S. HRG. 108–33

CONCURRENT RESOLUTION ON THE 

BUDGET FOR FISCAL YEAR 2004

HEARINGS

BEFORE THE

COMMITTEE ON THE BUDGET 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

January 29, 2003—THE STATE OF THE ECONOMY

January 30, 2003—THE BUDGET AND ECONOMIC OUTLOOK

February 4, 2003—THE PRESIDENT’S FISCAL YEAR 2004 BUDGET

February 5, 2003—THE PRESIDENT’S FISCAL YEAR 2004 BUDGET 

PROPOSALS

February 11, 2003—THE PRESIDENT’S INTERNATIONAL AFFAIRS 

BUDGET

February 13, 2003—DEPARTMENT OF TRANSPORTATION’S FISCAL 

YEAR 2004 BUDGET PROPOSALS

February 26, 2003—THE PRESIDENT’S FISCAL YEAR 2004 BUDGET 

PROPOSAL FOR MEDICARE AND MEDICAID

September 3, 2003—THE PRESIDENT’S FISCAL YEAR 2004 BUDGET 

(

Printed for the use of the Committee on the Budget 

CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL YEAR 2004

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87–370pdf 2003

S. HRG. 108–33

CONCURRENT RESOLUTION ON THE 

BUDGET FOR FISCAL YEAR 2004

HEARINGS

BEFORE THE

COMMITTEE ON THE BUDGET 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

January 29, 2003—THE STATE OF THE ECONOMY

January 30, 2003—THE BUDGET AND ECONOMIC OUTLOOK

February 4, 2003—THE PRESIDENT’S FISCAL YEAR 2004 BUDGET

February 5, 2003—THE PRESIDENT’S FISCAL YEAR 2004 BUDGET 

PROPOSALS

February 11, 2003—THE PRESIDENT’S INTERNATIONAL AFFAIRS 

BUDGET

February 13, 2003—DEPARTMENT OF TRANSPORTATION’S FISCAL 

YEAR 2004 BUDGET PROPOSALS

February 26, 2003—THE PRESIDENT’S FISCAL YEAR 2004 BUDGET 

PROPOSAL FOR MEDICARE AND MEDICAID

September 3, 2003—THE PRESIDENT’S FISCAL YEAR 2004 BUDGET

(

Printed for the use of the Committee on the Budget 

COMMITTEE ON THE BUDGET 

DON NICKLES, Oklahoma, Chairman 

PETE V. DOMENICI, New Mexico 

CHARLES E. GRASSLEY, Iowa 

JUDD GREGG, New Hampshire 

WAYNE ALLARD, Colorado 

CONRAD BURNS, Montana 

MICHAEL ENZI, Wyoming 

JEFF SESSIONS, Alabama 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN ENSIGN, Neveda 

JOHN CORNYN, Texas 

KENT CONRAD, North Dakota 

ERNEST F. HOLLINGS, South Carolina 

PAUL S. SARBANES, Maryland 

PATTY MURRAY, Washington 

RON WYDEN, Oregon 

RUSSELL D. FEINGOLD, Wisconsin 

TIM JOHNSON, South Dakota 

ROBERT C. BYRD, West Virginia 

BILL NELSON, Florida 

DEBBIE STABENOW, Michigan 

JON S. CORZINE, New Jersey 

HAZEN MARSHALL, Majority Staff Director 

MARY ANN NAYLOR, Staff Director 

(II) 

iii

C O N T E N T S 

HEARINGS 

Page 

January 29, 2003—The State of the Economy ...................................................... 1

January 30, 2003—The Budget and Economic Outlook ....................................... 205

February 4, 2003—The President’s Fiscal Year 2004 Budget ............................. 291

February 5, 2003—The President’s Fiscal Year 2004 Budget Proposals ............ 345

February 11, 2003—The President’s International Affairs Budget ..................... 435

February 13, 2003—Department of Transportation’s Fiscal Year 2004 Budget 

Proposals ............................................................................................................... 543

February 26, 2003—The President’s Fiscal Year 2004 Budget Proposal for 

Medicare and Medicaid ........................................................................................ 615

September 3, 2003—The President’s Fiscal Year 2004 Budget ........................... 671

STATEMENTS BY COMMITTEE MEMBERS 

Chairman Nickles ................................................... 1, 205, 291, 345, 435, 543, 615, 671

Senator Bunning .................................................................................................. 588, 758

Senator Byrd................................................................................................................. 426

Senator Conrad ....................................................... 2, 205, 291, 345, 435, 543, 615, 671

Senator Corzine ............................................................................................................ 593

Senator Enzi ......................................................................................................... 488, 649

Senator Feingold .................................................................................................. 424, 755

WITNESSES 

Barry B. Anderson, Acting Director, Congressional Budget Office ..................... 228

Michael E. Baroody, Executive Vice President, National Association of Manufacturers ................................................................................................................ 36

Hon. Mitchell E. Daniels, Jr., Director, Office of Management and Budget ...... 354

Douglas Holtz-Eakin, Director, Congressional Budget Office .............................. 697

Glenn Hubbard, Chairman, Council of Economic Advisers ................................. 304

Michael P. Jackson, Deputy Secretary of Transportation, United States Department of Transportation ................................................................................. 552

David R. Malpass, Chief Global Economist, Bear Stearns & Company, Inc. ..... 19

Hon. Colin L. Powell, Secretary, United States Department of State ................ 447

Gene B. Sperling, Former National Economic Advisor and Director of the 

National Economic Council ................................................................................. 56

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

and Human Services ............................................................................................ 626

QUESTIONS AND ANSWERS

Questions and Answers............................................................... 276, 405, 427, 492, 604

ADDITIONAL MATERIALS AND CHARTS SUBMITTED 

Testimony, charts, and graphics submitted ............. 93, 259, 397, 486, 594, 719

(1)

THE STATE OF THE ECONOMY 

WEDNESDAY, JANUARY 29, 2003

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

The committee met, pursuant to notice, at 10:08 a.m., in room 

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

Present: Senators Nickles, Allard, Burns, Enzi, Sessions, 

Bunning, Crapo, Ensign, Conrad, Sarbanes, Nelson, Stabenow, and 

Corzine. 

Staff present: Hazen Marshall, staff director; Dan Brandt, economist and Bob Taylor, special counsel. 

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

chief economist. 

OPENING STATEMENT OF CHAIRMAN DON NICKLES 

Chairman NICKLES. I call the Committee to order. I want to 

thank everybody for coming and especially thank my colleague and 

ranking member, Kent Conrad, for his assistance. 

We have a series of hearings set up. Today will be on economic 

growth. We have three very distinguished panelists that will provide their expertise and insights on how we might be able to better 

grow the economy, and I appreciate their participation as well. 

I would especially like to thank my friend and colleague, Senator 

Conrad, who has served on this committee I believe 16 years. He 

has served as chairman and ranking member, and he has also 

served in almost every position in this committee. I appreciate his 

service. The last Congress was a very difficult Congress. It is always difficult. This committee is a tough committee. I appreciate 

that, I recognize it, and I recognize and appreciate the willingness 

of our colleagues to serve on it. We have several new members on 

the Committee. I welcome them. I see Senator Conrad Burns has 

just joined the Committee as well as Senator Mike Enzi from Wyoming joining us, Senator Sessions from Alabama, Senator Bunning 

joins us as well. So we welcome you to the Committee. Senator 

Crapo has joined us, and Senator Ensign will be here as well. So 

we have some new members and some veterans. I believe Senator 

Hollings has been on this committee for 27 or 28 years. I have been 

on it for—I am not sure how long—a long time. It is kind of bad 

when you think, well, maybe 20 years or so. 

I want this committee to be an enjoyable, educational, informative opportunity for all of us so we can better learn how to manVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\DOCS\87370.TXT TISH PsN: LAF
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age Government and maybe have a better success in the budgeting 

process. We have a $2-trillion-plus budget. That is a big challenge. We don’t have a $750 billion budget. Our budget is not just the discretionary amount. Our budget is the entire Federal budget. So we 

need to keep a lot of things in perspective. 

We have some big challenges. We happen to be presiding now at 

a historic time. We have had a recession, and we have had revenue 

declines. We went from surpluses to deficits. That is caused primarily because revenues have fallen. Revenues have fallen by 9 

percent in the last 2 years, the first time in history we actually had 

a revenue drop 2 years in a row. I believe it dropped from 2000 to 

2001 1.7 percent and the next year almost 7 percent, combined, 

about a 9-percent drop in revenues. That is historic. At the same 

time, expenditures went up, and expenditures went up rather dramatically. Last year, they grew by 7.9 percent, and that is 11 percent if you exclude falling interest rate costs. So you had revenues 

declining and you had expenditures growing rather dramatically. 

So we went from a surplus of, I believe, $129 billion to a deficit of 

$159 billion just between 2001 and 2002. 

Well, we need to reverse that, and hopefully one of the ways we 

can reverse that is by having a growing economy. The purpose of 

our hearing today is to figure out how can we grow the economy. 

I compliment President Bush. He challenges us last night in the 

State of the Union Address. He made several recommendations to 

Congress on how we might better grow the economy. I compliment 

him for those proposals. We will have administration witnesses before this committee to explain those proposals and to hear ideas. 

That is not the purpose of this hearing. The purpose of this hearing is to pull in individuals who are recognized as experts in their 

field to hear their insights on how we might better grow the economy and to have maybe a little dialog. So we will have administration witnesses. I believe we have scheduled tomorrow CBO, and 

they just issues the report, the budget and economic analysis. I 

haven’t had a chance to look at it. It just came out. I think they 

are supposed to have a hearing in the House Budget Committee 

today. I believe that was canceled, so we will hear from them tomorrow. So we get a little more technical from CBO on what their 

analysis of it is, and then the following week we will hear from 

Mitch Daniels and administration officials to explain their budget 

and give us some insights as well. 

So I look forward to working with all members of our committee. 

I look forward to our witnesses. Before I introduce our witnesses, 

I will call on the ranking member and my friend Kent Conrad for 

any opening remarks he might have. 

OPENING STATEMENT OF SENATOR CONRAD 

Senator CONRAD. Thank you, Mr. Chairman. 

Thank you, first of all, for holding this hearing because I think 

it is a critically important subject. Thanks, too, for the new energy 

and attitude you have brought to the Committee. It is welcome and 

we look forward very much to working with you. 

I want to report to our colleagues that the incoming chairman 

and his staff have been eminently fair in the operations of the 

3

Committee, and we all appreciate that very much. They are professional and it has been a delight to deal with them. 

I want to also welcome the new members. We have many new 

members, and we are delighted that they have joined the Committee. We look forward to working with you in the days ahead as 

we discuss really critical choices for the country. What do we do 

with the budget of the United States? What do we do to promote 

growth? What do we do to improve the national defense and improve education? What do we do to secure the long-term fiscal 

strength of our Nation? 

It won’t surprise you, Mr. Chairman, if I just turn briefly to a 

few charts to make the point on what I think I have learned from 

my past service here in terms of what is effective.


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I want to go back to the 1980’s when we had a policy of a significant tax cut at the same time we were having a significant military 

buildup, and what we saw was the deficits increased dramatically. 

Then in the 1990’s, we changed course, and we moved back toward 

balanced budgets. I want to just talk about what I learned from 

those changes. 

During the period of the 1980’s, when deficits were growing dramatically, I believe Federal Government borrowing was squeezing 

out private investment; that as the Government competed for 

funds, that reduced funds available for investment. Investment is 

critical to economic growth. 

Then we saw a change and, instead of adding to deficits and adding to debt, we started growing out of deficits, we got very good results in the real world. Real investment in equipment and software 

grew much faster in the 1990’s than in the 1980’s.

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Let’s go to the next chart. The unemployment rate fell to the lowest level in 30 years at this time that the Federal Government was 

moving toward fiscal balance.


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Let’s go to the next one. Total wage and salary income rose rapidly in the 1990’s, again, much faster than in the 1980’s.

Now we face a circumstance in which 2 years ago the projections 

were by the Office of Management and Budget and the CongresVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00014 Fmt 6633 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF

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sional Budget Office that we would have $5.6 trillion of surpluses 

over the next decade. Now we see that that circumstance has 

changed dramatically. If we adopt the President’s policies, the additional tax cuts that he is advocating, the spending that he is advocating, we will be $1.5 trillion in the red.

When I look at his specific plan for economic growth, the stimulus plan or the growth plan, it strikes me that it will be ineffective in the following ways: 


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First of all, only a small part of it is effective in this fiscal year, 

some $36 billion this fiscal year, with a 10-year cost of over $900 

billion when the associated interest cost is included.

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It also strikes me that it will be ineffective because it is so heavily weighted to the highest-income people in our country. Those 

earning over $1 million a year will get an $88,000 tax reduction, 

but those in the middle of the income stream in this country, those 

in the middle 20 percent who earn between $21,000 and $38,000 

a year will get, on average, only $265. Yet those are the people that 

are very most likely to spend the money and thereby stimulate the 

economy.


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It also strikes me that over the long term it will be ineffective 

because of the deficits and debt that it will add. This is to me the 

key point. 

We are looking ahead with the new CBO numbers. If Social Security is not used, is not invaded for other purposes, we see deficits 

throughout the whole rest of the decade of very, very large proportion, approaching $4 trillion. It is for that reason that on our side 

we have proposed a different stimulus package, one that has much 

more stimulus now, but much less cost over the 10 years. We have 

just received an evaluation from Mark Zandi, the economist that 

has now been widely quoted in the Wall Street Journal and on the 

various news programs. His conclusion is that for 2003 the Democratic plan would give us about eight-tenths of 1 percent growth in 

GDP; the Republican plan, about half as much. The same is true 

for 2004: the Democratic plan, about 1 percent of GDP growth, in 

addition to what will otherwise occur; the Republican plan, about 

four-tenths.


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The bigger message is the long term. In the long term, he finds, 

as have other econometric modelers, that the President’s plan will 

actually hurt growth—by a very small amount but, nonetheless, 

negative. The reason is that the growth of deficits and debt will 

provide a drag to the economy that overwhelms the increased efficiency one gets from the tax changes that are made. 

That tells me, Mr. Chairman, that we do have a real challenge. 

How do we forge a plan that gives lift to the economy now, but 

doesn’t endanger long-term growth by adding to deficits? 

Chairman NICKLES. Senator Conrad, thank you. I am going to 

try and make sure that we don’t have this turn into a debate between you and me. I could respond, but I won’t at this time. 

Do any other colleagues wish to make a comment before I introduce our guests? If not, we are delighted to have three outstanding 

panelists, and I seek and welcome your testimony today. Your 

statements will be inserted into the record. 

First, I am going to ask you—I am not going to set a time limit, 

but if you would keep your remarks to 7 or 8 or 9 minutes, then 

we will open it up for questions. I am not ringing a bell. 

First we have David Malpass. He is the Bear Stearns chief global 

economist. I have had the pleasure of knowing him for some time. 

I respect and admire his work. He has had a series of economic appointments during the Reagan and Bush administrations, including 

6 years with Secretary James Baker at Treasury, and also the 

State Department. Mr. Malpass has extensive experience on economic, budget, and international issues, including the 1986 tax cut 

and the Gramm-Rudman budget law. So, Mr. Malpass, welcome. 

STATEMENT OF DAVID R. MALPASS, CHIEF GLOBAL 

ECONOMIST, BEAR STEARNS & COMPANY, INC. 

Mr. MALPASS. Thank you, Senator. Mr. Chairman, Senator 

Conrad, members of the Committee, thank you for the invitation to 

testify. 

What I propose to do, Senators, is go through in detail the first 

page of my prepared testimony, and then explain the graphs as a 

way to summarize the prepared testimony. 

The economy faces an unusual number of near-term problem: 

Iraq, the war on terrorism, artificially expensive oil, sudden weakness in the U.S. dollar, a large and growing current account deficit, 

rapid growth in Federal Government spending, and a 3-year decline in equity values. 

Arrayed against these problems are the small-business character 

of the U.S. economy, record low interest rates and inventory-tosales ratios. Inventories are at low levels now. We have the likelihood, I think, of a pro-growth tax cut. We have a strong, flexible 

labor force, 131 million workers in the United States with fast productivity growth. 

The balance, in my view, is favorable for the longer-term U.S. 

outlook. I will be more confident about the near term when Iraq 

disarms, a growth-oriented tax cut passes Congress, and oil prices 

find a lower level based on market forces rather than a cartel. 

A growth-oriented tax cut is a critical part of the recovery. Our 

economic health depends on the efficiency of the capital and incentive structures rather than on cash in the consumer’s pocket. I disVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00021 Fmt 6633 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
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agree with the view that consumption is the weak part of the economy or that a demand-oriented tax cut is a necessary step for economic recovery. 

One key to faster economic growth is to shift from the present 

debt-biased capital structure to a more balanced one. That is why 

President Bush’s proposal to eliminate the double taxation of dividends would, in my view, add to both the near- and long-term 

growth outlook. Remember that double taxation causes a heavy 

bias toward debt in the corporate structure. 

There is an additional urgency for the U.S. to make progress on 

a growth agenda. In most other parts of the world, economies are 

substantially weaker than ours. Unemployment rates are higher, 

government spending and unfunded pension liabilities are even 

greater than our own, health care systems are less effective, and 

currencies even more volatile than the dollar. 

As a result, clear U.S. leadership will play a critical role in helping improve growth policies elsewhere, including promoting tax reform, currency stability, sensible environmental policies, and restraint in the size of Government. 

What I would like to do now is show you some of the graphs in 

my prepared testimony. On page 2, there is a graph showing some 

budget issues, and the first graph is one showing how well economists do in forecasting the growth rate. The graph shows you that 

economists do badly at this task. You can see in the 1990’s, for example, how CBO and OMB both expected certain growth rates, 

roughly 2-3 percent, and the actual economy grew much more 

strongly. Then in 2000-2001, we saw the actual growth rate well 

below the OMB and CBO expectations. CBO just put out a new report this morning, and one thing they do is show the sensitivity of 

the budget deficit to growth. They find that the change in the Fiscal Year 2002 fiscal deficit was a $471 billion deterioration; of that, 

16 percent was caused by tax cuts, another 16 percent by new 

spending, and fully 68 percent by the change in the economic outlook. 

So what they are saying basically is that growth is critical to the 

fiscal deficit much more so than the assumptions on the deficit effect of a tax cut. 

Looking out over 10 years, what CBO found was that the numbers are more clear against government spending. Of the $5.6 trillion deterioration in the fiscal outlook, the tax cuts caused less 

than a quarter of that, spending caused a full third, 32 percent, 

and the slower economic growth caused nearly half of the deterioration in the longer-term fiscal outlook. 

The graph that I show on the bottom of page 2 illustrates this. 

We fall into a big fiscal deficit 2.5 percent growth. If you have a 

3.5-percent growth rate, you run into big surpluses in the outyears. 

Small changes in the growth outlook, meaning half-percent 

changes in the longer-term growth outlook have a great deal of control over the fiscal deficit. 

I would like to show you now page 4. What happened in 2002 

was the aftermath of a recession. We can all regret it and regret 

the loss of jobs. By the numbers, it was a shallower recession than 

17

what we have seen. The peak to trough was the shallowest that we 

have on record. 

On page 5, I am showing business equipment spending. We often 

hear the idea that there was simply no investment taking place in 

2002. In reality, the rate of recovery was pretty much in line with 

averages. By the third quarter of 2002, we were back at the level 

of business equipment spending that was the average of the boom 

years, of the 1997-to-2000 period shown on the graph. 

At the bottom of 5 and the top of 6, I show a chart about the 

peak to trough job losses. Again, as I emphasize, it is unfortunate 

to lose any jobs, but when you have a recession, you do lose jobs. 

What we saw in the recent recession is that the job losses in this 

last recession peak to trough were 1.7 million. That was 1.3 percent of the labor force. The U.S. economy and the number of workers is just much bigger than what we used to have. 1.7 million job 

losses is unfortunate, but relative to GDP was the smallest loss in 

jobs from peak to trough of any of the recessions going back into 

the 1960’s. 

At the bottom of 6, even though the unemployment rate has 

climbed now to 6 percent, it is below what used to be the normal 

unemployment rate or even the trough unemployment rate. In the 

1970’s, the unemployment rate never really got down to the current 

level. 

The gist of this is that while we have to focus on getting more 

jobs into the economy, it was a shallower-than-normal recession, 

and a shallower-than-normal recovery. Fewer jobs were lost than 

in the normal peak to trough recession. 

One of the reasons for that is that personal income growth was 

strong in 2001 and 2002, well above average. The top of 7 shows 

you the current path of personal income growth versus what the 

average cycle. One of the reasons for the strength of personel income growth was the strength of the economy leading into the recession in 2001, but also the tax cuts that occurred in 2001. 

We had unusually well-timed fiscal and monetary stimulus that 

allowed a shallower-than-normal recession and better-than-normal 

personal income growth. 

On page 7 and 8, I describe the consumer behavior. We often 

hear the idea that the consumers were profligate, spendthrift. Certainly we could all save more, and that would be good. As we look 

at the data, there is a huge discrepancy in the government data. 

They exclude capital gains income from income. 52 percent of 

Americans hold equities, either directly or indirectly now. As people took capital gains, the Government didn’t see that income, 

didn’t record it. Capital gains tax was considered an expenditure. 

The higher the stock market went in the 1990’s, the worse it looked 

for the personal savings rate. It gave the Government justification 

for taxing money away from people by saying, look, the people 

aren’t saving. In reality the low savings rate was purely a mistake 

in the Government personal savings data. 

At the bottom of 8, we have tried to adjust the savings rate simply to include one of the discrepancies, the realized capital gain. 

People actually were saving at a relatively steady rate in the 

1990’s, and I think that has continued up through 2002. So as you 

think about how to build a tax cut, be leery of the idea that you 

18

have to have a tax cut to replace lost consumption. There really 

wasn’t any lost consumption, and there really wasn’t as much lost 

savings. This is particularly true at the lower-income levels because their personal wealth and net worth is much more tied up 

in the home than in equities. As you go up in the income brackets, 

people lost more from the stock market, but at the lower income 

levels they still may have a home and a job, and that turns out to 

be the critical part of consumption. 

On page 9 of my prepared text, I go through reasons for thinking 

that the capital structure is really what you ought to focus on in 

thinking about a tax cut. We have a heavily skewed system in the 

United States where debt is strongly encouraged by the Tax Code. 

President Bush has proposed a way to somewhat level the playing 

field. I think it would be very stimulative in both the short and the 

long run—

In the middle of 10, I address municipal bonds. I think there is 

a little bit of confusion going on there. One of the criticisms of the 

tax proposal is that it might disadvantage municipal bonds. I disagree on two grounds: 

First, in economic theory and practice, municipal bond yields are 

related to the after-tax return on U.S. treasury securities. President Bush’s proposal to eliminate double taxation of dividends 

won’t affect that calculation. 

Second, municipal bonds are substantially different from dividend-paying equities in terms of creditworthiness and volatility. 

The two instruments aren’t very good substitutes for one another. 

I don’t agree with the idea that eliminating double taxation of corporate income would somehow disadvantage State and local governments. In fact, I think they would benefit immensely from the 

new jobs that are created in the economy by the proposal. 

On page 10 and 11, my testimony goes through foreign experience with double taxation of dividends. What we find is that the 

U.S. is one of only three major economies that double taxes corporate income. As a result, the U.S. has the second highest combined top tax rate on dividends. The only country that has a higher 

tax rate on dividends is Japan. That is an aberration in our system. 

Chairman NICKLES. Mr. Malpass, do you have a chart that shows 

effective countries’ tax rates on dividends? 

Mr. MALPASS. The text on page 11 goes through a breakout of 

countries. On page 10, it points out that only three countries—the 

U.S., Switzerland, and Ireland—have double taxation. 

Chairman NICKLES. I would just be interested, if there is a chart, 

I would be interested in seeing what other countries are doing, if 

you have it. I am not asking you to do——

Mr. MALPASS. I don’t have it here, but I will be happy to provide 

it. 

Chairman NICKLES. I appreciate that. You kind of need to summarize so I can get to the other panelists. 

Mr. MALPASS. I will finish it here. 

Deficits and interest rates are connected on page 11. There really 

isn’t a correlation between the fiscal deficit and interest rates. In 

the 1980’s 10-year bond yields fell throughout the decade even as 

19

the fiscal deficit was rising. In 1999 and 2000, as we moved into 

sizable fiscal surpluses, bond yields were rising sharply. 

In summary, the Administration’s tax proposal will, in my view, 

provide substantial near-term and long-term stimulus. It will reduce the distortion in the U.S. capital structure and boost the U.S. 

growth rate. I think there are obviously many other things that 

should be done at this point to stimulate growth because, that is 

the dominant factor in the fiscal deficit. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Malpass follows:]

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Chairman NICKLES. Mr. Malpass, thank you very much. 

Next we will hear from Michael Baroody. He is the executive vice 

president of the National Association of Manufacturers and serves 

as chairman of the Asbestos Alliance Steering Committee. The National Association of Manufacturers has 14,000 member companies 

and subsidiaries. In addition to that, Mr. Baroody has an impressive background that includes serving as Assistant Secretary at the 

Department of Labor and also as the Deputy Assistant to President 

Reagan. 

Mr. Baroody, welcome to the Committee. 

STATEMENT OF MICHAEL E. BAROODY, EXECUTIVE VICE 

PRESIDENT, NATIONAL ASSOCIATION OF MANUFACTURERS 

Mr. BAROODY. Thank you very much, Chairman Nickles, and 

Senator Conrad and members of the Committee. 

As the Chairman indicated, I am here to testify both for manufacturers and the NAM and for the Asbestos Alliance we lead. I 

would like to try to summarize the formal testimony that I have 

submitted and ask that the studies I attached to that formal submission be included in the record. Those are studies that look at 

the asbestos litigation crisis. I also attached a copy of the NAM’s 

pro-manufacturing, pro-growth policy agenda that we would recommend to the 108th Congress. 

I would like to summarize emphasizing three major points. 

First, American manufacturers are on the leading edge of the 

most intense global competition in history, which, put simply, 

makes it impossible to raise prices. That means that if costs rise 

for whatever reasons, including congressional action or inaction, 

while we can’t raise prices and costs go up, something has got to 

give. Regrettably, in the past 2 years, despite the fact that we have 

the best workers in the world in manufacturing, it was the people 

who make things in America who had to give, and they had to give 

too much as we lost 2 million jobs in American manufacturing. 

Second, the overall economy—and, more specifically, the manufacturing economy—is growing currently too slowly to reverse this 

trend, far more slowly than in any comparable recovery period in 

the post-World War II era. In fact, the recent recession was unique 

in that manufacturing led into the slowdown and currently lags in 

the recovery opposite from the pattern of previous recessions. 

In December of 2000, as the recession in manufacturing became 

apparent to us, the NAM called for pro-growth policy, including 

pro-growth tax relief. Now that the manufacturing slowdown has 

proven so durable, we repeat the call more urgently than ever, in 

the conviction that manufacturing remains central to the strength 

of the American economy and its prospects for future economic 

growth and as central to our national security as to our economic 

security. 

Third, Mr. Chairman, there is a need to look at obstacles to 

growth. I have in mind among them the well-documented burden 

of excessive regulatory and legal compliance costs which together 

accumulated to an estimated $700 billion last year. On the regulatory side alone, these burdens tend to fall disproportionately on 

manufacturers, so much so that the regulatory costs per worker in 

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thirds more than the burden on it per employee in the general 

work force. While the costs of the legal system are borne broadly 

throughout the country, there is one egregious example: the asbestos litigation crisis—it is a scandal, really—that has fallen especially hard on manufacturers. I would like to elaborate on this last 

point first and then return briefly to my other two before concluding this summary. 

Over its history, asbestos liability has bankrupted more than 65 

companies, more than 20 of them in the past 2 years. Though most 

of the companies which made asbestos products and mined it are 

in bankruptcy, the list of defendant companies continues to grow. 

A preliminary Rand study last fall offered an estimate of 6,000 defendants. Last week, that estimate was revised upward by 40 percent. It is now 8,400 defendant companies. 

By any common-sense standard, many defendants who were 

made to pay, and sometimes paid to the point of bankruptcy, 

haven’t harmed anyone. They are guilty only of being a solvent and 

usually an insured defendant. I have in mind, for one example, Mr. 

Chairman, a small Midwestern manufacturer of industrial air compressors. The company employs about 100 workers. Its compressors 

contain no asbestos, and it knows of no way that their use could 

have exposed anyone to asbestos. Yet they have been sued in multiple cases in multiple courts. And, worse, as for the plaintiffs, by 

any similar common-sense standard most of them aren’t sick. 

Again, Rand estimates that anywhere from two-thirds to 90 percent of all claimants are ‘‘functionally unimpaired, meaning that 

their asbestos exposure has not so far affected their ability to perform activities of daily life.’’

What we have, Mr. Chairman is a massively dysfunctional system that forces many companies in cases where they aren’t liable 

to compensate people who aren’t sick. That dysfunctional system 

hurts people. It creates many victims and many classes of victims, 

and first among these victims are the people who really are sick. 

Yet often they are forced to wait for years for compensation that 

is inadequate, and it is inadequate because the awards going to 

people who aren’t sick are depleting the resources that ought to go 

to compensate people who are. 

To illustrate the dysfunction, there is the case of the widow of 

a shipyard worker, widowed because of his fatal asbestos illness. 

Her only recourse was to sue several companies. She reports that 

most of them filed bankruptcy in the past 2 years, and she can expect to receive only a fraction of the compensation she might have 

expected pre-bankruptcy, perhaps a few thousand dollars. Contrast 

that with the notorious October 2001 Mississippi case where a jury 

awarded $150 million to six plaintiffs, $25 million each, about 

whom their lawyer boasted that ‘‘Most of these guys have never 

missed a day of work in their lives.’’

As for fairness in that, one member of the asbestos trial bar who 

favors reform, as we do—and there are many of them—testifying 

last September before both then-Judiciary Committee Chairman 

Leahy and now Chairman Hatch, concluded by urging Congress ‘‘to 

act quickly to fix this broken and abused part of our justice system 

before the real victims of asbestos lose everything.’’

35

If sick people and their families are the first victims of the system, they are not the last. There are thousands of economic victims, including people whose jobs are lost or threatened, whose retirement savings are depleted, and whose communities are diminished and economically shaken by the effects of massive asbestos 

liability burdens that hang over the companies they work for. One 

of the defendant companies in the Mississippi case I just mentioned 

is now bankrupt. Its total liability added up to more than the company had made in profits in its entire 40-year history. Another company saw 42 percent of its market value, $3.8 billion, disappear in a day because of financial market concerns about 

its asbestos liability. Thus far, $54 billion has been spent on this, and several estimates of the present and future liability if the asbestos litigation 

system isn’t reformed exceed $200 billion and range as high as 

$275 billion. 

The Nobel Prize-winning economist Joseph Stiglitz completed an 

excellent study last year of the economic consequences, and particularly on workers, of this asbestos crisis. Put briefly, he found 

that 60,000 workers had lost jobs because of bankruptcies; that 

these workers and their families had lost $200 million in wages because of this; and that workers at bankrupt companies had seen 

their retirement 401(k) savings drop by an average of 25 percent. 

When the study was released, I characterized its findings to mean 

that what we have seen so far was ugly, and we ain’t seen nothing 

yet. 

Rand, for example, says the eventual costs could exceed 400,000 

jobs, and if the system remains unreformed, the number of bankruptcies could grow with concomitant loss of jobs and wages, market valuation retirement savings, and community economic activity 

and well-being. 

Mr. Chairman, that takes me back to where I began. The overhang of asbestos liability is huge, and it adds to costs at a time 

when we can’t raise prices. I have called a $250 billion anchor of 

present and future liability that American industry has to drag as 

it strains to participate in this recovery. What we need instead of 

that anchor is the wind at our backs—in other words, more growth. 

Manufacturing remains today at the leading edge of productivity, 

innovation, and technology. Most of the R&D done in America, for 

example, is done in manufacturing. We are challenged as never before—by the effects of global and domestic economic slowdown and 

geopolitical certainty, the export-depressing effects of an overvalued dollar, the return of double-digit health care cost inflation, 

and other substantial changes. 

Mr. Chairman, a concluding thought. The state of the economy 

is our subject, and we are always in danger of assuming too much 

about its capacity to withstand such problems and costs as the asbestos crisis represents because—well, because it has withstood so 

many challenges in the past and continued to grow despite them 

and to prevail in global competition. The cumulative weight of 

these problems can overwhelm even a $10 trillion economy and 

sorely test even the considerable strengths of modern American 

manufacturing. This Congress could make a good start at dealing 

with them and invigorating economic growth by passing tax relief 

36

of the sort proposed by President Bush, which the NAM strongly 

supports, by constraining Federal spending, by doing no harm 

when it comes to adding regulatory and other costs to the conduct 

of business in America, and at long last, by responding to repeated 

urgings from the Supreme Court and elsewhere with a solution to 

the asbestos litigation nightmare. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Baroody follows:]

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Chairman NICKLES. Mr. Baroody, thank you very much. 

Our next witness we have is Mr. Gene Sperling. I think most of 

us know Mr. Sperling. We had the pleasure of working with him 

during his role advising the Clinton administration. He was the 

White House National Economic Advisor, and he also served as Director of the National Economic Council. Currently, Mr. Sperling is 

a senior fellow for economic policy and Director of the Center of 

Universal Education at the Council on Foreign Relations. 

Mr. Sperling, welcome. 

STATEMENT OF GENE B. SPERLING, FORMER NATIONAL ECONOMIC ADVISOR AND DIRECTOR OF THE NATIONAL ECONOMIC COUNCIL 

Mr. SPERLING. Thank you, Mr. Chairman, Senator Conrad, the 

rest of the Committee. I will do my very best to summarize my remarks, my testimony; if I read it, I would probably go longer than 

President Bush did last night. 

Chairman NICKLES. Thank you. 

Mr. SPERLING. I really want to focus in on two things, which are: 

one, what I believe is the short-term economic policies we need to 

stimulate demand and restore growth; and then, second, why I believe that the long-term focus on fiscal responsibility is an essential 

component to growth in the degree that it increases savings and 

capital and, I believe, leads to the type of sustainable growth and 

virtuous cycle that I think our country benefited from in the 1990’s. 

Let me start on the need for economic stimulus. There are several things Mr. Malpass said that I agree with. Consumers unquestionably were the economic hero in 2001, I think for a variety of 

reasons. I think the significant income gains that we have seen in 

the last half of the 1990’s and productivity have carried through. 

I think people saw their housing values staying high, and so I 

think there is no question that the consumer response was stronger 

than anyone expected. I also agree with him that outside of construction, aircraft, and telecom, there were some industries that 

certainly moved into growth on the investment side. 

The reason why I disagree, though, about the need to have a 

sharp degree of demand stimulus right now is that, one, I believe 

that for us to count on that consumer demand being there would 

be very unwise. Help-wanted index, at a 40-year high; we have lost 

2.35 million private sector jobs in the last 2 years. Yesterday the 

consumer confidence went to its lowest level since November 1993. 

In other words, consumer confidence is lower today than it was in 

September and October of 2001 after 9/11. In terms of investment 

growth, some companies certainly—industries are picking up, but 

look at a Business Council survey that showed that 78 percent of 

major companies are planning on reducing or maintaining their investment levels. Capacity utilization stays at 74 percent, 61.7 percent in the high tech. So I think that we do face a far greater risk 

of a negative downturn in which the perception of less demand 

could keep more companies sitting on the fence, and that this could 

lead to a negative cycle. So, in a sense, when one supports stimulus, one supports essentially an insurance policy against that type 

of negative cycle downward. 

54

Now, I believe if you are going to do a stimulus, it should really 

have two fundamental principles. I respect those who disagree that 

you need any kind of stimulus. If we are going to talk about that, 

it should be about how you inject as much demand as possible into 

this period of time when we fear weak demand will lead us in this 

downward cycle. Therefore, you fundamentally want to do a ‘‘bang 

for the buck’’ test. How much of the stimulus is likely to inject 

more consumer spending and business spending in the time that 

we are trying to focus on? So, therefore, my test has been how 

strong is the ‘‘bang for the buck’’ analysis and how much can we 

do this without having long-term costs on our deficit in the long 

term. 

Now, my opinion is that so far we have not served our country 

well with the forms of stimulus we have done. If you look at the 

consumer demand elements, we did get an advance of the 2001 tax 

cut at the 10-percent level into the fall of 2001. We left out the 34 

million families at the bottom who would have had the highest propensity to spend. While, Chairman Nickles, I congratulate you and 

Senator Clinton for making progress on unemployment, the people 

who get unemployment insurance are among those most likely to 

spend a high percentage of their funds and in the communities 

hardest hit. So, again, I don’t think we have served the country 

well with the types of stimulus that we have done so far. 

Second, on the business incentives, the goal on the business incentives for stimulus, as opposed to our different strategies for 

long-term growth, is to take measures that accelerate investment 

into this time period. Therefore, I supported having a very strong, 

40-percent depreciation bonus last year, but just for that year. 

What we passed was a 30-percent depreciation bonus, but it lasts 

for 3 years. That is a little bit like a store saying we have a special 

deal this weekend, 50 percent off; oh, but, by the way, you can get 

the same deal 2 months from now, 2 months after, 2 months after 

that. Nobody would rush to the store to buy in that circumstance. 

What we wanted to do was say to those companies who were sitting on the fence, we want you to accelerate your investment now, 

and so in doing that you offer temporary incentives that makes 

companies feel that they need to accelerate investment up in addition. Again, by doing a 3-year plan, we encouraged anybody sitting 

on the fence to keep sitting on the fence, because you could get the 

same incentive in 2004 that you could by accelerating investment 

right now. Again, I don’t think we have served our country well because we have not seen, I think, the effectiveness of that stimulus. 

Finally, we heard warnings from both Democratic and Republican Governors that States were hurting. Now, just from a simple 

point of view, $1 of stimulus at the Federal level will be canceled 

out by $1 of tax increases or spending cuts at the State level. So 

it has not made sense for us to have a plan that did not deal with 

the State contraction that they are going under. 

Now, let me stress, I am not for a complete bailout of States. I 

think that would create a moral hazard situation. I think you want 

States to feel that they are not going to be fully bailed out when 

they run through the rainy-day funds. Again, I believe we could be 

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lem, especially in light of the fact that States are facing the additional challenge of homeland security. 

So, quite simply, as my testimony says, I think that we should 

focus on consumer demand that is highly targeted to getting spending out in 2001. I think we should assist the States. I think the 

business incentives should be temporary. I would recommend that 

the Administration and Democrats compromise on a plan that is 

limited to costs in 2001—excuse me, 2003, that doesn’t have longterm costs, but you could take a mixture of Democratic ideas and 

things like increasing the child tax credit or expensing, as President Bush proposed, but limit the cost to 2001. Now—excuse me, 

2003. 

Now, I think going to our long-term situation, one of the great 

debates that we are having right now is on what should be the importance of long-term fiscal discipline. If I was speaking earlier, I 

don’t think I would have to even start with this case. In the mid1990’s, we debated how to balance the budget, how to have fiscal 

discipline, not whether it matters economically. In the late 1990’s, 

there was a bipartisan agreement that the Social Security surpluses should be fundamentally saved. 

I want to just kind of mention why I believe the seven reasons 

that fiscal discipline should be very important, and as I look at my 

clock, Mr. Chairman, I realize that I am going to have to go briefly. 

No. 1, fiscal discipline was fundamental to the increase in national savings in the 1990’s. Our private savings rate, regardless of 

whether it is calculated right, certainly moved in the wrong direction. The full increase in our net national savings came from the 

improvement in our Federal fiscal position. All of our national savings improvement came from fiscal discipline. 

Second, the fiscal responsibility promoted a strong long-term investment climate through low interest rates and increased confidence. As Harvard’s Martin Feldstein said, ‘‘An anticipated future 

budget deficit means a smaller amount of funds at the future date 

to finance investment in plant and equipment. Restricting that investment will require a higher rate of interest.’’ I think that the 

point that we have to focus on, and which Peter Orszag and Bill 

Gale have done so, is what is the impact of anticipated deficits on 

interest rates. A company that is going bankrupt on asbestos may 

not see their stock value go down dramatically the day somebody 

walks in to file the papers. I guarantee you the moment that markets anticipate the expectation that the company may be going into 

bankruptcy, I guarantee you their stock market goes down. Therefore, one has to analyze what is the expectations of deficits on longterm interest rates, and their study says that when you look at 

that, you find 92 percent of studies do show this very strong link. 

Let me mention a couple of final things, as I am running out of 

time, which is, one, the question has been raised: Do surpluses create growth or growth create surpluses? That is the wrong question. 

The question is: What is the best fiscal policy that encourages a 

sustainable degree of economic growth in which, as the economy 

heats up and there is a greater demand for capital, we do not hit 

the wall of inflation or capacity, but we continue to have an environment that seeks additional investment? The magic of the 1990’s, 

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provement in the fiscal situation created more capital and savings 

for the private sector. Instead of crowding out the private sector, 

as Senator Conrad fears, we actually crowded in more capital by 

paying down the debt. That should be our question: Which are the 

policies that lead to greater fiscal—lead to great sustainable 

growth? 

The last point I want to make is one that I think is missed much 

too often. I heard the OMB Director say yesterday that with the 

stimulus policies the Administration is proposing, the deficit may 

be $300 billion, and that that is OK because that is within 3 percent of GDP. I agree that temporary deficits to stimulate the economy, and particularly to fight a war, is justified. I also agree that 

if you can keep it at a relatively low level of a couple percent of 

GDP, that is a good place to be. The only reason we are in that 

position is because of the policies of savings surpluses from the late 

1990’s. Had we just been in a position of projected balanced budgets in 2001 and 2002, the deficit for next year would be projected 

to be $600 to $700 billion. It would be the largest deficit even as 

a percentage of GDP. 

So our lesson today should be that rainy days do come. You do 

need to stimulate the economy. You do need to face war. That is 

all the more reason why the long-term fiscal discipline, once we get 

out of this period of economic weakness, is justified. 

I clearly have much more to say, Mr. Chairman, but I fear I am 

already over the allotted time. So thank you. 

[The prepared statement of Mr. Sperling follows:]

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Chairman NICKLES. Mr. Sperling, thank you very much, and to 

all three of our panelists, thank you, and I appreciate your respect 

for the Committee’s time. We have several members that wish to 

ask a few questions, and I think all of you will have a chance to 

add additional comments during the question and answer session. 

I might want to mention, I should have mentioned it before Mr. 

Baroody made his speech or comments. One of the reasons why I 

requested—I still wear a manufacturer’s hat on occasion. I came 

from the private sector. I look at the economy as a great engine 

that is able to overcome and has overcome a lot of obstacles in the 

past. There are a lot of things that can impede economic growth. 

I used to hire a lot of people in the private sector. Excessive taxation can impede your ability or willingness to grow, but also can 

excessive regulation and also excessive litigation. One of the reasons why I requested Mr. Baroody is because I am very concerned, 

maybe even—you know, we are going to have a significant discussion and debate in this committee, in the Finance Committee, and 

on the floor of the Senate about what the size, scope, duration of 

the growth package should be. How much of it should be up front? 

Very legitimate question. Those are all good questions. Good, frank 

discussion. Then how do we put it together? 

I think the President has a very good package. If I was drafting 

it, I probably would have put something a little different. Being a 

manufacturer, I like expensing. I want to recoup that investment 

as rapidly as possible. I would like to depreciate things in the year 

that you write the check or shorten the depreciation cycle as much 

as possible. Or maybe if you are going to do—and, Mr. Malpass, 

you don’t need to get me—I have a list. My staff has done my work. 

I have the list, and the United States is the second highest to 

Japan on taxing corporate dividends, second highest in the world, 

if you add corporate tax and the tax on consumers, the effective 

rate of 70 percent, only Japan is higher. Now, that is not good, not 

if you want to encourage investment and have earnings distributed 

to owners. It is just bad tax policy. 

There are different ways of fixing that. One way of fixing it 

would be to allow the corporation to deduct the dividends. That 

would be my preference. It is probably more expensive. Those are 

things that are probably more efficient. So those are things that we 

will have to weigh not only in this committee but also in the Finance Committee. 

One of the things I wanted to do, I want this committee to think 

broad. When we are talking about growing the economy, it is not 

just how we make a few little changes in tax policy, but also are 

there some things on the regulatory side or the litigation front? I 

am very concerned from a manufacturing standpoint they are probably more concerned about asbestos’ potential liability than they 

are tax cuts or taxation of dividends, probably much more concerned, because one can be a fatal blow. 

Mr. Baroody, I think you mentioned that there were 60,000 jobs 

lost and a potential to lose another 300,000 or 400,000. Is that correct? 

Mr. BAROODY. That is correct, sir. 

Chairman NICKLES. Well, that is staggering, because we are talking about jobs. You are talking about in most cases, I would think, 

69

jobs that pay pretty well. I am concerned about the loss of manufacturing jobs in this country. We have had growth in a lot of sectors. Manufacturing is not one of them. So I mention that. 

I am going to ask all of our colleagues, myself included, to adhere 

to a 5-minute time limit if they would so we can make sure that 

colleagues don’t have to wait too long, and we will do it by order 

of appearance. First I will call on my colleague Senator Conrad. 

Senator CONRAD. Thank you, Mr. Chairman, and thanks for the 

comments. Thanks to this panel of witnesses. I thought they were 

excellent and very interesting. 

Mr. Malpass, in your testimony that appears on page 11, there 

appears to me to be a contradiction, and maybe you can help me 

understand why you don’t see it that way. You say there, ‘‘I expect 

long-term U.S. interest rates to rise during 2003, but not because 

of increased government borrowing. Rather, the private demand for 

credit should rise as the expansion gains traction, putting upward 

pressure on interest rates.’’

It would seem to me that you are saying increased demand for 

private credit puts upward pressure on interest rates. Why not increased demand from the governmental sector for credit? Why 

doesn’t that put upward pressure on interest rates as well? 

Mr. MALPASS. Part of that is the magnitude. The total debt in the U.S. is $20.4 trillion of which the Government portion is only 

$3.7 trillion. So as private demand goes up for credit, that is simply 

a bigger chunk. 

Another way to look at this is U.S. Government debt versus the $8.3 trillion issued by the other six major issuers of Government 

debt. Even though we do have a big national debt, it is small relative to what other countries are issuing. 

The U.S. is at a debt-to-GDP ratio of 34 percent now. The contemplated fiscal deficits, are simply not large compared to the other 

demands. There is a statistic——

Senator CONRAD. Let me ask you——

Mr. MALPASS. Yes? 

Senator CONRAD. Let me ask you, if I could, I understand the 

point that you are making, but it would seem to me that you are 

making the point that increased demand for private credit puts upward pressure on interest rates even though the governmental sector is smaller in terms of outstanding debt. Nonetheless, an increasing demand from the public sector would also have the effect 

of putting upward pressure on interest rates, would it not? 

Mr. MALPASS. Actually, no, sir, and I am not sure if I gave a 

complete answer before. There is a concept in economics called real 

interest rates or the real return on capital. Excluding inflation, it 

is the return on capital hurdle that you have to meet. As the economy begins to grow, then people want to put their money in fastergrowing investments. That raises the real interest rate within the 

economy. As the private sector begins to gain traction, what you 

are going to see is real interest rates going up, meaning people 

have other alternatives for where they can put their funds. That 

is simply not the same effect as what you would get from a fiscal 

deficit. 

Senator CONRAD. Mr. Sperling, maybe I could turn to you. I must 

say that logic eludes me. It seems to me that to whatever extent 

70

either the private sector is going and increasing its demand for 

credit or the governmental sector increases its demand for credit, 

both of those put upward pressure on interest rates. Mr. Sperling, 

I would ask your evaluation of that question. 

Mr. SPERLING. Senator, I guess I would share more your perspective. Nothing about capital repeals either the law of supply and demand or the law of fungibility. The question is—and I think this 

is the right way to think about it—that when the private sector 

goes into our capital savings, when the private sector looks for capital to borrow, to invest for productive growth, is there a greater 

supply of capital available to them because the Government is paying down debt, or is there less capital available to them because 

the Government is crowding out? 

If the Government is essentially borrowing, we are reducing the 

supply of capital for a given amount of demand. Basic economics 

would suggest that in that situation the cost of capital, which is 

measured in terms of interest rates, would go up. There is nothing 

to suggest otherwise. 

One of the things that I try to say in my testimony is that this 

perception, this argument that the amount of deficits increase interest rates is not one I learned on the Democratic side. I learned 

it from listening to Republican CEOs in the 1980’s. That is where 

I learned the phrase ‘‘crowding out.’’ What I list in my testimony 

is the past language of Michael Boskin, of Martin Feldstein. So 

that really supports this basic supply and demand. 

There is even another element, which is, to the degree that you 

fear that there will be increased deficits in the future, you have a 

degree of uncertainty that would make a borrower ask for a greater 

risk premium and could also raise deficits higher. So, you know, I 

think that the sentence that you referred to there is exactly the 

point, which is that as the private sector asks for more funds, as 

the economy strengthens, interest rates will go up because there 

will be less capital. I do point you to an analysis from Goldman 

Sachs on April 14, 2000, that I mentioned here, where they suggest 

that the swing in the deficit during that period of growth kept interest rates 200 basis points lower. So according to Goldman Sachs, 

because the Federal Government, as opposed to borrowing $200 billion, was paying down $200 billion in debt, that $400 billion swing 

was responsible for up to 200 basis in lower long-term interest 

rates, and that is the type of—therefore, leads to the type of sustainable long-term investment climate that I think we all would 

like to promote. 

Senator CONRAD. My time has expired. 

Chairman NICKLES. Senator Conrad, thank you very much. 

Next I will call upon Mr. Enzi. I am going to step out for a moment, but after Senator Enzi is finished, I believe Senator Corzine 

would be next. Senator Enzi, if you would please chair in my absence, I would appreciate it. 

Senator ENZI. Thank you, Mr. Chairman. I want to express my 

appreciation for having the opportunity to serve on this Budget 

Committee. As a long-time accountant and small businessman, this 

is really the first opportunity I have had in the Senate to deal with 

numbers. I find it very exciting. I understand the critical role the 

71

budget plays in today’s economy, and I welcome the challenge of 

creating a budget that is fiscally responsible. 

I note this committee has a tremendous amount of power. It develops the foundation for the work of the Senate, and I appreciate 

your being the Chairman. Further, I appreciate the conversations 

and meetings we have already had and I believe we are moving in 

the right direction. 

Chairman NICKLES. Well, we welcome you to the Committee. 

Senator ENZI. Thank you. I earned an accounting degree at 

George Washington University here in the District, and as a result, 

there was a tremendous immersion in governmental accounting. 

Given that knowledge and valuable experience I have to say that, 

while we are tromping on corporations for bad accounting, we really ought to be embarrassed about the Government. This isn’t working at all like the textbooks. [Laughter.] 

Senator ENZI. Of course, I am not saying the textbooks were 

flawless either. I think there is a lot of room for improvement. 

I had the opportunity over New Year’s to go down to Brazil to 

witness the inauguration of the new President. To meet with him 

and several members of his cabinet. I was shocked to find out they 

consider their government a leftist government. They don’t define 

politics as conservative or liberal, that sort of thing down there. Of 

course, when I had an opportunity to ask the President what the 

main goals of their government is, he said the number-one goal 

was balancing the budget. The number-two goal was to try and get 

government to the lowest level possible, to that closest to the people. Finally, the third was to reduce bureaucracy. That sounds 

pretty conservative to me. 

They have a whole different understanding, a more comprehensive understanding than we do of the importance of balancing a 

budget down there. They can see how it affects their economy, and 

we ought to be able to see that, too. 

When I came 6 years ago, we talked about balancing the budget, 

and we did a balanced budget constitutional amendment debate. 

We didn’t pass that, but the American people held our feet to the 

fire and said balance the budget. We got the message, even though 

we didn’t get the constitutional amendment. We balanced the budget and we did that for quite a while. 

However, in recent years, we have started spending more. I think 

the worst word in the American dictionary is probably ‘‘surplus,’’ 

surplus when you have a huge debt. Apparently, surplus means 

you can spend a lot. We did began spending. We avoided that balanced budget, and the economy went down. I do think there is a 

relationship there. 

Now, to get to my questions, Mr. Baroody, you mentioned a lot 

about asbestos. What are you suggesting as a solution to the asbestos problem? 

Mr. BAROODY. Senator Enzi, the Asbestos Alliance, which the 

NAM leads and is comprised of now more than 150 organizations, 

most of them companies but some other associations, has for some 

time been urging on the Congress consideration of legislation that 

in its essence would establish in law medical criteria that would 

encourage if not require that the courts make the vital distinction 

72

they are not now making, namely, between people who are sick and 

deserving of compensation and people who are not sick. 

The corollary to that would be to take the latter group, the people who are not currently sick, even if they can propose evidence 

of exposure to asbestos, which a lot of us can do, and suggest that 

the statute of limitations be tolled, so that if they should subsequently become sick, they haven’t forfeited by artificial deadline in 

the law the opportunity to seek compensation subsequently. 

There are other aspects to the legislative ideas we have urged on 

the Congress, but the essence is that medical criteria approach. 

Senator ENZI. Thank you. 

For each of you, again, referring back to my comment about a 

balanced budget and the inability of Government to spend a country into wealth, a proposal that keeps coming up is for giving $150 

or $300 to everybody in the country. Isn’t that a rather small level 

even for those at or below the poverty wage? So how much of an 

impact will that have? Is that the best way for us to go? Let’s start 

with Mr. Malpass. 

Mr. MALPASS. For a lot of people, $100 or $300 is significant, and 

so I don’t want to dismiss that as a generosity by the Federal Government. I guess the issue is whether you create more jobs and 

long-term growth by having the Government take money from the 

people and then give it back to certain people. That is a redistribution of income. You tax from one group and then you give back. In 

fact, we have huge transfer programs which have that effect. It is 

part of the progressivity of our system. 

One of the debates that is going on right now is simply what will 

be the first quarter or the second quarter growth rate if we gave 

$300 to everybody in the country. I think that we just wouldn’t see 

that much impact because a lot of the people that get that money 

would figure out that in the end the Government was going to get 

it back from them. So they might spend a little of it and save some 

other part of it, and we wouldn’t have accomplished anything in 

terms of changing the growth incentives for companies to be created, to hire workers and make long-term growth. 

Senator ENZI. Mr. Sperling? 

Mr. SPERLING. Thank you, Senator. As to your direct question, I 

think that the idea is and the relation to growth is that if you get 

too many companies sitting on the fence, essentially they are looking out and not seeing many people spend. Then it is understandable that they don’t want to invest or hire more people now. The 

more they do that, the weaker consumer confidence gets, the less 

people spend, and you get a more negative cycle. So that is why 

I think as an insurance policy injecting money into people who are 

likely to go to the store, spend it, so that it might at least convince 

some companies to not do further layoffs and hopefully get people 

expanding again makes sense. 

In terms of the question of the impact and the balanced budget, 

this is how I would look at it. When you are trying to stimulate 

the economy, I think you could make a good case for doing more, 

Senator, than that amount. So, for example, I think one could go 

higher in your tax cut for families to help stimulate the economy 

now. I would not make—but I think when you extend that, then 

you have to deal with the benefits of that versus the negative costs 

73

that you mention of moving away from balancing the budget, because tax cuts or spending will both likely have a negative impact 

on the long term, which is why, if I could be bold enough to say 

where I would be, I think a good compromise for this Congress 

would be to take some of President Bush’s ideas to give people closer to—families closer to $1,000 this year to help inject more spending into the economy right now when we need it, but just make it 

a 1-year plan. Let’s get that done quickly when we need it now. 

Then we all have these major debates on dividends, long-term tax 

cuts. Some of us would like to freeze some of those things. Let’s 

have that debate later. Let’s not have those debates about the long 

term hold us from injecting something into the economy right now 

that could help stimulate demand and make sure we don’t fall into 

a negative cycle. 

Senator ENZI. Again, I have to apologize to Mr. Baroody, but I 

have used up my time. 

Senator Corzine. 

Senator CORZINE. Thank you, Mr. Enzi. I truly appreciate this 

discussion. I think this is the heart of the issues that need to be 

debated with regard to how our Government interfaces on economic 

policy. I am a big believer that national savings actually ends up 

driving investment and we ought to do those things that improve 

that. I come down on the side of thinking managing our Federal 

deficit over a cycle toward balance is the best way to improve particularly private sector investment, and we need to address that. I 

appreciate the discussion we had about the interaction of particularly Mr. Sperling’s interaction of growth and our economic situation, the Federal and State budgets. I think to talk about $90 billion worth of deficits at the State level and talking about growth 

programs or stimulus programs that ignore that I think are very 

weak. 

What I would—since the heart of the proposal on the table for 

growth—I guess we are not using the word ‘‘stimulus’’—is the dividend exclusion. I would like to poke around a little bit on that. 

Am I not correct, David, or any of the witnesses, isn’t valuation 

of most companies driven by net free cash-flow? Isn’t that the basic 

theory of how we get to——

Mr. MALPASS. I will go along with that. 

Senator CORZINE. I would like to understand how it is that when 

we take cash off the balance sheet of corporate America at a period 

in time when we are not seeing strong investment, that we think 

that is somehow or another is going to encourage growth or stimulus. One might argue, no matter how you felt about double taxation on dividends, that potentially you would want to have the 

dividend potentially deducted at the corporate level to deal with 

the interest issue, but you wouldn’t want to take cash off a balance 

sheet if you are trying to grow companies. When you go to a bank, 

you have to put down a margin. When you hire people, you have 

to pay them. You have to have cash to be able to do that. It seems 

to me that when we see these economic models show a slow to limited growth even by the President’s projections, I think what we 

are actually seeing is a robbing of cash off the balance sheets of 

companies. This is a pretty dangerous thing to do in a period of 

slack growth. 

74

Mr. MALPASS. I don’t think I agree with that way of thinking 

about it. Let me see if I can state my view on it. 

Right now, if a company has retained earnings or, over its life, 

is going to earn money and create retained earnings, there is a 

wedge between that company and the shareholders. There is a toll 

gate. If you want to give the cash to the owners of the company, 

you have to pay a hefty tax to the Government. 

That blocks the turnover of capital within the economy, so you 

have a lot of companies that really don’t need the cash. The logical 

thing for them to do is give the cash to the shareholders who can 

then reinvest it somewhere more effectively. That can be achieved 

by lowering the toll on the capital. 

As far as free cash-flow, if you lower the double taxation of corporate earnings, which I think is an onerous burden right now, you 

get a lower cost of capital and a better distribution of capital within the economy. You get companies that don’t need the cash giving 

up some of their cash to companies that can have a higher return 

on investment from that new cash. 

Senator CORZINE. How does that connection work? I mean, is 

there any kind of certainty that the cash that Microsoft gives up 

on its balance sheet is going to go to someone that is going to have 

a higher rate of return on capital in that? Why is that stimulus or 

growth in any kind of short-term period of time? Isn’t it really the 

judgment about what the internal rate of return would be available 

on various investments that that company has? 

Mr. MALPASS. As we think about the late 1990’s, I think one of 

the things that happened was a bubbling in Nasdaq. Part of that 

was because companies had every incentive to keep all the cash 

and go make acquisitions, even at very high prices. If we had had 

a cheaper method of distributing cash to shareholders, I think you 

wouldn’t have seen some of those decisions made. Some of the acquisitions were simply made because the corporation had excess 

cash. They knew they were not supposed to give it to shareholders 

because that subjects it to extra taxation. So they acquired some 

other company. 

Senator CORZINE. I don’t think the technology industry or the 

folks that were creating software and all of the productivity growth 

would argue that their choice was holding it back for their own 

purposes or even in mergers. It was really to reinvest back into the 

growth in the economy. Objectively, I certainly hear that. I heard 

certainly here the principle of holding cash as the basis of investing. 

Mr. MALPASS. Double taxation also causes unwise investments by 

companies. Every day a company is making a decision how much 

to invest in R&D. They have a choice: Should they dividend the 

cash or should they hire another scientist to try to invent something new? With the toll gate that we have right now, there is really no logical or rational way that the company can make that decision accurately. They are inevitably going to pay lower dividends. 

It stagnates the rotation of cash within the economy to have this 

toll gate. 

Senator CORZINE. As you know, by the way, just on a factual 

basis, only about 50 percent of reported corporate earnings are 

taxed. The beneficiaries, when you use a divided exclusion, even by 

75

your own numbers, 50 percent of the American people have no participation in dividends. If you then look at IRAs, 401(k)’s, tax-exempt pension funds, you get the number of people actually benefiting from this so-called savings of double taxation down to about 

a quarter of the population of supposed dividend beneficiaries. 

Mr. MALPASS. I do think it would change the capital structure 

and the distribution of taxation. We will see rotation within the equity ownership. I think what you gave there was somewhat of a 

static analysis. I think people who ought to own dividend-yielding 

stocks will rotate from less wise investments into wiser investments. I think you will get an efficiency gain within the economy 

simply from the rotation of ownership. 

Right now a lot of people make investment decisions—you have 

to—on an after-tax basis. The double taxation of corporate earnings 

right now drastically distorts the decisions made on which stocks 

people own and how much cash a corporation holds. 

Senator ENZI. Senator Bunning. 

Senator BUNNING. Thank you very much. I have an opening 

statement. I would like to ask unanimous consent that it be put 

into the record. 

Chairman NICKLES. Certainly. 

[The prepared statement of Senator Bunning follows:]

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Senator BUNNING. I have a copy of the new CBO baseline update, 

and it shows that by the year 2007, we will be back to a balanced 

Federal budget. Even if the main elements of the Bush tax cut 

were made permanent, and even if the Bush growth plan were enacted, it appears that the budget would be balanced only 1 or 2 

years later, by 2008 or 2009, under the baseline scenario. Adding 

the cost of Medicare expansion, a war, and other assumptions, of 

course, could put this date out farther. 

I would like to ask a related question to the asbestos litigation. 

I understand that approximately $20 billion has been paid out by 

companies for claims and costs relating to asbestos litigation and 

that this number is estimated to reach as high as $275 billion. This 

issue is having an intense impact on some of the companies in my 

home State of Kentucky, with companies setting aside vast 

amounts of reserve cash to deal with this litigation. This is cash 

that could be used to improve capacity, grow businesses, and create 

jobs for Kentuckians. 

Could you address the impact that this litigation is having on 

our overall economy? Could you comment on ways that Congress 

can help to mitigate—I know you have commented some—mitigate 

the negative effect of this litigation on the economy as a whole? 

Mr. BAROODY. Senator Bunning, it is more like $54 billion that 

has already been spent. 

Senator BUNNING. $54 billion instead of $20. 

Mr. BAROODY. Yes. 

Senator BUNNING. Thank you. 

Mr. BAROODY. On dealing with the asbestos liability. 

Senator BUNNING. What about the estimated reserves? 

Mr. BAROODY. The estimated present and future liability totals, 

there are several estimates that exceed $200 billion, and $275 billion is a realistic and a reasonable estimate that concerns us a lot. 

I have characterized that in my statement as an anchor on not 

just but primarily on the manufacturing economy’s ability to grow 

as robustly as we ought to be growing at this stage in a recovery. 

We are doing—the overall economy is doing no better than half as 

well as it ought to be in this stage of a recovery, manufacturing 

even worse. 

The overhang of that liability, the uncertainty that attaches to 

it, the necessity for companies to think about establishing the reserves you are addressing, all decrease the degree to which companies can be thinking about hiring, increasing wages, and making 

job-creating and productivity-enhancing investments in both the 

short and the long term. 

The reason that the National Association of Manufacturers is a 

proponent, as I alluded to in my statement, of the President’s proposal is that we think it looks both to the short and the long term 

on the tax side. We certainly need—we urge the Congress to look 

at the huge impact in the same terms, short and long term, that 

these inhibitors to growth that I have talked about and stressed in 

asbestos represent. They destroy jobs. They dry up the retirement 

savings of growing numbers, thousands and tens of thousands of 

people around the country, and they depress the economic wellbeing of the communities they operate in. 

81

Senator BUNNING. They also put a lot of companies out of business. 

Mr. BAROODY. That is correct. They throw them into bankruptcy. 

Senator BUNNING. OK. One other question. The U.S. trade deficit 

is now running close to about $400 billion a year, nearly 4 percent 

of the gross domestic product. One explanation for this increase in 

the trade deficit is the effect of a strong dollar—or at least what 

used to be a strong dollar; it is kind of weakening as we go on—

on both the price of products exported from the U.S. and products 

imported to the U.S. 

Could you discuss whether the current prices of the U.S. dollar 

are in line with the economic fundamentals? If not, what steps 

should the Government be taking to bring the dollar more in line 

with the global currency markets? 

Mr. BAROODY. Senator Bunning, we have spoken out, 

unapologetically, now for a year and a half or more about our 

sense—not that the dollar is strong or weak but that it is, in our 

view, overvalued and that the overvaluation of the dollar against 

all global currencies is having the impact you just identified and 

is contributing to the record balance of accounts problems that you 

identified in significant ways. 

First, the good news is that the dollar has come down in its overvaluation against a basket of currencies by about 15 percent over 

the last 6 months or so. We are hopeful that that will be accompanied—first, that that trend will continue and it will be accompanied by growth globally——

Senator BUNNING. Well, but then explain to me why the deficits 

are continuing to accelerate as far as our trade is concerned. 

Mr. BAROODY. Because that is——

Senator BUNNING. In other words, how much lag time is in 

there? 

Mr. BAROODY. Well, we are just beginning to see something of a 

response on exports, and it is not enough yet. That is the first answer. There is a lag time. The second is that the 15-percent recentering of the value of the dollar goes perhaps half as far as our 

sense is that it needs to go. Against some of the Asian currencies, 

there continues to be a mismatch between what the market would 

set as the value of their currency relative to ours of 25 or 30 percent. So we have not yet seen the effect we call for in terms of revaluing the dollar according to market forces. What we have seen, 

while it goes in the right direction, has not been enough, and the 

lag times are just beginning to elapse sufficient that we will see 

some response. 

I would make one other point. You asked what we would have 

done about it. Back in the 1980’s, there was intervention on the 

value of the dollar. The National Association of Manufacturers is 

not calling for an overt intervention. We are calling for two things: 

first, that the rhetoric of our National Government about a strong 

dollar make the point that what we want—what we view as a 

strong dollar is one where the market sets the value. We have 

asked for the Administration to shift its rhetoric into neutral, is the 

way I put it. We applauded what the President said at the summit 

last summer, speaking about the need for the dollar to be set by 

82

market values, among other reasons, in the interest of a manufacturing recovery and competitiveness. 

We would ask that our Government also encourage other foreign 

governments, including those I pointed to in Asia, to cease their 

own intervention, which tends to keep their currencies artificially 

low and ours artificially high. 

Senator BUNNING. Last question for Mr. Sperling and Mr. 

Malpass. I am curious about your views toward capital gain tax reform. Do you support lowering or repealing the tax? Would you address the impact of capital gains tax cuts or repeal could have on 

the economy in the short term or long term as well? Either one. 

Mr. SPERLING. Well, I guess the first thing I think we would 

probably all agree on is that whatever the benefits or dis-benefits 

of it, it would not be what you would call a stimulus proposal in 

the sense you are actually trying to encourage people to essentially 

save and invest more. 

There has always been a lot of religion on this issue. To me, 

there is very little to suggest that further lowering of the capital 

gains tax would have any noticeable benefits on our economy. As 

you know, in 1997, we did have a bipartisan agreement to lower 

the capital gains, and we went along with that. As you know, 

President Clinton signed that. I at this point would not see a reason to go further. 

My more basic point, sir, is that I think whenever we——

Senator BUNNING. I don’t want to interrupt, but I want you—

what was the spike when capital gains was reduced by 8 percent 

in the revenue for the United States Government? There was a 

huge spike. I think it was close to $65 billion. 

Mr. SPERLING. Well, Senator, nobody disagrees that there was—

that the late 1990’s were a tremendous economic period in terms 

of revenues coming in and investment. We had the unusual situation of the longest expansion in history actually growing strong, 

growth and higher productivity near the end. I myself would attribute that more to kind of more sound fundamentals in terms of 

fiscal discipline, I think wise monetary policy, than the capital 

gains reduction per se. The comment I was going to make is that 

I think the important thing when doing tax cuts is to calculate in 

not just whatever marginal incentives they may have, but the potential negative impacts that one has from raising the deficit, and 

to make one’s calculations in that way. 

So, for example, on dividend exclusion, I would think that an 

overall corporate tax reform in which dividends were taken care of 

in a way that did not raise the deficit——

Senator BUNNING. You are not getting to my question. You have 

given——

Mr. SPERLING. I am sorry, Senator. 

Senator BUNNING. I asked you about capital gains, and now you 

are on dividend exclusion. 

Mr. SPERLING. I am sorry, sir. I do not personally nor do I think 

that many people would attribute the strong increase in capital 

gains or revenues significantly to the cut in capital gains we had 

in 1997. 

Senator BUNNING. Thank you. 

Mr. Malpass, do you have an opinion on that? I am finished. 

83

Mr. MALPASS. I think there was a direct effect. As you lower the 

rate of tax on something, you get more of it. If you lower the capital gains tax, you are going to get more capital gains. That is one 

of the factors that we saw. 

We saw another example. Congress in its wisdom lowered the 

capital gains taxation on houses in roughly 1997. What we saw was 

the value of houses go up and the number of houses go up. The 

same analogy would apply to equities. 

The value of a given equity is the after-tax value. If you lower 

the capital gains tax wedge that is in there right now, the equity 

market is going to respond favorably to that. 

We are in a situation right now where a lot of people have capital gains loss carry-forwards——

Senator BUNNING. I guess we do. 

Mr. MALPASS. If you lowered the capital gains tax rate right now, 

the Government wouldn’t even lose very much in the short run. I 

think you get even more of a benefit right now this year from a 

capital gains tax cut than you would have, say, in the peak period 

in 1999. 

Senator BUNNING. Thank you very much, Mr. Chairman. All I 

can say is that for the first time we have a positive scoring estimate on lowering the capital gains tax rate by CBO and OMB. 

Chairman NICKLES. Thank you, Senator Bunning. I am just looking at the history of capital gains receipts, and it is pretty significant increases that happened after the tax reduction from 28 to 20 

percent. It is also a pretty significant reduction in the revenues. 

Actually, this is startling. From 2001 to 2002, revenues on capital 

gains went from 97 to 55. That is a $42 billion decrease and almost 

a 45-percent reduction, something like that, very significant. 

Senator SARBANES. Were the rates increased at that time? 

Chairman NICKLES. No. 

Senator BUNNING. No. There weren’t any profits. 

Senator SARBANES. The rates stayed the same, so it was the 

economy that did that, I take it. 

Chairman NICKLES. Yes, there was a 45-percent reduction in 

Nasdaq in the year 2000 that had something to do with that, and 

I had some of those that crashed as well. [Laughter.] 

Chairman NICKLES. Senator Stabenow. 

Senator STABENOW. Thank you, Mr. Chairman, and thank you to 

each of you for coming and speaking to the Committee today. 

I wondered, Mr. Baroody, coming from the great manufacturing 

State of Michigan, if we might talk a little bit about pressures on 

manufacturers for a moment. I am proud of what we make in 

Michigan, not just automobiles but refrigerators and washing machines and all kinds of things. I happen to believe that the economy 

is based on making things and that a manufacturing base is critical to the United States economy. 

I would agree with you that asbestos is an issue that has to be 

addressed, and I would encourage the Judiciary Committee to do 

so. 

Where would you rank health care costs to your members right 

now as a pressure on your bottom line? 

Mr. BAROODY. It is a huge and durable concern that has sort of 

come back with a vengeance, if I could put it that way, in the last 

84

2 or 3 years. Increasingly our members, and especially our smaller 

members—the majority of NAM members are small—are reporting 

double-digit health coverage cost increases again. We had hoped in 

an earlier period that we had seen the end of that. Unfortunately, 

we haven’t seen it. It is coming back very hard, and it is prompting 

the squeeze I talked about. If you can’t raise prices but your costs 

go up, in this case health care costs, something has got to give. The 

response from a growing number of our members is that they have 

had to require of their own workers a greater copay, a greater premium share if they have any hope of maintaining coverage. 

Senator STABENOW. I am hearing the same thing, and nationally 

we are seeing the average costs of health insurance has risen 12.7 

percent just in the last 2 years. In talking with manufacturers in 

Michigan, for instance, Daimler-Chrysler shared with me that they 

are now spending more on health insurance than they are on purchasing the raw materials for the vehicles. 

What was interesting to me is that about half of that cost is the 

explosion in prescription drug prices, and I wanted to note that as, 

Mr. Chairman, you spoke about having the second highest dividend 

taxes, we pay the highest prescription drug prices, our businesses 

and our individuals, of anywhere in the world. I would suggest that 

we have to tackle that. The average brand name product is going 

up three times the rate of inflation. 

So when we look at where we ought to be addressing cost issues 

for manufacturers, for other businesses, as well, as you said, for 

employees—they are paying higher copays or maybe taking a pay 

freeze so their employer can maintain their insurance policy—this 

is a huge squeeze both to workers and families as well as businesses. I would hope that as we are debating what we are doing 

in terms of the budget and the economy that we would include 

health care costs as a part of that. 

I am wondering, we have been attempting to increase competition through greater use of generic drugs and other opportunities 

to lower prices, and I certainly would encourage the manufacturers 

to be involved in that debate. I am sure you are. 

Mr. BAROODY. Yes, ma’am. 

Senator STABENOW. This is a major issue in terms of a drain and 

a squeeze on the economy right now. I would suggest as well in 

terms of double taxation, you have people paying the payroll tax, 

seniors who have paid it all their lives who now are on top of that 

having to struggle with their prescription drugs because it is not 

a part of Medicare. So there are a lot of ways in which people are 

taxed doubly and pressured doubly and triply with that. 

I would like to ask about another kind of proposal. I am a proponent of doing something immediately. I put in legislation last 

time to create a major bonus depreciation and believe in stimulating the economy immediately in terms of investment. I certainly 

want to support efforts to do that. An effort that has been supported by the Business Round Table and others has been the idea 

of a payroll tax cut or refund based on the payroll tax. I am wondering if the manufacturers have looked at that and taken a position. 

Mr. BAROODY. Ms. Stabenow, we have looked at it. We have not 

included it in our priority approaches or recommendations to this 

85

Congress or to the Administration about stimulus—or, we think 

more accurately, the term ‘‘growth’’—provisions. 

If you would indulge me, we put it this way: We are not sure at 

the NAM that we or anyone else really knows how to stimulate an 

economy that is this large and this traumatized. The effort to accumulate a number of short-term provisions is, we think, bound to be 

complicated and the payroll tax provisions would be complicated 

particularly, again, for a lot of smaller employers like our small 

manufacturers. 

Also, we think that proposals that can promise some short-term 

effect and do so in a way that builds toward a stronger and more 

durably growing long-term effect are the ones we would prefer. 

That is why we are so enthusiastic about marginal rate cuts as opposed to temporary provisions to try to put—to accelerate demand 

by putting money immediately in people’s pockets. 

That is also why we did favor and recommended an end to the 

double taxation of dividends. Frankly, we would have preferred it 

on the corporate side and have done a lot of analysis over the years 

indicating to us that that could have a very big growth impact if 

it were enacted. Certainly on the expensing side for small manufacturers, we are very encouraged by the proposals that I think both 

parties are talking about in terms of increasing depreciation or expensing for small manufacturers. 

When we looked at all the possible proposals, we ended up 

prioritizing first the three provisions I just talked about—end of 

double taxation, acceleration of marginal rate cuts, and something 

to spur business investment over a longer period of time than just 

1 year—rather than looking at the payroll tax provisions or ideas 

that others have talked about, including the BRT. 

Senator STABENOW. Mr. Sperling, would you like to respond to 

the proposal I know that has been introduced in the Senate relating to payroll tax really both for business and for workers? 

Mr. SPERLING. As I said, I think that as an insurance policy 

there is adequate justification for a one-time injection of funds. It 

is a stimulus policy. I have in the past hoped that such could have 

been timed in 2001 and 2002 with the Christmas shopping season 

where I think people would be more likely to take their check and 

spend it, and perhaps had we had that, it could have prevented us 

from having the weak Christmas shopping season we did. 

I think the level—I think it becomes highly complicated, however, to actually try to month by month change withholding. So my 

belief would be that it would be better to do it as a single rebate 

check off last year’s payroll. I personally would limit it to the employee side so that it would be more focused on getting demand 

going. That is where I believe we have our greatest weakness. 

I guess my final comment, which I was trying to make before, is 

that whenever we judge these tax cuts, we do have to look at the 

full—you know, Chairman Nickles talked about you have to look at 

the full picture. The full picture is simply that you have to recognize that there are positives, perhaps in demand, perhaps longerterm work incentives, but there are also negatives when the deficit 

rises and we crowd out private sector savings. 

In 1997, we did things like capital gains and other things in the 

context of a balanced budget plan that actually increased fiscal disVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00091 Fmt 6633 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
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cipline. So on all of these discussions, I would just encourage people not just to look at one side of the coin but look at the balance. 

My feeling is if it is one time only and it helps stimulate the economy, it will not have a long-term impact, it is worth the risk. When 

things are going to have longer-term permanent impacts on our 

deficits in the decade where we need to be saving more to deal with 

the long-term entitlement challenge coming, then I think it is incumbent upon us to do a more comprehensive analysis of the benefits of the tax cut weighed against the disadvantages of hurting our 

national savings. 

Senator STABENOW. Just a closing comment, Mr. Chairman, if I 

might. I find it so interesting, the debates that we have in theory 

in terms of how to stimulate the economy and how to create growth 

when we have, I would reiterate—and I have said this before. We 

have two examples, actually going on three now, of differences, one 

worked, one didn’t. The 1980’s was very much a supply side approach, relieving those at the higher incomes, hoping that will 

trickle down. We saw massive increases in national debt, explosion 

on interest rates. The 1990’s was different. In 1997, I was in the 

House when we balanced the budget for the first time in 30 years, 

a focus on slowing spending, on balancing the budget, paying down 

the national debt, and focusing on education and innovation spending. 

Now we are back to policies that look more like the 1980’s, and 

if this was just a theoretical discussion, I guess it would have more 

impact on me. We have practical realities of what worked and what 

hasn’t worked. I would hope that we would focus on what has 

worked because it was very significant in the 1990’s. 

Chairman NICKLES. Senator Stabenow, thank you very much. 

Senator Allard, I apologize. I noticed that you came very early 

and then stepped out and maybe got lost in the queue and maybe 

because I stepped out as well. So I apologize for that, but you are 

next and thank you. 

Senator ALLARD. Well, Mr. Chairman, no concern on my part, 

and I am just glad to be here on the Committee. I apologize for 

having to step out, and I missed the testimony from Mr. Baroody 

and Mr. Sperling. 

I did appreciate the testimony that Mr. Malpass provided us 

with, and you talked about an increase in personal spending. The 

question that came to my mind: What was happening with business spending? I had read reports where business spending had 

come down. I didn’t see in your comments or the report that you 

were putting here for the Committee where you talked anything 

about business spending. I would like to have you comment on 

that, if you would, please. 

Mr. MALPASS. Business spending in the 1990’s grew strongly. In 

fact, in some areas——

Senator ALLARD. In the recent time period. 

Mr. MALPASS. In 2002, we were in a recovery. People are often 

saying that there was simply no business investment going on. 

That is actually not the case. 

There was a crash in aircraft spending. Taking that out, almost 

all other sectors of business equipment saw growth in 2002. U.S. 

equipment investment, was $954 billion in the first quarter of 

87

2002. That compared to $452 billion for the whole European Community. I think it is important that people put in perspective the 

magnitude of the U.S. economy, even in 2002, which we think of 

as a weak recovery. Every quarter our investment was roughly 

double what Europe was doing. That really has a powerful implication for productivity growth into the future. 

Senator ALLARD. So the business spending and the personal 

spending, pretty much the same? 

Mr. MALPASS. Consumption, unlike previous recessions, didn’t 

dip in 2001. Business spending often takes off in the second year 

of a recovery. It didn’t do that this time. Overall business spending 

versus a normal recovery was weaker than the normal jump. 

Senator ALLARD. So your conclusion is that we need to do something to stimulate some business spending. Is that your conclusion? 

Mr. MALPASS. Yes, certainly. I would be happy with stimulus or 

growth measures. If you create a good environment for the economy, that is a stimulus in the near term because people anticipate 

the better future. 

What I think would be important is to create a good climate long 

term for investment. That is going to cause people to buy equipment today. 

Senator ALLARD. So you are of the view that if we would take 

away the double taxation on dividends, that would be a stimulus 

for business spending. 

Mr. MALPASS. Correct. It’s both a near-term and long-term stimulus. There really is no difference in my mind between what is a 

stimulus and what is a growth-oriented change in the Tax Code. 

They are both going to operate the same because people look 

ahead. 

Senator ALLARD. Now, I read over the President’s proposal on reducing the double taxation on dividends. There is a lot of paperwork—I see a considerable amount of paperwork that is involved 

because you take how you are going to carry that over to the individual stockholders, and if there is—particularly a company has 

said part of it is going to be subject to double taxation and part 

of it will not be on your dividends, then you have percentages that 

have to be carried over into all your allocation distributions to your 

shareholders. 

Do you view that as a significant disadvantage for business that 

they would not respond to that increased recordkeeping requirement? 

Mr. MALPASS. As you change the Tax Code, there are always consequences. 

Senator ALLARD. Yes. 

Mr. MALPASS. Some of them are a 1-month cost in terms of programmers. 

As I have heard it explained, the 1099 form that people now get 

can be changed to show tax-free dividends and also deemed dividends. What we are talking about is enough computer programming so that when you get that year-end statement, it shows some 

additional information. 

Senator ALLARD. So with the age of computers, you think it is a 

very workable solution then? 

88

Mr. MALPASS. I can’t speak for Bear Stearns on that. We are a 

huge paperwork generator. I don’t know our position on that. I 

have heard the Administration talk about the paperwork requirement, and it sounds to me like it is quite manageable. 

Senator ALLARD. Yes, OK. I just want to say, Mr. Baroody, it is 

good to hear you say that you didn’t want to see a lot of intervention on your question here to Senator Bunning about the value of 

the dollar. I am, I think, of like-minded view. I want to see the 

markets carry that value of the dollar. I would just add on top of 

your comment that when our trade deficit has been most favorable 

has been during the Great Depression, and also during the end of 

the 1970’s when we had the misery index, and that is when our 

trade deficits were most favorable. I have always felt that trade 

deficits actually reflected the condition of the economy, and if the 

economy was doing good, we bought more goods and services, and 

so our trade deficit would change. Could you comment on that? 

Mr. BAROODY. Senator, our concern is not so much with the imbalances in the deficits. Obviously that is a symbol of the concern, 

but it is much more hard-edged than that. Companies which make 

heavy equipment find that they are at a 10, 15, 25 percent cost disadvantage with their global competitors for only one reason: the 

imbalance in the dollar. 

Senator ALLARD. Yes. 

Mr. BAROODY. If the market would be allowed to set the value 

of that dollar, that imbalance and disadvantage would go away. 

Our exports would rise. Our exports-dependent employment, which 

are all very good, highly skill-demanding, but highly rewarding 

jobs, would also rise. 

So, yes, we are not talking about some Machiavellian intervention. We are talking about letting the market set the value of global currencies, including but not limited to the dollar. If we do that, 

a lot of manufacturing’s exports problems get ameliorated significantly. 

One point. I mentioned the distinction between this recession we 

are coming out of and all the previous ones. Contrast it with the 

one of 10 years ago, similarly characterized as relatively mild, and 

not with the same adverse impact on manufacturing I reported to 

you today. One of the reasons was that even during that 1990-91 

recession, export growth by the United States held up at about 7-

percent rates. In this recession, export volume actually declined, 

and we think it declined primarily because of the value of the dollar. 

Senator ALLARD. One more question, if I might, Mr. Chairman. 

Mr. Malpass, you had a question over here from my colleague 

about a refund or some kind of reduction in the payroll taxes. Most 

of the payroll tax is Social Security. That has got to have an impact 

on the Social Security Trust Fund, wouldn’t you say? So, in effect, 

we are taking money right out of Social Security with that proposal. 

Mr. MALPASS. That has been confusing to me. Right now, as people pay Social Security tax and their employer pays it, it goes into 

the trust fund. So if there were a holiday, it seems as if it would 

stop the buildup. 

Senator ALLARD. Have an adverse impact on Social Security. 

89

Mr. MALPASS. So I guess I haven’t understood that. From an economic point of view, the question is: Will you get much bang for 

the buck out of a short-term tax cut like that where everybody 

knows that the rates are going to go right back up? My view is that 

you won’t. 

Senator ALLARD. Mr. Chairman, thank you. 

Chairman NICKLES. Senator Allard, thank you very much. 

Next we have Senator Sarbanes. 

Senator SARBANES. Thank you. 

Chairman NICKLES. Senator Sarbanes, thank you as well for—

how many years on the Committee? 

Senator SARBANES. I stopped counting. 

Chairman NICKLES. Twenty-some? 

Senator SARBANES. No, I haven’t been on it that long. 

Chairman NICKLES. Not that long. Well, anyway, welcome. 

Senator SARBANES. Mr. Malpass, do you support an amendment 

to the Constitution of the United States to require a balanced 

budget? 

Mr. MALPASS. Senator Sarbanes, in 1997, I testified on that. In 

my testimony at that time, I went through quite a few of the economic issues that I think are important. I don’t know where I 

stand right now. I guess my view of this is that is very important 

that Congress restrain the growth rate in spending. That is where 

my focus is right now. 

Senator SARBANES. At the moment do you support an amendment to the Constitution to balance the budget? 

Consistent with your 1998 position? 

Mr. MALPASS. I haven’t thought about it. 

Senator SARBANES. You support President Bush’s economic program, which would increase the deficit. Is that correct? 

Mr. MALPASS. I have thought a lot about that. I support the program because I think it would be stimulative to growth. 

Senator SARBANES. It will increase the deficit. 

Mr. MALPASS. Well, in the long run, no. It is going to reduce the 

deficit by creating a better capital structure for the U.S. I think our 

focus has to be on how do we get out of this debt——

Senator SARBANES. Well, will it create a deficit in the short run? 

Mr. MALPASS. I think it will increase the deficit depending to 

some extent on the growth response that we get in that first year. 

Senator SARBANES. If we had a constitutional amendment requiring a balanced budget, as you advocated only a few years ago, we 

wouldn’t be able to do President Bush’s economic program, would 

we? 

Mr. MALPASS. The proposals that were before Congress at that 

time, it seems to me, had exceptions for war and for other things. 

So I don’t know—I think the exceptions may have been triggered 

by our current situation. 

Senator SARBANES. I don’t think so, but we can go back and 

check that. 

Mr. Baroody, do you support a constitutional amendment requiring a balanced budget? 

Mr. BAROODY. Senator Sarbanes, I believe that the NAM has had 

for some time on its policy books support for such an amendment. 

It is not a current category of our—I alluded to our pro-growth, 

90

pro-manufacturing policy agenda. We don’t mention that in it and 

haven’t in recent agendas. 

Senator SARBANES. You support President Bush’s economic program? 

Mr. BAROODY. We do. 

Senator SARBANES. How would one do that if there was a constitutional amendment requiring a balanced budget? You wouldn’t 

be able to do it, would you? 

Mr. BAROODY. To be candid, Senator Sarbanes, I think you may 

be right, and we haven’t thought about that in terms of the two together. What we have thought about is our own sense of the need 

for the manufacturing sector to contribute to—excuse me, to participate in this recovery. 

Senator SARBANES. Well, I have been very sympathetic to the 

manufacturing sector. 

Mr. BAROODY. Yes, sir, we know. 

Senator SARBANES. I think it is important now to draw out this 

obvious inconsistency. The NAM, in reacting to President Clinton’s 

speech, says, ‘‘The NAM believes that a constitutional amendment 

requiring a balanced budget will ensure fiscal soundness,’’ and 

came out in support of it. Now, that seems to have gone by the bye, 

as you have just said. It is not really on your current agenda. I am 

just trying to get at the point that what is sauce for the goose is 

sauce for the gander. 

Mr. BAROODY. It is a fair point——

Senator SARBANES. Mr. Sperling, do you support a constitutional 

amendment requiring a balanced budget? 

Mr. SPERLING. I do not support a constitutional amendment. I do, 

however, support Congress through its own mechanisms seeking to 

have the kind of pay-as-you-go standards that help lead to balanced budgets and to helping to save for us to deal with the longterm entitlement challenge. 

Senator, I think the main point that you are pointing to is the 

most profound. The swing in what was the mainstream view on 

deficit reduction and balanced budgets over the last 2 or 3 years 

is profound. As you will recall, in the late 1990’s there was almost 

a complete bipartisan commitment not only to balancing budgets, 

as you recall, but to actually saving the surpluses that come from 

Social Security for debt reduction. There was significant notions 

that new programs, however worthy, whether prescription drugs or 

tax cuts, had to have offsets that would be consistent within a balanced budget structure. I think it will be to our country’s great 

long-term disadvantage that we have moved so far away from what 

was so recently a bipartisan consensus. 

Senator SARBANES. Yes, but that consensus was not on an 

amendment to the Constitution. That consensus was on taking a 

series of measures that would achieve greater fiscal soundness. 

Mr. SPERLING. You can see from right now that the balanced 

budget amendment is in some ways too strict, but then not loose 

enough—I mean, but not good enough in some ways in the sense 

you would not want to be constrained in a temporary moment like 

this where you face war or even economic weakness. The balanced 

budget actually only allowed you an escape clause at, I think, 1 

percent growth, and it would be very difficult to tell when that was 

91

coming. So our view was that Congress, through responsible policies, as we saw when there was split Government in the late 

1990’s, was able to achieve that with that commitment, but without 

a constitutional mandate. 

Senator SARBANES. Now, Mr. Baroody, Jerry Jasinowski, the 

president of the NAM, testifying before the Senate Banking Committee last May, said, and I quote him: ‘‘The overvaluation of the 

dollar is one of the most serious economic problems now facing 

manufacturing in this country. It is decimating U.S. manufactured 

goods, exports, artificially stimulating imports, and putting hundreds of thousands of American workers out of work.’’

I, in fact, agree with this concern of the NAM, and have over 

quite a period of time. The Treasury Secretary nominee yesterday 

said, ‘‘A strong dollar is in the national interest.’’ When is the NAM 

going to be able to find some important administration support for 

its concern? It is very clear that some of our competitors are manipulating the currency in order to gain a trade advantage—I 

would put China forward as Exhibit Number One, but they are not 

the only ones. How are we going to address this situation? 

Mr. BAROODY. Senator, first, we are not for a weak dollar. We 

think that the——

Senator SARBANES. No, we are not for anything that is weak. We 

can’t be for anything that is weak. That is for sure. 

Mr. BAROODY. The appropriate term would be ‘‘a market-valued 

dollar,’’ and we have found some—and I alluded to it earlier in the 

discussion with Senator Allard. We have found someone authoritative in the Administration who has articulated the same view. I 

was going to fumble to see if I had the quote directly. Forgive me. 

President Bush, as I alluded, at a summit late last summer or 

early fall, made exactly the statement that you and I would agree 

on, I think, that the market should set the value of the dollar and 

that we must see to that, among other things, in the interest of enhancing manufacturing’s ability to compete. 

Senator SARBANES. Well, that is what we keep saying, but how 

do you then deal with the problem where you say the market is 

going to set the value——

Mr. BAROODY. Yes. 

Senator SARBANES. One of your prime competitors is not allowing 

the market to set the value of the currency but is intervening in 

a lot of very shrewd and skillful ways in order to affect the valuation and thereby they gain—I forget the percentage figure—20 

percent, I think you said. 

Mr. BAROODY. Well, it depends on the product and the country 

and currency we are dealing with. 

Senator SARBANES. Right. Well, now how do you deal with that 

problem? 

Mr. BAROODY. Good question. 

Senator SARBANES. You say, well, we don’t intervene in the market, we want the market to set it. Fine. I accept that. The other 

fellow is intervening in order to affect the valuation. Now, how do 

you deal with that situation? 

Mr. BAROODY. Not easily. I mean, first of all, we have asked for 

the Administration, as I have said, to shift its rhetoric into neutral. 

We have insisted we are not asking for intervention, but I think 

92

the corollary to that—and the Administration understands that 

this is our view—is that if we are not going to seek intervention 

by our own Government and currency exchanges, we do want our 

Government consistent with that to speak out against interventions by other countries when they do it. 

You are right, people more versed in the currency markets than 

I would tell you that perhaps you could add up three or four Asian 

countries over the last 3 or 4 years and find that they have made 

purchases exceeding $400, maybe even $500 billion of dollars for 

the sake of continuing this imbalance. 

We think that the world trade and international investment 

needs to be governed by rules. The WTO provides some rules. We 

want to see through those mechanisms that companies which are 

intervening in this way are powerfully induced to cease so that the 

market can set these rates. 

Senator SARBANES. Well, that is nice phrasing, ‘‘powerfully induced,’’ and I accept that. 

Mr. Chairman, thank you very much. I just ought to close by observing it is really fascinating to watch those who were such vehement advocates of an amendment to the Constitution to require a 

balanced budget—and it extends quite widely, this circle having 

relegated that to the mists of the past as they now support substantive proposals from the Administration that will, in fact, contribute to the deficit. My own view is that we need to run a deficit, 

at least in the current fiscal year, in order to try to give a boost 

to the economy. So I accept that. I am not in favor of building in 

the long-term deficit over subsequent years because I think we 

ought to wait and see and make those judgments as we move into 

those years in terms of the economy in order to try to maintain 

some semblance of fiscal discipline. There are a lot of people 

around here who were screaming only a few years ago to amend 

the Constitution and have a balanced budget, and that is all simply 

gone by the board. 

I thank the Chairman. 

Chairman NICKLES. Senator Sarbanes, thank you very much. To 

our panelists, I want to thank you as well. 

We will have our next committee hearing tomorrow morning at 

10 o’clock. We will have Barry Anderson, who is Deputy Director 

of CBO, also as our principal witness. They just came out with 

their budgetary and economic outlook today, so that will be the 

subject of our hearing. 

To our panelists, thank you very much. I think this has been 

very informative and very helpful to us as we try and put together 

a package that will grow the economy. So thank you all very much. 

Mr. SPERLING. Thank you, Mr. Chairman. 

Mr. BAROODY. Thank you, Mr. Chairman. 

Mr. MALPASS. Thank you, Mr. Chairman. 

Chairman NICKLES. Thank you. 

[Whereupon, at 12:16 p.m., the committee was adjourned.]

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(205)

THE BUDGET AND ECONOMIC OUTLOOK 

THURSDAY, JANUARY 30, 2003

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

The committee met, pursuant to notice, at 10:06 a.m., in room 

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

Present: Senators Nickles, Domenici, Allard, Sessions, Crapo, Ensign, Conrad, Sarbanes, and Stabenow. 

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

senior analyst. 

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

deputy staff director and Sue Nelson, deputy staff director. 

OPENING STATEMENT OF CHAIRMAN DON NICKLES 

Chairman NICKLES. The committee will come to order. 

I want to thank our members. My guess is we will have a few 

more members shortly. I want to thank Mr. Anderson for joining 

us today. I think most everybody around here has had the pleasure 

of getting to know Barry Anderson. I compliment him for his many 

years of service in the fields of budgeteering. He has got about 30 

years of budget experience and expertise. He has worked at the 

General Accounting Office; he has worked at OMB for many years. 

Since 1999, he has been at the Congressional Budget Office as Deputy Director. So, Mr. Anderson, we welcome you to our committee 

again. 

Before we proceed, I think I will call upon my colleague, Senator 

Conrad, for any opening remarks, if any, that he might have. 

OPENING STATEMENT SENATOR CONRAD 

Senator CONRAD. Thank you, Mr. Chairman. 

I want to echo what the Chairman has said in commending Dr. 

Anderson for his service. We appreciate it very much. We know you 

could have certainly made more money in the private sector, but 

your dedication to public service is deeply appreciated, both in the 

executive branch of Government and certainly here. I am reminded 

that it was 2 years ago that you were here testifying on behalf of 

Dan Crippen, who was the CBO Director and who had been injured 

in a terrible accident. So you were here at that time giving us the 

view that we were going to be in this very advantageous circumstance of having nearly $6 trillion of budget surpluses over the 

next decade. 

206

What a dramatic change from those happy days: $5.6 trillion, we 

were told, over the next decade in surpluses; now with your new 

report today, down to $20 billion. That, of course, is based on no 

policy changes, no additional spending, no additional tax cuts. We 

all know that the President has laid on the table significant 

changes: additional tax cuts, making the tax cuts permanent, his 

growth package, which is virtually all tax cuts, additional spending 

on prescription drugs and Medicare reform. Obviously there will be 

additional costs if we go to war with Iraq. Those are not expressed 

in the numbers that the Acting Director will give us today.

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If we take into account those changes, the changes the President 

has proposed in policy, what we see over the next decade is not any 

surplus, not $5.6 trillion, not $20 billion, but no surpluses; but instead we would be $1.6 trillion in the red.


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Let’s go to the next chart. Frankly, of greatest concern to me is 

that not only do we see deficits as far as the eye can see, but if 

we also take out Social Security, if we are not taking Social Security funds and using those to pay for tax cuts and using those for 

other purposes, what we see is really an ocean of red ink out ahead 

of us for the entire rest of the decade, deficits that are what I 

would call ‘‘operating deficits,’’ a more accurate reflection of the 

real deficits of the Federal Government, running in the $300 to 

$400 billion a year range throughout the entire rest of the decade.


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The question becomes: Where did the money go? Where did this $7 trillion turn—where did all those dollars go? What we see is the 

biggest reason is the tax cuts, both those that have already been 

enacted and those proposed. The second biggest reason is technical 

changes, largely that the revenue models, the revenue being generated is not what was anticipated, given the various levels of economic activity, really that revenue was being overestimated quite 

apart from the tax cuts. 

The second biggest reason is spending, 25 percent of the reason 

of the disappearance of the surpluses, spending that has already 

occurred and that is projected to occur under the President’s plans. 

Most of that obviously has gone for defense and homeland security. 

Then the smallest part is the economic downturn, some 10 percent of the reason for the disappearance of the surplus.

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Let’s go to the next chart. This leaves us with very unfortunate 

results with respect to the national debt. You will recall the President told us in his plan of 2 years ago that he was going to have 

maximum paydown of the debt. That is not what we see now. Instead, we see substantial increasing of the debt. In fact, the debt 

by 2008, when the President said his plan would allow for virtual 

elimination of the debt, instead we will have a debt of some $4.8 

trillion. Again, that is publicly held debt.


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Why does all this matter so much? Well, Director Crippen testified here last year, saying ‘‘as we look ahead, put more starkly, Mr. 

Chairman, the extremes of what will be required to address our retirement are these: we will have to increase borrowing by very 

large, likely unsustainable amounts; raise taxes to 30 percent of 

GDP, obviously unprecedented in our history; or eliminate most of 

the rest of Government as we know it.’’


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Then he concluded that is the dilemma that faces us in the long 

run, Mr. Chairman, and these next 10 years will only be the beginning. 

Let me just put up a final chart that I want to show this morning, and that is, here is what he was talking about. We are in the 

sweet spot of the fiscal cycle now; that is, the trust funds of Social 

Security and Medicare are running surpluses now. When we get 

Social Security out to 2017, the baby-boom generation has started 

to retire, the trust fund goes cash negative. When it does, it goes 

cash negative in a very significant way, very dramatic. That is why 

I have always believed during this period we should not be running 

deficits at all, that, in fact, we should either be paying down debt 

or we should be prepaying the liability that is to come. Unfortunately, we are doing neither, and the President’s plan digs the hole 

deeper, much deeper, a hole that is really stunning, approaching $4 

trillion over the next decade when one safeguards the Social Security funds, which virtually everyone in Congress had pledged to do.

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With that, Mr. Chairman, I look forward to the testimony of our 

witness and questions of our colleagues. 

Chairman NICKLES. I didn’t make any opening comments because I was afraid you were going to make some of yours. [Laughter.] 

Chairman NICKLES. Just for the information of our witness and 

also Senator Burns, we have a Finance Committee vote at 10:15. 

They are trying to get that done. I just wonder if we should gamble 

on that. 

I think we will go ahead. Let me make a few remarks, since we 

only have to run downstairs. So we won’t go down until they tell 

us they need us, and we just have to go down a couple flights, and 

we can be back in 5 minutes. Let me make——

Mr. ANDERSON. I promise not to change the numbers in between 

time. 

Chairman NICKLES. I appreciate that, Mr. Anderson. Thank you. 

I just want to make a couple comments. 

One, I don’t concur with the analysis of my friend and colleague 

Senator Conrad, and while I do think people are entitled to their 

opinions, they are not entitled to their facts. I will just throw out 

a couple of facts, and I will insert these into the record. I think we 

would agree—one of the comments that Senator Conrad mentions—that CBO and OMB, and, I might mention, every other analyst, misjudged total revenue estimations for 2001 and 2002 and, 

frankly, for the out-years big time, in trillions of dollars. Certainly—well, I say in trillions. I would have to extrapolate that, 

and I will ask you a question, but the forecast that Senator Conrad 

was alluding to, the $5.6 trillion surplus that was forecast in January 2001 over that 10-year period of time, I would just look back 

to 2002. This is factual. We have 2002 numbers. CBO projected in 

2002 there would be a surplus of $313 billion. Congress enacted a 

few changes. We cut some taxes, a total of $75 billion, and we increased some spending, a total of $75 billion. The economic and 

technical re-estimates were $321 billion. CBO missed it big time. 

That was 68 percent of the difference, not an insignificant amount. 

It is 68 percent of the difference if you want to look at what happened in 2002, because the year before we had a $127 billion surplus. In 2002, we had a $158 billion deficit. Big swing. Why? Three 

hundred twenty-one of it is economic and technical re-estimates. 

Most of that, where the CBO was off, where OMB was off, where 

we were off, was you had a precipitous drop in income. You had 

a decline of income of 7 percent. That is historic in any estimation. 

It followed, I might mention, a reduction of income in 2001 of about 

1.7 percent. 

So never, or certainly not in recent decades have we had two consecutive years of reduction of income no one estimated and a total 

combined—if you add the 2 years together—of about 9 percent reduction. A bunch of this nonsense on the charts, well, this is caused 

by tax cuts and so on, just doesn’t bear out. It is not factual. 

Well, I want to be very factual. I am adamant that we be factual. 

Senator CONRAD. I agree with that absolutely. Let’s be factual. 

I mean, what I put up here, there was nothing here that wasn’t 

factual. 

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Chairman NICKLES. Let me finish. I want to be factual, and I am 

going to insert this into the record. We did go from a $127 billion 

surplus in 2001 to a $150 billion deficit in 2002, and according to 

my chart—and maybe I will ask Mr. Anderson to substantiate this, 

but we got this from him—I believe that $321 billion of that change 

was due to economic and technical re-estimates.

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Changes in CBO’s Baseline Projections of the Surplus Since January 2001 January 2003 Adjusted Baseline 

[by fiscal year, in billions of dollars] 

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002—2011

Total Surplus as Projected in January 

2001 ....................................................... 281.118 312.934 359.148 396.809 432.940 504.996 572.721 635.089 710.386 795.963 888.707 5,609.693

Changes to Revenue Projection.

Legislative.

EGTRRA .............................................. (70.208) (31.338) (84.003) (100.697) (100.318) (125.606) (142.120) (150.709) (158.152) (175.921) (117.284) (1,186.148) Economic Stimulus ............................ 0.000 (42.591) (39.406) (29.062) (3.548) 16.101 16.814 16.042 13.666 10.140 7.246 (34.598) Other .................................................. (0.999) (0.630) (2.900) (3.125) (3.351) (3.440) (1.637) (1.345) (1.352) (1.527) (1.516) (20.823) 

Subtotal, legislative ................. (71.207) (74.559) (126.309) (132.884) (107.217) (112.945) (126.943) (136.012) (145.838) (167.308) (111.554) (1,241.569) 

Economic & Technical ........................... (72.334) (307.949) (295.215) (265.766) (237.498) (205.784) (184.082) (171.476) (162.862) (154.810) (115.446) (2,100.888) 

Total Revenue Changes ..................... (143.541) (382.508) (421.524) (398.650) (344.715) (318.729) (311.025) (307.488) (308.700) (322.118) (227.000) (3,342.457) 

Changes to Outlay Projections.

Legislative.

Discretionary ...................................... 1.515 50.242 77.431 82.091 84.455 84.629 85.260 86.017 87.231 89.432 91.667 818.455Mandatory.

EGTRRA ......................................... 0.000 6.226 6.600 7.006 7.081 9.597 9.542 9.360 9.668 11.080 12.244 88.404Economic Stimulus ....................... 0.000 8.278 3.526 0.036 0.023 (0.014) (0.040) (0.036) (0.010) 0.003 0.003 11.769Farm Bill ....................................... 0.000 1.613 8.406 9.854 10.212 9.867 9.253 8.072 8.037 7.519 7.273 80.106Debt Services ................................ 0.537 4.937 14.779 30.259 45.387 60.078 75.838 93.138 111.895 132.551 153.559 722.421Other Mandatory ........................... 11.432 4.072 14.942 6.154 5.892 3.045 2.257 4.178 3.172 3.127 3.281 50.120

Subtotal, mandatory ................. 11.969 25.126 48.253 53.309 68.595 82.573 96.850 114.712 132.762 154.280 176.360 952.820Subtotal, legislative ................. 13.484 75.368 125.684 135.401 153.050 167.202 182.110 200.729 219.993 243.712 268.027 1,771.275

Economic & Technical.

Discretionary ...................................... 1.340 1.085 4.528 5.205 (0.353) (2.074) (0.856) 0.834 3.278 5.436 11.323 28.406Mandatory .......................................... (4.350) 12.325 6.594 2.532 8.591 37.617 54.326 61.132 75.148 84.286 105.167 447.718

Subtotal, econ. & tech. ............ (3.010) 13.410 11.122 7.737 8.238 35.543 53.470 61.966 78.426 89.722 116.490 476.124

Total Outlay Changes ................... 10.474 88.778 136.805 143.138 161.288 202.745 235.580 262.695 298.419 333.434 384.518 2,247.399

Total Impact on Surplus ............................ (154.015) (471.286) (558.329) (541.788) (506.003) (521.474) (546.605) (570.183) (607.119) (655.552) (611.518) (5,589.856) Total Surplus or Deficit (-) as projected in 

January 2003 ......................................... 127.103 (158.352) (199.181) (144.979) (73.063) (16.478) 26.116 64.906 103.267 140.411 277.189 19.837

Memorandum:.Total legislative changes ........................... (84.691) (149.927) (251.993) (268.285) (260.267) (280.147) (309.053) (336.741) (365.831) (411.020) (379.581) (3,012.844) Total econ & tech changes ........................ (69.324) (321.359) (306.337) (273.503) (245.736) (241.327) (237.552) (233.442) (241.288) (244.532) (231.936) (2,577.012) 

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I happen to think instead of us just pointing fingers back and 

forth, I think it would be wise for us to figure out how we can get 

the growth in our economy again so those estimates can be more 

accurate on the income side. 

I might also mention in 2003, I believe CBO projects that we will have a deficit of $199 billion. In 2001, CBO projected that we 

would have a surplus of $359 billion. There is a big difference 

there, a total of $558 billion difference; $126 billion was due to legislative changes on the Tax Code. We cut taxes $126 billion. I 

might mention bipartisan tax cuts. That is both President Bush’s 

tax cut and also the bipartisan stimulus act that totaled $126 billion. 

Then we also had spending increases that totaled $126 billion. It 

is very interesting how both the spending and the taxes equaled 

changes from the baseline. We also had $306 billion in technical 

and economic re-estimates. That is 55 percent of the difference. 

So, again, there is a big difference between the estimate that was made in 2001 for surplus in 2003 of $359 billion when we went to 

a deficit projected to be $199 billion, most of which, the majority 

of which was re-estimates because of the reduction in incomr. We 

didn’t meet the targets. Why didn’t we meet the targets? It wasn’t 

because of the tax cut. The tax cut was part of it, but a very small 

part. Spending increases was part of it. The majority of it was reestimating the economic forecast. 

So I just mention that. I think it is important to try and look at 

history, but I also think—and, Mr. Anderson, this kind of may be 

my opening—CBO has missed it a lot. In your statement—I read 

your statement that you are going to present to the Committee. I 

have read it, and you have kind of a window of these—I think you 

have a chart that is called the uncertainty of your projections, and 

it shows the figures. 

Now, you stopped on 1997, but as I mentioned, CBO really 

missed it in 2001 and 2002, and I don’t know why you didn’t show 

those, because that is where—you know, trying to guess what the 

budget is going to be in 10 years to me is more hypothetical than 

anything else. We missed it big time. In 2001, we missed it big 

time for 2002 and 2003. Even last year, we missed it big time. 

I am not being critical. You are a professional. You work with 

great people. Everybody missed it. No one projected that big of a 

reduction in revenues. 

Now, part of the problem—could we have that Nasdaq chart? 

Part of the problem happened because of the stock market. The 

market decline precipitously, and it has caused all of us, myself included, a significant reduction in our accounts. In 2000, Nasdaq fell 

from its peak 45 percent, and that reduced my IRA account, and 

it reduced millions of Americans’. I don’t think anybody projected 

how that was going to flow through the system. 

So I am not faulting, but I do know that you or OMB—CBO, excuse me, and OMB testified before the Committee, and they grossly 

overestimated the amount of money that was going to be received. 

Even when they testified January 2001, we had already had a 

major decline in stock values, unparalleled, but estimates were just 

way off. On January 1, no one was projecting that revenues would 

be declining by 7 percent in 2002, or even a reduction in 2001. 

224

Now, granted, in 2001, we didn’t know September 11th was coming. That had a dramatic impact, no doubt. On January 1 of 2002, 

that had already happened, but we still had—in 2002 is when we 

had the biggest reduction of income. September 11th had already 

happened. Again, I am not faulting. These are unintended consequences maybe as a result of September 11th. Everybody, all the 

professionals, missed the total estimates coming into the Government big time, by hundreds of billions of dollars. We had total revenues—correct me if I am wrong—of $2.25 trillion in the year 2000, 

and last year they were $1.85 trillion. That is a reduction of $175 

billion compared to 2 years before, not to mention from what was 

projected, which was much higher. CBO missed it big time, and so 

did everybody else. 

So, Mr. Anderson, you are my friend, but we all have to do a better job. I take some responsibility now that I am chairing this committee. I really want to do a better job. I want to do a better job 

in fiscal management of the Government, all the Government. I 

look forward to working with you to accomplish that goal. You are 

an accomplished professional. You have done a fantastic job. You 

have some great people. CBO, OMB, everybody missed the estimates big time in 2002, and I did note in your report that you 

project that we have a deficit this year of $199 billion and that deficit declines if we stay with present law, declines basically to a balanced budget in 2006. We are working on 2004’s budget, so in 3 

or 4 years, 2007, it would be balanced. 

Congress is also looking at some changes—growth package, prescription drugs, could have a military conflict that could influence 

that as well. 

So I mention this. I would like an explanation from you, if possible, in your comments as to how did CBO miss it so much and 

how can we do a better job in estimating revenues. 

I might mention you have done very well in estimating outlays. 

You are on target on your outlay estimates. Everybody missed it 

on revenues. Maybe if we could figure out modeling or something 

to where we could do a better job on the revenue estimates, I think 

it would be helpful for the future. 

So with that comment, I welcome you to the Committee, and, 

again, I will apologize. In a second I think we are going to have 

to run downstairs. Welcome again before our committee. 

STATEMENT OF BARRY B. ANDERSON, ACTING DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. ANDERSON. Thank you, Mr. Chairman. Thank you for your 

kind comments, and yours, Senator Conrad. I had hoped to make 

my career more than that of super sub, but I am glad to be here 

anyway and to talk about the Congressional Budget Office’s economic and budget projections for the upcoming 10 years. 

Chairman NICKLES. Go ahead. Please proceed. 

Mr. ANDERSON. I have a statement I would like to submit for the 

record, if that is approved by the Committee, but instead of reading 

that statement, I would like to summarize and address five points 

from it. 

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Chairman NICKLES. Mr. Anderson, can you give us 3 minutes? 

We will be right back. Good. Thank you. I apologize. We will be 

right back. [Recess.] 

Chairman NICKLES. Mr. Anderson, I apologize, but now you can 

begin, and we won’t be interrupted again. 

Mr. ANDERSON. Thank you. As I said, I have a statement I would 

like to submit for the record, but I would like to summarize it briefly and emphasize five points. 

First, as you have indicated, I have been in budgeting for quite 

some time, and have been doing budget and economic forecasts for 

some time, and am used to the kind of uncertainty that you alluded 

to and that is inherent in any kind of budget forecast. 

With respect to the forecast we are making this year, I have to 

say that I do not believe I have ever encountered an economic forecast that is more uncertain. The reason for that is not the intrinsic 

uncertainties in the economy that are detailed in our report. Rather, it is the—as I call it—hippopotamus under the living room rug 

that nobody seems to be able to talk about, and that is the geopolitical risks. 

As you may know, Mr. Chairman, we base a lot of our economic 

forecasts taking on what the private sector and our panel of economic advisors tell us. We try to listen carefully to them and not 

be significantly different in our forecast from the larger economic 

wisdom of private economic forecasters. We pay a lot of attention 

to the consensus of the Blue Chip economic forecasts. 

What they assume with respect to the outcome of the current 

geopolitical situation is unknown. We have not built into our economic forecast the potential outcome of the current geopolitical situation we are facing, not just in the Middle East, not just in Asia, 

but also the terrorism aspects. The reason is that for all the uncertainties and problems you have just mentioned, those geopolitical 

outcomes are virtually impossible for us to predict. 

We have looked at what others have said about the impact of the 

geopolitical situation on the economy and have tried to make estimates, but those other forecasts vary widely across the board. In 

addition, the possible geopolitical outcomes have impacts not just 

on direct spending for homeland security or national defense and 

not just on the price of oil but potentially on a much, much broader 

range of factors that includes the more important aspects of consumer and business confidence. 

Therefore, we have a set of economic projections here that suffers 

from the same risks that previous economic projections have had 

to take into account, but on top of that, there is a level of geopolitical uncertainty that surronds CBO’s forecast with more uncertainty, I think, than I have ever seen before. 

My second point is that added to this level of geopolitical uncertainty, we also do not have—as you have correctly indicated, certain policy actions that the Congress and the President are actively 

debating as we speak. Those policy actions are very big and very 

important. They include not only defense spending, not only 

antiterrorism spending, but also increased spending on education, 

on health, on drug benefits, and various kinds of proposals on the 

tax side. As you have correctly pointed out, our projections do not 

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take into account any potential new legislation. The impact of that 

new legislation could be large. 

Having made those two points, I would like to just spend a few 

minutes on our baseline itself. Again, our baseline is not a forecast. 

It is a projection of what—under our assumptions about the economy and our pricing out of current law—the budget deficits and 

surpluses would be over the next 10 years. As the chart indicates, 

you can see that we have a projection of a $199 billion deficit in 

fiscal year 2003, dropping to $145 billion in fiscal year 2004, gradually declining after that, and then going to surpluses by 2007 (See 

Table 1). Those surpluses would increase into the out-years. 

The point I would like to highlight from this, in addition to the 

uncertainties, is that as a percentage of Gross Domestic Product 

(GDP), virtually all of those numbers are quite small. To know the 

specific year in which we cross from deficit to surplus is much less 

important than to look at what the baseline says, under our economic assumptions, about how much of a deficit or surplus as a 

percentage of GDP we will have for the upcoming future. It is not 

the situation that I saw so much of in the 1990’s and the 1980’s, 

when we had significant deficits—significant not only in nominal 

amounts but as a percentage of GDP. 

Instead, the numbers here—again, with no new legislation included—are very close to balance whichever year you take. About 

the only exception to that occurs way out in the out-years, in 2011, 

2012, and 2013, when under current law the 2001 tax cut is scheduled to expire, and therefore, the amount of revenues coming in are 

projected to be significantly greater. 

With those introductory comments, I have two other comments 

I would like to make before I end my short presentation. The comments revolve around the uncertainty of our budget projections. 

Not only do we have significant uncertainty in the CBO baseline 

by design—that is, we explicitly do not make forecasts of what is 

going to happen in legislation—but we also have it in part because 

of the impossibility of accurately forecasting geopolitical outcomes. 

In addition, much uncertainty has to do with the fact that the U.S. 

economy and the Federal budget are highly complex and are affected by many economic and technical factors. 

That uncertainty can be best illustrated by a fan of probabilities 

surrounding CBO’s year-by-year point estimates, as indicated in 

this chart (See Figure 2). Not surprisingly, the range of those possible outcomes widens as the projection period extends farther out. 

The fan chart makes clear that outcomes quite different from the 

ones we have projected have a significant likelihood of occurring. 

We can also use the fan chart methodology to examine whether 

CBO’s projections are consistently biased in one direction or another. As the next chart indicates, CBO’s missed estimates of the 

budget’s bottom line do not appear to be systematically biased (See 

Figure 3). Sometimes the projections were too high and at other 

times, too low. For example, the 5-year budget calculations made 

between 1993 and 1997 tended to be too pessimistic, while most of 

the estimates made earlier tended to be too optimistic. 

By the way, this chart presents only estimates through 1997 because we did not have actuals for the full 5-year period beginning 

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in 1998. We also do not have a figure in here for 1982, because 

CBO did not produce a full 5-year projection at that time. 

The same chart can also be looked at not only to see if there is 

some systematic bias but also to see if we can achieve greater estimating accuracy in our forecast. 

In looking at recent criticisms of our methods, we undertook to 

do some calculations to see whether our baseline economic projections sufficiently accounted for the supply-side effects of changes to 

tax laws. The small fan charts show that increasing the assumed 

response of labor supply and investment—the feedback effects—

would generally not have improved budget estimates made during 

periods in which there had been major changes to the tax system 

(See Figure 3). 

For example, adding revenues to the baseline projections of the 

primary surplus—that is, the surplus excluding interest costs—for 

the mid-1980’s to reflect larger supply-side effects from the Economic Recovery and Tax Act of 1981 would have increased rather 

than reduced the forecasting inaccuracies. Similarly, incorporating 

larger supply-side effects from the Omnibus Budget and Reconciliation Act of 1993 than those incorporated into subsequent baselines 

would have reduced the level of revenues and magnified the inaccuracies. 

I am not saying, Mr. Chairman, that there are no supply-side effects. There are. CBO has regularly—does now and, in this document, continues to—estimate the supply side effects of fiscal 

changes in general and tax changes in particular. To do more than 

what we have done in the past according to this analysis, would 

not apparently have increased our accuracy. 

The last point in my testimony is that given the uncertainty surrounding CBO’s outlook and the current pressures on the budget, 

I thought it might be useful to say something about how our projections might be used in considering fiscal policy. 

First, several factors argue for focusing on the long term. Just 

past the 10-year budget baseline loom significant long-term strains 

on the budget as the baby-boom generation ages. The number of 

people reaching retirement age will surge by about 80 percent in 

the next 30 years while the number of workers to pay for those 

benefits will increase only by 15 percent. 

In addition, we know given the demographic situation, that the 

costs per enrollee for Federal health benefits are likely to grow 

much faster than inflation. As a result, the amount that the Government spends for major health and retirement programs 30 years 

from now is projected to consume a substantial portion of what the 

Federal Government currently spends for all its programs. Although the current baseline that I have just talked about leads to 

a brighter situation for the next few years, that picture is bound 

to change; and policy choices now would serve the Nation’s fiscal 

health best if they could avoid making the long-term situation 

worse. 

Today, with security and economic concerns paramount, the longterm perspective may seem elusive. The current debate seems to 

focus on desirable levels of taxes and spending and, correspondingly, the appropriate size of Government. This chart is a good way 

228

to keep in mind what that longer-term situation is, particularly 

over the next 10 years (See Figure 1). 

It also helps present what I see as two contrasting viewpoints 

about how questions about future policies ought to be answered. 

One viewpoint advocates a more limited size of Government. Proponents of that viewpoint seek lower levels of taxation and lower 

levels of spending. CBO’s estimates indicate that total revenues as 

a percentage pf GDP are now close to their historical level. As you 

can see, at our current levels of taxation, we are close to the average revenues we have had for the past 40 years—that is, about 18 

percent or so. However, revenues as a share of GDP are projected 

to creep up to more than 19 percent by 2010 under current policies. 

If the tax cuts enacted in 2001 are allowed to expire in 2010, as 

is called for under current law, then by 2013, revenues as a percentage of GDP will climb to 20.6 percent—a level never reached 

before except during World War II and in 2000, and more than 2 

percentage points above the 1962-to-2002 average. 

Another viewpoint is to see a larger, more expensive role for Government. This viewpoint says that there are important and legitimate unmet needs that cannot be offset elsewhere by spending cuts 

and that require a higher level of taxation. CBO’s baseline does not 

include the funding for those needs. If it did, spending as a percentage of GDP would move toward higher levels than those depicted in the figure—levels closer to the historical average shown 

there. 

Boosting spending further to pay for education, homeland security, precription drug benefits for the elderly, and other needs, including, possibly, a war with Iraq, will require a level of revenues 

much above the historical average; and without the willingness or 

ability to cut other spending in order for deficits not to grow, taxes 

must go up. 

So the outstanding question for the Congress seems to me to be, 

as it creates a budget for 2004 and future years, not the way this 

chart looks now but rather how it should look in the future. While 

some people feel that there may be some obvious, clear path to a 

higher standard of living for all Americans, I do not see the public 

policy choices that must be made as quite so clear. 

Whatever the decisions that are made, it is critical, I think, to 

avoid a prolonged and unsustainable mismatch between taxes and 

spending. Cutting taxes and limiting spending growth is one alternative. Boosting spending and increasing taxes in order to support 

that spending is another. 

In this context, I hope, Mr. Chairman, that CBO’s baseline projections can be used to gauge the degree of latitude that the Congress has to adjust its priorities while preserving a budget that balances long-term economic growth and fiscal responsibility with 

unmet needs. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Barry Anderson follows:]

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Chairman NICKLES. Mr. Anderson, thank you very much. We appreciate your presentation before the Committee and welcome your 

input, and we will ask you a few questions. 

Before I do that, I notice my colleague and former chairman of 

the Committee arrived, and I wished to mention this yesterday but 

we missed each other in the Committee. I wanted to compliment 

him for his many years of service on this committee—I believe 

going back to 1975? 

Senator DOMENICI. Right. 

Chairman NICKLES. That is remarkable. You also chaired it or 

was ranking member, I believe, for about——

Senator DOMENICI. Seventeen years. 

Chairman NICKLES. Seventeen of those years. Senator Conrad 

and I would say that that is not an easy challenge, and you handled yourself very well, both as chairman and as ranking member. 

Senator DOMENICI. Thank you. 

Chairman NICKLES. Passed a resolution every year, and I compliment you for your service. I am delighted that you are still on 

this committee and would welcome any opening comments that you 

wish to make. 

Senator DOMENICI. Well, thank you very much, Mr. Chairman. It 

is good to be here. I heard a little bit but not enough to be totally 

familiar with the words of wisdom you have given us, but I would 

like to say before I make a few observations, Mr. Chairman, that, 

one, I compliment you based on what I have seen about your attitude about the Committee. I think it is marvelous that you are enthusiastic and that you want to broaden the scope of the hearings 

and activities of the Committee. I think that will be welcome. The 

committee has broad jurisdiction in that regard, and if the Committee members want to join you, that would be a very exciting approach for the Committee. 

In addition, as I have told Senator Nickles heretofore, for better 

or for worse, the Committee has a legacy from those 17 years of 

expanded power beyond which those who wrote the Budget Act envisioned. Clearly, the scope and capacity to mandate change 

through reconciliation is a rather fantastic power, and it has been 

used so often that I believe it is now without challenge. Of course, 

the challenge can be made as to what to use it for, but not to its 

use. In addition, the concept of reserve funds that are released at 

the Chairman’s call, if the Senate complies with what the Committee said, it is indeed a very vital tool which you will find exciting as you attempt to use the Committee for more than just a resolution that perhaps in some instances would not even be complied 

with. 

So I think that is a good result. I am very hopeful that sometime 

we will be able to document the impact of that on the Senate. I 

would think a small textbook about the impact of the Budget Act 

in 25 years on the procedures and processes of the U.S. Senate 

might indeed be a welcome document. It will show that Senator 

Robert Byrd, the beloved spokesman for open debate and filibusters, helped write a bill that clearly whacked filibusters to the 

bone. They are not available in anything that has to do with the 

budget, neither reconciliation, neither budget resolution, neither 

amendments. I am sure that if it we reconsidered, that is, the 

241

Budget Act, people would wonder whether it would pass in that 

way, Mr. Chairman, again. 

I have had a chance to review as much as I usually do, even 

when I was chairman, the economic outlook, and I understand it 

is very uncertain. I do understand that the world is uncertain. It 

is not just the policies of the Federal Government in budgetary 

matters that are uncertain. I am a bit concerned. I see the deficit 

as being manageable, and I see your projections for the next 10 

years of the deficit as being manageable. However, you have not 

put into your projections what we might do. Your projections, so everybody understands, are what we have already done. You don’t 

have in these projections what Senator Nickles and this committee 

might say we are going to do in taxes. It doesn’t have what we are 

going to do in expenditures in excess of this baseline or less than, 

or in new entitlement programs that are not in your baseline. 

Hopefully, when they finish their work, they will ask somebody 

to adjust the baseline, but you start with yours. That is a good 

working arrangement, Mr. Chairman. 

Also, it would appear to me that 10 years out of 10 years of debt, 

accumulation of deficit is workable. I would be interested what the 

debt-to-GDP ratio might be at 20 years or 30 years or 40 years, 

with just a few things put in it, assuming Medicare and assuming 

Social Security and perhaps a few other benefits of significance are 

put into it. It would be interesting to see the debt—debt, not deficit-to-GDP ratio. Could you tell us just in summary what is the 

debt-to-GDP ratio now and what will it be in 10 years? 

Mr. ANDERSON. It is about 35 percent now. Under our baseline, 

I believe it declines to 14 percent. Two years ago, we did a study 

of the debt-to-GDP ratio under a variety of different long-term scenarios. The operative word from that is ‘‘explosive’’; that is, with 

the growth that one can see of the baby boomers retiring for Social 

Security, Medicare, and Medicaid, one can see an explosive result 

in debt to GDP. 

Senator DOMENICI. Thank you very much, Mr. Anderson. 

Thank you, Mr. Chairman. It is good to be with you. 

Chairman NICKLES. Well, it is good to have you back, Senator 

Domenici, and, again, I thank you for your service and look forward 

to working with you continually on this committee and on the Energy Committee, of which you are now chairman. I think you will 

do a fantastic job in that capacity as well. 

I am going to call upon our colleagues in order of appearance. I 

would like to recognize the ranking member, but before I do, I want 

to just say I always want these meetings to be congenial, as I stated earlier, you are entitled to your opinion, not your facts. I say 

that all the time. We might have a little difference of opinion on 

some things, and one of the questions I think I would ask you, Mr. 

Anderson, is: Where did the $5.6 trillion surplus go? Or where did 

the $313 billion surplus that you projected in 2002 or the $350 billion surplus that you projected in 2003—how that differed? If you 

would, just give us a little piece of paper. You don’t have to do it 

today. You can do it today if you so desire. How much of your revenue estimates were missed? How much of it was technical and 

economic? How much of it because of the tax changes we made? 

How much because the spending exceeded estimates? If you have 

242

that, you can submit it for the record. If not, I just wanted to mention to my colleagues, we are going to have a lot of hearings, but 

I will try to always stick to the facts and never impugn anybody’s 

motives in any way, shape, or form. 

If you have that information, you can give it to us, or——

Mr. ANDERSON. Let me just answer very briefly. As was mentioned, I was here 2 years ago and was at that time the official representative of CBO’s forecast of the $5.6 trillion surplus. I hope 

that the forecast I am presenting now turns out to be much more 

accurate than the one that we presented then. 

Let me also point out that that $5.6 trillion projection covered 

the years 2002 through 2011. We are in 2003 now. We still have 

quite a few years to go on that. Yes, our projections have changed 

dramatically. I personally hope—and I am sure you all do too—that 

they will change dramatically again but in the opposite direction; 

that we will see a much greater increase in economic growth than 

the growth we have seen in the past 2 years. 

Looking at what has happened in 2002 and then looking at the 

revision for the projections for 2003 through 2011 relative to the 

$5.6 trillion, we have seen, as was indicated previously, that $5.6 

trillion surplus now go to a cumulative baseline surplus of $20 billion for the 2002–2011 period. 

Where did that $5.6 trillion go? Well, first of all, economic and 

technical changes accounted for well over $2.5 trillion of the reduction, or about 46 percent. Let me emphasize that I said economic 

and technical. The line between those two isn’t nearly as distinct 

as it appears in our documents, with specific numbers for each kind 

of change. It is very much a subjective process to decide how much 

of a change is economic and how much is technical and how much 

interaction there is between the two. Therefore, I like to lump them 

together when looking at it. 

We missed for sure. We missed on the economy. We missed the 

technical interactions of the economy with the budget, and that 

constituted about 46 percent of the decline in the projected surplus. 

The remaining 54 percent is from legislation, and I think it is 

important to break that legislation into three components. The first 

is the Economic Growth and Tax Relief Reconciliation Act of 2001, 

which accounted for about 23 percent. The second is increased discretionary spending, which was about 18 percent. The remainder 

reflectsis a few smaller bills and debt service on the rest. 

My point is, it wasn’t the tax cut and it wasn’t spending. It was, 

first, the economy and, then, a combination of the tax cut and 

spending. That took us from $5.6 trillion down to $20 billion. 

Chairman NICKLES. Can I just ask you a question? 

Mr. ANDERSON. Sure. 

Chairman NICKLES. This is on my time now. I will turn it over 

to my colleague, but you are answering some of the questions. I 

happen to concur. The figures I have showed that, yes, the technical re-estimates, 46 percent. I show tax cuts of 21 percent on the 

bipartisan but also the bipartisan economic stimulus being another 

1 percent, so tax cuts being 22. On spending, I show discretionary 

at 15 percent and mandatory at 17 percent for a combined spending increase of 32 percent. 

243

Mr. ANDERSON. The figures you have I believe are accurate, but 

the mandatory total includes debt service. 

Chairman NICKLES. I think that is correct. 

Mr. ANDERSON. Then I think everything balances out. 

Chairman NICKLES. I appreciate that. I would also like the 

breakdown for 2002 and 2003, and you don’t have to give that to 

us today, but I would just like it. I think it would be good for the 

record. 

You missed big time and everybody else did, so I want to continue repeating that. I am not throwing stones. I am just trying to 

maybe help us get to where we are more accurate. It was a very 

difficult time to estimate. I did show the chart on Nasdaq collapsing in 2000, and I don’t think it was plugged in correctly on 

those losses and how they would go through, whether that is reduction in capital gains, which I remember yesterday we pulled out a 

chart that showed capital gains income went from $119 billion to 

50-some, maybe 70 and then 50-some. 

Anyway, I think we are pretty close, and basically if you could 

give us year by year, but I think it shows that economic and 

technicals were $308 billion of the difference in 2002. That is way 

off. That is way off. I told my friend and colleague, I said—and we 

are debating whether to do a 5-year or 10-year budget. We missed 

it so badly in the first 2 years. You know, we all need to do better, 

and maybe if we don’t have an unpredictable event, we will be 

much closer. 

On the revenue side, like I mentioned before, you were very close 

to being right on the money on outlays. You have been for years. 

Outlays, the estimates are very close. The revenues, because there 

was unprecedented decline or reduction in revenues of 7 percent 

last year, we all missed it big time. So I just mention that. 

It is a pleasure to call upon my colleague and friend, Senator 

Conrad. 

Senator CONRAD. Thank you, Mr. Chairman. 

Let me just revisit this question of where the money went. 

Mr. ANDERSON. Sure. 

Senator CONRAD. Because the calculations you have just done 

leave out significant items that are included in the chart that I 

showed. The chart that I showed, let me just put that back up. It 

showed that the disappearance of the surplus from 2002 to 2011, 

we included the President’s proposals; that is, we are not talking 

about your baseline, which you are precluded from taking into account what the President has proposed going forward. You have to 

do just what has happened so far. So, of course, that leaves out the 

President’s proposed making the tax cuts permanent, does it not? 

Mr. ANDERSON. Our projection clearly does. It is based on current 

law. 

Senator CONRAD. Yes. You don’t have that included, and that is 

because you are presenting what is in current law. You don’t have 

the President’s growth package included in your calculation; isn’t 

that correct? 

Mr. ANDERSON. Correct. 

Senator CONRAD. In addition, you show the associated interest 

costs with the loss of that revenue on the spending side. 

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Mr. ANDERSON. I tried to differentiate debt service when separating out three categories: taxes, spending, and additional costs. 

Senator CONRAD. Right. I would attribute it to the tax cut. You 

are losing—you have additional interest costs because of the tax 

cut. When you do that calculation and you look at the $5.6 trillion, 

we adopt the President’s policies, we are $1.6 trillion in the hole. 

That is over a $7 trillion swing. Where did it go? Thirty-nine percent of it is the tax cuts, both that have been made and that the 

President proposes, and the associated interest costs. Twenty-six 

percent are the technical changes. Much of it is the revenue not 

coming in as anticipated, quite apart from the tax cut. Spending, 

25 percent, most of that defense and homeland security; 10 percent 

economic downturn. 

So, Senator Nickles, I am not trying to have my own set of facts 

here. I am trying to do an honest determination of where the 

money went and where it is going. What accounts for this dramatic 

turnabout? I honestly believe the presentation that I have made is 

an accurate assessment of that. It takes into account not only what 

has happened but what the President proposes. It includes the associated interest costs. 

Now, let me go to—you put up a fan chart, Mr. Anderson, which 

I commend you for showing because I think it is very important to 

understand how wide the swing can be here. Let’s look back at 

what CBO showed in a fan chart back in 2001 and where we have 

actually come out. This is the range of estimates in the fan chart 

from low to high 2 years ago, and now we put in where we actually 

are. We are below the low end. 

I can remember so well people telling me when I raised doubts 

about the size of the tax cut, that that was going to put us in jeopardy of going back into deficits and debt, so many people told me, 

Kent, you are being overly cautious. There is going to be more 

money than the top end of the projection because of the dynamic 

effect of the tax cut. We will have even more revenue. The head 

of the Office of Management and Budget of the President of the 

United States said there was going to be more revenue. He said 

that in testimony before this committee. He said maybe much 

more. 

Well, he was wrong. He was wrong. Those of us who warned repeatedly that we were headed into a risky circumstance when we 

are betting on a 10-year forecast unfortunately have been proven 

all too right. I think, you know, past is prologue. Now we have a 

question of what we do going forward. 

I think the Chairman is right to say we have to focus on what 

is going to improve economic growth, what is going to help us with 

this long-term circumstance. In addition to that, I believe we have 

to be very mindful of where this is all headed. 

Mr. Anderson, you talked about explosive growth of debt as we 

head into the time of the baby boomers. Let me just put up the 

chart that I ended with before that shows what is happening to the 

trust funds. Let’s put up that. Medicare Trust Fund, we are in the 

sweet spot of the cycle, and when this thing turns, it turns big 

time. Yet the President is proposing at that time a tax cut package 

now that will cost $4 trillion then. It doesn’t add up. It doesn’t add 

up. It is going to be a very deep hole for this country. 

245

When you say explosive growth of debt, you are referring to, I 

take it, the effect primarily of the retirement of the baby-boom generation. 

Mr. ANDERSON. Right. 

The CHAIRMAN. Senator Conrad, are you—do you have a response? 

Mr. ANDERSON. A couple of things. First of all, with respect to 

the numbers you mentioned, we will provide for the record the 

numbers you need for comparing the projections of 2 years ago with 

what actually happened and what the impact has been for 2002, 

2003, and for the current 10-year projection period. 

Chairman NICKLES. I appreciate that. We thank you. 

Mr. ANDERSON. Second, my long career has been in budgeting. I 

am not an economist, and I am not an economic forecaster. In 

working with economists and economic forecasters, I believe that 

they have their most difficult time making forecasts when there is 

a change—a fundamental change. That is one of the things that 

was so pronounced in the past 2 years—that is, that we had a 

change from a fundamental rate of powerful economic growth to a 

rate that led us into a recession. As was pointed out, we didn’t 

catch it. The Office of Management and Budget (OMB) didn’t see 

it. Neither did anybody else. 

The last thing I would point out is that we have also looked at 

the fan chart and at where we came out with respect to those projections. We do that without having policy changes in there—which 

I think your chart has—because we don’t project policy changes in 

the baseline. Nevertheless, I also don’t wish to dispute the point 

that, even taking out the policy changes, we are barely at the bottom line of the fan anyway. 

Senator CONRAD. If I could just make a point on that? I don’t 

want to leave the impression that I was being critical of CBO. 

Chairman NICKLES. No, I know you weren’t. 

Senator CONRAD. I wasn’t being critical of you showing the fan 

chart. I was trying to show where we are in the real world compared to the estimates of where we might be. You know, it is pretty 

stunning, and I think it has got to sober us all with respect to what 

we do going forward. 

Chairman NICKLES. Senator Conrad, I echo that. I think I said 

the same thing. Nothing critical, Dr. Anderson, of you or even your 

cohorts. We just all missed the numbers big time, particularly 2 

years ago. We didn’t know about the terrorists, and we didn’t know 

what happened in the market. I think there was a lot of negatives 

there that have flowed up, and the reason why revenues were down 

$175 billion from 2 years ago, that has hurt us big time. 

Next we will call on Senator Crapo. 

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

Mr. Anderson, I just have a question at the outset with regard 

to the first chart you showed called the budget outlook where you 

projected potential surplus and deficit over the next 10 years. As 

I understood your testimony and that chart, we see a significant increase in revenues in the out-years, primarily as a result of the expiration of the Tax Act of 2001; is that correct? 

Mr. ANDERSON. Starting in 2011, that is correct. 

246

Senator CRAPO. I realize it is not what you do in terms of you 

have to focus on current law, and currently that law is projected 

to expire. Have you done any projections as to what chart would 

look like if we assume that the Tax Act is continued and not allowed to expire? 

Mr. ANDERSON. Yes. 

Senator CRAPO. Well, first of all, I would like to ask if you would 

make those charts available. Second, what does that tell us if we 

make the assumption that the tax cuts are made permanent? 

Mr. ANDERSON. If the tax cuts are made permanent, the surpluses in the out-years are not eliminated, but they are greatly reduced. 

Senator CRAPO. There are still surpluses? 

Mr. ANDERSON. There are still surpluses, small surpluses, in the 

out-years. One of the points I made is that in this time period, from 

2004 to 2013, as a percentage of GDP, deficits or surpluses are relatively small. They don’t really climb to a significant level until one 

reaches 2011, 2012, and 2013. 

If one extended the tax cuts in 2011, 2012, and 2013, you would 

still have surpluses, but as a percentage of GDP, they would be 

very, very small. 

Senator CRAPO. All right. Thank you. I want to focus now on the 

spending side of the equation for the next budget year, and as I understand your testimony—well, actually, let’s look back at the current year for a moment. If I understand your testimony correctly, 

outlays grew by about 8 percent in 2003; is that correct? 

Mr. ANDERSON. Correct. 

Senator CRAPO. Do you know how that is broken out among mandatory spending versus discretionary? 

Mr. ANDERSON. It is in our document here; The Budget and Economic Outlook: Fiscal Years 2004-2013. I will tell you what it is in 

just a second. 

Senator CRAPO. All right. Well, the question I have is—and, 

again, looking at your testimony, it appears that you are projecting 

a 5.5 percent increase in outlays for this coming budget year. Do 

I read that correctly? 

Mr. ANDERSON. That is correct. I believe that is correct. 

Senator CRAPO. Well, again, I will kind of read from some of the 

statistics I get here, and you can correct me if I am reading them 

wrong. I understand that you are taking into consideration net interest costs falling during that period, but if you take out the interest factor, the actual increase in outlays is about 6.7 percent for the 

coming year. 

Mr. ANDERSON. I believe that is correct. 

Senator CRAPO. The growth in the economy, do you know what 

we expect the economy’s growth to be? 

Mr. ANDERSON. For calendar year 2003, 2.5 percent. 

Senator CRAPO. So what you are projecting is that Congress is 

going to be outspending the growth in the economy by more than 

double in the coming budget year. 

Mr. ANDERSON. I think it is 2.5 for 2003, and I think the figures 

you are quoting were between 2003 and 2004. 

Senator CRAPO. Oh, OK. 

Mr. ANDERSON. It is 3.6 for 2004. 

247

Senator CRAPO. OK. So somewhere——

Mr. ANDERSON. Yes, right. 

Senator CRAPO [continuing]. In the neighborhood of about a double of the economy. 

Mr. ANDERSON. Right. 

Senator CRAPO. Can you tell me what is fueling the rise in 

spending there in your projections? 

Mr. ANDERSON. It is entirely in the entitlement area; that is, discretionary spending is growing at about or a little bit lower than 

the rate of the economy. In the entitlement area, particularly in the 

health area, Medicare and Medicaid and other Federal health benefits are increasing at rates significantly greater than the size of the 

economy. 

Senator CRAPO. So if we are concerned about the rate of growth 

of spending on the spending side of the budget, it is the entitlement 

area, and particularly the health care area of entitlements, that we 

must focus on. 

Mr. ANDERSON. It is; however, our baseline for discretionary spending assumes current law, which is right now at about a $750 

billion budget authority level for 2003 and then just inflation. As 

we have talked about before, we don’t have estimates in there for 

a war or additional anti-terrorism expenditures or whatever new 

discretionary expenditures may come out. Under that scenario you 

are exactly right. 

Senator CRAPO. So what you are telling me is that under the 

Budget Act, you are required to assume that discretionary spending remains stable? 

Mr. ANDERSON. At inflation, that is correct. 

Senator CRAPO. At inflation. 

Mr. ANDERSON. Right. 

Senator CRAPO. Regardless of what you would see with regard to 

congressional actions, and I understand that. 

If I could just ask one more question, I know that you have previously been asked about the potential cost of a war and that you 

have provided that information to the Budget Committee before. 

Could you briefly tell us whether you have any evaluations as to 

what the potential cost of a war with Iraq would entail? 

Mr. ANDERSON. In late September, we did some estimates and 

broke them out in several different categories. The categories we 

broke them out into was the cost to get the men and materials and 

troops and ships over to the Middle East, so the deployment costs. 

Then we had a cost per month for combat, particularly the cost for 

the first month and for subsequent months. Then we had a cost for 

redeployment to take our materials and men back. Then we broke 

all that down by whether one looks at what we call the heavy air 

where we had much more concentration on an air conflict versus 

a heavy ground conflict. What we didn’t do was say how many 

months the conflict was going to last. 

Senator CRAPO. So you have broken it out on a monthly cost 

basis? 

Mr. ANDERSON. On a monthly basis. After we did all that, then 

we also took a look at some historical occupation costs and gave figures on a monthly cost there. So I have these figures here, but the 

purpose of them was to take a look at past figures and our current 

248

knowledge and provide you with the information so that if you 

make a judgment of how long you think the war is going to last 

and how long the occupation was going to last, then you would 

have some broad senses of what the cost would be. 

Senator CRAPO. I know we have those numbers, but if you could 

submit those again, I would appreciate that. 

I believe my time has expired. 

Chairman NICKLES. Senator Crapo, thank you very much. 

Next we will call on Senator Stabenow. 

Senator STABENOW. Thank you, Mr. Chairman. 

Just to follow-up with Senator Crapo’s comments regarding the 

costs of war and Department of Defense, Homeland Security, and 

so on, you had indicated that economic change, slowdown, coupled 

with the tax cut passed last time and spending amount for these 

swings or changes and the loss of the surplus and so on, and I 

would just to my colleagues urge us to take a look at history when 

we are in time of war. We saw in the 1960’s and early 1970’s a 

buildup in military spending because of Vietnam and large deficits 

accumulate. In the 1980’s, we saw large supply side tax cuts and, 

again, a large military buildup in the 1980’s. The result was a tripling of the national debt and an explosion in interest rates. 

I now see—and we are all talking about being at the brink of 

war, major war, possibly, with Iraq and homeland security, coupled 

with other costs that we have that relate to the ongoing war on terrorism. I would just first indicate that I would hope we would look 

to history and what has happened in the past when those items 

collide. We know, in fact, that on the discretionary side the largest 

increases are in defense and homeland security, and we all support 

those efforts to make sure that we are providing safety and security. Those are the kinds of spending increases that we are seeing, 

and we are going to see increased pressure in those areas. Wouldn’t 

you agree—

Mr. ANDERSON. I agree, and the history aspects, particularly for 

military history and the costs involved, I think are important for 

whenever we consider a future military action. 

Senator STABENOW. Concerning your comments regarding the 

uncertainties—and we certainly are in a time of credible uncertainty, geopolitical as well as economic, and I wouldn’t want to be 

in your shoes or those of CBO trying to figure this out in the time 

of great uncertainty that we have. 

In looking at your comments, I noted that your comments on economic uncertainty and where that comes from are different from 

what we heard yesterday, in part, from economists saying it wasn’t 

about demand. You are putting forth another view that the growth 

of consumer spending is uncertain in the near term; however, because demand is weak—we have heard this certainly in many 

places. Demand is weak in many sectors of the economy; spending 

by the business sector remains weak as low corporate profits and 

excess capacity from overinvestment during the bubble years of the 

1990’s have inhibited investment. So we have an excess capacity 

problem which would say we need to increase demand. It is not a 

question of increasing supply. It is a question of increasing demand 

so we can bring down that overcapacity. At least that is how I 

would read it from what you are saying. 

249

Then you go on, moreover, uncertainty about the strength of demand the risks of terrorism and war and so on have caused businesses to be cautious. 

Mr. ANDERSON. Right. 

Senator STABENOW. Could you speak to that? Because I think 

that is very important as we debate how we stimulate the economic, how we do things in a way that will strengthen and hit the 

right points. It seems to me you are saying very clearly that demand and bringing down that excess capacity is important in terms 

of stimulating the economy. 

Mr. ANDERSON. Well, you have hit on the highlights of what our 

major concern here is, and particularly your reference to the uncertainties aspect. We feel that much of the lack of demand, both on 

consumers and on the part of businesses, and much of the low level 

of capacity is very, very much related to the uncertainties involved. 

Again, it is not just the business uncertainties. We highlight those. 

We talk about those. The world gets smaller every day. We have 

much more competition with people outside the country here, the 

foreigners. It is the geopolitical. 

The resolution of that kind of geopolitical we feel is perhaps 

much more important, and perhaps much important than we can 

give credit for here, because it is so difficult for economists or forecasters or businessmen to really tie those larger issues together 

with the impact that it has on consumer confidence, business confidence. 

Now, after having said that, are we in the conditions for a jumpstart, if you will? Are we in the conditions for stimulus? Yes. You 

mentioned history, and I do like history, not just military but also 

financial and economic. Our estimates, our success at doing stimulus proposals in the past has not been uniformly good. Frequently, 

we have get the timing exactly wrong. That is, by the time we take 

the actions to do particularly a fiscal policy impact on jump-starting the economy, the economy will have changed in and of itself. 

Monetary policy is perhaps another thing. Monetary policy generally can be done much quicker than fiscal policy. 

So my comment to you is that I agree, we are in the conditions 

now—and it certainly has been discussed actively by not only the 

political environment but by the economic environment—that we 

might be ripe for, could be very ripe for a jump-start stimulus. 

Timing is paramount, though. 

Senator STABENOW. I agree. You are saying exactly what many 

of us have said in terms of having whatever happens happen immediately. From what you are saying, this needs to be focused on 

consumer confidence and demand and all of those efforts that are 

different than some, certainly than what we have heard in terms 

of many of the tax proposals that are more long term as opposed 

to immediate and focusing on demand. 

I would just say, in conclusion, one other comment. I found it interesting and very important to note for the record that when we 

look at the next 10 years and the focus on whether we will be in 

surplus and when, it is important to note that of the $1.3 trillion 

that is projected in a cumulative surplus over the next 10 years, 

as you indicate, the last 3 years are almost entirely responsible for 

that total and that that accounts for 93 percent of the 10-year sum. 

250

That is because you assume that at the end of 10 years the tax cuts 

are not extend. Isn’t that correct? 

Mr. ANDERSON. That is correct. 

Senator STABENOW. So that we only have surplus, 93 percent of 

what you are projecting occurs only if those tax cuts are not extended. If they are extended, do you have numbers at this point as 

to what we are talking about in terms of debt? 

Mr. ANDERSON. I have them. I don’t know exactly—I was asked 

before, and I will provide them for the record. The surpluses do not 

evaporate, but they remain very small. So basically, just as the 

numbers we have for the initial years would indicate, if we were 

to get rid of the—if we were to retain the tax cuts, we would have 

surpluses of very small levels, not only nominal amounts but as a 

percent of GDP, from basically the next 2 or 3 years throughout the 

10-year period. 

Senator STABENOW. Thank you. 

Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Stabenow, thank you very much. 

Next we call upon Senator Ensign. 

Senator ENSIGN. Thank you, Mr. Chairman. 

I want to go back to a line of questioning regarding the 10-year 

numbers. Tax cuts wipe out the surplus, or at least greatly decrease it. Second, you don’t project any increases in discretionary 

above inflation because you are not allowed to. Is that correct? 

Mr. ANDERSON. Correct. 

Senator ENSIGN. If you project those out, what happens to the 

surplus? 

Mr. ANDERSON. It is gone. 

Senator ENSIGN. OK. I just wanted to make sure. I don’t want 

to get partisan about this, but we have heard a lot about the tax 

cuts. Last week we had on the floor of the House the omnibus bill. 

There were $500 billion in new spending increases voted on in that 

bill—$500 billion over the 10-year period of time. 

Senator CONRAD. Would the Senator yield? 

Senator ENSIGN. In just a second. The President’s proposal on 

tax cuts is about $670 billion over 10 years. I haven’t seen too 

much economic modeling that state that the spending increases are 

going to actually grow the economy, where tax cuts—that is the 

whole point. The purpose for tax cuts is a supply side effect. During 

the 1980’s, we saw a tripling of the debt. 

Three factors. One, we had going into the 1980’s—tremendously 

high interest rates. Second, we had a dramatic decrease in the size 

of the Defense Department that had to be rebuilt. Third, the tax 

cuts actually increased revenues to the Government. We outpaced 

those increases in revenues to the Government by spending, both 

mandatory and discretionary spending. Is that correct? 

Mr. ANDERSON. We believe at CBO, consistent with most other 

economists, that there is a dynamic or supply side effect to tax 

cuts, although I want to be very careful, it depends upon the tax 

cut. 

Senator ENSIGN. The kind of tax cut. 

Mr. ANDERSON. Absolutely. 

Senator ENSIGN. I totally agree with that. 

251

Mr. ANDERSON. How permanent in nature, and there are very 

different kinds. In addition, we believe that the effect is very much 

influenced about how the tax cut is financed. In fact, we are seeing 

that today. Where we have a tax cut that goes through 2010 and 

then, if you will, expires. Well, the economic impact of a tax cut 

that goes out for 6 or 7 years and then goes away is much, much, 

different, I think, than an economic impact of one that goes out 

permanently and is also financed by spending cuts. 

Senator ENSIGN. I think it is fine to look out 10 years, but at the 

same time, we are so off on 1- and 2-year numbers, I have little 

faith in 10-year numbers. I think we should have fiscal discipline. 

I don’t want to add to the voices that say there is not a problem 

with running deficit, as long as you keep the deficit at a certain 

percentage of the GDP. I believe that we should look to not only 

balancing the budget but also paying down the debt. I am a strong 

believer in that. Lastly, I also believe that certain types of tax cuts 

can stimulate the economy. The one thing I have learned in Washington, D.C., is we don’t cut spending. There just is not a lot of appetite here to cut spending. I am one of the few that actually will 

vote to cut spending, and the best we can hope to accomplish is to 

slow the rate of growth of government spending down. We continue 

to increase and increase and increase spending up here. I would 

like to see the rate of growth slow down and have some tax cuts. 

That seems to me the only way that you are going to take care of 

the deficit. I believe a combination of slowing down spending with 

the right kind of tax cuts is the only way for us to get to where 

we all want to be, and that is where we are not leaving our children and our grandchildren, with a country that is debt-laden. 

I apologize to Senator Conrad, I took so long to yield. 

Senator CONRAD. No, I appreciate it very much, Senator. 

The Senator mentioned that we voted on $500 billion of spending 

increases. 

Senator ENSIGN. Correct. 

Senator CONRAD. I would just say to the Senator, that is just not 

correct. We voted on $27.7 billion of spending increases. Those 

were 1-year appropriations—1-year appropriations. The only way 

you get to $500 billion is you accumulate it over 10 years. There 

is no requirement—there is no requirement that you have additional expenditures for follow-on years. 

Senator ENSIGN. We have all seen up here, when we do 1-year 

expenditures they get added into the baseline. We don’t just do 1-

year expenditures on education or on anything else, and then the 

next year cut it back. We never do that. It gets added into the 

baseline. That is why that $500 billion number, I believe, is real. 

Senator Stabenow said let’s look at the past. I haven’t been around 

this place for too long, but it doesn’t take long to realize that things 

don’t get taken away. 

I think back to Ronald Reagan’s famous statement, the best way 

to eternal life is to become a Federal agency or a Federal expenditure. It never goes away. 

I think that we should be consistent. Let’s look for the right kind 

of tax cuts to stimulate the economy and have some restraint on 

Federal spending and that is how we will get out of these deficits. 

I thank the Chairman for the time. 

252

Chairman NICKLES. I thank the Senator. 

Senator Allard. 

Senator ALLARD. Mr. Chairman, thank you. I just want to go into 

the debt limit just briefly here, if I may. Right now, when we talk 

about our debt limit, we are talking about the total debt. We are 

not talking about the public debt. That is correct? 

Mr. ANDERSON. Correct. 

Senator ALLARD. Just share with us some of the—maybe historically why it is that when we set the debt limit—this is actually 

money going outside the Government for money to be put in. There 

is an obligation out there. Why is it that we don’t use the public 

debt as the limit as opposed to the total debt? 

Mr. ANDERSON. I am not exactly aware of exactly why the decision was made many years ago to use what we call in the budgeting community the gross debt, that is, the debt not only that goes 

outside the Government, the debt to the public, but also that portion of securities that are given to Government agencies, such as 

those that operate trust funds. So I am not sure exactly of the 

limit, but the irony of that is that if one looks at the two changes 

that we have had, the last two changes we have had in the debt 

limit, the one from 1997 to just recently, the changes in that were 

almost exclusively—I believe exclusively because of an increase in 

the amount of debt for inside the Government. Over that period of 

time, we have actually reduced the debt that went to the public, 

the outside. 

Senator ALLARD. You know, the only thing I could think of is 

that perhaps maybe they were just looking at the obligations on 

the general fund, in which case these trust funds—like Social Security is a future obligation on the general fund if we are going to 

honor those notes which automatically go out on Social Security, 

for example, or any of the other funds. I think that is an automatic 

obligation on the general fund. 

Mr. ANDERSON. It may well have been. There have been proposals recently also to decrease the amounts of moneys coming into 

trust funds and make up for those losses by transfers from the general fund. Well, that——

Senator ALLARD. That is a future obligation, exactly. 

Mr. ANDERSON. Yes, that would have debt limit concerns then 

under the current definition that we have. It is an odd and confusing thing to explain to the public. 

Senator ALLARD. Now, we just raised the debt limit last year, the 

first part of last year, I think, didn’t we? We are at $6.4 trillion. 

Mr. ANDERSON. Yes. 

Senator ALLARD. The Administration at the end of this last 

year—or somebody in the Administration has suggested that 

maybe we need to raise that a trillion or so. Can you share with 

us some of the thoughts—or has the Administration shared some 

of the thoughts of why they think that might be necessary? 

Mr. ANDERSON. I believe just before Christmas the Treasury Department came to the Congress and said that they needed an increase—I don’t recall the exact amount—of the debt limit and that 

they would need it by about a month from now. The cash-flows of 

Treasury are such that April, as you might imagine, is our big cash 

intake month. Because so many people resolve—both individuals 

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and corporations, but particular individuals resolve their tax liabilities about the middle of April, because of that, Treasury does need 

or run short of income in February and March, and I believe what 

Treasury said, that under current projections—and we looked at 

them carefully and we believe that we are consistent with them—

they are going to bump up against the current debt limit of $6.4 

trillion sometime around a month from now, that is, at the end of 

February. 

Senator ALLARD. At the end of February. I mean, if we would 

deal with the debt limit in this particular piece of legislation, our 

resolution, I guess we wouldn’t. We need—that is a statutory 

change, isn’t it? 

Mr. ANDERSON. I believe so, yes. 

Senator ALLARD. This is a resolution. So we will have to probably 

deal in the Congress, if we are going to raise that debt limit, we 

are going to have to deal with that within—before this resolution 

actually gets even reported out of the Senate. 

Mr. ANDERSON. I believe so, yes. 

Senator ALLARD. OK. 

Mr. ANDERSON. Again, Senator, though just as we talked about 

from 1997 to 2002, a good portion of that is the increase in debt 

to trust funds. 

Senator ALLARD. Yes. Now, there is also—I mean, our budget has 

been pretty impacted by the cost of the war. We have had an impact there. I think there has been a cost to the war there. How 

have you figured in—and I am sorry I missed your presentation. 

I had another committee meeting. Did you talk anything about the 

future potential costs of this war? We could be right in the middle 

of this resolution, and we could potentially—I am not saying we are 

going to be, but potentially be at war with Iraq. We are amassing 

our troops on the borders now, and so there is some extra cost 

there. Have you given that any thought? 

Mr. ANDERSON. We have given it a lot of thought, and I did talk 

about it a bit, but it is easy to summarize. 

First of all, in our baseline projections where we do not make, 

explicitly do not make forecasts of congressional action, we do not 

have any forecast of what additional appropriations the Congress 

may provide to the Department of Defense for conducting the war. 

Second of all, the major impact of the war could be its impact on 

the economy. By its impact on the economy, I mean not just oil but 

in a much broader sense, particularly on consumer and business 

confidence. 

We at the Congressional Budget Office try to take into account 

what the private sector forecasters of the economy do. We have an 

extensive panel of economic advisors that meets twice a year. We 

regularly communicate with them, and we do an awful lot with 

what is known as the blue chip, taking a look at the consensus and 

various different estimates there. We are not sure exactly what 

they have done with an expectation of the war or not. Our estimates are such that we feel that these larger geopolitical risks are 

not really something one can estimate on the economy. 

So our economic projections and the baseline that we presented 

here this morning is basically not taking into account what war 

might do to the economy. It could be positive. A quick resolution 

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of the war could take away a lot of the uncertainty and could get—

just to pick oil, for example, lower the price of oil considerably. 

There are many, many other scenarios that go well into the opposite direction and would cost not only the Federal budget but also 

the economy billions and billions of dollars. 

Senator ALLARD. I am going to change completely away now from 

that and go into the tax cut area. When we put in place the temporary tax cuts a year and a half ago, the Congress here, I noted 

in an editorial by the Washington Post—and they have never been 

any friend particularly of those of us who want to cut taxes, but 

they had to admit in one of their editorials, very short in that editorial, that the temporary tax cuts that were put in place a year 

and a half ago that extended out only over 10 years actually did 

help buoy up the economy. 

Do you have any evidence to indicate from what you have put in 

that those tax cuts did actually help buoy up the economy so that 

it kept us out of going any further than what we have gone if they 

hadn’t been in place? 

Mr. ANDERSON. We have looked at the impact of the tax cuts, 

temporary, yes, but temporary through 2010, and also the increased spending. I have been in budgeting for many years and 

looked at many different efforts to provide a jump-start or a stimulus. As you may have heard me say just a few moments ago, I 

think one of the problems of using fiscal policy in that sense is getting the timing right. There have been so many times in the past 

when, because of the delays of passing the legislation and then actually implementing the various different types of tax or spending 

for stimulus purposes, that frequently we have missed the timing; 

that is, we provided the stimulus tax cuts or spending at the wrong 

time after the economy has picked up. 

Last year, I think we hit it right. We may have been lucky. I am 

not sure it was the immense wisdom of those of us here in Washington. Nevertheless, from an economic perspective, I think we hit 

it right. By that I think we mitigated the depth of the downturn 

by the combination of the fiscal policies that we made. 

Senator ALLARD. So your bottom line is that we did help buoy up 

the economy from your point of view. 

Mr. ANDERSON. Yes, we did. We have some estimates of exactly 

how much that was. I will be happy to provide them for you for 

the record. 

Senator ALLARD. I would appreciate that if you would provide it. 

Mr. ANDERSON. Certainly. 

Senator ALLARD. Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Allard, thank you very much. 

We are delighted to also have Senator Sessions join us, a new 

member of the Committee. Welcome, Senator Sessions. 

Senator SESSIONS. Thank you. I won’t—I had an important Judiciary Committee meeting. I just had to be there, and I am sorry 

I couldn’t be here earlier. 

After the last Gulf War, the price of oil did plummet significantly, didn’t it? 

Mr. ANDERSON. It really did, yes. 

Senator SESSIONS. Was that a factor in the general economic 

growth that we sustained after the Gulf War? 

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Mr. ANDERSON. I think it was definitely a factor, and not just the 

price but also certainty, as we have been talking about here, the 

levels of uncertainty on the economy were diminished after the last 

war. We hope they will be diminished shortly here, too. 

Senator SESSIONS. Well, I know that a lot of people are nervous 

about the economy and they would like to see it bounce back. There 

are things that indicate that it is healthy enough that the market 

should reflect that, and it hasn’t shown that. I suspect some of it 

is nervousness over the war, and the sooner we can get that over, 

I think we can have every prospect—and I am glad you agree—that 

some stability in the region, we could show a reduction in oil 

prices, which could be key to long-term growth. Certainly that can 

be our hope. 

That is all I have, Mr. Chairman. 

Chairman NICKLES. Senator Sessions, thank you very much. 

I would make just a couple quick comments. I was kind of fumbling around for the record. Its total amount of money that we pay 

for Social Security and Medicare approximately equal to the total 

taxes that we receive in Social Security and Medicare? 

Mr. ANDERSON. The total amount of money we pay for Social Security and Medicare now is less than the amount of taxes that we 

pay because of the general fund transfers that we make, particularly to Medicare Part B. 

Chairman NICKLES. OK. That wasn’t my question. 

Mr. ANDERSON. I am sorry. 

Chairman NICKLES. My question was: Is total amount of money 

that we pay in Social Security and Medicare equal to the total 

taxes we take in Social Security and Medicare? I know there is 

presently some general revenue fund that supplements Part B, but 

I think if you take that out, they are roughly equivalent, I think 

the income and the outlays are roughly equivalent, and I want you 

to substantiate that or correct me if I am wrong. 

Mr. ANDERSON. I believe that it is largely true. That is right. 

Yes, it is. 

Chairman NICKLES. There are a lot of misconceptions about trust 

funds, period. 

Mr. ANDERSON. Yes, there is. 

Chairman NICKLES. A lot of misconceptions that maybe at some 

point we need to try to figure out or better explain. I believe the 

total payroll taxes, the 15.3 percent, which includes Social Security 

and Medicare, the total money that is received on payroll taxes for 

those two accounts are roughly equivalent to the outlays that we 

make every year on those two programs. 

Now, granted, Medicare has—we say we supplement—we transfer general revenue funds and so on, but, anyway, revenues, I believe, and outlays are roughly equivalent for those two programs. 

Mr. ANDERSON. I believe you are correct. 

Chairman NICKLES. You could correct me if I am wrong, or you 

could give me something for the record if that is incorrect. I think 

Senator Conrad and I are both concerned about long-term viability 

of both programs. We will have hearings that will deal with those 

at a later point. I am planning on having a Medicare hearing and 

we may do a Social Security hearing as well. I am really concerned. 

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Those are two programs that have a lot of attention and I think 

some confusion on trust funds that I wrestle with. 

One other question is in regards to what Senator Allard was talking about on debt limit. The publicly held debt is what, $3.7 

trillion? 

Mr. ANDERSON. 3.2 or 3.3 trillion? I should have that on my fingertips. 

Chairman NICKLES. $3.5 trillion at the end of 2002. 

Mr. ANDERSON. Right. 

Chairman NICKLES. Does it really make sense or is it necessary—I know you mentioned that you thought we would be up 

against the statutory debt limit by the end of next month or close 

to that time. 

Mr. ANDERSON. Right. That is correct. 

Chairman NICKLES. The statutory debt limit also includes debt 

owed the trust funds or debt owed the Government; is that correct? 

Mr. ANDERSON. That is correct. 

Chairman NICKLES. We are not going to be bouncing checks on 

those. Those are basically governmental entries. Does it make 

sense to have the debt limit exceed what is in excess of the publicly 

held debt? 

Mr. ANDERSON. First of all, I think it is very, very confusing for 

the public, that is, to try to talk about a debt limit that has a limit 

on debt that the public doesn’t actually incur, the intergovernmental transfers. 

What the purpose was when it was originally instituted many 

decades ago, I don’t know. I am just not aware of that. I do not 

find it from a budgetary perspective particularly helpful to have 

the liabilities of intergovernmental accounts reflected as part of the 

debt limit. 

Chairman NICKLES. I appreciate that. I may even do a hearing 

one of these days, Senator Conrad, on some of the trust funds and 

misconceptions and so on. 

Let me ask you one addition question. If we did make the President’s tax cut that passed in 2001 permanent, would we continue 

under your projections under the baseline to have surpluses for all 

those years? 

Mr. ANDERSON. Yes. Deficits would decline, as we indicated, in 

the near term, get to surpluses, small surpluses, and then remain 

there through 2013. 

Chairman NICKLES. I appreciate that. I look forward to working 

with you. 

Mr. Anderson, I have several questions that I think I will submit 

to you for the record and would appreciate your response to those 

as well. 

Chairman NICKLES. Senator Conrad, do you have any final comments? 

Senator CONRAD. I do. Thank you, Mr. Chairman. 

On the last point that was made, I think we have to be very careful about the message we send the American public about surpluses. There are no surpluses here anywhere, anywhere in sight, 

under any scenario. Your baseline doesn’t include, does it, any provision for making the tax cuts permanent? 

Mr. ANDERSON. It does not. 

257

Senator CONRAD. There is no provision in your baseline for the 

President’s growth package and the revenue loss from that, is 

there? 

Mr. ANDERSON. That is correct, no provision. 

Senator CONRAD. There is no provision in your baseline for the 

President’s proposal on reforming Medicare or providing a prescription drug benefit. 

Mr. ANDERSON. That is correct. 

Senator CONRAD. There is no provision in your baseline for 

growth in spending for homeland security above inflation. 

Mr. ANDERSON. Correct. 

Senator CONRAD. There is no provision in the baseline for potential costs of the war. 

Mr. ANDERSON. Correct. 

Senator CONRAD. You have indicated potential costs of the war, 

if there were a 5-year occupation, relatively short conflict, I think 

those estimates were in the hundreds of billions of dollars, were 

they not? 

Mr. ANDERSON. I believe for a 5-year occupation that would get 

up into that level. 

Senator CONRAD. The other thing that is important to understand is in the baseline, you are jackpotting, you are including Social Security Trust Fund surpluses over the next decade; is that not 

correct? 

Mr. ANDERSON. I presented them on a unified basis. 

Senator CONRAD. Unified basis. 

Mr. ANDERSON. Right. 

Senator CONRAD. Which means all the funds are jackpotted, 

which means there is no special treatment for Social Security surpluses or for other trust funds. They are really not treated as trust 

funds. All the money is jackpotted. 

The problem with that is, I believe, that it misleads the American people as to our true financial condition. No company in America could jackpot its retirement funds or its health care funds for 

employees and pay operating expenses out of that, could they? 

Could any company do that? 

Mr. ANDERSON. We certainly have a different way of treating our 

trust funds than anybody else, and I think I agree with what you 

are saying with respect to the confusion that it causes the American public. Even the mere phrase ‘‘trust fund’’ we treat differently 

than what you or I or the American public or businesses treat as 

trust fund. 

Senator CONRAD. You know, the thing that has always struck 

me, I came from a financial background to the Congress, and I 

started out in this committee way at the end of the table there. I 

will never forget when I had my first briefing on how the Federal 

Government does its accounting. To me, it is totally misleading. I 

had a long talk with Chairman Greenspan about this 2 weeks ago, 

and I personally believe we ought to go to an accrual system, because that would demonstrate to people there are no surpluses 

here, under any scenario, under any presentation. Even if you 

leave out the President’s proposals for additional spending and additional tax cuts, all that aside, there are no surpluses. Because in 

an accrual system, what would show is that we have these incredVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00263 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
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ible liabilities that are hanging over us, for Social Security, for 

Medicare. 

The reason they don’t appear on the balance sheets of the Federal Government is because the notion is Congress could change 

those programs on 30 days’ notice. That is the reason we don’t 

show them as contingent liabilities. Does anybody believe these are 

not truly liabilities? I don’t think there is a member around this 

dais that wouldn’t say those are real liabilities. 

Chairman NICKLES. Just to echo some of the things Senator 

Conrad is saying, I am happy to get into some of our unfunded liabilities that we are looking at in some of our programs—Social Security, Medicare. Both—well, Medicare certainly, and Social Security for the most part, a PAYGO system. It is so far from being a 

funded system. I think the unfunded vested liability in Social Security is more like $10 or $11 trillion. So one could put that figure 

down if you want to say actual debt, you could add that. It is a liability. We basically agreed to pay for it on a PAYGO basis, right 

or wrong. Some people would like to change the system, and I 

think maybe with some merit, to provide for a vested capitalized 

system, but that would take some transition and some political cooperation to make that happen. 

Senator CONRAD. I go back to any private company, there is no 

company in America today that could take the retirement funds of 

its employees, the health care funds of its employees, and use them 

to pay operating expenses. If they did that, they would be on their 

way to a Federal facility, but it wouldn’t be the Congress of the 

United States., 

Chairman NICKLES. They would also be on their way to a Federal 

facility if they used PAYGO. Every company in America has actuarial standards that they must meet that the Federal Government 

does not. 

Senator CONRAD. Absolutely. This may be an area where the 

Chairman and I are on the same page. I think we would do the 

country a tremendous service if we would have hearings that would 

focus on these unfunded liabilities and where we are headed, the 

demographic time bomb we face, and what the implications are for 

future policy. Perhaps that will be another day. 

Chairman NICKLES. I look forward to working with you. 

Mr. Anderson, thank you very much. 

Chairman NICKLES. For the members of our committee, our next 

hearing will be on Tuesday. We will have Mr. Glenn Hubbard, who 

is the President’s Council on Economic Advisers, present to us at 

2:30 on Tuesday. 

The committee is adjourned. 

[Whereupon, at 11:48 a.m., the committee was adjourned.]

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THE PRESIDENT’S FISCAL YEAR 2004 BUDGET 

TUESDAY, FEBRUARY 4, 2003

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

The committee met, pursuant to notice, at 2:04 p.m., in room 

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

Present: Senators Nickles, Enzi, Sessions, Conrad, and Corzine. 

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

senior analyst. 

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

chief economist. 

OPENING STATEMENT OF CHAIRMAN DON NICKLES 

Chairman NICKLES. We will convene the hearing. Dr. Hubbard, 

welcome. We are delighted to have you before our committee. We 

are delighted, as well, that Senator Enzi is with us. 

I will apologize and mention that because of the recent tragedy, 

there are several of our members that are attending the memorial 

services, and our hearts, and prayers, and sympathies are certainly 

with the victims and their families of this recent disaster. I observed the memorial service, the President and others, we have 

several of our colleagues that are present, and we decided to go 

ahead and conduct the hearing today. 

Dr. Hubbard, we welcome you to our committee. We are pleased 

that you would join us and pleased as well that my friend and colleague, Ranking Member Senator Conrad is with us as well. 

Senator Conrad, do you have any opening comments? 

OPENING STATEMENT OF SENATOR CONRAD 

Senator CONRAD. First of all, Mr. Chairman, I want to join you 

in saying that our minds are very much with the family members, 

and we are thinking very much about those who lost their lives. 

It is an incredible tragedy, and I think the Chairman was right to 

go ahead with the business of the Committee because, after all, 

this deals with issues that affected those who gave their lives. So 

I think the Chairman was quite right in proceeding, and we certainly welcome Dr. Hubbard here. 

Mr. Chairman, I would start with just a brief review of where we 

are from my perspective, and where we are headed, and why this 

all matters a lot. 

The President said in 2001 that he was using conservative economic assumptions. He said, ‘‘Tax relief is central to my plan to enVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00297 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
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courage economic growth, and we can proceed with tax relief without fear of budget deficits. Even if the economy softens, projections 

for the surplus in my budget are cautious and conservative. They 

already assume an economic slowdown in the year 2001.’’

Well, we now know, with the President’s release of the budget, 

that those statements really missed the mark. We were told that 

we were going to have nearly $6 trillion over the next decade in 

surpluses. In the President’s most recent information, that has 

turned to $2.1 trillion in deficits, a truly dramatic turn, approaching $7.8 billion over the next decade.


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Let us go to the next. Last year, the President said our budget 

will run a deficit that will be small and short term. Well, again, 

he missed the mark, and the reality of our situation is much more 

stark. This, again, is from the President’s own documents that 

show that we are actually, even though we are running record deficits now, those deficits on the left-hand side of the chart are record. 

They are the biggest in dollar terms we have ever had. The President’s own information shows that if we pursue this budget policy, 

we never get out of deficit, and in fact they become much larger 

over time, as the baby boom generation retires.


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The President, as part of his package, has proposed a stimulus 

or a growth package, but we see that very little of it, very little of 

the cost of it is effective in this first year, the first fiscal year. Less 

than 5 percent of the stimulus plan or the growth plan is effective 

this year.


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The one thing that is growing is the debt, and the debt is growing dramatically. Gross Federal debt will go from $6.2 trillion last 

year to $9.4 trillion by 2008, a time at which the President had 

previously indicated we would virtually retire the publicly held 

debt.

Now, we go to the question of what works in terms of economic 

growth. The Chairman has been very correct, I think, to point out 

what we have got to do is get back on an economic growth path. 

This is from the Macroeconomic Advisers, who I am told provide 

macroeconomic analysis to the White House, as well as to the Congressional Budget Office. What their estimates show is that the 

President’s policy does provide a spike up in the near term, but 

past 2005 provides lower economic growth than if we did not do 


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anything at all. It actually hurts economic growth for the long 

term. 

That view is buttressed by Mark Zandi, the chief economist for 

Economy.com. He says, in 2003, the Democrats plan that provides 

more short-term stimulus will provide about twice as much economic growth in 2003, little more than twice as much in 2004, but 

interestingly enough will not provide the long-term harm that the 

President’s plan will have.

Again, he finds, just like the other econometric firm has found, 

that the President’s plan actually hurts long-term growth. 

Let me just conclude with a statement from you, Dr. Hubbard, 

in your textbook. You say, and I quote, ‘‘We can represent the large 

increases in the Federal budget deficit in the early 1980’s, creating 

short-run pressures for higher output and interest rates. By the 

late 1990’s, an emerging Federal budget surplus put downward 

pressure on interest rates.’’ I would agree with that, and I would 

suggest that increasing deficits, increasing debt will serve as a 


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drag on the economy. That is what other economists have found; 

that the dead weight of deficits and debt actually hurt long-term 

economic growth. That is really what this discussion is about, this 

debate is about.

We have got to, together, find the strategy that will best help our 

country return to economic growth, and I thank you, Mr. Chairman, for the hearing. 

Chairman NICKLES. Senator Conrad, I will agree with that last 

statement. I hope that we will work together and find the policies 

that will help best grow the economy. 


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I would like to show one chart. I am going to try and avoid chart 

wars with you. The guy makes charts like they are popcorn. They 

keep popping up every where I go, Senator Conrad’s charts.

I am going to show this chart because this chart kind of shows 

what happened a little bit, and maybe I will ask Dr. Hubbard to 

help maybe explain, but the blue is revenues, and you can see revenues in the year 2000 were over $2 trillion—$2.25 trillion. The 


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next year they declined by about 1.7 percent, went down to $1.99 

trillion, and then in 2002, declined to $1.853 trillion, a reduction 

of almost 7 percent from 2001 to 2002, a combined reduction of 

about 8.5 percent. 

Conversely, expenditures climbed dramatically, total outlays of 

the Federal Government. There was, let me see if I have the percentages, the spending increased between 2000 and 2001 about 4.2 

percent and then between 2001 and 2002 by 7.9 percent. Actually, 

if you took away the reduction in interest costs, spending grew by, 

well, actually, in the appropriated accounts by over 12 percent. 

So you had spending growing dramatically, revenues declining 

substantially, and, Dr. Hubbard, OMB missed the guess on revenues and so did CBO. You both guessed about the same. I mean, 

your mistakes were about even. You both misjudged revenues, but 

I will tell you history has never shown this kind of reduction in 

revenues. Two consecutive years, we have never had reduction in 

revenues, and we have certainly never had a reduction in revenues 

of 7 percent like we saw between 2001 and 2002. 

I might note from my colleagues, since the President has pro- posed a budget of $2.2 trillion, if revenues would have maintained 

any type of growth for 2001, 2002, 2003, 2004, a growth of 2 percent, and we would still be in balance, but we had a rather dramatic departure in growth and a decline in revenues. At the same 

time, we also had a big increase in spending. 

So, Dr. Hubbard, one of the questions I will ask you—I am going 

to ask Senator Enzi if he has any opening remarks—but one of the 

questions I will be asking you is what caused this dramatic reduction of income? There was a stock-market collapse, but how did 

that flow through? How has that impacted? Why did everybody 

misjudge the estimates, even in 2001, on total revenues by hundreds of billions of dollars? 

We all goofed. OMB goofed, CBO goofed; i.e., Congress, so the 

Administration and the Congressional Branch both misjudged total 

revenues by a lot, and so as a result, we are a couple hundred billion dollars behind, and then how do we get out of this mess? 

I do not think you can get out unless you grow the economy. You 

have some proposals. I would like to hear from you today on how 

you think the Administration’s proposals would grow the economy, 

how they will create equity, how they will increase market values. 

I think a large part of this reduction in revenues was a result of 

the stock market decline, and will the proposals that you are advocating, will that increase stock market values? 

Before I finish that, I would like to call upon Senator Enzi if he 

had any opening remarks. 

Senator ENZI. I will stay with the new tradition. 

Chairman NICKLES. Thank you. I appreciate that. 

So, Dr. Hubbard, to introduce you, I will say that you were confirmed by this body on May 10th of 2001, so I guess I should not 

give you full credit for the estimates that were made in January 

of 2001, but we are delighted that you are here. You were appointed by the President to be chairman of the Council of Economic 

Advisers. You also received your Ph.D. in economics from Harvard 

University in 1983, and you are currently on leave of absence from 

Columbia University. 

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You also served as deputy assistant secretary for Tax Analysis 

at the Treasury Department, which also makes it very important 

for you to be here, I think, to further explain some of the growth 

proposals that you have made. So, Dr. Hubbard, we welcome you 

to our committee. We are delighted to have you here, and we are 

happy to hear your opening remarks. 

STATEMENT OF GLENN HUBBARD, CHAIRMAN, COUNCIL OF 

ECONOMIC ADVISERS 

Mr. HUBBARD. Thank you very much, Mr. Chairman, and Senator Conrad, Senator Enzi. 

In my oral remarks, I really just wanted to do three things with 

you: one, to try to sketch first a sense of long-term prospects for 

the economy and why I still believe they are very, very bright; second, to talk about the problem that the President was trying to fix 

in his growth package; and then, third, to talk about benefits of the 

plan and then come back to some of the budget issues that you and 

Senator Conrad had raised. 

In a sense, we start out with a very complicated time, not just 

for budgeting forecasting, but for thinking about the economy. The 

recession we went through and the recovery that we are now in are 

very atypical. We had not only an investment collapse leading this 

business cycle, which is very unusual, but of course we had the terrible events of September 11th, and corporate governance scandals 

as well. 

That is not just a challenge for forecasters. I think it is a challenge for all of us in Government, in the executive branch and the 

legislative branch, in thinking about policies. 

It is important, I think, to start out with the long term. One 

thing that is very clear about the American economy is that productivity growth is not only good for us absolutely; that is, we have 

had an increase in structural productivity growth in the United 

States, but it is good relative to our trading partners, and most of 

that is not because of what we do here in Washington, it is because 

of the strength and resiliency of the private sector in the United 

States and institutions that promote that flexibility, and part of 

our role is to try to think of policies that bolster that flexibility. 

In the short term, as I said, we experienced a recession that is 

atypical by post-war standards, in particular, because of the key 

role played by business investment. As we have argued in the Administration, and I think the President has said very persuasively, 

a key downside risk in the economy at the moment also comes from 

investment. Public policy, as you know, has been quite active. The 

Federal Reserve has worked very, very hard for an accommodative 

monetary policy. In the Executive and legislative branches, of 

course, fiscal policy has been quite appropriately propping up the 

economy’s near-term prospects. 

In terms of risks to the outlook, the key risk that we see in the 

Administration is a delayed investment recovery. Built into most of 

the forecasts in the private sector is a very timely and vigorous investment recovery. As I talk with business executives around the 

country, as I am sure all of you do, one gets a sense of delay, a 

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ments must jump. Part of this reflects general uncertainty in the 

environment, partly it reflects concerns over corporate governance. 

At the same time, in the consumer sector, there is a possibility, 

given the significant loss of wealth in the household sector, that 

consumers might engage in a bit of what economists call some precautionary saving in response to changes in uncertainty. 

The President, as you know, put out a very bold jobs and growth 

initiative. You know, of course, what is in it. What I would like to 

do is explain why we think the President’s initiative is aimed foursquare at the problem. 

First of all, the most immediate effect I think from the President’s plan in addressing the investment issue comes from the reduction of cost of capital for many small businesses who are, one, 

paying taxes at individual rates, and of course the rate cuts are accelerated, and from a dramatic increase in small business expensing. 

In addition, eliminating the double tax of corporate income, both 

on the dividend side and retained earnings side, is a significant 

pro-investment change in the tax code. We have estimated at the 

Council that the cost of capital for investment would fall by between 10 and 25 percent, depending on the assumptions you use 

about the life of a piece of equipment or how that equipment is financed. 

To those who say there is no short-term effect, let me translate 

that into something that is more familiar in our policy discussions, 

which is an investment tax credit. What the President proposed in 

eliminating the double tax would be the equivalent of between a 4- 

to 7-percent investment tax credit. Put that way, I think you can 

see this is a very large change in investment policy, not simply 

aimed at long-term growth. 

We believe that eliminating the double tax also has very important effects on corporate governance by making debt and equity on 

a more neutral footing, taking a lot of the wind from the sails of 

financial engineering and increasing the premium on cash and 

transparency and decreasing the premium on the management of 

earnings. 

The President’s proposals would also help, we believe, shore up 

the problem that is identified on the consumption side. This comes 

from the acceleration of the tax relief already in place. That is, of 

course, principally accelerating marginal rates, but also the child 

tax credit and marriage penalty relief. 

The cash out the door, if you will, from the Treasury, is estimated by our Treasury to be about $52 billion in calendar year 

2003. That could be bigger, depending on the timing of changes. 

This is, of course, the down payment on a long-term tax cut, and 

economists have long believed the responses of consumers and businesses to long-term tax changes substantially exceeds that through 

short-term changes. So not only is the cash out the door, in terms 

of what the President is proposing, as large or larger than many 

of the alternative plans that have been surfaced, but also, by being 

long term, is likely to have a much bigger effect. To be concrete, 

for a family, a typical family of four, with the two earners making 

($39,000) would get $1,100 in relief in the President’s plan. 

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We believe also the plan has very important effects on the employment market in the United States, most directly by raising 

GDP growth, but also through the proposal for reemployment accounts, which is a very bold and new way of trying to get people 

back to work, instead of simply languishing on unemployment insurance. 

I think it is important, as I mentioned at the beginning, to note 

how the proposals will help the economy in the long run, and here 

there is a lot of confusion as to who actually bears the burden of 

a tax. Sometimes we think who bears the burden of a tax is who 

writes the check to the IRS. So, for example, if we are thinking 

about the proposal to eliminate the double tax on corporate income, 

is this about people who get dividends and retained earnings capital gains? Of course, in part, it is. 

Economists argue that most of the burden of the double tax is 

not borne by those people, it is borne by all of us. To see why, we 

know intuitively when we double tax something, we get less of it, 

and here the something we are getting less of is capital formation. 

As we get lower capital formation, we get a lower level of productivity and lower wages. Who bears this tax in a dynamic economy 

like ours is all of us, in terms of our wages, not the recipients of 

dividends for capital gains. 

A very important question, of course, for the short term and the 

long term, is the effect of the policy on the fiscal position of the 

Government. We, in the Administration, like all of you, are very 

concerned about the country’s fiscal outlook. We do not believe that 

tax relief of the kind and size that the President proposes worsens 

substantially the Government’s fiscal position. 

The way I think of this, as an economist, is to look for a fiscal 

anchor, and the most logical fiscal anchor is thinking about our 

debt-to-GDP ratio, which does not rise in response to the President’s proposals. The comment on deficits and interest rates that 

is often mentioned is one where, as a profession, we believe we 

know the sign, and I am delighted to note that the Senator purchased my textbook. I hope he purchased it, so I can get some royalties for my kids. [Laughter.] 

Mr. HUBBARD. I think we know the sign. The magnitude depends 

a lot on the types of deficits and what they are used for. Just as 

a household or a business, it matters what you do with the money, 

so it does for Government. We believe that pro-growth tax policies 

are very much in our country’s interest and very much have a high 

internal rate of return. 

Is the notion of deficit welcome? No. Is it understandable? Yes, 

for much of the reasons that Senator Nickles made in his opening 

presentation. We, in the Administration, the Congressional Budget 

Office and many in the private sector missed the mark on forecasts 

of surpluses in recent years. There is no doubt about it. Much of 

that has to come with complex changes in our economy that I look 

forward to discussing with you, if you like. 

Let me end by closing on the economics of the President’s plan. 

We believe that this plan adds substantially to GDP growth. If you 

look at the changes in the cumulative level of GDP going forward, 

about nine-tenths of a percentage point in the end of the first calendar year, and about 1.8 percent by the end of 2005. These level 

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effects of GDP are persistent. They are largely permanent, which 

means two things; one, a larger economy and, second, a larger feedback for Federal revenue. 

Thank you very much, Mr. Chairman. 

[The prepared statement of R. Glenn Hubbard follows.]

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Chairman NICKLES. Dr. Hubbard, thank you very much. 

I am glad that Senator Corzine joined us as well, so thank you 

for coming. 

Let me just ask you a couple of questions. You mentioned, under 

your proposal, your effort to eliminate double taxation of dividends, 

and a little birdie tells me that you were very instrumental in getting that included in the President’s proposal, so I will compliment 

you on it. 

I think many people, and almost all economists, I would believe, 

would think that double taxation is not good tax policy. It needs 

to be fixed. Some might argue maybe not now or maybe it should 

be done in the form of more comprehensive tax reform, but it is not 

good tax policy to tax such a large percentage of distribution of corporate earnings. The tax rate I believe I saw in the handout last 

week is 60 or 70 percent; is that correct? 

Mr. HUBBARD. That is correct. 

Chairman NICKLES. A corporation pays 35 percent, an individual, 

whatever their collective rate is. It might be 28, it might be higher, 

it might be lower. Is there an effective rate that you count or can 

estimate that corporate dividends are taxed at in the United States 

compared to other countries? I saw one chart that had us listed as 

the second-highest tax rate on dividends of all industrialized countries; is that correct? 

Mr. HUBBARD. That is correct. For new equity finances, money 

just going into the corporate sector, only Japan, among major countries, would have a higher tax rate. This is because I think most 

of the industrial world has some kind of dividend relief, not always 

complete, but some sort of dividend relief. We really are the outlier 

in that respect. 

Chairman NICKLES. I have often thought it was wrong, and I 

may have some bias because I used to run a corporation, but I 

thought the best way to fix it would be to allow the corporations 

to deduct dividends, just like they deduct interest. They write a 

check for dividends, why can they not expense that with before-tax 

dollars instead of—or just get an expense for dividends, just like 

they get an expense for interest. Is that not another way of doing 

it? 

Mr. HUBBARD. Well, if everybody in the economy faced the same 

tax rates or the corporate rate is the same as individual rates, 

there is no tax-exempt entities, from a purely economic perspective, 

you could give relief at the individual level or the corporate level. 

It would be the same effect on the cost of capital. 

What the President was trying to do, and has said many times, 

is make sure that income is taxed once, and only once, and he 

means the ‘‘once’’ part, as well as the ‘‘only once’’ part. If you do 

relief at the corporate level, given the importance of exempt shareholders and foreign shareholders, it is quite possible much of the 

income is not taxed at all. 

A second reason we had was, in terms of thinking about corporate governance, relief at the individual level puts a great deal 

of pressure on management to meet the judgment of the capital 

markets. If they have good projects, of course, they can retain earnings, but there is the constant pressure from the capital market. 

325

So you are right, relieving double tax on either margin is in the 

economy’s interest. Those are the principal reasons the President 

used in his decision. 

Chairman NICKLES. I was assuming one of the reasons was that 

it might cost a lot more because you do have a lot of dividends that 

are in tax-exempt status, 401(k)’s, retirement accounts and so on. 

Mr. HUBBARD. It clearly costs more, but I think his concern was 

principally with the argument that we want to tax it once, and only 

once. 

Chairman NICKLES. Let me ask you a question. There is also a 

very significant retirement savings or both savings and retirement 

savings proposals by the Administration. I do not believe you alluded to those too much, but those would have the impact of basically creating what I would call a Roth IRA, but basically after-tax 

dollars going into an account that would have tax benefits of not 

paying taxes on accumulated earnings; is that correct? 

Mr. HUBBARD. That is correct, Senator. 

Chairman NICKLES. Do you want to further explain how that 

would also help the economy. 

Mr. HUBBARD. Sure. First of all, one big reason for the Lifetime 

Saving Account and Retirement Saving Account proposal, to which 

you are alluding, is simplification. Under current laws, you know 

many families have access to a bewildering array of savings incentives with different phase-outs and different rules, and it seems 

quite silly to tell people you should save for this, that and the other 

purpose, as opposed to giving them choice and control. 

What the President’s proposal would do is create one nonretirement and one retirement vehicle. By expanding contribution limits, 

this would significantly increase savings. There is a large body of 

work in economics. I confess I have contributed to it, so I have a 

bias in my statement, but I believe these plans have significant 

chances to increase saving. 

A counterargument that you often hear is, well, this is just reshuffling, and to that, I would ask you the question how many 

American families do you think, on a year-to-year basis, can reshuffle $7,500 in cash for every member of their family? Not many. 

Quite quickly, this is marginal saving, new saving for the economy. 

Chairman NICKLES. So the proposal on the lifetime savings, I 

thought was $7,500 per person, and so I was assuming that would 

be $15,000 per couple. 

Mr. HUBBARD. That is correct. That is my point, that if your argument is you are not getting any new saving for people who are 

really saving at those rates, that is largely going to be new saving. 

Not very many families could reshuffle at those rates for very, very 

long. 

Chairman NICKLES. Senator Conrad. 

Senator CONRAD. Thank you, Mr. Chairman. 

Let me first talk about something the Chairman has mentioned 

several times about the tax rate on capital, and, Dr. Hubbard, you 

just mentioned it. 

CBO did an analysis of this question, and it is in their latest 

budget book on Page 26: ‘‘Effective marginal income tax rates 2001 

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1Table not available at press time.

to 2013.’’ They are not 60-percent effective rates, they are not 50-

percent, they are not 30-percent. 

Effective tax rates on capital 2003, 15.5; 2004, 15.4. Those are, 

according to CBO, effective tax rates on capital, including individual income taxes and corporate income taxes. 

Let us turn to the question of economic growth because that really is the key, I think, Mr. Chairman, as you quite rightly have said 

before. 

Are you familiar with Macroeconomic Advisers, Dr. Hubbard? 

Mr. HUBBARD. Yes, of course. 

Senator CONRAD. I take it you have respect for them. 

Mr. HUBBARD. They are a certainly very well-known econometric 

consulting firm. 

Senator CONRAD. This is what they wrote about the President’s 

plan: ‘‘Initially, the plan would stimulate aggregate demand by 

raising disposable income, boosting equity values and reducing the 

cost of capital. However, the tax cut also reduces national savings 

directly, while offering little new permanent incentive for either 

private saving or labor supply. Therefore, unless it is paid for with 

a reduction in Federal outlays—’’ which the President does not propose ‘‘—the plan will raise equilibrium real interest rates, crowd 

out private-sector investment, and eventually undermine potential 

GDP.’’

Let us just put up graphically what they are talking about here. 

What this chart shows is the black line is the President’s policy, 

and it does show a spike up in 2004, but then it plunges and is 

below the rate of growth that we would get if we did nothing for 

2005 and beyond.1

This same group—and then I will ask you to comment, Dr. Hubbard. On the cost of corporate capital, Dr. Hubbard, you have testified that the President’s plan will lower it 10 to 25 percent. That 

is what I heard you say. If I have got it wrong, please correct me. 

Their analysis shows something quite different. They show on the 

cost of corporate capital a reduction of 2-1/2 percent, not 25 percent, 2-1/2 percent in 2003, but then rising dramatically so that in 

2006 the cost of corporate capital under the President’s plan is increased by approaching 7 percent. The cost of corporate capital, because of the President’s plan, is increased from, actually toward the 

end of 2004, right through 2017, cost of corporate capital is increased. 

Dr. Hubbard, obviously you have a different take. You say that 

this is going to reduce the cost of corporate capital. They say it is 

going to increase it. I guess that goes to the heart of the debate. 

What is your response to what these respected economic consultants are saying? 

Mr. HUBBARD. Sure. If I could take the two parts of your question, Senator. Going back to the issue of effective tax rates, I will 

look at the CBO table. That is at variance with work going back 

to Feldstein, Poterba and Dicks Mireaux in the early 1980’s. In any 

event, what matters for securities markets is the tax treatment of 

the marginal investor, not average effective tax rates. 

327

On the issue of the models, I think you are learning a lot about 

model assumptions as much as you are about model output. Let me 

connect the point you made about GDP and the point you made 

about cost of capital. You are alluding to a model in which the principal channel for tax policy is changing disposable income, and a 

model in which interest rates are very responsive to changes in 

saving. 

On the point of the structure of the model, I think most economists would view that there are channels for tax policy to affect the 

economy far greater than disposable income. For example, in such 

a model writing checks to everyone has identical effects to changing marginal tax rates. We do not believe that as a profession. That 

is to say there are very few supply side channels in such models. 

Second, I just do not buy the interest rate sensitivities, and rather than getting into an economic discussion, let me just try to 

shape some intuition. We just had a major swing over the past couple of years in CBO forecasts about the long-term surplus. That is 

what we started out our discussion with. We have the lowest nominal and real interest rates in quite some time in the United States, 

which is to say there is lots going on in a world capital market, and 

the notion that fairly small changes in U.S. Fiscal policy have dramatic effects on the world real interest rate, I do not buy. So what 

is giving you both the GDP effect and the cost of capital effect are 

exactly that. 

The work we have done at ECA, the work Allen Sinai has done 

at Decision Economics, the study the Business Round Table put 

out, both have very large and persistent effects on GDP and reductions in the cost of capital. I am afraid you are just rediscovering 

the old problem that economists just do not always agree. 

Senator CONRAD. I will grant you that. I will tell you one other 

thing, if I could say this, Mr. Chairman, is you have an assumption 

on page 8 of your testimony. ‘‘Another important assumption is 

that the estimates discussed above assume no changes in the 

stance of monetary policy.’’ That is what I have a hard time believing. We have Chairman Greenspan saying to us deficits do matter, 

that if you run up significant deficits, that that inhibits their ability at the Fed to have a more accommodative monetary policy, and 

that is his testimony before Congress as well as personal statement 

to me. 

So the bottom line is we have got a very significant disagreement 

between economic experts. You are asserting you are going to get 

stronger economic growth. Others, respected economists, say that 

you will actually hurt long-term economic growth with this plan because of the dramatic increase in deficits and debt, the upward 

pressure that puts on interest rates, the additional cost of capital 

that results, and therefore, what we wind up with is less investment and lower economic growth. 

Mr. HUBBARD. If I might, Senator, on those points—of course I 

do not comment on monetary policy, but I will say that if you put 

familiar monetary policy reaction functions like a Taylor Rule into 

what we did, you get much the same effect early on. Where these 

models are generally unreliable is in the out years. We are also 

very conservative because the calculations we did assumed a zero 

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stock market effect, so we have deliberately tied our hands behind 

our back. 

Chairman NICKLES. Thank you very much, Senator Conrad. 

Senator Enzi. 

Senator ENZI. Thank you, Mr. Chairman. 

I thank you, Dr. Hubbard, for joining us today. The comments, 

and I read the expanded comments that you did as well, are extremely helpful in understanding some of the different relationships. Any time that we talk about taxes we are talking about 

probably the most complex thing in the United States, and I think 

you did a good job of explaining some of those things. We just got 

the budget materials yesterday. I have been trying to wander my 

way through there. There are some 2,700 pages involved in the information that we have got, and I found it all to be, everything that 

I have been able to go through to be extremely helpful, but not 

enough time. Of course when we do the budget process, I have already found in my short time on this committee that everybody in 

America thinks that we are actually doing appropriations, and I 

am having a little trouble conveying the difference between budget 

and authorization and appropriation, and trying to get them to understand that we do not look at every program and every line item, 

that that is the job of the appropriators, that we are trying to come 

up with a blueprint that is much more general and a little bit more 

focused on the policies, although I am kind of fascinated with some 

of the policies that we kind of tie our hands with at the same time. 

As an accountant it seems a bit cumbersome and in some cases 

counterproductive. It is not a simple math problem where we are 

just adding and subtracting numbers. It is a complex issue that requires policy decisions. This is the policy, the group, as we make 

these financial analyses, and I am hoping that we have enough 

help on staff to be able to grasp, and through people like you that 

are testifying, to grasp some of the complexities of these things. 

Then it gets a little bit more complex because each of us that are 

here each has our own opinions based on past experience and desires on what could happen. 

I was very pleased to find in the budget that there is a performance review. I knew that there was a Government Performance and 

Results Act. I have done some auditing of agencies using that myself. It is a very good way for a person to learn about the different 

agencies, and I was glad to see that incorporated in the budget, 

and noted that a lot of the programs, while they are not suggested 

to be eliminated, are noted as being ineffective. I guess that would 

be a note for us to perhaps make some policy that there either be 

some changes in the program or elimination of the program. At any 

rate, I am glad to see that performance review. 

I like the idea of the employment bonus that is in there too. I 

think that can have some pretty good effects for States and employment, which really kind of brings me to the heart of the matter and 

my love, which is small business. If we are going to employ people 

faster and we are going to have growth, we really ought to be relying on that sector of the economy that provides the most growth 

and absorbs the most employees and provides them with employment, which is small business. 

329

So the question that I am getting to here is to find out why there 

would not be more of an emphasis on dividends for small business. 

The reason that I bring this up is even before the President made 

that proposal as I was traveling around Wyoming, I have had a 

number of small corporations, they did not go the Subchapter S 

route, they went a full corporation. Under that mechanism we are 

able to accumulate more capital for their business more quickly. As 

the business matures, then they wind up with these dividends that 

they really ought to get out, but they are somewhat irritated that 

they have to pay taxes on them twice. They know they already paid 

on them when they were growing the business. Now they have to 

pay on them when it is released to them as individuals. So it is not 

a new problem that just came up as a result of the President mentioning this. It was something that small businessmen with regular 

corporations have been mentioning to me for a long time. 

Capital is always a problem when we are starting a new business, and I noted Senator Conrad’s comment that the tax on capital 

was 15.5 and then 15.4 percent. I think that chart probably refers 

to capital gains as opposed to overall capital. I would be interested 

in seeing that chart in some more depth because there is a big difference between what you get charged on the dividends that you 

receive and the capital that you get from selling your stock. Most 

of these small businessmen that I know are not interested in selling their stock. They want to continue to do that business, but they 

have some other investments they would make if they could get 

their dividends out a little bit faster without having to give quite 

as much to the Government a second time. 

So my question is: should there be more of a concentration on 

what can be done with small business? The proposal would apply 

to all businesses I assume. 

Mr. HUBBARD. Well, I think there is two very important small 

business channels. First for the small businesses who are paying 

taxes on the individual system, the rate cuts are not only increasing after-tax income, but a real cut in the cost of capital and cost 

of hiring workers for small businesses. For the C-corporations that 

you mentioned, there are two effects. One is by eliminating the dividend tax on excludable dividends, but also the buildup of retained 

earnings. What the President is proposing is not just eliminating 

the dividend tax, but if I am a small business owner and I am 

growing the company and plowing money back in, I get continuous 

basis adjustments. So if I do wind up selling out, then I do not 

have to pay capital gains tax on those accumulated retained earnings. So we think this is very small-business friendly, and the same 

tax policy that is very good for large business is in this case good 

for small business. 

In addition for small businesses, the expensing changes the 

President has proposed are very much pro investment. 

Senator ENZI. Thank you. 

Chairman NICKLES. Senator Enzi, thank you very much. 

Senator Corzine. 

Senator CORZINE. Thank you, Mr. Chairman. 

Chairman Hubbard, welcome. I have questions about the dividend exclusion issue with regard to corporate governance. I have 

many of the same questions that Senator Conrad asked with reVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00335 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
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gard to return on capital because I have a hard time understanding 

where payment of dividends, where 50 percent of them roughly are 

going to non-taxpaying entities is going to dramatically change the 

return on capital. I can see at the margin it has some improvement, but just back of the envelope kinds of calculations. I do not 

see how it gets in the 10 to 25 percent range, and I frankly would 

love to see how that mechanism works. It does not jive with any 

of the economic discussions that I am hearing. 

The corporate governance issue, I question why dividends are 

going to change the investor community’s review of what the return 

on capital is, after-tax return on capital is, of a business any more 

than where they are today when they look at the use of capital. 

Then I put that in conjunction with, which I think is explaining 

what Senator Conrad was talking about, at least with the model 

that reduces rates of return over the long run, is you take cash off 

a balance sheet, encourage that and put incentives on that as opposed to retaining it, and I think what you do is have a lessened 

ability to actually form capital. You certainly cannot retain or hire 

employees if cash is flowing off the balance sheet. You cannot go 

to the bank and place a margin down. You cannot go to the rating 

agencies and suggest that you are going to be in a solid position 

on how you approach it. 

Now, I do not particularly like double taxation on dividends either, but I believe that if you wanted to have, as the Administration has stated, and you wanted to encourage capital formation, but 

you also wanted dividends not to be prejudiced relative to interest, 

you would do it against taxable income on a company’s balance 

sheet because it is no difference than interest not being taxable. So 

I would love to hear your comments on that. If we have a second 

round, I have a series of questions I would ask about State and 

local budget crises that also impact tax rates. Property taxes in 

this country are rising very, very sharply because of the budget 

problems that we have in our State and local Governments. Was 

that taken into consideration when the package that was put together to so-called stimulate the economy or create a growth package, did we take into consideration the estimated 70 to $90 billion 

budget deficits that are occurring that are causing an aggregate tax 

increase at the State and local level that is really quite substantial? 

I could go into other undermining tax bases, dividend exclusion, 

and tie it to the Federal Tax Code, or the competition that excluded 

dividends have with a very select group of investors who might be 

a buyer of municipal bonds. 

Mr. HUBBARD. Four very good questions. Let me try to go over 

each of them, first the question about whether there is any marginal effect. First, I would be happy to give you the paper that has 

all of our calculations and how we did it if you like, but let me get 

to the core of your question, which was the importance of non-taxpaying entities. What counts is the marginal investor, and most of 

the work we have by empirical researchers in finance is that the 

marginal investor is probably a high tax individual from our home 

town, and so basically the high tax individuals are more likely the 

marginal investors setting securities prices. So even if the vast maVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00336 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
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jority of dividends were received outside of that investor, as long 

as he or she is at the margin——

Senator CORZINE. I might just ask a what-if question since we 

are running a current account deficit of, I do not know, 450 billion, 

485 billion. You know the number better than I do. It strikes me 

that the marginal investor is not even a U.S. investor. 

Mr. HUBBARD. Well, the marginal investor may also be other taxable investors, that is true. These policies are actually——

Senator CORZINE. That is exempt in the context of——

Mr. HUBBARD. Well, again, that is not the evidence that we have 

from the empirical work people have done on securities prices. For 

corporate governance, I guess there are really two effects that get 

at your question. One, much of the wind in the sails, as you know 

very well, in financial engineering transactions, comes from the 

asymmetric treatment of debt and equity and from timing differences. That is the wind in the sails from many tax planning 

transactions. Most, though not all of those, would be eliminated by 

the President’s proposal. The idea here is not to bias toward paying 

dividends. It is not to force money out of corporation solution. It is 

to make sure that business people are making decisions as business people under business judgment and not the tax code. 

We both know there are causes in which retained earnings may 

not have been used to the highest value of shareholders, and were 

there to be neutral treatment, the pressure from institutional 

shareholders, from capital markets generally, is probably very 

healthy. So we are not arguing for biasing for dividends, simply not 

being biased against dividends. The President’s proposal would 

have them neutral. 

On the issue of corporate versus individual, the key principle the 

President was after was taxing income once, and to do that in the 

context of share holdings in the United States, it is really easiest 

to do the relief at the individual level. I might note that the Treasury Department and the American Law Institute studies have also 

focused principally on individual relief, so it is not simply something the Administration had done. 

On the issue of State and local, we have——

Senator CORZINE. There is a big debate in the economic literature I think over time about where you bring in the most efficient way. I think I even read a paper that you wrote in the 1980’s 

with regard to the subject where you presented both sides of the 

case. 

Mr. HUBBARD. It was certainly both sides, the issues. The bang 

for the buck is much smaller doing it at the corporate level because 

you are incurring a great deal of extra cost, and the marginal effect 

is the same, so the bang for the buck is smaller. So again, in terms 

of the use of scarce resources, that was our thinking. 

On State and local, two issues that you raised. One is the scale 

of State problems, and they are significant, no doubt about it. The 

view the President had was that this is not the time for a one off 

aid to the States. Most of the State issues are structural. There are 

elements in the President’s budget, as you are aware, in Medicaid, 

education and other areas that are additional funding for the 

States. We believe the President’s proposal not only does not make 

the State situation worse, it makes it better. 

332

Your question alluded to effect on the tax base of say removing 

dividends. So if I am a State that piggybacks off the 1040 structure, am I not worse off? Well, no. We have estimated State-byState income responses to higher growth, and find that State revenues in total would be $6 billion higher. The loss of dividends from 

the base is 4 billion, and we would be happy to get you those Stateby-State. 

Senator CORZINE. Thank you. 

Chairman NICKLES. Senator Corzine, thank you very much. 

Next, Senator Sessions. 

Senator SESSIONS. Thank you, Mr. Chairman. I thank you for 

this hearing. 

Dr. Hubbard, one thing I have thought about some recently, and 

I will just ask your view of it. Generally our economy does better 

when our major world trading partners are healthy. How are the 

major world economies doing compared to the United States at this 

time? 

Mr. HUBBARD. You raise a very important point, also getting 

back to Senator Corzine’s question about the current account position in the U.S. We have a situation which it is hard to have applause with one hand clapping, and the one hand is our economy. 

As rocky as things have been, we have been more of an engine. The 

Japanese economy, as you know, is in quite significant distress and 

unlikely to grow over the next couple of years. The Euro zone not 

only has large structural problems, it has issues relating to monetary policy constraints on its growth. In the short term emerging 

markets are not likely to be high sources of growth, so we have a 

situation in which for the near future the U.S. economy is the engine of growth. A key part of the President’s agenda is the promotion of growth around the world. I know that our newly confirmed Treasury Secretary will be carrying that message to industrial countries and to emerging markets alike. So we agree that is 

important. We want to encourage better, more pro-growth economic 

policies in Japan and in Europe and in emerging markets as well. 

In the forthcoming economic report of the President, if I can tout 

one of our home products, will have a chapter detailing the President’s agenda there. 

Senator SESSIONS. I think that is important for us to remember, 

and many of these economies have great potential I think, but the 

have more taxes, more regulation and less committed to the free 

market. I am convinced that that is a factor in their being less 

competitive than we are. Do you have any thoughts on that? 

Mr. HUBBARD. Absolutely. If you go back to the first remark I 

made about the long term for the U.S., there has been a lot of 

introspection about why productivity growth in the U.S. is higher 

than it once was. More interesting I think to me as an economist 

is why it is so high relative to our trading partners. We are not 

smarter than the Europeans and Japanese. We do not have better 

technology. We all know cell phones here are worse than they are 

in Europe. It cannot be that. What it is, is our policies, our institutions that promote flexibility in allocating capital and labor, and 

that is something we should never take for granted. I think that 

is something we can export in the sense of having a pro-growth 

mission for the world. 

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Senator SESSIONS. Well, I would agree with that, and I hope that 

the world could see that as the State takes a larger and larger percentage of the net wealth of the economy, I think it depresses the 

private sector. I think what the American experience has been is 

that the private sector is what drives our growth, creates jobs, 

makes us productive, allows us to be able to spend $15 billion in 

Africa for AIDS or lead in many other areas of the world that other 

nations are not able to do because their economy is not as healthy. 

Let me ask this. One thing that you mentioned in your written 

remarks on page 13, I think is important. These numbers that you 

have come up with are consistent with what I have seen others 

say, that this package that the President has proposed would 

produce a growth of almost 1 percent in GDP next year, by the end 

of 2003, and that by the end of 2004 it would be 1.7 percent increased GDP, more than if the growth package were not passed. 

Then you talk about the number of jobs which would be created 

from just that much increase in growth. Would you talk about that, 

please? 

Mr. HUBBARD. Absolutely. The President called this the Jobs and 

Growth Initiative for a reason. We can go back to that long-term 

story again. Productivity growth being high is a great blessing for 

our economy, but it means something else. It means as an economy 

we have to grow more rapidly than we might once have had to 

grow to increase employment. That is very much of the President’s 

mind. The GDP effects of this proposal, we believe, would lead to 

about a half a million extra jobs in 2003. These are new jobs 

that——

Senator SESSIONS. That is this year. 

Mr. HUBBARD. This year, that would not have existed, and close 

to 900,000 in the next year. Over the long term the structure of the 

President’s proposals raise all of our incomes through their effect 

on capital formation and economic growth. So this is very much a 

jobs initiative. As your question suggests, we get jobs in the American economy by promoting growth in the private sector and that 

is what the President is trying to do. 

Senator SESSIONS. One more. Well, Mr. Chairman, I will turn it 

back over to you, and would just say to me, our challenge is to continue to strengthen and unleash the engine of the private sector 

that has made America the envy of the world. If we keep working 

on that and do that, I think we will work our way out of the financial difficulties we are in today. If we burden down the private sector with more and more taxes, we take a larger and larger percentage of GDP in the form of Government which inevitably is less efficient than the private sector, then I think we have the danger of 

a permanent slowdown as Germany has seen, as Japan has seen, 

and to me that is the big challenge. In this crisis and difficulty that 

we are in, we want to create jobs and vitality in the private sector, 

and not create a large and dominant bureaucracy in the central 

Government. 

Thank you. 

Chairman NICKLES. Senator Sessions, thank you very much. 

Dr. Hubbard, a couple of quick comments. I have yet to hear of 

an economist—I am going to download this economic group that 

Senator Conrad alluded to, and maybe see if they are defending 

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double taxation of dividends. Let me just ask you a couple of questions because I am interested. I do not know why anybody or how 

anybody can really defend it, but you correct me if I am wrong. I 

used to run a corporation. I want to distribute, let’s say hypothetically, $100,000. We have retained earnings and we are willing 

to give it out to our shareholders. That is what we would like to 

do. We would like to give it out to the owners. If you do so in the 

corporate world today, a corporation has to pay tax on it. Maybe 

some people are able to escape that, and if they know something 

I do not, that is interesting. A corporation that is a taxpaying corporation that would distribute that $100,000, they have to pay corporate tax on it. Today that tax rate is 35 percent. So they want 

to distribute $100,000, but OK, after taxes they are left with 

$65,000. They distribute the $65,000 to the owners, and the owners 

have to pay taxes on it, and let’s just assume it is a 30 percent tax 

bracket, and so $22,000 of that would go to the government in 

taxes, so the net result would be the Government would get 

$57,000 and the individual that you are trying to distribute the 

earnings to, would get $43,000. Is that correct, the Government 

would actually get more of that distribution than the owners? 

Mr. HUBBARD. That is correct. 

Chairman NICKLES. Now, conversely—and I would like for Senator Corzine to catch this—conversely the present tax code says, all 

right, well, bonuses are fine. You can deduct bonuses. There is no 

limit on bonuses, and so we will grant the $100,000 bonus, the corporation gets to write off that, and so the net cost to the corporation is not $100,000, assuming they are profitable—if they are not 

profitable this does not make sense—but if they are profitable, the 

net cost to the corporation of paying the $100,000 bonus is $65,000. 

The individual gets the $100,000. The individual pays the taxes on 

the $100,000, let’s assume $30,000, and so the Government loses 

money from the corporation taking the deduction. The individual 

pays the taxes, so basically you have a distribution on the bonus 

where the Government just about comes out even, and maybe lose 

a little bit because 35 percent is higher than 30 in this hypothetical, but it could be the same. So the bonus transaction works 

out really well. But dividend distribution to the owners is a really 

crummy deal. So certainly in a closed corporation or one where 

managers can say, well, we will distribute cash payments through 

a bonus type system, it makes eminent good sense, and it makes 

very little sense to distribute dividends to the owners. So shareholders really come out on the short end of the stick. Maybe people 

that might be recipients of some type of bonus plan would come out 

very well. 

I just think the present tax code is really skewed against shareholders and it is very biased toward debt. If you are making a debt 

vs. equity decision, if you need new capital, you are going to issue 

equity or you are going to go to debt, the present tax code screams 

at you to go debt, and you have a lot of corporations now that are 

struggling with that. So I just mention those. If my examples or 

hypotheticals are not accurate, you could please correct me. 

Mr. HUBBARD. No. I think they are very accurate, Mr. Chairman, 

and they point out the basic problem, that we have created a situation in which we want business people thinking as much about tax 

335

planning techniques as they are about real business. That is not 

only a waste of their time, it is a waste of resources for our country. 

You asked whether people could not support eliminating the double tax in dividends, the principal disagreement on the other side 

would be if you thought neither investment nor saving is responsive to changes in the rate of return, then doing this is not a good 

thing. I am aware of very few economists who believe that, but that 

would be a principal argument. 

I think your questions also raise the sense in which this is an 

important short-term concern for the economy, too. I know there is 

a tendency to think of this aspect of the President’s proposal as 

being simply about the long-term—interesting tax policy but a 

long-term question. Again, particularly in light of the corporate 

governance scandals and particularly in light of high hurdle rates 

on investment, we believe it is important for the short term as 

well. 

Chairman NICKLES. Thank you. I want to touch on one other 

issue that hasn’t come up. Senator Conrad had a chart that showed 

enormous red at the bottom of it and showed deficits just climbing 

out of sight. I am guessing that assumes a lot of things. I want to 

look at maybe the long-term debt projections that you and your office have, and I haven’t really looked at those that closely. 

I will touch on one program that I think Senator Conrad and I 

are concerned about long term, and that would be Medicare. The 

Administration is working on a proposal that not only would provide enhanced benefits, i.e., prescription drugs, catastrophic, preventive care, lower deductibles, but it also is talking about trying 

to reformulate the program to make it competitive and affordable 

and successful, that would help salvage the program and save the 

program for the long term. 

Would you care to explain that? Many people characterize it, 

well, yes, what the Administration is trying to do is make you join 

an HMO if you are going to get prescription drugs. Would you care 

to comment on that? 

Mr. HUBBARD. Sure. Well, I don’t want to go through the details 

of the plan because it is in progress. To get at your question, I 

think what the President is trying to say is, look, of course, we 

should have a prescription drug program in Medicare. It is crazy 

that we don’t. The question is: Do we want a Medicare system that 

is modernized, that improves quality and choices for seniors? 

In terms of your principal concerns here on the budget, I would 

say two things about Medicare: one, our economy’s ability to make 

good on our promises that we have rightly made in Medicare and 

Social Security and other programs is to have the economy growing 

as rapidly as possible. As the budget points out, the real fiscal 

issues for our country are not the short-term wiggles in our budget 

deficit, because with the proposals we have, with the very conservative assumptions we have in the budget, the debt in the hands of 

the public relative to GDP is still stabilizing in the out-years. That 

is not an issue. 

The issue is the entitlements programs. When we take a look at 

Medicare, we have to make sure that we start with the medical 

maxim of doing no harm. Yes, we should add a benefit, but we 

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don’t want to do so in such a way that actually jeopardizes the program. That is what the President will try very hard to do. 

Chairman NICKLES. Thank you very much. 

Senator Conrad. 

Senator CONRAD. Thank you, Mr. Chairman. 

Dr. Hubbard, would you say that the new Secretary of the Treasury, Mr. Snow, is somebody that has a good understanding of how 

the economy functions? 

Mr. HUBBARD. Absolutely. 

Senator CONRAD. I am glad you said that. Let me just put up his 

evaluation back in 1995 dealing with these questions we have been 

talking about. He said then, ‘‘A credible, sustained reduction in 

Federal deficits leading to a balanced budget will bring major economic benefits. As the Government spends less and borrows less 

from investors to cover declining deficits, more capital will be available for investment in the private sector of the economy. Inflationary pressure will ease and interest rates will respond by declining as much as 2 percentage points.’’

Now, I quote from him because I believe he has got these relationships right. Now, the President comes before us and has a proposal that explodes deficits. This is from the document, ‘‘Analytical 

Perspectives Contained in the President’s Budget for Fiscal Year 

2004,’’ and it shows deficits as a percentage of GDP, it shows these 

are the good times because we all know what is coming—the babyboom generation, and then the deficits and debt explodes. This is 

according to the President’s analysis. 

So if Secretary Snow was right that reducing deficits has major 

economic benefits, I can only conclude increasing deficits hurts the 

economy. We are talking about huge, massive deficits going up approaching 15 percent of GDP in the out-years here. 

You know, it is what takes me back to what other economists are 

saying, that the plan that the President has sent us does not give 

us much boost in the short term. The Democrats’ plan has much 

more stimulus short term. That gives us more economic growth 

this year when the economy is weak. Because it doesn’t have these 

out-year additional costs, as does the President’s plan, it doesn’t do 

damage by raising deficits, raising debt, that reduces societal savings, that reduces the pool of money available for investment, that 

retards economic growth. 

So, you know, I have looked at all of these analyses that we have 

available to us from respected economists, and there is such a divide, those who say that your plan will actually hurt long-term economic growth. 

I must say, I look back to the 1980’s and the 1990’s. In the 

1990’s, we reduced deficits and we had the longest economic expansion in our Nation’s history. I don’t quarrel with providing stimulus 

at a time of economic slowdown. It does strike me that adding to 

deficits and debt in the coming years, when the baby-boom generation is about to retire, is going to explode the debt and hurt the 

economy. 

That is the nature of this debate and this disagreement, and, 

again, I will certainly give you a chance, if you want, to respond 

to any of that. 

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Mr. HUBBARD. Sure. You actually raise several questions. Let me 

start near the end of your questions and remarks with the notion 

that we reduce deficits. Let me go back to the story of the economy’s boom and downturn. 

We got very good news in the 1990’s about our economy’s expected ability to grow. That raised surplus projections. It raised our 

current incomes. It also raised real interest rates. In other words, 

if the sign goes the other way, theory would tell you that good news 

about the future raises both surpluses and real interest rates. 

When we got a sense that we may have been overly optimistic, we 

see surpluses declining, current income declining, and interest 

rates declining. 

On the notion of John Snow’s comments, let me not put words 

in John’s mouth. You can ask him. Having had this conversation 

with him many times, I think his view, very similar to my own, is 

that what is very important is to stabilize spending, precisely the 

priority that he mentioned in the statement you attributed to him. 

The reason for that is principally because the ultimate claim on the 

resources of society from Government is from the size of Government. It is our taxes today or our taxes tomorrow. There is a significant body of work in economics, most notably by Robert Barrow, 

who is a Harvard professor, suggesting that countries with very 

large governments have lower rates of growth. This isn’t a question 

about whether they are deficit-financed but a question of the size 

of government, and limiting spending was and is a very important 

issue. 

On the issue of balancing the budget, you know, we could have 

a balanced budget in the United States relatively quickly. It is a 

question of our priorities. If you wanted a budget that did not have 

improvements in homeland security and defense, did not have 

Medicare modernization, and did not have a growth package, it 

would be possible to have a balanced budget very fast. We all know 

that fiscal responsibility is very important and a balanced budget 

is important. So are other things. The question is priority. 

The President puts the priority on growth and spending restraint 

as being the issue, and I think that is where we may just have a 

difference of opinion. 

Senator CONRAD. I would just conclude by saying that is correct. 

I don’t see that the President has put any priority on balancing the 

budget or reducing deficits. Just the opposite, his plan is to mushroom deficits and mushroom debt at the most inopportune time—

right before the baby-boom generation starts to retire. He is going 

to present a future Congress, a future administration, and future 

generations with a chasm, a fiscal chasm, and then we are going 

to see really tough choices. That is to me a profound mistake. 

Mr. HUBBARD. We obviously, of course, don’t share that in the 

Administration, Senator. The view is that the effects of the President’s proposals on economic growth are very much in the country’s 

fiscal interest just as much as they are in GDP. 

I neglected to mention—since you showed the chart comparing 

the Democrat and Republican plans, let me, without commenting 

on any model, just make a fairly general statement. I know of very 

few economists—and I will say very few economists—who would 

suggest to you that the kinds of temporary tax changes that have 

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been in most of the Democratic proposals will have a very big effect 

on the economy. We have a widespread research on this in economics, from Democratic economists and Republican economists. This 

one just isn’t that controversial. 

Senator CONRAD. Well, I would say to you that none of these 

stimulus plans have much effect. Truth be told, the plan the President has advanced does not, according to a wide spectrum of economists, including the Administration’s own claims. 

The one thing we know is it explodes deficits and debt. Another 

thing we know is the baby boomers are getting ready to retire. 

Then the huge surpluses that are being thrown out by the trust 

funds are going to turn to massive deficits. That is going to present 

this country with truly difficult choices. 

As the head of CBO said last year in testimony before this committee, it is going to present this country with choices of 

unsustainable debt, unprecedented tax increases, and/or the elimination of the rest of the Government as we know it. That is pretty 

draconian. 

Mr. HUBBARD. If I may, Senator, that is, of course, a statement 

about the entitlement programs. 

Senator CONRAD. Correct. 

Mr. HUBBARD. As a statement, that is correct. The President’s 

proposal does not lead to mushrooming either deficits or debt-toGDP ratio, and I would invite you to look at the budget and the 

pictures in the budget which plot debt-to-GDP ratios. We believe 

those are actually conservative, that the revenue feedbacks from 

the President’s proposals are actually quite substantial, although 

those are not portrayed in the budget. 

Senator CONRAD. I would just draw your attention to page 43 of 

the President’s ‘‘Analytical Perspectives.’’ This is what it says: 

‘‘2004 budget policy extended, debt-to-GDP explodes.’’ That is not 

my chart. That is from the President’s ‘‘Analytical Perspectives.’’

339

Look, I don’t know how it can be otherwise. I mean, if we look 

at—look at the Social Security chart, where we are headed. We 

know that the trust funds are running big surpluses now. The 


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President is taking all that money and using it to fund tax cuts. 

You have got over $2 trillion out of Social Security surpluses in the 

next decade to pay for tax cuts and other expenses of Government. 

That is when the trust funds are running surpluses. Here is what 

is going to happen. We are in the sweet spot now. We are up there 

in the green. This is where we are headed. The baby-boom generation is coming. We have never seen this before. That is what is 

going to mean these extraordinarily awkward choices, and I think 

it is just a terrible mistake.

Chairman NICKLES. Senator Enzi. 

Senator ENZI. Thank you, Mr. Chairman. I didn’t realize we were 

going to have such strong support on balancing budgets, and we 

may be able to go further that way than I ever thought that we 


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341

could, because I have always had some concern about trying to 

spend ourselves into prosperity. There is a great opportunity any 

year that we look at the budget. Everybody kind of drools over the 

possibilities of new programs that we could do and new spending 

that we could do, and I understand how we can’t just take a couple 

of trillion dollars, although that is an awful lot of money, and add 

a few billion to that and think that we can change the world. 

What I am curious about is: Should we be putting our money 

into programs or into investing in ourselves? My Grampy used to 

always say that you even had to be careful investing. He said, 

‘‘Never own anything that can eat while you sleep.’’ [Laughter.] 

Senator ENZI. That has been pretty good advice to me, but that 

is because the expenses keep going and the investment isn’t there 

to back it up. 

Are you saying that with the President’s proposal what we are 

talking about with the tax cut is actually getting increased investment? 

Mr. HUBBARD. Yes, Senator. First, in the sense of business investment, capital investment, we believe it is very pro-investment, 

the rate cuts, the expensing provisions, elimination of the double 

tax, but also for human capital investment. As your question was 

hinting, a big kind of investment we do is investment in ourselves, 

and there is a large and growing body of work in economics suggesting that high marginal tax rates can also discourage that investment and discourage risk-taking and entrepreneurship. So the 

President’s plan is very much centered on all these margins. 

Senator ENZI. I think you were also getting at the difference between some tax cuts that would last over a period of time versus 

giving cash. Would you expand a little bit on your comments between expanding this 10-percent tax bracket and giving a one-time 

cash benefit to everybody? 

Mr. HUBBARD. Well, certainly we—if you are a consumer, you are 

going to respond very differently to somebody giving you an 

amount of money, say $300 once in a check, and somebody telling 

you I am going to give you $300 a year forever, as if it were an 

annuity. That is intuitive to us as individuals. It also happens to 

be borne out statistically. People respond only between a third or 

half as much to temporary changes. 

So if the notion is you would like to shore up the consumer, if 

that is the goal, you want changes that are enduring, the President’s policies have that advantage. They are accelerating rate cuts 

you already passed. They are already in the law, and so they are 

not just one-off changes. One-off changes have an odd fine-tuning 

feel about them. Going back to the beginning of your question, in 

Government, you know, we can’t fine-tune the U.S. economy. We 

shouldn’t kid ourselves that we can. What we can do is help the 

private sector have an environment for growth. 

Senator ENZI. Thank you. 

Chairman NICKLES. Senator Enzi, thank you very much. 

Senator Corzine. 

Senator CORZINE. Yes, thank you, Mr. Chairman. 

I hear the argument repeated a number of times about high marginal tax rates stifling the economy and what we need to do to 

342

grow the economy is to adjust those marginal rates in lots of different forms. 

For the life of me, I am having a hard time understanding how 

in the 1990’s we created 22 million new jobs; we probably had the 

highest rate of entrepreneurship that we ever had in the history 

of the country, created more millionaires, worked on reducing poverty levels, and at least since we started cutting marginal rates, I 

actually believe that marginal rates were 80 percent. You would be 

right, when they are moving from 38.5 or 39.5 to 35, one wonders 

why we think we—and you talked about fine-tuning—why we 

thought that the tax structure that produced such grand expansion, 

basically the best expansion we had in the 20th century, created 

the kind of growth that actually allowed for paydown of deficits, 

needed to be tinkered with, fine-tuned so much that we ended up 

losing 2.5 million or 2.4 million private sector jobs certainly over 

the last 2 years. I am troubled by—I read on the White House’s 

press release that we were going to produce 190,000 jobs in 2003, 

and I heard 500,000 today. 

You know, I have the big question of what did we think was 

wrong with what was creating the kind of economic growth that we 

had with the tax structure we had. You know, I see some reform. 

I personally don’t believe in double taxation of dividends. Again, we 

can argue about where that ought to be addressed. Why when we 

just came through one of those periods in history where we saw the 

most significant investment boom, the rise in productivity, 22 million new jobs, that we thought we needed to fine-tune the Tax Code 

from 39.5 down to 35 to accomplish some growth projections that 

there is among reasonable people, as we have heard today, significantly different views on what its impact on growth is going to be 

or certainly long-run national savings. 

Mr. HUBBARD. Economists have a kind of annoying phrase they 

use a lot, which is, ‘‘All else equal,’’ which is our way of saying we 

don’t want the world——

Senator CORZINE. It is kind of like holding the money supply——

Mr. HUBBARD. We don’t want the world to move while we are 

talking. One reason it is annoying when economists talk to people 

is because the world does move. There are very few clean experiments. 

Now, I raise this because when you talked about the 1990’s, it 

is, of course, not the tax structure of the American economy that 

led to the boom of the 1990’s. We know that we got lots of good 

news about the productivity potential of the American economy. 

That was very good news, even though we had rising marginal tax 

rates in 1993. The good news for our economy was such that netnet we did very well. When you asked would we like to have that 

kind of growth forever, of course, we would. 

There is a large body of work in economics, in labor economics, 

in the study of investment and the study of finance, to suggest that 

marginal tax rates not only discourage labor supply but entrepreneurship and risk-taking, small business formation. This is a vast 

literature covering data from the 1980’s and data from the 1990’s. 

You simply can’t hold all else equal in the two experiments that 

you did. I wish economists had more natural experiments. We 

don’t. 

343

On the issue of jobs, I think if you look on the website, what you 

will see is two sets of numbers. They are often calculations presented on a year-to-year basis, that is, comparing annual averages. 

Fourth quarter to fourth quarter is another presentation. The 190 

that you mention I think is roughly the year over year for the first 

year gain in jobs. The 510,000 is quarter 4 to quarter 4. That is 

over the course of a calendar year. 

Senator CORZINE. You are talking about the rate of growth that 

you are expecting in——

Mr. HUBBARD. Over the course of the calendar year. I used that 

today because, frankly, I think it is more intuitive. I think it is 

easier to talk about growth over a period than comparisons of annual averages. You will find both numbers because I know people 

have fascinations with one or the other approach. 

Senator CORZINE. Was there business investment in the 1990’s? 

Was there entrepreneurial activity with the tax structure that we 

had? That increase was a part of the increase in productivity 

growth that we experienced in the 1990’s, and also has continued 

on into the current environment? 

Mr. HUBBARD. Well, let me give you the classic yes and no answer from an economist. Obviously rate of investment was very 

high in the 1990’s. It is obvious we had good news. It was also obvious that we had too much investment in the 1990’s. We had been 

working through a period of excessive investment. Part of that was 

because we were overly optimistic. We can miss things. Frankly 

speaking, the very biases in the Tax Code that Senator Nickles was 

referring to also created opportunities for some unwise risk-taking, 

some financial engineering, some lack of transparency in earnings 

and investment. 

So while, yes, the 1990’s had many very positive things about 

them, none of those positive things would suggest, to me at least, 

that it is not worth the candle to improve the tax structure. 

Chairman NICKLES. Dr. Hubbard, thank you very much. I might 

mention, maybe if you would provide for the Committee—I mentioned to you this big reduction of revenue between 2001 and 2002, 

trying to figure out where did that go, because I know there was 

some irrational exuberance, as Alan Greenspan would say, when 

the market was going up, and I think that caused a lot of things—

big bonuses, big payments, a lot of transactions that were happening that generated a lot of tax payments. When the market collapsed, a lot of that collapsed, and maybe that had really inflated 

the ride up and pulled out. 

You have projected that we have bottomed, and you have projected an increase in revenues, I believe, between 2003 and 2004 

of 5 percent, something like that. If you could give us—I am really 

interested in how that declined so dramatically and where was that 

reduction, if you have any analysis. 

Mr. HUBBARD. I would be happy to give you all the details, Senator, but I can give you the Cliffs Notes version in short order. If 

you were to draw a trend line in Federal receipts relative to GDP, 

the story of the late 1990’s is borrowing forward. We had a tremendous increase in revenue growth, partly because we have a very 

progressive tax system and incomes had grown very rapidly among 

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the very well off, and a big increase in capital gains. We know that 

as the bubble burst, that went away. 

I will get you all the details, but the largest answer is that is 

the key point. 

Chairman NICKLES. I appreciate that. 

For the information of colleagues, we have provided the disk for 

the President’s budget so you won’t be carrying those five or six 

volumes around with you all week. You will have that. 

Dr. Hubbard, thank you very much for testifying. 

Mr. HUBBARD. Thank you, Mr. Chairman. 

Chairman NICKLES. I appreciate your response to our questions 

as well. 

Mr. HUBBARD. Thank you. 

Chairman NICKLES. For the information of members and others, 

tomorrow morning we will have the Director of the Office of Management and Budget, Mitch Daniels, to testify at 10 o’clock. 

The committee is adjourned. 

[Whereupon, at 4 p.m, the committee was adjourned.] 

(345)

THE PRESIDENT’S FISCAL YEAR 2004 BUDGET 

PROPOSALS 

WEDNESDAY, FEBRUARY 5, 2003

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

The committee met, pursuant to notice, at 10:04 a.m., in room 

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

Present: Senators Nickles, Domenici, Allard, Burns, Sessions, 

Crapo, Ensign, Cornyn, Conrad, Hollings, Murray, Wyden, Nelson, 

and Stabenow. 

Staff present: Hazen Marshall, staff director; Jim Hearn, senior 

analyst and Cheri Reidy, senior analyst. 

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

Horney, deputy staff director. 

OPENING STATEMENT OF CHAIRMAN DON NICKLES 

Chairman NICKLES. The committee will come to order. 

Today the Budget Committee will hear testimony on the President’s fiscal year 2004 proposals. We are very pleased to welcome 

Mitch Daniels, the Director of the Office of Management and Budget. 

Mr. Daniels has one of the toughest jobs in Government. I compliment him for the work that he has done. I have had the pleasure 

of knowing him. Prior to joining the Administration, he worked as 

senior vice president for Eli Lily, and he also spent 11 years working for our colleague Senator Dick Lugar. Director Daniels, we are 

delighted to have you with us as well. 

First I will call upon my colleague Senator Conrad, if he has any 

opening remarks. 

OPENING STATEMENT SENATOR CONRAD 

Senator CONRAD. Thank you, Mr. Chairman. Thank you for holding this hearing. Thank you to Director Daniels for being here. 

Director Daniels, this is a budget proposal that we have strong 

disagreements about. We think it is going in the wrong direction, 

that it will build deficits and debt in a way that hurts our longterm economic strength. 

Before I go into that, I think perhaps just a review of where we 

have been would be useful. I hate to bring you back to words that 

you have used before, but let me just go back to what you told us 

back in 2001. You said then that ‘‘the budget was built on extremely conservative assumptions; the Government has been unVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00351 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
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derestimating its revenue repeatedly, and we may well be doing 

that again. 

When you look at these numbers, you will find that chances are 

probably better that we have greater, not smaller, surpluses over 

these years.’’


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Let’s go to the next chart and just look at the reality of what has 

happened. You will recall CBO had done this fan chart on likely 

outcomes, and the midpoint was based on the notion we would 

have almost $6 trillion of surpluses. In 2001, you were telling us 

that there was going to be even more money, in your judgment, 

than that. 

Now if we go back and look at what has actually happened, we 

are below the bottom line of outcomes. Let’s go to the next chart. 

So the result is that instead of $5.6 trillion of surpluses over the 

next decade, if we adopt the President’s policies, we are $2.1 trillion in the hole. That is just over the next 10 years.


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Let’s go to the next chart. Last year, the President told us that 

the budget will run a deficit that will be small and short term. 

Again, we can now reflect on that and look at what is happening. 

This is what the President’s budget is now telling us. We look at 

his document; it is the ‘‘Analytical Perspectives.’’ This is a chart 

from the President’s own budget book. We never escape from deficit, and the deficits mushroom geometrically if we extend the 2004 

policies. That is what is in the President’s budget book.


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Let’s go to the next one. The President told us back in 2001 the 

importance of paying down debt. He said, ‘‘My budget pays down 

a record amount of debt. We will pay off $2 trillion of debt over the 

next decade. That will be the largest debt reduction of any country 

ever. Future generations shouldn’t be forced to pay back money 

that we have borrowed. We owe this kind of responsibility to our 

children and grandchildren.’’


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Well, that is another statement, I guess, that is by the boards. 

Let’s go to the next that shows what is happening to the gross Federal debt. It is not going down. It is going up, and going up dramatically. The same picture would emerge if we looked at publicly 

held debt. The President told us in 2001 we would pay off virtually 

all publicly held debt. Now we see by 2008 we will have $5 trillion 

of publicly held debt.


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I guess the point of all this is that this game plan hasn’t worked. 

It hasn’t come close to working. What the President is proposing 

is more of the same—more tax cuts that are not paid for, that add 

to the deficit, that add to the debt, that put us in a circumstance 

where we never emerge from deficit as far as the eye can see. In 

fact, the deficits become so large that they are clearly 

unsustainable. 

So that is my reading of the President’s proposal. I think it is 

one we cannot adopt. We must find a way to move in a different 

direction. 

I thank the Chairman. 

Chairman NICKLES. Senator Conrad, thank you very much. I will 

put you down as undecided on the President’s budget. [Laughter.] 

Chairman NICKLES. Still some possibility, but slightly undecided. 

I welcome before the Committee—I haven’t had the chance to 

welcome—Senator Murray and Senator Wyden. Especially I want 

to say to Senator Hollings, whom I have had the pleasure of serving on this committee with for many, many years, and I think this 

is the first time you have joined us since I have been chairman, I 

am delighted to have you continue on the Committee. I appreciate 

your service on the Committee. On occasion we have worked together, and I hope that we can in the future. I say that to all of 

our members. I would love to see us do a bipartisan budget. It 


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hasn’t happened in many years. It will be a challenge. This committee is a committee that is a big challenge. We have lots of work 

to do, needless to say. 

I want to avoid extended debate amongst members, but I do 

want to make just a couple comments since a couple of you have 

missed a couple of our previous meetings. Yesterday we had a 

meeting with Dr. Glenn Hubbard, the President’s Council of Economic Advisers Chairman, and he did a good presentation. I had 

a chart that showed that revenues have declined 9 percent—8.5 

percent over the last 2 years. We went from a little over $2 trillion, 

$2.025 trillion to $1.85 trillion, a reduction in revenues received. 

Because of that, we have enormous deficits. 

Now, that was misjudged by CBO and OMB both, and it was 

caused by a lot of things. Maybe Director Daniels will touch on 

that. Part of it was caused by the stock market bubble bursting, 

and it was also caused by a terrorist attack, and it was caused by 

a recession. 

So revenues have declined precipitously. We have never had in 

our history basically a 9-percent reduction in revenues. Because of 

that, we are behind and we have some deficits. So, in my opinion, 

to get out of this deficit situation we have to show fiscal discipline, 

but we also have to figure out ways to grow the economy. The Administration has put forth a proposal; they have put forth a budget. 

It is very important for us to pass a budget. So, Director Daniels, 

I welcome you. I am not going to ask other colleagues—if other colleagues are just dying to say something, I will recognize them. If 

not, I will recognize Director Daniels. 

With nobody objecting, Director Daniels, welcome back to the 

Committee. I would appreciate your comments before the Committee. Please proceed. 

STATEMENT OF HON. MITCHELL E. DANIELS, JR., DIRECTOR, 

OFFICE OF MANAGEMENT AND BUDGET 

Mr. DANIELS. Thanks to the Committee for the privilege of being 

here. I have submitted written testimony, and in the interest of 

time, let me just extemporize for a minute or two and just pick out 

a couple of key points. 

The President has sent what we call a budget. Obviously it is a 

program that comprises his sense of the Nation’s needs and priorities. I think they are pretty plainly set forth. They begin with the 

defense of the physical safety of Americans, which now includes 

carrying not only a stronger and transformed Defense Department, 

but also carrying a war on terror to those who would harm us 

where they live. I will probably point out more than once today 

that the best homeland security money, to use our new term, that 

we can spend is that which we spend stopping terror before it ever 

gets to our shores. 

Behind this, the new category we call homeland security, defending Americans against hateful people who might leak through. Behind that, action to invigorate the economy, an economy which has 

grown for five straight quarters but not at a rate the President 

finds adequate. Therefore, he made a considered judgment to act 

for the third time in his Presidency to try to stimulate greater 

growth and more jobs. 

354

Yes, we forecast a deficit. There are two or three things that are 

important to note about this. One is that although its origins are 

sometimes misunderstood or misrepresented, they are really no 

mystery. They are: The recession that was on in the first quarter 

of 2001 wasn’t known at the time that we all got together around 

those forecasts we inherited, just as we inherited the recession. 

Second, the attack of September 11th and the war and extraordinary costs, now over $100 billion, that nobody saw coming, or 

could have. The third phenomenon in a triple witching hour was 

the collapse of the stock market bubble. Now, that did start in 

March of 2000, but as far as I know, no one saw how far and how 

fast that would continue. If anybody did, they are a very wealthy 

person today, I presume. 

Those three phenomena together put us into deficit, and just, as 

I say, to dispel one fiction, I have been reminding people that if the 

President’s 2001 tax plan had never passed, if no tax plan had 

passed—and even those who opposed it at the time tended to favor 

some sort of tax relief. Let’s pretend that none had ever passed. We 

would have had triple-digit deficits last year and this year and next 

year. 

So people ought not be casual about the facts and trying to assign blame for something that really must be blamed on three circumstances that were not within the control of anyone here and, 

as far as I know, no one had a crystal ball so clear they could see 

them coming. 

The most important objective for returning to balance, of course, 

is economic growth. It was economic growth and a strong stock 

market which brought about the last surplus. I would offer or try 

to offer a word of encouragement to Senator Conrad and others 

that they ought not give up so easily, because surpluses are the 

consequence of strong economies, not the other way around. They 

could return just as surprisingly as the last time. No one saw the 

last surplus coming, not 5 years, not 3 years, not 1 year ahead of 

time. Those forecasts were all for big deficits running on without 

end. 

In fact, in the year the surplus arrived, 4 months in, both CBO 

and OMB and others were still forecasting a deficit. So just as we 

have learned how surprisingly quickly things can change in a negative direction, we ought to maintain the hope and the kind of policies that will make a very strong economy and, therefore, a return 

to balanced budgets much more likely. 

I will end on one other point. Part of the proposal that the President has made is to reinstate the regime of budgetary controls that 

expired last year under the Budget Enforcement Act. We hope that 

this committee, which has taken so much leadership in the past in 

maintaining fiscal discipline in the Congress, will take the lead 

here, too, and help us to get back caps. We suggest them for 2 

years, which we think is a realistic timeframe—2 years at the level 

of spending restraint, 4 percent, that matches the expected growth 

in family income that the President has proposed. 

We thank you for the opportunity to be here, and I am happy to 

answer any questions. 

[The prepared statement of Mitchell Daniels follows:]

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Chairman NICKLES. Director Daniels, thank you very much. 

A quick question. I notice your baseline without any changes has a deficit in 2003 of $264 billion. The Congressional Budget Office 

had a deficit projected, I believe, of $199 billion, so that you were 

significantly more pessimistic. You even put a $25 billion assumption that revenues would be lower than what your computers were 

telling you. Would you care to explain to us that $60 billion difference and why you put the $25 billion plug in for reduction a in revenue? It 

looks to me that you are just making it worse, and P.R.-wise it 

might have been better if you took out your $25 billion reduction 

in 2003 estimate and $15 billion in 2004, you would be less than 

$300 billion in both years. You wouldn’t be at record nominal deficits. I don’t know why that was done. Would you care to explain 

that? 

Mr. DANIELS. Well, we were trying for accuracy, Mr. Chairman. 

I don’t doubt that optically it would have looked better. We are actually $55 billion below our friends at CBO in our revenue estimate. I hope we are wrong. I really do. I think we would all feel 

better if we saw revenues recovering, if we saw deficits substantially smaller than we are forecasting. We have been trying to 

learn as we go, and there has been a completely ahistorical phenomenon going on with revenue. The economy has been growing 

and revenues have fallen. This is not what we have seen before. 

Typically, as the Committee knows, in the year after a recession—a recession pulls down receipts, and that is to be expected. 

Typically in the year after, there is a very sharp snapback. That 

did not happen, and we are still learning why. A lot of it clearly 

was in the capital gains area and other forms of income related to, 

I believe, the stock market bubble. That is the reason we made the 

adjustment. We have just been watching as the best models of the 

brightest people missed on the high side. So we have calculated the 

likely extent of that miss, if it continues, and made that adjustment. 

I sure hope we are wrong. It is the most pessimistic report in the 

field. Until we——

Chairman NICKLES. It is or is not? 

Mr. DANIELS. It is. Ours is, as far as I know. Until we see revenues coming back, as you might have expected from history, we are 

going to continue to be careful. 

Chairman NICKLES. Well, I guess I better appreciate or understand it, but just for the information of our colleagues, estimates 

have been fairly on target—correct me if I am wrong—on outlays, 

both by OMB and by CBO, while the estimates by everybody, private sector, OMB, and CBO, have missed it on revenues. They have 

missed it for years, and missed it big time between 2001 and 2002. 

We had a 7-percent reduction in revenues, and that is a big part 

of our problem. You have taken a more pessimistic estimate of 

what revenues might be, and maybe it is more realistic. No one is 

going to accuse you of a rosy scenario. 

Still, revenues are hard to guesstimate. There were trillions of 

dollars lost in the market over the last 2 or 3 years, beginning in 

March of 2000, and that flushes through the system, maybe affecting corporations’ behaviors and so on, which impacts revenues, 

359

total receipts. I notice personal income tax was down $150 billion 

from the high; corporate income tax was down about—oh, a significant sum, I can’t remember, $40-some billion. 

Mr. DANIELS. Could I just show one thing, Mr. Chairman, to pursue that point a little bit? 

Chairman NICKLES. Sure. 

Mr. DANIELS. We also missed revenues wildly in the earlier 

years. As I said, no one saw the surplus coming. Now with the benefit of a few years of experience in looking back, we can see a pattern that, I think, points us to a common-sense answer. 

On the green line—I asked our folks: What is the long-term 

trend of Federal revenue? Obviously it moves up and down with 

events, but it is surprisingly stable, and it is about 3.3 percent. We 

looked back 10 years, 20 years, I think 40 years, and that is the 

average, and that is what the green line reflects. 

Well, we hit an incredible hot streak in the late 1990’s, and revenues surged far above that historical trend line. Where I think all 

predictors were misled was to imagine that that rate might slow 

down, but that we would move on from that top plateau. So the 

predictions that Senator Conrad was talking about assumed that 

we might grow at a modest rate but not drop, as we did. 

What has happened, as you can see, is we sort of had a bulge 

of revenue, and now we have given it all back. In fact, we are just 

going to back to that long-term trend line, we think, in another 

year or two. 

So it was a unique phenomenon, both on the way up and the way 

down, and I think now we can see the reason for the extent of the 

misses of both the surplus and its disappearance. 

Chairman NICKLES. I appreciate your comments. 

Senator Conrad. 

Senator CONRAD. Thank you, Mr. Chairman. 

Director Daniels, as I listen to you, tax cuts seem to have played 

no role in the disappearance of the surplus. Our analysis would indicate it played the biggest role. When you look at what has already occurred, what the President has proposed going forward, the 

tax cuts are the biggest reason. 

I want to go back to this question of estimating because, you 

know, I must have showed this fan chart that CBO was warning 

us at the time of the uncertainty of the forecast. I must have shown 

it a dozen times in this committee, I must have shown it dozens 

of times on the floor, warning people that the tax cut was 

unaffordable because there was a risk the 10-year forecast would 

never come true. 

You told us not to worry, there is going to be more money than 

the forecast. 

Well, as we can see now, there is not only less money than the—

this is the mid-range of the forecast. That is what people adopted. 

As it has turned out in the real world, we are below the bottom 

range of possible outcomes. 

I just have to say, in terms of holding people accountable, you all 

took what Senator Baker talked about in the 1981 tax cut as a riverboat gamble. You took a riverboat gamble. You said there was 

going to be more money or at least as much. It was wrong. It was 

360

wrong. It was a mistake. It was a huge mistake. There are enormous consequences associated. 

Now what you are telling us is let’s have some more tax cuts. 

Even though none of this adds up now, let’s have some more tax 

cuts. This black line is the CBO baseline. The blue line shows what 

happens if you add the President’s additional tax cuts. The red line 

is if you add the President’s additional policies. We never get out 

of deficit. 

Let’s go to the final, which is from the President’s own document. 

It shows we never get out of deficit and that in many ways we are 

in the best of the circumstances right now. We are in the sweet 

spot because the trust funds are throwing off hundreds of billions 

of dollars of surpluses. 

My question to you is: Do you ever see us escaping from deficit 

if the President’s plan is adopted? When would it be? 

Mr. DANIELS. Well, quite possibly, sir. Let me take apart things 

you said piece by piece. 

First of all, those fan charts are important. I showed them, too. 

In the 2001 submission, in fact, you and I agreed that it was a very 

difficult business trying to pretend we could peer out as far as 6 

and 8 and 10 years when we made such enormous—had such enormous surprises just in the previous few years. We reserved 15 percent of the theoretical surplus at that time as a buffer against surprise. It wasn’t near enough, as it turns out. 

Second, it simply is not true that any policy, let alone the tax 

cuts, is responsible. As I just showed you——

Senator CONRAD. The tax cuts have no part of the deficits going 

forward? 

Mr. DANIELS. That is not what you said, and that is not what I 

said. The deficit we see today would be a triple-digit deficit, would 

be $170 billion this year if——

Senator CONRAD. I am not talking about just this year, sir. I 

mean, let’s be fair. I am talking about the 10 years of this budget 

window; the tax cuts and burgeoning debt. That is undeniable. 

That is a fact. 

Mr. DANIELS. Well, sir, your comment moves me to use a fourletter word: bunk. 

Senator CONRAD. The tax cuts have no part in the increase of 

deficits over the 10 years of this budget window? 

Mr. DANIELS. The only deficit we know about is the deficit we are 

experiencing right now, perhaps the deficit for next year. Let’s be 

a little humble about what we can and cannot see going forward. 

That same fan chart, which we don’t prepare—our friends at CBO 

do—if you look at it now shows a range—I don’t know, did we bring 

it?—shows a range from deficits larger than we proposed, but also 

including surpluses once again. The point is we——

Senator CONRAD. In fairness, that is without—that is without, as 

you know, any policy changes. That is without the President’s proposed additional tax cuts. That is without the President’s additional spending proposals. That is without any cost of war. That is 

without any policy changes. 

The document from your own budget document shows we don’t 

ever get out of deficit here. 

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Mr. DANIELS. Well, fortunately for me, my eyes are good enough 

to see that that chart goes to 2050. Now, having—I would 

think——

Senator CONRAD. It is your document, sir. 

Mr. DANIELS. I know, but I am certainly not citing it as gospel 

the way you are. I would think having learned how much we can 

be surprised in either direction over the space of 2 or 3 years, you 

would be a little bit humble about telling us what is going to happen in 50. 

Now, the point I am making is it is sometimes loosely said that 

we are in deficit because of the President’s tax relief. That is not 

true, not close. As you know, and as some observed at the time, the 

President’s 2001 tax relief bill has most of its effects over time. So 

if it is such a bad idea, you know, please stop complaining about 

it and propose its repeal. 

Now, when you do, you will have a little trouble because you will 

have to explain to America what you want to repeal. Most of the 

money is in the lower bracket, from 15 percent to 10, that reduction, and in the child credit and in the marriage penalty. The 

pieces that, again, get loosely thrown around in rhetoric about the 

rates don’t move the needle detectably. 

It is an honest argument we can have that as to the future has 

nothing to do with the fact that recession, war, and a disappearing 

bubble put us in the red as we are today. 

Senator CONRAD. I would just say to you it is absurd to sit there and suggest the tax cuts already enacted and the additional $1.8 

trillion of tax reduction the President proposes plays no role in a 

return to massive deficits and dramatically escalating debt. That 

doesn’t pass the laugh test. 

Chairman NICKLES. Senator Conrad, thank you very much. 

For the information of all of our colleagues, we are trying to stay 

on 5 minutes, 5 or 6. I am not going to ring somebody down unless 

it is necessary, but hopefully we will stay pretty close to that. 

Senator Allard. 

Senator ALLARD. Mr. Chairman, thank you. 

I just feel like I want to respond a little bit to some of my colleague’s criticism here and kind of put this in the proper perspective. Some of the comments that we saw put on the chart I noted 

were comments that were made before 9/11. Nobody would have 

predicted that. The stock market, nobody would have predicted 

that. I think that the Chairman of this committee hit it right on 

the nose about the real flexibility, the real problem we have had 

is on revenue. 

So I think the question that is facing the Congress and facing 

this committee is how is it that we can best grow the economy. I 

look at what the tax burden is today to individual taxpayers as a 

percent of gross domestic product. If we look at the time between 

World War II and now, it is among the highest it has ever been. 

It is not the highest year, but it is among the highest years that 

it has ever been, and the most highest years have been in the last 

3 or 4 years. 

If we look at spending, like I think Phil Gramm said last year 

during budgeting, you know, we have been spending around here 

like a drunken sailor, and spending has gone up, and there has 

362

been tremendous increases in spending. We look at the corporate 

tax burden which in some cases may get us up to 60 percent, which 

is the second highest in the world of all countries when you do a 

comparison of all the countries. So I try and sit here as a policymaker and say how is it that we can stimulate this economy. You 

know, if it was increased spending, we should have been seeing it 

happen. The only area that I see where we may be able to help this 

economy is to reduce the burden of taxes. 

If we look historically, the tax cut that we had a year and a half 

ago was passed by this Congress—almost 2 years now—that did 

help the economy. Even the Washington Post said in one of the editorials back in September, you know, we have to admit that if that 

tax cut had not occurred, we would have been in worse shape 

today, and so that it did help sustain the economy. 

So I just want to emphasize that I for one think that if we are 

going to get this economy to grow, we are going to have to drop 

taxes to do it. It is the only alternative. Nothing else is working. 

We have got to do it, and I want to commend the President for 

doing it. 

I would like to have you maybe share with me, Mr. Daniels, 

some of the thought about how the tax cuts that are being proposed 

now by the President are going to act to stimulate the economy and 

why you selected those various aspects of our Tax Code to stimulate economic growth. 

Mr. DANIELS. Sure, Senator. I think this really points us to 

maybe the single most important issue that we all ought to try to 

join together and wrestle with. I think by far the most—the one the 

President spent the most time on in the time leading up to the submission of the program this week, in other words, his determination and the course of defense rebuilding and fighting the war on 

terror and homeland security was pretty much clear and understood. The big question was whether or not to act, try to act further 

to strengthen the economy. Senator Conrad, I think his questions 

really mean to go to this point. We know why we have fallen out 

of balance. The question is how best to get back in and at what 

pace. How urgent is that compared to some other priorities? 

As we have been saying all week, a balanced budget is a very 

high priority for this President. There are a couple things that he 

has placed ahead of it. There honest people can differ. 

So there was some considerable counsel during the last quarter 

of the year that says, look, the economy is growing, it won’t be necessary to try to act further, and trust to luck. The President, after 

taking all that in, decided to act and in a way that most people 

found pretty bold. 

He was not prepared to trust to luck that the economy would 

grow or grow more quickly or generate more jobs than it is generating. As I say, honest people can differ. 

The deficit for 2004 would be well over a third smaller if you 

made that decision, and perhaps some Senators would prefer that, 

to opt for a much smaller deficit, hoping that the economy will perform adequately. The President came out in a different place. 

There we can have, and should have, really, a good discussion. 

In terms of the pieces of the program, I think it is a balanced 

program for the near term. The acceleration of the rates, which in 

363

particular would have benefit along with the other provision on expensing for small business, I believe—I personally believe would 

have the most jobs effect in the short term. Behind that, the acceleration particularly of the child credit, which would put cash in the 

hands of families, principally low- and middle-income families, 

might have a near-term effect also. 

The much debated dividend exclusion, the ending of double taxation of dividends, I would say is more of an intermediate and 

longer-term effect, but also very important. We don’t need growth 

just next year to move back toward balance. We need sustained 

growth over a period of years, and a balanced program would try 

to encourage that. 

Chairman NICKLES. Senator Allard, thank you very much. 

Senator Hollings. 

Senator HOLLINGS. Director Daniels, the budget deficit for 2004 

is projected to be, what, 307 is what you project it to be? 

Mr. DANIELS. Yes, sir. 

Senator HOLLINGS. Well, now, you told Chairman Nickles a 

minute ago that you were trying for accuracy, and you and I have 

corresponded about this. If you turn to page 312, you will see without Social Security it is 482. Isn’t that more accurate than 307? 

Mr. DANIELS. Both are accurate numbers, sir. It is two different 

ways of looking at the question. 

Senator HOLLINGS. Well, the law is Section 13-301 that was 

passed in this Budget Committee by a vote of 20-1 and passed on 

the floor of the Senate by a vote of 98-2 and signed by George Herbert Walker Bush on November 5, 1990, that you are forbidden to 

set a budget using Social Security Trust Funds. Isn’t that correct? 

Mr. DANIELS. Well, we report the so-called on-budget number 

faithfully for that reason. 

Senator HOLLINGS. I know what you do. The law is there, and 

you are not supposed to do it. Yet you tell Chairman Nickles you 

are trying for accuracy. 

Now, let’s get really accurate and turn to page 332, and you will 

see that the debt goes up from 2003 $6.7 trillion to $7.3 trillion in 

2004 for a deficit of $569 billion, not 307. That is the actual deficit. 

That is how much money comes in and how much money goes out. 

You’ve got less coming in, more going out. Just like any housewife 

keeps her budget. You’re spending in the next fiscal year, according 

to your budget, the next fiscal year, $560 billion more than you 

take in. Is that correct? 

Mr. DANIELS. Well, not in a cash sense. 

Senator HOLLINGS. What is that? 

Mr. DANIELS. No, not in a cash sense. The unified budget would 

actually be the right measure of that, the——

Senator HOLLINGS. I am looking at the arithmetic. Don’t give me 

the unified and the fancy talk and dance now. Let’s get to the 

truth. You said you were trying to be accurate. Where is my question inaccurate? 

Mr. DANIELS. It is an accurate measure of the so-called on-budget 

deficit, and as you know——

Senator HOLLINGS. No, don’t give me on-budget deficit. What is 

the debt? Doesn’t the debt go up, which is the deficit, in my opinion, the gross—you have got it cited here, gross Federal debt. 

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Mr. DANIELS. Yes. 

Senator HOLLINGS. That is what I am asking about, not the onbudget deficit. 

Mr. DANIELS. Debt by either measure goes up, that is correct. 

Senator HOLLINGS. We finally got that. 

Now, you said the 307 is 2.7 percent of the GDP, but actually it is $569 billion, that is 5 percent of the gross domestic product. Isn’t 

that correct? 

Mr. DANIELS. That would be about right. 

Senator HOLLINGS. Now, that would be about right. 

Now let’s turn to page 1 of this budget here, and I will read you 

a sentence here. It says, ‘‘Compared to the overall Federal budget 

and the $10.5 trillion national economy, our budget gap or deficit 

is small by historical standards.’’ Do you remember writing that? 

Mr. DANIELS. I do. 

Senator HOLLINGS. So that is exactly what Kenneth Lay was 

doing with Enron, making his budget appear to be more favorable 

to the stockholders. Here what we are trying to do is make our 

budget look better for the taxpayers, because you read this here on 

page 1, ‘‘Compared to the overall Federal budget,’’ and everything 

else, ‘‘the deficit is small by historical standards.’’ Whereas, the 

truth is—you finally acknowledge it on page 332—that it is $569 

billion. 

Do you know, Director Daniels, that if you took all the deficits 

from Harry Truman in 1945 to Gerald Ford in 1975, 30 years, the 

cost of World War II, the Korean War, the Vietnam War, and you 

added up all of those deficits for six Presidents in 30 years, it 

would only come up to $358 billion. Here you are submitting a 

budget with a deficit of $569 billion and calling it historically 

small? 

The truth of it is, look at your page—go to this other book, historical tables, talking about the history, and you will see on page 

117 that the debt as a percent of GDP goes to 64.8 percent. 

Now, in the Maastricht Treaty in the European Union, you can’t 

even become a member unless your debt is 60 percent or less of 

your GDP. Here you and I, the United States of America, which is 

mouthing around about Germany and France being cowardly, they 

could come back and say you and I are cheapskates. We won’t pay 

the bill. That is why all the economists in all the countries believe 

paying the debt and paying the bills and not having excessive borrowing. That is why they have got it in their treaty. Here you have 

got 64.8 percent, and you would have to go back to 1955, almost 

50 years, historically, to find that level. 

Director Daniels, I just can’t understand why we don’t get the 

truth about this budget and start paying for the war. While you are 

testifying, I can tell you now we are not going to be on TV because 

everybody wants to hear Colin Powell. They don’t want to hear you 

and me right now. [Laughter.] 

Senator HOLLINGS. That is fortunate for both of us. What happens is that he is trying to sell the United Nations on going to war, 

and we as the Budget Committee ought to be trying to sell the 

country on paying for the war. We paid for the war in every war. 

Even in the Civil War, President Lincoln raised taxes. Tax dividends rather than cut taxes. Raise the income tax rather than cut 

365

taxes. You can go right on down. We had a 90 percent personal 

level in World War II, in Korea, and you come historically the corporate level, Mr. Chairman, at 50 percent, and what we are telling 

those poor GIs, we want you to go into Iraq—we are waving the 

flag. We are loyal. We are supporting you. We hope you don’t get 

killed. Hurry back because we want to give you the bill, we are not 

going to pay for it. Me and my crowd, Strom and I are home free, 

and we are going to give it to the poor GI going into Iraq. 

Now, this is the first sad Congress that ought to be ashamed of 

themselves and a Budget Committee that dances around the fire 

about charts and everything else. Do you believe we ought to pay 

for the war? 

Mr. DANIELS. Well, Senator, I believe you have framed this question in the right way this morning, as you often do. I would like 

to respond, I would like to start responding by saying that I think 

you are presenting the right question. You said there is a risk in 

excessive borrowing, and I think everyone would agree. The question is: What is excessive? Let me present the issues as the President faced them. 

Senator HOLLINGS. While they are looking for that, he said we 

have enough stimulus. You say you have got—this year you project 

on that same page, the last page, that we will have a $554 billion 

deficit, Mr. Chairman, $554 billion at the end of September this 

year, without the cost of Iraq, because we haven’t gone in yet, 554, 

and next year 569. That is a trillion stimulus, gentlemen, ladies. 

That is a trillion stimulus. Senator Daschle’s is 146 and the President is 133, $12 billion more a month does not stimulate. I mean, 

we have got enough stimulus. In the 2-year period, we have got a 

trillion dollar stimulus going on, and running around here trying 

to buy the election is really what it is, not the needs of the country 

but the needs of the campaign. 

Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Hollings, I am going to have to put 

you in the undecided category as well. [Laughter.] 

Chairman NICKLES. I am counting votes around the table. 

Director Daniels, do you want to make a comment? 

Mr. DANIELS. I don’t feel I gave a complete answer to the Senator’s question, and let’s do talk common sense and not numbers 

that would be hard for folks to follow. 

You cautioned against—and the President would agree—excessive borrowing. The problem with governing is you have to make 

choices based on the situation as you find it. We find ourselves, of 

course, in a situation no one could have imagined for two or three 

different reasons just 2 years ago. This is the way it looks to the 

President, and I know it may well look different to you. You recognize what a baseline is, and our baseline—and CBO’s actually says 

just the same thing—tells us that if the central goal, if our No. 1 

priority should be to get back to balance, it is not hard to do. We 

could hold the Government at exactly the position it is today. We 

could grow it with inflation, and you would be back in balance in 

a couple of years. 

The question is: What would you not do? What would you have 

the President not do? Would you not try to grow the economy? 

Most members of both parties—there are a lot of differences about 

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2 No chart provided at press time.

how best to do it, but most folks with whom I have visited believe 

we ought to act, not trust to luck. 

Would you not further strengthen our defenses and our homeland defenses and prosecute the war on terror? Would you not 

begin the drive to improve and modernize Medicare? Would you not 

continue doing something more—the President will be criticized for 

not doing enough more, I am sure—about education of disadvantaged children, about veterans, about global AIDS and so forth? 

That is the debate we ought to have. 

If, in fact, the wisest thing we can do as a country above and beyond those other objectives is to get back to balance, we can do 

that. It is not impossible. I urged your colleague a minute ago not 

to give up so easily. 

These are the President’s choices. Apples to apples, the deficit we 

will face is about average for the last 25 years, counting the surplus years. It is not extraordinary. We ought to try to move it back 

toward balance, and the budget forecasts that happening. You can 

make it much closer to balance right away if you are prepared to 

forego some of these initiatives, and that is what the budget resolution is all about. 

Chairman NICKLES. Thank you very much. 

Senator Crapo. 

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

Mr. Daniels, if you could leave that chart up for just a minute, 

I would like to talk with you a little bit more about that.2

I think that the debate that we are having, that we see being 

framed, misses the point to a certain extent. That is, it seems to 

me that a lot of the discussion, both in the media as well as here 

in the halls of Congress, circles around whether we should try to 

balance the budget now—in other words, to reduce the deficit as 

much as possible—or whether we should have tax relief as an effort 

to try to stimulate the economy. The attack that I seem to hear is 

one that says we can’t have tax relief now because it would cause 

us to have too much in terms of deficit. 

I am remembering back to when we were debating President 

Clinton’s proposals for tax increases, and we had the same kind of 

debate in reverse. We can’t have a tax increase now because it 

will—actually it was framed in the context of those of us opposed 

it saying we can’t have a tax increase now because it will stimulate 

more spending, not help us reduce the deficit. In those days, we 

were showing figures that for every $1 of tax increase that we had 

had under previous proposals, spending in Washington went up by 

$1.50 or something like that. The question we tried to focus on 

then, which is the question I think we should focus on now, is 

spending and whether that spending is justified and whether tax 

relief, which is a form of spending of the Federal revenue, is justified in terms of stimulating the economy. 

Here is the point that I wanted to focus on. It seems to me that 

you have hit the nail on the head by the chart that you put up 

here. For those that are criticizing the current deficit—and, frankly, I am one of those who thinks that maybe we can do a better 

job at reducing the deficit as we put this budget together. For those 

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who are criticizing the deficit that the President has proposed in 

his budget, they have to be ready to say what it is that they would 

do differently. 

Now, some have said let’s not do the tax cut, and that is where 

I see most of the focus of the debate today. If you look at your 

chart, and if you look at the statistics that have been presented, 

just focusing this on the tax cut doesn’t get to the issue. 

We just went through a debate and a series of votes on the floor 

in putting together last year’s final appropriations budget where 

we had proposals to spend somewhere between $400 and $500 billion more than we ended up with ultimately in the budget that we 

put together. 

So you and I both know that there are those who want to spend 

a lot more in every one of these categories and others if they have 

the opportunity. 

Again, that is the debate we ought to be having. Should we block 

all spending now and have a freeze and not do what we need to 

do for national defense, not do what we need to do to prosecute the 

war on terrorism, not do what we need to do in order to protect 

our homeland security, and not do the things that have been talked 

about here, and not have an economic stimulus package in the form 

of tax relief? Or should we have a different mixture of the entire 

package? 

The question I asked you is maybe just to elaborate a little bit 

further on the points that you were just making. We all want to 

reduce the deficit, and I for one don’t think that it feels totally satisfactory to say that it is small in terms of historical circumstances. 

That is true. Frankly, I would like to see the deficit be zero. You 

would, too. 

What is going to be the impact on the deficit if we don’t have the 

tax relief but we do then go back into the spending mode that we 

just fought off in the last few weeks here in the Senate? 

Mr. DANIELS. Well, Senator, the irony is not lost on me that 

there are people in town I bump into on Monday, Wednesday, Friday who are urging a lot more spending, and when I see them on 

Tuesday, Thursday, and Saturday they are yelling at me about the 

deficit. You know, you can’t have it both ways. 

Clearly, spending restraint, I would hope there would be bipartisan support from those who share the President’s priorities and 

from those who believe that a balanced budget should come ahead 

of some of his top priorities, even higher on the list. I would hope 

there would be bipartisan agreement, for goodness’ sake, let’s control spending on the way. The President suggested a common-sense 

measure and a moderate 4-percent growth, which is a substantial 

deceleration from what we are really forced to propose, more like 

9 percent in the year just past. 

Senator CRAPO. Could I interrupt and just ask you a quick—I 

know our time is running out here. Would you agree, then, that for 

those who are saying that we don’t do the job properly with regard 

to the deficit in the current President’s proposal, that first and 

foremost they need to say what it is that they would not do that 

would help bring that deficit down? If that is they would like to 

stop the tax relief, they need to recognize what impact that will 

and won’t have on the deficit, and make a commitment that they 

368

won’t replace that loss of proposed tax relief with increased spending. Would you agree that those are the—that those who are making this argument would have to at least answer those questions? 

Mr. DANIELS. Well, I am hoping that will happen. You know, the 

old question ‘‘Where’s the beef?’’ came to my mind this morning because sometimes in these forums beef is all we get—people beefing 

about the situation we are in, but not willing to step forward and 

present an alternative plan. 

I want to say a word of appreciation for Senator Hollings, as I 

have often felt moved to do. First of all, he has drawn our attention 

back again to the long-term fiscal problem we have, the unfunded 

liabilities, the true liabilities on the books of the Federal Government, which are much bigger than any 1-year or 2-year or 5-year 

deficit we are looking at. Second, he puts squarely the question: 

Might it be wiser to raise taxes in the situation we are in? I don’t 

mean to put a proposal in his mouth, but he at least raised the 

question. That is an honest question. 

Now, the President came out in a different place. He came out 

that, as perhaps your question suggested, believing that higher 

taxes on a weak economy might be very counterproductive, might 

even turn us back in a negative direction in terms of economic 

growth. He would prefer to move in the direction of growth and 

stimulus, even at the cost of a somewhat higher deficit temporarily. 

That is an honest thing we ought to be debating, but it is incumbent on those who want to throw rocks at his priorities to tell us 

what theirs are. 

Senator CRAPO. Well, it just seems to me that whether the proposal is to increase taxes or to not have a tax reduction, that those 

who are weighing in on any of those proposals or something in between need to be prepared to also commit, if the issue is the deficit, 

that the increased tax revenue or the savings of tax revenue lost 

through stopping a tax cut would be dedicated to the deficit, not 

to increased spending. 

Chairman NICKLES. Senator Crapo, thank you very much. 

Senator Murray. 

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

Mr. Daniels, I really don’t envy you your job of trying to sell to 

the American people the fact that long-term debt and deficit spending is a good idea. I came to the Senate in 1992, and I clearly remember Ross Perot running around the country with charts and 

graphs and making a very clear case of why deficit spending wasn’t 

good, and as a result of that, my coming to the Senate, a number 

of other people, and we put together some really tough package 

back in 1993 that got us out of that cycle. I think the American 

public is pretty cynical about deficit spending. 

I come from a State and a region, as Senator Wyden knows, 

where we have been struggling for the last 2 years. I sat on this 

committee 2 years ago when the Administration was projecting a 

$5.6 trillion surplus in 10 years, and I cautioned everyone to be 

careful. Oregon, Washington, other States on the west coast were 

hit with a huge energy crisis. We saw a real impact on our employment. The dotcom bubble had burst. I told this committee that surplus is going to be gone soon. I, of course, wasn’t able to predict 

9/11. That had a serious impact on it, too. I was very concerned 

369

about a tax cut at that time because we saw on the west coast the 

unemployment rising. That has not left us. Oregon and Washington 

are still at the top of the country in terms of unemployment. We 

have had 76,000 people in my State lose their jobs in the last couple of years. One out of nine people don’t have health care today 

because our health care system is based on employment. They have 

lost their health care as well. 

We are very concerned about the budget proposal that has come 

forward to us, the tax cut proposal that could put us into a worse 

deficit spending; but even more so, people are saying, What does 

this do to help me get back to work? 

Now, I have two quick questions for you. 

How will this tax proposal put people back to work in my State 

today? I don’t see how a dividend tax is going to help the unemployment rate on the west coast? 

Second, I would say in response to my colleague from Idaho, who 

I share a lot of concerns with as well, sometimes spending is important to get us back on track. When you put money into transportation and you build highways, you put those people back to work 

immediately at construction jobs and engineer jobs and design jobs, 

and that helps our unemployment. It helps economic development 

in the long run. 

So is it correct to say that spending is always not helpful to our 

economy? I don’t think so, and I would love to hear your response 

to both of those. 

Mr. DANIELS. Well, thank you, Senator. Your cautions a couple 

years ago were well placed, and we now see how they were well 

founded. The President shared them, but events overtook us all in 

a way that maybe not even you had foreseen. 

In terms of the growth package, I think I would stand on the answer I gave a few minutes ago. I think in terms of immediate help 

to put people back to work, I would sort of rank the—I would rank 

the proposals roughly this way: I think the acceleration of the 

rates, probably first, both for the benefit to consumers but also because so many small businesses would see a fast improvement in 

their situation and might be able to hire more people. You know 

that that is where the jobs come from, net new jobs in this economy. I think behind that the child credit, through which many of 

your constituents would receive an immediate several hundred dollars, depending on their family circumstance, from bringing that 

reform that Congress has already voted for forward. I think the 

small business is expensing up there at the top, too. 

One other thing I would mention that I think has gotten too little 

attention is the President’s proposal, on top of the unemployment 

insurance compensation that we have now for, $3-plus billion for 

new re-employment accounts, in which 1.2 million Americans, including many of your constituents, could access money that they 

could control to suit their own personal family circumstance and to 

create an incentive, because they could keep the balance if they got 

back to work more quickly. It is a new idea that we hope——

Senator MURRAY. Well, I would agree with you. You are talking 

about putting cash in people’s pockets today. That is important if 

you want them to be purchasing things. I think that the other side 

of that is if this puts us into debt, it is going to cost people more, 

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as Ross Perot told us so many times, in terms of their interest 

rates on their mortgage or their house or sending their kid to college. 

Mr. DANIELS. This is what governing is about, Senator. The 

President believes it is a good idea, it is a good chance to take to 

take an additional step for growth at this time. 

Again, there was a lot of counsel—there is still some out there—

that says don’t take that step, things well enough—leave well 

enough alone. That wasn’t where he came out. 

With regard to interest rates, interest on mortgage rates, we 

have the lowest rates in 40 years, thank goodness. It has been very 

beneficial to individuals and to the economy. We want to keep an 

eye on that, but for the moment that is a big plus. 

Senator MURRAY. Well, on the spending side, don’t you agree 

that when you spend money, for example, on transportation 

projects that I alluded to, that also helps get our economy going 

again, gets the revenue streams going again, and moves us in the 

right direction? 

Mr. DANIELS. Well, the President is proposing, for example, 

greater highway spending in a new reauthorized highway bill, and 

that certainly I think has done well. Better infrastructure is very 

good for the economy. When I think of highways, I think first of 

all of the way they enable businesses and individuals to practice 

more commerce. We need a good infrastructure to do that. 

I think we have to be a little cautious about and always remember that the dollar we spend on a given project had to be taken 

from somebody first. 

Senator MURRAY. Let me ask—is my time up? A really fast, 

quick question. Our State legislatures are in extreme—they have 

to balance their budgets. We have a $2.5 billion deficit in the State 

of Washington alone, and I am concerned about the Medicaid reform package. If you could just comment quickly, it looks like a 

block grant proposal that has failed several times in the past, and 

I just am curious on whether or not—how this is going to help our 

States when it seems to me that combining these programs is not 

going to help our State legislatures when they are dealing with the 

Medicaid crisis. 

Mr. DANIELS. The first thing to note is it is purely optional, so 

any State that believes it would not be of net benefit to them can 

continue on without any effect. It involves—if you get a chance to 

look at it more closely, it involves what States, almost all States, 

I think, have been telling Secretary Thompson and telling the 

President they want, much more flexibility and more money to go 

with it, several billion dollars in the first few years, so there would 

be more money per beneficiary, along with more flexibility. 

Again, it is strictly up to the States to choose. 

Senator MURRAY. I know my time is up, but let me just say that 

if you base it on the formulas from the past that have rewarded 

States who are not as efficient, it is simply going to put more of 

our State legislatures in a bind. I will talk with you more about 

that. 

Chairman NICKLES. Senator Murray, thank you very much. 

Senator Ensign. 

Senator ENSIGN. Thank you, Mr. Chairman. 

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I want to take a little off of what Senator Crapo and Senator 

Hollings were talking about. I do think it is very important for us 

to look at the long-term debt that we have with Social Security. As 

a matter of fact, Senator Hollings, I am one of those people that 

would love to see Social Security money not touched. There are a 

couple of reasons that I would like to protect Social Security one, 

we would have to reduce Federal spending. We would be forced to. 

The money wouldn’t be there to spend. If we actually had to take 

that money and put it in an account, we would be forced to reduce 

Federal spending. 

Second, as far as I am concerned, it would give us much more 

flexibility on saving Social Security for future generations and 

would give us the option of possibly creating private accounts for 

future generations, we could turn Social Security into a pension 

system. That is the way that Social Security should have been set 

up a long time ago. It wasn’t. It was a pay-as-you-go type of system, unfortunately. I would like to see it someday transitioned 

more into a pension system similiar to what many companies have. 

If companies or States, borrowed money from their pension funds 

and spent that money, there would be a revolt in this country. So 

I would certainly echo those types of thoughts. 

Taking off of what Senator Crapo said, though, I am critical of 

those in Congress who want to increase spending, but I am also 

critical of the Administration in this regard: I don’t think enough 

emphasis has been put on the deficit. It is just a priority that I 

think should be higher on the list of the President’s priorities. I 

think it is a legitimate discussion to have. There are choices that 

will have to be made. I feel it unfortunate that the President didn’t 

lead a little more on saying, you know, we are going to war. We 

are in a war on terrorism already, and we are probably going to 

war with Iraq. I think most of us feel that if we are going to war 

in Iraq that it is going to be a significant cost, so we have to make 

very wise choices on this Budget. 

I have made those kinds of votes in the past, and I would be willing to join you in those difficult choices. I think that that is up to 

Presidential leadership, for one, to help control spending, because 

without the President it is difficult to get enough votes to control 

Federal spending. 

On your graph, if you could put that one graph up, I had one 

quick question on there. The Medicare part of the deficit, does that 

include prescription drugs?

Mr. DANIELS. Yes. 

Senator ENSIGN. How much larger, if the bill that was sponsored 

by Senator Kennedy last year, if that bill would have passed, how 

much larger would those deficits be in the out-years? 

Mr. DANIELS. Well, they would be substantially larger, but the 

real place to see the difference, I suspect, would be in capturing the 

unfunded promise that we already have. The unfunded promise of 

Medicare is about $13 trillion. That is more than 3 times the national debt, or 2 times if you measure the gross debt, as Senator 

Hollings does. As we try to improve Medicare and, after that, Social Security, we have to be very, very careful to watch that number. 

372

The bill from last year that advanced the farthest in the Senate would have added another $6 trillion to the long-term unfunded liability of Medicare. So we do have to be very careful about that in 

any reform that we pass. 

Senator ENSIGN. I agree, and I think that we have got to be careful as we go forward. I love the talk from both sides—especially 

from the other side of the aisle about deficits. I love the fact that 

they are stressing how important it is to control deficit spending. 

I just hope that when it comes down to votes, that we get the votes 

on some of these things because we know that there are going to 

be votes on spending more money on the Medicare prescription 

drug package. 

Senator Hagel and I, we had the only package that fit within the $300 billion number that we had available to spend last year. 

Every other package was outside of that number, and some of them 

were substantially outside. 

Another point that I would like to make is what Senator Crapo said, and I made this point last week, that the $500 billion in extra 

spending that we tried to tack on to the omnibus appropriations 

bill, that adds to the baseline, which, you know, adds tremendously 

to the deficits, does it not? 

Mr. DANIELS. Absolutely. 

Senator ENSIGN. So if we are going to be concerned about the tax 

cuts, those same people should be willing to not vote for more 

spending, I guess is the point to be made. 

Mr. DANIELS. Well, again, it is a matter of where one’s priorities 

are, and I will take back to the President your reservations. Likewise, I would agree with you that those who differ with this set of 

priorities do have that same responsibility to tell us what they are 

for. 

Senator ENSIGN. Thank you, Mr. Chairman. Just two quick closing comments. That is, I criticized the other side of the aisle. Once 

again, I criticize the Administration. The steel imports last year 

was a terrible decision on the Administration’s part—I think it 

hurts the economy, and adds to the deficit. Additionally, sigining 

the farm bill was also a terrible decision made by the Administration as it also adds to the deficit. So I am trying to be fair in my 

criticism here. If we are concerned about deficits, I would like to 

see us all working together. I personally believe that it is important for us to pay down long-term debt and to handle those unfunded liabilities that we have in the future with Medicare and Social Security. 

Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Ensign, thank you very much. 

Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. 

Welcome to Mr. Daniels, and I think your point about what are 

you for is exactly what this is about. Senator Hatch and I, for example, have introduced the Health Care That Works for All Americans Act, the first comprehensive, bipartisan health proposal in a 

decade. That is really why I serve on this committee, is to try to 

find some common ground on health care issues. 

Let’s talk for a moment about the way the Administration is approaching this health area. It seems to me there are two special 

373

problems today. Medical costs are gobbling up everything in sight. 

The number of uninsured has increased dramatically, we have a 

demographic tsunami, millions of baby boomers retiring in 2010 

and 2011. 

So tell me, if you would, because I want to find common ground 

with the Administration—that is what Senator Hatch and I are 

pursuing with our proposal—how what you are looking at moves us 

in that direction. For example, the tax credits that you are offering 

for health insurance, I look at those and I don’t see how we get 

very far down the road with the idea of the Administration’s tax 

credit proposals if you can’t buy decent coverage at an affordable 

price. So I ask, as somebody who wants to work with you, somebody who has got a bipartisan proposal in front of the Congress 

and the Administration, how is what you are looking at with tax 

credits going to sort of move us down the road given the seriousness of the problem? 

Mr. DANIELS. You are correct that the President has proposed—

re-proposed—for the third time tax credits to help those who are 

not insured to obtain coverage. It may not be a complete answer, 

but we think it would be of tremendous value to those who could 

take advantage of it. 

I think other areas for early cooperation could be medical malpractice reform, clearly a major driver not only of costs but driving 

physicians out of medicine altogether right now in States where 

frivolous lawsuits have run amuck. Medicare reform we think is 

fundamental to overall health care reform. 

I also encourage you to stay in close contact with Secretary 

Thompson, who very quietly but effectively has, through work with 

the States, through a much more flexible policy of waivers with the 

States, has enabled between 1 and 2 million Americans to secure 

coverage in the last year or two. 

So you have put your finger on the biggest problems, the cost, 

the uninsured, and the long term, and the President is trying to 

move forward on all fronts. 

Senator WYDEN. I am going to move on. I think Secretary 

Thompson’s initiatives for demonstration projects is a good one. I 

have met with him. I am going to support his demonstration 

projects, and I say full steam ahead. However we have got to start 

looking at health care as an ecosystem. What goes on over here relates to what happens over there. I hope that you all, particularly 

at OMB, will look at this proposal that Orrin Hatch and I have. 

We have gotten a favorable reaction from the AFL-CIO and the 

Chamber of Commerce, two groups that don’t exactly flock to each 

other on this health issue. We are offering an alternative. We 

would like your support. 

The second area very briefly, Mr. Chairman, involves a regional 

matter that has my part of the country up in arms this morning, 

and that is your proposal with Bonneville Power. The proposal 

there, particularly in the performance assessment section, seems to 

indicate that OMB is looking at trying to privatize major functions 

of the Bonneville Power Administration. We just think that would 

be poison for our area, and I would like to give you a chance this 

morning to take that off the table if that is the position of the Administration. This is something Democrats and Republicans look at 

374

in a bipartisan kind of way. Tell us what your position is with respect to the Administration’s desire to privatize functions at Bonneville Power. 

Mr. DANIELS. Well, no such interest on our part, if you mean by 

that the privatization of the entire authority out there. Questions 

have been raised for a long time in this administration, the last administration, and Presidencies before that about the operations 

there, about the fairness of it, really, to taxpayers nationwide. No, 

it is—improvements are in order, but not what you call privatization. 

Senator WYDEN. Well, I appreciate that. Just know that just yesterday Bonneville Power said this is something the Administration 

believes should be explored. So people out in the region are 

corcerned, particularly, given how hard we have been hit economically across the board. There is enormous concern in the Northwest 

about this and when OMB says critical things about Bonneville 

with respect to the private sector, and it sure looks—if it looks like 

a dog and acts like a dog, sometimes you think it is a dog. This 

seems to indicate support for privatization. You have told me that 

you are not interested in doing that. Know that our region feels 

very strongly about it, and I thank you. 

Mr. DANIELS. Thank you. 

Chairman NICKLES. Senator Wyden, thank you very much. 

Senator Cornyn. 

Senator CORNYN. Thank you, Mr. Chairman. I want to thank Director Daniels for being here today and tell you that I believe the 

President and OMB deserve a lot of credit for this budget that you 

have laid out. As you pointed out at the outset, this isn’t about just 

numbers. This is about priorities. This is really about values, and 

I think you have done a good job of laying out what those values 

are, what those priorities should be, and challenging those who 

would criticize this budget to come up with some alternative. 

I think we have heard some of those mentioned today that I personally would not support, like tax increases, but that is the debate 

we ought to be having, and I appreciate your work and your office’s 

work. 

I am particularly pleased to see that the Administration remains 

committed to restraining the growth of Federal spending, and I 

happen to have a different point of view from Senator Conrad, for 

example, on the effect of the tax cuts and believe that really the 

primary culprit for the situation we find ourselves in today is 

spending increases that range up to a 10.8-percent increase in the 

year 2000, but we have seen pretty much lack of any restraint 

whatsoever on the part of the Federal Government when it comes 

to spending money during good times, and now when our income 

and our revenue is dramatically decreased, as it was in 2002 with 

a 7-percent decrease in Federal revenue because of the circumstances you have summarized for us, it calls for restraint, I believe. I think the President’s proposal of 4-percent growth—not a 

cut. You know, nowhere else I have ever been would somebody consider a reduction in growth a real cut except in Washington, D.C. 

The President’s budget proposes a modest 4-percent growth in the 

Federal budget and spending restraints that would allow us to 

375

hopefully deal in a responsible fashion with the unfortunate set of 

circumstances we find ourselves confronted with today. 

I really have just two questions I want to ask. I am very supportive of the President’s plans to improve government performance and make it more accountable to the public when it comes to 

how tax dollars are actually spent by the Federal Government by 

reducing waste and inefficiency and making sure that taxpayers 

really get a bang for their buck. Could you summarize just briefly 

for us here what does this year’s evaluation reveal about the performance of the Federal Government when it comes to spending tax 

dollars in a responsible way and being accountable to the public we 

all serve? 

Mr. DANIELS. Yes, Senator. There is a new document in the 

budget this year, Performance and Management Assessments, and 

the bulk of that document does report the assessment using a 

standard evaluation tool that was worked out by people throughout 

the Government but with the help of outside experts of 234 programs. It is a long step, but it is really just the first step toward 

a goal that many Members of Congress have urged on OMB for a 

long, long time, and that is to get serious about identifying what 

works and what doesn’t so that Congress can make budget decisions with that in mind. We don’t want to overclaim for this, but 

people have worked very, very hard. It is the first serious attempt 

to do this, and I think there are some lessons in it. 

There are very few programs that we can identify as clearly effective. The test of effectiveness includes things like a clear purpose, the accountability to devise measures for telling whether that 

purpose is being approached or not, and then hard results using 

those measures. There aren’t very many programs that meet that 

test right now. There are a fair number of programs that clearly 

fail it, and then the top of the bell curve there is a large number 

of programs about which we just don’t have enough information. 

As we see it, that is not a gentleman’s C. That is an F in waiting 

because the burden of proof must finally be on the proponent of 

spending. So a program that goes on year after year and can’t 

prove its value at some stage ought to give way to something that 

we think might work better. 

I appreciate your question, and I do hope that people will spend 

some time looking at the evaluations and giving us feedback. Undoubtedly, of the 234, some are in error or missing some important 

information. It is a very impartial attempt. There is no ideology in 

it. There is no question in that assessment tool about should Government be doing this or not. That is a separate, of course, very 

important question, but this is meant to be ideology-free. We are 

just trying to get at the issue of does it work or doesn’t it, can it 

prove it works. We would very much value feedback, and we are 

beginning to get some. 

Senator CORNYN. I appreciate the Administration’s effort to begin 

to provide that information to the Congress so we can then make 

some decisions based upon the information that you are providing 

us. 

My second and last question has to do with the new Department 

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tions from 22 different Federal agencies into one Federal Department of Homeland Security whether we are going to see some savings associated with that, perhaps through increased efficiency or 

just consolidation of duplicative functions, or if we have not and do 

not see any in the short term, whether you contemplate that we 

will in the mid- to long term. 

Mr. DANIELS. Well, Senator, the motivation for that Department 

was not to save money. In fact, we are going to spend more money. 

On a percentage basis, it is the highest priority in the President’s 

budget. This President will do and spend what it takes to protect 

Americans. 

As I said earlier, we don’t count it in those numbers, but I consider the most important homeland security money we spend to be 

that the military and intelligence services use to go after terror before it ever shows its face at an American airport or other point of 

vulnerability. 

In the immediate term, there are enormous responsibilities on 

Governor Ridge, Secretary Ridge, and his people to get organized. 

Thank goodness the Congress passed that legislation. We clearly 

were not organized. It’s no one’s fault but we never needed to be 

able before to identify and assess and protect against this sort of 

threat. So that was a fundamental first step, but the first real job 

is to get organized and to get better at this as fast as we possibly 

can, ‘‘this’’ being protection of our most vulnerable places. 

Along the line, of course, we would expect to see some savings 

from consolidation. Shame on all involved if that doesn’t happen. 

That is not the first motivator. 

Also, there are some limitations on what the Department can do 

for the first year in terms of personnel and so forth, and that will 

delay the day when I think meaningful efficiencies can occur. Keep 

asking the question because it is an important responsibility. 

Senator CORNYN. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Cornyn, thank you very much. 

Senator Sessions. 

Senator SESSIONS. Thank you, Mr. Chairman, and thank you, 

Mr. Daniels. I know you are in a lonely fight sometimes to contain 

spending. I salute you for that. I remember very distinctly being 

elected Attorney General of Alabama in 1994, and my predecessor, 

through colossal mismanagement, had left us with a $5 million deficit looming on a $15 million budget. That is a big deal. Faced with 

no alternative, we identified the non-career civil servant employees, 

and we had to let them go, one-third of the office. As we reorganized and closed offsites and got rid of automobiles and did other 

things, we made that office more productive than it was before I 

took over. It still well below the number. 

So I think you are correct, and I hope you will continue to challenge these agencies and departments to reduce their overhead, 

make themselves more productive and efficient. Your program—

what is it called, PART?—to identify those is a step in the right 

direction. I think you can be a lot more aggressive in my view. I 

don’t think most people know that in this Government and in this 

Senate you walk around here and see the money we spend and say 

we can’t save on efficiency. That is not correct. 

377

So what do we expect the inflation—I know our spending is going 

up 4.2 percent this year. What do we expect our inflation rate to 

be this year? Do you have that number. 

Mr. DANIELS. 2.2. 

Senator SESSIONS. So this is nearly double, spending is going to 

go up nearly double the inflation rate. I know the Chairman asked 

to try to work together in a bipartisan way, but I don’t think we 

can forget that on a virtual party line vote just a few weeks ago, 

amendment after amendment after amendment came from the 

other side on issues all of us cared about to spend more, more, 

more. They totaled up to $500 billion more in amendments just to 

those appropriations bills and didn’t pretend to deal with every 

issue. We have people here that want more roads and more health 

care. 

So ultimately we need to understand that this Congress can’t 

solve every problem in America. Yes, it sounds good politically to 

say I am going to do more and more and more and spend more, 

but if we don’t maintain our discipline, we are going to be in trouble. I think Senator Frist deserves a lot of credit for saying we are 

going to have a reasonable increase in spending this year, but we 

are not going to go with another $500 billion. 

The testimony we had yesterday from Dr. Hubbard was that we 

would have with the President’s growth package a 9.9-percent, almost 1-percent increase in GDP this year in growth, and another 

1.7 next year, and we would create 1 million more jobs. So isn’t it 

true that if that were to occur, based on the President’s growth 

package, we would begin to see some increase in revenue as a result of those new jobs and growth? 

Mr. DANIELS. Yes, sir, I think everyone that I know of agrees 

that there would be a recapture, a feedback, an effect from any 

measure that Congress might vote for, any growth measure. Economists will differ as to what percent of the money left in taxpayers’ 

pockets or spent by the Government would come back. Of course, 

in our accounting we use zero because we don’t pretend to know 

how to be precise about that. I guess Dr. Hubbard gave you an estimate of about 40 percent, I believe it was, of this particular growth 

package would come back. 

I don’t know if that is right or not, but it is on the order of the 

estimates a variety of outside economists gave as the President 

thought about this. So we know that the zero that we incorporate 

is wrong and too pessimistic, but we make no attempt to forecast 

just what that positive effect might be. 

Senator SESSIONS. So you have no dynamic scoring, but it is obvious to me that if all economists agree that we will have some increase in growth as a result of this package, it will increase tax 

revenues to some degree. You are providing no—because of the dispute over dynamic scoring and the fact that nobody knows precisely how much, you are not showing any numbers for that. 

Mr. DANIELS. That is right. As we said in answer to an earlier 

question, for now we have certainly the most pessimistic revenue 

numbers of any forecast I am aware of. We sure hope they are 

wrong, and we hope a growth package will make them wrong by 

a big margin. Unless and until we start to see that, we are going 

to continue to try to be cautious. 

378

Senator SESSIONS. With regard to your PART program, this program to analyze the agencies of Government and to challenge them 

to be productive to meet the mission for which they were created 

to begin with, I would like to ask a couple of questions about it and 

would just say all of us know that one of the great failings of Government in this Congress and many times State government is that 

when agencies and departments cease to be productive and efficient 

and really be worthy of the money they get, we never seem to stop 

them. If anybody challenges them, whatever their mission is, they 

holler and say that, you know, we are hurting people unfairly. It 

is very, very, very difficult to stop them. 

Your analysis showed that only 6 percent of the programs in 

Government were rated as effective, 24 percent were rated moderately effective, and 50 percent you weren’t able to rate. 

On those programs that turned out to be effective, what kind of 

increases in spending did they get? What kind of increases or cuts 

have you proposed for those that are ineffective? 

Mr. DANIELS. Yes, there is a table in the book, Senator. It is not 

an exact one-to-one correspondence. In other words, there are some 

programs that are ineffective for which the right answer might be 

let’s fix what is wrong, it is too essential not to do, or there is not 

an alternative program that gets at the same thing. In general, 

those that we were able to reach a clear judgment about, we reinforced with greater increases, and vice versa. 

Let me make one other point. There are really two parts to that 

book: one that looks at individual programs, like your question 

pointed to; the rest looks at the departments and the way they are 

doing their day-to-day business. The President has made it a part 

of the responsibility of every Cabinet Secretary and Department 

head and people working for them to leave the everyday operations 

in better shape than we found them. This is often an afterthought 

or no thought at all for busy people who are eager to work on new 

policies and so forth. We have made quite a to-do of it, and I do 

believe a sense of real accountability and team spirit has set in 

around it. 

Last, let me say that it is refreshing to get a question about productivity because it is too rarely asked, and in American business, 

business generally, productivity is an expectation. I think we all 

know one great thing happening in the economy is productivity 

continuing to run up above 5 percent. 

Senator SESSIONS. Right now, even——

Mr. DANIELS. Right now. That means that a business becoming 

more productive at a 5-percent rate can deliver the same amount 

of work next year with 5 percent fewer dollars. What would it be 

like if the Federal Government was improving its productivity even 

by a percent or two? 

Almost no department seems to think that way. There are some 

that are really working on that. I will cite them: the Veterans Administration, Social Security Administration, who are actively looking at places in their activities where they ought to be able to do 

more per person or per dollar invested and thereby give the taxpayer better service at fewer dollars. 

Senator SESSIONS. Thank you. 

Senator SESSIONS. Thank you, Senator Sessions. 

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Senator Stabenow. 

Senator STABENOW. Thank you, Mr. Chairman, and, Mr. Daniels, 

thank you for coming. We all want to focus on increased productivity and efficiency for the precious dollars that are available. 

I would focus on two things. First, in terms of economic models, 

I continue to feel the need to say to colleagues over and over again 

that we don’t have to debate economic models. We have experience 

in our lifetime of models that have worked and not worked. We 

have the 1980’s and we have the 1990’s. 

In the 1980’s, there were supply side economic tax cuts that were 

put forward, very much like this administration, and with the hope 

that it would trickle down, with a massive buildup in spending, 

most of which was defense spending at that time. I lived through 

the 1980’s as a State legislator in Michigan and lived through the 

highest unemployment, at least in my lifetime, and explosion in interest rates as a result of a massive buildup in debt. That is one 

model. 

We come to the 1990’s, and I had the opportunity in the mid1990’s, 1997, in fact, to be in the Congress in the House when, for 

the first time in 30 years, we balanced the budget. We had a different approach. We had a focus on fiscal responsibility, paying 

down the debt, and more focus on demand-side tax cuts for the 

middle class, an actual slowing in spending, contrary to what is 

often said, a slowing in spending. I was there for the voting on cuts 

in spending at that particular time. 

There was a focus on education innovation, increases in dollars 

there, that helped to increase that productivity that you, in fact, 

are talking about, that we have seen in the private sector because 

of the increase in education focus and innovation. 

So now we come back to 2001, 2002, 2003, and we see again, like 

the 1980’s, a focus on supply side economics, trickle-down economics, a great increase in defense spending, and I have voted for that 

given the current situation, and all of us have great concern about 

safety and security for our citizens. What have we seen as a result 

of this? We are seeing a great increase in defense spending, and 

what do we have now? Over 2 million private sector jobs lost in the 

last 2 years. We have to go back to the Eisenhower administration 

to find that kind of a number, and a dramatic increase in the national debt. 

So I would just say to my colleagues, we don’t have to debate economic theory. We have real-life experiences that we have all lived 

through. For many of us, we are scratching our heads as to why 

we would choose a 1980’s economic model versus a 1990’s economic 

model that worked. 

Before asking you to respond, I would just say to look at where 

the economic uncertainties come from, and the CBO comments a 

week ago we were told that there is excess capacity from overinvestment during the bubble years of the late 1990’s, inhibiting investment, and that the growth of consumer spending is uncertain 

in the near term because demand is weak in many sectors of the 

economy, and that, again, strength of demand is the concern that 

was raised. 

Now, that says to me that we need tax cuts like we have suggest 

that put dollars directly into the pockets immediately of middle-inVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00385 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
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come consumers, small businesses, those that will move the economy in the short run. I continue to scratch my head, Mr. Daniels, 

as to why we are not using the approach that is even backed up 

by experience in the 1990’s of fiscal responsibility and keeping an 

eye on the debt, paying down the debt, balancing the budget, and 

focusing on tax cuts that go directly to the middle class. 

Mr. DANIELS. Well, thank you, Senator. I see things in part the 

same and in part differently. I take a slightly different lesson from 

the history. Both the 1980’s and the 1990’s were periods of extraordinary economic growth in this country. It is astonishing to me 

that people have a memory blank like some do, but I think an honest reading is both were very strong decades. We just had a 20-year 

run from 1982—well, 19 years—to 2001 with only one small, very 

short interruption until the recession which started in 2001. The 

lesson I would take is that there is no one model that is perfect 

in all circumstances at all times. 

We had good results. One thing we ought to be careful about is 

assuming that it is what Washington does that dictates the outcome because there are always many more factors involved. In 

terms of those things that Government can do to create the right 

climate for growth, it may not be the same answer all the time. 

I would certainly argue from the results that the tax cuts, which 

began to take effect at the depth of the recession in 1982, led to 

or had something to do with the gigantic increase in economic 

growth, 20 million new jobs and, some forget, a lot of new revenue 

to the Government. You quite correctly pointed out that there were 

other things going on. We were facing the Soviet Union. There was 

a lot of spending on defense and also on non-defense programs that 

came along at the same time and which consumed all the new revenue and more. Some people think too much more, but in terms of 

economic outcome, it was spectacular by any measure. The 1990’s 

were spectacular in their own way. Certainly in the situation like 

that, we were able to spend the peace dividend. Most of the cuts, 

as you know, most of the spending moderation was achieved because of changes in the defense budget. Certainly at a time like 

that, it was good policy to get to surplus. People in both parties, 

people in this room had a lot to do with it. Get the surplus, pay 

down some debt, exactly the right thing. 

Now the question in a very different sort of environment is what 

is right now, and what you have got here—we talked about this. 

What is the right balance of our priorities? Where do you put a balanced budget versus the war on terror, homeland defense, economic 

growth and so forth? Honest people can certainly differ about how 

high on that list it ought to be, but that is how I think I would 

frame it. 

Last, I agree with you that if we are going to have a growth 

package, as the President and others believe, certainly at least a 

substantial piece of it ought to involve the near term, ought to involve consumers, and there are elements of his package that we believe do that. 

Senator STABENOW. I appreciate your comments. My concern is 

that two-thirds, really, of what you propose has nothing to do with 

the short run and is estimated to continue to increase the national 

debt. Many of us, both sides of the aisle, the business community 

381

that I talk to in Michigan are extremely concerned about where we 

are going, back into deficit spending. 

Let me shift, though, to one other item, and that is the question 

of health care, to follow-up on Senator Wyden’s comments and others’—again, talking about to the business community. The largest 

cost, the explosion in costs that they are most concerned about relates to health care costs, not just seniors but the business community, workers. It is certainly the biggest drain right now and the 

most sense of being uncontrolled in terms of the explosion on prices 

and so on. 

When we talk about Medicare, there are really two pieces on the 

health care front. One is updating Medicare in some fashion. I 

would argue that, in fact, anyone who has paid the payroll tax all 

their life in order to have health care available at the time they 

retired, called Medicare, who then turns around and pays the bulk 

of their health care and prescription drugs, which isn’t covered, is 

being double taxed. I would argue that is much bigger double taxation than anything that the dividend tax would provide for most 

seniors. That is a real issue, out-of-pocket costs and double taxation. 

On the business front, we have been working to create more competition as it relates to brand-name prescription drugs to lower 

prices. Strong evidence, major coalitions, we have all kinds of business organizations and employer groups and Blue Cross/Blue 

Shield-Michigan is playing a major role, and others, to create more 

competition to lower prices. 

Last summer, we passed on a very strong bipartisan vote, 78 

members voted for a bill that would tighten the generic laws, open 

the border to Canada to change the market pressures to be able to 

lower prices, and create more flexibility for States in negotiating 

lower prices for the uninsured in their States. This passed with a 

very strong bipartisan vote, and I would like to know if the Administration, as we introduce it again this year, will support that effort 

to lower prices, which are the largest driving factor in the explosion 

of health care costs. 

Mr. DANIELS. Well, the President will, I am sure, take a look at 

anything that might help Americans with the cost of health care. 

You mentioned prescription drugs, which, though it is something 

like a dime on the dollar, is growing faster than other areas, and 

that is an area of concern. The President acted, as I think you 

noted, late last year to make sure that there wasn’t abuse of the 

patent extension process, something that had been, I think, misused on several occasions. He tried to move repeatedly to make discounts available to especially lower-income senior citizens until we 

can get to comprehensive Medicare reform that includes prescription drugs. Secretary Thompson has gone a long way working with 

individual States along the lines you talked about to give them 

some flexibility to wrestle with this cost problem. 

So any reasonable proposal in this area I am sure he will look 

at. 

Chairman NICKLES. We need to move on, if you don’t mind. 

Senator STABENOW. Yes, absolutely. We look forward to working 

with you. There is certainly much to be done in this area. 

Chairman NICKLES. Senator Stabenow, thank you very much. 

382

Senator Nelson? 

Senator NELSON. Mr. Director, I am going to ask you some specific questions. Having just returned from the memorial service in 

Houston yesterday where the President spoke quite eloquently and 

spoke not only to a grieving Nation but a grieving NASA family as 

well. 

I have been quite critical in the 2 years that I have been Senator 

not only of your administration but of the previous administration 

in trying to starve NASA of funds when so much is demanded of 

it. Indeed, the funding today for NASA in real dollars is the same 

as it was 12 years ago. So it actually spans three administrations, 

but primarily it spans two administrations. 

Now, I notice that you are coming up with beginning to give 

some relief in your proposed budget to the tune of close to about 

$470 million, but most of that is in space science. In fact, in the 

Space Shuttle program in your budget, you are actually—overall 

the space flight part of the budget is actually reducing. Where I 

have been so sharply critical of this administration and the previous one is that there are a number of safety upgrades that ought 

to be done, but yet have been delayed for funding reasons. We have 

been saying this for some period of time. It is ultimately going to 

cause a catastrophe. 

Now, fortunately, in a very unfortunate world, I don’t think the 

delay of those safety upgrades is what caused this catastrophe. It 

looks like this is a failure of the thermal protection system perhaps 

caused as a result of something like that debris falling off the external tank. The fact is that space flight is risky business, and 

there is no excuse for us not proceeding with the safety upgrades 

if we are going to keep flying the Space Shuttle, and that is our 

only access for humans to space. With a huge investment up 

there—which I have complimented Mr. O’Keefe, publicly and privately, that he is getting his arms around the cost overruns on the 

Space Station. I think he is to be commended for that. 

Now, he knows what I have said. I would love to hear what you 

say. 

Mr. DANIELS. Well, thank you, Senator, for your leadership in 

this area. I would start by pointing out—and these facts are well 

known to you—that were it not for the last 3 years, which were 

catch-up years, you would be below the level of 12 years ago, measured as you did it. In other words, it may have been inadequate—

I know from your viewpoint it probably was, but the funding of 

NASA, I should say, in the first three budgets, including the one 

just delivered for this President marked the sharpest increases in 

that whole time period. That is true, and I would be glad to go 

through the piece parts with you, but as we see it, that is true of 

NASA, it is true of the shuttle budget, and it is also true of the 

shuttle maintenance and life extension budget within that. It well 

may be that more should have been done and that more will be 

necessary, but at least it has been moving in the right direction. 

I would say—and, again, no news to you—that there have been, as 

I read the record, anyway, and have seen it for 2 years, your views 

are not universally held, and there are a lot of your colleagues who 

have been skeptical and who have preferred to grow other proVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00388 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
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grams of Government more than NASA. So they may be rethinking 

that in light of what has occurred. 

Last, I do appreciate your advocacy and your pointing out this 

morning the importance of some improvements in some fundamental problems that NASA has had, and I think the Space Station is probably the single biggest example. If the Space Station 

had not been overrunning at the rate it was, more resources might 

well have been available for other things in a more balanced program. I think you are right that the new leadership has begun to 

really get a handle on that. The better job that is done there, I 

think the more consensus and support there will be to strengthen 

other programs, perhaps starting with the shuttle. 

Senator NELSON. Well, in light of this tragedy this weekend, let 

me suggest something that you can do. There is the political will 

here on Capitol Hill, including Senator Stevens, in this 2003 appropriations omnibus bill in conference to put in some additional 

money to get some of these safety upgrades started. So what I 

would suggest that you could do is don’t oppose that and it will 

happen, because the political will is here, particularly in light of 

what has just happened. 

Mr. DANIELS. All right, sir. 

Senator NELSON. Let me ask you, we have got a problem over at 

the Department of Housing and Urban Development. There is 

about a $250 million shortfall for the public housing operation 

fund, and, of course, I am hearing this from housing authorities 

back home that, as a result of this shortfall, they have been asked 

to reduce their operating budgets. This budget you have submitted 

doesn’t make up for this shortfall. In fact, it even cuts it more by 

$40 million. 

So can you tell me—give me some level of comfort. Tell me why 

the shortfall, and how about these authorities that are now being 

told because of this shortfall that they have got to cut back on their 

operational expenses. 

Mr. DANIELS. Well, I would like to reserve the right to write you 

or visit you with a full report, but I will give you a quick answer 

now. There have been some really very serious administrative 

problems in many of the public housing authorities. Many are well 

run, many are not well run at all. The Secretary, in fact, has been 

compelled to take over at least two that I can think of where there 

is not just failure to keep track of money but misuse of funds and 

things like that have been going on for a long time. This is a partial source, I believe, of some of the shortfall that some have experienced. Some are simply spending money faster than they were 

supposed to be spending it. I would be more than happy to try to 

give you a fuller report. 

Senator NELSON. I think that is increasingly going to be a problem, and I would appreciate very much your response. 

Mr. DANIELS. Sure. 

Chairman NICKLES. Senator Nelson, thank you very much. 

I have to leave, and I am going to ask Senator Allard if he would 

chair the balance of the hearing because I understand Senator 

Conrad and Senator Hollings both have additional questions. 

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Director Daniels, a couple of quick ones from me. A little confusion may come out on on-budget/off-budget. The unified deficit that 

you are projecting is $304 billion or $307 billion for 2003 and 2004? 

Mr. DANIELS. Presuming the President’s entire program including his growth package became law. 

Chairman NICKLES. OK. The baseline you are projecting, if noth- ing changed, would be $264 billion or something for 2003; is that 

correct? 

Mr. DANIELS. For 2003, dropping to, I think it is $158 billion in 

2004. 

Chairman NICKLES. That is the cash-flow. I think a lot of people, 

members included, really get kind of confused on-budget/off-budget, 

Social Security surpluses and so on. 

A couple of other comments. Just maybe—and I am going to 

present this to our colleagues a little more in-depth, but the total 

tax, the payroll tax, the 15.3 percent Social Security and HI tax is 

on wages up to $87,000 this year. Anyway, back in last year, the 

last year just complete, if my calculations are correct, the total 

amount of money going in, received in payroll taxes and the Part 

B premiums I believe equaled $691 billion and the expenditures, 

Social Security and Medicare, were $706 billion. I believe your proposal or estimates are $711 billion in receipts and $743 billion in 

outlays, the point being if you add the two programs together—and 

people talk about raiding or stealing Social Security funds and so 

on. There is a lot of confusion. If you put the two together, we are 

actually spending more on the programs than we are taking in, so 

I don’t quite concur with this claim about raiding of the funds because we should include this or not add that to the calculation. 

I make those comments, and I will work with my colleagues so 

we can all have maybe a better understanding. It gets kind of confusing because you have the Social Security funds and the HI 

funds, and then you have general revenues, subsidies into Part B 

and so on, so it is kind of confusing. The total amount of money, 

payroll going in and outlays coming out for basically seniors under 

the two programs, there is a little more going out than going in, 

so there is not—if you combine the two there is not really a current 

surplus. Is that correct? 

Mr. DANIELS. It is correct, and you point to the reason: because 

Medicare viewed in its entirety runs a deficit. That is to say, it has 

to be subsidized heavily by the general fund and the taxpayers who 

pay into that. 

Chairman NICKLES. The same beneficiaries on Medicare are the 

ones that are also receiving Social Security. 

Mr. DANIELS. More or less. 

Chairman NICKLES. OK. Senator Conrad, I will call upon you, 

and then, Senator Allard, if you would be kind enough to conclude 

the hearing. 

For the information of our colleagues and press, we expect our 

next hearing to be on Tuesday with Secretary of State Colin Powell, and that will be at 10 o’clock. So, again, I thank my colleagues 

for their indulgence, and thank you, Director Daniels. I apologize. 

I need to run for another meeting. Thank you. 

Senator Conrad, I was going to call on you, then him, then Fritz. 

Senator CONRAD. It seems to me it is unfair not to——

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Senator ALLARD. I have already asked my questions. 

Senator CONRAD. Oh, you did. OK. 

Chairman NICKLES. You didn’t hear what he said? [Laughter.] 

Senator CONRAD. I was obviously not paying very close attention. 

I apologize. 

Director Daniels, again, first of all, I want to say I appreciate 

your public service, and I think you are a straight shooter. I have 

a profound disagreement with you on what is the wisest course for 

the Nation, but that is what democracy is all about. I want to make 

clear, because we have strong differences it doesn’t mean I have a 

lack of respect for you. I have respect for you. I think you know 

that. 

Mr. DANIELS. You know it is mutual, Senator. 

Senator CONRAD. I even enjoy your company from time to time. 

I do have a profound difference. 

Let me first try to correct the record. We have had a number of 

colleagues on the other side say that we voted on a package of $540 

billion of amendments on the last appropriations bill. We did not. 

We voted on these amendments, and they totaled $37 billion, not 

$540 billion. These were 1-year appropriations amendments. What 

were they? Improve homeland security, $5 billion; improve education, $6 billion. 

Now, in addition, these amendments were not voted on as a 

package. They were voted on individually. So the first amendment 

failed, $5 billion to improve, strengthen homeland security. It 

failed. So that money was not used. 

So then there was a vote to improve education using that $5 billion plus another $1 billion. That failed. 

So then there was an amendment to deal with Amtrak because 

Amtrak was going to shut down without it. That was adopted. 

Then there was an amendment on strengthening law enforcement. That was for $500 million. That failed. 

So totaling these amendments even for the year is not correct. That isn’t how we voted. We didn’t vote on a package of $580 billion or $540 billion or whatever number keeps being thrown 

around. It is just not accurate. 

Let me go to the longer term. Senator Cornyn made a point 

about outlays and receipts, and this is looking at the long term. 

This is from 1980 and going ahead with the President’s policies to 

2008. We can see outlays as a percentage of GDP have come down. 

We have got a reversal last year because of the need for additional 

spending on defense and homeland security. That is where the increases have come from. 

On the other hand, the revenue line has dropped precipitously, 

partly as a result of the economic downturn, partly as a result of 

the stock market drop, dramatic drop. You are absolutely correct 

that that is a factor. Also partly because of tax reductions, tax cuts. 

We can see where we are headed if we continue on the President’s 

plan, which will add, according to the President’s own analysis, 

some $1.8 trillion to deficits and debt. The size of tax cuts, including the associated interest costs, and that is on top of the $1.3 trillion passed in 2001. 

So that leaves us with this gap, and the thing that I think—let’s 

go to the next chart. The thing that most concerns me is what SenVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00391 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
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ator Hollings has been trying to alert us to is hard reality. When 

we talk about these deficits, we talk about the gap, as you indicated, and Senator Nickles did, cash-flow differences. That is the 

deficit. What that doesn’t own up to is the money we owe the trust 

funds because indeed there are separate trust fund. I know Senator 

Nickles wants to combine them, but that is not the way they are 

set up. They are separate trust funds. Both the Medicare and Social Security Trust Funds are running surpluses. Part B of Medicare is funded in part by general fund money. That was an agreement made here long ago as a way of funding Medicare Part B. 

Social Security Trust Funds, Medicare Trust Funds are currently 

running substantial surpluses. Instead of using that money to pay 

down debt or prepay liability, that money is being used to pay for 

other things. Here is what we see. According to the Administration’s own document, we have just got red ink to look forward to 

in the future. 

Let me just put up an ad that ran, the Concord Coalition, a bipartisan group. This is an ad signed by Warren Rudman, former 

prominent Republican United States Senator, signed by Peter Peterson, prominent Republican, former Secretary of Commerce, 

signed by Robert Rubin, former Secretary of the Treasury, signed 

by Senator Nunn, prominent Democrats, a former Democratic Senator. What they are saying is: Are we really cutting taxes or are 

we just raising them for our kids? 

The point they make in this—I just want to read from this and 

ask the Director. What they say here is: ‘‘Guns and butter and tax 

cuts, can we have it all? To enact permanent new tax cuts in the 

face of large new spending pressures such as the prospect of war 

in Iraq, the inevitable post-war costs, massive but indispensable 

homeland security needs, and a major prescription drug add-on for 

Medicare is to proclaim that America can painlessly have it all. 

Unfortunately, we can’t. Sooner or later, someone has to pay the 

bills for guns and butter and tax cuts. Many worry about class warfare. Almost no one seems concerned about another kind of warfare, generational warfare. Yet that is what we risk if we continue 

to live beyond our means and pass the IOUs to our children and 

grandchildren.’’

Their conclusion is that we have got these unfunded obligations 

out here, Social Security, Medicare, civil service and military retirement, $25 billion. 

What part of their statement do you disagree with? 

Mr. DANIELS. There are many parts of their statement I agree 

very strongly with, and let me start with that, and then I will answer your question. I think both your chart and their advocacy, the 

coalition’s advocacy over time, and Senator Hollings, all point us to 

the real, the largest problem, not to dismiss any of the problems 

we are wrestling with this year or next year, but the largest problem is the unfunded entitlement. That is the big swing in your 

chart, about 2013. It is really not the product of the deficits, although we would all like to make them smaller and we hope we 

can. It is all overwhelmed by the effect of the mismatch between 

the promises we have made and the revenues coming into those 

programs the way we have them set up now. 

387

I think the Concord Coalition would agree, although they may 

have a disagreement in this year about the growth package. I believe I am right in saying that they would agree with me that we 

cannot tax our way out of that problem. We are going to have to 

have fundamental reform of those programs if we are really going 

to avoid that, that ski slope that you saw there. So on all those 

things I would agree with them, and perhaps we here all agree. I 

think the question immediately before us is twofold. 

One is: should we aggravate the deficits that circumstances have 

brought us? Should we undertake some new borrowing in order to 

have a growth package? Some say yes, and I think there are some 

who say no. Then second, if so, what kind of package? There are 

a lot of ideas. The President’s put his forward, and Senator 

Stabenow and others have suggested some alternatives to that. 

Those are important debates to have, and we can have a very different deficit outcome this year and next, depending how we answer them, but you do have to weigh that against the perhaps lost 

opportunity of putting more people back to work. 

Senator CONRAD. Let me just conclude by saying this to you. I 

personally support tax cuts this year to give lift to the economy. In 

fact I would support a bigger package than what the President has 

proposed. What I find dangerous and I believe is radical and reckless is the President’s plan for additional tax cuts in future years 

that explode the deficits, explode the debt. Making the tax cuts permanent, which is proposed, costs 600 billion this decade—I think 

600 billion is the estimate—costs 4 trillion the second decade, right 

at the time the baby-boomers retire. So you are making the circumstance that we face with Medicare and Social Security where 

we would agree we face massive long-term imbalances. You are 

making our ability to deal with that far more difficult, and presenting the country with what I think in the future will be truly 

draconian choices. 

Further, I believe that adding to deficit and debt when we are 

already in deep deficit and debt will not enhance economic growth 

but inhibit it. Because of the dead weight of that deficit and debt, 

will reduce the pool of societal savings, will reduce investment, will 

reduce economic growth, not improve it. That is where this debate 

lies. It is an honest difference. 

I am alarmed. I do not want to hide it. I think this is a profound 

mistake for our Nation, not shortcuts in the short term to lift the 

economy, but these deep permanent cuts when we already face demands we cannot finance. 

With that, I again want to say to you, I respect your public service. It is not easy to be in your position. It is certainly not easy at 

a time like this. Let me thank you for your appearance. 

Mr. DANIELS. Appreciate it. 

Senator ALLARD. Thank the Senator from North Dakota, and I 

would just say that I am pleased to see that you would support 

some tax cuts, and I think there is room perhaps for some compromise. As one member of this committee, and I think the Chairman will agree with me, that that is certainly a step in trying to 

get some kind of bipartisan proposal out of this committee, and so 

I want to compliment you for that outreach I think to the other 

side. 

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I would just want to put in my two bits as far as permanent 

versus temporary tax policy. I think that temporary tax policy, although it has a positive impact on the economy, that a permanent 

tax policy has more of an impact as far as long-term economic 

growth is concerned, because I can recall my experience as a businessman. Your decisions are going to be—your long-term decisions 

will not occur, unless there can be some assurance that that longterm tax policy is going to be in place. When we have temporary 

short-term tax policy I think that there is—you are not going to 

make those long-term decisions, and so you do not have as great 

an impact to the economy. 

I am wondering if you have taken, Mr. Daniels, an opportunity 

to kind of look at the difference in long-term economic growth—and 

you are going to have to use an economic model which we do not 

use around here—but you ar going to have to use—if you have 

looked using a dynamic approach, what might be the difference in 

economic growth between say a package of cut packages that only 

go out for 5 years, as opposed to 10, as opposed to permanent? 

Mr. DANIELS. Senator, I do not know. I think the President 

would share your common sense view that predictability is worth 

something. That is to say at the margin more businesses and individuals will make those decisions you talked about, hire that next 

employee, risk that next dollar when they think they know what 

return they can expect over time. 

I guess my reflection on this whole business of permanence—and 

therefore, the course the President supports making the cuts permanent. My reflection on this is there is not anything permanent 

about taxation the way we do it. We jerk this system around every 

so often, and I think it would probably be a very good thing to 

make the tax cuts permanent and just step back and leave it alone 

for the next 8 or 9 years, but odds are that will not happen. Circumstances change, the composition of Congress changes, and I am 

a little bemused by the debate that sort of suggests that it is all 

or one. You know, the cuts that are in place I think may well be 

challenged before they ever take effect, before they ever show up 

on Senator Conrad’s charts. As we pointed out earlier, very little 

of that 1901 Act has taken effect so far. If Congress changes its 

mind, it could take that effect away tomorrow or next year or the 

next year, all kinds of multiple shots at it. So I am just thinking 

out loud here a little bit, but to me, as good a principle as permanence versus temporary is, let us be realistic. I mean this is a debate and a conversation that is going to keep on going every year. 

Senator ALLARD. Thank you for your response. I want to bring 

up another subject on the total debt. I think of it in terms of the 

total obligation on the General Fund, and I am looking at some figures here where over time, where we have the total Federal debt 

as a percentage of gross domestic product, there are some pretty 

substantial figures there, and that includes not only what you pay 

out what we would call the public debt is—that is interest and everything that you are paying out to the public—but it also includes 

future obligations to the General Fund as far as Social Security 

and the other trust funds, where those moneys get automatically 

transferred into the General Fund. 

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When I look at that as a percentage of gross domestic product, 

has there been any discussion as to where that percentage could 

begin to have a real dramatic effect on economic growth, or do you 

just totally disregard it all together? I look at it as a public policy 

here. I am thinking, well, Social Security, both sides I think generally agree it is around 2017 Social Security is going to be spending more money than what it brings in in revenues. Then that is 

either going to mean a tax cut or it is going to result in a cut in 

benefits, or it is going to result in having to pay that money out 

of the General Fund, repaying what has been borrowed over these 

years. I think that is going to create a real challenge as we get closer. 

I am wondering if you looked at that sort of—there is a whole 

bunch of complex issues there. I wonder if you would make some 

comment on those for us, please? 

Mr. DANIELS. I do think the total level of debt is something to 

be concerned about, something to watch, something we ought to try 

to make sure is controlled and reduced. That is true whether you 

measure it in gross debt or the debt actually outstanding in public 

hands. Clearly there are many nations of the world with a much 

bigger debt burden than we have. They tend to be the nations that 

already are facing an entitlement crunch that they constructed for 

themselves, and are getting there a little sooner than we are. I do 

not know where the red line is. A look at the history says we are 

not there now. We have been at much higher levels at different 

times in the past, but it is certainly something that the President 

and this administration keep a weather eye on and want to see 

brought down. 

The best way to do it, of course, is to have an economy that 

grows fast and outruns any borrowing that might be going on. That 

is how we brought it down most effectively in the past. 

Senator ALLARD. The Senator from South Carolina. 

Senator HOLLINGS. Thank you, Mr. Chairman. 

Director Daniels, you just heard the Concord Coalition, and Senator Conrad observed that you cannot take it all, and you cannot 

have it all, and the way you said you cannot go in two different 

directions at the same time. I am back now to the observation that 

our distinguished astronaut, Senator Nelson, he was going right on 

down the list of how he was worried and how we had cut the budget and everything else like that, but then did not find us by any 

manner or means at fault. That worries me. 

I speak advisedly. I remember when we used to have just a singular Space Committee with the Senator from Utah, Ted Moss, 

heading it up. Otherwise, I have been intermittently either the 

Chairman of the overall or ranking member of the overall Commerce, Space, Science Transportation. I could see about 15 years 

ago in the mid 1980’s with that space station, that we could not 

afford both the space station and the shuttle. I admonished our 

friend, Sean O’Keefe when he came over—he used to be your Deputy Director—and Senator Nelson. I have got the highest regard for 

Sean O’Keefe. He was not sent over to NASA. You see he worked 

with us on the Appropriations Committee. He worked the Secretary 

of the Navy, then as your Deputy Director, now the Administrator 

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of the National Aeronautic and Space Administration. He was not 

sent over to increase the budget. 

I said, ‘‘I know you are over here trying to get on top of those 

overruns,’’ because that is the reason we could not afford both. An 

$8 billion space station was all of a sudden $100 billion space station. Right to the point, Senator Nelson, these little upgrade you 

talk about, not going to do it. I do not think the team down there 

at Canaveral was shortchanging upgrades. I think they tried, and 

will find that they did everything possible on upgrades. They might 

could have had—and the astronaut can tell us about a procedure. 

I was wondering why they were not drilled and given the equipment to dock up with the space station and come back, if they observed critical damage had occurred when the insulation came off 

and knocked that wing. Then why cannot we go to the space station and then another shuttle come up uninjured or undamaged 

and save us? 

We have found out and we know that the particular vehicle, the 

shuttle itself, was of a 10-year duration. That is what they said 

they would last. Now we have had the Columbia 22 or 21 years, 

and you cannot upgrade those tiles. I remember the first one that 

went up, the tiles flew off, and they have been flying off now for 

20 years. What really needed to be done and needs, present tense, 

to be done is get us a new vehicle, not just upgrades. We could not 

get into the research and back the shuttle program. 

I told Sean when he came over. I said, Now, I am for the shuttle. 

You got a tremendous national value and investment here in these 

astronauts, takes then a long time, the best of the best Americans, 

and they are coming into this program and everything else like 

that, but we are not giving them—I do not know what that space 

station’s going to do. I never have been, frankly, I have to plead 

guilty, I have never been enthused about it, because the shuttle 

can go up—this one went 16 days or whatever it was—and the experiments can be had. 

So give us the figures, Director Daniels, of what was requested 

by NASA for the space shuttle and what was approved by the Director of Office and Management and Budget. Not just your 2 

years. Go back under Dan Goldin. Go back further than him. You 

will prove the point that Senator Nelson has made. They have been 

stultified. They have been starved. Coming up here and playing 

this sordid game of, yes, we all want defense, we all want homeland security, we all want health care, we all want space, we all 

want, we all want. That is the needs of the country. Then the 

needs of the campaign says, I am for tax cuts, I am for tax cuts. 

It is a total fraud to talk about stimulating it with 133 or 143. Senator Daschle is 143. President Bush is 133. At 12 billion more a 

month, you are putting in, as I said, $554 billion, Senator Domenici, this year is the estimate of the deficit, and 569 billion next 

year. That is a trillion stimulus there. So 12 billion a month more 

is not going to do it. I am for paying the bill. 

Now you say—and the intimation was with all of those senators 

present, they thought, well, old big mouth Hollings, he is talking 

one way and going in another direction. No. I believe in that freeze. 

In fact I was Chairman of State, Justice, Commerce Appropriations, and with Senator Judd Gregg, we froze that appropriation. 

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We made an exception for the Securities and Exchange Commission, but we froze it. We have been operating at a frozen continuing 

resolution. I put in a value-added tax to pay for the war. You see, 

I do not want to just freeze spending. I want to freeze revenues, 

freeze taxes. We cannot afford to cut revenues, because we are just 

passing it off, as the Concord Coalition says, to the next generation. 

That is all it is. 

Please, there is that chart there. As far as paying for the war, 

I cannot stand to send those fellows into Afghanistan and Iraq and 

say, by the way, I got to go to Disney World. I cannot afford to pay 

for it. Do not give me the economics argument about stimulating. 

That is no stimulus at all, neither one of them are. 

Secretary O’NEILL was right. He said it is not stimulus. We have 

got plenty of stimulus in there. We have got to start doing what 

we did in 1993. We had—you say history. I remember the history. 

We had high unemployment in 1992, 1993. We had low consumer 

confidence. We had a $400 billion deficit in 1992. So we had a lot 

of similarities. We went with Alan Greenspan, who says you are 

not only going to have to cut spending, you are going to have to 

increase taxes. Our problem is they invited Charles Schwab and he 

says cut the taxes on dividends. Come on. 

So here is what we have done. All of America has already paid 

for the war. In the Civil War they raised income tax and tax on 

dividends. Down here now we put a tax cut. World War I the rate 

went up to 77 percent; World War II, 94; Korea, 91; 77 percent in 

Vietnam; and a 52 percent for corporations, and we paid for it. We 

believe in at least not just committing them to battles, but do not 

ask them to come home and get the bill. Come on. 

So that is our problem right there now. I know you believe in 

taxes. I see Senator Domenici is here. In trying to be fiscally responsible I authored the Seaport Security Bill last year, and from 

May until November I argued about paying with a use tax. We had 

a little use tax on on a container of around $17 for 40,000 pound 

of textiles or pharmaceuticals or whatever. It was just a little 17 

bucks use tax. You folks at the Administration call it a tax, that 

would be increasing taxes. The House members said, we cannot 

vote to increase taxes. I see by the morning paper you are increasing taxes on meat producers. You are increasing taxes on Medicare 

claims. You are increasing taxes on veterans. All of those are use 

fees. But last year when I was trying to pay the bill and be fiscally 

responsible and not go in two different directions, they were increasing taxes. Now you call them user fees. 

Cannot we go along, just a VAT, because it will take a year for 

the IRS to pay for the war? Do you not believe in paying for this 

war? Do not worry about deficits right now. Let’s get the country 

serious. They are ready for a sacrifice, and I am convinced you are 

agreeing with me, but you are constricted by the White House, are 

you? 

Senator ALLARD. Mr. Daniels, I would ask that you make your 

comments short so that we can get to Senator Domenici. 

Mr. DANIELS. Well, I will just thank the Senator for his comments. It is a legitimate point of view. I think each of those wars 

was paid for by a mix of taxation and borrowing. We had borrowing 

in some of those wars far more than we are looking at now, and 

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the question is, what is the right balance, what is the right balance 

in view of everything, the conflict, the state of the economy and so 

forth? But yours is an honest and legitimate viewpoint and deserves to be heard. 

Senator ALLARD. Senator Domenici. 

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

First of all, to all the staff and you, I apologize for being so late 

and continuing this hearing, but frankly, I was cheating and 

watching Secretary Powell, to be honest with you. I guess I am 

very pleased to say that it was a great, great presentation. But I 

think with reference to some of the points about spending money, 

we frequently wonder, some of us around here, what is in the CIA’s 

budget, because an awful lot of it we do not approve in open, but, 

boy, that was just an hour and 20-minute discussion just loaded 

with disclosing what we do by way of surveillance which was rather incredible. I would think the skeptics will not think as much 

about it as I do, but I believe it is about as conclusive as you are 

going to get. 

Let me ask just about 10 questions. One, what would you say is 

the percentage debt, not deficit, but debt to GDP, where a country 

of our type gets, where it gets powerless? I am not speaking now 

of—I am speaking of the conventional debt to the public, not inside 

debt. 

Mr. DANIELS. Senator Allard and I talked a little about it, and 

I do not know exactly the number. I would say that this nation has 

been successful and prosperous in the past with levels higher than 

we have today, so I do not believe we are at that level today. I do 

believe there is a level beyond which you would not go or should 

not go. I do not know precisely where it is, but I think it is north 

of where we are. 

Senator DOMENICI. Do you have the capacity to go beyond the 5 

or 10 years and see what it would be in 15, 20 or 30 years in terms 

of this debt versus GDP, or is that beyond your capacity? 

Mr. DANIELS. It is beyond our capacity, and I——

Senator DOMENICI. I think the Congressional Budget Office is 

doing it and I think Alan Greenspan is doing it, because it is pretty 

obvious that is the time it will get dangerous in terms of debt. 

Mr. DANIELS. We can give you a number. It is just that I have—

I just think we have to be mindful how far off it might be. 

Senator DOMENICI. Right. Second, I note that we are bragging 

now about the amount of interest we are paying, and that is good, 

but it is principally because the percentage that we pay, the cost 

of debt is dramatically reduced. I recall when it started coming 

down, we were busy trying—excuse me. When it was high we were 

busy making it short term, hoping it would come down. Have we 

made the transition toward more of the debt being long-term debt 

now that it is down in the 3-1/2 or 4 percent, or is it still short 

term? 

Mr. DANIELS. That is a question for Peter Fisher and Secretary 

Snow. I do happen to know that we, like a lot of Americans, refinanced the mortgage pretty successfully, and my recollection from 

talking to Mr. Fisher is that something on the order of 40 percent 

of the debt did turn over in each of the last 2 years, so that you 

are exactly right that despite the fact that we have slipped into 

393

deficit, our borrowing costs have actually gone down, and they are 

as low as they have been in 20 odd years. 

Senator DOMENICI. See, if somebody were to ask me about a 

home mortgage, and they said, I am going to get 5.8 percent, and 

my next question would be the terms. Is that 1 year or 5 years? 

I would suggest they get 15 or 20 years at that rate. I think, unless 

there is something different about the Government, when rates are 

at 3.4 you ought to get as much of the debt out there as you can, 

not as little. Could you just look in the record and tell us for the 

record where we have been and where we are going? 

Mr. DANIELS. I do not know what the average maturity has been, 

but we will get you that answer. 

Senator DOMENICI. Thank you. I noticed in the staff preparation, 

which I found to be very good and I compliment you on it, there 

is a series of observations regarding PAYGO, and there is something that I do not quite understand. It says that the President’s 

budget proposes a number of cap adjustments, one of which is entirely new, the one with respect to building of nuclear waste repository at Yucca Mountain. Is that the one that is entirely new? 

Mr. DANIELS. I suppose. If there is only one that is new, that is 

it. 

Senator DOMENICI. What is it? What do you do with Yucca Mountain that is different that we call it a cap? 

Mr. DANIELS. I would like to write you a letter about that if I 

may, Senator. It is a complicated subject, but the idea is, I believe, 

that we may have large and lumpy costs associated with that facility, and we would like to treat them separate from a predictable 

cap. 

Senator DOMENICI. Well, we have got the expert there sitting behind you. I know that. He used to work for me. He knows more 

than anybody else. But as long as you are not attempting to abolish 

the trust fund. The way we have treated trust funds, I will support. 

If you are going to take that in an isolated manner and say it is 

no longer to be treated as general revenue, we have got a lot of others who want to joint that parade, so it is not that; is that correct? 

Just a yes or no on that. It is not that? 

Mr. DANIELS. I think that is correct, but let me——

Senator DOMENICI. He is saying I am correct, so we can say it. 

Mr. DANIELS. I never pay attention to them. [Laughter.] 

Senator DOMENICI. I would like to know what it is. It has been 

up and down, not only because of costs, but we have been very reluctant appropriators, as you know, because of personalities and 

other things. 

Mr. DANIELS. Yes. 

Senator DOMENICI. The President’s budget proposes that we extend the use of, quote, ‘‘emergency designation.’’ That has always 

been a disputable item with respect to both discretionary caps and 

PAYGO. Please explain to me what are we doing different? It says 

that we are going to change the process. The President’s budget 

proposes that we extend the use of emergency designation. 

Mr. DANIELS. Well, let me say this about the whole idea of caps. 

We think this is—we would like to indicate the President’s support 

for renewal of a Budget Enforcement Act, including those two features. We know it is this committee’s and this Congress’s prerogaVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00399 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
394

tive to take the lead here in exactly how that ought to be designed. 

So we did not presume to go further than laying out a few principles as to emergencies. We would like to make sure it is written 

in a way that minimizes misuse of this. Ultimately the President 

can try to enforce that, but it was used occasionally in the past to 

get around the caps, and we do not want that again. 

Senator DOMENICI. Could you explain that to us also? I would 

think this is extending the way we have heretofore treated emergency designation vis-a-vis emergency spending, but I am not quite 

sure from the summary that that is the case. 

Mr. DANIELS. That is what we intended, but we will follow-up. 

Senator DOMENICI. Could you, if you do not have it at your fingertips, state it for the record—and you might have been asked 

this—the exact amount of the growth in domestic spending year 

over year, as best you can do it, excluding defense, obviously, and 

excluding homeland defense, even though some of homeland defense has heretofore been in discretionary. It might be a little bit 

difficult, but what do you assume the growth in domestic, as I have 

defined it, is? 

Mr. DANIELS. If I heard you right, Senator, domestic discretionary spending, so exclusive of defense and what we call homeland security. 

Senator DOMENICI. Go ahead. 

Mr. DANIELS. 3.8 percent, and so this would be 11, $12 billion, 

something like that. 

Senator DOMENICI. With reference to that category, could you tell 

us for the record what programs you have suggested for elimination if any, and what programs you have suggested should be reduced by more than 5 percent? 

Mr. DANIELS. Well, not all of them from memory, but I will——

Senator DOMENICI. No, you do not have to, just state them for 

the record. 

Mr. DANIELS. We absolutely will. Let me just cite, for example, 

there are 45 programs, most of them small and of recent vintage 

at the Department of Education that we proposed for elimination, 

those funds to be redirected and more to other programs, but those 

are some good examples. There are some programs that were set 

to expire that we propose to let expire. 

Senator DOMENICI. Might you have one of your analysts tell us 

comparably, how many programs have we eliminated over the past 

5 years that you all know as budgeteers? 

Mr. DANIELS. Sure. 

Senator DOMENICI. Put that in the record so we will have it when 

we begin debating this. 

Homeland Security, well, we do not have anything to compare it 

with in the past. I assume you are doing your best to compare it 

with the 1903 appropriation for Homeland Security. How much 

does Homeland Security go up under however you figure it? 

Mr. DANIELS. As a category it goes up 7.6 percent. Now this does 

not count that part of it that is at the Department of Defense. That 

is another 6 to $7 billion. But most people, when they ask us this, 

they are thinking about the activities of guarding our ports and our 

airports and better intelligence and all, infrastructure protection 

395

and all of that. So the answer to that is 7.6 percent, more or less 

from 32 billion to 35 billion. 

Senator DOMENICI. In reference to the increases in defense, how 

much do you have as your estimate of growth in the defense spending? You have already told us that. 

Mr. DANIELS. It is 4.2 percent, and that comes to—it is calculated 

at $10 million plus inflation. That is the steady track that the 

President and Secretary Rumsfeld and I have settled on and put 

into both the baseline of the budget, both into our forward policy 

I should say, and into the—it is matched exactly in the Future 

Years Defense Program. This may be—as far as I know this is the 

first time you have actually had inconsistency there. In other 

words, there have been a lot of times in the past there was a socalled FYDE (fid-up), that had all kinds of ideas in it that were not 

reflected in anybody’s planning or the eventual budget. We are trying to make this thing much more business like and predictable. 

Senator DOMENICI. Just an observation. Seeing the staff behind 

you there and some of their valiant efforts with reference to what 

the U.S. Government could count on with reference to the selling 

of—what do we call it when we sell to the telecommunication companies? 

Mr. DANIELS. Auctions and spectrum auctions? 

Senator DOMENICI. Spectrum auction. I note that after all these 

years and all the people in Government telling us we would win 

that case, we lost it in the Supreme Court, right? We lost all that 

money we thought we were going to get. I would have bet money 

the other way as a lawyer, but they have made some pretty good 

history about what a bankruptcy does to a Federal license. It does 

not matter how much you owe the Government, it is just like any 

other asset. 

Mr. DANIELS. We should have settled that case. 

Senator DOMENICI. Should have, you are right. We had a pretty 

good offer is my recollection. After all the work the staff did, we 

had a good offer. 

One last question with reference to the stimulus. Why is the 

stimulus in the first year so small? 

Mr. DANIELS. We’ve got it down at $40 billion. You are right, it 

is relatively small. It is our best estimate. It matters a lot what the 

timing of passage would be, and even if Congress moves quickly, 

we would not see it passing with too many months left in the fiscal 

year. So it is worth noting that if the President’s package passed 

intact, it would have much more effect, 113 billion in the next fiscal 

year, as we count it anyway today, than about 39 to 40 in this 

year. 

Senator DOMENICI. While we all would like tax cuts and tax reform, it would seem to me that more is needed in the first year 

rather than the second year if you are looking at stimulus. If we 

are looking at we would just like to cut taxes, it might seem we 

cut them any year and that would be good. But there was no way 

to come in with more in the first year that made sense; is that it? 

Mr. DANIELS. Well, that was just our best faith estimate, but I 

think the President would agree with you. If the Congress did decide to move quickly, he would be happy about that, and of course, 

396

some of the provisions are retroactive to the 1st of January, so he 

clearly agrees that we ought to move now. 

Senator DOMENICI. Yes, a lot of them are. 

Mr. DANIELS. As fast as we can. 

Senator DOMENICI. A lot of them are retroactive and thus count 

in the early years, but some are adding them as if they continue 

to count again, as they put the two packages together. 

Mr. DANIELS. That is right. 

Senator DOMENICI. Some are pulled back and thus should not be 

counted twice. Can you do that for us on a separate account? Can 

you tell us how much of the taxes are moved forward that were already in place and would have come into effect in the out years? 

Mr. DANIELS. Oh, yes, absolutely. 

Senator DOMENICI. Just tell us what that is. My guess is it is a 

pretty good chunk. 

Mr. DANIELS. Yes, it is. 

Senator DOMENICI. I have no other questions. I thank you for the 

good work, and I hope all the staff are doing well over there. I 

never see Capretta over here. I guess there are no issues with reference to Medicare or Social Security. 

Mr. DANIELS. We have him working too hard, Senator. 

Senator DOMENICI. You hired him out? 

Mr. DANIELS. We’ve got him busy. He is working on Medicare. 

Senator DOMENICI. Thank you. 

Senator ALLARD. Thank you, Senator Domenici. You always 

bring a very interesting perspective to our discussion. 

Mr. Daniels, thank you for showing before this committee. 

Mr. DANIELS. Yes, sir. 

Senator ALLARD. Appreciate your time and effort. 

Mr. DANIELS. Thank you. 

Senator ALLARD. The committee is adjourned. 

[Whereupon, at 12:42 p.m., the committee was adjourned.]

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(435)

THE PRESIDENT’S INTERNATIONAL AFFAIRS 

BUDGET 

TUESDAY, FEBRUARY 11, 2003

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

The committee met, pursuant to notice, at 10:04 a.m., in room 

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

Present: Senators Nickles, Gregg, Allard, Enzi, Sessions, 

Bunning, Crapo, Ensign, Cornyn, Conrad, Hollings, Murray, and 

Stabenow. 

Staff present: Hazen Marshall, staff director; and Roy Phillips, 

senior policy analyst. 

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

Rudisell, analyst. 

OPENING STATEMENT OF CHAIRMAN DON NICKLES 

Chairman NICKLES. The Budget Committee will come to order. 

Today we will hear testimony from Colin Powell, Secretary of 

State. I think everyone is well aware that the Secretary is one of 

the most distinguished and accomplished individuals in the country, as a professional soldier, as Chairman of the Joint Chiefs of 

Staff, and presently as Secretary of State. 

Mr. Secretary, we welcome you to this Committee, compliment 

you for your leadership. I complimented you in private for your 

presentation before the United Nations last week. That was a superb presentation; well documented, well presented, forceful case, 

so I compliment you for that. Today we look forward to hearing 

from you on a variety of issues, budget and other issues confronting 

and challenging our country today. 

First I will call upon my colleague, Senator Conrad, if he has any 

opening comments before I proceed. 

OPENING STATEMENT SENATOR CONRAD 

Senator CONRAD. Thank you, Mr. Chairman, and special thanks 

to you for holding this hearing. Special thanks to you, Mr. Secretary, for being here. As an American I would just like to say how 

proud I was of the presentation that you made and the way you 

conducted yourself. I think it makes us all proud. 

I think no one should doubt that the Congress of the United 

States will provide the resources necessary to defend this Nation 

and protect American interests. There should be no doubt about 

that in anyone’s mind. That if war comes, America will stand as 

436

one. With that said, I have just returned from my home State and 

I thought I would share with you, Mr. Secretary, the questions that 

I am receiving. As I spent time in North Dakota, people came to 

me and asked me questions, asked me why we are not doing certain things, why we are doing others. Let me just give you a sampling of what I heard, and perhaps you could address it as you 

move through your remarks. 

One question I receive frequently, perhaps more frequently than 

I have any others, is: Why doesn’t containment work with respect 

to Iraq? I know the President has said that he believes containment is no longer viable after the attack of September 11th. People 

have asked me—they can see why it wouldn’t work with a terrorist 

organization because there is no country to retaliate against. But 

in the case of a nation state, why doesn’t containment work as it 

did against the Soviet Union? 

To extend this, Morton Halperin has a piece in this morning’s 

Washington Post arguing that containment has worked with respect to Saddam Hussein, that he has not attacked anybody since 

1991, and raises the question why it can’t continue. That is a question I have received frequently. 

Second, and, again, a frequent question is: Why the difference in 

policy toward North Korea and Iraq? The question that has been 

put to me is that Korea is developing nuclear weapons, perhaps already has some, has kicked out the inspectors and warned that 

they may launch a pre-emptive attack against us. But we say there 

is no crisis with respect to Korea, that it can be solved diplomatically. But in the case of Iraq, where they have inspectors and they 

have not yet discovered evidence of a nuclear capability, we are 

prepared to launch a war against them. 

A third frequently asked question is the terrorist threat against 

the United States. In my meetings at home this last weekend, I 

was asked: Senator, isn’t our top priority still Osama bin Laden 

and Al-Qaeda? Aren’t they posed to attack us again? Aren’t we diverting our attention by focusing on Iraq first? 

A final question I would put to you that has been raised to me, 

most recently yesterday morning in a meeting with a businessman 

that does substantial business overseas, and with other businessmen who have been in my office in the last 10 days, saying that 

they are facing an increasing tide of anti-American sentiment. 

That, too, was talked about in this morning’s paper in an article 

headlined, ‘‘Sneers From Across the Atlantic: Anti-Americanism 

Moves to West Europe’s Political Mainstream,’’ and a second story 

on the front page, ‘‘U.S.-Europe Rifts Widen Over Iraq.’’

I found a really rising tide of concern back home about this question. One man that I had breakfast with yesterday was saying that 

he is increasingly concerned about the anti-American sentiment he 

is finding in business dealings overseas. 

Those are kind of a grouping of questions that I am receiving 

most frequently, and I would be very interested in your take on all 

of that. 

Chairman NICKLES. Mr. Secretary, unless other colleagues have 

remarks, welcome to the Committee. Thank you. 

437

STATEMENT OF HON. COLIN L. POWELL, SECRETARY, UNITED 

STATES DEPARTMENT OF STATE 

Secretary POWELL. Thank you very much, Mr. Chairman, and I 

thank you also, Senator Conrad, for your opening remarks, and I 

will get to all of those questions in the course of my opening remarks. 

Mr. Chairman, I do have a statement for the record and would 

like to submit it at this time and then go to a shortened presentation. At the end of this shortened presentation, I will talk to the 

questions raised by Senator Conrad. 

Mr. Chairman, members of the Committee, I am pleased to appear before you to testify in support of the President’s international 

affairs budget for fiscal year 2004. Funding requested for fiscal 

year 2004 for the Department of State, USAID, and other foreign 

affairs agencies is $28.5 billion. 

Let me say at this point, Mr. Chairman and members of the 

Committee, how deeply appreciative I and all of my colleagues in 

the Department of State and USAID are for the support that this 

committee has provided to us during the last 2 years, the first 2 

years of the Bush administration; and it has been a source of real 

encouragement to the people of the Department to know that we 

are making the case to the Congress that we need this kind of support, we are deserving of this kind of support, but, more importantly, we are receiving the support we need to take the case of the 

American people out to the world and to support our diplomats who 

are on the front line of offense with respect to our foreign policy 

and to taking the American case to the people of the world. In light 

of what Senator Conrad said, never has it been more important for 

us to be giving that kind of support to our diplomatic efforts across 

the world. 

Mr. Chairman, the President’s budget of $28.5 billion will allow 

the United States to: First, target security and economic assistance 

to sustain key countries supporting us in the war on terrorism and 

helping us to stem the proliferation of weapons of mass destruction; 

Launch the Millennium Challenge Account—a new partnership 

generating support to countries that rule justly, invest in their people, and encourage economic freedom; 

Strengthen the U.S. and global commitment to fighting HIV/

AIDS and alleviating humanitarian hardships; 

Next, combat illegal drugs in the Andean Region of South America, as well as bolster democracy in one of that region’s most important countries, Colombia; and 

Finally, reinforce America’s world-class diplomatic force, focusing 

on the people, places, and tools needed to promote our foreign policies around the world. 

I am particularly proud of that last goal, Mr. Chairman, because 

for the past 2 years I have concentrated on each of my jobs—first, 

as primary foreign policy adviser to the President, but also as chief 

executive officer of the Department. Under my CEO hat, we are 

asking for about $8.5 billion within that $28.5 billion for the running of the Department. 

Let me give you some highlights of what these funds are for. 

First, we have been reinforcing our diplomatic force for 2 years and 

will continue in fiscal year 2004. We will hire 399 more profesVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00443 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
438

sionals to help the President carry out the Nation’s foreign policy. 

This hiring will bring us to the 1,100-plus new foreign and civil 

service officers we set out to hire over the first 3 years of the Bush 

administration to bring the Department’s personnel back in line 

with its diplomatic workload. 

For a period during the 1990’s, we were not hiring anyone, foreign service or civil service. We were not administering the foreign 

service exam. It was a very unfortunate period for the Department. 

New blood wasn’t being brought into the Department. If you want 

to have a career Ambassador 15 years from now, you have got to 

hire one today. If you want to have the right kinds of people in 

your embassies years from now, you have got to hire them today. 

It is the same concept that I followed when I was Chairman of the 

Joint Chiefs of Staff. If you want a great battalion commander 15 

years from now, you have got to bring in a second lieutenant now. 

If you want squad leaders to lead young Americans in battle 6 or 

7 years from now, you have got to bring in a private now. 

We shortchanged the Department, and it has been my No. 1 priority to fix that problem by bringing in wonderful young people 

who want to serve their Nation as diplomats or as civil servants 

within the Department of State. I am proud of what we have been 

able to do. Over the last 2 years, we have administered the foreign 

service written exam to some 80,000 Americans who stepped forward and said, ‘‘I want to be part of this operation.’’ This is multiples of what we have been able to do in past recent years before 

this administration came in. On the last Foreign Service written 

exam that was administered some 38 percent of the people who 

passed the exam were minorities. So we are diversifying our work 

force. We are making the Foreign Service increasingly look like 

America, and, frankly, look like the rest of the world. That sends 

a powerful signal to the rest of the world, because there is no point 

in my giving these exams and encouraging people and reaching out 

to the minority community to come and apply if I can’t hire them 

at the end of the day. So I thank the Congress and especially the 

members of this Committee for the support you have provided to 

that Diplomatic Readiness Initiative. 

Second, I promised the employees of the Department that we 

would bring state-of-the-art communications, information, and 

technology capabilities to the Department, because people who 

can’t communicate rapidly and effectively in today’s globalizing 

world can’t carry out our foreign policy. We are approaching our 

goal in that regard as well. 

For example, when I spoke at the U.N. last week, within minutes 

after my speech was finished we were transmitting it in all sorts 

of different languages to every point on the face of the earth. All 

of our embassies were getting in real time information on the 

speech, the visuals and backup materials that I used, so that our 

Ambassadors could immediately go out and explain our position 

around the world. 

As I have discussed with my staff the morning after my speech, 

one of the most impressive things about the speech was the audience and the size of the audience listening to it, all in real time. 

There was one picture in one of the newspapers—I forget whether 

it was the New York Times or the Washington Post—of a group of 

439

Marine aviators sitting on an aircraft carrier in their ready seats, 

looking at the screen, and there I was on the screen. It kind of 

snapped me back. 

The point is they are not waiting for somebody to write the story. 

They are not waiting for one of the learned talking heads to tell 

them what they should have heard or seen or analyzed. They were 

watching me in real time, instantaneously. So, increasingly, knowledge and information is being communicated directly to consumers 

instantaneously. We all know this phenomenon. Call it what you 

will: 24/7, CNN, Fox, MSNBC, you name it, radio, instant wire 

service information. But that is the way we communicate to the 

world right now, instantaneously, directly to the consumer. We 

have to make sure that that information technology is also available to all of our diplomats, all of our embassies, every action officer, every desk officer everywhere in the Department of State. So 

I will not be satisfied until every employee of the Department of 

State at every one of our 260 installations around the world have 

instantaneous access to the Internet and to the world of modern 

communications. With your support, we are going to make that 

happen. 

It goes to one of the points that Senator Conrad made earlier: 

getting the message out and dealing with anti-Americanism when 

we find it by getting out our product and our message as fast as 

possible. The daily message line that is coming out of our new strategic communications operation run from the White House, that 

daily message sheet I am now having distributed to every single 

embassy, every single facility around the world as soon as we get 

it from the White House and add our own product to it. We are not 

sitting around punching up cables on telefax machines anymore. 

Scan it and send it, and let’s get going, let’s get it out there, and 

let’s expect our people to know what we know here in Washington 

as fast as we know it. As I say to all of my Ambassadors, I want 

you to use it coming back the same way. You are my experts; you 

are my battalion commanders. Tell me what is going on out in 

those countries. I am counting on you, not just the expert within 

the Department on C Street. This information technology knits us 

all together. We have a first-class, world-class website now that 

gets more and more hits every single day. We are trying to make 

it more lively, more interesting to people. 

Ambassador Boucher, my Spokesman, is here. He is the face of 

the Department of State as you see him brief every day. But I told 

him I am tired of seeing his face on the website. It is either my 

face or his face on the website. Usually it is his face more than my 

face, which is also disturbing. [Laughter.] 

Secretary POWELL. I told him I didn’t want to see either one of 

our faces on the website. I want to see our diplomats. I want to see 

the people who work for us. I want to see exciting, different things 

that are happening around the world. I want people to go to that 

website and see the central font of knowledge about what is going 

on in the world, presented to you by your Department of State. So 

let’s put the kids that we bring in to mentor on the website. Let’s 

put what one of our Ambassadors is doing to help people in need 

in a particular country. But let’s mix it up. Let’s make it lively. 

Let’s use information technology to take America’s story to the 

440

world, not as a lecturing way of taking our story to the world but 

just showing who we are, what we stand for, how we care about 

the world, talking about HIV/AIDS, talking about poverty, talking 

about the need to feed people throughout the world these days, and 

taking that value system through the power of information technology. But I need the money to do it, and I thank this Committee 

and I thank the Congress for supporting me in that effort. 

Finally, with respect to my CEO role, I wanted to sweep the slate 

clean and completely revamp the way we construct our embassies 

and other overseas buildings, as well as improve the way we secure 

those buildings. In turn, this will secure the men and women who 

occupy them and take care of their family members in our embassies around the world. It is dangerous business out there. I lost 

three members of our State Department family last year. We put 

them in danger, and we have an obligation to protect them to the 

best of our ability. 

I think when I first took over as Secretary of State, and during 

some of my transition discussions with members of this Committee, 

we had extensive discussions about how to build embassies, how to 

build them cheaper, how to build them better, how to make sure 

the system was efficient. We want to make sure we are not wasting 

the taxpayers’ dollars, but make sure we are doing it right. 

I am very pleased at what we have been able to accomplish over 

the last 2 years. General Chuck Williams, whom you have heard 

me brag about before this Committee, is in charge of our overseas 

building program. He and his team are doing a great job in getting 

the costs down and rationalizing our entire management structure 

for overseas building facilities. I think we have a good record to 

present to the Committee, and I know the Committee has followed 

this very, very closely as well. I am pleased that we have gotten 

on top of that situation. 

Mr. Chairman, as principal foreign policy adviser, my other hat 

for the President, and principal hat, I have budget priorities in that 

portfolio as well. Let me highlight our key foreign policy priorities 

before I stop and take your questions. While I am talking about foreign policy, I want to ask the members of this committee for their 

strong support, and I hope you will all find your way clear to vote 

for the Moscow Treaty that is now out of committee and will be on 

the floor in the very near future. I would sure like to see a 100-

0 vote for that treaty. It is a good treaty. It serves the interests 

of the American people as well as the people of the Russian Federation and, I believe, the world. 

Mr. Chairman, the 2004 budget proposes several initiatives to 

advance U.S. national security interests and preserve American 

leadership. The 2004 Foreign Operations budget that funds programs for the Department of State, USAID, and other Foreign Affairs agencies is $18.8 billion of the $28.5 billion total. Today, our 

No. 1 priority is to fight and win the global war on terrorism. The 

budget furthers this goal by providing economic, military, and democracy assistance to key foreign partners and allies, including 

$4.7 billion to countries that have joined us in the war on terrorism. Of this amount, the President’s budget provides $657 million for Afghanistan, $460 million for Jordan, $395 million for PakiVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00446 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
441

stan, $255 million for Turkey, $136 million for Indonesia, and $87 

million for the Philippines. 

In Afghanistan, the funding will be used to fulfill our commitment to rebuild Afghanistan’s road network. In addition, it will establish security through a national military and national police 

force, establish broad-based and accountable governance through 

democratic institutions and an active civil society, ensure a peace 

dividend for the Afghan people through economic reconstruction, 

and provide humanitarian assistance to sustain returning refugees 

and displaced persons. United States assistance will continue to be 

coordinated with the Afghan Government, the United Nations, and 

other international donors. 

Now, that is bureaucratic language. The reality is we have done 

one heck of a job in Afghanistan. But the problems are not all behind us, and it is still a fragile situation. But we can be very proud 

of the fact that over the last 16 or 18 months we have now seen 

the government take over, getting ready for the election next year. 

We have seen a National Army start to form, and this morning I 

was reading through my briefing materials how these battalions 

that were trained are now starting to go to other parts of the country outside of Kabul and starting to make their presence known, 

starting to put the imprint of the central government on the rest 

of Afghanistan. A National Police force is being brought up. A judicial system is slowly being created. Institutions are being formed. 

The road is under construction. It is not just a road, it is more than 

a road. It is a line of communication that allows the exertion of 

central control over other parts of the country. Because there is a 

road, commerce will flow and people will be able to get around. Displaced people, refugees coming back into the country can now 

move. So, all sorts of good things will happen with this road. 

However, there are still dangers in Afghanistan. Operation Enduring Freedom will continue to go after Al-Qaeda and Taliban 

remnants. But, we have accomplished a great deal, and we should 

be proud of the work that we have done working alongside coalition 

members, working alongside ISAF, and working alongside United 

Nations organizations. A great deal has been accomplished. You 

can see it in the eyes of the children who are now being educated, 

and you can see it in the eyes of women, who are now playing a 

role in the life and in the future of Afghanistan. 

Mr. Chairman, I also want to emphasize our efforts to decrease 

the threats posed by terrorist groups, rogue States, and other nonstate actors with regard to weapons of mass destruction and related technology. To achieve this goal, we must strengthen partnerships with countries that share our views in dealing with the 

threat of terrorism and resolving regional conflicts. The 2004 budget requests $35 million for the nonproliferation and disarmament 

fund, more than double the 2003 request. It increases funding for 

overseas export controls and border security to $40 million and 

supports additional funding for science centers and bio-chem redirection programs. 

Funding increases requested for these programs will help us prevent weapons of mass destruction from falling into the hands of 

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ons or source material, especially in the Russian Federation, 

former Soviet Union. 

The science centers and bio-chem redirection programs support 

the same goals by engaging former Soviet weapons scientists and 

engineers in peaceful scientific activities, providing them an alternative to marketing their skills to States or groups of concern, give 

them a healthy, positive alternative and keep them from thinking 

in any way about going to those States or those non-state actors 

who might be working on weapons of mass destruction. 

The budget also promotes international peace and prosperity by 

launching the most innovative approach to U.S. foreign assistance 

in more than 40 years. The new Millennium Challenge Account, an 

independent government corporation funded at $1.3 billion, will redefine what development aid is all about. As President Bush recently told African leaders meeting in Mauritius, this aid will go 

to nations that encourage economic freedom, that root out corruption, and that respect the rights of their people. Moreover, this 

budget offers hope and a helping hand to countries facing health 

catastrophes, poverty, and despair, those countries who are suffering from the effects of humanitarian disasters. 

The budget includes, in addition to the other things I have talked about, more than $1 billion to meet the needs of refugees and internally displaced persons. The budget also provides more than $1.3 

billion to combat the global HIV/AIDS epidemic. The President’s 

total budget for HIV/AIDS is $2 billion, which includes the first 

year’s funding for the new emergency plan for HIV/AIDS relief announced by the President in his State of the Union Address. These 

funds will target 14 of the hardest-hit countries in Africa and the 

Caribbean. 

This budget also includes almost half a billion dollars for Colombia. This funding will support Colombian President Uribe’s unified 

campaign against terrorists and the drug trade that fuels terrorist 

activity. The aim is to secure democracy, extend security, and restore economic prosperity to Colombia and prevent the 

narcoterrorists from spreading instability to the broader Andean 

Region. 

To accomplish this goal requires more than simply funding for 

Colombia. Therefore, our total Andean Counterdrug Initiative is 

$731 million. Critical components of this effort include resumption 

of the Airbridge Denial program to stop internal and cross-border 

aerial trafficking in illicit drugs, stepped-up eradication and alternative development program efforts, and technical assistance to 

strengthen Colombia’s police and judicial institutions. 

Mr. Chairman, members of the Committee, to advance America’s 

interest around the world, we need the dollars in the President’s 

budget for fiscal year 2004. We need the dollars under both of my 

hats, CEO and principal foreign policy adviser. The times we live 

in are troubled, to be sure, as was noted earlier. I believe there is 

every bit as much opportunity as there is danger in the days 

ahead. American leadership is essential with both the danger and 

the opportunity. 

With regard to the Department of State, the President’s fiscal 

year 2004 budget is crucial in order for us to exercise the leadership that will deal with the dangers and the opportunities. 

443

Before closing, Mr. Chairman, I would like to pause and comment to some extent on the issues raised by Senator Conrad. 

First, with respect to Iraq, why doesn’t containment work? Containment is a strategy that we have followed for many, many years. 

I have been an advocate of containment. I worked very hard in the 

first year and a half of this administration to put in place smart 

sanctions, another form of containment. Yet we found that even 

with all of these containment efforts of the past 12 years, they have 

not served to stop Saddam Hussein in his pursuit of weapons of 

mass destruction or to encourage him to get rid of the weapons of 

mass destruction that we know he has. Notwithstanding all our efforts at containment, we see evidence that he continues to try to 

break out of the box. Containment was able to control some of the 

money that is going to the regime through the Oil for Food Program, but he is still able to get additional money through smuggling and illicit activities activities across the borders of neighboring States. What really brought this all home to roost, that we 

couldn’t just rely on containment, was after 9/11 we see these nonstate actors, terrorist organizations, Al-Qaeda, bin Laden, others, 

terrorists that are trying to develop weapons of mass destruction, 

seek weapons of mass destruction. 

This morning it was brought home to me once again when I read 

the transcript of what bin Laden, or who we believe to be bin 

Laden, will be saying on Al-Jazeera during the course of the day. 

You will be seeing this as the day unfolds, where once again he 

speaks to the people of Iraq and talks about their struggle and how 

he is in partnership with Iraq. This nexus between terrorists and 

States that are developing weapons of mass destruction can no 

longer be diregarded and ignored. 

As the President has said, 9/11 changed things, and so we have 

a regime led by Saddam Hussein who has not accounted for all the 

weapons of mass destruction they have had in the past, and who 

continues to pursue them. We have non-state terrorist actors such 

as Al-Qaeda, led by Osama bin Laden, that would do anything to 

get their hands on this kind of material. As I tried to demonstrate 

before the United Nations last week, there are linkages. They are 

not as firm as some would like to see in order to conclude that it 

is actually happening. However, they are firm enough to give us 

every indication and sufficient evidence that if allowed to continue, 

if this regime was allowed to continue to develop weapons of mass 

destruction, it is just a matter of time before coincident interests 

between the Iraqi regime and organizations such as Al-Qaeda will 

raise the likelihood that these kinds of weapons could fall into their 

hands. It is that nexus, especially in the post-9/11 environment, 

that persuades us even more that this is the time to deal with this 

regime once and for all. 

This is not just the isolated view of the United States of America. 

We brought this case to the Security Council last September 12th 

when the President, in response to people all over the world saying 

if you have a case, bring it to the Security Council, bring it to the 

United Nations. The President did just that. He didn’t act unilaterally. He came to the Security Council and made the case that Saddam Hussein, notwithstanding containment, after 12 years was 

still in clear violation of his obligations. Then the President 

444

charged me to work with the Security Council to come up with a 

strong resolution that would be a different resolution, not like all 

of the previous 16, a resolution that had teeth. 

We worked for seven and a half weeks on that problem, and we 

came up with a resolution, 1441, that was unanimously agreed to 

by every member of the Security Council that was sitting there on 

the morning of the 8th of November. That resolution clearly says: 

first, Iraq is guilty, you have been doing this, you are in material 

breach. All of us agreed on that morning that Iraq continued to be 

in material breach of its obligations, meaning it was guilty of having weapons of mass destruction, of not having accounted for the 

anthrax, for the botulinum toxin, for the missiles, for all the other 

programs, for the nuclear program, all the other things they have 

been doing. We all agreed. 

The second thing the resolution said was we are giving you one 

last chance—one last chance to come into compliance, one last 

chance. Not one of ten more chances. One last chance. Put forward 

a declaration in 30 days that tells us everything you have been 

doing. Make sure it is complete, full, and accurate. All 15 members 

voted for Iraq to put forward such a declaration. Then it said we 

are going to provide a rigid inspection regime, not to play detective 

running all over Iraq looking for these things, but to work with you 

in disarming. The obligation and the burden is on Iraq, not on the 

inspectors. Finally, we said if you fail to put forward a full, complete, and accurate declaration and if you do not cooperate with the 

inspectors in helping you to disarm, then this will constitute further evidence of your unwillingness to comply, your ignoring of the 

will of the international community. New material breaches to pile 

on top of old material breaches, and at that point, the Security 

Council has a responsibility to meet again to consider what serious 

consequences might be appropriate. 

We are reaching that moment. We are reaching the moment 

when the Security Council can no longer look away. The inspectors 

have reported to the Council on the 27th of January that Iraq was 

only providing passive cooperation. Dr. Blix said on the 27th of 

January that Iraq still does not yet understand as of that day that 

its obligation was to disarm. Dr. Blix and Dr. Elbaredi have now 

returned from Iraq on their weekend trip, and they will be reporting to the Council this Friday. We all anxiously await their report. 

There are some on the Security Council, there are some in the 

international community, who are saying, well, we just need more 

monitors. Dr. Blix dealt with that yesterday. When asked about it, 

Dr. Blix said—not Colin Powell, not President Bush—Dr. Blix said 

we don’t need more monitors and inspectors, we need Iraq compliance and cooperation. That is the issue, not more inspectors, not 

more technical means. All the technical means and all the inspectors in the world aren’t the answer. The answer is Iraqi compliance, Iraqi full, active, complete cooperation. If we had that, we 

could probably do with fewer inspectors because we would not be 

running around looking for needles in haystacks. The haystacks 

would be brought before the inspectors and peeled apart to show 

you where the needle is or where the needle was and what happened to the needle that used to be there. That is not what we are 

getting from Iraq. 

445

So while this debate continues—and it is a very vigorous debate, 

a debate with some of our best friends and allies—reasonable people can argue and debate over this issue. But it is clear that a moment of truth is coming with respect to Iraq and with respect to 

the Security Council as to whether it will meet its responsibilities. 

This is not just some academic exercise or the United States 

being in a fit of pique. We are talking about real weapons. We are 

talking about anthrax. We are talking about botulinum toxin. We 

are talking about nuclear weapons programs. We are talking about 

chemically-filled bombs that are missing, and that Iraq has not accounted for. 

We are talking about evidence that came from Iraq. They acknowledged and admitted under duress; after pressure was applied 

to them; after the truth was put in front of their face. They acknowledged that these systems existed. They have not accounted 

for them. 

The United States will not look away from this challenge. Guess 

what? Nor will many of our friends and allies who perhaps are not 

being heard quite as vigorously as other friends and allies. The 

Group of Eight European nations stepped forward not too long ago 

and expressed their support for President Bush’s approach. 

Last Wednesday, after I spoke before the United Nations, the 

Vilnius 10, some of the newer free nations in Europe that have a 

clear understanding of what the future holds and why these dangers have to be dealt with, also stepped forward and expressed 

their support. 

Much is being said this morning about disagreement in NATO as 

to whether or not our Turkish friends and our Turkish ally, our 

Turkish NATO colleague should be given support in this time of 

danger. Three of the European nations in NATO are saying, well, 

let’s not do it at this time. But 16 nations are saying we should 

do it at this time. 

So while we are hearing a lot about the three, let’s remember 16 

nations, including, of course, Turkey and the United States, that 

have stood up for Turkey. Turkey has now said under Article IV 

to the Alliance, we want to consult with the Alliance as to what 

our needs might be. I think this the is time for the Alliance to say 

to a fellow Alliance member we agree with you, and if you are concerned, we are concerned. That is what alliances are all about, and 

I hope NATO will be doing the right thing with respect to Turkey 

within the next 24 hours. 

With respect to North Korea, we are following this situation 

very, very closely. It is not in the second-tier position, but it is not 

a 12-year problem, as we had with Iraq, with Iraq invading its 

neighbors, with Iraq using chemicals against its own people and its 

neighbors. This is a problem that emerged in recent months. We 

have been working it for just about three months now. 

For a period of years, the international community had been led 

to believe that North Korea was acting in a way consistent with 

its obligations under a variety of agreements. A North-South agreement of the early 1990’s between North and South Korea, where 

both sides agreed in writing that they would not pursue nuclear 

weapons. But North Korea was pursuing them. Then the Agreed 

Framework of 1994 when North Korea agreed to cap its activities 

446

with respect to reprocessing material into usable plutonium for nuclear weapons at the site known as Yongbyon. That was an agreement. Then between 1994 through the fall of 2000, other statements and agreements were entered into between the United 

States and North Korea. In the fall of 2000, President Clinton 

issued a statement that essentially said that the United States had 

no, hostile intention toward North Korea and assumed North Korea 

was following its obligations with respect to nuclear weapons. 

The Nuclear Nonproliferation Treaty dealt with this. The IAEA 

was dealing with this. Then we came into office in early 2001. We 

took a long time to examine our policy with respect to North Korea 

because we were concerned about their proliferation activity. We 

were concerned about their sale of missile technology and what 

they were doing. Then after a long review, President Bush authorized me to begin engagement with North Korea. But it was about 

that same time that intelligence information became available to 

us. We could put it all together now and see that while everybody 

was looking at Yongbyon as having been sealed up, North Korea 

was pursuing nuclear weapons through another technology, enriched uranium. So everything they had been assuring us about 

turned out to be not good enough. They were working somewhere 

else. 

So we could have ignored it. We could have looked another way, 

say let’s not have a problem, let’s not have a crisis, let’s not call 

them on it. But we didn’t. I met with the North Korean Foreign 

Minister. This business about we won’t talk to them—I talked to 

him in Brunei at the end of July last year. I asked if he would like 

to have a cup of coffee. He agreed. We sat and we talked. I said, 

‘‘look, we want to do things for your country, your people are hurting. But we need to deal with some issues having to do with proliferation and nuclear weapons and the size of the army that you 

have hanging over the 38th parallel. These are issues we will bring 

to the table, and we want to have a bold approach as to how we 

might be able to help you.’’ He said, ‘‘fine, let’s talk.’’

We then sent Assistant Secretary Kelly to North Korea a few 

weeks later. It took a while because there was a small problem in 

the region and we had to let that calm down. Assistant Secretary 

Kelly went in, but he had to say to them right up front that we 

know about this enriched uranium facility and program that you 

have got going. They were stunned that we knew it and that we 

had faced them with it. They thought about it overnight and came 

back the next day and said,‘‘yes, we have it.’’ ‘‘ We do it, we are 

trying to develop the capability.’’ They acknowledged it. We had to 

take that into account. They essentially said, ‘‘what are you going 

to do about it’’? 

What we said is this is not acceptable. It puts the whole Agreed 

Framework and all of the other agreements that you entered into 

at risk. It is not going to get you anywhere. We will not be cowed 

into giving you a new document or a new statement simply because 

you have admitted this. So let’s find a way to discuss this, and let’s 

find a way to move forward. But you must be held to account for 

these actions. 

So over the last several months, we have been engaged with the 

international community. We have called upon the IAEA to meet 

447

its responsibilities, and they did. The Board of Governors called 

North Korea to account for its actions. North Korea responded by 

unsealing Yongbyon, and the Board of Governors of the IAEA will 

meet again in Vienna tomorrow to see what further action might 

be required. 

We have said to the North Koreans we have no intention of invading or attacking North Korea. We have no interest in that. But 

we will defend our interests, and we have all of our options available to us. The option we are pushing is a diplomatic one, and we 

want to do it within a multilateral framework. Why not a multilateral framework? We are forever being accused of being 

unilateralist, and now when I want to be multilateralist, people are 

saying, no, be unilateralist. But it is a regional problem that affects 

more than the United States. It affects China, it affects Russia, it 

affects Japan, it affects South Korea. It affects other nations in the 

region. We believe those nations should be part of this solution. 

We cannot, once again, have a solution that involves some direct 

engagement between the United States but does not include the 

rest of the region. The rest of the region can play a role in giving 

North Korea the kinds of security guarantees it is seeking, but at 

the same time making sure that this time we remove nuclear 

weapons as a threat in the Korean Peninsula and do everything we 

can to help the people of North Korea overcome the economic problems they have, the problems of starvation and deprivation that is 

affecting their people in such a negative way, and see if we can 

help them, help the society to deal with their problems and see if 

we can help them with the transformation that is going to be necessary for them to deal with their problems. 

There is a tide of anti-Americanism, and there still is a threat 

from Al-Qaeda and Osama bin Laden. But our attention has not 

been diverted. Every morning the President starts out thinking 

about and talking to his senior advisers about Al-Qaeda, what they 

are doing, and the threats that we are facing. We can handle more 

than one issue at a time, and I think we are doing it rather well. 

There is anti-Americanism out there. But there is also a 

groundswell of support for America. We are having difficulties right 

now with respect to some of our policies. There are concerns about 

our policies in the Middle East. The President intends to engage 

in the Middle East more aggressively than we have been able to 

in the past, now that the Israeli election is over and now that one 

way or the other we are going to deal with weapons of mass destruction with respect to Iraq. 

I think that the current problems we are having with respect to 

anti-Americanism can be dealt with and can be reversed and 

changed as we move through to the conclusion of this issue with 

Iraq and as we engage more fully on the Middle East peace process. So I think there is still that groundswell of support for America, even though we are running through some difficult times right 

now with respect to some of our policies. 

Mr. Chairman and members of the Committee, forgive me for 

taking so long with this opening statement, but Senator Conrad—

I won’t say asked for it but, invited it. [Laughter.] 

[The prepared statement of Colin Powell follows:]

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Chairman NICKLES. Mr. Secretary, thank you very much for your 

comments. We are delighted that you are here today. I think you 

have done a lot to dispel this anti-Americanism sentiment that 

seems to be somewhat more prevalent in Europe, and maybe it is 

exaggerated in some areas. 

I also want to compliment you and the Bush administration. You 

have inherited some big problems. You are Secretary of State, but 

in August 1998, two of our embassies were attacked and a couple 

of hundred people were killed, over a couple of hundred people 

were killed in Tanzania and Kenya. That was in August 1998. So 

it is part of your responsibility, part of our responsibility to make 

sure we protect those embassies. You have asked for a significant amount of funds, I believe $4.7 

billion, to combat terrorism, and I think included in that is also 

protection of our embassies and our American personnel. But you 

inherited that problem. Those embassies were attacked by AlQaeda. When you and the President mentioned that you are going 

into Afghanistan, many people predicted a quagmire. You have 

been very successful. I compliment you. I think very few people 

have looked back and maybe patted you enough on the back. The 

success that we had with the—I am going to say the minimal loss 

of life in Afghanistan is really historic. The liberation of Afghanistan, that is a monumental achievement. You are certainly to be 

complimented on it. You were breaking up Al-Qaeda. Now, maybe 

they have moved and they have hidden, and the hunt continues. 

But that is a problem that you inherited. Those embassies were attacked in 1998. The USS Cole was attacked in 2000. Not much was 

done or at least not much visible or aggressive enough, at least in 

this Senator’s opinion. Why didn’t we do more to get Al-Qaeda earlier? But you have gone after that problem. 

You inherited a problem in Iraq. With respect to the noncompliance, there was, I think, 16 U.N. resolutions. President Clinton 

spoke very forcefully in February 1998, when he said, talking about 

Saddam Hussein, that if Hussein fails to comply and we fail to act 

or we take some ambiguous third route, which it sounds like the 

French are pursuing now, this gives him yet more opportunities to 

develop this program of weapons of mass destruction. It allows him 

to continue to press for release of sanctions, continue to ignore the 

solemn commitments he has made, and he will conclude that the 

international community has lost its will. He will then conclude he 

can go right on and do more to rebuild an arsenal of devastating 

destruction and someday, some way, I guarantee you, he will use 

the arsenal. 

I think every one of you who has really worked on this for any 

length of time believes that is true. That was Bill Clinton in February 1998. But we didn’t do much. Certainly the collective community didn’t do much, and the arms control inspectors were kicked 

out in 1998, and Hussein continued to build his arsenal. 

So now this administration, and you particularly, has really led 

and said we need to enforce these resolutions, so that the United 

Nations will have some credibility. You were successful in passing—not easily, I might mention—the last U.N. resolution. Then 

you presented the case very forcefully, very clearly, and very diplomatically last week before the United Nations. 

463

So I just mention those events. You have inherited some big 

problems. You have gone after it and had exceptional success in Afghanistan. We still have work to do. Now you are going after, I believe, trying to clean up this problem, that Bill Clinton and others 

have identified, as really there, Iraq building weapons of mass destruction and which you put together so well in your speech last 

week. It is really not acceptable to think that Iraq can be building 

these tons of weapons such as anthrax and giving those or possibly 

distributing those to terrorists. 

There are some of reports suggesting the dissolution of NATO 

with three countries, particularly led by the French in undermining 

NATO. Correct me if I am wrong, but France is not a military partner in NATO. Is that correct? 

Secretary POWELL. It is part of the Alliance but not part of the 

military component of the Alliance, the integrated military component. 

Chairman NICKLES. I am amazed at their presumption that they 

are controlling the alliance, but they are not a part of the military 

alliance. I don’t believe NATO has bases in—or the U.S. doesn’t 

have them. Does NATO have bases in France? 

Secretary POWELL. As you recall, France evicted NATO headquarters back in 1966, or thereabouts. 

Chairman NICKLES. I was just pointing that out. I am kind of interested in that. Also, the alliance and NATO’s interests, the Persian Gulf War in 1991 was not a NATO operation. That was a coalition that you and President Bush and his team and Secretary 

Baker at the time put together. Is that correct? 

Secretary POWELL. Yes, sir. It was a Coalition of the Willing 

under a U.N. Security Council resolution. Many NATO nations 

joined us there, but it was not a NATO operation. 

Chairman NICKLES. Well, budget-wise, you mentioned $4.7 billion you have requested for the war on terrorism. Are you receiving 

the funds that you need? Many in Congress may say we want to 

give you more whether you want it or not. Are you getting adequate funds for rebuilding, sustaining our efforts in Afghanistan 

and Pakistan and other countries of concern and interest and cooperation in the war against terrorism? 

Secretary POWELL. Sir, we are getting good support, and I just 

might mention that the embassy construction account, is $1.5 billion on top of the $4.7 billion that you mentioned a moment ago. 

Obviously I cannot tell you that it is all the money I could use. 

But I think within the constraints that exist in the Federal budget, 

and after the President has examined all of his priorities, I think 

that the allocation that the State Department is getting in the 

overall Federal budget is adequate. And we are pleased that we 

have a real increase in our budget, including the Millennium Challenge Account, which showed a very significant increase, but even 

without the Millennium Challenge Account, we are getting an increase in our budget. We have fared well in the budget deliberations. 

Chairman NICKLES. Secretary Powell, thank you very much. 

One additional comment. You mentioned in North Korea that 

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riched uranium facility, can you tell us when we believe that work 

started? 

Secretary POWELL. I can’t be precise, but it started certainly by 

1998 or 1999. As we looked into it, when it became clear to us in 

2002, and we could start now to look backward in time to see what 

had been missed earlier. Clearly it was begun in 1998, 1999 at the 

latest. When political decisions were made at the start of it at that 

time, I haven’t been able to determine. But it was during the years 

of the previous administration. But they had no way of knowing it. 

President Clinton and Secretary Albright had no way of knowing 

that. Frankly, we didn’t know it for the first year-plus of our administration. 

So I am not being critical of the previous administration. They 

didn’t know it, nor did we until last summer when the pieces started to come together. The Intelligence Community made us aware 

of it over the summer. We kept pressing back saying you have got 

to make sure of this before we go anywhere with it and start telling 

our friends about it and face the North Koreans with it. We have 

got to make sure. The more we looked, the more they went back 

in time, the pieces started to come together. 

Chairman NICKLES. Well, correct me if I am wrong, but when 

they were building the plutonium plant—in Yongbyon? 

Secretary POWELL. Construction of the 5 mega watt reactor at 

Yongbyon, began in the early 1980’s and was completed in 1986. 

Chairman NICKLES. When they were building that, that was in 

violation of the Nuclear Nonproliferation Treaty, which they had 

previously signed. 

Secretary POWELL. Yes. 

Chairman NICKLES. Then they were paid in terms of oil and nuclear power plants not to produce at that plant, and they shut that 

plant down. Shortly after, then, they started a new plant which 

was in violation of their framework agreement. 

Secretary POWELL. Yes, sir. The Agreed Framework froze the activity at Yongbyon, shut down the 5-megawatt reactor, and the reprocessing facility. Unfortunately, it didn’t take it out. It didn’t remove it. The Agreement that was arrived at at that time was that 

work would stop, the reactor wouldn’t work, the reprocessing facility and another facility there would not be operated. Light water 

reactors would be provided to the North Koreans to satisfy their 

power needs, and until the light water reactors came on to assist 

them with their power needs, we would provide heavy fuel oil for 

their generating capacity. That was the Agreed Framework deal. 

It did serve the purpose for 8 years of not allowing plutonium to 

be developed at Yongbyon for the use of weapons, so that was good. 

But at the same time, somewhere in that period, early in that period, North Korea made a political decision that, fine, while everybody is looking at Yongbyon, let’s start using enriched uranium as 

another technique to develop a nuclear capability. 

Chairman NICKLES. Wasn’t that agreement to prevent types of 

technology or different nuclear facilities? 

Secretary POWELL. The Agreed Framework specifically dealt with 

Yongbyon, but it was in the spirit of no nuclear weapons development. There were other agreements: the Nonproliferation Treaty, 

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tween South Korea and North Korea. So there is no question that 

the entire international community as a result of the Agreed 

Framework, NPT, Safeguard Agreement, and the North-South 

Agreement all were going through the 1990’s with the clear understanding and expectation that North Korea had made a commitment through these agreements not to further develop a nuclear 

weapon. But they weren’t doing it. 

Chairman NICKLES. Thank you very much. 

Senator Conrad. 

Senator CONRAD. Thank you, Mr. Secretary, for your excellent 

presentation this morning. Two follow-up questions, if I could. 

First, with respect to containment, you indicate that containment 

is not a strategy that makes sense with respect to Iraq because it 

failed to disarm Saddam. My understanding of the strategy of containment was it was not a disarmament strategy. Certainly the Soviet Union had weapons of mass destruction in great number—

chemical, biological, nuclear. We never sought to use containment 

to get them to disarm. We sought to use containment to prevent 

them from using it. Basically what we had was mutually assured 

destruction. 

In the case of Iraq, what we would have is an understanding that 

if we ever had any sense that he was going to use them or did use 

them, we would simply obliterate the country. 

Why is that not an effective strategy? 

Secretary POWELL. I think an argument can be made that that 

might have been effective prior to 9/11. But when you see the 

emergence of groups such as Al-Qaeda, when you see Al-Qaeda 

presence in Iraq, when you see contacts taking place between AlQaeda and Iraqi leaders, and when you see that Iraq has been a 

state sponsor of terrorism and has demonstrated its willingness to 

participate in terrorist activities over the years, and when you see 

the nature of that regime, I think it is no longer a prudent course 

of action to rely solely on containment. 

With the Soviet Union, we had a more rational actor. We had a 

series of agreements that we could verify, and I participated in negotiating a number of those agreements, whether it was the INF 

Treaty or START-I or the Conventional Forces in Europe Treaty—

a variety of agreements in international law between two very, 

very powerful nations that understood the nature of their power. 

Frankly, during my days as Chairman and my days as National 

Security Adviser, I wasn’t worried about the Soviet Union leadership in the Kremlin 1 day deciding that, gee, it might be clever and 

useful of us to let some of this stuff slip out and be used by a terrorist organization. 

They understood the seriousness of having such weaponry, and 

they protected it and took care of it. In fact, it was after the Soviet 

Union broke up that we started to worry that some of that material 

might leak out. Along came the Nunn-Lugar Program and a number of other comprehensive threat reduction programs to get rid of 

this material before it could leak into the hands of terrorist organizations. With the rise of terrorist fundamentalist organizations 

such as Al-Qaeda over the last 10 to 12 years, I think it fundamentally changes the situation. 

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Senator CONRAD. Could I ask just one follow-up, which would be: 

Why doesn’t that same analysis apply to North Korea? Not only are 

they bad actors and unpredictable, I think everyone would say, but 

more than Iraq, they appear to be much further along in terms of 

developing nuclear weapons, perhaps already have some. They are 

desperately poor, and could make money by selling weapons. Why 

doesn’t that same analysis that applies to Iraq apply to North 

Korea? 

Secretary POWELL. It does. We are very concerned about proliferation. We know that North Korea has shared its knowledge. 

We know that it sells weaponry. The previous administration tried 

to deal with this problem through the Agreed Framework which 

capped Yongbyon. When this administration came into office, the 

previous administration was working with the North Koreans to 

try to bring under control their proliferation activities and to find 

a way to get them out of that business. 

But, the problem was not solved when we came into office. We 

came into office, reviewed the situation, and began to engage the 

North Koreans on why there was a better way to move forward to 

a better future for their people than selling weapons and proliferating knowledge and activities. That still remains our policy. It 

doesn’t mean that the only way to go about this problem is to immediately reach for a military solution. 

I think that there are still diplomatic ways, working with our 

friends and neighbors in the region, powerful friends and neighbors 

in the region who have influence over North Korea, to convince 

them that it is time to get out of this business. North Korea, with 

no natural resources that people are terribly interested in, with an 

economy that is not functioning, with a population that is in enormous distress, still clings to the possibility that missile technology 

and weaponry of this type gives them political currency that they 

would not otherwise have. What we have to do as part of our diplomatic strategy is to persuade them, slowly—and it will take time; 

they are not a regime that responds instantaneously—but slowly 

over time persuade them and convince them that the possession of 

this kind of capability will not cause us to give them something or 

to provide them with something that does not ultimately deal with 

the problem. 

They want a security guarantee. Will they give up all of their 

weapons, finally, totally in response to being provided a security 

guarantee from the United States or from regional powers? That is 

what we will have to see. 

What would not be acceptable, it seems to me, Senator, is for us 

to say we will provide some kind of document that guarantees your 

security in return for your thinking about giving up your nuclear 

weapons or giving up—resealing Yongbyon but continuing to do 

something else. We need a total, comprehensive solution, and it 

will take time to get there because the North Koreans obviously 

are wary of, you know, the integrity of their regime and what 

threats their regime may be under. We have said we have no plans 

to invade. We are desperately concerned about the starving people 

of North Korea. We want to help them. The solution lies in diplomatic efforts that engage them, multilaterally, and ultimately us 

talking to them within that multilateral setting that can start to 

467

roll this back. But at the same time, we must make them absolutely aware of the fact, and the reality, that we have not taken 

any of our options off the table. We remain strong and our options 

are all on the table, but we are looking for a peaceful, diplomatic 

solution. 

Chairman NICKLES. Senator Gregg. 

Senator GREGG. Thank you, Mr. Chairman, and thank you, Mr. 

Secretary, for an excellent presentation. You touched on a lot of 

issues which are very important and which I think you have fully 

explained. One issue, however, that you didn’t touch on which I 

would be interested in is the question of Turkey and the recent 

veto of Turkey’s request for defense from the NATO allies, which 

it is a member of—I think it is a military member of NATO—and 

whether or not the United States will unilaterally—and in my 

opinion, it should—stand by Turkey so that Turkey feels some comfort from our support. 

Secretary POWELL. We will stand by Turkey, and not just the 

United States alone. Sixteen of the 19 NATO nations said that they 

wanted to respond to Turkey’s request. NATO works by consensus. 

Senator GREGG. Unanimous rule. 

Secretary POWELL. Sir? 

Senator GREGG. Doesn’t NATO work by unanimous——

Secretary POWELL. It works by unanimity. That is what these Alliances are about. And it is soon going to get to 26, and it may be 

even more difficult to get a consensus at some point in the future. 

But we still are hopeful that a way can be found for the Alliance 

to respond, and we are undertaking the most intense diplomacy 

today, talking to France, Germany, and to Belgium to see if they 

would not change their position because all we are essentially 

doing is responding to a member nation’s request for planning assistance in the event of some trouble that may lie ahead. I think 

that is a perfectly reasonable request, and France and Germany 

and Belgium at the moment are using their blocking power for 

really a different purpose, and that is to signal their disagreement 

with the approach that we need to bring this to a resolution with 

Iraq in the very near future in the U.N. 

So we hope that intense diplomacy will persuade those three 

countries that this is the time to stand by a fellow NATO member 

who has asked for help. If we do not succeed in breaking that deadlock in NATO, I think that would be unfortunate, but, nevertheless, we will go ahead with those nations who are so inclined. 

There are nations willing now to provide that support to Turkey to 

make sure that Turkey gets the support that it needs. 

Senator GREGG. I would just note as a side comment that we 

have had experience with unanimity as a form of government in 

Poland—I think it was in the 1600’s, maybe the 1700’s—and it totally failed. Doesn’t that undermine the capacity of NATO to function? Isn’t this a classic example of the risks that NATO puts itself 

in with the rule of unanimity and now the expansion of member 

States? 

Secretary POWELL. Well, for over 50 years it has operated under 

these rules, and it is perhaps the most successful political and security alliance in history. But it does mean that you have to work 

with each member nation and persuade and convince and cajole 

468

and debate, and sometimes you succeed. Most times you do succeed; you do end up with full agreement on most of the things that 

the alliance has done for peace and security in Europe and the 

world. Sometimes you aren’t able to achieve it, and then you find 

another way to solve the problem. 

Senator GREGG. On another subject, the Administration has proposed—and I congratulate it for its moving in this direction—a significant expansion of our efforts to fight AIDS internationally. But 

my concern is that you are running it through the Global AIDS 

Fund. There is a GAO report which will be coming out fairly soon 

on this fund. It does mean that these dollars—$15 billion is the 

projected amount—will be running through a third-party organization, which, although we now have the Chairmanship of, we do not 

have the voting control over. Europeans basically control this fund. 

I am wondering if the GAO report finds, as I suspect it might, that 

this fund is filled with patronage, mismanagement, and inefficiency 

and waste, which is unfortunately a common event in these international groups, whether the Administration would be willing to 

consider a different approach to how we get this money into these 

needy countries and to the people who need it. 

Secretary POWELL. I have not seen the GAO report. We would be 

deeply concerned if there were suggestions that patronage, mismanagement, and all the other things you mentioned were contaminating the work of the fund. It is a new organization, just up 

and running. My knowledge of it suggests that it is off to a pretty 

good start. I am sure there are some startup problems, however. 

We are very pleased that Secretary Thompson will now be the 

Chair of the Board. I am sure he will bring dynamic leadership to 

it, even though, it is a multilateral organization and others will 

have their say on where the funds should be distributed. But it has 

selected a number of projects already that seem to be worthy programs going in the right direction. But obviously, Senator, when 

the report comes out, I will read it with intense interest. We have 

no intention of ignoring problems if they exist of the kind you mention. 

Senator GREGG. Well, philosophically, why would we use this 

fund versus going on a more unilateral basis and making sure that 

these tax dollars did end up where they are supposed to go? 

Secretary POWELL. Well, we do have a number of other ways of 

distributing funds. As you know, the President’s new Emergency 

Plain for HIV/AIDS will not flow money through the Global AIDS 

Fund, the fund you are talking about, except for $1 billion of the 

$15 billion. We also have a number of bilateral arrangements with 

countries on supporting them in their HIV/AIDS programs. But the 

Global AIDS Fund was a way of generating resources from many 

nations throughout the world, as well as private organizations and 

individuals. I think it is just up and running, and I think it is off 

to a pretty good start. It was a U.S. initiative working with the 

United Nations, and I think we ought to at least give it the benefit 

of the doubt as it goes through this second year of existence with 

the $2 billion that it has been able to raise. 

Senator GREGG. I have some other questions, but I will wait. 

Chairman NICKLES. Senator Gregg, thank you very much. 

Senator Hollings. 

469

Senator HOLLINGS. Mr. Secretary, like the others, I want to 

thank you for the excellent presentation and the calming influence 

you have had in the past 2 years. With all of this big talk, braggadocio, you are either with us or against us, I am sick and tired, it 

is all over with, it is a bad movie and I am not going to listen to 

it, that sort of frightens the international community, much less 

some here in this country. When you are running around deploying 

a couple of hundred thousand troops and all the weaponry you 

have got, it is need, the calming influence. 

Let me tell you from whence I come. I don’t have any idea of any 

immediate threat from Iraq of weapons of mass destruction. If 

there were an immediate threat of weapons of mass destruction, we 

have got the Israelis, the best assault team in the world. They have 

already proved their mettle. They know what is going on. Their 

Mossad intelligence is the best. They have already knocked out a 

nuclear plant, and if there was a weapon of mass destruction that 

was of an immediate threat, there is no question that the Israelis—

they wouldn’t dilly around and look for more inspectors or make 

telephone calls or anything else. They would hit it. They would 

knock it out. So I am not worried about that. 

That being the case, will war lessen the use of weapons of mass 

destruction? Will that cause more likely the use of weapons of mass 

destruction or the less likely use of it? 

Secretary POWELL. First and foremost, it will remove one of the 

sources of such weaponry, because if it comes to war because Iraq 

would not disarm peacefully, Iraq will be disarmed. In this place 

that has devoted so much money, time, energy, and political leadership to developing these kinds of weapons, that will all stop. The 

place will be sanitized. It will be cleaned out. There will be no 

weapons of mass destruction for any future Iraqi leadership to use 

or for any terrorist to get their hands on. I can assure you, Senator, 

that the Israelis, who, you are quite right, are very knowledgeable 

about these sorts of matters, have shown no reservations about the 

need for someone to disarm Iraq, either peacefully or otherwise. 

It is not so much whether there is an imminent threat I can see. 

Unfortunately, imminent or immediate threats, those are not the 

troublesome ones. It is the one that you didn’t think was immediate or imminent, but suddenly, bang, it has happened, it is there. 

We didn’t think there was an immediate threat of somebody flying 

airplanes into our buildings, the World Trade Center or the Pentagon. 

Senator HOLLINGS. But the flying of the planes into the buildings 

was caused by Osama bin Laden, who didn’t like us having an air 

field in Saudi Arabia. 

Secretary POWELL. Yes, well, I would not like to think that. 

Senator HOLLINGS. That was the presence there. Now, what we 

are demanding here by invading Iraq is the presence in an Islam 

country, and the question arises: Are we really getting rid of AlQaeda or are we creating more Al-Qaeda with an invasion? 

Secretary POWELL. First of all, I would not like to see Al-Qaeda 

going into the subways of New York or some other crowded facility 

in our Nation or in a nation of Europe and releasing anthrax or 

botulinum toxin or using ricin as a way of killing people, and the 

source of that material was Iraq or some other nation. So I think 

470

getting rid of the source of such material, potential source of such 

material would be in our interest. 

I think that if it becomes necessary to use military force in Iraq, 

it will be done in a way that will be seen as surgical, it will be seen 

as a military operation that is not targeting the people of Iraq or 

the institutions or the infrastructure of Iraq. After it is over, I 

think you will see, as so many people and nations have seen in the 

course of the last 100 years, that the United States comes not to 

occupy, it comes not to impose its will, it comes not to gain sovereignty over a place but to make a place better than when we 

went in. 

I think you will see humanitarian aid immediately start flowing 

to the people of Iraq. I think you will see us trying to build on the 

institutions that are existing in Iraq. We don’t want to have to run 

all of Iraq. We want to build on the institutions. What we want to 

do is cut out the abscess, get rid of the infection and see if we can 

put in place a political system that will represent the people of 

Iraq, that will create a country that wants to live in peace with its 

neighbors, no longer has weapons of mass destruction, and is using 

its $20 billion a year of oil revenue to build schools, to build infrastructure, to put in place a health care system, and to make a better Iraq which could be a model for the rest of the region. 

Senator HOLLINGS. Well, we both hope that is the case, Mr. Secretary, because there is a majority in that region that would think 

that we were the infidel in the land, in the Holy Land of Islam. 

So I have got my fingers crossed about the cost, whether it will 

work, and everything else. But as Secretary of State, I know you 

put a lot of trust, a lot of value in alliances. Now, you have got to 

make a command decision. Do you cause the break-up of the alliances in NATO and the United Nations by barreling in? Specifically Belgium is a wonderful friend, France, Lafayette, we are here, 

I fought with the French in World War II. Don’t call them cowards. 

I can tell you that right now. I would be glad to come before this 

committee and testify. Germany we have got now, that is a good 

friend; Russia, China. Don’t give me the political poll of 15 versus 

4 or whatever it is. I was tempted, listening to Chairman Nickles 

when he wants to deride the Clinton administration, the majority 

of the people of America voted for it. So let’s don’t start that game. 

I think we have got to be a little bit more deliberate. You are 

the Secretary of State. You have been the calming influence, and 

you really believe that, regardless of China, Russia, and everyone 

else in the alliances, that we just go ahead and break up the alliance just to get Saddam, who is not an immediate threat. 

Secretary POWELL. France, Russia, China, all voted for 1441. We 

took our time. We were deliberate. We consulted. We talked. We 

aren’t breaking up the Alliance. We are just making sure the Alliance, both the U.N. Alliance and the NATO Alliance, deals with 

this responsibility and remains relevant to the task put before it. 

If the United Nations passes 16, 17, 18 resolutions saying to a 

country like Iraq and a dictator like Saddam Hussein, ‘‘You must 

disarm’’, and he says, ‘‘No, I am not’’; and the Alliance doesn’t do 

anything about it, doesn’t respond, particularly when a resolution 

was passed by all of them saying what would happen if he did that, 

then who is breaking up the Alliance? Not the United States. The 

471

Alliance is breaking itself up because it will not meet its responsibilities. 

Now, with respect to the infidel charge, the people of Kuwait 

didn’t think we were infidels when we went in there and kicked out 

the Iraqi army in 1991. They welcomed us. 

The people of Kosovo didn’t think we were infidels when we went 

in there to help the people, the Muslims of Kosovo. I can assure 

you that the people of Afghanistan do not think we are infidels, because we went out there and took out a terrible regime and the 

people of Afghanistan can see that all we are trying to do is help 

them put in place a new government responsible to the people and 

that the international community has come to help them. They 

know we are going to leave as fast as we can. 

Senator HOLLINGS. Well, this is the Budget Committee. Do you 

think we ought to pay for the war? 

Secretary POWELL. I think we have to do what we think is right. 

Senator HOLLINGS. No, I mean pay for the war. Of course, I 

think it is right. We have always paid for all the other wars. But 

you have got another gentleman from the Federal Reserve testifying, as you are testifying, that what we really need is a tax cut 

and that we ought to send those boys into Iraq and hope they get 

back. The reason we hope they get back alive is they are going to 

have to pick up our bill, because this Congress is not going to pay 

for it. 

Secretary POWELL. Mr. Chairman, I can’t speak on that issue. 

The issue I can speak on is that we have to meet our worldwide 

responsibilities, and if conflict is necessary—and we hope it is not, 

the President is still hopeful for a peaceful solution—then we have 

to do what we have to do. Whatever it costs, the cost has to be 

borne, hopefully not just by the United States but by other nations 

who will be in this coalition with us. 

We are not going into this alone, and there has been a steady 

stream of visitors to the Oval Office to make the case to the President that he is not going in alone. You heard Prime Minister Howard yesterday, the Prime Minister of Australia. You heard Prime 

Minister Berlusconi, Prime Minister Blair. We are not going in this 

alone. 

Senator HOLLINGS. Thank you, Mr. Chairman. 

Chairman NICKLES. Thank you. 

Senator Sessions. 

Senator SESSIONS. Thank you, Mr. Chairman. 

Secretary Powell, thank you for your leadership. This Congress 

is behind you. We voted in the Senate 77-23 to authorize you and 

the President and the whole team to evaluate this circumstance in 

Iraq, to guarantee that this dictator would disarm, and we authorized you to use force if necessary—without a vote of the United Nations, without a vote of NATO, and alone if need be. I thank you 

for the work you have done to assemble a majority of the nations 

in the European area overwhelmingly to be supportive of that, and 

I think we are making great progress. It is just good to see. Some 

of the nations, I am sure, in Europe are under a good bit of pressure from France and Germany perhaps to not stand with us, but 

they stood with us. They have written editorials and letters affirming our policy. They voted with us on the Turkey question. 

472

So I think a lot of progress has been made, and I salute you for 

that, and I believe that in the long run, if the United States does 

not stand firm now to allow the resolutions of the United Nations 

and our own firm commitments to be eroded and not be acted upon, 

then we have not done well. In the long run, peace and stability 

in the world will not be there. I know other people in the world 

may be nervous about this, but if it turns out—certainly it won’t 

be perhaps as quick as the Afghan operation. But if it turns out 

it is good for the people of Iraq, even partly as good for those people as it did for Afghanistan, then I think the people of the world 

will appreciate what we have done. 

We are not there to take oil. We are there to protect our security 

interests and liberate the people of Iraq. I just salute you for it. It 

is a difficult time, and I wanted to make that comment. 

I really would be surprised if Senator Hollings would suggest 

that we would expect some other nation to defend our security interests. I don’t think that is reasonable. I don’t think we should do 

that. It would be a stunning development were we to do that. 

You know, we had in our committee—Senator Gregg chaired the 

Health, Education, Labor, and Pensions Committee, and we had 

Sir Elton John talk about AIDS. His call was very passionate for 

us to do more. I believe we should do more. I support the President, 

the great increase in efforts for this colossal worldwide tragedy. 

But I asked Sir Elton John, What can we do to make sure the 

money is well spent? I referred to his foundation that he meticulously monitors to help with the AIDS circumstances in Africa. I 

noted that many experts say if you give the money to the governments in Third World countries, it oftentimes does not get to the 

people who really are in need. We have got this new group, this 

Global AIDS Initiative, that perhaps can be effective in that regard. 

But can you give us some assurance—and let me just mention to 

you what Sir Elton John said when I asked him about this problem. He replied, ‘‘I concur with you totally. What that money has 

to go toward is training people to build an infrastructure so people 

can get drugs they need in remote parts of countries, and it needs 

to be run on a government level. But I know what you are saying. 

I do not know how you do that, because I am just a singer. This 

is something that the politicians have to make sure that when the 

money goes to governments, the money is spent in the right way. 

I have said before that we are a small AIDS organization. We can 

control where everything goes, and we do. We know where every 

penny goes. But when you get these vast sums of money that we 

are talking about here today, you are going to run into those kinds 

of problems, and I do not personally know myself how you solve 

them. But I concur that it is a major problem.’’

I know you have thought about that. What can you tell us about 

your plans? 

Secretary POWELL. With respect to the President’s new Emergency Plan, it will be run by a Special Coordinator with the rank 

of Ambassador representing the President and me, located in the 

State Department. We are now looking at the right organizational 

arrangements. 

473

The money will be used in a way that will support sometimes 

government efforts, sometimes directly to private efforts. 

There is a certain surface attraction to the idea to forgetting all 

about governments and go right to private NGO’s. But, in reality, 

when you get into many of these countries, you really have to use 

and buildup and assist their government health care system to deliver these services. 

What we have to do is make sure that we build the infrastructure in a sensible way for them to deliver the services. Sometimes 

it will go directly to a private NGO over the government but with 

the knowledge of the government because you don’t want conflicting policies. We have to make sure that we put in place solid 

systems for accountability and solid systems for transparency and 

solid systems for making sure that it goes through the government 

agencies and out to the people in need; and that we are actually 

delivering services, not getting ripped off, and not seeing the money 

go into bureaucratic ratholes. That is a challenge for us and a challenge we have to meet. 

To some extent, it also bounces against the Millennium Challenge Account where we are going to be investing and looking at 

those countries that are committed to democracy, committed to 

transparency, committed to the rule of law, committed to ending 

corruption. That same sort of test should be applied with respect 

to the global initiative to make sure it is going to countries that 

truly are committed to this and will use the money for the intended 

purpose and make sure it gets out to the delivery system and not 

just to the bureaucratic system. 

Senator SESSIONS. Well, you know, you lose a few million dollars 

here and a few million dollars there, and tens of thousands of victims of AIDS will not be getting the medicines. So we want to 

make sure that every single dollar gets there. 

Will this new Ambassador, for the lack of a better word around 

here, be a czar-like person that would have the ability to convene 

all the agencies involved and speak to the Congress as to the effectiveness of the program? 

Secretary POWELL. Yes, we intend for this person to not just be 

another bureaucrat who can’t go to the washroom without my permission, but somebody who is carrying not only my authority but 

the authority of the President to bring together whoever needs to 

be brought together to deal with the issue of cross-agency boundaries. 

It would have to be somebody who has the ability to work, however, closely and in close coordination with AID and with the Global AIDS Fund and all the other other organizations such as HHS 

that are involved in the AIDS fight. But for this program of $15 

billion over 5 years, it will be somebody with unique authority and 

responsibilities and able to do just what you just described and also 

be available to speak to the Congress, testify before the Congress, 

and justify the program before the Congress. 

Senator SESSIONS. If this Global AIDS Initiative that we are 

going to work closely with and you plan to contribute to—it makes 

me somewhat nervous because we do lose some management control there. If that organization fails to function effectively, are we 

474

able to get out of it? Are we signing some sort of long-term contract 

that we would have to continue? 

Secretary POWELL. Well, the first year request is for $450 million, and you have the power of the purse every year, and it is a 

totally owned U.S. Government organization subject to the will of 

the Congress. So you have full control over it. 

I would hope that control would not be exercised with too many 

earmarks and legislative direction. 

Senator SESSIONS. I just think we will need to, Mr. Chairman, 

make sure that those agencies are actually utilizing the money that 

they receive as effectively as absolutely possible, and if they are 

not, we shouldn’t hesitate to use another route. 

Thank you, Secretary Powell, for your leadership. 

Secretary POWELL. Thank you, Senator. 

Chairman NICKLES. Senator Sessions, thank you very much for 

your statement. 

Senator Stabenow. 

Senator STABENOW. Well, thank you, Mr. Chairman. Thank you 

very much for your service to our country. 

First just a comment following up on Senator Hollings in terms 

of the budget, and just a comment that as we are facing possible 

war with Iraq, as we have the war on terrorism, we are seeing on 

this Budget Committee numbers that show us going further and 

further in debt as a country. I have deep concerns about what that 

means. We should be paying for these efforts and not putting it on 

the American credit card. I hope that as we discuss the budget we 

will be discussing that as well. 

Mr. Secretary, as we are talking about the issues of terrorism—

and you mentioned earlier Al-Qaeda, heaven forbid that they are 

back here in our country and another outrageous attack killing 

Americans happens, I would like to speak for a moment about the 

issue of homeland security or hometown security, as I think it is 

appropriately called. While this is not within your realm in terms 

of the budget, I know that you play an important role as we are 

determining priorities. I would just share with you I have now had 

nine different meetings around Michigan, small towns in the Upper 

Peninsula to Detroit, to the west side of the State, one yesterday 

in Port Huron, Michigan, along the river between Canada and the 

United States as we go into Lake Huron. I hear the same thing everywhere I go, and that is, very deep concern about the lack of 

partnership from the Federal Government in terms of funding at 

this time. 

We have local police chiefs and fire chiefs that are not on the 

same radio frequency in the same town, let alone between cities 

and counties. We have great communications concerns. 

I am sitting with a group of people yesterday who tell me that 

they are finding out about the increased alert through CNN like we 

do instead of through other ways. 

I am concerned about the lack of training, not only trainers being 

available, whether it is bioterrorism or other efforts that are needed, but the cost when a police officer or a fire fighter or others go 

into training, the replacement costs so that officers are there on the 

streets covering their normal duties, their increased costs of training as well as increased costs for personnel. I am very concerned 

475

that we are not stepping up, that we are not partnering with them, 

and we, in fact, I don’t believe are ready—they are working hard. 

They are working overtime to be prepared and taking on more and 

more responsibilities. But I know in a State like Michigan, where 

we are a border State and we have issues of bridges and tunnels 

and waterways and all of the other issues—drinking water that 

needs to be protected, drinking water sources, nuclear plants, all 

of the other things, I am very concerned that we are not providing 

them the support that they need, and duct tape is not going to do 

it. We are going to need dramatic increases, I believe, in resources 

going directly to local communities. 

So I share that with you. I know that is not in your international 

budget. But I have a great concern as I move around the State, obviously not a partisan issue. I am hearing from Republican sheriffs 

and Democratic sheriffs and people of all stripes and all persuasions, philosophically who are asking for our help. I would ask that 

you convey that as part of this strategy to be able to respond, particularly as we move closer to war when we know we heighten the 

possibility of an attack on our homeland. 

Secretary POWELL. Thank you very much, Senator. 

As you all well know, issues with respect to the Administration 

and the specific issues you mentioned with respect to training and 

how to announce alerts and how to communicate that down, and 

some of the other needs that exist in local communities, I will convey all of that to my colleague, Secretary Ridge, and to the President. 

Senator STABENOW. I would just say that we continue to try to 

pass amendments, pass supplementals as long ago as last July we 

passed in the Congress a supplemental that went to the President’s 

desk that was not released. So while there may be philosophical 

differences about whether the Federal Government should play a 

role in helping local communities fund these efforts, they will not 

be able to do it without our help. 

One other comment in a different vein, Mr. Secretary. I would 

ask you to step back for a moment, and if you might comment, as 

we look in a broader view on America’s role now as it relates to 

nuclear threats, nuclear issues and how you would view our leadership on these issues when we start 3 years ago now with the Senate voting no on the Comprehensive Nuclear Test Ban Treaty; the 

President pulls out of the ABM Treaty. We say that all types of 

weapons are on the table with Iraq including nuclear, so we are 

sending one set of messages. Then we have very great concerns 

about India and Pakistan, about what is happening now in North 

Korea, which I believe to be extremely serious threats to us. When 

you put this all together now in the United States of America, what 

messages are we sending with our own actions, and how do you 

view the situation in what is clearly a highly disturbing and tense 

situation as it relates to nuclear proliferation around the world? 

Secretary POWELL. There are other messages that I think are 

just as important, Senator. One is the Treaty of Moscow which is 

now before the Senate for its consideration, and I hope it gets a 100 

to 0 vote which represents a huge reduction in the number of nuclear weapons that the United States and the Russian Federation 

will have pointing at one another or available to be pointed at one 

476

another. I think that sends a signal to the world that the two most 

important nuclear holding powers in the world are going down with 

the number of nuclear weapons, not up. I think that is an important signal. 

Yes, we did get out of the ABM Treaty, and we did it after long 

discussion with the Russians. Why did we get out of the ABM 

Treaty? The principal reason was it was keeping us from defending 

ourselves against these very weapons that you make reference to. 

The ABM Treaty prevented us from moving forward on missile defense. Missile defense is for the purpose of destroying these horrible weapons that might come our way or might come at one of 

our friends and neighbors. Interestingly, after we finally said to the 

Russians, ‘‘Look, we cannot find a solution on this one; we are 

going to have to withdraw,’’ they said, ‘‘Fine. Let’s continue to work 

together on strategic issues. Let’s cut the number of offensive 

weapons.’’ Lo and behold, within the past few weeks the Russians 

have even indicated more of a willingness than just a couple of 

months ago to work with us on missile defense because they see 

it in those same terms. 

So the ABM Treaty, rather than encouraging proliferation, shows 

that proliferators should think twice if they are facing missile defenses that can essentially void the value of your missile. 

With respect to India and Pakistan we have been working very 

closely with both sides, and I think we have played an important 

role in de-escalating the tension last year. I remember vividly some 

very long and difficult conversations I had with both India and 

Pakistan, their leaders, to tell them knock it off with respect to 

using rhetoric that might suggest that nuclear weapons were a 

weapon that was usable in this confrontation, and they both did. 

That situation has calmed down. 

With respect to North Korea, we are trying to convey a message 

to them that says, ‘‘You will get nowhere with this kind of activity, 

this kind of proliferation, because we will not be terrified, we will 

not be scared, we will not be held hostage by this kind of weaponry. 

The sooner you understand that you are doing nothing but pursuing fool’s gold that will not achieve any political purpose, the better off you will be and we will be, but in the interim, you should 

know, that we are a strong and powerful Nation and we have all 

of our options.’’

It has been part of U.S. declaratory policy for the 50 plus years 

of the nuclear age that the best deterrent is to simply not talk 

about what we might or might not do, but nobody can have any 

thought in mind right now that the United States is thinking of a 

nuclear option. We are not. There is no need for it in any of the 

theaters that we have been talking about this morning. But nevertheless, the United States has available within its armed forces a 

full range of capability and options. It is that full range and what 

we might or might not do that has served a strong deterrent purpose for the last 50 years, and I think it has served the interest 

of world peace by people understanding that we have that full 

range of options. 

Senator STABENOW. I appreciate that. Thank you. 

477

I would just say in conclusion that it is very important that our 

actions—people listen to our actions as well as our words. I think 

both are being judged. So thank you. 

Chairman NICKLES. Thank you, Senator Stabenow. 

Senator Ensign. 

Senator ENSIGN. Thank you, Mr. Chairman. 

Mr. Secretary, I want to start with the AIDS epidemic. There 

have been some questions asked about that. I met with several of 

the leaders from African countries last week. We had a round table 

discussion that Senator Santorum put together to discuss the AIDS 

problem in Africa. It truly is a calamity. The representative from 

Kenya talked about the 2 million people in Kenya that are infected 

with the HIV virus, and out of the 2 million people, or about 2.2 

million people I think it was, about 2,000 of them are actually getting treatment. Just doing some simple math it costs about $300 

one person. The cost of treatment is down from a few years agon. 

Just to treat the people in Kenya is $600 million a year. I think 

that it tells us that there is no way that we have enough money 

to get everybody on treatment. It is important that we educate as 

we try to prevent the disease from spreading. 

Representatives from Uganda participated in the roundtable discussion last week, and from what I understand the infection rates 

in that country went from 20 percent down to 6 percent. Recently, 

they went back to more of their traditional values. They were a 

monogamous society that had unfortunately gotten into what a lot 

of the rest of the world has gotten into, the sexual revolution. Because of behavioral attitudes and it is almost all heterosexual—we 

have seen a dramatic increase in the spread of AIDS. 

There are many concerns about the Global AIDS Fund. One, that 

it is bureaucratic, anf therefore very slow. I have strong concerns 

about that. Also the governments that you mentioned, in almost 

every case, it is the local NGO’s that actually does the work. It is 

true that the Ugandan Government was involved in implementing 

its AIDS prevention policy, but it really was the NGO’s that were 

the most effective. So I would hope that in putting together the 

Global AIDS Fund that all of these things are taken into account. 

A lot of us have concerns that this money is going to be wasted, 

and then there is going to be a backlash against support for the 

fund. An average American would say ‘‘Why don’t I get prescription 

drug coverage instead of you helping out these African countries?’’ 

I think that we have the responsibility to help in the global fight 

against AIDS as long as we are being good stewards of those hardearned tax dollars provided by the American people. 

I have a question on the HIV front—right now we are being told 

that the Mexico City language does not prevent AIDS money 

from—there is no Mexico City language associated with the AIDS 

money. It only is associated with family planning, population control money. We are getting reports that indeed, because money is 

fungible, a lot of the people who are providing abortions overseas 

are using the AIDS money we provide for abortions. Could you 

make a comment on that? 

Secretary POWELL. Yes, sir. As a matter of fact, in the very near 

future we will be meeting within the Administration to examine 

the various new programs, Global AIDS Fund, but especially the 

478

new Emergency Plan for HIV/AIDS. Balancing it against other policies such as the Mexico City policy to make sure that we have a 

consistent approach across the whole administration. I am aware 

of your concern, and we will be meeting on that within the next 

few weeks. 

Senator ENSIGN. I appreciate that because there are many of us 

up here in Congress that would like to put the restraints on the 

spending to make sure that we are not going to fund abortion 

around the world. 

I want to ask a question though on North Korea, switching gears 

just a little bit. It seems to me that the reasons to identify how we 

have gotten to where we are in North Korea is not to place blame, 

but to prevent this in the future—we need to learn from the past. 

It seems to me that the way that you are dealing—and I congratulate you and the whole administration on how you has handled the 

Iraq situation and the global war on terrorism. I believe that if you 

study history, dictators do not respond to diplomacy. Very rarely do 

they just respond to talking. A lot of them, especially the ones that 

are the evil dictators of the last century, and certainly the ones 

that we have around today respond to strength. They respond if 

there is something at stake. 

In North Korea we have one of those dictators. How did we get 

in this situation? What mistakes were made during the 1990’s that 

led us to this situation, and, if we have a country like North Korea 

in the future, how can we assure that we do not make the same 

mistakes. 

Secretary POWELL. North Korea certainly does understand America’s strength. In fact they are very fearful of America’s strength, 

and we have made it clear to them that we have all of our options, 

but it is not necessary right now, as we are trying to find diplomatic solutions, to sort of beat them over the head with it. They 

know what we have and they know what we can do. 

Senator ENSIGN. I agree with that. 

Secretary POWELL [continuing]. North Korea knows that it cannot win a war on the Korean Peninsula, but they sure can create 

a lot of havoc and they can destroy a lot of people and destroy quite 

a few cities, especially the city of Seoul in the process. So we both 

have a good understanding of what the other can do. 

North Korea elected to use a route of missile proliferation and 

weapons of mass destruction programs to give itself more strength 

and authority on the world stage than it would have otherwise on 

the basis of its economy or its system. I think in the course of the 

last decade or so, as these programs became more obvious, attempts were made to capture these programs and to eliminate 

them over time. At the same time you are not precipitating a crisis 

or a war on the Korean Peninsula that nobody wanted, especially 

the South Koreans. We have to be especially mindful of the views 

of our South Korean friends. They are interested in unification 

with their brothers. The Korean people are very homogeneous. 

They want to be one Nation again. No Korean leader will ever be 

elected to the leadership in South Korea without a commitment to 

ultimately bringing the two peoples back into being one people, so 

they are not anxious to see a conflict. 

479

So efforts were made over the last 10 years to remain strong, 

keep our presence in Korea, watch that army of theirs, but at the 

same time find ways to corral these programs, eliminate them, 

bring them under control. The previous administration worked 

hard on it. I give them credit, and not at all criticism on my part. 

They worked hard to control what was going on at Yongbyon, and 

they brought it under control, but unfortunately, they were not 

able to eliminate that capacity, but they brought it under control. 

The capacity to restart it remained, and it was not going to go 

away under the Agreed Framework until the light water reactors 

were up and running. Only then would the cells be removed and 

sent off somewhere else for storage and destruction and made safe. 

Unfortunately, the previous administration had no way of knowing, nor did we—we were in the same boat as the previous administration when we came in—that the North Koreans had the ability 

to move in another direction with respect to nuclear weapons, because they frankly, I guess, saw the value of nuclear weapons. 

They saw how they could extract things from the rest of the world 

by saying they were moving toward nuclear weapons, and so they 

did not want to give away the card that everybody thought they 

had at least pushed off to the side. 

So when we found out about it, we had to call them on it. The 

solution we are going to find this time has to be a solution that 

deals with it once and for all. 

Senator ENSIGN. If I may interrupt just for a second. I want to 

go back though because we need to learn from this. I understand 

not wanting to encourage a war, but it seems to me that we tried 

to appease his father, and now we have a second generation of 

madmen in North Korea. The agreement was broken, and North 

Korea continued to develop weapons of mass distruction with the 

means to misuse, while the U.S. paid them not to do so. Any agreement now must include proper verification measures. 

Secretary POWELL. This was a major concern that we had when 

we came into office, and that a number of the arrangements that 

had been made were lacking in verification. The previous administration understood that as well, and in our transition conversations 

between my team and the outgoing team, we talked about the need 

for verification, and that is why their efforts have not moved even 

more rapidly along, because they could not sort of crack this nut 

with respect to verification and assuring that no more technologies 

would be sold. 

But on the handoff we were more skeptical, and we wanted to 

make sure we knew what we were doing and took our time to review our policies. But at the same time we still think there is the 

potential for diplomatic solution. What we will not do, and what a 

lot of people are pressing us to do, but we are going to resist the 

pressure, is suddenly say, ‘‘Just tell us what you want, tell us what 

you want just to get this problem off the table, and then we will 

give you whatever you want.’’ That is not the best way to solve this 

problem. It is not going to be our approach. 

Senator ENSIGN. I totally agree. 

Chairman NICKLES. Senator Ensign. 

Senator ENSIGN. Can I just conclude with this, Mr. Chairman? 

480

It is such an important lesson for us to learn, the danger of nuclear weapons of mass destruction, in the hands of somebody like 

this. I think that we need to learn from the past that it is virtually 

impossible to verify with a dictator like this. So empowering them 

just to avoid a situation at the time is a very dangerous thing for 

us to do. I think it was wrong at the time. I think you can look 

back on those situations and say, ‘‘It was a mistake. We should not 

make these agreements in the future because once weapons of 

mass destruction are available to a country like North Korea, the 

situation becomes much more dangerous and much more difficult 

to control with in the future.’’

I thank you for your indulgence. 

Chairman NICKLES. Senator Ensign, thank you very much. 

Mr. Secretary, I was hopeful that we would be able to get you 

out of here by 12. I think we have at least three senators, maybe 

four. Can you go another 15 minutes? 

Secretary POWELL. Yes, sir. 

Chairman NICKLES. I will ask my colleagues, try and be mindful, 

and I probably should have been rapping the gavel a little earlier. 

Senator MURRAY. 

Senator MURRAY. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary, for your very informative and candid 

discussion today. I wanted to talk about foreign assistance programs because I really think that the case needs to be made that 

each military threat facing our country is really first a foreign policy issue, and it is not enough to address the threats to this country solely through our capacity to respond militarily, but we need 

to do more on the foreign policy side as well. I was struck by a 

statement that Senator Lugar made last week in a Foreign Relations Committee. He said that the United States spends 8 cents on 

foreign policy for every dollar that goes to defense. I am curious if 

you could share with us what you think might be the appropriate 

ratio with your background for these two functions. 

Secretary POWELL. I do not think it is appropriate to compare 

Foreign Operations funding with Defense funding or Foreign Operations with Social Security or any other function. I think it can 

stand on its own merit. I think eight cents compared to a dollar 

for the Pentagon is not the right comparison. The fact of the matter 

is only about one percent of our Federal budget is allocated to this 

function. I would like to see it be a lot more, but as a result of the 

priorities that we have and the resources available to the Congress 

and to the President, I am pleased that President Bush has been 

able to increase it every year that he has submitted a budget, and 

he has taken some dramatic steps with respect to the Millennium 

Challenge Account, which is a 50 percent increase in what we had 

been doing previously with respect to development assistance, and 

what he has now done with the Emergency Plan for HIV/AIDS is 

another significant increase, and so we are doing a lot better with 

respect to our commitment to these kinds of programs. I would like 

to see it be a lot more because the needs around the world are 

great. Senator Ensign was talking HIV/AIDS. He described it as a 

calamity. That is certainly true, but it is far more than a calamity. 

It is an absolute catastrophe on the world stage that we have to 

do something about; poverty, famine, they all interact. People who 

481

are hungry are more susceptible to the diseases that flow from 

HIV/AIDS and then go into malaria and tuberculosis. So I would 

like to see us do a lot more. I would double and triple it if I were 

king for the day. 

But I recognize that the President has to shape his budget in accordance with a large number if priorities and the Congress has to 

do the same thing, and so I hope that you will fully fund the President’s request, and that is the best I can do, support the President’s request. 

But obviously, if the President has requested more, I would be 

even more pleased. 

Senator MURRAY. Well, thank you for that. I know that without 

question the war on terrorism is a top priority for this country, but 

that is what I am having a little bit of trouble with the President’s 

budget and rhetoric on our assistance programs. In your testimony 

you said this budget contains 4.7 billion for countries that have 

joined the war on terrorism, and I think there is no question we 

should not work with countries as you have done, Pakistan, Turkey, Jordan. It is in our national interest obviously, but is this assistance really foreign assistance, helping people in the traditional 

sense of health or education or democracy? It seems to me, if I look 

at this, the budget really significantly redirects foreign assistance 

to the war on terrorism, so I am kind of troubled by your assertion 

that the budget increases foreign assistance funding. 

By taking $4.7 billion away from other foreign assistance initiatives are we not really reducing our foreign assistance globally? 

Secretary POWELL. No. It is for all kinds of assistance. It is not 

simply for terrorism activities. It is for a variety of assistance efforts in these countries that have been particularly helpful on the 

war on terrorism. The Millennium Challenge Account, that additional, that 50 percent increase in the budget. 

Senator MURRAY. Is that part of the 4.7? 

Secretary POWELL. No, separate. It is on top of the $4.7 billion. For this year it is $1.3 billion for the Millennium Challenge Account to get it up and going and running. 

Chairman NICKLES. Senator Murray, thank you very much. If 

you do not mind, I would like to move kind of quickly. 

Senator CORNYN. Senator CORNYN. Thank you, Mr. Secretary, for being here. I appreciate your long-time exemplary service on behalf of the Nation, 

and I just, particularly at this time I wanted to say that. 

But quickly I have one question. Really it relates to our relationship with Mexico. As you know, we have a very important relationship based on geography and history and culture, and I was gratified when the President, the first international trip he took after 

he became President was to see President Fox in Mexico. I am a 

firm believer in the need to deepen and improve our relationship, 

strengthen our relationship with Mexico. I would like to work with 

you and your department on that. 

But I am very concerned about Mexico’s failure to live up to an 

international treaty that was passed in 1944 governing the distribution of vital water resources, and particularly disturbed by 

Mexico’s most recent failure to abide by an interim agreement 

which at least promised some hope to South Texas farmers, and 

482

that interim agreement called for the delivery of 200,000 acre-feet 

by the end of January. Unfortunately, at that time there was no 

schedule for the repayment of the remaining 1-1/2 million acre feet, 

but for those who like to be optimistic and hopeful, that at least 

it offered some hope. Now we know Mexico has delivered only 

129,000 of that 200,000 acre-feet, even under that interim agreement on January the 31st. I have to tell you that particularly folks 

in the agriculture business in South Texas have been devastated 

by Mexico’s failure to live up to this obligation. It has had a ripple 

effect in our economy. Over a billion dollars has been lost over the 

last 10 years due to the failure to abide by the treaty. 

So some have, in their frustration, voiced several options that 

they think the United States ought to consider. One would be possible sanctions against Mexican agricultural produce grown by the 

very water that they feel should have been delivered under the 

treaty, but which has not been. Second, possible renegotiation of 

the Colorado River Treaty that actually sends Colorado River water 

to Mexico. Third, to just terminate the treaty entirely, just to walk 

away from it. 

I would appreciate your thoughts on Mexico’s failure to abide by 

the interim agreement, as well as the negotiations, which I believe 

are occurring even today in San Diego on this matter. 

Secretary POWELL. We are very disappointed that Mexico has 

been unable to meet its obligations under the 1944 treaty and there 

is such a backlog of 1.5 million acre-feet. The interim agreement 

to provide 300,000 acre-feet for this growing season we thought 

was an important step. They have been working hard to try to fix 

this problem. The President raises it with President Fox in every 

conversation. I raise it with my Mexican colleagues in every conversation. It was the subject of considerable discussion when we 

had the Binational Commission meeting in Mexico City in December. At the time they said they would be coming forward. So they 

made a commitment to 300,000 acre-feet, but as you know, Senator, they only provided the 129,000 or 130,000 acre-feet that you 

made reference to. We are pressing them very hard, trying to get 

another increment right away of 55,000, trying to get back up to 

their obligation for the 300,000 acre feet for this growing season. 

We will continue to press. As you noted, they are meeting on it 

now. There are often technical debates as to how much water is or 

is not in a particular reservoir, or set of reservoirs in Mexico, but 

it receives the highest level attention from our government. I would 

try to avoid the sorts of remedies that you described, Senator, either a boycott or embargo on certain quantities of goods coming 

from Mexico, or abrogation of the 1944 Treaty, or redoing the Colorado River Agreement, and let us continue to pound away to see 

if we cannot get them to meet the commitments they made for this 

growing season, as a start toward resolving ultimately the 1.5 million acre-foot backlog. 

Chairman NICKLES. Senator Cornyn, thank you very much. 

Mr. Secretary, thank you for that. We have two additional senators that wish to speak. I will call on Senator Allard. Mr. Secretary, I apologize. I need to step out, and then after Senator Allard, it is Senator Bunning. 

483

Senator Bunning, if you would be kind enough to wrap up the 

hearing. 

Just for notification of our colleagues, the next Committee hearing will be on Thursday with Michael Jackson to discuss transportation, Deputy Secretary of Transportation. 

Mr. Secretary, I apologize, but I need to leave. 

Secretary POWELL. No, I fully understand. 

Chairman NICKLES. But this has been an outstanding hearing. 

Your presentation last week—I complimented you on it a couple of 

times—was outstanding, and also your presentation today has been 

superb. So thank you very much. 

Secretary POWELL. Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Allard. 

Senator ALLARD. Thank you, Mr. Chairman. 

I would also reiterate what some of my colleagues already said, 

at least on this side since I have been here, I think you are doing 

a great job. I think you are an important part of the Administration team, and so I have a great deal of respect to the way you are 

conducting yourself on foreign affairs. 

I understand that you are engaged in discussions with the Government of Israel over the possible U.S. multi-year assistance packages that consists of loan guarantees as well as some military aid. 

This is to try and address the current economic and security crisis 

we have there in Israel. I wonder if you would share with me briefly the feeling from the Administration—apparently they have been 

somewhat supportive—and has there been any thought about when 

this money may be made available, and when you might be making 

requests? 

Secretary POWELL. We have been in intense discussions with the 

Israelis, and we are familiar with their needs, really sensitive to 

the needs of our Israeli friends. No decision yet is forthcoming with 

respect to the amount that we will be able to provide, and no commitments have been made to Israel yet, and so we do not have 

something to put before the Congress at this time. 

Senator ALLARD. The other brief question I have concerns the 

Millennium Challenge Account. It brings forth a lot of concepts, I 

just wonder why are they not being addressed in the agencies we 

already have? So I would like to know just what your thinking is, 

why you felt like it was necessary to set up a new separate agency 

and why the current agency structures you have cannot address 

some of your problems, and if you could share some of that thinking with this member, I would appreciate it. 

Secretary POWELL. Thank you, sir. The Administration, especially the President of course, felt very, very strongly that the Millennium Challenge Account should not be just seen as aid in the 

old traditional sense. He wanted a specific program that encouraged democracy building, infrastructure building, the end of corruption in development nations, a rule of law, transparency, economic development, education, and he wanted to reward those 

countries that have made a solid political commitment to that end. 

New democracies, emerging democracies, perhaps even older democracies that now firmly put their path on completing the democratic transition and to getting into a globalized 21st century world, 

where they had to take care of their people and had to prepare 

484

their people for the demands of the 21st century world. Very often 

our usual USAID programs deal with needs that may be related to 

one of these kinds of countries or not, may be related to a country 

where there is a specific need. But he wanted it to be new and different and focused on that kind of capacity building. 

Senator ALLARD. So this is much more proactive. The other ones, 

they kind of comes after the fact. This is a more——

Secretary POWELL. Yes, it sometimes comes after the fact and it 

really is sort of need based as opposed to having this specific dynamic to it, to encourage these kinds of countries. In order to make 

sure that everybody understood that clear message, he felt it best 

to do it through an independent agency which we are in the process 

of setting up now. 

Senator ALLARD. Thank you very much for your comments. 

Secretary POWELL. Thank you, Senator. 

Senator BUNNING. [Presiding] Mr. Secretary, thank you for being 

here. I am sorry that I was at a prior meeting on the Banking 

Committee, some of us were. 

Let me ask you just one question, and get you out of here. First 

of all, congratulations on your speech at the United Nations. I 

thought it was targeted and right directly to what we needed to do, 

and I am very proud of it. 

Secretary POWELL. Thank you, sir. 

Senator BUNNING. In the past years the U.S. has, to some degree, 

tied economic assistance to Egypt to that country’s willingness to 

make economic reforms that will move it closer to a free market 

economy. Could you address what assurances, if any, that the 

United States has asked from Egypt that they will engage in political reforms that will move them toward a greater democratization? 

Secretary POWELL. We try to encourage Egypt in every way that 

we can to undertake economic reforms we believe are needed within that country to make its economy more viable and to do a better 

job of taking care of its people. With respect to specific programs 

and specific initiatives that we have used over the years to do that 

and we are using now, I would like to provide you a more fulsome 

answer for the record. But certainly we encourage them, push 

them, discuss with them, and use our embassy team in Cairo to 

given them ideas as to things that they can be doing and should 

be doing in order to make their economy more productive and to 

make better use of the aid that we are providing to them. 

Senator BUNNING. If you would follow-up with a written response, I would appreciate that. 

Secretary POWELL. Yes, I would like to give you some more specifics. There are some new and exciting things we have been doing, 

and there has been some progress in Egypt that I would like to report for the record. 

Senator BUNNING. Kent, would you like to? 

Senator CONRAD. I would, if you do not mind, Mr. Secretary, just 

a final question. We are often advised to hope for the best and prepare for the worst. What would you advise us is the worst case situation we might confront with respect to Iraq and North Korea 

that this Committee should be prepared to deal with? If you were 

looking ahead, what are possible outcomes, possible consequences 

that we should be especially sensitive to? 

485

Secretary POWELL. I hope the Committee, with respect to Iraq, 

will be sensitive to the needs that might immediately exist if a conflict were to come, if we are not able to avoid a conflict. There will 

probably be immediate needs to assist the Iraqi people in provision 

of food, provision of other humanitarian needs. In due course they 

will be able to take care of themselves because they have the 

money, but the system may be shaken so badly initially the Oil for 

Food Program may be thrown into disorder. So that the Congress, 

I hope, would support us in any emergency supplemental requirements we have to take care of the people of Iraq until such time 

as we can get their systems back in place and running. 

Senator CONRAD. Do you have any sense of what the size of such 

a supplemental might be? 

Secretary POWELL. No, sir. I could not even begin to speculate, 

but I want to assure you, sir, and the Committee, that there is an 

enormous amount of work being done within the Department of 

State, Department of Defense, where an office has been created to 

work on this, and will look at all of the issues having to do with 

humanitarian needs, medical needs, how to protect the oil fields of 

Iraq for the benefit of the Iraqi people. 

This canard that is constantly being tossed out, that all we want 

is their oil. The oil of Iraq belongs to the people of Iraq, and we 

will help the people of Iraq use that oil for their benefit and not 

to threaten their neighbors. That is not only a matter of principle, 

it is a matter of international law if we go in there. I cannot at this 

point though give you an estimate of any supplemental needs that 

would be required. 

With respect to North Korea, the only thing I would suggest at 

this point is that the Congress support us in our diplomatic efforts, 

and that we be given a little bit of room to maneuver, and that 

there is some patience shown. It took 14 months for the last agreement to be dealt with back in the 1990’s. We are not intending to 

have a similar process or a similar agreement, but these things 

take time. Diplomacy does not always produce instant results, but 

very often produces good results, and I hope we will have a good 

result there. 

Senator CONRAD. Thank you very much for your testimony here 

this morning. 

Senator BUNNING. Thank you, Mr. Secretary. 

Secretary POWELL. Thank you, Senator. 

Senator BUNNING. We appreciate you being here. 

Secretary POWELL. Thank you. 

Senator BUNNING. We are dismissed. 

[Whereupon, at 12:10 p.m, the committee was adjourned.]

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DEPARTMENT OF TRANSPORTATION’S FISCAL 

YEAR 2004 BUDGET PROPOSALS 

THURSDAY, FEBRUARY 13, 2003

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

The committee met, pursuant to notice, at 2:34 p.m., in room 

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

Present: Senators Nickles, Allard, Burns, Cornyn, Conrad, Sarbanes, Murray, Wyden, Byrd, and Corzine. 

Staff present: Hazen Marshall, staff director; and Don Kent, senior analyst. 

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

Kuehl, analyst. 

OPENING STATEMENT OF CHAIRMAN DON NICKLES 

Chairman NICKLES. The committee will come to order. 

Today we will hear testimony from Michael Jackson, who is U.S. 

Deputy Secretary of Transportation. Mr. Jackson, we welcome you 

to this committee. 

Mr. Jackson serves as the Department’s chief operating officer 

with responsibility for day-to-day operations of 11 modal administrations and works with over 100,000 DOT employees nationwide. 

Prior to coming to this position, he served as chief of staff of the 

Secretary of Transportation during President George H.W. Bush’s 

administration, and prior to that served in the private sector both 

with Lockheed Martin, IMS Transportation Systems and Services, 

and also worked as president of the American Trucking Association. 

Mr. Jackson, we welcome you. Before I call upon you for your 

opening remarks, I will ask my colleague, Senator Conrad, if he 

has any opening remarks he wishes to make. 

OPENING STATEMENT SENATOR CONRAD 

Senator CONRAD. Thank you, Mr. Chairman. Thank you for holding this hearing. Thank you, Mr. Jackson, for being here today. We 

appreciate your appearance. 

Let me talk about what we see in this budget proposal and 

things that concern us, if I can, and then perhaps you could address some of these matters in your testimony, or perhaps we can 

do it when we get to questions. But let me just start with a quote 

from the Director of OMB before this committee earlier this month, 

in which he said, ‘‘A better infrastructure is very good for the econVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00549 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
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omy. When I think of highways, I think first of all of the ways they 

enable businesses and individuals to practice more commerce. We 

need a good infrastructure to do that.’’

I personally strongly agree with the opinions expressed by the 

Director of the Office of Management and Budget. But when I look 

at the President’s budget, I see something that doesn’t match the 

words. The President has put forth a transportation spending plan 

that will force States to cancel or postpone hundreds of road, 

bridge, and transit projects at a time when they are facing their 

own fiscal crises. States such as Texas and Virginia have already 

served notice that they will be canceling hundreds of millions of 

dollars in highway projects in the wake of large State deficits. I am 


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very fearful that the plan put forward by the Administration will 

only make that circumstance worse. 

Let’s go to the next chart. The President has proposed reductions, almost 11 percent below the 2002 level, and 6.7 percent 

below the level expected to be enacted for 2003. We can see the 

baseline for 2004 would be $32.9 billion. What passed for 2003 was 

$31.8 billion. That is the Senate-passed version. For 2004, the 

President is proposing $29.3 billion.

That is a proposal—let’s go to the next chart—that we are told 

will cut jobs by 171,000, that at the time the President is proposing 

a growth package to increase employment, increase economic activity, and yet, on the other hand, is proposing a budget for transporVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00551 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF

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tation that will reduce the number of jobs by almost as much as 

what he is talking about increasing the number of jobs. This to me 

does not make sense.

Let’s go to the next chart. Your own Department issued its conditions and performance report last week. For the highway program 

alone, adjusted for inflation, the report says that we need an average annual Federal investment of $41.2 billion to maintain the existing interstate highway system. To actually improve the system, 

we would need an average annual Federal investment of nearly 

$53.4 billion. Yet the Administration has come forward with a proposed highway funding level that starts at $29.3 billion and only 

reaches $33.9 billion by the end of fiscal year 2009. I really question whether this is a credible budget proposal.


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Now, Mr. Jackson, I could go down a list of other cuts in the 

transportation budget proposal, but I think the other one I would 

like to focus on is Amtrak, cutting Amtrak funding by 14.2 percent 

below what is now expected to be in the 2003 omnibus bill that we 

will act on perhaps as early as tomorrow. Hopefully we will.


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The President has proposed $900 million in Amtrak funding, nearly $900 million less than what Amtrak is expected to ask for 

in order to maintain its existing system and to avoid further delay 

in critical capital improvements in fiscal year 2004. 

Finally, I am also concerned about your proposals to require communities to contribute large subsidies to participate in the essential air service program. I can tell you, in terms of growth, economic development, the single most important thing that companies talk to me about when they are talking about operations in 

North Dakota, bringing operations to North Dakota, is: What is 

your air service? This move on essential air service threatens that 

vital lifeline. 

So these are areas of concern that I hope you will address in your 

testimony or, again, perhaps in questions that we get to afterwards. Again, thank you for being here. 

Chairman NICKLES. Senator Conrad, thank you very much. 

Secretary Jackson, just a couple of comments. Correct me if I am wrong, but in 1998, in highway funds we were spending about $200 

billion. In the year 2000, when we had a big increase in highway 

funds, it went up to $27 billion. The year just completed, in 2002, 

it was $32 billion, so that went up by 60 percent between 1998 and 

2002. Correct me if I am wrong, but that is a tremendous increase, 

funded primarily by gasoline taxes. So I just want to kind of put 


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this in relative—some people say, well, wait a minute, that might 

be less than what we just appropriated—we haven’t finished, but 

the appropriation bill we will finish tonight or tomorrow. Like I 

say, it has been on a very steep climb if you increase spending for 

highways between 1998 and 2002 of 60 percent. That is a pretty 

significant increase. I just wanted to point that out. 

Secretary Jackson, we welcome your testimony today. We have 

a lot of big challenges, certainly in highways, mass transit, essential air service. You have some proposals. We look forward to hearing you explain some of those. So welcome to the Committee. 

STATEMENT OF MICHAEL P. JACKSON, DEPUTY SECRETARY 

OF TRANSPORTATION, UNITED STATES DEPARTMENT OF 

TRANSPORTATION 

Mr. JACKSON. Thank you, Chairman Nickles. I appreciate it. 

Members, I appreciate the ooportunity to be here today. 

Secretary Mineta is unable to be here but sends his warm wishes. He is recovering from back surgery but is doing terrifically well 

and expects to be back in the office soon. 

Chairman NICKLES. Please give him our regards as well. He is 

a friend of all of ours on the Committee. 

Mr. JACKSON. Yes, sir, I certainly will do that. 

On his behalf then, I am pleased to present to you an overview 

of the Department of Transportation’s 2004 budget. As you know, 

President Bush is requesting a $54.3 billion budget for the Department, a 6-percent increase. Also, as you know, two modes of the 

Department of Transportation—the Transportation Security Administration and the U.S. Coast Guard—will be departing the Department on March 1st to go to the new Department of Homeland 

Security. We celebrate their many successes with us, and we look 

forward to working with them as we go forward in this new departmental arrangement. 

I would like to discuss the highlights from the DOT 2004 budget 

and just point to a few key initiatives, and then perhaps we can 

answer some of the questions raised, Mr. Chairman, by you and 

Senator Conrad. 

As you know, the current laws authorizing surface and aviation 

transportation are up for reauthorization this year, and we will be 

spending a significant amount of our energy working with the Congress working on these reauthorizations during the course of the 

year. We will release before too long the details of our aviation and 

surface transportation reauthorizations, but I want to share just a 

couple of the principles that will be animating our work. 

For the surface transportation programs, we will include increased funding flexibility for States and local authorities. We will 

continue to encourage innovative financing tools, and DOT will 

seek to improve efficiency for freight transportation networks and 

to support the more efficient movement of freight transportation. 

We will support efficient environmental review processes and make 

them a priority. We will continue a strong emphasis on public 

transportation by simplifying transit programs and fostering a 

seamless transportation network. Finally, our proposals will include an emphasis on consolidating and expanding Federal safety 

programs. 

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I would like to repeat myself on that point. For DOT, 2003 will 

be a year of special focus on highway and aviation safety. Secretary 

Mineta has challenged the Department to take the same type of innovation and focus and discipline that we used to stand up the 

Transportation Security Administration during this past year and 

focus that same passion on addressing the safety issues that confront the Department. There are forty-two thousand deaths a year 

on our highways. Almost one out of four, or over 9,000 of these 

lives, could be saved if people would just buckle up. We have to do 

better in this. We will do better in this. The President’s proposals 

include some concentration reducing highway fatalities by focusing 

on seat belt usage, impaired driving, and other safety initiatives. 

Regarding the highway reauthorization budget, let me begin with 

the fundamental principle. We are committed to maintaining the 

guaranteed funding levels that link highway funding to Highway 

Trust Fund receipts. We are committed to the firewalls. 

In fact, the President’s budget request will actually propose to 

obligate more for highway programs than we expect to collect in 

the Highway Trust Fund. We will squeeze everything we can out 

of the Highway Trust Fund. We will preserve the principle of the 

firewalls. We will actually partially spend down the trust fund balance, and we will try to squeeze as much value out of the trust 

fund as we can. But the President’s budget does not propose to increase highway user fees. 

For the Federal Highway Administration, the Administration’s 

2004 budget request proposes that all revenue from gasohol taxes 

be deposited directly into the Highway Trust Fund rather than the 

General Fund, as it is currently structured. That is a $600 million 

a year boost in Highway Trust Fund obligations, and it goes 

throughout the course of the reauthorization. 

In addition to making obligations above the level of estimated re- ceipts into the Highway Trust Fund, we unveil a brand new $1 billion infrastructure performance and maintenance initiative specifically aimed at addressing immediate highway needs with projects 

that can be implemented quickly—getting money out to States and 

localities to make essential repairs and to do work quickly. We 

hope this will improve operating efficiency and remove bottlenecks 

and put people to work in the transportation industry. 

All up, our proposed program spends at a level that keeps the 

Highway Trust Fund balance relatively constant. The obligation 

limit for 2004 is $29.3 billion. This is a 6-percent increase above 

the President’s amended request for 2003. 

I would be happy to talk in greater detail in the Q and A session, 

Mr. Chairman, about the annual movements and the levels of investment in the trust fund, and I suspect that your questions will 

point us in that direction. 

When comparing the President’s 6-year surface transportation 

reauthorization proposal in total—including highways, highway 

safety, transit, and motor carrier safety—to the 6 years of TEA–21, 

the President proposes an overall increase of 19 percent. 

Reducing highway fatalities is priority one for the National Highway Traffic Safety Administration, and the President’s budget requests $665 million for NHTSA to reduce fatalities, prevent injuries, and encourage safe driving practices; $447 million of NHTSA’s 

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2004 funding request will support grants to States to enforce safety 

belt and child safety seat use, and to reduce impaired driving. 

At DOT we are also working to keep our highways safe through 

the work of the Federal Motor Carrier Safety Administration by focusing on ways to prevent fatalities and injuries resulting from accidents involving commercial motor carriers. The 2004 budget request includes $447 million to address these problems. 

Another way to improve transportation safety is to continue to 

encourage the use of public transit, a dependably safe and efficient 

way to get people where they need to go. The President’s 2004 

budget request includes $7.2 billion to strengthen and maintain our 

public transportation networks. It includes $1.5 billion to fund 26 

new start projects that will carry 190 million riders annually when 

completed. 

Having touched briefly on these surface issues, I would like to 

turn to the reauthorization of our aviation program. While we will 

soon release policy details of our aviation reauthorization proposal, 

let me say the President is requesting $14 billion for FAA programs. 

Because travel demand in air services will inevitably return to 

pre-9/11 levels, and because we will face once again capacity problems and constraints in our aviation system, it is important to continue our Federal investment in this area. It is also important to 

continue to remain focused on aviation safety issues to meet our 

goal of reducing aviation fatality rates by 80 percent over the period from 1996 to 2007. 

To meet both safety and mobility needs, the budget proposes to 

spend a greater portion of the accumulated cash balances in the 

Airport and Airway Trust Fund. Again, we propose to spend down 

the trust fund. In the post-9/11 environment, receipts into the trust 

fund have dropped. We are proposing to work hard to use the 

money that we have available in the trust fund and extend it as 

far as possible. 

The President’s budget request and our reauthorization proposals 

maintain current levels of aviation infrastructure investment and 

expand FAA’s safety staff, including the number of air traffic controllers needed to man our air traffic control system in the future 

as we face an anticipated cycle of retirements in the next several 

years. 

Let’s turn now to railroads, a topic that has already been raised. 

First, Amtrak. Amtrak faces severe and persistent financial challenges. The Administration has asked Congress to adopt reforms 

that will strengthen Amtrak’s business operations and its financial 

condition, but Amtrak continues to request funds, indeed request 

more funds, to maintain the same mode of operation that has existed for the last 30 years. The Federal Government simply cannot 

afford business as usual at Amtrak. 

The 2004 budget request includes $900 million for Amtrak. This 

is a funding level with a message. We need to do better at Amtrak. 

We need to make core business improvements. 

Passenger rail, I would like to say, is an important part of the 

overall transportation infrastructure. We need viable passenger 

rail, and we look forward to working with Congress on an economically viable reauthorization proposal. 

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Finally, I want to share with you the President’s request for our 

maritime programs. The Maritime Administration supports essential transportation and intermodal connections for domestic and 

international trade, and the President has requested $219 million 

for MARAD. One of MARAD’s continuing challenges is the disposal 

of obsolete ships, those that pose a potential environmental risk to 

our Nation’s waterways. The 2004 budget request includes $11.4 

million for removal of the highest risk vessels. 

My prepared remarks focus on these and many other parts of the 

Department’s transportation objectives. I would like to thank you 

again for the opportunity, Mr. Chairman, to speak today with the 

Committee. I look forward to responding to any questions that you 

may have, and I would ask that my prepared remarks be considered part of the record. 

[The prepared statement of Michael Jackson follows:]

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Chairman NICKLES. Secretary Jackson, thank you, and we will 

include your remarks, and I appreciate your presentation. Let me 

just ask you a couple quick questions, and then we will go to our 

committee members. 

You are going to be asked repeatedly and maybe—the rec- ommendation that you have for highways is a total of $29 billion? 

Mr. JACKSON. $29.3 billion is the total Federal aid highway obligation limit. 

Chairman NICKLES. The bill that is just now being passed is $31.8 billion or something like that. 

Mr. JACKSON. That is what I am told. 

Chairman NICKLES. So many people will come to you and say, 

well, wait a minute, we are having a reduction. How do you justify 

or explain that reduction in highway funds? Granted, I mentioned 

historically it is a 60-percent increase from where we were just a 

few years ago, in 1998, I believe. But, still, the highway users, 

when they receive those funds, they only want to go up. 

Mr. JACKSON. Yes, sir. 

Chairman NICKLES. So how do you explain that? 

Mr. JACKSON. It is an excellent and important question, and I appreciate it, and I will try to unpack it in a couple of different ways. 

First, the Administration supports the principle that receipts into 

the highway program should fund the highway program. 

In addition, we have offered to spend down the trust fund balances by slightly over $1 billion annually over the course of this 6-

year reauthorization cycle, leaving about a $14.6 billion balance at 

the end of this period. It fluctuates above and below that during 

the course of this period, but call it $15 billion, and we think that 

is a prudent balance in the trust fund. All of those moneys are obligated, and if the States asked us to spend them out at a rate that 

is different than our historical rate, we would be obligated to pay 

those funds. So we think that is a prudent balance. 

Chairman NICKLES. Secretary, let me ask you a question. You 

mentioned all the funds in the trust fund are obligated. You mean 

there are already existing contracts, highway contracts, out in the 

States? Those contracts are initiated so if there is a trust fund balance of—of 20? 

Mr. JACKSON. About $15 billion is what is projected in our proposal for the course of the reauthorization cycle. 

Chairman NICKLES. What are the existing obligations against 

those trust funds right now if you just stopped? If we completed 

every contract that is on the books, how much——

Mr. JACKSON. About $42 billion, roughly. I can explain a little 

bit. There is a pretty standard spendout rate for our obligations. 

Approximately 68 percent outlays over the first 2 years, and then 

you spend out the remaining funds over the next seven years. So 

we have a lot of experience and a pretty clear picture about how 

these obligations spend. But the first point here is that we have 

proposed to spend down the trust fund by a little over $1 billion 

a year. That is part one. 

The second part gets us into the so-called RABA discussion. In 

TEA–21, the target obligation level set by the authorizers was 

$27.18 billion—$27,180,000,000—in 2002. We had, however, the 

benefit of a $4.5 billion RABA, revenue aligned budget authority, 

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plus-up. It is like this. I can explain it as working in a regular job 

where you have a salary, and if you get the benefit of a bonus at 

the end of the year you have that added to your salary and that 

to spend. That is exactly where we were in the year 2002 with the 

States. We had a baseline target that the bill authorized for us to 

shoot for. That is the $27 billion figure. But the economy was doing 

very well, and we had created a mechanism in the previous authorization to allow us to enjoy the benefit of that booming economy. 

What has happened is that people have come to expect that not 

just their base salary, but also their bonus, is their entitlement. 

That is the problem that we are facing here. The trust fund revenues simply will not justify paying at this level. If we took the 

$31.8 billion number and we simply adjusted that for inflation over 

the course of the next 6 years, the Highway Trust Fund would be 

bankrupt by the end of this reauthorization cycle. So the Administration is saying that we have put a proposal on the table that is 

prudent. It is balancing what is a difficult set of decisions for the 

Nation at a time when there are tremendous strains on our budget 

and tremendously important priorities to choose from. 

So we think it is a prudent budget. We think it is a fair budget. 

We think it is a reasonable budget. But most of all, it is a budget 

that lives within the context of the existing law. 

Chairman NICKLES. Secretary Jackson, thank you very much. 

We have several members. I am going to ask all of our members—and I was trying to keep my remarks with 5, 6, or 7 minutes. 

I would like to ask all members to do that as well. 

Senator Conrad. 

Senator CONRAD. If the Chairman would alert me at the end of 

5 minutes, I would appreciate that so I don’t go over either. 

Mr. Jackson, you are familiar with the conditions and performance report on highways done by the Department of Transportation? 

Mr. JACKSON. Yes, sir, I am, Senator. 

Senator CONRAD. Is my reading of that correct that they are saying to maintain the current system we would need $41.2 billion a 

year? 

Mr. JACKSON. That is the report’s finding, yes, sir. 

Senator CONRAD. The investment needed to improve the system, $53.4 billion? That is my reading of the report. 

Mr. JACKSON. That is the finding of the report, yes, sir, but it depends on what you mean by ‘‘improve.’’ You could obviously improve the highway system by every dollar that you add into it if 

you spend those dollars wisely. 

Senator CONRAD. But I guess we would go back to the fundamental there, to maintain the current system, $41.2 billion. So 

would you agree that a budget that the President proposes of $29.3 

billion, according to your own Department’s analysis, will not maintain the current system? 

Mr. JACKSON. I think we can use our money better, and we can 

address the concerns raised by this report by spending wiser and 

spending appropriately. Let me say that in my experience with the 

Department dating back to the last Bush administration, the Congress has never appropriated these target-level funds. They are 

based on descriptions and analyses of what professionally the highVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00568 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
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way engineers would like to see as a maintenance level, and to my 

knowledge, those levels have never been reached in appropriations 

for us in recent times. 

Senator CONRAD. So would I be correct in concluding that you don’t agree with your Department’s report that $41 billion is necessary to maintain the current system? 

Mr. JACKSON. The report of the Department lays out an approach and a program to use $41 billion wisely, and I am telling you we 

don’t have $41 billion to use. 

Senator CONRAD. Let me just ask you this: You have indicated 

that you are using all that the trust fund has available. Are you 

familiar with the Congressional Budget Office’s runs that have 

looked at assuming that additional revenue would be credited to 

the trust fund from the President’s proposed policy of transferring 

2.5 cents a gallon in ethanol tax to the trust fund that currently 

is being credited to the general fund and how much money that 

would raise? I am told that the CBO’s runs indicate that if we simply grew at the rate of inflation from the 2003 level, the trust fund 

balances would never fall below zero and never trigger a gas tax 

increase, but that $3 billion would be available for 2004 above what 

the Administration has recommended. 

Mr. JACKSON. I am not familiar with that study, sir. Our own internal Administration projections estimate that moving the 2.5 

cents from the general fund to the Highway Trust Fund will yield 

$600 million annually. 

Senator CONRAD. Yes, that is exactly what CBO has found, $600 million a year, but that that would permit an expenditure of $3 billion more in 2004 than what the President has recommended. 

One other scenario that they have run was starting at $31.1 billion in 2004, growing at the rate of inflation thereafter, a balance 

of $5 billion would still be maintained in the Highway Trust Fund, 

and that 2004 funding level of $31.1 billion would be $1.8 billion 

above the President’s recommendation. Are you familiar with that 

analysis? 

Mr. JACKSON. I have not seen that run, sir. I would be happy to look at it. The $5 billion is what we would consider a perilously low 

balance in the Highway Trust Fund. We have looked at these numbers very carefully. There certainly is a zone for reasonable disagreement about what an appropriate level of balance is in the 

trust fund. But that level would be perilously low and below where 

we think it should be. That strikes me as approximately a 2-month 

reserve. 

Senator CONRAD. That is the calculation, a 2-month reserve. 

Let me just conclude by saying that when you say the Nation 

can’t afford $900 million more for Amtrak, it strikes me that this 

administration is recommending a $1.5 trillion tax cut. That to me 

is unaffordable. This is a matter of choices. We are going to have 

to make choices. I don’t think it is a good choice to decide we are 

going to cut highway and bridge construction in this country and 

lose 171,000 jobs when the economy is weak. I must say that 

doesn’t make sense to me. 

I thank the Chair. 

Chairman NICKLES. Senator Conrad, thank you very much. 

Senator Burns. 

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Senator BURNS. I am going to pass. I am working on something. 

I have some information coming. 

Chairman NICKLES. Senator Allard. 

Senator ALLARD. I want to get some clarification on the unobligated dollars that we have in the Highway User Trust Fund. 

Mr. JACKSON. Yes, sir. 

Senator ALLARD. Now, the Chairman was talking about obligated 

dollars. I guess my question is: Do we have any unobligated dollars 

at all sitting in the trust fund? 

Mr. JACKSON. No, sir. All of the trust fund balances are obligated. That is different than, for example, the FAA’s AIP program 

where we do have some portion which is not obligated. 

Senator ALLARD. OK. So just so we get this and I understand it 

correctly, there are no funds in the highway transportation budget 

that have not been obligated? 

Mr. JACKSON. That is correct. That is what the balance is, all of 

that roughly $15 billion. 

Senator ALLARD. So when city and county people come to us and 

say we want the unobligated amounts, what they are wanting is 

a lower balance in the obligated funds, which may mean if we get 

into a shortage of money that somebody’s project that was started 

doesn’t get completed. 

Mr. JACKSON. Exactly. 

Senator ALLARD. OK. Generally what likelihood do we have that 

we will not be able to measure up to those obligations that we have 

now in the trust fund? Do you have confidence that we’ll be able 

to meet all those obligations we currently have? 

Mr. JACKSON. I do. We think that the level that we have pro- posed, which reduces the trust fund balance to about $14.6 billion 

by the end of this authorization cycle, is a fair and a prudent balance to maintain in the account, and that is based on a fair bit of 

history and a lot of close scrutiny. 

Senator ALLARD. You are willing to spend out the $1 billion? 

Mr. JACKSON. Yes, sir. 

Senator ALLARD. That has been obligated? 

Mr. JACKSON. Right. So——

Senator ALLARD. That is $1 billion out of somebody’s project that 

is going on out there. 

Mr. JACKSON. It is $1 billion——

Senator ALLARD. Are you comfortable with that? 

Mr. JACKSON. Yes, sir, we are. We are accelerating down, we are 

spending down that balance a little bit, and we think that a modest 

spend-down—it is sort of hard for me to think of a spend-down of 

$1 billion as modest, but in the scheme of this program, that 

spend-down level seems reasonable to us. We have had extensive 

conversations in the Administration about that, and that is the 

comfort zone. 

Senator ALLARD. So that is based on current law? 

Mr. JACKSON. That is exactly right. 

Senator ALLARD. So the Congress would have to be careful that 

they don’t enact laws in what length of period that might have an 

adverse impact on the balance of that? Because you are assuming 

under current law that there will be money there that you can 

spend down your obligated dollars, and if we do something that 

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would reduce the collection of fuel dollars in some way or another, 

it could have even a greater impact on those dollars, right? 

Mr. JACKSON. Yes, sir. It assumes that the sources of revenue 

proposed in the President’s budget are adopted. It is basically not 

proposing a change in any of the user fees that drive revenue into 

the trust fund. 

Senator ALLARD. I guess it is possible, if things really go bad, 

that you would come back and ask for a tax increase if you some 

way or another saw that trust fund get into trouble and we have 

overobligated it, right? 

Mr. JACKSON. That is not something that we are contemplating. 

We are trying to find a reasonable proposal and a fair proposal that 

doesn’t require any changes in taxes and user fees. 

Senator ALLARD. You are 100 percent confident of that, 90 percent, 75, 50 percent? 

Mr. JACKSON. I am very, very confident that it is a fair and prudent level to maintain. 

Senator ALLARD. So 90 percent confident. 

Mr. JACKSON. And RABA, the revenue aligned budget authority, 

does provide a mechanism to reduce the obligation limitation if the 

economy does not perform and revenues into the trust fund are 

below where they were anticipated to be. That is what happened 

in 2003. The trust fund didn’t generate enough money to support 

the $27 billion baseline, not to mention the $31.8 billion funding 

level which we had enjoyed as a result of the boom economy in 

2002. However, when we adjusted our 2003 budget request downward per the law, it turned into a no-starter. Frankly, the Administration, after some brief discussions with the Congress, agreed that 

we should at least use additional funds to bring us to the $27 billion baseline level. I understand that Congress is proposing to pass 

legislation at the $31.8 billion level, which is to add the bonus that 

came through the good years to 2003 as well, even though the revenues into the trust fund don’t support that level of expenditure. 

Senator ALLARD. Is that a transfer out of general revenues? Or 

where is that? 

Mr. JACKSON. Well, it comes out of the trust fund money and 

does reduce the trust fund balance, but it is a deficit impact because this is money that we hadn’t intended to spend on the program. 

Senator ALLARD. Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Allard, thank you very much. 

Next I will call upon our distinguished colleague, and the first 

time I have had him join our committee during our hearing. Senator Byrd. Senator Byrd, just for your information, we usually call 

on people, recognize them on their order of appearance. If you wish 

to defer, we will be happy to accommodate you as well. 

Senator BYRD. Thank you, Mr. Chairman. 

Mr. Jackson, does the Administration support Amtrak serving as 

their national passenger rail system? 

Mr. JACKSON. We do believe that Amtrak is an essential part of 

intercity passenger rail for the foreseeable future, although we 

have tried to lay open the prospect that, some competition could be 

injected into intercity passenger rail in a modest and thoughtful 

way. We have had expressions of interest from other competitors 

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or potential competitors of Amtrak to provide some service of that 

sort. 

Senator BYRD. But the Administration does support Amtrak as 

the national passenger rail system? 

Mr. JACKSON. We have proposed $900 million worth of support 

for Amtrak in our 1904 budget, yes, sir. 

Senator BYRD. When will it begin to propose a realistic funding 

level that will address Amtrak’s long-term viability? 

Mr. JACKSON. This year we hope that the reauthorization cycle, 

Senator, will allow us to take a good hard look at the fundamental 

business problems that face Amtrak. Working with you and your 

colleagues in the Senate and with the House, we hope to come up 

with a plan that would allow them to be viable for the long haul. 

We believe that fundamental business reforms are needed. I will 

say that I very much think that the current president of Amtrak, 

David Gunn, is making some very important strides in bringing 

some business discipline to Amtrak, so we hope to continue to work 

closely with them as well. 

Senator BYRD. Mr. Gunn took the reins at Amtrak just last 

spring. He was given the mandate to strengthen Amtrak’s performance, and yet it seems as though the Administration is constantly 

dictating reforms to Mr. Gunn and the Amtrak board. Mr. Gunn 

has asked for the time and opportunity to meet the mandate given 

to him just a few months ago. Should we not let him do his job and 

find the best plan for Amtrak? 

I think that it is really the responsibility of Congress and the Administration and our partners, which include Amtrak, include the 

States, and include all the people with equity in this system to set 

a vision for Amtrak and tell them where we think they need to go, 

and then David will be a good executive and take the railroad 

where the Congress and the Administration point him to. So the 

budget that was placed before us just earlier of $1.8 billion is really 

a budget that does not fix Amtrak. It just tries to stabilize a patient that is already in the ICU, and what we think we need to do 

is figure out not just how to stabilize the patient, but to make the 

patient healthy, and so we think that the time spent in reauthorization to look at all the core problems that we have had for 30 

years and see if we can find a better way of doing business is time 

well spent. 

Senator BYRD. I think the Administration will be supportive of 

Amtrak’s long-term viability. I live in an area of the country that 

does not have much of an opportunity. It cannot count on much by 

way of airline service, and when it comes to building highways, we 

have spent enormous sums per mile on highways. We have to have 

some kind of a rail system we would think, and I hope that the Administration will be realistic when it comes to dealing with Amtrak. 

If the $1.8 billion budget request from Amtrak sustains the patient, a $900 million budget from the Administration kills. 

Mr. JACKSON. Sir, I think that the way I would characterize it 

is that the patient is in ICU and we need to look at what they need 

to live, and then we need to see where they need to go. The proposal to maintain business as usual for the next 4 years while we 

try to figure out how to run the operation is not, in our view, a viaVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00572 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
567

ble proposal. We ought to face the tough choices now and tell Amtrak where it needs to go and what it needs to do to make fundamental business reform. So we do believe that Amtrak and intercity passenger rail are vital parts of the transportation network. 

We need intercity passenger rail, and we will support it and work 

with you as we take on the reauthorization challenge. 

Senator BYRD. I hope we will do that. We are supportive of the 

airlines when they lose money. We are quick to come up with a 

bagful of money when the airlines need money. We are helpful to 

the waterways. I have been around here since—I was with Mr. Eisenhower when he proposed the highway system. I voted for it, and 

have voted for the moneys to sustain it over these many years. I 

have voted for appropriations for the Appalachian highway system. 

When it comes to the rail system we want to pinch pennies. We expect too much. We need a rail system in this country. I would hope 

that the Administration would keep that in mind. The States have 

already great financial burdens on them. They are experiencing severe budgetary difficulties. I hope we are not suggesting that the 

States should cut their programs and public services even further 

to finance a national rail system. 

Keep this on mind on the rail system, will you, please? 

Mr. JACKSON. Yes, sir. 

Senator BYRD. As to the Highway Trust Fund, even in the wake 

of the disturbed funding increase accomplished through TEA–21, 

we continue struggling to maintain the current inadequate conditions of our highway network. 

Mr. Phil Gramm is here. He was so helpful as we worked together a few years ago on our highway bill. 

As an example, the Road Information Program reports that one 

in four of our Nation’s bridges is classified as deficient, and that 

the average age of bridges in the U.S. is 40-years-old. In the light 

of the action by the Conference Committee, does the Administration stand by its proposed fiscal year 2004 highway funding level 

of $29.3 billion which will be a $2.5 billion cut from the level of 

funding tentatively due to be set for fiscal year 2003? 

Mr. JACKSON. Yes, sir. Although, Congress has not yet passed 

this bill, I understand that it is headed in that direction. The Administration is mindful of the many, many challenges that face the 

Congress in making prudent budgetary decisions, and we think 

that $29.3 billion is a prudent funding level for this program. 

Senator BYRD. It has been estimated that every one billion dollars of spending on our Nation’s infrastructure produces approximately 47,500 good paying jobs. With the Administration’s stated 

focus on the creation of new jobs to replace those that have been 

lost during the past 2 years, why has the Administration chosen 

not to avail itself of the opportunity to invest in the creation of approximately 132,750 jobs for our economy. 

Mr. JACKSON. Well, the understanding that transportation investment does help stimulate economic growth was a part of the 

consideration that impelled us to add $1 billion a year to the program. The Administration takes the position that in order to stimulate growth within the economy, the most efficient tools are the tax 

policy tools that apply across the spectrum of the economy as proposed by the President. 

568

Senator BYRD. When it comes to the matter of future highway 

spending, your formal opening remarks, Mr. Jackson, state that the 

Administration will squeeze everything we prudently can from the 

trust fund, but the President’s budget request does not propose new 

user fees. Your budget request for the FAA have included appropriations from the General Fund totaling about $6 billion over the 

last 3 years. You have asked for these moneys out of the General 

Fund because you know that there are not adequate resources in 

the Airport and Airways Trust Fund to pay for it. If, as you claim, 

the Highway Trust Fund does not have adequate resources to address all of the infrastructure spending that we need to address the 

congestion problem, why have you not requested appropriations 

from the General Fund to address this need? 

Mr. JACKSON. On the whole, the Administration believes that we 

should try earnestly to fund the highway needs with money generated by the trust fund, that money in to money out of the trust 

fund is the right way to provide stability and long-term common 

sense for the country on surface transportation investments, in this 

hugely important program. So we feel like that we ought to try to 

live within the walls that we have constructed there, and that is 

what our proposals represent. 

Senator BYRD. Do I have any time left, Mr. Chairman? 

Chairman NICKLES. I have given you about twice as much as——

Senator BYRD. Have you really? 

Chairman NICKLES. I was very interested in your questions. 

Senator BYRD. Oh, thank you. Thank you. I have some more interesting questions. [Laughter.] 

Chairman NICKLES. Well, we can have a second round. I would 

like to let other senators ask a question. 

Senator BYRD. Well, thank you very much. 

Chairman NICKLES. Thank you, Senator Byrd, and we are delighted to have you on this committee. 

Senator CORNYN. Senator CORNYN. Thank you, Mr. Chairman. 

I would like to, Mr. Jackson, ask a few questions about Amtrak 

as well, because like Senator Byrd, I would like to see Amtrak succeed, but things are not looking too good. I note that the omnibus, 

the Conference Committee approved a $1.1 billion for Amtrak for 

2003, but your budget request for 2004 is $200 million less than 

that; is that correct? 

Mr. JACKSON. Yes, sir. 

Senator CORNYN. Could you sort of describe for me sort of what 

your vision is, what the Transportation Department’s vision is 

about the future of Amtrak? Do you envision it as a national passenger rail system? I hear you talking about intercity, and certainly we know that in places like the Northeast it is perhaps more 

financially viable, where people are closer together. 

Mr. JACKSON. Yes, sir. 

Senator CORNYN. But do you envision it continuing as a national 

rail system? 

Mr. JACKSON. I do think that a network of intercity rail service 

is something in our future and should be in our future, but precisely what that network will look like and how we will manage it 

in a businesslike and publicly responsible fashion is the subject for 

569

the reauthorization debate. We do not go into that debate with an 

assumption that we will do everything that we are doing today, nor 

does it assume that we are limited and not able to add different 

and new types of service in the future. It says that we just have 

to figure out how to do it in a common sense businesslike way. So 

we are asking for some reasonable competition, and we are asking 

for States and localities to help pay the load if there is a need for 

an operating subsidy, not unlike the way that we manage our Federal transit programs. We are, at the Federal level, focused on the 

infrastructure investment, and if that infrastructure investment 

needs an operating subsidy, we feel the States should share that 

burden. Senator Murray’s State is an excellent example of a State 

that has stepped up to the plate and made a very significant investment in railroad service. 

So we are trying to encourage more States to do what her State 

has done. We are looking for a way to work with the States in a 

prudent fashion. When Secretary Mineta and I met with the President on this topic, he said that we want to make change, but he 

is mindful of what his previous job was as Governor of your State, 

sir. He knows that the States are pressed and that we have to be 

able to put a proposal on the table that is prudent, measured and 

allows us to transition from where we are today to where we need 

to be. We need a separate plan for the Northeast corridor that can 

be understood in much different economic terms than our long-term 

rail system. 

Senator CORNYN. Well, I am intrigued. For example, you talk 

about competition. What would competition look like for something 

that is bleeding as much red ink as Amtrak is now? Who do we 

expect to compete to lose money on the order that Amtrak has been 

losing money? 

Mr. JACKSON. Well, what you would have to decide is whether 

you can run a railroad with a more cost effective operating structure than Amtrak has done. I believe the answer to that is yes. I 

believe if you talk to the President of Amtrak, he would tell you 

that he can reduce operating expenses as well. For the last two 

years, I have had the privilege of serving on the Amtrak board representing the Secretary of Transportation. I have had the benefit 

of looking at that operation, and, I certainly believe that we can do 

better. 

But the idea is, if a State wants to guarantee that a given route 

is run, it could run a competition among any interested parties to 

operate rail service in a given corridor. Then if some sort of subsidy 

is needed, the State would have to face up to the question of 

whether among all the transportation investments that it has to 

make, this is a reasonable and prudent subsidy. Right now the 

States do not have to make those investments. They just wait for 

the Federal Government to fund the program. 

Senator CORNYN. Let me ask you about that last point. Do you 

have a spreadsheet, or does it exist somewhere in the Department 

of Transportation, a comparison of the per capita—the per mile cost 

of the Federal—excuse me—the subsidy that the Federal Government pays for rail, air and highways, and how those compare? 

Mr. JACKSON. I am certain we can get you some numbers like 

that. In the case of Amtrak we have figures about the individual 

570

subsidies for individual routes. That data is fairly widely available 

from Amtrak, from the Inspector General, and from the Department and other analyses. In other modes of transportation it depends on whether you characterize user fees as a subsidy or not. 

If you are paying highway taxes, you are paying for what you get. 

Senator CORNYN. I would be interested to see if you could put 

your hands on something like that or——

Mr. JACKSON. I would be happy to put something like that together. 

Senator CORNYN [continuing]. Or approximating that, I would be 

interested. 

Mr. JACKSON. Yes, sir. 

Senator CORNYN. Finally, and quickly, as you know, my State 

has a 1,200 mile border with Mexico, and as a result of NAFTA we 

have seen a tremendous increase in the amount of traffic, commercial traffic, which benefits the Nation, coming across our roads, so 

obviously they are burdened with additional traffic. There is concerns, of course, about safety issues. No one wants to look in their 

rear view mirror and see an 18-wheeler with bald tires and bad 

brakes bearing down on their family. But can you sort of describe 

in summary fashion what this budget includes in terms of enhancing the safety of our roads along the border and maintaining those 

roads to accommodate that huge increase in traffic, as well as population? 

Mr. JACKSON. Yes, sir. First of all, the budget does include some 

very considerable investments, and I would be happy to pass very 

detailed budget information to you about the border investment in 

particular. But let me just characterize it this way for you to get 

oriented on it. In the appropriations act 2 years ago, we had quite 

a bit of conversation about how to meet our NAFTA obligations and 

what type of investments were needed at the border for safety inspectors and for weigh-in motion or weigh scales to do the business 

of enforcement. We have made some very, very considerable investments there. The Federal Motor Carrier Safety Administration’s 

enforcement tools at the southern border have grown by about 25 

percent overall, so we have a very large number of people. We have 

invested in border crossing technology with the States of Texas, 

California, New Mexico and Arizona, but a very large part of that 

investment went into Texas. We are awarding safety education 

grants for the States that have this border work to do with us, so 

we are making some considerable investments and putting a very 

considerable number of our staff and enforcement folks into the 

field in our border states. 

Senator CORNYN. Like the Amtrak information you are going to 

get for me, that comparison, I wonder if you could help direct my 

staff and I to the specific investment that is made under this proposed budget to deal with that——

Mr. JACKSON. Yes, sir, I would be happy to put a little package 

of that together and convey it to you, and we would be happy to 

brief your staff if you would like detailed questions answered on 

any of those issues. 

Senator CORNYN. Thank you very much. 

Thank you, Mr. Chairman. 

571

Chairman NICKLES. Senator Cornyn, thank you very much. Senator Corzine. 

Senator CORZINE. Thank you, Mr. Chairman. Welcome the witness. 

First I would observe, I would like to see some of those subsidy 

numbers, too, for various modes of transportation. 

Mr. JACKSON. Yes, sir, Senator. 

Senator CORZINE. Second, I would identify with a number of the 

Senators who have talked about the difference between a conditions and performance report with regard to highways, and what 

needs to maintain, and then obviously to improve the system. But 

I note with regard to mass transit the percentage differences between those are even greater than they are actually for highways. 

Got almost double, over double, just to maintain the mass transit 

system, if I have read your report right, 7.2 is the number, flat line 

number year to year, and 14.9 is the maintenance number, and 

$20.6 billion is suggested as bringing it up to a level that would 

improve the condition and performance. Am I right on those numbers? 

Mr. JACKSON. I think that you have the basic numbers from the 

report as printed. 

Senator CORZINE. So I think the need of maintenance and improvement with regard to mass transit is equally important, and 

certainly in our highly urbanized areas it is true. 

I just want to make sure that I am reading this that we are not 

changing—you are not suggesting changing the formulation that 

funds mass transit on its relative basis to highway funds. 

Mr. JACKSON. We are suggesting making some awfully important 

programmatic improvements in it, but we are still funneling money 

into the transit program through the trust fund mechanism that is 

in place. Actually, transit——

Senator CORZINE. At roughly the same percentages, if I have——

Mr. JACKSON. Actually, the transit portion grows by 2 percentage 

points relative to the previous authorization cycle and the money 

that is required to be spent out of the Highway Trust Fund. 

Senator CORZINE. I have a little trouble tracking all the math, 

but——

Mr. JACKSON. I don’t blame you. There are some pretty big numbers. 

Senator CORZINE. I would say that flat-lining mass transit in a 

world where we clearly have new safety needs in the context of 

homeland security is a tough task. That is before any allowance for 

inflation, which is an absolute down. So I think in some context, 

given the challenges for our mass transit system to be secure for 

those that use it, and given that many of the identified targets that 

we hear about or potential targets identified, I think the overall decrease that is actually happening to mass transit with a flat-line 

number is really substantial relative to performance and service to 

the communities that are at hand. 

Mr. JACKSON. Let me help unpack that one just a little bit, if I 

could, Senator, because I share your concern about the importance 

of transit and the focus on security. We certainly feel like the transit agencies that operate in your State and in the New York region 

572

just were phenomenal stars—the story of well-trained and professional folks—on 9/11. I can help unpack it a little bit this way. 

First of all, the Administration’s proposal gives States a significant amount of new flexibility to address their needs rather than 

have very stovepipe categories and say they can only apply this 

much for buses, this much for research, etc. We are trying to say 

give the States the flexibility to use that money. That is a very significant help. 

Second, we are proposing a 25-percent increase in the New 

Starts program, which funds is our major transit investments, and, 

finally, a 20-percent increase and support for rural areas. So that 

is a significant thing. 

Let me talk about the top-line dollar. You are a man who understands top-line dollars—and bottom-line dollars. 

Senator CORZINE. I like bottom-line dollars. 

Mr. JACKSON. Those, too. Well, I will talk to you about the bottom line then. $1.2 billion was flexed out of the Highway Trust 

Fund to support, mass transit programs in 2002. So we created in 

TEA–21 the capacity to take Highway Trust Fund money and use 

it on transit projects. Frankly, you can go both ways. If I remember 

correctly, $2 million went from transit accounts into highways and 

$1.2 billion went the other way. 

So when we looked at the experience of States and how they 

were using the money with their localities, what we found is that 

there is a significant kicker that is embedded in the program that 

has grown over time and that communities have come to understand and use to make effective transportation investments. So I 

think that one thing that is not present on that bottom-line number of transit funding is this experience of flex funds being used to 

substantially improve what we have got there. We expect that to 

continue. 

Senator CORZINE. I know I am getting down to the long end of 

my 5 minutes. I want to totally identify with the series of questions 

that Senator Byrd asked with regard to Amtrak. I am sure other 

folks will. I do want to emphasize, though, that tunnel safety 

money and safety money with regard to Amtrak has not flowed, either from FEMA or from the Transportation Department, at least 

to my knowledge, for the on-the-ground folks like the Port Authority of New York and New Jersey, and I suspect we will hear the 

same thing from Maryland and other places. I think that for those 

safety considerations and security considerations, it is money out 

of one pocket which is continuing—you may call them stovepipes, 

but, you know, it is a very hard choice that we are putting on 

States that are actually in fiscal crisis right now and have constitutional responsibilities to balance their budgets. 

I understand we have overall budget constraints. That is why we 

are having these hearings. But this is a very, very tough choice 

that we are backing our States into making. 

Chairman NICKLES. Senator Corzine, thank you very much. 

Senator Murray. 

Senator MURRAY. Thank you, Mr. Chairman, and thank you, Mr. 

Jackson, for being here today, and I join my colleagues in sending 

with you our speedy recovery wishes to Secretary Mineta. 

Mr. JACKSON. Thank you, Senator. I will pass those along. 

573

Senator MURRAY. Thank you. The conference agreement that 

closed this morning provides close to the level of funding that Amtrak requested for 2003 when you consider the decision to delay the 

$100 million. I think we have $1.15 billion for 2.3, and you have 

heard the concern expressed here on the Budget Committee about 

that today. 

Last year, in a hearing in front of the Transportation Appropriations Subcommittee, you testified that the 2003 budget request of 

$520 million was a place holder and that your Amtrak reauthorization proposal would be coming to Congress shortly. As you and I 

know, we have had this conversation a number of times. Your 2004 

budget, which we now have, contains $900 million for Amtrak, 

which is $250 million below what we agreed to last night. But Amtrak is telling us they need $1.8 billion to stay functional. 

You have said now for over a year that we are going to get an 

administrative proposal on reauthorization. Can you tell us when 

we expect to see that? 

Mr. JACKSON. We have a proposal that is reaching the final 

stages within the Department, and we expect to move it up in a 

timely fashion this spring. I can’t give you an exact date, but I can 

tell you that the Department has had extensive conversations within the Administration. We are absorbing those into some actual——

Senator MURRAY. Are you planning on putting a written proposal 

before Congress? 

Mr. JACKSON. We are, yes, ma’am. 

Senator MURRAY. I know you represent Secretary Mineta on that 

Amtrak board and know all of the tremendous problems facing it. 

Do you think that if we appropriate your request of $900 million 

for Amtrak in 2004 that we will be forced to cut routes or services? 

Mr. JACKSON. I think that we will have to look at what the Congress chooses to do in the reauthorization to answer that question 

fully. Just to give you an example—I am not trying to dodge the 

question, but if every State were to belly up to the bar the way 

your State has done in making a partnership commitment with 

Amtrak——

Senator MURRAY. With current State budget deficits, I don’t 

know how much longer any of them will be able to do that. 

Mr. JACKSON. Right. Well, there is a rather large budget deficit 

that is associated with this year’s budget Federal proposal as well, 

and so we are all juggling those multiple good objectives. So I think 

that we have to dig into this reauthorization program. We look forward to engaging in that. 

Senator MURRAY. I look forward to seeing your written proposal 

when it comes. 

Mr. JACKSON. OK. 

Senator MURRAY. I did want to thank you. Your budget includes 

$75 million for a Sound Transit link light rail, and I want to thank 

you and Secretary Mineta and FTA Administrator Jennifer Dorn 

for really working hard on this project. It is an extremely important one for the Seattle-Tacoma area. I wanted to ask you if in putting this money in your budget, is it your Department’s belief that 

the revised $500 million FFGA will be signed this year? 

Mr. JACKSON. I can do you one better than that. We hope it will 

be signed before the end of this fiscal year, and we are having a 

574

very good relations in the conversation with Sound Transit. So I 

am very hopeful. I think Administrator Dorn——

Senator MURRAY. Do you know when you are going to send it to 

Congress for our review yet? 

Mr. JACKSON. I don’t know that. I know that they are working 

very hard on it, and at the risk of being obsequious, let me say that 

we are very grateful for your intervention in this particular application. It has made a big difference, and thank you for your work 

in bringing this project to the point where it can be considered for 

an FFGA this year. 

Senator MURRAY. Great. Thank you. I look forward to working 

with you again. Thanks for your work on that. 

One last question really quickly. I wanted to follow-up on Senator Cornyn’s question on the Mexican border. You know the Ninth 

Circuit decision, which I noticed you didn’t answer in your response 

to him. The transportation appropriations bill required you to beef 

up the safety checks and inspection procedures, and now the Ninth 

Circuit Court of Appeals has forbidden you from opening the U.S.-

Mexican border because there was not an environmental impact 

statement, I believe is the court decision. Do you know how long 

it is going to take you to prepare that EIS? 

Mr. JACKSON. We don’t. We did an environmental review, and I 

may not have the exact term of art for what it is called. It is an 

environmental assessment shy of the full-blown EIS. We believe 

that that was the appropriate level of review for this particular 

project. Regrettably, the Ninth Circuit Court did not share that 

view, and we are in the process of discussions with the Justice Department on our——

Senator MURRAY. Do you have an estimation of when the border 

will be open at this point? 

Mr. JACKSON. I don’t. We need to reconcile this issue. It is pending a legal matter and so I need to defer to the lawyers who have 

the lead in this area to help us take an appropriate course of action. 

Senator MURRAY. Well, we did appropriate money for truck inspectors on the border and inspection stations. What is being done 

with that money since the border is not open? 

Mr. JACKSON. Right now we are trying to bring additional focus 

to truck safety enforcement in the border zone, which is, as mentioned in our previous discussions, a priority issue for us as well 

and part of the overall effort to bring greater scrutiny to border 

traffic. So we are putting those people to good use. As you know, 

there are restrictions written in the appropriations language directing that we not take those assets and use them elsewhere in the 

system. If it turns out that we feel that we should have the flexibility to use those assets in a different way, then we will come back 

to the Congress and ask for that type of flexibility. 

Senator MURRAY. Thank you very much, Mr. Chairman, and 

thank you, Mr. Jackson. 

Mr. JACKSON. Yes, thank you, Senator. 

Chairman NICKLES. Senator Murray, thank you very much. 

Senator Sarbanes. 

Senator SARBANES. Thank you, Chairman Nickles. 

575

Mr. Jackson, I have a number of questions, and I will try to run 

through them with you very quickly. 

Mr. JACKSON. Yes, sir. 

Senator SARBANES. Two days ago, the Washington Post had an 

article reporting that the new security and flight rules for three 

nearby airports in Maryland—College Park, Washington Executive, 

and Potomac Air Field—are taking a heavy toll on operations and 

on employee income and revenues of the airport owners and businesses located there. The three airports are currently operating at 

only about 15 percent of the pre-9/11 levels. What thought is the 

Administration giving to compensating these airports and their 

fixed based operators for their losses in revenue and income during 

these restrictions? For all intents and purposes, these airports have 

been closed down, through no fault of their own, for national security reasons. Shouldn’t the Federal Government undertake some effort to provide them compensation for their financial losses? 

Mr. JACKSON. At this juncture, we have not proposed anything, 

Senator, but I do not want to close the door on a discussion with 

you. We do believe that these three airports pose a particular vulnerability for the capital, which has necessitated, similiar to all the 

general aviation airports in the country, that we impose some specific security restrictions on traffic in and out of these places. As 

a result of raising the national threat level to Threat Level Orange, 

we have put some enhancements in place over the last weekend at 

these three airports. 

So I recognize that it makes flying in and out of those three locations more burdensome. I wish that I could——

Senator SARBANES. More burdensome? It, in effect, is putting 

them out of business. If you are going to treat them as acceptable 

collateral damage in the fight against terrorism, it seems to me you 

ought to undertake some program of recompensing them. Simply 

by virtue of their location, through no other fault of their own, they 

have had imposed upon them such restrictions that they, in effect, 

have been closed out of business. 

Mr. JACKSON. Well, they have certainly seen their business significantly diminish. 

Senator SARBANES. The number of flights in and out of College 

Park has plummeted from 1,800 a month to 164 last month. They 

don’t even have 10 percent of their previous business. 

Mr. JACKSON. The budget for this, I have to say—this sounds like 

a classic bureaucratic dodge. This is not a DOT budget issue. This 

is a Secretary Ridge budget item for the Transportation Security 

Administration. So I don’t bring to this table the ability to commit 

the Department of Transportation to a security program of the sort 

that you are talking about. But what I will commit to you, sir, is 

if you would like us to engage with you in a discussion about options on that topic, I would be happy to do that. 

Senator SARBANES. Were the limitations imposed upon them a 

DOT act? 

Mr. JACKSON. They are a Transportation Security Administration 

act, yes, sir, and the Transportation Security——

Senator SARBANES. It seems to me when you carry it to the point 

of putting somebody virtually out of business, you ought to figure 

out what you can do to compensate in that situation. We intend to 

576

pursue this. You have two problems. One is: Are the restrictions 

you are imposing reasonable given the circumstances? One could 

examine that. But I know you are on very high alert and all the 

rest of it, and it is difficult to raise those kinds of issues in the current environment. But, nevertheless, if you are going to impose 

these kind of restrictions to the extent of virtually putting these 

people out of business—that is what it amounts to. I don’t think 

the Federal Government ought to just come along and do that and 

not do something to make up for it. 

Can you take that back to the Department and undertake to look 

at it? 

Mr. JACKSON. Yes, sir, I will. I will tell you that that question 

has been a topic of debate, and we will take that back for further 

scrutiny and be happy to follow-up. 

Senator SARBANES. All right. Let me——

Chairman NICKLES. But you are basically saying, though, that 

you believe that is in Secretary Ridge’s Department. 

Mr. JACKSON. Not to split a budget hair, but the budget money 

for that program is in Secretary Ridge’s Department. DOT didn’t 

get the passback for the Transportation Security Administration in 

our 2004 budget. 

Senator SARBANES. I do think that is a bureaucratic dodge. 

[Laughter.] 

Mr. JACKSON. But I am not trying to give you a bureaucratic 

dodge because I personally——

Senator SARBANES. Well, I know. You come along and you take 

the action that causes the problem, and then you say, well, if you 

are going to get that problem alleviated, you have got to go look 

somewhere else. Then you go somewhere else, and the other guy 

says, ‘‘I never caused this problem.’’

Mr. JACKSON. Well, Senator——

Senator SARBANES. ‘‘Why are you coming to me? I didn’t create 

this problem.’’ Right? 

Mr. JACKSON. Let me be a very non-bureaucratic guy. I hate bureaucratic solutions. I will take the responsibility to do what you 

asked, which is to discuss this with Secretary Ridge, and get back 

in a straightforward way with you. 

Senator SARBANES. All right. I appreciate that. 

Mr. JACKSON. Yes, sir. 

Senator SARBANES. Your budget proposes lowering the cap on the 

Federal match for transit projects to 50 percent. Is that correct? 

Mr. JACKSON. On New Starts program, sir. 

Senator SARBANES. Currently the cap is 80 percent for both highway and transit projects. Does your budget lower the cap for highway projects as well? 

Mr. JACKSON. No, sir. Let me try to unpack this one a little bit 

as well. The 50-percent match is for the New Starts program—I am 

going to avoid getting the big budget book here. 

Senator SARBANES. What are you doing on the highway projects? 

Mr. JACKSON. 80/20 is the standard——

Senator SARBANES. We always had the same match in order not 

to skew the decision for local decisionmakers as between highways 

and transit. We didn’t want the Federal Government coming along 

and tipping scales because of the different match. We wanted to 

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leave that neutral so that decisions would be made on the basis of 

what would meet local transportation needs. 

Mr. JACKSON. Senator, let me explain it this way: The core program, the largest portion of our transit expenditures are an 80/20 

match. The core program, thank you for the chart—which is $5.6 

billion, is formula grant research program. That is an 80/20 match. Then there is this one fund of approximately $1.5 billion that is 

called Major Capital Investment Grants. These are very large capital projects, which are intended to be a 50/50 match. We have been 

working backward from the 80/20, and I will just give you some recent experience on this one. On average, with the funds that States 

and localities bring to these projects the Federal share for these 

projects is slightly under 50-percent right now. 

Senator SARBANES. But that is because they are willing to make 

that extra commitment. But when you structure the thing up front 

for their choice, it is still 80/20 between transit and highways, is 

it not? 

Mr. JACKSON. It is not for this program, but it is for the bulk of 

the transit program 80/20. For New Starts, our proposal is 50/50. 

Senator SARBANES. What is it for new starts in highways? 

Mr. JACKSON. We don’t have a comparable equivalent program in 

highways. They are all, of course, as you know, very large investment programs. 

Senator SARBANES. So if I am a locality and I undertake to do 

a new highway project, what is my match? 

Mr. JACKSON. 80/20 is the standard. 

Senator SARBANES. If I am a locality and I undertake to do a new 

start transit project, what is my match? 

Mr. JACKSON. Our proposal is 50/50. 

Senator SARBANES. So you have lost the level playing field, and 

it seems to me you are tipping the scales. 

Mr. JACKSON. We are trying to balance a program which has far 

exceeded the capacity to meet demand. So what we are trying to 

say is we can fund more projects if we bring a 50 percent match 

to it, and we feel comfortable with that proposal because the programs on the table in recent years have managed to bring a 50/50 

match to the table and jump-start the——

Senator SARBANES. But you could do the same thing with highways. You could fund more highway programs if you did a 50/50 

match. Could you not? 

Mr. JACKSON. That is right. That is absolutely——

Senator SARBANES. Don’t you have requests for highways far in 

excess of available funds? 

Mr. JACKSON. We have a program that has a long history, and 

we are sticking to that with the highway program. I am trying to 

tell you that in a constrained budget environment, we are making 

a business judgment, which, by the way, has been a very high priority of the Appropriations Committees in the House and Senate, 

particularly in the House, to push——

Senator SARBANES. It has been a priority of the Chairman of the 

sub-committee in the House. 

Mr. JACKSON. Yes, sir, a very big priority of his. 

Senator SARBANES. Not in the Senate. Not in the Senate. You 

have a comparable situation. You have highway demands far in exVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00583 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
578

cess of available money. You have transit demands far in excess of 

available money. Now, if you are going to reduce the match and 

you can put a rationale out for doing that, I don’t see why you 

wouldn’t reduce the match in both categories. The same logic would 

apply. You said——

Mr. JACKSON. Yes, but——

Senator SARBANES You can do more highway projects at a 50/50 

match. 

Mr. JACKSON. It is, Senator, a prudential judgment about how to 

stretch limited funding in order to support more big transit capital 

investments, and it is our prudential judgment that this is a fair 

way to do it. 

Senator SARBANES. Fair to whom? 

Mr. JACKSON. Fair to the users and to the taxpayers that need 

these systems and that would otherwise be deprived of the financial capacity to start one. 

Senator SARBANES. Let me ask one final question. You state, 

‘‘The President proposes an overall increase of 19 percent for the 

next surface transportation reauthorization as compared to the 6 

years of TEA–21.’’ Is that correct? 

Mr. JACKSON. Yes, sir. 

Senator SARBANES. For the last year of TEA–21 transit, was guaranteed $7.22 billion. Will transit get a 19-percent increase in 

the reauthorization proposal, bringing it up to $8.6 billion in the 

last year of the reauthorization? 

Mr. JACKSON. Transit over the course of the reauthorization pe- riod would go up from $36.2 billion to $45.7 billion during the period of this proposed reauthorization. 

Senator SARBANES. What would it be in the last year of the next 

authorization? 

Mr. JACKSON. In 2009, the mass transit category will total a little over $8 billion. 

Senator SARBANES. That is not a 19-percent increase over the 

7.22. 

Mr. JACKSON. The 19-percent increase referred to the entire sur- face transportation program, which grows from $207.252 billion to 

$247.1 billion. 

Senator SARBANES. If transit is not growing, what is growing? 

Highways? 

Mr. JACKSON. Highways is growing and transit is growing, but 

the overall surface transportation program will grow by 19-percent 

figure, sir. 

Senator SARBANES. Well, how much does transit grow by? 

Mr. JACKSON. It grows from $36.2 billion——

Senator SARBANES. Percentage. 

Mr. JACKSON. The percentage, I would have to ask somebody to 

do——

Senator SARBANES. Ten percent? You gave me an $8 billion figure as against the 7.22 base. That would be 10 percent, would it 

not? 

Mr. JACKSON. I am sorry, sir. I missed that question. 

Senator SARBANES. You gave me an $8 billion figure against a 

7.22 base. That would be a 10-percent increase, would it not? 

Mr. JACKSON. Yes, sir. 

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Senator SARBANES. All right. You have an overall 19-percent increase, so highways is increased by how much? 

Mr. JACKSON. Highways is increased by 23 percent over that period of time. 

Senator SARBANES. Well, we have tried very hard to develop 

some equity or equitable parity between highways and transit, and, 

as I read your proposals here, you have completely thrown that in 

the wastepaper basket. 

Mr. JACKSON. Senator, I don’t think so, and I share very much 

your commitment to the transit investments that we need to make. 

In fact, the total money that we are committing over the period actually grows from TEA–21 to the new reauthorization proposal by 

some 26 percent. So we are putting more money in this investment. 

Then the point that I made to a previous question about the flex 

funds being used in the transit is a very important part to understand about how we are going to fund transit going forward. 

When we first gave this flex funding authority in ISTEA, which 

Secretary Mineta was an author of, we didn’t have a baseline and 

understand how to do it and how to use it. What we found, as I 

said, $1.2 billion is now flowing annually from highways to transit; 

$2 million went the other way. So flex funding becomes a significant tool to help States deal with these issues, and they are not 

represented in percentage increases that you and I were talking 

about. 

Senator SARBANES. Well, now, wait, let me just——

Chairman NICKLES. Senator Sarbanes——

Senator SARBANES. I know my time is up, but let me just stop 

him on that right now. Have you eliminated the bus discretionary 

program, the one that makes capital investment grants for bus and 

bus facility improvements? 

Mr. JACKSON. What we have done is combine a number of programs, I believe five programs combined down to two, and we put 

the bus money with some additional flexibility into the Formula 

Grants and Research category. 

Senator SARBANES. Well, I mean, come on. You talk about flex 

money. It is not flex money. You are taking money that was there 

for particular purposes. You are eliminating the purposes, and then 

you say, we are providing additional funding. You are not providing 

additional funding. 

Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Sarbanes, thank you very much. 

Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. My apologies to you, 

Mr. Chairman, and to our witness. We also had an Energy hearing, 

which, of course, touches on this issue. Going last, I guess we are 

at the point in the hearing where almost everything has been said 

and almost everyone has said it. I just have one question that perhaps you can shed some light on how we have evolved on these 

transportation issues through this year, because it seems to me, 

Mr. Jackson, the Administration’s position on transportation is sort 

of a movable feast. It just varies depending on the time, and I 

would like to see if I can make some sense out of the process. The fiscal year 2003 budget started for Transportation at $23 billion. That was the President’s budget proposal. Then it went to 

580

$27.7 billion with respect to the supplemental. That is where it 

went next. As of last night, it went to $31.8 billion. 

What I am really interested in is your explanation as to how this 

process works, because I want to see if I can take that information 

and figure out how to use it to get this account up. I think that 

transportation is, dollar for dollar, just about the best investment 

the country can make, and I would like to see if I could get your 

sense of how this process has worked over the year. Circumstances 

didn’t change that dramatically, as far as I can tell, in terms of the 

transportation situation. But somehow it went through these three 

stages and went from $23 billion to $31.8 billion. If you will give 

me some information as to how you all went about making these 

judgments, I think then I may be able to divine a strategy that will 

help me get this account up that is so important for 2004. That is 

what my constituents want. They thought it was useful that I 

voted for the Gregg amendment to cut capital gains and joined Senator Nickles on estate taxes and the like. But what they think is 

really useful is transportation. That is what they think makes 

sense dollar for dollar in terms of a stimulus package, and I want 

to get this account up. Tell me how it went through these stages 

throughout 2003. 

Mr. JACKSON. I will be happy to give you a concise history of that 

as best I can, and since you had an important role in this, I think 

you probably have a fairly good understanding on some of these 

elements yourself. 

It is a very simple thing. We talked earlier about a working man 

and his paycheck, working for a company that has done very well 

and that individual is given an opportunity to have a bonus at the 

end that supplements the paycheck. 

If you think of that example, which many working men and 

women have in the course of their budgeting for their families, year 

in and year out, there is a lesson for what happened here in the 

plan laid out by Congress for managing our investments in the 

highway program. 

We had a projected baseline obligation limit for each year of the 

authorization. It was $27 billion. We also had this tool, RABA, that 

said if the revenues into the trust fund are not as large as we expect, we will spend less, we will cut our budget and we will live 

on less. So last year, the President simply took the law passed by 

Congress and said we promised ourselves as a Nation that if we 

had less into the trust fund, we would live on less. That is the 

number we began with. It was $4.4 billion less than the previous 

year’s baseline target. 

That budget proposal was immediately pronounced a difficulty 

that we should not impose upon ourselves, and the Administration, 

after some conversations with the Congress, agreed to put the $4.4 

billion back into the pot, which is to say to fund this program at 

the level that the TEA–21 authorization limits promised. What we 

didn’t agree to, until the omnibus bill got to the point of closure, 

was that we should put the additional, if you will, bonus payment 

that came from having a good economy in 2002 and make that part 

of the baseline in 2003. 

What has happened here is that the Congress has come to expect 

that the bonus payment is part of our salary. It is not part of the 

581

baseline salary. It is a bonus payment that came from a good economy. We didn’t have a good economy last year, yet we have just 

voted ourselves another $4 billion bonus. 

I know the money is going to a good purpose. I certainly appreciate and understand that. But what we did was pass a law and 

say here is how we will discipline ourselves, and what we have now 

done is consider the bonus the entitlement. That is simply what 

happened. 

At the end of the day, the Administration agreed that this was 

an investment that it was willing to make as part of the overall 

assessment of what we needed to do to deliver a set of appropriations bills. 

Senator WYDEN. I am still mystified as to how we are going to 

do all this again in 2004. 

Mr. JACKSON. It was very painful this year, so I am somewhat 

mystified myself. 

Senator WYDEN. One can kid about it, I guess. My constituents 

think that this is tremendously important from an economic and a 

stimulus standpoint, and I want to be able to explain in something 

resembling English how these decisions are made. I think you are 

saying there was a good year in 2002, but we really did not think 

it was a good year in 2002. Eventually we decided there was a good 

year in 2002, so we will give you some more at the final calculation 

for 2003. 

If that is what you are saying, and tell me if that is the case. 

I do not know where we end up in 2004, because this obviously has 

not been such a good year. 

Mr. JACKSON. Well, I will try to go through this from the point 

of view of the budget mechanism of the RABA, and it is probably 

a longer conversation than can be sustained by the time allotted 

to me, but the RABA mechanism has two provisions that help us 

decide whether we can go up or should go down around the baseline that was passed. One part of it is a so-called look back, which 

considers the amount of money that actually came into the trust 

fund. That is the look back. Then it takes the Treasury forecast of 

what will happen in the year ahead—the look forward—and it adds 

that into the equation. So the combination of look forward and look 

back becomes a projection for RABA that allows us either to adjust 

upwards or downwards from the authorized level of the 6-year program. In most of TEA–21 we had a plus number. At the end we 

had a negative number. So that is the law and that is the way the 

law works. 

What I would say to your constituents is that the President’s 

budget overall imposes a 4 percent increase in discretionary programs and that we have proposed a 6 percent increase in the highway fund. 

Senator WYDEN. Well, I am not going to belabor this. I guess the 

look back and the look forward seem to have gotten it up once, 

which sounds useful, but now it sort of looks like we are ignoring 

this exercise because some of us think that this ought to be a good 

stimulus, and we cannot yet get a bipartisan agreement on it. I 

hope that we can. I want to engage the Chairman just for a moment. I think the Chairman has been absolutely right in coming 

back to the importance again and again of the value of getting a 

582

bipartisan agreement on this issue. Certainly if we cannot get a bipartisan agreement on every account, there ought to be an effort 

to get a bipartisan agreement on some key accounts. If ever there 

was one that was a natural, this one is. I mean there is not a single person who comes up to any of us and says, ‘‘This ought to be 

a Democratic road and this ought to be a Republican road.’’

All they do is talk about potholes and traffic jams and the like, 

and I want to end this by saying I am very anxious to work with 

the Chairman and pick up on his message that we try to do as 

much of this in a bipartisan way as we possibly can, and if ever 

there was an account that would lend itself to that, I think this 

would be the natural. 

Mr. Jackson has been patient—I was late—and put this into 

something resembling English, but we need a process to get to the 

higher number quickly, rather than this water torture exercise that 

we have gone through in 2003. 

Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Wyden, thank you very much. 

Just a couple very quick questions, Secretary Jackson. 

Administration believes it ought to abide by the law? 

Mr. JACKSON. Yes, sir. 

Chairman NICKLES. Is not RABA part of the law? 

Mr. JACKSON. Yes, sir. 

Chairman NICKLES. So should we not be spending 23 billion in 

1903 instead of 31? 

Mr. JACKSON. That was our initial proposal, sir. 

Chairman NICKLES. I am just—I think Congress passed RABA. 

Mr. JACKSON. Yes, sir. 

Chairman NICKLES. With the previous administration, I might 

mention. 

Mr. JACKSON. Yes, sir. 

Chairman NICKLES. But the idea of that was to get money out 

of the trust fund, and I guess maybe people never really thought 

the negative might happen. 

Mr. JACKSON. Right. We had 3 years during the 6-year period 

where it was a plus, and we had 3 years of a down. 

Chairman NICKLES. What I think we are seeing is that Congress 

has no intention of abiding by the down side. 

Mr. JACKSON. That appears to be true. 

Chairman NICKLES. We will take the up side, but the down side, 

Congress is going to kind of ignore the law, and I think put us on 

a course that is either going to—I started to say bankrupt the trust 

fund, but inevitably lead to either higher gasoline taxes, or we are 

going to have some contractors that are going to be severely disappointed. 

I might mention, I will drive some of our people nuts, but I think 

the 80/20 ratio is a little high for highways. Now, Senator Sarbanes 

was not really trying to get you to say we should go 50/50 on highways. He was trying to make the distinction between mass transit 

and highways, but 80/20 encourages a whole lot of things, that if 

it was a more balanced ratio—and I have been looking at Federal 

tax versus State tax. I think you would have a more balance—right 

now everybody wants all the Federal money from highways because the Federal Government is paying 80 percent. You have a 

583

more balanced structure. Even if you moved it to some extent—and 

you might be looking at different ways to help us out of this quandary, because obviously the votes are going to be there for continuing at 31 billion plus. We may have to try and figure out a way 

to do this. Some people would like to say they want a tax increase, 

but that is not going to pass in my opinion. So we have to kind of 

figure out how we handle this in the future, and maybe some ratio 

change, maybe even gradually or something. I do not know. We will 

just have to be thinking about it, because I can easily see RABA 

has just been ignored. We might as well repeal it, just ignore it, 

because it was just an excuse to get more money, but they never 

want to go down. It is kind of—you are right, that bonus became 

base and nobody wants it cut. But I also read the law. 

One other little section of the law. I believe we passed a law that 

said that Amtrak is going to be self sufficient by 1902. Is that not 

a law? Was that not part of the 1997 bill that we passed that was 

trying to send a signal to Amtrak, you are going to have to get off 

the Federal subsidy train? 

Mr. JACKSON. Yes, sir, it was. 

Chairman NICKLES. Is that still the law? Is it still on the books? 

Mr. JACKSON. That is the law that would be replaced by the reauthorization, but Amtrak failed to hit that self-sufficiency target. 

Chairman NICKLES. I understand we failed to—is Amtrak due for 

reauthorization? 

Mr. JACKSON. This year, yes, sir. 

Chairman NICKLES. This year. I hate to see very 5 years we keep 

coming back, well, yes, we are going to have to fix it, and also in 

the meantime, if I remember the subsidy for Amtrak back in 1997 

was, what, 600 million? 

Mr. JACKSON. Just 2 years ago it was $521 million in the Administration’s budget. 

Chairman NICKLES. 500 or 600 million. Now the bill that just 

passed was—500 or 600 million, and now it is 1.1 billion in the bill 

that just passed. Your proposal is 900 million, which is a significant increase over 2 years ago. 

Mr. JACKSON. Yes, sir. 

Chairman NICKLES. Still people are clamoring that they want it 

to be more. Would you do me a favor and give me a list? I noticed 

in your budget proposal you mentioned several routes that had significant subsidies per passenger, per trips? 

Mr. JACKSON. Yes, sir. 

Chairman NICKLES. Did you do that—I am assuming you have 

it for all the lines. Would you go ahead and give that to us for all 

the lines? 

Mr. JACKSON. Yes, sir, I would. 

Chairman NICKLES. Would you do the same thing for essential 

air service? 

Mr. JACKSON. We can give you those numbers on essential air 

service, yes, sir. 

Chairman NICKLES. I would appreciate it. I know you had some 

reforms scheduled for essential air service, and I believe you are 

working—I believe I heard you say to Senator Murray’s request, 

that you are planning on doing a—or introducing or proposing an 

Amtrak reauthorization reform proposal as well? 

584

Mr. JACKSON. Yes, sir. 

Chairman NICKLES. I would encourage that. I think we need to 

pass it. We did not really get it done last time. I think we passed 

in 1997, ‘‘hope you get there, but we did not really give you any 

direction.’’ Maybe Congress this time can lend some seriousness to 

the proposal, try to make it happen, try to save what maybe is economically a viable spinoff to other areas, maybe encourage States 

and other areas, maybe give States flexibility to use some of the 

mass transit funds that they cannot utilize, us that for Amtrak or 

other public transportation. 

But anyway, the list of—also you mentioned that you have 26 

mass transit projects that are new starts. 

Mr. JACKSON. In this proposal, yes, sir. 

Chairman NICKLES. In this proposal. I believe you mentioned the 

new starts would total $1.5 billion, and that was just in the 1904 

budget. Would you give us a list of those and what their projected 

total cost is? 

Mr. JACKSON. Yes, sir. I believe we have a list of all the New 

Starts program in this Budget in Brief book that we have provided 

to your staff, but if there are any questions, we would be happy to 

answer the questions about those. 

Chairman NICKLES. I apologize because I tried to review most of 

this material and I did not get that far. 

Mr. JACKSON. You could not possibly keep up with all that flow 

of paper, sir. 

Chairman NICKLES. But I am concerned about getting started. I 

happen to be one that compliments you on moving to 50/50. I am 

concerned about encouraging new starts and having people think 

this is the grand salvation for some areas, and starting on projects 

that frankly are economically not viable and they would not be 

starting them if it was not for the fact that they thought the Federal Government was going to be picking up 80 percent of the cost 

or more, and I think if you increase the percentage cost at risk 

from the local area, then they will be much more prudent with 

their own dollars than they would be with Federal dollars. I really 

do believe there is this idea, that whether you are talking about 

highway funds, you are talking about Medicaid funds, you name it, 

if it is coming from the Federal Government, it is free, and let’s leverage this to the hilt, and with minimal consequences if their contribution is that small. 

So anyway, you are supplementing the subsidy, and also I believe Senator Cornyn was asking for information on relative subsidies compared to different transportation modes. 

Additionally, the Highway Trust Fund, you mentioned trying to 

transfer or your proposal to transfer the 2.5 cents gasohol tax, 

which now goes to General Revenue, and I believe I heard you say 

that that would raise about $600 million per year, would be moved 

from General Revenue that it is presently going into General Revenue, and will be going into the Highway Trust Fund. Is that correct? 

Mr. JACKSON. Yes, sir. 

Chairman NICKLES. Part of your theory is on that, you are looking at gasoline taxes, a user fee. 

Mr. JACKSON. Exactly. 

585

Chairman NICKLES. So people that are using the roads should 

pay for the roads. 

Mr. JACKSON. Exactly. 

Chairman NICKLES. Does a gasohol car do as much damage on 

the road as a——

Mr. JACKSON. Yes, sir, there is no material difference. 

Chairman NICKLES. How much additional fund would be going—

how much additional money would be going into the trust fund if 

the Federal excise tax was the same on gasohol vehicles as it is on 

other gasoline vehicles? 

Mr. JACKSON. I believe there is a delta of 5.3 cents between what 

is collected in the tax on gasohol presently, and what is collected 

presently for gasoline. 

Chairman NICKLES. The volume of that times the number of gasohol gallons would be equal to how many dollars? 

Mr. JACKSON. It would be—roughly, since it is $600 million for 

the 2.5 cents, call it $1.4 billion, something in that range, probably 

would be a seat of the pants guess there. 

Chairman NICKLES. So if it is 1.4 plus the 600, if you had basically gasohol you would be close to $2 billion per year if gasohol 

vehicles paid the same gasoline taxes as other gasoline? 

Mr. JACKSON. Yes, sir. 

Chairman NICKLES. There is also a very large category of vehicles that do not pay Federal excise tax. Correct me if I am wrong. 

Vehicles by some tribes, Native Americans, some are exempt from 

State tax. Are they also exempt from Federal tax? 

Mr. JACKSON. To be honest, I do not know the answer to that 

question, sir. I will be happy to get that for you. 

Chairman NICKLES. I notice in my State there is a growing number of tribes that I believe are exempt from Federal excise tax. I 

would be interested in knowing that, so if you could do that. 

Mr. JACKSON. I would be happy to provide you a list of any exemptions that are available under current law. 

Chairman NICKLES. Also with the amounts it would raise if that 

exemption was not there. 

Mr. JACKSON. Yes, sir. 

Chairman NICKLES. I happen to look at roads as users should be 

paying for them, and I think that would make sense. Would you 

agree that possibly some State—right now part of the Federal excise tax on gasoline, part of that 2.86 cents per gallon is for mass 

transit? 

Mr. JACKSON. Yes, sir. 

Chairman NICKLES. Some States do not have mass transit, or 

they have limited mass transit. It is in the form of bus, maybe 

some light rail or some other alternatives. 

Mr. JACKSON. Yes. I do not think I could find a State that does 

not have some meaningful mass transit and makes use of those. 

There is the ability to flex part of your mass transit formula funding into highways if you are not going to be able to use it for mass 

transit purposes. As I explained earlier, I believe in the year 2002 

it was slightly over $2 million that flexed from——

Chairman NICKLES. 2 billion? 

Mr. JACKSON. $2 million. It was $1.2 billion that went the other 

way, and it was a couple of million dollars that went that way. So 

586

that says that the States are actually using their formula for transit projects, and they are taking some of that highway money, a 

significant amount, $1.2 billion net through out the country, and 

putting it into transit investments. 

Chairman NICKLES. I thought maybe you misspoke a little earlier. So you are saying that some States have taken as much 1.2 

billion out of highway funds and used those for mass transit? 

Mr. JACKSON. Exactly. All the States collectively spent that much 

in 2002. 

Chairman NICKLES. Only a couple of million that actually went 

from transit to highways? 

Mr. JACKSON. Exactly. 

Chairman NICKLES. Maybe I am being parochial, but my recollection is, like a State like mine, we receive very little out of the transit funds, very little, de minimis, 10 percent of what we contribute, 

something like that. That is for bus in Oklahoma City and Tulsa. 

I worked some time ago to try to get some flexibility on some of 

that money to be used to subsidize Amtrak, which at that time we 

did not have in our State. So that was an effort that I made, which 

it is kind of a form. So we would be connected to this interstate 

system that we were not presently. 

Mr. JACKSON. Yes. 

Chairman NICKLES. We are presently on it. Do you think that 

makes sense? Should States be able to have some flexibility to be 

able to at least get some de minimis amount of the transit funds 

if they so desire for Amtrak? 

Mr. JACKSON. I think that is something we should take a hard 

look at, and I would be happy to do that. We are, as a principle, 

in President Bush’s proposals for transportation, trying to give 

States a maximum amount of flexibility to spend their money in 

the way that the States think is appropriate. So that would have 

to be something that we look at in our TEA–21 reauthorization and 

also think about it in the context of the Amtrak reauthorization. 

Chairman NICKLES. I would appreciate it. Did I ask you for—I 

did ask you for a list of the Amtrak subsidies by route? 

Mr. JACKSON. Yes, sir, by route. We can give you that, yes, sir. 

Chairman NICKLES. So we can kind of figure out which ones are 

breaking even, which ones are not, which ones are subsidized, 

which ones are subsidized by their States. 

Mr. JACKSON. Yes, sir. 

Chairman NICKLES. I believe you mentioned Washington might 

be subsidizing or helping their State. We are in our State. 

Mr. JACKSON. You are in your State, and California is in their 

State. There are a few States that do that in a systematic way, but 

there are only a few that provide that type of assistance. 

Chairman NICKLES. I believe in your Amtrak proposal you are 

going to try and make that opportunity available for more States. 

Mr. JACKSON. We are, yes, sir. 

Chairman NICKLES. I understand. Secretary Jackson, I appreciate your cooperation before the Committee, and your endurance 

of maybe repetitive questions, but thank you very much. 

Mr. JACKSON. Not a problem at all. 

587

Chairman NICKLES. I appreciate your appearance and look forward to some of your answers to our questions. Thank you very 

much. 

Mr. JACKSON. Thank you, Mr. Chairman. I appreciate your having me here. 

Chairman NICKLES. The meeting is adjourned. 

[Whereupon, at 4:18 p.m., the committee was adjourned.]

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THE PRESIDENT’S FISCAL YEAR 2004 BUDGET 

PROPOSAL FOR MEDICARE AND MEDICAID 

WEDNESDAY, FEBRUARY 26, 2003

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

The committee met, pursuant to notice, at 3:11 p.m., in room 

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

Present: Senators Nickles, Gregg, Allard, Enzi, Crapo, Ensign, 

Cornyn, Conrad, Murray, Wyden, Stabenow, and Corzine. 

Staff present: Hazen Marshall, staff director; and Megan Hauck, 

health policy director. 

For the minority: Mary Ann Naylor, staff director; and Sue Nelson, deputy staff director. 

OPENING STATEMENT OF CHAIRMAN DON NICKLES 

Chairman NICKLES. The committee will come to order. 

Today, the Budget Committee will hear testimony from the Secretary of the Department of Health and Human Services, Secretary 

Tommy Thompson. Prior to becoming Secretary of HHS, Tommy 

Thompson was Governor of the great State of Wisconsin for 14 

years, and did a fantastic job as Governor. He was a pioneer in 

welfare reform, in Medicaid, in health care, in education. He really 

has been, and I say that not just bragging about a friend who happens to be testifying today as Secretary of HHS, but as a member 

who worked on welfare reform and health care issues, Governor 

Thompson was maybe the premier Governor who was leading the 

fight for real reform and real successful reform, I might mention, 

that saved a lot of people from the chains of welfare dependency 

and also changed the whole operation of welfare and saved money 

in the process. It is a real success story in this Senator’s opinion. 

I was pleased to be a participant in, I believe, a very positive, evolutionary, significant reform. 

The Secretary has proposed significant reforms in Medicare and 

Medicaid as well. We look forward to hearing from him on both of 

those issues today. 

Before I make any further comments, I would call upon the ranking member, my friend Senator Kent Conrad. 

OPENING STATEMENT OF SENATOR CONRAD 

Senator CONRAD. Thank you, Mr. Chairman. I want to add my 

voice to yours in commending the Secretary. I always thought he 

was innovative and creative and focused on issues that really make 

616

a difference. As Governor, I very much appreciated the work he did 

on welfare reform and was glad we were able to move forward with 

that at the Federal level. I think we made dramatic improvements, 

and a lot of it was based on work that you did as Governor, and 

we want to recognize that. 

I also have always felt as a Midwesterner a certain kinship and 

I have especially appreciated the sensitivity that you have shown 

on issues that relate to rural health care. We have a lot of problems out there, and you are acutely aware of them. Differential 

medicare reimbursement levels around the country create very serious problems for rural parts of our Nation. 

I have used the example many times that Mercy Hospital in Devil’s Lake, North Dakota, gets half as much as Mercy Hospital in 

New York to deal with a heart attack; exactly the same illness but 

half as much money. Rural hospitals don’t get rural discounts when 

they buy equipment, and they don’t get any rural discounts when 

they have to pay salaries for the people that work in those institutions.

Today, in terms of an opening statement, Mr. Chairman, if you 

will permit, I want to point out the things that concern me deeply, 

because as I look ahead, this is what I see. These are projections 

from the Social Security Administration. They show that we are in 


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the sweet spot now in terms of the Social Security Trust Fund. It 

is throwing off nearly $200 billion a year in surpluses, but we see 

that in 2017 it goes cash-negative. When it goes cash-negative, it 

does so in a big way. It is like falling off a cliff. We have got to 

prepare for that time.

Let’s go to the next chart that shows the same pattern with respect to Medicare. The Medicare Trust Fund is running cash surpluses that are much more modest than Social Security, but it goes 

cash-negative in 2016. Proportionally, it is an even more stark and 

more serious story in terms of the trajectory.


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Let’s go to the next chart. This one is really the most important 

because it puts all the information together with the President’s 

proposed tax cuts. And this is why, I must confess, I don’t comprehend what the President has proposed. It seems to me that it 

doesn’t add up, and it has us headed over a cliff. 

On this chart, to the tax cuts are in red, the Medicare surplus 

deficits are in blue, and the Social Security surplus deficits are in 

green. The Medicare and Social Security estimates are based on 

GAO’s analysis. Frankly, I think they are somewhat conservative, 

but we are using their numbers. 

We prepared the tax cut estimates, because they are for an extended period of time going out to 2023. What one sees is that 

when the costs to the Federal Government in Social Security and 

Medicare explode, the cost of the tax cuts’ explode. What we are 

left with is deficits of staggering proportion.


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Let’s go to the next chart. The revenue loss from the President’s 

tax cut proposal is larger than Medicare and Social Security shortfalls combined. The Social Security shortfall—according to GAO—

is $3.4 trillion and Medicare’s shortfall is $5 trillion. The tax cut 

is larger than both combined, at $11 trillion over that period.


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Again, I don’t think we have a program in front of us that makes 

sense or adds up. The final chart is from the President’s budget 

document, and it shows that we are in the sweet spot of the budget 

cycle now, with the trust funds throwing off substantial surpluses. 

But look what happens after 2013. Again, this is from the President’s own budget document. After 2013, the deficits are totally 

unsustainable. This does not include war costs, the cost to fix the 

alternative minimum tax, or a number of other things that are 

likely to happen.


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So, Mr. Secretary, I think we are going down a budget path that 

makes no earthly sense to me, and that is what I want to talk 

about when we get to the questioning period. 

Chairman NICKLES. Senator Conrad, thank you very much. 

Mr. Secretary, Senator Conrad’s chart showed a $5 trillion negative deficit, an unfunded liability in Medicare over the next 75 

years. I think it is closer to $13.3 trillion, at least the figures—I 

am not sure what the differences are, but——

Senator CONRAD. If I might say, this is GAO’s estimate of the 

shortfall counting the general fund transfer to Medicare. Your estimate excludes transfer, which is required by law. 

Chairman NICKLES. I believe the unfunded liability on Medicare 

is $13.3 trillion. I believe the unfunded liability in Social Security 

is less than that. So we have significant problems, and I appreciate 

Senator Conrad’s admonition. We need to do something about it. 

I believe you have proposed some changes both in Medicare and 

Medicaid that would help alleviate the deficit. One of the fastestgrowing accounts in Government today is Medicaid. You have a 

proposal to fix it. The States are all screaming. State governors 

have been coming into town to see us recently. Medicaid growth 

has compounded at really unsustainable rates. It needs to be 

changed, and you have a proposal to change it. We look forward to 

hearing from you. 

Last year, Medicaid grew 14 percent. This is the Federal cost. 

The year before 9.7 percent; the year before that, 9.1 percent. Even 

the rate of growth been increasing every year. It is obviously not 

sustainable. It is not sustainable to the Federal Government or to 

the State governments. States have been saying, Federal Government, you pick up a greater share. It is not sustainable for the Federal Government either. So, you have some proposals to reform it. 

I compliment you for that. This may be the first significant reform 

in Medicaid in some time. 

You also have some Medicare reforms to propose in an effort to 

save Medicare. I compliment you for those, and we look forward to 

hearing your explanations and suggestins regarding both of these 

very important, significant programs. I compliment you for your 

service in the past, and I look forward to working with you on 

these issues as well. Please present your statement. 

STATEMENT OF HON. TOMMY G. THOMPSON, SECRETARY, 

UNITED STATES DEPARTMENT OF HEALTH AND HUMAN 

SERVICES 

Secretary THOMPSON. Good afternoon, Mr. Chairman. Thank you 

so very much for your kind words, and thank you for inviting me 

here. 

Mr. Conrad, thank you as well for your kind words and for your 

charts and for your explanations. 

Members of the committee, it is an honor for me to appear in 

front of you and thank you so very much for inviting me to testify 

this afternoon. 

Mr. Chairman, I want to thank you for your continued leadership 

on so many issues that are vitally important to the American people. I have enjoyed our previous meetings, and I know that this 

625

whole committee wants what I want, which is for all Americans to 

be as healthy as they possibly can be. 

In my first 2 years at the Department, we have made tremendous progress in our efforts to improve the health, the safety, and 

the well-being of the American people. We continue to make extraordinary progress in providing health care to lower-income 

Americans. Through waiver and State plan amendments which 

have been granted to States, we have expanded access to health 

coverage for more than 2.2 million individuals. We have expanded 

the range of benefits offered to 6.7 million other Americans. 

To expand on our achievements, the President proposes outlays for HHS of $539 billion. That $539 billion represents an increase 

of $37 billion, or 7 percent, over last year’s request, and an increase 

of more than $109 billion, or 25 percent, since 2001. The discretionary part of the budget increase is $1.6 billion, or 2.6 percent, to $65 billion of budget authority. This would be $600 

million, or 1.5 percent, higher than the enacted fiscal year 2003 appropriation bill. The $539 billion, ladies and gentlemen, is a big 

number, and I have a solemn responsibility as Secretary to make 

sure that every one of those dollars is put to good, effective use. 

I owe it to the people who pay the taxes, and I owe it to the people 

who consume the services. 

One way to ensure these dollars are effective is to work with this 

committee and other committees to improve and strengthen our 

two largest health programs: Medicare and Medicaid. These are the 

two topics I would like to outline for you this afternoon. 

As you well know, Mr. Chairman, Senator Conrad, our Nation’s 

Medicare program needs to be strengthened and needs to be improved to fill in the gaps in current coverage. The President has 

proposed numerous principles for Medicare enhancements to ensure that we are providing our seniors with the best possible care. 

We have dedicated $400 billion over the next decade to achieve this 

ambitious goal, and we look forward to working closely with Members of Congress to develop and pass a responsible and effective 

Medicare bill this year. 

The budget proposes a prescription drug benefit that would be 

available to all beneficiaries, would protect them against high drug 

expenditures, and would provide additional assistance through generous subsidies for low-income beneficiaries to ensure ready access 

to needed drugs. 

Passing Medicare legislation will be a huge task, and improving 

Medicaid is also urgent. In fact, Medicaid is growing even more 

rapidly than Medicare. The Federal portion is $162 billion this 

year, and the program is growing about 9 percent a year. But State 

Medicaid programs are under tremendous financial pressure, and 

beneficiaries risk losing coverage. Two-thirds of the States currently have already made reductions or have reductions pending. 

The President has proposed a plan to preserve coverage, make 

Medicaid more efficient, and provide better health care delivery. 

We must begin by addressing the immediate fiscal needs of the 

States. President Bush’s plans would meet the 9-percent base 

growth in the program, and then would allow forward funding by 

$3.25 billion in the first year and $12.7 billion over 7 years. The 

forward funding would help people during the current economic 

626

conditions, and the flexibility would put the States in a better position to handle future economic downturns without having to cut 

people from Medicaid. They will have the flexibility to make adjustments to weather the storm. 

I had a chance to discuss this proposal with many Governors, Republicans and Democrats, on Monday and throughout the weekend, 

and their reaction was very positive. 

Let me be very clear about two things: first, State participation 

in a new program would be optional; second, mandatory populations would continue to receive all of their mandatory benefits. 

The Medicaid entitlement for mandatory populations would be unchanged. States will have much more flexibility in covering optional populations, which account for a large part of Medicaid 

spending. They will gain the ability to target special-needs populations such as those suffering from mental illness and AIDS and 

those who prefer home- and community-based coverage. If we do 

not improve Medicaid, 1 million Americans could lose coverage this 

year, and millions more next year. I look forward to working with 

Congress to make sure they keep it. 

While I am here, I would like to mention one other item in our 

budget. President Bush recently announced a new initiative, 

Project Bio-Shield, that would help prepare this country for a bioterrorist attack. He would spend roughly $6 billion over 10 years 

on new counter measures. This proposal would speed up research, 

the approval of vaccines and treatments, and ensure a guaranteed 

funding source for their purchase, just the latest in our forwardlooking efforts to protect the homeland. 

Mr. Chairman, Americans have made many great discoveries 

over the years, and the discoveries that will endure the longest 

have expanded our understanding of nutrition and exercise, birth 

and aging, and how to prevent, treat, and cure disease, disability, 

and suffering. Our doctors have better knowledge and technology 

at their disposal than ever before. The rest of us also have access 

to a treasury of good advice about getting and staying healthy and 

energetic. 

We have much more to discover, Mr. Chairman, and at the same 

time we also have the opportunity to put our recent discoveries into 

practice, to make sure America’s Federal and State health programs and the entire medical industry reflect the best work of our 

researchers and the kindest impulses of our hearts. By working together, we have made great progress toward that goal. As the 

major proposals in the President’s budget show, there is much 

more that we can do together. 

The President has made improving our Nation’s health and 

health care one of his highest priorities for the year, and by working together, we can make it one of our proudest achievements. 

I look forward to all the work, and I know our discussion this 

morning will be able to get things rolling. So thank you, Mr. Chairman and members of this committee, for giving me this opportunity 

to come before you and answer your questions. 

[The prepared statement of Secretary Thompson follows:]

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Chairman NICKLES. Secretary Thompson, thank you very much. 

Let me just make a couple of comments and ask a few questions. 

You mentioned Medicaid was growing at a rate of 9 percent. Last 

year, the Federal amount grew 14 percent. 

Secretary THOMPSON. That is correct. 

Chairman NICKLES. As a matter of fact, if you look all the way 

back to 1998, it was 5.9 percent, then 6.7, then 9.1, 9.7 in 2001, 

then 14 percent in 2002. That ramp really concerns me. If there 

was a 1-year spike and you expected it to come down but it has 

been getting bigger, then I am concerned that it may be bigger next 

year. 

Now, you have proposed changing it, but part of that is because 

of congressional add-ons. Part of that is because we have changed 

some of the laws in the Finance Committee and others, a result of 

which is that we have given States great incentives to add people. 

I might mention that I believe about three-fourths of Medicaid 

spending is optional; in other words, you have mandatory Medicaid 

spending, but you also have optional Medicaid spending, optional 

on individuals, optional on income levels. Optional spending is 

where a lot of the explosion has been. I have been troubled by the 

fact under SCHIP we have a much greater Federal subsidy for 

higher income than Medicaid, and I think that needs to change. It 

bothers me to think that we would subsidize people with higher incomes more percentage-wise than we do people with lower incomes, 

and that is what we have done under SCHIP as an incentive for 

States, to cover some additional kids. 

I believe your proposal, and maybe you can better explain it, 

would allow States to take the moneys that they are presently receiving under Medicaid, SCHIP as well as Medicaid mandatory and 

optional, and block that money together. Maybe ‘‘block’’ is not the 

right terminology—have flexibility on how they would cover those 

same people as far as benefits, and incentives, to participate. Is 

that correct? 

Secretary THOMPSON. That is somewhat correct. If I could just 

take a few minutes to explain. 

It is not a block grant because the mandatory population and the 

mandatory coverage for the mandatory population is not touched. 

We have a trend line that we have to decide each year somewhere 

around October, and it is based upon the cost accounting of the 

States. We project out a 10-year trend line, and for the next 10 

years we project that the trend line is 9 percent. 

Now, next year, if drugs keep going up, the trend line could be 

10 percent, and that would change the trend line for the next 10 

years, maybe at 10 percent. So we would project out for 10 years. 

That continues. That will continue. That will remain static. 

The second part of it, however, allows for the one-third of the 

population which are the optional population—two-thirds of the 

population in Medicaid is mandatory; one-third is optional. Twothirds of the services are optional and two-thirds of the costs in the 

budget are for the optional population and two-thirds of the options. So, we have allowed the States—we have taken the most successful parts of TANF, the most successful parts of SCHIP, and 

rolled it into Medicaid, so that States would have the discretion to 

be able to allow them to develop a better program in their Medicaid 

639

system and be able to get the Federal dollars to be able to allow 

for optional service without asking for waivers. 

For example, the State of Utah had a Medicaid budget in which 

their health benefits were higher than the Governor and the State 

employees. They want to be able to reduce their health benefits in 

their Medicaid population to be able to buy into their State health 

plan, save money, and allow for more people to be covered. They 

couldn’t do it under the Medicaid law because everything has to be 

uniform, so they will be able to change that and allow that to take 

place. 

Your State, you have rural areas and you have urban areas. 

Under the Medicaid law, you have to have uniform and the same 

services from one part of the State to another. So if you add an optional population, you will then have to make sure of that in the 

urban area and in the rural area. So you may have an HMO that 

you want to put some people in. You can’t do that unless you have 

HMOs in both to save money. 

So, the States right now only have the capacity of continuing 

funding allowing the program to grow or be able to have the flexibility to define the kind of program they want for their particular 

State. That is the beauty of the changes. It is voluntary. So States 

could either accept it or not. Plus we would forward-fund $12.7 billion over 7 years. The first year would be $3.25 billion. We would 

ask the States to divide up the Medicaid pot into two blocks: one 

for acute care, which is not growing as rapidly, but the second one 

is long-term care and prevention, which is growing much faster. 

What we would like to see happen is that States would be able 

to start addressing the long-term population, the elderly population. We would like to give them the flexibility for keeping more 

of their senior citizens in their homes, therefore lessening the cost 

and improving the quality of care. We are also putting more into 

prevention because that is where we are going to save the most 

dollars and improve the quality of health. They really don’t have 

the capacity to do that under the existing law. This would allow 

them, if they want to go into it, to be able to do that. 

Chairman NICKLES. Secretary Thompson, thank you. 

I have additional questions on the upper payment limit which I 

think is a rip-off in the present system, one which is driving costs 

very high. 

Secretary THOMPSON. That is true. 

Chairman NICKLES. I want to try and stay on the 5-minute limit 

for myself and for all of our colleagues, so I will come back to you 

on that. By chance I don’t get a second round, I will submit that 

question to you as well. I think upper payment has to be addressed, and the phase-out is very long, I think, under existing 

plans. 

Senator Conrad. 

Senator CONRAD. Thank you, Mr. Chairman. 

Let me follow-up if I can on where the Chairman started, because he talked about the increasing costs in Medicaid, which are 

sobering indeed. But it think it is very important to point out that 

it is not just in Medicaid that we have seen these escalating costs. 

In 1999 Medicaid increased by 5.8 percent, but private health insurance went up 5.5 percent. In 2000 they both went up 9 percent. 

640

In 2001 private health insurance actually went up more (10.5 percent) and Medicaid went up 10.4 percent. So I think from that one 

could conclude Medicaid is doing a relatively good job, given the 

fact the program has a sicker and more disabled population than 

private insurers. 

But what is happening here is that health care costs are driving 

everything up in a way that is clearly unsustainable. There is no 

way we can afford these double-digit increases in health care costs, 

either in Medicaid, Medicare, or in the private sector. 

When I go home there is nothing brought to my attention more 

frequently by the business community and other institutions than 

what is happening to private insurance costs. We have without 

question, a serious challenge to the Medicaid system in terms of 

these costs, and Medicare as well. But more largely, this is a problem of health care costs in general in this country. 

One other point I wanted to make is this. When we talk about 

optional groups, I look to what is happening in my home State. In 

North Dakota, medically needy individuals with catastrophic medical needs are allowed to spend down to meet income eligibility levels. The North Dakota income eligibility level for one person is 

$500 a month in net income. If they are above that, they are out. 

The leel for a family of two is $516. These are very, very low levels 

of income. What absolutely confounds me is how the President’s tax 

cuts go together with the escalating costs in Medicare and Social 

Security. 

You were a Governor. You had to balance budgets. You had to 

make tough decisions, and you did. I am sure you had a balanced 

budget requirement, or if you did not, you balanced the budget. 

This is the thing that absolutely strikes me as extraordinarily serious for the country. Again, the blue part of those bars is the Medicare surplus which turn to deficits. The green bars are Social Security. What started out as a surplus turns to deficits. The red is the 

effect of the President’s tax cuts. What this chart shows us is at 

the very time the costs to the Federal Government explose because 

of the retirement of the baby boom generation, the costs of the 

President’s tax cuts explode, driving us deeper and deeper into deficit.

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Mr. Secretary, how do you explain this? 

Secretary THOMPSON. Let me try to explain it this way. The 

health care costs in America are going up a lot because we spend, 

I think, money the wrong way. Our Medicare budget really drives 

medical care costs, and we spend 90 to 95 percent of our Medicare 

dollars on getting people well after they get sick, and less than 10 

percent of the money on keeping people well in the first place. We 

spend $155 billion a year on tobacco-related illnesses in which 

400,000 people die. We spend $117 billion a year on obesity, of 

which 300,000 people die. We spend $100 billion on diabetes, of 

which 200,000 die. 17 million Americans have diabetes today. 16 

million more Americans are prediabetic. 90 million plus Americans 

have one or more chronic illnesses. That is driving up. If you add 

those three figures, that adds up to $384 billion a year on three 

diseases which can be prevented, and we only spend $269 billion 

on Medicare, and we spend $284 billion a year on Medicaid. So if 

you are going to have an impact on health care costs, we have to 

put more into prevention and we have to do something about 

changing human nature, about eating, exercising and not smoking. 

You will have the biggest impact of anything possible to lower the 

health care costs. 

In regards to the taxes, I am not the President, but the President 

feels very passionate about the fact that he wants to make sure 

that the economy gets moving. He rightfully believes that the tax 

cuts will energize the economy and make up the deficits that you 

are talking about in the outer years by getting more people working and generating more money in the economy, and that is why 

the President is pushing the tax cuts. 

Senator CONRAD. Let me just say though, the President’s numbers do not show what you have just said. You have suggested that 

the tax cuts are going to energize the economy and lead to lower 

deficits. The President’s own numbers show that the deficits explode under his spending and tax policy. This is his estimates of 

what happens. 

I know my time is up, Mr. Chairman. 

Secretary THOMPSON. All I can answer is that as I understand 

the way that matters are scored in Washington, nothing takes into 

consideration enhanced economic growth or development. So you do 

not have the positive side to a tax cut that goes into a chart like 

that. 

Senator CONRAD. I just say to you, 2 years ago we had that same 

pitch made to us when we were told that we had 5.6 trillion in surpluses over the next 10 years. We passed the tax cut, and now we 

are $2 trillion under water, a $7.7 trillion reversal. 

Chairman NICKLES. Thank you very much. 

Senator ALLARD. 

Senator ALLARD. Thank you, Mr. Chairman. I just would followup on that thought a little bit. That tax cut that happened 2 years 

ago, many economists said that we would have been worse off 

today if we had not had that in place, and even individuals who 

had not supported the tax cut 2 years ago had to admit that it did 

hold up the economy, buoy up the economy. In fact the editorial in 

the Washington Post, for example, in September, made that admission in their editorial page. So I do believe, and I think many 

643

economists do believe, that that tax cut that we had 2 years ago 

did hold up the economy. I think that your point is well made in 

that regard. 

You are probably getting a lot of pressure now, if I may move on 

to another issue, from the States. I mean they are suffering a lot 

of shortfall as far as their revenues are concerned. I think they 

made the mistake in many cases, when the economy was doing 

well, they instituted a lot of programs. In the Medicaid program, 

I think about two-thirds of those programs in Medicaid are optional 

to the State, that about a third are mandated. I would guess that 

they are coming to you and asking for you to sustain some of those 

programs that they elected to go in partnership with as an optional 

program. 

Would you share with me some of your thinking in regard to 

those issues as they bring them up to you? 

Secretary THOMPSON. Absolutely, and thank you very much for 

the question. Senator, 38 States last year made reductions in their 

Medicaid budget. 32 plus of those States are going to make reductions to their Medicaid populations this year. The easy answer is 

just—and my fellow Governors came to me and said, ‘‘Just give us 

more Federal dollars and everything will be well.’’ But to me, that 

does not solve the problem because the program is old, it is tired, 

it needs some streamlining and modernization, just anything else 

does. So instead of just putting more Federal dollars into it, I wanted to develop a system that is going to be more workable, more 

flexibility, more innovative, and so we have set up a program in 

which the States will get some additional money up front, $12.7 

billion over 7 years, and $3–1/4 billion the first year. The trend line 

goes up at about 9 percent, which is adjusted each year in October 

and November, and we announce it in December and January. 

If those States want to go into it on a voluntary basis, they 

would get for the first year an additional $3–1/4 billion and there 

would be about a 12 percent increase from the Federal dollars. The 

second thing we allow for them is that the States every year, in 

order to determine the State’s share, they have to compute. They 

have a base thing. Usually it goes from 50 percent partnership 

from the Federal Government up to 77 percent in Mississippi. But 

each year, in order to readjust the base, States have to compute in 

September and October what their population increases are going 

to be, what their utilization is going to be, and what the medical 

indexing costs are going to be for their particular State. Those 

three factors are added on to their base budgets. So what we are 

saying, we are going to forego at the Federal level, if you come into 

the program on a voluntary basis, the fact that you will not have 

to increase your allotment based upon population or utilization, 

just the indexed cost of Medicaid, which would be a great savings 

for every State. 

For that, for that good deal, we are asking the States to come 

in and divide up their population into two groups. The first one is 

acute care, which is not growing very rapidly, and the second one 

is long-term care and prevention, which is the most expensive and 

is the one that is growing the fastest. We are asking them to develop programs in how to manage that population better. We are 

going to set up a clearinghouse in the Department of Health and 

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Human Services of the best practices. We will be sending out suggestions for the States that are in this, how they could handle this 

population better and be able to prevent illnesses. Disease management would hold down a lot of cost, both for the Federal and State 

level. Managing individuals with diabetes, obesity, asthma and so 

on, and we could save money. 

We would also encourage them to try and find ways in which 

they would keep their senior citizens in their own home using 

home health care, using other things, and giving them the flexibility to do that. 

Then on top of that, we would allow them to have a 15 percent 

for administration for special needs population. For instance, if you 

have a State in which a factory closes down, we would allow them 

to be able to use the special needs population, or HIV/AIDS, or 

mental health, which they cannot get under this current medical 

assistance program, to be able to use money on a temporary basis 

for those categories of population to help them over this. 

So it would be less money for the State. They would get an advance on their money, and they would have the responsibility for 

developing new, innovative programs to take care of their acute 

care and their long-term care, and developing more areas of prevention, as well as trying to keep their senior citizens in their 

homes. 

Senator ALLARD. What kind of impact does that have on those 

programs that we are mandating down on the States? We do not 

give them an option. We just say there is a third. You got to take 

them. 

Secretary THOMPSON. That is not being changed at all, Senator. 

The mandated programs, the mandatory populations will stay the 

same way under this existing law. That is why it is not a block 

grant. It continues to rise. A block grant is a flat leveled source of 

revenue, like the TANF bill. It is $16.8 billion a year for 5 years, 

$16.8 billion annually over 5 years. That is a block grant. This continues to grow. Plus it excludes the mandatory population with the 

mandatory options. They are maintained the same way under the 

new law as they will under the old law. 

Senator ALLARD. Now, the first year is 3–1/4 billion? 

Secretary THOMPSON. 3–1/4 billion. 

Senator ALLARD. 12 percent increase? 

Secretary THOMPSON. Pardon? 

Senator ALLARD. Which is a 12 percent increase? 

Secretary THOMPSON. Well, no. It is a 9 percent growth rate, and 

on top of that will be an additional 3–1/4 billion dollars. The total 

program is $284 billion. So about 2 percent. So 2 percent above the 

9 percent. 

Senator ALLARD. 11. 

Secretary THOMPSON. About 11, 11 and 12 percent. So then in 

order to maintain——

Senator ALLARD. That is the first year, right? 

Secretary THOMPSON. Yes, and the second——

Senator ALLARD. Is it constant? 

Secretary THOMPSON. No. It is advanced funding of $12.7 billion 

over 7 years. There are different amounts. 

Senator ALLARD. OK. 

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Secretary THOMPSON. It is about $2–1/2 billion. So if you draw 

on your piece of paper, you see a trend line like this going up here 

at 9 percent a year, and then for those States that would voluntarily go into it, they would be above the trend line out to year 

2011, would by the seventh year. Then those States would fall 

below the trend line, would only be getting maybe 6 percent, 7 percent, instead of the 9 or 10 percent from the Federal Government, 

which would maintain and get their budget neutrality. 

So the Federal Government would not spend any more money, 

but it would have the ability of allowing the States right now to 

get the money up front and be able to use the flexibility for developing a better program. 

Senator ALLARD. When they get used to that amount of growth 

at the end of that curve, because you have it going up higher, then 

it drops down below. 

Secretary THOMPSON. Below the trend line. 

Senator ALLARD. Do you not kind of establish an appetite for the 

State and it is going to be very difficult to say no to, and they are 

going to expect that? Because you are talking about probably a 

whole different group of elected officials and policymakers? 

Secretary THOMPSON. I am developing a program, Senator, that 

is going to work now. It is going to bring efficiency in. It is going 

to bring disease management in. It is going to bring in prevention 

and so on. There is no question—and being a Governor, I have to 

be absolutely candid with you—there is an insatiable desire at 

every level of Government to have somebody higher pay for the bill. 

But I developed a budget neutral program that is going to allow 

for flexibility and for new kinds of thinking in the Medicaid arena 

to really provide for States the opportunity to develop a better 

health care system. 

Senator ALLARD. Mr. Chairman, I will wrap it up, but I just want 

to compliment Secretary Thompson. He is bringing in some new 

thinking, and thinking about reform. I think we need to do that. 

I appreciate it. I wanted to challenge you a little bit during the 

questioning. 

Secretary THOMPSON. Please, challenge me. 

Senator ALLARD. I appreciate that very much. We need people 

like you thinking out how we can make people more responsible on 

these programs. 

Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Allard, thank you very much. 

Senator WYDEN. 

Senator WYDEN. Thank you, Mr. Chairman. I share my colleague’s view. Tommy Thompson is one of the finest people in public life. 

Mr. Secretary, as you know, my State is the poster child for Medicaid and health care flexibility. There is no State that has more 

waivers, for example. You could probably call me the Senator from 

the State of Waiver, because we basically waived out of the programs all together. 

I am very troubled about the Administrations’s Medicaid proposal, and I want to talk to you about how we might find some 

common ground here. 

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Flexibility is something the Governors are very much for. We 

have all been meeting with them. However, they are very worried 

about how this proposal ramps up on money and then reduces it. 

As the proposal is written, basically, the money is pulled away 

when the demographic tsunami hits in 2010 and 2011, when we 

have all these baby boomers. That is when the money would essentially go away. What I am hearing from the Governors, and I think 

my colleagues are hearing too, is that we might have a leave-nochild-behind experience, where it is not even 7 years before the 

money starts to disappear. 

What could be done to guarantee to the Governors, to lock it in, 

that if they are part of this flexibility effort, that the money will 

actually be there 2, 4, 6 years out? That, at a minimum, is what 

I think we need to get to a compromise, because as I say, I think 

a lot of Governors are very troubled about the fact that the money 

is going to be gone just when that baby boomer tide rolls to shore. 

Secretary THOMPSON. Let me answer it in three ways. The first 

way is the State of Oregon is not able to use its full SCHIP money. 

Your SCHIP money gets sent back to the Federal Government and 

redistributed to other States because you have a very progressive 

program that you passed before the SCHIP bill, same way as 

Washington. This would be ideal for you, because you would be 

able to use to SCHIP money to be able to help pay for low-income 

working parents, and that money would be able to be used in Oregon and Washington for that category of people, which would lessen the State’s responsibility in that arena, and would be able to use 

your SCHIP money for a very good cause. 

Second, the States would be able to lessen their payments because when you look at it, every September, those three factors 

that I mentioned—let me use it this way. It is about $122 billion 

a year which States are paying right now, and it is rising about 

10 percent. So figure $12 billion a year increase that the States 

have to pay. The States, you have got to increase that payment. 

There is a base of $122 billion, and above that, they are going to 

have to pay an additional $12 billion next year into the Federal 

Government to meet their match. So we are reducing that match 

by two-thirds because we are waiving the requirement for the 

States to be able to have to increase their population base or their 

utilization, just their indexing. So it is wonderful deal for Oregon 

because they get their SCHIP money and they will have to pay less 

into the Federal Government to get their Federal dollars, which 

equates out to about a 1 percent increase on the Federal match for 

Oregon. 

The third thing is, during this period of 7 years when the money 

has been increased and front-loaded, we are expecting them to develop programs that are going to help administer disease management, preventative care, and being able to keep seniors in their 

home. That is where we are dividing up the categories into longterm care and prevention and acute care, and it will allow for 

transferability of up to 10 percent of the money. 

But those three reasons we think Oregon will be much better off, 

even when it goes below the line because there still will be an increase of about 6 or 7 percent each year in the out years, years 8, 

9 and 10. 

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Senator WYDEN. Mr. Secretary, you say little that I disagree 

with, but it does not respond to the question that I asked, which 

is what can be done to lock it in, to guarantee it? That is what the 

resistance is all about. The flexibility you are talking about, we are 

for, and frankly, I can figure out some ways with you to do it as 

well. We could pass a law to just let people roll over their SCHIP 

money for example and do exactly the same thing. I am on board 

for the flexibility. What I am troubled about, and what your three 

points did not address is that if we do not have a guarantee, if we 

do not lock this in so that the additional funds accompanies the 

flexibility, I think we are going to find it very hard to move forward 

with what could be an extraordinarily helpful initiative. As I say, 

I could not be more supportive of the flexibility, the waivers. Your 

demonstration projects on the insued make sense. Frankly, the 

only quarrel I really have with you is, unlike Orrin Hatch and I, 

we actually have a bill, we have introduced a bill that has got the 

AFL-CIO and the Chamber of Commerce on it. 

Secretary THOMPSON. I like your bill. 

Senator WYDEN. We are still looking for your concepts to be 

translated into a bill. I know that is going to come. But if you can 

figure out a way, working with—and I think I reflect the views of 

a number of my colleagues and Democrat Governors, if you can figure out a way to guarantee these dollars are going to be there, I 

think we can do business on this flexibility issue, and do something 

to make a huge difference for scores of low income people. 

Secretary THOMPSON. First off, the mandatory population is open 

ended, so that money is always there. The same way as the existing law is. The only thing is, is that on the optional population, in 

order to drive efficiencies, you have to make sure that the States 

are willing to make some changes. If you do not have that reduction in the years 8, 9 and 10, which is not a reduction from what 

they are getting or from the previous year, they will always go up. 

It is just that I do not see how you are going to make the States 

make changes to improve in prevention and treatment. I will be 

more than happy to work with you. I thank you for your ideas, and 

I will be looking forward to them, but that is my concern. 

Senator WYDEN. I think you do have good ideas, but without the 

accountability, without the assurance on the part of the States, I 

think given the precarious financial straits of these States, a lot of 

them are going to be reluctant to do it. That will be too bad, because I think there is an opportunity here to do something effective. 

One last question if I might, Mr. Chairman? I think I am probably on my time limit. 

Mr. Secretary, on the Medicare program, one of the things that 

is exasperating our part of the world, and I know Senator Murray 

is concerned about this as well, is Medicare essentially penalizes 

people for holding costs down. What we need to do again to get 

ready for 2010 and 2011 is to send a message that, look, if you are 

going to be innovative, if you are going to come up with ways to 

stretch your dollars, and the like, that the Federal Government will 

send a message that we are not going to stick it to you. What happens now is our providers get penalized for being efficient with 

health care dollars. I mean why come up with anything innovative? 

648

Why not just continue bumbling on through with clunky volumedriven services and rewarding people for being inefficient. What 

can we do in that area? 

Secretary THOMPSON. Senator, we can do a lot, and you are absolutely correct. The problem is the Federal Government moves way 

too slow for me and for you and for most people, but that is the 

nature of the vehicle. In rural areas we have put in a rural health 

task force to look at this, and we have got a rural open door program which involves monthly toll free telephone conferences for interested parties to call in and get advice on how they can make 

changes for the better. We have a Sole Community Hospital Initiative that we started administratively last July. It changes its inpatient hospital payment regulation to allow more isolated hospitals 

to benefit from higher Medicaid payments which they did not know 

about that we allow. We have started an inpatient rehabilitation 

facility, incorporates a special adjustment for rural providers to account for the fact that the data showed it is more costly to provide 

rehabilitation service. We have a physician assistant ownership of 

rural health clinics, which they could not under the current law. 

We allowed that to be changed. We have a pass-through payment 

for the nurse anesthetist services which was not possible before. 

We have got a phase down of certain graduate medical education 

and costs from wage index calculation which helps rural areas, and 

helps Oregon, Washington, and Wisconsin and Oklahoma, and we 

have done that administratively. We have also allowed for staffing 

flexibility for certain critical access hospitals that rural areas desperately needed. Those are just some of the things we have done 

administratively. 

Finally, our actuaries wanted us to raise the wage portion of the 

reimbursement formula from 71 percent to 72 percent, and we said 

that—which would have been a reduction in payments to rural hospitals. We said no, or I said no, and it stayed at 71 percent. I think 

it would be great, Senator Wyden, if we could set up a committee 

of individuals that really want to look at the overall Medicare system and try and find ways in order to improve it. I would love to 

be able to be part of that. I have several suggestions and ideas, and 

I would need somebody like you, Orrin Hatch, and Don Nickles, 

and anybody that wants to work on it, really wants to come in and 

roll up their sleeves. We could make some great progress in this 

are, and I am willing to do the heavy lifting to give you the ideas 

if you could just tell me what we can get passed. 

Senator WYDEN. You always have been. 

Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Wyden, Thank you very much. 

Mr. Secretary, we will give you that chance this year. 

Secretary THOMPSON. Thank you. 

Chairman NICKLES. I am serious about that. 

Senator Enzi. 

Senator ENZI. Thank you, Mr. Chairman. 

Mr. Chairman, I have a statement that I would like to have included in the record. 

Chairman NICKLES. It will be so included. 

[The prepared statement of Senator Enzi follows:]

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87370.443
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Senator ENZI. Mr. Secretary, we appreciate your being here, and 

I share your interest in creating more health care choices for the 

Medicare beneficiaries. 

I am very concerned about the rural programs. You just mentioned some a moment ago, but in the rural areas, we do not have 

any real competition between health plans, and I would like to 

know how the President’s plan to strengthen Medicare health plan 

competition would work in rural and frontier areas. We get a little 

bit beyond rural, actually. 

Secretary THOMPSON. Senator Enzi, I cannot give you the details 

of the Medicare plan as of yet. We are very close to making the decisions, but the decisions have not been finally made. In fact, I 

have another briefing session with the President at the end of this 

week. We are very close, it is very imminent, and I would like to 

be able to hold my answer to your question until the final details 

are made so that I can give you all the correct information. I would 

hate to mislead you in any way, because I pretty much know where 

it is going, but I want to be absolutely certain before I give you an 

answer. 

I can tell you that it would be based upon the Federal Employees 

Health Benefit Plan, FEHBP. Just like in your State, your foresters, law enforcement officials, your civil service and social service workers are able to have several different choices under the 

Federal Employees Health Benefit Plan, and that is the model that 

we are looking at. 

Senator ENZI. So you are assuring me that there will be some 

rural and frontier components to it, then. 

Secretary THOMPSON. That is correct, Senator. 

Senator ENZI. I appreciate that. 

Secretary THOMPSON. There will be some other changes, too. 

Senator ENZI. I appreciate the emphasis that you are placing on 

preventive. 

Secretary THOMPSON. Thank you. 

Senator ENZI. We think there are some great strides that can be 

made there. Now, of all the times that I have talked to people 

about how much their program will save, I have never seen anybody come back with the numbers that show that it did after we 

implemented whatever it was. So I hope that we will have some 

of those numbers with it, too. 

But what I am wondering about is that right now, two-thirds of 

the seniors can receive, say, the flu vaccine, and Medicare covers 

it. That is, all of them could receive it, but only two-thirds of them 

take advantage of the program at the present time. 

Does the President’s Medicare plan consider how to increase the 

utilization of that? If we are going to have the prevention, will they 

take advantage of the prevention? 

Secretary THOMPSON. The President is very passionate about 

prevention, as I am. I cannot say at this time what is going to be 

in there on prevention, but I can certainly tell you what we are trying to do in the Department on prevention, because we are doing 

a tremendous amount, and I would love to enlist your help and be 

able to do more. 

653

Senator ENZI. I am just concerned about that utilization and figuring out how to market it so that we can—if we put the prevention out there and people do not use it——

Secretary THOMPSON. We should require every Medicare recipient before they go into Medicare to have a physical, to be able to 

be examined, to be able to determine benchmarks, the condition. 

We would save millions if not billions of dollars on preventive care 

if we would just do that—if we set up programs requiring people 

with diabetes to walk 30 minutes a day, lose 10 to 15 pounds—you 

can reduce the instance of diabetes by 60 percent. We have just 

done an exhaustive study out at NIH. We have a program of $100 

million that we are requesting in this budget, Senator, in which we 

would like to set up healthy cities, at least 10 healthy cities across 

America, that would have to reduce the incidence of obesity, asthma, and diabetes in their city in order to quality. They would be 

designated a ‘‘healthy city.’’ We think that a lot of cities are going 

to be vying for that; we think it is great. 

We have a $125 million program for ‘‘tweeners,’’ those kids between the ages of 9 an 13, to become physically active, to pick a 

verb—walk, run, jump, ski, dance, whatever the case—and we are 

putting out a lot of information on this. 

We are going out into the minority communities where diabetes 

and obesity are very high, and we are trying to figure out ways in 

which we can address those particular issues. That is where we are 

going to save the dollars, and that is going to improve the quality 

of health of so many Americans. 

Senator ENZI. I certainly appreciate your enthusiasm on it. I saw 

that enthusiasm when you were starting the welfare reform movement in the country, and I have a lot of confidence that that is 

going to happen now in this program as well. 

I know that I am out of time. I do have a couple more questions; 

I will submit those. I know that you have some very able staff who 

can help in answering these questions, too, because she came from 

my office. 

Secretary THOMPSON. Senator, I always say I have the best people in the Federal Government working for me, and I stand by that 

statement, sir. 

Senator ENZI. Thank you. 

Secretary THOMPSON. Thank you very much for allowing us to 

hire her. 

Chairman NICKLES. I would vouch for that, Senator Enzi, absolutely. 

Chairman NICKLES. Senator Murray. 

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

Thank you, Mr. Secretary, for being here today. Just to followup on one of Senator Wyden’s questions, you mentioned the SCHIP 

allocation and some of the funding challenges that we face in Oregon and Washington and other State returning dollars. A question 

I have on the Medicaid dollars that you are putting out there and 

how you are going to allocate it—are you going to base that on expenditures or allocation, because that is really important to our 

States. If you are going to base it on expenditures, that will be very 

different than if you base your formula on allocation. 

654

Have you determined that? You kind of used the words interchangeably in your testimony. 

Secretary THOMPSON. It is based upon expenditures because of 

the States’ match and the Federal match. 

Senator MURRAY. But for those of us States who have to return 

our SCHIP dollars because we haven’t been able to use them——

Secretary THOMPSON. But under this proposal, you would get 

your allocation and be able to use it. It would not be sent back. 

Senator MURRAY. That is where I am challenged with understanding what you are saying. If you base it on expenditures after 

we have had to return some, that is a very different formula funding than if you base it on what our allocation is. 

Secretary THOMPSON. It is different. Under Medicaid, it has to be 

based upon expenditures, because there has to be a State contribution. It will be less under the new provision than it is under the 

old, but it is still there. 

SCHIP is going to be allowed to go to the State and be given to 

the State, and there will be an allotment given to the State, but 

it will be on top of the Medicaid proposal. 

Senator MURRAY. Then, you are saying it is based on the allocation. 

Secretary THOMPSON. It will be an allotment allocation to the 

State of Washington. So you will not have to send your SCHIP 

money back. You will be able to use your SCHIP money in the 

State of Washington not only for children but for low-income parents. 

Senator MURRAY. Let me turn to Medicare, because that is a 

huge issue for us. 

Secretary THOMPSON. I know it is. 

Senator MURRAY. I think we all know that we need to modernize 

Medicare and increase prevention, but I am very concerned that if 

we turn Medicare over to the private insurance market, we are 

going to add to the current inequities in the system. I know you 

have said many times in the past few months that seniors will not 

be forced into HMOs in order to receive prescription drug coverage, 

but I think it is pretty clear that the Administration is looking to 

expand the role of private insurance in Medicare, and to me, that 

approach is fairly troubling. I think we have to remember that 

Medicare was created a long time ago because of the failure of the 

private insurance industry. 

Secretary THOMPSON. That is true. 

Senator MURRAY. If we look at Medicare-Plus-Choice right now, 

we see some pretty painful limits of private insurance. It works 

great in some of our large urban areas, but in a lot of places in my 

State, it does not work well. Some States have plans that offer prescription drugs or vision benefits, but seniors in my State do not 

have access to that. 

Let me put up this chart. I know that you know this; we have 

talked about this before. This is the Medicare reimbursement chart 

that shows a number of States—or, the inequities in the Medicare 

reimbursement system that Senator Wyden actually referred to a 

few minutes ago. We see where Louisiana gets reimbursed at over 

$7,000——

Secretary THOMPSON. Take a look at Wisconsin. 

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Senator MURRAY. Yes, you are down there with us. 

Secretary THOMPSON. Yes, I am right down there; you had better 

believe I am. 

Senator MURRAY. This is my concern. There is a huge gap, and 

if these amounts are used to determine the Medicare-Plus-Choice 

reimbursement rates, we are going to exacerbate a problem that is 

already there. It punishes States like Wisconsin, Washington, Oregon, and others——

Secretary THOMPSON. Iowa. 

Senator MURRAY [continuing]. As Senator Wyden said, it sort of 

benefits States that have been inefficient. As he said so eloquently, 

there is no reason to do anything innovative, to work toward preventive care, to try to make changes. If all you do is reduce your 

costs, then we get a benefit system reimbursement like this, and 

if you are going to put your proposals based on these inequities, it 

is only going to make States not want to do something that reduces 

their costs. 

Secretary THOMPSON. You have said a lot of things, most of 

which I agree with, so let me try to answer and allay some of your 

fears. 

First off, the Medicare-Plus-Choice program is HMOs. The model 

that we are talking about is not an HMO model. 

Second, you are very satisfied I am certain about the Federal 

Employees Health Benefits Program, and your Federal employees 

in the State of Washington have many choices, and every one of 

your Federal employees in the State of Washington is covered 

under the Federal Employees Health Benefits Program. That is the 

model that we want to use in the Medicare system. 

Finally, most of the reimbursement formulas are statutory, and 

I cannot change them. 

Senator MURRAY. But you can give us proposals to change them. 

Secretary THOMPSON. I can give you proposals. I could set up a 

committee and sit down and talk to you about ideas and how we 

can do it. 

Senator MURRAY. I think that is important to do, because it is 

hard for Congress to move forward on this when you have winner 

States and loser States, and we do not have anything from the Administration to help us deal with this. 

Secretary THOMPSON. But this administration—we have only 

been in office for 2 years, and we inherited this system. We cannot 

change everything. I am trying to come up with innovative ideas 

on Medicaid. I have many ideas on the uninsured that I would like 

to sit down and talk to you about; quality assurance; preventive 

health—ways in which we can really improve the system. Most 

people do not ask me for my ideas. I wish they did. 

Senator MURRAY. Well, I would like to work with you on this, because if we just base the prescription drug benefit on the same inequities that we already have and the same formulas that we already have, there will be States who are going to lose all over 

again in a way that just simply is not fair. So I think it is important that we talk about how that formula is going to be—whether 

you are going to provide a flat per-beneficiary amount, the same for 

everybody in the country, when you come to prescription drugs, or 

you are going to base it on an inequitable formula. If you base it 

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on an inequitable formula, you are going to have a number of us 

who are going to absolutely oppose you. 

Chairman NICKLES. Senator Murray, you made an excellent comment, and I concur. 

Secretary Thompson, I will again say that several of our colleagues are saying we all recognize that we need to make significant Medicare reforms, improvements, to resolve some of these inequities in the system. 

Secretary THOMPSON. Absolutely. 

Chairman NICKLES. I will work with them. 

Senator MURRAY. Great. 

Secretary THOMPSON. You are going to find that this administration wants to work with you and accomplish those reforms. How 

many of those reforms can be adopted is a political decision, and 

we have to—the problem is that prescription drugs is the dessert, 

and unless we are willing to make the necessary changes to 

strengthen and improve Medicare right now, with prescription 

drugs being the dessert, we will never get back to Medicare and 

make the necessary changes until it is in a crisis situation. 

So I think we have an opportunity this year. 

Senator MURRAY. Mr. Secretary, let me just say that if the only 

people who get the high-calorie dessert are the people with the 

high-calorie dinner, we are all going to be overweight, and this 

Medicare program will never work. [Laughter.] 

Secretary THOMPSON. You know me—I have everybody on a diet 

in my Department, so I do not like that, Senator. 

Chairman NICKLES. Well-said. 

Senator Gregg. 

Senator GREGG. Well, there is nothing that kills good policy faster than a good formula fight. I sympathize with the Senator from 

Washington because our State is in the same situation as hers, but 

stepping into the territory of formula fights can really undermine 

policy very quickly. 

Secretary THOMPSON. You are absolutely correct, Senator. 

Senator GREGG. We should probably fight out the formulas 

amongst ourselves, and the Administration should set policy. 

On the issue of policy, I am interested in the basic theory here 

of your Medicaid proposal which, as I understand it, is that you are 

going to incentivize States to be more efficient with their dollars, 

create more preventive activity, create more health care cost containment by giving them more flexibility over how they use their 

Medicaid dollars. Is that essentially where it is? 

Secretary THOMPSON. That is correct. 

Senator GREGG. The theory is that you are going to give them 

more up front because when they produce more preventive health 

activity and more efficiencies, they will be able to do more with less 

as they move out into the outyears. Is that the theory? 

Secretary THOMPSON. That is the theory. 

Senator GREGG. Historically——

Secretary THOMPSON. But they will still not do less because it is 

still growing. 

Senator GREGG. Right. The basic Medicaid population is required 

to be covered under any scenario. 

Secretary THOMPSON. That is correct. 

657

Senator GREGG. But theoretically here, and arguably, a State will 

get more money to use for its optional population and use it more 

effectively for that population because they will have more flexibility over it, and they will know they need to use it more effectively because in the outyears, they are going to have to do more 

with less; right? 

Secretary THOMPSON. That is correct. 

Senator GREGG. Some States have occasionally used the Medicaid 

money in a fungible manner, and——

Secretary THOMPSON. In a what? 

Senator GREGG [continuing]. In a fungible manner——

Secretary THOMPSON. Yes. 

Senator GREGG [continuing]. I am just wondering what sort of 

protections there are to address that. 

Secretary THOMPSON. States have got the statutory authority to 

change their optional programs, because there are no restrictions. 

They can change the optional programs, and they can ask for waivers. We have to make sure that the waivers are budget-neutral. 

That is the accountability. The optional programs are still going to 

have a limitation based upon the dollars and the flexibility that is 

granted, but there is going to be a lot of flexibility for them to develop the program, as you indicated, Senator. 

But the mandatory populations, the mandatory options, and the 

mandatory protections, are all still existing in the law. 

Senator GREGG. I understand that. Is there going to be within 

the waiver application a requirement for preventive activities and 

good health care and things like that? 

Secretary THOMPSON. We are going to set up——

Senator GREGG. They are not going to be that categorical; it is 

just going to be simply here is the money, and we encourage 

you——

Secretary THOMPSON. We are going to set up a clearinghouse in 

the Department in which we are going to make prevention the key 

element, and we are going to send out these templates to each and 

every Governor and State legislature and say these are the kinds 

of things that we think you should do with your program; it will 

save you money and improve the quality of health for your citizens. 

Senator GREGG. Let me move on to another subject because my 

time is limited here. The Bio-Shield program that you proposed—

is it your view that this should be a mandatory funding stream or 

come through discretionary funding? 

Secretary THOMPSON. We think it should be mandatory. 

Senator GREGG. You are thinking of $6 billion over what period 

of time? 

Secretary THOMPSON. Six billion dollars over 10 years. 

Senator GREGG. Do you think this should be joined with addressing the issue of compensation for injury and liability in order to get 

utilization of this funding stream up? 

Secretary THOMPSON. We do not think so, Senator. I know that 

has been a concern of yours. We do not believe that you should tie 

the two together. We think this is a whole new concept that is 

going to be very difficult to pass in this current thing; putting anything more on is going to be more difficult. 

658

Senator GREGG. Well, if we look at the experience under smallpox, it appears that there are two reasons why smallpox vaccinations are not progressing very effectively, or at least in the expansive way that we had hoped. One is that people do not perceive the 

threat, I think, and that is unfortunate, because the threat is 

real——

Secretary THOMPSON. That is correct. 

Senator GREGG [continuing]. If it hits, it is going to be multiple. 

It is not going to be a single incident, in my opinion; it will be all 

over the country. If you are going to attack us with a biological 

weapon, you are not going to just attack one place—you are going 

to attack 20, 30, 40 places, and the panic will be considerable, and 

the response will be very difficult to coordinate. 

But the second element appears to be the fear of lack of compensation should there be an injury. Why wouldn’t you think the 

same framework would play into the effort in Bio-Shield, where 

you are going to bring on line vaccines which are fairly unique for 

fairly unique diseases, diseases which represent a national security 

threat, and people who are getting those vaccinations are going to 

want to know, well, if it does not work the way everybody says it 

is going to work, am I going to have a chance to get some sort of 

compensation. 

Secretary THOMPSON. Senator, you are absolutely correct in your 

analysis of smallpox. These are the two issues that are causing us 

a lot of concern, because people do not perceive as big a threat as 

you and I both know it is. 

Second, we think that it is the compensation. I have talked to the 

Association of Nurses and the hospital associations and the SEIU, 

the employees union, and all of them indicate that they would be 

more than happy to cooperate much more so and enthusiastically, 

I might add, if in fact we have a compensation fund. We are working on that, as you know. I believe my staff has been meeting with 

your staff, and OMB staff has been meeting with you on that particular question. 

We think that Bio-Shield really is not to the implementation of 

the counter-measure. We think it is in the development as well as 

getting it approved and being able to get it manufactured and getting FDA to grant its approval. We think that utilization as the 

next step is something different and should not be tied to BioShield. 

Senator GREGG. Thank you. 

Chairman NICKLES. Senator Gregg, thank you very much. 

Senator Stabenow. 

Senator STABENOW. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary, for your service, and I commend you 

on wanting to bring some flexibility for the States. Coming from 

State government myself, I know that the concern, as Senator 

Wyden mentioned, is that in return for flexibility that the States 

will be left at some point having the flexibility as to whom to eliminate from health care services, and that is the concern about 

whether or not resources will be there in the long run. I think I 

would like to have the opportunity to work with you as well, with 

others, on that piece, because I think that that is a very, very big 

concern as to what that flexibility ultimately means for people. 

659

I wanted to just make a couple of comments and then ask a couple of questions. First, I think it is important when we are always 

talking about numbers and we are talking about optional services 

under Medicaid and mandatory to really talk about what those are, 

because ‘‘optional’’ sounds like they are really not needed. 

Secretary THOMPSON. This is very important. 

Senator STABENOW. Yes. Ultimately, we are talking about health 

care for people; we are not talking about buying a car—although 

I would like everyone to buy three or four and buy them from 

Michigan——

Secretary THOMPSON. At least manufactured in Michigan. 

Senator STABENOW [continuing]. That is right—but the reality is 

that this is health care that we are talking about. It is not a pair 

of shoes, it is not a car. It is not something that people are running 

out to do, getting sick just so they can go get health care. 

So when we look at this and the explosion, I think it is important 

to remind ourselves of the context. We have more people out of 

work right now, so the number of people on Medicaid goes up. We 

have 2 million-plus private sector jobs that we have lost in the last 

2 years, so we have more people going onto Medicaid. 

When we look at optional, what we see is the States trying to respond to things that certainly people do not think are optional. Prescription drug coverage—most people who have cancer or high 

blood pressure do not consider it ‘‘optional’’ to take medicine. When 

we look at the other things, prevention is already there. States that 

are trying to do prevention is viewed as an optional service. Dentures are an optional service. If you do not have your front teeth 

as a senior, and you cannot eat meat, they probably do not consider 

that optional. Things like glasses are considered optional. 

I just mention that because these are not optional as in not necessary for someone. They are just optional in the way we have designed the program, the bureaucracy. 

The same thing with the individuals—according to the Kaiser 

Commission on Medicaid and the Uninsured, they say that many 

optional beneficiaries are among the most vulnerable people enrolled in Medicaid, including disabled individuals and the elderly 

who need nursing homes. Again, if you have a mom or a dad who 

needs a nursing home, that family certainly does not view that as 

optional. 

So I just say that to say that it is important to understand that 

these are optional only because we have chosen to call them optional, not because people consider them optional in their lives. 

The other thing I would just comment on—and I would like to 

talk about prescription drugs for a moment—is that when we talk 

about choice, I understand that you are talking about lots of different choices or kinds of insurance systems. I am pleased that you 

are no longer saying—at least the initial information we had was 

that people would have to go into an HMO under Medicare in order 

to be able to receive help, and in Michigan, that has been a real 

failure. In fact, my mother was in a Medicare HMO and had a very 

good experience but was dropped along with over 36,000 seniors because plans were pulling out of Michigan. So this has been a serious, serious issue for us. 

660

But when I hear about choice from people, they are not asking 

for more insurance companies to choose from. They are asking for 

prescription drug coverage. They think that Medicare works. It is 

dependable, it is reliable. It has worked except for one thing—it 

does not cover prescription drugs. 

What my seniors are saying is that the choice they want is the 

choice to pick their doctor, the choice for their doctor to pick their 

medicine. 

So I appreciate where you are going, but that is not what I am 

hearing from people in Michigan. That is not the choice that they 

are wanting. The choice that they are wanting is to be able to have 

prescription drug coverage, and I want very much to work with you 

to have something that makes sense. 

On prescription drugs, one of the things that we have not talked 

about today is why we are seeing an explosion in health care costs. 

I hear from business after business in Michigan, including the Big 

Three, that the biggest reason their health care costs are going up 

is because of the explosion in prescription drug prices. Doctors are 

getting less money—although I am glad we could address their concerns in the last budget. I wish we had addressed hospitals and 

nursing homes and home health agencies and others. But no one 

else is seeing large increases in reimbursement, yet the average 

brand name prescription drug is going up three times the rate of 

inflation, and that is being paid for by business, it is being paid for 

by individuals, and so on. 

So I would like to talk to you about the whole question of how 

do we bring these prices down. If we continue paying prices that 

are three times the rate of inflation, and we just add Medicare coverage, we break the bank. We have to deal with the question of 

prices. 

We had a bill that passed the Senate, Senate bill 812, last year 

that closed loopholes on generic drugs. I know the President has 

moved forward part of the way on that, and I commend the Administration——

Secretary THOMPSON. We think quite a bit of the way. 

Senator STABENOW. I guess my first question would be will you 

support going the additional steps in order to really close the loopholes. It is my understanding that things like enforcement of the 

new Orange Book listings, late-filed patents, collusion, and other 

important elements in S. 812 have not yet been implemented, and 

I am wondering if you are willing to work with us to take the bipartisan bill passed with over 70 votes in the Senate—Senator 

Schumer and Senator McCain’s bill—would you support doing the 

rest of the job in terms of generic drugs so that we can lower 

prices? 

Secretary THOMPSON. You have raised many things. Can I go 

through them——

Senator STABENOW. Sure. 

Secretary THOMPSON [continuing]. First, on Medicaid, I know you 

are from the State and you understand it, but most people do not 

understand that this is a tremendous buy for the States because 

it is going to lessen their payments each year to get the Federal 

dollars. So the Federal share will go up, and the States’ share will 

go down. 

661

So over a period of time, even over this 10 years, the States’ involvement will be less, and the Federal involvement will be more, 

because they will not have to pay as much in on an annual basis. 

It equates to about a 1-percent increase in the Federal match. 

Second, under the existing Medicaid law, it is so strict—for instance, you mentioned that you have some companies that are closing down——

Senator STABENOW. Many. 

Secretary THOMPSON [continuing]. The State cannot go in and do 

anything for those poor people under the Medicaid law. It does not 

allow them to. Under this provision, the States could have the discretion to go in for a period of time and pay the health insurance 

for those employees under the Medicaid system. 

Senator STABENOW. I appreciate that. I also know there is a 

tradeoff in that if there is a pot of dollars, and they are moving it 

to those who are unemployed, then it means they are not able to 

do prescription drug coverage or they are not able to handle senior 

citizens’ dentures and so on. 

Secretary THOMPSON. But it is an optional thing. Right now, 38 

States this past year have cut back on optionals; 42 States are 

going to cut back this year. The States—and you will know this 

from your background—do not have a choice. When they get to the 

point where they have to make a decision, they have to drop the 

whole class or the whole option. They cannot redesign the program. 

Under the new provision, let us say the States have one or two 

choices right now—maintain the program as it is or drop it—don’t 

you think the State of Michigan, the Governor, and the legislature 

would like to have a third option—maybe lessen the benefits or increase the copays, but allow the program to continue. They cannot 

do that under existing law. Under the new law, they will be able 

to. 

Senator STABENOW. I do appreciate that, and I do believe that 

flexibility is a good item. I guess my comments earlier were more 

toward the lack of our willingness to have health care be a priority. 

We put all of these boxes out there——

Secretary THOMPSON. It is my priority. 

Senator STABENOW [continuing]. I understand that, and mine as 

well——

Secretary THOMPSON. And the President’s. 

Senator STABENOW [continuing]. But there is not a sense of urgency about addressing what is an urgent matter for people in 

their daily lives. 

Secretary THOMPSON. I think this is extremely urgent, and that 

is why I am pushing it so hard and trying to elicit your support, 

because I know that you understand it, and I think you should support it, because I think it would be great for Michigan. 

Senator STABENOW. One other quick question, if I might——

Chairman NICKLES. Senator Stabenow, you have already gone 

about 10 minutes. Let me call on Senator Enzi now. 

Senator STABENOW. Well, I will follow-up, because I did want to 

ask you also about the dramatic increases in advertising for prescription drugs and how that affects our pricing. So I would like 

very much to follow-up. 

Secretary THOMPSON. You asked me if I would like to assist you. 

662

Senator STABENOW. We need to bring prices down, because it is 

a tremendous pressure on the economy at this point. 

Secretary THOMPSON. Well, there are things that we can do, and 

I think we can do it together, and I am willing to work with you. 

Chairman NICKLES. Senator Stabenow, thank you very much. 

Senator ENSIGN. Senator ENSIGN. Thank you, Mr. Chairman. 

Mr. Secretary, I have so many questions and so little time. I am 

very passionate about these issues, as you are, and love some of the 

things that you are doing and certainly what you did as Governor, 

leading the country, especially on the welfare reform revolution 

which really led to the landmark legislation that we passed here 

in Washington, D.C. 

My only charge, I guess, would be to encourage more States to 

do what you did and not just cut the rolls in half, but cut them 

up to 95 percent, from what I understand when you were Governor. 

Secretary THOMPSON. I only got to 94 percent. I did not get to 

95. 

Senator ENSIGN. Sorry, sorry, excuse me. I always exaggerate. 

But certainly the State budgets could use that, and you and I both 

know that those people are better off than when they were on welfare. 

The thing that I have been stressing for a long time also in 

health care is the importance of prevention. It was one thing that 

a few years ago, we could not get the bean-counters up here in 

Washington to score some of the preventive measures. For instance, you mentioned diabetes. Dieticians working with diabetics, 

teaching them how to eat better, is crucial. When I was in the 

House, I authored a bill to do that. We were only able to get the 

study. Now we are going forward with some more things like that 

such as the idea of physical therapy caps. It just makes a lot more 

sense if you can get somebody through physical therapy and get 

them back into society instead of having to be institutionalized or 

in a nursing home or whatever. Those are some simple solutions, 

but those are still tiny compared to preventing the onset of diabetes in the first place. Other important health issues we need to address are the smoking problem, eating right and exercising. If you 

do those three things, you will, as you said, dramatically cut the 

cost of prescription drugs, the cost of health care, and the cost of 

hospitalization. We are talking about doing that kind of stuff with 

some of the older populations, but unfortunately, our kids are being 

trained in the worst possible habits today. The junk food that they 

are feeding our kids in schools is promoting the worst possible eating habits. They allow soda pop machines in our schools because 

that is a way they can make a little extra money. The claim that 

kids will not eat good food if we feed them is not true. Well, if that 

is all that you feed them, they will eat it. [Laughter.] 

Secretary THOMPSON. I really like you. 

Senator ENSIGN. Well, it is one of those things we learn at home 

first. When my wife and I—and we are just as soft as any other 

parents sometimes—we give them too many choices. But then, we 

finally say, ‘‘You know, this is really ridiculous. Instead of giving 

them three or four choices for dinner—no—this is what is for dinner tonight, and you are going to sit there—and there is no snack—

663

and you are going to eat your vegetables, and you are going to eat 

the right things.’’ Training our kids when they are young is absolutely critical in this. 

A big part of this is leadership from the President in talking to 

kids and then setting up programs through the Department of Education. Specifically, in Medicaid and Medicare, can you give me 

some feeling—I know you do not have the exact specifics on what 

you are going to encourage the States to do—but can you give me 

some idea, for example, on smoking. My State leads the country in 

the number of smokers and smoking-related deaths. A large part 

of that is because a lot of people move to Nevada and work in the 

casinos and there is a lot of smoking in the casinos. 

Secretary THOMPSON. On smoking, I am trying to come up with 

some discretionary dollars to use in the program to have people 

stop smoking. Seventy percent of people who smoke want to stop; 

they just do not have the intestinal fortitude to do it, they do not 

have the medicine, the counseling, and so on. I think it would be 

smart of we had some dollars with which we could utilize programs 

that are out there that are effective when people want to stop 

smoking. Get it advertised, get it throughout the State Medicaid 

program, and say these are some programs that will help you stop 

smoking. If 70 percent want to stop smoking, let us help them. It 

would save us many dollars in the future—$155 billion a year on 

tobacco and 400,000 deaths. That is the one best way in which we 

can have the biggest and most direct impact on the health care 

budgets in America. 

Senator ENSIGN. Once again getting back to the kids, does it 

make any sense to anybody else that kids are not allowed to buy 

cigarettes, but we do not do anything if they smoke cigarettes? If 

you walk onto the parking lots at high schools, the kids are smoking cigarettes; yet it is against the law in my State to buy them. 

Secretary THOMPSON. It is against the law to buy them. 

Senator ENSIGN. It is against the law to buy them, but they can 

go ahead and smoke them. Personally, I think we are sending the 

wrong message. 

The other commentary that I would like to make on smoking is 

that I think Hollywood and the music industry have a huge responsibility here. We always hear about the evils of the tobacco companies and the way they are persuading kids. I remember growing up 

and remember how companies used to go after Hollywood actors to 

get them to endorse their products because they knew how important stars were in influencing people’s behavior. 

Well, in almost very major motion picture and in many music 

videos what are the people doing? They are smoking. The lead actors make it cool. So that is something that I think Hollywood 

needs to be held accountable for. We know that if we can get people 

not to smoke by the time they are about 20 years old, the chance 

of them smoking is incredibly small. So that is a huge area in the 

future to save on health care costs. 

Secretary THOMPSON. All I can say is amen. You are right on. I 

wish I could put you on every television station in America. 

Senator ENSIGN. Mr. Chairman, can I ask one more question on 

prescription drugs? 

664

Senator Hagel and I had a prescription drug bill last year that 

we actually got 51 votes on. We ended up having four Democrats 

vote for our bill. It was the only one that fit within the budget last 

year. Unfortunately, it did not come through the Finance Committee, so it was subject to a budget point of order. 

But it addressed something that I think is fundamentally wrong 

with our health care system, and that is if you are going to give 

a prescription drug benefit, and you just give the drugs to people, 

there is no accountability to the patient. 

Our bill said that the patient is going to be responsible for the 

first dollar expenses unless they are very, very poor. They would 

pay up to a certain amount it was around $1,200 and then it went 

up from there depending on income. But the bottom line was that 

they paid the first dollars, and after that, the Federal Government 

picked up the cost. 

In health care today, with low-deductible policies or low copays, 

there is no accountability in the system. One person provides the 

service, somebody else pays for the service, and one person receives 

the service, so there is no connection there. 

I think it is very important for us when we are designing a prescription drug proposal—because these costs will skyrocket in the 

future—that we add accountability. 

Senator Stabenow talked about that somebody will go out and 

buy a car just to buy a car, but they do not just go out and get 

health care. That is bunk. People go out and get prescription drugs. 

There are a lot of hypochondriacs in this country, and there are a 

lot of seniors who are lonely, and they may go to the doctor to have 

somebody to talk to. We know there is a tremendous amount of 

overutilization. There has got to be some accountability in the system for some of the costs; otherwise health care costs will continue 

to spiral out of control. 

So we really want to continue to work with you and your staff, 

to try to make sure that the prescription drug proposal that is enacted in is not only good for seniors but is responsible to the next 

generation. 

Thank you, Mr. Chairman. 

Secretary THOMPSON. You raise some very valid points, and I 

want to work with you very much, Senator. Thank you very much 

for your comments. 

Chairman NICKLES. Senator Ensign, thank you very much. 

Senator Corzine. 

Senator CORZINE. Thank you, Mr. Chairman. 

Welcome, Mr. Secretary. 

Secretary THOMPSON. Thank you, Senator. How are you? 

Senator CORZINE. I, like my colleagues, appreciate the flexibility 

and creativity that you have tried to bring to a complex subject. I 

think the preventive care elements that have been talked about repeatedly are extraordinarily important elements of trying to rein in 

costs, and I hope that all of us can be a part of the process to make 

that more a fundamental element of what we are trying to do here. 

I do want to express, though, some frustrations. It strikes me 

that in a number of States—I am obviously reflecting the experiences that we have in New Jersey—where people have been creative, where they have been flexible, where they have moved in a 

665

forward-looking way, for instance, with regard to prescription 

drugs, and made choices, it would appear—and again, obviously, 

since I have a vested interest in representing my State—that they 

have often been punished, or at least not rewarded, for those kinds 

of innovation and flexibility. 

The same thing with the SCHIP. Our State has been one of the 

most aggressive under both a Republican and a Democratic Governor, in a bipartisan way, in reaching out to register. 

Secretary THOMPSON. You have done a good job. Congratulations. 

Senator CORZINE. They have done a great job. But it is unclear 

to me—well, first of all, there is the technical issue of the reallocation, which the current administration is looking for in this difficult 

time, and I guess CMS has not moved to actually reallocate those 

funds this year, which is a problem, one of several, with regard to 

what people would count on in their budget based on what the law 

said and what was supposed to happen. I can understand why you 

want to correct and use it in other States, appropriate in the long 

run; I think that is a good idea. But at least as the law works 

today, there are supposed to be funds that are flowing to 13 States, 

and a decision on that has not been taken, and I think that just 

compounds some of the other issues that go on. 

I am also worried about where SCHIP will fit in the reform program that you are suggesting—the flexibility program that you are 

suggesting. Will those funds that are allotted be required to be 

used for SCHIP, or will they fit into a larger block that potentially 

will pull away from kids? I know you talked about acute care and 

long-term care. One of the most successful bipartisan initiatives 

that has come out in recent years, at least in my view and certainly 

for New Jersey, is the SCHIP program and its application to bring 

more kids in. I am very concerned that the dough that gets blockgranted here then moves away from that particular area and will 

not be used for dealing with children’s health, which is such an important issue for education, and then have long run implications. 

So I would like to hear how you think that is going to work. 

I am going to be remiss again if I do not say something about 

I thought your initiative to make sure that SCHIP could be used 

for low-income pregnant women and the confusion with the fetus 

as opposed to the child is a concern of mine. I think we are getting 

issues that do not necessarily relate to what I think is a very, very 

important issue to be prenatal care, post-partum care, for low-income women and children mixed up in another debate, and I would 

encourage that we reconsider and move on that. 

But most of my questions, a lot of them, are not unlike what my 

colleagues brought forward, but this SCHIP issue I think may be 

one of the vital areas in Medicaid that I am very concerned the reforms will undermine. 

Secretary THOMPSON. Thank you very much, Senator. 

Let me go down the list. First, you are concerned about the waiver being applied for by the Governor of New Jersey on drugs. I had 

a nice meeting with the Governor this week. I was with him and 

his staff I believe on Friday for an hour and a half, and we worked 

through as much as we could. 

The problem I have is one in which the law requires me to be 

budget-neutral. I cannot break the law. So we are trying to work 

666

out different figures which might be able to give New Jersey some 

relief. We are working on that. I cannot promise you; all I can tell 

you is that we are working on it, and I think the Governor was 

quite satisfied with the meeting, and hopefully we can make some 

progress. 

On SCHIP, I understand that New Jersey would like to get the 

reallocation. If I were New Jersey, I would love it, too. I just think 

the concept of States like Washington, Oregon, New Mexico, and 

Tennessee—the States that cannot use their SCHIP because they 

were out in front and developed the program that is too rich now 

for SCHIP to fund—that they should not be penalized by not being 

able to get the SCHIP dollars. We are trying to——

Senator CORZINE. I would only remark that I thought that that 

was dictated by law. Maybe we ought to change the law. 

Secretary THOMPSON. That is dictated by law. 

Senator CORZINE. Therefore, sort of in the same way that you 

spoke about the other issue——

Secretary THOMPSON. I am talking prospectively, and I think you 

will agree with me on that. 

Senator CORZINE. I actually think that IGT and all the other 

things—if we had a level playing field, people would be a lot less 

frustrated about how these things work. 

Secretary THOMPSON. I agree. 

Senator CORZINE. I suspect the Chairman is going to ask about 

that upper payment limit in the same way. 

Secretary THOMPSON. You have the upper payment limit, you 

have the IGs, you have disproportionate share—all of those things. 

Senator CORZINE. I guess my point is that in a number of instances where you have been good citizens, and you have been creative and used the flexibility that was available and some resources that the State put in to make sure it happened, it does not 

always work out to your advantage in the transition. 

Secretary THOMPSON. No, it does not. In my own State of Wisconsin when I was Governor, one of my biggest gripes was because 

we were being very progressive and doing some neat things, and 

we always got penalized for doing that. 

Senator CORZINE. It is a concern as we go through a reform toward flexibility and the kinds of innovations you are talking 

about—and I think this is what Senator Wyden was referencing—

it may end up having some hardships for those who have already 

done a lot of the things or have begun to do a lot of the things that 

you are suggesting. 

Secretary THOMPSON. In the SCHIP program part of Medicaid, 

we want to be able to use more flexibility. I think the SCHIP program has been an exceptional one, but there have been some problems with it, and the problem I see with it is that it does not allow 

the parent or parents of that child to also be enrolled, and I am 

looking for ways to be able to do that, and that in the SCHIP program will be able to be utilized by the States to do that. 

I developed a very successful program in Wisconsin doing that. 

It saved money, and it got more children enrolled—it took me 24 

months to get a waiver from the Federal Government in order to 

do that. That is part of this provision in this one. 

667

In regard to the abortion question, I want you to know that that 

was not considered at all. The Medicaid law allows for prenatal 

care right now. We just extended the same thing in the Medicaid 

law to the SCHIP for children. I believe that those children deserve 

prenatal care. 

Senator CORZINE. You would agree that the mother needs prenatal care? 

Secretary THOMPSON. I certainly do. 

Senator CORZINE. I think we are both on the same page in what 

we are trying to accomplish here, and at least my reading of the 

initiative is that that is not necessarily how it gets interpreted. 

Secretary THOMPSON. It does not get interpreted that way, and 

I just want you to know, because I made the decision, and it was 

based upon making sure that that child would come into the world 

healthy, and if that child was born to a Medicaid mother, that 

mother would have prenatal care. But if that child was an SCHIP 

child, that child’s mother could not get prenatal care. That did not 

make any sense to me. 

Senator CORZINE. We agree 100 percent on that, and we need to 

make sure that we have it in the way that it is meant. 

Secretary THOMPSON. That is the reason for it. 

Senator CORZINE. Thank you. 

Chairman NICKLES. Senator Corzine, thank you very much. 

Mr. Secretary, I have just a couple of quick questions that I was 

not able to ask you. I mentioned the fact of upper payment limit 

abuses that are presently in the system. The Administration, and 

I compliment you for this, you have taken action to curtail some 

of the abuses. A lot of States have really found ways to gimmick 

the system or almost scam the system where they move repayment 

rates or reimbursement rates on Medicaid substantially up in a 

Government-owned hospital, community-owned hospital, or Stateowned hospital up to the Medicare limit. They are reimbursed and 

then they reimburse the smaller amounts. You would end up having basically a Medicaid procedure that would be entirely paid for 

by the Federal Government. Isn’t that correct? 

Secretary THOMPSON. Absolutely. 

Chairman NICKLES. Now, you have tightened it up, but you do 

not stop it. You kind of phase it out, but you phase it out over a 

10-year period. You save, according to your report——

Secretary THOMPSON. There are five States—which we have preliminarily determined have UPL transition periods phased out over 

8 years. 

Chairman NICKLES. Eight years. Excuse me. 

Your report says that it saves $55 billion. It really seems to me 

to be a scam. If we eliminated it totally, what would the savings 

be? 

Secretary THOMPSON. I do not know, Senator. 

Chairman NICKLES. Would you report that back to us? 

Secretary THOMPSON. Sure. It would be a lot. 

Chairman NICKLES. I expect that it would be. If you haven’t gotten the thrust, I am really concerned about something that is growing from 6 to 9 to 14 percent in cost when I see some of the gains 

where the States have been very innovative I am afraid that some 

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of the States, now that you have tightened up on UPL, are finding 

other ways. 

Secretary THOMPSON. Yes, they are. 

Chairman NICKLES. Some of the State health directors are very 

adroit, and I would imagine they have hired professionals to figure 

out how they can make Medicaid a 100 percent Federal program 

and avoid the State match. 

Secretary THOMPSON. That is correct. 

Chairman NICKLES. I do not think we should allow that to happen. 

Secretary THOMPSON. I do not, either. 

Chairman NICKLES. I would appreciate suggestions from you and 

some of your experts that we might incorporate so we can stop the 

cheating on the system and come up with a Federal-State program 

that is run by the States and not have this be entirely a Federal 

program. If we are going to change it into an entirely Federal program, then let us do it for all States. 

Correct me if I am wrong, but in this particular program, I believe there are 28 States that are participating, using UPL, States 

I would say are cheating on the system. 

Secretary THOMPSON. Well, you have the use of Inter-Governmental Transfers, Senator. There are three IGT programs. You 

have the use of Inter-Governmental Transfers, as part of the upper 

payment limit; and then you have the use of IGT’s as part of disproportionate share and you have began to use IGT’s in other payments. Each one of those has some merits, but there are a lot of 

abuses, and we are trying to tighten up the system so there are not 

abuses in it. The Inter-Governmental Transfer is the one that right 

now needs to be tightened up. 

The upper payment limit is on a glide-path down to 100 percent. 

Chairman NICKLES. I am not convinced that we need to phase it 

out over 8 years. 

Secretary THOMPSON. I understand. There are only five States 

that are still in the 8-year. Some are at 5 years, some are at 4 

years, some are at 3, and some are at 2. But you are going to have 

to change the law in order to do that. 

Chairman NICKLES. Well, I am in that business. 

Secretary THOMPSON. I know that, and I am very appreciative 

that you are, Senator. 

Chairman NICKLES. I am happy to work with you. I notice one 

of your——

Secretary THOMPSON. But I would like to point out that the 

upper payment limit is small compared to the IGT. That is the one 

that I am much more concerned about, and I would like to spend 

some time discussing it with you. 

Chairman NICKLES. Could you give me a thumbnail, what do you 

mean by IGT? 

Secretary THOMPSON. It is an agreement between the State and 

the county. The county for home and community based health care 

spends $100 for the service. They bill the State for $100 as the rate 

for that service. But the State says we will increase your rate and 

you bill us $200, we will then bill the Federal Government $200 

for that service. Then, if it is a 50–50 matching State, the Federal 

Government pays to the State on a quarterly basis $100 for this 

669

bill, because the Federal Government’s share is $100, and the 

State’s share is $100. So in this example the State was supposed 

to pay $100, and they get $100 for this from the Federal Government, and they pay the $200 to the county; the county keeps $100 

plus $25 commission and sends $75 back to the State. So the State 

has only provided $25 instead of their statutory match rate of $100 

in this example. 

Chairman NICKLES. Are you talking about for home health? 

Secretary THOMPSON. For anything—for doctors, for home 

health—anything that includes counties or local providers. 

Chairman NICKLES. All this under Medicaid? 

Secretary THOMPSON. Under Medicaid, yes. 

So the counties have reached an agreement with the State that 

they will increase their billing to the State, which increases the 

billing to the Federal Government, which lowers the percentage the 

State has to pay because the Federal Government gets the higher 

bill, and they pay their percentage on the higher bill, and they 

send that percentage back to the State, and then the State transfers that on to the county or to the city, and the city takes a commission, and they turn around and send the balance back to the 

State, which lessens what the State’s participation is. 

Chairman NICKLES. It is pretty close to the upper payment limit. 

Secretary THOMPSON. Well, that is part of the upper payment, 

but IGT is used in conjuction with the upper payment limit and 

other payment mechanism. 

Chairman NICKLES. Is that right? Well, I would be very receptive 

to some ideas on stopping some of these things. I would like to 

even go further to tighten them up but impose penalties for the 

people who are abusing the system. If people are going to be rewarded for coming up with games to figure out how to make this 

an entirely Federal program, and/or if we include that, I am a little 

concerned about your Medicaid proposal. I do not want to use the 

word ‘‘block grant,’’ but the level that you are submitting to the 

State, if they have that built into their base, are we rewarding 

them vis-a-vis the 22 States that do not do that in setting up the 

Medicaid program as you have proposed? 

Secretary THOMPSON. I am not sure if the IGT is in the base. It 

is in the base. 

Chairman NICKLES. If it is in the base, you are somewhat rewarding them for that. I would hope that as this progresses, we 

would not have that included in the base. I think that rewards 

some devious planning. It may be legal, and maybe some people 

are doing it because they say, ‘‘We know that other State are doing 

it.’’ I notice the number of States that have done this went from 

12 to 28 just in the last couple years. 

Secretary THOMPSON. Yes, but now there are more. 

Chairman NICKLES. Now there are more than that, you are telling me. How many more? 

Secretary THOMPSON. I do not know, but we are getting applications every day. There are corporations out there that are making 

money off this, coming up with ideas. Every time we close one idea, 

they come up with another idea. 

Chairman NICKLES. Well, you know, the IRS is now coming down 

hard on some firms that came up with tax shelters that were really 

670

pretty abusive. I look at this as somewhat in the same vein, and 

I look at us paying the bill. When I see our Medicaid bills climbing 

by 14 percent and climbing every, single year percentage-wise, I 

want to stop this kind of abuse. Maybe we can come up with some 

penalties for those who participate in this kind of scheming. So 

suggestions that you have, whether they be the Inter-Governmental Transfers or whether it be UPL or others, I solicit those, 

I welcome those, I want to work with you. 

Secretary THOMPSON. UPL is going down. It is on a glide-path. 

You do not think the glide-path is fast enough. 

Chairman NICKLES. That is correct. Look at the glide-path. If 

somebody has been ripping you off, and you say, ‘‘Next year, if you 

rip us off a little less, maybe we will be pleased because we are 

making savings,’’ that does not satisfy me. I think we ought to close 

the door. 

Secretary THOMPSON. I understand that, but that was negotiated 

before I got here, Senator. 

Chairman NICKLES. I understand that, and I understand there 

are certain hospitals that have done exceptionally well and have 

powerful members. It does not change the fact that we have to try 

to save this system, and you are to be complimented because you 

are proposing the most significant reforms in both Medicare and 

Medicaid that we have considered, frankly, in my career in the 

Senate, which has been 23 years. Both need to be improved and 

saved. So I compliment you for it; I just happen to think we ought 

to tighten up on these abuses. 

We have enhanced and improved some benefits, whether you are 

talking about prescription drugs, lower deductibles or 

catastrophics, there are a lot of positive things we can do in Medicare, and maybe more preventive possiblilities in both Medicare 

and Medicaid. Those are some of the positive things, but likewise 

if we do not stop some of the abuses, we will not be able to afford 

it. 

So I look forward to working with you and other members of the 

committee to really make significant improvements in these two 

major programs, and I appreciate very much your participation before the committee. 

I do hope that you will respond to additional questions if submitted to you by myself or others. 

Secretary THOMPSON. Thank you very much, Senator, for giving 

me this opportunity. I really appreciate the cooperation from both 

sides here today wanting to really take a look at this and work on 

it. 

I think we can come up with a Medicaid plan that everybody can 

buy into and really support, improve the system, and save some 

dollars, make it more people covered and more efficient. I know 

that that seems almost impossible to say, but I think we can do 

that just like we did under welfare. 

Chairman NICKLES. I look forward to that, and we will work together to make that happen. 

Mr. Secretary, thank you very much. 

The committee is adjourned. 

[Whereupon, at 5:01 p.m., the committee was adjourned.] 

(671)

THE PRESIDENT’S FISCAL YEAR 2004 BUDGET 

THURSDAY, SEPTEMBER 3, 2003

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

The committee met, pursuant to notice, at 10:37 a.m., in room 

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

Present: Senators Nickles, Allard, Bunning, Crapo, Conrad, 

Corzine, Stabenow, and Sarbanes. 

Staff present: Hazen Marshall, Majority Staff Director; and Mary 

Ann Naylor, Staff Director 

OPENING STATEMENT OF CHAIRMAN NICKLES 

Chairman NICKLES. The committee will come to order. I want to 

thank everybody for their cooperation. Senator Conrad and I both 

had some challenges since we are returning this week, and so we 

moved the hearing from 10 o’clock to 10:30. I understand that Director Holtz-Eakin also has other commitments. 

So, Director Holtz-Eakin, I thank you very much. I want to 

thank my friend and colleague, Senator Conrad, for his attendance, 

and also Senator Crapo for his participation and Senator Corzine 

for his participation. You are welcome to come up a little closer, if 

you prefer to do that. We will call on Senators by their time of arrival. 

I will call on my colleague, Senator Conrad, for any opening remarks that he wishes to make. 

OPENING REMARKS FROM SENATOR CONRAD 

Senator CONRAD. Thank you, Mr. Chairman. Again, thank you 

very much for moving this hearing to accommodate other hearings 

and other committees, and welcome to Dr. Holtz-Eakin for his first 

testimony, I think, before the Senate Budget Committee. 

The report that you have just issued should send alarm bells 

sounding throughout Washington and really throughout the country, because what it tells us very clearly, as a part of a series of 

reports, is that we are on a course that is utterly unsustainable, 

and it is going to require us to make substantial changes in budget 

policy as we go forward. 

I go back to what the President told us 2 years ago when he said 

‘‘Tax relief is central to my plan to encourage economic growth, and 

we can proceed with tax relief without fear of budget deficits, even 

if the economy softens.’’ Well, that has proven to be simply wrong.

672


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Then, the President told us last year that ‘‘our budget will run 

a deficit that will be small and short-term.’’ That has also proved 

to be wrong. These deficits are not small, and they are certainly 

not short term. They are very large deficits. They are record budget 

deficits in dollar terms, even large as a percentage of GDP, and we 

see no end in sight.

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If we look at the report that you have just issued from the Congressional Budget Office, and of course you are required to report 

in a certain way, you are required to report based on what is, not 

with changes that people are advocating. But if we take just three 

of the things that are out there that we all know are going to have 

to be dealt with, the President’s proposal to make the tax cuts permanent, the President’s endorsed prescription drug bill, a reform of 

the alternative minimum tax, which if we fail to do will affect 30 

million people by the end of this decade——just those three 

changes and what we see are deficits that go on for the next 10 

years in very large amounts. This also includes, by the way, treating Social Security as a trust fund; that is, not using Social Security Trust Fund surpluses to pay other bills.

676


87370.476
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What we see are truly large deficits throughout the entire rest 

of the decade. When we look at where the money went because, remember, just 2 years ago we were told there were going to be nearly $6 trillion of surpluses, if we look at that same period of time, 

here is where the money has gone: Nearly 40 percent for tax cuts; 

28 percent increased spending, almost all on defense and homeland 

security; 27 percent technical changes, largely lower revenues not 

associated with the tax cuts, so almost two-thirds of the loss of the 

projected surplus and turn to deficit is on the revenue side of the 

equation and some 7 percent from the economic downturn.

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87370.477
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We clearly have a revenue problem and a tax and a spending 

problem. The revenue problem is really quite dramatic, and we 

have gone from having revenues that were very high as a share of 

our gross domestic product to now having revenue this year that 

is projected to be the lowest since 1959. So, clearly, we’ve got a revenue problem, as well as a spending problem.

680


87370.478
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If we look at the spending, we look at the increases that have 

occurred there, look at the increase that has occurred on spending, 

just for this year, over the baseline, 92 percent of it is in just three 

areas: defense, homeland security, and rebuilding New York and 

support for the airlines. That is where the increase in spending has 

occurred. If you look at the last 2 years, it is the same thing. It 

is actually a larger percentage for just defense, homeland security, 

rebuilding New York and the other items I have mentioned, the 

support for the airlines, and of course the international piece of 

this because of Afghanistan and Iraq.

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87370.479
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What that leads us to conclude is that the gross Federal debt, instead of being reduced, which we were told would happen, is instead skyrocketing, in fact, it is more than doubling over this next 

10-year period to nearly $15 trillion at the end of 2013.

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87370.480
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All of this—let us go to the final chart—all of this occurs at the 

worst possible time, because this is a time we ought to either be 

prepaying the liability of Social Security and Medicare or paying 

down the debt in preparation for what we all know is to come. In 

many ways, this chart is the most alarming because what it shows 

is that the trust funds of Social Security and Medicare turn cash 

negative at the very time the cost of the tax cuts explode, driving 

us deeper and deeper into deficits and debt to levels that are clearly unsustainable.

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Mr. Holtz-Eakin, I will conclude by saying what you said: that 

budgets, economics teaches us, are about making choices, and that 

is really the importance of this committee and the importance of 

a budget. We have to make choices. I would submit to my colleagues we are going to have to make very difficult choices on both 

the revenue side and the spending side if we are going to get back 

on a fiscal course that is sustainable. 

Chairman NICKLES. Senator Conrad, thank you. 

I am going to make just a couple of comments. I do not want to 

get into a debate with you. I want us to listen to the Director, but 

I would like to show a couple of charts to give a little different 

viewpoint. Some of my observations are exactly the same. 

Senator Conrad mentioned that we have a revenue decline, and 

this shows that revenues declined rather precipitously since the 

year 2000, when we had revenues over $2 trillion a year, forecast 

this year to be $1.77 trillion. That is a rather significant reduction 

in revenue, part of which was caused by the tax reduction, part of 

which was caused by the recession. It also shows that spending—

the red figures—have gone up and gone up rather dramatically. 

Senator Conrad mentioned most of that increase is for defense. We 

did have a terrorist attack on 9/11, and we have also had a war 

in Afghanistan and Iraq. Those have been very expensive propositions.

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We have also had spending grow in a lot of other areas. Let me 

show the next chart.


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The tax cuts that we enacted last year have made a significant 

difference. Many people said the tax cuts would not help the economy, but, frankly, if you look at the economy, since we passed the 

tax cuts, the economy has grown. Last quarter, it grew at 3.1 percent. That is significant. It has made a significant difference in the 

stock market, it has made a significant difference in the economy. 

So we have now had several quarters in the positive. The stock 

market has gone up over $2 trillion just in the last few months, 

in the next chart, as well.


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I did want to show that nondefense discretionary spending has 

grown as well. So I just make those points. We are debating the 

Labor-HHS bill, which has grown dramatically, in double-digit figures, frankly, over the last several years. Spending over the last 5 

years, and, Mr. Holtz-Eakin, you can correct me if I am wrong, but 

I think it has grown an average 7.7 percent. Labor-HHS has grown 

about 12 percent. So there has been some big increases in spending. I just wanted to allude to those, but also I wanted to point out 

that, yes, we did make a decision to pass the tax cuts, and I think 

they have helped. 

When we were debating the tax bill earlier this year, I believe 

Dow Jones was at about 7,500. It is now at 9,500. That is a big 

change. I think we have made a significant contribution to that 

change with some of the tax changes that we have made. We will 

have to make some tough decisions for the future. We will have to 

make tough decisions on limiting the growth of spending. 

In the budget update that we have before us, you assume that 

the Iraq expenditures, the supplemental, is built into your base, 

about $80 billion per year for the next 10 years. That is an assumption that will not turn out to be true. I hope it is not true. 

I hope we do not spend $80 billion a year for the next 10 years. 

So I hope that is a one time expenditure. Granted, we are going 

to have some expenses, but it will be significantly less than that, 

probably hundreds of billions of dollars less than that. 

Senator Conrad mentioned AMT. Well, some people said we fixed 

it. Maybe we can fix it, maybe we can modify it—other changes 

maybe. 

We have a proposal on prescription drugs, and I am concerned 

about that proposal. Many have said it is not near enough, and I 

will be working on that. Actually, we are in conference on that as 

we speak, and I am a conferee, but I hope to make that proposal 

more affordable for future generations. It could be much more expensive for future generations. 

We have a lot of challenges. That is part of what this committee 

is all about, and we welcome Director Holtz-Eakin to join us. We 

now have a few other colleagues that have joined us. I would like 

to call on the Director, unless anybody would like to make a couple 

of opening comments. If not, I will call on the Director. 

[No response.] 

Chairman NICKLES. If not, Director Holtz-Eakin, thank you for 

joining us and welcome to our committee. 

STATEMENT OF DOUGLAS HOLTZ-EAKIN, Ph.D., DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. HOLTZ-EAKIN. Thank you, Mr. Chairman, Senator Conrad. It 

is a great pleasure to make my first appearance before the committee. The report we put together, our summer update to the 

budgetary baseline, has been out for a week. I submitted the summary of that report as my written testimony, and I thought that 

in my remarks, I would confine myself to a few of the key points, 

and then we would discuss things as Members were interested. 

Let me walk through it in roughly this order: first, talk a little 

bit about the facts and then spend a couple minutes on what I 

think are key features of the baseline projections and close with 

693

some observations about the economic outlook that underlies our 

baseline projections. 

First, on the facts. As many of you are well aware, the CBO’s summer update projects that the deficit will reach $401 billion in 

fiscal year 2003. We are projecting a baseline deficit of $480 billion 

in fiscal year 2004, $341 billion in 2005, and a total of $1.4 trillion 

in cumulative deficit over the 10-year budget window, with all of 

that in the first 5 years and a modest surplus in the final 5 years 

of the budget window. 

The dollar figures; the fiscal year 2004 budget deficit are, in fact, 

the largest ever. But compared to GDP, 4.3 percent is not the largest deficit in recent history. The 6 percent of GDP in the early 

1980’s is larger. Our baseline projection shows a return to surplus 

in 2012. Over the course of the budget window, there is a pattern 

of diminishing deficits and an ultimate return to surplus. 

If you look at a different indicator of the fiscal year status of the 

budget, the ratio of debt in the hands of public, which measures 

both receipts in and outlays from the Treasury as a fraction of 

GDP, this baseline projection shows the debt-to-GDP ratio rising 

from 37 percent at the outset to a high of 40 and then diminishing 

throughout the 10-year budget window and closing at 30 percent in 

the year 2013. 

So those are the basic facts regarding the outlook that we put in 

our report, and what I wanted to do was to spend a few minutes 

talking about what I think are three key features of this baseline 

projection. We can show the pattern here. This displays—and these 

charts are in the handouts that I hope are in front of all of you—

our baseline projection at this time, and then the one in March 

that we put out. It shows deficits as a fraction of GDP, and it is 

also in your handout if we need to look at it more closely, I hope. 

Three key features of this projection: 

Key feature No. 1 is that it is, in fact, a baseline projection. As 

Senator Conrad noted at the outset, CBO projects the implications 

of current law on both the receipts and outlay sides, in performing 

its baseline projections. And, in particular, this projection embodies 

the assumption that discretionary spending grows at the rate of inflation, inclusive of the supplemental appropriation in 2003. That 

supplemental appropriation had $80 billion in budget authority 

and about $60 billion of that was devoted to operations in Iraq and 

Afghanistan. The presumption in the baseline is that that would 

continue and increase at the rate of inflation over the budgetary 

window. 

It also embodies the assumption that the tax cuts, both those 

passed in 2001 and also those passed by Congress earlier this year, 

will sunset, as scheduled within the legislation. So our budgetary 

outlook is a projection, as opposed to a forecast of precise outcomes. 

It is an implication of current law and serves as a neutral baseline 

against which Members may measure any changes that they might 

pursue as a matter of policy. 

The second feature I would like to note is that this projection is 

actually quite similar to the one in March. Its basic character has 

not changed. It features larger near-term deficits, diminishing 

throughout the budget window and an ultimate return to surplus. 

As a result of the legislation enacted earlier this year, both on the 

694

spending side and supplemental appropriations and on the receipts 

side in the form of the Jobs and Growth Tax Act, the near-term 

deficits are larger. And the projection shows that coming to balance 

later than we showed in March, but the basic character is similar 

to the projection that CBO issued earlier this year. 

Over the budget window, the projection shows a return to balance in the form of two things: 

First, revenues grow, on average, at a rate of 7.5 percent per 

year during this budget projection, with receipts as a fraction of 

GDP rising from a low of 16.2 percent by 4 percentage points, up 

to 20.5 percent. That over–4-percentage-point rise in receipts as a 

fraction of GDP comes both from the sunset of the tax cuts of this 

year and 2001, but also from increases in receipts as a fraction of 

GDP stemming from a real bracket creep, from rising real incomes 

in the economy, from the influence of the alternative minimum tax, 

and from the taxation of funds in tax-deferred savings plans as 

those are withdrawn. The bulk of the 2.3 percentage points is the 

from sunsets. The remaining factors offer a smaller contribution to 

the rise over the course of the budget window. 

On the outlay side, mandatory spending rises at a rate of 5.2 percent, on average, during this projection. It accelerates later in the 

budget window, reflecting is the leading edge of the influence of the 

retirement of the baby-boom population on the Federal budget. The 

number of, for example, enrollees in Medicare grows at 1 percentage point per year in the first 5 years but after 2008 begins to grow 

at a rate between 2 and 3 percentage points per year. Over the 

longer term, the demands of entitlement spending, even in the absence of a new prescription drug benefit in Medicare will be such 

that under current law, Medicare, Medicaid and Social Security 

will rise from 8 percent of GDP to 14 percent in 2030. That longterm pressure of entitlement spending remains a key feature of the 

budgetary outlook in the United States. 

Finally, on the outlay side, the rate of growth of discretionary 

spending is assumed to be 3.1 percent. That is according to the 

baseline projection rules under which CBO constructs these estimates. Because that is lower than the assumed rate of growth of 

nominal GDP that the baseline embodies, the assumption that discretionary spending is shrinking as a fraction of GDP is a fact that 

should not be lost on people in interpreting the results. 

The last feature, I think, that merits mention, in looking at our 

baseline projection, is that there is a tremendous amount of uncertainty associated with the baseline projection. There is the normal 

uncertainty with which CBO and many other analysts have struggled over the years that stems from attempting to see the future 

path of the economy, from technical adjustments to the baseline 

projection which reflect shifts in the relationship between the underlying economy and budgetary receipts and outlays; but in this 

circumstance, it also reflects a greater uncertainty about the evolution of policy. In the report, we made an attempt to provide Members with some guidance as to the possible range that one could envision due to policy uncertainty. 

Now, it should be noted, there are some pieces of uncertainty 

that we did not attempt to quantify in the report. The most notable 

would be the costs of reconstruction or ongoing occupation in Iraq. 

695

We did not have sufficient policy guidance to include those projections in the summer update. We have since, as I hope members are 

aware, released a bit of information about particular scenarios regarding occupation in Iraq, at the request of Senator Byrd. We did 

not, and were not able to quantify costs associated with energy legislation, which has assumed a new priority in the aftermath of the 

August blackout. 

We were, however, able to quantify those areas where we did 

have some guidance on the nature of potential policy directions. In 

particular, on the receipts side, what would be the implications of 

keeping the tax cuts of 2001 and 2003 in place and not permitting 

them to sunset, and what would be the implications of fixing, in 

the technical sense—of not having pure inflation place people 

under—the alternative minimum tax? On the outlay side, we took 

a look at the implications of the Medicare prescription drug bill as 

it was embodied in the budget resolution passed by the House and 

Senate earlier this year and at alternative paths for the growth 

rate of discretionary spending. 

Over the past 5 years, discretionary spending has grown at a 

rate of about 7.7 percent per year, on average. That rate is closely 

matched between defense and nondefense discretionary spending, 

and we tried to show the influence of a more rapid impact from, 

of a more rapid growth of, discretionary spending by using that historical average. 

What you see, as a bottom line, is not intended as a projection 

or forecast in any way, but as a band of the uncertainty that these 

possible policies would encompass. As shown in the graph, and at 

the upper end, if one were to freeze discretionary appropriations, 

there would be a clear and more rapid return to surplus, and we 

would have a lower debt-to-GDP ratio than the 30 percent in the 

baseline. 

At the other extreme, if one were to embody into the baseline 

projection all of the possibilities that include permanent tax cuts, 

fixing the AMT, a Medicare prescription drug bill and very rapid 

discretionary spending growth, you could see that the budget would 

not return to surplus. Indeed, the indicator of the fiscal sustainability, the debt-to-GDP ratio, would rise from 30 percent in the 

baseline out in 2013 to something like 67 percent under that particular scenario. We offer those not as particular projections, but to 

give you some sense of the importance of alternative choices in policy and their impact on the budget going forward. 

Now, let me close—and take your questions after that—by talking a little bit about the denominator in that debt-to-GDP ratio, 

which I think is a good way to summarize the outlook going forward. 

Our projection for the economy comes in two pieces. Over the 

near term, CBO attempts to produce a roughly 2-year forecast that 

includes the cyclical recovery that we anticipate coming in the U.S. 

Then over the longer term, we restrict ourselves to baseline projections of the trend rate of growth in the economy and do not attempt long-term forecasts of business cycle fluctuations. 

In the former, our baseline embodies an assumption that we will 

have faster near-term growth, rising from 2.2 percent in calendar 

2003 to 3.8 percent in 2004. The key features of the economy that 

696

will go along with that more rapid growth are a relatively slow recovery in the rate of unemployment, which will hang up in the vicinity of 6 percentage points. That reflects the net effect of two factors. As the economy grows faster, we do anticipate that more jobs 

will be created. That, on the one hand, would lower the unemployment rate. 

At the same time, our reading of the labor force evidence is that 

many workers have, many more workers than is perhaps typical in 

a cyclical downturn, have elected not to participate in the labor 

force. They will be drawn back into the labor force, which will slow 

the decline in the unemployment rate. Inflation will remain modest 

in the near term, and as a result of that, there will not be great 

upward pressure on interest rates from an inflationary standpoint. 

Over the longer term, we expect the economy to grow, on average, at a rate of 3.3 percent, between 2005 and 2008 and then to 

average 2.7 percent from 2009 to 2013. As this committee is well 

aware, the key to long-run economic growth projections is the rate 

of productivity growth in the economy. Our projections embody the 

assumption that productivity growth will continue at a rate of 

about 2.1 percent, a bit below the high point of the post-1995 acceleration but still very healthy productivity growth in the U.S. economy. 

The diminished rate of overall GDP growth comes as a reflection 

of, again, the baby-boom population beginning to withdraw from 

the labor force and a slower growth in the number of workers 

available for production. And, as a result, the combination of robust 

productivity growth, and a slower growth in the labor force will 

lead to a bit slower long-run GDP growth. 

In closing, I want to note that our projections attempt to include 

the impacts of the fiscal policies that are in place in the budget 

projections. In particular, we take into account, in our long-run 

projections, the impact of the baseline spending on deficits and, 

thus, on pressure on credit markets, higher interest rates, and any 

diminished investment that might result. 

We, in the same way, on the receipts side, take into account the 

incentive effects of the tax cuts, which would increase labor supply 

and incentives to save, as well as the crowding-out effects that 

come from the deficits associated with the tax side. 

The net effect is a modest negative. But if you read through the 

detailed discussion of that, in Chapter 2, what you will see is that 

to do such a projection requires us to struggle with a very tough 

analytic problem, quite frankly. 

The behavior of the economy will depend primarily on how the 

private sector views the fiscal policies. In particular, will the tax 

cuts be made permanent or not, or will some features of the tax 

cut be made permanent or not? We, quite frankly, do not know, in 

any precise way, what the private-sector believes about the future 

of that fiscal policy. We have constructed our projections, in the 

spirit of baseline projections, by assuming that private-sector 

agents will, in fact, believe that the sunsets occur on schedule and 

believe that the discretionary spending will grow as in the baseline. 

In fact, expectations could differ greatly, and the actual impacts 

would differ as a result. 

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This problem with trying to discern what the private sector 

thinks about the future path of policy shows up not only in the economics, but it is also difficult in doing the baseline projections 

themselves. For example, in the face of a sunset, there are clear incentives to shift tax activities across years. That will affect our 

baseline receipts on a year-to-year basis, and the usual problems 

associated with doing baseline projections of revenues are, in fact, 

much more complicated in this setting. 

So it is important to keep that in mind, that the underlying baseline policy adds to the uncertainty associated with our projections 

at this point in time, and we have made a good-faith effort to get 

both the economics and the budget projections correct in that context. 

So, with that as the highlights, I think the key messages are associated with the nature of baseline projections and the uncertainties. I would be happy to take your questions. 

[The prepared statement of Mr. Holtz-Eakin follows:]

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Chairman NICKLES. Director Holtz-Eakin, thank you very much 

for your presentation. I notice our colleagues are here. I will defer 

any questions at this point. I have some, but I would like to give 

our colleagues a chance. 

Senator CONRAD. I have a few questions, if I could. 

First of all, thank you for that presentation—very professional 

and very clear. 

You know, we go to the point of uncertainty. You indicated there 

is great uncertainty looking forward, and you have given reasons 

for that uncertainty. Let me just go back to 2 years ago when CBO 

produced a similar fan chart of potential uncertainty. You will recall at the time you adopted—CBO adopted, you were not there—

the midpoint of the range telling us, and telling the country, that 

we were going to have $5.6 trillion of surpluses. I think it is useful 

to go back and fit what has really happened. What we see is the 

red line. What that shows us is we are below the bottom of what 

was projected just 2 years ago, with respect to what the deficits 

would be, and quite far below the bottom. 

Let me go to the next chart. This is from the Washington Post. 

I do not know if you saw Alan Sloan’s column of yesterday in the 

Washington Post. Alan Sloan said that after adjustment for political reality, deficit projections get scary. What he has done is he 

took your baseline numbers, and then instead of using Social Security to offset the cash shortfall, he set that aside. So he started 

with, here, $1.4 trillion. He then set Social Security aside, $2.4 trillion over the 10 years. Then, he added in what the President has 

proposed and what is in our budget for $400 billion for prescription 

drugs because that is not in your baseline; is that correct? 

Mr. HOLTZ-EAKIN. That is correct. 

Senator CONRAD. Because that has not happened, so you cannot 

put it in your baseline. 

He then put in $400 billion for fixing the alternative minimum 

tax, which by the end of this decade is going to affect $30 million 

American people unless we do something. Then he extended the 

tax cuts, and I think he had $2.8 trillion there, and he added that 

all up. Instead of $1.4 trillion of deficits, he had, on an operating 

basis, $7.4 trillion of deficits over this period of time. While $1.4 trillion is daunting, $7.4 trillion, which he asserts is 

more realistic in terms of what will actually happen, is truly stunning. Just 2 years ago, we were told we are going to have $5.6 trillion of surpluses over the next 10 years. Now, we are talking about 

$7.4 trillion of deficits. 

The first question I have for you in this Sloan calculation, are 

there any elements of that with which you disagree, in terms of the 

numbers? 

Mr. HOLTZ-EAKIN. I think the numbers strike me as reasonable. 

I will not pretend to have done a detailed analysis of Mr. Sloan’s 

column. 

Senator CONRAD. Well, I would ask you to take a look a that 

when you have more time and just to tell me whether or not you 

think those numbers are roughly accurate because it tells me that 

we are on a course here that is utterly unsustainable, especially 

given the fact the baby boomers are about to retire. You know, this 

is all happening at what I call the worst possible time. 

712

If, in fact, we face deficits of that magnitude, $7.4 trillion over 

the next 10 years, what would your advice be to this committee and 

to the Congress on fiscal policy? 

Mr. HOLTZ-EAKIN. It, as you well know, is not the role of the 

CBO Director to offer up specific policy advice. I think that, in looking at the impact of deficits on the economy, one really needs to 

focus on the fact that deficits represent, on net, a diminishment of 

national saving. There are circumstances in which shifting from 

saving to spending can prove beneficial. Indeed, in times of economic slack, this is widely recognized as one of the things that can 

support an economy and, if done with appropriate discretion, timing, and skill may even be beneficial. 

Going forward, in an economy that has reached full employment, 

that has achieved its capacity utilization, that additional spending 

places a strain on the economy. The symptom of that strain is typically higher interest rates or greater capital inflows, and that, 

other things equal, will slow the accumulation of capital, in both 

its physical and human forms, and reduce the rate of overall economic growth and the pace at which the economy will expand. That 

is the ultimate tradeoff in examining the impacts of policies that 

might increase the deficit—are the gains in the near term sufficient 

to outweigh those particular costs? 

Senator CONRAD. Let me just say, and I would say to my colleague, the chairman, with respect to his opening statement, I did 

not quarrel with having tax cuts in the near term. In fact, I proposed bigger tax cuts than the President proposed, in the near 

term, to give lift to the economy. The great concern I have is the 

combination of tax cuts that go on into the future, that explode in 

costs at the very time the cost of the Federal Government explodes 

because of the retirement of the baby-boom generation is taking us 

toward a fiscal cliff. I think it is just as clear as it can be, and it 

is utterly unsustainable, and we have to change course. 

Does that mean tax increases? No. I do not think tax increases 

would be a wise thing with the economy weak. I think that would 

be counterproductive. I do think we have to look on the revenue 

side of the equation down the road, and I think the first place to 

look ought to be the over $200 billion a year that is owed that is 

not being paid. That is truly stunning, a tax gap. The difference between what is owed and what is being paid, the vast majority of 

people pay what they owe. 

Have you done any estimates on the tax gap that are more recent than those numbers which are now some 4 years old? 

Mr. HOLTZ-EAKIN. No, we do not have any recent estimates, but 

we would be happy to work with you if it was a topic that you 

wanted to pursue. 

Senator CONRAD. I would ask that you do an estimate for me, 

and the chairman might join me for the committee——

Chairman NICKLES. Certainly. 

Senator CONRAD [continuing]. On the difference between what is 

owed and what is being paid because I think that is something we 

are going to have to look at very closely. 

Mr. HOLTZ-EAKIN. Happy to do that. 

Senator CONRAD. I thank you. 

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Chairman NICKLES. Senator Conrad, thank you very much, and 

I appreciate those comments. 

Senator Crapo. 

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

Dr. Holtz-Eakin, I wanted to go back with you and your discussion about Chapter 2 of the report. Primarily, if I understand you 

or understood your testimony correctly, you were talking about the 

potential for doing what I call dynamic scoring; is that right? You 

were talking about the difficulty of trying to understand what the 

impact on the economy truly would be of the tax relief, and the 

spending, and how those who operate in the economy will view 

those. 

Mr. HOLTZ-EAKIN. I would choose a different term, quite frankly. 

Dynamic scoring is typically associated with scoring a particular 

bill or piece of legislation. What we were trying to do was the best 

baseline projection, which involves, I understand, the impact of 

policies in place, as these are on the future path of the economy. 

It is, at an analytic level, very similar. You have to find out how 

the policies will influence the future path of the economy, and what 

we try to do is outline our thinking and the different dimensions 

on the policy front. 

Senator CRAPO. So, although I may be using the term differently 

than you do, does the Budget Committee, as it makes these projections, actually try to determine what the impact of, say, the extension of the tax relief would be on the economy, in terms of increased economic activity or decreased economic activity and then 

build that into the budget projections? 

Mr. HOLTZ-EAKIN. Indeed, we tried to place in our baseline projection, in particular, the impact of the sunset of the 2001 tax cuts 

at the end of 2010, and show the impacts on labor supply, which 

in this case would be negative, as well as all of the other possible 

impacts of the many policies in place. So you see the net effect of 

all of the spending and all of the tax policies in our projection. 

Senator CRAPO. So, for example, on Page 12 of the report, you 

have some of the alternative policy options that Congress could 

adopt, and you have projected out what those impacts would be if 

Congress did adopt them; for example, if Congress extended the expiring tax provisions or adopted a prescription drug benefit and so 

forth. 

Just taking the tax provisions, there is a number there that you 

have for each of the years, and then a total for the 10-year period. 

Does that number simply total up the expected fiscal impact of the 

lost revenue to the Federal Government or does it also include projections of what might occur, in terms of increased revenue to the 

Government, from increased economic activity, if the tax policy 

were correctly implemented? 

Mr. HOLTZ-EAKIN. It is a static estimate of the budget costs built 

on our baseline economic projection. We did not include any 

feedbacks from particular entries in Table 1–6 on the underlying 

economy. 

Senator CRAPO. Would it not be more accurate to try to project 

those kinds of impacts? Let me ask the question this way: Would 

it not be correct to say that if we have an extension of the expiring 

tax provisions, for example, that that would have an impact on ecoVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00719 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
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nomic activity in this country and generate an increase in revenue 

in other taxation? 

Mr. HOLTZ-EAKIN. There is no question that if that were the 

baseline policy, we would estimate our underlying path of the economy differently. The net effect of the incentives from lower marginal tax rates, the incentives to consume from tax credits, for example, and from the overall deficit or surplus is not clear, but certainly you would want to take all of those considerations into account when doing the projection. 

Senator CRAPO. But you have not done that in this chart. 

Mr. HOLTZ-EAKIN. No. 

Senator CRAPO. I guess my question is would it not be much 

more accurate to do that? 

Mr. HOLTZ-EAKIN. It would be perhaps more accurate, but the 

spirit of the chart is to allow people to rank things in a very technical projection sense. We know the ordering of things because they 

are done on a level basis with the same underlying economy. So we 

thought that that clarity was outweighed by the virtues of doing 

a more particular forecast. As a computational matter, it is quite 

difficult to do this once in the baseline. To do every line in that 

table would have extended the project somewhat. 

Senator CRAPO. I understand that. In fact, my next question was 

going to be, if we decided to try to do it, and that is where I call 

it dynamic scoring, if we tried to do dynamic scoring of something 

like extending the tax cut or adopting a prescription drug benefit, 

is it doable? 

Mr. HOLTZ-EAKIN. It is doable. The questions are really at the 

practical level: Is it doable in a timely fashion, in the legislative 

process? Is it doable with sufficient understanding to be useful to 

the Members? Can we get well enough specified policies to actually 

implement it? It requires one of the advantages of baseline policies, 

which is that we know them down to the last detail, whereas proposals are often less detailed and harder to implement. But, in 

principle, one could do this kind of analysis on any particular proposal. 

Senator CRAPO. All right. Just one last question, and that is you 

mentioned that the impact on the labor market or the labor supply 

would be negligible. Was that the impact of extending the tax cuts 

or the impact of allowing the tax cuts to expire? 

Mr. HOLTZ-EAKIN. As it is mentioned in our report, the impact 

of allowing the tax cuts to expire, having higher marginal tax 

rates, has a negative impact on labor supply, although the size of 

that impact is small relative to the kinds of uncertainty associated 

with just going out 10 years in an economic projection. 

Senator CRAPO. That is another aspect of this dynamic scoring 

that I am talking about, is it not? If we do allow the tax cuts to 

expire, and that has a negative impact on the labor supply, then 

that, in itself, will then play into the deficit numbers in some way. 

Mr. HOLTZ-EAKIN. Yes, but the deficit numbers will ultimately 

reflect all of the influences of the policy not just any one particular 

piece, and we would have to work through that. 

Senator CRAPO. Understood. All right. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman NICKLES. Senator Corzine. 

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Senator CORZINE. Thank you, Mr. Chairman, and, Director, for 

a very informative presentation. 

I am awestruck, frankly, by the negative cash-flow that we have 

experienced relative to what people think. Seven trillion dollars between the 2001 and, using your baseline number, and if I use this 

bottom-line number on your last chart that you presented to us, 

where we get to 67 percent of debt-to-GDP, that would be a $13-

trillion cash-flow, negative cash-flow, swing in two/three years. I do 

not know anyone who would, you know, I would be hard to find 

anyone considering that sound fiscal policy. 

I know it is not your issue to comment on, but I think it puts 

us in a devastated fiscal situation. If I read the assumptions that 

you are putting in, which really ties into the Sloan article that Senator Conrad spoke about, reforming Medicare with a prescription 

drug benefit, alternative minimum tax and expiring tax provisions 

with some allowance for discretionary spending on defense, whether it is missile shield or boutique nuclear weapons or increased 

force structure, those things seem like probabilities that are something north of 50 percent, if you were going to assign probabilities, 

and I just wonder if you think moving to a GDP or debt-to-GDP 

of 67 percent is one that is going to have the kind of impact you 

are all projecting on interest payments and level of interest rates, 

that I see in these projections, we are talking about really still fairly historic low interest rates, 2005–2008, interest payments which 

actually are going to get close to what we are spending on discretionary domestic spending anyway if we follow along the paths we 

are. 

I wonder if those are realistic assumptions in the context of the 

assumptions that could be made with regard to the spending that 

we think is likely to occur on defense, Medicare prescription drugs, 

AMT adjustment. 

Mr. HOLTZ-EAKIN. The interest rate and other assumptions in 

the economic projection are built on the baseline budget projections. They do not, in fact, reflect the various alternatives that are 

in that table. It is the same issue that arose earlier. We believe 

that the interest rate assumptions in our economic projection are 

consistent with the baseline budget, but they do not attempt to accommodate all possible ranges of budgetary outcomes. 

Senator CORZINE. Would you care to make any guess of what 

would happen if we actually went to debt-to-GDP of 67 percent? 

Would that impact interest payments in a context of dynamic scoring? 

Mr. HOLTZ-EAKIN. I think you would want to distinguish between 

two things. The first is a consistent, steady, high debt-to-GDP ratio 

as, for example, other countries have had, where you would have, 

at the same interest rates, higher interest payments on the Federal 

budget, no question. 

The second is whether you believe that the debt-to-GDP ratio has 

stabilized or is continuing to rise. If markets recognize a fiscal policy that is not stable and shows an ever-rising debt-to-GDP ratio, 

you would expect much sharper increases in interest rates. 

Senator CORZINE. You certainly would associate that with the 

bottom end of the projection that you had in your chart, I would 

presume. 

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Mr. HOLTZ-EAKIN. Yes. 

Senator CORZINE. That would lead to real competition in capital 

markets, the Federal Government competing with the private sector for capital and would undoubtedly weaken economic growth relatively substantially, I would suspect, the kind of thing that we 

saw in the eighties, as we saw our budget deficits balloon. 

Mr. HOLTZ-EAKIN. The projections in that particular scenario, 

which again represent a particular combination that may not have 

any special features, but the numbers in there are, in fact, much 

larger than what we experienced in the eighties. The deficit as a 

fraction of GDP is larger than the 6 percent, which was the highest 

in the eighties, and the average was much lower. So that would 

have substantial impacts, one would expect, on capital markets and 

on the capital accumulation in the economy. 

Senator CORZINE. Have you happened to calculate, and I would 

like actually to see this, what the debt burden per individual would 

be under baseline projections and maybe your two other projections 

that you show on the fan? How much does each individual end up 

having responsibility for and, using your assumptions on what interest rates would be, what the debt tax is for each individual? 

Mr. HOLTZ-EAKIN. We would be happy to work through it and get 

you that number. I do not actually have it with me. 

Senator CORZINE. I think those things would be interesting to 

understand how each individual is, in the U.S., is taking on a responsibility, a financial responsibility to fund the kind of deficits 

that we are running. 

Thank you. 

Chairman NICKLES. Senator Allard. 

Senator ALLARD. Thank you, Mr. Chairman. 

I would just like to followup on a letter that the chairman had 

sent out requesting an analysis of the tanker aircraft study. I serve 

on Armed Services, and we will have a hearing on that tomorrow, 

and there might be a hearing on it today. 

I would just like to have, for the record, your comments on how 

the Air Force’s lease proposal compares to a direct purchase of the 

tanker aircraft. 

Mr. HOLTZ-EAKIN. Our analysis shows that the particular financing arrangement in the Air Force proposal would, in fact, deliver 

the same planes on the same schedule at a higher cost than would 

buying the planes through the appropriations process. Over the life 

of the lease, it would be a difference of about $5.7 billion. 

Senator ALLARD. Now, would you talk a little bit on the uniqueness of that proposal. They have, in my looking at it, they have set 

aside a special purpose fund or trust. There are bonds that are sold 

to bring money into that fund. It is also there is a loan provision 

in there, and then the expenditure goes out. What implication does 

that have over the oversight of this committee and Congress in 

general? 

Mr. HOLTZ-EAKIN. I think, if you read through our report, there 

are two features that they are mentioning in that regard. 

The first is that the trust that would be set up would, in fact, 

issue bonds. It would also engage in some construction financing, 

and it would purchase the planes from Boeing. The trust itself 

would exist solely for the purpose of borrowing and making those 

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purchases, and it would, in fact, be controlled by the Air Force. 

From that perspective, it is clearly a governmental activity and 

ought to be reflected in the Government’s budget, with interest 

payments reflected in the usual outlay stream and purchases of 

planes in the usual outlay stream and all transactions between the 

Government and the trust as intergovernmental transfers. It is our 

view that this is best viewed as an activity of the Government that 

should be in the budget. 

To the extent that one sets the precedent of allowing this kind 

of special financing arrangement to go forward, it does, in fact, 

allow projects to be given a greater priority, through an apparent 

cheapness on the budget. This makes the cost of those airplanes 

appear to occur largely in the end years of the life of the lease; 

it‘‘back-loads’’ the cost in some budgetary sense. That is a misleading impression, in our view, of the true way that should be 

budgeted, since our view is that the goal of the budget should be 

to present policymakers with the various proposals on a level playing field so that those projects that merit priority on policy grounds 

receive it. To the extent that projects get to move up just by arranging this kind of a financing scheme, that would be at odds with 

what we view as the objective of presenting the budget in a clear 

and level fashion. 

Senator ALLARD. You are viewing this as a lease purchase. 

Mr. HOLTZ-EAKIN. We believe it is best viewed as a purchase of 

these aircraft. If one did manage to draw the conclusion that the 

activities of the trust were not, in fact, governmental activities, 

which is not an opinion we share, but if one drew the opinion that 

that was outside the boundaries of the Government, it is still difficult to believe that this is an operating lease for these very specialized aircraft. So the transaction should be put in the budget as 

a lease-purchase. 

Senator ALLARD. Yes. Lease purchases traditionally get treated 

as the expenditure occurs at that particular point in time that the 

agreement is entered into. 

Mr. HOLTZ-EAKIN. In contrast to the operating——

Senator ALLARD. I think I have been involved in some of that before, and so this looks to me like kind of a different animal than 

what we have had ever had to deal with as far as accountability. 

And so when they, what is your understanding, when they sell 

those bonds, I mean, when you sell bonds out on the market, there 

is some assurance that there will be revenue coming in somewhere, 

and where is that, your understanding, where is the assurance that 

that revenue will come from? 

Mr. HOLTZ-EAKIN. The Air Force report to Congress discusses 

this. Reports in the press indicate that there will be three kinds 

of bonds issued. Two of those would be retired using the lease payments from the Air Force to the trust. The third would depend 

upon the ultimate sale of the aircraft to the Air Force and, as a 

result, the underlying source of the credit-worthiness of these is the 

flow of resources from the Air Force to the trust. 

Senator ALLARD. But there is some assumption there that there 

will be a flow of resources from the Congress during these years 

in the budget process; is there not? 

Mr. HOLTZ-EAKIN. Indeed, yes. 

718

Senator ALLARD. I mean, that has a budgeting impact. If, for 

some reason, the dollars do not come, then they began to have an 

impact on our budget; is that correct? 

Mr. HOLTZ-EAKIN. Ultimately, these are purchases of aircraft. 

Boeing receives $131 million per aircraft, on average, and the Air 

Force pays $161 million, on average, through the trust in order to 

acquire them. Those resources will have to come from the U.S. 

budget. 

Senator ALLARD. Can you ever recall when we’ve had this type 

of budgetary mechanism used to finance any type of capital investment like that? 

Mr. HOLTZ-EAKIN. My tenure as CBO Director makes me the 

worst study in this room, quite likely, but it is, upon analysis, inconsistent with both broad Federal budgeting principles and with 

precedence for what constitutes an operating lease. 

Senator ALLARD. Well, I assume, though, that you spent some 

time looking it up, as though we have ever done this before, and 

the simple answer is, no, we have never done this before; is that 

correct? 

Mr. HOLTZ-EAKIN. Not to my knowledge. 

Chairman NICKLES. Senator Allard, thank you. 

I am going to take a little time as chairman. I did not ask any 

questions, but this is one that I was going to raise. It is one that 

I sent a letter to the Director asking. 

Let me ask you just to kind of paraphrase a couple of things. The 

net present value of the cost of purchase is $131 million and lease 

would be $161 million? 

Mr. HOLTZ-EAKIN. That is not a present value, but if you look at 

the flow of financing, as we understand the arrangement, Boeing 

would get an average of $131 million in constant dollars, so ignore 

inflation. But it would get an average of $131 million for each 

plane. 

The Air Force would pay, in total, for lease payments plus purchase at the end of the lease, $161 million. The difference can be 

ascribed to the particular financing arrangement that requires payment of interest to bondholders and also construction financing. 

Chairman NICKLES. No, Boeing would not get more money, but 

the cost of the—or would they? 

Mr. HOLTZ-EAKIN. Boeing would, if one compared this particular 

arrangement with simply appropriating budget authority and purchasing the airplanes, Boeing would get the same. It would simply 

be less costly for the taxpayer. 

Chairman NICKLES. The taxpayers would end up paying more because the financing mechanism is not the same. 

Mr. HOLTZ-EAKIN. Yes. 

Chairman NICKLES. Your letter to me states, and I will include 

this in the record, ‘‘CBO analysis of the proposed arrangements 

would cost between $1.3 billion and $2 billion more in presentvalue terms or 10 to 15 percent more than an outright purchase’’; 

is that correct?

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Mr. HOLTZ-EAKIN. That’s correct. 

Chairman NICKLES. So 10 to 15 percent more or $1.3 to $2 billion 

in present value more if we did the lease versus the outright purchase. 

Mr. HOLTZ-EAKIN. Yes. If you asked the hypothetical question, 

how much would I have to put aside in an account right now to 

buy 100 of these planes either through the appropriations process 

or through this leasing arrangement, it would be $1.3 to $2 billion 

more expensive. You would need that much more right now to do 

it via the lease route. 

Chairman NICKLES. Now, you mentioned, over the term of the 

purchasing arrangement, it was a difference of about $5 billion, did 

you not? 


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Mr. HOLTZ-EAKIN. That is adding up year-by-year differences and 

not taking into account the time value of money as the present 

value would. 

Chairman NICKLES. So, nominally, if you looked at the number 

of dollars, as that would spread out over, what, a 20-year period? 

Mr. HOLTZ-EAKIN. Roughly, yes. 

Chairman NICKLES. That the total difference would be about $5 

billion more? 

Mr. HOLTZ-EAKIN. Yes, $5.7 billion is our estimate. 

Chairman NICKLES. I appreciate that. 

Senator ALLARD. Would the chairman yield on that time 

value——

Chairman NICKLES. Sure. 

Senator ALLARD. In that agreement, there is no set value on interest. So that is a floating figure out there. We do not know what 

they are going to pay on interest on that, do we? We do not know 

what the maintenance costs either on that, do we? 

Mr. HOLTZ-EAKIN. Indeed, we know, at this point, until the lease 

is signed, some of the terms are not settled. This is our best estimate, given our understanding of the arrangement. The particular 

interest costs would be——

Senator ALLARD. That is not fixed in contract, in this agreement 

at all. I mean, that will change. 

Mr. HOLTZ-EAKIN. The lease payments would be fixed in an expectation of covering the expected borrowing costs. So there is 

imbedded in this arrangement, an expectation of borrowing costs 

that could then differ. 

Chairman NICKLES. Senator Allard, thank you very much, and 

thank you, Mr. Director. 

Senator Stabenow. 

Senator STABENOW. Thank you, Mr. Chairman, and thank you 

for your presentation, Mr. Director. 

First, a few observations when we look at where we are going. 

I would share Senator Corzine’s reaction in looking at these numbers of tremendous, tremendous concern about where we are going; 

and if we factor in decisions that will be made by this Congress, 

we are looking at huge, huge budget deficits. I know it is your job 

to report that, not to create it, but it is a great, great concern. It 

seems to me we have two basic questions we are debating: one is 

how to create jobs, and one is how to balance the budget, and do 

deficits matter? 

I think it is self-evident, Mr. Chairman, that we have lost 3 million private-sector jobs in the last 2–1/2 years. That is not debatable. Those are real numbers which say to me that we should be 

looking at a different way to create jobs. In my State, the unemployment number is going up, not down, which is of deep concern 

to me. 

In terms of balancing the budget, I was there in 1997 when we 

balanced the budget. I was a proud member of the House to vote 

for that, the first time in 30 years bringing deficits down, which I 

think helped certainly the private sector. But now we are looking 

at these huge deficits again, and we debate, Do they matter? There 

are a lot of ways to spin it, but just to share with the colleagues 

and putting this in perspective, am I correct that the projected inVerDate 0ct 09 2002 11:15 Nov 25, 2003 Jkt 089402 PO 00000 Frm 00747 Fmt 6601 Sfmt 6601 C:\DOCS\87370.TXT TISH PsN: LAF
742

terest on the public debt for 2003, this year, is $322 billion, my understanding? $322 billion a year, that is 1 year, which is almost as 

much as the 10-year costs of a Medicare prescription drug plan. So 

in 1 year, we are talking about interest that is almost as much as 

that. It is almost 10 times what we spent on homeland security, 

and I am very concerned, representing the largest border crossing 

in Northern America, in Detroit, that there has been proposals to 

actually cut back 30 border inspectors right now when we have 

deep concern about what is happening there. So we are talking 

about 1 year’s interest payments costing more than 10 times our 

homeland security costs, and it is almost as big as the entire nondefense discretionary budget. Wouldn’t you agree? I mean, we are 

looking at about $391 billion for most of homeland security, education, health care, environmental protection, basically everything 

nondefense, nondefense discretionary. So you are looking at 1-year 

interest payment that almost is as much as the entire nondefense 

discretionary budget. We could wipe that out, basically, and not 

touch this deficit. 

So this is a big number. This is a huge number. I am deeply concerned about where we are right now and the amount of money 

that we are putting out in interest compared to other critical needs 

that people have, just balancing the budget for the future, for the 

2008 number that you are talking about. 

I would say one other comment, and that is, when Senator Conrad spoke about the $200 billion owed in unpaid taxes by people who are not following the law, not playing by the rules like the 

majority of Americans, that is basically half of the entire discretionary budget, nondefense discretionary budget, if people were just 

following the law. 

So, Mr. Chairman, I would hope that we would look for those 

numbers and find, in fact, what is happening with people who are 

avoiding paying their taxes and following the law. 

That is more of a statement. I am going to switch to—because 

I realize you are reporting the numbers. You are not determining 

the numbers. But I know people in the State of Michigan are deeply concerned about the money going out in interest that could be 

going out to fund their child’s education or health care or more 

homeland security at the border or police and fire folks to answer 

911. 

Mr. HOLTZ-EAKIN. If I could clarify one thing. 

Senator STABENOW. Yes. 

Mr. HOLTZ-EAKIN. The number for net interest payment by the 

Government to debt held by the public would be $157 billion. The 

$322 billion is a gross interest cost, which includes intergovernmental transfers among holdings within various funds. 

Senator STABENOW. So it is Social Security, it is—basically, what 

we are looking at, no matter how you spin the numbers, is a huge 

amount of money going out in interest at a time when we are 

struggling to meet homeland security needs and to meet other critical needs. If we also put that in the context that—Senator Conrad 

has another chart that shows that 96 percent of the spending that 

we are talking about right now in the last 2–1/2 years has been defense, homeland security, or rebuilding the sites that were attacked 

on 9/11, 96 percent. So no matter how you look at those numbers, 

743

this is a question of limiting our ability to respond to job creation 

efforts or to meet other needs. 

I would like, though, to ask one question on a different topic and 

get your response to that. There has been a growing concern about 

the currency intervention of foreign countries, such as Japan and 

China, and this is of particular concern to leading manufacturing 

States, such as mine, in Michigan. These aggressive economic distortions are hurting our economy; they are hurting working families. 

Recently, I joined with several colleagues in writing to the administration about this issue. If our manufacturing sector and our 

economy as a whole are to thrive, we need currency markets that 

reflect the true value of currencies. This manipulation is giving 

Chinese and Japanese workers unfair advantages over American 

workers. I am disappointed that Treasury Secretary Snow has been 

thus far, while in China, unable to convince China to allow its currency to float freely. 

But my question to you is: Could you comment on how foreign 

currency manipulation stymies economic growth here in America 

and what impact on our own economy there might be if Japan and 

China stopped what I believe is clearly an unfair trade practice? 

Mr. HOLTZ-EAKIN. Well, the question raises a number of very 

hard economic issues. From the point of view of the economic 

growth, both in our projection and more generally, one of the key 

features of the outlook at the moment is that the United States is 

one of the few countries that has any substantial prospects for 

rapid economic growth. To the extent that there is more rapid economic growth abroad, in Japan, China, or elsewhere, that would 

have the most direct impact on our ability to both grow faster and 

to export more, probably outweighing the particulars of currency 

values, certainly in the near term. 

With respect to the impacts of distorting relative prices, no economist would favor providing misleading price signals through currency intervention or otherwise. It is best if companies faced the 

appropriate incentives to produce products and consumers faced 

the appropriate incentives to purchase them. The issue is the degree to which empirically it has been a successful strategy on a 

sustained basis, actually, in currency markets, and there is a great 

dispute about that among economists. 

Finally, with respect to China, magnitudes matter, and at this 

point, while the flow of Chinese goods has increased in recent 

years, it still represents—manufacturing imports from China represent about 2 percent of U.S. manufacturers’ shipments. So the 

degree that we would quantitatively see dramatic differences in 

manufacturing or broader economic growth from that particular 

quarter is open to question. 

Senator STABENOW. Well, they are growing about 8 percent a 

year, and so when you look at what is happening with China——

Mr. HOLTZ-EAKIN. They have certainly grown rapidly in recent 

years. 

Senator STABENOW. Yes, absolutely. 

Thank you. 

Chairman NICKLES. Senator Stabenow, thank you very much. 

Next, Senator Bunning. 

744

Senator BUNNING. Thank you, Mr. Chairman. I am sure glad 

Senator Stabenow voted for our balanced budget bill. For 40 years 

we tried to get that out of the House of Representatives. As a member of the Budget Committee, and as John Kasich has tried to do 

for, I guess, the 8 years he was Chairman of the Budget Committee, we finally got a bill before President Clinton, and he finally 

signed it into law, and we balanced the Federal budget for the first 

time in over 40 years. The House of Representatives didn’t seem 

to have much interest in it. 

Senator Conrad’s charts brought to mind some interesting 

things, especially the last chart that he put up on the projections 

of 2001 and showed the red line going straight down. There was 

no mention on that chart of the two wars that we have been involved in since that time or the New York-D.C. 9/11 attacks. They 

did have a dramatic, dramatic effect on the budget and the budget 

deficits and the spending of this Federal Government over the last 

two years. 

I am sure, Senator Conrad, that you will be someone who will 

be glad to take credit, and I will be, too, if we finally pass a prescription drug benefit for our senior citizens, something we have 

promised them for the last 10 years. In fact, this Budget Committee put $400 billion in a prescription drug benefit for seniors. 

My prayer is that it won’t explode after the 10 years and will not 

cost more than the $400 billion that we have allocated. I am hoping 

that the conference committee will bring back a very substantial 

bill that will do what we want it to do in the right manner of doing 

it. 

Let me ask some questions of our Director of the CBO. Could you 

comment on the GDP growth assumed in the CBO projections? It 

seems to me that you have assumed 2.2percent real GDP growth 

through 2003 and assume a 3.8percent real GDP growth in 2004 

and assume an overall average of 3.3percent from 2005 to 2008, 

and a 2.7percent from 2009 to 2013. Is that on the laws that are 

now on the books? 

Mr. HOLTZ-EAKIN. Yes. 

Senator BUNNING. They are? 

Mr. HOLTZ-EAKIN. Yes. 

Senator BUNNING. I wonder how you came up with that number. 

Mr. HOLTZ-EAKIN. The near-term projection reflects the expectation that, in fact, the economy will grow faster. It reflects the expectation that we will see a recovery in investment, which has been 

the predominant feature of the economic downturn in recent years. 

That investment recovery will be stronger in 2004 than in 2003, 

aided in part by the partial expensing provisions that are current 

law. 

Senator BUNNING. Did that also take in consideration the recession that we picked up in 2000 and carried into 2001? 

Mr. HOLTZ-EAKIN. These are built on the current state of the 

economy reflecting that recession. 

Senator BUNNING. OK. Go ahead. 

Mr. HOLTZ-EAKIN. We see a cyclical recovery returning the economy back to its potential GDP over the next several years. That 

particular forecast, the short-term economic forecast, should be distinguished from the long-term projection, which does not attempt 

745

to forecast business cycles, but instead focuses on growth in the potential for the economy to produce. That particular potential reflects capital accumulation, the availability of labor supply (both in 

numbers of people and hours worked), skills, and productivity 

growth from technological advance. 

Senator BUNNING. Did you consult with the Fed? 

Mr. HOLTZ-EAKIN. We have a panel of economic advisers, which 

includes members of the academic community, business forecasters, 

and our panel meeting was attended as well, in particular, by Vincent Reinhart, who is Director of Monetary Affairs at the Fed. We 

have been working in conjunction with all experts that we can 

bring into the process. 

Senator BUNNING. So, in other words, you are in consultation 

with the Fed on the monetary policy of this country. Are you also 

consulting the Congress of the United States on the fiscal policy? 

Mr. HOLTZ-EAKIN. I would hesitate to say that we are in consultation with the Fed on monetary policy. We have a representative come attend our forecast meetings and give us whatever advice 

he may have to offer. In that way, it reflects whatever critique the 

Fed may have provided. 

Senator BUNNING. Would you think that would be a pretty difficult job in assuming the overall average of 3.3percent from 2005 

to 2008 and 2.7percent from 2009 to 2011? That would be a guesstimate rather than an actual forecast? 

Mr. HOLTZ-EAKIN. It is our best estimate given what we know 

about the underlying trends. It is subject to tremendous amounts 

of uncertainty that we——

Senator BUNNING. If we had another 9/11, would that affect that, 

do you think? 

Mr. HOLTZ-EAKIN. Certainly. 

Senator BUNNING. You are also suggesting that we are going to 

have low inflation and rapid productivity growth. 

Mr. HOLTZ-EAKIN. Yes. 

Senator BUNNING. Is there any special reason for that? 

Mr. HOLTZ-EAKIN. Well, the two, in fact, play into one another, 

given the underlying trends in productivity, our analyses of the 

source of advances in productivity growth in the high-technology 

sectors, and its diffusion through the economy. If you have rapid 

productivity growth, the capacity for the economy expands more 

rapidly, and that lessens inflationary pressures, other things equal. 

Senator BUNNING. There was someone who was talking—I think 

it was Senator Corzine—about the Government competing with private sector for money if interest rates happen to go up. I can remember a time in this country—and I know that Senator Corzine 

can—when the prime rate in this country was over 20 percent. I 

wonder if we have any more pressure at 1 percent than we do at 

20. 

Mr. HOLTZ-EAKIN. Well, I think the correct barometer of credit 

market pressure is real interest rates, adjusted for inflation. Over 

the long term, one would expect all interest rates to rise to overcome the effects of inflation, so a 1 percentage point increase in 

sustained inflation is to move up all interest rates. So what we are 

trying to do is adjust for that——

746

Senator BUNNING. But we also have a short-term projection, and 

what I read, the Fed—and that is very difficult to do—it looks like 

they are saying you are pretty well set for the rest of this year and 

for the first 4 months of next year at a prime rate of about 1 percent. Then all bets are off, and particularly if there is any kind of 

inflation that comes into this market. 

My projection, or my looking at the market in the monetary policy and in the security and bond market, particularly the corporate 

bond market, where Chairman Greenspan seems to peg the interest rates, I see a slight inclination to go up. So I would suspect that 

by next March or April or May, we will see the Fed start to move 

the prime in direct relationship to the corporate bond rate, which 

is what he pegs it to—many other things, but, I mean, he also 

looks at the corporate bond rate very seriously. 

Is that an accurate picture? 

Mr. HOLTZ-EAKIN. Well, what the Fed will do, we will see. In our 

projection, what we assume is that interest rates will rise over the 

course of the next year and a half. Indeed——

Senator BUNNING. That is a pretty——

Mr. HOLTZ-EAKIN [continuing]. Consistent with the Federal 

funds futures, which show Federal funds rates rising in early 2004. 

Our projection shows a rise as well. 

Senator BUNNING. OK. I have taken my time, Mr. Chairman. 

Thank you. 

Mr. HOLTZ-EAKIN. Mr. Senator, if I could take the liberty of——

Senator BUNNING. Yes. 

Mr. HOLTZ-EAKIN. You said at the outset of your remarks that 

you had budgeted $400 billion and that you would expect $400 billion as well for Medicare prescription drugs in the second 10 years. 

I want to——

Senator BUNNING. No, I didn’t say the second 10 years. I said for 

the first 10 years. 

Mr. HOLTZ-EAKIN. OK. Well——

Senator BUNNING. That is what is in the budget. I am hoping 

that it will be restrained in the second 10 years. 

Chairman NICKLES. I heard you. I think you were talking to me 

instead of the Director. 

Senator BUNNING. That is because you are on the conference. 

Chairman NICKLES. Senator Sarbanes. 

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

Mr. Director, welcome. We are pleased to have you here. I know 

this is your first appearance before this committee, I believe. 

Mr. HOLTZ-EAKIN. Yes. 

Senator SARBANES. It has really been quite a mild, calm hearing 

thus far, and I hope to keep it on that track. 

I must say that the figures you are giving us are really daunting, 

to put it mildly. You are now projecting, as I understand it, a deficit for 2003 of $401 billion. Is that right? 

Mr. HOLTZ-EAKIN. That is correct. 

Senator SARBANES. That is as of September 30th, in other words, 

just a few weeks away. That is what you project the deficit will 

come in at. 

Mr. HOLTZ-EAKIN. Yes. 

747

Senator SARBANES. Now, that is the total deficit. That includes 

the surplus we are running in Social Security. Is that correct? 

Mr. HOLTZ-EAKIN. It is the unified budget deficit, yes. 

Senator SARBANES. Unified budget deficit. What is the on-budget 

deficit? 

Mr. HOLTZ-EAKIN. For 2003, our projection is that it would be $562 billion. 

Senator SARBANES. $562 billion. Now, you are projecting for next year a deficit, as I understand it, of $480 billion? 

Mr. HOLTZ-EAKIN. Yes. 

Senator SARBANES. That is the total deficit. What is your projection for the on-budget deficit, in other words, without the Social Security revenue? 

Mr. HOLTZ-EAKIN. $644 billion. 

Senator SARBANES. $644 billion. 

Mr. HOLTZ-EAKIN. Yes. 

Senator SARBANES. What were you projecting in March of this 

year that the deficit would be in 2004, in other words, at the end 

of next year, the total deficit? 

Mr. HOLTZ-EAKIN. Our baseline projection in March was $200 

billion. 

Senator SARBANES. $200 billion, and you are now projecting $480 

billion. Is that correct? Almost two and a half times as much. 

Mr. HOLTZ-EAKIN. Yes. 

Senator SARBANES. These are very large number, are they not, 

for deficits? 

Mr. HOLTZ-EAKIN. They are large in dollar terms. They are not 

the largest relative to the economy. 

Senator SARBANES. I want to address that in a minute, but in 

dollar terms, nominal terms, they are by a substantial margin the 

biggest we have ever had. Is that correct? 

Mr. HOLTZ-EAKIN. The previous largest was $290 billion. 

Senator SARBANES. $290 billion? 

Mr. HOLTZ-EAKIN. Yes. 

Senator SARBANES. That is the unified budget? 

Mr. HOLTZ-EAKIN. Yes. 

Senator SARBANES. Next year you are projecting $480 billion. 

Mr. HOLTZ-EAKIN. Yes. 

Senator SARBANES. Now, as I understand it, when you make your 

projections, you work with certain assumptions that are called a 

baseline approach, which encompasses certain assumptions. Is that 

correct? 

Mr. HOLTZ-EAKIN. Yes. 

Senator SARBANES. Now, I want to try to develop this because I 

think it is very important to try to lay all of this out. The baseline 

assumes that the existing statutory arrangements will continue. Is 

that correct? 

Mr. HOLTZ-EAKIN. Yes. 

Senator SARBANES. So it would not encompass the prescription 

drug benefit? 

Mr. HOLTZ-EAKIN. No. 

Senator SARBANES. Which has not yet been enacted, which we 

are working on. Is that correct? 

Mr. HOLTZ-EAKIN. That is right. 

748

Senator SARBANES. It would not encompass the—many people 

are saying there is going to be a necessity for AMT reform because 

more and more people are becoming affected by it, and at some 

point there will be pressure to change that. So there is no allowance for what reform might be done with AMT. Is that correct? 

Mr. HOLTZ-EAKIN. That is correct. 

Senator SARBANES. Then you are assuming, I guess, in your 

baseline that these tax cuts which were enacted will expire toward 

the end of the 10-year period. Is that correct? 

Mr. HOLTZ-EAKIN. Yes. 

Senator SARBANES. In fact, I noted that the sort of budget benefits that hold down the size of this deficit depend very heavily on 

an influx of revenue in the end years, of course, resting, as you do 

with your analysis, on the assumption that those tax cuts—that the 

taxes will come back into effect, that the tax cut will not become 

permanent. Is that correct? 

Mr. HOLTZ-EAKIN. That is correct. 

Senator SARBANES. But I do note that, of course, the President 

and many in the Congress are pushing very assiduously now to 

make those tax cuts permanent. Is that correct—well, I won’t ask 

you that. I will just make that as an observation. We are anxious 

to preserve your nonpartisan status. I think it is very important 

both for the Director and the Congressional Budget Office. 

Now, if those three things were all to change, the surpluses you 

are projecting right at the tail end of this 10-year period would not 

be there, would they? 

Mr. HOLTZ-EAKIN. That is right. 

Senator SARBANES. So, in effect, we would be looking at—while 

the projections at the moment are that right at the end we would 

move the budget back into—at the end of this 10-year period, having experienced very large deficits in the interim, we would move 

it back into surplus. If those three things happen, let alone other 

things that might happen, including whether the assumption that 

the increase in programs will parallel inflation rather than running 

ahead of inflation, leaving that one to one side, we wouldn’t be 

showing any surplus projections for your 10-year period. Is that 

correct? 

Mr. HOLTZ-EAKIN. That is right. 

Senator SARBANES. Now, you make a point, and you do it in your 

statement—and I know you are trying hard here to be balanced. 

You say, ‘‘Although such deficits for this year and next year would 

be smaller than those of the mid-1980’s relative to the size of the 

economy, they would reach record levels in nominal dollar terms.’’ 

You repeated that here today. 

Now, if I factor in these three items that we discussed—extension of expiring taxes, AMT reform, and a prescription drug benefit—I am really getting to a point where the deficits, even relative 

to the size of the economy, are really getting very close to those 

that were in the mid-1980’s, am I not? 

Mr. HOLTZ-EAKIN. I don’t know the exact figure, but the chart I 

showed at the outset included those three items and very rapid discretionary spending growth. If those four were together, they 

would, in fact, at the end of the projection produce deficits exceeding those in the 1980’s. 

749

Senator SARBANES. Yes, would exceed them. If you had the 

spending projections plus these other three items? 

Mr. HOLTZ-EAKIN. That is right. 

Senator SARBANES. Or without these other three items? 

Mr. HOLTZ-EAKIN. With those other three. All four in conjunction. 

Senator SARBANES. So we would then, in effect, be running 

record deficits, not only in dollar figures, so-called nominal terms, 

but record deficits as a percentage of the economy relative to the 

size of the economy. Would that be correct? 

Mr. HOLTZ-EAKIN. If you did all four of those, yes. 

Senator SARBANES. Yes. Now, I am interested in the spending increases. There is a chart here, I think—if I could see the 92-percent 

one, because there is a lot of talk about increases in discretionary 

spending as though somehow the Congress has gone on some sort 

of spending binge or something. But as I understand it, the increase in defense spending—and this chart indicates that—92 percent of the increase in discretionary budget authority in the current fiscal year is accounted for by an increase in defense, 75 percent, an increase in homeland security, 10 percent, and 7 percent 

for trying to make up for 9/11, the special money to New York City, 

the airline relief, and so forth and so on. 

Now, does that correspond with the CBO’s analysis? 

Mr. HOLTZ-EAKIN. We haven’t looked at those numbers, and I 

would be happy to go through them with the Senator. The projection that I have discussed, the 7.7 percent discretionary spending 

increase per year, is build on a 5-year historical average. It excludes the impact of the 2003 supplemental, so it is discretionary 

spending growth, in exclusion of that. If one looks at those numbers, the growth rate is very similar for defense and nondefense 

discretionary spending, and within nondefense discretionary spending there are growth rates comparable to that or greater in a wide 

number of areas. 

Senator SARBANES. Do you differ with this analysis that the percent of change in discretionary budget authority, that 92 percent 

of it in 2003 is attributable to these items? 

Mr. HOLTZ-EAKIN. Without looking at the construction of those 

numbers, I really can’t say. I would be happy to do that. 

Senator SARBANES. Well, this is a very intimidating projection, is 

it not? I mean, you yourself in some of your statements have made 

the point that the deficits when the economy is—you are projecting 

now that the economy is going to pick up and it is going to be closer to full capacity—is that right?—over this time period. 

Mr. HOLTZ-EAKIN. Yes. 

Senator SARBANES. Is it your view that running substantial deficits when the economy is close to or at full capacity is an inadvisable economic policy? 

Mr. HOLTZ-EAKIN. To the extent that going forward we run large 

sustained deficits in the face of full employment, it will, in fact, 

crowd out capital accumulation and otherwise slow economic 

growth. 

Senator SARBANES. It will slow economic growth. Is that right? 

Mr. HOLTZ-EAKIN. Yes. 

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

750

Chairman NICKLES. Senator Sarbanes, thank you very much. 

I have a couple questions, and I think Senator Conrad does, too. 

Let me just touch on a couple of those. 

Senator Bunning asked if you gave consultations on fiscal policy, 

and you are consulting us; at least you are appearing before the 

committee, and we appreciate that. You have done it very professionally, and I think all of us are appreciative of that. 

Let me ask you for a little advice. Last year, we debated at 

length whether we should have a 5- or a 10-year budget. If you 

were giving a recommendation to Congress, is it your thought that 

a 5-year budget would be more realistic than a 10-year budget? 

Mr. HOLTZ-EAKIN. I believe it is a matter of the science of budget 

projection. The uncertainty associated with 10-year budget windows is extremely large, and I could make a good case for going to 

5 years. 

But I would attach two caveats to that, quite frankly. The first 

is the degree to which there are sophisticated consumers of 10-year 

numbers who understand the uncertainties and don’t believe them 

as point estimates; then more information is better than less. The 

second caveat is that in some cases, for example, in the growth of 

the entitlement programs (the numbers I mentioned earlier, for Social Security, Medicare, Medicaid), the underlying determinants are 

sufficiently easy to project (demographics and structures of programs) that the message of going out to even (2030 where spending 

that would be 14 percent of GDP) is important information as well 

for Members to have. That will be the real economic cost of those 

programs. It will be financed one way or another. But that level of 

spending is important to bring to the budget process. 

Chairman NICKLES. I appreciate that. I raise that for a couple 

reasons. One, we wrestle with budgets, and we also—when you are 

trying to put together a 10-year budget, you spend a whole lot of 

time arguing about things that Congress may or may not do in the 

next 5 years. Most of the things that Senator Sarbanes just mentioned that may have a negative impact, all of which are going to 

have to be dealt with by Congress. We make a change in the alternative minimum tax. We make a change on extension. We make a 

change on discretionary spending. We make a change on entitlement spending. All those have to have an act of Congress, which 

a future Congress is going to have to wrestle with. 

Now, we can guess what we might do, but, anyway, I just mention that. 

Let me ask you your advice on another subject. The debt limit 

right now is for public and government debt? 

Mr. HOLTZ-EAKIN. Yes. 

Chairman NICKLES. Some have proposed that maybe it really 

should be debt held by the public alone. Do you concur with that? 

Mr. HOLTZ-EAKIN. Well, as I noted in several of my remarks, I 

think that the debt in the hands of the public relative to GDP is 

a very useful indicator of the future path of fiscal policy. It reflects 

in a summary statistic cash in and cash out of the Treasury in the 

numerator and the performance of the economy in the denominator. Those are the issues that this committee faces all the time. 

So it is a useful piece of information. 

751

To the extent that you want to align budgetary control mechanisms like a debt limit with that indicator, then you will have both 

the information and the policy matching up. 

Chairman NICKLES. I appreciate that. 

Let me ask you a question on entitlements. You mentioned that 

presently on entitlements, Social Security, Medicare, Medicaid, 

presently that is 8 percent of GDP in 2002, and it is projected to 

grow to 14 percent by 2030? 

Mr. HOLTZ-EAKIN. Yes. 

Chairman NICKLES. That is present law? That doesn’t include 

prescription drugs? 

Mr. HOLTZ-EAKIN. That is right. 

Chairman NICKLES. I can’t remember if it was CBO, or maybe 

it was OMB, priced the 75-year projections of Medicare and Social 

Security and showed that Social Security had an unfunded liability 

of $4.9 trillion and Medicare, $15.8 trillion? Does that sound right? 

Mr. HOLTZ-EAKIN. Those are ballpark figures. There have been 

a variety of estimates provided by both the Treasury Secretary as 

well as OMB. 

Chairman NICKLES. The Medicare 15.8 does not include prescription drugs. 

Mr. HOLTZ-EAKIN. No, it doesn’t. 

Chairman NICKLES. Most estimates of the bills that were considered last year and are presently being considered are in the $4, $5, 

$6 trillion range, at least the two bills that are in conference, I believe. Is that correct? 

Mr. HOLTZ-EAKIN. Yes, at CBO we have been trying to build the 

capacity to do 75-year cost estimates, for lack of a better word, and 

while that is not yet completely up to use at the moment, we did 

use that capacity to take a preliminary cut to see if these reports 

of a $6 trillion number were in the ballpark. Indeed, they appear 

to be in the ballpark, if not a little low. 

Chairman NICKLES. I appreciate that. Also, I asked you for a 

study of the two bills that are now pending in conference, the 

House and the Senate. If my memory serves me correctly, the Senate bill, which we purported to have at $400 billion, but because 

of an amendment or two that were added, I think you estimated 

it to be as much as $460 billion. Is that correct? 

Mr. HOLTZ-EAKIN. That is right. 

Chairman NICKLES. So we do have a challenge. I happen to be 

one—and maybe I am incorrect—that thinks that those estimates 

are low. Again, it is very important how we design the program, 

designing copayments and others; if not, utilization will explode 

and the costs will greatly exceed estimates. I am just concerned 

about it. I appreciate your providing the committee some information. 

We have a vote ongoing, and I know Senator Conrad has additional questions, so I will turn to him. I have an interest in this 

question as well. 

Senator Conrad. 

Senator CONRAD. I would like to go back to the lease agreement 

with the Air Force because I think it is a very important public policy question. The difference here, when the time value of money is 

taken into account, is $1.3 billion to $2 billion. Is that not correct? 

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Mr. HOLTZ-EAKIN. That is right. 

Senator CONRAD. That is the difference. What the Air Force is 

saying to us is, look, CBO does not take into account the difference 

in the capacity that we are buying, so the question of value of what 

we are getting versus cost. Of course, you can’t do that. That is not 

your charge. 

The Wall Street Journal had an editorial today in which they say 

they are mistaking cost for value in an attack on the tanker leasing 

deal, and they point out that these planes are more than 43 years 

old, that then Air Force Secretary James Roche realized the urgency of the problem when he peeled back the skin of a tanker 

being refurbished and found the metal underneath was disintegrating. 

They go on to point out that age isn’t the only problem. Not only 

will the new 767s be able to refuel all planes in the military’s inventory, unlike the existing planes, but they carry up to 20 percent 

more fuel and 3 times the cargo. 

They go on to point out that Boeing’s main competitor is the European consortium that produces Airbus, which virtually defines 

corporate welfare. 

Their final point is that the real issue is not just lifetime cost but 

value for money. They conclude that the Air Force needs tankers 

now, and the leasing arrangement was deemed the way to get 

tankers into its hands most expeditiously, not least because it bypasses procurement procedures that could stretch out a buying decision for years. 

I make these points because I think all of these facts have to be 

on the table when people make a determination. Cost is obviously 

an important factor, and there is a differential, $1.3 to $2 billion, 

when the time value of money is taken into consideration. 

There also is a hard reality we have been presented with. The 

Air Force has told us they need these planes, they need them urgently, and that these planes have more capacity, substantially 

more than the existing fleet, and that these planes, unlike the existing planes, can refuel all planes in the inventory. 

You know, we have a very curious situation right now. The tankers can only refuel Navy planes. Then they have to land. Then they 

have to retool. Then they can refuel Air Force planes. These new 

tankers would be able to refuel both Navy planes and Air Force 

planes without having to land to retool. 

So I think all these issues have to be in front of us before we 

make a decision. 

Chairman NICKLES. Senator Conrad, thank you. 

Just one final comment on Boeing, and I guess you are going to 

make a presentation today before the Commerce Committee. 

Mr. HOLTZ-EAKIN. Yes. 

Chairman NICKLES. From a budgetary standpoint, you have already mentioned that a lease is going to cost $1.2 to $2 billion 

more, and that is on present-value dollars. Over the life of the contract, it will be as much $5.7 billion, for a difference of at least $31 

million if you are trying to say the purchase price today per plane. 

That seems to me to be—the Air Force, I believe, was saying that 

they thought it would be a total difference of cost of $150 million. 

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Do you know what that—not $4.6 billion. They were saying $150 

million. What is the difference? 

Mr. HOLTZ-EAKIN. The difference comes from a variety of 

sources. One would be the assumption by the Air Force that if one 

were to get the same planes at the same schedule through the regular appropriations process, Congress would not provide it with 

multiyear procurement authority, which indeed Congress could provide, and there is precedent for that taking place. 

The second difference is the assumptions about the kinds of interest costs built into the lease arrangement, and there we have 

tried to detail it out. There are some interaction factors as well. 

But the bulk of it is the procurement authority and the assumption 

that using the appropriations process to deliver the same 100 

planes on the same schedule would somehow not yield the cost savings associated with multiyear procurement. 

Chairman NICKLES. OK. From a budgetary standpoint—and this 

is one of my big concerns about it—it seems to me just to bypass 

the budget. This is a way—we are going to go into leasing; therefore, it won’t show up until outyears when we are writing the 

checks and when they are ultimately purchased. So you would have 

a cash-flow chart that won’t have as much money up front, and it 

will have a big swing at the end when in the last years you will 

be writing big checks. 

Mr. HOLTZ-EAKIN. What I would emphasize in response to Senator Conrad’s remarks is that indeed our analysis is independent 

of value. It is focused on budgetary treatment, which the Chairman 

just mentioned, and on two alternative routes, the cost of two alternative routes. One route is the leasing arrangement. The second 

route would be for Congress to provide additional budget authority 

to the Air Force to purchase the same planes on the same schedule, 

either at the expense of other military programs or perhaps just by 

raising total BA. If it did that, the overall costs of the program 

would be lower. 

Chairman NICKLES. What about the budgetary aspect—does it 

seem to you that this type of a mechanism really just bypasses the 

budget? 

Mr. HOLTZ-EAKIN. Yes. 

Chairman NICKLES. To me, I think we need to be very cognizant 

of that. We could have any of the authorizing committees say, well, 

we are going to do lease-purchase arrangements and make all 

kinds of financial commitments that really wouldn’t be noted, except for maybe asterisks, there will be some expenses coming down 

in the future. But there is a liability to the Federal Government 

that is coming, and I kind of think it should be on budget. So I 

make mention of that. 

We have a vote. The time is almost expired. 

Senator SARBANES. Mr. Chairman? 

Chairman NICKLES. I will call on Senator Sarbanes to conclude. 

Senator SARBANES. I wanted to ask one quick question. What 

real GDP growth rate do you think we could sustain and be at a 

full-capacity economy? 

Mr. HOLTZ-EAKIN. Our long-term projections, the 3.3 percent 

from 2005 to 2008, and 2.7 percent thereafter, are our estimates of 

full-employment growth rates in the outyears. 

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Senator SARBANES. What is the unemployment rate that goes 

with those projections? 

Mr. HOLTZ-EAKIN. 5.2 percent. 

Senator SARBANES. Now, we were at 4 percent for a while and 

seemed to be able to sustain it without an inflationary economy, 4 

percent unemployment and sustain it without an inflationary economy. Why wouldn’t we seek a higher growth figure that would 

bring with it a lower unemployment rate and—well, if we base it 

off this recent experience, not an inflation problem? 

Mr. HOLTZ-EAKIN. In the long run, the inflation problem will reflect more the Federal Reserve’s targets in monetary policy. With 

respect to the real growth rate of the economy, it will be dictated 

by the rate at which we accumulate capital, labor, and technologies, the key of those being productivity growth. The difference 

between very rapid productivity growth in some years in the late 

1990’s and our sustained average productivity growth in the outyears is probably the biggest difference. 

Senator SARBANES. Well, now, Greenspan seemed to have the 

view that we had done something of a breakthrough on productivity growth, and I thought there were figures recently that 

seemed to sustain that given where we are. Is that not right? 

Mr. HOLTZ-EAKIN. I can’t speak to the Chairman’s views, but our 

productivity growth, 2.1 percent over the budget window, is, in fact, 

a rate which is close to but not equal to the peaks of the post-1995 

acceleration.

Senator SARBANES. All right. Well, thank you very much, and the 

hearing is adjourned. 

Mr. HOLTZ-EAKIN. Thank you. 

[Whereupon, at 12:16 p.m., the committee was adjourned.]

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