[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
TREASURY DEPARTMENT FISCAL YEAR 2003 BUDGET
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, FEBRUARY 6, 2002
__________
Serial No. 107-22
__________
Printed for the use of the Committee on the Budget
Available on the Internet: http://www.access.gpo.gov/congress/house/
house04.html
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COMMITTEE ON THE BUDGET
JIM NUSSLE, Iowa, Chairman
JOHN E. SUNUNU, New Hampshire JOHN M. SPRATT, Jr., South Carolina,
Vice Chairman Ranking Minority Member
PETER HOEKSTRA, Michigan JIM McDERMOTT, Washington
Vice Chairman BENNIE G. THOMPSON, Mississippi
CHARLES F. BASS, New Hampshire KEN BENTSEN, Texas
GIL GUTKNECHT, Minnesota JIM DAVIS, Florida
VAN HILLEARY, Tennessee EVA M. CLAYTON, North Carolina
MAC THORNBERRY, Texas DAVID E. PRICE, North Carolina
JIM RYUN, Kansas GERALD D. KLECZKA, Wisconsin
MAC COLLINS, Georgia BOB CLEMENT, Tennessee
ERNIE FLETCHER, Kentucky JAMES P. MORAN, Virginia
GARY G. MILLER, California DARLENE HOOLEY, Oregon
PAT TOOMEY, Pennsylvania TAMMY BALDWIN, Wisconsin
WES WATKINS, Oklahoma CAROLYN McCARTHY, New York
DOC HASTINGS, Washington DENNIS MOORE, Kansas
JOHN T. DOOLITTLE, California MICHAEL E. CAPUANO, Massachusetts
ROB PORTMAN, Ohio MICHAEL M. HONDA, California
RAY LaHOOD, Illinois JOSEPH M. HOEFFEL III, Pennsylvania
KAY GRANGER, Texas RUSH D. HOLT, New Jersey
EDWARD SCHROCK, Virginia JIM MATHESON, Utah
JOHN CULBERSON, Texas
HENRY E. BROWN, Jr., South Carolina
ANDER CRENSHAW, Florida
ADAM PUTNAM, Florida
MARK KIRK, Illinois
Professional Staff
Rich Meade, Chief of Staff
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
Page
Hearing held in Washington, DC, February 6, 2002................. 1
Statement of:
Hon. Paul O'Neill, Secretary, U.S. Department of the Treasury 4
Prepared statement of:
Mr. O'Neill.................................................. 6
TREASURY DEPARTMENT FISCAL YEAR 2003 BUDGET
----------
WEDNESDAY, FEBRUARY 6, 2002
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10 a.m. in room
210, Cannon House Office Building, Hon. Jim Nussle (chairman of
the committee) presiding.
Members present: Representatives Nussle, Spratt, Sununu,
Gutknecht, Miller, Davis, Clayton, Price, Clement, Moore,
Capuano, Putnam, and Hastings.
Chairman Nussle. The Budget Committee will come to order.
Good morning. This hearing is intended to examine the
President's budget for fiscal year 2003 with respect to the
Department of Treasury. Areas of particular emphasis will
include the following: the need for economic security and a
plan to achieve that, emphasizing tax relief and support for
emerging economic recovery; the importance of other tax
incentives proposed by the President providing assistance with
regard to education, health coverage, the environment and other
areas; and the Department's role in enhancing homeland
security.
Testifying this morning is the Honorable Paul O'Neill,
Secretary of the Treasury. He's been before us before. We
welcome the Secretary back to the Budget Committee.
Before we begin, let me just comment briefly on the
evening's activities. It appears that as we read in the
newspaper today that at least Senator Daschle believes that the
economic stimulus bill is not going to pass. Based on what
we've been hearing, it appears that there is much less concern
in the Senate for this project than there has been in the House
as we moved through the fall. And there are those who are
already celebrating and dancing on the grave of economic
stimulus.
Let me just warn, or suggest, to those who would dance on
the grave of economic stimulus that you're forgetting--and
there are two kinds that might be dancing, there might be those
who don't believe that stimulating the economy is important.
And there are also those, I hear, that believe that if we don't
pass an economic stimulus plan somehow we'll get back to
balance that much faster, maybe even today or tomorrow.
Let me report to both sides of that equation that they're
missing the whole point of what's important. It has nothing to
do--as far as I'm concerned--with the budget in Washington as
much as it has to do with the budget that people have to
balance around their kitchen tables. We know many of them,
they've been coming to our meetings. Our friends here at the
Budget Committee talked about many of them yesterday. Mr.
Capuano spoke probably as passionately as anyone yesterday
about some of the folks that are out of work and are having to
deal with that.
Now, you may have a different idea of what stimulating the
economy and dealing with the people that are out of work right
now need. But I will tell you, it has much less to do with
what's important in Washington as it does to what's important
around people's kitchen tables as they're balancing their
checkbooks. Part of the reason that the President put this into
the plan, part of the reason that the House passed two versions
of economic stimulus and stood ready to pass probably two or
three more is that we felt it was important to continue to
promote economic security as part of the equation to get our
economy and get our country back on its feet.
Yes, we might be in somebody's definition of a recovery.
But that recovery may not come as fast, may not grow as fast,
may not last as long as we need it to, unless we continue to
give it the kind of the kick in the pants or the shot in the
arm that it needs. So, I would hope that we continue to discuss
and debate and keep as a priority the economic security of this
country. It's not just about cutting taxes. It's about making
sure that there's job training available for people who are out
of work, making sure there are health care benefits as they
make that transition, and making sure that unemployment
benefits are there as well.
There are also some tax stimulus measures that were
specifically for the victims of September 11, going directly to
New York. It will be very interesting to see, as these votes
transpire in the Senate, if actions are part of the rhetoric
that we've been hearing over the last number of weeks and
months as people have been so concerned about those in New York
and those who have been victims as a result of September 11.
Not everybody got what they wanted in an economic stimulus
plan, this is still a legislative body. We have to work out
compromises and details. But if we can't even get it to
conference to do so, it makes it impossible to achieve that
negotiation and work in the benefit of the American people.
So unfortunately today, we have the Secretary of the
Treasury come within that context to talk a little bit about
the security of the country with the news hanging over our
heads that the Senate may decide to punt this issue. But I
think it's no less important to talk about maybe, not only
stimulating the economy and growing the economy and creating
jobs, but also maybe some alternative ideas on how to do so, if
in fact economic stimulus is dead in the Senate.
So with that, I'll turn it over to my friend, John Spratt.
Mr. Spratt. Let me assure you, Mr. Chairman, that if you
want to extend unemployment benefits, every Democrat in the
House of Representatives will vote for that. Thirteen weeks, 26
weeks, you put it on the floor, give us a clean up or down vote
on that, we'll vote for it overwhelmingly. If you want to do
what we also proposed, and that is, help those who are
unemployed continue their COBRA rights, exercise their COBRA
rights, and continue their health insurance coverage, we'll
vote for that in a skinny minute, let me assure you.
What we question is whether or not you should load onto
this bill provisions like a repeal, retroactively, of the
corporate AMT, whether you should load onto this bill a
provision that would shelter the income of financial holding
companies when it's earned abroad. That may be good tax policy,
but it belongs in a different bill in a different place. It
ought to be subject to the pay-go rule, among other things.
In any event, we are ready to pass what the essentials of a
stimulus package would be when it comes to dealing with the
recession at hand. I am a little curious, as I go through the
budget, looking at those things that are already passed,
already in law, which constitute what we've traditionally
called the safety net.
For example, as I understand this budget, it calls for a
cut in the employer's share of the unemployment insurance
benefit, so that the States would assume more responsibility
for the administration of unemployment insurance plans and for
the extended benefits. That portion out of which we pay for
extended benefits, the tax, the fractional tax levied for that
purpose, would be repealed as called for in this budget. I
don't understand how that comports with a recovery package.
This budget would say to the decline in the Transportation
Trust fund, the best way and place to pump money all over the
country for infrastructure investment and counter-cyclical
economics is public works like that. It would say, take your
lumps, we're going to cut the State highway departments by $9
billion because the Trust Fund is down that amount, the Corps
of Engineers, $300 billion.
This is a program in place that would be usable and useful
for stimulating the economy. We are actually proposing to cut
back on that. Freeze child care, cut LIHEAP, other things that
are part of the safety net. So I don't get it. If you're for
it, why all these provisions in this budget, and why don't you
give us a cleaner up or down vote?
Mr. Secretary, welcome. We look forward to your testimony.
We are deeply concerned about the state of the budget. I've
been here for nearly 20 years. I spent a large part of my
effort to try to turn this big battleship around that we call
the Federal budget, get it out of the red ink into the black.
We thought we were headed out to a lot more comfortable seas
than we find ourselves right now.
The question is, what's the plan? How do we get back on the
course we were on where we were talking realistically about
national savings, about paying down debt and about getting rid
of some of the debt that we've accumulated over these many
years. Can we get back there? If so, how do we do it? What in
this budget will put us back on that path?
Thank you for coming. Thank you for your time. We look
forward to your questions and answers.
Chairman Nussle. Without objection, all members will have
the additional time to submit opening statements for the
record, if they care to do so at this point. With that,
welcome, Mr. Secretary, back to the Budget Committee. We are
pleased to receive your testimony.
STATEMENT OF HON. PAUL O'NEILL, SECRETARY, U.S. DEPARTMENT OF
THE TREASURY
Secretary O'Neill. Thank you for inviting me to be here
today, Mr. Chairman, Congressman Spratt, distinguished members
of the committee.
If it's all right with the Chair, I would like to read a
very short statement that's maybe 7 or 8 minutes, if that's OK,
to set the scene for our conversation this morning.
Chairman Nussle. Please.
Secretary O'Neill. We've had a year to work together, and
you all know that I'm an optimist about the U.S. economy. I
believe our economy is distinguished in the world in its
leadership demonstrating productivity and creating a level of
prosperity that's unexampled anyplace else in the world.
Interesting enough, this morning the report was presented
showing that in the fourth quarter of 2001, our productivity
grew at a rate of 3\1/2\ percent, which is an unexampled
experience. This is three quarters in a row, even during a very
slow recessionary period, where the U.S. economy has
demonstrated that we can, in our private sector, achieve
remarkable levels of productivity under the most difficult of
circumstances.
I believe we were on the verge of recovery before the
September 11 terrorist attacks, and that our resilience and
determination have brought us back to the early stages of
recovery today. We see more and more signs every day indicating
that the seeds for recovery are there, and only need nourishing
to speed the process of putting Americans back to work. I
believe we will return to prosperous economic growth rates of 3
to 3\1/2\ percent as soon as the fourth quarter of this year,
especially if we're able to pass still-needed economic security
legislation to hasten and strengthen our recovery.
As the Senate struggles with this today, I hope they keep
in mind that we need to do two things for displaced workers. We
need to provide assistance to them now, and as importantly, we
need to boost job creation to speed their return to work.
Strengthening our economy is a key goal of the President's
budget. A return to our normal growth rates means jobs for the
1.4 million Americans who have lost jobs during this recession.
Just as a strengthening economy means greater prosperity
for our Nation's people, it also means greater strength for our
government. It means greater revenues going into the Treasury
without raising taxes, giving us resources to address the
Nation's needs and the retirement of even more Federal debt,
leading to long term economic security for our children. Even
with all that must be done to enhance our security, we expect
that a return to economic growth will bring us back to
government surplus in the year 2005.
The economic slow-down began in mid-2000, when GDP and job
growth slowed sharply. Business capital spending began to
plummet in late 2000, and accelerated its decline in 2001,
dragging down the economy. In August, we were beginning to see
the evidence of an economic turnaround.
I firmly believe, and I think the data shows this, that had
it not been for the terrorist attacks of September 11, we would
have seen an end to the economic downturn and would perhaps
have avoided a recession. The September 11 attacks created
shock waves that rippled throughout all sectors of the economy.
Financial markets were shut down for almost a week. Air
transportation came to a standstill. As a result, GDP fell 1.3
percent at an annual rate in the third quarter.
By late November, the National Bureau of Economic Research
declared that the United States was in a recession. They
designated the end of the previous expansion to be March 2001,
but they observed that the slow-down might not have met their
qualitative standards for a recession without the sharp
declines in activity that followed the terrorist attacks.
In sum, the score card for the economy in 2001 reflected a
combination of adverse events. The private sector lost more
than 1.5 million jobs. The unemployment rate rose 1.8
percentage points. Industrial production was off nearly 6
percent during the year. And at the end of the year, industry
was using a little bit less than 75 percent of its productive
capacity.
As bad as these numbers are, they could have been worse.
Your and our well timed bipartisan tax relief package put $36
billion directly into consumers' hands in the late summer, in
fact, beginning on July 23 and through the early fall,
providing much needed support as the economy sagged. It was the
right thing to do at just the right time.
It's not surprising that both the Congressional Budget
Office and the Office of Management and Budget project deficits
for this year and next, as a result of the economic slow-down
and the response to the September 11 attacks. The President has
presented a budget to speed our recovery. First, the budget
includes tax relief to stimulate job creation. The President
proposed accelerated depreciation, speeding up the reduction in
the 27 percent income tax rate, reduction of the corporate AMT
as passed by the House in December, and checks to those who
didn't benefit from last summer's tax rebates.
These are all things that enjoy bipartisan support in both
houses of Congress. And we remain eager to work with Members of
Congress to complete work on such a package to create jobs and
assist dislocated workers with extended unemployment insurance
benefits, and temporary assistance for health care.
Second, the President's budget proposes strict fiscal
discipline increasing spending for national security and
homeland defense and holding the line on other spending. His
management agenda calls for performance measures to be used to
determine where budget increases are allocated so that our
resources go into projects and programs that make the biggest
difference in people's lives.
As the experience of the 1990's shows, this discipline is
crucial to ensuring we do not return to systemic deficits of
the past. But fiscal discipline alone will not guarantee budget
surpluses. We must return to 3 to 3\1/2\ percent annual growth
to insure surpluses in the years ahead. The focus, as the
Chairman said, must be on restoring growth. Surpluses will then
follow naturally. Raising taxes would stifle the process of
getting Americans back to work. This is a bad idea, as our
recovery is struggling to take hold.
According to 1999 data, the most recent available, 33
million small business owners and entrepreneurs pay taxes under
the individual income tax rate system. They've made business
plans that assume the tax relief enacted last summer will take
place as scheduled. Eighty percent of the benefit of cutting
the top two rates goes to these small business owners and
entrepreneurs. These are the engines of job creation in our
economy. Tax relief should be accelerated as the President has
proposed, to boost job creation. Such relief will have minimal
or no effect on long term interest rates. According to a recent
analysis by the Council of Economic Advisors, a $1 trillion
change in the public debt over 10 years would tend to raise the
long term interest rate by 14 basis points. Since the tax cut
last year, the 10-year nominal rate has averaged 4.93 percent,
a little off of that this morning, which is substantially below
the 6.16-percent average from 1993 through the year 2000.
Again, restoring growth is the key to America's future.
Restoring growth will ensure we have the resources in
Washington to fight the war on terrorism, to provide for
homeland defense and provide the service that the American
people want and need and demand. The President's budget will
help to ensure that both peace and prosperity are restored to
the American people as soon as possible.
That's the completion of my statement, Mr. Chairman.
[The prepared statement of Secretary O'Neill follows:]
Prepared Statement of Hon. Paul O'Neill, Secretary, U.S. Department of
the Treasury
Good morning Chairman Nussle, Congressman Spratt and members of the
committee. Thank you for inviting me to testify today. Now that we've
had a year to work together, you should know that I am an optimist
about the US economy. I believe we always have untapped potential that
can be unleashed to spread prosperity throughout the Nation. Never has
that been more true than right now. Even after a difficult year, my
optimism about the fundamentals of the US economy has not changed. I
believe we were on the verge of recovery before the September 11
terrorist attacks, and that our resilience and determination have
brought us back to the early stages of recovery today. We see more and
more signs every day indicating that the seeds for a recovery are
there, and only need nourishing to speed the process of putting
Americans back to work. I believe we will return to prosperous economic
growth rates of 3 to 3\1/2\ percent, as soon as the fourth quarter of
this year, especially if we are able to pass still-needed economic
security legislation to hasten and strengthen our recovery.
Strengthening our economy must be our primary goal. It is the focus
of the President's budget. That must be our goal, because a return to
our normal growth rates means jobs for the 1.4 million Americans who
have lost jobs during this recession. Just as a strengthening economy
means greater prosperity for our Nation's people, it also means greater
strength for our government. It means greater revenues going into the
Treasury, without raising taxes, giving us resources to address the
Nation's needs, and the retirement of even more Federal debt--leading
to long-term economic security for our children. Even with all that
must be done to enhance our security, we expect that a return to
economic growth will bring us back to government surplus in 2005.
The economy's slowdown began in mid-2000, when GDP and job-growth
slowed sharply. Business capital spending began to plummet in late
2000, and accelerated its decline in 2001, dragging down the economy.
In August we were beginning to see the evidence of an economic rebound.
I firmly believe that had it not been for the terrorist attacks of
September 11, that we would have seen an end to the economic downturn
and would perhaps have avoided a recession. The September 11 attacks
created shockwaves that rippled throughout all sectors of the economy.
Financial markets were shut down for almost a week. Air transportation
came to a standstill. As a result, GDP fell 1.3 percent at an annual
rate in the third quarter.
By late November, the National Bureau of Economic Research declared
that the US was in a recession. They designated the end of the previous
expansion to be March 2001, but they observed that the slowdown might
not have met their qualitative standards for recession without the
sharp declines in activity that followed the terrorist attacks.
In sum, the scorecard for the economy in 2001 reflected a
combination of adverse events:
The private sector lost more than 1.5 million jobs.
The unemployment rate rose 1.8 percentage points.
Industrial production was off nearly 6 percent during the
year.
Industry was using less than 75 percent of its capacity.
As bad as these numbers are, they could have been worse. Our well-
timed bipartisan tax relief package put $36 billion directly into
consumers' hands in the late summer and early fall, providing much
needed support as the economy sagged. It was the right thing to do, at
just the right time.
It's not surprising then that both the Congressional Budget Office
and the Office of Management and Budget project deficits for this year
and next as a result of the economic slowdown and the response to the
September 11 attacks. Last April's budget forecast a fiscal 2002
surplus of $283 billion. The Mid-Session review figures, released in
August, took account of the impact of the President's tax relief
package and projected a $195 billion surplus in fiscal 2002. The new
budget forecasts a fiscal 2002 deficit of $9 billion, assuming no
policy action to stimulate the economy. The reduced surplus estimates
are the result of the economic downturn and the response to the
September 11 attacks. CBO's projections confirm that tax relief played
a minor role in the surplus decline in the next few years--accounting
for less than 12 percent of the decline in 2002 and less than 28
percent in 2003.
FY 02 Surplus
In billions
April 2002 budget baseline........................................ $283
Changes from:
weaker economy/technical changes.............................. 197
enacted spending.............................................. 54
tax relief.................................................... 40
______
February 2003 budget baseline..................................... 9
The CBO budget projects a 10-year surplus of $1.6 trillion. Last
August, after factoring in the tax relief package, the CBO projected a
$3.4 trillion surplus for the next 10 years. The recession and the war
on terrorism depleted the 10-year projections by $1.8 trillion. The
lesson from these numbers is simple--10-year projections are a useful
discipline but they do not predict the future. None of last year's 10-
year estimates foresaw the events of September 11 or a negative $660
billion worth of ``technical changes'' that are now included in the new
10-year estimates by agreement among the technical experts. We do know
about the here and now, and we should deal with the here and now,
reigniting growth to restore long-term surpluses.
The administration's growth projections are similar to the
consensus of private forecasts. Over 90 percent of the Blue Chip
Economic Indicators panel members say the recession will end before
April of this year. We share that assessment. Personally, I am
optimistic that the economy will do even better than our budget
assumptions suggest. For the near term, we expect the economy to grow
2.7 percent during the four quarters of 2002. That projection includes
the foreseeable effects on the economy of the President's economic
security package.
The lesson is clear. A strong economy is crucial to restoring
budget surpluses. Some would suggest that we need surpluses to improve
our economy. They have the logic backwards. Growth creates surpluses,
not the other way around.
The Federal budget was in deficit every year from 1970 through
1998. From 1970 through the early 1990's, government spending growth
exceeded government revenue growth by \3/4\ of a percentage point a
year, on average. Fiscal discipline was imposed by the historic Omnibus
Budget Reconciliation Act, signed in 1990 by President Bush. With
fiscal restraint made an integral part of the budget process, once the
economy took off in the 1990's, revenue growth was double the pace of
spending growth. It was the rapid economic growth of the 1990's that
generated the burgeoning budget surpluses, which appeared even as
Federal outlays grew about 3.5 percent a year from 1993 through 2000.
Today the economy is recovering. The tax cut of last May helped to
keep the economic downturn shallow and it will continue to help. Energy
prices have retreated. The Federal Reserve has reduced short-term
interest rates 11 times since the beginning of 2001. Measures of
consumer confidence are bouncing back. The index of leading indicators
increased sharply in December for the third straight gain. Motor
vehicle sales have remained strong, and initial filings for
unemployment benefits are in decline. But we all know that unemployment
itself is a lagging indicator. Although the current trend is positive,
too many people will remain out of work. And given the choice, they'd
rather have a regular paycheck than an unemployment check.
The President has presented a budget to speed our recovery. First,
the budget includes tax relief to stimulate job creation as a crucial
tool to speed our recovery and put Americans back to work. The
President's proposals--accelerated depreciation, speeding up the
reduction in the 27 percent income tax rate, reducing the corporate
AMT, and checks to those who didn't benefit from last summer's tax
rebates--enjoy bipartisan support in both houses of Congress. I'm eager
to work with all of you to complete work on a package to create jobs
and assist dislocated workers with extended unemployment benefits and
temporary assistance with health care.
Second, the President's budget proposes strict fiscal discipline--
increasing spending for national security and homeland defense, and
holding the line on other spending. His management agenda calls for
performance measures to be used to determine where budget increases are
allocated--so that our resources go into the projects and programs that
make the biggest difference in people's lives. As the experience of the
1990's shows, this discipline in crucial to ensuring we do not return
to systemic deficits of the past. But fiscal discipline alone will not
guarantee budget surpluses. We must return to 3 to 3.5 percent annual
growth to ensure surpluses for years to come.
The focus must be on restoring growth. Surpluses will then follow
naturally. Raising taxes would stifle the process of getting Americans
back to work. This is a bad idea, as our recovery is struggling to take
hold. According to 1999 data, the most recent available, 33 million
small business owners and entrepreneurs pay taxes under the individual
income tax rates. They have made business plans that assume that the
tax relief enacted last summer will take place as scheduled. Eighty
percent of the benefit of cutting the top two rates goes to small
business owners and entrepreneurs. These are the engines of job
creation in our economy.
Tax relief should be accelerated, as the President has proposed to
boost job creation. Such relief will have minimal, or no, effect on
long-term interest rates. According to a recent analysis by the CEA, an
expected $1 trillion change in the public debt over 10 years would tend
to raise the long-term interest rate by 14 basis points. Since the tax
cut last year, the 10-year nominal rate has averaged 4.93 percent,
which is substantially below the 6.16-percent averaged from 1993
through 2000.
Restoring growth is the key to America's future. Restoring growth
is the key to ensuring we have the resources in Washington to fight the
war on terrorism, provide for homeland defense and provide the services
the American people demand. The President's budget will help to ensure
that both peace and prosperity are restored to the American people as
soon as possible.
Chairman Nussle. Thank you, Mr. Secretary.
Based on what you've told us this morning--and I was also
pleased to hear your testimony yesterday at the Ways and Means
Committee--let me just cut to the chase based on what I've
heard in the news over the last 24 hours as what's transpiring
in the Senate or what may not be transpiring in the Senate. Do
we still need an economic stimulus bill? Do we still need a
plan to stimulate the economy? And if so, what form should that
take?
Secretary O'Neill. The President has proposed in his
budget, after careful consideration, that we go forward with a
stimulus plan, with a total of something in the $70 billion to
$80 billion range. And he's said repeatedly it should include
assistance for individuals, that it should include money to
induce businesses to keep the jobs that they do have and to
expand beyond the ones that they do have, to directly deal with
a question that was suggested earlier of expanding coverage of
unemployment insurance and health care costs of people who have
been dislocated by the events of September 11.
We have been clear, the President's been consistent. On
October 5 he put down specifically what he thought should be in
the stimulus bill. Two bills were passed by the House, the one
in December included the work of the bipartisan coalition in
the Senate. We believe there are a majority of members of the
Senate who would vote for this bill if it could get to the
floor. From last night's news accounts, it appears it's not
going to be permitted to come to the floor for consideration.
Chairman Nussle. I've heard you describe the economic
stimulus principles that the President laid out in four
different parts. Could you break those into the four component
parts and tell us what the stimulating effectwould be of each
one? If for instance we are now at a point where we're going to
begin to negotiate this on the floor and pass individual bills,
as Mr. Spratt suggested, that there are certain bills that
maybe the Democrats want and there are certain bills that the
Republicans want and let's just put them on the floor and let
them stand on their own.
Let's talk about stimulating the economy. You want to
stimulate the economy. What is the stimulative effect of
extending unemployment benefits versus creating jobs, as an
example?
Secretary O'Neill. Let me go to the strongest component of
the economic stimulus that was considered in the House, and as
well by the bipartisan coalition in the Senate. The accelerated
depreciation provisions that were considered in their broadest
measure would do this. They would give additional free cash
flow to every business. As I said in my prepared remarks, most
of the businesses in the United States are small businesses,
they're not large businesses. Every business would benefit by
being able to accelerate depreciation.
To share with you a story from meetings last summer, after
you all passed the tax reform bill, I had and have continuous
meetings with people from throughout the economy as a way of
understanding better what it feels like to be out there on the
front lines of creating economic income and wealth. There was
one meeting where there was a florist present who talked about
the effect of the tax reductions for him, because as I said in
my testimony, most of these small businesses file under the
individual income tax rate. He said, well, you know, while it's
probably not meaningful to all of you here, the effect of the
change that you made in my tax rates are going to permit me to
hire one additional person.
And I think it's such a telling story, because that's where
the jobs in America come from, from the florists, from the
corner grocery store, from the shoe maker. We read and we
marvel at the numbers of corporations like the ones I've headed
in the past with their tens of thousands of employees. It's not
to say that they're not important. But the real life blood of
America's economic strength are those individual jobs in the
florist shop.
So, the accelerated depreciation would free up cash flow
for every single one of those people. Some would use it to
protect jobs they already have, some see an additional demand
would create additional jobs. It's the strongest single
component.
The second important component from a stimulus point of
view is accelerating the rate reductions. Why is it important?
Because it has the effect, even though the amounts may seem to
be small, of changing the perception of individuals and
families about what kinds of investments they can make
themselves going forward.
For example, if you're 30 years old or 35 years old and
you're looking at the prosect of buying your first house, and
you see that you're going to have, because of a tax rate
reduction acceleration, you're going to have an extra $20 or
$30 a month, if you think about that it may not seem like much
to you, a few hamburgers at the corner stand. But $20, let's
say $30 a month on an annual rate basis means the difference in
the size of mortgage you can cover by maybe $4,000 or $5,000.
So, it means a difference of whether you're going to have an
extra bedroom for your second child or not. It's that
translation of accelerating the rates that makes a difference
from the point of view of what we might expect in economic
performance.
Now, directly to your question of extending unemployment
insurance, because it's really providing more money to people
who otherwise wouldn't have it, it doesn't have the same kind
of stimulative effect, but there's a good reason to do it,
which is, if you're out there, and because of the slowness in
our economy, you've now run out of your 26 weeks worth of
benefits, and the average duration of unemployment periods has
gone up, it's a compassionate thing to do.
From the very beginning of this, the President has said, I
care about those people out there who have been impacted by the
slowness of the economy, by the events of September 11. The
President has said, again, since October 5, please do something
about this. Here are the right ideas. The House has acted
twice, we've simply not been able to get a bill in front of the
whole Senate, because the leaderships have not been able to do
that.
Chairman Nussle. I agree with your assessment, this is a
package deal. It's not one or the other. Both are needed in
order to accomplish the ends that we want to accomplish here in
the short term, and I appreciate your testimony on that.
Mr. Spratt.
Mr. Spratt. Mr. Secretary, when you came here last year,
did you have any intimation in projecting a surplus of $5.6
trillion that you might be sitting on a surplus of $600 billion
this year, that you'd see $5 trillion of it vanish over a
period of 12 months?
Secretary O'Neill. Let me say, my sense of where we are
today is we're still looking at this 10 year period of having a
$1.6 trillion surplus, compared to the $5.6 trillion we had
last year. But indeed, when I was here last year and testifying
before various committees of Congress, I warned that 10 year
numbers were a useful exercise, but one shouldn't think they
predict anything. I think there's no one in this room who would
say they anticipated and predicted the terrorist attacks of
September 11. They've had a profound impact on the potential
surplus going forward.
Now, I believe that our economy is so strong and so good
that we will figure out a way over time to both better protect
ourselves against the prospect of terrorist attacks and it
won't end up hurting our productivity, which is another way of
saying, I think we are so good, we will figure out a way to be
better protected and we will at the same time improve our
productivity.
I've spent a lot of time thinking about this, because as
you know, the Customs Service is part of my brief. One of the
challenges we have is to figure out how to do an ever better
job of looking at and examining individuals and goods coming
across our borders. If one just extended the practices of the
past in the wake of September 11, it would cost us untold
amounts of money in negative impact on our economy.
I believe, and I think we're beginning to demonstrate, with
a combination of better ideas and technology, we can take all
this in and our economy will be better off.
Mr. Spratt. Let me agree with you about Customs. I've been
a long-time supporter of Customs. I believe that you've got to
have more people to crack more containers. Two percent of your
cargo containers, just that, are opened up and inspected. We've
given them other missions, such as drug enforcement, that have
displaced them from their traditional missions. Put them back
in their traditional missions, have reasonable fines, and they
more than pay for themselves. I think the old revenue yield
from a Customs agent was about $21 for every dollar we spent in
salaries. Pretty good return. You would have liked to have seen
that at Alcoa, I think, by hiring one additional worker, get 21
additional dollars of profit.
But now there's an additional reason to do it, and that is,
they're part of the front line of our protection against
terrorism. So I encourage you to pursue that.
In the meantime, as you say, I guess it's sort of
improvisational, we've got a lot of different problems we
didn't see, so now we've got to rethink the plan. I'm looking
for the plan in the budget, and I don't quite discern a plan
here. We heard it yesterday from Mitch McDaniel also, he was
saying basically let's hope the economy is going to be more,
grow better than we're anticipating here, because we're trying
to be conservative about the projections. Is that basically
what you're saying, if we can get the economy going fast, that
events may be self-correcting?
Secretary O'Neill. I think if anyone has any doubt, the
only way the Federal Government gets any money is to take it
away from the people. We believe that it doesn't make sense to
raise taxes in a slow economic period. And we do believe, as I
said in my opening statement, I have great optimism about the
long run future of the U.S. economy. If we had the time, I'd
tell you in some detail why I know that it's true that we are
going to continue to lead the world in income generation, in
job creation, and in wealth accumulation.
But I have no doubt that we will do well and that we will
generate a very substantial amount of money. As a matter of
fact, I think maybe we gave you along with the prepared
remarks----
Mr. Spratt. I want to come to that.
Secretary O'Neill [continuing]. The revenue picture that
we're looking at, with where we are right now, with the
assumptions that we and CBO have joined in about where our
economy is going. We're going to see a 55-percent increase in
the revenue coming to the Federal Government over this next 10
year period, just as sure as anything.
Mr. Spratt. The chart up on our screen right now is one way
of saying how dramatically the path we were on has changed
since last year. This is not a political chart, it's just fact
of life that confronts us both. Last year the budget was
projected to generate surpluses that would pay off debt. As a
consequence, the biannual ritual of having to raise the debt
limit seemed almost a ritual of the past. It was something in
the far off future, like 2007.
Now we've got a statutory debt that is climbing at a much
higher rate, that upper line there. And you're going to have to
come back to us pretty soon. Can you tell us when, how much,
what's going to be required in order to keep the debt subject
to statutory limit and compliance with law over the next
several years?
Secretary O'Neill. Yes, I'd be happy to do that. I think
for those who don't understand the nuances of how we do things
in the Federal Government, it's important to recognize that the
debt subject to statutory limit is driven to a very substantial
degree by what are really credits to the Social Security Trust
Fund. That's what's really driving these numbers along.
But more directly to your question, how soon do we need to
do something about this, we need to do something about this in
March. The sooner in March, the better. We've proposed in a
letter that I sent to all the appropriate committees in
December an increase of $750 billion in the statutory limit.
One of the things I've done in the last couple of months,
since it became clear that we were going to have to talk about
this issue, is to go back and review the history of what the
Congress has done on this subject. All of you Members will
appreciate that this is, I would argue, this whole thing is an
anachronism. Whatever your inclinations may be, we don't have a
choice. We do not have a choice.
But in the past, in spite of the fact we didn't have a
choice, there have been some really unfortunate things done in
order to post-pone the inevitability of having to deal with the
statutory debt limit. It is my fervent prayer to you that you
not cause the American people to pay for with real money the
costs of doing things to postpone dealing with this issue that
we must deal with under the law of the land. We have no choice.
I hope we won't add to the fact that we have no choice endless
conversation and real financial costs as we get this thing
done.
Mr. Spratt. If I could have just a couple more minutes, Mr.
Chairman.
Let me pick up where you were about the Social Security
Trust Fund, and ask you--and let me make something clear. We
aren't seeking to raise taxes in the middle of a recession. We
don't want to do that, but we're looking at a 10-year time
frame. And if these deficits continue accumulating and the on-
budget deficits are serious throughout the 10-year time frame,
a couple hundred billion dollars, it does beg the question,
should we pay for the war on terrorism? Should we pay for these
additional needs out of the Social Security Trust Fund?
Secretary O'Neill. Well, let me say what I think is, we in
Washington all know this. I worry that people out there in the
land don't understand the nuances of all this. Every dollar
that comes into the Federal Treasury as a consequence of Social
Security and Medicare taxes is credited to the Social Security
Trust Fund. So none of those dollars are used for anything
except to in effect buy government securities that go into the
Trust Fund.
Now, there is a difference, and we all know this. I think
it is really an unfortunate thing on this important public
policy issue for any of us to posture as though anyone in this
town seriously intends not to deliver the promised benefits to
Social Security recipients or Medicare recipients. If anyone
believes that that's a real thing, I'll tell you, you could get
all the time you want on all the talk shows in the world.
Because you would be the only person advocating such a thing.
Mr. Spratt. We had a plan in place that emerged on both
sides of the aisle, in the White House and the Congress over
the last 3 or 4 years, and that plan was to use those surpluses
solely to redeem, buy up outstanding debt held by the public,
which would have two effects. In the short run, it would add
$3.6 trillion to the national savings. I would hope that would
send a signal to the long markets in particular that you were
talking about earlier, that with the total reduction of the
debt held by the public, we were doing things differently.
There would be capital formation, net national savings.
Greenspan sat where you're sitting and said, I see this as the
single most efficient way to increase the savings of this
country.
So it would have done that, and at about the time the baby
boomers run through everything else and only have payroll taxes
to meet their benefits, it would have made Treasury, put
Treasury in the position of having no outstanding debt to the
public, when it had to borrow to meet those benefits. Don't you
agree both of those were substantial, good policies that we
were pursuing and need to get back to?
Secretary O'Neill. I would like very much to rescind the
recession and the terrorist attacks of September 11. That would
be great. And that would put us back where we were a year ago.
I don't know how to do either one of those things.
The President has said--looking at the totality of the
American economy and our need to pursue the war on terrorism,
our need to beef up homeland security--that he believes it's
necessary at this time, given the unusual circumstances of a
recession, the terrorist attacks and this national emergency,
that it makes sense with this combination of circumstance to
propose and implement the budget he has proposed.
There are only really two ways to get to a different fiscal
situation than what the President has proposed. One is to raise
taxes. We don't think that's a good idea. The other is to
reduce the spending the President has proposed. As I observed
in my testimony, the President has provided substantial
increases to pursue the war on terrorism and substantial
increases to deal with the needs of homeland security, and to
follow on the commitments that were made and agreed last year.
For example, the budget for discretionary spending on
education is going from $40 billion to $50 billion. Perhaps
someone doesn't join the President in thinking that we should
have that $10 billion year-to-year increase in education
discretionary spending. And certainly it is a possibility for
Members who want to pursue it to recommend reducing some of the
items the President has proposed for spending in fiscal year
2003. The President's judgment, our judgment, is given the
circumstance, this is the right blend of policies.
Mr. Spratt. Two quick questions and I'll quit and turn it
to others. In one of the highlights of the budget, OMB says the
administration will seek to extend the pay-go rule and
apparently the other budget rules that have been in place since
1990. Interestingly enough, you salute former President Bush
for the budget summit agreement of 1990, and you see this as a
turning point. I think you're correct in doing it. I would have
said something about 1993 and 1997, too.
But nevertheless, we need a plan, and that was the
beginning of a plan. It included tax increases, too, so you're
a brave soul for introducing it, because not everybody on this
side of the aisle necessarily thought it was a good idea at the
time.
But if we do have an extension of the pay-go rules, would
you expect those rules to apply to the tax cuts that are
proposed in this budget request, some $600 billion in
additional tax reduction? Do you think it should be applicable
to that tax reduction request, so that those tax reductions
would have to be offset, revenue neutral?
Secretary O'Neill. I think making the tax cuts permanent is
frankly something I think we should have done last year. We
have lots of rules and lots of conventions, and I think it's
really unfortunate that we acted as though last year when we
get to the sunset date on the tax reductions that were enacted
last year that we're going to raise the 10-percent rate on the
lowest income taxpayers to 15 percent, basically a 50-percent
increase in taxes, when we get to the expiration period for low
income people.
I don't believe that was ever true--I don't believe it
today, I didn't believe it a year ago. We have all these phony
conventions that cause people to do things as though they were
real. It's really very unfortunate. Does anybody really believe
they're going to have an elimination of estate taxes that lasts
for 9 months? It's an absurdity, some of the things that are
done here. I don't sign up for them, I don't believe in them. I
think we ought to face the reality of where we are.
Mr. Spratt. But the question comes, will the pay-go rule
apply to the additional $600 billion?
Secretary O'Neill. We've included in our budget planning
making permanent the tax cuts as the President said in the
State of the Union. I think our numbers reflect an anticipation
that we will see the reality of permanent status for the tax
cuts.
Mr. Spratt. Without offsets? So the pay-go rule won't
apply?
Secretary O'Neill. They're basically included in our
expectation and forecast of where the economy will be. I guess
the question is, let's deal specifically with estate taxes.
Should we be proposing now that we cut some spending in the
year 2011 in anticipation of making the estate tax permanent? I
don't know how to do that.
Mr. Spratt. One final question. Whatever else you say about
the last 12 months, I think you have to acknowledge that we
made some mammoth miscalculations, going from $5.6 trillion to
$600 billion, $5 trillion in surplus has disappeared. And a
large part of it's disappeared due to what we call vaguely and
ambiguously economic and technical factors over which to some
extent you preside, because a lot of those economic and
technical factors apply to the revenue calculations of the
government.
I don't have your particular table in the administration's
book, but just looking through CBO, to give you the flavor of
the adjustment, for example, this year, legislative tax cuts
will take about $86 billion off the revenue projection.
Economic reductions in revenue estimates will take $123
billion. Technical will take $62.8 billion.
As you go out over time, the economic and technical factors
continue. And they are substantial until you get to the end of
the chart there, almost as much as the tax cuts itself.
Now, obviously we've got a problem there. I know there are
intervening factors. But there also here is a question of
whether or not we've really got a good handle on our ability to
project revenues. Are you concerned now, given revenues coming
into the Treasury at this point in time, capital gains
realizations and other tax takes, that the revenue chart you
just showed me, 55-percent increase over the next 10 years, is
a reliable chart?
Secretary O'Neill. I'm comfortable with the first year. And
as the years go by, I think as the CBO showed and demonstrated
in its chart of uncertainty, the farther away you get from
today, the less human beings are capable of truly predicting
the future.
Having said that, I will say this to you. The reason why
these conventions were established is because the Congress had
fallen into a habit of the camel's nose under the tent, if you
will, of establishing a small program with a little bit of
money with every intent and purpose of turning it into a
mountain over a longer term period. And those of us, this now
includes me 25 years ago, who were concerned about what I would
say is fiscal sanity, were really concerned about the
difficulty of ever stopping anything once it starts in the
Federal Government. So we said, we need to impose and have the
discipline of projecting the long-term consequences.
I think projecting the long-term consequences of spending
is something that we can better do than we can project the
long-term revenue expectations. Because it's so tied, revenue
projections are so tied up with year-to-year variations and
what's going on in the real economy.
So I think we need the discipline of projecting these
numbers, but I don't think we should confuse projection with
prediction. These are two very substantially different things.
We should use the numbers to inform ourselves, not to blast
each other.
I must tell you, I think it is believable, and I think it
demonstrates the point that you're making, $660 billion worth
of technical corrections, not just from the Treasury staff,
from the independent Congressional budget staff, deciding in a
12 month period, $660 billion evaporated. I think it goes right
to the heart of the matter that it's not possible to know 10
years out with precision. It's possible to have a point of
view, it's not possible to have a prediction that will hold
water.
Mr. Spratt. Does that mean, then, that moderate year-to-
year tax reduction, seeing where you are, what you've got
before you have mammoth tax reduction, is a better policy to
take?
Secretary O'Neill. Well, I think this. When I look at the
tax situation, I'd observe, and again, we gave you a chart that
I think is well worth everybody understanding. What this is is
the tax take going back to 1945. What it shows is that the
average Federal tax take since 1945 has been 18 percent. With
the reform that you all enacted last year, over this period out
to 2010, we're still looking at taking 19 percent of the
people's money to do whatever we will do with it at the Federal
level, which is a full percentage point more than the
historical average going back to 1945.
So when I think about where we are in terms of balance
between how the Nation uses its resources, at least on a
historical basis, I would say we're above trend. And I would
make this argument. That the more wealth and income we generate
in this country, the less of it as a percentage that ought to
come through the Federal Government.
Because as we do a better job of meeting common needs for
the population, the common needs should not rise as fast as the
rate of increase in income and wealth creation in the society
at large. This says we're running against that trend, that even
though we're going to go from a $10 trillion economy to a $20
trillion economy, we're going to insist on taking a bigger
fraction of it here in Washington than we did from the period
from 1945 until now.
Mr. Spratt. I'll swap charts with you. You can take this
one back with you, because it shows you how we got where we are
and where we seem to be headed. We brought outlays as a
perecentage of GDP down substantially from 22 to 23 percent of
GDP in the early 1980's. We brought revenues up. They met in
the middle and the difference between the revenue percentage of
GDP and the outlay percentage is of course the surplus. That's
the way we did it.
But we actually brought revenues up by a lot less than we
brought outlays down over that period of time.
Thank you very much, Mr. Secretary.
Secretary O'Neill. Thank you.
Chairman Nussle. Let me report to members, the Secretary
has time constraints today that I'm going to respect. It's my
practice not to interrupt, I obviously don't interrupt myself,
and I'm not going to interrupt the Ranking Member during his
questioning. But I will report to members that I will try and
keep this to 5 minutes as much as possible. Please help me with
that.
With that, Mr. Sununu.
Mr. Sununu. Thank you, Mr. Chairman. Welcome, Mr.
Secretary.
Secretary O'Neill. Thank you.
Mr. Sununu. I'll use that graph as a springboard to go back
to a very simple but important point that you made earlier in
your testimony. That is, the overall picture of this budget,
the size of the surplus or the deficit, is dependent on just
two things. You can either propose to cut spending below the
President's level, and we will have a discussion and a debate
here about priorities, and perhaps moving funding from one area
to another, homeland security, national defense, domestic
priorities. But in order to affect the balance, you can either
cut spending below the President's request, or raise taxes.
Now, I have heard from the other side that there's no
desire or intention to raise taxes, that's a red herring,
that's not what we're out to do. You can't get away from the
fact that it strains credulity when someone says, well, we
would never propose raising taxes in a recession, but you know,
that tax increase in 1990 was really a good thing. It's
especially problematic when that tax increase almost certainly
made the recession of 1991 even worse.
It strains credulity to say, well, we have no interest in
increasing taxes, but you know if you want to make a current
tax law permanent, we're going to expect you to raise taxes
somewhere else, on somebody else, on another part of the
economy. You simply can't have it both ways, to say, well,
we're not going to cut spending below the President's level,
and we're not going to raise taxes, but then hedge your bets by
saying, you know, maybe raising taxes in a recession is a good
thing, or if you want to make the tax code permanent, you've
got to raise taxes elsewhere. I think we need a bit more
clarity on what the policy intentions really are.
Now, having said that, there is one other way that you can
make a difference, and that's to increase overall revenue
collections by strengthening the economy. And here also the
President's budget, I think, has tried to take a step in the
right direction.
In fact, all of this discussion about the balance and debt
and deficit, at the end of the day, when we're looking at the
total debt to tell by the public, or the debt ceiling, I really
have one question. And that is, what effect has the change in
our debt position or our deficit projections had a material
effect on the capital markets and on the economy?
We've seen a whole host of changes in the world since
September 11. More spending for homeland security, more
spending for national defense, a big slow-down in the economy,
a big reduction in revenue forecasts. As a result, a big
increase in the forecast, a significant increase in the
forecast for deficits and a much higher forecast of debt held
by the public out there in the markets.
My question is this. With all of these announcements, all
of this news and information going into the capital markets,
what's happened to interest rates? Has it had what I think many
might have expected would be a very damaging effect to the
capital markets, a big increase in interest rates, now that
we're not going to be retiring so much debt?
Secretary O'Neill. The Treasury rates are down. And I think
the 10 year Treasury rates, as I said in my testimony, are
down. This morning as I was leaving the office I think the 10
years were trading about 490, which is off of their 8 month
trend as compared to the 1993 period where we were looking at
something over 6 percent.
But I think you raise a very important point that everyone
should understand. Long-term interest rates are a function of
two things. They are a function of the necessary cost of
capital, that is to say, the rate that's required to cause
people to save money instead of spending it, which has tended
since 1870 or so to be in the 3 to 3\1/2\ percent range. The
rest of the long-term interest rate is an anticipation the
markets have about inflation rates. The reason why we now have
this 10-year rate at 490 is because the markets are
anticipating that inflation is going to stay under control.
Mr. Sununu. So despite all the announcements, despite all
the change in the forecasted surpluses, despite all the impact
that this might have on our ability to retire debt, you've
actually seen interest rates go down?
Secretary O'Neill. Exactly.
Mr. Sununu. A second question, and maybe a more forward
looking one about the economy. We all want the economy to begin
growing again, we're all concerned about job creation. That,
more than anything else, will have an impact on revenue growth
and on restoring surpluses. I think there are two things right
now that we could do to really make a material impact on long-
term economic growth: expand trade promotion overseas and the
potential for U.S. companies to export overseas, and pass a
comprehensive energy policy. Could you talk briefly, because my
time is up, about the impact that those two specific pieces of
legislation that have already passed the House of
Representatives would have on our long-term prospects for
economic growth?
Secretary O'Neill. Let me say just a few words about the
trade promotion authority first. I'm convinced, and this is now
not just observation but personal experience, that the thing
that has powered our economy in the last 15 years is the ever
more open economy that we're running. Because it has brought us
high value goods at lower prices than we otherwise would have
had. It's also brought us competition, it has forced our
enterprises and entrepreneurs to constantly get better at what
they do.
While sometimes one would wish that there would be
something called pricing power, which is to say, when your
costs go up, you don't have to find offsets, you just raise
your prices. It is really to the benefit of our economy that
we've had an open economy, more open than any other, that has
caused us to be unbelievably productive. I said earlier, this
morning's report is fourth quarter productivity rate in the
U.S. economy, 3\1/2\ percent, just unexampled in our
experience.
On the question of energy and the need to pass energy
legislation, our President has said over and over again that we
need to better protect ourselves from energy dependence on the
rest of the world. We fashioned a program that we think brings
all the parts together to give the Nation an energy policy and
energy programs that will support and implement the policy. We
need it now.
Chairman Nussle. Mr. Clement.
Mr. Clement. Mr. Secretary, great to have you here today.
Secretary O'Neill. Thank you.
Mr. Clement. I know you've got a tough job. Commenting
about what my colleague said a while ago about taxes. We
Democrats are not going to propose a tax increase, and I don't
think the Republicans will at this time.
Also, I want to talk to you in terms of our economy, where
we are. I'm a veteran, served 2 years in the regular Army, 29
years in the National Guard. Very strong on national defense. I
will vote for an increase in our defense budget and bolster our
homeland security.
My concern is that the White House is not giving the
consideration to you and the other members of the so-called
economic team the weight we should have to turn this economy
around. I'm worried about the recession. I'm worried about the
emergencies that we have. I'm worried about what happened
September 11.
I just don't see the White House giving the same
consideration to the economic team as the White House is giving
to fighting terrorism and bolstering homeland security. I know
you commented a while ago about job creation. But the fact is,
we've lost a lot of manufacturing, industrial jobs in the
United States. We're not in a recession, but depression with
high tech. And that applies to many of the other so-called
economic sectors of our economy.
Therefore, I have to ask you the question, where is the
economic team, and just like John Spratt commented a moment
ago, where is our plan? Where is our strategy to turn things
around? Because in 1 year--I'm not talking about 10 years, but
in 1 year--we've had an unbelievable turnaround and $5 trillion
has disappeared. I'm no worried about a 10-year forecast. I'm
worried about maybe we ought to go to a 6-month forecast,
rather than a 10-year forecast, to have something that's
believable.
Secretary O'Neill. First of all, I don't think there's any
mystery to the difference between the January or February 2001
10-year projections and the ones we have now. The CBO has laid
out very well why the numbers are different, and a very
substantial reason for the difference is the economic slow-down
and terrorist attacks. I think it's just very clear that those
conditions have made a huge difference in the forecast of
future surpluses.
Now, I would hasten to add, as I said before, and I will
say again, I am a great optimist, and I suspect we can and will
do better going forward. We've given you the best estimates
that are actually more conservative than outside estimators.
But to your comment about high tech depression, I would say
this. The slow-down in our economy began in the year 2000. It
didn't begin in 2001.
And the reason that we began to see a slow-down is because
there were excesses in our economy reflected in the high tech
industries. High tech companies were, in more than a few cases,
pushing their products to the degree that they were providing
finance for their customers to buy their products. Because
without that push, there wasn't enough demand to keep the rate
of growth going.
It's not an unfamiliar thing to see in our own economy, in
the world economy, excesses that result in a period of
readjustment. I think we've seen that to a fair-thee-well with
the likes of CISCO and Nortel and the other information
technology communications based companies. They were running at
an unsustainable rate and our economy finally said, stop, we
can't keep doing this.
Mr. Clement. But let me ask you this, getting away from
high-tech--transportation. I'm on the Transportation Committee.
We're taking a hit from the Bush administration of $9 billion.
I know the State of Tennessee alone, that's $158 million.
That's a lot of jobs. That's thousands of jobs that we're not
going to have simply because of this proposal.
Secretary O'Neill. Let me be clear about this. You're not
taking a hit from the Bush administration. The Congress has
passed a law that tells us how we will calculate the amount of
money that's provided in any year's budget. We have faithfully
followed the law. We are proposing to spend the dollars that
flow from a law passed by the Congress that tells us how much
money we should spend on highways in any particular year. We
have simply followed the law, as we have in previous periods.
Mr. Clement. But we could draw down the Highway Trust Fund.
Secretary O'Neill. If you wanted to change the law and
spend more money than what the President's proposed, you could
certainly try to do that.
Chairman Nussle. Mr. Gutknecht.
Mr. Gutknecht. Thank you very much, Mr. Chairman, and
welcome, Mr. Secretary.
Secretary O'Neill. Thank you.
Mr. Gutknecht. I want to change focus just a minute,
because I think there are two issues that are very important
that your office can really help us with. As you mentioned
earlier, we're going to have to wrestle with this whole issue
of debt limit some time within the next month and a half. I
want to talk about that, and another issue that your office can
be very helpful, and that's called dynamic scoring.
We talk a lot about that here in this committee and in the
Congress. I think most of us agree that if you tax economic
activity at 100 percent, you're going to get a lot less
economic activity. I think we all instinctively know that tax
policy has consequences. Unfortunately, when the Congressional
Budget Office or the Office of Management and Budget or the
other economic prognosticators apply their pencils to whatever
tax law changes we might recommend, they're not scored on a
dynamic basis.
Now, I have become aware just recently that within the
bowels of your offices, they do have the computer model to do
dynamic economic scoring. Yet they continue to refuse to use
it. I guess the question about dynamic scoring that I would
pose to you--and with your signature you could change that
today--if you and your minions are unwilling to use that
computer model, would you mind if we did? Because as long as we
continue to use the old way of scoring these things, we will
never see the permanent tax relief that I think is important.
I do appreciate this chart. I think every Member should
take it home and show it to their constituents. Because a fact
that we always forget, in America today, the average family
spends more on taxes than they do on food, clothing and shelter
combined. That is disgraceful. And it's going to remain so
until we can get some help from your office to get dynamic
scoring.
So, sir, if your people are not going to use that model,
would you mind if we did?
Secretary O'Neill. Well, we live with the conventions that
you all decide are the appropriate ones for us to use. And one
of the things I think, I don't know how this committee would
feel about it, but I think one of the things that would be
useful to do would be to look at the conventions that now exist
and are required for how we present information to you. If
there was an agreement that we should give you both static and
dynamic numbers, we could certainly do that.
That is not the convention you all have adopted. And you
all have, I was saying earlier, there are lots of conventions
that have been put onto the Congressional Budget Act of 1974
that simply bear elimination or modification. I would think it
would be a worthy task for this committee to reconsider some of
the things that cause perverse effects, including this issue
you raise about not having dynamic scoring.
If you'd like to have dynamic numbers, I'd be happy to give
them to you----
Mr. Gutknecht. Well, I would.
Secretary O'Neill [continuing]. If you can get them into
the conversation, God bless you.
Mr. Gutknecht. Well, they're in the conversation. But the
difference is, this committee and the Congress speaks with many
voices. You speak with one. You have a huge advantage in this
debate by clarifying this and at least providing two sets of
projections. Then we'll have to determine public policy
collectively. But you could be very helpful on that.
The second point I want to get back to you is this debt
limit. Because everyone in this room knows that the money that
comes in through the Federal Insurance Contribution
Administration, it's a contribution, not a tax, there's only
two things essentially that can happen to that money. You can
either pay benefits or you can buy government bonds, right?
Secretary O'Neill. Right.
Mr. Gutknecht. So as the economy improves, as more people
go back to work, which we certainly hope that they will, then
we're going to have more money coming in, and that raises the
debt.
At some point, it seems to me we've got to have honesty as
it relates to the Federal debt. I think Representative Chris
Cox has proposed, I think, a very, very interesting solution.
So that we begin to define real publicly held debt as the
national debt. I would hope the administration would not only
take a serious look at that, but become an ardent advocate of
that position. Because it seems to me we're not being
completely honest about public debt when we say that the debt's
going to go up if the economy improves.
Thank you, I'll yield back my time.
Secretary O'Neill. May I say just one word about that?
Mr. Gutknecht. Please.
Secretary O'Neill. I think we all know, debt is a
consequence of all the other actions taken by the Congress.
Having a debt ceiling is an anachronism beyond belief that we
still have to go through this process. That's one of the
reasons why there is a Budget Committee, to try to get a better
handle on the total implications of what the Congress does, so
that whatever the debt turns out to be, it's not an ill-
considered thing that fell out of the sky, it's a consequence
of all the other actions taken collectively by the Members of
Congress.
Chairman Nussle. Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman.
Mr. Secretary, in hopes of staying to my time a little bit,
I have a lot of questions, but first of all, I'd like to see if
we can get some copies of some of the documents you claim that
we would have been out of recession by now had 9/11 not
occurred. I have seen nothing that would suggest that, and I
would just like to see whatever you have.
Because the only thing, we listen to CBO, we listen to some
other things, I also try to follow some of the basic indices.
Just looking at the stock market alone--I'm not looking at 9/
11, because it's hard to tell what the impact of that was. I
mean, if the recession did start in the spring, which I think
everybody has come to the conclusion of, I look at it from the
date the President signed the economic growth bill. And right
now, since that date, as of right this very minute, the stock
market is down 13 percent. I wonder how that bill might have
stimulated the economy if we're down 13 percent.
I guess in theory you could say, well, we would have been
down further if the bill hadn't done. But I look at reality and
reality is measured by what has happened, not what we think
might have happened.
I look at it, I guess to me, when I heard the President
come out and publicly state, no, his tax bill in the future,
over my dead body will it ever be changed, great, great
political statement, good headlines. But since that day, the
stock market's down, oh, I don't know, 6 percent. I just wonder
how that helped the economy. I know it's good politics, but I
wonder how it helped the economy.
So I'd be interested in seeing some of the statistics that
you're using to make those statements. Again, I'm not prepared
to argue with you, because I don't know. So I'd like to see
them.
I guess to me, I also want to talk about Social Security.
We have a lot of rhetoric all the time, and I'm going to say to
you the same thing I said yesterday to Mr. McDaniel and to
others. I look at the proposal before us and I look at the
Social Security Trust Fund being dipped into for the next 8 to
10 years, depending on how you measure it.
And people at home don't understand off budget, they don't
understand on budget, they don't understand this, that or the
other thing. They do know one thing: the average person making
$40,000 at home, right now, all across this country, between
them and their employer's share of the Social Security FICA
payment, pay $4,960 each and every year that they think is
going to Social Security. I want them to know, and I want it
clearly said that that $4,960, which is very real money out of
their paychecks, it's not phony money, it's not bond money,
it's not borrowed money, it is cash out of their pocket, is
currently being used and will be used for the next 10 years to
balance the budget. It will not be used to stabilize Social
Security.
You have to add me to that talk show list, I guess. Because
though I do not believe that current Social Security recipients
will at all be hurt, I do believe with every ounce of my soul
that my generation has a risk, a real, serious risk, of not
having Social Security there when we need it. I have a real
belief of that, and if that puts me on the talk show, so be it.
But I don't think that makes me unique. I have never said,
and I have heard almost no one say, that current Social
Security recipients are jeopardized one bit. It's about the
future of Medicare, not just Social Security. So whatever talk
shows you can get me on, give them a call, I'll give you the
phone number later on.
I guess the only other point I want to make is, again, my
numbers may be wrong, and I'd like to see them, but in the
budget proposal, I see on page 31 the claim of 300,000 jobs
being created by the new stimulus proposal the President is
pushing. On page 397 of that same book, I see that the cost for
that stimulus package is estimated at $77 billion in this
fiscal year. Simple math, that means $256,667 per job. Where do
I get one? That's a pretty good job, I know a lot of people who
would want it.
For me, if that's what we're going to do, if that's the
measure of success, which is fine, it's a good measure, I'd
rather give people, I know lots of people who'd jump at $50,000
a job. That's five times as many jobs being created if you just
simply create a jobs program. If that's the only measure of
success, if that's how we do it, I'd like to see the money used
a little bit better. I just don't see, I'm not sure how you'd
measure the benefit of $256,000 per job. I understand the
theory of potentially maybe stabilizing the economy for the
long-term future. But I don't see it here. Again, anything you
provide me at a later time or now, whatever you want that would
make me a little more comfortable.
All I know is, if that money were being spent on a housing
program, $256,000 per unit of affordable housing, I'd have HUD
in here screaming it was an ineffective program and we ought to
cut that program, too much money. And I would happen to agree
that it would be. I'm not so sure it's any different for jobs.
Thank you.
Secretary O'Neill. Let me start with the end of what you
said. If you would like to have a greater economic efficiency
in the stimulus package, then what you favor is not giving
anybody an extension of unemployment benefits and you don't
want to provide any continuation coverage for health benefits.
These are the transfer payment portions that make the cost of
protecting 300,000 jobs what you say. Because there's a
compassionate component in this $80 billion that's a very
substantial part. It's about half of the total cost, is about
the President's sense of compassion, which I would hope you
would join, about caring about the people who were dislocated
by September 11.
So if you want simple economic efficiency, then there's a
way to get that. But I doubt that you really don't want the
compassionate part of this budget.
To the issue that you make about the Social Security, I
would propose this to you. I think it's time that together, we
create a Federal balance sheet that has the unfunded liability
of Social Security for your generation on it. It's $10 trillion
or $10.5 trillion. Then maybe we can have a really interesting
conversation about how we need to make reform instead of the
rhetoric about stealing from the Social Security Trust Fund,
which we all know is not true. Nobody's taking a single penny
out of the Social Security Trust Funds.
I would be delighted to have an argument or a discussion,
more politely, about the unfunded liability and put it on the
Federal balance sheet, so we can have a conversation that has
meaning.
Chairman Nussle. Mr. Putnam.
Mr. Putnam. Thank you, Mr. Chairman.
Good morning, Mr. Secretary.
Secretary O'Neill. Good morning.
Mr. Putnam. Thanks for sticking around until we get down to
the freshman questions.
If my friend from Massachusetts is worried about his Social
Security, I can assure you, I've already given up on getting
mine. [Laughter.]
We're looking forward to solving the economic problems of
today so that we can focus on the future of Social Security
down the road and come up with a better system.
We have such a dynamic and diverse economy. There are so
many different moving parts to it, from the manufacturing and
industrial and agricultural and high tech and the whole gamut
of opportunities for people to be gainfully employed and pursue
the American dream. But for one particular sector that has been
highlighted even before we hit the official recession, rural
America and the agricultural sector have been depressed for
some time.
As we develop these strategies and pursue expanded trade,
and pursue these growth strategies to bring all of the American
economy forward, are there some things in particular that we
can do to help rural America get an extra leg up beyond just
making the Farm Bill more generous year after year?
Secretary O'Neill. Well, I think, you know, we work on
trade promotion authority. One of the things were going, I
think, to continue to do, we're going to continue to provide
opportunities for markets that are not now served. A huge part
of our rural America's farm product is going offshore today.
And a reason to pursue trade promotion authority is to keep
expanding those markets. That rightfully should be the
attention of U.S. producers.
Probably the most productive area, growth area, after maybe
semiconductors, is the U.S. farm economy. It is really
remarkable the rate at which our farmers have been able to
improve their ability to produce more and more product with
fewer and fewer resources. I think that's an important aspect
of helping rural America, more particularly farm part of
America.
The other thing we need to do in a broader sense, where we
don't have such a dense population, is to continue to see to
the growth of our economy. Because more and more, if you look
at where American industry is expanding, it's expanding in
small towns with plants that have 100 to 300 people. It's not
the story of mammoth plants with tens of thousands of people
any more.
The more we can do to create the conditions for economic
expansion across the totality of the American economy, the more
we're going to see that spreading out and benefiting more and
more people and reducing the pressure to centralize the
population as well.
Mr. Putnam. The reason why I ask you that, I certainly
understand you're the Secretary of Treasury and not the
Secretary of Agriculture, but from a macro perspective, from
the total economic, the total view of the American economy, 25,
50, 100 years from now, what role do you see production
agriculture playing in the American economy? What role do you
see traditional manufacturing jobs playing in the American
economy? Are we really so sophisticated, are we really so
technologically advanced, that we will essentially export our
ability to produce our own food and fiber, or will there be
other factors that emerge?
Secretary O'Neill. I don't think so. I think if you look
back 25 years ago or 30 years ago, in the best farm land in
Iowa, the yield, the corn yield was maybe 65 or 70 bushels an
acre. Last fall, some relatives that I talked to about these
kinds of things I think had a crop yield of 210 bushels an
acre, which is really just phenomenal.
I'm one who doesn't believe there's a foreseeable end to
the productivity potential of the U.S. economy. For that
particular crop, if you go back 25 or 30 years, we were still
planting corn in rows so that we could get equipment between
the rows of corn to do weeding. And now we plant corn like
grass, so that we don't have to worry about weeds growing up in
the crop once the plants are established.
I don't think we're done with that. Our ability to conceive
of new technology, you know, this, if you go ride on a combine
in an Iowa corn field, the computer is measuring the moisture
content and the yield on an acre basis, so that in the next
planting season, the computer knows where to put the more
intense fertilizer to raise the yield in areas that are low
land or rocky or whatever. I don't think we've even touched the
surface of what's technologically possible to continue to have
the U.S. farm economy as a critical part of our economy and
feeding the whole world.
Mr. Putnam. Thank you, Mr. Secretary. Thank you, Mr.
Chairman.
Chairman Nussle. Mr. Price.
Mr. Price. Thank you, Mr. Chairman.
Mr. Secretary, welcome to the committee, thank you for your
testimony.
Secretary O'Neill. Thank you.
Mr. Price. I'd like to begin by making what I hope you'll
understand as a constructive suggestion and then move to a
question having to do with the corporate alternative minimum
tax. I just can't help noting in your statement the thumbnail
historical account you give of the progress that we made in the
1990's toward digging ourselves out of the fiscal hole,
retiring some of the national debt and making responsible use
of these unprecedented surpluses.
You say in your statement that fiscal discipline was
imposed by the historic Omnibus Budget Reconciliation Act
signed in 1990 by President Bush. I remember that battle, and I
think you're exactly right to give a great deal of credit to
President Bush, Senior. You might have noted that Newt Gingrich
and most House Republicans opposed that act. But it was
bipartisan, and it did have a lot to do with our economic
turnaround.
Why is it too much to mention the 1993 Deficit Reduction
Act in a parallel fashion? The 1993 act was remarkably similar
in its aggregate impact. It was remarkably similar in the mix
of spending cuts and tax increases that it contained. Now, the
political dynamic was very different; it was passed with
Democratic votes alone.
But I think any fair analysis would say that those two
acts, in tandem, are responsible for what we saw in the 1990's.
So why is it so difficult to acknowledge that? Why is it so
difficult, even in a thumbnail sketch, to give that kind of
balanced credit where credit is due? It would really make for
considerable bipartisan goodwill. That's a commodity that I
think is too often missing from our budget discussions.
Let me now turn to a question. There are----
Secretary O'Neill. If I may, I'd be happy to----
Mr. Price. That's fine, but I don't want to lose my chance
to ask further questions.
Secretary O'Neill. I'd be happy to stipulate your point. I
think certainly that's a contributing thing. The other thing
that's really important, and I didn't make much out of it, is
the unbelievable productivity spurt that we got in the private
sector, partly because we were faced with strong competition
from offshore.
Partly because I think the American people got their act
together and realized that the slowness that we were acting
with during the late 1970's and early 1980's was going to do us
in unless we saw our role in the world as leading the world and
not just kind of lollying along. It's remarkable what we
accomplished in that decade together.
Mr. Price. Absolutely. I agree with that, and I also think
the positive signal sent to the markets by the Acts of 1990 and
1993 had a great deal to do with our economic performance.
I would ask you something perhaps more mundane, but it has
to do with what I'm hearing from constituents and what I'm
wondering about myself. There are reports that the Enron
Corporation, over 5 of the last 6 years, paid no Federal taxes
whatsoever. I'm not sure if that's true. If it is true, I
wonder why it's true, given the presence of the alternative
minimum tax. I think laymen don't understand why, with an
alternative minimum tax in place, which supposedly takes care
of this kind of problem, why that would still be possible.
So does this point to some flaws in the alternative minimum
tax, and does it lead you to reconsider your position on the
corporate alternative minimum tax in general? As you know,
House Republicans have proposed, not only to repeal the
corporate AMT, but also to refund corporate AMT payments over
the past 16 years. What is your current disposition toward that
proposal?
Secretary O'Neill. In the December action by the House,
there was an AMT provision that was prospective that would have
cost, over the 10 year accounting period, $1 billion or so. We
were favorably disposed to that.
To your earlier question, as I think you know, under the
law, it's prohibited for me or for anyone else in the Treasury
Department that doesn't have a direct duty in the IRS, to
examine a tax return. So I haven't got a clue what's in
anyone's tax return, including yours and Enron's. I think
that's an appropriate law.
Now to the broader question of whether every individual and
corporation ought to pay taxes, I think they should pay the
taxes that are required by the law. Those who don't pay the
taxes that are required by the law ought to be punished to the
fullest possible extent, including going to jail. If the
judicial system finds in this particular case that you're
mentioning that they violated the law, I assume the Justice
Department will pursue them to the point of incarceration, if
that's what's indicated.
Now, is there a broader principle that people should pay no
matter what the law says? I don't think so. If there are people
who make $20,000 a year or some even make $40,000 or $50,000 a
year and by our tax law they don't have to pay any taxes,
should they volunteer to pay taxes? I don't think so.
Mr. Price. Well, I'm not asking you, obviously, to comment
on the legality of Enron's behavior. What I'm asking is, are
there loopholes in the law that make this a conceivable
outcome, that a corporation could completely escape taxation
for 5 out of 6 years?
Secretary O'Neill. Well, let me say that I presume that
Members of Congress carefully consider the provisions of the
tax code, and whatever is there is what you all intended. If
people and companies legally use the tax code as you all
apparently intended it, and end up paying some lesser or
greater amount, I assume that's what you intended.
Now, if there's fraudulent behavior, let me say again, I
think we ought to put fraud makers in jail. There should not be
any room for American citizens or companies violating the law
of the land.
Chairman Nussle. Mr. Miller.
Mr. Miller. Thank you, Mr. Chairman.
Mr. Secretary, it's good to have you here today.
Secretary O'Neill. Thank you, it's nice to see you.
Mr. Miller. My good friend, who's gone now, made a couple
of comments. One, he applauded the President for receiving
input as it applies to the war on terrorism, and how he's
handled that. Then he said the White House, meaning the
President, he would encourage him to give more consideration to
the White House economic team when making economic decisions on
how to stimulate the economy.
You didn't have a chance to really address it, but I
believe he's done that. I don't think the stimulus package was
developed in a vacuum. I believe that his economic team at the
White House was very involved in that. Shame on the Congress
for not implementing that, for bottlenecking. The same thing
with trade promotion authority. I think that was well debated
with his economic team, and the benefits were seen in that. We
saw that in our House, yet it's gone nowhere.
The comment also about taking a transportation hit as far
as budgetary constraints, and I applaud you in your response.
You're correct in the dollars that were received are being
spent where they belong. There's a debate many of us, some from
California and other States, think you could take money out of
the Farm Bill and put in transportation. But I know the
Chairman and others might not agree with that.
So it's just a matter of prioritizing a limited amount of
dollars out there. You were commenting when I walked in about
the open economy and how that has fueled the economy, and I
agree with that, and the competitive marketplace, how that's
beneficial. You have a lot of regulatory authority, and one
we've talked about that has brought some concerns up to me is,
a lot of Americans just think that the Treasury Department is
the Federal Government's bank, money goes there and it sits
there and you pay our bills as they come in.
But you have authority well beyond that. One issue we have
talked about earlier, along the lines, and maybe you could tell
me a little more about where you are in the process regarding
banks and other financial holding companies, then becoming more
active in real estate as it applies to selling real estate,
bundling as it applies to them also doing title policies. Where
are you on that decision?
Secretary O'Neill. Let me respond directly to your
question, but don't let me forget to come back. There's one
point I want to make on your earlier comment. On this issue of,
I guess it was an issue that was addressed in the sweeping
regulatory scheme that was in the Graham-Bliley legislation of
a couple years ago, raised the issue of extending to banks the
opportunity to be in the real estate business. It's something
that we've been looking at now for some time.
The way you all set these terms, it's necessary for the
Treasury and the Federal Reserve to come into agreement on
whatever we might do. Because of all the concern that's been
expressed, we've been talking with the Federal Reserve about
what we might do. At the moment, we're seriously looking at the
possibility of reopening the comment period because there seems
to be so much division of opinion about what ought to be done.
We haven't quite decided yet, but that's where we're tending
toward at the moment.
Mr. Miller. So in that specific area, there is, I've been a
realtor and been a developer in the past, I think banks do a
great job of what they do. I think realtors do a good job of
what they do, and I think the title insurance company does a
great job of what they do. However, when you look at the
concept of bundling, I think it creates a tremendous conflict
of interest, especially when realtors, bankers, and title
policies, how does a title insurance firm that's owned by the
bank insure title against the loan they made to the person who
bought the house? It creates too much of a conflict.
Yet when you put a bank in a position where they can sell
the house internally, they're automatically going to do the
loan and automatically do the title policy. It eliminates a
tremendous amount of competition, which I think has been
healthy for the economy and the industry. That's what I'd like
you to kind of address, and I think you're going that way.
Secretary O'Neill. Well, I don't really have a
knowledgeable point of view on the substance. What I have
developed a knowledgeable point of view about is the ambiguity
of the legislative history on this subject, which I find
frankly very unfortunate because I don't think that the
executive branch should be writing laws.
Mr. Miller. I agree.
Secretary O'Neill. And when we're left in a position of
huge ambiguity about the intent of Congress, then we're torn
one direction and another. In effect, we become the law writer
instead of the regulator. I think it's totally inappropriate.
Mr. Miller. I agree.
Secretary O'Neill. If I may go back to, because I wanted to
comment on one point you made about comments that were made
earlier, and the characterizations that were made. In the
interest of not using everyone's time, I have chosen not to
respond to everything that's said. So I hope the fact that I
don't respond to everything that's said doesn't mean I agree
with everything's that's said.
Mr. Miller. I tried to respond for you.
Secretary O'Neill. Thank you.
Mr. Miller. You're welcome.
I yield back the balance of my time, Mr. Chairman.
Chairman Nussle. We have two votes on the floor. I'm going
to take Mrs. Clayton for her time, and then we will recess
until after the second vote. We will continue the hearing.
Mrs. Clayton.
Mrs. Clayton. Thank you, Mr. Chairman.
Thank you, Mr. Secretary. I do appreciate your consistency,
but let me just make a couple observations about the budget.
The budget is a budget that we understand is in war times, so
there is an overriding assumption that there should be no
question about the amount of money that we allocate to defense.
If you question that, then you don't understand that this
Nation is at war. We all understand that we are at war.
But at the same time, regarding discussions about the
budget, it should not be seen that useful discussion about
differences of how we protect Americans and protect their
Social Security, as well as protecting their health care, and
their education. To what extent the amounts of dollars, whether
it be national security or homeland security, has to be
balanced doing so, I think the President said, we have to do
whatever is required.
Well, the question is, not to question the President as to
what's required, but to question how much. A discussion about
the budget is the most important issue we can talk about
because it is here where we actually put meaning to the
political words we talk about. It is the allocation of the
Nation's resources as to whether we care about the people. We
protect our people from foreign invasion, but we also ought to
protect our people's quality of life.
So my concern is that this isn't balanced in that regard. I
am concerned when there is money taken away from job training.
I am concerned when there is not enough money put in for senior
citizen prescription drugs. They also need to be protected.
I see the protection from terrorism, the protection for
life being all equal threats. I applaud the priority of having
national defense. I applaud the priority of doing more for
homeland security.
When thinking about raising the deficit, you are right, the
law is structured and there are no other choices. The reason
that you have to do this is because the consequences requires
action now, the public debt we now have, you claim that the
money that comes is a contribution that goes to Social
Security, not really taxes, but people think of it as taxes
when they come off. They also don't understand that the money
is not there in cash. You understand that it is an IOU from the
government to the trust fund.
Secretary O'Neill. Right.
Mrs. Clayton. That's good for intellectual discussion. But
for the heartland, they don't understand that. So they have a
concern about the way to finance the government, we are
actually taking those IOUs, those surplus now, and paying off
the debt. Those are comments, you can respond to them if you
like. I do appreciate you coming here, but I do want to say
that we ought to have a discussion that allows individuals to
debate all of this. We shouldn't say that defense is a sacred
cow or defense should never be debated.
Now, I'm for defense. It should be that we ought to do far
more for our military men and women than we are doing. Why do
we need to put so much in old fashioned instruments? We're
putting the same dollars that we would have put in 2 years ago
after the terrorist attack, the same technology, and yet we
have been invaded by terrorists. So we have learned nothing in
this process.
So some of us want to question that. Some of us want to say
that we are very patriotic and we want to have the strongest
defense. What constitutes the best defense given the attack of
September 11? It seems that we have a different kind of
strategy, all of it wouldn't be going to be the same
technology, the same instrument, the same budget with no
strategic difference in our approach to that.
Thank you, Mr. Chairman. Thank you for allowing me to have
the time.
Secretary O'Neill. May I just say one thing? I very much
agree with the philosophical and programmatic content of what
you said. This is outside my oversight responsibility. But I
think it's true that the Congress has expressly forbidden the
Defense Department to even consider additional base closings,
which would save money that could be used for some other
purpose. So I agree with you completely, it's useful to look at
everything. We should stop spending money on bases that don't
really have a reason to exist any more as an example of having
a more rounded approach to what we're doing with our money.
Mrs. Clayton. Thank you.
Chairman Nussle. Thank you. Mr. Secretary, as you see, our
fancy new system here, next week we'll be showing the Winter
Olympics. [Laughter.]
Right now it's just the floor of the House.
Secretary O'Neill. I'll come back for that.
Chairman Nussle. We have a vote on, so we'll stand in
recess, potentially three votes, this one and two others. Thank
you.
Secretary O'Neill. Thank you, Mr. Chairman.
[Recess.]
Mr. Hastings [assuming Chair]. The committee will come to
order. I want to once again thank Secretary O'Neill for being
here, and the members who are coming back from the votes. I've
been advised that the Secretary has time constraints also, so
if there's only us, I suppose we'll meet those time constraints
very easily.
Mr. Secretary, I apologize for not having been here
earlier, but I had some responsibilities on the floor. But I
understand that the questioning here was somewhat similar to
what we went through yesterday when Director Mitch Daniel was
here. A lot of the talk there was regarding the spending and
past budget agreements and so forth.
I understand that you mentioned the role of the 1990 Budget
Agreement that kicked off the economic boom. But I understand
that you did not mention the 1993 plan that was signed by
President Clinton. I just wondered why is that. Is it because
the dynamics of both of them were different?
Secretary O'Neill. The simple answer is yes; plain reaction
control for some of that. Also I would say, I don't think that
tax increases are pro-economic growth and job generation and
wealth creation. I was asked a question before you were here by
one of the members. I said in the spirit that the question was
offered that, the suggestion was it would be nice for us to
have a bipartisan sense that everyone wants to do well.
I said I would stipulate that, and went on to say that I
also didn't mention in my prepared statement how important it
was that our private sector found the will and the way to
produce unbelievable rates of productivity growth as compared
to previous periods. So I think there's a lot of credit to go
around. Again, I think the less money we can take away from the
people who earn it to do the public business, the more rapidly
and effectively we'll be able to grow our economy.
Mr. Hastings. One other observation that I might have.
Yesterday in the Budget Committee, it was pointed out that the
Reagan tax cuts caused the deficits. But my understanding was
that the agreement, and I wasn't here then, and I don't think
you were part in any way of the government either, but the
agreement was that in exchange for the tax relief, because of
the static scoring, there was to have been a reduction in
spending. That didn't happen, I think spending was about at 150
percent, if my memory serves me correctly, of the tax relief.
But during the whole 1980's, revenues to the Federal
Government in fact doubled.
Secretary O'Neill. That's right.
Mr. Hastings. And the problem was that spending increased
faster than the revenues.
Secretary O'Neill. That's precisely right.
Mr. Hastings. What you're suggesting in the Clinton budget,
while spending was restrained, at least less than what the
revenue growth was, and therefore we could catch up.
Secretary O'Neill. That's right.
Mr. Hastings. Thank you very much.
Mr. Moore from Kansas.
Mr. Moore. Thank you, Mr. Chairman.
Thank you, Mr. Secretary, for being here. I'd like to carry
on, I guess, with part of this bipartisan atmosphere, but I do
have some questions and some comments I'd like to make. A year
ago, there was a lot of discussion in Washington, the President
and leaders of Congress and a lot of people in Washington about
the dangers of paying down the debt too soon. That's something
I told people back home, you don't have to worry about Congress
ever doing that, that's not going to happen, in my opinion. I
wish it would, because I think it's one of the healthiest
things we could do for our country and our economy.
But there was talk a year ago about projected surpluses.
I'm going to put it in context, because I certainly don't hold
the President responsible for the recession. I don't hold the
President responsible for 9/11, nobody does. Nobody of any
sanity does. I voted for the President's tax cut last year.
But I do have some concerns, and I expressed some of those
concerns to the President when I was at the White House
February or March, whenever it was, and we were talking about
his proposed tax cut. I told him about tax cuts which have been
instituted in Kansas over the past 3 or 4 years. And the
legislature in February of last year was in session, and they
were struggling to find money to fund education because of
revenue shortfalls. That's happened in a lot of States now.
I told the President, I would, to me tax cuts were not a
partisan issue and I would support tax cuts appropriate. I
thought $1.6 trillion was too much, I wanted $1 trillion. Came
back and compromised at $1.35 trillion, which I voted for.
But I guess, I want to tell you, I visit a lot of high
schools back home and really enjoy talking to high schools, I
say talking to them, I like to listen to them, because they
have a lot of wisdom to share. I was talking about budget
surpluses and projected revenues and projected surpluses. And I
said to this class that I was talking to, what do you think
projected means? This one young man raised his hand and said,
maybe yes, maybe no. And boy, was he right, because we were all
wrong about projected surpluses.
I guess I would ask you, in view of what you've said
already, and I supported this last time and I think we need to
do this, would you consider supporting 5-year budgeting instead
of 10-year budgeting?
Secretary O'Neill. I think it makes an awful lot of sense
to do a 5-year budgeting. I said earlier, it's OK as a mental
discipline to do 10-year projections. But we shouldn't confuse
that with and think it's a prediction. It's only a guesstimate,
if you will. I think we should have a higher sense of
discipline for ourselves on 5-year budgeting and yes, I think
that's directionally right.
Mr. Moore. I would hope that you will advocate that within
the administration, because I think it really just makes so
much sense. Because we can't tell what the weather's going to
be 7 days from now, much less what the surpluses or what the
economy's going to look like a year from now or 5 years from
now.
Secretary O'Neill. I agree with you.
Mr. Moore. But 5 is better than 10 years.
I also, when I talk to these high school students, I was
talking last year and at that time I think the national debt
was about $5.7 trillion. Just coincidentally about the same as
the projected surplus. And I was talking about that debt and
the benefits of paying down the debt in terms of what Chairman
Greenspan had said about lower long term interest rates if
we're able to keep our debt down and keep fiscal
responsibility.
I said to these students, guess what happens if we don't
pay down the debt, who's going to have to pay it down. They all
looked at one another and in kind of a chorus they said, ``We
will.'' And I think, I believe that you agree with this, and I
think most people here agree with this, that it is inherently
unfair for us to push our debt onto our children and
grandchildren and future generations in this country. I hope we
can all get back to the point where we can be talking about
hopefully surpluses. It's a lot more fun to govern when we're
talking about surpluses than deficits.
But I do want to say, and this is winding down here, you
said there are a couple of options. One is raise taxes.
Nobody--very few people in this whole body--are talking about
raising taxes. The other was cutting spending. There's a lot of
talk about that. The other, though, is no new tax cuts. That's
another option. Right now, when the President's talking about a
stimulus package of $80-plus billion, and we are in a situation
where we have to spend more on protecting our country and
defending our country, and I think virtually everybody here is
going to do that as well, we're behind the President 100
percent on that.
I'm just very nervous, though, about more tax cuts when
we're in a situation of revenue shortfalls, and adding to the
debt which I'm going to ask my kids and grandkids to pay. I
don't think that's fair. I understand you believe it's going to
grow the economy. I talked to a Republican banker back home, 70
years old. I said, Ben, what do you think about the President's
proposed stimulus package? He kind of laughed and he said, we
don't need that. He says, that's really nuts. We don't need to
do that. He says he thinks the economy is recovering, as
Chairman Greenspan has indicated there are positive
indications, and I've heard other economists say that.
So I would just ask you please to consider, maybe the best
course of action is to do nothing in terms of trying to further
stimulate this recovery if it's underway. Because if it is
underway and we do that, we're going to end up adding to the
debt that we already have in this country. I say that with all
due respect, and I really mean that. Because I hope and believe
we're all working toward the same objectives here. Thank you.
Secretary O'Neill. Thank you.
Mr. Hastings. Mr. Davis.
Mr. Davis. Thank you, Mr. Chairman.
Mr. Secretary, thanks as always for your candor. It's
refreshing.
Secretary O'Neill. Thank you.
Mr. Davis. One of the comments you made earlier I'd like to
enlarge upon was your statement the only way to get money was
to take it away from people. That normally describes us just
raising taxes to fund the government. But as has been made
painfully clear today, and I think you would agree, because we
can go into deficit spending, into this publicly held debt,
which I think roughly is about $3.4 trillion, we also have the
ability to take money away from one generation and give it to
another.
Now, I applaud your candor in acknowledging the
relationship between increasing the size of the publicly held
debt and the impact on interest rates. As I'm sure you know, in
2002, under your proposal, we will increase the publicly held
debt by $157 trillion.
Secretary O'Neill. Billion.
Mr. Davis. And I understand your further point that you
think the impact will be de minimis in terms of the impact on
interest rates, and I certainly hope you're correct. I know
we'll have some debate about that.
Given how fragile these projects are, Mr. Secretary, and
how fragile they continue to be, and this is a chart, it's not
the unified budget surplus, it's just the Social Security and
Medicare Trust Fund surpluses, shouldn't we err on the side of
caution, avoid this further tax cuts the administration
proposes, which I think is in excess of at least $800 billion
over 10 years, and instead aim for a balanced budget and
dealing with the security spending?
Secretary O'Neill. Well, at the moment, I'm not sure I can
get this from your chart, but at the moment, we're anticipating
even with the tax reduction of last year, which over the 10-
year period only accounts for 40 percent of the difference, and
in this year, accounts for 15 percent of the difference, we're
anticipating a surplus along with the Congressional Budget
Office of $1.6 trillion over the next 10 years.
So with the slow-down in the economy, with the terrorist
attacks, with $660 billion worth of so-called technical
reductions that reduce the surplus, I think we still do have an
appreciable surplus. I honestly do not think it's a good idea
to raise taxes to create what I call an accommodation for
accountants. I think restoring growth to our economy will get
us back on a track that will produce even larger surpluses than
what are now being estimated, and it will do it sooner rather
than later.
Mr. Davis. Mr. Secretary, my question was directed to the
new tax cuts that you're proposing, not revisiting the existing
tax cuts that were enacted.
Secretary O'Neill. Well, maybe we could talk specifically
about those. In effect, most of them are tradeoffs against
spending. There's really no difference. We in the Congress have
adopted a process of saying, for example, that at the end of 10
years, everything is reopened and we go back to the status quo
on the tax side and the President said, we ought to make the
tax cuts that were enacted last year permanent. That means that
from a scorekeeping point of view, the fact that we're now
saying, the estate tax provisions should be permanent, not just
last for 9 months, scorekeeping says that costs a lot of money.
The truth of the matter is the process and procedure and
conventions that are followed are unfortunate. Because we all
know that when we get to the end of the 10-year period and
we're faced with the prospect of increasing the tax rates on
the lowest income taxpayers from 10 percent to 15 percent,
we're not going to do that.
Mr. Davis. Well, Mr. Secretary, at the risk of
interrupting, because we're going to run out of time here, my
question was directed to the tradeoff, not between spending and
the tax cuts, it's the tradeoff between paying down the
publicly held debt and the tax cut.
Secretary O'Neill. Well, why would you trade it any
differently than the $48 billion increment the President has
asked for to pursue the war on terrorists? Every dollar,
whether it's on the spending side or the tax side, if it has
the effect of reducing the size of the surplus, is traded
against reduction in the publicly held debt. So I think it
makes no difference at all.
Mr. Davis. There is no disagreement here about whether we
should spend the money on the security. The question is to what
extent should we put emphasis on paying down the publicly held
debt, or taking risks on interest rates versus doing new tax
cuts beyond what we did last year?
Secretary O'Neill. I said earlier that I think the data is
really clear in what it is that sets interest levels. The first
is kind of a natural or real requirement of capital markets as
to a 3, a 3\1/2\ percent return for capital on a constant
dollar basis. The other portion of interest rates is decided by
inflation. To the degree our combined actions here in
Washington raise the specter of inflation, then we've got to
worry about rates going up. At the moment, I would say
inflation is about as benign as it's been for 40 or 50 years.
And so I don't think that's an immediate source of concern.
In fact, long rates are down substantially from the level that
they averaged from the period 1993 to the year 2000. And then
if you want to specifically talk about the tax side, let's take
the issue of a proposed tax credit for senior citizens for
prescription drugs.
Mr. Davis. Mr. Secretary, I have to interrupt you, because
the Chairman's about to cut me off. My last question, which is
a very brief one, is do you think the assumptions upon which
you are basing your proposal, in particular the additional tax
cuts of about $800 billion, do you think those assumptions are
more reliable than the assumptions you brought to us last year
about the rate of growth in the economy?
Secretary O'Neill. I think the pricing that you find in the
budget is the best that human minds know how to make it. I
would say the independent Congressional Budget Office has been
almost in perfect parallel with what we've been saying. If you
look at our estimates of everything compared to independent
private sector people, we're always on the conservative side.
Does that mean that I believe the projections of 10-year
numbers are ones that I would bet my life on? I wouldn't.
Anyone who would simply doesn't understand how life works. I
said earlier, let me say again, nobody that I know anticipated
the terrorist attacks on the World Trade Center. It was
simply--thank God--an un-knowable thing. Hopefully it's a
preventable thing going forward.
But we don't know what's going to happen 6 months from now
or 9 months from now that could cause us or force us to change
our projections for the period going forward.
Mr. Davis. Thank you, Mr. Chairman.
Mr. Hastings. Thank you, Mr. Davis.
Mr. Secretary, thank you very much for your time here. We
apologize for having to break these meetings for our votes. But
that's part of the way it works.
I just remind members that the next scheduled meeting is
next Tuesday at 2 p.m. We have Assistant Secretary Wolfowitz
from Defense.
With that, the meeting stands adjourned.
[Whereupon, at 12:30 p.m, the committee was adjourned, to
reconvene at the call of the Chair.]