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[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]

              THE PRESIDENT'S BUDGET FOR FISCAL YEAR 2004

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

            HEARING HELD IN WASHINGTON, DC, FEBRUARY 4, 2003

                               __________

                            Serial No. 108-1

                               __________

           Printed for the use of the Committee on the Budget

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

                                 ______

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                            WASHINGTON : 2003
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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
CHRISTOPHER SHAYS, Connecticut,      JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
GIL GUTKNECHT, Minnesota               Ranking Minority Member
MAC THORNBERRY, Texas                JAMES P. MORAN, Virginia
JIM RYUN, Kansas                     DARLENE HOOLEY, Oregon
PAT TOOMEY, Pennsylvania             TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington             DENNIS MOORE, Kansas
ROB PORTMAN, Ohio                    JOHN LEWIS, Georgia
EDWARD SCHROCK, Virginia             RICHARD E. NEAL, Massachusetts
HENRY E. BROWN, Jr., South Carolina  ROSA DeLAURO, Connecticut
ANDER CRENSHAW, Florida              CHET EDWARDS, Texas
ADAM PUTNAM, Florida                 ROBERT C. SCOTT, Virginia
ROGER WICKER, Mississippi            HAROLD FORD, Tennessee
KENNY HULSHOF, Missouri              LOIS CAPPS, California
THOMAS G. TANCREDO, Colorado         MIKE THOMPSON, California
DAVID VITTER, Louisiana              BRIAN BAIRD, Washington
JO BONNER, Alabama                   JIM COOPER, Tennessee
TRENT FRANKS, Arizona                RAHM EMMANUEL, Illinois
SCOTT GARRETT, New Jersey            ARTUR DAVIS, Alabama
GRESHAM BARRETT, South Carolina      DENISE MAJETTE, Georgia
THADDEUS McCOTTER, Michigan          RON KIND, Wisconsin
MARIO DIAZ-BALART, Florida
JEB HENSARLING, Texas
GINNY BROWN-WAITE, Florida

                           Professional Staff

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

                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 4, 2003.................     1
Statement of:
    Hon. Mitchell Daniels, Jr., Director, Office of Management 
      and Budget.................................................     6
Prepared statement of:
    Mr. Daniels..................................................     8
    Hon. Artur Davis, a Representative in Congress from the State 
      of Alabama.................................................    21
    Hon. Adam H. Putnam, a Representative in Congress from the 
      State of Florida...........................................    22

 
                         THE PRESIDENT'S BUDGET
                          FOR FISCAL YEAR 2004

                              ----------                              

                       TUESDAY, FEBRUARY 4, 2003

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:45 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Gutknecht, Ryun, 
Hastings, Schrock, Brown, Wicker, Bonner, Franks, Garrett, 
Barrett, McCotter, Diaz-Balart, Hensarling, Spratt, Moran 
Baldwin, Moore, Lewis, DeLauro, Edwards, Scott, Ford, Capps, 
Thompson, Baird, Cooper, Meek, Davis, Emanuel, and Majette.
    Chairman Nussle. Good morning again. This is the full 
committee hearing of the Budget Committee of the House of 
Representatives on the President's budget for fiscal year 2004.
    The witness today will be Mitchell E. Daniels, Director of 
the Office of Management and Budget. I am pleased to welcome 
Mitch Daniels back to the Budget Committee. I am also pleased 
to receive today the President's budget of the United States 
for fiscal year 2004.
    We are appreciative that you got it to us on time. That is 
probably more than can be said about the Congress of late with 
regard to getting its work done on time. But we appreciate that 
you got your budget on time to us, and we receive it here 
today.
    When the President submitted this budget for fiscal year 
2004 yesterday, the underlying question for me was a very 
simple one. Is it fiscally responsible? Is it a fiscally 
responsible blueprint for governing, and does this fiscally 
responsible blueprint for governing deal with the difficult 
challenges that America faces? From what I have read at this 
point, and based on what I believe is a very ambitious agenda 
laid out by the President in last week's State of the Union 
address, I believe the answer to these questions is yes.
    Now, I have no doubt that there will be critics of the 
President that will scoff. They will point to the substantial 
near-term deficits that are provided under this budget, 
deficits that the President and his aides have not glossed over 
at all. Those deficits are troubling. Deficits do matter, 
especially coming just 2 years after when we anticipated budget 
surpluses for as far as the eye can see.
    But we all know what happened and how we got to this point 
in time. Our economy which had slowed dramatically in the year 
2000, slid into recession just as President Bush took office.
    Later that year, terrorism struck here on our own soil, 
further challenging our national and economic confidence. Our 
necessary response--rebuilding and shoring up security here at 
home, and taking on terrorism where it breeds overseas--has 
required a commitment of not only our American will, but our 
resources.
    I would like to refer you to chart No. 9. There we go. 
There are many factors that contribute to where we are today, 
but most of those factors were beyond the control of the United 
States Congress, beyond the control of the President of the 
United States in turning these surpluses into deficits.
    You cannot have a discussion about surpluses and deficits 
and forget September 11, 2001. You cannot have a discussion 
about turning surpluses into deficits without recognizing that 
we had an economic recession that went deeper as a result of 
the terrorist attack in 2001. And yet it seems that for some 
reason the smallest portion of the reason why we might be in 
deficits, the tax cut that was passed--if we all remember, in 
order to spur the economy of 2001--we often forget or assume 
that it was the tax cuts, and the tax cuts only, that for some 
reason has driven us into deficits and driven us into the 
situation that we find ourselves.
    All of the factors that we faced then are still active 
today. At the same time we continue to face increasingly urgent 
demands in areas such as education and health care. Budget 
deficits are among the results, but fiscal responsibility is 
not just about making the numbers add up in a certain way.
    A friend of mine recently said, you know, the Soviet Union 
had a balanced budget. That is true. The Soviet Union was not 
being fiscally responsible. That is obvious. It is 
fundamentally more about governing than just about whether the 
numbers add up.
    And governing requires striking a balance among competing 
demands, weighing desires against needs, and facing obligations 
not only on today's generation but also tomorrow's. Fiscal 
responsibility requires a plan, requires a budget.
    The House of Representatives and this committee deserves a 
lot of respect and a lot of admiration for doing just that, 
writing the budget. It is not perfect, trust me on that. If it 
is the budget that Jim Nussle would write, it might look 
slightly different than the budget that ends up leaving the 
committee.
    But it is a compilation of the wants and the needs and the 
frustrations and the desires of the American people through 
their representatives. This committee has done its job, and for 
that it deserves a commendation. Not every committee in 
Congress has been able to write a budget, even the Budget 
Committee of the Senate.
    So we begin our work to that end today, writing a budget. 
Today's budget needs to be written on three principles. We must 
prevail in the war against terrorism, principle No. 1, 
committing all of the resources necessary for that task.
    Principle No. 2, we must provide for and enhance the 
security of our homeland. This is not a one-time job. It is a 
permanent and ongoing task, especially when we are trying to 
protect ourselves against evil doers, who spend all of their 
time calculating ways to terrorize and kill Americans.
    Both of these, along with the other needs cited above, will 
require government spending and will result in continued 
deficits for a time. But what matters is that we don't lose 
control of spending. We must not commit to strategies that win 
the popular support today, only to balloon in costs that will 
be imposed on our own children and grandchildren.
    And I would like to show you chart No. 6. This is what 
happens when you don't control spending. You can just see here 
the deficits will deepen without spending restraint. You have a 
deficit under the President's budget, there is no question 
about that. But if spending grows at the rate it has been 
growing just the average of the past 5 years, you can see that 
we will never get back to balance, but deficits will explode in 
the outyears. That is why controlling spending is so important 
to this task.
    The third important principle that we have to build this 
budget on is helping to restore the strength and stability of 
our economy. According to last week's projection by the 
Congressional Budget Office, without action this economy will 
continue to limp along with unemployment rates at about 6 
percent for the next several years. This is not acceptable. It 
is not acceptable to me. It is obviously not acceptable to the 
President. It is not acceptable to the families who are 
struggling to make ends meet. It takes a growing economy to 
protect jobs and opportunities, which restores Americans' hope 
so that they can make better lives through their own effort.
    Our current situation is much like the situation that many 
families throughout the country are facing around their kitchen 
tables. When faced with tough times, they still buy the family 
groceries for the kitchen, but they don't cover the remodeling 
of the kitchen. So as we begin to construct this year's budget, 
we must adhere to the same principles that families deal with 
every day around their kitchen tables. We must control 
spending. Even though we have to borrow for emergencies, we 
must control our spending.
    And with that I would like to turn to my friend, Mr. 
Spratt, for any comments he would like to make.
    Mr. Spratt. I thank the chairman. Director Daniels, welcome 
back. It is quite a different situation from when you first 
came here 2 years ago. Two short years ago the forecasters at 
the Office of Management and Budget, OMB, looked into their 
crystal balls and saw nothing but surpluses for the next 10 
years and beyond. All together, $5.6 trillion in surpluses were 
forecasted.
    Now, granted that was an accountant's or an economist's 
construct, but that was the forecast on which you based your 
economic policies, and in particular the tax cut that was 
enacted in June of 2001. If I could have chart No. 1.
    During the last 2 years, the situation has deteriorated 
from a surplus, a cumulative surplus, including Social 
Security, over that period of time, of $5.644 trillion, to 
$3.133 trillion in July when you did your mid-session review in 
2001. By February that was down to 739 billion, by July to 444 
billion, and now this February, when we factor in your budget 
policies, the cumulative surplus will not be $5.6 trillion; it 
will be a deficit, a deficit of $2.122 trillion.
    That means in 2 years we have seen a swing in the budget 
for the worse of $7.8 trillion, which is phenomenal. I will ask 
you later if you feel in any way chastened by this whole 
experience, if there have been any lessons that we have learned 
from it. Do we have the charts yet? OK, we got a technical 
problem.
    Chairman Nussle. We won't take that out of your time.
    Mr. Spratt. The situation we are in now, according to the 
information you furnished us, using your numbers, is that the 
cumulative surplus before you implement your policies is $129 
billion in the red. We have got right now, assuming none of the 
policies you propose were enacted, we have a deficit of $129 
billion. That comes off of the table in your budget.
    All together, your budget proposals on top of that deficit 
come to $1.993 trillion, and that is how you get the $2.122 
trillion cumulative deficit over this 10-year period, 2002-11.
    What is radically different about this year as compared to 
2 years ago is that 2 years ago you could have made the 
argument, and did, that with a surplus apparent of $5.6 
trillion, some of it should be given back to the American 
people.
    We didn't argue with that. What we argued with was whether 
or not we would bet the budget on an accountant's or an 
economist's construct, this blue sky forecast that foresaw 
deficits this large. We said, let's take it step by step, have 
smaller tax cuts and see if this surplus is really going to 
materialize. You insisted, the administration insisted instead 
in taking a big bet on the expectation that that surplus could 
be realized.
    You can call that negligence, miscalculation. What you say 
today in your materials that you have sent us is that you 
missed the estimation of the surplus by $3.174 trillion. Two 
years later, looking back, you say there never was--the surplus 
of $5.637 trillion, to that extent, to the extent of $3.2 
trillion, did not materialize for economic reasons.
    You don't break them down between technical and economic, 
you just say economic reasons. So in a sense, that is a 
misestimate of $3.2 trillion, and it is an acknowledgment that 
the surplus of $5.6 trillion, if it ever had any chance of 
materializing, won't materialize to that extent. It is really 
about a 2.4, $2.5 trillion surplus.
    Now, the problem that you have got now is that you have 
more than spent already the more than $2.5 trillion adjusted 
surplus. By your own numbers, you spent $129 billion of what is 
left of a $5.6 trillion surplus after you adjust it for 
economic miscalculation. Adjusted for economic miscalculation 
is $2.463 trillion. You have spent, in tax cuts, in stimulus 
cuts, and in other enacted legislation, mostly for homeland 
defense and defense, $2.592 trillion, which is more than the 
surplus was in the first place. That is why you have got the 
$129 billion deficit beginning this year.
    Now, what that means is that anything you propose in the 
way of new tax cuts, or anything you propose in the way of new 
spending initiatives is going to go straight to the bottom 
line. You can't offset it against the general fund, it has been 
exhausted, the surplus. You can't offset it against Social 
Security, you have fully spent and--borrowed and spent the 
Social Security surplus. You can't offset it against the 
Medicare surplus. It has been borrowed and spent. It goes 
straight to the bottom line. It gets charged up to the deficit. 
When we charge it to the deficit, we charge it to our children. 
They are the ones that will pay it.
    I don't see anything in this proposed budget that convinces 
me that the budget will be--that the debt we are accumulating 
will be paid before our children inherit the burden of paying 
it themselves. So that is the problem that I have with the 
budget before us.
    No. 1, we are going forward intentionally now, per your 
proposal, with additional budget deficits of $2.122 trillion. 
We are making that choice now. This is not a matter of 
misestimation or something like that. We know that every dollar 
we spend for these additional tax cuts or for additional 
benefits, whatever they may be, will go directly to the bottom 
line. So if we adopt this budget, we are willfully, wantonly 
and intentionally increasing the deficit by $2.122 trillion, 
your number, your budget, and that is the consequence.
    Now, I understand all of the circumstances that give rise 
to this and don't hold you responsible for all of them. I do 
think that we cut way close to the margin with the initial 
budget in 2001. But let's leave that behind us as a problem 
that has already occurred and now has to be dealt with.
    What I found troubling about your budget is I don't see any 
effort here to deal with it. I don't see any effort to develop 
a plan that will get us out of the hole that has been dug. 
Growth won't do it. You are assuming real growth of over 3 
percent. I hope we attain it. But I can't imagine that we will 
get as much real growth over and above what you have assumed to 
take us out of a $2.1 trillion deficit.
    Defense spending certainly isn't going to be the solution 
to it. It was in the 1990s. We were able to restrain defense 
spending after the end of the cold war, and that helped us get 
rid of the deficit. But defense spending we all know is going 
up. In fact, it is understated in this budget, understated in 
the regular budget and understated also if we have a war. We 
can't find anything here even for the expedition in Afghanistan 
now, any extra amount for that. So defense is understated in 
any event. It is going up. It is not coming down. It is not 
going to eradicate the deficit.
    Nondefense spending you budgeted below inflation, around 2 
percent a year. But once you will make the adjustments for 
homeland security and for a few favored programs, that means we 
will have to hold other programs to a percent, to 1.5 percent 
growth over 10 straight years. If you read any budget history, 
you will know how improbable that is.
    So you have already assumed a lot of constraint on 
nondefense discretionary spending. Deficits are coming back. 
Before you get your hands around this problem, there is no way 
around it, you have got deficits as far out as you forecast. 
That means more national debt.
    By our calculation the national debt will go up on your 
proposal from $3.540 trillion, debt held by the public, to just 
over $5 trillion. There will be a 50-percent increase. And also 
by our calculations, there will be a 50-percent increase in the 
debt service, the interest paid on the debt owed by the United 
States of America.
    That becomes, Mr. Director, a new kind of debt, a new kind 
of tax. It is a debt tax that future generations will have to 
pay just to service the debt. And it becomes a real fiscal 
drag, because people pay taxes and see nothing in return for 
it. That is one of the great benefits that we achieved over the 
last 10 years. We have turned the one of the fastest growing 
accounts in the budget, interest on the national debt around, 
and brought it from $250-something billion down to about $170 
billion. That will reverse itself under your budget. Interest 
on the national debt will grow about 50 percent due to the debt 
accumulation here over the next 5 years. That is going up. So 
that is not going to help us pay off the deficit either.
    Medicare-Medicaid. The question is how much can we contain 
these two programs. You got about $100 billion each for growth 
in those programs over the next 5 years. They are not likely to 
be the sources of restraint.
    So I am looking here and saying, where is the solution? You 
have got this problem. I think you would acknowledge this is a 
problem. I am sure, knowing you, that you don't, you don't 
enjoy presiding over a budget that is accumulating a surplus of 
$2.1 trillion. So where is the solution? And how do we derive a 
solution, particularly if you go forward with additional tax 
cuts?
    If I can just have the chart that shows the total tax cuts? 
Back there. These are the tax cuts in the Bush agenda, the 2001 
cuts, already made, the stimulus package, already done. The 
January 2003 growth package on top of that is $615 billion. 
Making permanent the cuts that were made in June of 2001 is 
$692 billion, and then we think you have to throw in the 
alternative minimum tax, because all of us are going to 
confront that issue, as the number of taxpayers who have to pay 
the alternative minimum tax rather than the posted rate goes 
from 2 million to 39 million, somewhere between 2 and 39, 
politically there will be no way around it, we will have to fix 
that.
    The total amount of tax reduction, revenue reduction 
adjusted for debt service comes to $4.4 trillion. That has got 
to be part of the problem. And I think you are worsening the 
problem and putting a solution almost out of reach, making 
deficits intractable again, structural instead of cyclical with 
the budget proposal you have got.
    I look forward to your testimony and to asking you further 
questions.
    Chairman Nussle. Director Daniels, welcome back to the 
Budget Committee, and we are pleased to receive the President's 
budget and your testimony at this time.

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

    Mr. Daniels. I thank the committee as always for the 
privilege of appearing. This week we do present the President's 
program for the next fiscal year. No such presentation lacks 
for long-term importance to the Nation's future, but few in our 
history have directed the Nation's public resources at more 
fundamental challenges.
    The President plans to prosecute the war on terror, as he 
says, ``relentlessly.'' There is no more effective way to 
protect Americans or, as we now say, provide homeland security 
than to root out terror and stop it before it can reach our 
shores.
    The budget provides $380 billion for the war on terror, and 
the continued rebuilding of our national security capabilities. 
Spending on domestic homeland security is also given top 
priority, with spending rising at the fastest percentage rate 
of any category.
    The President's third priority is to reinvigorate an 
American economy that has grown for 5 straight quarters, but at 
a rate he deems far too slow. To this end, he proposes a major 
growth and jobs plan.
    Below these three overriding objectives, the President 
urges greater spending on a host of essential activities: 
Veterans' programs, education of our disadvantaged and disabled 
children, the alleviation of Africa's AIDS tragedy, research on 
a pollution-free automobile and many others.
    The budget has returned to deficit, a phenomenon that 
pleases no one, but which ought not be misunderstood or 
overstated. Today's deficit, while unwelcome, was unavoidable 
and is manageable. In fact, given a sputtering economy, it 
reflects appropriate economic policy, as the President decided 
in advocating a bold economic plan.
    The deficit's origins are no mystery. It was the product of 
a triple witching hour in which recession, war, and the 
collapse of a stock market bubble all coincided, presenting our 
country and government with a radical change of circumstances.
    Since it has come up, let me pause to dispel a persistent 
fiction or, more accurately, misrepresentation. Note this fact. 
If there had never been a 2001 tax cut, if the President's 
opponents had been triumphant and no tax relief had been 
provided to the American people, we would still be experiencing 
triple digit deficits today. Let me repeat. If those who 
opposed tax relief in 2001 had succeeded and no bill of any 
size had ever passed, the 2002 budget would have been $117 
billion in deficit, and the 2003 shortfall would have been $170 
billion.
    Even if we had never been attacked and incurred no cost of 
war or recovery from September 11, and no tax relief had become 
law, we still would have gone into deficit. There is no 
question about what got us out of balance. What we should be 
debating is the right way and the right pace for getting back 
in.
    Deficits are not always unacceptable. The strongest 
proponents of balancing the budget continually make exceptions 
for war, recession and emergency, exactly the conditions we 
have experienced simultaneously. In other words, there are 
times when it is necessary for the Federal Government to borrow 
in order to address critical national priorities, and these are 
such times.
    In proposing an aggressive economic growth plan, the 
President is consciously opting to accept somewhat greater 
borrowing in order to put more Americans back to work. He did 
so in the knowledge that today's deficit is moderate and 
manageable, moderate by any historical measure. At 2.7 percent 
of GDP, the 2004 shortfall will be smaller than in 12 of the 
last 20 years and less than half the largest deficit in that 
period. It is manageable, in fact highly so, in that the costs 
of debt service are extraordinarily low.
    Just 5 years ago, interest payments took up 15 cents of 
every budget dollar. This year, thanks to the lowest interest 
rates in 40 years, it will be just 8 cents.
    A balanced Federal budget is a very high priority for this 
President. It is not and cannot be the highest priority let 
alone the only one. He does not place it ahead of our national 
security or the safety of Americans from domestic terror or a 
growing, full-employment economy.
    If a balanced budget were all that mattered, it would be no 
great trick to accomplish. By either CBO or OMB estimates, all 
we would have to do is stop where we are, hold our spending 
growth to inflation for the next couple of years. But that 
would mean no action to create jobs, no new action to defend 
our homeland, no further strengthening of our defenses and so 
forth. The most important objective in this context is economic 
growth, the wellspring of balanced budgets.
    No one saw the last surplus coming, not 5 years ahead, not 
3 years ahead or even 1. In fact, 4 months into the year of the 
first surplus, both OMB and CBO were still predicting a deficit 
for that year. A strong economy produced that unpredicted 
surplus and only a strong economy can bring a surplus back.
    If we balance our priorities, we will balance our budget in 
due course. Our projections, which incorporate extraordinarily 
conservative revenue estimates, $55 billion below CBO's for 
this year alone--those projections see deficits peaking this 
year and heading back down thereafter. To hasten our return to 
balance, the President proposes to restore the system of 
spending controls under the recently expired Budget Enforcement 
Act. He asks the Congress to pass, along with this year's 
budget resolution, a reenacted BEA incorporating 2 years of 
caps, limiting discretionary spending to the 4 percent path 
that would match government's growth to the growth of the 
American families' income. That renewed statute should also 
reinstate the so-called PAYGO system that limits the budgetary 
effect of entitlement spending and revenue measures.
    This committee and its counterpart in the other body have 
the first and fundamental role in helping the President decide 
the Nation's priorities. You also are the taxpayers' first line 
of defense against excess or misuse of the dollars which the 
government takes away from them.
    On behalf of the President, thank you for your service 
here, for your leadership and restoring an orderly, effective 
budget process during 2003.
    [The prepared statement of Mitchell Daniels, Jr., follows:]

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

    Thank you as always for the privilege of appearing.
    This week we are presenting the President's program for fiscal year 
2004. No such presentation lacks for long-term importance to our 
Nation's future, but few in our history have directed the Nation's 
public resources at more fundamental challenges.
    The President plans to prosecute the war on terror relentlessly. 
There is no more effective way to protect Americans, or, as we now say, 
to provide ``homeland security,'' than to root out terror and stop it 
before it can reach our shores. The President's Budget provides $380 
billion for the war on terror and the continued rebuilding of our 
national security capabilities. Spending on domestic homeland security 
is also given top priority, with spending rising at the fastest 
percentage rate of any major category.
    The President's third priority is to reinvigorate an American 
economy that has grown for five consecutive quarters, but at a rate 
that he deems far too slow. To this end the President proposes a major 
growth and jobs plan, the third of his Presidency.
    Below these three transcendent objectives, the President urges 
greater spending on a host of essential activities: veterans' programs, 
the education of our disadvantaged and disabled children, the 
alleviation of Africa's AIDS tragedy, research on a pollution-free 
automobile, and so on.
    The budget has returned to deficit, a phenomenon that pleases no 
one, but which ought not be misunderstood or overstated. Today's 
deficit, while unwelcome, was unavoidable, and is manageable. In fact, 
given a sputtering economy, it reflects appropriate economic policy, as 
the President decided in advocating a bold economic plan.
    The deficit's origins are no mystery. It was the product of a 
triple witching hour in which recession, war, and the collapse of a 
stock market bubble coincided, presenting our country and government 
with a radical change of circumstances.
    Let me pause to dispel a persistent fiction, or, more accurately, 
misrepresentation. Note this fact: If there had never been a 2001 tax 
cut, we would still be experiencing triple digit deficits today. Let me 
repeat: if those who opposed tax relief in 2001 had succeeded, and no 
bill of any size had ever passed, the 2002 budget would have been $117 
billion in deficit, and the 2003 shortfall would have been $170 
billion.
    Even if we had never been attacked, and incurred no costs of war or 
recovery from September 11, and no tax relief had become law, we still 
would have gone into deficit, as a consequence of the recession and the 
popped revenue bubble. There is no question about what got us out of 
balance; what we should be debating is the right way, and right pace, 
for getting back in.
    Deficits are not always unacceptable. The strongest proponents of 
balanced budgets routinely make exceptions for war, recession, and 
emergency exactly the conditions we have experienced simultaneously. In 
other words, there are times when it is necessary for the Federal 
Government to borrow in order to address critical national priorities.
    These are such times. In proposing an aggressive economic growth 
plan, the President was consciously opting to accept somewhat greater 
borrowing in order to put more Americans back to work.
    He did so recognizing that today's deficit is moderate, and 
manageable. It is moderate by any historical measure: at 2.7 percent of 
GDP, the 2004 shortfall will be smaller than in 12 of the past 20 
years, and less than half the largest deficit in that period. It is 
manageable, in fact highly so, in that the costs of debt service are 
extraordinarily low. Just 5 years ago, interest payments took up 15 
cents of every budget dollar; this year, thanks to the lowest interest 
rates in 40 years, it will be just 8 cents.
    A balanced Federal budget is a very high priority for this 
President. It is not, and cannot be, the highest priority, let alone 
the only one. He does not place it ahead of our national security, the 
safety of Americans from domestic terror, or a growing, full employment 
economy.
    If a balanced budget were all that mattered, it would be no great 
trick to accomplish. By either CBO or OMB estimates, all we would have 
to do is to stop where we are, to hold our spending growth to inflation 
for the next couple years. But that would mean no action to create 
jobs, no new action to defend our homeland, no further strengthening of 
our defenses, and so forth.
    The most important objective in this context is economic growth, 
the wellspring of balanced budgets. No one saw the last surplus coming: 
not 5 years ahead, or three, or even one. In fact, 4 months into the 
year of the first surplus, both OMB and CBO were still predicting a 
deficit for that year. A strong economy produced that unpredicted 
surplus, and only a strong economy can bring a surplus back. If we 
balance our priorities, we will balance our budget in due course.
    The costs of a potential conflict in Iraq are not included in this 
submission. We all fervently hope that no such event will prove 
necessary, but if it should, we would present to the Congress 
immediately a request for the funds estimated to be required to enable 
a decisive victory, a secure and compassionate aftermath, and the 
replenishment of stocks and supplies to prewar levels.
    Our projections, which incorporate extraordinarily conservative 
revenue estimates, see deficits peaking this year and heading back down 
thereafter. To hasten our return to balance, the President proposes to 
restore the system of spending controls under the recently expired 
Budget Enforcement Act. He asks the Congress to pass, along with this 
year's budget resolution, a reenacted BEA incorporating 2 years of caps 
limiting discretionary spending to the 4 percent path that would match 
government's growth to the growth of American family income. That 
renewed statute should also reinstate the so-called PAYGO system that 
limits the budgetary effect of entitlement spending and revenue 
measures.
    Finally, no discussion of this or any future budget should take 
place without serious examination of the real fiscal danger facing our 
Republic. We will debate the right level of imbalance for this year and 
next, as we should. We will argue over the right amounts to be employed 
in defense reconstruction, or economic growth measures, or fighting the 
scourge of AIDS, as we must. But, from a financial standpoint, these 
are small matters compared to the looming, unfunded liabilities of our 
huge entitlement programs.
    The unfunded promises of Social Security are some $5 trillion, more 
than the entire national debt outstanding. The figure for Medicare is 
even more staggering: its promises exceed its future receipts by more 
than $13 trillion, a figure more than triple the national debt and 40 
times the deficit we will run this year. We cannot conceivably tax our 
way out of this dilemma. Only sustained economic growth, coupled with 
thoughtful reform of these programs, can secure to future generations 
the same degree of protection, or more, that seniors enjoy today.
    This committee, and its counterpart in the other body, have the 
first and fundamental role in helping the President determine the 
Nation's priorities. You also are the taxpayer's first line of defense 
against excess or misuse of the dollars which the government takes away 
from them. On behalf of the President, thank you for your service here 
and for your leadership in restoring an orderly, effective budget 
process during 2003.

    Chairman Nussle. Thank you, Director Daniels. My first 
question is a pretty simple one.
    How does the President of the United States justify 
proposing running deficits for at least the next 5 years and, 
very much likely, a lot longer?
    Mr. Daniels. He justifies this by placing a balanced budget 
high on his priority list, but not at the top, Mr. Chairman. As 
I made mention, there is a fairly straightforward path to 
balance if that is all we really cared about--if we cared about 
it more than the successful prosecution on the war of terror, 
if we cared about it more than further action to spur economic 
growth in particular.
    Let me show a slide that might help illustrate this. No. 1, 
everyone here understands the concept of a baseline, and this 
shows if we were to continue government at its present level 
and inflate spending for inflation, but only inflation, and do 
nothing new, we could return to balance within a couple of 
years. And as I said, if this were the sole objective of this 
administration, if it were the wisest course of policy, then 
there is a course available to us.
    But let us talk about what you would not do. You would not 
act to invigorate the American economy. You would not act to 
further strengthen our defenses or extend the war on terror or 
build a homeland security system. You would not act to improve 
our Medicare system--genuine catastrophic coverage, more 
choices, prescription drug coverage--and you would not act on a 
host of other fronts on which the President believes the Nation 
ought to step forward boldly. You would not continue growing 
our investment in education, you would not attack the tragedy 
of AIDS in Africa and so forth.
    These are the choices the President has made. These are the 
choices that he believes justify the budget he has laid out.
    One last comment: As has been already amply illustrated, 
the course of prediction is a very hazardous one. No one saw a 
surplus coming. No one saw how fast a weak economy, a popped 
stock market bubble and a terrorist attack would take it away. 
If we make the right choices, particularly if our economy 
strengthens and strengthens quickly, we may see some 
substantial improvement in this picture and well within the 5-
year time frame.
    Chairman Nussle. Using your chart, it appears that the 
economic growth package that the President has built into this 
budget certainly gobbles up a lot of the resources that could 
be used to get back to balance.
    Let us just jettison that package. Wouldn't we get back to 
balance much sooner?
    Mr. Daniels. One doesn't know because then you are betting 
that today's economy will grow and will in fact turn up the 
revenue that we are now projected to. It has been 
underperforming in that respect. That is one reason we at OMB 
have produced the lowest revenue estimate in the field for this 
year and next.
    The President's choice, you are quite correct. If all you 
cared about was the accounting and the projection of the 
Nation's books for the next year or two, you might stay put on 
the economy we have. The President wasn't satisfied to do that. 
He is not satisfied with employment at the level it is. But 
those who want to quarrel with his program, I think, have some 
obligation to step forward with their own.
    Chairman Nussle. With regard to long-term obligations such 
as Medicare and Social Security, is the growth package or 
growing economy not an important factor to the long-term 
solvency of both of those important programs?
    Mr. Daniels. Yes. Absolutely. Just as there is no way back 
to balance without a strong economy that generates more 
revenues, there is certainly no way to fund even the current 
promises of Social Security or Medicare without very strong 
economic growth. And if we do intend to modify those programs, 
it may only make that, the need for sustained, long-term, 
strong economic growth, more important.
    Chairman Nussle. Why do the budget projections that you 
provide us from OMB today--why do they not assume or 
contemplate the beneficial effects of an economic growth 
package in the calculations? Some would refer to that as 
possibly dynamic scoring. Why don't you use dynamic scoring or 
why don't you make an assumption that the economic growth 
package will actually stimulate economic growth in years to 
come?
    Mr. Daniels. As you know, Mr. Chairman, we continue to 
abide by the convention that ignores the effects of changes in 
tax law or fiscal policy. This, we know, is the--is an 
inaccurate way to approach it. No economist that I know 
believes that you can lower taxes or tax rates or provide new 
incentives to investment and not create some new economic 
activity and eventually some new revenue to the Federal 
Government.
    People debate honestly whether that feedback effect is 30 
percent or 40 percent or more. We know it is not zero. But 
observing the conventions that we found on our arrival, we 
continue to use that here. So any positive effect--any positive 
effect from any economic package that might pass this Congress 
would be upside to those numbers.
    Chairman Nussle. Let me move on to what I believe are the 
important three principles in building a budget.
    First, with regard to our national defense and the war on 
terrorism, why is there not even an estimate in the budget or a 
placeholder, if you will, for potential war with Iraq?
    Mr. Daniels. The fundamental reason is that we all hope 
earnestly there won't be a war with Iraq and that event could 
be averted today or tomorrow or any day if Saddam Hussein would 
simply respond to the 11 years of demands by the world 
community that he disarm.
    If the President is forced to act, we will be ready. And as 
we have in the past, we will come to the Congress for one-time 
supplemental spending on an order that we think is adequate to 
cover the decision the President may have taken.
    Chairman Nussle. Turning quickly to homeland security, what 
is the status of getting the Department of Homeland Security 
not only up and running, but fulfilling a budget commitment 
within this budget in order for it to be successful? What is 
the status within this budget with regard to homeland security 
and the new department?
    Mr. Daniels. We are off to a fast start in that the 
Senate--and the President is very grateful--did confirm 
Secretary Ridge and the first of his fellow appointees. But 
there is no time to waste. And while the President seeks 
substantial new funds on top of the major new commitment 
already made, let us recall that we doubled homeland security 
spending in 1 year. We will have tripled it in just over 3 
years if this budget is enacted.
    And while we invest massive new amounts of money in these 
activities, it is really important and equally important that 
we organize well and act quickly and decisively.
    So we seek the help of this committee and every other 
Member of Congress in removing obstructions, removing barriers 
to the new department getting organized, moving people, moving 
dollars to the places where they will reduce the risk to 
Americans the most.
    Chairman Nussle. Finally, let me turn to Medicare.
    It appears in this budget proposal that the President is 
adopting the--at least the tactic or contemplates a plan 
similar to what the House of Representatives considered last 
year, but the details of the Medicare proposal were left out.
    Two questions: First of all, is that the contemplation of a 
package that might be similar to what the House of 
Representatives put in its budget in previous years? And No. 2, 
when might we expect a proposal from the President with regard 
to Medicare and Medicare modernization?
    Mr. Daniels. I think you can expect a proposal within a 
very short time. I think it will bear some similarities to each 
of the plans that was considered in the last Congress, but have 
its own distinctive features, as it must. The President will 
insist on a plan that widens choices for seniors, including the 
choice to stay exactly with the coverage they have if that is 
their preference; a plan that makes--takes careful account of 
the needs of our poorest seniors and protects them and affords 
them greater coverage that they can afford; and also it keeps 
an eye on the long-term obligations that are inherent in the 
Medicare program so that we do not unduly exacerbate the 
unfunded liability problem we already face.
    Chairman Nussle. Let me end by just suggesting to you that 
we have had a good partnership with regard to holding the line 
on spending, even without a budget, a budget passed as a 
concurrent resolution this last Congress. The House Budget 
Committee has worked very closely with you and with the 
administration to enforce spending restraint.
    Part of the success or failure of the plan that you have 
proposed depends on the successful completion of the process 
from 2003 fiscal year appropriations. We understand that they 
are in the final throes, if you will, of that negotiation. I 
would encourage you to continue to hold the line on the 
proposals that the administration has made, as well as the 
House of Representatives, at $751 billion for discretionary 
spending and just report that we hope that that is also done in 
a very timely manner.
    We cannot successfully move on with this budget unless or 
until we are able to complete the appropriations process that 
was, I believe, irresponsibly thwarted as a result of Senate 
inaction last year. So I would hope you would continue to hold 
the line in that regard.
    Mr. Daniels. It is the President's intent, Mr. Chairman, 
and he appreciates your support.
    Chairman Nussle. With that, I turn to Mr. Spratt.
    Mr. Spratt. Thank you, Mr. Chairman.
    Mr. Daniels, you were quoted as saying a couple of weeks 
ago, we have returned to an era of deficits, but we ought not 
hyperventilate about this issue--your word.
    Let me show you a chart that takes my breath away. Maybe I 
am not hyperventilating, but it leaves me a little breathless. 
And that simple table there on the wall, which shows the on-
budget deficits, the deficits in our basic general fund budget 
for the next 5 years, which is the full forecast time frame of 
your budget--should be 10, but it is 5.
    But looks what happens. This is why we despair when we look 
at this budget, because we don't see relief in sight. It stays 
over $400 billion this entire time frame. Starts at 468 and 
ends at 433, just below a half-trillion dollars a year. And the 
total debt accumulation resulting from that is $2.14 trillion.
    Let me show you again on another chart that I was trying to 
call up, the bridge chart. This is taken from your budget 
presentation. It shows how you restated the surplus for 
economic adjustments by $3.174 trillion, so that the adjusted 
surplus is $2.463 trillion.
    It further shows that enacted policies taken today already 
put on the books and put into effect, two-thirds of which 
constitute tax cuts, have more than spent the adjusted surplus. 
You have got $2.5 trillion actually spent out of an adjusted 
surplus of $2.4 trillion, so much so that at this point in 
time, the cumulative deficit for the next 10 years, 2002-11--
that time frame is used to keep it consistent with your 
original budget--is $129 billion in deficit.
    Now, to get to those big numbers I just showed you before, 
the general fund deficits, the on-budget deficits of 438, $468 
billion, nearly a half-trillion dollars a year to get there, 
you have got to implement the policy proposals you are now 
making. You are standing at a real threshold. If you go forward 
with those proposals, we can have $2.1 trillion in additional 
debt. If you stop here and hold the line here, you can stop at 
$129 billion.
    So what you are doing, to restate my point, is voluntary. 
This is not something that fell out of the sky. This is not 
something that happened to us. This is a conscious policy 
decision that is being made at this point in time. We are $129 
billion in the red right now. If you put forward your budget 
proposals that total up there on that chart, which come from 
your budget--they come to a total $1.99 trillion. Add that to 
129 and you get the $2.1 trillion that you are going to add 
over this time frame.
    So that is your policy choice, correct?
    Mr. Daniels. At least we have a choice, Congressman.
    And let me start by saying, I don't know and you don't know 
anything about what the effects of this will all be over 10 
years. We have learned this over a 7-year failed experiment to 
look out this far. Our forefathers were much wiser and never 
looked out more than 3 years and then, for a quarter century, 5 
years.
    But the starting point for any such discussion is, none of 
us knows any more than we knew 2 years ago now that we were 
already in recession, that the stock market bubble would 
continue to deflate, taking revenues with it, nor that we would 
be at war within 9 months.
    Mr. Spratt. But one thing we do know, 77 million baby 
boomers are marching to their retirement as we speak. And they 
begin to retire in 2008. We have got a choice now as to whether 
we prepare ourselves for that, which we were trying to do a 
couple of years ago by paying the debt held by the public, or 
whether we add 42.5 trillion more debt on top of the debt we 
already owe in preparation for their retirement, which would 
demographically change this budget like nothing we have ever 
seen before.
    Mr. Daniels. I commend you very much for drawing our 
attention to that. That is something we speak about at length 
in the budget. It is the real fiscal danger of the long-term 
health of this country and much more so than the outcome in any 
one fiscal year--this one, next one or any time soon.
    But let me go back. You point out that the budget we 
present does include voluntary choices. Indeed it does. And for 
all the speeches I hear when I come here, I never hear a plan 
different than the one the President proposes. And I am still 
waiting to hear, which of the things he wants to do, given the 
situation we are facing, do you believe are unwise, are less 
important than chasing back toward a balanced budget quicker. 
It is a legitimate debate, but let us have it.
    Would you not act to spur the economy? I believe you are 
the cosponsor of a bill that has a greater effect in the first 
2 years than the one the President has suggested. Would you not 
act to extend the war against terror? Would you not act to 
strengthen our homeland security? Those are very legitimate 
points, but those are the issues that we ought to move on and 
join.
    Mr. Spratt. We did indeed make such a proposal, but it was 
marked by this characteristic. We had short-term stimulus and 
long-term balance. We had a short-term tax cut that put as much 
impetus into the economy right now, in 2003, as we could, $136 
billion worth; but we restored--those were short-term so that 
in the long run, as the economy got better, the bottom line of 
the budget would get better, too. Deliberately, by design, it 
is done that way.
    Yours gets worse. We go out in time. The economy gets 
better. We are assuming pretty robust growth and the bottom 
line is still there; it is still red as it can be.
    Mr. Daniels. Again, I don't know and you don't know. It 
depends entirely on----
    Mr. Spratt. I know what I read in your budget forecast, and 
I guess that is your best judgment at this point in time, and 
you are willingly incurring another $2 trillion in debt with 
the policy choices you are making.
    Mr. Daniels. Again, it makes no claim and takes no credit 
for any economic improvement that might come as a result of a 
balanced program that the President and many economists he 
consulted with think is really good not just for the short-
term, but the long-term problems facing the country.
    Mr. Spratt. One last question. Do you think it is good 
fiscal policy to borrow money in order to cover the revenues 
lost to tax cuts?
    Mr. Daniels. It depends on what you use it for, 
Congressman.
    And you know, let us talk a little bit about those revenues 
that either subconsciously, or perhaps consciously--you often 
talk about our ``spending.'' We ``spend money'' when we leave 
more in the pockets of the American taxpayer. I am not sure 
that is how most taxpayers think about it. You know that money 
is not gone. There has been very little effect of the 
President's 2001 tax relief already. He would like to 
accelerate it into this year because we think it would have an 
important economic effect, but very little of that has 
happened.
    Also, we are still waiting--if it is such a bad idea to 
leave more dollars to the American taxpayer in that way, where 
are the proposals? Bring them on to repeal it. And by the way, 
which portions would you repeal? The marriage penalty, would 
you reinstate that? Would you not extend greater child credit--
tax credits? Would you repeal the 10 percent or----
    Mr. Spratt. Before you get to that--you are pushing two 
additional tax cuts now that total $1.3 trillion in additional 
revenue losses. Leave aside what has already been done.
    Why are you pushing two additional tax cuts of the same 
size together, that are larger really than the first tax cut, 
when we don't have any surplus against which to offset it?
    Mr. Daniels. The President believes that the most important 
thing we can do is put more people to work now. I don't know, 
and again no one here knows, what the long-term effect would 
be--the static, no-effects, no-feedback figure we have for the 
first 5 years, a little over $400 billion--and he feels that is 
a reasonable investment if it puts more Americans back to work 
and eventually begins to generate more revenue for the 
Treasury.
    Mr. Spratt. Thank you for your testimony.
    Chairman Nussle. Mr. Gutknecht.
    Mr. Gutknecht. Thank you, Mr. Chairman.
    Mr. Daniels, let me first of all say that it is always 
tough to be the first one out of the box. And I think your job 
is especially difficult today because in the absence of any 
other plans, I think all Members on both sides of the aisle 
will tend to be a bit more critical.
    But I must say, this is a tough pill to swallow. And you 
know a lot of things have changed in the last year and a half. 
I think most of the members of this committee and, frankly, the 
entire Congress are proud of the fact that for the last 5 
years, we actually balanced the budget; we paid down almost 
half a trillion dollars of debt. I think there are still a lot 
of people here who believe that this is a very high priority 
for this committee and, ultimately, for the Congress.
    I also believe that the American people have an expectation 
that we will do everything we can to try to eliminate wasteful 
Washington spending and balance the budget.
    As I look at your budget--and again, I don't want to be 
overly critical, because I suspect we will probably bounce 
around, wrestle back and forth and have a lot of heated debates 
in this committee and in the Congress; and as we begin to look 
at the alternatives, it may well be that this budget looks 
better as we go forward. But as of today, it is a difficult 
pill to swallow.
    Essentially what I read in your budget is, you say ``yes'' 
to more defense, you say ``yes'' to more homeland security, you 
say ``yes'' to Medicare reform and prescription drugs and you 
say ``yes'' to tax relief. I am also heartened by the fact, 
though, that you talk about limiting the growth in the Federal 
budget to the growth in the average family budget, but I am not 
certain that your numbers quite square with what the average 
family budget is actually doing out there.
    You are talking really about a growth of something like 4.5 
percent. The CPI right now is 2.2 percent. There are many 
families in my district that are happy to get a 3-percent 
increase in their family budget. I am sort of curious, how do 
you come up with this family budget? Where is your mythical 
family budget and how do you square that with what I see 
happening in my district and the numbers coming from the Bureau 
of Labor Statistics?
    Mr. Daniels. There were a number of measures that we looked 
to when the President gave us this guidance, and they all came 
in around 4 percent.
    I completely agree with you that averages can be 
misleading, and for everyone at that average or above it, there 
is somebody below it. And it is exactly those families the 
President has in mind when he proposes a jobs and growth 
initiative for this year. But measured a variety of ways--and I 
will be glad to furnish you some--we were struck about how they 
all did center. Most of these are forward looking, what is 
expected this year and next; and when he gave us that guidance, 
we were struck by how consistent a variety of approaches are in 
reaching about 4 percent.
    Mr. Gutknecht. Let me just editorialize on another point 
that I have been working on. And I do agree with the 
administration that the time has clearly come, and perhaps it 
is past due, to actually do something about reforming our 
Medicare system. And frankly, I think we need to do something 
to make certain that those seniors who are currently falling 
through the cracks have something to protect them in terms of 
the high cost of prescription drugs.
    My concern is that the administration continues to refuse 
to look at what I think is one of the fundamental problems, and 
that is that Americans pay far too much for the same 
prescription drugs relative to the rest of the free world. 
There are plenty of studies available, and I would encourage 
you and OMB and the people at FDA and others to take a serious 
look at what Americans pay for those drugs versus what people 
in Germany, France, Canada, Japan, Mexico, any of our other 
trading partners--look at what we pay for those drugs versus 
what they pay.
    If you are serious about doing something about prescription 
drugs, you ought to do something about the price that Americans 
pay. We certainly should pay our fair share, but we pay far 
more than our fair share.
    Let me just say in terms of tax relief: I supported the tax 
plan, and frankly it was a different universe then, but still I 
thought it was the right thing to do then and I believe it is 
the right thing to do now. But I think we should at least 
acknowledge--and according to the numbers that I have, the 
average American family today--last year, 111 million American 
taxpayers received an average of $634 worth of tax relief.
    As we go forward, I am not certain--it is going to be very 
difficult, for me at least, to justify to my constituents that 
we need additional tax relief at a time we are trying to fight 
a war and we are trying to provide prescription drugs and we 
are trying to improve domestic security. I am not sure my 
average taxpayer out there says, you know, what I really need 
is another $3 million in tax relief.
    I think as we go forward, there is going to be a lot of 
arguing in this committee and in the Congress. It may well be 
that this budget will look a lot better after that has been 
done, but right now it is difficult for us to justify borrowing 
an extra trillion or 2 trillion, whatever the number is, from 
our grandchildren in order to say ``yes'' to all of these 
national priorities.
    I yield back.
    Mr. Daniels. Fair point, Congressman, and I think that you 
pose it in the right way; that is to say, these are choices. 
That is what a budget is. That is what governing is about.
    It is absolutely true that if one believes--and there were 
many who counseled the President last fall to believe that--let 
us leave well enough alone; the economy is perhaps faltering 
here and there, but it is not bad. Signs are that it is going 
to improve so lets take a chance. There may be Members here who 
do see it that way. If you do, it is true that the deficit for 
next year would be more than a third smaller, would be much, 
much smaller than we project and much smaller than the year we 
are in, but that is a choice. And having studied it very 
carefully, the President chose jobs and economic growth and was 
not willing to take the chance that, well, they could leave 
well enough or maybe not well enough alone.
    Chairman Nussle. Mr. Moran.
    Mr. Moran. Mr. Daniels, you are a nice guy. I like you 
personally.
    Mr. Daniels. Mutual, Congressman.
    Mr. Moran. Well, don't be so fast.
    And you are a good, loyal soldier. But the price of that 
loyalty is going to be that you are going to have to accept 
some responsibility for the worst management of this Nation's 
economy in American history. And I say that because the stock 
market has lost $5 trillion in value since your President took 
office.
    And it is not all because of 9/11. As Allan Sloan says in 
The Washington Post today, it fell faster before 9/11 than it 
has subsequently. This first 2 years is worse than during 
Herbert Hoover's--the first 2 years of his administration 
during which the Great Depression occurred. And yet we have 
lost more equity value during these 2 years.
    Now, what you have chosen to do through your tax cuts and 
other spending, some of which, a small amount of which is fully 
justified in terms of homeland security, but you have reversed 
$5.6 trillion of surplus that was estimated for the next 10 
years when you took office. We now have more than a $2 trillion 
deficit. So that is almost an $8 trillion turnaround, $8 
trillion fiscal reversal. And, of course, I am using 10-year 
numbers because many of your tax cuts don't even take effect 
until 2010. So if you are willing to do that, obviously you 
have looked out 10 years to know what the effect would be.
    Now, what you have done: In total, you proposed that we cut 
$4.4 trillion of revenue in tax cuts. You are proposing that we 
spend all of the Social Security Trust Fund surplus, $2.2 
trillion. You have got triple-digit deficits for as far as the 
eye can see. And yet, you said, both you and President Bush 
said, and I am quoting, there is a strong, bipartisan consensus 
to preserve very large surpluses as a threshold condition of 
public finance. In fact, the President's budget said that such 
budget surpluses should be, in quotes, ``at least the size of 
the Social Security surplus.''
    Even as recently as last February, the White House Web site 
said we are going to keep the promise of Social Security and 
keep the government from raiding the Social Security surplus. 
And yet when the baby boom generation starts to retire in 2008, 
doubling the number of retirees, you are going to have worked 
up the public debt to $5 trillion, adding $4 trillion more in 
public debt.
    If that is not the worst economic management, I can't 
understand what is. And yet you are going to tell me--instead 
of recognizing that when you are in a deep ditch, you stop 
digging; you are going to tell me that we need economic 
stimulus. And yet your $1.5 trillion tax cut provides only $31 
billion of economic stimulus this year.
    That is not going to stimulate the economy. What you are 
doing is cutting revenue in outyears where, by your own 
admission, we don't know what the situation is going to be. It 
is the least conservative, most risky budget that I have ever 
seen. And I used to work within a Republican administration on 
the budget many years ago and, you know, I really can't believe 
this.
    So what I am going to ask you is, doesn't the Republicans' 
current claim that chronic, long-term budget deficits do not 
harm the economy contradict decades of Republican statements to 
the contrary? Didn't the Contract With America insist that we 
amend the Constitution to prevent just this kind of multiyear 
deficits that you are now predicting and proposing?
    If you would like to respond, Mr. Daniels.
    Mr. Daniels. And I still like you.
    First of all, you used the right word when you talked about 
the fact that the surpluses we hope to see were estimated. They 
were estimated. And Congressman Spratt and members of this 
committee, I think we all agree, we had to be very cautious in 
accepting those. These are estimates we inherited. They were 
not invented by this administration. They were just the same as 
the ones that our predecessors and outsiders all saw at the 
time.
    Mr. Moran. But you used them for the tax cut, to justify 
the tax cut.
    Mr. Daniels. Point well made. We used them. However, at 
that time, we said we couldn't trust them. We thought we should 
reserve--and we did, $842 billion--some 15 percent of the 
estimate as a buffer, as a protection, in case we were wrong. 
We didn't realize how much reserve we needed to take. None of 
us did.
    Now you talk about the economic performance. The stock 
market decline you are talking about began in March 2000. 
Industrial production began to go down that year. Unemployment 
began rising that year. The recession was on in the first 
quarter of 2001. So we have to be a little careful where we 
assign blame, if any is to be assigned, for the economic 
recession, which is the overriding factor, along with the 
collapse of the stock market bubble, in changing that estimate 
from where we hoped it would be to something much less than 
half as big.
    Mr. Moran. The difference is, we wouldn't have worsened it 
with the tax cuts.
    Mr. Daniels. On that score, again I would simply invite you 
to bring a plan forward. The money has not been, in your usage, 
``spent.'' Almost all of it remains with American taxpayers; 
and any year--this year, next year, any year--that it seems a 
wise course to repeal that tax cut to raise taxes on the 
American people, if that is really the right thing to do for 
our economy, really the right thing to do fiscally, then please 
propose it and let us have a good, honest debate.
    I do want to remind you, when you look more closely, the 
elements of tax relief that have all--most of the money--are 
for the low bracket, the move to the 10 percent bracket, the 
repeal of the marriage penalty and the increase in the child 
tax credit. That is where all the money is. And if you are not 
prepared to go after that, then I am not sure what your 
complaint with that bill is.
    Mr. Moran. The biggest piece of your tax cut is in the 
elimination of the double taxation on dividends. I don't want 
to give myself a tax cut that my kids are going to have to pay 
for.
    Chairman Nussle. The gentleman from Pennsylvania, Mr. 
Toomey.
    Mr. Toomey. Thank you, Mr. Chairman.
    And, Mr. Daniels, thank you and thank you for your 
persistent and even valiant effort on behalf of the President 
to restore some kind of fiscal discipline to Federal Government 
spending.
    I am glad to hear my colleagues on the other side have such 
a passionate concern about the size of the deficit. It gives me 
hope that they will join me in working to try to cut some 
spending in this budget and throughout the appropriation 
process.
    But while we are talking about deficits, I want to follow 
up on a point, if I could, if we could bring up chart No. 2. I 
did a little quick math here, and it is probably not perfect, 
but I think I am in the right ball park. I looked over the 
period of time that represents the biggest economic expansion 
in our Nation's history, from 1983-00 when we produced more 
wealth, more jobs, had more economic growth than ever before in 
our Nation's history. With one minor interruption in about 1991 
or so, we had an almost uninterrupted, extraordinary period of 
economic growth. During that period, if you looked at the 
average annual deficits in those years, it comes out to about 
2.7 percent of GDP.
    And I just wanted to ask you, Mr. Daniels, in the budget 
that the President has proposed, what is the deficit as a 
percentage of GDP for next year, approximately?
    Mr. Daniels. 2.7 percent.
    Mr. Toomey. So it is about exactly equal, just about, to 
the period of the most extraordinary period of sustained 
economic growth we have had.
    Is it in your opinion, during the 17 years of this 
extraordinary growth, would it have been wiser for us to have 
raised taxes in an effort to try to diminish that deficit? And 
if we had done so, do you think we would have the kind of 
economic growth we had during that period?
    Mr. Daniels. I doubt it, Congressman, just as I doubt that 
higher taxes now would be good for jobs or good for the economy 
or also good for the budget. Again, it is an honest debate that 
we can have.
    I think what your chart reflects, and it is accurate, is 
that there is no--there is certainly no correlation anyone can 
find between deficits, at least at that level or surpluses at 
the level we saw for 4 years, and an economic outcome.
    Mr. Toomey. And further to that point, some argue that when 
you have a deficit--you know, assuming there is a level of 
spending that we can't get below for a moment, which is another 
issue; but given that, some argue that when you finance it in 
part with the deficit, even at the magnitudes we are talking 
about, very modest magnitudes relative to the size of our 
economy, that that somehow crowds out private investment 
capital. And my question is, is there any evidence that crowds 
out investment capital and has any more deleterious effect on 
the economy than confiscating that money from the private 
sector through the taxes?
    Mr. Daniels. No, there is no such evidence. That is not to 
say that there is no level anywhere at any time that might not 
begin to have that effect.
    And again, there is no disagreement that we want to control 
spending, control deficits and move back toward balance. We are 
in agreement with the passionate arguments made here already 
today. But it is certainly so that at the level of deficit we 
are now experiencing, you can't find any effect on interest 
rates. And in a multi-trillion dollar world capital market, I 
guess it would be surprising if you did.
    Mr. Toomey. It seems to me the evidence does suggest, from 
a variety of economies and long periods of time, it is the 
total amount of government spending which is a better measure 
of the misallocation of capital in our society, because a large 
portion of it is absolutely necessary; but on the margin, what 
we are doing is allocating capital for political purposes and 
through a political process rather than allowing the free 
people engaging in the marketplace to allocate capital 
according to what they need and what their desires are.
    So my big concern is that we are growing spending too much. 
I think it is too much spending that is the cause of these 
deficits. And I am a little disappointed that this budget 
proposes that we grow spending at a rate that exceeds the 
expected rate of growth of the economy, because if we do that 
over long periods of time, obviously by definition the 
government grows in relation to the economy.
    I look particularly at, for instance, what is allocated for 
the Labor, Health and Human Services and Education component. 
As you know, in the period from 1996-02, we doubled the size of 
that, the second largest appropriation bill, I think. And yet, 
in this budget, it is proposed that that one grows by 3.8-
percent higher than expected economic growth.
    Are you open to working with Congress to find a way to cut 
back in some of the non-defense, non-homeland security areas, 
so we could trim this back down to a level of total growth that 
does not exceed the total growth of the economy?
    Mr. Daniels. We always welcome constructive thoughts about 
how we could limit spending and limit deficits. To be honest, 
although we certainly welcome the concern expressed here about 
red ink and the budget, we tend to wait expectantly for 
suggestions about how we can control spending better. Many of 
the same folks who profess to be distraught about imbalance in 
the budget are simultaneously very forthcoming with ideas about 
how to spend more money.
    Anyone who thinks we have overlooked something and the 
President proposed too much spending, please, I will leave my 
number.
    Mr. Toomey. You will get a call.
    Mr. Daniels. Let me just point out that in last year's 
budget, no bones about it, the President proposed a lot of new 
spending, more than he ever expected to, more than he would 
have preferred to, 9 percent on the discretionary line. 
Everyone knows what that was about. It was about the repair of 
damage, about the recovery from 9/11, about rooting out a 
terrorist haven in Afghanistan, et cetera, and building a 
homeland security network.
    All of us wish we never had to ask for or spend that money. 
But having done so, it is time, and it should be possible for 
us, to decelerate. We can't continue at that rate, and I 
suspect that we will hear more from people who think that 4 
percent is too little than from folks like you who would like 
to see it come down further.
    Mr. Toomey. Thank you.
    Chairman Nussle. Let me announce that all members will be 
permitted to put a statement in the record, if I didn't say 
that before. I would ask unanimous consent that that be done.
    [The prepared statement of Artur Davis follows:]

 Prepared Statement of Hon. Artur Davis, a Representative in Congress 
                       From the State of Alabama

    Mr. Chairman, Director Daniels, I thank you for the opportunity to 
offer my remarks on the President's budget.
    Mr. Chairman, I represent a district that has portions of it lodged 
in the 19th century and completely forgotten in the context of progress 
as we know it in United States.
    It is the third poorest congressional district in the country. Six 
of the poorest hundred counties in the United States reside in 
Alabama's Seventh District. We have a poverty rate that hovers near 40 
percent. We have an infant mortality rate that is higher than in half 
the countries of the world. Consider every major index of social misery 
and persistent poverty, Mr. Chairman, and the Seventh District of 
Alabama will stand at the top of them.
    My constituents look to the President's budget to assess the 
President's priorities, and we are deeply disappointed by what we see.
    Unfortunately, Mr. Chairman when I look at the President's budget I 
see that we are borrowing trillions of dollars from our children's 
future to give away to our Nation's most fortunate; while taking away 
the very money that will help working families achieve the American 
dream.
    I see nothing that can help the impoverished people of my district 
to lift themselves out of poverty. Instead, the President wants to 
completely eliminate the Empowerment Zones and the Enterprise 
Communities that are giving businesses vital incentives to locate in 
Jefferson County, Sumter County, and in nine other Black Belt counties 
desperately needing jobs. This misguided effort will level businesses 
and kill jobs. This budget will depress economic growth for a region 
already in depression.
    Looking at this budget, I see very little that will help the 
families who live in counties completely cut off from major 
transportation networks. Instead, we are cutting by $2.5 billion the 
very transportation funding that will bring the interstates--and vital 
industries and jobs--to my struggling district. Without access to 
highways, my district will continue to struggle to attract industry.
    The President has called for eliminating the HOPE VI program, which 
transforms dilapidated housing communities into livable and affordable 
neighborhoods. In the city of Birmingham, the President also proposed 
to cut the heart out of the Federal effort to expand housing 
opportunities. A HOPE VI project at Tuxedo Court is awaiting its last 
installment of $20 million to transform this urban community into a 
thriving neighborhood. How can the President give over $300 billion to 
wealthy investors (who most certainly have housing they can afford), 
and not spare $20 million for the mothers, fathers and children of 
Tuxedo Court?
    How can he not spare any funding for rural housing assistance--a 
program whose funding he completely eliminated?
    While 12 community health clinics have closed in the last 4 years, 
the President proposes some $52 million in rural healthcare initiative 
cuts, a painful blow in my district. In a region where 25 percent of 
the children have no access to health insurance, the President cuts the 
Child Health Insurance Program.
    Mr. Chairman, we are cutting taxes by trillions of dollars and 
creating deficits of trillions of dollars. In the next 10 years, we 
will pay a trillion dollars in interest on the Federal debt that this 
President is creating. And yet, in all of this, the President's budget 
is blind to rural America's more pressing needs. The vulnerable are 
consistently sacrificed, and no where is this more evident than in a 
district such as mine.
    This is unacceptable. We must reorder our priorities during this 
time of economic recession to assist struggling families, struggling 
businesses, and struggling states.
    In the summer of 1999, Mr. Chairman, then-candidate Bush rebuked 
his Republican allies in Congress by stating, ``They shouldn't balance 
their budget on the backs of the poor.'' I call upon the President now 
to prove that his words were more than election-year rhetoric. Mr. 
Chairman, I call upon the President to stand up for the ones who cannot 
stand up for themselves and put forward a budget that fairly meets the 
priorities of our great Nation.
    Thank you, Mr. Chairman.

    [The prepared statement of Adam Putnam follows:]

  The Prepared Statement of Hon. Adam H. Putnam, a Representative in 
                   Congress From the State of Florida

    Mr. Chairman, I am pleased that we have convened today to receive 
the Fiscal Year 2004 Budget from the President of the United States. I 
am humbled and honored to be here today with you, Ranking Member 
Spratt, and the rest of the Committee, to begin the process of 
reviewing and passing a budget for our country. I would like to thank 
the Director of the Office of Management and Budget Mitch Daniels for 
joining us to discuss in detail the President's budget. I am confident 
that with a budget which holds spending growth to 4 percent, the same 
rate of growth as the average American families' paycheck, we can act 
in a fiscally responsible manner while also giving the President the 
tools he needs to strengthen America's future at home and abroad.
    ``The President has presented a bold plan to fund America's 
priorities while maintaining our strength and stability at home and 
abroad,'' said Putnam. ``This budget reflects two realities. First, we 
have an obligation to defend our homeland from terrorists who want to 
attack us. Second, in order to fight deficits, we need to grow the 
economy and hold the line on spending.''
    This budget will go far to strengthen America's domestic future. I 
am pleased with the President's commitment to grow America's economy. 
The President has proposed a job and growth package that will benefit 
all Americans, and I am delighted to see that this budget would allow 
over 5 million taxpayers in my home state of Florida to have lower 
income tax bills in 2003. The budget also includes over $7 billion for 
Medicaid programs in Florida. Our state is currently suffering a 
budgetary crisis and these funds will go far to improve access to 
affordable, high quality health care for many Floridians. A quality 
education for every child has always been a high priority for this 
President. I am pleased that the President's budget includes $590.8 
million to raise student achievement in the high poverty school 
districts of Florida. This budget also includes $383 million for 
Florida's school lunch program and $510 million to ensure that Florida 
meets its responsibilities to schoolchildren with disabilities.
    While the President has shown a strong commitment to enhancing our 
domestic security, he has also presented a budget that lays out a 
solid, aggressive plan to bolster our nation's strength and stability 
abroad. This budget makes a clear commitment to provide our Nation with 
the best trained, best equipped and most efficient military force in 
the world. The budget provides the newly created Department of Homeland 
Security and related agencies with the resources necessary to protect 
our homeland from terrorist attacks.
    I look forward to Director Daniels' testimony as I am sure he will 
provide all of us with a clear picture of the President's budget and 
its focus on the most urgent needs of our country: fighting the war 
against terror, ensuring that our citizens are safe, strengthening and 
stabilizing our economy, and getting unemployed Americans back to work.

    Chairman Nussle. We have an hour before the memorial 
service begins, and out of respect to that, I am going to try 
to ride pretty hard on the gavel here to get 5 minutes for 
members.
    Ms. Baldwin.
    Ms. Baldwin. Thank you, Mr. Chairman.
    Clearly, we come to this 2004 fiscal year budget at a very 
difficult time. We have talked about many of the factors--our 
sluggish economy, the fact that we are engaged in one war and 
on the brink of potentially another, a return to deficit 
spending, estimated to be around $199 billion in 2003. And in 
contrast to the opinion of the majority perhaps, I don't see 
the role that I believe the tax cut of 2001 plays in that 
deficit situation.
    Both parties, though, agree that economic growth is 
essential to our recovery. We listen to our favorite economists 
talk about that at the macro level, if you will, and each of us 
as Members of Congress has a different sort of micro 
perspective on this.
    I speak with my unemployed constituents. I talk with people 
who are struggling financially right now, those needing to 
change their long-range plans, perhaps return to work after 
retirement, of no longer being able to afford to pay for their 
kids to get a college education.
    I think Democrats have been clear about what we think will 
jump-start this economy, invigorate it, stimulate that growth 
that we think is the cornerstone of recovery. Our economic 
package, in fact, focused on three critical points, that it 
needed to be fast acting, temporary and front-loaded, if you 
will; that it needed to be fair in that it reached all 
Americans, not just the very wealthiest of Americans; and it 
needed to be fiscally responsible, 136 billion to your 674 
billion, if you will.
    In my estimation, the blueprint, the budget the 
administration has sent us fails to address growth according to 
all three of these tenets that Democrats have regarded as 
rather central to growth and recovery. And in fact, this budget 
sort of hallmarks, or its centerpiece continues to be, tax cuts 
for the very wealthy, large corporations; and also contains 
structural or chronic deficits that I fear will place the 
burden and sacrifice squarely on the shoulders of hard-working 
and working-class Americans and the next generation.
    Given what we have before us, I have a couple of questions. 
It seems like this budget has taken off the table some things 
that could be a part of this dialogue that the administration 
has indicated reflect their values. And, of course, budgeting 
is a value-based exercise. If you look at all non-defense 
appropriations, you are left with approximately $300 billion in 
spending. We have this year a $200 billion deficit.
    So that brings us to the question, how much of this budget 
deficit do you intend to draw down or tackle through budget 
cuts? I would ask first in terms of this next year, and 
certainly ask you a follow up if we have time beyond that.
    But given--in this context, I think many of the things that 
are being put on the table are precisely what is going to help 
us grow this economy, what is going to help get kids the 
education they need to be the great work force of the next 
generation. Your proposed cuts in education and retraining for 
displaced workers, your proposed restructure of Head Start, the 
threatened cuts in higher education funding, all threaten our 
ability to grow.
    Mr. Daniels. Well, first of all, we are talking about $400 
billion and not $300 billion in non-defense--actually a little 
more than that. But let me say that the President generally 
agrees with many of the priorities you just mentioned.
    You know, I don't know where the idea of cuts comes from, 
with one exception I will come to. Everything other than 
defense and homeland security grows at 3.8 percent in the 
proposal that the President has made. That is a lot of money on 
top of the biggest base in American history.
    As was mentioned earlier, there has been a tremendous run-
up over the last few years. So the base of spending of $750 
billion means that 4-percent increase, $30-plus billion of new 
money. You can do a lot with that amount of money. The 
President--by making choices and differentiating among those 
things that don't work or have served their purpose. This is 
the reason he is able to propose $1 billion more for Title I 
for disadvantaged kids, $1 billion more for programs for the 
disabled, IDEA, something that has never been proposed by any 
previous President.
    Yes, there are some programs in education and elsewhere 
which we think probably are not delivering for our kids and we 
ought to take the money from those and put it where it will do 
a better job. Let us be careful to note there is a big 
difference between slow growth, which is what the President 
proposes--growth off the biggest base we have seen in our 
history--and cuts; and be careful about our language.
    Chairman Nussle. Mr. Hastings.
    Mr. Hastings. Thank you, Mr. Chairman.
    If I can get my friend from Alabama to lean back. Thank you 
for being here and presenting the President's budget. Thus far, 
we have heard a great deal about deficits. It is something that 
we heard when I was first elected in 1994. And as my friend 
from Pennsylvania mentioned, I am glad that everybody now is 
concerned about the deficit. Let me weigh in on that issue and 
mediate a different way and just ask for your response to a 
very quick question.
    Is the President proposing this budget with a deficit 
simply because he wants to, or because he must do so, so that 
our Nation can fully recover economically and wage the war on 
terrorism?
    Mr. Daniels. The answer would be ``B,'' Congressman.
    As we tried to make plain and as I hoped to in my opening 
statement, a balanced budget is a high priority. It is an 
important objective. We shouldn't lose sight of it, and as the 
budget contemplates, we should start marching back toward it.
    But it cannot be the only priority of government, at least 
in the President's view. Ahead of it comes a sacred 
responsibility for the physical safety of Americans. And that 
is manifested both in his call for aggressive war on terror 
where it lives, a strong defense, and a homeland defense to 
protect us against hate that might leak through.
    Also, he has made the choice, but it is one we can debate 
honestly, to try to generate greater growth or at least to have 
greater likelihood of growth. Again, you could have a smaller 
deficit if you were prepared to trust to luck with the economy 
we have now. The other priorities, taken together, are not 
particularly expensive, but many are very important--education 
and veterans, an initiative about AIDS and so forth--and to a 
large extent they are offset in our budget by slowing down and, 
in some cases, even transferring funds for purposes--for 
programs that don't work well or purposes that may have been 
served already.
    Mr. Hastings. I appreciate that. I am sure we are going to 
hear a great deal more about this as this debate goes on and as 
we proceed with the budget in this committee.
    I want to focus on an area that I have enjoyed working with 
you on in the last year, and that is specifically the 
environmental management account within the Department of 
Energy. And just to repeat, the environmental management 
account takes care of the worst environmental problem we have 
in this country and that is cleaning up the nuclear sites--
Hanford in my district, Savannah River, Oak Ridge and Idaho. 
And the legacy of these sites, by the way, is the Second World 
War, which we won, and the cold war, which we won, and this is 
the responsibility for the Federal Government to be involved in 
that cleanup.
    What the administration proposed last year was to 
accelerate that cleanup. At Hanford alone, for example, 
accelerating the cleanup from 2070 to 2030 saved something like 
$40 billion, with a ``B'', just at that one site alone.
    My question to you--and by the way, I appreciate the 
President's proposal that, in fact, increases spending this 
year again. Is that increase a reflection of your confidence in 
the accelerated cleanup thus far, even though we have just 
started that process? And if that is the case, as long as there 
is progress in the acceleration, will the administration 
continue to support that acceleration in funding in future 
years?
    Mr. Daniels. Answer is yes.
    More than anything, I think the acceleration is a 
reflection of the President's view that it was simply 
unacceptable to leave environmental hazards of this magnitude 
lying around for decades and decades. We couldn't believe the 
situation we found when we got here, when people said, ``Here 
is our plan. In just 70-odd years, we will be done.'' That is 
not thinkable.
    So this was a situation where the President was prepared to 
spend more on an environmental imperative. And we, as you 
mentioned, brought forward the completion of those jobs by 
decades. And we are going to keep going on that. I don't 
believe--even if we run into trouble at a given site, I don't 
believe that it is acceptable to go back to the situation we 
found.
    I might add that there is $5 billion, an unprecedented 
amount of resources, committed to environmental purposes in 
this budget, the highest operating budget the EPA has ever had, 
up 7 percent. It is one of the points of emphasis, much more 
than most other--than most departments, along with the Freedom 
Fuel initiative and a variety of others.
    So environmental management at DOE is a big-ticket item, 
but only one of many in the President's pursuit of a safer and 
cleaner environment.
    Chairman Nussle. Mr. Moore.
    Mr. Moore. Thank you, Mr. Chairman.
    And thank you, Mr. Daniels, for being here. On January 7, 
there was a proposed rule change in the House, and the change 
allowed the House to increase our national debt limit without a 
separate vote. I opposed that, and I said at the time the rule 
change will, quote, ``impose a new tax, a debt tax, a tax equal 
to the interest payments on our $6.2 trillion national debt, a 
tax that cannot be repealed.''
    Today, Mr. Daniels, you are here presenting the President's 
fiscal year 2004 budget, and the total receipts are stated as 
$9.2 trillion. The total spending is $2.23 trillion. So we are 
no longer, as you have already acknowledged, in surplus, but 
now we are in deficit mode.
    I voted for the President's tax cut in 2001, and I am not 
here to criticize that. I am not here to really point fingers 
or try to lay blame, but I think we do need to find a way, 
together as Americans, to get out of this ditch we are getting 
into; and we are getting deeper and deeper right now.
    The debt tax for 2004 is $176.4 billion. And so people 
understand what that really means, to put it in context, the 
Federal Government spends on education, according to the 
numbers in the Post this morning and, I think, in your budget 
submission, $85.3 billion on education. And yet we spend $174 
billion, twice as much as on education on our debt tax.
    Mr. Moore. We spend as a nation $62 billion on veterans 
benefits, and yet we spend $174 billion on debt tax.
    We spend, according to the Post, $31 billion on environment 
and natural resources, but we spend $174 billion, almost five 
times as much, on debt tax.
    So I think this debt tax, the interest it costs to service 
the national debt, is very important. And while you say, well, 
we need to put it in context, and I agree that we do, I think 
we need to find a way and a plan to get back to balanced 
budget.
    And I heard you--I was up at 1:30 in the morning flipping 
channels, I saw on C-SPAN Mitch Daniels was sitting there 
talking. I hope it wasn't real time last night, I hope it was a 
rebroadcast.
    Mr. Daniels. That is why they make 99 channels.
    Mr. Moore. You were talking, and I heard you saw something 
about we have to consider the fact that--how did you say it? 
You were talking about what I have heard Chairman Greenspan 
talk about. You say there is no real evidence, I believe, that 
ties the cost, the national debt that we have, to interest 
rates.
    Yet in September of last year, Chairman Alan Greenspan 
said, history suggests that an abandonment of fiscal discipline 
will eventually push up interest rates, crowd out capital 
spending, lower productivity growth, and force harder choices 
upon us in the future. And I really, in the 4 years I have been 
in Congress, have somewhat become a disciple of Chairman 
Greenspan, because I think it makes sense. I tell people back 
home, most Americans live by three simple rules most Kansans 
do. No. 1, don't spend more money than you make; No. 2, pay off 
your debts; and No. 3, invest in basics in the future.
    And people say, well, we do that as a family, why can't the 
Federal Government do that? I think we need to get back to 
that. I want to move on to one more thing and ask you a 
question about this. You asked for proposals here, where--and I 
tell people back home, when I agree with the President, I am 
going say that. When I disagree with the President I am going 
to say that. And I agree with parts of the President's 
proposal.
    For example, I think a lot of Democrats and Republicans 
would say we need relief from the alternative minimum tax, No. 
1. No. 2, we need accelerated marriage penalty tax relief. And 
No. 3, I think a lot of Democrats would certainly agree with an 
increase in the child tax credit. But one big problem that I 
have with the President's $674 billion economic stimulus 
package is this elimination of dividends by corporations, tax 
on that.
    I don't have a problem in concept--in fact I think the 
Republican leadership proposed something like that at the end 
of the last session, but they never brought it up to the floor. 
I would have supported a partial on that. But the President 
comes along, the President proposes a total elimination.
    My concern is this, one of my concern is this: No. 1, the 
cost is way over half, $354 billion of the total package I 
believe.
    But last week, 10 days ago, I called the Department of 
Revenue--the Kansas Department of Revenue--and I said: If the 
President's proposal on this dividend tax elimination passes, 
what impact will that have on the Kansas budget? They said it 
will cost $51 million in lost revenues. Now, Kansas is a 
relatively small State. And I will tell you right now, we are 
in the same fiscal position as about 45, 46 other States. We 
are looking at a revenue shortfall somewhere between $750 
million, with an M, not a B like we are talking about here, and 
$1 billion. And we don't have that money.
    I talked to the new Governor. She says, we don't have $51 
million to lose. I guess I would like your comment on that. The 
President is a former Governor. I hope he is going to empathize 
with the position that a lot of States are in right now.
    Mr. Daniels. Yes. First, let me thank you for your 
comments. Yours has been a consistently constructive voice, and 
I know the sincerity of your views about keeping as close to 
balance as we can and getting back there, and we will welcome 
your thoughts about doing that.
    I will say one fundamental thing. The best thing for the 
budget of Kansas would be a return to stronger economic growth, 
and also more confidence, more investor confidence. Most States 
are in the fix they are in because, first of all, growth and 
employment, taxes paid began to fall off. And in many cases the 
biggest fall-off, just as for the Federal Government, came from 
stock market related revenues, capital gains and payments for 
options and bonuses and things indirectly related to the stock 
market.
    So getting the economy going faster again and, in 
particular, strengthening investor confidence would be a good 
thing for Kansas. And I don't doubt that there would be a 
substantial, I hope more than compensating offset for the 51 
million single point estimate they have for the effect of that 
change.
    Chairman Nussle. Mr. Schrock.
    Mr. Schrock. Thank you, Mr. Chairman. Thank you, Mr. 
Daniels, for being here. There seems to be a common thread 
going through all of this, and that is deficits. Of course I 
can identify myself completely with what Mr. Gutknecht said, 
and Mr. Moore just stole the rest of my thunder.
    But I am concerned about the deficits as well. And clearly 
any thinking person knows that the tax cuts did not drive us 
into this situation. We simply must have homeland defense. We 
simply must have defense spending.
    During most of the 1990s the Defense Department was pretty 
much decimated, and now we are trying to play catch-up ball. So 
that is something we simply have to address.
    But I want to keep a cap on spending as well. I don't know 
if it was you or someone else who said the course of prediction 
is a hazardous one. There is no way that we know what is going 
to happen at noon, well, 1 o'clock today, let alone next year. 
So that is a very valid point.
    The tax cuts, nobody has mentioned that specifically. But I 
think Mr. Moore did very well. I think that the AMT and the 
child tax credit and the marriage tax penalty are three of 
those that I think are absolutely vital. I think the others are 
going to be subject to a great deal of debate, and that is 
something that I look forward to.
    But we need to hold the line on spending. And I think a lot 
of what the President addressed in the State of the Union 
address is going to get a lot of scrutiny over the next several 
weeks. But those three that Mr. Moore mentioned, that I was 
going to mention had he not, I think are the most important tax 
cuts that we can possibly do for the American people right now.
    Chairman Nussle. Mr. Lewis.
    Mr. Lewis. Thank you, Mr. Chairman. Welcome, Mr. Daniels. 
Welcome. It is good to see you.
    Mr. Daniels. Likewise.
    Mr. Lewis. Mr. Daniels, in this budget we see and witness a 
dramatic increase in defense spending. At the same time we see 
an overall freeze on resources for domestic programs across the 
government. Just a close review of the proposed budget, there 
is very little compassion in this budget.
    This budget calls for reduction in vocation training and 
after-school services, and would eliminate 45 programs in the 
Department of Education alone.
    It also would reduce aid for rural development, would phase 
out a Clinton administration effort to put 100,000 new police 
officers on our Nation's streets, and eliminate a 10-year old 
program that has demolished and replaced dilapidated public 
housing, and this program is better known as HOPE VI. In my 
district in the heart of the City of Atlanta, this program has 
been very successful, very effective.
    Mr. Daniels, not so much of a question, but I would like 
for you to respond. With this proposed budget, what is your 
vision? What is the vision of the President for America and the 
world community for the next year, the next 5 years, the next 
10 years? Where are we going as a Nation and as a people with 
this proposed budget?
    Mr. Daniels. Very fair and well put question, Congressman. 
Thank you. First, let me say that, and I recognize that you 
have only had 24 hours to read it. But I do hope that you will 
be able to spend more time with the budget. I think that you 
will find that the comments you just made were selective and 
not at all representative of the proposal in its entirety.
    Let me go back to the fact that defense spending rises 4.2 
percent in this proposal. The rest of government, including all 
of the programs you mentioned, grows at almost the same level, 
3.8 percent. I have pulled homeland security out for this 
purpose. So each is growing just a little to one side or the 
other of the 4 percent family income level that the President 
told us to aim at.
    Secondly, I think, if this is not a budget that expresses 
the compassion of the American people and of this President, 
than he is going to fire me, because he was very clear about 
the importance of it doing that.
    Let me just give you a few examples. I think it is 
important you mentioned the world community because America's 
compassion, this President's compassion extends beyond our 
borders. And the new initiative for AIDS of course has gotten a 
lot of attention, very large. No attention at all has been paid 
so far to the new increase in famine funding, $200 million of 
emergency additional money on top of the outpouring that the 
United States provides, as you know, well over half of all of 
the food aid in the world already, and the President wants to 
go further there.
    You single out a couple of programs. And it is true that 
across $2 trillion, we do find some programs that have either 
run their course, like COPS, which was supposed to provide 
100,000 policemen, and did, provided 100,000 plus. The HOPE VI 
program you mentioned in housing has served an important 
purpose. But is there a better way to serve it? HOPE VI, like 
COPS, was supposed to end. It was supposed to sunset last 
September 30, and did. It was supposed to demolish 100,000 
units, it demolished 115,000.
    When we look back, we find that it cost $120,000 a unit to 
do it, whereas the Home block grant available to the same 
communities, including yours, does it for $80,000. And it took, 
on average, 5 years instead of 2 years to get the job done.
    So the idea of bringing down old public housing and 
replacing it with new and better housing is a very important 
one, and the course of compassion is to do it in the best way 
we can, the fastest and most effective way.
    So I would be glad to visit with you further about this. 
But the President was very clear. I haven't mentioned the new 
initiatives for mentoring of children of prisoners, many of 
which he mentioned at the State of the Union, new ways to 
express the compassion of the American people, but we would 
like to work with you on it. And certainly I would defend this 
budget passionately as meeting that test.
    Mr. Lewis. Well, thank you very much, Mr. Daniels. I look 
forward to working with you.
    Chairman Nussle. Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. If I can get the chart 
No. 3 up, Mr. Chairman. Mr. Daniels, take a look at this chart, 
as we debate the outlines for the past many years and as we try 
to project the future. We have had deficits for a goodly number 
of years. I notice we hit a spike where we had a surplus for a 
short period of time, but with the surplus we were taking, 
almost 21 percent from the public.
    And we have talked and listened to the debate today over 
the economy and whether you could borrow money to have tax 
cuts. It is not true that if your mother was in the hospital or 
needed to go to the hospital and you didn't have the money, 
wouldn't you borrow the money to get her in the hospital? And 
isn't it the same if you have a sick economy? Shouldn't we do 
whatever is necessary in order to try to stimulate the economy, 
and get people back to work? We can't continue to have a 5 
percent unemployment for a sustained period of time. We have 
got to find a way to generate jobs. And if we didn't have the 
tax cut, what would this chart look like, if you tried to 
project it out for the next 10 years? Are we sufficient to run 
the government say if we wanted to take 22 percent from the 
economy to run government, or is 18 percent a fair number?
    Mr. Daniels. I don't know what a fair number is, 
Congressman. But I certainly think that we want to be very 
careful not to strain--to increase taxes so that we damage the 
economy. I don't know any economist who wouldn't worry that 
beyond some point you would do that and in the end perhaps have 
less revenue than a growing economy, a strong one would have 
produced.
    So I am well aware of the averages you are talking about. 
It is true that we had reached levels of taxation never been 
seen in this country, before the 2001 tax cut happened. We were 
taxing at a total level that was unprecedented, individual 
income taxes were at the highest level ever. So I think there 
was a bipartisan consensus that some relief was necessary, and 
as I have mentioned before, much of that relief has not arrived 
yet. And if there are those who either have changed their mind 
or never believed it was a good idea in the first place, would 
like to go back to higher levels of taxation, then they will 
have multiple chances to make that argument.
    Mr. Brown. Mr. Chairman, if I can follow through for just a 
minute. We talked about cutting the death tax and the impact 
that is making back in the States. But is that a reason not to 
cut it, if we are having a double tax, which we are? Those 
people worked and paid taxes all of their lives to generate the 
wealth to leave to their children. And should we, in effect, 
assess another 55 percent on top of that? The same way with the 
dividends. You know, the corporations pay that tax and should 
we in effect have to pay a double tax? Is double taxing the 
American people the right way to generate revenue?
    Mr. Daniels. Obviously the President thinks not. Your 
question does raise an important point that the original whole 
tax relief of 2001 was in large part aimed at strengthening the 
economy over time, but also in part correcting certain 
injustices at least that the President saw in the Tax Code, the 
marriage penalty, for instance, and the death tax.
    And likewise, his proposal on the double taxation of 
dividends is as much a fairness and equity proposal as it is a 
long-term economic growth initiative. But, both of those 
considerations I know entered his thinking in making those 
suggestions.
    Mr. Brown. Thank you.
    Chairman Nussle. Ms. DeLauro.
    Ms. DeLauro. Thank you very much, Mr. Chairman, and thank 
you, Mr. Daniels.
    Let me just get right to the point. My view of this budget 
doesn't meet the standard of responsibility or honesty that 
taxpayers, that businesspeople and consumers have a right to 
expect.
    We have seen our surpluses evaporate in the last 2 years. 
We now face record deficits. The budget includes nearly $1.5 
trillion in tax cuts, while it leaves families with no help for 
health care, child care or housing. The budget promises States 
additional Medicaid funding only if they agree to program 
changes that would severely restrict access. The budget doesn't 
factor in the costs of the war in Iraq, fixing the alternative 
minimum tax, or Afghanistan.
    The deficits that are caused will lead to increased 
interest rates, and a larger portion of taxpayers' dollars will 
go to paying for the interest on the debt.
    In essence, if you believe what Alan Greenspan says, and if 
history suggests that an abandonment of fiscal discipline will 
eventually push up interest rates, then I think what we are 
abandoning here is fiscal discipline.
    That means homeowners in this country will see a tax, 
because there will be an increase in their interest on their 
mortgages, there will be a tax on small businesses trying to 
gain access to capital, a tax on kids trying to pay back 
student loans, and people ought to know that. They ought to 
know that from today forward they are going to be taxed because 
of these deficits.
    Let me move to another point, and I will get to my 
question, which is, if you take a look at what has happened 
here--and my colleague before talked about double taxation--if 
you take a look at what dividend tax relief has done here, what 
we are saying is that we are converting income tax into 
essentially a tax on wages only, that the proposals eliminate 
most of the individual tax on income from capital, interest, 
dividends, capital gains, and the only kind of income that is 
going to be double taxed is going to be wages because we are 
going to subject wages to the full force of the income tax and 
to the payroll tax.
    And I will quote the Washington Post this morning. It says, 
``In other words, if you have the money, you can simply invest 
it and watch the tax-free earnings pile up. As a practical 
matter the taxes that would remain would be on those chumps 
whose sole income is from their jobs.'' Those ``chumps'' are 
the hard working men and women of this country who are getting 
nothing from this budget.
    I would like you to address the point on removing from any 
kind of tax obligation, if you will, income from capital and 
the double taxation on workers. Again, that is wages at 10 
percent to 15 percent, and they will bear 15.3 payroll tax 
burden as well.
    Mr. Daniels. Well, thank you. I welcome your concern for 
income tax payers. Correct me if I am wrong, but I think you 
voted to keep their taxes at the highest levels in history just 
2 years ago when the President was making exactly this point, 
and I would welcome your joining him to bring the relief 
forward to this year when it could do them and the economy the 
most good if this has become a big concern for you. I think 
that there are a variety of other issues involved here, and I 
won't take time to untangle them all. But the President's 
Medicaid reform, for example, is strictly optional for the 
States. States who have been asking for more flexibility would 
have it, but no State would be obliged to take him up on the 
offer of more flexibility and more money.
    Ms. DeLauro. I understand, and if you will pardon me, that 
Indiana Governor Frank O'Bannon said that the Medicaid 
proposals are alluring in the short run, largely because of the 
promised up-front money and flexibility, but the potential 
problems are down the road, he said, where the question is, 
quote, will people come off the programs who really need the 
service?
    I understand this is a State that you are particularly 
interested in, in terms of potential future electoral office.
    Mr. Daniels. Well, I am interested in that because it is my 
once and future home. But those Governors who don't believe it 
would work out well in their State are under no obligation 
whatsoever. It is simply a new option, a new choice that they 
would be free to make, and many Governors have been clamoring 
for that kind of choice.
    You know, on the question of interest rates and their 
possible increase certainly it is something to watch. As I 
indicated earlier, it could well be that at some level a 
connection between deficits and interest rates might show up. 
It hasn't in the past. But we ought to be watchful. I would 
just say that at the present time your constituents and 
everyone else's are--although the economy has its problems 
interest rates is not one. We have the lowest interest rates in 
40 years.
    Mortgage payments being refinanced has been one of the 
great blessings, putting much more money in people's pockets, 
in fact more money than most changes Washington can conceive 
of. So we ought to keep our eye on it, and certainly we ought 
to try to join hands on policies that say that we never do see 
an increase other than the one that a growing economy would----
    Ms. DeLauro. But if there is more demand on credit, don't 
we then dry up the pool and the cost of credit goes up? I think 
that is what Mr. Greenspan was talking about.
    Thank you, Mr. Chairman.
    Chairman Nussle. I apologize for interrupting, but we want 
to keep things moving.
    Ms. DeLauro. I understand.
    Mr. Wicker. Thank you very much. Mr. Daniels, I want to 
congratulate you on some excellent testimony this morning, and, 
Mr. Chairman, on a very fine hearing.
    As a brand new member of this committee, I want to observe 
that we are much more technologically advanced on the Budget 
Committee here than the Appropriations Committee where I came 
from. I love the fact that we put the charts up for everyone to 
see.
    I am going to ask staff, and I have alerted them ahead of 
time, to put up No. 3 of Mr. Daniel's charts dealing with the 
effect on the deficit of the tax cuts and also the effect on 
the deficit if the tax cuts had not been enacted. I think that 
is chart No. 3.
    I thought I had given advance notice about this. At any 
rate, while we are searching for that chart, let me just ask 
you, Mr. Director, when you estimated that there would have 
certainly been deficits had the tax cuts not been enacted, did 
you use dynamic scoring?
    And, you know, the public is listening here. I think 
sometimes we use Washington, D.C. terms. But you have pointed 
out, and I think most members of this committee believe--and 
the President believes--that tax cuts do stimulate jobs, they 
do improve the economy, and when that happens people pay more 
taxes and revenues are enhanced.
    So my question is about this chart that I am not able to 
point to, did you use dynamic scoring? Did you account for the 
economic impact of tax cuts or no tax cuts?
    Mr. Daniels. No, sir. We simply stripped it out. No, sir, 
this very simply pretends that the tax cut had been defeated. 
And, in fact, let me point out that there weren't too many 
people, as I recall, 2 years ago who advocated no change at 
all. There were alternative plans for less tax relief. But this 
imagines a complete defeat for the President, no tax relief at 
all, and we would have had triple digit deficits last year and 
this year and probably next year. It is only a way of saying 
let's quit looking for blame where there is none. The deficit 
came back directly as a result of the popping of the stock 
market bubble, the recession that we did not know was on as we 
sat here 2 years ago. Some suspected it. I remember very 
clearly in December of 2000, Vice President-Elect Cheney said 
he believed we might be at the edge of recession. He was 
chastised for talking down the economy and so forth. He was 
dead right. But nobody knew that. And nobody's model had that. 
Those two factors, plus the cost--the cost directly of 9/11 
already exceeds $100 billion.
    You know, Congressman Spratt asked a fair question, do I 
feel chastened? Of course. Who doesn't? Despite our avowed 
skepticism and our attempts to be cautious and our attempts to 
leave some buffer and all of the rest, we didn't leave nearly 
enough for the events that history threw at us.
    Mr. Wicker. I think that point is well made. We are under 
terrible time constraints here. But here is the frustration 
that I have of chart like that, which is of course very 
accurate.
    The President obviously believes--he is convinced--that his 
tax cuts will be beneficial to the economy, and yet you stated 
to us in your testimony today that your office uses the 
conventional assumption and avoids dynamic scoring.
    Is there a way for your office at least to provide us an 
alternative set of budget assumptions and enable us to see 
which is more accurate? I mean, I am an advocate of changing 
the rules around here. We have had a discussion about dynamic 
scoring earlier today, and certainly it is hard to be accurate. 
But it does seem to me that it hurts the President's case when 
he is firmly convinced, as am I, that the tax cuts will be good 
and will enhance revenues and we can't show it on our budget 
document.
    Mr. Daniels. You are right, of course. Let me just say a 
couple of things. One is, we had the shortest and shallowest 
recession in a long, long time, and I could parade a group of 
eminent economists across this platform, all of whom have said 
that were it not for the tax relief of 2001 it would been much 
worse, and I think that is undoubtedly so.
    Secondly, with regard to scoring, yes, I do believe what we 
do now is unnaturally conservative, disregards any effect from 
these changes, and is therefore for sure inaccurate.
    However, if we were to leap into a new scoring system we 
would be suspected and accused, I am sure, of doctoring the 
numbers to make the President's proposals look better. So we 
have not done that. We have played by the rules we found.
    I do think that the lead, in terms of some change here, 
probably should rest with a bipartisan or nonpartisan entity. 
It could be the Congressional Budget Office. And the way 
forward probably is the one you suggest, not discarding the 
old-fashioned static model, but presenting an impact statement 
or an alternative set of projections that makes some reasonable 
estimate of what the real world effects would be.
    Chairman Nussle. Mr. Edwards.
    Mr. Edwards. Mr. Daniels, I respect you as a capable public 
servant who genuinely cares about balancing budgets and fiscal 
responsibility. I believe you probably would be willing to make 
deeper budget cuts than Members of Congress. But eventually in 
Federal budgeting, as well as in football coaching, we have to 
judge an administration by its results and not just its 
personal expressed values.
    Two years ago, when my two sons were just 3 and 5 years 
old, your budget projection said that they would face no 
national debt when they graduated from high school. Now that my 
two young sons are 5 and 7 they will face, according to your 
numbers, at least a $7 trillion national debt on which they 
will pay interest for the rest of their life. They will face 
that debt before they even finish elementary school.
    Now, in the history of the United States there has never 
been, to my knowledge, that type of enormous economic collapse 
in such a short period of time in regard to the Federal budget 
outlook. And I don't blame you or the administration for all of 
that; that would not be fair. But I don't think reasonable 
people can deny that the proposed $4 trillion in tax cuts don't 
exacerbate a very serious deficit situation.
    You know, what we do know from history is that guns and 
butter policies did not work in the Johnson administration in 
the 1960s, that guns and butter policies did not work in the 
Reagan administration of the 1980s in regard to Federal 
deficits, and it did not work in the last 2 years with this 
administration when it proposed in effect a guns and butter and 
tax cut policy and still promised we could pay down the 
national debt to zero.
    I guess my conclusion today is that what I am hearing is 
that you are, in effect, genuinely, but in effect asking us to 
ignore the repeated lessons of history and to trust, by faith, 
the budget analysis of those same analysts that told us just 2 
years ago we could have our cake and eat it too. We could have 
a $1 trillion national debt, and my two young sons would face a 
totally debt free country in just a few years.
    In all due respect, and it is with great respect, I am not 
sure I am willing to take that kind of risk when the 
consequence might be paid by my sons, the children of these 
Members of Congress and future generations of our children and 
grandchildren.
    I want to make a few other observations, having listened to 
the testimony and the very able questions on both sides of the 
aisle. In case I don't leave you time to answer this question 
verbally, I hope you can do so in writing later.
    What should I tell the 12,500 Army soldiers in my district 
at Fort Hood who will soon be deployed to the Iraqi theater? 
What is fair about cutting, by 14 percent, the Impact education 
funds designed to help their children get a better education 
here at home while mom and dad are in harm's way fighting 
against Saddam Hussein? What is responsible or compassionate or 
conservative or fair about that policy, especially when one 
considers, in my same district a friend of mine who said he 
made a million dollars in dividend income last year will not 
have to pay a dime in taxes on that same dividend income in the 
year that these military school children will receive a reduced 
education, even while mom and dad perhaps are giving their 
lives for our country?
    In his State of the Union address, President Bush said, and 
I quote, ``This country has many challenges. We will not deny, 
we will not ignore, we will not pass along our problems to 
other congresses, other presidents, and other generations.''
    You know, I think President Bush was right in that 
principle, and that is frankly why I find this budget to be 
stunning in its level of fiscal irresponsibility. It ignores 
and denies the real day-to-day consequences of long-term 
deficit spending. It even goes beyond passing along the deficit 
problem, the national debt problem to our children; it 
exacerbates that problem by 2, to 4, to $5 trillion.
    If passing a $300 billion deficit this year on to our 
children is good stewardship, I seriously think we need to 
reconsider the meaning of stewardship. And if passing a $300 
billion deficit this year and adding several, 2 to $4 trillion 
to our already enormous $6 trillion national debt is 
conservative, then perhaps we need to reconsider the definition 
or meaning of conservative.
    In my opinion, this budget breaks faith with our children, 
who will have to pay taxes on this deficit for the rest of 
their lives, and on our seniors by undermining the integrity of 
the Social Security system.
    Mr. Daniels. I will be glad to write you a letter about 
Impact Aid. But the first thing you can tell--you wouldn't have 
to tell the folks at Fort Hood--is that this President has 
raised their pay, brought it from a dreadful level when they 
had been mistreated and underpaid for years, and as well as 
their benefits, their housing, has treated them with the 
respect that they are due given the job that they do and the 
risks they will take. And the impact of that I think dwarfs 
enormously any impact they will ever feel from a program which 
I will be glad to debate the merits of with you on that.
    Mr. Edwards. I would appreciate that response on what I 
think is a very important program. They care about their 
children's education.
    Chairman Nussle. Mr. Bonner.
    Mr. Bonner. Mr. Chairman, Mr. Daniels, this is the first 
time I have had an opportunity to ever ask an OMB Director a 
question.
    Mr. Daniels. You have been waiting for years to get at one 
of these people.
    Mr. Bonner. I am a new Member of Congress. I have served 
for less than a month. But I have been on the Hill for almost 
18 years. I will have to admit that my ears are playing tricks 
on me to hear so many of my friends on the other side express 
grave concern about deficit spending. I wish we had had that 
during the first years of the Reagan administration, the first 
Bush administration, and so on and so forth. I welcome it, 
quite frankly.
    I would like to ask you two questions very briefly. No. 1, 
are you aware of any bill that has been introduced by any of my 
colleagues on either side that would repeal the tax cut of 
2001?
    Mr. Daniels. No, sir. Not so far.
    Mr. Bonner. Because there has been a great deal of 
criticism about that, how that has exacerbated and made the 
deficit more difficult. I haven't heard one, and I have, to the 
contrary, proposed and introduced my first piece of 
legislation. That would make----
    Mr. Baird. Will the gentleman yield? I believe Mr. Rangel 
has introduced a bill, arguing that until the war has been 
resolved the tax cuts will not move forward.
    Mr. Bonner. Well, I have not had a chance to talk with the 
gentleman from New York, but I would welcome that opportunity. 
I have introduced a bill that would actually make permanent the 
tax cuts of 2001. How can the people of this country truly plan 
long-term financing for their own families when we actually 
have a sunset provision in 2010?
    One comment that I might make, however, and it is not 
necessarily disappointment in your office, Mr. Daniels, but I 
would welcome an opportunity for your office to help me and my 
constituents back in south Alabama. You said in your statement 
that a strong economy produced unprecedented surpluses and only 
a strong economy can bring those surpluses back. Our economy in 
the First District of Alabama is tied largely to some of the 
projects that the Civil Works Division of the Corps of 
Engineers has worked on.
    We have a number of areas where we don't have interstate 
systems, but we have a river system that if it is not managed, 
if it is not maintained appropriately, then we are putting a 
nail in the coffin of hope to those economies there. And I 
would welcome an opportunity, while I am not being critical of 
the budget, somewhat disappointed that I think for the third 
year in a row this area has been cut, to find an avenue of 
opportunity to work with the administration, to rather than 
turn those into cuts, into opportunities, because I think that 
they would truly help pave the way for a lot of rural 
economies, not only in Alabama, but in Mr. Wicker's State of 
Mississippi and other communities throughout the country.
    Thank you again for this opportunity.
    Mr. Daniels. Thank you, sir.
    Chairman Nussle. Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman. Mr. Daniels, it is good 
to see you. You have asked about our plan, and chart No. 5, the 
one that--yeah, that one--that is our plan, the little green 
there where we took a massive deficit and turned it into a 
surplus. That is a result of Democratic leadership that was put 
in motion without a Republican vote. We made the tough choices. 
It was kept in motion with enough of a minority in the House 
and the Senate to sustain the President's vetoes of Republican 
plans that would have gotten us off track. It was unpopular, 
but responsible. As a result of making the tough choices we 
lost 50 seats in the House of Representatives but it was good 
for the budget, it was good for the economy.
    There are tough choices. This budget doesn't have any tough 
choices, just excuses. The massive deterioration in the budget, 
not anybody's fault. There is every indication that nobody 
thinks that there is a problem, and we can still afford massive 
tax cuts, eliminate the tax on dividends, repeal the estate tax 
on dead multimillionaires, so that, as was suggested, the Leona 
Helmsley theory of taxation, only little people pay taxes, will 
be instituted.
    We have a 5-year budget. And the next chart, No. 3--the 5-
year budget spends Social Security and Medicare and then some. 
As far as the eye can see the whole budget gets worse and 
worse. We go more and more into debt. This stops at 2008, which 
is interesting, because that is the year when those born in 
1945 begin retiring. And there will be significant strain on 
Social Security and Medicare, and we will be in the worst 
possible shape at that time. There is no apparent plan to deal 
with that. So what will be the future of Social Security and 
Medicare?
    You have indicated that there is apparently no contingent 
plan about a war in Iraq. I guess if we go to war we will just 
add that up to more debt, let the next generation pay for it 
while they deal with Social Security and Medicare.
    And even if there is more debt--I guess No. 9--if you can 
explain what effect it is going to have on the debt tax, what 
more we will have to pay on taxes as a result of the national 
debt.
    Is that 5 minutes?
    Chairman Nussle. I believe it was. Do you have any 
response, Mr. Daniels?
    Mr. Daniels. Only to say, you are sitting in the right 
place, Congressman. This is the right forum for those very 
debates to happen. There are only two ways to move more quickly 
back to balance than we now project. You can raise taxes or you 
can cut spending, and this is the forum for making those 
proposals. Ultimately, it has to produce a budget resolution.
    If you don't like the one that the President is 
recommending, or the one that your colleagues may carry 
forward, then that is the place to present the tax increases 
that you believe would lead to a positive difference. The 
President, I would guess, would find that a very risky course. 
Trying to tax our way back to prosperity is a pretty dubious 
enterprise, but honest people can differ.
    Chairman Nussle. Mr. Franks.
    Mr. Franks. Mr. Daniels, I guess my first comments to you, 
sir, are one of sincere commendation for just your sincerity 
and your clarity of mind before this committee, and it seems 
clear to me that the President has laid out in this budget 
clear emphasis on the need to build the economy and to protect 
this Nation against the specter of terrorism. And now this 
committee has the grave responsibility to try to meet those 
priorities in the context of making sure that we do not do 
damage to the future and to the economy through deficit 
spending.
    So with that, I would like to ask you just one incredibly 
unfair and theoretical question, but one that I think is an 
important one for us to consider.
    If the fate of the world depended upon us balancing this 
budget and our focus was on trying to do that through the 
reduction in spending, again an unfair question, what areas 
would you consider to be the most responsible for this 
committee and this Congress to consider in terms of reducing 
spending to meet a balanced budget?
    Mr. Daniels. I don't think there are any unfair questions, 
Congressman, and I don't view that one as unfair. I will take 
you back first to the facts I displayed a little earlier on. We 
can get back to balance in pretty short order without cutting 
anything, without cutting anything, simply by maintaining the 
government where it is, doing nothing new for a couple of 
years. In fact we could let it grow with inflation. Anything 
you found to cut would hasten the day of a balanced budget, if 
that was all that our duty required.
    If times were normal, if the economy were stronger, if 
there were not the threat to lives of Americans, if we weren't 
in a war now and potentially facing another, that might be 
something we could all agree to do, to make our No. 1 priority, 
not just one of several. It would not be beyond our reach to do 
that. Under the circumstances the President thinks that would 
not be a wise choice, and I hope most folks will agree.
    Mr. Franks. Thank you, sir.
    Chairman Nussle. Let me just report to my colleagues that 
we have 5 minutes left, and time for one more inquiry before 
the memorial service begins. Could I just see--of the members 
who have not yet had an opportunity to speak--what interest 
there would be in recessing the hearing in respect for the 
memorial service and then coming back. Would that work for 
members? I see a few members that are interested in that.
    My understanding is that while it is inconvenient for all 
of us, including Mr. Daniels, you know there is a lot of 
inconvenience that a lot of people have had to go through as a 
result of the tragedy that happened this weekend. And out of 
respect to that, I think I would really like to recess the 
hearing out of respect to that memorial service and then come 
back afterwards if we can do that.
    So, Mr. Ford, you will end our first inquiry, and then we 
will come back after the memorial service.
    Mr. Ford. Thank you, chairman. Mr. Daniels, good to see 
you. There has been a lot of talk here today about what 
Republicans have done over the years and what Democrats have 
done over the years in terms of spending and tax cuts, and one 
thing we cannot deny is that what has traditionally been 
thought to be a Democratic approach, which is to run deficits 
up, now seems to be something that Republicans want to do. I 
know my friend, Mr. Bonner, made an excellent point that he 
finds it ironic that Democrats would be urging for us to 
restrain spending somewhat. I would remind him, as well as all 
of my colleagues on the other side, that some 60 percent of 
Democrats in this Congress have never been in the majority. So 
to label that or to try to affix that label to most of us not 
only is unfair, it is untrue.
    But let me get to the point which I think is most relevant. 
Most of what we are talking about here, as important as it is 
and as much as it makes to budget experts like you and Mr. 
Spratt and Mr. Nussle and the others on the committee, it is 
pretty irrelevant to most people.
    I think most people sitting at home are wondering, ``what 
are they doing to create more jobs here in my community? What 
are they doing to help make my schools better? What are they 
doing to make sure if I get sick or someone I know gets sick, 
if he or she has to go to the hospital, that they will get 
treated, and won't have to sign a bunch of papers or go through 
a bunch of bureaucracy in order to have things done?''
    I imagine most Governors are wondering how come the 
President didn't provide much relief for us in his budget. I 
know you have come back to try to offer some changing of 
Medicaid formulas and so forth. But we all know the best way, 
as you have told us many times in the past, Mr. Daniels, as 
well as this President, that to help consumers the best is to 
put money right in their pockets. To help States the most would 
be to provide some direct aid.
    You mentioned a few minutes ago that us Democrats, if we 
are so opposed to the President's budget, then we should have 
the courage to offer our own. You accused Mr. Scott of either 
wanting to raise taxes or cut spending.
    I might remind you, you work for the President of the 
United States. That is your responsibility, and if you choose 
to shift it to us then you should just admit that you all have 
failed in 2001 and that this budget that you are proposing 
today won't accomplish much more than what you accomplished 2 
years ago, and we would be happy to try to assist.
    But the reality is you are borrowing more money to gamble 
again. You borrowed money in 2001 against an estimated or 
projected surplus. Now you are borrowing money again, as Mr. 
Spratt indicated, against the bottom line which you can't 
offset against Medicare, Social Security. We use all of those 
big words to say we are not really running a debt.
    The reality is we have got this credit card, and we now owe 
a lot more on it than we did 2 years ago. It is estimated we 
will owe even more on it if and when--I hope to have kids, my 
momma can't wait for me to have kids, so when I have kids, what 
those kids will have to pay on down the line.
    In light of that, you propose a dividends tax reduction. 
You have not proposed much to help, I think, regular folks. As 
much as I think there is some merit to that, I don't understand 
how that will stimulate much right away. Most economists and 
people who know far more than me, and you being one of them, 
have all suggested that it may be good in the long run, get 
people investing in companies that actually are producing 
profits, get people investing in the market again.But the 
reality is what do you do for people who earn 50 to $60,000 a 
year?
    I might add, you all use these great numbers. But over half 
of American tax filers will get back less than a $100 this year 
under the plan. I am just curious, what is going to help create 
more jobs in Memphis, where I represent, and better schools and 
make hospitals work better, and frankly make this conversation 
more relevant for people, because all of this stuff is about 
outer years and debt tax.
    I mean, I get a sense of what we are talking about, but at 
the basic level my Governor, who, like Mr. Moore's Governor, is 
faced with a $400 million debt, not as big as California, New 
York, Florida, but that is a lot of money where I come from, 
and we are expected to have a $500 million shortfall next 
year--what does this budget do to help us provide more health 
care or keep these hospitals open in my State and to keep 
schools functioning, not at the levels they are functioning now 
but to increase it?
    I might add, you still haven't funded the No Child Left 
Behind Act, and you all can say it is us but the reality is you 
all haven't done much to help it either.
    But I would love to hear just a few seconds of response or 
even get a letter from you, Mr. Daniels.
    Mr. Daniels. It says I have got a minute-four. I think you 
asked the question in the right way, Congressman, the way the 
President does. What must be done for this country? And I have 
given his list of the things he thinks must be done. Many of 
the things you just mentioned are on it. Certainly more jobs is 
on it, better education is on it, better health care is on it.
    You know, borrowing or a deficit is not a policy of this 
President. It is a consequence of the choices that he believes 
that we have to make in order to make that kind of difference 
in the lives of average citizens. With regards to the States, 
some haven't noticed but Federal transfers to States have been 
going up very fast, 9 percent a year for the past 4 years, 
going up faster than State spending. So on a net basis it is 
helping States with the problems that they have encountered.
    Mr. Ford. Mr. Daniels, as you close out, one last thing, 
maybe you can respond in writing. The dividend tax cut, my 
Governor and my mayors in my area say that it could hurt their 
ability to raise money through some of these municipal and 
other tax-free bonds. I would love to get your thoughts on what 
impact you would think long term that will have as we try to 
build new schools and even try to do some of these things that 
the Federal Government doesn't help us much on.
    Mr. Daniels. Yes, sir. We will write you on that. I would 
agree with you that that particular part of the President's 
plan is more for the intermediate and long term, not just for 
the short term. His is a more balanced approach. Some say only 
do things that will affect the next few months, and his 
proposal was a little broader.
    Chairman Nussle. With that, I thank members for their 
participation in the first part of this.
    We will recess until 2 o'clock, and as I said before to 
members, please keep an eye on the memorial service and we will 
try and also inform members of when the hearing will come back 
to order, but approximately 2 o'clock.
    We stand in recess.
    [Whereupon, at 1 p.m., the committee was recessed, to 
reconvene at 2 p.m., this same day.]
    Chairman Nussle. This resumes the hearing on the 
President's fiscal year 2004 budget, the House Budget 
Committee. When we left off, we were in the process of 
questioning the witness before us today, the very distinguished 
director of the Office of Management and Budget, Mr. Daniels. I 
will call on members as they have arrived. Mr. Diaz-Balart.
    Mr. Mario Diaz-Balart. Thank you very much, Mr. Chairman, 
and I will be brief because as a freshman, I know that one has 
to be careful, one says, the first time someone speaks in 
committee. I want to first thank you, Mr. Chairman, Mr. 
Daniels, also for your presentation. Mr. Chairman, I have to 
admit that I have learned a lot as a freshman in this 
committee. I have learned not only from Mr. Daniels, but I have 
also learned a lot from the honorable members of the minority 
party today. I heard today a couple of things I thought very 
interesting.
    As a freshman, I learned today that a 4-percent increase in 
spending, 4-percent growth in the size of government excluding, 
I believe, defense, I learned today that that is a cut. I also 
learned today, Mr. Chairman, that--and this one I have to admit 
was a real eye opening experience. And I hope the other 
freshmen have gotten as much out of this meeting as I have, and 
particularly learning some of the ways of Washington, D.C. For 
someone like me who is new to Washington, D.C.
    I also learned from some of the honorable members of the 
minority party that when the President proposes that government 
take less money away from the taxpayer, that that is actually 
an increase in government spending. Mr. Chairman, I also 
learned that today when the President--I want to talk a little 
bit about Florida--talks about how in Florida residents--about 
5 million taxpayers in Florida would have lower income taxes in 
2003, how 1.2 million small business taxpayers could also use 
their savings to invest in new equipment, expand facilities, 
hire additional workers; how in the case of 1.9 million married 
couples in Florida would benefit from the accelerated reduction 
of the marriage penalty; how 1.4 million married couples and 
single parents in Florida would benefit from the acceleration 
of the increase in the child tax credit; that those millions of 
Floridians are rich Floridians.
    Mr. Chairman, I thought I would mention the fact that I 
learned a lot about an incredible amount of millionaires that I 
was not aware that existed in Florida. I learned how--again, I 
repeat--how not taking peoples' money is increasing government 
spending. And Mr. Chairman, I want to note for the record, note 
that in the district that I am fortunate and blessed to 
represent, the people there believe that if government 
increases spending by 4 percent, that is not a cut, that is a 
4-percent increase.
    For the record, Mr. Chairman, I want to make it very clear 
that the people in the district that I am blessed to represent 
believe that if you let them keep more of their money, Mr. 
Chairman, that is not increased government spending. And for 
the record, Mr. Chairman, I also want to note that many, most, 
those millions of Floridians that would benefit from this 
program are not rich people. They are hard-working men and 
women who work awfully hard to put the food on their table to 
pay the mortgage and pay their rent. Mr. Chairman, I just want 
to make sure that at least for this district that I am blessed 
to represent, I set the record straight.
    Chairman Nussle. I thank the gentleman.
    Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman. As you know, I have 
had the privilege of following budget debates at the Federal 
level for almost 20 years now. I think most folks back home are 
confused by these hearings. The numbers are too big to even 
imagine, but they want to know whether their government is 
working for them or against them. I am worried, and I realize, 
Mr. Daniels, you have probably the toughest job in the 
administration, maybe the toughest job in America.
    The criteria used to be for the job that you had to pay for 
the administration's promises. Then pretty soon, people started 
pretending they were paying for the promises. And now people 
don't even pretend to pay for the promises. I had the pleasure 
of seeing two of your predecessors, very distinguished and 
smooth people before this committee, essentially ruining their 
reputations by later contradicting what they told this 
committee. Makes me wonder whether we should put OMB directors 
under oath when they come. We have heard a lot of happy talk.
    Let me read to you a quotation from one of your 
predecessors that he was only willing to reveal after he 
retired from public service. And this is a quote. ``I knew we 
were on the precipice of triple digit deficits, a national debt 
in the trillions and destructive and profound dislocations 
throughout the entire warp and woof of the American economy. By 
then, all the major errors which would eventually shatter the 
Nation's fiscal stability were apparent. I had most of the 
diagnosis down already. It was only the full and final 
magnitude of the numbers that would materialize later, but I 
kept quiet and tried to work inside. It proved to be of no 
avail.''
    The administration locked the door on its own disastrous 
fiscal policy jail cell and threw away the key. David Stockman 
wrote that in his book, The Triumph of Politics--it is on page 
13--as he reflected on his own prior testimony before this 
committee. If we could have slide No. 5 presented, please, 
entitled ``The Fiscal Opportunity Loss,'' the President, in his 
State of the Union--excellent State of the Union address, as 
Chet Edwards already said--we will not pass along problems to 
other Congresses, other Presidents or other generations.
    And yet, with the long-term structural budget deficit that 
we are being presented with, it seems to me that is precisely 
what we were doing, and that is what is the greatest risk to 
your own personal reputation. By putting this debt tax, this 
debt burden on later generations, we are passing the buck to 
future generations. I have been a deficit hawk most of my 
career. It is very tough to achieve what the Clinton 
administration achieved with that graying patch there. The only 
three consecutive years of budget surpluses that we have had 
since the days of Calvin Coolidge and Herbert Hoover.
    While we shouldn't hyperventilate about the deficits, it is 
going to be remarkably difficult for this Congress--under 
either party--to dig our way out of this hole. That is the 
macro problem. The micro level in your budget, and I hate to be 
parochial, we in the Tennessee Valley have an agency called the 
TVA. And on the very last page of your budget, you essentially 
suggest that by September of this year, they need to have a 
plan to cut their debt in half.
    Well, their debt is large, but for each one billion of debt 
reduction, that is a 18 percent rate increase or tax on the 
people of the Tennessee Valley. So I hope you will be sparing 
on the people in that seven-State region as you essentially 
force them to be taxed, to dig out of their debt hole when the 
Federal Government is not doing very much to dig out of its 
debt hole. We have, on the screen there, two giant patches of 
red, and they extend almost as far as the eye can see. As you 
correctly put it, no one can predict much beyond a few years 
ahead. But you know the problems of this body and I hope and 
pray for you that you do not suffer the fate of your 
predecessors because it looks all too likely at this point.
    Mr. Daniels. Thank you for your solicitude, Congressman, 
and I appreciate it, and I guess I can only say that nothing 
about this job has to do with me or any reputation I might ever 
have. It is about trying to help this President deal with the 
problems facing him, which are different than the problems 
facing his predecessor or his predecessor. And that is what we 
are gathering about today. Recession he inherited, a war no one 
asked for, created this situation and what we all must be--the 
business we must all be about is how to deal with it best. And 
I presented his plan, which does place some things above the 
objective, the near-term objective of a balanced budget, not 
many, but a few. We are very receptive of other ways to meet 
the Nation's needs and do even better than we forecast to do 
here. The micro level, I will say that no one favors higher 
rates for people in the TVA area. They had a plan to reduce 
their debt. This was their stated objective in previous years 
and have for various reasons not acted on it and in fact moved 
away from it. We have called on them to write a new one. And 
there are many, many ways that do not involve rate increases 
that they might first of all avoid take on greater debt which 
at present they would like to do and begin to move down the 
25.3 billion that they piled up. So we would be glad to work 
with you on that and with the interest of the upper-most 
ratepayers.
    Chairman Nussle. Mr. Hensarling.
    Mr. Hensarling. Thank you Mr. Chairman and thank you Mr. 
Chairman for recessing us so we could witness a very moving 
memorial and wonderful celebration of heroic life. Mr. Daniels, 
one of the advantages you have as being a member of least 
seniority in your party is, No. 1, you get to sit in front of 
the chairman so that your wife and mother may see you on C-
SPAN. Another additional advantage you have is you have the 
opportunity to hear the testimony and questions of many wise 
and senior members, some of which spoke with a lot of passion. 
I, too, am passionate about issues. One of the issues I am 
passionate about is the American family and I want to commend 
you and the administration for holding the growth in government 
spending to a level no higher than the growth in the family 
budget. I believe it is a good starting point and I believe we 
have a lot more room to grow however. A friend and colleague 
and fellow Texan earlier today spoke to us about learning the 
lessons of history. I believe it is, indeed, difficult to 
project these deficits 10 years in the future. I believe that 
economic forecasting not unlike auto mechanics is a highly 
imprecise science. Perhaps there may be a little more agreement 
though on the historical record. Have you looked at the history 
of what has happened when this Nation has cut marginal tax 
rates and what that impact has been on economic growth and tax 
revenues?
    Mr. Daniels. Yes. From time-to-time.
    Mr. Hensarling. Can you tell us what that impact has been?
    Mr. Daniels. Typically the impact has been that revenues in 
succeeding years did increase. This was certainly the 
experience in the 1960s, again in the 1980s.
    Mr. Hensarling. And its impact on economic growth?
    Mr. Daniels. Revenues increased because economic growth 
after the fact of the tax increases was substantially higher.
    Mr. Hensarling. I would like to take a look historically 
also--I would be curious if you looked at the flip side of the 
coin and what our history has been in the modern era when we 
have actually raised marginal rates and its impact on deficit 
reduction. Historically, is it your impression that as we have 
raised marginal rates, that any increased government revenue 
has been earmarked for deficit reduction or is, instead, the 
government budget continue to grow, outpacing both inflation 
and economic growth?
    Mr. Daniels. There have certainly been many occasions in 
which any new incremental revenues were spent.
    Mr. Hensarling. So is it your opinion, then, that 
increasing marginal revenues is historically proven to be a 
poor method by which to fight deficits?
    Mr. Daniels. I will just say that I think it would be a 
poor method in the situation which we find ourselves now this 
for certain. The economy underperforming, higher tax rates--
particularly higher tax rates. I think the President believes 
it would be backwards economic policy and probably counter 
productive.
    Mr. Hensarling. Mr. Daniels, over the last 5 years, 
discretionary--Federal discretionary budget has grown an 
average of 7.2 percent a year which has outpaced both inflation 
and economic growth. Presently, I believe the average American 
family pays almost 40 cents on the dollar to pay their Federal, 
State and local income taxes. If the Federal discretionary 
budget continued to grow at 7.2 percent and if we continued to 
have modest economic growth without the passage of an economic 
growth program and since you have been asked to look through 
your crystal ball in the future, would you have an opinion on 
what the tax burden might be on the American family 10 and 20 
and 30 years in the future?
    Mr. Daniels. No, not offhand, but I would certainly concur 
that the rate of spending growth that we have experienced in 
the last few years needs to be curtailed as the President has 
suggested, needs to slow down to something much more moderate 
and that particularly when coupled with the pending increases 
not immediately but 10 and 15 years out and the obligations we 
have committed to under our entitlement programs would combine 
to be an unsustainable burden on future taxpayers.
    Mr. Hensarling. Mr. Daniels, I have heard a lot of talk 
today about the deficits. But typically, I have only heard one 
response to them, and that is increasing taxes once again on 
the American family. I would certainly propose for all the 
members here that there is another option and it has a lot to 
do with cutting Federal spending. Thank you, sir.
    Chairman Nussle. Mrs. Capps?
    Mrs. Capps. As a new member--another new member of our 
Budget Committee, I want to first tell you, Mr. Chairman, what 
an honor it is to serve on this panel. As a committee which 
sets the framework for our fiscal policies, I know we are here 
to begin to make the important choices which address our 
country's challenges. I see the budget as a reflection of our 
priorities, our values, if you will. And while we must continue 
the fight against terrorism, we can't forget our key domestic 
challenges. I am a nurse and I came to Congress after spending 
two decades working in the public schools of my community. As 
such, I focus my professional life on efforts to improve health 
care, both in my community and now in our Nation. Today there 
are many health care issues in my congressional district and 
rural and other areas across this country that the Federal 
Government can and should do something about, like the growing 
shortage of doctors and nurses, and millions of people without 
access to health care, millions of seniors without ability to 
get prescription medications, and a public health 
infrastructure that is stretched beyond capacity which really 
does impact our homeland security.
    I met just a few minutes ago with a group of 
representatives of one of our Nation's largest nonprofit health 
and social service organizations, and I told them I was going 
to come and ask you some questions for them about health care. 
I have three topics, and I hope we can touch on all three, but 
I want to start on a very significant one, which is the reform 
of Medicare. This administration is pushing private health 
plans as a panacea to Medicare's woes. We have had private 
plans in Medicare. And in my district, they are not working. 
Medicare+Choice plans are dropping out of the program and 
cutting back benefits. None of these plans want to participate 
in rural, districts like mine and the premiums are rising 
faster than Medicare costs. Given all of that, my question to 
you is, why these private health plans will be good for the 
programs for all of our seniors.
    Mr. Daniels. I think these are probably not the plans that 
would serve seniors under a reform like the President will 
propose. I will observe that the Medicare+Choice plans have 
been leaving not because seniors don't like them. Seniors' 
customer satisfaction rates have been well over 90 percent. 
They have been leaving because in a command and control system, 
they are losing money at the rates that the government has 
chosen to pay them.
    So I don't think they are a model, certainly not the way we 
administered it. I would expect that under a program like the 
President will propose, you will see a close parallel to one 
that works very well for Federal employees who are served even 
in small communities and rural areas, are served with a great 
degree of choice about physicians and about the kind of 
benefits that they--that suit them and their family best. And 
the President is very sensitive to the concerns you mentioned. 
It has to be a plan that works for everybody everywhere, and it 
has to be one that opens many new choices while preserving the 
ones that seniors have now.
    Mrs. Capps. Thank you. I am going to look forward to 
continuing that. I want to bring up one issue. I worked very 
successfully, I believe, in the House and Senate to address our 
nurse shortage, and that situation I am watching because the 
budget that--Tommy Thompson said some good things about it in 
the Department of Health and Human Services budget in brief, 
but nurse education loans actually are going to be cut in the 
President's budget, so I am going to be watching this. I am 
also very mindful of Medicare payment cuts to Medicare 
providers. The cut that was 5.4 percent last year is now going 
to be followed up with 4.4 percent.
    In this current budget, you say you want to fix the 
physician problem, but we are hearing from these same people 
that were in my office and also in my district that they are 
really struggling. So I want to know what your views are on 
Medicare provider payment increases during this fiscal year.
    Mr. Daniels. In particular, the physicians, we think, are 
not being fairly compensated. There is really an arithmetic 
flaw using old data, and I think you are familiar. We think 
that is the strongest case, probably stronger to be honest, 
than many of the other providers for whom the independent, so-
called Med-PAC committee has continually given evidence of are 
being adequately compensated for the moment. But there is an 
issue with physicians, and we are interested in trying to fix 
it. Let me say a quick thing about nurses because it is a very 
important problem. And we have been trying and would 
respectfully ask your guidance and assistance maybe.
    We have a program called Health Professions grants, which 
has historically been aimed at generating more professionals 
and also getting them to underserved areas. It hasn't been 
working very well at all. Meanwhile, there is a somewhat 
parallel program called the National Health Service Corps, 
which seems to do that job very well, and in particular, has 
been, I believe, supporting nursing education. The President, 
in this budget, also suggests nurse loan forgiveness as another 
initiative. But we have to find better targeted ways to get at 
this common goal. There are places where we have all the 
doctors I think we can use, and too many places where we don't 
have enough doctors and certainly not enough other 
professionals.
    Mrs. Capps. I do look forward to working with you, and I am 
very cautious about the Health Service Corps as a model because 
it doesn't deal with bedside nurses. But I hope this is a 
conversation that we can continue, and I appreciate you being 
here.
    Chairman Nussle. Mr. Garrett, do you have any questions?
    Mr. Garrett. No.
    Chairman Nussle. Mr. McCotter.
    Mr. McCotter. Thank you Mr. Chairman. I just want to touch 
and make sure I understood a couple of the larger ramifications 
of the budget and then a specific question. And bear with me. I 
am new here. Just a simple country lawyer from Detroit. The 
three--it seems to me that in addressing what happened before, 
the 1990s were a very good decade for economic growth, but I 
think it was important to remember that you had two engines 
driving that. The prior administration I believe deserve credit 
for NAFTA, which opened up expanding economic opportunities in 
other markets. And I think we saw the final economic expansion 
of the economy based on the concept of the computer.
    And if I am correct on this, as the economy expands from 
new ideas and new initiatives, it can often overexpand on the 
expectation that it will produce more wealth or more 
opportunity than it really can, and then the market can correct 
either by stopping at that point, or in the case of 
overexpansion, contracting.
    So therefore, while revenues were increasing in the 1990s, 
one of the three prongs of the problem we are in now is the 
inherited recession. But in many ways, that was not due to the 
fiscal policies of either the prior administration or this one. 
It was really due to the concepts of NAFTA--and NAFTA and the 
computer winding up its own initial expansion and rush for the 
economy.
    Secondly, I believe you talked about the war on terrorism. 
And we are in a state of war. We are in a state of war with an 
enemy that does not fight by conventional diplomatic means or 
military means, and it is the kind of war that the better we 
do, the less we are aware of it. And I think spending on things 
such as homeland security, which would be much better perhaps 
over a 10-year period, say, if we could go back, but right now 
we cannot go back we can only go forward. And I think I 
understand that.
    And finally, this is where my question comes into you, 
especially in prognostications which are always a risky 
proposition, September 11, it strikes me that to a certain 
extent, one of the things people have not factored to the 
effect on the economy is, has anyone noticed or has there been 
anywhere where I can find out more information because I 
believe there is a direct link between September 11 and what 
happened in this sense. It makes it much more difficult for 
people to make rational economic forecasts either in a family 
room or a board room or somewhere else because they now have to 
factor in the potential for by the very nature, an 
unpredictable act of terrorism that could adversely affect the 
economy.
    So in many ways, much of what we do, either through the 
budget or through any policy, we have to understand that many 
average policy believe that at any time, something could happen 
in this country through an act of terrorism--be it biological, 
chemical or other that could throw the economy right back into 
a recession. Where can I find more information, or has anyone 
done a study of that and how people are trying to prepare for 
that?
    Mr. Daniels. I think those are pretty profound comments end 
to end, Congressman. And let me react to two or three things 
you said. First of all, I have often said in this room that I 
think enormous credit is owed to members of both branches 
during the previous administration and both parties in the 
Congress for a good fiscal outcome that occurred, and that gave 
us a pretty good starting point for the events that hit us, 
starting in 2000 and 2001. I do believe that. I think, 
secondly, that you are quite right that we need to be careful 
not to be too Washington-centric in our view of a $10.4 
trillion economy. Things that are said and done here have an 
effect and can have an important effect, but we ought not 
imagine that anyone in Washington or any group of people 
collectively run the economy or manage the economy or words 
like this that are too loosely thrown around.
    So yes, I do believe developments in technology, and in a 
freer world, the economy had an awful lot to do with the 
results that were achieved. All that said, I certainly agree 
with you that we are living with uncertainty now. I don't know 
exactly where to go for a study by the very definition of the 
problem. There is not precision around this subject. But 
clearly, uncertainty for investors may be causing some 
hesitation. That is not necessarily going to be fixed by some 
spending or taxing decision that we make here. But these are 
the cards we have been dealt, and we want to work with Congress 
to play this hand out in the best interest of all Americans.
    Chairman Nussle. Mr. Emanuel.
    Mr. Emanuel. Thank you, Mr. Chairman, and thank very much 
for providing time after the service for us to speak. And thank 
you Mr. Director. I have worked on both sides of Pennsylvania 
Avenue albeit a short period of time here. And I know and 
appreciate the tough choices that have to be made in the budget 
and appreciate the last couple of months you had to go through 
and you look better for the wear of that. And what happened to 
Al Strivland and Leon Panetta through that last 3 months and 
their competing demands to meet the challenges and struggles 
that our Nation and our families face, both to fund the war on 
terrorism and our homeland security, to invest in education and 
health care and the needs that our families face here at home, 
as well as to provide tax cuts to hard-working families.
    There is a current debate going on between the parties at 
the White House and the public domain about whether deficits 
really even matter, whether they have an economic impact. I 
think that if you don't think that deficits matter, and it is a 
fair debate of whether they have a fiscal response. But if you 
don't think they matter, they also lead to a view that there 
are no political consequences to deficits, and therefore they 
lead to an attitude that is disrespectful, or it lowers them as 
you would say on the priority list. And just for one fact, the 
Chicago Tribune noted in its editorial yesterday, we spend $171 
billion on interest on the Federal debt. That is more than we 
spend on education, transportation, and energy conservation 
initiatives combined.
    So those who think that deficits or building up the 
national debt don't matter, I would like you to know that even 
though that $171 billion is low, it still crowds out and is 
larger than the combined Federal commitment to education 
transportation and energy conservation. I think regardless of 
party, everybody agrees all three are important to our economic 
future today and tomorrow. So although they are not politically 
sexy, and I understand the politics around deficits, deficits 
do matter. There may not be political consequences, but there 
are surely investment and fiscal consequences and they reflect 
in our values.
    I also want to say and give you a sense that we talked 
about, whether there is a cut or a growth and to pay for this 
additional debt and to pay for the other priorities and you 
said I think right. We need to balance priorities. I believe we 
need to offer the American people a balanced deal: Targeted tax 
cuts, investments in education and healthcare, and also an 
attempt to target and deal with our war on terrorism. There are 
cuts in education investments like teacher quality for $173 
million that will be cut. The maximum Pell grant award will be 
frozen for the second year in a row at $4,000 while everybody 
agrees higher education costs are soaring. Paying for our 
national debt has consequences for our ability to invest in 
America's future. This brings me up to two other points.
    I want to thank you, Mr. Chairman, but I finally heard an 
economic argument in behalf of repealing the inheritance tax 
and that is we need to repeal it for all these children of 
millionaires because we are going to bequeath them nothing but 
a debt tax. So they are going to need that money from the 
inheritance tax to pay off that debt tax. The administration's 
budget refers to the looming problems in Social Security--I 
think I am quoting directly--the real fiscal danger.
    It is therefore illuminating to me, and they put a flashing 
red light around Social Security and say that is the real 
fiscal danger to examine the size of the administration's tax 
cuts relative to the size of the Social Security deficit over 
the next 75 years. According to the Social Security actuaries, 
the deficit and Social Security over the next 75 years amount 
to .72 of GDP. The cost of the administration's tax cuts 
including the 2001 tax legislation in the new proposals amounts 
to between 1.7 and 2.1 percent of GDP. That is more than twice 
the Social Security deficit over the same period of time and 
yet no flashing red light around the real fiscal danger. And my 
question is how can the deficit and Social Security be the real 
fiscal danger to this country when the administration's tax 
cuts are more than twice as big over the next 75 years and 
there is no warning issued to the consequences and costs 
associated with those deficits?
    Mr. Daniels. Although I thank you for saying I look better 
than I might, I think you do a real injustice to Leon Panetta. 
Every time I see him, he looks so tan and healthy, I am 
envious. Things have got to get better after you leave this 
job. Let me associate with two or three things you said in 
answer to your question. Yes, deficits do matter. Most 
emphatically they do.
    What we all have to work toward and reach toward is the 
answer, how much do they matter, how much do they matter 
compared to other issues, some of them life and death issues 
that we are facing as a country. And governing is about 
choices, and the President welcomes the Congress' help in 
working with him to balance the choices we have to make now. 
Let me say something about the debt service we have. We all 
wish that we had a zero interest payment. It is, however, 
important to note that, again, thanks to the lowest interest 
rates we have seen in the lifetime of most Americans, our 
interest payment this year will actually be lower than the year 
just finished and will stay in the 8 or 9 cent range throughout 
the time horizon we are looking at here, 8 or 9 cents of the 
dollar we spend. I wish it was 6 cents or 5 or 4. And if we do 
the right things and get the right breaks, it could be that. 
But again, that is a sharp contrast of 15 cents just 5 years 
ago. So there is some consolation there.
    Finally on Social Security, I think I see the situation a 
little differently, although I will be happy to take a look at 
the mathematics you just ran through, but the present value of 
the Social Security shortfall is between 5 and $6 trillion, and 
it is much, much larger than the impact of any tax or spending 
bill we will consider right now. The point of that chapter was 
to say as important these matters are, what is the right level 
of taxation today, by how much should spending increase and so 
forth, there is an issue sitting out there for the long-term 
that is a couple orders of magnitude bigger.
    Mr. Emanuel. I will send you the material we came up with 
noting that, and then we can analyze and look at that and 
continue that discussion because I think the choice--as you 
know, choice reflects values and priorities. And my own view is 
I just hope when we say it is a real fiscal danger, we don't 
overlook what we think is important versus other areas.
    Mr. Daniels. That is fair to say, Congressman, and doesn't 
mean there aren't other dangers around. I just want to say I am 
unaware of any analysis that says we can conceivably raise 
taxes high enough to cover the unfunded liabilities of Social 
Security or Medicare, that we would have to raise taxes to 
unthinkable levels in the future to cover those problems.
    Mr. Emanuel. That isn't what I was suggesting.
    Chairman Nussle. Mr. Davis.
    Mr. Davis. Thank you Mr. Chairman, Mr. Daniels, good 
afternoon. Freshman need to figure out the mikes on these 
things. Several times you have made a point, but I think is 
certainly a very accurate one. And it is that governing is 
about choices and governing is about priorities. As I look at 
the President's budget, I do it in the context of my own 
district. My district, the Seventh District of Alabama, is one 
of the poorest districts in the country, but it is similar to a 
lot of districts in the Delta, a lot of districts in the rural 
black belt. These are parts of our country that, frankly, 
regardless of the economic state that we have had in America, 
they lag behind. They have poverty rates that have been 
chronic. They have had unemployment rates that are two or three 
times the national average.
    I have to confess to you that I am struck as I look at the 
budget, I see an interesting and disturbing pattern when it 
comes to rural America. If I could pick just a few choice 
examples. A $52-million cut from rural health initiatives. And 
when I say ``cut,'' obviously I mean a decrease from the 2002 
projected spending levels. The empowerment zones that have been 
so important in revitalizing a lot of communities in west 
Alabama, funding is eliminated all together. The rural 
community advancement program, $356 million, 40-percent cut. 
Throughout this budget, there is, in my mind, a shifting of 
priorities away from rural America. So given what you have said 
about budgets reflecting choices and budgets reflecting 
priorities, to people who live in districts like mine in rural 
America, what does this budget say about the President's 
priorities?
    Mr. Daniels. Well, I think that read fairly and completely, 
it would say that rural America is very high on his priority 
list. The programs you mention are relatively small. I am not 
saying that they are not important and not in some cases 
effective, but there is a lot you didn't mention. I mean, just 
to pick one at random, a program which has not always found 
favor, I have to say, in some previous Republican 
administrations, but we try to look at honestly and fairly, the 
Economic Development Administration which provides grants, 
specifically in high unemployment and high poverty areas. We 
have marked down for a significant increase.
    Last year's farm bills--much maligned but dramatic increase 
in spending in rural America, I must say--takes full account of 
the needs of the rural south in terms of its emphasis. So I 
think that you know, this President comes from, lives in, rural 
America, knows the people there and connects with them on a 
personal level when he gets the chance. So these issues are 
very close to his heart. Where you see things that could be 
done better or could be touched up, we would invite you to show 
us where you think would be most useful.
    Mr. Davis. Let me follow up in that point, Mr. Daniels. I 
was back in my district yesterday, and had a chance to meet 
with some economic development people. And I will tell you that 
they often say to me that the empowerment zones in the 
enterprise communities that were enacted in the last several 
years have done two important things. No. 1, they have given 
businesses an incentive to come to parts of our country that 
have often been outside the radar screen of a lot of folks in 
the business community; and second of all, they provided a 
direct stimulus that has allowed certain people to get jobs.
    Again, I will note that funding for that program is 
eliminated all together, if I understand the budget correctly. 
As a matter of policy, do you agree that programs like the 
enterprise community can provide effective stimulus for rural 
America, and if you do agree with that, can you tell me what 
the President's budget is reflecting?
    Mr. Daniels. They can but they don't always reflect that 
record. I will be glad to write you a more detailed letter of 
our view of that particular program if you like. But throughout 
this budget, we have been searching for ways to address 
priorities like this in the most effective way. And simply the 
presence of an appealing title or an occasional success story 
doesn't always tell us whether this is a smart thing to do for 
all of America.
    Mr. Davis. Let me follow up on Congresswoman Capps' 
question. She asked you about an issue that is frankly critical 
in my district also, and it is the question of Medicare 
reimbursements. You were stating that you agreed with 
Congresswoman Capps that it would be appropriate to give 
doctors back some of the money that has been taken away from 
them because of estimates and problems with the Medicare 
reimbursement formulas. Given that that is your conclusion, do 
you think the Senate did the right thing 2 weeks ago when it 
voted down an amendment that would have restored some of the 
Medicare cutbacks that Congresswoman Capps asked about?
    Mr. Daniels. Well, we have to find the right time and 
place, and it could be soon or it could be on some measure 
later in this year to try to rectify this situation. As I 
recall, the Senate did act or proposed to act to provide 
greater payments to physicians as well as some hospitals. And 
we will see what can be worked out in the conference. Whether 
that is the right time and place to make that adjustment is up 
to the members of the conference. But sooner or later, the 
President would like to see it taken care of.
    Chairman Nussle. Mr. Thompson.
    Mr. Thompson. Thank you, Mr. Chairman and Mr. Daniels, for 
being here. I want to thank you for your emphasis on 
priorities. I think that is very important as we set out in 
this effort to craft a budget that is going to work for the 
entire country. And I don't think anybody disagrees with you on 
either side of the aisle that homeland security and national 
security are certainly top priorities. But I am one who 
believes that economic security is also very, very important, 
and I don't think you have homeland security without economic 
security. And I don't think we can get there unless all of us 
are willing to make a commitment toward this debt reduction and 
make a commitment to some sort of pay-as-you-go effort when we 
are proposing new programs or when we are increasing funding in 
old programs nor can we get there if we neglect the needs of 
our States, and that has been raised a couple of times today.
    But the truth is that 48 States are in the red right now, 
they are struggling, and everybody in those States are 
struggling. And what we are talking about is not only the 
priorities, but the values of the people that all of us 
represent. And if that is not the real bottom line, it is 
certainly a big part of the bottom line. And some of the people 
on the committee have mentioned specific programs, but, you 
know, you can take anyone you want. You can talk about the 
500,000 veterans that got a notice in the mail that they are 
because of budget constraints, they are no longer eligible for 
veterans health care or they are going to have to wait 6 months 
or a year before they can have their first appointment.
    Folks have mentioned education, Pell grants, Impact Aid or 
the full funding of the No Child Left Behind Act and health 
care is certainly an obvious one, irrespective of where your 
district lies, rural urban or otherwise. And while we may not 
need to get too excited or hyperventilate over this debt that 
we have, I, for one, believe it is something that is very, very 
important, and I think it was explained well during this 
hearing, that it is not just a debt, it is a debt tax. This is 
a tax that is going to be imposed on every taxpayer in this 
country from now on. And if you just do the rough math, it is 
about $2500 per taxpayer.
    So Mr. Chairman, to use your analogy, we are not talking 
about remodeling the kitchen, what this budget does is it 
spends the food budget, and it spends it long before anybody is 
fed, and that doesn't even take into consideration as you 
pointed out what cost of war might be or some of the spending 
programs that the President talked about in his State of the 
Union message.
    I think every major economist will tell you, and the models 
that they use for doing their forecasting, I think including 
CBO and the Federal Reserve, are based on the assumption that 
any expected future deficits will increase interest rates. And 
I think that is a big issue, and I hate to beat a dead horse, 
but everybody has talked about that some way or another.
    So the real question for me is how do we recognize the 
priorities and the values of all the people we represent? How 
do we move to repeal this debt tax, a billion dollars a day in 
interest alone, money that just goes away from the priorities 
and the values that all of us on both sides of this dais have 
talked about? If we don't do it, I am afraid we are headed for 
a Federal train wreck, and it is going to be the local 
governments in all of our home States that are going to be left 
to clean up the mess from that Federal train wreck. The truth 
is they are all the same taxpayers. Doesn't matter if they are 
talking about them here or talking about State legislatures in 
this country. It is all the same taxpayers.
    Mr. Daniels. I quite agree, Congressman. As I pointed out 
before, to an extent that a lot of people hadn't noticed, 
frankly I hadn't until very important questions about State 
finances came up, the transfers from the Federal Government to 
the States have gone up very, very fast. Four years ago, $285 
billion. Next year $407 billion. It is a 9 percent rate of 
increase. A lot of it is driven by automatic programs like 
Medicaid, for instance. But a lot of it are new decisions that 
have been made. A lot more in education under the last and 
particularly this President. A lot more in highways and 
unemployment more recently.
    So let us remember, by the way, that the Federal Government 
doesn't have any money of its own. It has to take it from the 
taxpayers. It is all the same taxpayers. So we are taking from 
the taxpayers of certain States and making life easier for the 
taxpayers of some of their fellow Americans.
    Mr. Thompson. If you would allow me to interrupt you for a 
second: But the difference is, in addition, we are also tacking 
on this horrendous debt that not only the taxpayers are going 
to be faced with, but their children, their grandchildren, our 
children, our grandchildren are going to be faced with.
    Mr. Daniels. Well, the question is, is it important or not 
to do what--to put this money to the purpose to which we have 
put it? Many, many families, the majority of American families, 
do take a mortgage. They decide that long-term housing is 
important to them, and that is a smart financial decision.
    As I indicated, our Federal mortgage payment is actually as 
low as it has been since 1979, 8 cents on the dollar. We ought 
to try to keep it there. But the fact is, that the burden today 
is about half of what it was just a few years ago. And I try 
always to give credit to people in both parties who worked hard 
during a different set of circumstances to get that down.
    So we will continue to pay attention to it and remain very 
receptive to ideas that won't hurt the economy and take two 
steps back for one step forward, but that might make that 
deficit smaller, and welcome your ideas in that respect.
    Mr. Thompson. Thank you. I look forward to working with you 
on this. And I just--I just can't believe we can dig our way 
out of this by expanding that debt. It is something that is 
really troubling for all of us.
    Chairman Nussle. Next in line would be Mr. Meek.
    Mr. Meek. Thank you very much, Mr. Chairman.
    Director Daniels, it has been a real honor having the 
opportunity to hear you respond to some pointed questions and 
some questions that I am pretty sure that you can answer in 
your sleep as relates to this budget.
    But I wanted to just, I guess, speak for a moment, being a 
creature from a State legislature--I was in the State senate 
this time last year and served in the State legislature for 
some 8 years, and I can't help not only read, but speak to my 
colleagues throughout the country in the National Association 
of State Legislators of some of the things that they are facing 
right now. And the worries, they are very worried about this 
budget that we are putting forth now. There are all kind of 
different, how would you say, descriptions of this budget, a 
wartime budget, a budget of hard times, a budget of priorities.
    But back in the States we are looking at a 50 to $70 
billion shortfall throughout the country, of them having to 
make some very rough choices. Being a member of the State 
legislature, serving on appropriations and the budget committee 
during my 8-year period, there was a lot of what I call 
``devolution'' of taxation.
    Here in Washington it is very easy for us to give tax 
breaks to individuals that need to be, whatever the taste may 
be on either side of this table here, for the top 1 percent or 
the top 2 percent or 3 or whatever the case may be. And then at 
the same time, what comes from that, over 50 percent of all 
Americans, they may receive maybe $100 or $200 back in a tax 
rebate. So it is a pretty good night out at the restaurant. But 
it is at the cost of their children's education.
    In looking at the education budget, I can't help but 
reflect on the kind of pain and suffering educationally and 
economically that many States are going to go through as they 
look at this. And at the end of my--how would you say--
statement here, I wanted to really--I wanted you to start 
thinking about in this budget, how is it going to help this 
Nation's Governors? How is it going to help State legislators? 
How is it going to help local school boards and city councils 
meet their bottom line in being able to provide the very 
necessary services to our country, need it be in a time of war, 
or need it be in a time of nonwar?
    You know, as we look at this, the National Conference of 
State Legislators, they are saying that two-thirds of their 
States must reduce their budgets by almost $26 billion between 
now and June 30 of this year. States have already addressed 
$41.9 billion in shortfalls as they craft their 2003 budgets.
    The news even gets worse as we move on. State legislators 
see in their 2004 budgets that it is going to be some $65 
billion. If I said million earlier, I meant billion--billion 
dollars in shortfalls in their 2004 budget. This is really 
where the rubber meets the road, and what you may call in-your-
face, last line of defense of people asking for dollars.
    As we make these cuts, as we make $45 billion--if we cut 45 
programs in our Education Department right now, as we look at 
being $9 billion below--the Leave No Child Behind Act that we 
all felt very good about, I will tell you that it was a breath 
of bipartisan fresh air in the lungs of many educators and many 
individuals in the States that were looking for some new ideas 
from the Federal Government. And now, seeing in this budget 
some $199-million below the 2000 authorized level, 2002 
authorized level, of the Leave No Child Behind Act, I am trying 
to find something good. Not to try to be partisan and not 
trying to be an ``I got you'' kind of person or Congressman, I 
am trying to find something good that I can share with my State 
legislators, that I can share with my city councils and county 
commissions on what they have to look for out of this Federal 
budget that is good.
    Mr. Daniels. Well, let me try to help you find it.
    First and foremost, once again, there is nothing the 
Federal Government can do for State and local governments 
nearly so important as to create the conditions for stronger 
economic growth. That has been, I think, correctly said. A lot 
of States during the boom era of the late 1990s raised their 
spending very dramatically, maybe in some cases faster than was 
smart, and have got to back up from that now.
    But the basic problem for them, as for the Federal 
Government, is a collapse in revenue, the popping of the 
bubble, the recession that came on us in 2001. And it has done 
to them just what it did to our revenues.
    Mr. Meek. I am sorry, Director.
    Just one more, Mr. Chairman.
    What happened, not only in my State, but many States, they 
followed the Federal Government's lead in trying to stimulate 
the economy, saying that tax breaks to individuals that would 
hopefully pass them down to hiring more employees and investing 
more, many States bit that hook, Florida for one.
    Spending, when we look at spending, when folks start 
talking about we have to stop spending, I am looking at the 
Leave No Child Behind Act when I hear that, because when it 
comes down to military spending, which--I am on the Armed 
Services Committee and glad to be there, and looking forward to 
serving with the Members of this Congress as we protect our 
country--I think it is important that we remember that in this 
debate when we start talking about tax cuts, who gets the tax 
cuts and who doesn't get the tax cuts, and what does it mean to 
the bottom line of everyday Americans.
    But, Director Daniels, I look forward to working with you.
    Chairman Nussle. Thank you.
    Mr. Baird.
    Mr. Baird. I would like to thank the Chair for reconvening 
the meeting and for giving us the time to participate.
    Two years ago the Chair and myself, and many of my 
colleagues across the way and the President himself, spoke a 
great deal about the importance of setting Social Security and 
Medicare aside in a lockbox.
    And if that is the case, I wonder if we might want to adopt 
a convention among the members of the committee and at the 
administration level that when we refer to deficits, that we 
refer to the full extent of the on-budget deficit, not the 
deficit masked by Social Security and Medicare. If we really 
believe that we should take Social Security and Medicare off 
budget, then we ought to report the deficits as full deficits 
on budget.
    I wonder if Mr. Daniels would be willing to entertain that 
suggestion?
    Mr. Daniels. It doesn't make a lot of difference to me. I 
think it--the unified budget is probably the proper way to look 
at the finances of the government. But either measure, you 
know, has its uses.
    Mr. Baird. I just think it is important, because if I look 
at figures of, say, 165--they vary, but that level of deficit, 
and in fact the on-budget deficit is over $480 billion 
projected for 2004--I think there is a substantial difference.
    I have heard my colleagues on the other side say people 
haven't talked about spending cuts. We need to cut spending. I 
will agree with you on that. But I think we need to put it in a 
context, and I will ask Mr. Daniels if my understanding is 
correct.
    As I look at your figures in the budget, the on-budget 
deficit projected for 2004 is $482 billion. The on-budget non-
defense discretionary spending is $429 billion. My 
understanding of that would seem to be, if we wanted zero 
deficit spending and want to have the tax cuts that are 
proposed, we would not only have to cut, but would have to 
eliminate all non-defense discretionary spending.
    Is that an accurate interpretation, given the numbers, not 
just cut, but eliminate all?
    Mr. Daniels. Well, on your formulation, yes.
    Mr. Baird. Given that, I just think we need to be careful 
about your rhetoric, lest we go home and say, folks don't just 
want to cut spending, we are talking about eliminating all 
nondiscretionary spending.
    Third, maybe I am not hearing correctly, but I have heard 
my colleagues on the other side say that all the members on the 
Democratic side want to do is talk about tax increases. I would 
defy you, ask you, invite you to cite one single record or 
statement in the record of this hearing all day long where a 
member of this side of the aisle has said we want to increase 
taxes.
    There has been discussion, and I think fair and sincere 
discussion, about whether or not when our Nation is at war, 
when we are $480 billion in deficit or heading in that 
direction, whether or not now is the time for the extent of the 
tax cuts--the full extent of the tax cuts that have been 
proposed by this administration. But I have yet to hear anyone 
from this side of the aisle say they favor a tax increase.
    I just think it is fair in the spirit of bipartisanship and 
collegiality and frankly just intellectual honesty, to be 
careful about how we say that.
    On the issue of double taxation, I have heard passionate 
statements by the administration about the need to eliminate 
the dividend taxation because it is double taxation.
    Mr. Daniels, seven States in this country--interesting 
States they are--face, effectively, double taxation because we 
are not allowed to deduct our sales tax from our Federal income 
tax returns. Let me share with you what those States are. You 
probably are well aware, But they are interesting States: 
Texas, the President's own state; Wyoming, the Vice President's 
State; Florida, the President's brother's State; South Dakota, 
Tom Daschle's State; Tennessee, some influential folks in the 
other body; and Washington and Nevada. I may have covered all 
of them there.
    Essentially, this is an unjust tax. States that have an 
income tax are able to deduct their State income tax when they 
file their Federal returns. States that have a sales tax are 
not able to. It seems to me that this amounts to double 
taxation.
    I wonder if you can comment on that, and if you would be 
willing to work with many of us on a bipartisan basis, 
bicameral, I believe, to try to address what I think is a 
fundamental inequity and what amounts to those States 
subsidizing the Federal Government.
    Mr. Daniels. Well, we would be more than happy to work with 
you on any matter that--of tax inequity. We have far too many 
in a Tax Code that is way too complex; and the President has 
suggested acting on one of those areas, but that doesn't mean 
that there aren't many more that--and, in fact, whatever else 
your suggestion may finally turn out to accomplish, I think it 
stimulated a lot of interesting discussion.
    People have stepped forward and said, you know, you have a 
point there, but here is another example and here is another 
one. One day I suppose that we will all try to turn to maybe 
the hardest subject of all: How can we get to a much smaller 
Tax Code that would be fair to everybody? But I appreciate your 
making that point.
    Let me just say one other thing that, in contemplating 
the--at least the immediate deficits we have, whether you 
measure them on a unified basis or on the so-called ``on-
budget'' basis, complete repeal--forget postponement. But 
complete repeal of the 2001 tax bill wouldn't come close to 
closing the gap--we have illustrated this in different ways--
wouldn't even come close; that is, if you reinstated the 
marriage penalty, put the 10 percent bracket back to 15, all of 
that, you wouldn't even come close.
    So we just have to recognize that economic events and 
international events changed our situation fundamentally, and 
now we have got to do the smartest and fairest thing about 
addressing it.
    Mr. Baird. I think you raise a legitimate point. Just to 
close, I think that is what we need to do. We need to say 
honestly, just on our side of the aisle, we need to be honest 
and say you can repeal all of the tax cuts and still not solve 
the problem. But on the other side of the aisle, you also must 
recognize that you could eliminate all discretionary spending 
and still not solve the problem.
    The question is, how do we go about it in a responsible 
way? Where do we target the tax cuts, and how do we get to some 
kind of balance over the long haul?
    Chairman Nussle. Mr. Daniels, we have come down to the last 
inquiry of the day. We are saving the best for last.
    So Mrs. Majette.
    Ms. Majette. Good afternoon. Thank you, Mr. Chairman.
    And, Mr. Spratt, I am pleased and honored to serve on this 
committee with you.
    Director Daniels, I am frankly troubled by the 
circumstances that we face in light of this budget, this 13\1/
2\ pound document that I received yesterday. And frankly, as 
you indicated earlier, we haven't had nearly enough time to go 
through it, but I have been able to glean a few facts from this 
incredible document and was frankly startled by the deficit 
projections.
    I know we have had a lot of discussion this morning and 
this afternoon the deficit situation and whether we should use 
10-year or 5-year forecasts. But either way, I think the 
numbers are shocking. I am particularly concerned about the 
impact the proposed budget and future budgets will have on our 
children and grandchildren. I am particularly concerned 
because, after all, they will be the ones responsible for 
paying the bills that we are refusing to pay today, and that, 
if we accept this budget, we are creating for tomorrow.
    This budget not only robs Peter, it fails to pay Paul. When 
we fail to make the investments in our future for education, 
for basic infrastructure and for research and development, what 
we are creating and what this appears to be is a blueprint for 
disaster.
    Before we get ready to bill our children and our 
grandchildren as much as $6,000 a year in taxes just to cover 
the debt, we must take pause. Right now, under the current debt 
of $6.4 trillion, each child under the age of 18, and I have 
two of them, today would owe $80,000. Now, that would be enough 
to send each one of them to Princeton for 2 years of 
undergraduate study, or almost 3 years at Georgetown Law 
School. That excludes the interest payments.
    Under the Treasury bond rate, the figure would jump to 
between $125,000 and $139,000 per person over a 30-year period.
    Now, if we add the projected $2.1 trillion in additional 
debt that the budget calls for, the figures jump dramatically. 
Each member of the next generation would then owe $106,000 and 
would pay between $166,000 and $184,000 over a 30-year period. 
Is that fiscal responsibility?
    But what I really want to know is, if we adopt this budget, 
how are we going to retire the projected $8.5 trillion in debt? 
How are we ever going to pay that back? I think you would agree 
with me that no prudent businessman or woman or consumer would 
ever borrow or lend any amount of money without a clear 
repayment plan. So I ask you, where is ours? What is ours under 
this projected budget?
    The other issue I would like for you to address, and I 
guess that you have already addressed the first part of it. 
With respect to my district, I represent what some people call 
suburban Atlanta. It is just east of the city of Atlanta, and 
the CDC is located there. As you know, that is the only Federal 
agency headquartered outside of Washington, D.C.
    Now, as recently as last week, the President, in the State 
of the Union address, described the national horrors that could 
result if a chemical or biological attack were launched against 
this country. And, furthermore, the budget explicitly states 
that no Health and Human Services activity is now more 
important than national bioterrorism preparedness.
    Yet, despite the urgency of the situation, the budget cuts 
the funding for the CDC. The President's budget specifically 
decreases the level of funding for CDC facilities.
    I have toured the CDC facilities, I have seen the state of 
those facilities. Many parts of the facilities are left over 
from World War II. There are holes in the floors and ceilings. 
Rainwater runs off because of leaks. Scientists' work is being 
stored in old refrigerators in the hallways. This is not the 
kind of situation that would lead us to have confidence in, nor 
lead that agency to have the ability to continue to be, the 
guardian of our Nation's health.
    Moreover, the CDC plays a vital role in protecting all 
Americans from the biological attacks that we pray will not 
come. Given the importance of the role of the CDC in homeland 
security, can you explain why funding for the CDC is being cut?
    Mr. Daniels. First, it is not being cut, it is going up a 
couple percent to about $4.2 billion. There is $110 million 
which was on the discretionary side last year that will be 
funded on the mandatory side this year. So it is a natural 
confusion again, especially when you have only had one day to 
look at the budget.
    But we will be happy to show you that, apples to apples, 
there is an increase. And the CDC is extremely important for 
the reasons that you gave, maybe more important than before.
    Of course, at NIH and elsewhere in HHS, the President has 
suggested billions of dollars of new money to research 
bioterrorism, several billion dollars--we estimate it can be as 
many as 6 over the next 10 years--to ensure vaccines and 
treatments for deadly bioterror threats that we don't have 
today. So the commitment there is enormous.
    Yes, there is a discussion on the CDC, about how many 
buildings ought to be built, how fast; they have been allowed 
to deteriorate badly over the last decade or so. There are some 
enormously ambitious plans to build a lot of buildings at once. 
But we are working with them, particularly, to make sure to 
fund the laboratories and the most important research 
facilities first. And I think when you do have the time to see 
the President's suggestion in this area in its fullness, that 
you will have confidence in it.
    Mrs. Majette. Thank you.
    Chairman Nussle. There is really no hearing that we have 
this year on the Budget Committee that rises to the importance 
of this hearing. We really appreciate the fact that you would 
spend 5 hours on the Hill with us here today, Director Daniels, 
and for you understanding the inconvenience of the interruption 
as a result of the memorial service.
    We appreciate your flexibility in the schedule.
    Mr. Spratt.
    Mr. Spratt. Let me echo what the chairman has said, and 
thank you for your forthright presentation, and also for your 
forbearance.
    I would like to ask if your staff can assist my staff in 
getting the numbers or values that correspond to charts 3.2 
through 3.7 in the analytical perspectives.
    Mr. Daniels. Absolutely.
    Chairman Nussle. I would also like to thank Mr. Spratt and 
the minority members in particular for helping us, assisting us 
with the organization of the committee. There aren't many 
committees that go through that process in a bipartisan way, 
and I want to thank you for that.
    And last but not least, I have two constituents here from 
Iowa who are visiting, Conrad and Erik Clement, and more 
important than constituents, they are family. And so we welcome 
them to the Budget Committee.
    And if there is no other business to come before the 
committee, we will stand adjourned.
    [Whereupon, at 3:15 p.m., the committee was adjourned.]

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