mexico, and they are closing the plant. 

Mr. Secretary, how do we compete with that if we do not go right 

to the heart of smart trade policies, currency manipulation with 

these countries that are taking our jobs, and focus on more than 

wealth accumulation of a few? We need to focus on work, the value 

of work, the value of a middle class, and the value of making sure 

that that household income that Chairman Greenspan talked about 

to us yesterday, that is driving this economy, buying those cars 

which we want to buy in Michigan, American made cars, and buying the refrigerators and buying the homes, we are not going to be 

able to do that if we are being asked for our workers to receive 2.50 

an hour and no health benefits, or go to China for 33 cents as an 

average wage. So how do you speak to all of that? 

This vision that I see coming out of the administration is one 

that is working for a few, but I do not see it working for the people 

in my State of Michigan. 

Secretary SNOW. Thank you, Senator. The question you raise is 

a large one, and a critical one. It is really the central issue of economic policy. How do we make the American citizens better off? I 

think basically the answer is, by allowing the dynamics, the dynamism, the creativity, the energy of the American system to play 

out. You know, you go back 100 years and think of what the country was. We were an agricultural Nation, industrialization was just 

beginning. We had 40 percent of the work force engaged in agriculture. Today, as you know, it is less than 2 percent. 

And yet, the standard of living, year after year after year after 

year, as people left agriculture and moved into industry, and then 

left industry and moved into other things like computer chips and 

technology and health care and so on, we have had a progression 

from low value jobs in the United States to higher and higher and 

higher value jobs. 

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The reason—and you know this as well as I—the reason American workers have high wages is they are productive. Wage rates 

reflect the productivity of the work force. Our work force is the best 

in the world. They have the highest wages in the world. They are 

the most productive in the world. Our job, I think, in public policy, 

is to continue to create the conditions where the inherent talent 

and ability of the American work force and our businesses can reflect itself in the marketplace. 

Senator STABENOW. Mr. Secretary, with all due respect, these are 

different times now in a global economy. I understand going from 

agriculture economy to manufacturing, and we have all been told 

that now we are moving into high tech, value-added positions, and 

we need to focus on education and innovation, all of which I support, and I wish it was more reflected in this budget, by the way, 

since we do need to be doing that. 

But with all due respect, we are not talking about only manufacturing jobs or low-end jobs that are now being lost or exported because of the pressures internationally. We are talking engineers. 

We are talking about—in this report, at the beginning of the week 

with the Council of Economic Advisors, it was recommended that 

one of the ways to lower health care cost is by exporting health 

care providers, like radiologists. I have friends of mine in Lansing, 

Michigan, high-end engineers who are now in custodial positions 

because they cannot find high-end engineering or computer jobs 

that are being exported to India and other place. 

This is not, at this point in time, just about an evolution of economics in a world economy. If we are not smart about trade, if we 

do not address currency manipulation——

And I would just ask one question, and then, Mr. Chairman, I 

am sure I have used my time, but I just want to ask one question 

on that because if we in fact are saying we are productive and can 

compete with anybody, which I agree totally—when manufacturers 

sit in my office this week from Grand Rapids, Michigan and say, 

‘‘Just give us a level playing field.’’ By the way, they were outraged 

about this report that came out the beginning of the week. They 

are saying, ‘‘What are we going to do about a level playing field 

and currency manipulation by China?’’

I would just simply ask, in conclusion, what are we going to do 

about that? Mr. Secretary, we certainly know that something is 

going on, and we would welcome, and we need your leadership on 

that issue. 

Secretary SNOW. Thank you very much, Senator. I think we are 

making some good progress with the Chinese on that subject. We 

have engaged them. You know I spoke with Premier Wen, went to 

Beijing and had a long meeting with him and his economic policy 

leaders, the head of the Central Bank, Governor Zho, and the finance minister, Minister Jin, and a number of leaders in the economy. We are straight with them. We said, ‘‘You know, this system 

does not hold together. It does not work. It is not right for the 

world economy. It is not right for the world trading system, and 

you need to move to a flexible set of exchange rates that allows the 

market to set the value, rather have you arbitrarily establish the 

value.’’

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We have an agreement on that with them. They have acknowledged the need to move to a flexible exchange rate. They rightly 

point out they cannot do it tomorrow because their financial structures are so rudimentary, but they are beginning to take steps. 

There is increasing talk about maybe moving to a partial float or 

a currency basket, but I want you to know we are very much engaged on that issue and want to hold their feet to the fire on continuing to make forward progress there. 

Chairman NICKLES. Secretary Snow, thank you very much. 

Senator Stabenow, thank you. 

Senator ALLARD. 

Senator ALLARD. Thank you, Mr. Chairman, and welcome, Mr. 

Snow. 

When the President came into office, I think it has pretty well 

been established that the stock market began to decline well before 

that election. Then when he was sworn into office at that time, that 

is when you started your 3-year downturn and went into actually 

a recessionary period, and the President’s plan for economic growth 

was to cut taxes. At that particular point in time, I think relatively 

speaking to the history of the country, taxes were pretty high. I 

agreed with the President that when you have that high tax rate, 

if you begin to drop taxes, then you will stimulate the economy. 

We are saying that now. I do not think that anybody can deny 

that the economy is not in recovery, even at the last parameter to 

change which is unemployment rates, and I would have real concern for us to raise taxes in any sector of our economy at a time 

when we are looking at recovery that is just beginning. I wonder 

perhaps maybe you might comment on the impact that raising 

taxes would have as we are just starting in this growth period. 

Secretary SNOW. Senator, I would be very much opposed to that. 

I think it is about the single worst thing we could do. It would undermine this recovery, which as you point out is a very firm and 

good recovery. I think it is singularly bad economic policy that 

would jeopardize the recovery and put us on the wrong path. 

Senator ALLARD. I would like to followup a little bit on my statement now on the labor market and the unemployment figures. The 

unemployment rate fell to 5.6 percent in January, and it is well 

below the peak of 6.3 percent in June, and the payroll employment 

increased by 112,000 jobs. But I want to go to this household survey because the figures I have, they show a gain of 500,000 in January. As we move along, it seems like there is a greater discrepancy between the payroll employment and the household survey, 

and nobody seems to come up with an answer as to why this is occurring. 

I happen to feel that it reflects, and talking to many economists, 

they feel it reflects what is happening in the small business are, 

the self-employed area. I talked with some executives in the hightech companies that say, ‘‘Well, when you separate your employees, 

you cut back, you give them a bonus or you give some kind of a 

separation stipend, and they take this cash’’ and they say, ‘‘Now is 

my opportunity to go in business for myself,’’ so they start their 

business in their home, and that is not really reflected perhaps in 

that. That has kind of been my view and what I have picked up. 

234

I wonder, perhaps if you have any real things that you can add 

to that discussion that might enlighten us? 

Secretary SNOW. Thank you, Senator. You are absolutely right, 

there is a marked discrepancy between the two surveys, one showing relatively modest, the 112,000 pickup for January versus the 

five times that pickup in the household survey. I must say economists are sort of puzzled on this. I do not think anybody has a real 

good answer for it, but I would credit your hypothesis. I think your 

hypothesis may well explain the difference because the establishment survey or payroll survey, as it is known, deals with established businesses. 

There is a phenomenon going on that you mentioned that I think 

is very real, and that is more self employment. The large companies, in order to shed overhead costs of pensions and of rising 

health care costs, are in effect outsourcing functions that used to 

be done in the business. An H.R. department will be outsourced 

and the people who used to do the pension planning, who used to 

do the benefits planning and so on, are now doing it, but they are 

not doing it as an employee of the ABC Corporation. They are 

doing it as a sole practitioner. The household survey does not pick 

that up the same way. It may eventually pick it up, but it does not 

pick that up the same way the establishment does. 

I had a friend come visit me recently to sort of illustrate your 

story. He worked in a big establishment. He had a good job in a 

big establishment. He left, and he founded his own small business. 

He now has 12 employees plus himself. And he is not in the household survey. They may get him eventually——

Senator ALLARD. I am almost thinking you have that backward. 

Is it not the household survey that picks up those people that are 

doing work at home and so on, and the payroll survey does not? 

Secretary SNOW. Yes, that is right. I flipped it on you. But he is 

not in the payroll survey. I think there is more of that going on, 

but we cannot quantify it very well. It needs to be quantified, I 

agree. But that is a working hypothesis that a lot of people are now 

trying to test. 

Senator ALLARD. I would like to approach this manufacturing job 

issue a little bit. I had an opportunity to hear testimony yesterday 

from Alan Greenspan, and he agreed with me that this is not a 

new phenomenon, that we have been seeing a decrease in manufacturing jobs since 1979, and he agreed that that was the date when 

we started seeing that phenomenon. But he also elaborated on it 

and said, ‘‘Look, it is not only what is happening here in the United 

States, but that is happening worldwide.’’ I said, ‘‘Even China?’’ He 

said, ‘‘Yes, because of the productivity efficiencies that are being 

built into the system.’’

I had a number of manufacturers come to me 2 years ago and 

say the value of the dollar in comparison to the yet or the euro was 

so high that it was making it difficult for them to move their goods 

and services overseas because they could not compete. Now the 

value of the dollar has dropped down, which is a good sign I think 

for our exports. It means that things that we import is going to be 

more expensive, things that we sell overseas is going to be less expensive. I cannot help but think that is going to have a positive impact. 

235

Do you have any way of knowing how much of an impact the decrease in the dollar is going to have and whether we are going to—

I mean is this going to be sort of a sustained thing, the drop of the 

value of the dollar compared to the yet and euro, for example, or 

not? 

Secretary SNOW. Senator, that is an important and interesting 

question, but I have made a habit of not trying to predict where 

the dollar is going, or getting into commentaries on relative values 

of currencies for good reasons that you know. 

Senator ALLARD. Sure. 

Secretary SNOW. But your opening point of manufacturing, there 

is the secular trend, long-term trend that Chairman Greenspan 

talked about, much more pronounced on jobs than on output of 

manufacturing. We still have a tremendously big, vital and important manufacturing sector. In fact, our manufacturing sector, if the 

United States did nothing else but carry on manufacturing, nothing 

else, would be I think the fifth largest economy in the world. I 

think our manufacturing sector has an output valued at 1.6 or 1.7 

trillion, with the Chinese economy at less than a trillion. So it is 

a huge vitally important sector. It is also a extraordinarily productive sector, and its productivity rates have been running well above 

the GDP growth rates. So the effect of that is, it is becoming a 

somewhat smaller part of GDP, but more importantly, it does not 

need as many workers. It is staying competitive. If we can reduce 

barriers in the rest of the world, which we are intent on doing, 

which is a tax on our manufacturers, we can expand manufacturing. 

But this recession was different in some ways in that on top of 

this long-term secular, we ended up with a cyclical downturn which 

was really harsh and dramatic. Senator Stabenow knows that 

being from a manufacturing area; Michigan, Ohio, Pennsylvania, 

Illinois, and Indiana really were hit very, very hard by this and 

still have not come back from it. 

I remember when it started. It started in the summer of 2000, 

because I was then, with my former employer, a transportation 

company that hauls lots of things for the manufacturing sector, set 

up automobiles as a major product line. And I got the reports in 

from the subsidiaries, the barge line and the ocean carrier, the container carrier and the logistics company and the railroad, and there 

was all the same story. The economy had hit a wall or gone over 

a cliff, whatever metaphor you want to use, and it has not come 

back to that level yet today. 

So it was a dramatic downturn in the manufacturing sector. It 

is beginning to show better results now. Finally, we are starting to 

come out of it. But the jobs have very much lagged. 

Senator ALLARD. Well, Mr. Secretary, I know that the chairman 

wants to call on other members. To me, I think things are—our 

economy is definitely recovering, and I am pleased to see it has 

moved toward a small business sector. I mean, I see that trend. 

And I think that that is exciting for competition. I think that is exciting for our economy because it is the small business sector that 

develops—they are the originators of new thoughts and ideas and 

new jobs. That is where large companies come from. And I think 

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it is good for the consumer because competition holds down goods 

and services and gives the consumer lots of choices. 

So I cannot help but be positive, bullish on the economy. I think 

it is because of Bush’s tax cuts that he put out as part of his program. 

Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Allard, thank you very much. 

Senator Byrd. 

Senator BYRD. Thank you, Mr. Chairman, and thank you, Mr. 

Secretary. 

My relations with the Secretary have been very good over a good 

many years, and I value his work. I also value my association with 

him. 

Secretary SNOW. Thank you. 

Senator BYRD. I think he and I both are supporters of Amtrak, 

which serves many rural areas of this country. 

But on another matter, the Secretary speaks today about the 

commitment to deficit reduction, and my observations lead me to 

believe that the criticism of the administration’s commitment to 

deficit reduction is growing. And the price of loyalty—former Treasury Secretary Paul O’Neill says the administration put tax cuts 

and short-term political gain ahead of the Nation’s long-term economic well-being. Mr. O’Neill’s says his warnings about the risk of 

a fiscal crisis were dismissed. 

The International Monetary Fund, which typically censures the 

budget policies of Third World, debt-heavy countries, recently 

warned that U.S. budget deficits risked destabilizing financial markets and stunting global investment and economic growth. 

The General Accounting Office issued a similar warning, along 

with Federal Reserve Chairman Alan Greenspan and former Treasury Secretary Robert Rubin. Even the conservative Heritage Foundation has blasted the administration’s reckless fiscal policies. 

Secretary Snow, why is the administration having such a tough 

time convincing the American public that it is truly committed to 

deficit reduction? 

Secretary SNOW. Senator, let me begin by saying that I reciprocate those kind comments you made and have the deepest admiration for you, and that goes back a long, long time that we have 

worked together. 

The administration is committed to this objective. We have to be 

committed to this objective. The future well-being of the country is 

what is at stake here. And as I said earlier, this is a deeply serious 

issue. We cannot afford to lose the confidence of our financial markets. We cannot allow our deficit to become a threat to our future. 

And I want to tell you that I am committed to seeing us bring that 

deficit down, and bringing it down in real terms, and then going 

on and dealing with the longer-term set of issues that Senator 

Conrad and I talked about. 

Senator BYRD. Mr. Secretary, my time is limited. I am sorry. But 

why is the public not responding positively to the President’s proposal to cut the deficit in half? 

Secretary SNOW. Well, Senator, maybe it is our fault in not being 

more persuasive. I guess I need to do a better job of getting out 

237

there and talking about what we are doing and why we are doing 

and our commitment to doing it. It is a job of persuasion. 

Senator BYRD. Well, Mr. Secretary, while the administration argues that the deficit will be cut in half over the next 5 years, your 

own budget documents show the deficit will be worse in 2009 if the 

President’s budget is enacted than if Congress took no action at all. 

The administration’s budget is filled with holes and magic asterisks 

by failing to include any funding for the war Iraq—this I cannot 

understand—failing to include any funding for the war in Iraq—to 

which I am vehemently opposed, I might say for the record, if there 

is anyone in here who does not already know it—or to address the 

impending crisis in Social Security. I think the administration has 

given the American people little reason to take its deficit promises 

seriously. 

Now, if I might go to a second question, I know there is plenty 

that could be said on both sides here about that question I have 

just asked. But I must go on. Our time is limited. 

Tax cuts for the wealthy. On page 131 of its budget and economic 

forecast, the CBO shows that during the Bush administration, corporate tax receipts have fallen by $76 billion; estate and gift tax 

receipts have fallen by $7 billion; while social insurance payroll 

taxes, which fall primarily on working-class American families, are 

at their highest levels ever, up $60 billion since 2000. 

So the question is: Why is it that during the Bush administration 

taxes that fall most heavily on middle-class working families are 

rising while the taxes that fall on the most affluent are falling? 

Secretary SNOW. Senator, the issue of corporate taxes I think is 

explained by the fact that the President inherited a weak economy, 

and with that weak economy, corporate profits have fallen significantly, and with lower profits, there is less to be taxed, as well as 

the fact that many companies lost money during that period and, 

as you know, acquired these tax-loss carry-forwards and so on that 

they applied against their tax returns. 

The numbers I have seen—and I will be pleased to share these 

with you—suggest that actually after the President’s tax cuts, the 

share of the burden of the total tax bill rises on the highest income 

and falls on the lower income. That is the effect of taking a number 

of people off the tax rolls, 3 million in 2003, putting into effect the 

10-percent tax bracket, the marriage penalty, and the child credits, 

and a variety of things. But the net effect of that is that the lowerincome groups pay a smaller share of the total tax burden today. 

Senator BYRD. Mr. Secretary—do I have time for a short statement? 

Chairman NICKLES. The Senator does. I will note Senator 

Bunning told me he needed to leave at 11:30. If you don’t mind, 

we will call on him, and then I will call on you again. 

Senator BYRD. Well, I would love to do that. I can’t do it. I have 

to take my wife to the doctor. I am running short of time now. I 

would love to accommodate to Senator Bunning, and I shall. Let 

him go ahead. I will leave and take care of my wife first. She is 

my first duty. 

Chairman NICKLES. You have your priorities——

Senator BYRD. I have them straight. And I have had them 

straight for almost 67 years. 

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Chairman NICKLES. My compliments to you. 

Senator BYRD. I have a lot further questions to ask, and all this 

business about increasing taxes, you see, covers up the fact that 

these cuts that have been made are really deepening the deficits, 

and the war in Iraq is deepening the deficits. And we have these 

problems that are confronting us now. It is one thing to say that 

we are raising taxes, but nobody says very much about the fact 

that the war in Iraq is costing us—is not included in this year’s 

budget. The President is not asking for anything in this year’s 

budget for Iraq. But it is going to cost us. 

I will close with this final thing, if I may. In response to mounting budget deficit projections, President Ronald Reagan signed into 

law 12 bills to increase taxes, including legislation to repeal part 

of his 1981 tax cut. Similarly, in response to alarming deficit projections, in 1990 President Bush’s father made the courageous decision to break his ‘‘No new taxes’’ pledge. Although President Bush’s 

father paid a high political price, it was the right move at the right 

time, and it started the country’s finances on the road to recovery. 

Presidents Reagan and Bush were confronted with the same 

choice that this administration will soon have to make, and they 

concluded that the budget could not be balanced without repealing 

tax cuts. In 1990, the Congress likewise concluded that all pieces 

of the budget—discretionary, mandatory, and revenues—would 

have to yield savings. Until this administration acknowledges this 

seemingly obvious fact, it will never bring the budget into balance. 

Again, I want to thank you, Mr. Secretary, and I look forward 

to talking with you further. 

Mr. Chairman, thank you for your patience, and I thank all my 

colleagues for their patience. 

Chairman NICKLES. Senator Byrd, thank you, and best wishes to 

you and your wife. 

Senator BYRD. Thank you. 

Chairman NICKLES. Senator Bunning. 

Senator BUNNING. Thank you, Mr. Chairman. Secretary Snow, 

thank you for coming. 

I noticed in the White House budget proposal—and we have 

talked about this prior, and I hope you have been brought up to 

speed because the last time you begged off on it—includes $83 million for a new regulatory agency in Treasury to oversee certain 

GSEs. I have spoken with your staff in the past about regulation 

of GSEs. Assistant Secretary Abernathy stated before the Banking 

Committee that he believes that the Tennessee Valley Authority, 

TVA, should be under SEC jurisdiction. And I have a videotape, if 

you want to see it, just so that there is no misunderstanding. 

Do you think that all GSEs, including non-housing GSEs, should 

be regulated? 

Secretary SNOW. Senator, we have proposed that the housing 

GSEs be under, the Federal Home Loan Banks as well as Freddie 

and Fannie. Our proposals at Treasury have not gone beyond that. 

Senator BUNNING. Well, you are not answering my question. My 

question was: Do you think that all GSEs should be regulated? 

Secretary SNOW. All Government-sponsored entities——

Senator BUNNING. Should be regulated. 

239

Secretary SNOW. Should be regulated. I am not sure what other 

entities you might have in mind. 

Senator BUNNING. Well, there are other GSEs other than 

Freddie, Fannie, and the Federal Home Loan Bank. 

Secretary SNOW. Who are not regulated? 

Senator BUNNING. Who are not——

Secretary SNOW. To your knowledge——

Senator BUNNING. Who are not being put into the new regulator 

that we are trying to create. 

Secretary SNOW. Right. Well, the reason that we are putting 

these in is that they have to do with housing and housing finance 

and present a very significant—play a very significant role in the 

whole issue of housing finance. And in our view, these entities have 

become so large relative to the housing finance business and actually to the whole financings of the United States that a strong regulator is necessary so we can assure the soundness——

Senator BUNNING. I don’t argue that fact with you. I agree with 

you 100 percent. I am asking you about those that are falling outside of the purview of what you have proposed. We have no one 

regulating TVA right now. No one, except they do have $26 billion 

in debt on the market, which is considered guaranteed by the Federal Government. They are not regulated by the Securities and Exchange Commission. They are not regulated, not by any public 

service commission in the service areas that they serve. And I just 

think that it is time we got a hold on the three commissioners who 

make all the decisions and have an oversight. And this would be 

a very nice time if we could include them in some type of oversight 

and regulatory commission. 

Secretary SNOW. Senator, could I take a hard look at that? You 

have asked me this before. The answer I haveten back is that they 

are different. 

Senator BUNNING. Yes, they are different, but they are a GSE. 

Secretary SNOW. Well, the response I haveten—and I will probe 

into it further to make sure I can really talk to this with my own 

knowledge rather than relying on others—is that they are not quite 

like Fannie, Freddie, and the Federal Home Loan Banks because 

they are actually—not just sponsored, they are owned by, they are 

the U.S. Government. 

Senator BUNNING. Well, the U.S. Government needs to regulate 

them, and that is the question I am giving you. 

I really feel naked up here because I do not have any charts to 

put up. 

[Laughter.] 

Senator CONRAD. Do you want to borrow some? 

Senator BUNNING. Yes, I could borrow the chairman’s because he 

talked about taxes. You know, already expired at the end of 2003 

were the AMT relief, work opportunity tax credit, above-line deductions for teachers’ classroom expenses, enhanced deductions for donations of computers to schools, and medical savings accounts. 

Those are already gone. Those were in the tax bills. 

Expiring at the end of this year are R&D tax credit, accelerated 

marriage penalty relief, accelerated child tax credit, and the 50-

percent bonus depreciation. We are about to jettison them at the 

end of 2004. 

240

After 2005, small business expensing up to $75,000, it is gone, 

and $3,000 deduction for education and tuition expenses. 

Expiring in 2008, capital gains reduction rate, dividend rate reduction, and there are many of them that expire after 2010. 

My question to you, Mr. Secretary, is: If we do not do something 

soon, most of the good things that we did as far as tax reduction 

are going to disappear. My question is: Do you have a priority? 

Secretary SNOW. Yes, we do, Senator. A number of the items you 

mentioned are in our budget. 

Senator BUNNING. I understand that, but do——

Secretary SNOW. The R&Ds and the child credits and the marriage penalty and so on. And I think it is critical that Congress act 

and make them permanent. I would go beyond that and say I 

would like to see the out-year——

Senator BUNNING. The 2008’s and 2010’s. 

Secretary SNOW. Going out to there, exactly, because there is an 

awful lot of good tax policy embraced in what you did last year that 

goes out, and if Congress fails to act on it, it means a tax increase, 

a large tax increase on the American people. 

Senator BUNNING. That is what my—and in this recovery period, 

in my opinion, and in the opinion of a lot of people that are smarter 

than I am, if we have a tax increase in this critical period with a 

recovering economy, we will send this economy the other way rather than allow it to grow as it should grow. 

Secretary SNOW. I agree with you fully. 

Senator BUNNING. OK. There are other questions I have, and I 

am going to submit them to you in writing. As a courtesy to the 

chairman, I will yield back. Thank you. 

Chairman NICKLES. Senator Bunning, thank you very much. 

Senator Cornyn. 

Senator CORNYN. Mr. Secretary, it is good to see you. I recall a 

statement that I heard you make shortly after you became Secretary of the Treasury, and it struck me as profound, but something simple enough that a humble barrister could understand, 

somebody who has not been, like you, very successful in business 

or an economist or someone with that sort of professional training. 

And you said simply this, that if you want more of something, you 

should tax it less. And, indeed, I think that has been the policy of 

the President and the policy of this Congress in passing the President’s tax relief and growth package, and I think we are seeing 

that come to fruition with the economy roaring back. And I am, 

like everyone, grateful for it. 

Obviously, employment is not yet where we want it to be, but I 

am gratified by what you have told us this morning in terms of 

your expectations, and I think that is consistent with everything I 

have heard from everyone who knows or should know something 

about this subject. 

But I, too, share concerns about the deficit, but I think we had 

a fundamental choice to make when we looked at the tax relief and 

growth package, and that is, did we want to try to address deficits 

alone at the risk of killing the economic recovery in the cradle, or 

did we want to take a chance that we could get the economy roaring back again and put people back to work and then have time 

241

in a healthy economy sufficient to deal with the deficit, as I understand this budget proposes to do? 

But I also am concerned about when I hear members of this body 

and the others on the other side of the Capitol talk about the deficit. Indeed, you have been asked this morning has the President—

or the statement has been made, The President has not given us 

a plan to deal with the deficit. But, you know, I was always under 

the impression that it was Congress who passed a budget. Indeed, 

that is what we are in the process of doing. I always believed that 

it was Congress that appropriated the money to spend it, and the 

President’s role, albeit that of the bully pulpit and given the power 

of the veto, that his role was really different, and that it is our responsibility. So I just say all that because I do believe that if there 

is an enemy in this process, as Pogo said, ‘‘We have met the enemy 

and it is us.’’

I recall, finally—and I will lead up to a question—that as we debated last year both the budget resolution and we debated appropriations, that there were amendments proposed on the floor of the 

U.S. Senate totaling $85 billion, or $1.2 trillion over time, to add 

to Government spending. And thank goodness we had the self-discipline to not agree to those huge increases in spending. 

But really what I want to ask you about is this: Yesterday, the 

Senate Judiciary Subcommittee on Immigration had a hearing on 

the President’s proposal for a temporary worker program. And I 

must tell you that as complex the subject that you deal with every 

day is, to me the issue of immigration reform rivals that in complexity. But one of the things that does make sense to me is that 

if we get people out of the shadows and onto the tax rolls, that represents a net benefit for the economy and the American people. 

Do you have any comments you would like to share with us along 

that line? 

Secretary SNOW. Yes, Senator. I agree with you. There was a 

time when Treasury had more to do with that whole area. The Immigration and Naturalization Service had been part of Treasury at 

one point, but, of course, now is not. And I agree with you that is 

one of the more complex areas that we deal with. 

But the President’s policy of giving an identity to these people so 

that they become part of the recognized—they are recognized for 

tax purposes and so on, will clearly help, as you say, bring people 

out of the shadows and put more revenue into the tills of the 

United States. They are here. We ought to recognize the reality 

that they are here. And we ought to make sure that they are not 

part of an underground economy but become part of the regular 

and visible economy. Yes, I think it is a very forward-looking policy. 

Senator CORNYN. And if I have time to ask one other question, 

I would like to ask you a little bit about some of the concerns that 

Senator Stabenow raised about job loss. And I appreciate very 

much your concern and the President’s concern and the concern we 

all share when people are out of work and they want to work and 

provide for their families. Yet we all understand we are in a very 

dynamic time with a global economy. And the example that you 

used about the dislocation that occurred in agriculture, for example, because of automation and now that less than 2 percent are 

242

doing what 40 percent of the work force used to do at one time. 

And I guess we could all harken back to the day before the computer when it took a lot more people to perform functions now that, 

thanks to technology, take less people. But the truth is that consumers have benefited at reduced costs, but it does place a burden 

on us, I believe, those of us in positions to help, particularly when 

it comes to education and making sure we have an educated work 

force that is capable of earning the good wages that the higher-paying jobs that will inevitably remain in this country are capable of 

paying. 

I know the President talked about that some in his State of the 

Union as it relates to community colleges. Would you address that 

issue? 

Secretary SNOW. Yes, Senator, I would be delighted to. The President in the State of the Union talked about his jobs for the 21st 

century program, and the linkage between jobs and education is 

just absolutely perfectly clear. And the community colleges that he 

referenced in the jobs for the 21st century program provide the 

pathway to the training that gives you the opportunity to participate in the economy. 

It is not just the effects of globalization that we are dealing with 

in this economy. There are really many more jobs displaced by domestic competition than from global competition. And that is evident by the fact that there are about 40 or 50 million new jobs 

every year in this country, but there is also 40 or 50 million jobs 

where people are moving on. 

I was at a community college in Florida, in Jacksonville, the 

Jacksonville Community College, earlier this week. And it was a 

moving and inspiring experience to listen to the faculty of the 

school—and they call it the Advanced Technology Center at Jacksonville Community College—talk about the effect this school is 

having on the larger Jacksonville community. It is supported by 

the business people who work with the faculty to design the 

courses, indicating what the job skill needs are that they see coming along, and they in effect tell the students, If you get these 

skills, you will have a job with us. 

Now, this is not just putting time in to get an associate degree. 

This is actually learning. And the school commits to actually conveying the knowledge and hands-on experience in large part. And 

they told some moving stories. I will tell you just one that makes 

the point about how community colleges provide the pathway from 

the present to the jobs of the future. 

A cab driver who had modest earnings as a cab driver, who went 

to the school, night school, and he would get calls, and he would 

have to go, give a ride, and then he would come back. And he did 

this for two or 3 years and finally got the skills to get a full-time 

job at much higher compensation levels. And he came back to the 

school with his first—he had never had a check before. He had always depended on these fares. He now had a check, and he brought 

it back to the college, to the faculty, and he said, ‘‘I just want you 

to know what you have done for me and my family by giving me 

the skills that I can get a full-time job earning $50,000 a year.’’

Now, there are a lot of people who are like that, who are looking 

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paying jobs. The community colleges are the link between those 

people and the skills they need to get those jobs. And he had not 

been displaced by global competition. He was a fellow who had a 

job in the United States and wanted a better job. 

And that is really how America works, people looking for better 

jobs and acquiring—and we need to make sure we give them the 

ability to acquire the skills to get those jobs. 

Senator CORNYN. Thank you very much. 

Secretary SNOW. I appreciate your asking that question. 

Chairman NICKLES. Senator Cornyn, thank you very much. 

Mr. Secretary, I thank you for your presentation. I have a couple 

questions, and I think Senator Conrad may, too. Are you OK? Is 

12 fine? 

Secretary SNOW. Yes, 12 o’clock is good, Mr. Chairman. 

Chairman NICKLES. One of the issues that we have in the Finance Committee deals with international trade, deals with compliance with WTO, and that is the FSC/ETI legislation. The bill that 

was reported out of the Finance Committee has a lower corporate 

tax rate for manufacturers than for other corporations. It has a tax 

rate of 32 percent, ultimately—it takes a few years to get there—

for manufacturers and 35 percent for other corporations, whether 

they be financial or service.

I personally think that is a mistake. I think it is a complication 

in the code. I think it is an inefficiency. I believe my history tells 

me that Canada tried a differential rate for manufacturing and repealed it. I would hope that the administration and your office and 

yourself would lend some advice to Congress before, in my opinion, 

making a mistake. I think we have to pass legislation to be compliant with WTO, and I want us to do that. I do not want to see the 

European Union get into a trade war with the U.S. That would be 

a lose-lose situation for both sides. 

But, conversely, I would like to see us fix it in a way that I would 

be willing to sipport. I personally would be very troubled by having 

a differential corporate rate. I think that is a serious mistake. 

Would you care to comment on that? 

Secretary SNOW. Well, I agree with you, Mr. Chairman. I think 

what the Canadians found when they had the differential rate favoring one class of economic undertaking over another, manufacturing, that all of a sudden there was a lot of entry into the manufacturing business by people who formerly had not been manufacturers, but for purposes of the tax code showed up as manufacturers. You create real distortions, I think, with that sort of approach. 

The better approach would be simply if we treated everybody the 

same. 

So I agree with you, and I think we are sending that message 

to both the House and the Senate in terms of what would make 

good tax policy. 

We feel strongly that we need to be in compliance with WTO. 

But we need to do it in a way that does not distort the Tax Code 

and create disincentives for one sector of the economy versus another. And we need to do what seems to me in a way that moves 

forward—it cannot get all the way, but moves forward in modernizing this 40-year-old set of tax policies that I think fundamentally 

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prejudice the interests of American manufacturers—American businesses, manufacturers and service providers as well. You know, 

those rules came into effect before the United States had emerged 

as a great trading country with 20 percent or so of our GDP tied 

up in trade, imports and exports. 

We need to modernize that whole system and remove the noneconomic limitations on foreign tax credits that do so much harm, 

reform the rules that increase the cost of U.S. companies doing 

business in foreign markets. I would hope at some point we could 

go to the larger issues. Maybe some of them can be dealt with in 

the FSC/ETI. The more that can, the better in the FSC/ETI framework. But I see the priority now on just getting us into compliance 

in a way that doesn’t prejudice U.S. businesses and doesn’t create 

distortions in the Code. 

Chairman NICKLES. I mentioned I was displeased with what 

passed out of the Finance Committee. Would you work with us to 

try to help us, one, come up with a proposal that is within the revenues available, to be WTO compliant, and give us what I would say 

is a uniform corporate rate? And if there are other things on the 

international tax side that would help make us more competitive—

and you mentioned one or two, and Senator Conrad and I have 

been around long enough that we know that there is a lot of work 

that needs to be done on the international tax code. But we need 

to move pretty quickly. I think we are looking at potential tariffs 

within 30 days. That might be postponed somewhat, but it is important for us to move expeditiously. 

And so if you could help assist us in maybe coming up with a 

package that would be WTO compliant in your view and would be 

fair to corporations, we would appreciate your assistance. 

Secretary SNOW. We will commit to do that, Mr. Chairman. 

Chairman NICKLES. I appreciate that. One other thing from my 

opening comments, and I was reading through it a little bit more, 

and that is the corporations that are engaging in the sale-in leaseout or SILO and qualified technological equipment transactions. 

You are familiar with these? 

Secretary SNOW. Yes, I am. 

Chairman NICKLES. I was asking my staff for an example, and 

they said, well, there are a lot of transit systems that are using it. 

Senator Conrad is familiar with some others, and my staff said it 

has already happened for leasing the Berlin subway system. U.S. 

corporations doing this, getting depreciation tax benefits, and it is 

a shell game. It looks to me like it is one of these things that I am 

alluding to that needs to be stopped. It may be legal, but it is an 

abuse of the tax system. I am a person, who doesn’t have to tell 

people where I am coming from. I want lower tax rates and I want 

an efficient system, but I find this an abuse, and I want to stop 

it and I plan on working to stop it. 

Would you care to comment? 

Secretary SNOW. Yes, I agree fully with your statements on that. 

The SILO transactions, which we have analyzed now, have no 

meaningful economic purpose or utility other than to create a 

transfer mechanism for tax benefits. There is no economic utility 

at all. There is simply a mechanism for a tax transfer. I think they 

need to be stopped. The spread of them is really a dangerous thing 

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to the revenues of the U.S. Government. The cost of the SILOs is 

so great that the Treasury Department has had to revise its corporate tax baseline, because of so much erosion of revenue. It is 

really, Mr. Chairman, a critical issue and I am sympathetic to the 

States and cities and so on, but the revenue they get for that is 

so small relative to the erosion of the revenues of the Federal Government, that it is no comparison. 

And now, of course, it is not even our cities and municipalities 

in the States, but it is the cities and provinces and so on of the rest 

of the world, Frankfurt and so on, getting the benefit of tax transfers that is paid for by subway system, paid for really by the taxpayers of the United States. So there is something just fundamentally wrong about this, and it needs to be stopped. Let us be real 

blunt about it, this is a real bad deal for the taxpayers of America. 

Chairman NICKLES. I appreciate your statement. I told Senator 

Conrad that I think part of our challenge now is that most of our 

colleagues on the Finance Committee and Ways and Means Committee probably are not aware of it. Since we are both on the Finance Committee, we may ask you or somebody from your staff to 

help us have an additional hearing on it to expose it. We are going 

to send some signals that we are going to try and stop it. 

There are a lot of banks, a lot of municipalities that are involved 

in this, but from my preliminary estimates, it looks like for every 

dollar the municipalities are getting out of this sham deal, the Federal Government is losing about 10 times as much. 

Secretary SNOW. A 10 to 1 ratio. 

Chairman NICKLES. That is not a very good deal. 

Secretary SNOW. If I can help you publicize what a bad deal this 

is for American taxpayers and how abusive this scheme is, just call 

on me. 

Chairman NICKLES. What do you estimate the savings to be if we 

close this door? 

Secretary SNOW. I do not have a real good number on that, but 

it is in the billions of dollars, 33 billion, I am advised. 

Chairman NICKLES. I have heard about the $30 billion figure. 

Secretary SNOW. 3 billion a year. 

Chairman NICKLES. If it is going international as much as it evidently is, it is pretty wide open. 

Secretary SNOW. It could be much larger than that because it is 

a growing phenomenon. I mean that is why I hesitated to put a 3 

billion a year. It could be a 4, 5 or 6 unless we stop it. 

Chairman NICKLES. Thank you. 

Senator CONRAD. 

Senator CONRAD. Let me just pick up on that point and say the 

Chairman and I have been talking about the need to close that particular loophole. What is happening, for those who are listening 

and watching, is municipalities are selling their subway systems, 

they are selling even their sewer and water systems to private entities, that then can take the tax benefits from the ownership of 

those facilities, depreciate them, for example, over time, and then 

the municipalities lease back these systems. This is truly a scam, 

and it has to be stopped. 

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posals, and now it is going offshore. The Chairman referenced a 

Berlin subway system. I mean this has got almost no limit to its 

potential for abuse, and it is one area that has got to be dealt with. 

I would go back, if I could, to the other conversation you were 

having with respect to FSC. I think we now have to consider, in 

light of the tax gap, in light of our WTO challenges, fundamental 

tax reform in this country. I do not think it can be postponed any 

more. All of us understand it is not going to happen this year in 

an election year. There has not been enough time devoted to it. 

I would hope, Mr. Secretary, that we could begin the process 

though, focusing on these challenges, the tax gap, the hemorrhage 

in the current revenue system, our WTO problems, the fact that 

our trading competitors have taxes that are rebatable at the border 

that confers an advantage onto their businesses and that we have 

tried to match this with FSC and all the rest, but over and over 

we are ruled out of compliance with WTO. There is a short-term 

solution, but I think there is a much more fundamental need to review our entire tax system. 

Let me ask you this question: what is the deficit; in your judgment, how would you define the deficit? 

Secretary SNOW. The deficit is, I guess, best thought of as the difference between the Government’s annual expenditures and its annual receipts. 

Senator CONRAD. And what is the debt? 

Secretary SNOW. The debt is the obligation that the Government 

has to its creditors. 

Senator CONRAD. I ask those—I know they are very fundamental 

questions, but I ask them because I find there is enormous confusion in the public because the deficit and the debt, and of course, 

Mr. Secretary, you have defined them with precision. I find when 

I am visiting with people there is confusion between the deficit and 

the debt. When the President says he is going to cut the deficit in 

half, a lot of people confuse that with the debt. 

Let me show you the thing that very much worries me about the 

President’s plan. I know this is very busy. I am not asking to try 

to decipher this, but I want to talk about—this is from the President’s budget. It shows the increases in the debt at the end of the 

year. It shows the debt right now is $6.76 trillion. Next year, at 

the end of this year, 2004, it says the debt will be $7.486 trillion, 

an increase of $726 billion, not the $521 billion that the administration has been talking about, but $200 billion more. The big part 

of the difference obviously is Social Security, but all of that money 

is owed. They are our creditors. We are borrowing, under the President’s budget from Social Security. 

The next year the debt goes up by $647 billion. The next year 

by $593 billion, the fourth year by $592 billion. In 2008 it starts 

to go up some more, $613 billion, and in the fifth year from 2004, 

the debt is going up $633 billion. I do not see this growth of the 

debt being cut in half anywhere, do you? 

Secretary SNOW. Well, the deficit is cut in half under our numbers, and pretty much the CBO numbers. 

Senator CONRAD. But the deficit, that is where we have this confusion. The deficit, you are talking about on a unified basis, when 

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ular money, and the problem with that is, I think that fundamentally misleads us as to the magnitude of the problem. 

Secretary SNOW. Senator, it also——

Senator CONRAD. Do we not owe the money back to Social Security? 

Secretary SNOW. Senator, it also though, as you and I have discussed on prior occasions, calls attention to the things that we really have to get focused on. You mentioned Social Security and Medicare. That is really what that chart says. We have to get focused 

on these large commitments we have made to the future. 

Senator CONRAD. Mr. Secretary, the problem I have, when the 

President goes out and tells the American people he is going to cut 

the deficit in half, I think that gives them comfort. I think that 

leads them to conclude that we are getting this thing under control. 

We are not getting it under control. Under the President’s plan, the 

debt is going up. In no year is it going up less than $600 billion. 

Secretary SNOW. Senator, I would hope that that chart and what 

it shows on debt will lead to furtherance of this large public discussion on the subject of Social Security and Medicare. I think we 

need to deal with Social Security first, in my view. The President 

has put it on the table with his call for the Commission, with his 

call for the personal accounts, tried to engender a broad national 

dialog. I think we are getting more and more attention to it. I commend you for bringing the fundamental longer term issue to our attention. It needs to be addressed. 

Senator CONRAD. The thing that I do not hear you talking about 

is the revenue side of the equation, and here we are, we have this 

addition to the debt every year, massive increases, and that is before the baby-boomers retire, that is before the full effect of the 

President’s tax cuts which make this situation pale by comparison 

to what is going to happen. 

So I would say this to you, maybe we can make a deal here. I 

am willing to talk about the long-term entitlement imbalances, but 

I would hope you are willing to talk about the long-term imbalances on the revenue side, because deficits are a product of the difference between spending and revenue, and just to talk about 

spending misses half the equation. 

Secretary SNOW. Senator, thank you. 

Chairman NICKLES. Senator Conrad, thank you very much. 

Mr. Secretary, so you know, Senator Conrad and I already plan, 

probably after we finish the budget cycle, on having hearings on 

some of the long-term obligations that our country is facing, Medicare and Medicaid being the two of the largest. Incidentally, the 

unfunded liabilities that are facing Medicare are about three times 

that of Social Security. But we plan on having hearings on those 

and trying to maybe set the stage on what can and could and 

should be done in the long term to help make those programs more 

affordable. He and I have little difference of opinion on whether 

you should focus on gross debt or debt held by the public, but that 

is a debate for another day. Also we will get into—I do not know 

if it will be at the same hearing or another, a discussion about 

trust funds. So we will need your participation on those, maybe 

both for educational purposes. 

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I want to compliment you on your hearing performance today. 

You were very educational, very forthright, very helpful to us in 

helping us maybe meet some of these challenges, find some of the 

problems, solve some of the problems, and I would encourage Mr. 

Manciw to listen to your presentation on employment statistics. I 

think that would be helpful. I compliment you and your outstanding staff. Thank you very much for your participation. 

Secretary SNOW. Mr. Chairman, thank you very much. 

Senator Conrad, thank you. 

Chairman NICKLES. The meeting is adjourned. 

[Whereupon, at 12:03 p.m., the Committee adjourned.]

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THE PRESIDENT’S HOMELAND SECURITY 

BUDGET 

WEDNESDAY, FEBRUARY 25, 2004

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The committee met, pursuant to notice, at 10:08 a.m., in room 

SD–106, Dirksen Senate Office Building, Hon. Don Nickles (chairman of the committee) presiding. 

Present: Senators Nickles, Gregg, Allard, Burns, Sessions, 

Bunning, Crapo, Conrad, Murray, Wyden, Feingold, Nelson, 

Stabenow, and Corzine. 

Staff present: Hazen Marshall, majority staff director; and David 

Ortega, senior analyst for homeland security, justice and community development. 

For the minoriyt: Mary Ann Naylor, staff director; and Mike 

Jones, analyst for justice, homeland security, community and regional development, Sarah Kuehl, analyst for social security, transportation. 

OPENING STATEMENT OF CHAIRMAN NICKLES 

Chairman NICKLES. Mr. Secretary, I would like to welcome you 

to our committee. We are delighted to have the Secretary of Homeland Security, Tom Ridge, before us today. I believe this is your 

first appearance before our Budget Committee, so we welcome you. 

I apologize for being a minute or two late. I went up to the sixth 

floor out of habit, but anyway I am delighted to have you before 

us. 

Mr. Secretary, you have enormous responsibility, and I compliment the President for selecting you. I compliment your willingness to serve our country in this very important task of being Secretary of Homeland Security. 

Since the year 2001, the Congress and the President increased 

discretionary appropriations for homeland security from basically 

$10 billion in 2001 to the President’s request of $30 billion for 

2005. We have created a new Department of Homeland Security in 

which you, as Secretary, oversee a total budget of over $40 billion, 

which include mandatory spending and fee-funded programs. 

As you know, Mr. Secretary, creating new agencies and new appropriations subcommittees can be challenging for budgeteers. We 

like to compare spending levels from year-to-year, and when you 

start moving around the pieces, it can get very confusing. I want 

to make sure, since we have thrown in a lot of new money, that 

262

we are spending the money wisely. I have seen some reports where 

that is not the case in some areas. 

I am concerned that Congress is creating programs under the 

banner of Homeland Security which, in some cases, some cities, 

some States are using as more or less general revenue sharing. I 

do not think we can afford that. I do not think we can afford to, 

frankly, rehabilitate fire departments throughout the country, and 

I do not think that is the purpose of your department. 

So we look forward the your discussion with us today. I think it 

is vitally important for us, as members of this committee and Members of Congress, to use adequate and I would say good oversight 

to make sure these funds are well-spent. And I intend to do that, 

and I look forward to working with all members of the committee. 

The President requests today a large increase for your domain—

a 10-percent increase. When we look at most of the Federal budget, 

it is pretty close to a freeze, that is very significant. I think you 

have to compete with all other priority programs, and there will be 

enormous competition. As we really try to be more frugal in this 

era of high deficits, you are going to have to justify that $3-billion 

increase and convince me, and I think other members, that it 

should go to your department instead of to other departments. 

And so anyway we are delighted to have you with us today. 

First, I will call upon my friend and colleague, Senator Conrad. 

OPENING STATEMENT OF SENATOR CONRAD 

Senator CONRAD. Thank you, Mr. Chairman, and welcome, Mr. 

Secretary, to the Budget Committee. 

I want to, first of all, commend the chairman for holding this 

hearing. We discussed a schedule of hearings, and we agreed that 

one of the most important hearings we could have would be on 

homeland security because, as the chairman has noted, the spending has increased dramatically, certainly the threat has increased 

dramatically, and much of that spending is in response to that 

threat. We all recognize that, and we support as strong a homeland 

security as we can provide. 

On the other hand, as the chairman mentioned, we have a responsibility to make certain that taxpayer funds are used wisely, 

and well, and for the purposes intended. And I must say I have 

been increasingly concerned about reports that I have heard from 

individual departments that spending initiatives that were pending 

previously, that were not approved once they were given the label 

of homeland security, whether or not they really fit that description, sailed through. 

And we have an obligation, as do you, to make certain that 

things do not just sail through because a label has been put on 

them, that they really strengthen our homeland security. And I 

know that has got to be an extraordinary challenge to you, bringing 

together all of these different agencies and several hundred thousand employees or approaching several hundred thousand employees to try to make certain the money is used wisely and well. 

Let me just go to put in perspective some of the issues that I see 

with respect to the issue before us. 

First is to kind of put in context where we are. This committee, 

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gress are faced with deficits that are at record levels—$521 billion. 

I believe at the end of this year it will actually be somewhat less 

than that, but nonetheless, a record budget deficit, by far the biggest we have ever had. 

In looking ahead, the President has said he is going to cut the 

deficit in half. I do not see that. I do not see that under the President’s plan. The only way that is achieved is by leaving out things. 

But when you add back the defense cost, when you add back addressing the alternative minimum tax, which the President’s budget only does for 1 year, when you add back the extension of the tax 

cuts, what I see on an operating basis going forward is extremely 

large deficits, by far the biggest we have ever had, and all of it at 

the worst-possible time, right before the baby boomers retire. 

One of the big problems we have is on the revenue side of the 

equation. We have to be tough on the spending side. We also have 

to look at the revenue side of the equation because the revenue for 

this next year, the year we are in, is projected to be the lowest as 

a percentage of gross domestic product since 1950. 

When I look at the long-term or at least the 5-year trend on 

homeland security, it matches what the chairman indicated—$9.4 

billion in 2001 and going up to $28.1 billion for 2005. So we have 

seen a dramatic ramp-up. All of us understand why. 

In terms of this year, the budget year 2005, the administration 

has called for a 10-percent increase, but I have tried to analyze 

that 10 percent, and what I see leads me to a somewhat different 

conclusion because much of that is Bio Shield advance funding for 

future years—2006 or 2008. When I take that out, I see about a 

4-percent increase, just to put in perspective what I think an appropriate analysis would be. 

And then when I look at the specifics, one thing that strikes me 

are cuts in these areas: State formula grants for first responders, 

the firefighter grants, the urban area security. In those areas, $990 

million cut in State formula grants, almost $250 million in firefighter grants, and then an area not under your direct control, over 

at the Justice Department, the COPS program and other law enforcement grants, $911 million, for a cut of a $1.4 billion, approaching $1.5 billion.

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And then I look at the cost of the Bush tax cut in 2005 for those 

earning over $337,000 a year, and the cost for the tax cuts for people earning over $337,000 a year in 2005 is $45 billion—30 times 

the amount of the cuts for first responders and for cops on the 

street. I know there are some who do not think of cops on the 

streets as first responders, but I can tell you my cops feel that way. 

And dramatic cuts in the COPS program are certainly not well-received in my constituency. 

Finally, on the issue of port security, those grants being cut by 

63 percent, and those are issues I want to go into in some more 

detail when we get to the questioning phase, Mr. Secretary. I hope 

this information is useful as we go into this questioning phase. 

Thank you, Mr. Chairman. 

Chairman NICKLES. Mr. Secretary, welcome to the committee. 

You are free to make any opening remarks you wish. 

STATEMENT OF HON. TOM RIDGE, SECRETARY, DEPARTMENT 

OF HOMELAND SECURITY 

Secretary RIDGE. Thank you, Mr. Chairman and Senator Conrad. 

You have been very kind to accommodate a scheduling conflict I 

had later on this morning. So, in order to give the membership of 

the committee the complete opportunity to address whatever questions they have, I would like to just ask unanimous consent that 

the statement be included in part of the record and get at it. 

Chairman NICKLES. Certainly. 

Mr. Secretary, Senator Conrad alluded to the fact, and Senator 

Collins has already written a letter, that dealt with the reduction 

in the program, the State Homeland Security Grant program from 

$1.7 billion to $700 million. Would you care to expand upon that? 

Secretary RIDGE. Yes, I would. 

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ment of 2004. What you are talking about with regard to the State 

Homeland Security Grant program is a shifting of some of those resources, a substantial amount, over $700 million into the Urban 

Area Security Initiative, where we feel that it is appropriate to 

take in not only population, but population density, threat, critical 

infrastructure and the like. 

So, if you go back and take a look and compare it with the 2004 

numbers, the overall request for the President has been sustained, 

and increases in other parts of the homeland security budget have 

been advanced. It is a shifting of resources because there is a shifting of priorities. I think it is a strategic decision, while we want 

to continue to support the development infrastructure around the 

country, continue to support States and their development of their 

own security strategies, that we shift some of those dollars where 

we think the greatest threat and the greatest possibility of catastrophic loss might be. 

Chairman NICKLES. Mr. Secretary, I happen to concur with that, 

but let me also say I do not want to waste money in the big cities 

either. 

Secretary RIDGE. I understand. 

Chairman NICKLES. And D.C. would be a program that one 

would say that is a high-threat area, probably one of the highest, 

with New York, and maybe Los Angeles and others. The District 

of Columbia funded leather jackets, assessed environmental problems on property prime for development. In Maryland, the money 

was buying Prince George’s county prosecutors an office security 

system; Virginia, a small volunteer fire department spent $350,000 

on a custom-made fire boat; in State and local Governments in the 

District, Columbia Hospital Association had a formula that guaranteed every city hospital a share of an $8-million grant. That meant 

the Psychiatric Institute of Washington, a small private hospital, 

received money to buy security cameras for its wards. 

I could just go on. I am just looking at a lot of money that is in 

a big city that is going to maybe be under the discretion—see, D.C., 

the agency used an additional $300,000, this is according to the 

Washington Post, and maybe they might be inaccurate sometime. 

I do not want to say it is gospel, but according to a Washington 

Post article, let me put it that way, and that was debated on November the 23rd, said that $300,000 was used for a computerized 

car towing system, which incidently I learned, my daughter learned 

the hard way. There is a lot of corruption in the D.C. car towing 

system—corruption. And I will repeat that because I am still mad 

about it. But I do not know that your department or the Federal 

taxpayers should be funding that. And I could go on. There is 

$100,000 to go to the mayor’s politically popular Summer Jobs program, but that does not make me more secure. 

So my point is I think you are on the right track and saying taking away or reducing the amount of money for the State grants 

that is going to every State by a population formula, I guess, and 

moving it into areas that you deem—I am guessing with your discretion—in the urban areas that are a higher threat, I happen to 

agree with that. But this is an urban area of high threat, and they 

waste a lot of money. And I am going to be just as vigilant on your 

$700 million under that urban grant program as I am on the State 

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program. And when I find that we are wasting money, I am not 

inclined to grant increases. 

And I just want you to know I want to be your ally, but I can 

also be your enemy if I find out that these funds are being wasted. 

And a lot of these funds, it looked like we Congress rushed to 

throw money at it, and the cities were all lobbying. They are here 

this week. The League of Cities and the Governors are all out saying, give us more money, we want more money, and then when you 

find out they are spending it in ways to buy leather jackets and 

so on, it infuriates me, and I wanted you to be aware of that. 

Secretary RIDGE. Senator, I do not think we would ever have any 

disagreement about the need to make sure that for every dollar 

that we are investing in security, we should get at least a dollar’s 

worth of return in security. Clearly, some of the expenditures that 

you have highlighted are of questionable relationship to that outcome. 

I will tell you, this year, for the first year, because we have only 

been in operation for a year as of Monday, we have asked the 

States to submit homeland security plans built from the grassroots 

up. We have also asked, with the Urban Area Security Initiative, 

that we get more complete prior expression of where those dollars 

are going so that as a formal function of our Department, we can 

start, one, limiting where these dollars can be expended, as we 

have a responsibility for building that national infrastructure 

across the country. 

So I am not going to try to explain how relevant some of those 

expenditures are to homeland security because I do not think I can. 

But I can tell you that there is not only a shared responsibility for 

us to oversee where those dollars go, but there is also a shared accountability and not just at the Federal level, but also at the State 

and local level to ensure that the dollars are being spent as Congress intended. And I assure you we will followup on that as rigorously as we possibly can. 

This year, for the first year, we will have plans. We are already 

screening the statewide plans. And while we do not want to be prescriptive, because one size does not fit all, we do want to frame 

where these dollars can go so we have a much better understanding of the integrated nature of the mutual aid systems that 

we are trying to build around the country. 

Chairman NICKLES. Well, these funds, correct me if I am wrong, 

these funds really are not supposed to be just a subsidy for local 

police and fire; is that correct? 

Secretary RIDGE. That is correct. 

Chairman NICKLES. Because I think a lot of cities have financial 

problems or challenges, and they would love to have us help them 

out, whether it is for assets or whether it is for other little things 

that are in the——

Congress has not abided by the President’s request in the past. 

In other words, we funded part of this. I believe you wanted most 

of the first responders’ money to go through FEMA and your department now. In the past, Congress had $1.6 billion of 

unrequested funding that was in the Department of Justice; is that 

correct? To make sure I am kind of on the right page. 

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Secretary RIDGE. Well, what we hope to do, Senator, is actually 

take the programs that had been, some of the programs that had 

been at FEMA. The basic source of these dollars were the Office 

of Domestic Preparedness. It used to be in Justice. We have it, and 

we want to combine our Office of Domestic Preparedness and our 

State and local office and then bring the relevant grants in from 

FEMA and from TSA so we can develop a one-stop shop for the 

State and locals, so we can better integrate the use of these resources, so we have much more rigorous oversight, and so we can 

evaluate whether or not we are getting a security return on those 

investments. 

Secretary RIDGE. For our purposes though, we need to combine 

those funds together to get your budget. 

One other thing, and that deals with the issue of the—well, 

maybe I will take it up later. I am going to ask all of our colleagues, the Secretary has a meeting, and he needs to leave. So I 

am going to try and be short, and I will ask all of our colleagues 

to try and keep their comments or questions to about 7 minutes, 

and I think we can get there—7 or 8 minutes, and we should be 

fine. 

So, with that, I will turn it over to Senator Conrad. 

Senator CONRAD. Thank you, Mr. Chairman. 

Let me just pursue, if I could, some of the items that the chairman was mentioning because I think this really does deserve scrutiny and your opportunity for response. 

In the article that the chairman was referencing, it indicates that 

‘‘Two years after Congress approved a massive infusion of cash to 

help gird the Washington area against terrorism, much of the $324 

million remains unspent or is funding projects with questionable 

connections to homeland security.’’ That is on the negative side of 

the ledger. 

On the positive they say, ‘‘Police, firefighters and public health 

have undergone disaster training, are better equipped to handle 

conventional attacks, weapons of mass destruction. They have more 

gear to protect them, more ambulances and fire trucks, more heavy 

equipment to diffuse bombs or locate victims buried beneath rubble. Local governments have at their disposal new blueprints on 

how to respond to a terrorist attack.’’ All of these things are very 

positive I think we would all agree. 

But they say, on the other hand, ‘‘Some police officers are still 

waiting for basic protective gear. Public health labs, swamped by 

the anthrax attacks of 2001, have no more capacity today. Most 

local Governments have no efficient way to give instructions to 

residents shut off from radio and television, and there is no comprehensive plan to unite families separated in a disaster.’’

Can we just take that paragraph, Mr. Secretary, and give you a 

chance to respond to that. Obviously, Washington, D.C., and you 

have talked about moving funds around to deal with the priority 

threat areas, and I think all of us would say that should be done. 

But here they are saying Washington, it has already been subjected 

to attack or the area, that some police officers are still waiting for 

basic protective gear. What can you tell us about that? 

Secretary RIDGE. The only thing I believe I could share with you 

is that among the priorities that the city of Washington set was obVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00273 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
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viously the purchase of some protective gear, as well as other emergency equipment during the first year of the funding. We are finding that throughout not only Washington, D.C., Senator, but 

around the country, that these Governors, and police chiefs, and 

fire chiefs understand that they are not going to be able to build 

themselves the kind of security unit or acquire new uniforms 

across the board and new equipment across the board, and so they 

are incrementally and sequentially making different purchases to 

buildup over a period of years the kind of capacity that they need. 

It reflects a decision by the mayor and the police chief as to what 

their priorities were. So, if they purchased some protective gear 

and other needs, we are not going to quarrel with that. We are just 

going to be mindful of their building up an adequate amount of 

protective gear and equipment over a period of time, and they are 

not going to be able to do this in a year. 

Senator CONRAD. Do you believe that it is adequate in the District? 

Secretary RIDGE. Well, again, I think the—I cannot tell you specifically the kind of protective gear that any particular police department has purchased. I can tell you that many of them have initially gone to protective gear and communications equipment, but 

I doubt if any of them have purchased the protective gear for everyone in their police forces. It is going to take some time, and the 

question becomes whether or not every individual police officer in 

every single police department has to have the same kind of protective gear. I do not believe that is necessary. 

Senator CONRAD. Let me just, if I could, Mr. Chairman, maybe 

I could ask that I just—I will give you a series of questions now, 

and if you could provide answers in writing, so that we not take 

the full time of the committee. 

My No. 1 question would be do the police in Washington, D.C., 

and surrounding communities have the protective gear that they 

need? No. 1. 

No. 2, do they have a system of communications that allows them 

to communicate an interoperable way? I held a hearing on this out 

in my home State, Mr. Chairman, and that was the No. 1 issue of 

first responders is a lack of interoperable communications. 

Third question, do the public health labs have sufficient capacity 

to deal with a bio or chemical attack? 

Next question, do local Governments, in the high-target areas, 

have an efficient way to give instructions to residents shut off from 

radio and television, such as a reverse 9/11 system? And maybe, 

Mr. Secretary, you could address that one right now before the 

committee. 

To your knowledge, do these local Governments, in these highvulnerability areas, have a way to give instructions to residents 

shut off from radio and television? 

Secretary RIDGE. I believe that the National Capital Region, 

which is a specific entity that you created in the legislation that 

created the Homeland Security Department, has worked to have 

that kind of system put in place. 

Senator CONRAD. Is it in place? 

Secretary RIDGE. Well, they are certainly working on it. I believe 

that Mayor Williams discussed it publicly. Arlington County has a 

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similar system. So I think, again, I cannot tell you today that it 

is completely in place across the National Capital Region. I can tell 

you it is a priority of the National Capital Region, and they have 

been working on it vigorously since the NCR was created. 

Senator CONRAD. Can I just ask that you, for the record, let us 

know what is the status. You know, the one thing that really 

struck me on that fateful day was the lack of communications. I 

mean here in Congress there was no communications. I think we 

saw that there really is a lack of a plan. I do not hold you responsible for that. I am just saying that is the reality that I saw play 

out on that day and massive confusion in this city. I mean, people 

were at jobs, did not know where their loved ones were. There was 

no ability to talk on a cell phone because the cell phone systems 

were overwhelmed. 

Finally, this article asserts there is no comprehensive plan to 

unite families separated in a disaster. To your knowledge, is that 

still the case that there is no comprehensive plan to unite families 

in the case of a disaster? 

Secretary RIDGE. Senator, this raises the question of responsibility of Government, and communities and families to do some certain things together. There is plenty of information out there about 

the need to have a communication plan and a contingency plan. 

There are individual efforts that have been undertaken by the National Capital Region to get families to think of how they would 

contact one another and then reassemble in the case of an incident. 

I know the National Capital Region is going to expand nearly $5 

million that the Congress has appropriated. So they have this massive public education effort to alert families that they need to develop these individual plans themselves—very family specific plans. 

I do not think it would be possible for any level of Government 

to design a family specific plan. That is something that they need 

to do themselves, but I do know that the National Capital Region 

is putting quite a bit of energy and quite a few dollars that Congress appropriated toward that end. 

Senator CONRAD. If you could give us a report on what the status 

of that is. 

Secretary RIDGE. Yes, sir. 

Senator CONRAD. Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Conrad, thank you very much. 

I next call upon Senator Gregg. For the information of our colleagues, the vote has started. We will continue throughout. We will 

continue with the hearing. 

Senator Gregg. 

Senator GREGG [presiding]. Thank you, Mr. Chairman. And let 

me join with yourself and with Senator Conrad, and I think the 

questions that Senator Conrad asked and that you asked, Mr. 

Chairman, are very appropriate, and I know the Department will 

want to answer them. 

Actually, to some extent, there is a certain deja vu all over again 

because I have gone through these hearings now, since I had jurisdiction of the issue of first responders for a number of years in my 

appropriations committee, and since we tried to set up a one-stopshop attempt. Unfortunately, due to the bureaucracy involved, we 

were never able to put up one-stop-shop. And I hope now that was 

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the concept of the Homeland Security Department, that we would 

accomplish that. I appreciate the Secretary pursuing that course, 

and I am sure it will be accomplished now that we have a central 

area. 

And the issue of first responders, since basically this was a program created by myself and Senator Hollings, was never to replace 

or give the police officers, and fire departments, and health people 

basically replacement parts. It is not a ‘‘blue light’’ program. It is 

not supposed to be like the LEA was in the seventies. It is supposed to be a threat-based organization. It grew out, as I have 

mentioned before, from the original Nunn-Domenici Act, which targeted the top 162 cities in the country, and it was supposed to 

bring those cities up-to-speed, and we decided to try to take it beyond that. 

I congratulate the Department for going to a threat-based system, and I understand that you are reorienting dollars to accomplish that. It is the right approach. It is going to make a lot of 

chiefs, fire chiefs, police chiefs, and Governors and mayors unhappy, but they have to understand that if they have a region that 

is not a high-priority threat, then they are just not going to get as 

much money as regions that do. 

Second, the State plan. We had an understanding there would be 

State plans in place before we gave out any of this money, and that 

was a precondition. I know you are now redeveloping the State 

plan, but again that is a little bit of deja vu all over again. But 

those State plans are critical to being sure that this money is not 

ending up buying blue lights, that it is going—and so I hope you 

will oversight those aggressively. 

I want to congratulate the Department for some things that it 

has done. One of the reasons I wanted the Department created was 

because, again, I had oversight over Immigration, but I did not 

have oversight over Customs, and I had oversight over Border Patrol, but I did not have oversight over Coast Guard, and I found 

that it was just chaos trying to get these departments to communicate with each other. 

I have spent a lot of time since the Department has been up and 

running talking to the line folks, the Customs agents, the Immigration folks and asked them, ‘‘Well, how is it working? Are you guys 

talking to each other yet?’’ And initially there was a lot of resistance. There was a sense of, ‘‘I do not want to learn that guy’s job, 

and he is never going to do my job as well as I can do it.’’

That has changed. That whole atmosphere has changed out 

there. There is a real positive atmosphere from the Immigration, 

the Customs people, the Border Patrol people. I sense a real dedication to trying to learn each other’s job, making this integrated. 

It is anecdotal to me, but it is good news, and I congratulate the 

Department for the effort there. 

What I want to ask is this Bio Shield issue. As Senator Conrad 

pointed out, most of this money is going to prefund Bio Shield, 

most of the new money. I am very concerned we are not making 

progress on this, that we are open to a biological and chemical attack. We have not been able to pass the Bio Shield bill out of the 

Senate. I got it out of our committee a long time ago. It should 

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have been through the Senate. It should have been passed. It 

should have been down to you. 

How much do you need the Bio Shield authorization to do this 

right, and even though you have not gotten the authorization, are 

you able to use the dollars to get us oriented for the purposes of 

first detecting and then handling biological and chemical attacks, 

which is clearly our biggest threat? 

Secretary RIDGE. Senator, as one who spent 12 years on authorization committees but never managed to get to an appropriation 

committee, I do not want to say that not having the appropriation 

would impair our ability to restrict our ability to use those dollars. 

I will let the Congress work that out. 

We are comfortable that the $2 billion-plus that you have provided us can be used under the circumstances designed by the legislation. That is, if we see that there is a specific threat, a biological threat, for which we do not have an antidote or a vaccine, and 

we know very clearly that there is not going to be a commercial 

market for this product, you have given us the resources to go in 

immediately and engage the private sector in researching the antidote or the vaccine. 

So, again, we will let the Congress work their will on whether 

or not we are going to get an authorization bill, but we believe that 

the appropriation gives us the opportunity to use those funds immediately when we do. 

Senator GREGG. On another issue, I was a little concerned about 

the Department’s request in the area of TOPOFF. It seems to me 

that TOPOFF has been an extremely constructive experience. It 

has now really gotten very mature. 

Senator CONRAD. Could the Senator explain what that is. 

Senator GREGG. TOPOFF is basically exercises of attacks, going 

through what is basically a military exercise. We stage a simulated 

attack on a city. It is biological, chemical or conventional or maybe 

even nuclear, and then it is a full scale, engage everybody in the 

community in a time line, very complicated, but very professionally 

done, much the way the Strategic Air Command used to stage their 

exercises relative to war. 

But I am a little concerned that the funding does not appear to 

be as aggressive as it needs to be in this area in order to stand up 

the next round of TOPOFF exercises. 

Secretary RIDGE. Senator, we think you have given us the resources to do that. I am actually going to have a briefing here in 

the next couple of days as we prepare for TOPOFF 3. Senator 

Conrad, the last TOPOFF 2 exercise included simultaneous events. 

One was a radiological event in Seattle, the other was a biological 

event in Chicago. When you bring to bear the Federal, State and 

local resources and all of the prime time players, we actually even 

had a, we call it VNN, a Virtual News Network, so we could work 

on crisis communication during this period. You learn a lot. You 

learn what you are doing right. You find gaps in the system, and 

you learn where you need to strengthen. 

Senator GREGG. What we learned was that the mayor of Seattle 

was a lot more efficient than the Federal Government in responding. 

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Secretary RIDGE. They did a good job, Senator. They did a good 

job. 

[Laughter.] 

Secretary RIDGE. So there are a lot of lessons to learn, both good 

and bad, and I think the Congress has been very generous with 

funding in that regard. Plus, not only the broad national exercises, 

but we literally run hundreds of both formal, on-the-ground, bootson-the-ground exercises or table-top exercises. That is one of the 

primary responsibilities of the Office of Domestic Preparedness, 

and one of the eligible costs associated with the dollars that Congress appropriates to our department. 

Senator GREGG. Senator Corzine? 

Senator CORZINE. Welcome Governor, and let me start with a 

compliment based on my reading of how the Department is working with the folks in my home State, and I feel like there is good 

dialog and coordination. That is the good news. Let me ask 

some——

Senator GREGG. Senator Corzine, could I note that I am going to 

have to leave to go vote. Could you recess the meeting after you 

finish and the other folks will be coming back? 

Senator CORZINE [presiding]. Sure. Absolutely. I would be happy 

to recess. 

I am going to ask a couple of questions: one about chemical plant 

security, one about screening issues at airports, and then a little 

bit about port security and do that relatively quickly. 

Chemical plant security is a major issue in my State. We have 

a number of plants that have more than a million folks that are 

in the fall-out zone of a potential explosion, and it is an issue that 

you have actually spoke very, I thought, eloquently about, talking 

about voluntary efforts that alone are not sufficient in a letter that 

you sent to the Washington Post, October 6, 2002. 

Do you feel the legislation that is working its way through Congress, which does not bring about mandatory review of security 

plans and review of technological elements of chemical plants is 

adequate to meet a standard of certainty for the communities that 

surround these plants? 

Secretary RIDGE. Senator, first of all, I would hope that, while 

there may not be mandatory review, we certainly are empowered 

to—the Department of Homeland Security is empowered with its 

discretion to go out and review the security plans at any chemical 

site. We have worked very hard over the past year visiting some 

of the potentially more problematic sites. Some of them have been 

in New Jersey. 

We have produced a document dealing with the common 

vulnerabilities of chemical facilities and potential indicators of terrorist activity. We have established a protection, training, and 

planning program. We are trying to develop a baseline for chemical 

facilities. So whatever the legislation might be, I do think it is very, 

very important that the Department of Homeland Security, particularly the Infrastructure Protection Unit, have the ability to go 

out and review the security plans. 

And likewise, I think one of the most important allies to determine whether or not that chemical site has met the local needs is 

that we get some, that the local first responders were included in 

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that assessment. Because actually they are going to be the ones 

that are going to have to deal with the incident if it occurs. 

So mandate—I think it is imperative that we have the ability to 

go out and review the security plans. 

Senator CORZINE. I would hope that you would have some kind 

of accountability for the plans. I think that the idea that you could 

go out is a good thing, but whether we are actually following 

through, I believe, based on at least my own anecdotal spot checks 

and others and broad bases, not all of what is being said is going 

to be done is being done, and I find it quite threatening in a community where there are multiple millions in a number of the incidents in New Jersey, but it is true across the country. 

Secretary RIDGE. Senator, we would be prepared to work with 

you on the language. What we have done, tried to do within these 

chemical facilities, is take a look at again the toxicity of the contents, proximity to population, and we have begun to set some priorities. And I think that clearly we will never have enough manpower to get out and visit and work with every chemical site 

around the country. We are going to have to rely on our first responders and the local law enforcement community to do that, but 

there are some that would offer great potential catastrophic consequences, and I would like to work with you on the language and 

make sure we get out and review those. 

Senator CORZINE. As you have I think appropriately identified 

threat-based elements with how you are designating your priorities 

in the Department, I think that is true here, and we need a 

prioritization basis on how you look at these. 

I think some of the things that I see coming through Congress 

not necessarily meeting the themes or the standards that I think 

I hear, and I have heard from you as you have commented on this, 

and I recognize that you recognize it is an important element. I see 

it working on the ground through our State efforts, but I would encourage you and the administration to do whatever you can to get 

a bill through with some meaningful bite with regard to 

prioritization and then mandates at least with regard to some of 

those issues, and I look forward to working with you. 

Let me ask about the state of screening by a TSA at airports. I 

am quite obviously being parochial in one sense in that Newark 

airport is one of the seven airports that did not meet the baggage 

screening deadline at the 1st of the year. I think there were seven. 

A lot of this is attributed, at least from the interviews that I 

have been able to put together with the folks on the ground, this 

is a heavy turnover in TSA and among screeners. I think average 

is 14 percent. I think it is 17 percent in Newark, and it goes up 

to 35 or 36 percent. By any managerial metric, those are high turnover rates and do not lead to the best of professionalism and efforts 

in carrying through. 

Is this a problem that is being recognized? Are there plans to address it? And particularly how soon do we think that these seven 

airports—I happen to have a special interest in Newark—that we 

can get this into a position that we can begin to give the public assurance that the safety of the airways is intact? 

Secretary RIDGE. Senator, I would like permission to get back to 

you specifically with a request to our anticipated deadline for the 

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Newark airport and for those seven. I do not have that information 

with me, but I would be pleased to work back to you. 

Yes, we have experienced similar problems at some of the other 

airports, Senator. A lot of it has to do with convenience, transportation, getting to the airports, the cost of either the inconvenience 

associated with taking public transportation—many of them have 

to—the cost of parking their vehicles. There are certain themes 

that we are seeing in some of our major airports around the country that we are going to try to address financially with different 

kinds of incentives to keep people working. 

We invest a great deal in them to train, but if we have this constant turnover, it is not, to your point, it does not provide the stability and the continuity we need. So we are aware of the challenge. A lot of it has to do I think with access, transportation, and 

we are reviewing a system of financial incentives to help alleviate 

some of the problems that these people are running into in order 

to get out there to serve the public. 

Senator CORZINE. I think there are real issues here I the overall 

structure, and any time you start a new program as broad as this 

is, that it can be the kinds of issues you cite. It does not happen 

to be the case at Newark because there is great public transportation there. It is a huge turnover. 

I would love to work with you on the specifics in that particular 

situation, but I think it is a national problem. And I will just ask 

for the record, since I need to go vote, on port security, I am curious what current percentage of containers that we are actually 

screening, if that is something that is available for the public view, 

and is there a metric of resources expended to increase the number, and is there a goal where we think we can, since you probably 

can’t screen every single container that ever comes to the shores, 

how can we get ourselves into a position to have the greatest confidence on our screening abilities? What is the percentage? Where 

do we stand with regard to our budget requirements to get to that? 

And since I have to go vote, I will take that on——

Secretary RIDGE. I would be pleased to, Senator. Just to assure 

you that we are layering in our review, our inspection of these container ships, beginning with a very precise targeting of these containers before they are unloaded in Singapore, and Hong Kong and 

the like. It is a rule-based system. We do it at the National Targeting Center here, and right now I think we are at 98 or 99 percent of the containers initially go through that process before they 

are even put on the ship. It is a very important and very complex 

application of the information we have acquired from the Coast 

Guard and the Customs over the years, and I would be very 

pleased to lay out in detail to you the different layers of defense 

as it relates to cargo container security. 

Sorry to keep you, Senator. Thank you. 

Chairman NICKLES [presiding]. Senator Corzine, thank you very 

much. That was an excellent question. 

Senator Burns. 

Senator BURNS. Thank you very much. 

I have just a couple of points. You might want to write these 

down, and you may have to respond to them, Mr. Secretary, in private or whatever. 

275

I notice you have in here an increase of about $892 million or a 

20-percent increase in improving aviation security. Could you tell 

me is that employees? Is that a capital investment? Where is that 

money going? Because every time I go down there, I have never 

seen so damn many people in my life. They are all over the place, 

and I am not real sure we need it. 

Secretary RIDGE. Senator, that additional $800 million is basically personnel costs. The 2004 budget, as we ramped up pursuant 

to the mandates from Congress, we did not need, because we were 

not fully ramped up—let me put it another way. We had an FTE 

requirement that was not fully met in 2004, and we needed additional dollars to meet it in 2005. So those are personnel costs, to 

your point, paying for labor, and paying for the baggage and passenger screeners. 

You should also know simultaneously we are now going back, 

having met the mandate of Congress, getting the technology deployed, hiring the screeners, on an airport-by-airport basis to see 

if the present configuration of people and technology is appropriate 

at each and every airport. So there will be some adjustments in the 

future. Some airports may have fewer, some airports may have 

more screeners. But we really need now to take a look an airportby-airport basis to determine whether or not we have the right 

number of people there. And the more technology we can deploy, 

in the long term, probably the fewer people we will need. 

Senator BURNS. Passenger IDs, any of these people on people 

who have a record of being frequent flyers, are they going to identify those people in some way or another, facilitate moving some of 

those people through these airports a lot quicker? 

Secretary RIDGE. Senator, as you know, we are working on two 

initiatives right now within the Department. One is the computerassisted passenger prescreening program. It is a pilot program that 

we hope, with the approval of Congress and basically we need the 

stamp of approval from GAO, that we can run that program. It 

would help us prescreen and probably eliminate a substantial of 

the secondary screening. 

There is another initiative that we are looking at called a Trusted Traveler Program, where people are prepared to give us, in advance, basic information about themselves, and so we can confirm 

their identity, verify who they are, and they do what they claim 

they do, to expedite their movement through the airport as well. 

So those two initiatives we are undertaking this year. 

Senator BURNS. In another area. Up in our State, when those 

grants come down to help first responders, fire departments, this 

type thing, there was a, if your EMTs or your first responders was 

not a part of the fire department, they did not get any funds. Is 

that a rule in your shop or is that a local State regulation? 

Secretary RIDGE. I think that is a restriction—I would have to 

double check, Senator—but I believe that is a restriction imposed 

by legislation. If it is the Assistant to Firefighters Grant program, 

I think it limits access to those dollars to firefighters. 

Clearly, the emergency management personnel that you are talking about, if they are part of a State or local scheme, can qualify 

for any money. But for the Assistance to the Firefighters Grant, I 

believe Congress limited that just to fire departments. 

276

Senator BURNS. You have different situations, like in the State 

of Montana, we have such small towns, you know, sometimes they 

are not together, and most times they are volunteer systems in 

that respect. 

One other question. In the area of bio defense, we have spent a 

lot of money in the procurement of vaccines and drugs that would 

be needed in case of a bio attack. Do those drugs have shelf lives, 

and what is our cost of replenishing those or turning those over 

from time to time? 

Secretary RIDGE. The drugs do have a shelf life. Health and 

Human Services, one of their responsibilities over the strategic national stockpile is to monitor and replace them if they have exceeded their shelf life. I cannot give you the specific annual figure to 

replace the vaccines or the other pharmaceuticals, but I will get it 

for you. 

Senator BURNS. And border, I understand we are going to restock 

a whole little town in Montana about people coming to Montana or 

that is going to work that border. I do have a complaint, though, 

and I hear this more than anything else. 

As you know, bureaucracies have habits of building fiefdoms, and 

we are getting a lot of complaints on just out and out harassment 

at these borders. And I know most, I should probably take that up 

with department heads, and I plan to do that, but I did want to 

bring it up during this hearing because I am concerned about that. 

The free flow, Mr. Secretary, is this. We have people who farm 

both sides of that border up there. They have farms in Canada, 

they have farms in the United States, and now all at once we are 

just—really, it is just a hassle to traverse that border now, where 

it has always been open before, and these are people that are everyday people, and most of them live in the area. But they say 

these people are just getting out of hand, and they are outrageous, 

and they are discourteous, and if you make them mad, they will 

leave your equipment sitting there. They might hold you for a half 

a day. I heard of farmer had to hold his equipment half a day because he made the guy mad, and I fail to understand this. 

Secretary RIDGE. Well, Senator, I would like to work with you on 

that. We have had some challenges along the borders because of 

that. 

Senator BURNS. I will bet you have. 

Secretary RIDGE. And our job obviously is to, No. 1 priority is security, but there is a commercial activity at the border. Some of it 

is visible with trucks, and cargos, and others. It is just good farmers who happen to have a parcel of land on both sides. So we would 

certainly like to work with you on that, and I am fairly confident 

we can come up with a satisfactory solution. You identify the problem, Senator, and we will correct it. 

Senator BURNS. Thank you. 

Chairman NICKLES. Senator Burns, thank you very much. 

Mr. Secretary, I told you earlier I would try to get you out—11:30 

is when you—do you have a little flexibility there? 

Secretary RIDGE. A quarter of. 

Chairman NICKLES. We will be OK. 

Senator Wyden? Thank you. 

Senator WYDEN. Thank you, Mr. Chairman. 

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Mr. Secretary, as you and I have talked about before, I feel very 

strongly that it is possible to fight terrorism without gutting civil 

liberties. Yesterday, the associated press ran a story that indicated 

that some of the remnants of Admiral Poindexter’s program are 

still continuing. I want to start with a couple of questions about 

that. 

My first question is can you make clear to us that none of those 

Poindexter programs are used to spy on law-abiding Americans on 

American soil? That is what the law requires. 

Secretary RIDGE. Senator, I am going to respectfully refer that 

inquiry to DOD, where Admiral Poindexter was engaged in that enterprise. I can assure you that nothing that we are doing in the Department of Homeland Security has been designed to collect information or to spy on American citizens. Frankly, every initiative 

that we consider, from the outset, there is both concern and consideration about the impact on civil liberties and privacy. 

The Congress very appropriately created within the Department 

a Privacy Office and an Office of Civil Liberties, and those couple 

of really talented lawyers and very good staffs are engaged at the 

very outset not only internally within the Department, but frankly 

with the groups and organizations around the country that legitimately are concerned about the universal protection of privacy and 

freedom. 

Senator WYDEN. Is your office involved, in any way, with data 

mining on the part of Government agencies? Because it seems to 

me that the Congress is just in the dark with respect to data mining. And we are paying for it, and my guess is you all are involved 

with other agencies in data mining today. And I would like to 

know, A, if that is the case; B, how many programs are going on 

involving data mining; and, C, how much money is being spent on 

data mining; and, D, whether there are any privacy rules with respect to how this data mining is going forward? 

What can you tell us about your office and data mining this 

morning? 

Secretary RIDGE. Well, Senator, I would like a little clarification 

from you, and I would be happy to have a private conversation 

with you, even a public exchange, if we framed the issue. 

We target containers coming into the United States. We buildup 

a data base that includes information about companies, and shippers, and we do refer to that. I do not know whether you consider 

that to be part of a data-mining process, but we do refer to information that we have compiled in Customs and the Coast Guard 

about companies and shippers. 

We do, as part of a program to move commerce through the borders, insist on going in to check the backgrounds of truck drivers 

coming across our borders from Canada to Mexico in order to get 

them access, quicker access to and from the States. 

We are contemplating a computer-assisted passenger screening 

program. This is probably perhaps where the greatest concern 

might be, where we would take the name, the address, the phone 

number, and the date of birth and other passenger name records 

that would be associated with that passenger. And, again, the Congress has set some thresholds and asked the GAO to examine the 

CAPPS program to ensure that the privacy protections that ConVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00283 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
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gress is concerned about are met. We are still working and developing that pilot program, which we cannot implement without the 

GAO’s imprimatur. 

So I would be happy to take up any of these or any related questions with you at any time. But we are getting access to personal 

information, and occasionally some proprietary information, but the 

most expansive reach would be the CAPPS program where we are 

trying to enhance security, reduce inconvenience, and frankly get 

access to some commercial information that commercial vendors 

might. 

Senator WYDEN. Why don’t you furnish to me, for the record, 

what programs involving data mining your agency is involved with 

because I think it is very clear that everything from airline ticket 

purchases, to visas, to driver’s licenses, a whole host of information 

is being examined by Government agencies every single day, and 

the Government, and certainly the Congress, is in the dark with 

respect to what is going on in data mining. There are no privacy 

rules. It seems to me the public has a right to know exactly what 

is going on here. 

Two other questions, very briefly. Section 313 of the legislastion 

creating the homeland security department calls for the creation of 

the Centralized Technology Clearinghouse. This is something I was 

very involved with. And the point of the clearinghouse was to make 

sure that our entrepreneurs and our small businesses would not 

have to traipse all over Washington, D.C., in order to get their 

technologies reviewed. We are not clear what the status is of the 

clearinghouse that is mandated by Section 313. Could you give us 

some sense of where that is because there are a lot of entrepreneurs and small businesses with ideas out there, and they 

wanted a one stop kind of process. What is the status of the clearinghouse? 

Secretary RIDGE. We understand and recognize it is a priority for 

the Congress. It is not as complete as I think you want it to be. 

With regard to getting access to information concerning procurement, we are in the process of streamlining that. In terms of it getting access to our Science and Technology Unit, to review the technology to see if it has application either within the Federal Government or elsewhere. Those are two features of that, as I read Section 313, that you wanted us to do. We are not completely done 

with either one yet; one, procuring information; two, assessing 

whether or not the technology is as good as it says it is and will 

perform as advertised. 

Senator WYDEN. I hope that you all can move quickly on that because it seems to me that this is something we hear again and 

again from small business people, that they traipse all over Washington, D.C., trying to get answers. 

One last question, if I might. Section 224 of the law was something that I was particularly interested in because it established 

something called NetGuard, which was essentially volunteers in 

science and technology. We saw after 9/11, for example, a lot of 

companies literally went to New York City in an effort to try to 

help them get their communications link-ups back and going, and 

they simply could not get in. 

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What is the status of section 224? This is something, like the 

clearinghouse, it is a very low-cost operation. NetGuard is volunteers. This is not something with Government employees. What is 

the status? 

Secretary RIDGE. Senator, I will have to get back to you on that 

one. 

Senator WYDEN. Fair enough. 

Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Wyden, thank you very much. 

Next, is Senator Sessions. 

Senator SESSIONS. Thank you, Mr. Chairman. 

Mr. Secretary, it is great to have you with us. You have had one 

of the greatest challenges anybody could have to try to assimilate 

all of these agencies and departments into one cohesive branch. I 

think you are doing a good job, and I salute you for it, but it is 

not easy. Anybody that has worked in the Federal Government, as 

I did, and worked with a lot of agencies, a United States attorney, 

and you know they are all quite different, have institutional prerogatives. When they decide to work together, they sign what 

amounts to treaties, you know, Memoranda of Understanding and 

things, that really I think indicate just how difficult it is to get people to work together. 

In that regard, I strongly believe, based on my experience at that 

level, partnerships between law enforcement at the local level, 

partnerships between State and local and Federal works. I have 

heard some concern in the field that there is not enough really 

partnering with the Federal Government in cooperative work. 

It is something, in my experience, you have to push constantly 

from the top, and it will eventually filter down, but without sustained leadership and pushing, it may not happen. I know you have 

indicated your desire to see this happen, but I wonder if you are 

satisfied at the level of cooperation and, if not, will you continue 

to push for that? 

Secretary RIDGE. Senator, I am very satisfied with the level of 

cooperation We have literally seven hundred thousand-plus volunteers in State and local law enforcement that want to be part of 

the Homeland Security team, and if given actionable information 

will take action to help us. 

Our challenge within the Department is to build an information 

network so that we can give them timely information. Just yesterday, we announced an initiative. Our goal is to complete it by the 

end of the year, and that is basically to design an Internet-based 

information-sharing system that once completed will go through all 

50 States and initially to the 50 largest urban areas. But, clearly, 

trunk lines can be spun off of that, so we can pass on down to the 

States and local law enforcement sensitive, but unclassified, information, and then as we complete our classification system, where 

needed, and when appropriate, even pass down secret information. 

It will be an Internet-based system. 

As I said before, our goal is to get it up and operational, and it 

is also not only going to connect us vertically, but the Operations 

Center in Washington, D.C., then can compare notes with the Operation Center in New York City. So there will be points of comparison, where they may pick up bits and pieces of information 

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that need to be shared. They may find some trends with regard to 

surveillance activity and share those. So, again, it is an Internetbased system. It is one of many that we are going to do in addition 

to secure phones, and video conferencing and the like, but our goal 

is to have that completely operational by the end of this year. 

Senator SESSIONS. I think that would be an historic step and 

would be very important. At the same time, I think you also need 

to push your local officials in areas to have regular meetings with 

the local law enforcement. Make sure they feel that they know how 

to access this and feel that partnership effort. 

Secretary RIDGE. If I might, Senator, one of the things I failed 

to note, and for everyone’s benefit, this was a system actually designed by State and local police, and shortly after 9/11 we became 

familiar with it. And it just seemed to be the easiest way to transmit information. 

During the holiday season, we actually used this system to connect with New York City and Los Angeles, California. So you’d get 

virtual real-time information exchanged. We saw a couple of States 

using it. New York and California get a lot of credit. We said this 

should be one of the main poles in the informational tent, and it 

was really brought to us by State and local law enforcement. As 

you point out, if we give them information, they can act on it. 

Senator SESSIONS. Mr. Secretary, we have a substantial problem 

with securing our borders with regard to immigration. We have 

large numbers of people here illegally. I understand that this bill 

calls for I believe $23 million for enhanced worksite——

Secretary RIDGE. Enforcement. 

Senator SESSIONS [continuing]. Enforcement. 

Secretary RIDGE. Yes, sir. 

Senator SESSIONS. Are you satisfied that can make a significant 

difference in that problem? 

Secretary RIDGE. Well, Senator, I think it is a doubling of the 

personnel and teams that we have within the Department. We will 

give you a status report here in maybe 6 months to tell you whether or not, after we get those dollars, and see if we need additional 

support. 

But I think, as a precursor to dealing with the President’s initiative concerning immigration, we will know that none of these laws 

are going to be effective unless we have the resources to enforce 

them. So we do have a doubling of those dollars to assist us in 

2005, and we think it is adequate to meet our laws under the existing laws because we are doing so many other things in addition to 

that at the borders to reduce the illegal flow of immigrants. 

Senator SESSIONS. Well, we are making some progress. 

Secretary RIDGE. Yes, sir, I think we are. 

Senator SESSIONS. There is no doubt about that. I have been a 

critic of, as you know, the legal system and its effectiveness in 

some of the things we have done. I think we probably need more 

than that in that account. 

And, second, you have a $100-million increase for purposes of 

dealing with detention and removal of illegals. As I remember the 

numbers, I think there are 400,000 absconders, people who have 

been arrested for violations of immigration law, were released on 

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bail, and they just never return. There are 400,000 out there. They 

also are not getting into the National Crime Information Center. I am sure this $100 million will help, but I hope that you will 

give high priority to guaranteeing, before we have any reform of 

the law, that our legal system is capable of dealing effectively with 

these problems. 

Would you make any comments about that expenditure and what 

you hope to achieve with it. 

Secretary RIDGE. Senator, you highlighted a challenge that we 

have with regard to the enforcement of the law, and that is dealing 

with those who fail to show up for that final determination hearing 

or there is a hearing, but we have no place to detain them. So the 

$100 million will significantly increase the capacity—not completely—but it is a significant increase in our detention capability, 

so once detained we can make arrangements to deport them. 

Senator SESSIONS. When people are convicted of felonies, they 

really should not be released. They are required by law to be deported, and I understand that has not been happening on a regular 

basis, and we need to make progress there. 

Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Sessions, thank you very much, spoken as a Senator and also a former U.S. attorney. 

Senator Stabenow. 

Senator STABENOW. Thank you, and welcome, Secretary Ridge, it 

is good to see you again. 

Secretary RIDGE. Hello, Senator. It is good to see you. 

Senator STABENOW. I first want to thank you for coming to 

Michigan and for the progress we have made at the border. It has 

been my pleasure to be a part of hosting you and a bipartisan delegation and have you come and see not only the challenge in Detroit, which is the largest Northern border crossing, as you know, 

but also in Port Huron, a smaller community where there are multiple risks and threats, and we look forward to continuing to work 

with you to meet those multiple needs, both for small communities 

as well as larger communities. 

I also understand you will be in Detroit on Friday to the Economic Club, so we welcome you again. 

Secretary RIDGE. Thank you. 

Senator STABENOW. There is no doubt in my mind that this is 

one of the most serious issues, if not the most serious issue, that 

we face as it relates to the budget, and this is not a partisan issue. 

We all care about safety and want to make sure we are safe, but 

we have different choices, and that is really what the budget process is all about. 

And one of my deep concerns is that after having 11 different 

meetings around Michigan with first responders, I can say emphatically that if I were to answer Senator Conrad’s questions 

about do we have protective gear, do we have interoperability on 

communications, do we have what we need in my State, the answer 

would be no, no, no. And that is of deep concern to me. 

And so when I look at choices in the budget, and I would ask, 

first, you to respond with your former Governor hat on, as being 

a distinguished Governor and having to work under Federal laws 

and budgets in the past, when we look at the fact that the PresiVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00287 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
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dent’s budget cuts the COPS program by $712 million, and the fire 

grant program by $250 million, and then provides some other increases, but when we look at the fact that, in totality for a Governor or a local community, you do not compartmentalize everything. You do not say to this police officer, you will only answer the 

call if we know it is terrorism, and you will answer the call if we 

know that it is a domestic problem. 

The practical reality is that law enforcement has to address a 

wide variety of issues. They get a call on a suspicious package, they 

do not know whether or not that is terrorism or whether that is 

something else, and yet they have to respond. 

So the local police chief, the mayor, the Governor looks at it in 

totality of what they need to be ready for threats no matter where 

they come from, which is one of my concerns about our attempts 

to divide this up in some way. Where the rubber meets the road, 

and you are dialing 911, that is just now how they look at it, in 

a practical sense. 

So I am concerned, I mean, as a former Governor, if you were 

receiving a $5-million increase in homeland security, but then a $5-

million cut in other areas, would you feel you were really moving 

ahead? 

Secretary RIDGE. Well, Senator, even the new math wouldn’t get 

me to that conclusion if you took $5 million out of this pot they 

used to give me and gave me $5 million in that pot, so I can understand that. But I want to share with you that I think it is, at least 

from Homeland Security’s point of view, the President has sustained his commitment, which was a considerable increase in 2004. 

What we are talking about, Senator, is the difference between—

and again you did say it was a matter of priorities—but the President’s request, by and large, for first responders this year is at 

2004 request level. 

In the budget process and in the legislative process, the Congress 

shifted some resources and took the dollar amounts for the State 

homeland security grants a little bit higher, took the assistance to 

the firefighters’ grants higher. But I think we have to be very clear. 

The President has basically sustained his request from 2004 to 

2005, and the priorities were shifted a little bit by Congress. 

And I think the President has come up in 2005, and here we 

have shifted—it is the same amount—but we have shifted the resources to where we think strategically there would be, at least for 

this time, it would be a better investment. 

Senator STABENOW. And I appreciate that. My concern, which is 

a larger concern, really addressed—that we are responsible for as 

well—is whether or not we are meeting 2004 levels and whether 

it is the same as 2005. Those levels were underfunding of what our 

communities needed. 

And the broader issue, and I have more of a statement, is that 

when we look at what former Republican Senator Warren Rudman 

and the commission, a distinguished group of people, looked at in 

terms of the broad needs that we have on first responders, they indicated that it would take $15 billion more a year to truly make 

sure the equipment was there, the communications was there, the 

bioterrorism training was there, the staff was there. 

283

This is more just a comment from the perspective of our Budget 

Committee, but when we look at this next year—and I am borrowing Senator Conrad’s chart—and we look at the fact that it is 

a matter of choices. For people who are earning over $337,000 a 

year, this next year they get $45 billion back in their pockets in 

terms of a tax cut. If we just gave them two-thirds of that, if we 

said we, as Americans, need to sacrifice together, and we are all 

going to be better off if we are able to fund everything that is needed in homeland security, and we just said you can have two-thirds 

of that, but we are keeping a third of it to fund first responders, 

I believe that would be a better choice to keep us safe. 

One other question, Mr. Secretary, and I will not ask you to respond to that. That is an issue for us to debate in terms of priorities. 

Secretary RIDGE. I understand. 

Senator STABENOW. On the local front in Michigan, when you 

were in Michigan last, we talked about a specific issue to Michigan 

which is the fact that Toronto closed all of their landfills and is 

now trucking all of their trash literally into Michigan. We have a, 

we showed you through a helicopter, the trucks coming across the 

bridge. 

Secretary RIDGE. Right. 

Senator STABENOW. Over 180 trucks a day. Even though we have 

better equipment at the border, and I was pleased to sponsor the 

amendment to create that and to work with folks at the border who 

have done an excellent job, we still cannot see inside of every truck. 

Every truck is not completely inspected. 

Your Department has initiated an effort to look at these trash 

trucks from a security standpoint. I wonder if you can share, at 

this point in time, any update on what you are finding or when you 

will be able to give us some feedback on that. This is a critical 

issue in Michigan for us and a real issue of national security because we do not know what is inside those trucks, and we are very 

concerned about our ability to keep people safe. 

Secretary RIDGE. Well, Senator, No. 1, thank you for your hospitality during that visit. I did learn quite a bit. The visit to Port 

Huron specifically was very eye-opening in relationship to a community with massive infrastructure and not very good access to 

any of the dollars that are out there, except through the State’s 

share, and I look forward to working with you and your colleagues 

to see if we can remedy that as we work with the regulations 

around the Urban Area Security Initiative. 

I did raise the issue with my counterpart in Canada, after our 

meeting, and clearly it was just the raising of the issue, but no resolution. It was raised again when I returned, based on my conversation with you, with Customs and Border Patrol. But what, if 

anything, they have done since that time we visited, I do not know, 

and I would be pleased to get back to you and report. All right? 

Senator STABENOW. Thank you. 

Chairman NICKLES. Senator Stabenow, thank you very much. 

Before I call on Senator Allard, Mr. Secretary, I need to excuse 

myself. Senator Crapo will conclude chairing the hearing. I just 

want to thank you for your presentation before our committee 

today, and also I look forward to working with you. You have taken 

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on a big challenge reorganizing a whole lot of the Federal Government. I think doing a good job, making our country safer, it is almost an impossible task, and I just compliment you and your team 

for the work that you are doing and look forward to working with 

you in the future. 

I apologize that I need to step out, but I think we just have three 

or four more Senators, so you should be done shortly. 

Chairman NICKLES. Senator Allard. 

Secretary RIDGE. Thank you, Senator. 

Senator ALLARD. Thank you, Mr. Chairman. 

Mr. Secretary, welcome. 

Secretary RIDGE. Senator. 

Senator ALLARD. I always enjoy what you have to say. 

The administration, I want to move right into one, a question 

here that has to do with the local nature and local problems that 

we are having in Colorado and several other States first, and then 

I have some other questions I want to talk to you a little bit 

about—the Information Analysis and Infrastructure Protection program that you have in place. 

The administration suggested a significant funding decrease for 

chemical demilitarization in the budget for the Department of Defense. We have a facility in Pueblo, Colorado, that will be profoundly affected, and understanding that you are not here today 

representing the Department of Defense, I would just ask simply 

does a delay in the disposal of chemical weapons and byproducts, 

essentially warehousing these hazardous materials, post a risk to 

homeland security? 

Secretary RIDGE. Senator, I would, without knowing the specific 

details of the change reflected in the DOD’s budget, I would say to 

you that the delay, in and of itself, I do not necessarily think would 

create a higher level of risk as long as there is no diminution of 

security around the facility. I do think that one organization that 

has been very good over the years at protecting their forest structure and everything associated with him has been the Department 

of Defense. But delay in final disposal, no, assuming that the security measures have been sustained. 

Senator ALLARD. And I think that is the big ‘‘if,’’ because I know 

around the facility we have in Colorado, I am not, at least the 

locals are not convinced, we have much in the way of security 

measures, and it seems that the sooner we can get this——

Secretary RIDGE. Is it through a private contractor? 

Senator ALLARD. They are in the process—yes, a local contractor 

has been let out, but security is minimal, and I think you always 

have to worry any time you have an accumulation of chemicals in 

one location whether it could ever become a target, whether it is 

a homegrown terrorist or foreign terrorist or whatever, and it 

seems to me that there could be some risk there. 

Secretary RIDGE. Yes. I am sorry I cannot be more specific, Senator, since I am not familiar with the particular venue or the contents at the facility. 

Senator ALLARD. Well, thanks for your interest in it at least. 

In January, the President, in 2003, in the State of the Union address, he had instructed the leaders of the FBI, and the CIA, the 

Homeland Security, and then the Department of Defense to develop 

285

a Terrorist Threat Integration Center to emerge and analyze all 

threat information in a single location. 

And there is a section there in the Homeland Security Act that 

provided that your Office of Information Analysis and Infrastructure Protection is to assess, receive and analyze law enforcement 

information, intelligence information and other information from 

agencies of the Federal Government, State and local Government 

agencies and private sector entities to integrate such information. 

Who is in charge of detecting and warning of these threats to the 

homeland? Is it you or is it the Terrorist Threat Information Center? 

Secretary RIDGE. The warning responsibility is given to our Department. The analytical responsibility is shared. We have analysts 

in the Threat Integration Center. While we do not collect information, because we are considered a full partner in the intelligence 

community, we can go back to the Threat Integration Center and 

ask whatever agency responsible for generating the information to 

answer questions that we might have from our analytical point of 

view about that particular piece of information. 

So, again, it is a collaborative exercise. We have analysts in it 

from the CIA, FBI, Homeland Security and others that paint a 

strategic threat picture. It is a real value added to our own independent analysis, and on a daily basis we do analytical work together. We, from time to time, go back and ask for additional information if, as part of their strategic analysis, there is something 

that catches our eye as it relates to our responsibility to secure critical infrastructure. 

Senator ALLARD. This has been spread through the various agencies and whatnot. I would think that you would have some concern 

about duplication of effort. How do you limit your duplication of effort? 

Secretary RIDGE. Well, Senator, I think having a couple of different groups or organizations bringing their various experiences to 

the analytical side of combatting terrorism is a good thing. Some 

people call it duplication, others call it competitive analysis. But I 

do think it actually is a better situation to have analysts in different departments may have a slightly different point of view on 

a particular piece of threat reporting, and it will be really forced, 

because of that competitive analysis, if there is a difference of opinion, for them to look deeper and more critically at that reporting 

stream. 

I think, by and large, there has been, in my experience so far 

with Homeland Security and the Threat Integration Center, there 

has been harmony in terms of the relationship, and frankly not too 

many differences of opinion as to what it all means. But when 

there is a difference of opinion, it just sharpens the clarity, and 

focus and gets a very robust discussion going on, and I think that 

is healthy. 

Senator ALLARD. I am just curious, we just stood up the Northern Command in the Department of Defense. It seems to me that 

there ought to be some communication between Northern Command and Homeland Security. Is there some avenues of communication that have been set up between individuals in those two departments? 

286

Secretary RIDGE. Well, we can communicate with the Northern 

Command, but as an old soldier, there is a chain of command that 

we use in order to do it. But we——

Senator ALLARD. So you feel comfortable with anything that they 

may be doing, anything that you might be doing and that is being 

coordinated. 

Secretary RIDGE. Yes. Well, you know, they just had a very, very 

significant multi-day, multi-incident exercise, and we were very 

much involved in the planning process and participating in that exercise. I am confident, in the months and years head, we will get 

locked up even closer. 

Senator ALLARD. There is a computer system being set up. It is 

called the Homeland Security Information Network. You are familiar with that. 

Secretary RIDGE. Right. 

Senator ALLARD. It is supposed to provide critical information to 

all 50 States and major urban areas. Can you update the committee on the program requirements and estimated costs on that. 

Secretary RIDGE. Senator, the cost, frankly, is minimal. I do not 

have a specific dollar amount, but since it is Internet-based, you 

have the infrastructure there. The costs will be associated with developing a classification system and some firewalls so that we can 

share, when appropriate, some classified, secret information. But it 

is actually a system that was developed by New York and California, by the State and local law enforcement community and a little assistance from I think the Defense Intelligence Agency, and it 

is the way that they have been communicating between their State 

and local officials. 

In one of our travels, some of our folks took a look at it and said, 

You have the backbone here. Let us see if we can devise what they 

used to call what they used to call was a Joint Regional Information Exchange System, JRIES. Let us take it nationwide. Let us 

draft it and tie it into, at first, to the 50 largest urban areas in 

America so that we have virtual contact with the States and the 

large urban communities. 

We used it during the holidays, when we raised, elevated the 

threat level, with New York City—our Operations Center was 

hooked up with the New York City Police Department and the Los 

Angeles Police Department by virtue of the Internet, and they are 

constantly information on a minute-by-minute basis. So it is a good 

system. It will take us about an entire year to get it up and running, but at the end of the day, it will give us the capacity to share 

information to just about every State and local law enforcement official in our major urban areas, and we think that is a good thing. 

Senator ALLARD. Thank you. 

I see my time has expired, Mr. Chairman. 

Senator CRAPO [presiding]. Thank you, Senator Allard. 

Next is Senator Feingold. 

Senator FEINGOLD. Mr. Chairman, Mr. Secretary, thank you for 

being here and for your work on behalf of our country. 

Let me ask you, first, about something that I have heard from 

emergency management officials in my State. They are concerned 

about a proposal in the President’s budget to cut funding for the 

Emergency Management Performance Grants. They are much more 

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concerned about the proposal to cut the percentage of grant money 

that they can use for personnel costs from 50 percent to 25 percent. 

I am told that this will have a tremendous impact on emergency 

management officials, especially those in small cities and counties, 

because salaries are often almost 100 percent of the cost of local 

and State emergency management programs. And a number of people told me in meetings back home and hearings that many local 

Governments will simply not be able to afford to have an emergency management official. The Emergency Management Performance Grant program is a respected program that our State and 

local officials have come to depend on. 

Why has the administration proposed reducing the personnel 

spending cap for the EMPG grants and potentially undermining 

State and local emergency management capacity? 

Secretary RIDGE. Senator, I think it is a decision based upon a 

shared responsibility for personnel costs and a primary responsibility for the Federal Government to send dollars out for training 

and exercise programs; that we would reduce the level that we 

would contribute to defray the salaries and use our portion of the 

funds so that once these men and women were in place they would 

have additional dollars to conduct a training and exercise program. 

So it was based on a notion that we have a shared responsibility 

to pay for the salaries. We have a primary responsibility to help 

provide funding for training and exercises. 

Senator FEINGOLD. Well, I understand that. I would just indicate 

that I think this is going to have such a disproportionate impact 

on some of our smaller counties and communities, and I hope we 

can work together to possibly reverse this before the budget is complete. 

I would like you to address EMS funding in your budget. Wisconsin EMS officials tell me that they feel sort of overlooked when 

it comes to first-responder funding. As you know, there has been 

no dedicated funding source for EMS funding, and the President’s 

budget proposal does not change that. 

I am told you will be submitting a report to the Appropriations 

Committee next week discussing the amount of funding EMS 

teams are receiving through DHS grants and the barriers facing 

EMS teams as they try to get these grants. 

Could you say a little bit about your findings and how the Department is working to make sure that our EMS services are not 

overlooked. 

Secretary RIDGE. Senator, I cannot tell you today what proportion of dollars that we have distributed to the State and local Governments have found their way down to the EMS personnel. Clearly, they are an invaluable part of our first responder community. 

We relied upon them heavily in Pennsylvania, as does just about 

every other State. So I cannot give that specific figure. 

It is certainly supporting EMS, not so much the personnel costs, 

but supporting their equipment acquisitions and their involvement 

in training exercises is clearly an eligible cost for the homeland security grants and if they are associated with the Urban Security 

Area Grant money and eligible costs there. 

I will be able to tell you, in a short period of time, to you and 

to Congress, as we read the State and territorial plans that they 

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have submitted to us, we should be able to get a read as to where 

they view the EMS infrastructure as a priority for the distribution 

of the billions and billions of dollars that we have available to 

them. I just cannot give you the specific figures on that. 

As a former Governor, I assure you I think EMS is an integral 

part of the first responder community, and they would be eligible 

for distribution of these dollars, whether or not other Governors or 

mayors, as they have developed their own individual plans, have 

decided that, for this distribution, they ought to get some of this 

money. I do not know yet. We just got the plans. 

Senator FEINGOLD. Thank you. I was pleased to hear that DHS 

is working to gather and disseminate first responder best practices 

information. The first responders from Wisconsin who I have talked 

to are excited about having a central Best Practices Center. The 

Council on Foreign Relations Independent Task Force, chaired by 

Senator Rudman, also found a real need for such a center, saying 

that having one would ‘‘allow all emergency responders to learn 

from past experiences and improve the quality of their efforts, 

thereby assuring taxpayers the maximum return on their investment in homeland security.’’

How are you involving the local first responder community in 

your efforts to gather and disseminate best practices? And I would 

like to inform Wisconsin first responders about your initiatives and 

when they will be in place. When can they realistically expect these 

programs to be online and available for their use? 

Secretary RIDGE. First of all, Senator, we have as part of the 

Homeland Security Advisory Council, a group of men and women 

specifically out of the first-responder community from around the 

country. And we were asked by the States, in anticipation of our 

request for statewide plans, to give them a template. And so we put 

together the first responder group, as well as a State and local 

group, and they were the ones that developed the template. 

That is why I am hopeful that I can report back to you that as 

the States took a look at the template that the Advisory Committee 

gave them that was, in part, authorized by the first responders and 

EMS folks, that there will be an EMS provision there. 

We are consolidating the State and local Government and the Office of Domestic Preparedness. We sent a letter to Congress here 

a couple of weeks ago so it can be a one-stop shop. This will be the 

driving force behind the initiative to get the best practices out. We 

will probably use many means of communicating back to your first 

responders in Wisconsin, not the least of which will be the Internet. I cannot give you a specific timeframe, but I will task my people to provide that information because if the first responders of 

Wisconsin are interested in it, first responders everywhere will be 

interested. I just cannot give it to you today. 

Senator FEINGOLD. Thank you for that. 

Other Senators are waiting to ask you questions before you have 

to leave, so let me just associate myself with the comments of Senator Wyden with regard to data mining, his questions, his emphasis on this. He and I have worked together on this, and we will continue to work with you and others to assure the American people 

that certain data-mining practices are not used in a way that goes 

beyond the challenge that you face, which is the terrorist threat. 

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And this is a matter of the highest priority to me, as it is to Senator Wyden, and we look forward to closely watching this with you. 

I thank you, Mr. Chairman. 

Secretary RIDGE. Senator, if I might, I would really like to take 

you up on that offer. I served with Senator Wyden some time ago. 

I know that is a passionate interest of his, and obviously it is yours 

as well. 

I do think the most immediate pilot program that we would like 

to initiate I think goes to the heart of everyone’s concern about individual privacy and liberty, and that is the CAPPS program. We 

think we have designed a program that is respectful of individual 

privacy rights. We know we need GAO’s approval; i.e., Congress’s 

approval. So particularly with that initiative I would welcome the 

opportunity to work with you to address any concerns that you and 

Senator Wyden or, for that matter, any other Members of Congress 

might have. 

Senator FEINGOLD. I look forward to that. 

Secretary RIDGE. Yes, sir. Thank you. 

Senator FEINGOLD. Thank you, Mr. Chairman. 

Senator CRAPO. Thank you very much. 

Secretary Ridge, we realize that your time is limited. We have 

three Senators who have not questioned you yet, and I believe Senator Conrad would like to have another round of questions as well. 

Secretary RIDGE. Sure. 

Senator CRAPO. I am the last one on our side, and I will just hold 

off until we finish up over there. And so we will next go to Senator 

Nelson. 

Senator NELSON. If Senator Murray was here before me, I would 

certainly defer to her. 

Senator MURRAY. No, thank you. 

Senator NELSON. Well, thank you. Thank you, Senator. Mr. 

Chairman, Mr. Secretary. 

Secretary RIDGE. Senator. 

Senator NELSON. Mr. Secretary, Interpol has testified to Congress last summer about the enormous amount of money that is 

being made in the knock-off goods trade. We know, for example, in 

the drug trade, that is a source of funding for terrorist organizations. But the profit on knock-off goods is enormously higher than 

the profit on the trafficking in drugs. 

And I just visited with your folks in the Jacksonville office, 

where they had just seized an enormous load, in this particular 

case it was at a flea market, of these goods. And interestingly they 

import the handbags without the labels. So it is legal to import 

them or the shoes or the pieces of the watches, and then once they 

are here, they assemble them and then put the Fendi or Ralph 

Lauren labels on them, which then it becomes illegal because it is 

deception, and that is against the law. 

And apparently billions of dollars are being made in this kind of 

trade all over the world. A lot of these items are being manufactured in China, where they can be manufactured very cheaply. So 

naturally my concern is, particularly with Florida being a place of 

14 deep-water ports, where a lot of commerce is coming into this 

country and where we just had this seizure over the weekend. 

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I would want to know, from you, what we can do to help you, 

perhaps first with legislation, increasing the penalties. Because, interestingly, if you get caught dealing in drugs, that is one kind of 

harsh penalty, but if you get caught dealing in these knock-off 

items, it is a much lesser penalty. And if we ultimately get the 

proof that profits from these criminal organizations are going into 

terrorism, then we better be concerned. 

The second item that I would wonder would it be helpful for us, 

as the legislators and the appropriators, to do is to create some 

kind of public education fund for you so that, when people go and 

buy these goods—and they know they are getting knock-off goods. 

It is not illegal for them to buy them. It is illegal for the guys to 

sell them—so that they see the potential link there with supporting 

terrorism, and thus a campaign of public service announcements. 

What do you think, Mr. Secretary? 

Secretary RIDGE. Well, first of all, Senator, I think my colleague, 

Secretary Hutchinson, testified that, from our point of view in border and transportation security, as we inherited the old Customs 

Department, that this is probably one of the fastest-growing areas 

of criminal activity not just in this country, but around the world. 

And the potential for it to be linked up, in time, because we have 

no contemporary evidence that suggests it is tied to terrorist organizations, but certainly the possibility always exists. 

So as it comes to enhancing the penalties or some form of public 

information campaign vis-a-vis the potential consumer, a couple of 

issues we would certainly look to work with you on. I would defer 

to Mike Garcia, of Immigration and Customs Enforcement, as to 

whether or not he thinks, in his experience, the penalties have 

been adequate, whether they have been a sufficient deterrent and 

would like to review, get the benefit of his analysis and then get 

back to you with a more complete opinion. 

Senator NELSON. OK. I will talk with Mr. Garcia then, and I 

have put this in a letter to you right after I met with your folks 

on Monday, after this big bust. 

Secretary RIDGE. Good. 

Senator NELSON. And that is there in your office. So if you would 

get your folks to direct it to Mr. Garcia. 

Secretary RIDGE. I will. Thank you. 

Senator NELSON. Mr. Secretary, of course, port security is of 

enormous importance to us in Florida, with us having so many 

deep-water ports. And I am concerned, a year ago the President 

had no money for the Port Security Grants. The Congress put in 

$125 million. This time the President has put in $43 million for a 

different kind of other than direct grants. 

This Senator is going to be working to increase that at least to the level of the $125 million for the grants, but beyond that, if you 

talk to the Nation Ports Council, as well as our own Florida Ports 

Council, they think, nationally, that from a security standpoint, 

that they are lacking about $5 billion. I am going to shoot, over the 

course of time, for a target of enhancing it by $2 billion. I would 

like to have your reflection on that, and perhaps this is something 

we can work together. 

I know you have $1.9 billion in the budget, but that includes the 

Coast Guard, and the Coast Guard has got a bunch of other things 

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to do, particularly in the waters off of Florida. Let us hope they do 

not have to start interdicting an exodus out of Haiti, but you know 

what we have to deal with down there. 

Secretary RIDGE. Yes, sir. 

Senator NELSON. Not only that, but the drug runners as well. 

Secretary RIDGE. Yes, sir. 

Senator NELSON. Give me your ideas. 

Secretary RIDGE. Well, Senator, I could not help but think, with 

Senator Murray, after you talked about port security, this is a conversation that the Senator and I have had before with regard to 

her perspective and yours as the inadequacy of the port funding. 

And I think it is worthy of the kind of public discussion, in a civil 

way, because it is of a civic interest to all of us. 

I just, as a former Governor, as someone who expended and saw 

expended both Federal, State and local resources in my ports in 

Pennsylvania, oftentimes they are publicly owned, you have public 

employees there, I more or less view them as part of the private 

sector’s distribution chain. It is part of their infrastructure. And 

while I think we have to make the business case that it is important for any major corporation to protection its own supply chain, 

I think that we need to have that conversation or debate here in 

the Congress. 

From my point of view, the Congress has appropriated hundreds 

of millions of dollars not only for grants, but you support the Coast 

Guard. The Coast Guard provides enormous port security. They are 

helping them with their security and vulnerability assessments. 

The Coast Guard puts captains of each port to coordinate the activity between the public and private sector. 

We get to a point I think, given the people and the resources we 

commit to all of these ports, but I think we ought to take a look 

at the private sector to enhance security at these ports. So, again, 

they are for-profit entities. It is part of their supply chain, and I 

think it is reasonable for the taxpayer to expect a major corporation that is importing goods to sell to our citizens that they invest 

in their supply chain. 

Senator NELSON. Well, I am going to help Senator Murray help 

you, even though you will not say that you need the help, we are 

going to try to help you to up that port security money. 

Thank you. 

Secretary RIDGE. Thank you, Senator. 

Senator CRAPO. Thank you very much. 

Senator Murray? 

Senator MURRAY. Well, thank you very much, Mr. Chairman. 

Obviously, from Florida to Washington State, we are deeply concerned about the administration’s proposal on airport security, and 

I again am very concerned, listening to what you have to say, and 

I do think we need to have a dialog, but we need to do it immediately I think. 

As a Senator from a State that depends on seaports for its livelihood, we have to have a cohesive port security plan that protects 

our communities and our economy from potential threats. I know 

we both agree that the agencies that are involved in securing our 

ports are doing an admirable job. They are working through a very 

difficult problem, but if they are not given the proper tools, and reVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00297 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
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sources and guidance to knit together a coordinated approach, all 

of us are left vulnerable. 

You talk about the supply chain, but that is only part of what 

port security is. Our ports are where a container or something can 

come in and enter this country in a way that puts everybody’s security at risk. 

I am deeply concerned about putting our security in the hands 

of the private sector when I know how much they are struggling 

today with costs of their own. And if they do not do it, we have left 

a real weak link in the chain at whatever port just simply does not 

have the money to do it. 

But there is another issue as well, and I have listened to you. 

You answered my question before when I asked you about this, by 

saying that the private sectors for goods moving in and out, similar 

to what you just said, and they should be responsible for picking 

up. I noticed that on I think it was News Hour with Jim Lehrer 

you said that the administration should engage the private sector 

and that it should be their dollars to provide security. 

Let me tell you what my problem with that is. We are at a real 

competitive disadvantage if we start requiring our ports in this 

country to pay for security. We already have a problem in Tacoma 

and Seattle with, if our prices are higher, containers are diverted 

to Vancouver. I know that is the same case in California. I do not 

know if that occurs in Florida. I assume it would. If the costs of 

bringing containers into our ports increases, if our private sector 

has to put that money in there, those containers will not come into 

this country. Now, that means a tremendous loss of jobs. That 

means killing jobs right here in the United States. 

My State is deeply concerned about this. If there is a Federal 

mandate that we have port security, and there is a reason that we 

should have that, it will have to be paid for. If our costs go up, 

those containers will be diverted. Now, that is an economic factor. 

It is a security factor as well, and it is a job killer in the State. 

So I wanted to engage you in that conversation today. I am glad 

that the Senator from Florida brought it up. He is correct. It is 

completely underfunded in this. If we are relying on the private 

sector to do it, I think we need to know how much you anticipate 

our port security efforts will cost the private sector. 

Secretary RIDGE. Senator, first of all, let me just, at the outset, 

say that we have a continuing responsibility that, again, as part of 

the Federal share, to continue to deploy our Customs and Border 

Patrol people there. We are going to make, through congressional 

appropriations, additional purchases of the nonintrusive technology, gamma ray and X-ray machines. So that is an ongoing contribution to enhancing port security. 

But when it comes to some of the other features of port security, 

again——

Senator MURRAY. Other features meaning? 

Secretary RIDGE. Well, surveillance cameras, fencing, infrastructure that accommodates the intermodal nature of securing the infrastructure that accommodates the railroads or the trucking companies that come in. I mean, there are security profiles and things 

that I think can be done at relatively low cost. We are in the process of——

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Senator MURRAY. Well, the commandant told us that the cost 

would be $7 billion. 

Secretary RIDGE. Seven billion dollars spread over a period of 

years? If that is the case, and I do not——

Senator MURRAY. I do know that the requests last year to your 

department for port security were over a billion dollars, and I have 

worked with a number of these ports. I mean, we had a wake-up 

call on September 11th, and many of these ports had absolutely no 

security in them. They are a huge weak link in our security chain, 

and they know that. They have been trying to step up to it. Congress told them to put together their plans. They have. I am aware 

that some of it is fencing and security cameras, but if we just say, 

private companies, you go do that, I know it will not happen. 

Secretary RIDGE. Well, first of all, Senator, I need to reiterate, 

in addition to my preference that the private sector pick up more 

of the additional expense with security because the taxpayer is already paying for a substantial part of the security, I think the taxpayer owns a lot of the land, has provided some of the initial security, but remember we began the security protocol before the container is even put on the ship. 

Senator MURRAY. Well, I heard your answer to Senator 

Corzine——

Secretary RIDGE. I guess it becomes a question of what is the additional security that you are most concerned with for purposes of 

our discussion? Is it continued scrutiny of the contents of the containers? 

Senator MURRAY. Well, I heard your answer to Senator Corzine, 

and I think he asked you what percentage of containers were 

screened, and you said 98 percent. 

Secretary RIDGE. Right. 

Senator MURRAY. I am assuming that you are talking about the 

24-hour-rule for screening manifests. 

Secretary RIDGE. Correct. 

Senator MURRAY. That does not look at what is in containers. 

How many containers are screened before they ever enter our 

ports? 

Secretary RIDGE. Actual physical screening, there is no quota, 

but I think now it is about 5.4 percent. 

Senator MURRAY. That is——

Secretary RIDGE. But I would say to the Senator, we could physically screen every container——

Senator MURRAY. We do not want to do that. I think there are 

really good programs in place to not do that. 

Secretary RIDGE. You could do it, but the economic costs associated with the physical screening of every container coming across 

by railroad car, coming across by truck, coming across by the shipping container, would be a far, far greater impact on the overall national economy than modest improvements at several hundred 

ports around the country. 

Senator MURRAY. And I do not think anybody believes that we 

need to do the actual physical. 

Secretary RIDGE. Right. 

Senator MURRAY. But I do think there are ways to provide security at ports where the containers are loaded before they ever get 

294

there and track them here, which is what Operation Safe Commerce was put in place to do. But——

Secretary RIDGE. What we may decide to use, Senator, depending 

on those lessons, there may or may not be a Federal role. I am not 

prejudging that one way or the other. 

Senator MURRAY. And actually some of that money still has not 

gotten out to them, so we are way behind the curve on where we 

need to be in order to learn that. 

But let me go back to the basic question here because it is a crit- ical one for our economy. If that $7 billion that the commandant 

himself told us was going to be necessary, and the vast majority 

of that is going to be required to be paid for by private companies, 

they will increase the costs to them at their containers. How do we 

deal with the competition? That means we will lose jobs in Washington State, I am assuming California, Florida, other ports on the 

East. I know we will in Washington State. I know our containers 

will be diverted. It is an economic challenge they face every single 

day. 

Secretary RIDGE. Senator, the assessment of the commandant of 

the Coast Guard was based on their review I think of most of our 

major ports, if not all of our major ports. I believe it was the optimum costs associated with the security plans to be dealt with over 

a period of time. As we buildup security infrastructure, be it at a 

port, be it at a local community, we are not going to ramp it up 

all at once, No. 1. 

No. 2, we have to be in the business of managing the risk, and 

when it comes to managing the risk around shipping containers, if 

that is the concern we have about enhanced security at domestic 

ports, we begin that process before the container is boarded on the 

ship. 

There is a very sophisticated rulemaking device, based on information we have from intelligence, from data that we have accumulated over the years, so we have a pretty good way of targeting potentially troublesome containers, for a variety of reasons: criminal 

information we have, threat information we might have, coupled 

with the information we have secured by Customs and the Coast 

Guard over the years. That process begins before these are ever 

loaded. 

Senator MURRAY. Are you confident, as Secretary of Homeland 

Security, that our ports are secure today and that we are safe from 

having a container come into any one of our major ports? 

Secretary RIDGE. Senator, if you are asking me to guarantee you 

the safety of 20,000 containers coming into the port every day, I 

will not do that. It can physically be done, but if we are going to 

talk about the impact on the economy, Senator, I think we need to 

understand that in an international economy, a domestic economy 

that is in the trillions of dollars, and so much of it relies on container security, we have to manage the risk, and you manage that 

risk——

Senator MURRAY. I understand that. But what I am asking is you 

are saying that, under the plans that our ports have put in place, 

that the vast majority of that is going to have to come up with the 

private companies to pay for, are you confident that they will do 

that, that the plans will be put in place and that we can tell our 

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citizens who live within blocks of a major port, work in our major 

ports, that they are secure? And even beyond that, if a container 

comes in, and the ports are shut down, and stores in Senator 

Conrad’s State no longer have anything on the shelves because we 

do not have any imports, are you confident that that will occur? 

Secretary RIDGE. Senator, I believe that the business of securing 

America is not exclusively the business of the American taxpayer. 

I believe the business of securing America, securing ports, securing 

chemical sites, securing nuclear sites, there is a shared responsibility. It is both in terms of leadership and financial responsibility. 

Now, what the division of costs associated with port security is 

between the public and the private sector, that remains for a very 

good public discussion, as we are having right now. But if every 

time we look to a particular sector within our economy and say 

that we cannot guarantee a fail-safe system, which we can never 

do any how, but insist that the taxpayer pay the entire measure 

for securing the private sector, that is just a philosophical difference as to how we go about integrating the resources and accepting the shared responsibility of securing the country. 

What balance is in there, Senator, remains to be seen. We certainly are going to have a continuing responsibility to buy nonintrusive technology, to continue to ramp up, and we have asked 

you for additional money for the Targeting Center. There will be 

other very significant Federal funds invested in securing these containers. 

You continue to give more money to the Coast Guard, I mean, 

there is a long list of things that the taxpayer is providing for to 

provide security, but I do think it will be helpful for us, once we 

get these vulnerability assessments completed and we take a look 

at the precise nature of these security plans, to see what is appropriate Federal costs and what should be borne by the private sector. 

Senator MURRAY. What do you expect the time line to be able to 

tell our private companies what their costs are going to be on this? 

Secretary RIDGE. First of all, Senator, I do not think they are operating in isolation because the captains of each and every port, 

more often than not, obviously, a member of the Coast Guard—you 

know, they sit down, and they have worked with these men and 

women in these companies for quite some time. And the level of security around these ports, not all, but most of them, was pretty 

good around some of them, nonexistent around others, but every 

day I think around the country, particularly at the major ports, 

they are doing more to integrate their security efforts, Federal and 

public. 

And it just remains, I cannot tell you today what those costs will 

be, but I think in time we will have a pretty good idea. And then 

we have to decide, as a country—both public and private sector—

at what level do we take security at any of these venues? 

Senator MURRAY. I understand all of that. I know my time is——

Secretary RIDGE. How high is the fence? How many cameras? 

Senator MURRAY. I just have to tell you, where I get really nervous with your argument is that if we rely on the private sector to 

do it, and they either do not have a money or there is a competitive 

disadvantage that they do not or for whatever reason, they are opVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00301 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
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erating in thin margins that they do not, who will end up paying 

for a tragedy is all of us. 

Secretary RIDGE. But, Senator, I am still trying to understand, 

I am still trying to understand is your concern with regard to the 

security of the port from domestic infiltration across into the port 

or is your concern the potential vulnerability around the container? 

I mean, there are different kinds of security concerns around a 

port, and I think that is where, very appropriately, the discussion 

would be who has what responsibility for what security concerns. 

Senator MURRAY. Well, I think both, but I do think the potential 

for something coming in a container on a ship into one of our ports, 

and you are the Secretary, and you know the information better 

than I do, is out there. It has always been part of what we need 

to understand, and accept and do something about, and that is a 

huge concern for me. 

Secretary RIDGE. Again, Senator, I thing the approach we are 

taking, laying in the targeting, the physical inspection of some of 

these containers before they get on the ship, we do board some of 

these high-interest vessels before——

Senator MURRAY. The 5 percent that you said are looked at before they——

Secretary RIDGE. The 5.4, that’s right. There is no quota. Whenever we find a high-interest container, we run it through the machine, and if there is something that reveals itself when it is run 

through the technology, we go in and open up the container. And 

it is about managing the risk. 

Senator MURRAY. Well, I agree with the Senator from Florida. I 

think we need to make sure we have the funds available and put 

in place a strong security system, and I look forward to working 

with you. 

Thank you, Mr. Secretary. 

Secretary RIDGE. Senator, I do too. Thank you. 

Senator CRAPO. Thank you. 

Mr. Secretary, the Department of Homeland Security has an important role in defending our homeland against bioterrorist attacks, including those involving anthrax, and smallpox and other 

toxins. And I note in your testimony that you have allocated some 

of the time and attention of your remarks here today to that. 

Could you please expand a little bit on that and tell this committee first how the fiscal year 2004 Department of Homeland Security funding is being allocated to meet those threats and then, 

second, how you will utilize any funding in fiscal year 2005 that 

we may appropriate for deterring or responding to such bioterrorism threats. 

Secretary RIDGE. First of all, Senator, our responsibility with regard to bioterrorism is joint with the Department of Health and 

Human Services. I think, as you recall, when we first sought to create a Department of Homeland Security, the legislation we initially 

sent to the Hill, we had requested the entire portfolio of bioterrorism defense responsibility, but I think Congress said that you 

have Health and Human Services, you have the NIH, you have the 

Centers for Disease Control, they will have primary responsibility, 

but there are roles that you play. 

297

One of the roles we play is to direct some of the research and 

development on technology that would help us sense a bio attack, 

bio sensors and chemical sensors, and so a considerable portion of 

the research and development dollars you have given to S&T is 

going out to the bio sensors. 

We have also built on the Bio Watch program we have located 

around the country. EPA has air quality monitoring stations at 

various sites around the country. Last year, we expanded those 

sites to include some modest technology that enables us to pick up 

potentially some bio or chemical agents, but it is still a very laborintensive process, and so some of the dollars that you have given 

us are going into technology that will actually capture whatever 

that agent is in the air, analyze it right at that point so we do not 

have to manually take the filter out and take it to a lab to get 

done. So we have that responsibility. 

We have a shared responsibility when it comes to Bio Shield. 

That is the program where both the Secretary of Health and 

Human Services and Homeland Security, based on threat, can access the dollars that Congress provided. If the threat indicates a 

biological threat, we view it as credible. We look at our stockpile 

of vaccines and antidotes, make a determination that we do not 

have anything in this country to combat that threat. Congress has 

appropriated $2.5 billion for us to access that. 

So, again, there are a variety of different ways. We interact both 

with Health and Human Services or act independently on our own 

to deal with a bioterrorist incident. 

Senator CRAPO. All right. Thank you. I have several other questions, but I think I am going to submit them to you in writing because I have just been informed that you are really over time. 

Secretary RIDGE. I appreciate it. I have to be with your colleagues on the other side of the Hill. 

Senator CRAPO. Senator Conrad. 

Senator CONRAD. Yes, I would just be very brief. 

Again, it has been good to have you here, Mr. Secretary. 

Let me tell you my honest assessment is that with all of the 

work that has been done, the resources that have been devoted, we 

are still ill prepared to deal especially with a chemical and biological—chemical or biological attack on this Nation’s urban centers. I 

have tried to evaluate, based on my staff’s analysis, the feedback 

we have ten from these experiments, if you will, in major cities. We 

look at the experience in Denver, and what we saw was really 

chaos; that the health providers basically left their hospitals. Everybody headed for the hills. 

I worry very much what would happen if there were a chemical 

and biological attack on the Nation’s capital, if there were a chemical, biological attack on New York City, if there were a chemical 

or biological attack on our Nation’s stadiums. I worry very much 

about that. I can imagine if they flew over a small plane with a 

chemical and biological agent and sprayed the crowd, the chaos and 

panic that would ensue. And I do not think we are yet as prepared 

as we need to be for those threats and that eventually. 

I noted that there are places where the money is being spent 

that just make no sense. We talked about the thousands of dollars 

for leather jackets, and $500,000 for a digital camera for mug 

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shots, and Dale Carnegie courses for sanitation supervisors. This is 

not money that you authorized. This is money that went to local 

units of Government, but this is what they did: Maryland cutting 

State spending for local health care outreach centers and then 

using Federal funds to fill in, basically substituting Federal funds 

for State funds, an $800,000 mobile command bus that they said 

would be the talk of the East Coast. 

You know, these are things that do not make lot of sense to me. 

And the conclusion that I want to leave you with is that more 

money will be frittered away without a clear national plan spelling 

out what first responders need to be able to do in an emergency 

and more stringent guidelines on how the money should be spent. 

That is not my conclusion. That is the conclusion from this detailed 

article that was in the Washington Post that I know you paid careful attention to. 

Can you just tell us what it is you are doing to make sure that 

this money does get spent wisely and effectively and what you are 

doing to lay out a clear national plan, spelling out what these first 

responders need to be able to do. 

Secretary RIDGE. Senator, during the past several months, in addition to worrying and directing congressionally appropriated dollars out to first responders, we have been working and created a 

national response plan and a national incident management system 

that has been accepted and will be used as the framework within 

which we can set guidelines and standards for our first responders. 

There are certain protocols that we will expect to be done in the 

event of a chemical incident, a biological incident and the like. So 

we have the framework of how we are going to train and exercise 

our first responders that show up to save lives in an incident. 

In addition to that, this is the first year that we are going to 

have the statewide plans, which hopefully were built on the template that the Department sent out to the Governors. We asked the 

Governors to take the lead. 

I think you are going to find, from 2005 forward, that we are 

going to be far more prescriptive in where these dollars would go 

so that we can monitor, on an annual basis, that we are able to 

say that that infrastructure that we all believe we need to buildup, 

sometimes it is a complete infrastructure in a major urban area, 

sometimes it is a mutual aid infrastructure around a wider, lesspopulated area. So we know that we have the training exercises 

and the equipment, consistent with the protocols that we have developed in the incident management system, to respond to a terrorist attack. 

So, again, I do think that we are far better prepared than we 

were a year ago. I do think we have a long way to go to get where 

we want to be, and our goal every single day, Senator, is to make 

sure we rise to a new level of readiness and preparation. I think 

we reached that goal, but we will now be in a position, having developed these statewide plans, and we have already alerted the 

Governors and the mayors to be a little bit more—we will be more 

prescriptive as to the menu that you can call on to spend Federal 

money. 

Senator CONRAD. Well, I think that is just very important. Again, 

I would say to you the one place that I think we are still deficient 

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is the preparation for a chemical or biological attack in one of our 

major urban areas or one of our stadiums. I hope there is just an 

intense focus on preparation, and I think the need to exercise, to 

train in a way that is a realistic replication of what might occur 

is critically important. 

Secretary RIDGE. Thank you, Senator. 

Senator CRAPO. Mr. Secretary, we thank you for your time and 

apologize that we have kept you over. This is very important information, and we will submit to you some additional questions that 

we did not get to ask. But, again, thank you very much for your 

time, and you can get on your way. 

Secretary RIDGE. Thank you very much. 

[The prepared statement of Secretary Ridge follows:]

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Senator CONRAD. Thank you, Mr. Secretary. 

Secretary RIDGE. Thank you, Senator. 

Senator CRAPO. This hearing is adjourned. 

[Whereupon, at 12:15 p.m., the committee was adjourned.]


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THE PRESIDENT’S BUDGET REQUEST FOR 

FISCAL YEAR 2005

THURSDAY, FEBRUARY 26, 2004

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The committee met, pursuant to notice, at 10:05 a.m., in room 

SD–106, Dirksen Senate Office Building, Hon. Don Nickles (chairman of the committee) presiding. 

Present: Senators Nickles, Domenici, Gregg, Enzi, Bunning, 

Crapo, Ensign, Conrad, Nelson, Stabenow, and Corzine. 

Staff present: Hazen Marshall, majority staff director; and Roy 

Phillips, senior policy analyst for defense and international affairs. 

For the minority: Mary Ann Naylor, staff director; and Rock 

Cheung, junior analyst for science and international affairs, 

webmaster. 

OPENING STATEMENT OF CHAIRMAN NICKLES 

Chairman NICKLES. Mr. Secretary, we are delighted to have you 

come before the Senate Budget Committee again. We appreciate 

your appearances both last year and this year. You have done an 

outstanding job. I compliment you on your leadership. As Secretary 

of State through a very challenging time in a lot of areas in the 

world, you have been an outstanding leader representing this government, this administration, and I compliment you for it. 

You are here today to present the administration’s budget on 

international affairs. This budget at this particular time, is a very 

big challenge. We have enormous deficits. We are calling almost for 

a freeze. The administration has proposed almost a freeze in all 

spending other than defense and homeland security, and international affairs. Your increases consume almost all the growth revenue in non-defense. It is a big increase. And so we look forward 

to your defending that increase. 

There are big increases for the Millennium Challenge and also 

for the very big battle of combating AIDS. I happen to be a supporter of the Millennium Challenge, but I am also trying to put a 

budget together, and I realize how difficult and challenging that 

can be. 

I welcome you before the committee. I appreciate your willingness to cooperate with us. Before I call on you for opening comments, I will ask my colleague and friend, Senator Conrad, for 

opening remarks. 

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OPENING STATEMENT OF SENATOR CONRAD 

Senator CONRAD. Thank you, Mr. Chairman, and again, thank 

you for convening this hearing. 

Thank you, Mr. Secretary, for once again coming up to testify on 

the budget proposal that is before us. 

I think it may be most appropriate to start with the headline 

from this morning’s paper, which should sober us all with respect 

to where this is all heading, that is, these massive deficits that now 

Chairman Greenspan has said will require cuts in Social Security 

in order to, in part, respond to where this is all headed. 

Yesterday, Chairman Greenspan called for those cuts in Social 

Security. This is something I have been concerned about and have 

been warning about for 3 years, that the budget policies of the 

President are inevitably and inexorably taking us in this direction.

We have record budget deficits now, and the President proposes 

further cutting the revenue base and adding to spending. That can 

only make the deficits worse, more serious, and put more pressure 

on recommendations like the one the Chairman made yesterday to 

cut Social Security benefits. 

When I look at the President’s budget proposal for this year and 

compare it to previous years in International, what I see is a disturbing pattern that the budget proposed by the President is not 

the real budget—not the real budget for international affairs, not 

the real budget in other areas as well, because time after time the 

President has come back to us and asked us for significant increases in what he proposed in his initial budget. That is certainly 

true in international affairs where he came back and asked for $1.3 

billion more after he submitted in budget in 2002, asked for $8 billion more in 2003, and then last year came back and asked for 

$21.6 billion more than his initial budget request. 

Now, Mr. Secretary, I would very much like to hear from you 

whether we can expect another large supplemental for international affairs in 2005. 

In the President’s budget proposal for 2005, international affairs 

is receiving the largest percentage increase of any area, a 16-percent increase in budget authority. In comparison, the President 

proposes to increase homeland security by 5 percent, defense by 4 

percent, and cut all other domestic spending by 4 percent when 

measured against CBO’s baseline. 


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As you know, Mr. Secretary, and every member of this committee 

knows, our budget deficit is skyrocketing. We have a deficit that is 

forecast at $521 billion this year. I personally believe it will not be 

that high, but, nonetheless, it will clearly be a record, much higher 

than any previous deficit, at least $100 billion more than any that 

we have seen before. 

And the President has told us, well, don’t worry, the deficits are 

going to be cut in half over the next 5 years. I don’t believe that. 

I don’t think that is an accurate report to the American people on 

our fiscal condition. I don’t think it comes close. The President says 

we are going to have a deficit of $237 billion in the fifth year. But 

the only way he gets there is he just leaves out things. He leaves 

out any defense expenditure, additional defense expenditure for the 

war on terror past September 30th. He leaves out dealing with the 

alternative minimum tax. And, most significantly, he leaves out the 

money he is going to have to pay back to Social Security and Medicare that he is taking from the trust funds. 

So I believe we have to tackle this in a very aggressive way, and 

we have to go after the spending side of the equation. We also have 

to look to the revenue side of the equation because the revenue side 

of the equation is where the biggest gap has opened. This year, 

CBO is telling us that revenue will fall to 15.7 percent of GDP, the 

lowest since 1950. 

Mr. Secretary, I would like to bring you back to something you 

said 2 years ago when testifying before this committee. I asked you 

then how the Nation could afford the President’s proposed increase 

in the international affairs budget, and I asked you if we should 

cut spending in other areas or raise revenues to pay for it. And this 

was your answer: ‘‘I think where we are right now is that for the 

foreseeable future, for the next several years, we may well have to 

increase the debt, as your chart shows, in order to deal with these 

priorities.’’

332

I think in light of what Chairman Greenspan said yesterday that 

it is appropriate to ask you: Is that still the right answer? Can we 

afford to continue on this course of borrowing and borrowing and 

borrowing, borrowing from Social Security, borrowing from the 

Medicare Trust Fund, borrowing from the Japanese and the Chinese and the South Koreans, borrowing from the so-called Caribbean banking centers, hundreds of billions of dollars to float this 

boat, whether that can possibly continue? 

Mr. Secretary, I noted in a recent Newsweek column from Fareed 

Zakaria, a foreign affairs commentator who has often been a supporter of the President’s international policies—and I will conclude 

on this note: ‘‘The greatest threat to America’s primacy in the 

world comes not from its overseas commitments, explains Niall 

Ferguson. It is the result of America’s chronically unbalanced domestic finances. The mounting Federal budget deficits that now 

stretch out as far as the eye can see will mean, if history is any 

guide, sharp cutbacks in American military and foreign affairs 

spending. We will see a forced retreat of America’s foreign policy 


94065.266
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similar to the years after the Vietnam War, only the cuts are likely 

to be much, much deeper and the resulting chaos far greater.’’

Now, my first question to you will be: Is that going to be the legacy of this administration? And how can that outcome be avoided? 

I thank you again, Mr. Secretary, for being here. 

Chairman NICKLES. Secretary Powell, we welcome you to the 

committee. Please give any opening remarks you wish. 

STATEMENT OF HON. COLIN L. POWELL, SECRETARY, U.S. 

DEPARTMENT OF STATE 

Secretary POWELL. Thank you very much, Mr. Chairman. I do 

have a prepared statement which I offer for the record. 

Chairman NICKLES. Thank you. 

Secretary POWELL. I will summarize that statement and then be 

ready for your questions. 

Before I begin, Mr. Chairman, let me say that we started today 

on a very sad note with the news that President Boris Trajkovski 

of Macedonia was in a plane crash which may have taken his life 

and others aboard the plane. He was a great friend of the United 


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States. I have spoken to the new Acting President and expressed 

the sympathy and condolences on behalf of the President and all 

of the American people. When I became Secretary of State in January of 2001, one of the first issues I had to deal with was a crisis 

in Macedonia. The place was coming apart, with a new President 

who was in great difficulty and anguish as to how to deal with the 

problems he was facing, and that was Boris Trajkovski. And I became a very good friend of his over the years and he a good friend 

of mine. And we worked through the problems in Macedonia to the 

point now where Macedonia is on a stable footing, the European 

Union is going to be replacing NATO with respect to providing additional support. We have much to be proud of as to what we have 

accomplished in Macedonia with our European friends and with 

the Macedonian people and the Macedonia leaders, especially with 

President Trajkovski. So he will be greatly missed, and we wish the 

Macedonian people all the best in this time of tragedy. 

Mr. Chairman, let me also take this opportunity to say to you 

how much I have deeply appreciated your support in the years that 

you have been in the Senate and as a member of this committee 

and chairman of this committee. You have been a good friend to 

the Department. We have done many things together over many 

years, Senator, and I just wanted to take this opportunity to thank 

you on behalf of all the men and women of the State Department 

for the support that you have provided to us. 

And I would like to say to the entire committee how much I have 

appreciated the support you have given to the Department in the 

3 years of my stewardship. I made certain promises to the committee when I came in about what we would do to fix management 

and similar sorts of issues, leadership issues, infrastructure issues 

within the Department and you have supported our efforts, and I 

think you can see the payoff in what we are doing with respect to 

our Diplomatic Readiness Initiative, how more and more people are 

coming into the Department. We fixed the problems of the previous 

10 years when people were not being recruited. Information technology has been improved. Morale has improved. And it could not 

have been done without the support of this committee and the entire Congress, and I express my appreciation for that as well. 

Mr. Chairman and members of the committee, I want to thank 

you for the opportunity to testify on the State Department’s portion 

of the President’s budget request for fiscal year 2005. The 2005 

international affairs budget request for the Department of State, 

USAID, and other foreign affairs agencies, as was noted by Senator 

Conrad, totals $31.5 billion, broken down as follows: foreign operations, $21.3 billion; State ops, $8.4 billion; P.L. 480 food aid, $1.2 

billion; international broadcasting, $569 million; and the U.S. Institute for Peace, $22 million. 

President Bush’s top foreign policy priority remains winning the 

war on terrorism. And winning on the battlefield with our superb 

military forces is just one step in this process and one part of this 

campaign. To eradicate terrorism altogether, the United States 

must help create stable governments and nations that once supported terrorism, like Iraq and Afghanistan. And we must go after 

terrorist support mechanisms as well as the terrorists themselves. 

335

We must help alleviate conditions in the world that enable terrorists to bring in new recruits. 

To these ends, in fiscal year 2005 our foreign affairs agencies will 

continue to focus on the reconstruction of Iraq and Afghanistan. We 

will continue to support our coalition partners to further our 

counterterrorism, law enforcement, and intelligence operations and 

cooperation. And we will continue to expand democracy and help 

generate prosperity, especially in the Middle East. 

Mr. Chairman, 48 percent of the President’s budget for foreign 

affairs supports the war on terrorism. For example, $1.2 billion 

supports Afghanistan reconstruction, security and democracy building. More than $5.7 billion provides assistance to countries around 

the world that have joined us in the war on terrorism; $3.5 billion 

indirectly supports the war on terrorism by strengthening our ability to respond to emergencies and conflict situations. And, finally, 

$190 million is aimed at expanding democracy in the greater Middle East, crucial if we are to attack successfully the motivation to 

terrorism, the roots of terrorism. 

Two of the greatest challenges confronting us today are the reconstruction of Iraq and the reconstruction of Afghanistan, so let 

me first turn to Iraq. 

The Coalition Provisional Authority, under the leadership of Ambassador Bremer, and the Iraqi Governing Council have made 

great strides in the areas of security, economic stability and 

growth, and democratization. Iraqi security forces now comprise 

more than half of the total security forces in the country, and over 

time that percentage will grow. In addition, the CPA has established, working with the Governing Council, a new Iraqi Army, 

issued a new currency, which is quite stable, and refurbished and 

equipped schools and hospitals and town centers and all of the 

other institutions and infrastructure one needs for a democratic society. And as you know, the CPA is taking steps to return sovereignty to the Iraqi people this summer. We are still committed 

to a turnover of sovereignty on the 30th of June. 

Much work remains to be done. Working with our coalition partners, we will continue to train Iraqi police, border guards, Civil Defense Corps, and the Army in order to ensure the country’s security 

as we effect a timely transition to democratic self-governance and 

a stable future. 

At the same time, we are helping to build critical infrastructure 

for the people—clean water, electricity, reliable telecommunications, all the systems needed for the basic needs of the people. 

All of this work goes on. It is going on with greater and greater 

effect and efficiency over time. It tends not to get the headlines, 

but the cellular telephone system is coming up, the land-line system is coming up. More and more people are gaining access to 

clean water. The electricity system is improving, and by the end of 

the year will be far ahead of anything that existed in the time of 

Saddam Hussein. Thousands of brave Americans, in uniform and 

in mufti, are in Iraq now working tirelessly to help the Iraqis succeed in this historic effort. Along side their military colleagues, 

USAID, State Department, and the Departments of Commerce and 

Treasury are working to implement infrastructure, democracy 

336

building, education, health, and economic development programs. 

These efforts are producing real progress in Iraq. 

The United Nations Secretary General’s Special Advisor, 

Lakhdar Brahimi, a very distinguished individual, returned from 

Iraq recently and gave his report to the Secretary General. The 

Secretary General released the report on Monday of this week, and 

we have had the report since it went to the Security Council, and 

we have been studying it. By any measure, the task we are facing 

is going to be difficult and complicated, but it is achievable. We are 

going to be moving toward elections as fast as we can in Iraq, but 

before we can get to elections that are done openly and fairly and 

allow all people in the society to participate, we want to go to an 

interim authority, an interim sovereign, until we can get full sovereignty on the basis of a constitution and the election of a legislature, and from that process new leaders who enjoy the full support 

of the Iraqi people. 

Creating a democratic government in Iraq will be an enormous 

challenge, but Ambassador Bremer, working with the Iraqi Governing Council and now with the United Nations as their full partners, is committed to success. And I think we will be successful. 

And the State Department is working hard to be prepared to assume a leadership role on the 1st of July, when the CPA will go 

out of existence and we will have a large embassy requiring new 

resources to stand up. It will be the largest diplomatic presence we 

have anywhere in the world. 

Afghanistan is another high priority for the administration. The 

United States is committed to helping build a stable and democratic Afghanistan that is free from terror and no longer harbors 

threats to our security. After we and our coalition partners defeated the Taliban government, we faced the daunting task of helping the Afghan people rebuild their country. I remember those first 

few days when President Karzai went in, no telephones—one telephone for the entire government. No money, no accounts, no nothing. No desks, no computers, no nothing. And in a short period of 

time in the sweep of history, in just a couple of years, we now have 

a functioning government that is increasingly reaching out to take 

greater control over the outlying provinces, to bring order throughout the country, a currency that is relatively stable. We are giving 

more and more technical assistance to Afghanistan so that they can 

get higher up on the food ladder and on the economic ladder and 

on the democracy ladder, women are being integrated into the society in every way possible. The lives of women and girls have improved so much over the past 2 years and will continue to in the 

years to come. 

Since 2001, the United States has rehabilitated 205 schools, 140 

health clinics, and trained 13 battalions of the Afghan National 

Army. It is still a dangerous situation. We saw five aid workers 

were killed yesterday by those remnants of the Taliban and other 

terrorists in Afghanistan, particularly in the southeast part of the 

country, that we know our work is not yet completed. And we are 

working, as you may have noted in the press recently, with our 

Pakistani friends to do more with respect to bringing that part of 

the country under control, also working with our NATO allies to increase NATO presence in the country, increase the number of proVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00342 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
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vincial reconstruction teams working in the country so that the 

countryside can be made safe for democracy and for development 

efforts. 

We are also pleased that we completed the project to pave the 

road from Kabul to Kandahar, and that was successfully done. The 

30-hour journey is now down to just 5 or 6 hours. It is not just a 

road and the journey. We are connecting the country once again so 

it is viable. 

While the Afghanistan of today is very different from that of September 2001, there is much left to be done, and we will be participating in a conference in the not-too-distance future with our 

friends and allies to see what else we need to be doing to help the 

Afghan people and President Karzai. 

The challenges we face in Iraq and Afghanistan are complex, 

daunting, and dangerous. We must not lose sight of the simple fact 

that two despotic, awful, terrible, miserable, disgraceful regimes 

are no longer in power, either in Kabul or in Baghdad. And both 

the people of Iraq and the people of Afghanistan have a brighter 

future to look forward to. Lives have been spent in this cause, the 

brave lives of coalition soldiers and the brave lives of civilians who 

gave their lives as well. And we mourn for them, but we will never, 

ever let their families think that they were lost in vain. They were 

not. It is a noble cause that they have been involved in, in both 

Afghanistan and Iraq, and it is up to us now to keep that work 

moving forward and not to shrink from the challenges ahead and 

to recognize all that we have achieved so far. 

It is expensive work. As I said 2 years ago, Senator, we were facing new challenges, and it might require additional debt to get ourselves through this period of challenge. That challenge is still with 

us. We have had to come in for significant supplemental increases 

for reconstruction efforts, for our defense efforts, and for our international affairs efforts. And the President is committed to doing everything he can in accordance with the plan that he has submitted 

to the Congress to bring the deficit under control, cutting it in half 

within the timeframe that he indicated. And I can assure you that 

he recognizes that this is an important task for the administration. 

And so we all have been told to make our requests as reasonable 

as we can, to seek no increases that are not necessary, to find savings within our budgets, and I think that is what we have tried to 

do in the State Department submission for 2005. 

As I mentioned earlier, the 2005 budget for international affairs 

provides more than $5.7 billion for assistance to countries around 

the world that have joined us in the war on terrorism, including 

Turkey, Jordan, Afghanistan, Colombia, Pakistan, Indonesia, and 

the Philippines. 

While progress has been made attacking terrorist organizations 

both globally and regionally, much more remains to be done, and 

the President’s budget supports that effort. A few highlights: $700 

million for Pakistan to help advance security and economic cooperation and opportunity for Pakistan’s citizens, including a 

multi-year educational support program; $461 million for Jordan; 

$577 million for Colombia to support President Uribe’s unified campaign against drugs and terrorism. 

338

In September 2003, at the United Nations, President Bush said, 

‘‘All governments that support terror are complicit in a war against 

civilization. No government should ignore the threat of terror, because to look the other way gives terrorists the chance to regroup 

and recruit and prepare. And all nations that fight terror, as if the 

lives of their own people depend on it, will earn the favorable judgment of history.’’ We are helping countries to that judgment. 

Two weeks ago, the President spoke at the National Defense University and spoke about another threat that we are facing—the 

threat of proliferation of weapons of mass destruction technology. 

The President described how we have worked for years to uncover 

one particular nefarious network, that of Dr. A.Q. Khan. 

Men and women of our own and other intelligence services, especially the United Kingdom, were able to understand that network 

and provide information about A.Q. Khan to other nations. And we 

now know that he was providing nuclear technology and information to Libya, Iran, and North Korea. 

At the NDU speech that the President gave, he proposed specific 

measures to take to strengthen the world’s efforts against networks 

such as A.Q. Khan’s and others who would proliferate weapons of 

mass destruction knowledge and technologies around the world. We 

are hard at work on that. We have seen results. 

We can be very proud, Mr. Chairman and members of the committee, of the fact that as a result of U.S. and U.K. efforts, Libya 

came to a conclusion, as they looked around the world, they saw 

that the United States and coalition partners were ready to take 

action against nations such as Iraq. But I think Libya did more 

than that. They looked and said: ‘‘We have spent millions and millions of dollars to acquire the wherewithal to perhaps someday acquire a nuclear weapon. We have spent millions and millions of 

dollars to produce chemical weapons. We have looked into biological weapons technology. What has it gotten us? It has made us a 

pariah on the face of the Earth. Nobody will deal with us. Nobody 

will invest in us. Nobody will come here. What we have seen is 

nothing but supporters of terrorism and procurers of weapons of 

mass destruction. What has it done for us? Has it made us safer? 

No. Made us more secure? No. Fixed our health care system? No. 

Made us more able to participate in the 21st century economy? 

No.’’

And so Colonel Qaddafi decided this was the wrong way to go, 

and he got in touch with us and our friends from the United Kingdom. An arrangement was worked out, and you know the rest. He 

is cooperating fully in giving up these programs. Much of the material that he acquired is being sent back out of the country. We have 

possession of quite a bit of it, and we learned a great deal about 

A.Q. Khan and the other proliferators in the world. And we hope 

that this will be a signal to other countries around the world that 

it is fool’s gold, it is ridiculous to invest in these kinds of technologies, because you will not scare the United States of America, 

you will not scare our coalition partners. All you are doing is denying yourselves the opportunity for a better relationship with the 

United States and with the rest of the civilized world. 

Mr. Chairman, moving on, on Monday of this week, Ambassador 

Tobias, Randy Tobias, who now heads up our global AIDS effort, 

339

Secretary Thompson, USAID Administrator Andrew Natsios, and I 

rolled out the strategy for the President’s emergency plan for HIV/

AIDS relief: $350 million in contracts to some of the NGO’s and 

private organizations who will be carrying out the fight at the 

grass-roots level. Making that announcement on Monday was a 

thrilling moment for me and the result of a lot of hard work on the 

part of Secretary Thompson and Administrator Natsios and Ambassador Tobias and all of my colleagues in the State Department, and 

so many others. 

With this program, the President has once again indicated his 

commitment to go after one of the great, great threats to civilization, and that is HIV/AIDS. Eight thousand people are dying every 

day as a result of HIV/AIDS, and we are going to do something 

about. It is a $15 billion program. It is dedicated to go after the 

source of this disease. It is also intended to educate people on how 

to protect themselves from the disease, and for those who have acquired the disease, to provide them with the wherewithal to live a 

life that is still of a quality nature. It is going to help those who 

have been made orphans by the disease. It is going to do everything we can to try to get this disease under control and educate 

the world about the nature of this disease. 

But it takes money, and we are very proud of the program that 

we have put forward to the Congress. We are very proud that the 

Congress has seen fit to support the first year of this program, and 

I hope that it will support the program in the years to come. 

Another part of the President’s agenda for the world has to do 

with the Millennium Challenge Account, an account where we will 

take American taxpayer dollars and make those dollars available 

to developing nations, but in this instance, only those developing 

nations that are committed to democracy, committed to the rule of 

law, committed to ending corruption, committed to market reforms 

and market economic policies. And we are standing up that corporation, and I am Chairman of the Board of Directors, and Mr. 

Paul Applegarth has just been nominated by the President to lead 

the corporation. We had our first board meeting not too long ago, 

at the beginning of this month, and we are ready to go to work. 

And we appreciate the Congress for the $1 billion it made available 

in this first year. 

Mr. Applegarth and Ambassador Tobias were over at my home 

the other evening for a little supper. They are both sort of roadrunning, as we say in the military. They are working here. Their 

families are still at home in another part of the country. And we 

just sat and talked. The longer the three of us talked, the more I 

could see the synergy that will exist between what each of them 

is doing, because they go together. Developing countries are 

doomed if they don’t do something about HIV/AIDS. And people 

who are suffering from HIV/AIDS are doomed if their countries are 

not doing something about poverty alleviation and getting into the 

21st century world with the rule of law and with the right kind of 

development policies. 

And so these two programs will reinforce one another and are essential parts of the President’s strategy for moving forward. They 

take money, but it is money well spent. And it shows America’s 

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commitment to the developing world, especially the developing 

world in Sub-Saharan Africa. 

There are so many programs like that in the budget that we are 

asking you to support. It does reflect an increase. It is one of the 

most significant increases, as Senator Conrad noted, in the discretionary part of the budget. But, you know, we really are in the 

front lines of foreign policy with our programs. USAID, the diplomats that are doing such a great job around the world, they are 

in the front line of foreign policy. They are the ones that are carrying our value system out to the rest of the world. They subject 

themselves to the kinds of dangers that their military colleagues 

do. Whether it is Ambassador Jim Foley in Haiti today, who is facing a difficult situation or the other Ambassadors that have passed 

through my office recently. Our Ambassador to Georgia helped the 

Georgian people through a crisis last November when the a President stepped down. He helped create circumstances, working the 

new leadership of Georgia, so that a new democratically elected 

President could take office. And that President with President 

Bush the other day. Or our Ambassador in Liberia, who was faced 

with a very difficult situation last year as people were firing at his 

embassy, as dead bodies were being placed before the embassy. 

But we worked with the Liberians. We worked our way through 

that. And now Liberia is on a path hopefully to peace and stability. 

We had a donors’ conference at the U.N. a few weeks ago and we 

raised $500 million for Liberia. It was American political activity, 

a little bit of American military strength, American support for regional solutions, American support for a political compromise that 

showed us the way forward. 

I could go to country after country around the world where our 

wonderful diplomats, working alongside so many other great Americans from all of the agencies of government work hard to serve the 

interests of the American people. And so when you support our 

budget, you are supporting that kind of effort, and you are bringing 

reconciliation and peace to places like Libya, Iraq, Georgia, Liberia. 

We are working hard in Haiti today to try to find a solution to that 

difficult problem. 

Our diplomats are hard at work in Beijing today with the North 

Koreans, the Chinese, and the South Koreans, the Japanese, and 

the Russians, and the results of the first 2 days of meetings are 

positive. There is a positive attitude. There is a promising attitude 

that is emerging from those meetings, and hopefully we can move 

in the right direction there. 

Diplomacy tends not to be something that happens overnight. 

You don’t see your successes right away. You see day after day 

after day after day failure, and then suddenly you get a breakthrough. And that kind of dogged, determined work is what the Department is all about. Because of what you did for us over the last 

several years, we have tens of thousands of American youngsters 

wanting to be a part of this Department. Thirty thousand people 

are year now are signing up to join the Foreign Service. They want 

to be a part of America’s team on the front line of foreign policy. 

And it is because you have said we are going to invest in information technology, we are going to invest in the benefits that you deVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00346 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
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serve for going out and serving your Nation. Well, they are responding, and they are serving their Nation. 

So, in conclusion, Mr. Chairman, members of the committee, let 

me just say keep supporting us because I think you are getting a 

hell of a return on the investment that the American people place 

in our international affairs accounts. And I promise you that as 

long as I am there with my team—Deputy Secretary Armitage and 

Under Secretary Grant Green and all the others, and Administrator Natsios—we will be good stewards of the people’s treasure. 

I am not spending my money. I am spending American taxpayer 

money. And I know that we also have to go in debt to finance some 

of our activities right now. We are all sensitive to that. We are all 

doing what we can to give you the best return on your investment, 

and we are all working with the President to get the deficit down 

and to put the Nation on the kind of balanced financial footing that 

Senator Conrad spoke to earlier. 

Mr. Chairman, I will just stop at this point and be available for 

your questions. 

Chairman NICKLES. Mr. Chairman, thank you for your opening 

statement. We have several colleagues. Let me make sure that all 

of our colleagues are aware of the fact that we plan on marking up 

the budget next Wednesday and Thursday. It is my intention to 

submit a budget document to markup on Wednesday and I expect 

to mark it up on Thursday. So you might expect—if we maintain 

our tradition, Thursday could be a rather long day. Maybe it won’t 

be. Maybe it will be very short. But I wanted to make sure that 

everybody is aware of that and notified of that. 

Mr. Secretary, two or three very quick little comments. And I am 

going to ask all of our colleagues, the Secretary needs to be out by 

noon, and if we can all keep our comments close to 7 or 8 minutes, 

I think we can accommodate that request. 

You mentioned the President of Macedonia unfortunately was 

killed. I happened to know him as well. I haven’t heard. Was that 

an accident? 

Secretary POWELL. It appears to have been an accident, flying in 

mountainous terrain in bad weather. 

Chairman NICKLES. That is very difficult terrain. I hate to see 

that happen because he was really leading that country in the 

right direction. 

Just a couple of other comments. You mentioned now that the 

U.N. is cooperating with us much more in Iraq. I am concerned. 

When there was an unfortunate bombing incident right outside 

their headquarters, the next thing we know, the U.N. was pulling 

out. We have shown great leadership, and I compliment you, I compliment the President, I compliment Ambassador Bremer and others. I have a staff member that is working over there. A lot of us 

have—all of us have constituents that are serving over there. But 

I am always questioning sometimes the UN’s resolve, and maybe 

that is just an editorial comment and I am not asking you to respond to it. But I am concerned. 

You mentioned it was a noble cause. It is that and more. I look 

at what this administration has done in Afghanistan and in Iraq, 

and I look at it as a liberation. As you mentioned, the women in 

342

Iraq now have freedoms that they did not enjoy before, their country was liberated. 

I object to the term ‘‘occupation.’’ We are planning on leaving. 

Correct me if I am wrong. 

Secretary POWELL. Absolutely. 

Chairman NICKLES. And so we are in the process of trying to expedite turning over total government control to the Iraqi people in 

a systematic way as soon as possible. It is a liberation. I would encourage your people maybe to use that word. 

One other comment. You mentioned Mr. Khan and the fact that 

he had distributed nuclear secrets. I don’t see him being punished, 

and I am concerned. This individual evidently was spreading nuclear secrets throughout the world to, as you mentioned, North 

Korea and Iran and Libya. It looks like he is getting off scot-free, 

and I am interested in your comment on that. 

Secretary POWELL. Very quickly, with respect to the United Nations, after the bombing last year that killed Sergio de Mello and 

so many others, the Secretary General had to take stock of the security situation. They are not soldiers. They don’t have a green 

zone. They have to be out where they can do their work. And they 

had to withdraw in order to assess security and figure out how 

they could do their work. 

I think we have demonstrated to the U.N. that the situation is 

improving, and we want to work closely with them on making sure 

that they can do their work in relatively safe conditions. You can 

never guarantee safety. Casualties are occurring every day. 

The U.N. has started to come back. Mr. Ross Mountain, a New 

Zealander, is in charge of humanitarian efforts of the U.N. For the 

most part, they are trying to headquarter these efforts from nearby 

countries, thereby reducing their vulnerability. But I expect their 

efforts to grow in the weeks and months ahead. 

We were able to arrange security for Mr. Lakhdar Brahimi, when 

he went in. And we are in constant touch with the Secretary General because after 1 July, we expect an even greater U.N. presence 

getting ready for the elections at the end of the year or some time 

next year, whenever they occur. 

And so we are working closely with the U.N. They have to have 

some level of confidence in security before they can put their people 

into dangerous situations. But they are anxious to play the vital 

role that the President has anticipated they would play. 

With respect to A.Q. Khan, as you know, Senator, he was seen 

as a national hero in Pakistan, and he occupies a special place in 

the life of the Pakistani people. President Musharraf is well aware 

of what Mr. Khan has been doing. I have had many conversations 

with President Musharraf about this. I think he took a bold step, 

the right step to uncover it all and not hide from the reality of 

what A.Q. Khan had done. And he got from Mr. Khan full acknowledgment of what he had done and a lot of information. And then 

President Musharraf felt it was in the best interest of his country 

and of his government and of the process of uncovering everything 

we could about this network for him to give a conditional amnesty 

to Mr. Khan. 

Chairman NICKLES. Did he cooperate? 

Secretary POWELL. He was cooperating. 

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Chairman NICKLES. Did Khan cooperate with Musharraf as far 

as saying here is what I did, here is where the information was 

going? 

Secretary POWELL. Yes. Dr. Khan cooperated with President 

Musharraf and with the Pakistani investigators who were pulling 

all of this up, with assistance from us because we had quite a bit 

of information we could provide to them. So we are getting a lot 

of information out of Dr. Khan’s openness, and I expect we will get 

a lot more as well. And it is important to note that the amnesty 

he was given is a conditional one, meaning he has to meet the conditions of the amnesty, which means full and open disclosure. And 

we are learning a lot from that. 

Chairman NICKLES. Thank you. One other comment. You mentioned about 48 percent of your budget is directed toward fighting 

terrorism for international security and so on. You also mentioned 

the terrorist attacks. Some people have said that your speech before the U.N. was hyped, that our going into Iraq was hyped or inflated or misled. I have heard some people say that we are misled 

into going into Iraq—or lied to, some people use that term. 

I looked at a speech that President Clinton gave in 1998, I think 

it was made to the Pentagon, and he said something like, ‘‘Now, 

let’s imagine the future. What if he fails to comply?’’ And he is 

talking about Saddam Hussein. ‘‘If we fail to act or we take some 

ambiguous third route, which gives him more opportunities to develop programs of weapons of mass destruction, and he continued 

to press for release of sanctions, continuing to ignore the solemn 

commitments he has made. Well, then he will conclude the international community has lost its will, he will conclude that he can 

go right on and do more to rebuild an arsenal of devastating destruction, and someday, some way, I guarantee you he will use the 

arsenal.’’

That was President Clinton. That was made in 1998. That was 

made in February 1998. 

I might mention we had two embassies that were bombed later 

that summer in Africa, killed a couple hundred people, all employees of the United States, some U.S. citizens. 

I am offended when people use words like ‘‘deliberately misled.’’ 

I happen to know you well, and you are my friend. And President 

Bush is my friend. And this is serious. When people make allegations of being lied to or misled leading up to this war, I am offended by it. 

You have been brought into it because of your excellent speech, 

I might say, before the United Nations a year ago—was that a year 

ago? 

Secretary POWELL. 5 February last year. 

Chairman NICKLES. It was about a year ago. Anyway, any comment on that? 

Secretary POWELL. Yes. Let me say, Mr. Chairman, that President Clinton’s statements and his actions during his Presidency, to 

include Operation Desert Fox, which involved the bombing of weapons of mass destruction facilities in Iraq in 1998, was based on the 

best intelligence that he had at that time. And it was a consistent 

picture that the intelligence community was giving us over time 

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tion which was that Saddam Hussein had never lost the intent to 

have such weapons, that he kept in place the infrastructure for 

such weapons. There was no doubt that if he was ever relieved of 

the pressure of sanctions, he would explode his capability and show 

it to the world again. He had used them before; he had used them 

against his own people; he had used them against his neighbors. 

And we believed, as President Clinton did, we believed that there 

was a stockpile of these weapons. 

When I went before the United Nations last 5 February, I knew 

very well that I was representing the views of the American Government to the entire world. And I wasn’t going to go hype anything or overstate anything. I wasn’t going to short-sell anything 

either. And I spent 4 days and nights out at the CIA with Director 

Tenet and with Deputy Director McLaughlin and with all their experts going over that presentation. And there wasn’t a word in that 

presentation that wasn’t the considered judgment of the intelligence community. Not everybody agreed with every single fact or 

finding, but it was the considered judgment of the intelligence community, and it represented the judgment of the Director of Central 

Intelligence. And it was based on the evidence that was available 

to us, not cooked. The analysts were in the room with us when we 

made those judgments and wrote that speech. 

And so if you look at it in retrospect, it did reflect the considered 

judgment not only of our intelligence services, but of the United 

Kingdom and most intelligence services that had looked at it. Any 

prudent person receiving the intelligence that I did or the President did, Prime Minister Blair, Prime Minister Aznar, Prime Minister Berlusconi, Prime Minister Howard, and so many others did, 

would have come to the same conclusion. This is a regime that had 

not given up these programs, had the intent, had the capability, 

was working on the delivery means, had done it before, was desperately trying to hide it, was desperately trying to get out of the 

sanctions that had kept it somewhat constrained. And you could 

reach the conclusion based on what the intelligence community had 

that there were stockpiles of such weapons. 

Now, the stockpiles are the only thing in my mind that is an 

issue. Dr. Kay, when he went in to start looking for this last year, 

thought there were stockpiles. He has now come to the conclusion 

that stockpiles are not there. 

Mr. Dulfer, who has gone in to replace him, will continue the 

work, look at additional sites, look at the documentation, interrogate people to see if more can be found out. But it seems to me that 

is the area that is in judgment. But nobody made up the information last year. It reflected the best judgment of the best people we 

have who were going about this trying to find the truth, not to hide 

the truth or to cook the books. 

And so I stand behind what the intelligence community gave us 

as Director Tenet stands behind what he gave us. As new information comes forward which puts into question old information, let’s 

examine it. If mistakes were made, let’s find out what those mistakes were and fix our process going forward. 

Chairman NICKLES. Mr. Secretary, thank you very much. 

345

Looking at the number of colleagues, again, I am going to ask all 

my colleagues to try and keep it pretty close to 7 or 8 minutes. Senator Conrad. 

Senator CONRAD. Thank you, Mr. Chairman. 

Mr. Secretary, you are a forceful advocate of important work that 

needs to be done in the war on terrorism and the global fight on 

AIDS. You are asking here for a 16-percent increase. The question 

for this committee is how to pay for it. How to pay for it. 

Are these increases so important that they should be paid for by 

cutting spending in other areas or by raising taxes? Because I 

think the answer of just borrowing more money is really no longer 

an option. We have record deficits now, and we are not going to 

have the deficit cut in half, as the President has said. That I think 

is utterly outside the question when one looks at the hard reality 

of where this is all headed. 

So I would ask you: Are these priorities so important that you 

would advocate cutting spending in other areas—and if so, 

where?—or raising taxes to pay for them? 

Secretary POWELL. I believe these are important priorities. As 

the President put his budget together, all of us had to compete our 

programs. In recognition of the finite resources available to the Nation, the President was strict in his guidance to us. OMB was strict 

in their application of that guidance, and so our programs competed with other discretionary spending and with the Defense Department’s needs. 

My figures suggest that we are 7.1 percent above 2004, including 

the supplemental, 2004 actual to 2005, 7.1 percent. I think it is a 

reasonable amount for the kinds of challenges we are facing on the 

war on terrorism, standing up new facilities in Iraq, and all that 

we are being asked to do on the war against HIV/AIDS and the 

Millennium Challenge Account. 

Now, it is always a question as to am I taking spending from 

someone else or am I just asking for the debt ceiling to be raised 

or am I asking for new taxes? I think that is a judgment that the 

President has to make in consultation with the Congress, and the 

Congress ultimately answers that question in the manner in which 

they act on the President’s budget. But what we try to do is put 

forward only those priorities that we felt were essential and were 

deserving of additional spending in 2005, Senator. 

Senator CONRAD. Let me put up this Newsweek article that I 

quoted from earlier. ‘‘The greatest threat to America’s primacy in 

the world comes not from its overseas commitments, explains historian Niall Ferguson. It is the result of America’s chronically unbalanced domestic finances. The mounting Federal budget deficits that 

now stretch out as far as the eye can see will mean, if history is 

any guide, sharp cutbacks in American military and foreign affairs 

spending. We will see a forced retreat of America’s foreign policy 

similar to the years after the Vietnam War, only the cuts are likely 

to be much, much deeper and the resulting chaos far greater.’’

346

Secretary POWELL. Well, I don’t know that I can agree with either Professor Ferguson or my good friend who I admire, Fareed 

Zakaria. America’s primacy in the world is unchallenged today, and 

it will be unchallenged in the future. I think people recognize that 

America does have some budget difficulties, but they also have confidence in the American political system and the American economic system to deal with this over a period of time—maybe not 

in a year or two. And it is unfortunate we have gone from a surplus 

to a deficit situation, but we had emergencies thrust upon us. And 

we have to work our way through this. And the President made 

judgments with respect to tax cuts, with respect to his economic 

plan, with respect to how much deficit we could sustain right now 

and how to get out of that deficit position. And I don’t think it is 

undercutting our position in the world, and right now we have 

demonstrated to the world that we will not shrink back from our 

responsibilities to go after terrorists and we will not shrink back 

from our obligations in Iraq and Afghanistan. 

I don’t see anybody coming to my office saying we are worried 

about you guys losing your primacy in the world. We will remain 


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347

the primary actor in the world, the sole superpower—not a superpower that imposes but a superpower that looks for allies and partnerships. 

So I don’t quite come to the same conclusion that Niall did or 

Fareed did. 

Senator CONRAD. Let me just say to you, I have not come to your 

office, but I will tell you, I have looked at the long-term projections 

the President has made, not just the next 5 years but his long-term 

projections of what happens with his proposed tax cuts and the increased cost as a result of the retirement of the baby-boom generation. We saw yesterday the Chairman of the Federal Reserve tell 

us those imbalances are so great that we have to cut Social Security. 

Now, you know, the explanation that somehow it is all just going 

to work out is becoming an increasingly hollow explanation. I don’t 

think it squares with the facts that we see before us, either in the 

immediate term or in the term beyond the 5-year budget window. 

And that is why people like Mr. Zakaria, who is, I think, in many 

ways an ally of yours on many issues, and a noted historian are 

warning us—are warning us—where this all leads. And it leads to 

incredibly serious choices in the years ahead. It will be very hard 

to see how international affairs will be exempt from substantial 

cuts, and even defense. 

I would be happy to have you respond to that if you would care 

to. 

Secretary POWELL. Well, I think I have, Senator. I am not competent to judge what needs to be done or not done with respect to 

Social Security. I do know that the country has vital needs now 

with respect to international affairs and defense expenditures. I do 

know that the challenges we are now facing were thrust upon us 

at the beginning of 2001, and we are responding to it. And it has 

put a great deal of pressure on our Federal budget, causing the deficit. 

And I know that there is debate about the President’s tax cuts, 

but he is confident that the tax cuts will lead to economic growth 

which will benefit the American people, and he has a plan. And you 

may disagree with the plan and believe that it is unachievable, but, 

nevertheless, it is the plan that he was submitted to the Congress 

that he believes will halve the budget in the period of years that 

you indicated earlier. And that is a debate that the Congress, of 

course, will have in the course of the year with the President. 

Senator CONRAD. Let me just say in conclusion, I think the notion that the President has floated that this is going to cut the deficit in half is entirely a fiction—entirely a fiction. I mean, I am surprised he didn’t say it was going to eliminate the deficit, just leave 

our some more things. But when you leave out the costs of the war 

past the end of September, when you leave out the crisis with the 

alternative minimum tax, when you leave out the $2.4 trillion he 

is borrowing from the Social Security Trust Fund, every penny of 

which he has got to pay back—he has no plan to do so—it leads 

people like the Chairman of the Federal Reserve to conclude that 

you are going to have to cut Social Security, and much else as well. 

So I would say to you I have enormous respect for you. But the 

policy of just continuing to increase expenditures and borrow the 

348

money I don’t think stands up. And we are going to have to do 

much better. 

Chairman NICKLES. Senator Conrad, thank you very much. I 

hope to have a budget next week that will cut the deficit in half, 

and it will be real. 

Senator Gregg? 

Senator GREGG. Thank you, Mr. Chairman, and I will be happy 

to debate Senator Conrad on his points in the future because I disagree with them. But today we are here with the Secretary of 

State, who has been a leader in what is one of the—what is the 

true issue that faces our country, which is that we are at war, and 

that whether we like it or not, there is a culture out there whose 

purpose it is to destroy our culture. And they have already shown 

that they are willing to kill innocent men and women to do it. And 

if they get their hands on a weapon of mass destruction, they will 

use it against us, whether it is biological or chemical, and they will 

kill thousands more Americans. And our purpose must be to defeat 

them, to find them, to chase them around the globe. 

And I admire the fact that this President has been myopic in his 

efforts to pursue that course, and I admire the fact that he has surrounded himself with people who understand the threat and who 

are also equally committed to defeating them. 

I think if we look at the track record of this administration, it 

is really rather extraordinary in this fight. If you look at what we 

have done in Afghanistan, in Iraq, if you look at what is happening 

in Libya, North Korea is starting to move, it appears, Iran has 

opened itself up to review of its nuclear programs—these are extraordinary steps in the right direction, and they are steps which 

are a function of the fact that we have shown strength and commitment. 

I can see scenarios where we would have still been debating with 

the Taliban as to whether or not we would have gone in there 

under other administrations, and we didn’t take that course. So I 

congratulate the administration and the Secretary of State for their 

aggressiveness in this fight, because that is what it takes. 

It also takes a strong State Department, and I appreciate the 

Secretary making the point that we as a Congress have stood by 

the efforts with the DRI program, with the IT program, with the 

embassy security program, with the visa/passport program, so 

hopefully the subcommittee that funds them is not a national security risk. But there are some specific concerns I have which are 

tangential to the larger issues, but which I would like to raise with 

the Secretary because our time is limited. 

The first is Charles Taylor. Not many people focus on Charles 

Taylor. I have been focusing on him for a long time, ever since his 

horrific actions and the genocide he created in Sierra Leone. 

The tribunal in Sierra Leone has indicted him as their first act. 

It was a courageous act when the indicted him. It was led by an 

American prosecutor. I think his name is Thomas, although I am 

not sure. And now that they have indicted him and Taylor has 

been forced out of his country, it appears that we cannot get him 

before the court. And he should come to Sierra Leone and be tried. 

He should be brought there and tried. 

349

This Congress has put a bounty on the effort to try to get him 

to Sierra Leone and try him, because if we don’t try him in Sierra 

Leone, no future tribunal that is structured on the issue of genocide, whether it is Rwanda or what is happening in the Congo, is 

going to have legitimacy. This man cannot be allowed to live under 

the aegis of a foreign country and be given that protection. 

I am just wondering what the State Department’s position is on 

getting him to Sierra Leone to be tried. 

Secretary POWELL. We believe he should be tried. We believe 

that ultimately he will be brought to justice before the tribunal. 

We had a challenge last year. We had a rapidly deteriorating situation in Liberia. The people were suffering badly—starvation, we 

had mobs running around. We had different resistance groups terrorizing the people. And we had to find a solution to all of that that 

would bring the situation under control and get rid of the leadership that was there, namely, President Charles Taylor. 

And after working with our friends in ECOWAS, the Economic 

Community of Western African States, we came up with a solution 

that would get Charles Taylor out of power, out of the country, but 

the only way we could arrange that to happen was to put him in 

a country where he would not be immediately subject to the tribunal and he would not be moved from that country to the tribunal. 

It wasn’t a perfect arrangement. We would have preferred another arrangement. But we had to deal with a real emergency at 

that time. And so it was an arrangement that was entered into by 

ECOWAS and we supported it. And as a result, Charles Taylor is 

no longer in power. He is no longer protected by his goons, and the 

Liberian people are heading toward a better future. He went to Nigeria, the country that was willing to host him as long as we didn’t 

put pressure on Nigeria to immediately turn him over to a court. 

We made it clear that we believe he is still subject to that tribunal. 

We made it clear that we believe this is still a matter between him 

and that tribunal. And we hope and we work for a set of circumstances to come about where it will be possible to turn him 

over to the court and put him before the court. 

Senator GREGG. Well, as you know, the——

Secretary POWELL. But for the moment, I am obliged to respect 

the political arrangement that was entered into which got him out 

of the place, out of Monrovia in the first place. 

Senator GREGG. I would hope that we have been generous 

enough to Mr. Taylor. It is time for him to be brought before the 

court. I think we should not be standing in the way of that, but 

I think we are. 

On another issue, which is really tangential, and which I suspect 

you have not focused on, and that is the security of the families of 

our—I know you have focused on the security of our families 

abroad. This has also been a priority of mine, but I now learn that 

the State Department has taken a position that if you go to an 

American school which is not receiving grants from the State Department, that that school will not be able to access the security 

funds which we put in the budget last year, and which you were 

kind enough to actually suggest an increase in. Whether you are 

in an America school that gets grants from the State Department 

350

or not get grants from the State Department, if a school is called 

an American school, it is a target unfortunately, and the whole 

purpose of these funds were to protect all Americans, especially 

families of State Department personnel overseas. 

I am wondering why this policy was put in place. It seems to be 

counter to what the intent—I know it is counter to my intent when 

I put the money in. It seems to be counter to the logic of the purpose of protecting these families. 

Secretary POWELL. I feel a very heavy obligation to protect not 

only my embassy compounds, but places where families live, where 

they go for recreation, and especially where they send their children to school. I need to give you an answer for the record. 

Senator GREGG. What I would really like you to do is change the 

policy. It makes no sense on its face. 

Secretary POWELL. Sir, I will look at it——

Senator GREGG. After you have looked at it. 

Secretary POWELL. Let me look at it before I——

Senator GREGG. I agree.

Secretary POWELL [continuing]. Change it, to find a reason for it 

first.

Senator GREGG. But please review. Thank you. I congratulate 

you for the job doing. I think it is extraordinary the progress that 

has been made, as I mentioned earlier, in these core areas of our 

national security, especially obviously, Afghanistan and Iraq. North 

Korea now appears to be moving, and Iran, and Libya, of course, 

and that is only a function of the fact that you and the President 

have shown a very strong hand and been willing to play it. Thank 

you. 

Secretary POWELL. Thank you, Senator. 

Chairman NICKLES. Mr. Gregg, thank you very much. 

Information from our colleagues: we have roll call that is now ongoing I think for about 5 minutes, just FYI. 

Senator STABENOW. Senator STABENOW. Thank you, Mr. Chairman. 

Welcome, Mr. Secretary. 

Secretary POWELL. Thank you, Senator. 

Senator STABENOW. First I would thank you for your service, and 

also say that I think it is good news that we have men and women 

wanting to be involved in foreign service, and coming to the Department of State we need the best and the brightest serving in 

very difficult circumstances. 

Two areas of question. First, because we are talking about the 

budget, I want to focus on the budget and what our priorities and 

choices are. When we look at this budget right now it is not complete. When we look at it in total we see a hole because there is 

not one penny for ongoing military or reconstruction efforts in Iraq, 

and I might just mention that the emergency supplemental we 

passed last year provided $18 billion to rebuild Iraq, and as a side 

note, after yesterday’s discussion on homeland security, that is four 

time more than what the President’s budget is for first responders, 

which is of deep concern to me in terms of relative risk to us and 

what is happening to us in terms of a national threat. 

351

But I am concerned that we are hearing rumors that there will 

be a supplemental after the election. We are also hearing from 

many military leaders that this will not serve in terms of the time 

limit; they need dollars ahead of time. If we are planning to be in 

Iraq for many years, you have indicated it will be very expensive, 

certainly very difficult. Why does the budget not include some type 

of estimates for our operations and rebuilding in Iraq so we can 

budget intelligently for the future? We may not know exactly what 

the number is, Mr. Secretary, we know it is not zero. 

Secretary POWELL. Senator, the judgment was made that in the 

course of regular 2004 funding and in the supplemental, we received enough money to carry us through the end of 2004 and well 

into 2005, so that the best way to handle it was wait until we 

reached 2005, and then there will be a supplemental request in 

2005. But there was not enough known about what that need 

would be to include it in the 2005 budget submission, and we have 

more than adequate funding to take us into at least first quarter, 

in my case, of 2005. 

Senator STABENOW. Mr. Secretary, I realize that is the position. 

I would just say that from our perspective on the committee, I do 

not believe that is responsible budgeting when we know that our 

first quarter into the next year we will be asked to come back with 

a supplemental. We are already borrowing to spend in Iraq, and rebuilding as well as the military, and for us to know that we are 

going to be going even farther into debt, it seems to me we at least 

ought to have a placeholder of an amount of money, and that is certainly something I think this committee should be discussing. 

Secretary POWELL. In my budget there are some moneys in 2005 

for things we really know about to a finite degree now, what it is 

going to cost us to run our embassy operations in Iraq. Those kinds 

of things we have put in the 2005 submission. 

Senator STABENOW. But you are agreeing that there will be additional dollars needed in 2005? 

Secretary POWELL. I am quite sure there will be a need for a supplemental in 2005. 

Senator STABENOW. Let me turn to another issue, an extremely 

serious issue that you have talked about, which is HIV/AIDS. 

There is no question in my mind that this is one of the, if not the, 

largest crisis that we have in the world community. When you say 

8,000 people are dying every day, including today as we sit here, 

I cannot imagine a bigger threat to humanity than HIV/AIDS. The 

President’s request to combat HIV/AIDS increased substantially 

this year to 2.8 billion, and I appreciate that, but I am concerned 

that the request lags behind the 3 billion that we authorized in legislation last year, which the President signed, and I am wondering 

if you can explain why we are not meeting the commitment that 

we made to the world community last year. 

Secretary POWELL. We are really still gearing up our programs. 

The HIV/AIDS Office is now just starting to issue contracts, enter 

into compacts with delivering agencies for the new moneys coming 

from the 2004 appropriations. So I think you will see that in the 

months ahead the rate of commitment of money will increase significantly and the funds will really start to flow out in a very, very 

rapid and responsible way. 

352

Senator STABENOW. Would you not agree that this is an emergency? 

Secretary POWELL. Ma’am, it is. 

Senator STABENOW. And there has to be the utmost sense of urgency. 

Secretary POWELL. It has the utmost sense of urgency. It is an 

emergency. It is a priority, and we are working as hard as we can, 

but we have to do it in a responsible way and make sure we are 

sending money out to programs that are prepared to receive the 

money, and we are not wasting the money, and that has taken us 

time to buildup the capacity to handle the additional moneys and 

to make sure we are doing it in a good way so that when I come 

up here next year, I am not criticized for having run bad programs. 

Senator STABENOW. Mr. Secretary, I have heard from a number 

of people and had a number of conversations with members of 

NGO’s that indicate that as fast as we can get them the resources 

they have the capacity to address this, and I am hopeful that we 

will do this as quickly as possible. 

Finally, this year’s request for the Millennium Challenge Account 

is 2.5 billion, nearly 1 billion short of the commitment outlined by 

the administration at the onset of the MCAs. I understand it is a 

new program also. I understand it takes time to ramp up, but we 

need assurance from the administration that we will meet the $5 

billion annual funding goal in year 3 that was promised, and I am 

very concerned again that things just are not moving as fast as 

they should be. 

Secretary POWELL. The President remains committed to reaching 

that $5 billion goal, and it is a brand new corporation. The first 

board of directors meeting I held on the 2nd of February. So inevitably it takes time to create programs, to get the criteria in place. 

Working with our Ambassadors, we now have their ideas in hand. 

We are evaluating the countries now. The evaluation system is 

being put in place, and you will see this program ramp up quickly. 

It just takes time, frankly, to put in place a system to spend these 

large amounts of money in a responsible way. But we will be 

ramping up quickly. I think we will be able to use what we have 

been given this year, and we will be able to use the $2–1/2 billion 

for 2005, and the President is still committed to hit the $5 billion 

a year target that he indicated when he created the program. 

Senator STABENOW. Finally, one of the things I noticed in reading former Secretary O’Neill’s book—and there were many interesting things in that book—but one of the things that I was appreciative of was his passion about HIV/AIDS after his trips to Africa 

and his suggestions about water projects, and the fact that only, as 

an example, half the people in Ghana have water, and what a difference it would make just providing the basics of water to everyone and how this could be done from his analysis, looking at the 

major reports and some of the contractors that have come in from 

the U.S. that have been suggesting huge projects of billions of dollars. His assessment was that things could be done for much, much 

less and much more quickly if we just talked about the basics and 

about wells and getting water to people in these countries. I am 

wondering if you have had conversations with him about his proVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00358 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
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posals? And I should also say I am hopeful he will continue to work 

on those, because I think he has the right idea. 

Secretary POWELL. Paul had a real passion for that, HIV/AIDS 

and clean water, and he and I spent many hours talking about 

both subjects. He had an idea about drilling wells rapidly, but we 

really do have a rather expansive program for wells and for other 

means of providing water, and we made another substantial commitment when I went to the World Summit on Sustainable Development in South Africa a year, year and a half ago. So we are I 

think as passionate and as committed as Paul O’Neill was for providing clean water because it goes along with development and it 

goes along with health, it goes along with combatting HIV/AIDS 

and other infectious diseases, so it is all part of the package. We 

may have had disagreements as to how best to provide clean water. 

It is not just a matter of digging a hole in the ground and up comes 

the water. You need other parts of that system. You need to be able 

to maintain and sustain that system over time. 

So we were looking at it in a more comprehensive way than Paul 

was looking at it. I hope he will continue to have an interest in this 

in private life, continue to work on both HIV/AIDS programs and 

clean water programs. 

Senator STABENOW. Mr. Secretary, I just cannot find the words 

strong enough to urge you to continue to focus on this as well as 

all of us needing to do that, because there cannot be a larger crisis 

right now in the world, and while we focus on military action, 

which is certainly an important component to leadership, focusing 

on hearts and minds and the leadership that we can provide as the 

greatest country in the world on humanitarian efforts, certainly 

sends an important message about our values as much as other actions. 

Secretary POWELL. I could not agree with you more, Senator. 

Thank you. 

Senator DOMENICI [presiding]. Thank you, Senator. 

Mr. Secretary, I am not sure that I can finish in the 3-minutes 

that remains on the vote, so if I come back, please do not consider 

that I am trying to abuse my time. It is just that I am not going 

to get 8 minutes in, I do not believe. 

First I want to tell you that I have a statement prepared that 

I want to put in the record. It is a statement of accolades, accolades 

for you, for our President, for America, with reference to the world, 

and principally with reference to what it means to be free. 

[The prepared statement of Senator Domenici follows:]

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Senator DOMENICI. But I have an issue that I am quite sure you 

agree is important, and I think it is so important that it requires 

more than people like you being interested. It requires the utmost 

action. Let me try to explain it to you in terms of what is happening today. 

We are engaged in a war against Iraq on the basis that they 

have historically been leaders in the use of weapons in mass destruction. Whether they were there on a given day or not will probably not be answered until history is beyond us. But we worried 

enough about it that we went to war. 

Now, Mr. Secretary, the problem I address is the proliferation of 

weapons of mass destruction and its components and its scientists 

around the world. When I first got involved in this issue, Mr. Secretary, it was Russia and America, and believe it or not, from that 

interest and the interest of some very expert people, the first laws 

were passed with reference to proliferation. Believe it or not, one 

afternoon in a 15-minute period, the appropriators here started two 

new nonprofileration programs. We did not take a month or 6 

months. One was $200 million to jump start the program to create 

a plutonium disposition program. I am tempted to stop and go to 

the other issue in a moment, but let me not do that and create a 

little further synergy about the issue. On that very same day that 

that happened, our Appropriations Committee, in conference, approved over 50 million for the United States of America to buy 

highly enriched uranium from the Soviet Union. That uranium acquisition has worked somewhat. We turned it over to an American 

corporation that was created by selling a Government corporation. 

You are aware of that company. Its record has been spotted at best. 

But programs like plutonium disposition, you know, they are a 

kind of a duck on water, and waiting around to drown, and you 

know how hard it is to drown a duck. That is how hard it ought 

to be to dispose of a program like plutonium disposition, but we are 

letting the problem languish to where it may disappear if we do not 

solve a little disagreement with Russia regarding what we in 

America would call indemnification. Maybe somebody would describe it as who is going to be liable for what in the event things 

do not work out. 

Let me just say, Mr. Secretary, I have talked to you briefly and 

I do not expect you to know a lot about this just because I called 

you on the phone, but I sent you a letter. I have tried my best to 

speak to the President, and I think a result of both the speech and 

a letter that had something to do with the President’s announcement. People do not know it, but the announcement on nonproliferation, it may go down in history as one of the most significant speeches given if it works. 

Mr. Secretary, I want to ask you and urge you, with all the 

things you are carrying around on your shoulders, to really consider pursuing with vigor the establishment of international institutions to control the spread of weapons of mass destruction, and, 

Mr. Secretary, I have, since our conversation, talked to the smartest people I could find. The other day you asked me who and I told 

you, remember, Sig Hecker? Since then I have spoken to Steve 

Younger, who is going to be a fellow after having been one of America’s—leading nuclear bomb makers, and he is going to be a fellow 

358

and research physicist. I asked him about this. He said we have 

to get somebody to get on with it and get this international thing 

going. 

Now, Mr. Secretary, do you think this is a big problem, proliferation? 

Secretary POWELL. I absolutely do, Senator, and that is why the 

President spoke to the issue at the National Defense University, a 

speech I think is an historic one, and one in which he laid out a 

number of things we have to be working on to include improving 

the ability of the major international organization that deals with 

nuclear activities and that is the IAEA. And he talked about passing resolutions before the U.N. He talked about passing the additional protocols to the Nonproliferation Treaty and a number of 

other areas that he is working on. 

With respect to the specific issue of liability and indemnification 

with the Russian Federation, it is a subject of considerable discussion. I have discussed it with my Russian colleagues recently when 

I was in Moscow, and in subsequent conversations with Foreign 

Minister Ivanov. And we have engaged the interagency process in 

recent weeks in a much more aggressive way to find a solution to 

these continuing, nagging indemnification and liability problems 

that are holding up not just the particular program you made reference to, but other programs that came out of the G–8. 

Senator DOMENICI. Mr. Secretary, I am thrilled to know that you 

are involved. I can tell you without mentioning names that I believe that people who have been working in your behalf—and I 

would not mention their names—I do not think they are competent 

to get this kind of treaty with the Russians. That is my view, not 

yours. To get that resolved needs your absolute mandate to the 

State Department that they put the kind of people in that can resolve it. I tell you, it is not that tough, but it has got to have some 

big people. 

I want to wrap this meeting up so that everybody that is here 

and the media that is here have to understand. We just had a national position, and our ranking member took a big swipe at the 

fact that America has gotten heavily in debt, and that the Fed 

Chairman just mentioned Social Security. Well, Mr. Chairman, and 

fellow Senators, I was chairman for so long in this committee, and 

I am so thrilled that this very, very competent man, Senator Nickles, is Chairman. 

But do you know, 18 years ago in the U.S. Senate we had a vote. 

Do you remember former Senator Pete Wilson? We wheeled Pete 

Wilson in in a wheelchair because he had had appendicitis. His 

was the deciding vote on a proposal by Domenici and Nunn to restrain the COLAs on Social Security, 18 years ago. Why? We knew 

just what is happening was going to happen. We never did this 

again because some people think 8 or 10 people lost elections the 

next time, but from my standpoint I do not think it does a lot of 

good to talk about this unless somebody is ready to do something 

about it. But I can tell you, you have some of the greatest programs 

mankind has ever seen, the greatest humanitarian program was 

this President’s effort of commitment of $2.8 billion for AIDS. Who 

would have thought it? There are still some people who think Republicans do not care and George Bush is a conservative from 

359

Texas, who cannot believe that he is the one who said we will 

spend 2.8 billion to address the world’s aids crisis. 

I tell you, I am not here to criticize how slow it has been because 

I understand with that much money, if you turn it loose, it will be 

gone in a year and then they will be back here saying, you forgot 

this one, this one, the other one, or you put too much here and too 

much there, and that is a bear of a job. I hope you get it done and 

I hope you get it done in your typical, methodical and terrific way. 

The man you put in the directorship is already under criticism because he is not a health man. We do not need a health man. We 

need a big-time manager, right? 

Secretary POWELL. Absolutely, and that is what we have with 

Ambassador Tobias. 

Senator DOMENICI. That is right, terrific. If you put anybody in 

charge that is going to look at 3, 4, 5 billion and spend it right, 

you are probably on the right track. 

My time is up and I am going to go vote, and I am not sure that 

I can come back. I have about 8, 9 questions. I will submit them 

to you. 

I do want to close by saying, as strange as it may seem, with this 

President having 1 year left, and hopefully he will have some more, 

it is very important that you, where you have the lead in some of 

these programs, that you really put Secretary Colin Powell behind 

them. Nobody will move them like you, and you ought to do it. The 

ones I mentioned are terrific. Weapons of mass destruction are 

moving around the world today like nothing we could have believed. We have a guy in Pakistan that 10 years ago if you would 

have found him selling that stuff, you would have hung him in the 

marketplace. The worst proliferator ever is that fellow from Pakistan. Is that his name, Khan? 

Secretary POWELL. Kahn, sir, Dr. Khan. 

Senator DOMENICI. Can you imagine admitting that he put weapons of mass destruction in five countries, and we are still running 

around saying, well, we do not know what to do about him? 

Thank you very much. 

Secretary POWELL. Thank you, Senator. 

Senator BUNNING [presiding]. Since I guess I was the first one 

back, I will be the first one to be able to followup on Senator 

Domenici. I would like to comment on an earlier statement by my 

good friend, the ranking member, about what Chairman Greenspan 

said and what he did not say. I have his statement before me. He 

stressed that he preferred cutting Government spending as much 

as possible before increasing taxes. He also endorsed in the statement the tax cuts that we implemented in the economic reform program, and then he suggested that we might consider cutting promised Social Security, and the exact words, ‘‘consider cutting promised Social Security benefits to future retirees.’’ He did not say to 

cut them. He did not say that that was an option. He said ‘‘you 

might consider it.’’

Well, I have news for Alan Greenspan, and I have had it before 

at every hearing—I know I am getting off the track, but I have to 

say these things. Chairman Greenspan has made so many wrongheaded statements over the period of the last 15 years that I have 

taken him to task at almost every meeting that he has attended. 

360

Knowing full well that nobody in this Congress of the United 

States of America is ever going to suggest that we cut Social Security benefits for those who have earned and paid for them. 

The fact of the matter is, as Chairman of the Social Security 

Subcommittee on the Ways and Means Committee, it was never 

brought up. The only thing that was ever suggested that if we did 

nothing, nothing to correct the problem, that by 2036 we would 

have to lower benefits to future beneficiaries after that time by 25 

percent. I wanted to clear that up because I think it is very important. 

Now to get to some of the things that concern me on your budget. 

9 percent increase for the U.N. and affiliated agencies. I bring that 

only to the point that does that consider any of the military money 

that we are spending in Bosnia or Kosovo with our troops, or is 

that excluding the dollars being spent by the DOD on our involvement in Bosnia and Kosovo? 

Secretary POWELL. It excludes it. Those are strictly within the 

military accounts. If it is a peacekeeping mission somewhere under 

U.N. auspices, then we pay our fair share, 27 percent of that peacekeeping mission, and that would be included in that account. 

Senator BUNNING. But we are continuing to pay the 100 percent 

of our troops, our troop presence——

Secretary POWELL. In Bosnia and Kosovo. 

Senator BUNNING [continuing]. In Bosnia for the last 8 years and 

Kosovo for the last 5 years. So that is not in this budget? 

Secretary POWELL. No. 

Senator BUNNING. I have a problem with the State Department 

only to the point that we created a law in the U.S. Congress, and 

it passed and the President signed it on arming cargo pilots to operate on international flights. It is called the Flight Deck Officers 

Law. 

In an op-ed piece—and I do not recommend this for reading, oped piece in Roll Call, because it is not one of my favorite periodicals—none are being allowed to do this because our State Department has not negotiated any agreements with any other nations to 

allow these armed pilots, whether it be on commercial aircraft or 

cargo planes to carry these. Can you bring me up to speed as far 

as where the State Department is in any kind of negotiations with 

other countries on this specific law that we passed? 

Secretary POWELL. No. I would rather provide the answer for the 

record, Senator. The only thing that I could say is that many of our 

friends and allies around the world do not have the same view of 

that approach to security, and therefore if we fly into those countries, there is probably a debate that will take place before we can 

get in place the necessary policies for our pilots to come in armed. 

But I would rather get a more precise answer for you for the 

record. 

Senator BUNNING. I appreciate that, because some of our intelligence, as you well know, indicates that that might be a source of 

national security as far as returning to the United States on cargo 

planes and on other planes that have been obviously canceled. 

Secretary POWELL. I do understand. 

Senator BUNNING. I thank you very much for your time, your patience, and my God, the responsibility that you hold as Secretary 

361

of State in this trying time with all of the things that are on your 

plate, our expansion, our problems in Iraq, our problems in Afghanistan, and many other areas, and the progress that we are making 

in those areas, and if at all possible, I will support almost everything in this budget, and we will figure out a way to pay for it. 

Secretary POWELL. Thank you, Senator. 

Senator BUNNING. Thank you. 

Chairman NICKLES [presiding]. Senator Bunning, thank you very 

much. 

Senator Corzine? 

Senator CORZINE. Thank you, Mr. Chairman. 

Welcome, Secretary. It is always great to welcome you, and I 

want to as well commend you for your service and particularly 

those who work with you as well in the State Department. The 

agenda is broad and long, and I feel like we are in strong hands 

under your leadership there. 

I also believe that the reinvesting in the people that you have 

made such a centerpiece is one of the most important things in the 

long run for our ability to be able to carry out our foreign policy, 

both current administration and future, and support it completely. 

That is the good news. 

I have a real problem. It is a little bit along the lines of sometimes a lack of complete information ends up undermining credibility. When we look at the budget this year with regard to what 

you are speaking to us about today, we are talking about 31.5 billion. And we all know that there is a plug there for reconstruction 

for additional aid that will accompany both our efforts in Afghanistan and Iraq. It has been there for 2 years, $18 billion last year 

and two odd years before. I do not understand how we cannot make 

some estimate, understanding that rational views know that is 

coming. And you put that into conjunction with other issues about 

the alternative minimum tax, which is left out or only put in for 

1 year or the elements with regard to the cost of some of the programs that were proposed in the state of the union message, like 

health insurance. It gives people an unease about full disclosure. 

I think actually the debate the Chairman talked about is less about 

misleading and lying and more about whether there was full presentation of the various interpretations of intelligence that came as 

we preceded the war. So I am very troubled about those issues and 

this is a particularly egregious example, that we will end up almost 

certainly having a substantial expenditure that is not included in 

our projections, and it leaves the American people with a false 

sense of, I think, what we are doing with regard to our budgetary 

policies, and then some way undermines credibility of people who 

I think are doing a terrific job and putting themselves at risk and 

all the other things that are associated with it. 

I guess that is my statement. I would ask you to comment on 

that, but more importantly, would like to hear some of your early 

interpretations of the writing of your report or the fact-finding report. I think the end of this week, if I am not mistaken, there is 

supposed to be an implementation of the fundamental law or at 

least an announcement. Do we think we are going to meet that 

deadline? There are certainly discussions with regard to whether 

June 30th is an appropriate timeframe for proper electoral process. 

362

I heard some movement away from maybe an election, although I 

do not want to put words in your mouth. It was left uncertain. I 

think nothing is more important with regard to our budgetary indications of whether we are going to have the resources to actually 

help build an electoral process that is going to have the credibility 

should the United Nations be presenting this. I really think that 

an exposition with regard to some of this fact finding—and a very 

credible person, Ambassador Brahimi, has certainly led the effort 

in Afghanistan in a way that I think almost everyone would argue 

has been remarkable. 

Secretary POWELL. Thank you. Senator. With respect to the 2005 

submission we do have dollars in there for things that we really 

can scope down and know what the requirement is going to be. 

There is $46 million requested for State operations in Iraq, including $17 million support cost and $29 million to staffing. That is 

known now. We can budget for that and we can put it in the budget, which we did. But with respect to other demands that might be 

placed on the Department, and frankly the larger demands that 

will be placed upon the Defense Department, it was felt that as a 

result of the supplemental efforts and the fact that there are other 

sources of money that will be coming online, revenues for oil sales 

in Iraq, the donors conference that came up with a lot of money 

in Madrid a few months ago, that money will start to kick in and 

help with reconstruction and budget support for the new Iraqi Government. 

For those reasons, it was felt that the 2004 regular appropriations, plus the supplemental appropriation, will take us through 

the early part of 2005. And we will have a better sense then of 

what additional moneys will be required with another year of experience under our belt. It was felt it was better to wait for that 2005 

supplemental to deal with that which we cannot see clearly now. 

That was the judgment that was made. So we put in, in the Department, that which we could see clearly had a finite way to scope 

it, and we did not make estimates, nor did others make estimates 

for expenditures they could not accurately make estimates for now. 

Senator CORZINE. Is there no contingency planning though of 

ranges that are actually thought through with regard to associated 

planning processes? 

Secretary POWELL. I do not know what the Pentagon might have done, but most of the $21 billion was for reconstruction activities 

and it is not yet clear what that will look like for the latter part 

of 2005, but we have enough to carry us into 2005 for our operations, both military, State Department and other operations, and 

that is why the judgment was made to wait until 2005 to see what 

kind of supplemental would be required for 2005. 

With respect to Mr. Brahimi, he is a man of enormous ability, 

and I haveten to know him very well as a result of what he did 

in Afghanistan, and he did a terrific job in Iraq. He visited with 

the parties and he reaffirmed the judgment we had come to that 

we could not really have the right kind of election between now 

and say the end of June, and there were certain deficiencies in the 

caucus process that we were looking at, and he recommended that 

we look at additional options for the purpose of selecting an interim 

government for Iraq. We are still driving toward a 30 June date. 

363

We think it is achievable. Ambassador Bremer is hard at work on 

the administrative law now. 28 February was our deadline. It is 

getting close. I have not talked to Jerry in the last 24 hours to see 

whether he thinks he will make it or not, but I think we are getting very close. There are some issues having to do with Kurdish 

authorities and the regional government of Kurdistan and some 

other issues that have to be dealt with. They are not easy, but I 

think we are getting close to conclusion of the work on the administrative law. 

The next real piece of work to be done—and we are looking forward to seeing what Ambassador Brahimi and the Secretary General might have to say about this—is what kind of interim government will you put in place? Will it be the governing council, an expanded governing council? Will it be Asura coming up with another 

group of individuals to take sovereignty? A variety of alternatives 

are being looked at, not only by us, of course, by the United Nations, but more importantly, by the Iraqis themselves as to how 

they want to go about it. And that will be the major activity of our 

governance group in the weeks ahead, what kind of sovereign government should we be supporting for hand over on the 30th of 

June? 

Senator CORZINE. The deadline appears though, you still very 

certain can be met in some format, just a different format? 

Secretary POWELL. Yes, 30 June still is achievable and we are all 

working toward that 30 June turnover. 

Senator CORZINE. I am sure you have read the Brahimi or the 

interim report or the fact-finding report. 

Secretary POWELL. Yes. 

Senator CORZINE. One of those things that sticks out very really, 

very prominently in that report is that security constraints are still 

a serious issue on the ground, and to some extent did not seem to 

jive with I thought your opening statement. There is some acknowledgement that security is getting better. They were not allowed to 

travel outside Baghdad. I am just reading from the report. They 

were not actually allowed to travel seriously in Baghdad, according 

to the report. How do you assess the security situation on the 

ground? 

Secretary POWELL. The security situation on the ground is improving but it is still dangerous. We are still losing people. There 

are still old regime elements and terrorists in Iraq who are doing 

everything they can to thwart our efforts. The Iraqi security forces 

are being built up and are being targeted because they are being 

built up. People understand, the bad guys understand that they 

want to go after Iraqi security forces, perhaps even more than they 

want to go after coalition military forces because they are trying 

to keep this from happening. So we still have a difficult situation. 

Our commanders I think know what they have to do, and we are 

putting a lot of effort and energy into building up the Iraqi police 

force, the civil defense corps, the army, the border police, and all 

the other security institutions that Iraq will need when it becomes 

a sovereign nation. Over 200,000 people, close to that number now, 

are now involved in Iraqi security operations, Iraqis involved in 

Iraqi security operations. So I think things will improve, but it is 

dangerous. 

364

Now, the team you are making reference to, they were not able 

to get as much access as they wanted, or they may have chosen not 

to go where they wanted because they were not comfortable with 

the security arrangements. But they got their work done, and we 

hope that by the time 1 July comes around, when we think there 

is an even more comprehensive role for the U.N. to play getting 

ready for elections, we will have put in place security arrangements, working with the United Nations, that will allow them to 

move more freely. But it is still a dangerous area. 

Senator CORZINE. One last followup question. You just implied in 

your response that it is insurgency, I take it primarily as the fomenter of the violence and lack of security, seem to have a debate 

going on among different elements of both our intelligence and/or 

defense establishment about whether what we are primarily seeing 

on the ground being outside influenced elements who are causing 

the security problems or insurgents? 

Secretary POWELL. We are seeing both. I do not think there is 

a debate. I think we are seeing both. On any day of the week you 

can get two opinions as to whether we are seeing more of one and 

less of the other or what the trends are for each. I think the Intelligence Community generally believes that we are seeing additional 

terrorists coming into the country and that the former regime elements are coming more under control, but we are seeing both. We 

are also seeing criminality, just plain criminality, people who want 

to blow up pipelines, want to steal from the pipelines, people who 

for one reason or another that has nothing to do with being a 

former regime element or a terrorist who just came into the country, want to cause trouble. So anyone who says it is all this or all 

that, that is not a correct assessment in my judgment. It is still a 

combination. 

Chairman NICKLES. Senator Corzine, thank you very much. 

A quick question. You have mentioned 200,000 people are being 

trained. Is that 200,000 Iraqis? 

Secretary POWELL. 200,000 Iraqis are performing some kind of 

security function, whether in the police, in the civil defense groups, 

border patrol, pipeline security, or the army itself. 

Chairman NICKLES. Senator Nelson. 

Senator NELSON. Thank you, Mr. Chairman. 

Mr. Secretary, thank you again for being so resolute as we continue to look for Captain Scott Spiker. There is a team over there 

that is looking for him, and although this is outside of your bailiwick, with your credentials of your past life, if you would just keep 

the pressure up, and I will give this to your staff. It is a letter from 

the family, which as you know, live in Jacksonville. I just want to 

urge you, as you are in the inner sanctum, talking about it, keep 

him on the forefront. They have been. I have been over there. 

There is a major who was set to rotate back. He is now a lieutenant colonel. He extended to keep up the search. From time to time 

we get some promising information, but we do not have any results 

yet. So I am going to give that to your staff. 

Secretary POWELL. I will stay on it, Senator. He was lost on my 

watch. 

Senator NELSON. Thank you. You know I want to talk to you 

about Haiti. When you were with us in our Senate Foreign RelaVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00370 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
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tions Committee 2 weeks ago I asked you the question, is it the 

policy of the Government for regime change? You said, No, it is the 

policy of the Government that it is not for regime change. I want 

to suggest to you that what appears to be the hands-off policy of 

the U.S. Government with regard to Haiti is in effect going to bring 

about regime change. Now, we might agree at the end of the day 

that Aristide is a bad character who has been corrupt and very ineffective, but in effect, when the U.S. Government lays hands off 

and allows the violence and the bloodshed to increase, that is going 

to bring about the regime change, and Aristide is going to go. And 

I know you have probably been overruled by the White House on 

this to keep a hands-off policy. I would like any of your comment 

on that, and then I want to encourage you, although you all have 

not taken my recommendation of putting an international police 

force in there with the other nations of the western hemisphere, 

that when he abdicates, it is clearly time for us to get in there and 

try to settle that thing down, because as you can see, just look at 

the news, you can see the rickety boats that they are building. 

They are turning up on Jamaica, they are turning up on the Turks 

and Caicos. 20 of them turned up on a freighter 5 miles off the 

Florida coast. This exodus is coming if we do not get in there and 

stabilize it. 

Secretary POWELL. Senator, I have not been overruled by the 

White House. There is no basis for it because the President and I 

have discussed this issue almost every day, and we have a common 

mind. We were together on it 7 o’clock last night in the Oval Office, 

and he and I discussed it again on the phone at 7 o’clock this morning. 

We have been trying to find a political solution to this crisis. I 

have been in daily contact with the CARICOM leaders, with 

France, with Canada, with the United Nations. I have been in relatively constant contact over the last week with the authorities in 

Haiti. I have been in contact with the opposition leaders of the DP. 

I have talked to them in groups. I have sent Ambassador Noriega 

down there to talk to them. We have tried to find a political solution. It has not been a successful effort at this point, and we continue to try to see if there is not a way forward. 

The issue of sending in a security force, be it a police force or 

a military force, has come up time and again. In fact, it came up 

again within the last 24 to 48 hours. What we have said and what 

my French colleague Dominique de Villepin said yesterday, and it 

has been somewhat misinterpreted was that the international community stands ready to help put together an international security 

force, whether it is police of some component gendarmerie or military or whatever. The international community stands ready to put 

that force together, as my French colleague said yesterday, as part 

of stabilizing some political resolution to this problem. 

What the international community—and there may be some 

members of the community who feel a little differently—but most 

of the members of the international community with the capacity 

to send forces in there have said is that Haiti really needs to find 

a political resolution to this problem. We do not want to get into 

an inter-positional situation between opposing forces at this time 

and coming down on one side or the other. 

366

I spent a great deal of time yesterday on the phone with Foreign 

Minister de Villepin, spoke to him again this morning, and he 

made his statement clear yesterday that France is willing to participate in such an effort. So is the United States. So is CARICOM. 

So is Canada. There may be African nations of the francophone 

community that are willing to participate in that, but we need to 

see some kind of political resolution. 

We have not succeeded in getting the political opposition, the DP 

as it is known, to agree to enter into this current proposal with 

President Aristide. The reasoning is well known. They have stated 

it clearly. They believe they have been misled in previous discussions with him. At the same time, we are concerned about the humanitarian situation. We are doing everything we can to make sure 

that food stocks are protected. There are some distribution problems in Haiti, but for the most part there is adequate food, medicine and other necessary stocks. 

I am very sensitive to the plight of the Haitian people, and we 

spent time this morning talking about a spurt in the number of 

people coming out onto our cutters, and there is a meeting taking 

place in the interagency community right now I think on how we 

should respond to that challenge. 

President Aristide is aware of all that we have been trying to do. 

He understands that we have not been able to reach an accommodation with the DP. I know that he is taking a look at the situation. I do not know what judgments he may come to. But we are 

in a difficult moment in the life of Haiti, the life of Haitian people. 

It is a great disappointment to me to find ourselves in this position. 

I went down 10 years ago with Senator Nunn and with President 

Carter and talked the generals out in order for President Aristide 

to come back in, and I regret that over those 10 years we have not 

seen the kind of progress that we had hoped for. President Clinton 

invested a couple of years of military presence. The international 

community spent tons of money trying to put in place a professional police force, and it did not work, and the political process, 

the democratic political process in Haiti has essentially collapsed, 

and the international community is ready to get engaged, willing 

to get engaged. There are debates and discussions taking place in 

the U.N. today, but anybody who looks at this says, what is it we 

are getting into? And we have gotten into something that looks like 

it is a political solution, and that has not yet emerged. 

Senator NELSON. Mr. Secretary, I pray that you are successful, 

and then once the country is stabilized, then I think we have to 

have fresh thinking about how we help them stay stabilized in the 

future. I say this in a bipartisan way because I think at the end 

of the immediate past administration that they started to let Haiti 

slip out of their sights, as has this administration up to this point. 

So I pray that you are successful, and then let us get our heads 

together of how it is going to be stabilized for the long run, and 

the kind of economic assistance that will give it some hope so that 

people will not constantly want to flee. 

Secretary POWELL. As you know, Senator, we have provided over $800 million from 1995 to the present to Haiti. We are still providing funding to Haiti, $75 million this past year. There is a request in our budget for more. The international financial commuVerDate 0ct 09 2002 09:44 Aug 02, 2004 Jkt 000000 PO 00000 Frm 00372 Fmt 6601 Sfmt 6601 C:\DOCS\94065.PDF TISH PsN: LAF
367

nity and the institutions of the international financial community 

are willing to help more, but they have become frustrated that the 

money does not seem to produce the kind of results intended. And 

so there is a reluctance, until the political situation stabilizes itself 

and there is a legislature and there is a functioning executive 

branch with some security in the country, and there are institutions that are functioning, there is a reluctance from the international community to just pour money into the place. But we are 

doing our part with respect to meeting the immediate needs of the 

Haitian people through NGO and private organizations, and we 

will continue to do so. 

Chairman NICKLES. Senator Nelson, thank you very much. 

Mr. Secretary, you have 5 more minutes? 

Secretary POWELL. Yes, sir, certainly. 

Chairman NICKLES. Just a couple of other issues Senator Conrad 

and I wanted to bring up. One is on the issue of foreign adoptions. 

Right now foreign adoptions are basically regulated by the Citizens 

and Immigration Services and the State Department. I have introduced legislation with Senator Landrieu and a bipartisan group of 

Senators called the Inter-Country Adoption Reform Act, basically 

put it under the Department of State, try and consolidate it, get 

it to where it will work much more efficiently. 

Would you review that and give us your thoughts? It would be 

put in under your shop. I think it would make it work a lot better, 

simplify the process. I would appreciate your getting back to us on 

your thoughts and comments. 

Secretary POWELL. I will look at it, Senator, right away. 

Chairman NICKLES. Also I want to just touch on a couple of other 

things. The big increases in your budget are for AIDS and for the 

Millennium Account. 

Secretary POWELL. Right. 

Chairman NICKLES. Last November, December, I went with Ambassador Tobias and Secretary Thompson on an AIDS African trip. 

Our work over there is meeting a need that is enormous, enormous, 

and I compliment you and the President. Ambassador Tobias is 

just an outstanding representative, taking on a challenge. I look at 

the job that you have, the job that we have, we all have big jobs 

around here. That is an enormous challenge as well, and I think 

we have the right person in there. 

The Global Fund assistance that Congress appropriated last year was $546 million. The amount that is in your budget is $200 million. The administration requested a total of $2.8 billion, and last 

year we appropriated a total of 2.4 billion. So I have not looked at 

all the differences, but I do know that Congress put in a lot of 

money in the Global Fund that was not requested, and you are requesting more money in other places. Is the 2.8 consistent on this, 

meeting that commitment of $15 billion? 

Secretary POWELL. Yes, sir. 

Chairman NICKLES. I appreciate that. Also I want to just touch 

on one other thing. The other big piece of that—and you mentioned 

they are combined, and I would echo that—the Millennium Challenge coupled with the Global AIDS Fund. One or two of the African countries I saw were so poor, and I am thinking there are such 

enormous resources here, if they had a legal system, if they had 

368

private property ownership. Uganda is one—and there are others—

the most fertile country I have ever seen, and yet we are sending 

food aid. They could grow enough to feed not only Ugandans but 

many other countries, but in many cases they do not have the rule 

of law and they do not have private property, and so I compliment 

you on both. 

Now, on the financial side of it, last year you talked me into a 

billion dollars for a new program. This year you are asking that 

program to grow to $2–1/2 billion. You have not obligated as of yet 

the billion dollars. Do you really need that $2–1/2 billion in 2005? 

Can we not slip some of that into 2006 and 2007. The increase we 

have on all nondefense programs is $2 billion, and you are asking 

a billion and a half of it for the Millennium Challenge Fund. You 

are not really quite ready to spend $3–1/2 billion or even obligate 

$3–1/2 billion, are you? 

Secretary POWELL. I recommend you really not slip it into the 

out years, Senator. We need that money in our accounts now in 

order to start planning how we are going to ramp up this program 

as fast as we can. There are countries that are desperately in need. 

Let me just touch on another effect that the program is having 

already. I am already hearing from a number of countries—you 

were concerned that they are not going to meet all the standards 

required for eligibility. They are asking: ‘‘Can we send a delegation 

to see you right away?’’ ‘‘What do we have to do?’’ ‘‘What do we 

have to do on the rule of law?’’ ‘‘What more do we have to do on 

corruption?’’ ‘‘What is our grade?’’ ‘‘What is the threshold for passing?’’ They want to be a part of this program. I think the way in 

which it is structured right now, with one now and two plus next 

year shows determination, shows the commitment of the President, 

of the American people and the Congress. So I would you not slip 

the two, and we will be ramping this up as far as we can. 

Chairman NICKLES. I appreciate it. With the concept I am with 

you 100 percent and I compliment you. 

One other compliment I want to make and that is in the Office 

of International Religious Freedom. Senator Lieberman and I sponsored that bill years ago. We found then that there was a lot of 

countries where people were persecuted and in some cases killed 

because of their religious beliefs. We find it with friends and allies 

even, in countries like Pakistan, Saudi Arabia or countries like 

China and others. The purpose of that bill was to highlight some 

of the problems and give us a lot of tools to help fix those problems, 

and I would just say I just have been looking at the report that 

was released just last December by the Commission, and it was an 

outstanding report. I would urge more attention I guess from all 

of us, Members of Congress and others. I find when we raise some 

of these issues with some of our countries, that our allies, our 

friends in the war on terrorism and so on, that they want to be cooperative. So I compliment the Ambassador-at-Large, Mr. Hanford, 

but also the work that that Commission is doing. 

I am amazed at how significant religious persecution is today in 

lots of places in the world. In Pakistan somebody walked into a 

church and just machine gunned people, and that happened recently, and so I think this Commission helped highlight some of the 

problems and also has good suggestions for some of the solutions. 

369

Secretary POWELL. Thank you, Senator. I fully support Ambassador Hanford and his work. It is a good report. Yesterday, I issued 

the Human Rights Report, and then we also have the Trafficking 

in Persons Report. All of these go to the human condition and what 

we believe God intended for all of mankind to enjoy, and we will 

continue to press these reports that frankly are the products of 

Congress. You wanted us to do this, and we take them all very, 

very seriously, and we go after these issues aggressively. 

Chairman NICKLES. Thank you very much. I think maybe in 

many cases we in Congress have not done enough to followup on 

them, but we can do that with our individual contacts with some 

of the embassies and on some of our trips, and hope that the State 

Department people would as well. 

Senator Conrad. 

Senator CONRAD. Thank you again, Mr. Chairman. 

Mr. Secretary, one of our colleagues suggested that somehow I 

had misled on the Greenspan testimony yesterday. I did not. I was 

quoting directly from the Washington Post Dispatch on what occurred there, and I just put it up. That is what I quoted from. ‘‘Fed 

Chief urges Cut in Social Security.’’ That is the headline. ‘‘Future 

benefits must be curtailed, Greenspan warns.’’ And I would be 

happy to go through the story, set the record straight here on what 

was said and what I alluded to. ‘‘Federal Reserve Chairman Alan 

Greenspan warned Congress yesterday the Federal Government 

has promised more retirement benefits than it can pay for and 

must consider scaling back those commitments soon to avoid damaging the economy in the future.’’

‘‘I am just basically saying we are over committed at this stage,’’ 

Greenspan told members of the House Budget Committee. Greenspan, who supported President Bush’s 2001 tax cuts again endorsed Bush proposal to make the tax cuts permanent. However, 

he said in response to questions that raising taxes would inevitably 

be part of any successful effort to reduce the growing Federal budget deficit. he stressed her prefers cutting spending as much as possible before increasing taxes. He said, ‘‘You don’t have the resources to do it all.’’ To curtail future spending Greenspan urges 

Congress, as he has in the past, to consider cutting promised Social 

Security benefits to future retirees. ‘‘Otherwise,’’ he said, ‘‘the growing burdens would create long term budget deficits that would 

drive up interest rates, depress economic growth, make it even 

harder for the Government to pay its bills.’’

That is what he said. That is about as clear as it can be. It is 

very interesting if one looks at what the President is proposing. He 

is proposing in his budget to borrow $2.4 trillion from Social Security that is funded by payroll taxes, and have tax cuts of $2.4 trillion over that same period that are largely going to income tax payers. That is the greatest shift of benefits from the many to the few 

in the history of this country. When one talks about class warfare, 

that is class warfare writ large. 

Let me just ask you this. 

Chairman NICKLES. Senator Conrad, you and I will need to debate that another day. The Secretary is being very generous with 

his time. 

370

Senator CONRAD. I just want to ask you this on the supplemental. Will you be asking for a supplemental as you have the 

least 3 years? 

Secretary POWELL. In 2005? 

Senator CONRAD. Yes. 

Secretary POWELL. I would expect that there would be a supplemental in 2005, sir. 

Senator CONRAD. Can you give us any sense of how big it might be? Last year’s reconstruction supplemental was $21 billion. Can 

you give us any sense——

Secretary POWELL. No, I cannot, sir. Really, I do not have any 

way of putting a number to it. If we could put a number to it clearly, then it would more likely be in the 2005 budget. It is up to the 

President ultimately to decide whether there will be a supplemental, what the amount is. But I think our planning assumption 

is that there will be a need for a 2005 supplemental. 

Senator Bunning is not here, but since you mention it—I could 

not quite read the article, but I did hear you say the word ‘‘consider’’ reductions. I think the point the Senator was making earlier 

was that Mr. Greenspan had said ‘‘consider,’’ whereas the headline 

suggests that he was advocating cuts. 

Senator CONRAD. I do not think there is any question he is advocating cuts. He is saying to us to consider. It is his recommendation. I think that is very clear, and that is not only clear based on 

what he said yesterday, it is clear on what he said 2 weeks ago. 

It got almost no press attention. So I think it is very clear, he is 

saying to us we are over committed, none of this adds up, and it 

does not add up, and that is the problem we have. 

When you send up a budget and you tell us here you are going 

to ask for a supplemental but you do not provide a number, the 

thing we know is the right answer is not zero. But what you have 

in this budget, or more accurately, the President has, is zero. We 

know that is not what it is going to be. 

Chairman NICKLES. Mr. Secretary, I want to thank you. I might 

mention that last year when we did the very large, $20 billion supplemental, actually I think it is $21 billion, we were told that that 

would basically be it, and not to expect a 2005 supplemental. That 

is still my expectation. I could be corrected, but I would like to be 

corrected if that is the case. We were told that other countries were 

going to be participating more. That was a large, large, large 

amount of money, and I look at the amount of money that is compared to what we have done in the past, and we were basically assured last year, when Ambassador Bremer and the administration 

requested that $21 billion and a lot of us were swallowing hard, 

that we would not be seeing another supplemental for infrastructure for Iraq. 

Secretary POWELL. I think we made it clear that there would not 

be another 2004 supplemental, and I do not know what Ambassador Bremer believes the needs in 2005 will be. But I cannot tell 

you today that neither the Defense Department, State Department, 

or other agencies of Government will not have need for a 2005 supplemental. It will be up to the President to decide whether or not 

a supplemental is forthcoming. It cannot be decided now what an 

amount might be in such a supplemental. 

371

Chairman NICKLES. Mr. Secretary, thank you. My staff informs 

me that the commitment was that we would not see another supplemental in 2004. 

Secretary POWELL. Right, Senator. 

[The prepared statement of Secretary Powell follows:]


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Chairman NICKLES. I appreciate the clarification both from you 

and my very knowledgeable staff. 

With that, Mr. Secretary, thank you very much for your appearance before the committee. 

The committee is adjourned. 

[Whereupon, at 12:15 p.m., the committee was adjourned.]


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