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[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

 
              THE PRESIDENT'S BUDGET FOR FISCAL YEAR 2003
=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION
                               __________

            HEARING HELD IN WASHINGTON, DC, FEBRUARY 5, 2002
                               __________

                           Serial No. 107-21

                               __________

           Printed for the use of the Committee on the Budget

  Available on the Internet: http://www.access.gpo.gov/congress/house/
                              house04.html

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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
JOHN E. SUNUNU, New Hampshire        JOHN M. SPRATT, Jr., South Carolina,
  Vice Chairman                        Ranking Minority Member
PETER HOEKSTRA, Michigan             JIM McDERMOTT, Washington
  Vice Chairman                      BENNIE G. THOMPSON, Mississippi
CHARLES F. BASS, New Hampshire       KEN BENTSEN, Texas
GIL GUTKNECHT, Minnesota             JIM DAVIS, Florida
VAN HILLEARY, Tennessee              EVA M. CLAYTON, North Carolina
MAC THORNBERRY, Texas                DAVID E. PRICE, North Carolina
JIM RYUN, Kansas                     GERALD D. KLECZKA, Wisconsin
MAC COLLINS, Georgia                 BOB CLEMENT, Tennessee
ERNIE FLETCHER, Kentucky             JAMES P. MORAN, Virginia
GARY G. MILLER, California           DARLENE HOOLEY, Oregon
PAT TOOMEY, Pennsylvania             TAMMY BALDWIN, Wisconsin
WES WATKINS, Oklahoma                CAROLYN McCARTHY, New York
DOC HASTINGS, Washington             DENNIS MOORE, Kansas
JOHN T. DOOLITTLE, California        MICHAEL E. CAPUANO, Massachusetts
ROB PORTMAN, Ohio                    MICHAEL M. HONDA, California
RAY LaHOOD, Illinois                 JOSEPH M. HOEFFEL III,  Pennsylvania
KAY GRANGER, Texas                   RUSH D. HOLT, New Jersey
EDWARD SCHROCK, Virginia             JIM MATHESON, Utah
JOHN CULBERSON, Texas                
HENRY E. BROWN, Jr., South Carolina  
ANDER CRENSHAW, Florida
ADAM PUTNAM, Florida
MARK KIRK, Illinois

                           Professional Staff

                       Rich Meade, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel

                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 5, 2002.................     1
Statement of:
    Hon. Mitchell E. Daniels, Jr., Director, Office of Management 
      and
      Budget.....................................................     8
Prepared statements and additional submission of:
    Hon. Kenneth E. Bentsen, Jr., a Representative in Congress 
      from the State of Texas....................................     6
    Hon. Rush D. Holt, a Representative in Congress from the 
      State of New Jersey:
        Prepared statement.......................................     7
        Question concerning NIH funding..........................     8
    Mr. Daniels..................................................    10

              THE PRESIDENT'S BUDGET FOR FISCAL YEAR 2003

                              ----------                              

                       TUESDAY, FEBRUARY 5, 2002

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 2:38 p.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Bass, Thornberry, 
Ryun, Collins, Toomey, Watkins, Hastings, Doolittle, LaHood, 
Schrock, Brown, Putnam, Spratt, McDermott, Bentsen, Davis, 
Clayton, Price, Kleczka, Moran, Baldwin, McCarthy, Moore, 
Capuano, Holt, and Matheson.
    Chairman Nussle. The committee will come to order.
    Let me first announce, if it isn't obvious, that we have 
made some renovations with the committee room over the recess. 
As some of you remember from last year's markup of the budget, 
we could barely hear ourselves in the room when we were having 
the debate.
    We put in a new sound system, a renovation that has been in 
the works for actually a few years. That was finally done--new 
microphones and sound system. I want to thank the staff and 
Architect of the Capitol, and a couple of private contractors 
that did the work for getting it done for our opening hearing 
today.
    As members know, we had a few hearings in other rooms, and 
we want to thank those committees as well for letting us use 
their rooms while we were going through our renovations.
    Just one piece of technical business. If you would like to 
speak, hold down this green button next to the microphone for a 
second. It will light up. That is your cue to start speaking. 
If you speak too long, I have been given a red button up here, 
and evidently I can cut all of you off if I need to.
    I know that is the order. See, I am about to do it now. We 
will, of course observe the First Amendment here in the 
committee room.
    Also, I would like to acknowledge the return of our friend 
Mr. Spratt, who was out. I wrote him a note just before his 
surgery. I told him that I know over the last year I was a pain 
in the neck, but I didn't realize that you had to have surgery 
over that. But we welcome you back. We are glad that you are 
back with us and feeling better.
    Mr. Spratt. Thank you, Mr. Chairman. I appreciate that.
    As I lay there in my hospital bed with lots of time to 
think, I asked myself how in the heck did I come back with this 
tumor in my back? The only reason was it must have been all of 
these years of repression in the minority.
    Chairman Nussle. Think of the size of the tumor that we had 
over 40 years.
    The hearing today is of course the kickoff. Maybe I should 
turn to Mr. Capuano for a quick 30 seconds. At least put your 
hat on if you are going to be here.
    Mr. Capuano. No, in deference of the decorum of the 
committee.
    Mr. Spratt. I move we allow Mr. Capuano to wear his hat.
    Chairman Nussle. This is the opening kickoff of course for 
the budget season, and unfortunately I think maybe some of the 
laughter may leave after about the next 10 minutes. Who knows. 
We will see.
    But this is a serious time for our country. Obviously today 
our country is at war. Today we cannot claim that our homeland 
is totally secure against future terrorist attacks. Today 
people throughout Iowa and throughout our country need jobs. 
And when it comes right down to it, when you need a job, that 
is the mother of all budget deficits. When you are sitting 
around your kitchen table and you don't have a place to go to 
in the morning to punch a time clock, to get a paycheck, that 
is the budget that really matters.
    In part that is why we are here today, to talk a little bit 
about that budget. Our President, in accordance with the 1974 
Budget Act, submitted his budget yesterday in the context of 
these three great American challenges. Our world did change on 
September 11. The question is whether we will allow those 
changes or those challenges to manage us or whether we will 
manage those challenges and those changes.
    Let me be crystal clear. We will meet those challenges that 
confront our Nation and we will begin today to craft a budget 
that funds America's priorities first and secures America's 
future.
    The President has submitted a wartime budget. He makes 
resources available for those three very important endeavors: 
To win the war, to secure the homeland, and to create jobs.
    The President's budget is an appropriate blueprint to craft 
our response to these challenges, but it also holds accountable 
and measures all government spending to that balancing test of 
those new priorities.
    The President's budget relies on reasonable sets of 
economic assumptions, within of course the mysterious world of 
economic presumptions. The budget that President Bush has sent 
to Congress I believe is a responsible budget, and I believe 
the budget is alive and well on Capitol Hill. Thank God that 
America's fiscal house was in good order back on September 10, 
so that we could address the challenges with the full power of 
America's Treasury today.
    Today we are honored to have before our committee again the 
President's Director of the Office of Management and Budget, 
Mitch Daniels.
    Let's take a quick look at what has been presented by the 
President. The President has prepared a wartime budget, and if 
it were not for the national emergency of September 11, today's 
budget would be a balanced budget. But you have to add it to 
homeland security and the emergency of September 11. You have 
to add to it the war against terrorism, and of course you have 
to add it to addressing the economy.
    So what does that equal? It does equal in fact a temporary 
budget deficit. What do we do about that? Well, there are 
basically five areas that we could use to address these 
temporary deficits that have been suggested. There are those 
who have suggested that we could raises taxes or somehow 
gimmick the tax cut. I think that is a non-starter. We could 
fail to fund some of the security priorities that the President 
has put forward. I also believe that is a non-starter. We could 
use smoke and mirrors, like forgetting to put in minus signs, 
or other smoke and mirrors that have been tried and true in the 
past. The guy who forgets two pages can make fun of somebody 
else for a change about a little mistake within the budget.
    I think the last two are really the place where we have to 
focus our attention in order to deal with the temporary budget 
deficits. We have got to grow the economy and create jobs, 
because I believe that is truly how we are going to get our 
economic house back in order, and we have to eliminate, where 
we can, wasteful Washington spending. Those are the solutions I 
believe that we need to look at.
    Republicans just had a retreat, and let me report to my 
colleagues on the Democrat side what we have decided are 
important priorities. Let me just announce them to you by way 
of what we came up with. Those are our budget priorities.
    No. 1 is obviously to win the war and fund the defense 
priority similar to what the President has presented today. 
Double homeland security funding. Stimulate the economy and 
create jobs. Fund America's priorities first. Hold down 
government spending anywhere we can. Modernize Medicare and 
provide a prescription drug benefit and get back to balance as 
soon as possible. These are the priorities and principles by 
which we believe we can begin to formulate a budget.
    Now, I have heard over the last couple of days that there 
is still the rolling out of those who suggest that the tax cut 
somehow has gotten us to this point, and let me just comment on 
that briefly.
    In 2002, as can you see from this chart, 72 percent of the 
reason why we lost the surplus is accountable to the economic 
downturn, 58 percent in 2003. As the next chart shows, over the 
10-year period of that $5.6 trillion surplus that we saw last 
year, while 1.7 of it was from the tax cut, as everyone 
remembers, 1.6 was because of the economic downturn, and almost 
a trillion of it was from our spending.
    Now, I say our spending, because I heard some suggestion 
somehow that this was Republican spending, and I went back and 
I reviewed the appropriation votes, and I would be glad to 
share those with anyone who wants to continue to call those 
Republican spending bills. They were some of the most 
bipartisan votes to pass appropriation bills that we have had 
in the history of the Congress. In fact for those who are 
wringing their hands saying where are we going to find areas in 
the budget to hold the line on spending, or maybe even to 
suggest some reduction in spending, let me also refer you to 
the chart that you may remember from last year.
    The green bars demonstrate where we were supposed to be 
within the caps. The red line with the numbers shooting up $150 
billion over the last 5 years alone show where we actually are. 
So for those who say 2 percent in nondefense discretionary 
spending outside of homeland security may not be enough cushion 
in order for us to fund our priorities, please remember that 
this is on top of huge increases of spending over the last 5 
years.
    Let me also suggest that I have heard those who have begun 
to use Medicare and Social Security as somehow a--I don't 
know--some type of a tactic within this debate. Let me read to 
you a quote, and then I am going to ask you to tell me who said 
this. ``The terrorist attack against the United States on 
September 11 has changed the focus of Congress and the Nation. 
Our first priority must now be to defend against further 
attack. Care for the victims. Rebuild what we have lost and 
track down the perpetrators of those acts on terror. The world 
must know that our country stands united and determined to 
provide whatever resources are necessary to accomplish these 
goals. Our concern for protecting the integrity of Social 
Security and Medicare Trust Funds remains, but must be achieved 
by returning to a policy of fiscal discipline over the long-
term.''
    Now, you might think either I said that or the President 
said that, but interestingly enough, that is right from the 
Senate Budget web site, from Senator Conrad. I join Senator 
Conrad in suggesting that we should not be scaring our seniors. 
We should not be using scare tactics. We should be honest about 
the fact that in order for us to get back to some level of 
fiscal discipline and still fund these priorities some tough 
choices remain. We can do so in a spirit of bipartisanship and 
I believe that we can still accomplish that together with the 
Senate.
    Now, as we move forward I believe that we can craft a 
budget together with the Senate. Senator Conrad, I believe, has 
a very strong set of credentials as a budgeter. I know that if 
he is willing to write a budget, his first budget, that is 
willing to win the war, defend our homeland, and deal with the 
economic recession that he will find a very willing partner in 
the House.
    So as we move forward we have to--we will win the war and 
secure the homeland. We will get our economy moving again. We 
will hold down the costs of government. We will protect 
Medicare and Social Security, and we will get back to balance 
as soon as possible, and we will secure America's future.
    We need to work together in order to accomplish that. The 
President's blueprint is a good first step that we will be glad 
to work with him in order to craft. I am happy to welcome back 
and to turn to John Spratt for any opening remarks that he 
would like to make at this time.
    Mr. Spratt. Thank you, Mr. Chairman. Director Daniels, 
welcome to our committee once again. We are glad to have you. 
Mr. Chairman, let me commend you for what you have done to the 
committee room. I think you are going to make it a much more 
effective room for us to conduct business and for the public to 
understand our business. I am glad you got it in last year's 
budget because I don't think we would be able to afford it in 
this year's budget. But nevertheless, it is a decided 
improvement.
    Let me begin by echoing what the chairman just said in one 
major respect. When it comes to waging war on terrorism, we 
stand foursquare with you and with the President. We are 
committed to paying whatever it takes to win this war, period. 
But we do believe that national security and homeland security 
don't have to come at the expense of Social Security. We can 
pursue terrorists. We can also pursue other priorities at the 
same time.
    We have before us a budget that has been badly mangled by 
the economy over the last 12 months. We could argue all day as 
to whether or not we should have foreseen these conditions, 
which I think we were trying to suggest at the time, the storm 
clouds gathering across the economy, but that is neither here 
nor there at this point in time. It has taken a hit on the 
budget.
    Nobody saw the war on terrorism. Nobody saw September 11 
coming. It has taken a hit. But if you will look, Mr. Chairman, 
on page 415 of Director Daniel's budget, you will see that he 
ascribes 43 percent of the deterioration in the surplus to the 
tax cut last year and 17 percent to other legislated action.
    If you add to that the repealer, the provision of the 
enacted tax cut last year which repeals everything in 2010, 
then the cost of these budget actions goes well over 60 percent 
in contributing to the deterioration of the budget.
    If I can have the first chart, because it shows in very 
simple tabular form the 10-year unified budget surplus. We see 
what has happened in 12 months. This is the most radical fiscal 
reversal in American history. Just last April, as we began the 
budget process, we were told the surplus would be cumulatively 
over this 10-year period of time $5.6 trillion.
    Last August, after taking account of the palpable decline 
in the economy over that period of time, that estimate was 
reduced by that amount, down to $3.1 trillion. This February, 
if you implement, according to our understanding of this 
budget, if you implement what the President is seeking here, we 
will take the surplus down to $661 billion. That is the unified 
surplus over this 10-year period of time, this same period of 
time. The unified surplus will drop from 5.6 trillion to $600 
billion over this period of time.
    Now, this is the unified surplus. Until very recently we 
had agreed that we would no longer look at this, but on the on-
budget surplus, excluding Social Security. The on-budget 
surplus last April was computed to be just a tad over $3 
trillion--$3 trillion, 46 billion. By August, the economy had 
taken that down to $575 billion.
    By our estimation the on-budget surplus will be an on-
budget deficit cumulatively over the next 10 years, 2002 
through 2011, and each year we are taking a budget that had an 
on-budget surplus in it every year and converting that on-
budget surplus into an on-budget deficit, the total of which 
will equal 60 percent at least of the accumulating surplus in 
the Social Security Trust Fund.
    That is the extent to which we will be invading, borrowing 
from once again and spending the trust fund for Social Security 
on the eve of the biggest demographic change in fiscal history. 
In 2008, 77 million baby boomers will start to retire. That is 
what we are doing to get ready for their retirement.
    We understand the need for temporary deficits to fight a 
war. We understand the need for temporary deficits as a kind of 
cyclical step against the declining and downturning economy. 
But we also understand the need to in the long run save, pay 
off debt, and provide for the commitments we have made, keep 
our promises to American citizens and some of the most 
fundamental programs that we have got, Medicare and Social 
Security. We just don't see those promises being upheld in this 
budget.
    Indeed, as I read through the budget, and I haven't read 
that much of it, but I really don't see where in the long run 
there is any effort to restore to that path that we were on so 
recently when we were all saying we won't spend another dime of 
the Social Security Trust Fund, where we were all saying, vying 
to see who could pay off the national debt the fastest. There 
is no sense that that is an objective worthy of reinstating, 
deferring sure, for the short term at least, past this 
recession, past the hump in this war, but at least having some 
kind of strategy built into the budget where we recover and 
return to that as an important policy objective.
    If it is in there, if the implementation is in there, I 
would like to know about it, because I cannot find it in there 
myself, Mr. Chairman.
    We have got other presentations to make, and I don't want 
to encroach on the Director's time. So I am going to end 
basically at that point, but also by emphasizing once again 
that there are going to be parts of this budget that we 
support, no question about it. We are going to support the 
parts that have to do with fighting the war on terrorism and 
protecting the American homeland. We are going to ask for 
justification. We are not going to be stinting. We are not 
going to nickel and dime you, but we have got a job to do.
    We are going to raise a debate, too, as to whether or not 
it is right, proper, and fair to use the surpluses in the 
Social Security Trust Fund to pay for the war, to pay for 
homeland security, is this the proper means of financing it. We 
can raise that argument, which I think is a debate we should 
have, and at the same time support what you are seeking, but 
question whether or not the means by which we would finance 
much of this is the way we should go.
    Thank you very much, Mr. Chairman, for the opportunity, 
and, Mr. Daniels, we look forward to your testimony.
    Chairman Nussle. Thank you, Mr. Spratt. Without objection, 
all members will have 7 days to submit written statements for 
the record at this point.
    [The prepared statement of Mr. Bentsen follows:]

Prepared Statement of Hon. Kenneth E. Bentsen, Jr., a Representative in 
                    Congress From the State of Texas

    I am pleased that the House Budget Committee will have the 
opportunity to question Office of Management and Budget (OMB) Director 
Mitch Daniels, as well as Congressional Budget Office (CBO) Director 
Dan Crippen about their new economic forecasts released during the 
August District Work Period.
    Today is not about assessing blame. It is about the Congress and 
the White House coming together to evaluate these new forecasts and 
begin appreciating their ramifications with respect to the President's 
domestic and foreign spending priorities. I am stunned at how much the 
Nation's fiscal picture has changed in four short months. Recall that 
in April, the OMB surplus projections were $281 billion for this fiscal 
year and $3.4 trillion for the next 10 years, which they portrayed to 
be more than enough to fund Bush's tax cut and new spending 
initiatives, while staying the course on debt reduction.
    Today, our Nation must come to terms with a new fiscal reality. By 
OMB's own admission, $123 billion of this year's surplus had somehow 
vanished, leaving a $158 billion surplus, almost entirely made up of 
Social Security tax receipts. We now expect that in fiscal year 2001 
alone, all of the Medicare Trust Fund ($29 billion) and $9 billion of 
the Social Security surplus will be consumed to fund government 
operations, according to the CBO, the Congress' official budget 
analysts. Moreover, looking ahead, the CBO estimates that all $170 
billion of the Medicare surpluses and $30 billion of the Social 
Security surpluses will need to be diverted to meet our current 
obligations over the next 5 years.
    At this critical juncture, with much of the appropriations process 
still ahead, it is vital that President Bush identify where spending 
will be cut in order to make room for his initiatives, including a 
$18.4 billion boost to defense an enhanced Federal role in education as 
well as Medicare reform. Will farm subsidies have to be slashed? What 
about tax credits for the working poor or housing programs? What about 
prescription drugs? What about the missile defense shield?
    Additionally, I am growing increasingly concerned about recent 
statements from Congressional Republicans that signify an about-face 
regarding Congress' commitment to protecting the Medicare Trust Funds. 
On four separate occasions over the past 2 years, the Republican 
leadership has shepherded legislation to the floor that not only 
dedicates the Social Security surplus but also the Medicare surplus to 
debt reduction. At this time of weakened economic performance, I am 
deeply concerned by the apparent willingness of Congressional 
Republicans' to retreat from their commitment to paying down the 
national debt. This departure from the path of debt reduction, in 
addition to the ``incredible shrinking surplus,'' perpetuates economic 
uncertainty within the financial markets, potentially doing real damage 
to today's sluggish economy.
    Finally, it clearly appears that the President and his allies 
overcommitted and cut the budget and fashioned the tax cut too close to 
the margin on the basis of overly optimistic economic assumptions. Now, 
the President's budget has us borrowing against Social Security and 
Medicare, increasing our long term public debt and leaving not a penny 
for fixing those programs.
    I am eager to hear where the administration plans to make the 
budgetary adjustments to meet our current obligations and their own 
spending priorities while adhering to the Congressional mandate for 
debt reduction and protection of the Social Security and Medicare trust 
funds.

    [The prepared statement of Mr. Holt follows:]

 Prepared Statement of Hon. Rush D. Holt, a Representative in Congress 
                      From the State of New Jersey

    Mr. Chairman, yesterday, the President submitted his budget to 
Congress. While we are all still trying to put our arms around more 
than twenty-five hundred pages in four separately bound volumes, I was 
happy with many of the President's proposals and disappointed with 
others.
    As OMB Director Daniels stated, the President's $2.13 trillion 
budget proposal will run a $106 billion deficit--the first deficit 
since 1997--and will continue to spend Social Security and Medicare 
dollars until 2005.
    What does that mean for this committee and for Congress? We are 
going to have to make some difficult choices this year, and we are 
going to have to work together to question the return on every dollar 
the Federal Government takes in and spends.
    Obviously, the war against terrorism, our homeland defense, and our 
economy should be our first priorities. These priorities are not in 
dispute-I think it is fair to say that every Member of Congress shares 
in these concerns.
    I would, however, challenge my colleagues to make investment a 
priority in the 2003 fiscal year as well. The best way to stimulate is 
to invest, and I believe we have an opportunity to enjoy high returns 
by prioritizing the education of our children and research and 
development.
    I was pleased to support the bipartisan ``Leave No Child Behind'' 
Act. And, in many ways this budget represents the President's 
commitment to education. However, this budget comes seriously short in 
other respects. While the budget calls for a 2.8 percent increase in 
education spending, this is below the rate of inflation. Moreover, 
hidden within this small increase is over $84 million in cuts to the 
bipartisan education reform the President signed into law just a month 
ago. I understand that Congress must restrain spending, but every 
dollar we invest in our children will certainly return many more 
dollars in the future.
    I was also happy to see the President's commitment to the National 
Institutes of Health, which enjoyed more than $3.9 billion in proposed 
spending increases. While overall investment in research and 
development is up by 14 percent, this statistic largely represents 
defense development. Civilian, non-health research and development 
would increase by only one-half of 1 percent, far below the level of 
inflation. Moreover, even though the National Science Foundation was 
identified by Director Daniels as a model agency only 3 months ago-
described as one of the ``true centers of excellence in this 
government'' for its low cost and efficient use of tax dollars-the 
National Science Foundation received only a one and one-half percent 
increase.
    We have many difficult choices to make this year. However, I hope 
in our effort to question priorities and eliminate waste that we do not 
eliminate investment in our future-our children, technologies and 
medical breakthroughs that will enhance every American's way of life.

  Question Submitted for the Record by Congressman Holt for Director 
                                Daniels

    I was pleased to see that the President proposed more than $27 
billion in funding for NIH, including $1.75 billion to combat 
bioterrorism. NIH funding has improved America's overall quality of 
life and led to new and innovative cures and treatments for some of 
humanity's most devastating ailments. Yet, I was disappointed to see 
that civilian, non-health research and development would increase by 
only one-half of 1 percent, far below the level of inflation. Moreover, 
even though-in an appearance at the National Press Club only 3 months 
ago-you identified the National Science Foundation as a model agency, 
describing it as one of the ``true centers of excellence in this 
government'' for its low cost and efficient use of tax dollars, the 
National Science Foundation received only a one and one-half percent 
increase.
    Can you explain why the President has proposed funding well below 
the rate of inflation for this agency, particularly considering the 
many practical research and development programs in NSF's jurisdiction? 
And have we formally rejected any plan to double the funding for NSF?

    No response was received from OMB at time of publication.

    Chairman Nussle. Director Daniels, welcome back to the 
House Budget Committee. Last year, when you testified here, one 
of the things you mentioned, and I was pleased to see within 
your budget blueprint, is that you wanted to put the ``M'' word 
back into OMB--management--and I see that throughout the 
document, and I want to commend you on that, we welcome you 
back to the committee, and you may proceed as you wish, and we 
look forward to your testimony.

  STATEMENT OF MITCHELL E. DANIELS, JR., DIRECTOR, OFFICE OF 
                     MANAGEMENT AND BUDGET

    Mr. Daniels. Thanks, Mr. Chairman, and Congressman Spratt 
in particular, glad to see you back.
    Mr. Spratt. Thank you, sir.
    Mr. Daniels. I have been doing it a little differently. 
Instead of doing these hearings on consecutive days, I took 
batting practice in the lower body this morning. So with your 
permission I would like to follow my usual practice and 
abbreviate as succinctly as I can the testimony which I have 
submitted for your inspection. Let me just highlight a few 
things from it, which will in part respond to comments each of 
you just made.
    The President submitted to the Congress this week a budget 
to win a two-front war. It asks for spending quite honestly in 
excess of what we would have under normal conditions, larger 
than what we requested last year and agreed upon with the 
Congress. It includes a request that in the aggregate would 
lead to a temporary deficit, something else we would vastly 
prefer not to do, but the President has been pretty forthright 
about his priorities and his belief that there are certain 
specified circumstances, war, recession or emergency, all of 
which exist today, which can justify temporary deficits.
    I wanted to associate very strongly with the comments of 
Congressman Spratt that returning to a path of surplus and 
further reductions of our national debt is a very appropriate 
and important goal. We did attempt to speak to it in the budget 
and if it is not manifest, we will make it more so. But it is 
our belief that if the economy comes back, and the sooner the 
better, that we can get back on a path where we not only can 
fund the needs of warfighting and defense, but also begin to 
balance and further reduce our national debt, and you are right 
to keep that objective in front of us. There are very few 
things more important to this President than balanced budgets 
and debt reduction, but we have a couple of tasks at hand that 
are more important.
    I would simply say beyond this that we got to keep our 
heads about the situation we are in. The chairman's statement, 
I thought, was right on target. Thanks to the efforts of 
members of this committee and many of your other colleagues, we 
arrived at this recession and then at this conflict in very, 
very strong fiscal position. The result is a deficit, yes, but 
the smallest one we have seen in any recession in the post-war 
period, a deficit that is far, far smaller than that being 
experienced right now by all of the other developed countries 
of the world. And this deficit is small in dimension despite 
the fact that we have a war and the costs of that war overlaid 
on top of it. So we ought to count our blessings in some 
respects for the kind of situation that we do find ourselves 
in.
    I want to say one other thing. Congressman Spratt spoke of 
a radical reversal, and so forth. But here too we need to keep 
a level head. We really don't know, and can't know what the 
next 10 years hold. We have made a brave attempt over the last 
7 years in what I would characterize as a failed experience to 
tell us ourselves with any kind of confidence what our surplus 
or deficit will be over that stretch of time. As the last year 
just reminded us, we can't even do that over a 1-year period, 
let alone 10, and there is every possibility that we can be 
meeting here next year with even higher surplus forecasts than 
the ones we looked at last year.
    I will simply point out to you that even with all of the 
changes that we have experienced, the $2.9 trillion, 10-year 
baseline surplus that we now see is the biggest we ever had 
except for last year's. Was last year right? This year wrong? 
Was last year wrong and the year before that right? We just 
aren't going to know for years. What we need to do is make the 
best decisions for the benefit of the Republic on a year by 
year basis, always with an eye to the future.
    But I appreciate the Chair's pointing out that this 
submission deals in a different way, possibly a little more 
serious way, with the issues of how the Federal Government is 
managed. We assert that that was something that needed doing in 
any event, but is essentially urgent now that the priorities of 
national defense, defending Americans in their homeland and 
restoring the economy to strength through an economic growth 
package have first, second and third claim on our resources.
    I appreciate as always the opportunity to be here, and I am 
eager to answer your questions.
    [The prepared statement of Mitchell E. Daniels, Jr. 
follows:]

 Prepared Statement of Hon. Mitchell E. Daniels, Jr., Director, Office 
                        of Management and Budget

    Mr. Chairman, my colleagues at OMB and throughout the executive 
branch have worked hard to present this committee and our fellow 
citizens with a very different budget for the fiscal year 2003. Before 
turning to the traditional subjects of totals, balances, and specific 
policies, let me recommend to the committee's attention some new 
features which I hope will now become part of your annual expectations 
and deliberations.
    This budget takes seriously the assessment of government 
performance, and its relationship to future spending. Activities where 
effectiveness can be proven are maintained and often reinforced; those 
that demonstrably fail, or can make no showing of effectiveness, in 
many cases are looked to as sources of funding. The days when programs 
float along year after year, spending taxpayer dollars with never a 
showing of reasonable results or return, must give way to an era of 
accountable government. This and all future budgets must no longer be 
permitted to answer only, ``How much?'' They must also address the 
question, ``How well?''
    This innovation responds to decades of calls by good government 
advocates. While long overdue, it is especially necessary at a time 
when the physical safety of Americans requires that the Federal 
Government take on many additional, expensive tasks.
    In the interest of both accuracy and sound management, this budget 
takes a major step toward full cost accounting of programs and 
departments by assigning the costs of health and retirement benefits to 
the places where those costs are created. At long last, the true cost 
of these programs will be visible, and managers will have full 
incentive to control the costs of additional personnel. Other disguised 
costs, such as the future liability associated with hazardous waste, 
remain and should be the object of further reforms.
                  the unexpected cost of the recession
    It has been clear for months--since September 11 to be precise--
that our fiscal picture had changed in a fundamental way. The weaker 
economy erased $177 billion of revenues previously expected for 2002, 
and $120 billion for 2003. Additional spending to respond to the 
terrorist attacks in these years subtracted another $31 billion from 
the surpluses we all had anticipated. Over a 10-year period, for those 
still professing to find use in such numbers, changed economic and 
technical factors reduced the surplus by $1.345 trillion.
    The recession that began in the first quarter of 2001 was the 
largest but not the only economic factor reducing estimated surpluses. 
The revised outlook for near-term productivity growth reduced the level 
of GDP--and hence the receipts base--throughout the budget window. Both 
the recession and the impact it has had on budget surpluses took us all 
by surprise.
    As the Washington Post has noted, ``2001 was a nightmare for 
economists,'' pointing out that, almost without exception, forecasters 
failed to see recession or its effects coming. In our misjudgments, our 
economists were in large and renowned company. The good people at the 
CBO, and 51 of the 54 private forecasters in the Wall Street Journal 
survey, all missed the recession even as it was well underway. The fact 
that our assumptions were toward the conservative end of the 
forecasting spectrum did not protect us from a very large misestimate. 
May I add that when the nation's economists are having nightmares, 
budget directors lose sleep, too. We ultimately must choose assumptions 
that we believe will be accurate, and it is no comfort later that the 
rest of the world was in error, too.
    The administration stated from the outset that it would leave room 
for error, particularly when it came to longer-term projections. In 
mapping out long-term policy proposals, our Blueprint expressly marked 
off over $800 billion (15% of the total expected) as a contingency 
reserve in the event that the hoped-for surpluses did not materialize. 
At least as far as one can tell from the latest 10-year estimate, even 
this generous hedge was not enough.
    The 2001 experience casts further doubt on the entire idea of 10-
year budget forecasts. The attempt to see 10 years out began only 6 
years ago--prior to that time 5-year forecasts were the longest ever 
attempted--but already enough evidence is in hand to convict. The 
experiment with 10-year forecasts demonstrates that no one can reliably 
predict budget levels this far into the future. In fact, despite all 
the lamentations, this year's 10-year baseline surplus forecast is just 
as big as that of 2 years ago; even after tax relief, it is the largest 
ever except for last year's. If we had taken a 1-year timeout from 10-
year guesswork, no one would say that anything was ``missing.''
    Our budget extends 10-year forecasts at the top-line level, for 
those still determined to find them credible, but it drops them from 
the rest of the document. There we return to the wisdom of our 
predecessors by using 5-year numbers, which are plenty uncertain in 
their own right.
                   a two-front war against terrorism
    Mr. Chairman, we present this week a budget for a two-front war. It 
proposes substantial increases, those the President believes necessary 
to deliver on the paramount duty of the Federal Government, to secure 
the safety of the American people.
    Last year's budget began the reconstruction of a neglected national 
defense base, and that project continues now with new urgency. The 
President asks Congress to support a 12% growth in base defense 
funding, part of this reflecting the new threats presented by a long-
term terrorist foe. He also requests an additional $10 billion, if 
needed, for the costs of continued hostilities at today's levels.
    Funding for the category of activities we now term ``Homeland 
Security'' will double under the President's plan: airline security, 
first responders, bioterrorism, border security and preventive law 
enforcement, are all scheduled for major increases as recommended to 
the President by Governor Tom Ridge.
    We have worked closely with the Office of Homeland Security to 
define and budget for these activities; an explanation of the 
definition of the Homeland Security budget is attached at the end of my 
testimony. We will guard against and oppose efforts to divert funds 
from Homeland Security requirements or to misclassify unrelated funding 
under Homeland Security's priority status.
    Winning our two-front war is not optional, and will be expensive. 
As in other times of national conflict, tradeoffs will be required. 
Other priorities will have to stand aside for a time, lest we commit 
the ``guns and butter'' mistake of the Vietnam era. We propose a very 
reasonable level that allows spending not related to the war or 
homeland defense to grow by around 2%.
    Within this ``Rest of Government'' category, the President proposes 
$355 billion of spending. It must be noted that the activities it 
encompasses have enjoyed rapid funding increases during recent years, 
growing by an average annual rate of more than 8% since 1998.
    Within this enormous sum, it is both possible and desirable to 
increase high priority programs of proven effectiveness, and this 
budget recommends many such increases. Dozens of programs across the 
government are scheduled for growth based on demonstrated results.
              measuring performance and delivering results
    For decades, good government advocates have called for systematic 
measurement of government's performance, and its reflection in the 
allocation of resources. In 1993, Congress passed the Government 
Performance and Results Act (GPRA), which was intended to implement 
this reform, but this mandate has been virtually ignored. The 
President's budget for 2003 responds to Congress' instruction, 
differentiating where the facts are available between programs that 
work and those that do not.
    Many programs of proven effectiveness are strengthened, by shifting 
funds from those which can make no proof of performance. NSF, WIC, 
Community Health Centers, and the National Weather Service are among 
the best performers, based on clear targets they have set and hard data 
that says these goals have been met or surpassed.
    A serious attitude toward performance is long overdue, but takes on 
special urgency at a time when the demands of national security assert 
a heavy claim on our resources. We hope the findings of this budget 
will trigger interest in performance assessment, and bring forth much 
new information about that large majority of programs for which we have 
no useful data at all.
                       restoring economic growth
    This budget funds a two-front war, but takes aim at a third 
priority as well, the struggling American economy. The President urges 
the Congress to act, and act quickly, on a jobs and growth package like 
that which passed the House but was blocked in the Senate just before 
Christmas.
    There are some encouraging signs of recovery, but the President is 
not satisfied to leave matters to chance. Government cannot ``manage'' 
the economy, but it should do what it can, and the President wants to 
act on a stimulus measure that might accelerate and strengthen 
recovery. While adding this action to his other budget proposals would 
likely make 2003 a year of a small deficit rather than a year of small 
surplus, the President favors the tradeoff in favor of jobs and growth. 
Past the short term, it is only rigorous economic growth that can 
restore surpluses in any event.
                               conclusion
    In sum, we should count our national blessings. Despite 
simultaneous war, recession, and emergency, we are in a position to 
fund the requirements for victory, plus a stimulus package, and still 
be near balance. The deficit we project will be the nation's smallest 
in times of recession since the early 1950's.
    Interest costs to the Federal Government will continue to decline; 
interest payments will fall below 9 cents of each budget dollar for the 
first time in 22 years. Despite everything, the outlook is promising 
for balance in the year after next, and for a return to large surpluses 
thereafter.
    The President's proposals thus do what must be done, while 
protecting our fiscal future. It is a privilege to submit them for the 
committee's review.

    Chairman Nussle. Thank you, Director Daniels, for your 
testimony and for the budget submission.
    Let me direct your attention to the one area in particular 
that has caused some question as we try and deal with the next 
2 years in particular. The Congressional Budget Office has 
submitted their economic factors and their projections as to 
what may or may not bode for the economy in the near future: 
Revenue projections, technical assessments about that.
    There is about a $65 billion difference between OMB and CBO 
in this regard. This is a pretty big difference. There are some 
that suggest that while your economic factors are a little bit 
more pessimistic than CBO's, your revenue projections are a 
little bit more optimistic and that has contributed to these 
big differences. Obviously, as we are trying to get back to 
some form of balance, as quickly as possible, meeting those 
priorities, that big difference is going to be--is going to 
loom out there as we are trying to land that 747 on the runway, 
as small as it may be.
    Would you comment on the differences between the economic 
factors within your proposal and what you know CBO to have been 
proposing?
    Mr. Daniels. Sure, I will. The $65 billion difference was a 
little bit of a surprise to me. We have worked closely with 
CBO. We see no advantage to the Congress in having to wrestle 
with starting points that are materially different.
    About a third or more of the difference is explained by the 
fact that they included in their baseline the emergency 
spending you voted for last fall and we did not. So that alone 
narrows the gap to something closer to maybe $40 billion.
    Much of that emergency spending is part of the new request 
that we have asked for. We have asked for it where Governor 
Ridge, for example, believes it is necessary, not where in the 
rush and the haste of last fall that $20 billion was placed. So 
that is a starting point differential that does leave a gap on 
the revenue side. It surprised me because, as you pointed out, 
we have what some people feel are perhaps unduly pessimistic 
economic assumptions here. I confess that I am trying to get to 
safe numbers, and I think probably we have accomplished that. 
We have growth this year of 0.87 percent. Some people think 
that that looks like pretty low growth over the 2-year period. 
That is right consistent with the private Blue Clip Index and a 
little bit below CBO.
    That notwithstanding, their revenue expectations came in a 
little bit lower than ours. We will have to see which is right. 
I think the biggest factor, as far as I can tell, is they 
assume almost no snap-back in terms of corporate profits and 
therefore the tax receipts from that.
    But when you factor for their inclusion of emergency 
spending in their baseline, you are down to about a 2-percent 
difference, and I hope that this is something the Congress will 
not find confusing.
    Chairman Nussle. Would you give us your thoughts and the 
President's thoughts on the issue of Social Security and 
Medicare? I mean my sense from talking to my constituents who 
are seniors--these are seniors, by the way, who fought and 
won--I even have a few of them left from World War I--fought 
and won World War II, fought in Korea, and there is even a few 
that are looking at retiring here shortly who had some 
experience in Vietnam. And what they tell me is that now is not 
a time to worry about putting green eye shades on. Now is the 
time to win the war and secure the Nation.
    Having said that, Mr. Spratt has brought up, and others 
have brought up the question of Social Security and Medicare. 
How are those issues addressed by the President in this budget? 
How can we get back to some form of balance in the near future 
so that we can again begin to pay off the national debt and 
prepare for that time when Social Security will be a much 
bigger challenge within this budget, probably in about the next 
5 to 7 years?
    Mr. Daniels. I think the commitment to Social Security and 
its promises is the most solemn one and the most bipartisan one 
I know of, and there need be no doubt on where the President is 
on these issues. Again, this year every penny of benefits will 
be paid, and the trust funds will grow by every penny that they 
are entitled to. And you know, the issue that perhaps we will 
debate has to do with what is to be done with the extra revenue 
that temporarily, for the next several years at least, will 
come into the Social Security system. And one option of course 
is to use it to pay down debt.
    That is what we have done when we have had the opportunity. 
That is what we look forward to doing again. Temporarily there 
are higher claims on that money, and it will be used not to pay 
down debt but to pay the cost of the war, the cost of homeland 
defense and the cost of reinvigorating the economy. We can run 
a surplus this year. I have got a chart to show you on that. 
This choice, certainly on the OMB baseline--this goes to your 
previous question--but we clearly have this choice.
    We can have a $51 billion surplus this year, use those 
dollars to further reduce our national debt. But to do that we 
would not be able to strengthen our national defense as the 
President has proposed. We would not be able to strengthen our 
homeland security as the President has proposed. It gets you to 
the second bar from the left. You would still have a surplus.
    The rest of government that we have growing at 3 percent--
or, I am sorry, 2 percent, could do that and still leave you at 
a rough balance. The largest contributor to this segment, by 
the way, is the farm bill that we believe Congress will finally 
enact.
    Then you have one last choice, whether to pass an economic 
growth or stimulus package or not. The President's view is that 
that should occur, we should not take a chance on the basis of 
a few encouraging signs that the economy is coming back strong 
enough and quickly enough, and therefore he continues to hope 
that the Congress will pass a bill like the one that the House 
passed and the Senate almost passed in December. I happen to 
think that would not only be the right thing for America's 
workers, those who are out of jobs now or whose jobs may be in 
jeopardy, but also the right thing in terms of the long-term 
fiscal strength of the country.
    To go back to those long-term projections and the wild 
fluctuations that they go through, the decisive dominant 
variable is always economic growth, and the sooner we return to 
a path of strong economic growth, in the 3 and 4 percent range, 
year on year, the sooner we will be back here debating how much 
debt we can pay down, as we would like to do.
    Chairman Nussle. And that is the X factor that was reported 
to us by the CBO Director as well. That economic growth is X 
factor in the long-term solvency of Social Security. If we have 
economic growth and it is vibrant and growing, the solvency 
lasts much longer in the Social Security system, is achieved 
for a much longer period of time than if we don't have a 
growing economy. So the choice for Social Security is not only 
a strong country and a safe country and winning the war on 
terrorism, but it is a growing economy.
    Mr. Spratt.
    Mr. Spratt. Mr. Chairman, let me share a couple of quotes. 
You are sort of asking is this still the doctrine of this 
administration? George W. Bush said, ``every dollar of Social 
Security and Medicare tax revenue will be reserved for Social 
Security and Medicare.'' I don't think you can say that now. I 
understand why not now. But the question I am asking is, where 
do we go from here? Is there some time in the foreseeable 
future when this doctrine, this value, this policy can be said 
to have primacy again? If so, where is it? How do we get back 
to this path in the budget you are presenting us?
    Mr. Daniels. Well, sir, it could be as early as the next 
couple of years. The estimates that allowed us all to think in 
terms of sustained on-budget surpluses, we had never seen 
anything like it before last year. What we see now, as I 
pointed out, is as good as anything we saw before. I can't tell 
you what course the war will take, whether the levels of 
spending we now need to undergo will continue for a long time 
or not, but they might. I have to tell you that we do believe 
the new costs of homeland security are probably a permanent 
fact of life, that the two oceans are no longer enough to 
protect Americans and that, sadly, these new dollars are likely 
to be a part of our budgets on a long time basis.
    Again the thing that matters most and really the thing that 
dwarfs everything else as a factor here is how fast the economy 
comes back and therefore how fast revenue growth comes back.
    You know, as those statements were being made the economy 
itself was taking us well below the Social Security or on-
budget line. If we had not increased spending at all last year, 
if there had never been any tax relief, we would still have 
been well below the Social Security line last--or this year and 
next. So it is the economy that matters most, and let's hope 
that the signs we are seeing now are real.
    Mr. Spratt. Well, once again the concern we have is not 
where we are. We can't do much about that now, but where are we 
headed and where are we going, and can we expect to get back on 
this path that we thought was a noble pursuit for us; that is, 
to pay down the national debt, to prepare for the retirement of 
the baby boomers, and to increase national savings. We seem to 
have lost the path, and I just can't find the route back to it 
in the budget you have got.
    In addition to the fact that these substantial increases in 
defense and homeland security are likely to be recurring, they 
are not going to be one-time increases, they will be pretty 
well institutionalized, built into the budget in the future, 
they will add to a lot compounded out to the future, 
particularly if you adjust them for inflation.
    In addition to that, you are seeking over $600 billion in 
additional tax reduction in this budget this year. When you put 
those two things together, an enormous increase in defense 
spending, a huge increase in homeland security, and a sizeable 
additional tax reduction, $600 billion worth, what happens? How 
do we get back without some kind of really rocket comeback in 
the economy to the halcyon days of the mid-1990's?
    Mr. Daniels. Well, sir, the spending increases you are 
talking about do occur this year. When you talk about tax 
reductions, you are talking about something 10 years or 9 years 
in the future. Perhaps it would help the committee to be 
reminded of that.
    Even after tax relief, the tax relief passed last year, 
revenues will be growing up very substantially over this time 
period. I hope, frankly, that economic growth comes back sooner 
and stronger and that even this is understated.
    The second point made here is that the amount of tax relief 
provided by the Congress last year is relatively modest, and 
much of it will not happen for a long time. Only about 24 
percent of the tax relief will occur in the first 3 years, only 
about 40 percent in the first 5 years. So for those who believe 
that this is an undertaxed society and an undertaxed economy, 
there will be multiple chances long before this tax relief 
takes effect, lots of chances to make changes.
    Mr. Kleczka. Could I ask a quick question? Are FICA taxes 
part of the blue line, Mr. Director?
    Mr. Daniels. These are total revenues.
    Mr. Kleczka. So what percentage of those lines would be the 
FICA tax? We saw a similar chart this morning at the Ways and 
Means Committee, and interestingly enough a big chunk of that 
is FICA. So you can't say that all of that is for general 
purpose spending.
    Mr. Daniels. Well, it would be around a third, but let me 
just pursue the point a little bit. Even after tax relief we 
are taxing the American economy and the American taxpayer at 
some of the highest levels in history, well above the post-war 
average, which was right around 18 percent. This is after tax 
relief. The tax relief was necessary to keep this from 
skyrocketing even further.
    Now we can have an honest debate about whether more should 
be exacted from Americans, but it is important to keep things 
in perspective. Ours I would assert is not an undertaxed 
economy and we have got to be very, very careful letting taxes 
get to a point where they might choke off growth. Without that 
growth we don't have a prayer of getting back into surplus. And 
to your point, which is an important one, we need to bear in 
mind that different sources of our revenue, we are taxing 
Americans after tax relief at record levels, and this is 
individual income taxes.
    So quite apart from the payroll taxes, we are continuing to 
raise now between 9 and 10 percent in income taxes, individual 
income taxes, out of every dollar this economy generates.
    Mr. Spratt. Mr. Daniels, if I can get back to the line of 
questioning we were following. I don't have your numbers for 
projected deficits every year over 10 years. But we do have the 
numbers that CBO gave us, and I don't know how much you 
deviate. There is before any of the policies you implement, 
spending or tax reducing according to this chart, which is the 
CBO summary, table No. 2, every year under current services, 
every year from 2002 until 2009 there is an on-budget deficit. 
Every year. Last year it was an on-budget surplus. This year, 
every year is an on-budget deficit. The question I am asking is 
if you add to that $600 billion in tax reduction and the 
substantial spending increases for defense, national defense 
and homeland defense, how in the world in this 10-year time 
frame do we ever get the budget back into on-budget surplus?
    Mr. Daniels. Sir, we get there if and only if the economy 
is very strong. When we met here in August, tax relief was 
already a reality. It was part of the numbers. And we saw long-
term surpluses over 3 trillion, and we saw on-budget surpluses. 
It is the economy, and the recession, which we were only then 
beginning to discover, was already on top of us, as well as 
some other economic factors. One of them that is in many models 
is what might be viewed as a terror attack; that is to say, the 
assumption that there will be somewhat higher nonproductive 
costs in the American economy to protect us from the threats 
that are now so evident.
    A lot of debate about whether we had overestimated 
productivity in that one very large estimate of last year and 
whether it was already running at a slightly lower rate, and 
whether it will run at a little bit lower rate still. So it is 
the economic factors that will dictate the outcome. That is 
another reason that we hope the Senate will join the House in 
passing the set of measures that would get this economy roaring 
again soon.
    Mr. Spratt. Two more quick questions, and I will turn you 
over, because I am taking a lot of time. But quickly, when do 
you expect to ask for an increase in the statutory limitation 
on the national debt, and what do you expect the national debt 
to be under your policies if your policies are implemented in 
this budget at the end for year 2011?
    Mr. Daniels. I would expect to request for the increase in 
the debt limit to happen in the next 2 months, probably be 
necessary to have that task taken care of by March some time. 
That is the advice that we have from Treasury. And we would see 
a debt--did you say at the end of the time period?
    Mr. Spratt. 2011.
    Mr. Daniels. And were you asking about public debt, sir? 
Debt held by the public? It is a little lower than I thought--
2.6 trillion.
    Mr. Spratt. By that point in time. I referred earlier to a 
chart on page 415 of your budget, I think it is table No. S16. 
If you have that handy, I just want to clarify.
    Mr. Daniels. Yes.
    Mr. Spratt. In any event, by my arithmetic, using your 
numbers, looking at the April pre-policy baseline of $5.6 
trillion cumulative surplus over 10 years, declining to $665 
billion, now, including the economic security plan, you 
attribute 1 trillion, 478 to tax reduction, and almost $600 
billion to other legislative action, which is other budget 
action, mainly spending action.
    I think my arithmetic is that is 43 percent, 17 percent due 
to other budget action so that 60 percent of the deterioration 
in the $5.6 trillion surplus over the 10-year time frame is due 
to legislated action to date, including the tax cut?
    Mr. Daniels. That would be correct. I guess I would point 
out, as we did last year, that when you are anticipating 
running gigantic surpluses of that kind we thought it was only 
just, as well as economically smart to share a significant 
portion of that with the American taxpayer who is producing the 
revenue.
    Mr. Spratt. Thank you very much.
    Chairman Nussle. Mr. Bass.
    Mr. Bass. I have got a few things to work out with the 
sound system here. Thank you, Mr. Chairman. Thank you for 
coming, Director Daniels. I am sure that you agree, as will 
everybody on this committee, that statements made almost a year 
ago, that were basically agreed to by everybody, are subject to 
some review, understanding what happened to this country in 
September, and that we all agree that national security and 
homeland defense has to be the top priority of this budget. I 
suspect that you would also agree, having now been around for a 
year or two, and some of us having been around for 6 or 7 years 
now, that trying to pin a debate on a budget estimate that is 
7, 8, 9 or 10 years out is about as accurate as trying to 
forecast the weather 7, 8, 9 or 10 days from now. What really 
matters is what we do in the next 12 months or 24 months.
    Clearly the money that we are proposing to spend on defense 
and homeland security is important. Some of the other 
priorities that you have outlined in your budget are equally as 
important. One of the biggest issues that will be debated, and 
I think perhaps my friend on the other side of the aisle 
alluded to this, is whether or not in a time of potentially 
recovering economy whether or not the administration will be 
willing to continue to consider the need and/or the scope of 
the economic stimulus package as we try to debate the issue of 
whether or not we have a deficit in fiscal year 2003, wanting 
to have strong economy, versus getting closer to balance, if 
the economy appears by most people's judgment to be headed to 
recovery anyway.
    Do you have any comment on that?
    Mr. Daniels. Well, Congressman, I think it is not an open 
and shut call, because balanced budget, surpluses, debt 
reduction are goals that we I think all share, and we are eager 
to get back there as fast as we can. The President, weighing 
this against the opportunity to try to do something to ensure 
swift and vigorous recovery, opts for the latter. And as I 
pointed out, although it would add to a little temporary red 
ink, over the long haul it may prove to be the best money we 
can spend, certainly if you are out of work today I think a 
trade-off that you would prefer the President and the Congress 
make. I would also submit that if you want to see those large 
surpluses return soon, as we do, that it is pretty good policy 
in that regard, too.
    But I acknowledge it is a close call, and as the chart I 
put up a little while ago shows, frankly, I think to an 
astonishing extent in a recession and a war we are very, very 
close to balance anyway, and no other country I think would 
find itself so well positioned. In fact, it is a better 
position than this country has been in in previous recessions.
    Mr. Bass. I agree with you, Director Daniels. I yield back.
    Chairman Nussle. Mr. McDermott.
    Mr. McDermott. Thank you, Mr. Chairman. I always look 
forward to reading the newspaper in the morning. I learn 
interesting things. I have been reading some of your 
editorials. I am glad to see you here today producing a no-
pain, no-gain budget. In the athletics I participated in it was 
always the feeling that if you didn't have some pain, you 
weren't getting anywhere. I look at the way you keep blowing 
smoke like you did the last time when you told us that the 
estimates were probably too low, that they would be up higher 
when it was all over. Now, I picked up the two papers this 
morning, if you put that slide up, No. 10.
    The Wall Street Journal says, ``Bush offers trillion dollar 
budget, launching era of deficit spending,'' and on page 8 in 
the Los Angeles Times it says, ``Budget sells Social Security 
down red ink river.'' Included in that is the graph which is on 
the board, and I would like to make a point.
    This business of being able to fight a two-front war. Right 
there is where Mr. Reagan cut taxes. That was the last time we 
had someone trying to fight a war and cutting taxes. You can 
see the direction of the line. You don't have to be an 
economist or anybody fancy to see what happens when you cut 
taxes. You don't provide the money, and then you have a 
military buildup.
    Now this is the Clinton years as we worked our way out of 
the problem. And hardly Mr. Bush gets in again and he says, 
let's build up for a two-front war and we can cut taxes another 
$600 billion.
    Now, this morning, I had the pleasure at the Ways and Means 
Committee, with Mr. Kleczka, of hearing the Treasury Secretary, 
who told us, No. 1, that we were passing this $600 billion tax 
cut now so that we could kind of sneak the estate tax repeal 
out. So we don't have to ever worry about that. He said there 
would be a lot of financial planning that would change, because 
people would have their money and would keep it forever. Then 
he told us that we were going to borrow from Social Security.
    I would like to put the next slide up, No. 8. This is what 
the Los Angeles Times is talking about when they say Social 
Security is down the river of red ink. If you look at that 
first blue line there, if you had not made the tax cut, this is 
where we would be at the end of 10 years.
    But you insisted, no, no, no, we have to do this. We have 
to make this tax cut to make this economy run. In 10 years we 
will just barely be up a little bit. And now you come in to us 
with a budget that says we are going to be in Social Security 
for as long as the eye can see. I don't know where you put 
that, how far out on the wall before you get out of using 
Social Security.
    The reason that is important to us is that there are 
thousands of people in Houston, Texas and around this country 
who have been working for a company called Enron. Today they 
have nothing, nothing but their Social Security check in the 
future.
    United Airlines, Sunday, they are talking about the fact 
that they are going to perhaps go into Chapter 11. The reason 
that is going to be real difficult is because it is an ESOP and 
all of the pilots' retirement money and all of the mechanics' 
money is in the corporation. If they go into a Chapter 11, they 
will have nothing but their Social Security money.
    And everybody in this country knows that right there, 2008, 
80 million people are coming onto Social Security, and you are 
deep in the surplus because you want to put a tax cut on the 
budget.
    Now all of this nonsense we hear about we want to raise 
taxes. If you call taking the repealer off and taking $600 
billion more out of the budget a tax cut, you have not heard 
the country saying that when you are in a deep hole the best 
way out of it is to stop digging. This budget is simply digging 
the hole deeper, and you simply are being irresponsible in 
planning for those people coming on Social Security.
    Now I am drawing mine, thank you, but all the rest of you 
who aren't, you better be wondering about what is going to be 
going on in 2010, because my kids are going to have to pay for 
it. They are going to have to dig us out of this hole, and so 
is everybody else in this room.
    So I think this budget is really fraudulent. I want to know 
when you are going to stop. What is your plan to get that line 
to come up out of the red? Where is it?
    Mr. Daniels. Thank you, Congressman, for those gracious 
comments.
    Mr. McDermott. Thank you. You are welcome. I will have more 
for you.
    Mr. Daniels. Well, in the first place I would ask you to 
please share your impressions with us in the future. If you can 
tell, as you assert you can, what will be going on in terms of 
Social Security, in terms of Social Security 7, 8, 9 years from 
now, I wish you would have told us that September 11 was 
coming.
    Mr. McDermott. We told you in April that you were skating 
on very thin ice.
    Mr. Daniels. You know the simple fact is that one of the 
reasons that much of the spending that has to occur now is 
required is because the peace dividends of the 1980's was 
cashed in two or three times over in the 1990's. So almost all 
the Congress succeeded in cutting in those years, and therefore 
there is an awful lot of rebuilding to do. This was the case 
even prior to the onset of the terrorist war and wherever that 
may lead us.
    The idea that we need higher taxes, that somehow this is 
the best way forward, either for a strong economy or to protect 
the Social Security, the future of Social Security, I think is 
pretty fallacious. But, again, if you believe that the central 
goal of policy should be to raise taxes or to have higher taxes 
than those we have today, you will have many, many chances to 
do it. Very, very little tax relief has been delivered to the 
American people, 40 billion last year, 38 billion this year. So 
if the prospect of giving parents a child care tax deduction, 
dependent tax deduction, you have many, many chances to correct 
what you see as mistakes.
    Mr. McDermott. Mr. Chairman, this is the chart that I was 
referring to. When you ask us did we show it to you, you wish 
we would have been prescient last year, that line right there 
showed that you left no margin for error. I admit that you had 
a downturn in the economy. We said it was coming. And big 
chunks of it had happened by August when they made the 
estimate. 9/11 did not cause the problems that we have right 
now. That overestimation of what money was there was the real 
problem.
    Chairman Nussle. The gentleman's time has expired.
    Mr. Thornberry.
    Mr. Thornberry. Thank you, Mr. Chairman.
    Mr. Daniels, all of us certainly find deficits distasteful. 
I think when you get past the demagoguery the question is, what 
are the alternatives for fiscal year 2003? That is what is in 
front of us, that is what we can deal with. The rest of it is 
assumptions and projections. The question is what can we do 
about this?
    Now, you had a chart a while ago that showed us some 
alternatives. If you want to take away the increase in defense 
and take away the stimulus, you showed us one way that we could 
get back to a balanced budget. But what we have heard from Mr. 
Spratt and others is they agreed generally, as I understand it, 
with the defense and homeland security emphasis. So what are 
the alternatives then if you assume that you are going to have 
this increase in defense, assume that you are going to have the 
homeland security? You don't like the fact you are going into 
deficit, you want to set all of the Social Security and 
Medicare money aside in a lock box to pay down debt. What are 
you left with for the fiscal year 2003 budget?
    Mr. Daniels. You described the choices we face very 
completely, Congressman, and the President's choices are 
obvious, obviously the ones encompassed in this budget. The 
defense of the American people is the first responsibility of 
the central government, above and beyond all else. That is 
where the new investments go.
    The Congressman sees this as a no-pain budget, but I don't 
think everyone is going to agree with that, because we have 
constrained the rest of government to the lowest growth rates 
we have had in a long time after years of big run-ups, and I 
think we can already hear the first complaints about that from 
folks who have been used to much bigger increases, and we will 
have to respectfully disagree.
    So there was another choice, as I illustrated. We could 
have left the fence where it was. We could not move forward 
with the war, we could not add to our homeland security and all 
the rest of that, and we could have a surplus. And instead of 
using Social Security funds to pay for those purposes, we could 
use Social Security funds to pay bondholders. That is the 
choice. We will get back to that one day, I believe, but not at 
a time of war.
    Mr. Thornberry. Well, let me follow up. We had Director 
Crippen before our committee January 23 talking about their 
changes and assumptions and so forth. Frankly, I was most 
interested in the point he tried to make at the end, and this 
is paraphrasing a little bit. He says it doesn't really matter 
what you are talking about the deficits, whether you use this 
year's numbers or last year's surplus numbers, it is not going 
to solve your Social Security problem. This is a long-term 
demographic problem. Unless you face that head on, you are not 
being straight with the American people about what it is going 
to take to solve it.
    Do you make those similar kind of--do you have a similar 
sort of outlook on what really matters in Social Security and 
what doesn't?
    Mr. Daniels. Yes, sir, absolutely. As much as I hope that 
we can regain our footing, once again begin paying down debt, 
all that accomplishes is to marginally increase your borrowing 
capacity when the crunch arrives, and you will not be able to 
borrow your way out of the Social Security problems if we don't 
reform the system. It depends entirely on reform of the system 
that we have today and strong economic growth so that we have 
revenues coming in when that time arrives.
    Mr. Thornberry. Which was also the point that he made, the 
economic growth--encouraging economic growth is the key factor 
to solving Social Security down the road.
    Let me ask you about one other issue. I share the 
chairman's view that putting more emphasis on management is a 
good and appreciated thing. I have been particularly interested 
in some homeland security issues. I notice in this budget, for 
example, that you have grants going to local police, local 
firefighters, to help them get the equipment that they need 
administered through FEMA, which are the people who are used to 
working with the local folks, and I think that is a terrific 
addition.
    You also have a lot more money going to border security, 
but what you have not done yet is consolidate or rearrange or 
change some of the border security agencies, which is something 
that I think is a good idea.
    We all want the money to be spent well, even in homeland 
security and defense. Can you tell me if maybe some other 
management reforms are coming, particularly our border 
security, to make sure that money is spent well, and that 
agencies actually talk to one another.
    Mr. Daniels. Quite possibly, Congressman. Governor Ridge is 
looking at this. I think he has openly expressed his view that 
we might be able to do better than we do today. We do have some 
parallel and sometimes overlapping activities going on at our 
border and he has got that under study right now.
    The administration did move even prior to the 11th on 
reform of the INS itself, and that is pretty well under way. 
But that may prove not to be enough, and I will report to the 
Governor your view that maybe further consolidation here would 
be a good idea.
    Mr. Thornberry. Thank you.
    Chairman Nussle. Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Mr. Daniels, I do want to go back. I have tried to avoid 
this, and I don't like this, where people say you are 
Enronizing and all of this other stuff. But I sat through two 
days of hearings saying it was the other guy's fault or 
whoever. I look at your testimony and you have a quote for 
those still professing to find use in such numbers, talking 
about a 10-year period and the fact that you were in good 
company of people who missed the recession, and people who 
missed the fact that the assumptions would be wrong, you have a 
word ``misestimate,'' which I am not sure that that exists. 
Then in your testimony from last year you go into some detail 
about people being skeptical about $5 trillion expected 
surpluses.
    Then you say, ``But the data suggests strongly that it is 
at least as likely that total surpluses before policy change 
will come to more and not less than today's projection.'' Quite 
frankly, you know, I am not going to accept this from anybody, 
that last year people were saying, oh, well, we are really not 
looking out 10 years because we were sold on 10 years. And my 
friends on the other side can try and sell it and say, no, 
nobody looks out 10 years, we only look out one. But I think 
the record is pretty clear on that.
    Now, let my say with respect to your overall budget 
package. I understand the need for the homeland security 
aspect. I was one of the ones who joined in calling for that 
last year. I understand the need for a great deal of the 
defense ramp-up money, both to pay for the cost of the war in 
Afghanistan as well as transformation as well as other needs on 
security that we now realize that we need.
    What I don't understand, quite frankly, is--and you said it 
just a few minutes ago--that these were additional costs, and 
costs in some cases without tremendous productive value, but 
they are necessary costs for security.
    But on the one hand while we agree on those costs, at the 
same time you have a budget that has a 9-percent increase in 
spending, and then you want to go and cut taxes by three-
quarters of a trillion dollars over the 10-year period. To me, 
quite frankly, that doesn't make a lot of business sense or 
business logic. When you have already locked in the one tax 
cut, now you want to add on to it an additional--I don't know 
what--35 percent on top of that, at the same time that you are 
admitting that you got additional costs that were unforeseen by 
anybody that you have to plug into the budget. Now, you are 
going to come back and say, well, we think tax rates are too 
high, we need to lock these in and we need economic stimulus.
    I would raise two points. No. 1 is that if it is the same 
economic stimulus bill that was brought up last year by the 
administration, if I understand correctly, that a vast majority 
of that occurs in the second, third and fourth and fifth years, 
well, all of us, including your own numbers, project that we 
will be out of recession by that time. So what type of stimulus 
is that?
    Second of all, the fact is that what is the point of 
borrowing money to pay for tax cuts? There is clearly a drag 
that is associated with that, whether you are borrowing at 4.9 
percent over a 10-year period or a lesser percent over a 7-year 
period.
    Finally, with all due respect to my colleague from north 
and west Texas, that I do think in the long term, this is not a 
Democratic or a Republican idea, but I do think in the long 
term, and what Dr. Crippen is saying, that you do grow the 
economy in part by lowering your debt ratios, and in fact we 
are going in the wrong direction here. Last year everybody was 
bragging about how much debt they can pay down, and now we are 
going to be adding a little debt for a while, then we are going 
to end up with considerable more on the books than any of us 
had projected. I don't think that does us any good positioning 
the economy for the long-term liabilities of Social Security 
and Medicare, and I think that is a real shame.
    I think that you know you have sent us two budgets. You 
have sent us the necessary budget on the defense and homeland 
security, and then have you sent us a political budget that has 
this additional tax cut that defies business logic, in my 
opinion.
    Mr. Daniels. Let me respond to a couple of the points that 
you made. First of all, I think the President would agree with 
you that any stimulus we do needs to be near term in its 
impact. The problem is here and now. We would want the effect a 
true stimulus bill would have to have effect here and now. It 
should be temporary.
    Now, the one that got so close to passage last year was 
reasonably well suited to that. It would have included, as I 
recall, rebates to people at the very low end of the income 
scale.
    Mr. Bentsen. But the bulk of it, sir, was in the corporate 
side, was out multiple years, $200 billion.
    Mr. Daniels. I disagree. The accelerated depreciation 
provisions, which had a lot of support on both sides of the 
aisle, would have lasted 3 years, but they would have started 
right away, and the rate reductions for the people in the 
30,000, 40,000 sort of bracket would also have had near term 
effects. So that was not a bad stimulus measure, certainly was 
acceptable to the President, and I think it is responsive to 
your point when you have a recession on now you want to take 
measures that have effects right now.
    A couple of other things. Among the reasons we ought to 
keep our heads in the current situation is that our debt and 
interest picture remains pretty darn strong. Actually our debt 
ratio will continue to come down even under the conditions that 
we think we see now in this particular budget. Interest costs 
as a percentage of Federal spending are continuing to come 
down. They are passing through 9 cents this year. Just a few 
years ago they were twice as high. They were 16 cents on the 
dollar just to service the debt.
    Mr. Bentsen. But a trillion dollars in additional P&I cost 
over what was projected in the last year does not appear to me 
to be a productive use of taxpayers' money, and I think both 
sides would agree on that fact. So, we seem to be moving in the 
wrong direction here.
    Mr. Daniels. It is hard to tell. These are the 10-year 
projections for the 7 years we have tried to do this, and you 
can see what an outlier at this time last year's is. When I 
said last year, and you quoted it accurately, was simply a 
literal translation of a matter of probability, that is to say 
that the 5.6 trillion, based on the situation as it was 
understood then, the assumptions in that budget, which are no 
different than CBO's essentially, were 50 percent probability 
assumptions. That meant there was as much chance that the 
number could go up as the number could go down. We could be 
back next year looking at the same projections. It can change 
as fast going up as it did going down.
    I point out to you if we had taken a 1-year time out from 
this 10-year experiment, we would be looking at a surplus 
projection that is the biggest one we had ever seen, actually 
slightly larger than the one that the previous administration 
made 2 years ago today.
    So the point is we don't know. We have to deal with the 
situation in front of us, which at the present moment I don't 
hear much disagreement here. We have to deal with it very 
vigorously in terms of the priorities that we face.
    Mr. Bentsen. Thank you.
    Chairman Nussle. Mr. Toomey.
    Mr. Toomey. Thank you, Mr. Chairman.
    Mr. Director, thank you for being with us today. Some of my 
colleagues on the other side of the aisle appear to be quite 
exercised obviously over the fact that we currently are 
projecting lower surpluses than we did last year.
    I find this baffling, frankly, especially when I look at 
the chart that you have. S6 on your supplement, which 
demonstrates, to my analysis, that from 1998 to 2002--at least 
if you look at those years--average annual discretionary 
spending grew at about 7 percent on an annual average basis, 
which is growth that is at least three times the rate of 
inflation. With all of that spending going on, it seems to me 
that most of my colleagues on the other side who are 
complaining so much about the size of deficits nevertheless 
voted against Republican budgets in the House-passed budgets 
that would have had less spending, voted against appropriation 
bills when they first came through the House at lower levels of 
spending, and consistently advocate even more spending.
    So I don't understand how people can be quite so upset 
about deficits when they advocate ever more spending, but let 
me shift to the tax question. You pointed out on a chart that 
when we passed tax reduction last year, we were passing it from 
a level that was at a post-war record high and that even after 
this tax reduction we will be well above the historical high.
    Are you aware of any time in American history, or any other 
developed nation that you might care to cite, when a modest 
reduction of marginal tax rates from a record high level has 
had negative impact on economic growth?
    Mr. Daniels. No, sir, not offhand.
    Mr. Toomey. There is a significant consensus amongst 
private sector economists that one of the contributing factors 
in the current economic downturn may have been the fact that 
peoples' incomes were rising consistently in the 1990's and it 
was pushing them into ever higher tax rates. During the 1990's 
we increased tax levels. Do you share the view that that 
effective bracket creep, that ever higher taxes that people 
might have been facing may have contributed to this current 
economic downturn?
    Mr. Daniels. Well, I am not certain. I do know that 
economic theory, but more importantly your common sense tells 
you at times of economic weakness, like right now, taking more 
out of the hands of private citizens and businesses is probably 
not a smart idea.
    Mr. Toomey. Thank you. I also wanted to refer to the budget 
where you have rated the effectiveness or the performance of 
various measures of the various executive branches. Now, when 
you look at the chart that you have put together, it is hard 
not to notice the dominant color on that chart. The dominant 
color is red, which indicates an unsatisfactory performance, if 
I understand it correctly. Do you intend and do you think we 
ought to systematically begin to reduce funding for those areas 
that are performing at an unsatisfactory level? Is that not an 
indication that there is waste of taxpayer money?
    Mr. Daniels. Let's be careful about how we interpret. There 
are two things going on, both of which we think are very 
important in the area of better management here. We have on the 
one hand attempted to begin, and this responds to a mandate of 
Congress in some statutes, such as the Government Performance 
and Results Act, passed in the 1990's, responds to the mandate 
of Congress by trying to become serious about separating 
programs that work from programs that don't. We do give a 
number of examples. I think we have 41 effective programs, 
somewhat more than that, we can point out or point to as 
ineffective, and frankly the vast majority in the middle about 
which we just don't have good enough data. I absolutely believe 
that we must come to the point where, as any business would, as 
any family would, we rigorously weed out those things that are 
not working and strengthen those things that are.
    So on that point I would very much agree with you. I would 
be careful not to mix too much the concept with the scorecards, 
which are a little bit different.
    This administration is committed to trying to do a better 
job of managing the day-to-day business of the Federal 
Government, and the five areas on those scorecards were 
selected because we think they are some of the biggest problem 
areas. Those are sort of by definition, therefore, you would 
expect a lot of red. As we told some of the departments, if you 
are all green we picked the wrong problem. We picked the 
problem that you solved already.
    So the thing to watch there is our ability or not to 
improve, and this is certainly the President's view. He has 
said to each Cabinet Secretary, of course the starting point is 
bad, that is why we picked these areas of systems, financial 
accountability, human capital, and so forth.
    Now, the real problem will be if they come back to him in a 
year or two and they are still red. But as he has pointed out, 
measurement is not about punishment, it is about creating the 
conditions for improvement.
    Mr. Toomey. Very quickly. I notice if you exclude the 
assumed economic stimulus package in your budget we would be 
within $3 billion of a balanced budget. I frankly think if you 
exclude the economic stimulus package--I hope we get one, I am 
not sure we will--absent that, I think we could and should get 
to a balanced budget for fiscal year 2003.
    My question is, if we can't get the economic stimulus 
package that we want, do you oppose spending that money on 
other purposes?
    Mr. Daniels. Yes, I do.
    Mr. Toomey. Thank you.
    Chairman Nussle. Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman.
    I would like to go back to chart No. 3 that Mr. McDermott 
was referring to, put that back up if we can, Mr. Daniels.
    I will stipulate to what the chairman said. Many of us who 
were Democrats voted for the spending proposals, so we can 
refer to those as Democratic and Republican spending proposals 
for the most part. If you could briefly take the opportunity to 
point out what you think is incorrect about this chart, if 
anything, Mr. Daniels?
    Mr. Daniels. Not having prepared it, let me study it for a 
moment. Well, one thing to bear in mind is that this excludes, 
of course, trust fund revenues in the calculation, which to me 
is a distortion, and the better calculations were those I heard 
earlier which measure the change in the surplus on the basis of 
the total revenues of government. This you know is designed, I 
guess, to measure the tax cut against only a partial revenue 
base. So I think a fairer comparison would be the one that the 
chairman, I think, started us with earlier.
    Mr. Davis. But, Mr. Daniels, we are not going to use any of 
those other trust funds to fund Social Security or Medicare. So 
I think we can agree to that. So this is really a 
representation about what availability there is in the surplus 
to deal with those needs in the future, right?
    Mr. Daniels. I am not sure I understand your question, sir.
    Mr. Davis. Let me move on in the limited time I have. The 
assumed rate of growth in the GDP in the tax cut you advocated 
to us last year was about 3.2 percent. Obviously that was a 
gross miscalculation. Apparently in your testimony you are 
advocating an additional tax cut that you calculated about $591 
billion. The Democratic staff calculates that as $675 billion. 
So, splitting the difference, let's call it about $630 billion. 
Aren't you concerned about equally miscalculating again the 
rate of growth, and shouldn't we be conservative this time as 
far as whether we are willing to plunge into a further major 
set of tax cuts given the uncertainty in the economy?
    Mr. Daniels. I am very conscious of the need to be careful 
about our estimates and we have in fact the most cautious, the 
lowest estimates in the field. They are lower than CBO's, they 
are lower than the blue chip. At this point, our estimate of 
this year of 0.7 many people think is far too conservative. I 
would rather, frankly, be safe. I would rather be on the safe 
side. I don't like it in business and I don't like it here to 
have to miss revenue estimate.
    Mr. Davis. But, Mr. Daniels, with all due respect, isn't 
that the same thing you told us last year about the assumptions 
you brought to the committee?
    Mr. Daniels. It was true we were in the bottom half of all 
predictors last year. Everybody was wrong. All the private 
sector people who make their money doing this all missed it, 
too, as well as CBO, as well as the administration. I am not 
asking for forgiveness here. I am angry that we missed. But I 
would--what I told you was true at the time; we believed that 
looking--everyone else thought that we had a reasonable 
projection.
    Mr. Davis. Perhaps you and I can agree that you are being 
as cautious this year as you were last year in your 
assumptions. My grandfather used to always say, there is no 
education in the second kick of the mule. Shouldn't we simply 
focus on our security needs, trying to minimize the deficit, 
before we launch into another major set of tax cuts and risk 
repeating the same mistake from last year?
    Mr. Daniels. Well, sir, the tax relief that is already in 
place, let alone making it permanent which is 10 years away, 9 
years away, you will have many, many chances to prevent that 
happening.
    Mr. Davis. So you are suggesting we might repeal some of 
the tax cuts.
    Mr. Daniels. I am just saying that if you believe that they 
are such a bad idea, you haven't lost anything. Only 80 
billion, $78 billion of relief has been given so far. Last year 
plus this year. All the rest, as my one chart showed, is out--
most of it, way out in front of you.
    Mr. Davis. But, Mr. Daniels, my time is up. What I hear you 
saying, correct me if I am wrong, is if our estimate is wrong 
again. We can go back and repeal some of these tax cuts, right?
    Mr. Daniels. If you think it is a good idea, for any 
reason.
    Mr. Davis. But under your definition, that is a tax 
increase.
    Mr. Daniels. I didn't call it that.
    Mr. Davis. I know you didn't. Not in this context. But if 
we miscalculate again, the only recourse we have, unless we 
want to go further into deficit--and you are advocating--is to 
go back and repeal some of these tax cuts.
    Mr. Daniels. There is a lot of spending you could cut, too. 
We could have gone further than we did, I suppose, in the 
proposals we made for this year. But you will have in any given 
year $2 trillion of spending you can look at.
    Mr. Davis. If I could, briefly, I just had one other 
question.
    Chairman Nussle. One more.
    Mr. Davis. Mr. Daniels, do you have any concern about the 
level of deficit that you are proposing to us which--actually 
let me restate that. The level of increase in the debt held by 
the public that you are advocating to us, a $157 billion 
increase in 2002, for example, do you have any concern about 
the impact that may have on the interest rates that we are 
currently enjoying and what that would do to our economy?
    Mr. Daniels. Not much. I have a lot of concern about any 
increase in the debt. I would like to be paying it down. But if 
you are interested, we have the lowest interest rates in 40 
years, lowest home mortgage rates, lowest long-term bond rates. 
We have looked and looked and looked. It is an interesting 
theory that what drives this is surpluses and deficits.
    But, in fact, there is absolutely no correlation. You can't 
find it. We have had interest rates go down when deficits were 
high. We have had interest rates relatively high when deficits 
were low. So you know, the good news here is we are--we have 
very, very low rates, historically low rates right now. If that 
was enough to ensure a strong economy, we would have a boom on, 
point one. And, No. 2, they are not connected in any way that 
one can find.
    Mr. Davis. If Chairman Greenspan were to testify before 
this committee that he sees there is a relationship between us 
reducing the level of debt held by the public and interest 
rates levels, you would not agree with that?
    Mr. Daniels. I read very carefully what the chairman has 
said. I think he would agree with me. Look, we agree that we 
ought to try to bring down deficits. You are certainly not 
interrogating someone today who enjoys red ink. I probably have 
as big an aversion to it as anybody in the room. I do believe 
it is far better to reduce our debt levels as far and as fast 
as we can. We do face a current situation, which means we have 
to interrupt the very healthy debt reduction we have 
undertaken. I hope that interruption is very short.
    Chairman Nussle. Mr. Hastings.
    Mr. Hastings. Thank you, Mr. Chairman, and welcome, 
Director Daniels. I give you some credit for doing a two-fer 
today, to go to the Senate and here. I don't know what you 
heard in the Senate but sometimes the discussion here today is 
rather pointed.
    Mr. Daniels. I guess I called it batting practice. It is a 
double-header.
    Mr. Hastings. There is, however, a silver lining out of all 
of this, believe it or not, coming from both sides of the 
aisle; because there is a common thread of what everybody has 
said, there is a concern of having and running deficits.
    There was a time when there was never any agreement on 
running deficits. One side would say that was not a problem. In 
fact, it was pointed out in one of the earlier charts that the 
Reagan tax cut exacerbated by implication the deficits. But 
what was not pointed out, the agreement that was not kept, and 
that agreement is for every dollar of tax cut there should have 
been a corresponding cut of spending. In fact, just the 
opposite happened. Spending increased by a dollar and a half 
for every dollar tax cut, so that exacerbated the problem. That 
is the fact.
    Mr. Nussle pointed out in his opening chart, and Mr. Toomey 
corroborated, that if we stayed with the baseline we would 
probably be in a very good situation coming into this year. But 
that was broken earlier. We are probably all to blame for that. 
The President was pretty specific in his State of the Union 
speech when he suggested that if you want to eliminate these 
deficits in the future--and apparently we all agree that 
deficits are not good--we ought to watch the spending part.
    You have talked about that it seems the only argument that 
we can talk about here is what revenue projections are. You 
stated over and over--I will give you one more chance to say it 
either short or long--to anticipate what revenues are coming in 
over a long period of time is an inexact science.
    I would just go back; probably only one person sitting 
around here thought that the football game would turn out 
differently last Sunday, and that is Mr. Capuano. Even the 
experts in the very short term were wrong in that case. But you 
are the only one. At any rate, you have your--it is an inexact 
science of estimating revenues over a long period of time. 
Just--if you don't want to answer it, that is fine.
    I have one more question to ask you. If you want to respond 
to that, I would appreciate that.
    Mr. Daniels. No. Well said. I mean, we have learned in the 
last year how big a miss can be just in a 1-year period, let 
alone 10.
    Mr. Hastings. I would just say the good news is when things 
start turning around, we anticipate that will happen hopefully 
sooner than later. You will have a lot of support on this 
committee. If it appears we won't get into a deficit situation, 
you certainly have my support.
    Mr. Daniels. I should probably kind of confirm what you say 
by pointing out that the misses, the revenue misses, were just 
about as big on the happy side for a couple, 3 years, when the 
economy grew at rates that hadn't been foreseen. That could 
happen again. We have to do all that we can to see that it 
happens again. And that was the point, really, of showing 
earlier how when you run those out over 10 years how wildly 
varied the answers can be.
    Mr. Hastings. The point is that even as much as a miss 
still anticipates more revenue over the next 10 years.
    Let me focus just on one area. I represent the Hanford area 
in Washington State. It is one of the nuclear sites that needs 
to be cleaned up. I might add, since we are talking about a war 
budget, Hanford came into being because of the Second World 
War, as did the other sites, and we are still cleaning those 
sites up.
    DOE has come up with a way of trying to incentivize, if you 
will, accelerate the cleanup. Would it be accurate to--with 
respect to the nuclear cleanup at those sites, that the 
administration's goal is to ensure that these DOE sites, the 
ones that are getting the job done, will continue to receive 
the funding that in fact they need?
    Mr. Daniels. Yes, absolutely, Congressman. The 
administration's real goal is to speed up the cleanup of these 
sites. It has been dragging. Some of them, if you can believe 
it, you know, are not scheduled to be cleaned up for 70 years. 
That is just unacceptable. In the meantime, we are experiencing 
incredible cost overruns in the aggregate that are well over 
$70 billion.
    So this budget does seek a reformed program and makes 
available new money for sites that get on a faster, surer track 
to cleanup. And we hope Hanford will be one of these to have 
more money to get the job done quicker.
    Mr. Hastings. Let me just follow up on that. You have 
within the budget a $800 million pot of money for that. I mean, 
when you total that with your baseline, it is exactly the same 
baseline as we had last year. This is the way to try to 
incentivize that. But you also said that if in fact there is 
progress that is being made at that $800 million, that can be 
increased in outyears. Can you give me an idea somewhere, how 
much that could go?
    The whole idea of this, of course, as you mentioned, is 
that it is like the Fram oil filter: Pay now or pay later. If 
we can pay now and save money in the outyears and accelerate 
the cleanup, that is what we ought to do. With that $800 
million, can you give me some idea of perhaps what the ceiling 
would be in the future?
    Mr. Daniels. I am sorry, I can't give you a good guess, 
Congressman, except to say that we do believe this is the way 
to go. It would be money well spent and increases would be in 
order.
    There is a pretty good model for this, I have learned. 
Probably it is the Rocky Flats Colorado example and spending 
more early, spending it smarter. In some cases, this will 
involve redoing contracts that are there now. But to get these 
projects on a lot faster track to cleanup, that has got to be 
in everybody's interest.
    We appreciate your leadership for a long time and your 
staying in touch with us to make sure we don't take our eye off 
this ball.
    Mr. Hastings. I appreciate that very much. I would just say 
that I mentioned a lot of these sites came into being in the 
Second World War. We take care of our veterans. Yet the 
outyears on this, I agree with you, is way out of line. So I 
appreciate your comments on that. Thank you, Mr. Chairman.
    Mr. Schrock [presiding]. Mrs. Clayton.
    Mrs. Clayton. Thank you, Mr. Chairman, and welcome back, 
Mr. Daniels. You know that the discussion of the budget is 
probably one of the most important issues we can talk about. It 
is indeed not necessarily a difference in principles or big 
pictures, it is a discussion about priorities, priorities of 
what we think is important for the American people. We can 
really agree that indeed, our defense should be a priority.
    The question, though, comes--at least from this member--as 
to what extent it needs to be raised. So I think one should 
understand that there are areas that we can agree on, but don't 
agree on the exact number. You shouldn't be surprised if 
Democrats or others may be saying, ``I told you so,'' because I 
remember when we had these discussions before, when we had a 
10-year budget, and we wanted to find out. Then there was the 
discussion about defense, then, was the big missing piece. Can 
we afford it? Has there been a plan for it?
    Now, September 11 has come and has clearly made all of us 
keenly aware, as we must be about the security of our Nation. 
We can't take anything for granted. We must be prepared for 
terrorism. But I gather this is also an opportunity to revisit 
last year's proposal for our defense without having September 
11. So when we think about that, we put that priority at the 
expense of everything else. One is constrained not to talk 
about it because they think we are not patriotic. Well, we are 
patriotic to the American people. Those budget items you want 
to cut, will affect people who are going to need heat or air. 
Those people are Americans. Their need to protect their quality 
of life is also important. Yet, those types of cuts are 
proposed, and also proposed are cuts in training.
    We are now in a recession. There are proposed to be cuts in 
Medicaid to hospitals. Our hospitals are struggling. I mean, 
the priorities in a budget identifies where we think things are 
very important. Homeland security, is very important. In fact, 
where you propose to make those allocations makes a lot of 
sense. The question is, how much and where does it come from?
    So the discussion about whether it should be $48 billion at 
the expense of cutting something else, those are questions we 
ought to have a debate about if you are serious about the 
budget. Do we take from the current law enforcement programs 
that they have enjoyed in bringing home, now to give to one's 
homeland security opportunity to give to another? I mean that 
we are shuffling the same money around. The same police 
department, who now wants those dollars to protect us, and to 
make sure that we are free from drugs. Now we call it homeland 
security, and we shuffle some more money over there.
    So, part of this needs to be revisited in terms of having 
the right balance and the right set of figures.
    Finally, the whole area of our commitment to our senior 
citizens. You know, all of us can be quoted, including myself, 
that we were not using this money. I have always said, where is 
the box and where is the lock? Apparently there is no box if 
there is no money in the box, right?
    As for the President--I agree with the President. The 
President said there are times when we should have deficits. 
Everybody knows that. There are times with the situation of our 
families, that we have to go borrowing because the issue is so 
important. So it is with the American people. But the rate that 
we are borrowing while we have to borrow and the double hit 
that Social Security is going to get, we are taking money now, 
and guess what, the debt we have to pay later is going to hit 
them again.
    So there is chart 8 which makes this abundantly clear. 
Social Security surplus. Without the new tax or last year's 
tax, that line on top would be showing where we would be. Now, 
if you include your new tax cut, you begin to see where the red 
ink is. You begin to see the impact that it is going to have on 
Social Security. In fact, the new tax cut, an additional $665 
billion on top of that--well, we are really going to have a 
train wreck. I am like Mr. McDermott, I have already started 
receiving my Social Security, so I don't want you to cut it 
off. I need my money; I want you to know that. But anyhow those 
who are coming behind me, like you and some others, you may not 
need it, but a lot of folks do need it.
    Mr. Daniels. I brought yours with me today, Mrs. Clayton.
    Mrs. Clayton. Did you? You are a scholar and a gentlemen.
    That $675 billion new tax cut is going to make it even more 
devastating. So I hope this debate as we go forward will allow 
room for us to discuss the priorities that ought to be equally 
as important.
    You put in there that we are going to have a prescription 
drug, but the amount of money you put in there is less than the 
amount of money you proposed the last time. And guess what? It 
is going to provide less assistance to a number of seniors.
    So this debate, I hope, is just beginning. Thank you, Mr. 
Chairman.
    Mr. Daniels. I will just respond by thanking you very much 
for those comments. I strongly agree that it is not only not 
unpatriotic, it is the patriotic thing to do to debate these 
proposals. I know that the Congress will and should take a 
close look at the President's defense request. I think you will 
find that Secretary Rumsfeld has put it together carefully, and 
he can justify what's asked for both in terms of rebuilding 
things that had deteriorated before and meeting the new threats 
that are there.
    But those are very, very legitimate questions. And I am 
happy to tell you that on a couple of the matters you 
mentioned, job training for instance, when one reads the whole 
budget, the President is asking for a substantial increase.
    Mrs. Clayton. Is the Job Corps going to increase?
    Mr. Daniels. There is the Job Corps. But in total, we were 
asking for an increase from 6.3 to 9.3 billion. He wants the 
national emergency grants which almost made it in as a part of 
the stimulus package in December--we certainly want those back. 
And that will give us a huge new amount of money that States 
can use to respond to the job training needs and other 
dislocated worker needs of the people that they are serving.
    Mrs. Clayton. How about the low-income energy to help 
seniors who need it?
    Mr. Daniels. We are asking for 1 billion 7. We have got a 
good bit left. This has been a kind winter, extraordinarily 
kind both in terms of mild temperatures and lower costs for 
energy costs, and therefore we have a lot of money, 770 million 
the last I looked, still in reserve for this year. But we are 
asking, of course, for 1 billion 7, moving forward, to continue 
that program.
    Let me say, lastly, that you say money will be shuffled 
around. Well, true; but you know that is exactly what we must 
do. In other words, for instance, you mentioned law 
enforcement. There are some new needs. We really may be saying 
the same police departments or fire departments, but there are 
some new needs. We do need the money to be moved from one 
purpose to another. We now know that we need emergency response 
teams, very well trained, to come into action if we are 
attacked again. So we do need to move the money from 
yesterday's top need to today's. And that is what we hope the 
Congress will work with us in doing.
    Mr. Schrock. Mr. Daniels, thank you for being here. I am 
pretty much pleased with the budget, I can assure you. I am 
especially pleased with the defense part of it. I think you 
were dead right when you said that the military establishment 
was decimated during the 1990's. Some of us have been screaming 
about that for a long time, whether we were up here or other 
places. I am glad to see the money in there.
    I have always been a voice of the military. I am a retired 
Navy captain, so I am very pleased to see that we are doing for 
the men and women in uniform what we need to do, and giving 
them the assets they need to fight this war on terrorism.
    There is one area that I am a little concerned about and I 
would like your comments on it. I noticed there were only 
funding for five ships in this next year. If we are going to 
maintain the fleet of 315 like everybody thinks we need to--
frankly, I think that is entirely too low, but that is the 
number they are talking about. I am not sure five a year will 
do it.
    I also understand that they are trying to delay--they want 
to delay the construction of Carrier 77 by a year or so. I am 
really baffled by that.
    Before you answer that, I was out of here for a few minutes 
on the triangle. I know Mr. Thornberry was talking about what 
if there is no economic stimulus package. Someone announced out 
there that Mr. Daschle said out there it is dead, kaput. So 
that might change things dramatically. I wonder if you could 
comment on the ship thing, and what the $80 billion in the 
stimulus package that looks like it is not going to happen will 
mean for this whole budget process on the coverage we have had 
here today.
    Mr. Daniels. You are correct about the five ships and also 
that most models suggest that is not a sufficient replacement 
rate to maintain today's 315. Beyond that, I will direct you to 
Secretary Rumsfeld and his people. Obviously, even in the 
context of a budget request that grows by 12 percent, they have 
had to make a lot of choices. There is a lot of--one would 
might say--transformation in this budget. There are a lot of 
requests for the kind of weapons that have just proven so 
effective in Afghanistan. We have to replace them. And now the 
people see we will need them to occupy a bigger place in our 
overall military readiness. So much of the new money goes in 
that direction.
    But I am well aware that among the areas that some people 
think have been--have been left behind a little bit is 
shipbuilding. That is a question that the folks at DOD will 
address for you.
    I am saddened to hear the news--I hope maybe it will prove 
inaccurate--about the stimulus package, because I think it is 
way too early to declare a victory over this recession, even as 
promising as some of the recent news has been. And once again, 
just from the fiscal standpoint, it makes a lot of difference 
whether we get to a 3 or 4 percent growth rate early this year, 
late this year, or not till early next year. You put those into 
our 10-year models and you will find very big changes for 
better or for worse, if you actually knew for sure that they 
were going to carry out over that whole time period.
    Mr. Schrock. Right. I agree. The carrier debate that they 
have had over the years I think is a moot point now, based on 
the mission they have carried out over in Afghanistan. To delay 
construction over another one is not a good thing.
    Mr. Price.
    Mr. Price. Thank you, Mr. Chairman.
    Mr. Daniels, welcome back to the committee. We appreciate 
your testimony. I would like to concentrate on the levels of 
publicly held debt that we are anticipating in this budget and 
the relation of that to the future of Social Security. To lay 
the groundwork for my question, I want to put two slides up. 
The first has to do with the amount of publicly held debt that 
we are now projecting for the end of the 10-year period 
compared to what we were projecting 10 months ago. Ten months 
ago, we were projecting no debt at the end of the 10-year 
period. Now we are projecting a debt of approximately $2.8 
trillion.
    The next slide shows the implications of this debt on the 
cast of debt service. If there is any money in the Federal 
budget that represents money down a rat hole it surely must be 
interest on the publicly held debt. We were anticipating debt 
service of approximately $700 billion over this next 10-year 
period. Now that projection is almost $1.8 trillion, over a 
trillion dollar increase in the projected interest payments.
    Now, I would like to ask you a couple of questions about 
this. First I would like to clarify your views on the Social 
Security Trust Fund. On September 6 before the Senate Budget 
Committee, you said you would appeal for caution and precision 
in the words we use. Then you went on to say that the assets of 
the Social Security fund were only bonds, and that, quote, 
``there are no assets other than the future promises that 
future taxpayers will pay off the bonds in those trust funds.''
    A month earlier you had said to the Senate Budget Committee 
that the bonds in the trust funds were, quote, ``nothing but a 
pile of IOUs.''
    Now, this leads to three questions. First, do you believe 
that the Treasury bonds held by the Social Security Trust Fund 
are or are not real assets backed by the full faith and credit 
of the United States?
    Secondly, assuming they are real assets, does the United 
States have an obligation to redeem these bonds when the Social 
Security cash flow reverses around 2015 to make good on 
promises to beneficiaries?
    And third, does this projected debt, which is 3 trillion 
more than what was anticipated 10 months ago, and this 
projected debt service, which is 1 trillion more than what was 
anticipated, does this make it more difficult to redeem these 
bonds and meet these obligations?
    As you know, until recently both parties have assumed that 
it is important to use the Social Security surplus to pay down 
the debt, and this is related in a positive way to meeting our 
future Social Security obligations. Do you still agree with 
that proposition?
    Mr. Daniels. Thank you Congressman. I do agree with that. I 
would say that paying down debt does make a positive but, I 
would say, partial--very partial contribution to addressing our 
long-term Social Security problems.
    Let me answer your other questions by way of illustration 
along the way. Are the instruments in the trust funds real? 
Yes, they are real. And, yes, they represent an obligation 
backed by the full faith and credit of the United States. And 
they will be honored; I don't doubt that for a second.
    When I said they are only bonds, I was really addressing a 
question much like the one that Congresswoman Clayton mentioned 
a minute ago. Some people have imagined or confused themselves 
that there is some cash somewhere in the box or that there is 
some other kind of asset, when in fact what is there is exactly 
what I said: simply a bond, a promise to pay on behalf of the 
taxpayers of the U.S., a very solemn promise, but one that will 
only be redeemed by the ability of the economy in the future to 
generate the resources necessary.
    Will it be more difficult to redeem that promise when the 
day gets here that Social Security is costing more than the 
payroll taxes that are scheduled to come in? It will be more 
difficult only in the sense that for a limited period of time 
we can borrow the money back, the money we have paid down in 
the interim. You know, it will not solve the problem. That's 
why I say positive but partial.
    Let me just make one or two other points about the charts. 
No. 1, we do very earnestly hope that in addition to defending 
our country and meeting the high priority issues of homeland 
defense and so forth, that we will be back quickly into 
surpluses and once again moving down in terms of outstanding 
public debt.
    Your chart shows a balance of less than zero dollars. Let 
me just point out, we always said that we thought there was a 
minimum beyond which it would be difficult to go, a few hundred 
dollars at least. If we get to that point as we all, I suppose, 
hope to do, to reach the numbers on your chart, you have to 
begin buying assets in the private marketplace. And this, I 
think, would be a very serious mistake and one that we will 
want to debate very vigorously if it is ever seriously 
advocated.
    Mr. Price. But the caution you expressed a year ago before 
this committee, that there is a danger of trying to buy down 
too much debt too quickly, I assume that we have solved that 
problem.
    Mr. Daniels. I don't know. You know, Chairman Greenspan and 
many others made the very same point. I hope it is something 
that we are seriously discussing again before too very long. 
But I do want to link your various excellent questions together 
by pointing out that if we can get back to that point, someone 
may suggest--a few already have--that it would be a good idea 
for the government to acquire not bonds, but equities or other 
assets, and put those in the Social Security or other trust 
funds. That, I think, would be a very, very dangerous mistake.
    Mr. Price. Can you say at what point we would in fact start 
again buying down debt under the budget projection you have 
submitted today?
    Mr. Daniels. Under this projection, it would be many years 
ago. But a strong economic recovery could bring that prospect a 
lot closer, just as the shift from 12 months ago pushed it out 
several years.
    Mr. Price. Thank you. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Moran.
    Mr. Moran. Thank you, Mr. Chairman. A lot of us try to be 
as nonpartisan as we can, including the ranking member of the 
committee. But, boy, on budgets like this it really makes it 
kind of hard.
    Let me share three quotes. I think the first is from Casey 
Stengle where he suggested this was ``deja vu all over again.'' 
I really think that is an apropos quote to this budget course.
    I think it was Santyanna that said, if we don't learn from 
our mistakes we are doomed to repeat them.
    And then one that I had occasion to read over the weekend: 
``free lunch economics is the worst kind of intellectual 
sophistry.'' That is a quote from your predecessor, Mr. 
Daniels--Mr. Stockman in his book, The Triumph of Politics. 
When you read that book, it just seems so eerily familiar, what 
is happening 20 years hence. Today we have a popular President 
again who is promising deep tax cuts, dramatic increases in 
defense spending, and yet he said that it is going to be OK, we 
are going to balance our budget. Of course, the fact is that 
for 8 years, President Reagan never submitted a balanced 
budget. I am afraid that is the situation we are going to have 
again in the first decade of the 21st century. And we are going 
in, I am afraid, with our eyes wide open. That is why, you 
know, it may seem like we are giving you a hard time, but it is 
really--I trust you don't take it personally--it is really this 
budget that you are forced to defend.
    You know, we entered the decade of the nineties, and I 
remember the grief that President Clinton had when he 
increased, actually increased income tax rates on the highest 
level of the wealthiest people. On the other side of the aisle, 
every single one of whom voted against that tax increase--I see 
the Chairman smiling, and I remember some of his histrionics, 
although they were effective at the time, and they caused us 
concern; but, you know, it passed by one vote.
    Despite all these claims that we were going to have high 
unemployment, that we were going to have a depression, that, 
you know, the worst kinds of scenarios were pictured, and yet 
for that decade the people at the highest income tax brackets 
actually took home more after-tax income than at any time in 
history. We had the lowest inflation, the lowest interest 
rates, the highest economic growth.
    In fact, one of the most important things was that long-
term interest rates came so low because the financial markets 
realized that the government was serious about balancing its 
budgets, about paying off its long-term debt. That is why we 
increased the rate of home ownership higher than it has ever 
been, and we had the highest standard of living. Those long-
term interest rates are terribly important, and I am glad that 
Mr. Davis brought that issue up.
    But today we see long-term interest rates not budging. Even 
though the Federal Reserve has cut rates historically, what, 11 
times over the last year, down to 1.75 percent, and still long-
term rates are over 7 percent. That is what affects people's 
standard of living. That is why we are so concerned about the 
direction in which we are going.
    The other thing that troubles me most is what this 
generation--the generation of which I am a part, the baby boom 
generation, I was born in 1945--we were the principal 
beneficiaries in the 1980's of those low income tax rates and 
high spending. But we have we had one chance given to us before 
we all retired en masse, to pay off our debt and to provide for 
our own retirement.
    That is basically what this issue is all about. Are we 
going to seize that opportunity to make right with the next 
generation, with our kids' generation, or are we going to give 
ourselves a tax cut because we are the principal beneficiaries 
that need these tax cuts, the baby boom generation? Yet last 
year, we made the decision to reward ourselves and to stick our 
kids with the cost of our retirement and public debt.
    Now we see in this new budget that of the debt, the vast 
majority, almost all of it, you know, $1.7 trillion tax cut 
plus another approximately $800 billion that is recommended now 
over the next 10 years, so that is about $2-1/2 billion of tax 
cuts, and yet our debt is going to be $2.8 trillion, so it is 
the vast majority of our debt; and we are going to go into hock 
to the Social Security Trust Fund for that amount of money.
    That is the problem. That is the issue before us. What does 
this generation do for the next generation? Do we reward 
ourselves with tax cuts or do we pay off our debts and provide 
for our own retirement? I don't hear a good answer from you or 
your colleagues in the administration, other than to say, well, 
we are going to--look at the economic growth rates we are 
projecting 5, 6, 7, 8, 9, 10 years out. Yet, on the other side 
of your mouth, you are saying, how can you predict anything 
longer than 5 years?
    The Treasury Secretary, on Meet the Press, said, well, if 
you want to project more than 5 years, nobody knows what's 
going to happen more than 5 years out. It is an inconsistency. 
I think it is an irresponsibility. But I would love to hear how 
you respond to that, Mr. Daniels. Thank you.
    Mr. Daniels. I certainly think that we are speaking the 
same out of all sides of our mouth; that is, to be very 
skeptical. I didn't say anything different last year. I said it 
over and over again, we have to be very, very mindful how 
inaccurate these long-term numbers could be. That is still the 
case. I very much hope that our long-term numbers are 
inaccurate. I think they might be. That is to say, things could 
be much better than we have 3 or 4 years down the trail.
    Mr. Moran. But, Mr. Daniels, couldn't they be much worse, 
too? If that is the case, why, 60 percent of the tax cuts don't 
take place more than 5 years out.
    Mr. Daniels. Precisely. It took into account how uncertain 
all this is. As I have said before, if one believes that the 
best way to strengthen Social Security and to deal with our 
long-term problems is to have higher levels of taxation, even 
higher levels of taxation on the American public than we have 
now, there will be lots of chances. Nothing has been lost, you 
know, the tax cut in the main hasn't happened yet. That tax 
relief has not happened yet.
    It is the point of view of the administration that the two 
things that must happen for Social Security's long-term health 
are, one, strong economic performance on a sustained basis, 
which we don't think is made more likely by higher taxes; and, 
two, reform of the program, without which everything else we 
attempt is kind of playing around the fringes.
    Yes, the nineties were a good decade, the eighties were 
too, by the way. But they obviously ended on a weak note. No 
good time lasts forever, I guess.
    We now know that the economy was grinding down from the 
second quarter of the year 2000 on and a full-blown recession 
arrived early last year. To our way of thinking, exactly the 
right time to--you say reward taxpayers; I would say punish 
them a little less and lift our foot off their throats a little 
bit as the tax relief bill of last year did.
    Chairman Nussle. The Chair recognizes a true patriot, Mr. 
Capuano.
    Mr. Capuano. Thank you, Mr. Chairman. Mr. Daniels, thank 
you. Before I comment on the budget in particular, there are 
few minor points that I would like to ask. I would appreciate 
in the future when you talk about unemployment rates--I said 
the same from the CBO--that you also talk about the numbers of 
people. I mean, based and just using your number of 5.9 rate, 
that is 8,395,000 people out of work. That is greater than the 
population of all but eight States. It is greater than the work 
force in all about three States. Only California, Texas, and 
New York have a larger work force than that entire number. It 
is greater than the combined work force of 15 States. It is a 
number, it is not a percentage. I understand you have to talk 
in percentages, I respect that. I would also like to see at 
some point a reference to individuals.
    Relative to Social Security, I just want to make it clear 
that I understand about the lockbox, I understand about the 
trust fund, I understand about borrowing from it. But 
nonetheless, when my brother pays his FICA taxes each and every 
week, that money is now being used not for Social Security, but 
to balance the budget, and will be so used, as I understand 
it--CBO had it for 8 years, you have it for 10 years, it 
doesn't matter. So I don't want to make any mistake about it. I 
don't want anybody listening to think that there is not real 
money here. There is.
    That real money, those dollars actually being paid by 
employers and employees, is being used not to fund Social 
Security, as people think it is, but to fund the budget. So I 
don't want to make any difference between trust funds and 
lockboxes. It is taxes. It is being used as such. People don't 
necessarily think that.
    I guess I also have to say relative to 10-year budgeting, I 
agree with you, 10-year budgeting is not a good thing. But 
neither is phasing in or out significant tax policy over a 10-
year period. When you do that, and you do it in such a manner 
that the weight is in the last several years of the 10-year 
period, if you really want to be seeing the impact of that 
action--again, tax increases, tax cuts, whatever it is going to 
be--the only way to compare apples and apples is to take a look 
at the full impact of that action.
    Therefore, if you are going to do one over 10 years, then 
you should--you must do the other over 10 years. Other than 
that, in a purest sense, I wouldn't do either over 10 years. Do 
your tax cuts, do your tax increases; bang, do them, get them 
over with. So I would agree with you that 10-year budgeting is 
not good, but you can't have one and not the other.
    As for the budget itself, I guess I have come to the 
conclusion--I mean, I did Financial Services all morning and I 
have come to the conclusion that basically Enron has decided 
our energy policy for this country. I am now starting to come 
to the conclusion that Arthur Andersen is doing our budgeting. 
I look at it, all I can think of, it is the exact same thing. I 
haven't had time to go through the entire budget, obviously. We 
have only had it for a day and a half. I look at it and I see 
Enron had hidden losses. They would borrow money from 
themselves and shift it off their budget into other places.
    We are borrowing money from ourselves in Social Security 
and shifting it to someplace else. I look at tricky accounting 
schemes. Enron would do things like use employee pensions, they 
would do all kinds of things. We are doing the same thing. We 
are using tax gimmicks, we are using accounting changes. We are 
using proposed stimuluses that aren't there. We are using 
revenue from ANWR that hasn't been approved. We are doing all 
those same things. Not as bad, and I certainly don't think it 
is as evil as potentially the Enron thing might be, but it is 
the same bottom line.
    We are weakening the SEC. Enron did it by lobbying, keeping 
us away from dealing with the SEC. We are doing it by not 
increasing pay parity. We are doing it by proposing people on 
the SEC, who are the very people that have caused the problems 
in Enron. Enron had a disregard for the workers and their 
children. They did it by ruining their pensions. We are doing 
it by dipping into the unemployment trust fund, by cutting that 
when the State of Texas is going to be the first one here at 
the door to ask for a loan.
    We are doing it by cutting job training. We are doing it by 
gutting GME for pediatricians. What is the next generation of 
pediatricians--where are they going to come from? My 
grandchildren won't have pediatricians.
    We are doing it by cutting LIHEAP. Enron did all of this 
while taking care of the fat cats. All the big guys walked away 
with only tens of millions, and they are crying that it wasn't 
hundreds of millions. We are doing it while doing corporate AMT 
tax cuts. We are doing it while accelerating the income tax 
cuts for the upper class. We are doing it with no benefits to 
the economy, according to CBO. This is CBO's statement, not 
mine.
    For me, I am very concerned. I understand there are 
different ways to do it, but we need to talk straight about it. 
We haven't done it in this budget. I understand the needs you 
have. I understand the pressures you have. I respect what you 
have done so far. But I will tell you there is going to have to 
be a lot of discussion relative to the way we get from point A 
to point B, and I don't necessarily think we are starting off 
on a great foot.
    Thank you.
    Mr. Daniels. Let me just comment favorably in several cases 
on things you have just said, Congressman. First of all, it is 
a good idea to think about people and not unemployment rates. 
The President certainly thinks that way. We have said the 
stimulus package, we think, would put 300,000 people back to 
work. It is the way we ought to think about testimony. It is a 
very good reminder and we will take that advice.
    Secondly, when time permits and you are able to read the 
budget, I think you will feel better about some of the things 
you singled out there. First of all, in unemployment insurance, 
this is a reform which is dollar neutral to the States; and 
yes, the Federal rate would go down, but we'd like to see the 
States able to deal with unemployment more quickly and 
flexibly.
    Part of the same proposal is to shift $9 billion that has 
been piling up in Federal hands to the States quickly as part 
of the reform. This is meant to be dollar neutral. It is really 
aimed at creating an unemployment system that works better than 
the one we have today, which is sort of crazily designed.
    Job training, when you are able to read all the way through 
the budget, you will see we would like to see it go up 
substantially. We are tying to do two things with job training. 
One is to raise the amount of money, all things counted, 
especially these national employment grants that I talked 
about, or national emergency grants. Secondly, to concentrate 
the money on the programs that seem to work well.
    We have got four programs in ten different departments, all 
trying to train Americans for jobs. We have tried to zoom in on 
28 that seem to be working pretty well. We would like to get 
more people working, more people into lasting jobs. So we agree 
with you on that. We are asking for as much LIHEAP money as 
last year, and we have a substantial carryover. We think we 
will be in really good shape on that. It is a very important 
program.
    The GME thing, I would like for you to feel a little 
better. It is a subsidy to hospitals. Fifty-eight hospitals in 
America get all this money. Three out of four are doing very 
well. That is $51,000 for pediatricians. We don't think we get 
any more pediatricians out of it, we just simply fund a few 
fortunate hospitals a little bit better. We think there are 
better ways to do this.
    And the training of medical personnel. We continue to train 
primary care physicians through other subsidies, while we have 
too few nurses and too few minority doctors. So we are trying 
to direct the funds from these, I would say less effective 
programs, to health professions' support that meets the needs 
of today.
    But those are all very important questions. We would be 
glad to follow up with to you make sure you understand how we 
are trying to address it. We are trying to make forward 
progress on those fronts.
    Mr. Capuano. Thank you.
    Chairman Nussle. Mrs. McCarthy.
    Mrs. McCarthy. Thank you. Thank you, Mr. Daniels, for the 
patience of staying here with us.
    Mr. Daniels. I always admire the patience of the people at 
the far end of these tables more.
    Mrs. McCarthy. No. 1, before I forget, I would like to ask 
you to follow up with me also on what you were talking about. I 
would like to understand the section a little bit better on 
what you are talking about, nursing and the health care issues, 
because that is extremely important.
    Mr. Daniels. Yes, ma'am.
    Mrs. McCarthy. And I am going to be gentle with you on this 
one. Going way back right, after September 11, we met and we 
talked about certainly--and this is going off the subject a 
little bit but it is still going to be in the budget, so it is 
important. I am a New Yorker. I did read what you said. I have 
to say I was extremely hurt by it, because we are not that way. 
We are just trying to protect certainly our victims and our 
citizens and make sure New York comes back to be the great 
State that it is.
    Now, with that being said, going back to the meeting that 
we had in the White House with you being there and talking 
about certainly the monies that would come to New York that was 
promised. And a promise is, from what I understand when I first 
got down here, your word is the only thing you have. If you do 
not have your word, nothing else matters. So I will fight for 
that. I am going to make sure I keep you to your word on that. 
You are Irish, right?
    Mr. Daniels. On my mom's side.
    Mrs. McCarthy. That means you are Irish, by the way, which 
means you are cursed because you do the same thing I do. I open 
up my mouth sometimes when I shouldn't. But this is what it 
comes down to.
    Mr. Spratt. Let the record show he nodded his head.
    Mrs. McCarthy. I always get censored. See what I mean? What 
I am saying is that we cannot take the money that was promised 
to the victims out of that money. I was one of those New 
Yorkers Congresspeople, that believed the President would end 
up giving us the money, and more so because we are going to 
need it. It was very difficult in my delegation because they 
want to make sure they had the money. I take people at their 
word. So I want to make sure that you follow that through. 
Because I will be very honest with you, if we can't keep these 
promises, then I have to say that I probably would not trust a 
lot of the things that were said here today. I mean that, 
because we are trying all to do the right thing.
    We have to win the war. We have to certainly make sure our 
men and women in the service are getting the services they need 
and are prepared for it. So I don't think you will find anyone 
here on this side of the aisle that will disagree with that.
    I don't even mind short-term debt, and I don't--if I was 
going to buy a house, that is short-term debt. Well, in my 
stage of life, it would be long-term debt. But it is an 
investment for the future. So I think we all understand that.
    But since I have been here, we actually have been trying to 
bring down the debt.
    So with that, I am asking you, are we going to make sure 
that New York State gets the money that it needs? Are we going 
to make sure that that $5 billion is not coming out of the 
September 11 victims' fund? Because I know what those victims 
are going through. I have gone to too many wakes, too many 
funerals. They should not even have to go through this stuff, 
they shouldn't.
    If what the President said is true--and I hope it is not--
if we have another attack in this country, we have to make sure 
that we take care of those that have already gone through it. 
We will have to make sure that we take care of those that might 
have to go through it. So, with that, I am going to put you on 
the line.
    Mr. Daniels. I am glad to affirm, again, that the 
President's commitment from somewhere back in mid-September of 
$20 billion of aid to New York City is going to be delivered. 
That is quite apart from the victims' compensation, which, 
whatever it becomes--and it will be several billion dollars--
ought to be viewed separately and apart from that.
    I had a chance to apologize to Senator Clinton this morning 
on the same subject.
    Mrs. McCarthy. That must have been interesting.
    Mr. Daniels. It was a good exchange. I started by 
reminiscing that Churchill said he had frequently been called 
upon to eat his own words and generally found it a wholesome 
diet.
    Mrs. McCarthy. Well, you could gain a little weight.
    Mr. Daniels. I tried to make clear yesterday, today, and 
every day, that the $20 billion is an inviolate number. We are 
going to go beyond that, it seems pretty clear to me, in terms 
of total aid to New York. We will go beyond that before the 
first penny of victim's compensation is counted.
    All that I meant to say is that I thought it was fair to 
the taxpayers of America that someday, when history totals up 
the final score, that we be given some recognition for this 
completely unprecedented arrangement to compensate the victims' 
families. We didn't do it in Oklahoma City. We didn't do it in 
other disasters. It is a new project. I think it is fair that 
somewhere along the line it be counted. But it won't be out of 
the $20 billion, I can assure you that.
    The other thing I mentioned this morning, it is especially 
relevant if Senator Daschle in fact has decided there will not 
be a stimulus bill, one piece of that bill that the President 
was looking forward to signing in December was the so-called 
``liberty zone'' concept that I think all New Yorkers are 
pretty much in agreement on. That is $15 billion of economic 
activity, subsidized by 5 to $6 billion of taxpayer likely lost 
revenue. We need a vehicle for that. That is the biggest 
missing piece of the $20 billion. Particularly if the growth 
package is now in real doubt, we need to be talking about how 
to get that done.
    Mrs. McCarthy. Obviously we were here together and we both 
heard it at the same time. I don't know what happened over 
there, but certainly, hopefully, we will find a vehicle to help 
New York get back on its feet.
    Thank you.
    Chairman Nussle. Mr. Moore.
    Mr. Moore. Thank you. Welcome, Mr. Daniels, to the 
committee. I think we are about finished here. I want to be 
gentle with you as well, just as Congresswoman McCarthy was.
    Mr. Daniels. A very healthy trend. I like this.
    Mr. Moore. I do have some questions and comments maybe 
mostly comments. I would like to find areas of agreement. It is 
important to recognize where we have differences. But I think 
it is also very important to recognize that we have a lot of 
areas of agreement and we should build on those.
    I heard you mention early on the difficulty in long-term 
projections and budgets, things of that nature. I had a 
proposal last year for a 5-year budget. I would sure like to 
see us move to something like that. It makes so much more sense 
than these crazy 10-year projections that we have, because we 
have all seen what has happened there. We don't need to go 
through all that again.
    I was at the White House last February or March, you were 
there, when the President had several members over talking 
about his proposed tax cut which is $1.6 trillion. I was 
frankly a lot more comfortable with about a trillion over 10 
years. But when the Senate worked its magic and the President 
was willing to compromise, I thought I should as well, and I 
supported that tax cut to the consternation of some of my 
friends on this side of the aisle.
    I really try to call things like I see them and not go 
party line all the time. I hope we will do more of that in 
Congress. I tell my chamber groups and other groups back home 
what is happening here. And the President, when I talked to him 
at the White House, I was commenting on the fact that Kansas 
had three or four tax cuts over the past 4 or 5 years, and all 
of a sudden the legislature is grappling to find appropriate 
funding for education because of a revenue shortfall. I said, I 
don't want that to happen in our country. The President gave me 
that little smile that he has and he said, Congressman, when we 
have these surpluses, that is not going to happen. I don't hold 
him responsible for that. The surpluses are gone. I was wrong 
and he was wrong, and that is fine. We can get on with this.
    I did vote for the tax cut. But what I do want to say is 
this, I don't have a problem with him on that. I don't have a 
problem with him on the recession. That is certainly not his 
fault in my view. And certainly nobody can point the finger at 
President Bush and say he is responsible for 9-11. Nobody.
    But I guess what I want to talk about is, having supported 
one tax cut in the past is one thing. But I am very concerned 
with--the surplus is all gone, that we are talking about a $600 
billion additional tax cut.
    I appreciated your very candid remarks. You said there is 
room for some good-faith, honest differences here. Well, if the 
information here is correct, that what Senator Daschle said is 
maybe that is not going to happen this year.
    But could I have that 2003 deficit chart, please, that Mr. 
Daniels had here? Chairman Greenspan and other economists with 
whom I trust have indicated that they think they see the light 
at the end of the tunnel here, that we are on the way to 
recovery. If that is the case, as you have indicated, that is a 
possibility. What I don't want to do is add another $600 
billion of debt to my kids and grandkids.
    We have fought so hard. I have only been in Congress 3 
years, but we have fought so hard to get our financial house in 
order and be fiscally responsible. I understand and I accept 
the President's word--I agree with this. There are times when 
it is appropriate for deficit spending, just as Mrs. McCarthy 
said: recession, war and national emergency. That is fine. We 
are there. That is fine if we have to do it. I am willing to 
support the President on the war, as is every Member of 
Congress I believe, virtually every Member of Congress.
    But I think and I hope and believe that, whatever we do 
here, we need to keep our eye on the ball and understand that 
in the future, if we pass these massive new tax cuts or massive 
new spending programs, we are going to have to live with the 
consequences or our kids and grandkids are going to have to 
live with those, No. 1.
    No. 2, and I will finish and hear your comments, I was back 
at the White House I think in early December. At that time I 
talked to the President about the stimulus package. That is why 
we were there, and for the trade promotion authority.
    But the other thing I talked to the President about was 
assistance for displaced workers. I asked him if he would 
support a free-standing bill if it got locked up and the 
stimulus package wasn't going anyplace, and he told me that he 
would. I would like to see that happen. That needs to happen.
    I have 3,000 Sprint employees in my district who were laid 
off, lost their jobs. There are people around this country who 
aren't asking for a handout. They only want a helping hand 
until they can find a new job. They were taxpayers before. They 
lost their jobs through no fault of their own. They just need 
assistance until they can become taxpayers again by finding a 
new job.
    I think the President--I hope and I believe--I know he is 
going to do the right thing there and push the leadership in 
Congress to bring up an assistance package. I am talking about 
unemployment benefits as well as medical benefits for displaced 
workers. That should happen, in all equity and fairness. We 
were promised that back at the time--all of us on a bipartisan 
basis voted for this airport security bill. The leadership and 
Congress said, take that out, we will pass this bill, and we 
will come back and pick that up.
    Well, the promise was made, and it has not been kept. The 
President made a promise. As Mrs. McCarthy said, promises and 
words are important; and I hope and believe the President will 
keep that promise to--not just to me but to the people in this 
country, the displaced workers. Because, again, they don't want 
a handout. They just need a helping hand right now.
    Thank you.
    Mr. Daniels. The President has been trying now for quite 
sometime to get a package that includes exactly the elements 
you talked about, extended unemployment and help for workers to 
maintain insurance, medical insurance until they can get back 
into productive employment; and he is going to be for that in 
whatever situation we find ourselves.
    Mr. Moore. But if the stimulus package doesn't fly, if it 
is dead or whatever, I hope that we will move forward on this 
package.
    Mr. Daniels. I think you are going to find him in favor of 
that. I think there is a need for caution, because a very bad 
mistake I think from a budget standpoint and from an economic 
standpoint would be to have a bill that gets bigger, bigger, 
bigger with all kinds of spending, all--probably in the name 
loosely of dislocated workers, doesn't put a single person back 
to work, only digs us a little deeper temporary hole.
    So, if in fact Senator Daschle has performed the last 
rights over stimulus today, then I think that is the next step, 
we have got to be careful about that.
    Chairman Nussle. Mr. Matheson.
    Mr. Matheson. Well, it is the end of a long day for you. I 
appreciate you taking the time for the committee. I just had a 
couple of issue areas I wanted to run past you quickly.
    Last year, I remember the administration gave Secretary 
Rumsfeld a very difficult challenge. They asked him to take a 
look at modernizing and reforming our military to address the 
challenges of the 21st century.
    Obviously, we have had remarkable events take place since 
that challenge was first given to him, and he has got a very 
full plate with the war on terrorism. Do you have a sense of 
where that effort is now in the review process, relative to the 
large increase in defense spending that is in this budget?
    Mr. Daniels. Yes. It is a very important question. I think 
as you look at Defense's proposal in the tail end you may get a 
chance to ask questions of the Secretary and his people. I 
think you will be encouraged that transformation is moving 
ahead, may have been propelled ahead by the events of September 
11. I think if you talk to folks at the Pentagon that you will 
hear them saying that that situation and fighting that war has 
been generating a changed thinking and certainly is reflected 
in the budget requests that are made for the kind of new 
weaponry that performs so well there, precision guided 
munitions and unmanned vehicles and the like.
    Secretary Rumsfeld, you may have read in the last week or 
two, has been in his usual direct and blunt way talking to his 
department and to the uniformed services about how he is not 
satisfied that the mentality shift has been clear enough, and 
he is still hearing too much pre-9-11 thinking, comments like 
that. So I think you can look for him to be just as aggressive 
about this as he has been about the conflict in Afghanistan. 
The administration certainly owes Congress a good accounting on 
this score.
    Mr. Matheson. I appreciate that. I noticed on Defense it 
had the red lights across your scorecard.
    Mr. Daniels. Well, you will be shocked to hear that the 
Department of Defense is not the best-managed enterprise in 
America. But it is under awful good management now. I think you 
can be optimistic, as I said earlier, that although we picked 
problem areas here and, therefore, it is not surprising you see 
some red lights there, I think you can look for some of those 
to improve.
    Mr. Matheson. Let me ask you one other--shift to a 
different issue. That is relative to how Medicare has been 
treated under the Balanced Budget Act amendment from a few 
years ago. The notion that here in Congress our Medicare 
Advisory Commission, we have taken a look at this and feel like 
the current formula for physician reimbursement is flawed, and 
I think there is general consensus in both parties that is the 
case.
    There is also a suggested 15-percent cut in home health 
care agencies. I am wondering if this budget--it seems that it 
incorporates--it does incorporate that 15-percent cut in home 
health care. It also incorporates the physician reimbursement 
cuts that are going to be put in place by the flawed formula. 
Am I reading that correct when I say that?
    Mr. Daniels. You are. For now it does not contemplate a 
change, that Congress hasn't flawed in those formulas. I would 
say that we are certainly open--I think you will find Secretary 
Thompson also very open to working with the Congress to see if 
there are ways to look across the whole realm of reimbursement. 
There may be some areas which are overly generous now that 
could be used to help level up areas that may be headed for 
real restrictions due to those formulas.
    Mr. Matheson. Do you think that the current formula for 
physician reimbursement for physicians is a flawed formula?
    Mr. Daniels. I don't know. It has led, of course, to some 
healthy increases. Now continuing to apply it literally would 
lead to some decrease, and that has got people understandably 
concerned.
    I would have to say I take an open mind toward it.
    Mr. Matheson. I would close with your comment earlier about 
funding for increased nursing. I am interested in that as well 
and finding ways to maintain the stability of our medical 
training hospitals.
    My spouse is a pediatrician, as a matter of fact; and I am 
real anxious to enter into that dialogue and learn about what 
thoughts are to reform the way that we provide a good 
environment for medical training in this country and medical 
research.
    Mr. Daniels. We would like to talk to you, to any 
interested Member about this. We spend a lot of money in this 
area. A lot of it for a long time has had as its central 
purpose getting new medical personnel into underserved areas, 
and yet we have a pretty poor record of that. We have 
subsidized an awful lot of medical education that did not lead 
to people serving the underserved communities, and we can do 
better. That is what some of our changes are aimed at.
    Mr. Matheson. Thank you.
    Chairman Nussle. Thank you.
    Ms. Baldwin.
    Ms. Baldwin. Thank you, Mr. Chairman; and thank you for 
your testimony and endurance, Mr. Daniels.
    The majority of members of this committee in their 
questions and comments have reiterated that we have no more 
important role than protecting the lives and the health of the 
American people, and I agree, and certainly many areas of this 
budget are relevant to those two topics. I wanted to explore 
two of them, interestingly two of the ones that the previous 
questioner delved into, Medicare and defense.
    Certainly under the 5-minutes rule you won't have nearly 
enough time to answer and explore fully the questions in either 
area, but at least I would like a sneak preview of the 
administration's thinking, and I know that we can trust you 
will follow up later with further detail.
    First, in the area of Medicare, for the second year in a 
row those of us who have worked long and toiled hard on the 
issue of prescription drugs are told that this administration 
will, if you will, hold that matter hostage to broader 
modernizations and reforms in the Medicare program. While there 
are a couple of short-term modernization or reform details that 
are spelled out, I think we have yet to see a broader sense of 
what the administration's vision is for Medicare modernization.
    As we are very anxious to be able to move forward with 
assisting--and, of course, every Member hears those painful 
stories of what our senior citizen constituents go through in 
terms of struggling with prescription drugs. I, for one, am 
very eager to hear details about that.
    On the defense side, a completely different direction. The 
data that I have been provided with, background materials from 
both DOD and OMB, suggests that, of the $48-billion increase 
proposed for defense, that $16.7 billion of that increase is 
attributable to the war on terrorism and three on the DOD 
budgets portion of homeland security.
    I presume that another significant chunk of this is the pay 
increase. I don't know how much that adds up to, the 4.1 
percent, if that is what is being proposed, but I would like an 
outline of what the rest of some $28 billion is being proposed 
for. What is DOD proposing if it is not for the war on 
terrorism or pay increase or homeland defense?
    Mr. Daniels. OK. Let me answer briefly, and particularly on 
the last question I would be happy to, by nightfall, to give 
you a little something on paper that breaks this out.
    But, first of all, on Medicare, the administration, the 
President is proposing yet again--this is second or third 
iteration--an immediate help for people who are most in need of 
prescription drug coverage right now. Reforming Medicare is not 
going to be an overnight thing. It has proven difficult to get 
started. The President is not prepared to do nothing on the 
prescription drug front, certainly for those who are the most 
exposed to the unacceptable choice between medication and other 
necessities.
    So we have a different approach. Our block grant to States 
approach of last year didn't seem to generate much traction 
here. So we have a different approach using the Medicaid 
program and one we have some hopes for. So we hope that 
Congress will take a look at that.
    Through more flexibility in Medicare over the last year, 
Secretary Thompson has approved well over a hundred waivers, 
many of which had been sitting around. When you gave States 
flexibility, he has gotten a million and a half uninsured 
people covered in the last 12 months; and we have a new 
standard waiver that we think will add a lot to that number.
    So it takes a little bit the same approach, and we would 
like to get that done.
    Ms. Baldwin. I do want to steer you back to--we are quite 
familiar with some of the immediate proposals. But that longer 
range--I am waiting to hear what the administration's vision is 
in terms of modernizing Medicare with a prescription drug 
benefit.
    Mr. Daniels. Sorry for dwelling too long on the near term. 
But yet I heard you say ``held hostage.'' but that wouldn't be 
our vocabulary for it, you might imagine. We just think it 
would be a terrible mistake to have, as some have said, desert 
before dinner, to put a complete prescription drug program on 
top of what we believe is a badly flawed and in need of reform 
Medicare program. We think it ought to be comprehensive reform.
    Now the President has laid out some principles for that. I 
would like to share those with you, and we will.
    Let me say that near their heart is the concept of greater 
choice for people and the opportunity to try to pick insurance 
coverage that fits their own needs, as opposed to the one-size-
fits-all system of today.
    On defense, just very quick. Most of the $38-billion 
defense increase--and you are quite right. There are 10 in 
addition that are in a contingent request, very much for war 
fighting that may be required by Presidential decision. But of 
the 38 you named, most of the big categories, I believe the 
homeland defense, when you see it all, is bigger than three. It 
is closer to eight or nine. There are some very substantial 
costs. For example, for force protection around bases here in 
the continental United States that contribute to that.
    But, most of the 38 I think Secretary Rumsfeld would say is 
restoration of the base of defense and repair of portions of 
our readiness and our procurement, our equipment that had been 
allowed to erode over the years when we didn't pay too much 
attention to this.
    So we will give you a full accounting, but I think you will 
find that, in addition to the areas you mentioned, personnel 
and replenishment of munitions, things that are directly 
attributable to the war, basic readiness and procurement are 
the two biggest categories.
    Chairman Nussle. Mr. Daniels, thank you so much for your 
testimony today. It has been a long day for you.
    Mr. Daniels. We can't keep going? Kidding.
    Chairman Nussle. We probably could.
    We appreciate your testimony. Your budget was on time. Last 
year, there was quite a folderol about the timeliness of the 
budget. The budget was on time. And let me report to you in 
return that our process will be timely as well. We will keep a 
very steady course in the House. We anticipate that we will 
have a similar track to what we had last year. By April 15 we 
will have a budget completed. So we appreciate the work you 
have been doing with us and will continue to do with us as we 
try and meet those deadlines.
    For my colleagues, 10 a.m., Secretary O'Neil is the next 
hearing.
    If there isn't any further business to come before the 
committee, we are in recess.
    [Whereupon, at 5:15 p.m., the committee was adjourned.]

                                
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