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[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]

 
                      AFTER THE HURRICANES: IMPACT
                     ON THE FISCAL YEAR 2007 BUDGET

=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

            HEARING HELD IN WASHINGTON, DC, OCTOBER 6, 2005

                               __________

                           Serial No. 109-11

                               __________

           Printed for the use of the Committee on the Budget

                       Available on the Internet:
       http://www.gpoaccess.gov/congress/house/budget/index.html

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
23-486                      WASHINGTON : 2005
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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
JIM RYUN, Kansas                     JOHN M. SPRATT, Jr., South 
ANDER CRENSHAW, Florida                  Carolina,
ADAM H. PUTNAM, Florida                Ranking Minority Member
ROGER F. WICKER, Mississippi         DENNIS MOORE, Kansas
KENNY C. HULSHOF, Missouri           RICHARD E. NEAL, Massachusetts
JO BONNER, Alabama                   ROSA L. DeLAURO, Connecticut
SCOTT GARRETT, New Jersey            CHET EDWARDS, Texas
J. GRESHAM BARRETT, South Carolina   HAROLD E. FORD, Jr., Tennessee
THADDEUS G. McCOTTER, Michigan       LOIS CAPPS, California
MARIO DIAZ-BALART, Florida           BRIAN BAIRD, Washington
JEB HENSARLING, Texas                JIM COOPER, Tennessee
ILEANA ROS-LEHTINEN, Florida         ARTUR DAVIS, Alabama
DANIEL E. LUNGREN, California        WILLIAM J. JEFFERSON, Louisiana
PETE SESSIONS, Texas                 THOMAS H. ALLEN, Maine
PAUL RYAN, Wisconsin                 ED CASE, Hawaii
MICHAEL K. SIMPSON, Idaho            CYNTHIA McKINNEY, Georgia
JEB BRADLEY, New Hampshire           HENRY CUELLAR, Texas
PATRICK T. McHENRY, North Carolina   ALLYSON Y. SCHWARTZ, Pennsylvania
CONNIE MACK, Florida                 RON KIND, Wisconsin
K. MICHAEL CONAWAY, Texas
CHRIS CHOCOLA, Indiana

                           Professional Staff

                     James T. Bates, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel

                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, October 6, 2005..................     1
Statement of Hon. Douglas J. Holtz-Eakin, Director, Congressional 
  Budget Office..................................................     9
Prepared statement of Mr. Holtz-Eakin............................    14

                      AFTER THE HURRICANES: IMPACT
                     ON THE FISCAL YEAR 2007 BUDGET

                              ----------                              

                       THURSDAY, OCTOBER 6, 2005

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 2:10 p.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee), presiding.
    Members present: Representatives Nussle, Ryun, Crenshaw, 
Putnam, Wicker, Garrett, Barrett, Diaz-Balart, Hensarling, 
Ryan, Simpson, Bradley, Mack, Conaway, Chocola, Spratt, Moore, 
DeLauro, Capps, Cooper, Davis, Jefferson, Allen, Case, and 
Cuellar.
    Chairman Nussle. I call the Budget Committee to order.
    Before we begin with the official agenda, let me pause for 
a moment; and, Doug, I know this is particularly important for 
you, your team, and family down at the CBO (Congressional 
Budget Office).
    The committee was very saddened to hear the news this week 
of the death of Bob Sempsey from a long-term illness. We offer 
Bob's family and all of the CBO staff our sincerest 
condolences.
    For those who didn't know Bob very well, I can say that he 
was well-known to many of us. He worked for the CBO for nearly 
25 years; and with his colleagues down at what is called the 
scorekeeping unit, they provided this committee and the 
Appropriations Committee with the vital cost estimates and 
scorekeeping tallies of the annual appropriation bills that are 
the core of the budget and appropriations process.
    He was also well-known in the extended family of the budget 
community and was famous for having a very dry sense of humor 
and for being an avid car enthusiast and certainly for his 
devotion to his family, Emily, Zack, and R.J.
    What is not commonly known about Bob is that he worked for 
the Ringling Brothers Circus before joining CBO, which was 
probably good training for the budget and the process.
    I am sure all of us will miss Bob, particularly down at 
CBO. So we offer just a moment of pause just to express our 
condolences and to let his family know that his service to his 
country, to this committee, and to Congress was deeply 
appreciated and his service will be deeply missed.
    Mr. Spratt.
    Mr. Spratt. Mr. Chairman, thank you for allowing me to add 
a word of sympathy to your staff and to the family of Bob 
Sempsey. We knew him better by his work product than by his 
personality, though his personality was well-known around here, 
and that work product was always excellent, and it is a symbol 
still of the legacy that he leaves in 25 years of service to 
CBO, the country, and the Congress of the United States. He 
will be missed here on Capitol Hill as well as at CBO.
    Thank you, Mr. Chairman.
    Chairman Nussle. Thank you, Mr. Spratt.
    Good afternoon and welcome to the Budget Committee hearing. 
When the committee last met back in July, our discussion at 
that time was what was called the midyear budget, an economic 
outlook; and things were looking pretty good at that point in 
time. We were continuing to see steady, strong economic growth 
and job creation. Tax revenues were up 15 percent over last 
year, we were keeping discretionary spending on track, and we 
were seeing a dramatic reduction in the deficit, in fact, a $94 
billion reduction in the deficit at that point in time.
    Things certainly were not perfect, they never are, but we 
certainly seemed to be heading in the right direction. A couple 
of weeks ago Hurricane Katrina hit, and our Nation was 
devastated, and so many people and families were devastated.
    It was the worst natural disaster on record, certainly 
everything has changed, and many things will change for quite 
some time. Within days, this Congress acted to get victims the 
critical emergency assistance they needed by approving $62 
billion in emergency funding; and Congress clearly remains 
committed to doing whatever is needed to recover from the 
disaster.
    But, at the same time, we better understand that our 
obligation to the hurricane victims and to all Americans 
doesn't end with quickly writing a bunch of big checks, that is 
the easy part for Congress. Congress must now prove we can 
handle the heavier lifting that follows by making reasonable 
and responsible choices and priorities in the next phase of the 
Katrina response.
    I think the first thing we need to do--and what is 
currently lacking, in my judgment--is to make a clear 
distinction between what is and what is not an emergency. I 
know that in the rush to get victims critical need and help in 
the first days and weeks after the storm, making this 
distinction was certainly far from our top priority, and 
appropriately so, but, today, a month later, it is time.
    Congress must set clear criteria to ensure that any 
spending deemed an emergency, and thus not subject to budget 
limits, is actually used to respond to the immediate and urgent 
needs of the people and families in the gulf. If funding 
requests do not meet these emergency and reconstruction 
criteria, then I believe, what is not the emergency portion of 
the response must be subject to the judgment, the deliberation, 
and oversight that are part and parcel of the regular budget 
process for the U.S. Congress.
    The purpose is not to limit help the Federal Government 
provides to hurricane victims, it is to prevent nonemergency 
spending from sliding through on what is often the fast track, 
without the proper oversight in the name of emergency relief.
    Further, we must aggressively follow all of the funds to 
prevent waste, fraud, and abuse, ensuring that every taxpayer's 
dollar we spend is hitting its intended target appropriately 
and providing the help that families need. This goes hand in 
hand with our government program reform efforts, which I would 
like to touch on here in a moment.
    Congress must also begin to make a down payment on this 
emergency spending, I know there have been a myriad of ideas 
floated around. One that was most interesting to me--actually, 
I received two letters on this topic--were from my friends on 
the other side of the aisle. In them, they suggested that the 
best way to respond to this emergency was actually to cancel 
our plans to reform government programs. In simpler terms, 
Congress' best response to this immense new spending need 
spurred by the hurricanes is to refuse to even look for savings 
in other areas of the budget and instead just increase taxes.
    Interesting logic, but I do not believe that is the right 
policy at this time for our country. From several folks on my 
side of the aisle, the Republican Study Committee (RSC), as an 
example, which I will note is particularly well represented on 
this committee, we have heard suggestions about off-setting 
Katrina costs, ranging from focused program cuts to across-the-
board spending rescissions.
    Just this past Tuesday, President Bush said in a press 
conference that Congress should, ``pay for as much of the 
hurricane relief as possible by cutting spending.''
    The President also pledged to work with Congress to finance 
Katrina reconstruction efforts in a fiscally responsible way 
and supported increased savings and commitment in mandatory 
programs; and my response to that is, great. But to get this 
done we need to have a strong partnership among the House, the 
Senate, and the administration. So here is what I believe 
Congress must do.
    First, Congress must reduce spending and make a down 
payment toward the emergency spending itself. In consultation 
with the leadership, I will propose an amendment to the budget 
for fiscal year 2006 calling for such additional spending in 
both mandatory and discretionary. I note that prior to Katrina, 
we were on a course to holding the nonsecurity, discretionary 
spending below last year's level.
    I would suggest that we further reduce this spending in 
three ways: first, with additional across-the-board 
discretionary reductions; second, a rescission package for 
unnecessary or low priority 2006 funds; and third, by 
permanently eliminating and deauthorizing programs that have 
been zeroed out by the appropriators so that they don't grow 
again and become priorities in the future.
    Appropriations Chairman Jerry Lewis has done a remarkable 
job this year, and I have every confidence that he and his 
committee can make this additional step.
    On the mandatory side or the automatic spending side of the 
budget, I propose that total net savings for reconciliation 
should be increased from the current $35 billion amount that 
was in our budget resolution, to a minimum of $50 billion in 
savings over the next 5 years.
    In addition, I propose that any hurricane-related mandatory 
spending increases must be fully offset within that amount, 
meaning this is a $50 billion net savings from government 
reform. Long after the current budget challenge, our challenges 
with mandatory spending will continue to exist. The baby 
boomers will still retire, medical costs will continue to 
skyrocket, and our largest government programs will still grow 
far beyond our means to sustain them.
    We must not fail to get ahold of this spending or simply 
throw up our hands and say that it is too hard or that now is 
not the right time or it is too difficult or that plan does not 
work, or I do not have a plan. An alternative, as certainly 
many will continue to suggest, this spending, which currently 
takes up over a half of the Federal budget and is quickly 
growing, will eventually crowd out every other priority: 
education, agriculture, science, the environment, you name it. 
It will severely limit our ability to cover our basic costs, 
let alone respond to any further disaster.
    And this isn't just about saving money, it is about 
reforming our largest, most critical government programs, many 
of which haven't been updated since their creation. Let me say 
that again. Many of these programs that we are talking about 
have not been updated, reformed, revised, or modernized, since 
their creation. Or been updated to ensure they are meeting 
their fundamental responsibilities and providing assistance to 
those who are most in need. So we better get started, and we 
better do it now.
    Again, this year's budget required $35 billion in savings. 
We can do that and more without losing sight of the needs 
related to the hurricane victims.
    Second, this committee will begin work on a fiscal year 
2007 budget now. We will not just add on emergency spending or 
give a blank check for an undefined notion of reconstruction. 
We must prioritize next year's budget to reflect this enormous 
Nation-changing event.
    We must begin now to debate the appropriate role for the 
Federal Government in any reconstruct effort. We must ensure 
that any nonemergency costs, including reconstruction, be 
addressed through the regular budget process. That means the 
administration should provide details for any reconstruction 
plan, a full accounting of the reconstruction costs; and the 
President's budget must include a post-emergency reconstruction 
financing plan. We cannot fund hurricane reconstruction through 
these regular, predictable emergency requests to Congress.
    I haven't been shy about my frustration with the 
administration's financing of the war in Iraq through repeated 
supplementals without details. I have adjusted my budgets to 
reflect forward-planning of the war's costs, but more needs to 
be done. Congress has already provided an unprecedented $62 
billion in disaster relief, largely without an up-front 
explanation of how that money would be spent or how it would be 
financed. That may have been appropriate, but I understand that 
about two-thirds of that emergency funding remains in the 
Federal Emergency Management Agency (FEMA) accounts today, two-
thirds of that $62 billion.
    That said, I understand that $62 billion may not be the 
final number, so I want to start planning now for any requests. 
And the best way to do that I believe is through the regular 
budget process.
    Also, starting this year, I will again insist that future 
budgets must include more realistic funding for natural 
disasters--they are bound to occur, and we are bound to cover 
them--to avoid a perpetual cycle of emergency spending. I have 
attempted these mechanisms in the past, and I believe the time 
for a rainy day account has finally arrived in Congress.
    So here is the bottom line. Congress needs to clearly 
identify the emergency spending from the disasters in the gulf. 
We need to make a down payment on this emergency spending by 
reducing spending and reforming government over and above what 
is already planned for in this year's budget.
    In addition, I challenge the administration that any plan 
for reconstruction be detailed in its policy to answer three 
important questions: What is the total cost? How will it be 
spent? And how will it be financed?
    Finally, it is my intention that today's hearing marks the 
beginning of Congress's deliberations on the fiscal 2007 
budget, which I intend to accelerate from its traditional 
schedule.
    On a final note, I have heard loud and clear, and I am sure 
you have, too, from your constituents, that while they want to 
do everything reasonable to help the people in the gulf they 
want us to do it responsibly. For me, it was probably best 
summed up by a gentleman that I met in Des Moines who 
experienced the flood of 1993, that was up until this disaster 
one of the largest natural disasters in history. He asked me a 
question, and this is as a victim himself. He said, explain to 
me why it is compassionate--think about this. Why is it 
compassionate to rebuild a person's home 15 feet below sea 
level after this experience? Explain to me why that is 
compassionate? And explain to me why it is reasonable to do it 
with my tax dollars. He wants a plan, and he wants it to be in 
the context of a fiscal blueprint.
    It is a question that we must be able to answer, certainly, 
to meet the needs of the people in the gulf--we all know that--
but to meet the needs of the taxpayers who finance it as well. 
We have asked Doug Holtz-Eakin, the Director of CBO, to be with 
us today to share his insight and perspective on these issues. 
We appreciate your return, Director Holtz-Eakin, and are 
certainly looking forward to your testimony.
    I would now turn to Mr. Spratt for any opening statement he 
may have.
    Mr. Spratt. Mr. Chairman, thank you for calling this 
hearing; and, Director Holtz-Eakin, welcome back. Your 
testimony before our committee is always useful and 
illuminating, and I am sure that it will be today as it always 
has been.
    This hearing comes at a very critical juncture. You have 
just heard the chairman's proposal, which is a bold proposal. 
Fiscal year 2005 has just ended. Yet most of the appropriations 
bills for 2006 have not been enacted, and the administration's 
budget for 2007 will soon be upon us, at the doorstep.
    Clearly, Mr. Director, we need the best analysis you can 
furnish us of what the cost of Katrina has been to date and of 
what the likely cost is to be overall. That is particularly 
needed if we are going try to accommodate the cost and spread 
the payment for it, the financing for it, over a brief period 
of time.
    Katrina descended on the gulf coast at a time when the 
Government's budgetary position was vulnerable, to say the 
least. In January of 2001, 4 short years ago, CBO and the 
Office of Management and Budget (OMB) both looked out 10 years 
and saw surpluses of $5.6 trillion, cumulatively. We on our 
side looked warily at those surpluses, noting that nearly 75 
percent of the cumulative amounts fell in the outyears. We took 
to heart your warning about the volatility of budget estimates. 
We were proud, frankly, of having moved the budget from a 
deficit of $290 billion in fiscal 1992 to a surplus of $236 
billion in the Clinton years, and we did not want to risk our 
hard-won gains, so we warned against betting the budget on a 
blue sky forecast.
    Neither our advice nor our budgets were adopted. Instead, 
we have had five budgets proposed by the administration and 
approved by Congress, and we have, as a result, large and 
chronic deficits. So we must supply relief for Hurricane 
Katrina and Hurricane Rita from a position of fiscal weakness, 
and that is one reason the chairman has made the statement he 
just made.
    But, in truth, the budget was in big trouble before 
Katrina, before Hurricane Rita. The deficit for 2005 was 
expected to be the third largest in history. The cost of 
Katrina adds to the deficit, but just before Katrina, CBO 
informed us in a letter that I submitted to CBO that we faced 
$4 trillion in deficits if we implemented the administration's 
policies--tax and spending policies--over the next 10 years, $4 
trillion in additional deficits.
    Congress, though, now is grappling with what the Government 
can do to help people recover from Katrina and Rita and how the 
cost of those actions, those recovery actions, relief actions 
should be financed. We have responded by enacting measures that 
have cost $70.8 billion thus far, and we know that additional 
sums, additional requests from the administration are on the 
way.
    I have to note with the some irony the inconsistency in how 
the Congress is mounting its effort now to approach hurricane 
relief versus other emergency costs. Congress has approved--and 
I will hasten to add I have supported--various supplementals to 
fund operations in Iraq, which have not been offset, none of 
it. Congress has approved various tax cuts, despite their 
contribution to the bottom line, to the deficit, which have not 
been offset.
    So the question arises, why offset the rebuilding of Biloxi 
but not the rebuilding of Baghdad? Has disaster relief been 
offset in the past? I would ask that to the Director, if he has 
any knowledge of that, to respond to that; and, if so, how 
should it be offset in all fairness, equitably in the wake of 
this particular disaster?
    In discussing offsets for hurricane costs, my colleagues on 
the other side have targeted programs like Medicaid, student 
loans, and food stamps, and this begs another question. Are we 
going to spread the costs of this disaster equitably over our 
whole population and make our response a sacrifice that we all 
share, or are we going to load the cost on those least able to 
bear it?
    In truth, the cuts being considered, for example, in 
Medicaid and student loans, were proposed long before Katrina 
and not to offset disaster costs but to partially offset $70 
billion in additional tax cuts. Those tax cuts are still called 
for in the budget we are operating upon, implementing still 
now, called for in the budget for 2006, along with $36 billion 
more in tax cuts not reconciled but called for in the 
resolution. The resolution sanctions another $106 billion in 
tax cuts.
    So I think it is fair to ask, if our object is to diminish 
the impact on the deficit and pay for Katrina, are we going to 
adopt these spending cuts for that purpose or to further offset 
tax cuts? Or have the tax cuts been scrapped and will attendant 
spending cuts, 100 percent of them, be used to offset the cost 
of Rita and Katrina?
    In the last several days, and just a few minutes ago, there 
have been various other proposals. The chairman has proposed 
basically a new budget resolution. So the question becomes, are 
we going to write tax reconciliation instructions as well as 
spending reconciliation instructions? Are we going to raise the 
spending reconciliation instructions from $35 to $50 billion 
and use those to further offset tax cuts of $106 billion, or 
table, defer, scrap the tax cuts and fully try to implement the 
spending cuts in order to manage the cost of Katrina?
    Since 2001 when the Bush administration first brought forth 
its trillion-dollar tax cuts, we have seen the stock market 
plummet and the economy slide into recession and then slowly 
recover. We have experienced the awful tragedy of 9/11 and our 
response to it. We have deployed thousands of troops to war in 
Afghanistan and for an even longer and larger war in Iraq, and 
we have now suffered the greatest natural disaster since the 
San Francisco earthquake.
    The 10-year surplus of $5.6 trillion has become a 10-year 
deficit of $3.5 trillion. The premises on which the Bush tax 
cuts were predicated have changed and changed drastically, but 
the tax cuts keep coming, at least unless they are deferred 
until we have dealt with the cost of Katrina and Rita and other 
expenses, including, for that matter, the emergency costs of 
financing our deployments in Iraq and Afghanistan.
    Today's testimony and CBO's ongoing work will be a great 
help to us as we grapple with these admittedly extremely 
difficult problems. Director Holtz-Eakin, thanks again for 
being here. We look forward to your testimony and your guidance 
as we enter upon this endeavor.
    Thank you very much.
    Chairman Nussle. I would ask unanimous consent that all 
members be allowed to place an opening statement in the record 
at this point.
    Without objection so ordered.
    [The information referred to follows:]

    Prepared Statement of Hon. Thomas H. Allen, a Representative in 
                    Congress From the State of Maine

    The costs of recovery, relief, and reconstruction after Hurricanes 
Katrina and Rita are great. Congress has already appropriated more than 
$60 billion for Katrina, making it, by a factor of four, the most 
expensive natural disaster in American history and some estimates put 
the total cost at around $200 billion.
    Members of Congress have been debating ``how to pay for Katrina.'' 
Senate Republicans have asked the President to propose spending offsets 
and suspend approved Federal spending. House Republicans have proposed 
specific cuts, including reducing or eliminating student loan and 
education programs, school lunch aid, Amtrak, health care for low-
income families, public broadcasting, and habitat conservation.
    As budget analyst Gene Sperling recently observed, it's the right 
topic, but the wrong question. He writes that ``focusing national 
attention solely on finding the one-time savings to pay for the one-
time cost of this horrible natural disaster risks distracting us from 
the far more damaging long-term fiscal deterioration caused by the 
administration's man-made economic policies.''
    Sperling notes that today's leaders fail to ask how to pay for the 
``dramatic, perpetual costs of permanent marginal, estate, dividend and 
capital gains tax cuts for America's most fortunate or the escalating 
tab for the President's prescription drug bill, not to mention the war 
in Iraq.''
    If leaders in Washington had been asking the ``how do we pay 
for...'' question in the last 5 years, perhaps they wouldn't have 
abetted our nation's slide from $5.6 trillion in budget surpluses over 
10 years that President Bush inherited, to the $3.5 trillion in 
deficits over 10 years we face today; a swing of more than $9 trillion 
dollars in the wrong direction.
    When Congress considered the President's $1.2 trillion tax cut in 
2001, I warned that it was not affordable. But Republican did not ask 
``how to pay for'' the largest tax cut in history, most of which 
benefited the wealthiest Americans. It passed, and prompted the 
dramatic descent from surplus to debt.
    In the next 3 years, Congress approved three more large tax cuts. 
In none of these cases did Republicans ask ``how to pay for'' these 
drains on the Federal Treasury.
    This past summer, Congress approved an energy bill with billions in 
subsidies for the oil and gas industry at a time when they were gouging 
consumers. Republicans never asked ``how to pay for'' this corporate 
welfare.
    Then came Katrina. With so much devastation, dislocation and 
despair, with the need for Federal aid to rescue and rebuild so great, 
why have Republicans suddenly chosen this event to make a stand for 
fiscal discipline?
    Many have noted that the estimate for Katrina recovery is equal to 
the cost to date of the war in Iraq (approximately $200 billion). Why 
is it that Republicans demand spending offsets to help Americans 
rebuild from an unavoidable hurricane, yet are willing to spend 
taxpayer money freely to help Iraqis rebuild from an avoidable war?
    The very week that the nation witnessed the drowning of New 
Orleans, the Senate was scheduled to vote on repealing the estate tax 
for the very few well-off couples with estates over $7 million. This 
vote was postponed. If the bill is revived, fiscal sanity demands that 
Congress, the media and the public give as much attention to paying for 
the $500 billion it will cost us during the next decade to eliminate 
inheritance taxes, as they have to Katrina's $200 billion price tag.
    I have long argued that the restoration of fiscal responsibility 
requires all sides to jettison hard-line ideology in order to reach 
bipartisan consensus. We need to put all options on the table, 
including spending cuts and upper-income taxes.
    Trying to pay for Katrina without re-considering tax cuts is like 
trying to rebuild New Orleans without fixing the levees. It will just 
perpetuate the disaster.
    A responsible and moral response to Katrina would be to put the 
people first, and adopt a package of incentives for job creation, 
retraining and housing choice that empowers Gulf residents to rebuild 
their communities. The challenge in Washington is whether leaders 
recognize that tough choices extend beyond the narrow question of ``how 
to pay for Katrina.'' Will these big budget choices be consistent with 
our values of fairness and responsibility to future generations, and 
our commitment to promote a larger, more prosperous and more inclusive 
middle-class? Or will we continue the failed policies of recent years 
that put the enrichment of the few above the needs of the many? That is 
the real question posed by Katrina.

  Prepared Statment of Hon. Connie Mack, a Representative in Congress 
                       From the State of Florida

    Mr. Chairman, I would like to begin by thanking you for putting 
together this important hearing today. I am proud to serve on this 
committee which, under your leadership, will be the first to take the 
lead and find significant savings in Federal spending in the aftermath 
of these two disastrous hurricanes.
    Mr. Chairman, being from Florida, I have a sense of what the 
communities in the Gulf South are going through. In fact, several areas 
in my district are still picking up the pieces and trying to recover 
from the storms of last summer. To this day, there are still funds owed 
to several municipalities that the Federal Government promised to 
supplement. That is an unacceptable avenue to go down again for this 
event.
    Beyond that, we all know how catastrophic hurricanes can be. But 
their damage is not merely limited to physical buildings and peoples' 
homes. They devastate the infrastructure of communities, the economy of 
the area, and the psyche of the people.
    As the citizens of the Gulf coast begin to get back on their feet, 
it is imperative that local and state governments lead and coordinate 
recovery efforts, with the aid of Washington and the private sector. 
This will undoubtedly be a long and difficult process, but the Gulf 
South will recover and thrive.
    With that said, Congress is the steward of the people's money. It 
begins here in the Budget Committee and should be realized by all of 
our colleagues. We must be disciplined in how we spend and what we 
supplement for the recovery, and we must make sure we continue to 
appropriately fund the nation's priorities while taking real steps to 
reduce and eliminate wasteful spending.
    Mr. Chairman, it is in that spirit that I welcome the opportunity 
to work with my colleagues to find a consensus on the role of Federal 
spending for this crisis. I trust we will be able to identify a 
responsible fiscal solution that fully funds all the integral, critical 
projects needed to help the Gulf region return to normal and, at the 
same time, keeps this government headed down the path of proper 
financial management and less government spending.
    That, Mr. Chairman, is how we can best ensure the continued 
freedom, security and prosperity for all Americans and all of our 
citizens affected by these terrible storms.
    I also, would like to thank Mr. Holtz-Eakin for taking the time to 
come before this Committee and give his insight on such important 
issues. Last week, President Bush, in an article from the Washington 
Post, floated the sweeping idea that all disaster response should be 
federalized, or at least a majority of it, and placed within the 
jurisdiction of the Department of Defense.
    Though I understand his thinking, I fail to see the wisdom behind 
such a plan. Oftentimes, while this nation is in the midst of a crisis, 
the Federal Government tends to go beyond the constitutional lines of 
federalism in an attempt to make things right. In the end, these 
movements can be helpful, but usually it is at a detriment to state 
sovereignty or power.
    I am fearful that if Congress were to enact this plan, it would 
place yet another strain on our nation's military forces, which are 
already performing so admirably under the current stresses.
    Beyond issues of posse comitatus, if we were to place the burden of 
disaster relief on our armed forces, can you provide an idea of what 
level of additional funding would be required to equip them for such a 
mission? Would more resources be needed for this type of involvement? 
And finally, what levels would our troop forces have to be at in order 
to handle such a request?

    Chairman Nussle. Director Holtz-Eakin, your entire 
statement will be made part of the record at this point as 
well; and you may proceed to summarize your testimony as you 
see fit. Welcome back to the committee.

 STATEMENT OF DOUGLAS J. HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL 
                         BUDGET OFFICE

    Mr. Holtz-Eakin. Well, thank you, Mr. Chairman, Mr. Spratt, 
members of the committee, first and foremost for taking a 
moment to recognize the service of Bob Sempsey who left behind 
a legacy of quiet professionalism and indeed worked at the CBO 
up to days before his unfortunate passing. Recognition of that 
type means a great deal to his family and to the staff at CBO, 
and I thank you for it.
    We are pleased to have the chance to be here today to be of 
assistance to the Budget Committee in this important area. 
Katrina and Rita are devastating and tragic events for the 
families in the areas affected, and they raise important 
questions about the scale of economic damages, about the 
overall path of the U.S. economy, about private sector and 
Government capacity for relief, recovery and restoration of 
economic activity, and about the ongoing role of such efforts 
in the budget and policy process; and it is entirely 
appropriate that this committee be the committee that addresses 
these, as all of these issues will run directly through the 
U.S. budget.
    We have submitted a fairly lengthy written statement for 
the record. We hope that the committee finds it to be valuable 
in its work. I will touch on three pieces of that written 
testimony in my remarks and then look forward to the questions 
that the committee might have.
    The first is to simply recognize that these hurricanes, 
Katrina and Rita, are unequivocally bad for the U.S. economy. 
There is destruction of lives, destruction of personal 
property, homes, the capital of businesses and governments. 
But, nevertheless, they are not so damaging that we cannot 
anticipate that the overall economy will weather this 
particular setback and that recovery will likely take place 
within a year. However, in the aftermath of these events, 
overall economic risks are heightened and monitoring the path 
of the economy is far more important.
    The second key thing I guess I would emphasize is that, 
going forward, the issue is economic growth, particularly in 
the affected regions and that the standard environment of 
incentives for private sector growth remains in place, that 
financial flows from the private sector in the form of 
insurance and loans and equity investments will be drawn to 
profitable activities. There are existing authorities for 
government financial flows to support the necessary public 
spending and infrastructure, and that economic growth does not 
have to be rethought in its broadest sense in this area, it 
needs to be allowed to continue.
    And that, finally, Katrina and Rita are uniquely large in 
their scale and the dispersion, especially, of their impacts, 
but natural disasters are not unusual. Indeed, anticipating 
disasters can be part of the regular budget process, even more 
than it is now. Policies that support recognition in the budget 
not only can appropriately guide trade-offs for the Congress 
but also can move past paying in the aftermath to mitigating 
the overall scale of the economic damages and lowering their 
costs in the future.
    So let me touch on each of those three and then take your 
questions.
    We have now put out two interim updates of the impact of 
the hurricanes on the U.S. economy. I won't belabor the 
mechanics of those. We have some slides that we can show first 
which summarize some of the impacts that are in the written 
testimony and which reflect the letters we wrote, in particular 
to the chairmen of the House and Senate Budget Committees.
    Hurricanes do several things. The first are there are 
direct losses. There are direct losses in the form of lives; 
there are direct losses in the form of capital. The total 
destruction of capital, to the best of our ability to guess it, 
is between $70 billion and $130 billion; in value of housing 
destroyed, something that looks like on the order of $20 to $30 
billion, about a quarter of the losses; the destruction in the 
energy sector, something that is on the order of $20 billion to 
$30 billion, about 25 percent of the losses; for other private 
sector businesses, destroyed plant and equipment is another 20 
to 25 percent of total losses; destruction of government 
capital, buildings, roads--all of the things that are the stuff 
of the public sector--is about 20 percent of the losses, on the 
order of $13 to $25 billion; and destroyed household goods, 
autos, and personal consumer durable goods are about 5 percent 
of total losses. So one of the things that happens is that 
there is a tremendous loss in wealth, and the economy is worse 
off as a result.
    Economic activity is also impeded directly, and some of the 
impacts that one sees in this chart are losses directly in 
energy production and as a result of the loss of the housing 
stock. You lose the housing services, although they can be 
replaced somewhat if you can go live in another location. There 
is about a billion dollars, a little more than a billion 
dollars in estimated agricultural losses.
    There are all sorts of things which impact directly in the 
region and lower national output. The national impacts derive 
from the impacts of these disruptions on two key national 
networks. The transportation network appears to be the lesser 
of the two impacts at this point.
    Transportation has been restored to the Mississippi, 
although not all of the port facilities are yet fully 
operational by any means, the notable damage being in the Port 
of New Orleans; and there are damages to the highway networks 
and to the rail networks that apparently will not lead to 
national interruptions of any sort but will slow down 
deliveries and make them more costly to be sure.
    Much of the attention has focused properly on energy 
impacts and the simultaneous loss of production facilities in 
the gulf. Hurricane Rita turned out to be more damaging in that 
regard it seems, with losses of refineries and pipelines and 
especially the power that runs them, and with the interruption 
of both production and the distribution of natural gas.
    Those impacts spread more broadly in the economy, raising 
energy costs to consumers and business purchasers as well. The 
net effect of all of this appears to be something that knocks 
down the economy directly in the third quarter by a full 
percentage point to a percentage point and a half in terms of 
its overall economic growth.
    Then some of the natural recovery mechanisms kick in. These 
are the rebuilding of houses, which boosts construction 
spending, and the purchase of business equipment to replace 
what is lost, which is the natural process of investment to 
rebuild the lost capital stock, and which will reduce, to some 
extent, the job losses. The guess is somewhere between 360,000 
and 480,000 jobs were lost because of these events. The 
reconstruction and rebuilding activities will tend to produce 
some recovery there.
    Under a set of assumptions--which have some risk--that 
roughly half of the insurance claims get paid out in the 
private sector to provide some financing; that the Government's 
about $10 billion of relief and recovery financing flows in; 
that gasoline prices ultimately recover to being only about 10 
percent higher than they were before Katrina struck, and that 
the rebuilding is not greatly delayed, that it is largely 
delayed only in the areas of great flooding, especially New 
Orleans, these other parts of the mechanisms might actually 
outweigh the negative impacts so we break even in the fourth 
quarter and actually start to grow faster than we might have 
otherwise expected early next year, getting the economy back to 
trend somewhere early in 2006. The message there is that this 
is an important event for the national economy but not an 
overwhelming one and that policy, as a result, ought to be 
focused on the appropriate response in the regional areas, not 
for the Nation as a whole.
    Are there risks here? Obviously. All of the risks are 
heightened. We have a much more fragile energy sector than we 
did prior to the hurricanes, consumers are less confident than 
they were prior to the hurricanes, and our scenario relies 
heavily on a relatively quick fall-off in these retail gasoline 
prices. That appears consistent with the pace of refinery 
recovery. It is important that this not turn out to be a very 
large crude oil event. That does not seem likely. The U.S. Gulf 
production is only about 2 percent of the world market.
    The hurricanes will have substantial impacts in the natural 
gas market for a while to come, and those will feed into 
electricity prices. So there are impacts that will last a 
while, but it is our expectation that those negative impacts 
will be outweighed by the positive impacts of the rebuilding 
effort.
    In that horse race between the negative impacts including 
the confidence of consumers and the rebuilding effects 
including the investment of businesses, it is important to 
remember that we do not have to decide the horse race now. 
Indeed, the Federal Reserve has the ability to monitor the 
evolution of the economy and adjust its policy accordingly. 
Everything that we have done assumes that they are on 
autopilot, and that is particularly unrealistic.
    So that is the quick version of the economic impacts as we 
know them today, and I emphasize that all of this is subject to 
a lot more learning as we find out more about the damages 
themselves and the pace of the rebuilding in the area.
    The second major point is that the recovery effort, the 
natural response of the economy to grow, to replace lost 
capital, to acquire more capital, and to generate jobs, does 
not require a major reexamination of Federal policy toward 
national economic growth or even regional economic growth. This 
is unique in its scale. It is unique in the dispersion of the 
evacuees.
    But investing in new capital, raising the standard of 
living and creating jobs are things that the U.S. economy does 
as a matter of course. Financial markets will provide, through 
profitable activities in the gulf area, equity and debt 
finance. Those firms that bought insurance will receive cash 
flows that will aid the financing of that, plus they will have 
some internal resources to aid it, and the Government will 
provide support for the household sector in the form of relief 
and has done so through the efforts of the Congress. It has 
standing authority to provide lots of necessary public 
infrastructure.
    And, if we go to the next chart, it is important to 
emphasize that there are, in addition to moneys, standing 
authorities in many of the areas that are central to setting 
the groundwork for an economic growth recovery in the region. 
This chart is meant to be illustrative and not exhaustive, but 
across the top are the various programs and agencies of the 
Federal Government. Across the left side, moving down, are 
various activities that are central as one moves through time, 
from search and rescue and debris removal and temporary 
assistance to providing housing and public infrastructure and 
other parts of the recovery mechanisms such as business loans.
    One can see that there is a variety of agencies that have 
authorities in many areas. As a result, it is a matter of using 
the broad authorities of FEMA, which cover many of the 
activities that are important in this effort; the Small 
Business Administration, which can provide household and 
business loans that are subsidized by the Federal Government; 
Housing and Urban Development, which provides housing; the FHA, 
which can provide some forbearance on mortgages; emergency 
authorities in the highway area and cash and benefits in food 
stamps and Medicaid and unemployment insurance.
    Much of the authority has already been provided by the 
Congress; and, as both the chairman and Mr. Spratt noted in 
their statements, much of the financing, in the form of $60 
billion in the Disaster Relief Fund, for example, is available 
already at this time.
    So the third point I would like to close with is that these 
hurricanes are unique in some attributes, but disasters in 
general are not, and they can be included in the regular budget 
process and approached as a matter of policy.
    Families hopefully budget for disasters. They buy insurance 
and pay the premiums for that insurance, whether it be a 
homeowner's policy or an auto policy or a health insurance 
policy, which compete with other demands for the family budget; 
and they do it in that fashion when they put money aside in a 
reserve and that way give up other opportunities that they 
might have to spend that money. In each case, the budgeting 
process provides trade-offs between budgeting for disaster and 
doing other activities.
    The same can be done in the Federal budget. The chairman 
and Congressman Cardin had an approach several years back. At a 
small level, the annual appropriation into the FEMA fund 
constitutes exactly that kind of an activity.
    In the written testimony we lay out a variety of options 
that the Congress could consider and certainly would be 
interested in working with the committee on more detailed 
proposals in this area. In doing that, several kinds of trade-
offs become apparent.
    The first, and the one that is noted most frequently, is 
between disasters and other forms of spending--and certainly if 
disasters are the paramount issue of the moment--it is 
important that they be prioritized above other activities and 
vice versa, but doing it in a regularized fashion would also 
provide some consistency across disasters as well and thus 
achieve an objective of fairness in addressing the victims of 
each natural disaster in the same fashion.
    And, as laid out in the written testimony, it is also the 
case that policies can do more than write checks after the 
fact. Policies can mitigate the cost of disasters by providing 
appropriate incentives to lower exposure to economic losses in 
these areas.
    So I thank you for the chance for the CBO to be here today. 
Katrina and Rita are important events. We will learn more about 
them as time elapses. The Congress will have the opportunity, 
given the large appropriations that have been made already, to 
learn more about them before any further action becomes 
necessary.
    I want to echo, in closing, some comments made by both Mr. 
Spratt and the chairman in the opening remarks. Not everything 
has changed because of these hurricanes. It remains the case 
that the U.S. economy is strong and that, as a result, the 
future path of the U.S. budget will be determined by the policy 
choices of the Congress and the President and that, prior to 
these hurricanes and now in the aftermath, the U.S. budget does 
not line up over the long term and that commitments to spending 
are far outstripping the revenues on the books to finance them 
and that that issue remains as part of the ongoing work of this 
committee.
    Thank you for the chance to be here.
    [The prepared statement of Mr. Holtz-Eakin follows:]

     Prepared Statement of Hon. Douglas J. Holtz-Eakin, Director, 
                      Congressional Budget Office

    Chairman Nussle, Ranking Member Spratt, and Members of the House 
Budget Committee, thank you for offering the Congressional Budget 
Office (CBO) the opportunity to discuss the likely economic and 
budgetary impacts of Hurricanes Katrina and Rita. Those storms exacted 
a tragic toll from the people of Louisiana, Mississippi, Alabama, 
Texas, and Florida and their property. The hurricanes also 
significantly damaged the nation's near-term energy supply. At this 
time, the extent of the damage and the costs of recovery are still 
unclear, but it is evident that recovery in the Gulf region will entail 
the expenditure of billions of private-sector and taxpayer dollars. 
That prospect raises important questions about the character and scope 
of current recovery efforts and about how to prepare and budget for 
future disasters.
    My testimony will make the following points:
     Hurricanes Katrina and Rita have temporarily and 
significantly reduced the growth of national economic output, but the 
overall effects that recovery and rebuilding will have on economic 
activity may more than offset that drag by early next year. 
Nevertheless, a full recovery in the affected Gulf states will take 
quite some time.
     Actions pursued thus far by the Federal Government will 
push the Federal budget further into deficit for the next few years, 
largely because of the $62 billion appropriated for emergency 
assistance but also because of various temporary changes to tax rules. 
The ultimate impact of the hurricanes on the Federal budget will be 
determined largely by the actions of the Congress and the President.
     The scale and scope of the damage from Katrina and Rita 
are unique, but costly natural disasters are not. The Congress may wish 
to consider options to incorporate planning for such events in the 
regular budget process. That planning may help evaluate policies for 
reducing the costs of future disasters and budgeting in advance for a 
greater share of those costs.
    CBO's estimates of economic losses and impacts continue to evolve 
as new data and analysis become available. The estimates reported in 
this testimony are updates of those provided in CBO's letter to the 
budget committees dated September 29, 2005.

            Economic Losses from Hurricanes Katrina and Rita

    The economic effects of the hurricanes arise from the loss of life 
and the destruction of private and government capital stocks in the 
Gulf states. Hurricane Katrina destroyed considerable numbers of 
residential structures; consumer durable goods, such as motor vehicles, 
household furnishings, and appliances; and business structures and 
equipment, particularly in the energy and petrochemical industries. 
Hurricane Rita appears to have had a smaller impact on residential 
structures and consumer durable goods, but its damage to the energy 
industry may be as great or greater than Katrina's. The damage to 
capital stocks has temporarily reduced employment and the growth of 
income in the affected areas.

                            DAMAGE ESTIMATES

    The damage has not been completely surveyed, but it is widely 
agreed that Hurricane Katrina alone has caused more economic damage 
than any recent catastrophe in the United States. Estimates from Risk 
Management Solutions (RMS), a private-sector company that provides 
services for the management of insurance catastrophe risk, suggest that 
total losses--insured and uninsured--from both hurricanes approach $140 
billion, the bulk of which is due to Hurricane Katrina. Insured losses 
are estimated to range from about $40 billion to $67 billion, with 
recent estimates closer to the lower end of that range.
    Losses of physical capital total between $70 billion and $130 
billion, in CBO's estimation (see Table 1). That amount is smaller than 
the total RMS estimate because a portion of both the insured and 
uninsured losses that RMS reports reflect losses arising from claims 
under business-interruption policies as well as the costs of 
demolition, cleanup, and repairable damage.
    As time goes on, it may be possible to base estimates on the damage 
that stricken areas have actually experienced, but at present, such 
estimates are not available. Using the shares of capital by type (fixed 
capital and consumer durable goods) for Louisiana as a proxy for shares 
in the whole stricken area, about 25 percent of the damage will have 
been in housing, more than 45 percent in business structures and 
equipment, nearly 20 percent in public infrastructure (roads, bridges, 
sewer systems, and so forth), and almost 10 percent in consumer durable 
goods. Nearly half of the losses in business structures and equipment 
will have been in the energy industry.
    Housing. The extent of the damage to the housing stock remains 
unknown. The National Low Income Housing Coalition estimated the number 
of housing units damaged by Hurricane Katrina using data from the 2000 
census and the Federal Emergency Management Agency (FEMA).\1\ The 
number of housing units were matched by census block to FEMA maps that 
provided estimates of the proportion of units that suffered at least 
moderate damage. That calculation indicated that about 287,000 occupied 
housing units were lost or damaged. Of that number, 135,000 units in 
New Orleans were probably damaged by flooding. Hurricane Rita also 
damaged thousands of homes, but no reliable estimates are as yet 
available. Some other measures of the effects of the two storms 
indicate that more than 400,000 units were damaged, but it is uncertain 
how those estimates were derived.
---------------------------------------------------------------------------
    \1\ National Low Income Housing Coalition, Research Note No. 05-02 
``Hurricane Katrina's Impact on Low Income Housing Units'' (September 
20, 2005), available at www.nlihc.org/research/05-02.pdf.

     TABLE 1.--ESTIMATES OF THE VALUE OF CAPITAL STOCK DESTROYED BY
                       HURRICANES KATRINA AND RITA
                       [Billions of 2005 dollars]
------------------------------------------------------------------------
                                                                Range
------------------------------------------------------------------------
Housing....................................................     17 to 33
Consumer Durable Goods.....................................       5 to 9
Energy Sector..............................................     18 to 31
Other Private-Sector.......................................     16 to 32
Government.................................................     13 to 25
                                                            ------------
      Total................................................    70 to 130
------------------------------------------------------------------------
Source: Congressional Budget Office.

    CBO estimates that the value of the damage to residential 
structures--not including relatively minor, easily repairable damage--
ranges from $17 billion to $33 billion. Under an assumption that about 
300,000 units sustained at least moderate damage from the two storms, a 
comparison of the value of damage estimates with that number of units 
suggests damage in the range of roughly $58,000 to $108,000 per unit.
    The Energy Industry. Currently, about 90 percent of crude oil 
production and roughly 70 percent of natural gas production from the 
Gulf of Mexico are shut down because of damage to platforms and 
pipelines that bring those products to shore. (The Gulf's production of 
crude oil makes up about 2 percent of the world's supply.) After 
Katrina, the Minerals Management Service reported that the storm 
destroyed or caused extensive damage to 66 producing structures; 
initial reports indicate that Rita destroyed or damaged 41 more. 
Fortunately, most of the high-volume platforms that operate in deep 
waters and account for nearly half of the Gulf's offshore oil 
production appear to have escaped significant damage. However, one 
large platform, the Mars facility, which on its own accounts for 10 
percent of Gulf oil production, was damaged badly enough by Katrina to 
be out of service until early 2006.
    In the petroleum-refining sector, damage from the hurricanes has 
resulted in the loss of 3 million barrels a day of refining capacity 
(or nearly 20 percent of the nation's total capacity), but much of that 
disruption of activity seems to be related to flooding and power 
outages. Onshore losses of capital for refineries, petrochemical 
plants, natural gas plants, bulk terminals, and pipelines appear to be 
smaller than the offshore losses.
    The electric power industry in Texas and Louisiana incurred 
significant damage as a result of the two storms. Although power has 
been restored to millions of customers, nearly 400,000 in those states 
remain without power. The industry has already reviewed its losses and 
claims that the costs of repairing downed transmission towers, 
substations, and local power lines, as well as recouping lost sales 
revenues during the period, will total $2.5 billion.
    By CBO's estimate, capital losses in the energy-producing 
industries will range from $18 billion to $31 billion. Those estimates 
are based on a rough assessment of the value of firms' damaged 
structures. Capital losses in the energy sector appear to constitute 
about a fourth of total losses from the two hurricanes.
    Government Capital. It is difficult to estimate the storms' toll in 
damage to government capital, which includes drinking water and sewage 
treatment facilities, roads and bridges, airports, schools, 
courthouses, and other public buildings. The status of water systems in 
the affected areas is not well known, and there are no reliable 
estimates of the cost of repairing those systems. Similarly, estimates 
for the repair and reconstruction of other public infrastructure--such 
as major highways and bridges, locally maintained roads and bridges, 
and port infrastructure--range in the vicinity of $10 billion but are 
highly uncertain.
    Because estimates of losses of government capital are lacking, CBO 
has assumed that about 20 percent of the capital destroyed as a result 
of the hurricanes was government capital. (That percentage was chosen 
because it reflects the government share of the total capital stock in 
Louisiana in 2003.) CBO has estimated the value of the losses in 
government capital at between $13 billion and $25 billion.

               LOSSES SUSTAINED IN PREVIOUS CATASTROPHES

    The combined losses of Hurricanes Katrina and Rita are likely to 
surpass those from the costliest hurricane previously on record 
(Andrew) and the three costliest disasters in recent history (Hurricane 
Andrew, the September 2001 terrorist attacks, and the Northridge 
earthquake). The extent of the damage done by the two recent hurricanes 
suggests that recovery will also take longer than the recoveries from 
those other large catastrophes.
     Losses from Hurricane Andrew, a Category 5 hurricane that 
struck about 20 miles south of Miami on September 24, 1992, totaled 
$38.5 billion in today's dollars, $19.2 billion of which was insured. 
(Those losses include destroyed capital as well as other losses.) About 
two-thirds of the dollar amount of all claims--approximately $12.5 
billion--was paid to holders of homeowner's policies. Commercial 
policies accounted for most of the remaining one-third of insured 
losses.
     The losses from the terrorist attacks on September 11, 
2001, are estimated at $87 billion in today's dollars. Privately 
insured losses are estimated to total $35.2 billion and include $11.9 
billion in business-interruption losses, $10.4 billion in property 
losses, $3.8 billion in aviation liability, $1.9 billion in workers' 
compensation benefits, and $1.1 billion in life insurance payments. 
(Another $1.1 billion in property losses remains in dispute.)
     The earthquake that struck Northridge, California, on 
January 17, 1994, measured 6.7 on the Richter scale and resulted in 
damages of $48.7 billion in today's dollars. Of that amount, $18.8 
billion was insured. Claims under homeowner's policies constituted more 
than three-quarters of the total dollar value of the insured claims. 
Those claims might have been far more extensive, but only 40 percent of 
homeowners carried insurance coverage for earthquake damage.

                    INCOME LOSSES IN THE GULF STATES

    The losses in the capital stock have largely shut down economic 
activity in New Orleans and have hampered activity in parts of the 
other states affected by the hurricanes. Employment and wage income 
have fallen as have state and local tax revenues. As rebuilding efforts 
gain force and economic activity begins to recover, employment, 
incomes, and state and local revenues will also recover.
    Employment and Wage Income. Excluding people whose work was 
disrupted only for a few days, the combined direct effect of Hurricanes 
Katrina and Rita on employment was probably the loss of between 293,000 
and 480,000 jobs. Moreover, the two storms' effects on general economic 
activity mean that employment will be temporarily depressed--for the 
nation as a whole as well as in the stricken areas.
    Measuring the effects of the hurricanes on employment will remain 
difficult, even after the Bureau of Labor Statistics begins to publish 
data for September later this month. In particular, the bureau faces 
considerable problems in measuring employment in the storm-damaged 
areas. The effects of Rita will not be reflected in the data for 
September but should appear in those for October (which will be 
published in November).
    Direct Effects of Katrina. Between about 280,000 and 400,000 people 
lost jobs directly because of Hurricane Katrina. The lower bound for 
those job losses comes from the number of storm-related claims for 
unemployment insurance filed to date. The Department of Labor estimates 
that by September 24, a total of 279,000 such claims had been filed, 
but that number could go higher. (One potential source of future claims 
is workers who have so far remained on their employer's payroll, even 
though unable to work, but who may be dropped if the business does not 
recover quickly enough.)
    CBO based the upper bound of the job-loss total on information from 
the Bureau of Labor Statistics' report of data for 2004 (using the 
Quarterly Census of Employment and Wages). That report includes the 
number of establishments, total employment, and total wages in areas 
affected by Katrina, which can be used to estimate the jobs potentially 
at risk because of flooding and other damage and thus an upper bound of 
the storm's possible effect on employment. In the 86 counties or 
parishes designated by FEMA as eligible for both individual and public 
disaster assistance, employment before the storm totaled 2.4 million 
jobs (1.9 percent of the national total). In 2004, the wage bill for 
those counties, in which people may have missed a week or more of work, 
was $76.7 billion (1.5 percent of the national total).
    Workers in the areas that FEMA has identified as flooded and storm 
damaged are the most likely to experience an extended absence from work 
(or even to lose their old jobs permanently). According to the Bureau 
of Labor Statistics, in the fourth quarter of 2004, about 22,500 
business establishments within those areas employed roughly 373,000 
workers and paid $3.5 billion in wages and salaries. (Those wage data 
are also quarterly, not annualized.) Most of the at-risk employment in 
Louisiana is in flooded areas, whereas in Mississippi, virtually all of 
the potential job losses are likely to be attributable to damage rather 
than flooding. In addition, jobs located at some distance from storm-
damaged areas may also be at risk: about 265,000 workers were employed 
within half a mile of such areas in Louisiana and Mississippi--184,000 
of them in Louisiana. The upper-bound estimate of job losses of 400,000 
assumes that most of the roughly 300,000 jobs in flooded areas plus a 
fraction of those either in nonflooded areas or within half a mile of 
flooded areas will be lost.
    Direct Effects of Rita. Hurricane Rita's impacts on employment 
appear to have been considerably smaller than those of Hurricane 
Katrina. Within areas identified by FEMA as having been damaged by 
Rita, employment in the fourth quarter of 2004 totaled about 12,600 
jobs, with a wage bill for the quarter of about $115 million (not an 
annualized figure). Because information on unemployment insurance 
claims attributable to Hurricane Rita is not available, the 12,600 
figure represents a lower bound on the number of jobs at risk of 
prolonged disruption (although some of those workers are probably still 
being paid by their regular employers and others may have been hired to 
participate in cleanup activities). However, nearly 140,000 people were 
employed within half a mile of those damaged areas; under the 
assumption that half of those jobs are also at risk of prolonged 
disruption, CBO estimates an upper-bound impact on employment of 
roughly 80,000 jobs.
    Aside from those effects, the evacuation of more than 2 million 
residents from the Houston metropolitan area probably resulted in the 
loss of a few days' pay for some workers and reduced profits for 
employers who continued to pay their workers. (Such effects will not 
show up in the October employment data.) In addition, renewed flooding 
in portions of New Orleans and St. Bernard Parish might slightly delay 
the recovery from job losses attributable to Katrina, although it 
should have no impact on employment totals by the end of the year.
    Revenues of State and Local Governments. Data from the state of 
Louisiana are especially difficult to acquire, but that state is 
expected to face the most severe revenue problems of all of those 
affected by the hurricanes. Early information from Mississippi, 
Alabama, and Texas indicates that state general fund revenues may not 
suffer significantly as a result of the storms. Some local governments 
may confront more-serious difficulties because they face significant 
losses in their property tax bases a development that also raises the 
risk of defaults on their municipal bonds. Louisiana and Mississippi 
are working to help local governments make payments on their bonds.
    Louisiana officials are still gathering information about the 
storms' effects on the state's budget. Most unofficial estimates of 
lost revenues have ranged from $1 billion to $3 billion, a significant 
shortfall given that the governor's budget recommendation for 2006 was 
based on the assumption that state revenues would total about $12 
billion. Local governments, particularly that of New Orleans, have lost 
significant portions of their tax bases--notably, revenues from 
property taxes. About two-thirds of the population of Louisiana lives 
in areas that are now officially declared disaster areas. In the 
affected parishes, annual property taxes totaled about $1.3 billion and 
local sales taxes, about $1.8 billion; together, they accounted for 
about 70 percent of statewide tax collections.
    In Mississippi, the storms' net effect on the state's general fund 
over time is likely to be negligible. Despite the fact that about two-
thirds of the Mississippi population lived in an area that has now 
officially been declared a disaster area, initial reductions in revenue 
resulting from lost income and wages and some decrease in gaming 
activities are not expected to be as large as in Louisiana. Moreover, 
those reductions will be balanced by increased collections from income 
taxes, as cleanup continues and rebuilding efforts begin. Affected 
counties in Mississippi collect about $1 billion in property taxes.
    Although the Gulf coasts of Alabama and Texas were hit by both 
hurricanes, those states are not anticipating any long-term effect on 
revenues. The 10 counties in Alabama affected by the storms hold about 
18 percent of the state's population; in Texas, the affected areas hold 
about 4 percent. In those states, the primary effect on revenues will 
be reductions (if any) in income taxes as a result of lost wages.

             The Scale and Pace of Reconstruction Spending

    The overall pace of reconstruction after the hurricanes is likely 
eventually to be quite rapid, although significant delays and 
bottlenecks could occur in the rebuilding effort and insurance 
settlements in some affected areas could be somewhat slower than they 
have been in past disasters. Spending for rebuilding and replacing 
privately owned structures, equipment, housing, and consumer durable 
goods (that is, total private replacement and rebuilding) could rise to 
between $20 billion and $40 billion (in 2005 dollars, measured 
annually) by the first half of 2006. Almost a third of such spending 
would be in the energy sector; another third would be in residential 
construction. The rebuilding of government capital facilities would add 
to that reconstruction activity.

                                HOUSING

    The scale of the devastation from the two storms suggests that a 
substantial demand for construction services will emerge, but the 
problems associated with rebuilding in New Orleans will delay and 
perhaps mute that response. Although the speed of repair and rebuilding 
is always constrained by the availability of funds and workers, 
residential construction is likely to add about $2 billion (measured 
annually) to economic activity in the last half of 2005, CBO forecasts, 
and about $10 billion in the first half of 2006. Those numbers, which 
represent the midpoints of the range of CBO's estimates, cover all 
construction associated with the storms, regardless of where it takes 
place. (Some homeowners may not rebuild on their original site but 
instead use the insurance payments they receive to build or buy a home 
elsewhere.)
    The midpoints of CBO's estimates incorporate the assumption that it 
will take 3 years to fully rebuild the housing stock. A 2-year 
rebuilding period is commonly used in such estimates, but CBO used a 
more conservative time frame because the rebuilding of New Orleans 
poses unique problems. It appears that property insurance compensation 
(private and flood insurance) and various grants and low-cost loans 
will be timely enough to support such a pace of rebuilding.

                           THE ENERGY SECTOR

    Levels of oil and natural gas extraction may be lower than usual 
through the middle of 2006, but the bulk of the Gulf coast's pipeline 
and refinery operations will probably be repaired by the end of this 
year. The pace and scale of repairs will become clearer in the near 
future as assessments of damages to Gulf drilling and undersea 
pipelines become available. The largest offshore facilities may be able 
to resume operations in the next few weeks; if they can, oil and 
natural gas production from the Gulf of Mexico may average half its 
normal level for the rest of this year. Other offshore facilities will 
probably return to production during the first half of 2006.
    Operators of refineries anticipate that damage from the storms can 
be repaired within a few weeks, but that recovery will depend on the 
speed of the restoration of electric power. (Complete restoration of 
electricity service may require another month or more.) National 
refinery production may be reduced by roughly 10 percent, on average, 
for the rest of this year, but it is likely to be at 100 percent 
capacity by year's end. A similar pace of recovery is likely for the 
region's large number of petrochemical complexes, natural gas 
processing plants, and natural gas pipelines.

                            OTHER INDUSTRIES

    Restoration of damaged structures and equipment--known as business 
fixed investment in industries other than energy is also likely to 
stimulate economic activity. If the private capital stock is rebuilt in 
an average of three to 4 years (a standard assumption), such spending 
will add $5 billion to $10 billion to business fixed investment in 
2006, the bulk of which is likely to be purchased from domestic 
suppliers.

                               GOVERNMENT

    Much of the repair work to public-sector capital, such as the work 
on the I-10 Twin Spans Bridge across Lake Pontchartrain and the pumps 
for New Orleans, started immediately after Hurricane Katrina in order 
to facilitate rescue and recovery operations. Federal funding will 
contribute to the repair of roads and water treatment facilities, 
although the scale of public rebuilding will be much smaller than that 
of the private sector.

         Effects on National Output, Employment, and Inflation

    The economic effects of the destruction wrought by the two recent 
Gulf hurricanes will be more pervasive than those of previous 
hurricanes and will affect the nation's economic activity for the 
balance of this year and all of next year. Hurricanes Katrina and Rita 
were unique in the scope of their destruction, the disruption of energy 
supplies, and the dislocation of workers. The storms have temporarily 
reduced the growth of economic output, but the effects of rebuilding on 
economic activity may more than offset that drag by early next year.
    At this time, it is still too early to know the degree to which 
economic activity will slow this year and how quickly it may recover. 
Factors that will affect the speed of recovery are how quickly 
insurance and government payments are distributed, how quickly consumer 
energy prices decline, and how quickly rebuilding starts, in New 
Orleans and elsewhere. For example, if, during 2005, about half of the 
private insurance claims are paid out; if Federal relief and recovery 
spending totals about $10 billion (in the form of transfer payments and 
outlays for goods and services); if gasoline prices fall back to levels 
only about 10 percent higher than their pre-Katrina levels; and if 
rebuilding is only slightly delayed relative to the timing experienced 
in previous hurricanes, then the economic dislocation of the hurricanes 
is likely to be offset by the reconstruction effort by early next year.
            effects on the growth of gross domestic product
    The hurricanes' initial effects on economic output stem from lost 
production in the affected regions and the temporary spike that has 
occurred in energy costs. Looking forward, however, the impact of the 
hurricanes on the pace of production and income will depend on what 
happens to four major categories of spending: investment (in business 
structures and equipment, commercial structures, and housing); spending 
on consumer durable goods; government spending for goods and services; 
and other household consumption expenditures (see Table 2).
    CBO estimates that the hurricanes may reduce real (inflation-
adjusted) growth of GDP in the third quarter of 2005 by between 1 and 
1\1/2\ percentage points, but as cleanup and repair begin, the economy 
in the fourth quarter is likely to grow at a rate not much different 
from what it would have been without the hurricanes and possibly even a 
little higher. Real GDP growth for the two quarters together--that is, 
for the second half of 2005 as a whole--is likely to be dampened by 
about half a percentage point. By the first quarter of 2006, though, 
spending to repair or replace the capital stock (homes, business 
structures, and equipment) is likely to drive the level of output back 
roughly to its previous trend and to continue to add slightly to growth 
during the rest of that year.
    CBO's analysis does not include any dynamic feedback effects--that 
is, the tendency of increased spending in one area of the economy to 
increase incomes, and consequently spending, elsewhere. Such effects 
are likely to be small, particularly if the Federal Open Market 
Committee of the Federal Reserve does not alter its apparent plan to 
raise interest rates. (The Federal Reserve increased rates by 25 basis 
points, or a quarter of a percentage point, on September 20, as had 
been expected before Hurricane Katrina.)

                         EFFECTS ON EMPLOYMENT

    The storms' effects on employment include not only their direct 
effects (the loss of between 293,000 and 480,000 jobs in the areas 
struck by the hurricanes) but also the negative impact of the energy 
shock-induced reduction in consumer demand and the positive impact that 
will accompany cleanup and rebuilding. The boost in energy prices that 
arose largely in the storms' wake is tempering the growth of 
consumption and GDP nationwide. Higher energy prices will dampen 
employment growth as well, compared with what it would have been in the 
absence of Katrina and Rita. By contrast, the reconstruction activity, 
which has already begun, will spur a huge demand for workers by early 
next year.

               TABLE 2.--ESTIMATED NET EFFECT OF HURRICANE KATRINA ON REAL GROSS DOMESTIC PRODUCT
                                   [Billions of 2005 dollars at annual rates]
----------------------------------------------------------------------------------------------------------------
                                              2005               2006                    2007
                                         -------------------------------------------------------------
                                             2d Half     1st Half     2d Half    1st Half     2d Half
------------------------------------------------------------------------------------------------------
Energy Production.......................    -18 to -28   -8 to -10    -5 to -7    -5 to -7    -5 to -7
Housing Services........................      -1 to -2    -2 to -4    -1 to -3     0 to -2     0 to -2
Agricultural Production.................      -1 to -2           0           0           0           0
Replacement Investment..................       6 to 12    16 to 34    16 to 35    16 to 35    12 to 25
Government Spending on Goods and               6 to 10    12 to 18    14 to 20    10 to 16     7 to 11
 Services...............................
Effect of Higher Energy Prices on            -6 to -10    -5 to -7    -2 to -5    -1 to -3     0 to -2
 Nonenergy Consumption..................
Other Consumption.......................     -8 to -12    -2 to -4    -1 to -3    -1 to -3     0 to -2
                                         -----------------------------------------------------------------------
      Real GDP..........................    -22 to -32    11 to 27    21 to 37    19 to 36    14 to 23
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.

Note: This table is an updated version of a similar table published by CBO on September 29, 2005. The estimates
  for ``Replacement Investment'' have changed slightly since that time.

    On balance, it is likely that the pattern of employment over the 
next year and a half will follow the pattern forecast above for GDP. 
The storms' initial adverse impact on the national level of employment 
will fade over the next few months, as many employees return to their 
former jobs or find new ones. By early next year, the pace of 
reconstruction will probably cause the net effect of the hurricanes on 
jobs nationwide to be minimal. If, as appears likely, output bounces 
back by early next year to equal or exceed its previous trend, total 
employment will be similar to what it would have been if the hurricanes 
had not occurred, even though some of the people who lost jobs may 
remain unemployed for some time.

                          EFFECTS ON INFLATION

    Consumer prices will grow at a faster rate during the second half 
of this year than had previously been expected, CBO forecasts, 
primarily because of the increase in energy prices. However, inflation 
should revert to pre-Katrina rates in the first half of 2006, 
provided--as most analysts anticipate--energy prices ease and drop part 
of the way back to their levels before the hurricane. Higher prices for 
construction materials and higher energy prices, through transportation 
costs, will tend to temporarily increase growth in the prices of many 
non-energy-related goods as well as in airline, bus, and railroad 
fares.
    The direct, short-term effects of the hurricanes on the rise in the 
consumer price index for urban consumers (CPI-U)--that is, the effects 
stemming from the increase in energy prices--will be substantial. As a 
result of those direct effects alone, growth of the CPI-U between the 
fourth quarter of 2004 and the fourth quarter of 2005 may be almost 1 
percentage point higher than it would have been in the absence of the 
hurricanes. Nevertheless, inflation as measured by the CPI-U may be 
slightly lower than previously anticipated during 2006, as the effect 
of the hurricanes on energy prices dissipates.

   Government Activity and Authority for Disaster Relief and Recovery

    The public-sector response to disasters such as Hurricanes Katrina 
and Rita involves a mix of funding and personnel from government 
agencies at the federal, state, and local levels. Federal agencies 
respond to natural disasters under both standing authority and specific 
legislative direction.

                THE FEDERAL EMERGENCY MANAGEMENT AGENCY

    FEMA is the Federal Government's lead agency in responding to 
natural disasters. When emergencies occur, local jurisdictions are 
generally the first responders. But when a hurricane or other 
catastrophe overwhelms both the local and state governments, the 
governor can request that the President declare a ``disaster'' or a 
``major disaster.'' The President's declaration puts into motion long-
term recovery programs to help individuals, businesses, and public 
entities that are victims of the disaster. Authority to declare a 
disaster and provide relief is provided by the Robert T. Stafford 
Disaster Relief and Emergency Assistance Act (the Stafford Act).
    FEMA identifies two main categories of disaster aid under the 
Stafford Act: individual and public assistance. Individual assistance 
begins immediately after the President declares a major disaster. It 
may include providing housing, food, and other basic needs for survival 
and distributing funds to meet needs that insurance companies and other 
aid programs do not cover. Those may include the repair of homes, 
replacement of personal property, transportation, medical care, and 
funeral expenses. FEMA may also provide unemployment benefits and 
reemployment services to people who are not covered by other 
unemployment compensation programs, as well as assistance with rental 
or mortgage payments for as long as 18 months. The Stafford Act 
currently limits cash assistance to an individual or a household to 
$26,200, an amount that is adjusted annually for inflation.
    Public assistance consists of grants to state and local governments 
to help cover the cost of repairing, rebuilding, or replacing 
infrastructure. It may also support debris removal, emergency 
protective measures, and the provision of public services. Certain 
types of nonprofit organizations may also qualify for public assistance 
if they provide education, utilities, irrigation, emergency care, or 
other essential services to the general public.
    FEMA performs much of its work on a reimbursable basis; that is, it 
arranges for other agencies to provide goods or services and reimburses 
them for their costs. For example, state agencies usually administer 
disaster unemployment assistance, and FEMA often works closely with the 
Department of Defense and the Army Corps of Engineers to address a 
community's infrastructure needs.
    Over the past 50 years, the Congress has gradually expanded FEMA's 
authority under the Stafford Act, sometimes as a result of a specific 
event. For example, following the terrorist attacks on the World Trade 
Center of September 11, 2001, the Congress authorized FEMA to reimburse 
New York City for economic losses from reduced tourism, a cost that 
would not ordinarily qualify for reimbursement. FEMA also has broad 
discretion in how it administers programs under the Stafford Act, and 
after September 11, the agency expanded the eligibility guidelines for 
many of its programs.
    To date, the President has requested and the Congress has 
appropriated $62.3 billion in emergency assistance in response to 
Katrina. Almost all of that amount--$60 billion--was provided to FEMA's 
disaster relief account; as a result, some of those funds may be used 
if necessary for assistance in response to Hurricane Rita or other 
disasters. (That account also held about $2 billion in unobligated 
funds provided in previous appropriations.) CBO estimates that outlays 
from those supplemental appropriations will total about $30 billion in 
fiscal year 2006 and that most of the remaining money will be spent 
over the following 3 years. Although billions of dollars were obligated 
in September (that is, during fiscal year 2005), most of the checks are 
likely to be written in subsequent months. The bulk of the spending on 
reconstruction activities will occur over a period of several years.
    As of September 27, FEMA had obligated about $14.5 billion for 
activities related to Hurricane Katrina and had allocated another $3.8 
billion for obligation in the future. Of that $18.3 billion, $8.0 
billion has been allocated to housing assistance and the acquisition of 
manufactured housing, $3.5 billion has been committed to states in the 
form of goods and services for relief activities, and $3.5 billion will 
be used to reimburse other Federal agencies--in particular, the Army 
Corps of Engineers and the Department of Defense (DOD)--for their 
disaster relief efforts. (Those agencies have also received funding of 
their own: the Congress provided $400 million to the Corps and $1.9 
billion to DOD for costs associated with the deployment of military 
personnel in support of relief efforts, for the evacuation of military 
personnel and their families, and for short-term repairs to military 
facilities.)
    In addition to the disaster relief fund, FEMA also administers the 
National Flood Insurance Program. Premiums provide most of the 
resources to pay claims under that program, which also has the 
authority to borrow from the Treasury if those amounts are not 
sufficient. Shortly after Hurricane Katrina, the Congress increased the 
program's borrowing authority by $2 billion, bringing the total 
authority to $3.5 billion. Although CBO does not have sufficient 
information at this time to estimate the total value of the hurricane-
related claims that FEMA is likely to face, information from the agency 
about the amount of flood insurance in force in affected areas suggests 
that those losses will significantly exceed the sums currently 
available to pay claims. CBO expects that the agency will exhaust its 
existing resources quickly, bringing net outlays for the program to 
almost $4 billion. At that point, additional funding is likely to be 
necessary to enable the program to quickly pay outstanding claims.
    By one measure, the Federal Government has committed a historically 
high level of resources for relief and recovery from Hurricanes Katrina 
and Rita. The recent emergency supplemental appropriation of more than 
$60 billion is almost double the emergency supplemental appropriation 
provided for the September 11, 2001, terrorist attacks and more than 10 
times the emergency appropriation after Hurricane Andrew.

                   OTHER CONGRESSIONAL ACTION TO DATE

    In addition to supplemental appropriations for disaster relief, the 
Congress and the President have enacted a number of other laws to 
assist those affected by the hurricanes. The TANF Emergency Response 
and Recovery Act of 2005 (Public Law 109-68) provides additional funds 
to states that were damaged by Hurricane Katrina and those that are 
hosting evacuees from the hurricane to provide benefits to needy 
people. That legislation will cost about $400 million, CBO estimates, 
mostly in 2006. The Congress and the President have also enacted laws 
authorizing flexibility in the use of disaster aid for displaced 
workers, changes to student loan programs, and priority funding for 
programs to aid individuals with disabilities. Much of the costs of 
those activities will be paid for with previously appropriated funds, 
but about $260 million will flow from the reappropriation of funds that 
otherwise would not have been spent.
    The Katrina Emergency Tax Relief Act of 2005 (Public Law 109-73), 
which was enacted on September 23, provides tax relief in a number of 
ways to businesses and individuals. The Joint Committee on Taxation 
estimates that the law will reduce revenues by about $6 billion, almost 
entirely over fiscal years 2006 and 2007. The provisions with the 
biggest effects on revenues allow taxpayers to deduct more personal 
property losses from taxable income, allow taxpayers more time to 
replace damaged property without being assessed income taxes on the 
insurance proceeds, and allow businesses and individuals to deduct more 
charitable donations from taxable income.

           THE ROLE OF OTHER FEDERAL DEPARTMENTS AND AGENCIES

    A number of other Federal agencies can and do assist individuals, 
businesses, and local governments affected by a disaster.
    Loans to Individuals and Businesses. The Small Business 
Administration (SBA) makes subsidized loans to residents and businesses 
in a disaster area. Homeowners may borrow up to $200,000 to repair or 
replace their home, and SBA provides loans of up to $40,000 to renters 
and homeowners to cover losses to personal property, such as clothing, 
appliances, and furniture. SBA provides loans of up to $1.5 million to 
businesses to cover damages to their physical property, and the agency 
also lends money to businesses that have suffered economic injury as a 
result of a disaster and need help paying their bills or meeting 
operating expenses.
    In 2005, SBA's disaster loan program received a supplemental 
appropriation of $501 million, and the President requested $83 million 
for fiscal year 2006. In the Federal budget, entries for such funds 
reflect the net value of the Federal subsidy over the life of the 
loans. CBO estimates that the appropriated credit subsidy provided for 
2005 will support a total loan level of $3.9 billion.
    Temporary and Permanent Housing. Following past disasters, the 
Congress has transferred FEMA resources or appropriated new funding for 
the Department of Housing and Urban Development (HUD) to assist 
individuals in their transition from emergency shelter to permanent 
housing options using existing HUD programs. Individuals may receive 
direct assistance through the Section 8 housing choice voucher program 
or through public housing, and states may use funds from the community 
development block grant (CDBG) and the HOME Investment Partnership 
programs to repair damaged homes and finance long-term redevelopment. 
After the five hurricanes in August and September 2004, for example, 
HUD provided $26 million in emergency funds to repair public housing 
units, $10 million to repair housing units for the elderly and the 
disabled, $40 million in additional Section 8 vouchers, and $16 million 
to relocate displaced families. In addition, the Congress appropriated 
$150 million in additional CDBG funds for states.
    A presidential disaster declaration allows the Federal Housing 
Administration (FHA) to call for a 90-day moratorium on foreclosures of 
FHA-insured mortgages. The agency may also encourage FHA mortgage 
lenders to offer special forbearance to affected borrowers and may 
relax its underwriting guidelines to permit disaster victims to qualify 
for certain loan programs that provide 100 percent financing for the 
cost of reconstruction or for replacement residences when residences 
have been destroyed or severely damaged by the disaster.
    Rebuilding or Repair of Roads and Bridges. State and local 
governments receive assistance for rebuilding roads and bridges that 
are part of the Federal-Aid Highway system through the Emergency Relief 
(ER) program of the Federal Highway Administration (FHWA). The ER 
program has direct spending authority of $100 million per year; 
however, the FHWA currently reports about $124 million of unfunded 
requests for aid through the program and anticipates that additional 
requests--not including those related to Hurricanes Katrina or Rita--
will total more than $500 million. Currently, the FHWA has no estimate 
of how much the damage caused by those hurricanes will add to its 
backlog. The recent highway act (Public Law 109-59) authorized the 
appropriation of additional sums as necessary for the ER program, 
although to date, no additional funds have been appropriated. In 2005, 
the Congress appropriated $1.2 billion for that program for emergency 
expenses resulting from the 2004 hurricanes.
    Restoration of Public Water Systems. The Department of Agriculture 
has two programs for rebuilding public water systems after disasters. 
The Emergency Watershed Protection Program provides funds to state and 
local governments to remedy emergency situations in local watersheds 
that present substantial danger to the public health. Spending is 
dependent on emergency supplemental legislation. In 2005, Florida 
received $120 million to repair damage and remove watershed debris 
caused by the 2004 hurricanes. Funds from the Emergency and Imminent 
Community Water Assistance Grant Program are available only to rural 
areas; the Congress appropriated $23 million in 2005 for such grants. 
In addition, public water facilities receive loans from state revolving 
funds that are eligible for grants from the Environmental Protection 
Agency, and some of those loans may be available to repair hurricane 
damage.
    Cash Benefits and Other Assistance. The Federal Government operates 
assistance programs that automatically respond in emergencies to the 
loss of income and other services, and many agencies have the authority 
to waive certain program requirements in the event of disasters. The 
loss of employment in areas affected by the hurricanes will result both 
in emergency unemployment benefits paid through FEMA (as mentioned 
above) and increased claims for regular state unemployment benefits, 
which CBO expects could reach $600 million in the coming months. 
Likewise, emergency Food Stamp assistance is available through at least 
October, and school children dislocated by the storms will receive free 
school lunches and breakfasts through the child nutrition program 
regardless of whether they had to pay some or all of the costs of meals 
before the storms. Higher expenditures for Medicaid in the coming 
months can also be expected because the employment and income losses 
resulting from the storms will increase the eligible population.
    Some Federal agencies can waive program rules for a limited period 
after a disaster. For example, in 2004, the Secretary of Education 
announced a policy of forbearance regarding interest on student loans 
for borrowers affected by hurricanes and other catastrophic events. For 
some assistance programs, rules for documenting and verifying the 
income and resources of applicants have been loosened pursuant to 
existing administrative authority.
    The effects of the hurricanes will also be felt by recipients of 
the major cash benefit programs. The surge in energy prices will 
increase consumer inflation for September and as a result boost the 
annual cost-of-living adjustments to those programs' benefits in 
January 2006 by perhaps 0.3 percentage points. Such an increase would 
increase spending in 2006 by $1.6 billion.

                      STATES' EMERGENCY RESOURCES

    Like most states, those affected by Hurricanes Katrina and Rita 
have procedures for funding disaster assistance programs that parallel 
current Federal practices; that is, state legislatures typically 
appropriate small sums to emergency-response accounts annually. None of 
the states provides funding in advance for those accounts at a level 
sufficient to cover large-scale emergencies, a practice that reflects 
the expectation that the Federal Government will step in to help when 
large-scale disasters occur.
    States tend to plan for two types of fiscal emergencies: economic 
downturns and natural disasters. States establish a variety of 
contingency and emergency accounts (referred to in one state as the 
Stormy Day Fund) to prepare for unforeseen disasters, either natural or 
man-made, which can occur at any time. The purpose of those accounts is 
to earmark money for emergencies or other unanticipated or hard-to-
estimate one-time expenditures that may occur within a given fiscal 
year. For the most part, the amounts allocated are relatively small, 
requiring the governor to go to the state legislature in the event of a 
large-scale emergency. Occasionally, a governor has the emergency 
authority to bypass the legislature entirely and borrow from almost any 
other state budget account. In Louisiana, for example, policy states 
that funds for disasters and emergencies are always to be available; 
the governor, in effect, has the authority to borrow from any 
appropriated funds to address an emergency.
    The amount of money that states commit to emergency accounts varies 
greatly, ranging from a few hundred thousand dollars to several hundred 
million dollars. Louisiana has an Interim Emergency Board fund into 
which up to 0.1 percent of total state revenue collections can be 
appropriated. For fiscal year 2005, the fund contained $15.5 million. 
The state also has an Oilfield Site Restoration Fund, which contained 
$8.4 million in 2005, and an Environmental Trust Fund, which contained 
$69 million.
    Mississippi does not have a statutorily created emergency fund; it 
does, however, have an Emergency Management Agency that administers a 
disaster relief fund. In fiscal year 2005, the Emergency Management 
Agency's budget was just under $1 million, and the Disaster Relief fund 
contained about $1.6 million. The goal in most states is to have enough 
money in those types of emergency accounts to provide the necessary 
match for Federal disaster assistance.

             Government Policy and the Response to Disaster

    September's hurricanes inflicted tragic amounts of human misery and 
loss of life. Together, they were unique in the scale and scope of 
dislocation, destruction of physical capital, and loss of income. 
However, investing in new capital and raising the standard of living 
are things that the U.S. economy does as a matter of course. The 
financial markets, as they always do, will steer debt and equity 
investments to profit-making opportunities. In addition, payouts on 
insurance contracts will serve as a source of funding for new 
investment as well as provide compensation for some of the lost 
capital. And given government support for necessary public 
infrastructure, as discussed above, many of those attractive investment 
opportunities will be found in the affected areas of the nation's Gulf 
coast. The effects of Katrina and Rita do not require a major 
reexamination of Federal policy toward national or regional economic 
growth.
    The magnitude of the Federal response to Katrina and Rita and the 
recurrent nature of natural disasters do raise related policy issues: 
the financing of current Federal assistance and budgeting for future 
disaster aid, and options for reducing the costs of future disasters.

               BUDGETING FOR RECENT AND FUTURE DISASTERS

    The Federal Government's additional spending for disaster 
assistance in the wake of Hurricanes Katrina and Rita will ultimately 
be paid for through some combination of reductions in other Federal 
spending and increases in tax revenues, either now or in the future. An 
important issue for policymakers is the extent to which payment for the 
current assistance should be made now rather than postponed through an 
increase in the deficit.
    Beyond that decision lies the question of how to budget for the 
costs of future disasters. Under current practice, most Federal funding 
of disaster assistance is provided through supplemental appropriations 
that are enacted as emergencies arise. Emergency supplementals require 
no offsetting rescissions (cancellations of previously provided budget 
authority) and are typically provided without lengthy legislative 
delays. Consequently, Federal assistance can be quickly provided to 
disaster victims and state and local governments. However, many 
analysts believe that current Federal budget procedures can lead to 
inappropriate evaluations of the trade-offs involved in providing 
assistance and can reduce incentives for mitigation and recovery 
efforts by state and local governments. Encompassing disaster aid 
within the regular budget process of weighing Federal spending 
priorities could lead to more-deliberate evaluation of standards of 
need and more consistent incentives for state and local governments and 
businesses to cover their losses.
    Federal budget procedures could make the real costs of current 
disaster policy clearer. One option--similar to the approach the 
Congress uses to fund Federal firefighting programs--would be to 
appropriate money for disaster programs in regular appropriation bills 
in amounts equal to the expected funding need for each program. (As a 
string of expensive emergency supplemental bills for natural disasters 
over the past 15 years demonstrates, spending on disasters has a 
predictable component.) Under such an option, unused funds would be 
available with no further action by the Congress when needs arose. 
Increasing regular appropriations would reduce, but certainly not 
eliminate, the need for emergency supplemental appropriations.
    Another option would be to use annual appropriations to create a 
rainy-day fund to cover future expenses for Federal disaster relief. 
Spending from such a fund could be made subject to further 
Congressional action when a need arose an important difference from the 
preceding option. Thus, the Congress could retain greater control over 
the use of the funds.
    Almost all states have some kind of contingency or emergency 
account; however, few provide funding in advance for those accounts at 
a level sufficient to cover large-scale emergencies. Furthermore, most 
states count on the fact that the Federal Government will step in with 
assistance when large-scale disasters occur. A major hurdle for the 
success of a rainy-day fund at the Federal level therefore would be to 
preclude the use of the fund for other purposes, as has happened at the 
state level.

     REDUCING THE BUDGETARY AND ECONOMIC COSTS OF FUTURE DISASTERS

    Policymakers may also wish to consider options to reduce the costs 
of future disasters. Although the underlying natural forces cannot 
always be controlled, it is possible to adapt investment strategies and 
economic activities to reduce the financial and personal toll such 
forces may exact.
    One goal calls for minimizing the sum of four types of costs 
associated with disaster risks: disaster losses, the costs of reducing 
those losses through mitigation (used broadly here to include 
preparedness and ``passive mitigation'' that simply forgoes risky 
activities), the administrative costs of reducing uncertainty through 
insurance, and the psychic costs of the remaining uncertainty. A second 
objective is to allocate disaster costs fairly.
    The two basic approaches for controlling the costs of future 
disasters--mitigation and insurance--work in different ways. Mitigation 
seeks to reduce injuries, deaths, and physical destruction by avoiding 
exposure to hazards, improving disaster resistance, and making plans to 
minimize losses after the event through timely and effective 
responses.\2\ By contrast, insurance does not reduce the damage caused 
by an event but spreads the costs of that damage to reduce the 
financial burden on the victims. To some degree, the two approaches are 
substitutes for each other: the more mitigation reduces exposure to 
risk, the lower the demand for insurance; conversely, the more complete 
the insurance coverage, the lower the incentive to undertake mitigation 
and avoid risky activity. The two approaches work best together when 
insurance premiums can be finely tailored to individual risks. In that 
case, policyholders who take effective mitigating action see the full 
financial benefit of their efforts through discounts in their premiums. 
Conversely, insurance prices that poorly reflect actual risks--
especially insurance that is subsidized, or even free--undermine 
mitigation incentives the most.
---------------------------------------------------------------------------
    \2\ However, mitigation can never eliminate all risks of loss from 
all sources, and a particular project may be counterproductive if the 
residual risk is not acknowledged and taken fully into account.
---------------------------------------------------------------------------
    Implicit or explicit insurance subsidies are a major feature of 
current Federal disaster programs. In the National Flood Insurance 
Program (NFIP), explicit subsidies are given to policies on structures 
built before the issuance of a participating community's flood rate map 
or before 1975, whichever is later (and not ``substantially damaged'' 
or ``substantially improved'' since then). Although those subsidies are 
not a factor in encouraging new development in flood-prone areas, they 
probably do tend to retard the rate at which residents and businesses 
move out of existing structures, thus keeping the level of risk and the 
likely cost of future disasters higher than they would be otherwise.
    Other Federal subsidies for disaster insurance are implicit, but 
they still have the effect of supporting risky behavior and 
discouraging mitigation. One example is assistance to individuals and 
businesses beyond payouts on flood insurance claims--for example, low-
interest reconstruction loans from the Small Business Administration. 
Another example is FEMA's Public Assistance program, in which the 
Federal Government pays a minimum of 75 percent of the eligible cost to 
rebuild public facilities owned by state and local governments, Indian 
tribes, and certain nonprofit organizations. Both of those programs 
effectively provide a form of unpriced insurance.
    A detailed analysis of the incentive effects and implications for 
efficiency and equity of current Federal programs and alternative 
policy options is beyond the scope of this testimony. However, three 
categories of available options can be sketched out.
     The government could try to promote efficient mitigation 
and risk sharing by looking for ways to strengthen the market for 
private insurance. Current regulation at the state level often keeps 
premiums below actuarially expected losses in high-risk areas to keep 
insurance ``affordable.'' In addition, Federal tax laws discourage the 
private provision of disaster insurance by not allowing the 
accumulation of reserves in advance of catastrophic events.
     The government could try to lessen the incentives it now 
provides for risky behavior. For example, it could phase out the NFIP 
subsidies on grandfathered properties, charge user fees for the 
implicit insurance it now provides to individuals and businesses in 
high-risk areas, or reduce the Federal share of costs in the Public 
Assistance program, particularly for projects to rebuild structures 
that would remain exposed to the high risk of damage in future 
disasters.
     The government could go beyond reducing disincentives to 
mitigation in its own disaster programs by providing more funding for 
mitigation or by imposing new mitigation requirements.

    Chairman Nussle. Thank you, Director Holtz-Eakin. Your 
testimony confirmed a lot of the work that you have been doing. 
You have kept in good touch with us in the Congress and the 
Budget Committees, and I appreciate the work that you and CBO 
have done to give us the information. It is not easy at all to 
make the kinds of predictions or judgments about how things are 
going in the midst of these disasters as they unfold, but you 
have done that, and they have been very helpful as we have 
moved forward.
    Your discussion of the family budget, it should not be all 
that revealing to us, but it really is, and it should give us 
all pause. Because we, as family members of this Federal 
budget, sitting around the kitchen table trying to decide as a 
family and as a Nation how to deal with this, no different than 
any family, are not allowed to just push their chair back from 
the table and walk away and say I do not like your plan. I do 
not like your ideas, or your plan is no good. If you want to be 
a responsible member of the family, you need to present your 
options.
    If you do not like the spending cuts, then tell us where 
you want to cut spending in other areas. If you don't like the 
programmatic performs, then tell us how you would reform the 
programs. If you don't believe any spending reductions are in 
play or necessary, than tell us how you are going to raise 
taxes.
    But to just look at the plan and to say it is no good--and 
I will admit, I put a plan on the table. I understand the first 
person to stick their head out of the foxhole is going to get 
shot at. That is fine, go ahead, but shoot with your options. 
Shoot with your plans, and your family budget discussion I 
think was an excellent one.
    Second, in just a brief response to my friend, Mr. Spratt, 
who talked about the difference between planning for and paying 
for Biloxi versus Baghdad. I could not agree more, which is the 
reason why we did budget for Baghdad, in addition to what I am 
suggesting now is budgeting for Biloxi, and it is a very 
serious effort.
    I was very frustrated with the administration's 
unwillingness over the last number of years to budget for what 
we believed--we at least had some inkling--was going to be the 
cost of the war; and that is the exact reason why we did budget 
for Baghdad. We have found the offsets in this process, as we 
have not only held the line on spending but we have put pro-
growth policies in place that got us $100 billion worth of 
savings as a result of growth in the economy from this year 
alone.
    So we have budgeted for the war on terror. It is not 
perfect, it is a down payment only. It is rare that you ever 
fully offset, whether it is emergency spending for natural 
disasters or emergency spending for wars that have occurred in 
our history, but we have made those plans. That is what we 
intend to do now.
    Let me direct you to a comment or a revelation that I have 
had that I am both surprised about, but I need some information 
on. That is, how is it that two-thirds of the money that has 
been dedicated to FEMA is sitting in their accounts? How long 
will that last? What is the spend-out rate, if you will? How 
long will this be enough to deal with the disaster itself?
    There are some who are suggesting--and possibly 
appropriately so--that there are resources available in the 
FEMA accounts to meet the needs of some of the Federal 
reconstruction efforts that will be necessary and certainly 
very appropriate under the Stafford Act for rebuilding as a 
result of what has occurred. Do you have any information or 
would you like to comment on that?
    That is the basic thrust of my questioning for today.
    Mr. Holtz-Eakin. The simple accounting of what has gone on 
is, of the $60 billion that was appropriated, about $14\1/2\ 
billion has been obligated, as of the latest data that we have, 
and that a little bit more has been allocated for obligation in 
the future. So a total of about $18 billion has been allocated. 
Of that, $8 billion has gone for housing purposes and about $7 
billion for relief and reimbursement of other agencies for 
relief purposes; and I think that is indicative of the kinds of 
things that one can expect.
    We anticipate that, overall, about half of the moneys will 
be spent out over the course of fiscal year 2006. So for every 
dollar that goes into the Disaster Relief Fund, half comes out 
in 2006. That is a bit above the historic rate, but we 
anticipate that would be appropriate in this circumstance, and 
that past the first year you might get, with less certainty, 
say, 30 cents, and then the remainder would fall out in the 
years to follow. That is because the money applies to many 
different kinds of activities.
    The direct assistance for housing families can get up to a 
bit above $26,000 over 18 months. That might go out a bit 
faster, but it is still a spend-out over a year or more. That 
is very different than the money that will go for 
reconstruction of infrastructure, where it is not even feasible 
outside of those areas where they had to restore infrastructure 
just to get in for relief. In most cases, it is not feasible to 
even get in and assess damage at this point. It will take much 
longer to assess, identify what will be built, hire people, get 
the construction projects going.
    It is a very slow process; and, for that reason, one should 
not expect those moneys to flow immediately out once they are 
put in the Disaster Relief Fund. They will be there. They will 
be available for a wide variety of needs. The money 
appropriated for Katrina was available for Rita, and it will be 
possible for the Congress to monitor the evolution of both the 
needs on one hand, as we find out more about the area, and the 
existing funding on the other hand.
    If it turns out to be the case that the money flows out 
faster than these projections anticipate, the Congress has 
shown that it can come back and move quickly to provide more 
funds. But I think it is sensible to use the guide of history 
and the guide of the kinds of activities to expect the money to 
go out over a fairly long period of time and to monitor it as a 
result.
    Chairman Nussle. I appreciate the very strong interest in 
attendance of members today coming back before votes this 
evening, and I respect them and appreciate that. I will save 
any more questions I have for the end, and Mr. Spratt is 
recognized for any questions he has.
    Mr. Spratt. Thank you, Mr. Chairman.
    Thank you, Director Holtz-Eakin, for your testimony.
    Let me ask you, based upon what you know now and what you 
know about previous disasters of this kind, can you extrapolate 
or estimate what the likely cost to the Federal Government will 
be for the Katrina disaster, in particular?
    Mr. Holtz-Eakin. I think that is one of the two most 
dangerous questions you can ask me. No, I cannot give you a 
scientific answer yet about the scale of the damages; and it 
will be a policy call in the end as to what fraction of those 
damages that the Federal Government will choose to use its 
powers to pick up. That is the truthful answer.
    What we know so far is that if one looks at other events--
the three I have are 9/11, Northridge, and Hurricane Andrew: 
The damages for 9/11 were, rough estimates, $87 billion; 
supplemental appropriations total were about $35 billion. 
Damages in the Northridge earthquake were about $50 billion; 
$12 billion in supplemental appropriations. Damages for 
Hurricane Andrew, about $40 billion; a little under $6 billion 
were supplemental appropriations.
    We have only guesstimates, as I said, about the damages in 
this particular event--combination of events, actually--$70 
billion to $130 billion for capital losses, but there could be 
other costs like debris removal; and there is about $62 billion 
in direct appropriations so far and some other legislation that 
is intended to provide help.
    So on both sides of that ledger I can give you some 
information, but I cannot tell you where we will end up. One is 
in the hands of the damage assessment, the other is in the 
hands of the Congress and the administration.
    Mr. Spratt. We hear the number $200 billion as a seat-of-
the-pants estimate, and I think that $200 billion means the 
total cost of Hurricane Katrina and not necessarily the Federal 
Government's share of that cost. That is the total that 
insurance companies must share and others. Do you have any 
light to shed upon that?
    Mr. Holtz-Eakin. We have tried to fairly carefully 
disentangle two kinds of losses. One kind of loss is just 
things that were in place and were damaged, buildings, and they 
are gone; and the second is losses of flows of income. Now they 
are not related obviously, but the wages that go away with the 
jobs and the profits that go away.
    The insurance companies often insure both, both the 
structure and business interruption insurance, you lose some 
business income. The insurance company estimates of total 
losses run a bit higher as a result. We have seen $140 billion 
as an estimate out of RMS, a risk management firm. There are 
some comparable estimates out of some of the other insurance 
groups.
    So estimates that include sort of a broader scope of things 
are north of ours, but they are all south of $200 billion, but 
all in the range of $150 billion, say.
    Mr. Spratt. Which would mean that the Federal share is 
likely to be under $150 billion itself then?
    Mr. Holtz-Eakin. Yes. Well, I mean, if the private 
insurance pays out part of that, the Federal share, what is 
over, over by definition, is well below that.
    Mr. Spratt. If we decided to have a 1 percent across-the-
board cut in discretionary spending and backed out defense and 
homeland security, which I think would probably be the 
formulation most likely, how much would 1 percent shaved across 
the board in the domestic discretionary accounts produce?
    Mr. Holtz-Eakin. We can get you the exact number, but it 
has got to be on the order of $4 billion.
    Mr. Spratt. About $3 or $4 billion. Not a great deal of 
money if you look at the magnitude of what we have got to do 
then.
    Mr. Holtz-Eakin. Small in comparison to these losses.
    Mr. Spratt. Back in August, when CBO came before us with 
its update of the budget and its update of the economy, we 
asked CBO to take that a step further and to adjust it for 
certain assumptions about likely actions by the Congress and by 
the administration. In particular, we asked you to assume that 
the tax cuts passed in 2001 and 2002 and 2003 for the most part 
would be extended when they expire--most of them in 2010, some 
before--and that other tax cuts on the administration agenda--
at least its agenda--at least of its July update mid-session 
review--would also we enacted.
    We asked you also to assume that the alternative tax will 
be fixed such that it didn't apply to more than the percentage, 
around 4 percent, of tax filers who now get affected by it. We 
asked you to take the President's budget, which applies the 
cost of Social Security privatization, partial privatization, 
in 2008 and 2009 and carry that out through 2015. And, finally, 
we asked you to plug into the forecast CBO's own model of what 
Iraq and Afghanistan are likely to cost, assuming a drawdown of 
troops after 2006 to a steady state of about 20,000 in each 
theater.
    I have got an electronic chart here that shows the impact, 
my point being that we had a serious problem before Katrina. 
Katrina worsens it, but the heart of the problem was there 
before Katrina. Katrina's worsening of the problem is not 
exactly marginal, but the problem was already extremely serious 
before Katrina hit us.
    Your estimate of deficit for this year was $331 billion 
when we close the books on September 30. You assumed that this 
would decline to $57 billion by the year 2015, but that rested 
on the various substantial assumptions that the tax cuts would 
not be renewed when they expired in 2010.
    We have gone back, using your projections, added in the 
President's budget, per your estimates. When we do this, we see 
that the total changes--and this is basically your study--are 
dramatic. The deficit of $331 billion per the assumptions that 
we used to adjust your forecast would grow to $640 billion, 
would double. Debt service is not shown on there, but it would 
grow from $182 billion this year to $458 billion in 2015, 
almost triple. The national debt held by the public would 
increase from $4.6 trillion to $9.2 trillion.
    Now those are the numbers before Katrina. What we have done 
since then is try to add to where you left off the likely cost 
of Katrina using, as I understand it, your spend-out ratio, 
your outlay ration. If you will just take a moment to look at 
that, can you tell us, does that look like it is in the ball 
park for what Katrina's likely input is to be? We have assumed 
$200 billion total cost to the Federal Government, which is a 
substantial assumption. You can whittle that back $50 billion 
and adjust the bottom line. But do those numbers like credible 
to you?
    Mr. Holtz-Eakin. Yeah. The only line that we have never 
really looked at is the one which is the additional to reach 
$200 billion. But the spend-out rate on what we have got over 
the first couple of years is about right, and the large patch 
of zeros to the right I think is the key way to think about 
this. Most of what is true about the budget before Katrina will 
be true after, because these are, in a budgetary sense, 
transitory.
    Mr. Spratt. But at the end of the period, instead of a $640 
billion deficit, we have a $655 billion deficit, still serious 
but still in the same ball park.
    Mr. Holtz-Eakin. Most of that is the debt service and will 
depend on how much is done, whether that $200 billion target 
you chose is appropriate or not.
    Mr. Spratt. Thank you very much, sir.
    Mr. Ryun. Mr. Chairman, thank you.
    First of all, I want to compliment you on having this 
hearing and also your leadership. I appreciate your willingness 
to look for and lead us on fiscal responsibilities. I know that 
I can subscribe to the same thing you feel, a difficult 
decision put off today only makes it more difficult tomorrow. 
We are talking about our children, our grandchildren, and the 
future of this country. So I thank you for your time.
    Mr. Director, my question relates to a call that I am sure 
that many of us have had in our offices. It relates to the cost 
of fuel in this country when we go to the gas pumps and pay a 
lot more than what we ever have before. As we look ahead to the 
winter heating oil, there is going to be a lot more expense 
involved in that. My question relates to what can we look at in 
terms of when this, the higher energy costs, might begin to 
change. And if you could respond in terms that the person on 
the street can understand, different indicators that if they 
see those changes coming, they might begin to feel some relief 
of some of these higher energy costs.
    Mr. Holtz-Eakin. I think the bills that people are paying 
attention to are their gasoline bill when they fill up at the 
pump; and there, you know, we are now running--instead of $1.80 
to $2, we are running north of that, somewhere at $2.75 or 
higher, depending on where you are. We anticipate that it will 
not go back entirely to the $2 level. We are expecting the 
damages to refineries and the gulf production to have impacts 
that last through early next year.
    So the first lesson is, not all of this goes away. Not all 
of it goes away quickly. But we expect a lot of it to dissipate 
over the next 3 months so that, beginning next year, the big 
bulk of the gasoline price impact has largely gone away. Not 
entirely. The heating oil is likely to be substantially higher. 
There has been a lot of attention paid to that. Most of the 
increase in heating oil is the derivative of the fact that oil 
is more expensive and most of that preceded Rita and Katrina. 
So that is true. One would not expect it to entirely reverse. 
The good news there, to the extent there is some, is that that 
is not the main source of winter heating in most of the 
country, it is a small fraction of heating.
    The third big impact is electricity. Underneath that 
natural gas, where natural gas powers electricity and natural 
gas as a direct heating source, natural gas prices are expected 
to remain higher.
    That I believe is the major energy event that has happened. 
Eighty percent of production of natural gas is domestic. It is 
very different than the large imports of oil, and we damaged a 
lot of our capacity to both produce and distribute it. So that 
is the bill to watch, and I think that will be the one that 
most people will notice as time goes on.
    Mr. Ryun. So you are saying maybe by next spring we might 
see some relief, but there is never going to be a return to 
some of the lower prices we have become accustomed to.
    Mr. Holtz-Eakin. I think oil and gasoline next spring is on 
a path where we would go back to something that looks like pre-
Katrina and Rita, maybe even lower for oil. For natural gas, I 
am far less confident in that.
    Mr. Ryun. I have a second question. I want to tag team off 
of what Mr. Spratt had to say. I know we are all concerned 
about the cost of Katrina and Rita. While you at this point 
cannot be pinned down--I understand that to a certain extent--
what I would like to have you do is respond to what you see as 
possibly a way to help control some of the costs by perhaps 
giving some incentives to the private sector, some things that 
might help control some of the costs. Because that is something 
that we are all concerned about. We want to be compassionate, 
but we also want to be responsible.
    Mr. Holtz-Eakin. I think there are two issues in 
controlling cost. The first is, for those events that have 
already transpired, Katrina and Rita, these are instances where 
one would like to rebuild at minimum cost, one would like to 
provide efficient financing, and to the extent that the 
standard mechanisms of bidding and oversight and good 
enforcement of contracts are brought to bear, that is the key. 
And that is very much what we would hope would be business as 
usual.
    I have another question, whether going forward there could 
be incentives in insurance markets, making them function a 
little better so that people would not put themselves in a 
position to suffer such exposed losses from other disasters. 
And that is a set of questions that we try to address at the 
end of the testimony.
    Ms. DeLauro. Thank you very much, Mr. Chairman.
    Thank you for being here today. Just a couple of comments 
and a question.
    First of all, I think the discussion around family budgets 
is appropriate except that when families do sit around and 
create their budget they are trying to deal with what 
priorities their families have and their budgets reflect those 
priorities. And I think quite frankly the American public takes 
a look at the Federal budget and gets a very clear indication 
of where our priorities are and how it is that we would spend 
their dollars.
    I would also add something to what Mr. Spratt said about 
the need for why are we offsetting the cost for Biloxi and not 
Baghdad, but in addition to that, other kinds of spending, 
ongoing military operations, Iraq, Afghanistan, the energy 
bill, the new tax cuts, none of which are offset. So that leads 
me then to my one or two questions.
    The other piece is given the $332 billion deficit, the 
third worst in American history, what sense does it make to 
increase the deficit by another $34 billion for big tax cuts 
for people earning over $200,000 a year? So does it make sense 
to consider freezing the estate tax at the current marginal 
rate and exemption level?
    As I understand it from your June report on this issue, 
with a 46 percent tax rate and an exemption rate of $2 million 
scheduled to take effect next year, only about 21,000 estates 
would have to file a return. But the revenue that would come to 
the treasury would still be more than $105 billion over the 
next 5 years, about half of what may be needed to pay for the 
Katrina cleanup. In contrast, full repeal of the estate tax 
would in 2010 benefit exactly 384 families in Louisiana, 
Mississippi, and Alabama, and would cost the Treasury almost $1 
trillion in foregone revenue and interest on the debt. Which of 
those two options do you see having the greater public benefit?
    Mr. Holtz-Eakin. This is the central question about the 
appropriate scale of offsets and the composition and it is the 
one that I will carefully not answer. I will do my very best to 
provide some guidance in how one might think about this. There 
have been a variety of principles that one might toss out to 
guide the search for offsets. One might be a rule that simply 
says I am an old-fashioned deficit hawk and the net increase on 
the deficit should be zero, full offsets somehow.
    Another principle that one might operate by and which I 
have heard people discuss is one that says, well, we should 
offset except for those things where the benefits do accrue 
somewhere down the line to our children. If there is a genuine 
infrastructure project that produces benefits over a long 
period, it might be appropriate to allow them to pick up a 
little bit of that but offset the rest.
    The third possibility which I have heard is this is a 
temporary economic event that should be addressed with 
temporary economic policies so you do not change permanently 
policies such as an estate tax in response to a transitory 
economic event. That says debt finance everything.
    That brings me to the second thing worth thinking about, 
which is that that kind of guidance assumes that the underlying 
budget starts from a position that on average balances and 
financing is put in place for the programs that the Government 
has undertaken, and that is not where we are. And so it may be 
the case that we will have to intermix the long-term process of 
getting the budget back into alignment with its objectives and 
the response to these transitory events.
    That is as best as I can give you a set of guidelines of 
how you might think about it without actually answering the 
question.
    Ms. DeLauro. Therefore, no answer to the question about 
another $34 billion through tax cuts for people earning over 
$200,000 a year. Does it make sense for us to go down that 
road?
    Mr. Holtz-Eakin. As you know that is a policy call and we 
seek to guide you with the numbers and their impacts and we 
hope it is useful.
    Ms. DeLauro. Quick question. Ahead, fiscal year 2007, the 
purpose of this hearing, the administration's budget includes 
no funding for 2006 for Iraq, or Afghanistan. Have you 
calculated how much future war spending may occur? If so, how 
much in 2007, how much over the 10-year budget window?
    Mr. Holtz-Eakin. Again we do not know for sure. As Mr. 
Spratt mentioned, we have tried to gauge the rough magnitude of 
scenarios which involve a continuation of the current level of 
forces in Iraq and Afghanistan and the support troops in 
surrounding states and a ramping down due to the acknowledgment 
that keeping that scale there over the long term is simply not 
sustainable. That ramping comes down to about 50,000 troops 
somewhere abroad by 2010 and remains at that level for the 
remainder of the budget window. If one takes that scenario at 
face value, outlays would total about $380 billion over the 
2006-2015 period. So some number like that seems appropriate 
for a continued involvement in a war of this type somewhere 
over the long term.
    Ms. DeLauro. Thank you very much. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Crenshaw.
    Mr. Crenshaw. Thank you, Mr. Chairman. Thank you for your 
testimony today. It seems to me that it has helped put our 
particular problem here in the Budget Committee more in 
perspective because while the hurricane devastated the region 
along the gulf coast, and being from Florida I can understand, 
we went through Hurricane Andrew, which up until this time was 
the largest natural disaster. And it certainly is awful and 
terrible as it relates to those localities and the local 
economies. But I guess you give us a ray of hope in the sense 
that because of the strength of our national economy, being the 
largest and strongest economy there is, $13 trillion, that we 
can handle from an economic standpoint a situation like this. 
And that is I think relatively good news that we have not seen 
long-term treasuries spike up. Most of the economic indicators 
are kind of still on track. I think you said that maybe we will 
expect economic growth to slow down maybe a half of percent 
this year but kind of get back on track.
    It has been pointed out that our public debt is going to go 
up obviously, but I read not long ago the Federal Reserve has 
said now we have about a $50 trillion net worth in terms of our 
families and our economies. So $4 trillion over $50 trillion is 
a pretty good debt to equity ratio, that we are handling that 
pretty well. But I still think that we are all concerned about 
the deficit.
    That is the one thing. The good news is the economy is 
strong and getting stronger, and it will have a little blip 
because of this. But still people are concerned about the 
deficit. And we cannot help but recognize that if we spend $60 
billion, which we have already done, and another $60 billion or 
up to $200 billion it will have an impact on the deficit.
    I guess the good news there is, as the chairman pointed 
out, just this year that estimate was reduced $90 billion. We 
are talking $330 billion deficit, which is about 2\1/2\ percent 
of GDP, down from maybe 4 percent. So if you add another $200 
billion it maybe goes back to up to 4 percent, but overall it 
is kind of well within the range.
    My question is kind of theoretical. Because I know being 
from Florida when we went through this kind of terrible 
disaster the local economies suffered, particularly in south 
Florida with Andrew, but there was a tremendous windfall in 
terms of sales tax revenues as the economy came back and all 
the building took place. I am sure you can quantify that in the 
region along the gulf coast that they will go through that 
cycle.
    My question is, is there any way that we can understand the 
investment that we will make at the Federal level, whether it 
is $60 billion, $100 billion, or $200 billion that is pumped 
back into the economies and in particular those local 
economies? Is there any way to quantify what kind of return on 
investment we might receive as a nation? Is that something that 
you can help us with?
    Mr. Holtz-Eakin. If it is a theoretical question I can give 
you a theoretical answer, yes. Now, actually doing it turns out 
to be pretty hard. There have been a large number of studies 
that attempt to look at the rate of return on Federal spending 
for capital projects, and they run into a variety of--they do 
not always produce particularly cheerful results, but they run 
into a variety of obstacles in getting the rate of return 
right. No. 1, there are a lot of things put in place which are 
not intended to produce economic benefits. They are simply 
meant to make people's lives better, and quantifying the degree 
to which people's lives are better is pretty hard. So you do 
not get the answer right from doing that.
    No. 2 is that there is a big difference between history and 
the future. The destruction that is evident from looking at the 
photographs suggests that the rate of return of putting some 
basic things in place down there is going to be very different 
than the same highway in some other location.
    And that brings No. 3, which is, is it the case that we 
have always spent our Federal capital dollars wisely? Have we 
chosen things in an economically efficient fashion to put them 
to the best bang for their buck? Well, I think most of the 
studies would suggest no, and that is an ongoing issue.
    Mr. Crenshaw. But you would say, for instance, in terms of 
some people would argue that the economic growth that has taken 
place as the economy has recovered is due in part to letting 
people keep more of what they earn, cutting corporate taxes, 
business taxes, that kind of has a positive impact. So some 
would say that is theoretical. Some would say that is pretty 
practical.
    Mr. Holtz-Eakin. It is far from theoretical that the key 
question is what are the incentives for a robust growth for 
economic environment. I think that there are--this is an 
economy that relies on the private sector extensively for that 
and it requires a bit of support from the government sector. 
And one of those places is putting in place the basic 
foundation in terms of both legal institutions and contractual 
institutions but also physical infrastructure to do the work, 
and getting that right is a key part of the job.
    Mr. Crenshaw. So the good news is at least theoretically 
that some of the money that we are spending now to solve these 
problems, there will be some sort of return on the investment 
which might help our economy grow?
    Mr. Holtz-Eakin. Yes.
    Mr. Crenshaw. Thank you very much.
    Chairman Nussle. Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman. I want to first thank 
Douglas Holtz-Eakin for speaking to the Nashville Rotary Club. 
I am sorry I was not there to personally greet you but I 
appreciate you making the effort.
    Mr. Holtz-Eakin. I was there the day Katrina hit. I hope it 
was a coincidence.
    Mr. Cooper. I think most Americans are getting more and 
more concerned about the deficit, and I think if there is a 
silver lining in the Hurricane Katrina it is that people are 
more sensitive to deficit issues than they were in the past. I 
think most Americans are looking for accurate information about 
the deficit, and I have run across a couple of things recently 
that I thought were interesting.
    One is from the Cato Institute, October 2005. The headline 
is ``Bush Beats Johnson,'' comparing the Presidents. It points 
out that President George W. Bush has expanded Federal 
nonentitlement programs in his first term almost twice as fast 
each year as Lyndon Johnson did during his entire presidency. 
So already President Bush is beating Johnson two to one and he 
still has most of his second term to go, so it could be a four 
to one margin.
    The one area in which President Bush is not exceeding 
Johnson's spending levels is in entitlement spending. But of 
course the new Medicare drug bill has not kicked in yet and it 
will start kicking in on January 1. As Senate Budget Committee 
Chairman Judd Gregg says, that bill is $43 billion over budget 
and it has not even started yet. Not a good omen.
    That is at the macro level. At the micro level more and 
more of my constituents are sensitive to earmarking projects in 
the Federal highway bill recently passed. There is an 
interesting article in today's Roll Call newspaper that looks 
at the last 50 years of highway bills and it says this: ``over 
the past 50 years there have been 9,242 earmarks in highway 
bills. Of these, 8,504, or 92 percent, have been inserted in 
the three highway bills enacted since Republicans took the 
House 10 years ago, 92 percent of all earmarks in the last half 
century just in the period in which our Republican friends took 
over the House of Representatives.
    Now, there are some very worthy efforts going on across the 
aisle. The Republican Study Committee (RSC) has Operation 
Offset. We appreciate that. But for folks back home it is 
results that count. I am going to be appearing with Senator 
McCain tomorrow in an effort that I think was pioneered by Mr. 
Flake on your side of the aisle to delay the Medicare drug bill 
for at least 1 year in the hopes that at least some of it could 
be paid for.
    I believe in Mr. Flake's estimate that alone would save 
about $40 billion, and since it is so hard to get a handle on 
the cost of these entitlement programs and, as I said, 
according to Senator Gregg that program is already $43 billion 
over budget when it has not even started yet, that would seem 
like a good area to begin looking for real savings. Because we 
all know that no matter how much you get highway earmarks cut 
or trimmed that is small potatoes in comparison to the numbers 
we are facing with Katrina or Iraq or other out of control 
areas of Federal spending.
    So I thought it might be useful for the committee members 
and the public at large to look at some of these things. I 
think the average member of the Rotary Club back home would be 
startled to think that George W. Bush was twice as liberal as 
Lyndon Baines Johnson at least in terms of domestic 
discretionary spending, maybe twice as liberal in terms of 
entitlement spending. That is a hard thing for a lot of folks 
to grasp. At least if the Cato Institute is right and they seem 
to have a pretty sound analysis here, that is the way things 
are heading.
    So to me it is not just a question of whether Harriet Miers 
is a conservative or not. It is becoming a question of whether 
this President is a conservative or not. Because, as you know, 
he is the first President since James Garfield in 1881 never to 
have vetoed a bill. He is the first President since John Quincy 
Adams to serve full terms never to have vetoed a bill. He is 
the first President since Richard Nixon to never have rescinded 
any spending. President Reagan rescinded 600-plus items. 
President Clinton rescinded over 163 items. But this President 
has rescinded zero items even though there are three 
congressional districts in the highway bill that got about $2 
billion in combined total. One congressional district alone got 
$760 million in the highway bill. That is a Congress that is 
spendthrift and out of control. I thank the Chair. I see that 
my time has expired.
    Chairman Nussle. Mr. Putnam.
    Mr. Putnam. Mr. Chairman, I am sure it will be of great 
comfort to people of the gulf coast to have the tutorial on 
presidential veto history, but let me ask you a question, Mr. 
Director. At the macroeconomic level in your report you touched 
on the inflation effects and the employment effects of 
reconstruction. But what you did not touch on and I am curious, 
because anecdotally we are hearing an awful lot at home about 
inflationary and employment pressures, as we see what was 
already a shortage of building supplies in the country, with 
steadily increasing prices as a result of the fact that they 
are petrochemical in nature, asphalt, shingles, things of that 
sort, and increased international demand; in other words, all 
the cement and copper and rebar going to China.
    Will this huge influx of construction needs in the gulf 
coast region put substantial inflationary pressures on the rest 
of the housing market, which has created I think half of our 
GDP growth in the last year, and what effect will it have on 
labor markets as skilled labor sees an opportunity and flocks 
to the gulf coast to be a part of the rebuilding efforts?
    Mr. Holtz-Eakin. The analysis is directly on the mark. We 
focused in our report on the broadest macroeconomic impacts, 
overall levels of consumer prices, overall levels of economic 
activity, touching only lightly on particular sectors. I do 
think we noted, at least I hope we have in this and in 
particular what we have in others, that the rebuilding effort 
will place particular pressures on the construction industry. I 
think the dynamics you described were exactly on the mark. One 
would expect the resources used intensively to become more 
valuable. You will see some pressure on prices there and you 
will see the skilled construction workers being in demand. I 
think that is exactly right, and it will in fact influence the 
pace of the reconstruction in the gulf area and it will 
influence building elsewhere.
    Mr. Putnam. Your report specifically says that by early 
next year the pace of reconstruction will probably cause the 
net effect of the hurricanes on jobs nationwide to be minimal. 
And the effects on inflation, you said higher prices for 
construction materials and higher energy prices through 
transportation costs will tend to temporarily increase growth 
in the prices of non-energy related goods as well as airline, 
bus, and rail, et cetera. You mention it but you make it sound 
like it is really not going to be that noticeable. And as 
somebody who had to wait 10 months to get a new roof after last 
year's hurricanes in Florida because of a shortage of materials 
and because these roofers have literally a 1-year waiting 
list--they have not caught up in Florida yet, and this is an 
exponentially larger event than what we had in Florida a year 
ago. Again, I am not taking issue with your numbers, but I have 
to believe it is more than a minimal or a temporary increase. I 
am curious to dig a little deeper with you on that.
    Mr. Holtz-Eakin. Sure. I think that you have said more 
clearly than we have the essence of the fact that these are bad 
for the economy. People's roofs are gone. The fact that there 
is money to be made putting them back on does not disguise the 
fact that people are worse off, and waiting 10 months for a 
roof is a bad thing. The essence of the numbers in the report 
is on average, across all States, across all industries, those 
doing better, those doing worse, what would be the national 
economic impacts and they are noticeable certainly in the next 
quarter or so, thereafter averaging out to be back to where we 
might have been otherwise and maybe a bit above. That does not 
disguise the fact that in some cases people will be 
demonstrably worse off, and there will be some long-term 
unemployment in the gulf coast from this. That will be an 
example. There will be people with long waits to get their work 
done. That is also true.
    To the extent that we have underestimated that mix, that is 
one of the risks in what we have done. I would acknowledge at 
the outset that the balance of how quickly some of this 
rebuilding gets done versus some of the other adverse effects 
is a key part of the risks.
    Mr. Putnam. Well, I agree that there is risk built into all 
of these models, but I am substantially more pessimistic than 
your report. I think we have already seen shortages of 
agricultural labor in California because of the movement of 
labor to the gulf coast regions who see opportunities 
inconstruction jobs. As I sit next to my friend from 
Mississippi, and I do not want to make it sound like I whine 
about waiting 10 months for a roof when these people do not 
even have a house, so you are faced with not one specialty in 
construction but entire new construction. With the inflationary 
pressures that means insurance dollars are not going to go as 
far. It means that everyone is going to see an increase in the 
price of goods, even housing markets in the Northeast or far 
West. And knowing what role housing has played in GDP growth, I 
think that is a real problem, but I appreciate your efforts.
    Chairman Nussle. Mr. Case.
    Mr. Case. Thank you, Mr. Chairman. Sir, what has amazed me 
just listening to the discussion from a fiscal stewardship 
perspective with respect to Katrina and Rita as we have sat 
through the last couple of years watching, I think, the worst 
and I guess, more importantly, the most avoidable deterioration 
in our Federal fiscal condition, maybe in our history, we were 
not going through a world war. We were not going through a 
classic depression. We were going through some difficulties but 
not anything that amounted to the kind of deterioration in our 
kind of fiscal situation that happened in some of those other 
situations, and we went through a series of tax reductions 
which starved revenue, which did not generate the projected 
dynamic impact. We went through, as my colleague Mr. Cooper has 
stated, one of the fastest accelerations in domestic spending 
in recent history. We went through the difficult fiscal 
conditions of Iraq and Afghanistan, and it took us somehow 
Katrina and Rita to approach a serious discussion of the 
budget. That is amazing to me, and that is a prelude to my 
question.
    Is there any fundamental difference between the budget 
balancing involved with Katrina and Rita versus the budget 
balancing that should have been involved with any of the other 
conditions that I have talked about over the last 4 years, 
whether it be Iraq, Afghanistan, whether it be an economy that 
did not come back faster than projected, whether it be the 
budgetary impacts of tax cuts? Is there anything fundamentally 
different going on here or did we just reach some point here 
when there seemed to be a critical mass of enough is enough? 
Are we in some different budgetary situation now just because 
of Katrina and Rita?
    Mr. Holtz-Eakin. There are things which are different and 
there are things that are the same. As I said to this committee 
before, I think if one looks backward from the vantage point of 
2003 or 2004, whatever you pick as the right date, look back at 
the big swing in the budget from about 3 percent GDP surplus to 
a 3-percent GDP deficit, a 6-percentage point swing, dramatic 
in its economics, it is hard to make the case that this was 
economically damaging. I know there is the policy fight about 
whether it is the right composition. But at a time when the 
world economy was weak and there were a whole variety of 
domestic shocks from Sarbanes-Oxley to 9/11, you can go through 
the list, I think the broad consensus is that swing did not 
damage the economy. It may have supported it at a time when 
there was not a lot of spending from other sources.
    That said, what is different now is that we are looking 
forward in a situation where we have a strong economy both in a 
cyclical sense, the impacts of the hurricanes notwithstanding 
in our view, and over the long term certainly, so that the 
budget is now being driven by policy decisions, and in that 
case I do think one thinks about it differently, the sustained 
large mismatch between spending and given the scale over 
decades, potentially worse. So that is different.
    What is the same is if you are looking forward and you are 
looking at spending outside of the normal process for Iraq, 
Afghanistan, Katrina, and Rita, no, they are not different. The 
policy tradeoffs are required. The same economic issues are in 
play and they are balanced.
    Mr. Case. From a perspective of the offsets of our 
colleagues in the RSC, my understanding at least, is just 
another form of the PAYGO debate limited to the spending side. 
Would that be a fair characterization? We have had this debate 
over PAYGO for a long time now. I have not heard a whole bunch 
of disagreement with PAYGO as a principle. Where the 
disagreement is, is what is on the table when you talk PAYGO. 
The interpretation I have of the offset proposals is it is a 
spending only PAYGO. If you have got to increase spending 
because of Katrina and Rita, not because of Iraq and 
Afghanistan, not because of anything else, we are going to 
focus on Katrina and Rita, then we are going to offset that by 
spending in other areas. That is just another form of PAYGO. 
Would you agree with that?
    Mr. Holtz-Eakin. I will be honest I have not read the 
particular document that lots of people talk about, so I will 
not characterize it. That notion of a PAYGO rule is one of the 
principles I have heard people talk about without labeling it 
that way, to have a net zero impact on the deficit.
    Mr. Case. Again getting back to the question of the cost of 
Katrina and Rita, I accept and understand your answer that you 
cannot project certain things. You cannot project what Congress 
is going to do. You cannot project how much of the insurance 
proceeds are actually going to be paid. You cannot project how 
much Congress will choose to make up. But there are things that 
can be projected with the costs of Katrina and Rita. For 
example, you made projections about the impact on the economy. 
When you talk about the impact on the economy, you are talking 
about impact on Federal tax revenues given the current tax 
scheme. Have you calculated out the impacts that can be 
reasonably predicted within a range of assumptions on Federal 
tax revenue losses? I assume it is not just if any. There are 
going to be Federal tax revenue losses on the cost of funding 
outright Federal obligations which are in existence today. For 
example, the chart you had up there on FEMA obligations that 
are not dependent necessarily upon direct additional Federal 
appropriations, on increased calls from State and local 
governments for assistance with Medicaid and TANF and just 
right down the list. Has there been any projection on the costs 
that assume we met those obligations, we would in fact have a 
dollar amount that we could affix to it?
    Mr. Holtz-Eakin. Yes, in some fairly incomplete ways. 
Certainly the impacts of the hurricanes on the economy have 
feedbacks to the budget. So for example, our guess is growth 
lower by a half a percentage point in the second half of this 
year. That has revenue consequences that look to be something 
on the order of $5 billion. Not a dramatic impact in a $2.6 
trillion budget, but it will have something to that effect. The 
damages also effect the ability to remit taxes so there has 
been some waivers and some money that would have come in this 
year that come in next year. There will be some things like 
that on both the tax side and on the spending side. Those turn 
out to be small compared to the other moneys that are at stake 
in the budget.
    Medicaid would be $1 to $2 billion, say, for the 700,000 
people that appear to be affected. The direct appropriations to 
the FEMA Disaster Relief Fund are $60 billion, $30 billion of 
spending next year. Those are the magnitudes involved.
    Mr. Case. So just a final question, Mr. Chairman. If we 
talk about the range that has been tossed out there, whether it 
is accurate or not, of $100 to $200 billion total cost, would I 
be correct in saying that most of those moneys would be the 
result of direct actions by Congress over and above the 
consequential loss of revenues and the vast majority is the 
decisions that we are going to make, affirmative decisions we 
are going to make in terms of funding Katrina and Rita relief?
    Mr. Holtz-Eakin. Yes, those will dominate the budgetary 
impacts and play out over a number of years.
    Mr. Case. Thank you.
    Chairman Nussle. Mr. Wicker.
    Mr. Wicker. Thank you, Mr. Chairman. It is always good to 
see the chairman allowing a little leeway in time to the 
questioner right before me. I have a question but I cannot 
resist responding to a couple of the things my friends across 
the aisle have said. I disagree that the tax cuts have starved 
the Treasury and have not had a positive effect on economy and 
on revenue, and I think that the chairman mentioned that when 
the chairman mentioned revenue had actually increased and that 
he was touting that fact at the last hearing we had. Indeed, I 
think tax cuts are responsible in large measure for that.
    My friend from Tennessee, Mr. Cooper, has had to leave the 
room. I will simply respond to what he had to say about the 
prescription drug benefit. I am almost certain the Democratic 
alternative to the Republican plan that was actually enacted 
was much more expensive than the law which we actually have in 
place. Similarly, I am impressed that there seems to be a 
willingness on the part of my colleague and friend to adopt 
some of the cuts that might be suggested by the very 
conservative Cato Institute. I would only hope that my friend 
from Tennessee can bring a few Democratic votes along.
    Finally, with regard to the idea of delaying for 1 year the 
implementation of the full rollout of the prescription drug 
benefit, I will congratulate Mr. Cooper on that and say that if 
he can get up a substantial number of Democratic votes for that 
idea I would be happy to join him on the floor and call the 
question. I would suspect that any delay in the prescription 
drug benefit would have to be done almost entirely by 
Republicans, and upon doing that this seemingly deficient 
prescription drug benefit that we have passed would start 
sounding better and better since it would have been Republican 
votes that would have postponed it.
    Nevertheless, I look forward to working with the gentleman.
    But my question is about homeowners and business insurance, 
Dr. Holtz-Eakin, and the very, very real problem that we have 
on the gulf coast with property owners who had no flood 
insurance, who did not think they needed flood insurance 
because they were not in a flood plain. Many of them had their 
property mortgaged. Many mortgagees did not require flood 
insurance of these individuals. Many of them had hazard 
insurance. As a matter of fact, many of these property owners 
had all of the coverage that a reasonably prudent person 
relying on Federal FEMA maps could have been expected to have 
under the circumstances, and yet they find that they are not 
covered because the damage is deemed to be flood coverage. In 
many cases that is subject to litigation but we know that in 
many cases that will be the case, Dr. Holtz-Eakin.
    Now, there is legislation that has been sponsored by some 
members of this committee entitled the Hurricane Katrina and 
Hurricane Rita Flood Insurance Buy-In Act. Are you familiar at 
all with that, Dr. Holtz-Eakin?
    Mr. Holtz-Eakin. I am not familiar with the specifics of 
it.
    Mr. Wicker. Let me tell you a little bit about the 
specifics. It would allow property owners affected by 
Hurricanes Katrina and Rita who did not live in places 
designated on the maps as flood plains but who did not have 
flood insurance, and who were then destroyed by water, to 
purchase coverage under the National Flood Insurance Program 
retroactively through the use of a buy-in. The property owner 
would be required to pay the equivalent of the national flood 
insurance premiums for 10 years with a 5 percent penalty, 
premiums to be set at a rate equal to the prevailing premium 
charged in the area. I can get you the details of that, but I 
think you get the gist of it.
    What would be the implications for the Flood Insurance 
Program if the Congress were required to pay for losses 
incurred by people who did not have flood insurance?
    On the other hand, what are the implications for the 
economy if these property owners are not in some way made whole 
for their losses? After all, they through no fault of their own 
relied on the Federal maps, had all the insurance that anyone 
could have been expected to have. What are the implications on 
the economy in general, on the banking and credit union 
industry, on property tax collections if we are not able to 
build those homes and businesses back, and what experience do 
we have based on other hurricanes that could be of benefit to 
us in trying to formulate some sort of fiscally responsible but 
fair and compassionate response to this terrible situation?
    Mr. Holtz-Eakin. Well, that is a good and very difficult 
question which I think probably we owe you a very careful 
answer for the record. Let me sketch briefly some of the issues 
that arise that we could flush out if you would like. The first 
is of course you ask what would be the consequences, and there 
would be budgetary consequences. I cannot do those in my head. 
We could try to work through that.
    The second would be the implications on an ongoing basis 
for an insurance program when people are allowed to buy 
insurance after the fact. That is not a particularly great set 
of incentives from an insurance point of view. That would have 
detrimental impacts on overall functioning of an insurance 
program. We could work through the details of that.
    Third is to recognize that insurance is not the only 
financial flow that can be used to allow people to recover from 
the loss of their home. There is self insurance which is 
saving; there is debt insurance; they can go borrow; and there 
are government loans. The Small Business Administration (SBA) 
provides loans to individuals as well as businesses. Those 
loans are subsidized by the taxpayers. And as usual when there 
are many policy instruments available, it is a mistake to rely 
on one, in this case flood insurance, to solve all problems.
    If this is an area where you would like a more detailed and 
careful answer we would be happy to work with you.
    Mr. Wicker. Yes, as a matter of fact, I would appreciate 
that. I would simply say to you and members of the committee 
that I have my questions about the legislation that I mentioned 
to you, although it may be an approach that I might take a look 
at later on. But I am working with insurance, business, and 
governmental experts in my home State of Mississippi and in 
other locations to try to devise some sort of recourse for 
these property owners who are in my opinion blameless in terms 
of getting all the insurance that they could possibly get which 
they could reasonably be expected to get, and yet are just 
found in a devastating position having lost basically almost 
their entire nest egg.
    So I would appreciate a comprehensive answer on the record 
and I will be happy to provide staff with your staff to work on 
this.
    Mr. Holtz-Eakin. Thank you very much.
    [The information referred to follows:]

           CBO Response to Congressman Wicker for the Record

    We can only guess at the Federal cost of the buy-in program. The 
amount of flood damage by hurricanes Katrina and Rita to structures 
that both lie outside FEMA's 100-year flood plains and were not covered 
by flood insurance is not known with any precision. A recent estimate 
of the total damage to the housing stock in Louisiana, Mississippi, and 
Alabama, both inside and outside of the 100-year flood plains, is more 
than $40 billion, with $17 billion of that damaged uninsured. Assuming 
that all of the uninsured loss was due to flooding and that the large 
majority was to homes outside the 100-year flood plains (because such 
homes greatly outnumber those in the flood plains and are less likely 
to have carried flood insurance), further assuming that the required 
payments (equivalent to 10 years of insurance premiums, scaled up by 5 
percent) would total less than $1 billion, and making some allowance 
for non-residential structures (which account for roughly 10 percent of 
flood coverage in force), the net cost of the buy-in proposal to the 
Federal budget would be in the range of $10 billion to $15 billion.
    As noted in the testimony, the buy-in proposal would undermine the 
flood insurance program. It would encourage at least some current and 
potential policy-holders to forego flood coverage, on the expectation 
that the government would provide a similar buy-in opportunity in the 
event their homes or businesses were flooded in the future. That 
encouragement would be strongest for property owners outside the 100-
year flood plains, who currently account for 30 percent of flood 
policies. However, those inside a flood plain also might forego 
coverage; some of them might simply be unaware that the program applies 
only to structures outside the flood plains, while others might 
anticipate that the eligibility requirements would be loosened in the 
future. Once the precedent for a post-event buy-in is established, one 
could argue for extending it on the grounds that the set of property 
owners who were not required to have flood insurance includes not just 
those outside the flood plains, but also those inside the flood plains 
who do not have federally-regulated or federally-backed mortgages. From 
there, one could argue further that it would be unjust to allow some 
neighbors to buy in after a disaster but exclude others simply because 
they had certain types of mortgages.
    The buy-in proposal also would undermine market incentives for an 
efficient allocation of resources. In this case, efficiency requires 
that property owners fully recognize and be expected to pay an 
actuarially fair price for the risks they assume. But if people expect 
another buy-in proposal or a similar program that indemnifies property 
owners after a future flood, they will be more likely to continue 
living in flood-prone areas and to undertake fewer mitigation projects 
to reduce potential flood losses. Consequently, the proposal would 
encourage excessive (relative to the assumed risks) development in 
flood-prone areas along the Gulf Coast and nationwide and discourage 
worthwhile mitigation efforts, both of which would raise the damages 
and hence costs of future floods.
    In the absence of any additional Federal aid for building repair 
and reconstruction, the $17 billion of uninsured losses would be borne 
by property owners, lenders who hold the mortgages on those properties 
directly, investors who hold the mortgages indirectly in mortgage-
backed securities, government entities that guarantee mortgage loans or 
mortgage-backed securities (FHA, VA, and Ginnie Mae), and taxpayers 
through existing aid programs. The share of the losses experienced by 
each group depends on a number of as yet unknown factors, such as the 
amount of homeowner equity in the affected properties; the amount of 
mortgages sold in secondary mortgage markets and not retained by 
lenders; and the number of homeowners who will file for bankruptcy as a 
result of their losses. The effects could be acute for some individual 
homeowners and their families, particularly those who had a substantial 
amount of equity in their homes. The effects of mortgage defaults on 
those properties are not likely to be significant for FDIC-insured 
institutions in the area because, taken together, they have enough 
capital to cover the losses, although some individual lenders may 
experience some difficulties. (The effects are negligible at the 
national level given that the amount of home mortgage loans owed by 
households nation-wide is almost $8 trillion.) Fannie Mae believes that 
their share of the losses from Katrina and Rita will be between $250 
million and $550 million, while Freddie Mac expects between $150 
million and $300 million in losses.
    As discussed in the testimony, the loss in the value of the housing 
stock would greatly reduce property tax revenues in the most heavily 
affected communities. To the extent that those communities remain 
viable places to live and work, that effect would diminish over time as 
new capital flows in to take advantage of attractive investment 
opportunities and the local population stabilizes and rebounds.

    Chairman Nussle. Thank you. Ms. Capps.
    Mrs. Capps. Thank you, Mr. Chairman. And Director Holtz-
Eakin, thank you for spending time with us this afternoon on 
this topic. After the hurricanes, and interestingly following 
the last discussion, many of my colleagues are focusing now on 
our record high deficit. That is on target for me even though 
in fact in the long run Katrina's recovery costs are not really 
a huge factor in our deficits. But as Mr. Spratt has pointed 
out, the deficit has been a major problem over a number of 
years. And now we have many of my constituents, at least, who 
are saying as they watch us appropriate, appropriately, $60-
plus billion for Katrina efforts, wait a minute. They are 
saying, look at the war costs. Now it is Katrina. And our 
deficit. What gives?
    So President Bush rushes to ask Congress to balance 
additional hurricane relief and reconstruction spending with 
substantial cuts to both discretionary and nondiscretionary 
programs, and ironically those cuts we would be making are to 
the very programs needed by the victims, many of them.
    As we all know, Hurricane Katrina has created a health-care 
crisis for almost all of its victims, capacity crisis for many 
health-care providers, and serious fiscal problems both for the 
States directly affected and those hosting large numbers of 
displaced people. I believe that Medicaid is the appropriate 
vehicle to provide essential health-care services to low income 
Katrina survivors over the next month.
    My question to you is what is your estimate, Mr. Holtz-
Eakin, of how many people are now newly eligible for Medicaid 
given their change in circumstances post Katrina? That is, now 
will we see large numbers and can you help us with what the 
number might be, under current eligibility rules, because of 
their loss of income or other change of status?
    Mr. Holtz-Eakin. I can check and get the exact number. I 
think the ballpark is about 700,000.
    Mrs. Capps. About 700,000 new individual enrollees under 
the current regulations for Medicaid.
    Another question, as you know, Senators Grassley and Baucus 
have proposed legislation to provide immediate access to 
Medicaid for displaced individuals. That would be an 
appropriate response on the minds of many people that we would 
want to make it easier and faster for people to get relief in 
enrollment. And they also are wanting to shift some of the 
burden to the Federal Government. So far the leadership in the 
House has not wished to see this legislation brought up here, 
but I am wanting to know because it is certainly gaining 
interest by the public. Allowing this in many of our States, 
how many additional low income Katrina survivors would enroll 
in Medicaid under the Grassley-Baucus legislation?
    Mr. Holtz-Eakin. I actually do not know the number of 
enrollees, but we would be happy to get that back to you.
    Mrs. Capps. But it would clearly be more than the 700,000 
that you indicate?
    Mr. Holtz-Eakin. I know that the dollars involved in the 
net effect of that legislation are much larger than the ongoing 
cost of new enrollees under current law. Details beyond that I 
will be happy to get back to you.
    Mrs. Capps. It seems to me with the hundreds of thousands 
of people now newly in need through no fault of their own, it 
is quite a strange time that we would be considering cutting a 
program like Medicaid, the very program which many of them, 
some of whom are constituents of our colleagues here, would be 
turning to in this time of need. I think that is the time this 
safety net would need to be strengthened rather than 
dismantled.
    Now maybe in the time remaining, it is hard to pin these 
issues down, but if we were to cut Medicaid by $10 billion, 
which is the minimum proposed I believe, it was desired to be 
more than that, but if we were to cut it by $10 billion over 10 
years and then we added these additional enrollees, could you 
describe that kind of scenario for us?
    Mr. Holtz-Eakin. I probably will fail you again on that but 
the staff has helped me with your question about the Grassley-
Baucus legislation. That legislation, in addition to the 
baseline coverage, would bring 250,000 new enrollees into the 
program.
    Mrs. Capps. So we are getting all these new enrollees at a 
time when we are expected, this committee has asked our 
Congress, to cut at least $10 billion from Medicaid over 10 
years. I just find that kind of amazing. Thank you.
    Chairman Nussle. Mr. Chocola.
    Mr. Chocola. Thank you, Mr. Chairman. Mr. Holtz-Eakin, 
thank you for being here today. Mr. Chairman, I would like to 
thank you for, as you stated, sticking your head out of the 
foxhole and offering some constructive options to increase our 
fiscal responsibility.
    I would also like to thank you for making the statement 
that it is time that we have a rainy day fund, to try to 
preplan for emergencies. And Mr. Holtz-Eakin, I think you said 
in your opening comments that families hopefully budget for 
emergencies. I think I would like you to expand on this, your 
thoughts on the Federal Government's prudence of budgeting for 
emergencies in the annual budget process and the economic 
impact that might have.
    Mr. Holtz-Eakin. The Federal Government does minimal 
amounts in the current budget process. There are some 
appropriations to the FEMA disaster account each year, small in 
nature. And my suggestion was that one could think of an 
insurance premium as being the average cost of the kinds of 
payouts that occur, and if one translated that to the Federal 
budget one could put into the budget a number each year which 
was typical of the cost over recent history, pick a horizon for 
the cost of disasters as appropriately designed, and count on 
the possibility that that would happen on average and have it 
compete with other budget priorities. That would be one 
approach to doing it.
    What would happen as a result is that in some situations 
the costs would come in below that. And in that case, absent 
some other change in the budget, this would result in a net 
national saving, and that would be available to the economy, 
which is the ultimate resource out of which all of this would 
be paid, and it would make the savings, annual accumulation a 
bit larger.
    In the years where the reverse happened, you would draw 
down on that, but it would be a way to allow for policy trade-
offs between disaster and non-disaster spending and within 
disasters at different points of time, and then also provide 
the economy with the resources to ultimately come up with the 
costs of those disasters.
    Mr. Chocola. I take it you think it would be a prudent 
thing for us to do.
    Mr. Holtz-Eakin. It strikes me as a sensible way to go 
forward.
    Mr. Chocola. In that same vein, I represent part of Elkhart 
County, IN, which is the manufactured housing capital of the 
country. There has been a lot of talk about temporary housing 
needs, FEMA-related spending. And I do not know if this is in 
your jurisdiction, but the concept of having contingency 
contracts, using temporary housing as an example, in place 
prior to disasters, whether it be temporary housing or some 
other item that we know we are going to need to respond in an 
efficient and effective manner in emergencies. Would that be a 
prudent thing to do as well as have contingency contracts in 
place that we could act upon by having the logistics, the 
pricing and everything ready to go when we need it?
    Mr. Holtz-Eakin. That is quite frankly beyond my area of 
expertise. It is one of those issues that is on the list of 
using the dollars effectively. Putting the dollars in place is 
only the first step. Using them effectively in the sense of 
providing the basic needs quickly and providing them in a cost 
efficient fashion, those are important issues, and it is where 
the oversight of the Congress I think is central. But it is not 
a place where I can give you particular insight into that 
aspect to it.
    Mr. Chocola. Could you maybe give us a little bit of 
historical perspective as to the governmental role and the 
private sector role? You were talking about replacement 
investment in the first slide you showed us. Is that private 
sector investment or is that a combination of private and 
public?
    Mr. Holtz-Eakin. It would be both. The large Government 
spending that is likely to take place will be the big 
infrastructure projects, highways and buildings, of those 
things, and those largely will happen later. So the bulk of 
this and those which will happen quickest will be rebuilding in 
the housing sector. Home building, commercial structures being 
repaired or rebuilt, replacing the equipment damaged within a 
business, that is going to be the key especially quickly.
    Mr. Chocola. Is there a way to characterize in 30 seconds 
or less kind of who does what, what you would expect based on a 
historical basis the primary role of the private sector and 
Government in this rebuilding effort?
    Mr. Holtz-Eakin. It is the case that there are different 
roles for writing the checks. Ultimately there is typically the 
hiring of the private sector to execute the projects. In terms 
of writing checks on the bulk of this, the damage will be in 
the private sector and the bulk of it will in fact take place 
in the private sector.
    Chairman Nussle. Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman. Mr. Holtz-Eakin, I 
apologize for being here and prolonging you for few more 
minutes. I will try not to take the full 5 minutes.
    The only person I think that has testified before this 
committee more than you in the last several years is Chairman 
Greenspan. And one of the constant points that he makes when he 
talks with us about fiscal responsibility is the need to couple 
cuts in discretionary spending with changes in the revenue 
side, better known as tax increases. And I think he said 
several times before this committee that he thinks any kind of 
a real strategy of addressing the deficit long term has to 
include the revenue side. Is Chairman Greenspan wrong?
    Mr. Holtz-Eakin. I cannot imagine a question I am more 
afraid of. If the Chairman is wrong, A, I would not know. And 
B, we might say things differently but I think the 
straightforward public finance question is what programs will 
the Government have and how large will they be and over the 
long term then put in place a revenue system to finance them.
    Mr. Davis. The reason I ask that is not to get a 
theoretical answer. The debate the committee is obviously 
having, we have a portion of the committee that has the mindset 
that we absolutely cannot touch any of the President's tax 
cuts. There is a portion of the committee that I think almost 
has the belief that you somehow violate his theological 
doctrine if you do that, that the tax cuts have to be kept in 
place, are presumed to preserve the health of the economy.
    That interestingly does not seem to be the opinion of the 
person who is usually regarded as the principal expert on 
macroeconomics in this country right now. So I want to give you 
a chance to react to that.
    Let me ask you a related question. In the early 1990s 
President Clinton and Congress raised the marginal tax rates 
and there was a lot of concern that that would damage the 
economy, that it would move us into a recession. In fact, Mr. 
Gingrich predicted that. Do you have any reason to think that 
the structural health of the economy today is somehow less than 
it was in 1992?
    Mr. Holtz-Eakin. The structural health of the economy is 
ultimately measured by the rate of productivity growth.
    Mr. Davis. Is it less than it was in 1992?
    Mr. Holtz-Eakin. It is in fact faster than it was in 1992.
    Mr. Davis. So therefore a better position to resist any 
change in the marginal rates?
    Mr. Holtz-Eakin. It is the result of not just market rates 
but all aspects of policy making. It has certainly been growing 
robustly since 1995 and has survived the most recent downturn.
    Mr. Davis. And my response to that is that I suspect you 
are right. And I think that is something this committee should 
be thankful for. If it is our mindset that we are going to have 
deficit reduction strategy, then I think it has to include the 
revenue side as well. The only reason to not do that in my 
opinion would be if we felt that it would somehow do violence 
to the economy. Again, some of us in this town still believe 
that evidence is every now and then relevant to the argument.
    So if we believe the economy is structurally stronger today 
than it was in 1992, in fact, in your phrase, if it is 
considerably structurally stronger, that suggests to me that we 
are even better positioned to absorb a marginal change.
    The other point I would make is probably consistent with 
what Ms. Capps said. On one hand there is this notion that it 
is courageous somehow to have a 2 percent discretionary 
spending cut and that we are somehow asking everyone to share 
equally in the sacrifice. That strikes me frankly as a very 
curious proposition. Because if we performed a 2 percent 
discretionary cut not only would it damage the Medicaid program 
that Ms. Capps talked about, it would also damage the section 8 
program that is being stretched even further because of 
Katrina. It would also damage the Head Start program and a 
variety of things that some of us think are still important to 
a class of underprivileged people in this country. I am having 
a hard time grasping the equity of imposing cuts on people in 
groups least positioned to bear those cuts.
    In my final 40 seconds I would simply make the observation 
and ask you to takes it to the administration. I do not think 
it is the tough minded, principled, responsible thing for 
Congress to hide behind a veil of let us just cut everything 
across the board. I think we ought to be straightforward and 
make choices. I think we ought to say to the American people 
that we think that program is more important than that program. 
Those decisions ought to happen, sir, by doing it in a blunt 
draconian way.
    And the final point I would make as it relates to equity, I 
think it is very hard to say to many of the people in this 
country that you are going to share in the burden of sacrifice, 
the people on Medicaid, the people on section 8, the people on 
Head Start, but we are not going to in any way allow people who 
have received the tax cuts to share in that burden. I think 
there is something fundamentally wrong with that, and I think 
it violates every notion of equity that I know.
    Mr. Wicker [presiding]. Mr. Simpson.
    Mr. Simpson. Thank you, Mr. Chairman. Let me ask you first, 
you mentioned in your testimony that the allocation for the 
funds for Hurricane Katrina could be used for Hurricane Rita. 
Is that across the board of the $62.5 billion that we have 
appropriated?
    Mr. Holtz-Eakin. No, but the bulk, $60 billion, were 
appropriations to FEMA. It is in the Disaster Relief Fund and 
it is available for the use of Katrina as well as Rita.
    Mr. Simpson. The Army Corps of Engineers told me they did 
not have the ability to transfer some of their funds over to 
use in Rita.
    Mr. Holtz-Eakin. That is correct. There are small pieces of 
appropriation as well for the Army Corps and for Department of 
Defense (DOD). There is less flexibility with those.
    Mr. Simpson. I happen to agree with Mr. Davis on one thing 
and that is that I do not like across the board reductions in 
spending. I think we should go in and make decisions. If we 
were to propose to the Appropriations Committee the various 
allocations for the Appropriations Committee that they had to 
go in and reduce them by 2 percent, I think the Committee on 
Appropriations could do that and make some priorities, and some 
programs might be cut more than 2 percent and some might be 
less than 2 percent, but we would be making decisions based on 
the program and the need; and as you said when you are looking 
at these things about how you are going to affect the future, 
rather than just looking at a 2 percent across the board 
reduction--and I could support some reductions in spending, but 
if you look at it, if we spend $62 billion already on these 
hurricanes, and our total discretionary spending is somewhere 
in the neighborhood of $880 billion. So if we tried to offset 
this whole thing through spending reductions, and you took in 
all the discretionary spending, you are talking about a 7, 7.2 
percent of your total discretionary spending.
    If you limit it to just non-defense, non-homeland security, 
you are talking upwards of 15 percent of your discretionary 
spending, if you try to reduce spending that much to offset it. 
Obviously, we are not going to do that. Unless we get into the 
mandatory spending programs, how are we going to balance this 
budget or get it back on track? And some people have suggested, 
as I think Ms. Capps was suggesting, that we do not do 
reconciliation. As you know, we are required to make some 
savings in various mandatory programs in reconciliation. If we 
do not do that, what will be the impact on the budget?
    Mr. Holtz-Eakin. The budget resolution calls for 
reconciliation savings of $35 billion over 5 years in the 
mandatory programs. The mandatory programs are two-thirds of 
Federal spending. And as a fraction of mandatory spending, that 
is not a large number.
    Mr. Simpson. If we talk about getting the numbers that Mr. 
Spratt had up there about the budget in the future, if we talk 
about getting that back in balance, we are necessarily talking 
about addressing some of the mandatory programs, and the 
further we put that off is that going to hurt our economy or 
help our economy?
    Mr. Holtz-Eakin. It is absolutely essential over the long 
term to address the mandatory programs, Social Security, 
Medicare, and Medicaid. Under current law with current spending 
trends grow dramatically. They are over 50 percent of Federal 
spending by 2015, and they become larger thereafter. And so it 
is, as a matter of arithmetic, unmistakable that this is the 
place that must be addressed in thinking about the long-term 
structure of the Federal budget. In the absence of changing any 
of those spending programs, the U.S. budget would grow 
increasingly out of balance.
    It would not in, I think, anyone's view be sensible or 
feasible to continue to borrow ever increasing fractions of our 
national income on international markets. The cost will go up 
or simply become impossible to acquire. So that means that you 
will either suffer some sort of mechanical debt crisis or you 
will raise taxes to levels that are much, much higher than they 
are today. That is the auto-pilot view of the fiscal future.
    Mr. Simpson. One other thing that I wanted to mention. 
Everybody here has mentioned how their constituents are 
concerned about the budget deficit, just like mine are and I 
think just like all Americans are. But I can tell you one thing 
they have talked to me about more than anything, and I think 
this is a policy question that is probably not in your purview 
and you probably do not want to respond to it. But people are 
concerned more about how we are going to spend this $63 billion 
or the potential for $100 billion or $150 billion in this 
hurricane related area, particularly New Orleans and stuff. If 
we are going to rebuild this in the same area that is so 
susceptible to damage in the future or if we are going to be 
smarter in how we spend this, and that we are rushing out to 
spend this money to help these hurricane victims before really 
sitting down and thinking about what we will do in the future.
    I appreciate the fact that in your report you put in some 
language about things that we ought to be looking at maybe in 
the future about mitigation and how we stop subsidizing the 
cost of insurance in some of the areas, how we stop--I think 
one of them was that the Federal tax law discourages private 
provisions of disaster insurance by not allowing the 
accumulation of reserves in advance of catastrophic events, and 
so forth and so on. To me the disasters happen and we have to 
take care of it, but I think it is almost as important, if not 
more important, that we look at how we spend this money and how 
it affects what we are going to do in the future in this area.
    I appreciate that. Thank you very much.
    Mr. Wicker. Mr. Jefferson, do you have questions? You 
reappeared and surprised me.
    Mr. Jefferson. I have lots of questions. Unfortunately I do 
not have time to ask them all. I was here to hear the testimony 
at the beginning of the hearing. But I had a Corps of Engineers 
meeting about levies in my area so I had to step out for a 
while. So I had to go take care of it.
    I do not know how much Mr. Spratt had a chance to follow up 
and it is very dangerous coming in not having had the benefit 
of everyone else's question, trying to ask one. But he asked a 
question starting out that I thought was very important in his 
opening statement. It was about why we are, I know it is large, 
I know it is a big ticket, but we are dealing with the issue of 
paying for the Katrina disaster relief as against what we have 
done with the other disasters.
    You take them all together, I am confident that they 
account for more money than we can ever contemplate spending in 
the Katrina instance. Yet before we can talk about that amount, 
we are trying to figure out how we can take it from some other 
places. No one wants to spread the disaster around to other 
people, particularly those who need help from the government 
the most, which I think is the essence of what his remarks 
were. I do not know how it got answered but why is it different 
in this case? Why are we seeking offsets for the Katrina 
disaster relief? And why is it different from the other cases? 
And do not tell me it is larger than them. I know that. But to 
take them all together, it is not larger than everything else 
we have paid for around here.
    Mr. Holtz-Eakin. I am sure I do not have a complete answer 
to that, but from the perspective of they are independent of 
the policy, No. 1, this is not different than other disasters. 
One of the points of the testimony was to emphasize that while 
the scale and physical spread of the destruction was quite 
extraordinary, disasters do happen and in that respect this is 
not different and one might want to think about regular 
procedures that applied equally across all such occasions.
    No. 2 was that at least what came up in the discussion was 
the setting may be different as opposed to the event. And we 
are starting from a position where the Federal budget is a 
pressing concern. It is not going to improve as a matter of 
economic growth. We are not going to grow our way out of the 
mismatch between spending and receipts. So the policies will 
have to come into play. This becomes a policy issue.
    Mr. Jefferson. Yes. So if this has been true, as Mr. Spratt 
also pointed out, perhaps he has got all of the answers on this 
side.
    There were already budget issues, have been budget issues 
around this place for a good long time. And as we have tried to 
deal with budget deficits and still deal with the Iraq 
situation and other emergency expenditures, we have not 
required payment for these offsets for these costs up front. 
There have been budget crises here for a good number of years 
now. So this is not a new circumstance. It may deepen it, but 
it isn't new. I think that there has to be some consistency to 
this policy, and we have got to have good reasons why it is not 
happening if we are going to accept it.
    Do you think it is good policy to pay for these--if we are 
going to have to pay for these Katrina disaster relief--from 
the must vulnerable of the population of this country, people 
who we have already cut the Medicaid program tremendously in my 
part of the world?
    As you point out in your statement, Louisiana does not have 
a tax base, at least the city of New Orleans doesn't have one 
at all. Our school board doesn't have one. New Orleans is about 
36 percent of the tax base of the State of Louisiana, so it is 
suffering a great deal. And its citizens are spread out all 
over the place, everywhere. And we are talking about Medicaid 
cuts at a time when there are more people eligible for Medicaid 
than ever before now, because of this disaster.
    Is that a smart policy?
    Mr. Holtz-Eakin. In the end, what becomes an appropriate 
policy will lie in the hands of the Congress. The question is 
whether the policy should be targeted uniquely on the costs 
associated with Katrina or whether you want to spread them more 
broadly to the issues facing the entire Federal budget.
    The compositional issues will be a matter that are the 
priorities of the Congress.
    Mr. Jefferson. People like yourself who count and report on 
the money and project about events that happen, you can project 
here that if you do not take care of people who--not just have 
the folks who used to be on Medicaid before, but a new 
population of folks on Medicaid--you can calculate that if you 
cut Medicaid more, with a growing population, that you are 
going to have more people out there suffering.
    And so my question isn't whether the policy you choose, or 
whether if you are sitting trying to figure out what is the 
best way to avert economic disasters from people around the 
country--is it a good policy to avert economic disaster for 
families that are going to be suffering from new circumstances 
they were not suffering from before?
    There are people out there now who have been eligible for 
these programs and never would have been eligible ever in their 
lives before. But they are now, and they will be for some time.
    Mr. Holtz-Eakin. Indeed, part of the discussion that you 
were unable to hear is that there are about 700,000 people who 
will be newly eligible for Medicaid, for example, as it stands 
under current law. The costs to the Federal Government of 
providing Medicaid to those individuals will be a bit above $1 
billion, between $1 and $2 billion. And there exists under 
current law FEMA authority to provide housing and assistance, 
up to $26,200 over 18 months, to individuals and families. So 
that there are indeed current authorities and moneys to provide 
some help to these families.
    The question that will arise and which is at the heart of 
your line of inquiry is whether that is sufficient. And that is 
something that I think we will find as the months go forward.
    Mr. Wicker [presiding]. Mr. Ryan from Wisconsin.
    Mr. Ryan. I want to comment on the chairman's opening 
statement which I have read a summary of, which I want to just 
show strong support for his notion and his idea of amending the 
budget resolution to come up with the savings from spending 
control to pay for those large unforeseen expenditures. And 
that is what we are going to be debating here.
    First of all, we have heard some encouraging support for 
this idea from the other side of the aisle. We heard some of it 
right here for addressing this through spending control. But we 
have heard probably a larger volume of ideas saying instead of 
engaging in spending control, in accelerating the spending 
control we have in the budget resolution, do not even engage in 
the spending control that we have already in the budget 
resolution, but undo tax cuts, or, more honestly, just raise 
taxes.
    Now, I wanted to ask you, Mr. Holtz-Eakin, about the tax 
increases--or the tax cuts that we had in 2003. Do you have a 
list or an estimate of what we thought the tax cuts would cost 
when we passed them in 2003 versus the reality of the revenue 
receipts that we have now seen since those tax cuts were 
enacted?
    Mr. Holtz-Eakin. We know that the Joint Committee estimated 
at the time that over the roughly 2003 to 2008 window, this was 
a budget impact of about $340 billion. And there has not been--
and it would not be analytically possible to go back and 
disentangle from all of the other economic and budget impacts, 
how much we can trace to that particular piece of legislation.
    But, you know, we had an initial estimate. We have seen the 
economy grow and have a strong cyclical recovery since. And we 
lie in a position where indeed we have seen all of the cyclical 
improvement, by and large, one could reasonably expect.
    Mr. Ryan. The reason I ask this question is because some 
are saying that the economy may be strong enough to absorb 
another tax increase. I hope the economy is strong, but I 
wouldn't want to risk that this economy could handle a tax 
increase at a time when we are coming off of these disasters, 
when we are experiencing a spike in energy prices, where we do 
have some inflationary signs on the horizon that Mr. Greenspan 
has pointed to, where we are going into a winter where we are 
going to see large natural gas price increases, we see gasoline 
price increases, home heating oil price increases, things that 
are very tough shocks to our economy. I think the last thing 
our economy needs right now is a tax increase.
    I also serve on the Ways and Means Committee which wrote 
that tax bill, and I have the 2003 Joint Committee on Taxation 
release, which you used the Joint Tax estimates when you 
incorporated the estimate of tax revenue effects of tax 
policies.
    The Joint Tax in 2003 when we passed that tax cut, it 
estimated that the individual income tax rate cuts would cost 
$46 billion this year. They also estimated that the corporate, 
the business tax cuts that were enacted, would cost $32 billion 
this year. Yet what we now find from reality is that over the 
last quarter, individual income tax receipts are up 16 percent, 
corporate income tax receipts are up 41 percent.
    And so we are seeing that what we estimated then were going 
to be huge revenue losers, big costers, have in fact been the 
opposite. And that is largely because of the economic growth 
that has occurred because of these tax changes. So when we 
thought that reducing individual income tax rates would cost us 
$46 billion in 2005, and reducing tax on capital and 
corporations would cost us $32 billion, using the Joint Tax 
spreadsheet in 2005, we have already seen just this year alone, 
that in fact is not only not true, it is vastly untrue.
    If you take a look at last year's numbers, they thought the 
individual tax rates would cost us $88 billion. They thought 
the corporate tax receipts would cost us over $50 billion. That 
did not materialize. Revenues were up; income tax receipt 
revenues, corporate tax receipt revenues.
    So the point I am trying to make here is, I think what the 
other side is arguing for is tax increases to raise revenue, 
when in fact the tax increases they are calling for never cost 
the revenue that we thought it would cost when we passed those 
tax cuts back in 2003.
    So I think it is important to look at reality, actual 
performance, what actually happened to the Government through 
receipts, what actually happened in the economy as we go 
forward and make policy with respect to paying for Katrina.
    The one thing we do know for certain is that if we do enact 
an across-the-board 2 percent cut in discretionary spending, if 
we increase--and it is less projectable--increase our mandatory 
savings, we will save that money; and we can easily project 2 
percent across the board will save us about $20 billion. Is 
that not correct?
    Mr. Holtz-Eakin. Yeah.
    Mr. Ryan. So we know we can come up with the savings 
through spending control.
    People on the other side have said we have spent too much 
money. I agree with that. That is where I think we ought to 
place our emphasis, in making sure that we pay for this 
disaster and not increase taxes because, No. 1, it is bad for 
the economy; but, No. 2, it defies the logic, given the fact 
that we have the reality in front of us, because these revenue 
cuts, these tax cuts, have actually increased revenues. Thank 
you.
    Mr. Wicker. Dr. Holtz-Eakin, I just have a few more 
questions I do not think will take long. On page 7 of your 
prepared testimony, you say that Louisiana is expected to face 
the most severe revenue problems from all of those affected by 
the hurricanes.
    Early information from Mississippi, Alabama, and Texas 
indicates that the State general fund revenues may not suffer 
significantly as a result of this storm. I really wonder what 
you are basing that on and how you can say that, particularly 
in light of the fact that you say the data from the State of 
Louisiana have been hard to acquire.
    The information that I received from the Governor's office, 
after I read this testimony today, was that out of a projected 
budget of $4 billion for my relatively small State of 
Mississippi, revenue losses may amount to $400 million.
    Now, later on in your testimony, you say that perhaps out 
of projected revenue of $12 billion in Louisiana, the lost 
revenues might be $1 billion to $3 billion. Well, if it is 
nearer to the lower amount, then you would have to agree that 
that would be about the same percentage of revenue lost as we 
are expecting in Mississippi. Am I correct on that?
    Mr. Holtz-Eakin. First, on the general issue of the quality 
of these numbers, I want to emphasize that it was our hope to 
identify the income losses in both the public sector and the 
private sector, but to get some sense of this for the States as 
well as the localities. But these numbers are extremely 
difficult to pin down. And I won't pretend that they have any 
undue precision.
    In the case of Mississippi, we relied not exclusively, but 
to some extent on the testimony of a State revenue officer in 
front of the Mississippi legislature. And it was that testimony 
that provided some official sanction to ballpark estimates.
    Mr. Wicker. Do you recall the figure that he gave?
    Mr. Holtz-Eakin. I believe it was a loss of less than 5 
percent of Mississippi State revenues, something that one does 
not want to pretend is nonexistent, and certainly given the 
timing, introduces cash flow issues, but which in a sense of 
trying to get a magnitude, we felt would be useful for people 
to know. This is one area where we will learn a lot more as we 
go forward. I would really emphasize that as opposed to what we 
know now.
    Mr. Wicker. Well, I would simply caution you on making a 
statement such as that based on incomplete data irrespective of 
the fact that you do base it on some testimony. I do expect it 
to be larger than 5 percent revenue loss and will be delighted 
if I am wrong on that.
    The only other thing I want to ask about, Mr. Ryan from 
Kansas asked about gasoline prices and about the oil and gas 
industry.
    Let me just ask on page 3 of your testimony you mentioned 
platforms and pipelines being damaged, particularly one large 
platform, the Mars facility, which on its own accounts for 10 
percent of the gulf oil production and was damaged badly enough 
to be out of service, early 2006.
    In all of this, do you have any information about 
environmental losses or damage as a result of damage to these 
platforms or pipelines? Have there been any significant spills 
that you have learned about because of this double lick that 
oil and gas platforms have had in the Gulf of Mexico?
    Mr. Holtz-Eakin. It has been a concern. It has been 
expressed in a lot of circles. But we have no firm evidence on 
that. And I know that it has been raised not just in the gulf 
but also in various areas for rebuilding. We are looking 
forward to finding out more as time goes on.
    Mr. Wicker. If you have no information so far after 5 
weeks, would it be fair to begin to feel that there in fact 
have been no spills resulting from these two catastrophic 
hurricanes in the Gulf of Mexico?
    Mr. Holtz-Eakin. I would hesitate to draw these 
conclusions. There are an enormous number of damages that we 
know are likely to have occurred that we have not been able to 
assess as a Nation. And certainly the CBO relies heavily on 
other people's efforts to gather information.
    Mr. Wicker. When you get anything on that, again I would 
appreciate you getting it to me.
    And lastly with regard to your statement that offshore 
facilities may be able to resume operations in the next few 
weeks. If they can, oil, natural gas production from the Gulf 
of Mexico may average half its normal level for the rest of the 
year.
    And, of course, based--I guess it was based on that 
information, in part, that you answered Mr. Ryan from Kansas' 
question, about next year's gasoline prices coming back to a 
pre-Katrina level. Am I correct that it is based on that fact 
that you made such a guesstimate for us?
    Mr. Holtz-Eakin. The gasoline prices are driven in part by 
how fast crude oil production resumes in the gulf, but much 
more heavily by the restoration of refinery capacity and full 
functioning of the pipeline system.
    Gulf production is 2 percent of the world crude oil market. 
It is a world market. The particular blending of gasolines for 
regions for air quality considerations means that there are 
much tighter supplies of refinery capacity. That is the crucial 
element in the pace at which gasoline prices might return to 
pre-Katrina levels.
    Mr. Wicker. And all of the data that you have obtained with 
regard to gasoline availability and pricing, have you seen any 
evidence of price gouging on the part of this industry?
    Mr. Holtz-Eakin. It is not something that we have the data 
to comment on in any meaningful way.
    Mr. Wicker. Thank you very much. Mr. Jefferson.
    Mr. Jefferson. I just have one or two. I hope we get the 
numbers right for Louisiana and Mississippi. And so I do not 
want to fuss about our problem being larger than yours. They 
are big enough.
    But I do want to ask a question about if we just consider 
the economic effect of actions taken here, is there any 
specific kind of spending in response to a disaster that has 
more of an advantageous effect on the economy than another; for 
example, for infrastructure, as a gauge to payments to 
individuals?
    And there is a lot of talk here still about making the tax 
cuts permanent on dividends and capital gains. Will any of that 
sort of extension help the hurricane survivors? Can you answer 
that?
    Mr. Holtz-Eakin. On the economic impacts of different kinds 
of spending in the affected areas, infrastructure versus 
payments to individuals for housing or Medicaid, health, things 
like that, I think it is best to think of those as differences 
in timing.
    There are, you know--the provision of FEMA relief is 
intended to provide for basic needs in the aftermath of such a 
disaster. That has clear economic benefits where the goal of 
any economic activity is to make people better off. So that is 
the immediate needs. That is what that provides.
    There is a different issue in providing a setting in which 
the regional economic growth can recover these losses and 
ultimately raise standards of living above where they were to 
begin with. And the outlays for necessary infrastructure are 
part of that. But that is an economic impact that is longer 
term. So I do not think it is a competition so much at the 
moment as in when those impacts might be seen.
    Mr. Jefferson. The other question was whether making these 
tax cuts permanent, particularly the dividend cut and the 
capital gains cut, will that help the hurricane survivors in 
this situation?
    Mr. Holtz-Eakin. The second aspect to the economics of this 
situation is the path of the national economy. And aggregate 
tax policy of this type is really about what are appropriate 
long-run incentives in the Tax Code for the aggregate economy. 
To the extent that it helps the individuals who have been 
harmed by these hurricanes, that will be through its aggregate 
economic performance.
    Mr. Jefferson. We talk a lot here about incentivizing, and 
return of business and individuals to New Orleans--because I 
represent New Orleans--to the gulf region.
    What sorts of incentives do you think are most effective in 
getting that sort of thing done, if you have had a chance to 
think about that, both in terms of their effect and their 
affordability?
    Mr. Holtz-Eakin. I think that an important consideration 
here is that there is a preexisting set of incentives that will 
have powerful impacts and have proven to have powerful impacts 
in the aftermath of past disasters.
    They are the opportunities for individuals to make some 
money rebuilding houses. They are the opportunities for firms 
to supply those workers with the services they need to house 
them. And there is an enormous amount of standard environmental 
governmental policy that allows the private sector to function 
and where private sector incentives take care of a lot of 
things.
    It may then be the case that particular additional policies 
require Government help, and that may be the infrastructure 
case. But I think those are the key things. Put in place the 
infrastructure and the environment, and rely on the broad set 
of incentives that are national economic policy.
    Mr. Jefferson. Last thing. When you say rely on a broad set 
of incentives, since this disaster is such a tough one, can we 
rely on the normal incentives; or do we deepen them in these 
cases to further incentivize the location of business?
    I remember Manhattan after 9/11. People said no one is 
going to go back there because they don't know if it is going 
to be safe. Here, of course, that question is even larger, 
because there is so much a broader effect and much broader 
area. So are we thinking about deepening the incentives as 
opposed to just relying on the ones that have been in place 
before that, even if they worked before?
    Mr. Holtz-Eakin. I think there will be an automatic 
deepening of private sector incentives. The question is really 
the degree to which it is effective to have targeted regional 
incentives in the aftermath of an event like this.
    There have been attempts of this sort after 9/11, attempts 
in enterprise zones and various target policies within States. 
I would say a fair reading of the literature is that those are 
far from guaranteed for success, and certainly far from a 
guarantee to be cost effective.
    Mr. Jefferson. Thank you.
    Mr. Wicker. Thank you, Dr. Holtz-Eakin. It has been a very 
informative 2\1/2\ hours. This hearing is now adjourned.
    [Whereupon, at 4:35 p.m., the committee was adjourned.]

                                  
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