```

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

 
              TREASURY DEPARTMENT FISCAL YEAR 2003 BUDGET
=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

            HEARING HELD IN WASHINGTON, DC, FEBRUARY 6, 2002

                               __________

                           Serial No. 107-22

                               __________

           Printed for the use of the Committee on the Budget

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

                        U.S. GOVERNMENT PRINTING OFFICE
                                WASHINGTON : 2002
_____________________________________________________________________________
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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 6, 2002.................     1
Statement of:
    Hon. Paul O'Neill, Secretary, U.S. Department of the Treasury     4
Prepared statement of:
    Mr. O'Neill..................................................     6

              TREASURY DEPARTMENT FISCAL YEAR 2003 BUDGET

                              ----------                              

                      WEDNESDAY, FEBRUARY 6, 2002

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Spratt, Sununu, 
Gutknecht, Miller, Davis, Clayton, Price, Clement, Moore, 
Capuano, Putnam, and Hastings.
    Chairman Nussle. The Budget Committee will come to order. 
Good morning. This hearing is intended to examine the 
President's budget for fiscal year 2003 with respect to the 
Department of Treasury. Areas of particular emphasis will 
include the following: the need for economic security and a 
plan to achieve that, emphasizing tax relief and support for 
emerging economic recovery; the importance of other tax 
incentives proposed by the President providing assistance with 
regard to education, health coverage, the environment and other 
areas; and the Department's role in enhancing homeland 
security.
    Testifying this morning is the Honorable Paul O'Neill, 
Secretary of the Treasury. He's been before us before. We 
welcome the Secretary back to the Budget Committee.
    Before we begin, let me just comment briefly on the 
evening's activities. It appears that as we read in the 
newspaper today that at least Senator Daschle believes that the 
economic stimulus bill is not going to pass. Based on what 
we've been hearing, it appears that there is much less concern 
in the Senate for this project than there has been in the House 
as we moved through the fall. And there are those who are 
already celebrating and dancing on the grave of economic 
stimulus.
    Let me just warn, or suggest, to those who would dance on 
the grave of economic stimulus that you're forgetting--and 
there are two kinds that might be dancing, there might be those 
who don't believe that stimulating the economy is important. 
And there are also those, I hear, that believe that if we don't 
pass an economic stimulus plan somehow we'll get back to 
balance that much faster, maybe even today or tomorrow.
    Let me report to both sides of that equation that they're 
missing the whole point of what's important. It has nothing to 
do--as far as I'm concerned--with the budget in Washington as 
much as it has to do with the budget that people have to 
balance around their kitchen tables. We know many of them, 
they've been coming to our meetings. Our friends here at the 
Budget Committee talked about many of them yesterday. Mr. 
Capuano spoke probably as passionately as anyone yesterday 
about some of the folks that are out of work and are having to 
deal with that.
    Now, you may have a different idea of what stimulating the 
economy and dealing with the people that are out of work right 
now need. But I will tell you, it has much less to do with 
what's important in Washington as it does to what's important 
around people's kitchen tables as they're balancing their 
checkbooks. Part of the reason that the President put this into 
the plan, part of the reason that the House passed two versions 
of economic stimulus and stood ready to pass probably two or 
three more is that we felt it was important to continue to 
promote economic security as part of the equation to get our 
economy and get our country back on its feet.
    Yes, we might be in somebody's definition of a recovery. 
But that recovery may not come as fast, may not grow as fast, 
may not last as long as we need it to, unless we continue to 
give it the kind of the kick in the pants or the shot in the 
arm that it needs. So, I would hope that we continue to discuss 
and debate and keep as a priority the economic security of this 
country. It's not just about cutting taxes. It's about making 
sure that there's job training available for people who are out 
of work, making sure there are health care benefits as they 
make that transition, and making sure that unemployment 
benefits are there as well.
    There are also some tax stimulus measures that were 
specifically for the victims of September 11, going directly to 
New York. It will be very interesting to see, as these votes 
transpire in the Senate, if actions are part of the rhetoric 
that we've been hearing over the last number of weeks and 
months as people have been so concerned about those in New York 
and those who have been victims as a result of September 11.
    Not everybody got what they wanted in an economic stimulus 
plan, this is still a legislative body. We have to work out 
compromises and details. But if we can't even get it to 
conference to do so, it makes it impossible to achieve that 
negotiation and work in the benefit of the American people.
    So unfortunately today, we have the Secretary of the 
Treasury come within that context to talk a little bit about 
the security of the country with the news hanging over our 
heads that the Senate may decide to punt this issue. But I 
think it's no less important to talk about maybe, not only 
stimulating the economy and growing the economy and creating 
jobs, but also maybe some alternative ideas on how to do so, if 
in fact economic stimulus is dead in the Senate.
    So with that, I'll turn it over to my friend, John Spratt.
    Mr. Spratt. Let me assure you, Mr. Chairman, that if you 
want to extend unemployment benefits, every Democrat in the 
House of Representatives will vote for that. Thirteen weeks, 26 
weeks, you put it on the floor, give us a clean up or down vote 
on that, we'll vote for it overwhelmingly. If you want to do 
what we also proposed, and that is, help those who are 
unemployed continue their COBRA rights, exercise their COBRA 
rights, and continue their health insurance coverage, we'll 
vote for that in a skinny minute, let me assure you.
    What we question is whether or not you should load onto 
this bill provisions like a repeal, retroactively, of the 
corporate AMT, whether you should load onto this bill a 
provision that would shelter the income of financial holding 
companies when it's earned abroad. That may be good tax policy, 
but it belongs in a different bill in a different place. It 
ought to be subject to the pay-go rule, among other things.
    In any event, we are ready to pass what the essentials of a 
stimulus package would be when it comes to dealing with the 
recession at hand. I am a little curious, as I go through the 
budget, looking at those things that are already passed, 
already in law, which constitute what we've traditionally 
called the safety net.
    For example, as I understand this budget, it calls for a 
cut in the employer's share of the unemployment insurance 
benefit, so that the States would assume more responsibility 
for the administration of unemployment insurance plans and for 
the extended benefits. That portion out of which we pay for 
extended benefits, the tax, the fractional tax levied for that 
purpose, would be repealed as called for in this budget. I 
don't understand how that comports with a recovery package.
    This budget would say to the decline in the Transportation 
Trust fund, the best way and place to pump money all over the 
country for infrastructure investment and counter-cyclical 
economics is public works like that. It would say, take your 
lumps, we're going to cut the State highway departments by $9 
billion because the Trust Fund is down that amount, the Corps 
of Engineers, $300 billion.
    This is a program in place that would be usable and useful 
for stimulating the economy. We are actually proposing to cut 
back on that. Freeze child care, cut LIHEAP, other things that 
are part of the safety net. So I don't get it. If you're for 
it, why all these provisions in this budget, and why don't you 
give us a cleaner up or down vote?
    Mr. Secretary, welcome. We look forward to your testimony. 
We are deeply concerned about the state of the budget. I've 
been here for nearly 20 years. I spent a large part of my 
effort to try to turn this big battleship around that we call 
the Federal budget, get it out of the red ink into the black. 
We thought we were headed out to a lot more comfortable seas 
than we find ourselves right now.
    The question is, what's the plan? How do we get back on the 
course we were on where we were talking realistically about 
national savings, about paying down debt and about getting rid 
of some of the debt that we've accumulated over these many 
years. Can we get back there? If so, how do we do it? What in 
this budget will put us back on that path?
    Thank you for coming. Thank you for your time. We look 
forward to your questions and answers.
    Chairman Nussle. Without objection, all members will have 
the additional time to submit opening statements for the 
record, if they care to do so at this point. With that, 
welcome, Mr. Secretary, back to the Budget Committee. We are 
pleased to receive your testimony.

 STATEMENT OF HON. PAUL O'NEILL, SECRETARY, U.S. DEPARTMENT OF 
                          THE TREASURY

    Secretary O'Neill. Thank you for inviting me to be here 
today, Mr. Chairman, Congressman Spratt, distinguished members 
of the committee.
    If it's all right with the Chair, I would like to read a 
very short statement that's maybe 7 or 8 minutes, if that's OK, 
to set the scene for our conversation this morning.
    Chairman Nussle. Please.
    Secretary O'Neill. We've had a year to work together, and 
you all know that I'm an optimist about the U.S. economy. I 
believe our economy is distinguished in the world in its 
leadership demonstrating productivity and creating a level of 
prosperity that's unexampled anyplace else in the world. 
Interesting enough, this morning the report was presented 
showing that in the fourth quarter of 2001, our productivity 
grew at a rate of 3\1/2\ percent, which is an unexampled 
experience. This is three quarters in a row, even during a very 
slow recessionary period, where the U.S. economy has 
demonstrated that we can, in our private sector, achieve 
remarkable levels of productivity under the most difficult of 
circumstances.
    I believe we were on the verge of recovery before the 
September 11 terrorist attacks, and that our resilience and 
determination have brought us back to the early stages of 
recovery today. We see more and more signs every day indicating 
that the seeds for recovery are there, and only need nourishing 
to speed the process of putting Americans back to work. I 
believe we will return to prosperous economic growth rates of 3 
to 3\1/2\ percent as soon as the fourth quarter of this year, 
especially if we're able to pass still-needed economic security 
legislation to hasten and strengthen our recovery.
    As the Senate struggles with this today, I hope they keep 
in mind that we need to do two things for displaced workers. We 
need to provide assistance to them now, and as importantly, we 
need to boost job creation to speed their return to work. 
Strengthening our economy is a key goal of the President's 
budget. A return to our normal growth rates means jobs for the 
1.4 million Americans who have lost jobs during this recession.
    Just as a strengthening economy means greater prosperity 
for our Nation's people, it also means greater strength for our 
government. It means greater revenues going into the Treasury 
without raising taxes, giving us resources to address the 
Nation's needs and the retirement of even more Federal debt, 
leading to long term economic security for our children. Even 
with all that must be done to enhance our security, we expect 
that a return to economic growth will bring us back to 
government surplus in the year 2005.
    The economic slow-down began in mid-2000, when GDP and job 
growth slowed sharply. Business capital spending began to 
plummet in late 2000, and accelerated its decline in 2001, 
dragging down the economy. In August, we were beginning to see 
the evidence of an economic turnaround.
    I firmly believe, and I think the data shows this, that had 
it not been for the terrorist attacks of September 11, we would 
have seen an end to the economic downturn and would perhaps 
have avoided a recession. The September 11 attacks created 
shock waves that rippled throughout all sectors of the economy. 
Financial markets were shut down for almost a week. Air 
transportation came to a standstill. As a result, GDP fell 1.3 
percent at an annual rate in the third quarter.
    By late November, the National Bureau of Economic Research 
declared that the United States was in a recession. They 
designated the end of the previous expansion to be March 2001, 
but they observed that the slow-down might not have met their 
qualitative standards for a recession without the sharp 
declines in activity that followed the terrorist attacks.
    In sum, the score card for the economy in 2001 reflected a 
combination of adverse events. The private sector lost more 
than 1.5 million jobs. The unemployment rate rose 1.8 
percentage points. Industrial production was off nearly 6 
percent during the year. And at the end of the year, industry 
was using a little bit less than 75 percent of its productive 
capacity.
    As bad as these numbers are, they could have been worse. 
Your and our well timed bipartisan tax relief package put $36 
billion directly into consumers' hands in the late summer, in 
fact, beginning on July 23 and through the early fall, 
providing much needed support as the economy sagged. It was the 
right thing to do at just the right time.
    It's not surprising that both the Congressional Budget 
Office and the Office of Management and Budget project deficits 
for this year and next, as a result of the economic slow-down 
and the response to the September 11 attacks. The President has 
presented a budget to speed our recovery. First, the budget 
includes tax relief to stimulate job creation. The President 
proposed accelerated depreciation, speeding up the reduction in 
the 27 percent income tax rate, reduction of the corporate AMT 
as passed by the House in December, and checks to those who 
didn't benefit from last summer's tax rebates.
    These are all things that enjoy bipartisan support in both 
houses of Congress. And we remain eager to work with Members of 
Congress to complete work on such a package to create jobs and 
assist dislocated workers with extended unemployment insurance 
benefits, and temporary assistance for health care.
    Second, the President's budget proposes strict fiscal 
discipline increasing spending for national security and 
homeland defense and holding the line on other spending. His 
management agenda calls for performance measures to be used to 
determine where budget increases are allocated so that our 
resources go into projects and programs that make the biggest 
difference in people's lives.
    As the experience of the 1990's shows, this discipline is 
crucial to ensuring we do not return to systemic deficits of 
the past. But fiscal discipline alone will not guarantee budget 
surpluses. We must return to 3 to 3\1/2\ percent annual growth 
to insure surpluses in the years ahead. The focus, as the 
Chairman said, must be on restoring growth. Surpluses will then 
follow naturally. Raising taxes would stifle the process of 
getting Americans back to work. This is a bad idea, as our 
recovery is struggling to take hold.
    According to 1999 data, the most recent available, 33 
million small business owners and entrepreneurs pay taxes under 
the individual income tax rate system. They've made business 
plans that assume the tax relief enacted last summer will take 
place as scheduled. Eighty percent of the benefit of cutting 
the top two rates goes to these small business owners and 
entrepreneurs. These are the engines of job creation in our 
economy. Tax relief should be accelerated as the President has 
proposed, to boost job creation. Such relief will have minimal 
or no effect on long term interest rates. According to a recent 
analysis by the Council of Economic Advisors, a $1 trillion 
change in the public debt over 10 years would tend to raise the 
long term interest rate by 14 basis points. Since the tax cut 
last year, the 10-year nominal rate has averaged 4.93 percent, 
a little off of that this morning, which is substantially below 
the 6.16-percent average from 1993 through the year 2000.
    Again, restoring growth is the key to America's future. 
Restoring growth will ensure we have the resources in 
Washington to fight the war on terrorism, to provide for 
homeland defense and provide the service that the American 
people want and need and demand. The President's budget will 
help to ensure that both peace and prosperity are restored to 
the American people as soon as possible.
    That's the completion of my statement, Mr. Chairman.
    [The prepared statement of Secretary O'Neill follows:]

Prepared Statement of Hon. Paul O'Neill, Secretary, U.S. Department of 
                              the Treasury

    Good morning Chairman Nussle, Congressman Spratt and members of the 
committee. Thank you for inviting me to testify today. Now that we've 
had a year to work together, you should know that I am an optimist 
about the US economy. I believe we always have untapped potential that 
can be unleashed to spread prosperity throughout the Nation. Never has 
that been more true than right now. Even after a difficult year, my 
optimism about the fundamentals of the US economy has not changed. I 
believe we were on the verge of recovery before the September 11 
terrorist attacks, and that our resilience and determination have 
brought us back to the early stages of recovery today. We see more and 
more signs every day indicating that the seeds for a recovery are 
there, and only need nourishing to speed the process of putting 
Americans back to work. I believe we will return to prosperous economic 
growth rates of 3 to 3\1/2\ percent, as soon as the fourth quarter of 
this year, especially if we are able to pass still-needed economic 
security legislation to hasten and strengthen our recovery.
    Strengthening our economy must be our primary goal. It is the focus 
of the President's budget. That must be our goal, because a return to 
our normal growth rates means jobs for the 1.4 million Americans who 
have lost jobs during this recession. Just as a strengthening economy 
means greater prosperity for our Nation's people, it also means greater 
strength for our government. It means greater revenues going into the 
Treasury, without raising taxes, giving us resources to address the 
Nation's needs, and the retirement of even more Federal debt--leading 
to long-term economic security for our children. Even with all that 
must be done to enhance our security, we expect that a return to 
economic growth will bring us back to government surplus in 2005.
    The economy's slowdown began in mid-2000, when GDP and job-growth 
slowed sharply. Business capital spending began to plummet in late 
2000, and accelerated its decline in 2001, dragging down the economy. 
In August we were beginning to see the evidence of an economic rebound. 
I firmly believe that had it not been for the terrorist attacks of 
September 11, that we would have seen an end to the economic downturn 
and would perhaps have avoided a recession. The September 11 attacks 
created shockwaves that rippled throughout all sectors of the economy. 
Financial markets were shut down for almost a week. Air transportation 
came to a standstill. As a result, GDP fell 1.3 percent at an annual 
rate in the third quarter.
    By late November, the National Bureau of Economic Research declared 
that the US was in a recession. They designated the end of the previous 
expansion to be March 2001, but they observed that the slowdown might 
not have met their qualitative standards for recession without the 
sharp declines in activity that followed the terrorist attacks.
    In sum, the scorecard for the economy in 2001 reflected a 
combination of adverse events:
     The private sector lost more than 1.5 million jobs.
     The unemployment rate rose 1.8 percentage points.
     Industrial production was off nearly 6 percent during the 
year.
     Industry was using less than 75 percent of its capacity.
    As bad as these numbers are, they could have been worse. Our well-
timed bipartisan tax relief package put $36 billion directly into 
consumers' hands in the late summer and early fall, providing much 
needed support as the economy sagged. It was the right thing to do, at 
just the right time.
    It's not surprising then that both the Congressional Budget Office 
and the Office of Management and Budget project deficits for this year 
and next as a result of the economic slowdown and the response to the 
September 11 attacks. Last April's budget forecast a fiscal 2002 
surplus of $283 billion. The Mid-Session review figures, released in 
August, took account of the impact of the President's tax relief 
package and projected a $195 billion surplus in fiscal 2002. The new 
budget forecasts a fiscal 2002 deficit of $9 billion, assuming no 
policy action to stimulate the economy. The reduced surplus estimates 
are the result of the economic downturn and the response to the 
September 11 attacks. CBO's projections confirm that tax relief played 
a minor role in the surplus decline in the next few years--accounting 
for less than 12 percent of the decline in 2002 and less than 28 
percent in 2003.

                             FY 02 Surplus

                                                             In billions
April 2002 budget baseline........................................  $283
Changes from:
    weaker economy/technical changes..............................   197
    enacted spending..............................................    54
    tax relief....................................................    40
                                                                  ______
February 2003 budget baseline.....................................     9

    The CBO budget projects a 10-year surplus of $1.6 trillion. Last 
August, after factoring in the tax relief package, the CBO projected a 
$3.4 trillion surplus for the next 10 years. The recession and the war 
on terrorism depleted the 10-year projections by $1.8 trillion. The 
lesson from these numbers is simple--10-year projections are a useful 
discipline but they do not predict the future. None of last year's 10-
year estimates foresaw the events of September 11 or a negative $660 
billion worth of ``technical changes'' that are now included in the new 
10-year estimates by agreement among the technical experts. We do know 
about the here and now, and we should deal with the here and now, 
reigniting growth to restore long-term surpluses.
    The administration's growth projections are similar to the 
consensus of private forecasts. Over 90 percent of the Blue Chip 
Economic Indicators panel members say the recession will end before 
April of this year. We share that assessment. Personally, I am 
optimistic that the economy will do even better than our budget 
assumptions suggest. For the near term, we expect the economy to grow 
2.7 percent during the four quarters of 2002. That projection includes 
the foreseeable effects on the economy of the President's economic 
security package.
    The lesson is clear. A strong economy is crucial to restoring 
budget surpluses. Some would suggest that we need surpluses to improve 
our economy. They have the logic backwards. Growth creates surpluses, 
not the other way around.
    The Federal budget was in deficit every year from 1970 through 
1998. From 1970 through the early 1990's, government spending growth 
exceeded government revenue growth by \3/4\ of a percentage point a 
year, on average. Fiscal discipline was imposed by the historic Omnibus 
Budget Reconciliation Act, signed in 1990 by President Bush. With 
fiscal restraint made an integral part of the budget process, once the 
economy took off in the 1990's, revenue growth was double the pace of 
spending growth. It was the rapid economic growth of the 1990's that 
generated the burgeoning budget surpluses, which appeared even as 
Federal outlays grew about 3.5 percent a year from 1993 through 2000.
    Today the economy is recovering. The tax cut of last May helped to 
keep the economic downturn shallow and it will continue to help. Energy 
prices have retreated. The Federal Reserve has reduced short-term 
interest rates 11 times since the beginning of 2001. Measures of 
consumer confidence are bouncing back. The index of leading indicators 
increased sharply in December for the third straight gain. Motor 
vehicle sales have remained strong, and initial filings for 
unemployment benefits are in decline. But we all know that unemployment 
itself is a lagging indicator. Although the current trend is positive, 
too many people will remain out of work. And given the choice, they'd 
rather have a regular paycheck than an unemployment check.
    The President has presented a budget to speed our recovery. First, 
the budget includes tax relief to stimulate job creation as a crucial 
tool to speed our recovery and put Americans back to work. The 
President's proposals--accelerated depreciation, speeding up the 
reduction in the 27 percent income tax rate, reducing the corporate 
AMT, and checks to those who didn't benefit from last summer's tax 
rebates--enjoy bipartisan support in both houses of Congress. I'm eager 
to work with all of you to complete work on a package to create jobs 
and assist dislocated workers with extended unemployment benefits and 
temporary assistance with health care.
    Second, the President's budget proposes strict fiscal discipline--
increasing spending for national security and homeland defense, and 
holding the line on other spending. His management agenda calls for 
performance measures to be used to determine where budget increases are 
allocated--so that our resources go into the projects and programs that 
make the biggest difference in people's lives. As the experience of the 
1990's shows, this discipline in crucial to ensuring we do not return 
to systemic deficits of the past. But fiscal discipline alone will not 
guarantee budget surpluses. We must return to 3 to 3.5 percent annual 
growth to ensure surpluses for years to come.
    The focus must be on restoring growth. Surpluses will then follow 
naturally. Raising taxes would stifle the process of getting Americans 
back to work. This is a bad idea, as our recovery is struggling to take 
hold. According to 1999 data, the most recent available, 33 million 
small business owners and entrepreneurs pay taxes under the individual 
income tax rates. They have made business plans that assume that the 
tax relief enacted last summer will take place as scheduled. Eighty 
percent of the benefit of cutting the top two rates goes to small 
business owners and entrepreneurs. These are the engines of job 
creation in our economy.
    Tax relief should be accelerated, as the President has proposed to 
boost job creation. Such relief will have minimal, or no, effect on 
long-term interest rates. According to a recent analysis by the CEA, an 
expected $1 trillion change in the public debt over 10 years would tend 
to raise the long-term interest rate by 14 basis points. Since the tax 
cut last year, the 10-year nominal rate has averaged 4.93 percent, 
which is substantially below the 6.16-percent averaged from 1993 
through 2000.
    Restoring growth is the key to America's future. Restoring growth 
is the key to ensuring we have the resources in Washington to fight the 
war on terrorism, provide for homeland defense and provide the services 
the American people demand. The President's budget will help to ensure 
that both peace and prosperity are restored to the American people as 
soon as possible.

    Chairman Nussle. Thank you, Mr. Secretary.
    Based on what you've told us this morning--and I was also 
pleased to hear your testimony yesterday at the Ways and Means 
Committee--let me just cut to the chase based on what I've 
heard in the news over the last 24 hours as what's transpiring 
in the Senate or what may not be transpiring in the Senate. Do 
we still need an economic stimulus bill? Do we still need a 
plan to stimulate the economy? And if so, what form should that 
take?
    Secretary O'Neill. The President has proposed in his 
budget, after careful consideration, that we go forward with a 
stimulus plan, with a total of something in the $70 billion to 
$80 billion range. And he's said repeatedly it should include 
assistance for individuals, that it should include money to 
induce businesses to keep the jobs that they do have and to 
expand beyond the ones that they do have, to directly deal with 
a question that was suggested earlier of expanding coverage of 
unemployment insurance and health care costs of people who have 
been dislocated by the events of September 11.
    We have been clear, the President's been consistent. On 
October 5 he put down specifically what he thought should be in 
the stimulus bill. Two bills were passed by the House, the one 
in December included the work of the bipartisan coalition in 
the Senate. We believe there are a majority of members of the 
Senate who would vote for this bill if it could get to the 
floor. From last night's news accounts, it appears it's not 
going to be permitted to come to the floor for consideration.
    Chairman Nussle. I've heard you describe the economic 
stimulus principles that the President laid out in four 
different parts. Could you break those into the four component 
parts and tell us what the stimulating effectwould be of each 
one? If for instance we are now at a point where we're going to 
begin to negotiate this on the floor and pass individual bills, 
as Mr. Spratt suggested, that there are certain bills that 
maybe the Democrats want and there are certain bills that the 
Republicans want and let's just put them on the floor and let 
them stand on their own.
    Let's talk about stimulating the economy. You want to 
stimulate the economy. What is the stimulative effect of 
extending unemployment benefits versus creating jobs, as an 
example?
    Secretary O'Neill. Let me go to the strongest component of 
the economic stimulus that was considered in the House, and as 
well by the bipartisan coalition in the Senate. The accelerated 
depreciation provisions that were considered in their broadest 
measure would do this. They would give additional free cash 
flow to every business. As I said in my prepared remarks, most 
of the businesses in the United States are small businesses, 
they're not large businesses. Every business would benefit by 
being able to accelerate depreciation.
    To share with you a story from meetings last summer, after 
you all passed the tax reform bill, I had and have continuous 
meetings with people from throughout the economy as a way of 
understanding better what it feels like to be out there on the 
front lines of creating economic income and wealth. There was 
one meeting where there was a florist present who talked about 
the effect of the tax reductions for him, because as I said in 
my testimony, most of these small businesses file under the 
individual income tax rate. He said, well, you know, while it's 
probably not meaningful to all of you here, the effect of the 
change that you made in my tax rates are going to permit me to 
hire one additional person.
    And I think it's such a telling story, because that's where 
the jobs in America come from, from the florists, from the 
corner grocery store, from the shoe maker. We read and we 
marvel at the numbers of corporations like the ones I've headed 
in the past with their tens of thousands of employees. It's not 
to say that they're not important. But the real life blood of 
America's economic strength are those individual jobs in the 
florist shop.
    So, the accelerated depreciation would free up cash flow 
for every single one of those people. Some would use it to 
protect jobs they already have, some see an additional demand 
would create additional jobs. It's the strongest single 
component.
    The second important component from a stimulus point of 
view is accelerating the rate reductions. Why is it important? 
Because it has the effect, even though the amounts may seem to 
be small, of changing the perception of individuals and 
families about what kinds of investments they can make 
themselves going forward.
    For example, if you're 30 years old or 35 years old and 
you're looking at the prosect of buying your first house, and 
you see that you're going to have, because of a tax rate 
reduction acceleration, you're going to have an extra $20 or 
$30 a month, if you think about that it may not seem like much 
to you, a few hamburgers at the corner stand. But $20, let's 
say $30 a month on an annual rate basis means the difference in 
the size of mortgage you can cover by maybe $4,000 or $5,000. 
So, it means a difference of whether you're going to have an 
extra bedroom for your second child or not. It's that 
translation of accelerating the rates that makes a difference 
from the point of view of what we might expect in economic 
performance.
    Now, directly to your question of extending unemployment 
insurance, because it's really providing more money to people 
who otherwise wouldn't have it, it doesn't have the same kind 
of stimulative effect, but there's a good reason to do it, 
which is, if you're out there, and because of the slowness in 
our economy, you've now run out of your 26 weeks worth of 
benefits, and the average duration of unemployment periods has 
gone up, it's a compassionate thing to do.
    From the very beginning of this, the President has said, I 
care about those people out there who have been impacted by the 
slowness of the economy, by the events of September 11. The 
President has said, again, since October 5, please do something 
about this. Here are the right ideas. The House has acted 
twice, we've simply not been able to get a bill in front of the 
whole Senate, because the leaderships have not been able to do 
that.
    Chairman Nussle. I agree with your assessment, this is a 
package deal. It's not one or the other. Both are needed in 
order to accomplish the ends that we want to accomplish here in 
the short term, and I appreciate your testimony on that.
    Mr. Spratt.
    Mr. Spratt. Mr. Secretary, when you came here last year, 
did you have any intimation in projecting a surplus of $5.6 
trillion that you might be sitting on a surplus of $600 billion 
this year, that you'd see $5 trillion of it vanish over a 
period of 12 months?
    Secretary O'Neill. Let me say, my sense of where we are 
today is we're still looking at this 10 year period of having a 
$1.6 trillion surplus, compared to the $5.6 trillion we had 
last year. But indeed, when I was here last year and testifying 
before various committees of Congress, I warned that 10 year 
numbers were a useful exercise, but one shouldn't think they 
predict anything. I think there's no one in this room who would 
say they anticipated and predicted the terrorist attacks of 
September 11. They've had a profound impact on the potential 
surplus going forward.
    Now, I believe that our economy is so strong and so good 
that we will figure out a way over time to both better protect 
ourselves against the prospect of terrorist attacks and it 
won't end up hurting our productivity, which is another way of 
saying, I think we are so good, we will figure out a way to be 
better protected and we will at the same time improve our 
productivity.
    I've spent a lot of time thinking about this, because as 
you know, the Customs Service is part of my brief. One of the 
challenges we have is to figure out how to do an ever better 
job of looking at and examining individuals and goods coming 
across our borders. If one just extended the practices of the 
past in the wake of September 11, it would cost us untold 
amounts of money in negative impact on our economy.
    I believe, and I think we're beginning to demonstrate, with 
a combination of better ideas and technology, we can take all 
this in and our economy will be better off.
    Mr. Spratt. Let me agree with you about Customs. I've been 
a long-time supporter of Customs. I believe that you've got to 
have more people to crack more containers. Two percent of your 
cargo containers, just that, are opened up and inspected. We've 
given them other missions, such as drug enforcement, that have 
displaced them from their traditional missions. Put them back 
in their traditional missions, have reasonable fines, and they 
more than pay for themselves. I think the old revenue yield 
from a Customs agent was about $21 for every dollar we spent in 
salaries. Pretty good return. You would have liked to have seen 
that at Alcoa, I think, by hiring one additional worker, get 21 
additional dollars of profit.
    But now there's an additional reason to do it, and that is, 
they're part of the front line of our protection against 
terrorism. So I encourage you to pursue that.
    In the meantime, as you say, I guess it's sort of 
improvisational, we've got a lot of different problems we 
didn't see, so now we've got to rethink the plan. I'm looking 
for the plan in the budget, and I don't quite discern a plan 
here. We heard it yesterday from Mitch McDaniel also, he was 
saying basically let's hope the economy is going to be more, 
grow better than we're anticipating here, because we're trying 
to be conservative about the projections. Is that basically 
what you're saying, if we can get the economy going fast, that 
events may be self-correcting?
    Secretary O'Neill. I think if anyone has any doubt, the 
only way the Federal Government gets any money is to take it 
away from the people. We believe that it doesn't make sense to 
raise taxes in a slow economic period. And we do believe, as I 
said in my opening statement, I have great optimism about the 
long run future of the U.S. economy. If we had the time, I'd 
tell you in some detail why I know that it's true that we are 
going to continue to lead the world in income generation, in 
job creation, and in wealth accumulation.
    But I have no doubt that we will do well and that we will 
generate a very substantial amount of money. As a matter of 
fact, I think maybe we gave you along with the prepared 
remarks----
    Mr. Spratt. I want to come to that.
    Secretary O'Neill [continuing]. The revenue picture that 
we're looking at, with where we are right now, with the 
assumptions that we and CBO have joined in about where our 
economy is going. We're going to see a 55-percent increase in 
the revenue coming to the Federal Government over this next 10 
year period, just as sure as anything.
    Mr. Spratt. The chart up on our screen right now is one way 
of saying how dramatically the path we were on has changed 
since last year. This is not a political chart, it's just fact 
of life that confronts us both. Last year the budget was 
projected to generate surpluses that would pay off debt. As a 
consequence, the biannual ritual of having to raise the debt 
limit seemed almost a ritual of the past. It was something in 
the far off future, like 2007.
    Now we've got a statutory debt that is climbing at a much 
higher rate, that upper line there. And you're going to have to 
come back to us pretty soon. Can you tell us when, how much, 
what's going to be required in order to keep the debt subject 
to statutory limit and compliance with law over the next 
several years?
    Secretary O'Neill. Yes, I'd be happy to do that. I think 
for those who don't understand the nuances of how we do things 
in the Federal Government, it's important to recognize that the 
debt subject to statutory limit is driven to a very substantial 
degree by what are really credits to the Social Security Trust 
Fund. That's what's really driving these numbers along.
    But more directly to your question, how soon do we need to 
do something about this, we need to do something about this in 
March. The sooner in March, the better. We've proposed in a 
letter that I sent to all the appropriate committees in 
December an increase of $750 billion in the statutory limit.
    One of the things I've done in the last couple of months, 
since it became clear that we were going to have to talk about 
this issue, is to go back and review the history of what the 
Congress has done on this subject. All of you Members will 
appreciate that this is, I would argue, this whole thing is an 
anachronism. Whatever your inclinations may be, we don't have a 
choice. We do not have a choice.
    But in the past, in spite of the fact we didn't have a 
choice, there have been some really unfortunate things done in 
order to post-pone the inevitability of having to deal with the 
statutory debt limit. It is my fervent prayer to you that you 
not cause the American people to pay for with real money the 
costs of doing things to postpone dealing with this issue that 
we must deal with under the law of the land. We have no choice. 
I hope we won't add to the fact that we have no choice endless 
conversation and real financial costs as we get this thing 
done.
    Mr. Spratt. If I could have just a couple more minutes, Mr. 
Chairman.
    Let me pick up where you were about the Social Security 
Trust Fund, and ask you--and let me make something clear. We 
aren't seeking to raise taxes in the middle of a recession. We 
don't want to do that, but we're looking at a 10-year time 
frame. And if these deficits continue accumulating and the on-
budget deficits are serious throughout the 10-year time frame, 
a couple hundred billion dollars, it does beg the question, 
should we pay for the war on terrorism? Should we pay for these 
additional needs out of the Social Security Trust Fund?
    Secretary O'Neill. Well, let me say what I think is, we in 
Washington all know this. I worry that people out there in the 
land don't understand the nuances of all this. Every dollar 
that comes into the Federal Treasury as a consequence of Social 
Security and Medicare taxes is credited to the Social Security 
Trust Fund. So none of those dollars are used for anything 
except to in effect buy government securities that go into the 
Trust Fund.
    Now, there is a difference, and we all know this. I think 
it is really an unfortunate thing on this important public 
policy issue for any of us to posture as though anyone in this 
town seriously intends not to deliver the promised benefits to 
Social Security recipients or Medicare recipients. If anyone 
believes that that's a real thing, I'll tell you, you could get 
all the time you want on all the talk shows in the world. 
Because you would be the only person advocating such a thing.
    Mr. Spratt. We had a plan in place that emerged on both 
sides of the aisle, in the White House and the Congress over 
the last 3 or 4 years, and that plan was to use those surpluses 
solely to redeem, buy up outstanding debt held by the public, 
which would have two effects. In the short run, it would add 
$3.6 trillion to the national savings. I would hope that would 
send a signal to the long markets in particular that you were 
talking about earlier, that with the total reduction of the 
debt held by the public, we were doing things differently. 
There would be capital formation, net national savings. 
Greenspan sat where you're sitting and said, I see this as the 
single most efficient way to increase the savings of this 
country.
    So it would have done that, and at about the time the baby 
boomers run through everything else and only have payroll taxes 
to meet their benefits, it would have made Treasury, put 
Treasury in the position of having no outstanding debt to the 
public, when it had to borrow to meet those benefits. Don't you 
agree both of those were substantial, good policies that we 
were pursuing and need to get back to?
    Secretary O'Neill. I would like very much to rescind the 
recession and the terrorist attacks of September 11. That would 
be great. And that would put us back where we were a year ago. 
I don't know how to do either one of those things.
    The President has said--looking at the totality of the 
American economy and our need to pursue the war on terrorism, 
our need to beef up homeland security--that he believes it's 
necessary at this time, given the unusual circumstances of a 
recession, the terrorist attacks and this national emergency, 
that it makes sense with this combination of circumstance to 
propose and implement the budget he has proposed.
    There are only really two ways to get to a different fiscal 
situation than what the President has proposed. One is to raise 
taxes. We don't think that's a good idea. The other is to 
reduce the spending the President has proposed. As I observed 
in my testimony, the President has provided substantial 
increases to pursue the war on terrorism and substantial 
increases to deal with the needs of homeland security, and to 
follow on the commitments that were made and agreed last year.
    For example, the budget for discretionary spending on 
education is going from $40 billion to $50 billion. Perhaps 
someone doesn't join the President in thinking that we should 
have that $10 billion year-to-year increase in education 
discretionary spending. And certainly it is a possibility for 
Members who want to pursue it to recommend reducing some of the 
items the President has proposed for spending in fiscal year 
2003. The President's judgment, our judgment, is given the 
circumstance, this is the right blend of policies.
    Mr. Spratt. Two quick questions and I'll quit and turn it 
to others. In one of the highlights of the budget, OMB says the 
administration will seek to extend the pay-go rule and 
apparently the other budget rules that have been in place since 
1990. Interestingly enough, you salute former President Bush 
for the budget summit agreement of 1990, and you see this as a 
turning point. I think you're correct in doing it. I would have 
said something about 1993 and 1997, too.
    But nevertheless, we need a plan, and that was the 
beginning of a plan. It included tax increases, too, so you're 
a brave soul for introducing it, because not everybody on this 
side of the aisle necessarily thought it was a good idea at the 
time.
    But if we do have an extension of the pay-go rules, would 
you expect those rules to apply to the tax cuts that are 
proposed in this budget request, some $600 billion in 
additional tax reduction? Do you think it should be applicable 
to that tax reduction request, so that those tax reductions 
would have to be offset, revenue neutral?
    Secretary O'Neill. I think making the tax cuts permanent is 
frankly something I think we should have done last year. We 
have lots of rules and lots of conventions, and I think it's 
really unfortunate that we acted as though last year when we 
get to the sunset date on the tax reductions that were enacted 
last year that we're going to raise the 10-percent rate on the 
lowest income taxpayers to 15 percent, basically a 50-percent 
increase in taxes, when we get to the expiration period for low 
income people.
    I don't believe that was ever true--I don't believe it 
today, I didn't believe it a year ago. We have all these phony 
conventions that cause people to do things as though they were 
real. It's really very unfortunate. Does anybody really believe 
they're going to have an elimination of estate taxes that lasts 
for 9 months? It's an absurdity, some of the things that are 
done here. I don't sign up for them, I don't believe in them. I 
think we ought to face the reality of where we are.
    Mr. Spratt. But the question comes, will the pay-go rule 
apply to the additional $600 billion?
    Secretary O'Neill. We've included in our budget planning 
making permanent the tax cuts as the President said in the 
State of the Union. I think our numbers reflect an anticipation 
that we will see the reality of permanent status for the tax 
cuts.
    Mr. Spratt. Without offsets? So the pay-go rule won't 
apply?
    Secretary O'Neill. They're basically included in our 
expectation and forecast of where the economy will be. I guess 
the question is, let's deal specifically with estate taxes. 
Should we be proposing now that we cut some spending in the 
year 2011 in anticipation of making the estate tax permanent? I 
don't know how to do that.
    Mr. Spratt. One final question. Whatever else you say about 
the last 12 months, I think you have to acknowledge that we 
made some mammoth miscalculations, going from $5.6 trillion to 
$600 billion, $5 trillion in surplus has disappeared. And a 
large part of it's disappeared due to what we call vaguely and 
ambiguously economic and technical factors over which to some 
extent you preside, because a lot of those economic and 
technical factors apply to the revenue calculations of the 
government.
    I don't have your particular table in the administration's 
book, but just looking through CBO, to give you the flavor of 
the adjustment, for example, this year, legislative tax cuts 
will take about $86 billion off the revenue projection. 
Economic reductions in revenue estimates will take $123 
billion. Technical will take $62.8 billion.
    As you go out over time, the economic and technical factors 
continue. And they are substantial until you get to the end of 
the chart there, almost as much as the tax cuts itself.
    Now, obviously we've got a problem there. I know there are 
intervening factors. But there also here is a question of 
whether or not we've really got a good handle on our ability to 
project revenues. Are you concerned now, given revenues coming 
into the Treasury at this point in time, capital gains 
realizations and other tax takes, that the revenue chart you 
just showed me, 55-percent increase over the next 10 years, is 
a reliable chart?
    Secretary O'Neill. I'm comfortable with the first year. And 
as the years go by, I think as the CBO showed and demonstrated 
in its chart of uncertainty, the farther away you get from 
today, the less human beings are capable of truly predicting 
the future.
    Having said that, I will say this to you. The reason why 
these conventions were established is because the Congress had 
fallen into a habit of the camel's nose under the tent, if you 
will, of establishing a small program with a little bit of 
money with every intent and purpose of turning it into a 
mountain over a longer term period. And those of us, this now 
includes me 25 years ago, who were concerned about what I would 
say is fiscal sanity, were really concerned about the 
difficulty of ever stopping anything once it starts in the 
Federal Government. So we said, we need to impose and have the 
discipline of projecting the long-term consequences.
    I think projecting the long-term consequences of spending 
is something that we can better do than we can project the 
long-term revenue expectations. Because it's so tied, revenue 
projections are so tied up with year-to-year variations and 
what's going on in the real economy.
    So I think we need the discipline of projecting these 
numbers, but I don't think we should confuse projection with 
prediction. These are two very substantially different things. 
We should use the numbers to inform ourselves, not to blast 
each other.
    I must tell you, I think it is believable, and I think it 
demonstrates the point that you're making, $660 billion worth 
of technical corrections, not just from the Treasury staff, 
from the independent Congressional budget staff, deciding in a 
12 month period, $660 billion evaporated. I think it goes right 
to the heart of the matter that it's not possible to know 10 
years out with precision. It's possible to have a point of 
view, it's not possible to have a prediction that will hold 
water.
    Mr. Spratt. Does that mean, then, that moderate year-to-
year tax reduction, seeing where you are, what you've got 
before you have mammoth tax reduction, is a better policy to 
take?
    Secretary O'Neill. Well, I think this. When I look at the 
tax situation, I'd observe, and again, we gave you a chart that 
I think is well worth everybody understanding. What this is is 
the tax take going back to 1945. What it shows is that the 
average Federal tax take since 1945 has been 18 percent. With 
the reform that you all enacted last year, over this period out 
to 2010, we're still looking at taking 19 percent of the 
people's money to do whatever we will do with it at the Federal 
level, which is a full percentage point more than the 
historical average going back to 1945.
    So when I think about where we are in terms of balance 
between how the Nation uses its resources, at least on a 
historical basis, I would say we're above trend. And I would 
make this argument. That the more wealth and income we generate 
in this country, the less of it as a percentage that ought to 
come through the Federal Government.
    Because as we do a better job of meeting common needs for 
the population, the common needs should not rise as fast as the 
rate of increase in income and wealth creation in the society 
at large. This says we're running against that trend, that even 
though we're going to go from a $10 trillion economy to a $20 
trillion economy, we're going to insist on taking a bigger 
fraction of it here in Washington than we did from the period 
from 1945 until now.
    Mr. Spratt. I'll swap charts with you. You can take this 
one back with you, because it shows you how we got where we are 
and where we seem to be headed. We brought outlays as a 
perecentage of GDP down substantially from 22 to 23 percent of 
GDP in the early 1980's. We brought revenues up. They met in 
the middle and the difference between the revenue percentage of 
GDP and the outlay percentage is of course the surplus. That's 
the way we did it.
    But we actually brought revenues up by a lot less than we 
brought outlays down over that period of time.
    Thank you very much, Mr. Secretary.
    Secretary O'Neill. Thank you.
    Chairman Nussle. Let me report to members, the Secretary 
has time constraints today that I'm going to respect. It's my 
practice not to interrupt, I obviously don't interrupt myself, 
and I'm not going to interrupt the Ranking Member during his 
questioning. But I will report to members that I will try and 
keep this to 5 minutes as much as possible. Please help me with 
that.
    With that, Mr. Sununu.
    Mr. Sununu. Thank you, Mr. Chairman. Welcome, Mr. 
Secretary.
    Secretary O'Neill. Thank you.
    Mr. Sununu. I'll use that graph as a springboard to go back 
to a very simple but important point that you made earlier in 
your testimony. That is, the overall picture of this budget, 
the size of the surplus or the deficit, is dependent on just 
two things. You can either propose to cut spending below the 
President's level, and we will have a discussion and a debate 
here about priorities, and perhaps moving funding from one area 
to another, homeland security, national defense, domestic 
priorities. But in order to affect the balance, you can either 
cut spending below the President's request, or raise taxes.
    Now, I have heard from the other side that there's no 
desire or intention to raise taxes, that's a red herring, 
that's not what we're out to do. You can't get away from the 
fact that it strains credulity when someone says, well, we 
would never propose raising taxes in a recession, but you know, 
that tax increase in 1990 was really a good thing. It's 
especially problematic when that tax increase almost certainly 
made the recession of 1991 even worse.
    It strains credulity to say, well, we have no interest in 
increasing taxes, but you know if you want to make a current 
tax law permanent, we're going to expect you to raise taxes 
somewhere else, on somebody else, on another part of the 
economy. You simply can't have it both ways, to say, well, 
we're not going to cut spending below the President's level, 
and we're not going to raise taxes, but then hedge your bets by 
saying, you know, maybe raising taxes in a recession is a good 
thing, or if you want to make the tax code permanent, you've 
got to raise taxes elsewhere. I think we need a bit more 
clarity on what the policy intentions really are.
    Now, having said that, there is one other way that you can 
make a difference, and that's to increase overall revenue 
collections by strengthening the economy. And here also the 
President's budget, I think, has tried to take a step in the 
right direction.
    In fact, all of this discussion about the balance and debt 
and deficit, at the end of the day, when we're looking at the 
total debt to tell by the public, or the debt ceiling, I really 
have one question. And that is, what effect has the change in 
our debt position or our deficit projections had a material 
effect on the capital markets and on the economy?
    We've seen a whole host of changes in the world since 
September 11. More spending for homeland security, more 
spending for national defense, a big slow-down in the economy, 
a big reduction in revenue forecasts. As a result, a big 
increase in the forecast, a significant increase in the 
forecast for deficits and a much higher forecast of debt held 
by the public out there in the markets.
    My question is this. With all of these announcements, all 
of this news and information going into the capital markets, 
what's happened to interest rates? Has it had what I think many 
might have expected would be a very damaging effect to the 
capital markets, a big increase in interest rates, now that 
we're not going to be retiring so much debt?
    Secretary O'Neill. The Treasury rates are down. And I think 
the 10 year Treasury rates, as I said in my testimony, are 
down. This morning as I was leaving the office I think the 10 
years were trading about 490, which is off of their 8 month 
trend as compared to the 1993 period where we were looking at 
something over 6 percent.
    But I think you raise a very important point that everyone 
should understand. Long-term interest rates are a function of 
two things. They are a function of the necessary cost of 
capital, that is to say, the rate that's required to cause 
people to save money instead of spending it, which has tended 
since 1870 or so to be in the 3 to 3\1/2\ percent range. The 
rest of the long-term interest rate is an anticipation the 
markets have about inflation rates. The reason why we now have 
this 10-year rate at 490 is because the markets are 
anticipating that inflation is going to stay under control.
    Mr. Sununu. So despite all the announcements, despite all 
the change in the forecasted surpluses, despite all the impact 
that this might have on our ability to retire debt, you've 
actually seen interest rates go down?
    Secretary O'Neill. Exactly.
    Mr. Sununu. A second question, and maybe a more forward 
looking one about the economy. We all want the economy to begin 
growing again, we're all concerned about job creation. That, 
more than anything else, will have an impact on revenue growth 
and on restoring surpluses. I think there are two things right 
now that we could do to really make a material impact on long-
term economic growth: expand trade promotion overseas and the 
potential for U.S. companies to export overseas, and pass a 
comprehensive energy policy. Could you talk briefly, because my 
time is up, about the impact that those two specific pieces of 
legislation that have already passed the House of 
Representatives would have on our long-term prospects for 
economic growth?
    Secretary O'Neill. Let me say just a few words about the 
trade promotion authority first. I'm convinced, and this is now 
not just observation but personal experience, that the thing 
that has powered our economy in the last 15 years is the ever 
more open economy that we're running. Because it has brought us 
high value goods at lower prices than we otherwise would have 
had. It's also brought us competition, it has forced our 
enterprises and entrepreneurs to constantly get better at what 
they do.
    While sometimes one would wish that there would be 
something called pricing power, which is to say, when your 
costs go up, you don't have to find offsets, you just raise 
your prices. It is really to the benefit of our economy that 
we've had an open economy, more open than any other, that has 
caused us to be unbelievably productive. I said earlier, this 
morning's report is fourth quarter productivity rate in the 
U.S. economy, 3\1/2\ percent, just unexampled in our 
experience.
    On the question of energy and the need to pass energy 
legislation, our President has said over and over again that we 
need to better protect ourselves from energy dependence on the 
rest of the world. We fashioned a program that we think brings 
all the parts together to give the Nation an energy policy and 
energy programs that will support and implement the policy. We 
need it now.
    Chairman Nussle. Mr. Clement.
    Mr. Clement. Mr. Secretary, great to have you here today.
    Secretary O'Neill. Thank you.
    Mr. Clement. I know you've got a tough job. Commenting 
about what my colleague said a while ago about taxes. We 
Democrats are not going to propose a tax increase, and I don't 
think the Republicans will at this time.
    Also, I want to talk to you in terms of our economy, where 
we are. I'm a veteran, served 2 years in the regular Army, 29 
years in the National Guard. Very strong on national defense. I 
will vote for an increase in our defense budget and bolster our 
homeland security.
    My concern is that the White House is not giving the 
consideration to you and the other members of the so-called 
economic team the weight we should have to turn this economy 
around. I'm worried about the recession. I'm worried about the 
emergencies that we have. I'm worried about what happened 
September 11.
    I just don't see the White House giving the same 
consideration to the economic team as the White House is giving 
to fighting terrorism and bolstering homeland security. I know 
you commented a while ago about job creation. But the fact is, 
we've lost a lot of manufacturing, industrial jobs in the 
United States. We're not in a recession, but depression with 
high tech. And that applies to many of the other so-called 
economic sectors of our economy.
    Therefore, I have to ask you the question, where is the 
economic team, and just like John Spratt commented a moment 
ago, where is our plan? Where is our strategy to turn things 
around? Because in 1 year--I'm not talking about 10 years, but 
in 1 year--we've had an unbelievable turnaround and $5 trillion 
has disappeared. I'm no worried about a 10-year forecast. I'm 
worried about maybe we ought to go to a 6-month forecast, 
rather than a 10-year forecast, to have something that's 
believable.
    Secretary O'Neill. First of all, I don't think there's any 
mystery to the difference between the January or February 2001 
10-year projections and the ones we have now. The CBO has laid 
out very well why the numbers are different, and a very 
substantial reason for the difference is the economic slow-down 
and terrorist attacks. I think it's just very clear that those 
conditions have made a huge difference in the forecast of 
future surpluses.
    Now, I would hasten to add, as I said before, and I will 
say again, I am a great optimist, and I suspect we can and will 
do better going forward. We've given you the best estimates 
that are actually more conservative than outside estimators. 
But to your comment about high tech depression, I would say 
this. The slow-down in our economy began in the year 2000. It 
didn't begin in 2001.
    And the reason that we began to see a slow-down is because 
there were excesses in our economy reflected in the high tech 
industries. High tech companies were, in more than a few cases, 
pushing their products to the degree that they were providing 
finance for their customers to buy their products. Because 
without that push, there wasn't enough demand to keep the rate 
of growth going.
    It's not an unfamiliar thing to see in our own economy, in 
the world economy, excesses that result in a period of 
readjustment. I think we've seen that to a fair-thee-well with 
the likes of CISCO and Nortel and the other information 
technology communications based companies. They were running at 
an unsustainable rate and our economy finally said, stop, we 
can't keep doing this.
    Mr. Clement. But let me ask you this, getting away from 
high-tech--transportation. I'm on the Transportation Committee. 
We're taking a hit from the Bush administration of $9 billion. 
I know the State of Tennessee alone, that's $158 million. 
That's a lot of jobs. That's thousands of jobs that we're not 
going to have simply because of this proposal.
    Secretary O'Neill. Let me be clear about this. You're not 
taking a hit from the Bush administration. The Congress has 
passed a law that tells us how we will calculate the amount of 
money that's provided in any year's budget. We have faithfully 
followed the law. We are proposing to spend the dollars that 
flow from a law passed by the Congress that tells us how much 
money we should spend on highways in any particular year. We 
have simply followed the law, as we have in previous periods.
    Mr. Clement. But we could draw down the Highway Trust Fund.
    Secretary O'Neill. If you wanted to change the law and 
spend more money than what the President's proposed, you could 
certainly try to do that.
    Chairman Nussle. Mr. Gutknecht.
    Mr. Gutknecht. Thank you very much, Mr. Chairman, and 
welcome, Mr. Secretary.
    Secretary O'Neill. Thank you.
    Mr. Gutknecht. I want to change focus just a minute, 
because I think there are two issues that are very important 
that your office can really help us with. As you mentioned 
earlier, we're going to have to wrestle with this whole issue 
of debt limit some time within the next month and a half. I 
want to talk about that, and another issue that your office can 
be very helpful, and that's called dynamic scoring.
    We talk a lot about that here in this committee and in the 
Congress. I think most of us agree that if you tax economic 
activity at 100 percent, you're going to get a lot less 
economic activity. I think we all instinctively know that tax 
policy has consequences. Unfortunately, when the Congressional 
Budget Office or the Office of Management and Budget or the 
other economic prognosticators apply their pencils to whatever 
tax law changes we might recommend, they're not scored on a 
dynamic basis.
    Now, I have become aware just recently that within the 
bowels of your offices, they do have the computer model to do 
dynamic economic scoring. Yet they continue to refuse to use 
it. I guess the question about dynamic scoring that I would 
pose to you--and with your signature you could change that 
today--if you and your minions are unwilling to use that 
computer model, would you mind if we did? Because as long as we 
continue to use the old way of scoring these things, we will 
never see the permanent tax relief that I think is important.
    I do appreciate this chart. I think every Member should 
take it home and show it to their constituents. Because a fact 
that we always forget, in America today, the average family 
spends more on taxes than they do on food, clothing and shelter 
combined. That is disgraceful. And it's going to remain so 
until we can get some help from your office to get dynamic 
scoring.
    So, sir, if your people are not going to use that model, 
would you mind if we did?
    Secretary O'Neill. Well, we live with the conventions that 
you all decide are the appropriate ones for us to use. And one 
of the things I think, I don't know how this committee would 
feel about it, but I think one of the things that would be 
useful to do would be to look at the conventions that now exist 
and are required for how we present information to you. If 
there was an agreement that we should give you both static and 
dynamic numbers, we could certainly do that.
    That is not the convention you all have adopted. And you 
all have, I was saying earlier, there are lots of conventions 
that have been put onto the Congressional Budget Act of 1974 
that simply bear elimination or modification. I would think it 
would be a worthy task for this committee to reconsider some of 
the things that cause perverse effects, including this issue 
you raise about not having dynamic scoring.
    If you'd like to have dynamic numbers, I'd be happy to give 
them to you----
    Mr. Gutknecht. Well, I would.
    Secretary O'Neill [continuing]. If you can get them into 
the conversation, God bless you.
    Mr. Gutknecht. Well, they're in the conversation. But the 
difference is, this committee and the Congress speaks with many 
voices. You speak with one. You have a huge advantage in this 
debate by clarifying this and at least providing two sets of 
projections. Then we'll have to determine public policy 
collectively. But you could be very helpful on that.
    The second point I want to get back to you is this debt 
limit. Because everyone in this room knows that the money that 
comes in through the Federal Insurance Contribution 
Administration, it's a contribution, not a tax, there's only 
two things essentially that can happen to that money. You can 
either pay benefits or you can buy government bonds, right?
    Secretary O'Neill. Right.
    Mr. Gutknecht. So as the economy improves, as more people 
go back to work, which we certainly hope that they will, then 
we're going to have more money coming in, and that raises the 
debt.
    At some point, it seems to me we've got to have honesty as 
it relates to the Federal debt. I think Representative Chris 
Cox has proposed, I think, a very, very interesting solution. 
So that we begin to define real publicly held debt as the 
national debt. I would hope the administration would not only 
take a serious look at that, but become an ardent advocate of 
that position. Because it seems to me we're not being 
completely honest about public debt when we say that the debt's 
going to go up if the economy improves.
    Thank you, I'll yield back my time.
    Secretary O'Neill. May I say just one word about that?
    Mr. Gutknecht. Please.
    Secretary O'Neill. I think we all know, debt is a 
consequence of all the other actions taken by the Congress. 
Having a debt ceiling is an anachronism beyond belief that we 
still have to go through this process. That's one of the 
reasons why there is a Budget Committee, to try to get a better 
handle on the total implications of what the Congress does, so 
that whatever the debt turns out to be, it's not an ill-
considered thing that fell out of the sky, it's a consequence 
of all the other actions taken collectively by the Members of 
Congress.
    Chairman Nussle. Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Secretary, in hopes of staying to my time a little bit, 
I have a lot of questions, but first of all, I'd like to see if 
we can get some copies of some of the documents you claim that 
we would have been out of recession by now had 9/11 not 
occurred. I have seen nothing that would suggest that, and I 
would just like to see whatever you have.
    Because the only thing, we listen to CBO, we listen to some 
other things, I also try to follow some of the basic indices. 
Just looking at the stock market alone--I'm not looking at 9/
11, because it's hard to tell what the impact of that was. I 
mean, if the recession did start in the spring, which I think 
everybody has come to the conclusion of, I look at it from the 
date the President signed the economic growth bill. And right 
now, since that date, as of right this very minute, the stock 
market is down 13 percent. I wonder how that bill might have 
stimulated the economy if we're down 13 percent.
    I guess in theory you could say, well, we would have been 
down further if the bill hadn't done. But I look at reality and 
reality is measured by what has happened, not what we think 
might have happened.
    I look at it, I guess to me, when I heard the President 
come out and publicly state, no, his tax bill in the future, 
over my dead body will it ever be changed, great, great 
political statement, good headlines. But since that day, the 
stock market's down, oh, I don't know, 6 percent. I just wonder 
how that helped the economy. I know it's good politics, but I 
wonder how it helped the economy.
    So I'd be interested in seeing some of the statistics that 
you're using to make those statements. Again, I'm not prepared 
to argue with you, because I don't know. So I'd like to see 
them.
    I guess to me, I also want to talk about Social Security. 
We have a lot of rhetoric all the time, and I'm going to say to 
you the same thing I said yesterday to Mr. McDaniel and to 
others. I look at the proposal before us and I look at the 
Social Security Trust Fund being dipped into for the next 8 to 
10 years, depending on how you measure it.
    And people at home don't understand off budget, they don't 
understand on budget, they don't understand this, that or the 
other thing. They do know one thing: the average person making 
$40,000 at home, right now, all across this country, between 
them and their employer's share of the Social Security FICA 
payment, pay $4,960 each and every year that they think is 
going to Social Security. I want them to know, and I want it 
clearly said that that $4,960, which is very real money out of 
their paychecks, it's not phony money, it's not bond money, 
it's not borrowed money, it is cash out of their pocket, is 
currently being used and will be used for the next 10 years to 
balance the budget. It will not be used to stabilize Social 
Security.
    You have to add me to that talk show list, I guess. Because 
though I do not believe that current Social Security recipients 
will at all be hurt, I do believe with every ounce of my soul 
that my generation has a risk, a real, serious risk, of not 
having Social Security there when we need it. I have a real 
belief of that, and if that puts me on the talk show, so be it.
    But I don't think that makes me unique. I have never said, 
and I have heard almost no one say, that current Social 
Security recipients are jeopardized one bit. It's about the 
future of Medicare, not just Social Security. So whatever talk 
shows you can get me on, give them a call, I'll give you the 
phone number later on.
    I guess the only other point I want to make is, again, my 
numbers may be wrong, and I'd like to see them, but in the 
budget proposal, I see on page 31 the claim of 300,000 jobs 
being created by the new stimulus proposal the President is 
pushing. On page 397 of that same book, I see that the cost for 
that stimulus package is estimated at $77 billion in this 
fiscal year. Simple math, that means $256,667 per job. Where do 
I get one? That's a pretty good job, I know a lot of people who 
would want it.
    For me, if that's what we're going to do, if that's the 
measure of success, which is fine, it's a good measure, I'd 
rather give people, I know lots of people who'd jump at $50,000 
a job. That's five times as many jobs being created if you just 
simply create a jobs program. If that's the only measure of 
success, if that's how we do it, I'd like to see the money used 
a little bit better. I just don't see, I'm not sure how you'd 
measure the benefit of $256,000 per job. I understand the 
theory of potentially maybe stabilizing the economy for the 
long-term future. But I don't see it here. Again, anything you 
provide me at a later time or now, whatever you want that would 
make me a little more comfortable.
    All I know is, if that money were being spent on a housing 
program, $256,000 per unit of affordable housing, I'd have HUD 
in here screaming it was an ineffective program and we ought to 
cut that program, too much money. And I would happen to agree 
that it would be. I'm not so sure it's any different for jobs.
    Thank you.
    Secretary O'Neill. Let me start with the end of what you 
said. If you would like to have a greater economic efficiency 
in the stimulus package, then what you favor is not giving 
anybody an extension of unemployment benefits and you don't 
want to provide any continuation coverage for health benefits. 
These are the transfer payment portions that make the cost of 
protecting 300,000 jobs what you say. Because there's a 
compassionate component in this $80 billion that's a very 
substantial part. It's about half of the total cost, is about 
the President's sense of compassion, which I would hope you 
would join, about caring about the people who were dislocated 
by September 11.
    So if you want simple economic efficiency, then there's a 
way to get that. But I doubt that you really don't want the 
compassionate part of this budget.
    To the issue that you make about the Social Security, I 
would propose this to you. I think it's time that together, we 
create a Federal balance sheet that has the unfunded liability 
of Social Security for your generation on it. It's $10 trillion 
or $10.5 trillion. Then maybe we can have a really interesting 
conversation about how we need to make reform instead of the 
rhetoric about stealing from the Social Security Trust Fund, 
which we all know is not true. Nobody's taking a single penny 
out of the Social Security Trust Funds.
    I would be delighted to have an argument or a discussion, 
more politely, about the unfunded liability and put it on the 
Federal balance sheet, so we can have a conversation that has 
meaning.
    Chairman Nussle. Mr. Putnam.
    Mr. Putnam. Thank you, Mr. Chairman.
    Good morning, Mr. Secretary.
    Secretary O'Neill. Good morning.
    Mr. Putnam. Thanks for sticking around until we get down to 
the freshman questions.
    If my friend from Massachusetts is worried about his Social 
Security, I can assure you, I've already given up on getting 
mine. [Laughter.]
    We're looking forward to solving the economic problems of 
today so that we can focus on the future of Social Security 
down the road and come up with a better system.
    We have such a dynamic and diverse economy. There are so 
many different moving parts to it, from the manufacturing and 
industrial and agricultural and high tech and the whole gamut 
of opportunities for people to be gainfully employed and pursue 
the American dream. But for one particular sector that has been 
highlighted even before we hit the official recession, rural 
America and the agricultural sector have been depressed for 
some time.
    As we develop these strategies and pursue expanded trade, 
and pursue these growth strategies to bring all of the American 
economy forward, are there some things in particular that we 
can do to help rural America get an extra leg up beyond just 
making the Farm Bill more generous year after year?
    Secretary O'Neill. Well, I think, you know, we work on 
trade promotion authority. One of the things were going, I 
think, to continue to do, we're going to continue to provide 
opportunities for markets that are not now served. A huge part 
of our rural America's farm product is going offshore today. 
And a reason to pursue trade promotion authority is to keep 
expanding those markets. That rightfully should be the 
attention of U.S. producers.
    Probably the most productive area, growth area, after maybe 
semiconductors, is the U.S. farm economy. It is really 
remarkable the rate at which our farmers have been able to 
improve their ability to produce more and more product with 
fewer and fewer resources. I think that's an important aspect 
of helping rural America, more particularly farm part of 
America.
    The other thing we need to do in a broader sense, where we 
don't have such a dense population, is to continue to see to 
the growth of our economy. Because more and more, if you look 
at where American industry is expanding, it's expanding in 
small towns with plants that have 100 to 300 people. It's not 
the story of mammoth plants with tens of thousands of people 
any more.
    The more we can do to create the conditions for economic 
expansion across the totality of the American economy, the more 
we're going to see that spreading out and benefiting more and 
more people and reducing the pressure to centralize the 
population as well.
    Mr. Putnam. The reason why I ask you that, I certainly 
understand you're the Secretary of Treasury and not the 
Secretary of Agriculture, but from a macro perspective, from 
the total economic, the total view of the American economy, 25, 
50, 100 years from now, what role do you see production 
agriculture playing in the American economy? What role do you 
see traditional manufacturing jobs playing in the American 
economy? Are we really so sophisticated, are we really so 
technologically advanced, that we will essentially export our 
ability to produce our own food and fiber, or will there be 
other factors that emerge?
    Secretary O'Neill. I don't think so. I think if you look 
back 25 years ago or 30 years ago, in the best farm land in 
Iowa, the yield, the corn yield was maybe 65 or 70 bushels an 
acre. Last fall, some relatives that I talked to about these 
kinds of things I think had a crop yield of 210 bushels an 
acre, which is really just phenomenal.
    I'm one who doesn't believe there's a foreseeable end to 
the productivity potential of the U.S. economy. For that 
particular crop, if you go back 25 or 30 years, we were still 
planting corn in rows so that we could get equipment between 
the rows of corn to do weeding. And now we plant corn like 
grass, so that we don't have to worry about weeds growing up in 
the crop once the plants are established.
    I don't think we're done with that. Our ability to conceive 
of new technology, you know, this, if you go ride on a combine 
in an Iowa corn field, the computer is measuring the moisture 
content and the yield on an acre basis, so that in the next 
planting season, the computer knows where to put the more 
intense fertilizer to raise the yield in areas that are low 
land or rocky or whatever. I don't think we've even touched the 
surface of what's technologically possible to continue to have 
the U.S. farm economy as a critical part of our economy and 
feeding the whole world.
    Mr. Putnam. Thank you, Mr. Secretary. Thank you, Mr. 
Chairman.
    Chairman Nussle. Mr. Price.
    Mr. Price. Thank you, Mr. Chairman.
    Mr. Secretary, welcome to the committee, thank you for your 
testimony.
    Secretary O'Neill. Thank you.
    Mr. Price. I'd like to begin by making what I hope you'll 
understand as a constructive suggestion and then move to a 
question having to do with the corporate alternative minimum 
tax. I just can't help noting in your statement the thumbnail 
historical account you give of the progress that we made in the 
1990's toward digging ourselves out of the fiscal hole, 
retiring some of the national debt and making responsible use 
of these unprecedented surpluses.
    You say in your statement that fiscal discipline was 
imposed by the historic Omnibus Budget Reconciliation Act 
signed in 1990 by President Bush. I remember that battle, and I 
think you're exactly right to give a great deal of credit to 
President Bush, Senior. You might have noted that Newt Gingrich 
and most House Republicans opposed that act. But it was 
bipartisan, and it did have a lot to do with our economic 
turnaround.
    Why is it too much to mention the 1993 Deficit Reduction 
Act in a parallel fashion? The 1993 act was remarkably similar 
in its aggregate impact. It was remarkably similar in the mix 
of spending cuts and tax increases that it contained. Now, the 
political dynamic was very different; it was passed with 
Democratic votes alone.
    But I think any fair analysis would say that those two 
acts, in tandem, are responsible for what we saw in the 1990's. 
So why is it so difficult to acknowledge that? Why is it so 
difficult, even in a thumbnail sketch, to give that kind of 
balanced credit where credit is due? It would really make for 
considerable bipartisan goodwill. That's a commodity that I 
think is too often missing from our budget discussions.
    Let me now turn to a question. There are----
    Secretary O'Neill. If I may, I'd be happy to----
    Mr. Price. That's fine, but I don't want to lose my chance 
to ask further questions.
    Secretary O'Neill. I'd be happy to stipulate your point. I 
think certainly that's a contributing thing. The other thing 
that's really important, and I didn't make much out of it, is 
the unbelievable productivity spurt that we got in the private 
sector, partly because we were faced with strong competition 
from offshore.
    Partly because I think the American people got their act 
together and realized that the slowness that we were acting 
with during the late 1970's and early 1980's was going to do us 
in unless we saw our role in the world as leading the world and 
not just kind of lollying along. It's remarkable what we 
accomplished in that decade together.
    Mr. Price. Absolutely. I agree with that, and I also think 
the positive signal sent to the markets by the Acts of 1990 and 
1993 had a great deal to do with our economic performance.
    I would ask you something perhaps more mundane, but it has 
to do with what I'm hearing from constituents and what I'm 
wondering about myself. There are reports that the Enron 
Corporation, over 5 of the last 6 years, paid no Federal taxes 
whatsoever. I'm not sure if that's true. If it is true, I 
wonder why it's true, given the presence of the alternative 
minimum tax. I think laymen don't understand why, with an 
alternative minimum tax in place, which supposedly takes care 
of this kind of problem, why that would still be possible.
    So does this point to some flaws in the alternative minimum 
tax, and does it lead you to reconsider your position on the 
corporate alternative minimum tax in general? As you know, 
House Republicans have proposed, not only to repeal the 
corporate AMT, but also to refund corporate AMT payments over 
the past 16 years. What is your current disposition toward that 
proposal?
    Secretary O'Neill. In the December action by the House, 
there was an AMT provision that was prospective that would have 
cost, over the 10 year accounting period, $1 billion or so. We 
were favorably disposed to that.
    To your earlier question, as I think you know, under the 
law, it's prohibited for me or for anyone else in the Treasury 
Department that doesn't have a direct duty in the IRS, to 
examine a tax return. So I haven't got a clue what's in 
anyone's tax return, including yours and Enron's. I think 
that's an appropriate law.
    Now to the broader question of whether every individual and 
corporation ought to pay taxes, I think they should pay the 
taxes that are required by the law. Those who don't pay the 
taxes that are required by the law ought to be punished to the 
fullest possible extent, including going to jail. If the 
judicial system finds in this particular case that you're 
mentioning that they violated the law, I assume the Justice 
Department will pursue them to the point of incarceration, if 
that's what's indicated.
    Now, is there a broader principle that people should pay no 
matter what the law says? I don't think so. If there are people 
who make $20,000 a year or some even make $40,000 or $50,000 a 
year and by our tax law they don't have to pay any taxes, 
should they volunteer to pay taxes? I don't think so.
    Mr. Price. Well, I'm not asking you, obviously, to comment 
on the legality of Enron's behavior. What I'm asking is, are 
there loopholes in the law that make this a conceivable 
outcome, that a corporation could completely escape taxation 
for 5 out of 6 years?
    Secretary O'Neill. Well, let me say that I presume that 
Members of Congress carefully consider the provisions of the 
tax code, and whatever is there is what you all intended. If 
people and companies legally use the tax code as you all 
apparently intended it, and end up paying some lesser or 
greater amount, I assume that's what you intended.
    Now, if there's fraudulent behavior, let me say again, I 
think we ought to put fraud makers in jail. There should not be 
any room for American citizens or companies violating the law 
of the land.
    Chairman Nussle. Mr. Miller.
    Mr. Miller. Thank you, Mr. Chairman.
    Mr. Secretary, it's good to have you here today.
    Secretary O'Neill. Thank you, it's nice to see you.
    Mr. Miller. My good friend, who's gone now, made a couple 
of comments. One, he applauded the President for receiving 
input as it applies to the war on terrorism, and how he's 
handled that. Then he said the White House, meaning the 
President, he would encourage him to give more consideration to 
the White House economic team when making economic decisions on 
how to stimulate the economy.
    You didn't have a chance to really address it, but I 
believe he's done that. I don't think the stimulus package was 
developed in a vacuum. I believe that his economic team at the 
White House was very involved in that. Shame on the Congress 
for not implementing that, for bottlenecking. The same thing 
with trade promotion authority. I think that was well debated 
with his economic team, and the benefits were seen in that. We 
saw that in our House, yet it's gone nowhere.
    The comment also about taking a transportation hit as far 
as budgetary constraints, and I applaud you in your response. 
You're correct in the dollars that were received are being 
spent where they belong. There's a debate many of us, some from 
California and other States, think you could take money out of 
the Farm Bill and put in transportation. But I know the 
Chairman and others might not agree with that.
    So it's just a matter of prioritizing a limited amount of 
dollars out there. You were commenting when I walked in about 
the open economy and how that has fueled the economy, and I 
agree with that, and the competitive marketplace, how that's 
beneficial. You have a lot of regulatory authority, and one 
we've talked about that has brought some concerns up to me is, 
a lot of Americans just think that the Treasury Department is 
the Federal Government's bank, money goes there and it sits 
there and you pay our bills as they come in.
    But you have authority well beyond that. One issue we have 
talked about earlier, along the lines, and maybe you could tell 
me a little more about where you are in the process regarding 
banks and other financial holding companies, then becoming more 
active in real estate as it applies to selling real estate, 
bundling as it applies to them also doing title policies. Where 
are you on that decision?
    Secretary O'Neill. Let me respond directly to your 
question, but don't let me forget to come back. There's one 
point I want to make on your earlier comment. On this issue of, 
I guess it was an issue that was addressed in the sweeping 
regulatory scheme that was in the Graham-Bliley legislation of 
a couple years ago, raised the issue of extending to banks the 
opportunity to be in the real estate business. It's something 
that we've been looking at now for some time.
    The way you all set these terms, it's necessary for the 
Treasury and the Federal Reserve to come into agreement on 
whatever we might do. Because of all the concern that's been 
expressed, we've been talking with the Federal Reserve about 
what we might do. At the moment, we're seriously looking at the 
possibility of reopening the comment period because there seems 
to be so much division of opinion about what ought to be done. 
We haven't quite decided yet, but that's where we're tending 
toward at the moment.
    Mr. Miller. So in that specific area, there is, I've been a 
realtor and been a developer in the past, I think banks do a 
great job of what they do. I think realtors do a good job of 
what they do, and I think the title insurance company does a 
great job of what they do. However, when you look at the 
concept of bundling, I think it creates a tremendous conflict 
of interest, especially when realtors, bankers, and title 
policies, how does a title insurance firm that's owned by the 
bank insure title against the loan they made to the person who 
bought the house? It creates too much of a conflict.
    Yet when you put a bank in a position where they can sell 
the house internally, they're automatically going to do the 
loan and automatically do the title policy. It eliminates a 
tremendous amount of competition, which I think has been 
healthy for the economy and the industry. That's what I'd like 
you to kind of address, and I think you're going that way.
    Secretary O'Neill. Well, I don't really have a 
knowledgeable point of view on the substance. What I have 
developed a knowledgeable point of view about is the ambiguity 
of the legislative history on this subject, which I find 
frankly very unfortunate because I don't think that the 
executive branch should be writing laws.
    Mr. Miller. I agree.
    Secretary O'Neill. And when we're left in a position of 
huge ambiguity about the intent of Congress, then we're torn 
one direction and another. In effect, we become the law writer 
instead of the regulator. I think it's totally inappropriate.
    Mr. Miller. I agree.
    Secretary O'Neill. If I may go back to, because I wanted to 
comment on one point you made about comments that were made 
earlier, and the characterizations that were made. In the 
interest of not using everyone's time, I have chosen not to 
respond to everything that's said. So I hope the fact that I 
don't respond to everything that's said doesn't mean I agree 
with everything's that's said.
    Mr. Miller. I tried to respond for you.
    Secretary O'Neill. Thank you.
    Mr. Miller. You're welcome.
    I yield back the balance of my time, Mr. Chairman.
    Chairman Nussle. We have two votes on the floor. I'm going 
to take Mrs. Clayton for her time, and then we will recess 
until after the second vote. We will continue the hearing.
    Mrs. Clayton.
    Mrs. Clayton. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary. I do appreciate your consistency, 
but let me just make a couple observations about the budget. 
The budget is a budget that we understand is in war times, so 
there is an overriding assumption that there should be no 
question about the amount of money that we allocate to defense. 
If you question that, then you don't understand that this 
Nation is at war. We all understand that we are at war.
    But at the same time, regarding discussions about the 
budget, it should not be seen that useful discussion about 
differences of how we protect Americans and protect their 
Social Security, as well as protecting their health care, and 
their education. To what extent the amounts of dollars, whether 
it be national security or homeland security, has to be 
balanced doing so, I think the President said, we have to do 
whatever is required.
    Well, the question is, not to question the President as to 
what's required, but to question how much. A discussion about 
the budget is the most important issue we can talk about 
because it is here where we actually put meaning to the 
political words we talk about. It is the allocation of the 
Nation's resources as to whether we care about the people. We 
protect our people from foreign invasion, but we also ought to 
protect our people's quality of life.
    So my concern is that this isn't balanced in that regard. I 
am concerned when there is money taken away from job training. 
I am concerned when there is not enough money put in for senior 
citizen prescription drugs. They also need to be protected.
    I see the protection from terrorism, the protection for 
life being all equal threats. I applaud the priority of having 
national defense. I applaud the priority of doing more for 
homeland security.
    When thinking about raising the deficit, you are right, the 
law is structured and there are no other choices. The reason 
that you have to do this is because the consequences requires 
action now, the public debt we now have, you claim that the 
money that comes is a contribution that goes to Social 
Security, not really taxes, but people think of it as taxes 
when they come off. They also don't understand that the money 
is not there in cash. You understand that it is an IOU from the 
government to the trust fund.
    Secretary O'Neill. Right.
    Mrs. Clayton. That's good for intellectual discussion. But 
for the heartland, they don't understand that. So they have a 
concern about the way to finance the government, we are 
actually taking those IOUs, those surplus now, and paying off 
the debt. Those are comments, you can respond to them if you 
like. I do appreciate you coming here, but I do want to say 
that we ought to have a discussion that allows individuals to 
debate all of this. We shouldn't say that defense is a sacred 
cow or defense should never be debated.
    Now, I'm for defense. It should be that we ought to do far 
more for our military men and women than we are doing. Why do 
we need to put so much in old fashioned instruments? We're 
putting the same dollars that we would have put in 2 years ago 
after the terrorist attack, the same technology, and yet we 
have been invaded by terrorists. So we have learned nothing in 
this process.
    So some of us want to question that. Some of us want to say 
that we are very patriotic and we want to have the strongest 
defense. What constitutes the best defense given the attack of 
September 11? It seems that we have a different kind of 
strategy, all of it wouldn't be going to be the same 
technology, the same instrument, the same budget with no 
strategic difference in our approach to that.
    Thank you, Mr. Chairman. Thank you for allowing me to have 
the time.
    Secretary O'Neill. May I just say one thing? I very much 
agree with the philosophical and programmatic content of what 
you said. This is outside my oversight responsibility. But I 
think it's true that the Congress has expressly forbidden the 
Defense Department to even consider additional base closings, 
which would save money that could be used for some other 
purpose. So I agree with you completely, it's useful to look at 
everything. We should stop spending money on bases that don't 
really have a reason to exist any more as an example of having 
a more rounded approach to what we're doing with our money.
    Mrs. Clayton. Thank you.
    Chairman Nussle. Thank you. Mr. Secretary, as you see, our 
fancy new system here, next week we'll be showing the Winter 
Olympics. [Laughter.]
    Right now it's just the floor of the House.
    Secretary O'Neill. I'll come back for that.
    Chairman Nussle. We have a vote on, so we'll stand in 
recess, potentially three votes, this one and two others. Thank 
you.
    Secretary O'Neill. Thank you, Mr. Chairman.
    [Recess.]
    Mr. Hastings [assuming Chair]. The committee will come to 
order. I want to once again thank Secretary O'Neill for being 
here, and the members who are coming back from the votes. I've 
been advised that the Secretary has time constraints also, so 
if there's only us, I suppose we'll meet those time constraints 
very easily.
    Mr. Secretary, I apologize for not having been here 
earlier, but I had some responsibilities on the floor. But I 
understand that the questioning here was somewhat similar to 
what we went through yesterday when Director Mitch Daniel was 
here. A lot of the talk there was regarding the spending and 
past budget agreements and so forth.
    I understand that you mentioned the role of the 1990 Budget 
Agreement that kicked off the economic boom. But I understand 
that you did not mention the 1993 plan that was signed by 
President Clinton. I just wondered why is that. Is it because 
the dynamics of both of them were different?
    Secretary O'Neill. The simple answer is yes; plain reaction 
control for some of that. Also I would say, I don't think that 
tax increases are pro-economic growth and job generation and 
wealth creation. I was asked a question before you were here by 
one of the members. I said in the spirit that the question was 
offered that, the suggestion was it would be nice for us to 
have a bipartisan sense that everyone wants to do well.
    I said I would stipulate that, and went on to say that I 
also didn't mention in my prepared statement how important it 
was that our private sector found the will and the way to 
produce unbelievable rates of productivity growth as compared 
to previous periods. So I think there's a lot of credit to go 
around. Again, I think the less money we can take away from the 
people who earn it to do the public business, the more rapidly 
and effectively we'll be able to grow our economy.
    Mr. Hastings. One other observation that I might have. 
Yesterday in the Budget Committee, it was pointed out that the 
Reagan tax cuts caused the deficits. But my understanding was 
that the agreement, and I wasn't here then, and I don't think 
you were part in any way of the government either, but the 
agreement was that in exchange for the tax relief, because of 
the static scoring, there was to have been a reduction in 
spending. That didn't happen, I think spending was about at 150 
percent, if my memory serves me correctly, of the tax relief.
    But during the whole 1980's, revenues to the Federal 
Government in fact doubled.
    Secretary O'Neill. That's right.
    Mr. Hastings. And the problem was that spending increased 
faster than the revenues.
    Secretary O'Neill. That's precisely right.
    Mr. Hastings. What you're suggesting in the Clinton budget, 
while spending was restrained, at least less than what the 
revenue growth was, and therefore we could catch up.
    Secretary O'Neill. That's right.
    Mr. Hastings. Thank you very much.
    Mr. Moore from Kansas.
    Mr. Moore. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for being here. I'd like to carry 
on, I guess, with part of this bipartisan atmosphere, but I do 
have some questions and some comments I'd like to make. A year 
ago, there was a lot of discussion in Washington, the President 
and leaders of Congress and a lot of people in Washington about 
the dangers of paying down the debt too soon. That's something 
I told people back home, you don't have to worry about Congress 
ever doing that, that's not going to happen, in my opinion. I 
wish it would, because I think it's one of the healthiest 
things we could do for our country and our economy.
    But there was talk a year ago about projected surpluses. 
I'm going to put it in context, because I certainly don't hold 
the President responsible for the recession. I don't hold the 
President responsible for 9/11, nobody does. Nobody of any 
sanity does. I voted for the President's tax cut last year.
    But I do have some concerns, and I expressed some of those 
concerns to the President when I was at the White House 
February or March, whenever it was, and we were talking about 
his proposed tax cut. I told him about tax cuts which have been 
instituted in Kansas over the past 3 or 4 years. And the 
legislature in February of last year was in session, and they 
were struggling to find money to fund education because of 
revenue shortfalls. That's happened in a lot of States now.
    I told the President, I would, to me tax cuts were not a 
partisan issue and I would support tax cuts appropriate. I 
thought $1.6 trillion was too much, I wanted $1 trillion. Came 
back and compromised at $1.35 trillion, which I voted for.
    But I guess, I want to tell you, I visit a lot of high 
schools back home and really enjoy talking to high schools, I 
say talking to them, I like to listen to them, because they 
have a lot of wisdom to share. I was talking about budget 
surpluses and projected revenues and projected surpluses. And I 
said to this class that I was talking to, what do you think 
projected means? This one young man raised his hand and said, 
maybe yes, maybe no. And boy, was he right, because we were all 
wrong about projected surpluses.
    I guess I would ask you, in view of what you've said 
already, and I supported this last time and I think we need to 
do this, would you consider supporting 5-year budgeting instead 
of 10-year budgeting?
    Secretary O'Neill. I think it makes an awful lot of sense 
to do a 5-year budgeting. I said earlier, it's OK as a mental 
discipline to do 10-year projections. But we shouldn't confuse 
that with and think it's a prediction. It's only a guesstimate, 
if you will. I think we should have a higher sense of 
discipline for ourselves on 5-year budgeting and yes, I think 
that's directionally right.
    Mr. Moore. I would hope that you will advocate that within 
the administration, because I think it really just makes so 
much sense. Because we can't tell what the weather's going to 
be 7 days from now, much less what the surpluses or what the 
economy's going to look like a year from now or 5 years from 
now.
    Secretary O'Neill. I agree with you.
    Mr. Moore. But 5 is better than 10 years.
    I also, when I talk to these high school students, I was 
talking last year and at that time I think the national debt 
was about $5.7 trillion. Just coincidentally about the same as 
the projected surplus. And I was talking about that debt and 
the benefits of paying down the debt in terms of what Chairman 
Greenspan had said about lower long term interest rates if 
we're able to keep our debt down and keep fiscal 
responsibility.
    I said to these students, guess what happens if we don't 
pay down the debt, who's going to have to pay it down. They all 
looked at one another and in kind of a chorus they said, ``We 
will.'' And I think, I believe that you agree with this, and I 
think most people here agree with this, that it is inherently 
unfair for us to push our debt onto our children and 
grandchildren and future generations in this country. I hope we 
can all get back to the point where we can be talking about 
hopefully surpluses. It's a lot more fun to govern when we're 
talking about surpluses than deficits.
    But I do want to say, and this is winding down here, you 
said there are a couple of options. One is raise taxes. 
Nobody--very few people in this whole body--are talking about 
raising taxes. The other was cutting spending. There's a lot of 
talk about that. The other, though, is no new tax cuts. That's 
another option. Right now, when the President's talking about a 
stimulus package of $80-plus billion, and we are in a situation 
where we have to spend more on protecting our country and 
defending our country, and I think virtually everybody here is 
going to do that as well, we're behind the President 100 
percent on that.
    I'm just very nervous, though, about more tax cuts when 
we're in a situation of revenue shortfalls, and adding to the 
debt which I'm going to ask my kids and grandkids to pay. I 
don't think that's fair. I understand you believe it's going to 
grow the economy. I talked to a Republican banker back home, 70 
years old. I said, Ben, what do you think about the President's 
proposed stimulus package? He kind of laughed and he said, we 
don't need that. He says, that's really nuts. We don't need to 
do that. He says he thinks the economy is recovering, as 
Chairman Greenspan has indicated there are positive 
indications, and I've heard other economists say that.
    So I would just ask you please to consider, maybe the best 
course of action is to do nothing in terms of trying to further 
stimulate this recovery if it's underway. Because if it is 
underway and we do that, we're going to end up adding to the 
debt that we already have in this country. I say that with all 
due respect, and I really mean that. Because I hope and believe 
we're all working toward the same objectives here. Thank you.
    Secretary O'Neill. Thank you.
    Mr. Hastings. Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman.
    Mr. Secretary, thanks as always for your candor. It's 
refreshing.
    Secretary O'Neill. Thank you.
    Mr. Davis. One of the comments you made earlier I'd like to 
enlarge upon was your statement the only way to get money was 
to take it away from people. That normally describes us just 
raising taxes to fund the government. But as has been made 
painfully clear today, and I think you would agree, because we 
can go into deficit spending, into this publicly held debt, 
which I think roughly is about $3.4 trillion, we also have the 
ability to take money away from one generation and give it to 
another.
    Now, I applaud your candor in acknowledging the 
relationship between increasing the size of the publicly held 
debt and the impact on interest rates. As I'm sure you know, in 
2002, under your proposal, we will increase the publicly held 
debt by $157 trillion.
    Secretary O'Neill. Billion.
    Mr. Davis. And I understand your further point that you 
think the impact will be de minimis in terms of the impact on 
interest rates, and I certainly hope you're correct. I know 
we'll have some debate about that.
    Given how fragile these projects are, Mr. Secretary, and 
how fragile they continue to be, and this is a chart, it's not 
the unified budget surplus, it's just the Social Security and 
Medicare Trust Fund surpluses, shouldn't we err on the side of 
caution, avoid this further tax cuts the administration 
proposes, which I think is in excess of at least $800 billion 
over 10 years, and instead aim for a balanced budget and 
dealing with the security spending?
    Secretary O'Neill. Well, at the moment, I'm not sure I can 
get this from your chart, but at the moment, we're anticipating 
even with the tax reduction of last year, which over the 10-
year period only accounts for 40 percent of the difference, and 
in this year, accounts for 15 percent of the difference, we're 
anticipating a surplus along with the Congressional Budget 
Office of $1.6 trillion over the next 10 years.
    So with the slow-down in the economy, with the terrorist 
attacks, with $660 billion worth of so-called technical 
reductions that reduce the surplus, I think we still do have an 
appreciable surplus. I honestly do not think it's a good idea 
to raise taxes to create what I call an accommodation for 
accountants. I think restoring growth to our economy will get 
us back on a track that will produce even larger surpluses than 
what are now being estimated, and it will do it sooner rather 
than later.
    Mr. Davis. Mr. Secretary, my question was directed to the 
new tax cuts that you're proposing, not revisiting the existing 
tax cuts that were enacted.
    Secretary O'Neill. Well, maybe we could talk specifically 
about those. In effect, most of them are tradeoffs against 
spending. There's really no difference. We in the Congress have 
adopted a process of saying, for example, that at the end of 10 
years, everything is reopened and we go back to the status quo 
on the tax side and the President said, we ought to make the 
tax cuts that were enacted last year permanent. That means that 
from a scorekeeping point of view, the fact that we're now 
saying, the estate tax provisions should be permanent, not just 
last for 9 months, scorekeeping says that costs a lot of money.
    The truth of the matter is the process and procedure and 
conventions that are followed are unfortunate. Because we all 
know that when we get to the end of the 10-year period and 
we're faced with the prospect of increasing the tax rates on 
the lowest income taxpayers from 10 percent to 15 percent, 
we're not going to do that.
    Mr. Davis. Well, Mr. Secretary, at the risk of 
interrupting, because we're going to run out of time here, my 
question was directed to the tradeoff, not between spending and 
the tax cuts, it's the tradeoff between paying down the 
publicly held debt and the tax cut.
    Secretary O'Neill. Well, why would you trade it any 
differently than the $48 billion increment the President has 
asked for to pursue the war on terrorists? Every dollar, 
whether it's on the spending side or the tax side, if it has 
the effect of reducing the size of the surplus, is traded 
against reduction in the publicly held debt. So I think it 
makes no difference at all.
    Mr. Davis. There is no disagreement here about whether we 
should spend the money on the security. The question is to what 
extent should we put emphasis on paying down the publicly held 
debt, or taking risks on interest rates versus doing new tax 
cuts beyond what we did last year?
    Secretary O'Neill. I said earlier that I think the data is 
really clear in what it is that sets interest levels. The first 
is kind of a natural or real requirement of capital markets as 
to a 3, a 3\1/2\ percent return for capital on a constant 
dollar basis. The other portion of interest rates is decided by 
inflation. To the degree our combined actions here in 
Washington raise the specter of inflation, then we've got to 
worry about rates going up. At the moment, I would say 
inflation is about as benign as it's been for 40 or 50 years.
    And so I don't think that's an immediate source of concern. 
In fact, long rates are down substantially from the level that 
they averaged from the period 1993 to the year 2000. And then 
if you want to specifically talk about the tax side, let's take 
the issue of a proposed tax credit for senior citizens for 
prescription drugs.
    Mr. Davis. Mr. Secretary, I have to interrupt you, because 
the Chairman's about to cut me off. My last question, which is 
a very brief one, is do you think the assumptions upon which 
you are basing your proposal, in particular the additional tax 
cuts of about $800 billion, do you think those assumptions are 
more reliable than the assumptions you brought to us last year 
about the rate of growth in the economy?
    Secretary O'Neill. I think the pricing that you find in the 
budget is the best that human minds know how to make it. I 
would say the independent Congressional Budget Office has been 
almost in perfect parallel with what we've been saying. If you 
look at our estimates of everything compared to independent 
private sector people, we're always on the conservative side.
    Does that mean that I believe the projections of 10-year 
numbers are ones that I would bet my life on? I wouldn't. 
Anyone who would simply doesn't understand how life works. I 
said earlier, let me say again, nobody that I know anticipated 
the terrorist attacks on the World Trade Center. It was 
simply--thank God--an un-knowable thing. Hopefully it's a 
preventable thing going forward.
    But we don't know what's going to happen 6 months from now 
or 9 months from now that could cause us or force us to change 
our projections for the period going forward.
    Mr. Davis. Thank you, Mr. Chairman.
    Mr. Hastings. Thank you, Mr. Davis.
    Mr. Secretary, thank you very much for your time here. We 
apologize for having to break these meetings for our votes. But 
that's part of the way it works.
    I just remind members that the next scheduled meeting is 
next Tuesday at 2 p.m. We have Assistant Secretary Wolfowitz 
from Defense.
    With that, the meeting stands adjourned.
    [Whereupon, at 12:30 p.m, the committee was adjourned, to 
reconvene at the call of the Chair.]

                                
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