Datasets:

gtfintechlab
/

CoCoHD_transcripts

	<html>
	<title> - THE PRESIDENT'S BUDGET FOR FISCAL YEAR 2004</title>
	<body><pre>
	[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


	______

	84-883 U.S. GOVERNMENT PRINTING OFFICE
	WASHINGTON : 2003
	____________________________________________________________________________
	For Sale by the Superintendent of Documents, U.S. Government Printing Office
	Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
	Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

	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.]


	</pre></body></html>