[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
AFTER THE HURRICANES: IMPACT
ON THE FISCAL YEAR 2007 BUDGET
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, OCTOBER 6, 2005
__________
Serial No. 109-11
__________
Printed for the use of the Committee on the Budget
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COMMITTEE ON THE BUDGET
JIM NUSSLE, Iowa, Chairman
JIM RYUN, Kansas JOHN M. SPRATT, Jr., South
ANDER CRENSHAW, Florida Carolina,
ADAM H. PUTNAM, Florida Ranking Minority Member
ROGER F. WICKER, Mississippi DENNIS MOORE, Kansas
KENNY C. HULSHOF, Missouri RICHARD E. NEAL, Massachusetts
JO BONNER, Alabama ROSA L. DeLAURO, Connecticut
SCOTT GARRETT, New Jersey CHET EDWARDS, Texas
J. GRESHAM BARRETT, South Carolina HAROLD E. FORD, Jr., Tennessee
THADDEUS G. McCOTTER, Michigan LOIS CAPPS, California
MARIO DIAZ-BALART, Florida BRIAN BAIRD, Washington
JEB HENSARLING, Texas JIM COOPER, Tennessee
ILEANA ROS-LEHTINEN, Florida ARTUR DAVIS, Alabama
DANIEL E. LUNGREN, California WILLIAM J. JEFFERSON, Louisiana
PETE SESSIONS, Texas THOMAS H. ALLEN, Maine
PAUL RYAN, Wisconsin ED CASE, Hawaii
MICHAEL K. SIMPSON, Idaho CYNTHIA McKINNEY, Georgia
JEB BRADLEY, New Hampshire HENRY CUELLAR, Texas
PATRICK T. McHENRY, North Carolina ALLYSON Y. SCHWARTZ, Pennsylvania
CONNIE MACK, Florida RON KIND, Wisconsin
K. MICHAEL CONAWAY, Texas
CHRIS CHOCOLA, Indiana
Professional Staff
James T. Bates, Chief of Staff
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
Page
Hearing held in Washington, DC, October 6, 2005.................. 1
Statement of Hon. Douglas J. Holtz-Eakin, Director, Congressional
Budget Office.................................................. 9
Prepared statement of Mr. Holtz-Eakin............................ 14
AFTER THE HURRICANES: IMPACT
ON THE FISCAL YEAR 2007 BUDGET
----------
THURSDAY, OCTOBER 6, 2005
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 2:10 p.m. in room
210, Cannon House Office Building, Hon. Jim Nussle (chairman of
the committee), presiding.
Members present: Representatives Nussle, Ryun, Crenshaw,
Putnam, Wicker, Garrett, Barrett, Diaz-Balart, Hensarling,
Ryan, Simpson, Bradley, Mack, Conaway, Chocola, Spratt, Moore,
DeLauro, Capps, Cooper, Davis, Jefferson, Allen, Case, and
Cuellar.
Chairman Nussle. I call the Budget Committee to order.
Before we begin with the official agenda, let me pause for
a moment; and, Doug, I know this is particularly important for
you, your team, and family down at the CBO (Congressional
Budget Office).
The committee was very saddened to hear the news this week
of the death of Bob Sempsey from a long-term illness. We offer
Bob's family and all of the CBO staff our sincerest
condolences.
For those who didn't know Bob very well, I can say that he
was well-known to many of us. He worked for the CBO for nearly
25 years; and with his colleagues down at what is called the
scorekeeping unit, they provided this committee and the
Appropriations Committee with the vital cost estimates and
scorekeeping tallies of the annual appropriation bills that are
the core of the budget and appropriations process.
He was also well-known in the extended family of the budget
community and was famous for having a very dry sense of humor
and for being an avid car enthusiast and certainly for his
devotion to his family, Emily, Zack, and R.J.
What is not commonly known about Bob is that he worked for
the Ringling Brothers Circus before joining CBO, which was
probably good training for the budget and the process.
I am sure all of us will miss Bob, particularly down at
CBO. So we offer just a moment of pause just to express our
condolences and to let his family know that his service to his
country, to this committee, and to Congress was deeply
appreciated and his service will be deeply missed.
Mr. Spratt.
Mr. Spratt. Mr. Chairman, thank you for allowing me to add
a word of sympathy to your staff and to the family of Bob
Sempsey. We knew him better by his work product than by his
personality, though his personality was well-known around here,
and that work product was always excellent, and it is a symbol
still of the legacy that he leaves in 25 years of service to
CBO, the country, and the Congress of the United States. He
will be missed here on Capitol Hill as well as at CBO.
Thank you, Mr. Chairman.
Chairman Nussle. Thank you, Mr. Spratt.
Good afternoon and welcome to the Budget Committee hearing.
When the committee last met back in July, our discussion at
that time was what was called the midyear budget, an economic
outlook; and things were looking pretty good at that point in
time. We were continuing to see steady, strong economic growth
and job creation. Tax revenues were up 15 percent over last
year, we were keeping discretionary spending on track, and we
were seeing a dramatic reduction in the deficit, in fact, a $94
billion reduction in the deficit at that point in time.
Things certainly were not perfect, they never are, but we
certainly seemed to be heading in the right direction. A couple
of weeks ago Hurricane Katrina hit, and our Nation was
devastated, and so many people and families were devastated.
It was the worst natural disaster on record, certainly
everything has changed, and many things will change for quite
some time. Within days, this Congress acted to get victims the
critical emergency assistance they needed by approving $62
billion in emergency funding; and Congress clearly remains
committed to doing whatever is needed to recover from the
disaster.
But, at the same time, we better understand that our
obligation to the hurricane victims and to all Americans
doesn't end with quickly writing a bunch of big checks, that is
the easy part for Congress. Congress must now prove we can
handle the heavier lifting that follows by making reasonable
and responsible choices and priorities in the next phase of the
Katrina response.
I think the first thing we need to do--and what is
currently lacking, in my judgment--is to make a clear
distinction between what is and what is not an emergency. I
know that in the rush to get victims critical need and help in
the first days and weeks after the storm, making this
distinction was certainly far from our top priority, and
appropriately so, but, today, a month later, it is time.
Congress must set clear criteria to ensure that any
spending deemed an emergency, and thus not subject to budget
limits, is actually used to respond to the immediate and urgent
needs of the people and families in the gulf. If funding
requests do not meet these emergency and reconstruction
criteria, then I believe, what is not the emergency portion of
the response must be subject to the judgment, the deliberation,
and oversight that are part and parcel of the regular budget
process for the U.S. Congress.
The purpose is not to limit help the Federal Government
provides to hurricane victims, it is to prevent nonemergency
spending from sliding through on what is often the fast track,
without the proper oversight in the name of emergency relief.
Further, we must aggressively follow all of the funds to
prevent waste, fraud, and abuse, ensuring that every taxpayer's
dollar we spend is hitting its intended target appropriately
and providing the help that families need. This goes hand in
hand with our government program reform efforts, which I would
like to touch on here in a moment.
Congress must also begin to make a down payment on this
emergency spending, I know there have been a myriad of ideas
floated around. One that was most interesting to me--actually,
I received two letters on this topic--were from my friends on
the other side of the aisle. In them, they suggested that the
best way to respond to this emergency was actually to cancel
our plans to reform government programs. In simpler terms,
Congress' best response to this immense new spending need
spurred by the hurricanes is to refuse to even look for savings
in other areas of the budget and instead just increase taxes.
Interesting logic, but I do not believe that is the right
policy at this time for our country. From several folks on my
side of the aisle, the Republican Study Committee (RSC), as an
example, which I will note is particularly well represented on
this committee, we have heard suggestions about off-setting
Katrina costs, ranging from focused program cuts to across-the-
board spending rescissions.
Just this past Tuesday, President Bush said in a press
conference that Congress should, ``pay for as much of the
hurricane relief as possible by cutting spending.''
The President also pledged to work with Congress to finance
Katrina reconstruction efforts in a fiscally responsible way
and supported increased savings and commitment in mandatory
programs; and my response to that is, great. But to get this
done we need to have a strong partnership among the House, the
Senate, and the administration. So here is what I believe
Congress must do.
First, Congress must reduce spending and make a down
payment toward the emergency spending itself. In consultation
with the leadership, I will propose an amendment to the budget
for fiscal year 2006 calling for such additional spending in
both mandatory and discretionary. I note that prior to Katrina,
we were on a course to holding the nonsecurity, discretionary
spending below last year's level.
I would suggest that we further reduce this spending in
three ways: first, with additional across-the-board
discretionary reductions; second, a rescission package for
unnecessary or low priority 2006 funds; and third, by
permanently eliminating and deauthorizing programs that have
been zeroed out by the appropriators so that they don't grow
again and become priorities in the future.
Appropriations Chairman Jerry Lewis has done a remarkable
job this year, and I have every confidence that he and his
committee can make this additional step.
On the mandatory side or the automatic spending side of the
budget, I propose that total net savings for reconciliation
should be increased from the current $35 billion amount that
was in our budget resolution, to a minimum of $50 billion in
savings over the next 5 years.
In addition, I propose that any hurricane-related mandatory
spending increases must be fully offset within that amount,
meaning this is a $50 billion net savings from government
reform. Long after the current budget challenge, our challenges
with mandatory spending will continue to exist. The baby
boomers will still retire, medical costs will continue to
skyrocket, and our largest government programs will still grow
far beyond our means to sustain them.
We must not fail to get ahold of this spending or simply
throw up our hands and say that it is too hard or that now is
not the right time or it is too difficult or that plan does not
work, or I do not have a plan. An alternative, as certainly
many will continue to suggest, this spending, which currently
takes up over a half of the Federal budget and is quickly
growing, will eventually crowd out every other priority:
education, agriculture, science, the environment, you name it.
It will severely limit our ability to cover our basic costs,
let alone respond to any further disaster.
And this isn't just about saving money, it is about
reforming our largest, most critical government programs, many
of which haven't been updated since their creation. Let me say
that again. Many of these programs that we are talking about
have not been updated, reformed, revised, or modernized, since
their creation. Or been updated to ensure they are meeting
their fundamental responsibilities and providing assistance to
those who are most in need. So we better get started, and we
better do it now.
Again, this year's budget required $35 billion in savings.
We can do that and more without losing sight of the needs
related to the hurricane victims.
Second, this committee will begin work on a fiscal year
2007 budget now. We will not just add on emergency spending or
give a blank check for an undefined notion of reconstruction.
We must prioritize next year's budget to reflect this enormous
Nation-changing event.
We must begin now to debate the appropriate role for the
Federal Government in any reconstruct effort. We must ensure
that any nonemergency costs, including reconstruction, be
addressed through the regular budget process. That means the
administration should provide details for any reconstruction
plan, a full accounting of the reconstruction costs; and the
President's budget must include a post-emergency reconstruction
financing plan. We cannot fund hurricane reconstruction through
these regular, predictable emergency requests to Congress.
I haven't been shy about my frustration with the
administration's financing of the war in Iraq through repeated
supplementals without details. I have adjusted my budgets to
reflect forward-planning of the war's costs, but more needs to
be done. Congress has already provided an unprecedented $62
billion in disaster relief, largely without an up-front
explanation of how that money would be spent or how it would be
financed. That may have been appropriate, but I understand that
about two-thirds of that emergency funding remains in the
Federal Emergency Management Agency (FEMA) accounts today, two-
thirds of that $62 billion.
That said, I understand that $62 billion may not be the
final number, so I want to start planning now for any requests.
And the best way to do that I believe is through the regular
budget process.
Also, starting this year, I will again insist that future
budgets must include more realistic funding for natural
disasters--they are bound to occur, and we are bound to cover
them--to avoid a perpetual cycle of emergency spending. I have
attempted these mechanisms in the past, and I believe the time
for a rainy day account has finally arrived in Congress.
So here is the bottom line. Congress needs to clearly
identify the emergency spending from the disasters in the gulf.
We need to make a down payment on this emergency spending by
reducing spending and reforming government over and above what
is already planned for in this year's budget.
In addition, I challenge the administration that any plan
for reconstruction be detailed in its policy to answer three
important questions: What is the total cost? How will it be
spent? And how will it be financed?
Finally, it is my intention that today's hearing marks the
beginning of Congress's deliberations on the fiscal 2007
budget, which I intend to accelerate from its traditional
schedule.
On a final note, I have heard loud and clear, and I am sure
you have, too, from your constituents, that while they want to
do everything reasonable to help the people in the gulf they
want us to do it responsibly. For me, it was probably best
summed up by a gentleman that I met in Des Moines who
experienced the flood of 1993, that was up until this disaster
one of the largest natural disasters in history. He asked me a
question, and this is as a victim himself. He said, explain to
me why it is compassionate--think about this. Why is it
compassionate to rebuild a person's home 15 feet below sea
level after this experience? Explain to me why that is
compassionate? And explain to me why it is reasonable to do it
with my tax dollars. He wants a plan, and he wants it to be in
the context of a fiscal blueprint.
It is a question that we must be able to answer, certainly,
to meet the needs of the people in the gulf--we all know that--
but to meet the needs of the taxpayers who finance it as well.
We have asked Doug Holtz-Eakin, the Director of CBO, to be with
us today to share his insight and perspective on these issues.
We appreciate your return, Director Holtz-Eakin, and are
certainly looking forward to your testimony.
I would now turn to Mr. Spratt for any opening statement he
may have.
Mr. Spratt. Mr. Chairman, thank you for calling this
hearing; and, Director Holtz-Eakin, welcome back. Your
testimony before our committee is always useful and
illuminating, and I am sure that it will be today as it always
has been.
This hearing comes at a very critical juncture. You have
just heard the chairman's proposal, which is a bold proposal.
Fiscal year 2005 has just ended. Yet most of the appropriations
bills for 2006 have not been enacted, and the administration's
budget for 2007 will soon be upon us, at the doorstep.
Clearly, Mr. Director, we need the best analysis you can
furnish us of what the cost of Katrina has been to date and of
what the likely cost is to be overall. That is particularly
needed if we are going try to accommodate the cost and spread
the payment for it, the financing for it, over a brief period
of time.
Katrina descended on the gulf coast at a time when the
Government's budgetary position was vulnerable, to say the
least. In January of 2001, 4 short years ago, CBO and the
Office of Management and Budget (OMB) both looked out 10 years
and saw surpluses of $5.6 trillion, cumulatively. We on our
side looked warily at those surpluses, noting that nearly 75
percent of the cumulative amounts fell in the outyears. We took
to heart your warning about the volatility of budget estimates.
We were proud, frankly, of having moved the budget from a
deficit of $290 billion in fiscal 1992 to a surplus of $236
billion in the Clinton years, and we did not want to risk our
hard-won gains, so we warned against betting the budget on a
blue sky forecast.
Neither our advice nor our budgets were adopted. Instead,
we have had five budgets proposed by the administration and
approved by Congress, and we have, as a result, large and
chronic deficits. So we must supply relief for Hurricane
Katrina and Hurricane Rita from a position of fiscal weakness,
and that is one reason the chairman has made the statement he
just made.
But, in truth, the budget was in big trouble before
Katrina, before Hurricane Rita. The deficit for 2005 was
expected to be the third largest in history. The cost of
Katrina adds to the deficit, but just before Katrina, CBO
informed us in a letter that I submitted to CBO that we faced
$4 trillion in deficits if we implemented the administration's
policies--tax and spending policies--over the next 10 years, $4
trillion in additional deficits.
Congress, though, now is grappling with what the Government
can do to help people recover from Katrina and Rita and how the
cost of those actions, those recovery actions, relief actions
should be financed. We have responded by enacting measures that
have cost $70.8 billion thus far, and we know that additional
sums, additional requests from the administration are on the
way.
I have to note with the some irony the inconsistency in how
the Congress is mounting its effort now to approach hurricane
relief versus other emergency costs. Congress has approved--and
I will hasten to add I have supported--various supplementals to
fund operations in Iraq, which have not been offset, none of
it. Congress has approved various tax cuts, despite their
contribution to the bottom line, to the deficit, which have not
been offset.
So the question arises, why offset the rebuilding of Biloxi
but not the rebuilding of Baghdad? Has disaster relief been
offset in the past? I would ask that to the Director, if he has
any knowledge of that, to respond to that; and, if so, how
should it be offset in all fairness, equitably in the wake of
this particular disaster?
In discussing offsets for hurricane costs, my colleagues on
the other side have targeted programs like Medicaid, student
loans, and food stamps, and this begs another question. Are we
going to spread the costs of this disaster equitably over our
whole population and make our response a sacrifice that we all
share, or are we going to load the cost on those least able to
bear it?
In truth, the cuts being considered, for example, in
Medicaid and student loans, were proposed long before Katrina
and not to offset disaster costs but to partially offset $70
billion in additional tax cuts. Those tax cuts are still called
for in the budget we are operating upon, implementing still
now, called for in the budget for 2006, along with $36 billion
more in tax cuts not reconciled but called for in the
resolution. The resolution sanctions another $106 billion in
tax cuts.
So I think it is fair to ask, if our object is to diminish
the impact on the deficit and pay for Katrina, are we going to
adopt these spending cuts for that purpose or to further offset
tax cuts? Or have the tax cuts been scrapped and will attendant
spending cuts, 100 percent of them, be used to offset the cost
of Rita and Katrina?
In the last several days, and just a few minutes ago, there
have been various other proposals. The chairman has proposed
basically a new budget resolution. So the question becomes, are
we going to write tax reconciliation instructions as well as
spending reconciliation instructions? Are we going to raise the
spending reconciliation instructions from $35 to $50 billion
and use those to further offset tax cuts of $106 billion, or
table, defer, scrap the tax cuts and fully try to implement the
spending cuts in order to manage the cost of Katrina?
Since 2001 when the Bush administration first brought forth
its trillion-dollar tax cuts, we have seen the stock market
plummet and the economy slide into recession and then slowly
recover. We have experienced the awful tragedy of 9/11 and our
response to it. We have deployed thousands of troops to war in
Afghanistan and for an even longer and larger war in Iraq, and
we have now suffered the greatest natural disaster since the
San Francisco earthquake.
The 10-year surplus of $5.6 trillion has become a 10-year
deficit of $3.5 trillion. The premises on which the Bush tax
cuts were predicated have changed and changed drastically, but
the tax cuts keep coming, at least unless they are deferred
until we have dealt with the cost of Katrina and Rita and other
expenses, including, for that matter, the emergency costs of
financing our deployments in Iraq and Afghanistan.
Today's testimony and CBO's ongoing work will be a great
help to us as we grapple with these admittedly extremely
difficult problems. Director Holtz-Eakin, thanks again for
being here. We look forward to your testimony and your guidance
as we enter upon this endeavor.
Thank you very much.
Chairman Nussle. I would ask unanimous consent that all
members be allowed to place an opening statement in the record
at this point.
Without objection so ordered.
[The information referred to follows:]
Prepared Statement of Hon. Thomas H. Allen, a Representative in
Congress From the State of Maine
The costs of recovery, relief, and reconstruction after Hurricanes
Katrina and Rita are great. Congress has already appropriated more than
$60 billion for Katrina, making it, by a factor of four, the most
expensive natural disaster in American history and some estimates put
the total cost at around $200 billion.
Members of Congress have been debating ``how to pay for Katrina.''
Senate Republicans have asked the President to propose spending offsets
and suspend approved Federal spending. House Republicans have proposed
specific cuts, including reducing or eliminating student loan and
education programs, school lunch aid, Amtrak, health care for low-
income families, public broadcasting, and habitat conservation.
As budget analyst Gene Sperling recently observed, it's the right
topic, but the wrong question. He writes that ``focusing national
attention solely on finding the one-time savings to pay for the one-
time cost of this horrible natural disaster risks distracting us from
the far more damaging long-term fiscal deterioration caused by the
administration's man-made economic policies.''
Sperling notes that today's leaders fail to ask how to pay for the
``dramatic, perpetual costs of permanent marginal, estate, dividend and
capital gains tax cuts for America's most fortunate or the escalating
tab for the President's prescription drug bill, not to mention the war
in Iraq.''
If leaders in Washington had been asking the ``how do we pay
for...'' question in the last 5 years, perhaps they wouldn't have
abetted our nation's slide from $5.6 trillion in budget surpluses over
10 years that President Bush inherited, to the $3.5 trillion in
deficits over 10 years we face today; a swing of more than $9 trillion
dollars in the wrong direction.
When Congress considered the President's $1.2 trillion tax cut in
2001, I warned that it was not affordable. But Republican did not ask
``how to pay for'' the largest tax cut in history, most of which
benefited the wealthiest Americans. It passed, and prompted the
dramatic descent from surplus to debt.
In the next 3 years, Congress approved three more large tax cuts.
In none of these cases did Republicans ask ``how to pay for'' these
drains on the Federal Treasury.
This past summer, Congress approved an energy bill with billions in
subsidies for the oil and gas industry at a time when they were gouging
consumers. Republicans never asked ``how to pay for'' this corporate
welfare.
Then came Katrina. With so much devastation, dislocation and
despair, with the need for Federal aid to rescue and rebuild so great,
why have Republicans suddenly chosen this event to make a stand for
fiscal discipline?
Many have noted that the estimate for Katrina recovery is equal to
the cost to date of the war in Iraq (approximately $200 billion). Why
is it that Republicans demand spending offsets to help Americans
rebuild from an unavoidable hurricane, yet are willing to spend
taxpayer money freely to help Iraqis rebuild from an avoidable war?
The very week that the nation witnessed the drowning of New
Orleans, the Senate was scheduled to vote on repealing the estate tax
for the very few well-off couples with estates over $7 million. This
vote was postponed. If the bill is revived, fiscal sanity demands that
Congress, the media and the public give as much attention to paying for
the $500 billion it will cost us during the next decade to eliminate
inheritance taxes, as they have to Katrina's $200 billion price tag.
I have long argued that the restoration of fiscal responsibility
requires all sides to jettison hard-line ideology in order to reach
bipartisan consensus. We need to put all options on the table,
including spending cuts and upper-income taxes.
Trying to pay for Katrina without re-considering tax cuts is like
trying to rebuild New Orleans without fixing the levees. It will just
perpetuate the disaster.
A responsible and moral response to Katrina would be to put the
people first, and adopt a package of incentives for job creation,
retraining and housing choice that empowers Gulf residents to rebuild
their communities. The challenge in Washington is whether leaders
recognize that tough choices extend beyond the narrow question of ``how
to pay for Katrina.'' Will these big budget choices be consistent with
our values of fairness and responsibility to future generations, and
our commitment to promote a larger, more prosperous and more inclusive
middle-class? Or will we continue the failed policies of recent years
that put the enrichment of the few above the needs of the many? That is
the real question posed by Katrina.
Prepared Statment of Hon. Connie Mack, a Representative in Congress
From the State of Florida
Mr. Chairman, I would like to begin by thanking you for putting
together this important hearing today. I am proud to serve on this
committee which, under your leadership, will be the first to take the
lead and find significant savings in Federal spending in the aftermath
of these two disastrous hurricanes.
Mr. Chairman, being from Florida, I have a sense of what the
communities in the Gulf South are going through. In fact, several areas
in my district are still picking up the pieces and trying to recover
from the storms of last summer. To this day, there are still funds owed
to several municipalities that the Federal Government promised to
supplement. That is an unacceptable avenue to go down again for this
event.
Beyond that, we all know how catastrophic hurricanes can be. But
their damage is not merely limited to physical buildings and peoples'
homes. They devastate the infrastructure of communities, the economy of
the area, and the psyche of the people.
As the citizens of the Gulf coast begin to get back on their feet,
it is imperative that local and state governments lead and coordinate
recovery efforts, with the aid of Washington and the private sector.
This will undoubtedly be a long and difficult process, but the Gulf
South will recover and thrive.
With that said, Congress is the steward of the people's money. It
begins here in the Budget Committee and should be realized by all of
our colleagues. We must be disciplined in how we spend and what we
supplement for the recovery, and we must make sure we continue to
appropriately fund the nation's priorities while taking real steps to
reduce and eliminate wasteful spending.
Mr. Chairman, it is in that spirit that I welcome the opportunity
to work with my colleagues to find a consensus on the role of Federal
spending for this crisis. I trust we will be able to identify a
responsible fiscal solution that fully funds all the integral, critical
projects needed to help the Gulf region return to normal and, at the
same time, keeps this government headed down the path of proper
financial management and less government spending.
That, Mr. Chairman, is how we can best ensure the continued
freedom, security and prosperity for all Americans and all of our
citizens affected by these terrible storms.
I also, would like to thank Mr. Holtz-Eakin for taking the time to
come before this Committee and give his insight on such important
issues. Last week, President Bush, in an article from the Washington
Post, floated the sweeping idea that all disaster response should be
federalized, or at least a majority of it, and placed within the
jurisdiction of the Department of Defense.
Though I understand his thinking, I fail to see the wisdom behind
such a plan. Oftentimes, while this nation is in the midst of a crisis,
the Federal Government tends to go beyond the constitutional lines of
federalism in an attempt to make things right. In the end, these
movements can be helpful, but usually it is at a detriment to state
sovereignty or power.
I am fearful that if Congress were to enact this plan, it would
place yet another strain on our nation's military forces, which are
already performing so admirably under the current stresses.
Beyond issues of posse comitatus, if we were to place the burden of
disaster relief on our armed forces, can you provide an idea of what
level of additional funding would be required to equip them for such a
mission? Would more resources be needed for this type of involvement?
And finally, what levels would our troop forces have to be at in order
to handle such a request?
Chairman Nussle. Director Holtz-Eakin, your entire
statement will be made part of the record at this point as
well; and you may proceed to summarize your testimony as you
see fit. Welcome back to the committee.
STATEMENT OF DOUGLAS J. HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL
BUDGET OFFICE
Mr. Holtz-Eakin. Well, thank you, Mr. Chairman, Mr. Spratt,
members of the committee, first and foremost for taking a
moment to recognize the service of Bob Sempsey who left behind
a legacy of quiet professionalism and indeed worked at the CBO
up to days before his unfortunate passing. Recognition of that
type means a great deal to his family and to the staff at CBO,
and I thank you for it.
We are pleased to have the chance to be here today to be of
assistance to the Budget Committee in this important area.
Katrina and Rita are devastating and tragic events for the
families in the areas affected, and they raise important
questions about the scale of economic damages, about the
overall path of the U.S. economy, about private sector and
Government capacity for relief, recovery and restoration of
economic activity, and about the ongoing role of such efforts
in the budget and policy process; and it is entirely
appropriate that this committee be the committee that addresses
these, as all of these issues will run directly through the
U.S. budget.
We have submitted a fairly lengthy written statement for
the record. We hope that the committee finds it to be valuable
in its work. I will touch on three pieces of that written
testimony in my remarks and then look forward to the questions
that the committee might have.
The first is to simply recognize that these hurricanes,
Katrina and Rita, are unequivocally bad for the U.S. economy.
There is destruction of lives, destruction of personal
property, homes, the capital of businesses and governments.
But, nevertheless, they are not so damaging that we cannot
anticipate that the overall economy will weather this
particular setback and that recovery will likely take place
within a year. However, in the aftermath of these events,
overall economic risks are heightened and monitoring the path
of the economy is far more important.
The second key thing I guess I would emphasize is that,
going forward, the issue is economic growth, particularly in
the affected regions and that the standard environment of
incentives for private sector growth remains in place, that
financial flows from the private sector in the form of
insurance and loans and equity investments will be drawn to
profitable activities. There are existing authorities for
government financial flows to support the necessary public
spending and infrastructure, and that economic growth does not
have to be rethought in its broadest sense in this area, it
needs to be allowed to continue.
And that, finally, Katrina and Rita are uniquely large in
their scale and the dispersion, especially, of their impacts,
but natural disasters are not unusual. Indeed, anticipating
disasters can be part of the regular budget process, even more
than it is now. Policies that support recognition in the budget
not only can appropriately guide trade-offs for the Congress
but also can move past paying in the aftermath to mitigating
the overall scale of the economic damages and lowering their
costs in the future.
So let me touch on each of those three and then take your
questions.
We have now put out two interim updates of the impact of
the hurricanes on the U.S. economy. I won't belabor the
mechanics of those. We have some slides that we can show first
which summarize some of the impacts that are in the written
testimony and which reflect the letters we wrote, in particular
to the chairmen of the House and Senate Budget Committees.
Hurricanes do several things. The first are there are
direct losses. There are direct losses in the form of lives;
there are direct losses in the form of capital. The total
destruction of capital, to the best of our ability to guess it,
is between $70 billion and $130 billion; in value of housing
destroyed, something that looks like on the order of $20 to $30
billion, about a quarter of the losses; the destruction in the
energy sector, something that is on the order of $20 billion to
$30 billion, about 25 percent of the losses; for other private
sector businesses, destroyed plant and equipment is another 20
to 25 percent of total losses; destruction of government
capital, buildings, roads--all of the things that are the stuff
of the public sector--is about 20 percent of the losses, on the
order of $13 to $25 billion; and destroyed household goods,
autos, and personal consumer durable goods are about 5 percent
of total losses. So one of the things that happens is that
there is a tremendous loss in wealth, and the economy is worse
off as a result.
Economic activity is also impeded directly, and some of the
impacts that one sees in this chart are losses directly in
energy production and as a result of the loss of the housing
stock. You lose the housing services, although they can be
replaced somewhat if you can go live in another location. There
is about a billion dollars, a little more than a billion
dollars in estimated agricultural losses.
There are all sorts of things which impact directly in the
region and lower national output. The national impacts derive
from the impacts of these disruptions on two key national
networks. The transportation network appears to be the lesser
of the two impacts at this point.
Transportation has been restored to the Mississippi,
although not all of the port facilities are yet fully
operational by any means, the notable damage being in the Port
of New Orleans; and there are damages to the highway networks
and to the rail networks that apparently will not lead to
national interruptions of any sort but will slow down
deliveries and make them more costly to be sure.
Much of the attention has focused properly on energy
impacts and the simultaneous loss of production facilities in
the gulf. Hurricane Rita turned out to be more damaging in that
regard it seems, with losses of refineries and pipelines and
especially the power that runs them, and with the interruption
of both production and the distribution of natural gas.
Those impacts spread more broadly in the economy, raising
energy costs to consumers and business purchasers as well. The
net effect of all of this appears to be something that knocks
down the economy directly in the third quarter by a full
percentage point to a percentage point and a half in terms of
its overall economic growth.
Then some of the natural recovery mechanisms kick in. These
are the rebuilding of houses, which boosts construction
spending, and the purchase of business equipment to replace
what is lost, which is the natural process of investment to
rebuild the lost capital stock, and which will reduce, to some
extent, the job losses. The guess is somewhere between 360,000
and 480,000 jobs were lost because of these events. The
reconstruction and rebuilding activities will tend to produce
some recovery there.
Under a set of assumptions--which have some risk--that
roughly half of the insurance claims get paid out in the
private sector to provide some financing; that the Government's
about $10 billion of relief and recovery financing flows in;
that gasoline prices ultimately recover to being only about 10
percent higher than they were before Katrina struck, and that
the rebuilding is not greatly delayed, that it is largely
delayed only in the areas of great flooding, especially New
Orleans, these other parts of the mechanisms might actually
outweigh the negative impacts so we break even in the fourth
quarter and actually start to grow faster than we might have
otherwise expected early next year, getting the economy back to
trend somewhere early in 2006. The message there is that this
is an important event for the national economy but not an
overwhelming one and that policy, as a result, ought to be
focused on the appropriate response in the regional areas, not
for the Nation as a whole.
Are there risks here? Obviously. All of the risks are
heightened. We have a much more fragile energy sector than we
did prior to the hurricanes, consumers are less confident than
they were prior to the hurricanes, and our scenario relies
heavily on a relatively quick fall-off in these retail gasoline
prices. That appears consistent with the pace of refinery
recovery. It is important that this not turn out to be a very
large crude oil event. That does not seem likely. The U.S. Gulf
production is only about 2 percent of the world market.
The hurricanes will have substantial impacts in the natural
gas market for a while to come, and those will feed into
electricity prices. So there are impacts that will last a
while, but it is our expectation that those negative impacts
will be outweighed by the positive impacts of the rebuilding
effort.
In that horse race between the negative impacts including
the confidence of consumers and the rebuilding effects
including the investment of businesses, it is important to
remember that we do not have to decide the horse race now.
Indeed, the Federal Reserve has the ability to monitor the
evolution of the economy and adjust its policy accordingly.
Everything that we have done assumes that they are on
autopilot, and that is particularly unrealistic.
So that is the quick version of the economic impacts as we
know them today, and I emphasize that all of this is subject to
a lot more learning as we find out more about the damages
themselves and the pace of the rebuilding in the area.
The second major point is that the recovery effort, the
natural response of the economy to grow, to replace lost
capital, to acquire more capital, and to generate jobs, does
not require a major reexamination of Federal policy toward
national economic growth or even regional economic growth. This
is unique in its scale. It is unique in the dispersion of the
evacuees.
But investing in new capital, raising the standard of
living and creating jobs are things that the U.S. economy does
as a matter of course. Financial markets will provide, through
profitable activities in the gulf area, equity and debt
finance. Those firms that bought insurance will receive cash
flows that will aid the financing of that, plus they will have
some internal resources to aid it, and the Government will
provide support for the household sector in the form of relief
and has done so through the efforts of the Congress. It has
standing authority to provide lots of necessary public
infrastructure.
And, if we go to the next chart, it is important to
emphasize that there are, in addition to moneys, standing
authorities in many of the areas that are central to setting
the groundwork for an economic growth recovery in the region.
This chart is meant to be illustrative and not exhaustive, but
across the top are the various programs and agencies of the
Federal Government. Across the left side, moving down, are
various activities that are central as one moves through time,
from search and rescue and debris removal and temporary
assistance to providing housing and public infrastructure and
other parts of the recovery mechanisms such as business loans.
One can see that there is a variety of agencies that have
authorities in many areas. As a result, it is a matter of using
the broad authorities of FEMA, which cover many of the
activities that are important in this effort; the Small
Business Administration, which can provide household and
business loans that are subsidized by the Federal Government;
Housing and Urban Development, which provides housing; the FHA,
which can provide some forbearance on mortgages; emergency
authorities in the highway area and cash and benefits in food
stamps and Medicaid and unemployment insurance.
Much of the authority has already been provided by the
Congress; and, as both the chairman and Mr. Spratt noted in
their statements, much of the financing, in the form of $60
billion in the Disaster Relief Fund, for example, is available
already at this time.
So the third point I would like to close with is that these
hurricanes are unique in some attributes, but disasters in
general are not, and they can be included in the regular budget
process and approached as a matter of policy.
Families hopefully budget for disasters. They buy insurance
and pay the premiums for that insurance, whether it be a
homeowner's policy or an auto policy or a health insurance
policy, which compete with other demands for the family budget;
and they do it in that fashion when they put money aside in a
reserve and that way give up other opportunities that they
might have to spend that money. In each case, the budgeting
process provides trade-offs between budgeting for disaster and
doing other activities.
The same can be done in the Federal budget. The chairman
and Congressman Cardin had an approach several years back. At a
small level, the annual appropriation into the FEMA fund
constitutes exactly that kind of an activity.
In the written testimony we lay out a variety of options
that the Congress could consider and certainly would be
interested in working with the committee on more detailed
proposals in this area. In doing that, several kinds of trade-
offs become apparent.
The first, and the one that is noted most frequently, is
between disasters and other forms of spending--and certainly if
disasters are the paramount issue of the moment--it is
important that they be prioritized above other activities and
vice versa, but doing it in a regularized fashion would also
provide some consistency across disasters as well and thus
achieve an objective of fairness in addressing the victims of
each natural disaster in the same fashion.
And, as laid out in the written testimony, it is also the
case that policies can do more than write checks after the
fact. Policies can mitigate the cost of disasters by providing
appropriate incentives to lower exposure to economic losses in
these areas.
So I thank you for the chance for the CBO to be here today.
Katrina and Rita are important events. We will learn more about
them as time elapses. The Congress will have the opportunity,
given the large appropriations that have been made already, to
learn more about them before any further action becomes
necessary.
I want to echo, in closing, some comments made by both Mr.
Spratt and the chairman in the opening remarks. Not everything
has changed because of these hurricanes. It remains the case
that the U.S. economy is strong and that, as a result, the
future path of the U.S. budget will be determined by the policy
choices of the Congress and the President and that, prior to
these hurricanes and now in the aftermath, the U.S. budget does
not line up over the long term and that commitments to spending
are far outstripping the revenues on the books to finance them
and that that issue remains as part of the ongoing work of this
committee.
Thank you for the chance to be here.
[The prepared statement of Mr. Holtz-Eakin follows:]
Prepared Statement of Hon. Douglas J. Holtz-Eakin, Director,
Congressional Budget Office
Chairman Nussle, Ranking Member Spratt, and Members of the House
Budget Committee, thank you for offering the Congressional Budget
Office (CBO) the opportunity to discuss the likely economic and
budgetary impacts of Hurricanes Katrina and Rita. Those storms exacted
a tragic toll from the people of Louisiana, Mississippi, Alabama,
Texas, and Florida and their property. The hurricanes also
significantly damaged the nation's near-term energy supply. At this
time, the extent of the damage and the costs of recovery are still
unclear, but it is evident that recovery in the Gulf region will entail
the expenditure of billions of private-sector and taxpayer dollars.
That prospect raises important questions about the character and scope
of current recovery efforts and about how to prepare and budget for
future disasters.
My testimony will make the following points:
Hurricanes Katrina and Rita have temporarily and
significantly reduced the growth of national economic output, but the
overall effects that recovery and rebuilding will have on economic
activity may more than offset that drag by early next year.
Nevertheless, a full recovery in the affected Gulf states will take
quite some time.
Actions pursued thus far by the Federal Government will
push the Federal budget further into deficit for the next few years,
largely because of the $62 billion appropriated for emergency
assistance but also because of various temporary changes to tax rules.
The ultimate impact of the hurricanes on the Federal budget will be
determined largely by the actions of the Congress and the President.
The scale and scope of the damage from Katrina and Rita
are unique, but costly natural disasters are not. The Congress may wish
to consider options to incorporate planning for such events in the
regular budget process. That planning may help evaluate policies for
reducing the costs of future disasters and budgeting in advance for a
greater share of those costs.
CBO's estimates of economic losses and impacts continue to evolve
as new data and analysis become available. The estimates reported in
this testimony are updates of those provided in CBO's letter to the
budget committees dated September 29, 2005.
Economic Losses from Hurricanes Katrina and Rita
The economic effects of the hurricanes arise from the loss of life
and the destruction of private and government capital stocks in the
Gulf states. Hurricane Katrina destroyed considerable numbers of
residential structures; consumer durable goods, such as motor vehicles,
household furnishings, and appliances; and business structures and
equipment, particularly in the energy and petrochemical industries.
Hurricane Rita appears to have had a smaller impact on residential
structures and consumer durable goods, but its damage to the energy
industry may be as great or greater than Katrina's. The damage to
capital stocks has temporarily reduced employment and the growth of
income in the affected areas.
DAMAGE ESTIMATES
The damage has not been completely surveyed, but it is widely
agreed that Hurricane Katrina alone has caused more economic damage
than any recent catastrophe in the United States. Estimates from Risk
Management Solutions (RMS), a private-sector company that provides
services for the management of insurance catastrophe risk, suggest that
total losses--insured and uninsured--from both hurricanes approach $140
billion, the bulk of which is due to Hurricane Katrina. Insured losses
are estimated to range from about $40 billion to $67 billion, with
recent estimates closer to the lower end of that range.
Losses of physical capital total between $70 billion and $130
billion, in CBO's estimation (see Table 1). That amount is smaller than
the total RMS estimate because a portion of both the insured and
uninsured losses that RMS reports reflect losses arising from claims
under business-interruption policies as well as the costs of
demolition, cleanup, and repairable damage.
As time goes on, it may be possible to base estimates on the damage
that stricken areas have actually experienced, but at present, such
estimates are not available. Using the shares of capital by type (fixed
capital and consumer durable goods) for Louisiana as a proxy for shares
in the whole stricken area, about 25 percent of the damage will have
been in housing, more than 45 percent in business structures and
equipment, nearly 20 percent in public infrastructure (roads, bridges,
sewer systems, and so forth), and almost 10 percent in consumer durable
goods. Nearly half of the losses in business structures and equipment
will have been in the energy industry.
Housing. The extent of the damage to the housing stock remains
unknown. The National Low Income Housing Coalition estimated the number
of housing units damaged by Hurricane Katrina using data from the 2000
census and the Federal Emergency Management Agency (FEMA).\1\ The
number of housing units were matched by census block to FEMA maps that
provided estimates of the proportion of units that suffered at least
moderate damage. That calculation indicated that about 287,000 occupied
housing units were lost or damaged. Of that number, 135,000 units in
New Orleans were probably damaged by flooding. Hurricane Rita also
damaged thousands of homes, but no reliable estimates are as yet
available. Some other measures of the effects of the two storms
indicate that more than 400,000 units were damaged, but it is uncertain
how those estimates were derived.
---------------------------------------------------------------------------
\1\ National Low Income Housing Coalition, Research Note No. 05-02
``Hurricane Katrina's Impact on Low Income Housing Units'' (September
20, 2005), available at www.nlihc.org/research/05-02.pdf.
TABLE 1.--ESTIMATES OF THE VALUE OF CAPITAL STOCK DESTROYED BY
HURRICANES KATRINA AND RITA
[Billions of 2005 dollars]
------------------------------------------------------------------------
Range
------------------------------------------------------------------------
Housing.................................................... 17 to 33
Consumer Durable Goods..................................... 5 to 9
Energy Sector.............................................. 18 to 31
Other Private-Sector....................................... 16 to 32
Government................................................. 13 to 25
------------
Total................................................ 70 to 130
------------------------------------------------------------------------
Source: Congressional Budget Office.
CBO estimates that the value of the damage to residential
structures--not including relatively minor, easily repairable damage--
ranges from $17 billion to $33 billion. Under an assumption that about
300,000 units sustained at least moderate damage from the two storms, a
comparison of the value of damage estimates with that number of units
suggests damage in the range of roughly $58,000 to $108,000 per unit.
The Energy Industry. Currently, about 90 percent of crude oil
production and roughly 70 percent of natural gas production from the
Gulf of Mexico are shut down because of damage to platforms and
pipelines that bring those products to shore. (The Gulf's production of
crude oil makes up about 2 percent of the world's supply.) After
Katrina, the Minerals Management Service reported that the storm
destroyed or caused extensive damage to 66 producing structures;
initial reports indicate that Rita destroyed or damaged 41 more.
Fortunately, most of the high-volume platforms that operate in deep
waters and account for nearly half of the Gulf's offshore oil
production appear to have escaped significant damage. However, one
large platform, the Mars facility, which on its own accounts for 10
percent of Gulf oil production, was damaged badly enough by Katrina to
be out of service until early 2006.
In the petroleum-refining sector, damage from the hurricanes has
resulted in the loss of 3 million barrels a day of refining capacity
(or nearly 20 percent of the nation's total capacity), but much of that
disruption of activity seems to be related to flooding and power
outages. Onshore losses of capital for refineries, petrochemical
plants, natural gas plants, bulk terminals, and pipelines appear to be
smaller than the offshore losses.
The electric power industry in Texas and Louisiana incurred
significant damage as a result of the two storms. Although power has
been restored to millions of customers, nearly 400,000 in those states
remain without power. The industry has already reviewed its losses and
claims that the costs of repairing downed transmission towers,
substations, and local power lines, as well as recouping lost sales
revenues during the period, will total $2.5 billion.
By CBO's estimate, capital losses in the energy-producing
industries will range from $18 billion to $31 billion. Those estimates
are based on a rough assessment of the value of firms' damaged
structures. Capital losses in the energy sector appear to constitute
about a fourth of total losses from the two hurricanes.
Government Capital. It is difficult to estimate the storms' toll in
damage to government capital, which includes drinking water and sewage
treatment facilities, roads and bridges, airports, schools,
courthouses, and other public buildings. The status of water systems in
the affected areas is not well known, and there are no reliable
estimates of the cost of repairing those systems. Similarly, estimates
for the repair and reconstruction of other public infrastructure--such
as major highways and bridges, locally maintained roads and bridges,
and port infrastructure--range in the vicinity of $10 billion but are
highly uncertain.
Because estimates of losses of government capital are lacking, CBO
has assumed that about 20 percent of the capital destroyed as a result
of the hurricanes was government capital. (That percentage was chosen
because it reflects the government share of the total capital stock in
Louisiana in 2003.) CBO has estimated the value of the losses in
government capital at between $13 billion and $25 billion.
LOSSES SUSTAINED IN PREVIOUS CATASTROPHES
The combined losses of Hurricanes Katrina and Rita are likely to
surpass those from the costliest hurricane previously on record
(Andrew) and the three costliest disasters in recent history (Hurricane
Andrew, the September 2001 terrorist attacks, and the Northridge
earthquake). The extent of the damage done by the two recent hurricanes
suggests that recovery will also take longer than the recoveries from
those other large catastrophes.
Losses from Hurricane Andrew, a Category 5 hurricane that
struck about 20 miles south of Miami on September 24, 1992, totaled
$38.5 billion in today's dollars, $19.2 billion of which was insured.
(Those losses include destroyed capital as well as other losses.) About
two-thirds of the dollar amount of all claims--approximately $12.5
billion--was paid to holders of homeowner's policies. Commercial
policies accounted for most of the remaining one-third of insured
losses.
The losses from the terrorist attacks on September 11,
2001, are estimated at $87 billion in today's dollars. Privately
insured losses are estimated to total $35.2 billion and include $11.9
billion in business-interruption losses, $10.4 billion in property
losses, $3.8 billion in aviation liability, $1.9 billion in workers'
compensation benefits, and $1.1 billion in life insurance payments.
(Another $1.1 billion in property losses remains in dispute.)
The earthquake that struck Northridge, California, on
January 17, 1994, measured 6.7 on the Richter scale and resulted in
damages of $48.7 billion in today's dollars. Of that amount, $18.8
billion was insured. Claims under homeowner's policies constituted more
than three-quarters of the total dollar value of the insured claims.
Those claims might have been far more extensive, but only 40 percent of
homeowners carried insurance coverage for earthquake damage.
INCOME LOSSES IN THE GULF STATES
The losses in the capital stock have largely shut down economic
activity in New Orleans and have hampered activity in parts of the
other states affected by the hurricanes. Employment and wage income
have fallen as have state and local tax revenues. As rebuilding efforts
gain force and economic activity begins to recover, employment,
incomes, and state and local revenues will also recover.
Employment and Wage Income. Excluding people whose work was
disrupted only for a few days, the combined direct effect of Hurricanes
Katrina and Rita on employment was probably the loss of between 293,000
and 480,000 jobs. Moreover, the two storms' effects on general economic
activity mean that employment will be temporarily depressed--for the
nation as a whole as well as in the stricken areas.
Measuring the effects of the hurricanes on employment will remain
difficult, even after the Bureau of Labor Statistics begins to publish
data for September later this month. In particular, the bureau faces
considerable problems in measuring employment in the storm-damaged
areas. The effects of Rita will not be reflected in the data for
September but should appear in those for October (which will be
published in November).
Direct Effects of Katrina. Between about 280,000 and 400,000 people
lost jobs directly because of Hurricane Katrina. The lower bound for
those job losses comes from the number of storm-related claims for
unemployment insurance filed to date. The Department of Labor estimates
that by September 24, a total of 279,000 such claims had been filed,
but that number could go higher. (One potential source of future claims
is workers who have so far remained on their employer's payroll, even
though unable to work, but who may be dropped if the business does not
recover quickly enough.)
CBO based the upper bound of the job-loss total on information from
the Bureau of Labor Statistics' report of data for 2004 (using the
Quarterly Census of Employment and Wages). That report includes the
number of establishments, total employment, and total wages in areas
affected by Katrina, which can be used to estimate the jobs potentially
at risk because of flooding and other damage and thus an upper bound of
the storm's possible effect on employment. In the 86 counties or
parishes designated by FEMA as eligible for both individual and public
disaster assistance, employment before the storm totaled 2.4 million
jobs (1.9 percent of the national total). In 2004, the wage bill for
those counties, in which people may have missed a week or more of work,
was $76.7 billion (1.5 percent of the national total).
Workers in the areas that FEMA has identified as flooded and storm
damaged are the most likely to experience an extended absence from work
(or even to lose their old jobs permanently). According to the Bureau
of Labor Statistics, in the fourth quarter of 2004, about 22,500
business establishments within those areas employed roughly 373,000
workers and paid $3.5 billion in wages and salaries. (Those wage data
are also quarterly, not annualized.) Most of the at-risk employment in
Louisiana is in flooded areas, whereas in Mississippi, virtually all of
the potential job losses are likely to be attributable to damage rather
than flooding. In addition, jobs located at some distance from storm-
damaged areas may also be at risk: about 265,000 workers were employed
within half a mile of such areas in Louisiana and Mississippi--184,000
of them in Louisiana. The upper-bound estimate of job losses of 400,000
assumes that most of the roughly 300,000 jobs in flooded areas plus a
fraction of those either in nonflooded areas or within half a mile of
flooded areas will be lost.
Direct Effects of Rita. Hurricane Rita's impacts on employment
appear to have been considerably smaller than those of Hurricane
Katrina. Within areas identified by FEMA as having been damaged by
Rita, employment in the fourth quarter of 2004 totaled about 12,600
jobs, with a wage bill for the quarter of about $115 million (not an
annualized figure). Because information on unemployment insurance
claims attributable to Hurricane Rita is not available, the 12,600
figure represents a lower bound on the number of jobs at risk of
prolonged disruption (although some of those workers are probably still
being paid by their regular employers and others may have been hired to
participate in cleanup activities). However, nearly 140,000 people were
employed within half a mile of those damaged areas; under the
assumption that half of those jobs are also at risk of prolonged
disruption, CBO estimates an upper-bound impact on employment of
roughly 80,000 jobs.
Aside from those effects, the evacuation of more than 2 million
residents from the Houston metropolitan area probably resulted in the
loss of a few days' pay for some workers and reduced profits for
employers who continued to pay their workers. (Such effects will not
show up in the October employment data.) In addition, renewed flooding
in portions of New Orleans and St. Bernard Parish might slightly delay
the recovery from job losses attributable to Katrina, although it
should have no impact on employment totals by the end of the year.
Revenues of State and Local Governments. Data from the state of
Louisiana are especially difficult to acquire, but that state is
expected to face the most severe revenue problems of all of those
affected by the hurricanes. Early information from Mississippi,
Alabama, and Texas indicates that state general fund revenues may not
suffer significantly as a result of the storms. Some local governments
may confront more-serious difficulties because they face significant
losses in their property tax bases a development that also raises the
risk of defaults on their municipal bonds. Louisiana and Mississippi
are working to help local governments make payments on their bonds.
Louisiana officials are still gathering information about the
storms' effects on the state's budget. Most unofficial estimates of
lost revenues have ranged from $1 billion to $3 billion, a significant
shortfall given that the governor's budget recommendation for 2006 was
based on the assumption that state revenues would total about $12
billion. Local governments, particularly that of New Orleans, have lost
significant portions of their tax bases--notably, revenues from
property taxes. About two-thirds of the population of Louisiana lives
in areas that are now officially declared disaster areas. In the
affected parishes, annual property taxes totaled about $1.3 billion and
local sales taxes, about $1.8 billion; together, they accounted for
about 70 percent of statewide tax collections.
In Mississippi, the storms' net effect on the state's general fund
over time is likely to be negligible. Despite the fact that about two-
thirds of the Mississippi population lived in an area that has now
officially been declared a disaster area, initial reductions in revenue
resulting from lost income and wages and some decrease in gaming
activities are not expected to be as large as in Louisiana. Moreover,
those reductions will be balanced by increased collections from income
taxes, as cleanup continues and rebuilding efforts begin. Affected
counties in Mississippi collect about $1 billion in property taxes.
Although the Gulf coasts of Alabama and Texas were hit by both
hurricanes, those states are not anticipating any long-term effect on
revenues. The 10 counties in Alabama affected by the storms hold about
18 percent of the state's population; in Texas, the affected areas hold
about 4 percent. In those states, the primary effect on revenues will
be reductions (if any) in income taxes as a result of lost wages.
The Scale and Pace of Reconstruction Spending
The overall pace of reconstruction after the hurricanes is likely
eventually to be quite rapid, although significant delays and
bottlenecks could occur in the rebuilding effort and insurance
settlements in some affected areas could be somewhat slower than they
have been in past disasters. Spending for rebuilding and replacing
privately owned structures, equipment, housing, and consumer durable
goods (that is, total private replacement and rebuilding) could rise to
between $20 billion and $40 billion (in 2005 dollars, measured
annually) by the first half of 2006. Almost a third of such spending
would be in the energy sector; another third would be in residential
construction. The rebuilding of government capital facilities would add
to that reconstruction activity.
HOUSING
The scale of the devastation from the two storms suggests that a
substantial demand for construction services will emerge, but the
problems associated with rebuilding in New Orleans will delay and
perhaps mute that response. Although the speed of repair and rebuilding
is always constrained by the availability of funds and workers,
residential construction is likely to add about $2 billion (measured
annually) to economic activity in the last half of 2005, CBO forecasts,
and about $10 billion in the first half of 2006. Those numbers, which
represent the midpoints of the range of CBO's estimates, cover all
construction associated with the storms, regardless of where it takes
place. (Some homeowners may not rebuild on their original site but
instead use the insurance payments they receive to build or buy a home
elsewhere.)
The midpoints of CBO's estimates incorporate the assumption that it
will take 3 years to fully rebuild the housing stock. A 2-year
rebuilding period is commonly used in such estimates, but CBO used a
more conservative time frame because the rebuilding of New Orleans
poses unique problems. It appears that property insurance compensation
(private and flood insurance) and various grants and low-cost loans
will be timely enough to support such a pace of rebuilding.
THE ENERGY SECTOR
Levels of oil and natural gas extraction may be lower than usual
through the middle of 2006, but the bulk of the Gulf coast's pipeline
and refinery operations will probably be repaired by the end of this
year. The pace and scale of repairs will become clearer in the near
future as assessments of damages to Gulf drilling and undersea
pipelines become available. The largest offshore facilities may be able
to resume operations in the next few weeks; if they can, oil and
natural gas production from the Gulf of Mexico may average half its
normal level for the rest of this year. Other offshore facilities will
probably return to production during the first half of 2006.
Operators of refineries anticipate that damage from the storms can
be repaired within a few weeks, but that recovery will depend on the
speed of the restoration of electric power. (Complete restoration of
electricity service may require another month or more.) National
refinery production may be reduced by roughly 10 percent, on average,
for the rest of this year, but it is likely to be at 100 percent
capacity by year's end. A similar pace of recovery is likely for the
region's large number of petrochemical complexes, natural gas
processing plants, and natural gas pipelines.
OTHER INDUSTRIES
Restoration of damaged structures and equipment--known as business
fixed investment in industries other than energy is also likely to
stimulate economic activity. If the private capital stock is rebuilt in
an average of three to 4 years (a standard assumption), such spending
will add $5 billion to $10 billion to business fixed investment in
2006, the bulk of which is likely to be purchased from domestic
suppliers.
GOVERNMENT
Much of the repair work to public-sector capital, such as the work
on the I-10 Twin Spans Bridge across Lake Pontchartrain and the pumps
for New Orleans, started immediately after Hurricane Katrina in order
to facilitate rescue and recovery operations. Federal funding will
contribute to the repair of roads and water treatment facilities,
although the scale of public rebuilding will be much smaller than that
of the private sector.
Effects on National Output, Employment, and Inflation
The economic effects of the destruction wrought by the two recent
Gulf hurricanes will be more pervasive than those of previous
hurricanes and will affect the nation's economic activity for the
balance of this year and all of next year. Hurricanes Katrina and Rita
were unique in the scope of their destruction, the disruption of energy
supplies, and the dislocation of workers. The storms have temporarily
reduced the growth of economic output, but the effects of rebuilding on
economic activity may more than offset that drag by early next year.
At this time, it is still too early to know the degree to which
economic activity will slow this year and how quickly it may recover.
Factors that will affect the speed of recovery are how quickly
insurance and government payments are distributed, how quickly consumer
energy prices decline, and how quickly rebuilding starts, in New
Orleans and elsewhere. For example, if, during 2005, about half of the
private insurance claims are paid out; if Federal relief and recovery
spending totals about $10 billion (in the form of transfer payments and
outlays for goods and services); if gasoline prices fall back to levels
only about 10 percent higher than their pre-Katrina levels; and if
rebuilding is only slightly delayed relative to the timing experienced
in previous hurricanes, then the economic dislocation of the hurricanes
is likely to be offset by the reconstruction effort by early next year.
effects on the growth of gross domestic product
The hurricanes' initial effects on economic output stem from lost
production in the affected regions and the temporary spike that has
occurred in energy costs. Looking forward, however, the impact of the
hurricanes on the pace of production and income will depend on what
happens to four major categories of spending: investment (in business
structures and equipment, commercial structures, and housing); spending
on consumer durable goods; government spending for goods and services;
and other household consumption expenditures (see Table 2).
CBO estimates that the hurricanes may reduce real (inflation-
adjusted) growth of GDP in the third quarter of 2005 by between 1 and
1\1/2\ percentage points, but as cleanup and repair begin, the economy
in the fourth quarter is likely to grow at a rate not much different
from what it would have been without the hurricanes and possibly even a
little higher. Real GDP growth for the two quarters together--that is,
for the second half of 2005 as a whole--is likely to be dampened by
about half a percentage point. By the first quarter of 2006, though,
spending to repair or replace the capital stock (homes, business
structures, and equipment) is likely to drive the level of output back
roughly to its previous trend and to continue to add slightly to growth
during the rest of that year.
CBO's analysis does not include any dynamic feedback effects--that
is, the tendency of increased spending in one area of the economy to
increase incomes, and consequently spending, elsewhere. Such effects
are likely to be small, particularly if the Federal Open Market
Committee of the Federal Reserve does not alter its apparent plan to
raise interest rates. (The Federal Reserve increased rates by 25 basis
points, or a quarter of a percentage point, on September 20, as had
been expected before Hurricane Katrina.)
EFFECTS ON EMPLOYMENT
The storms' effects on employment include not only their direct
effects (the loss of between 293,000 and 480,000 jobs in the areas
struck by the hurricanes) but also the negative impact of the energy
shock-induced reduction in consumer demand and the positive impact that
will accompany cleanup and rebuilding. The boost in energy prices that
arose largely in the storms' wake is tempering the growth of
consumption and GDP nationwide. Higher energy prices will dampen
employment growth as well, compared with what it would have been in the
absence of Katrina and Rita. By contrast, the reconstruction activity,
which has already begun, will spur a huge demand for workers by early
next year.
TABLE 2.--ESTIMATED NET EFFECT OF HURRICANE KATRINA ON REAL GROSS DOMESTIC PRODUCT
[Billions of 2005 dollars at annual rates]
----------------------------------------------------------------------------------------------------------------
2005 2006 2007
-------------------------------------------------------------
2d Half 1st Half 2d Half 1st Half 2d Half
------------------------------------------------------------------------------------------------------
Energy Production....................... -18 to -28 -8 to -10 -5 to -7 -5 to -7 -5 to -7
Housing Services........................ -1 to -2 -2 to -4 -1 to -3 0 to -2 0 to -2
Agricultural Production................. -1 to -2 0 0 0 0
Replacement Investment.................. 6 to 12 16 to 34 16 to 35 16 to 35 12 to 25
Government Spending on Goods and 6 to 10 12 to 18 14 to 20 10 to 16 7 to 11
Services...............................
Effect of Higher Energy Prices on -6 to -10 -5 to -7 -2 to -5 -1 to -3 0 to -2
Nonenergy Consumption..................
Other Consumption....................... -8 to -12 -2 to -4 -1 to -3 -1 to -3 0 to -2
-----------------------------------------------------------------------
Real GDP.......................... -22 to -32 11 to 27 21 to 37 19 to 36 14 to 23
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.
Note: This table is an updated version of a similar table published by CBO on September 29, 2005. The estimates
for ``Replacement Investment'' have changed slightly since that time.
On balance, it is likely that the pattern of employment over the
next year and a half will follow the pattern forecast above for GDP.
The storms' initial adverse impact on the national level of employment
will fade over the next few months, as many employees return to their
former jobs or find new ones. By early next year, the pace of
reconstruction will probably cause the net effect of the hurricanes on
jobs nationwide to be minimal. If, as appears likely, output bounces
back by early next year to equal or exceed its previous trend, total
employment will be similar to what it would have been if the hurricanes
had not occurred, even though some of the people who lost jobs may
remain unemployed for some time.
EFFECTS ON INFLATION
Consumer prices will grow at a faster rate during the second half
of this year than had previously been expected, CBO forecasts,
primarily because of the increase in energy prices. However, inflation
should revert to pre-Katrina rates in the first half of 2006,
provided--as most analysts anticipate--energy prices ease and drop part
of the way back to their levels before the hurricane. Higher prices for
construction materials and higher energy prices, through transportation
costs, will tend to temporarily increase growth in the prices of many
non-energy-related goods as well as in airline, bus, and railroad
fares.
The direct, short-term effects of the hurricanes on the rise in the
consumer price index for urban consumers (CPI-U)--that is, the effects
stemming from the increase in energy prices--will be substantial. As a
result of those direct effects alone, growth of the CPI-U between the
fourth quarter of 2004 and the fourth quarter of 2005 may be almost 1
percentage point higher than it would have been in the absence of the
hurricanes. Nevertheless, inflation as measured by the CPI-U may be
slightly lower than previously anticipated during 2006, as the effect
of the hurricanes on energy prices dissipates.
Government Activity and Authority for Disaster Relief and Recovery
The public-sector response to disasters such as Hurricanes Katrina
and Rita involves a mix of funding and personnel from government
agencies at the federal, state, and local levels. Federal agencies
respond to natural disasters under both standing authority and specific
legislative direction.
THE FEDERAL EMERGENCY MANAGEMENT AGENCY
FEMA is the Federal Government's lead agency in responding to
natural disasters. When emergencies occur, local jurisdictions are
generally the first responders. But when a hurricane or other
catastrophe overwhelms both the local and state governments, the
governor can request that the President declare a ``disaster'' or a
``major disaster.'' The President's declaration puts into motion long-
term recovery programs to help individuals, businesses, and public
entities that are victims of the disaster. Authority to declare a
disaster and provide relief is provided by the Robert T. Stafford
Disaster Relief and Emergency Assistance Act (the Stafford Act).
FEMA identifies two main categories of disaster aid under the
Stafford Act: individual and public assistance. Individual assistance
begins immediately after the President declares a major disaster. It
may include providing housing, food, and other basic needs for survival
and distributing funds to meet needs that insurance companies and other
aid programs do not cover. Those may include the repair of homes,
replacement of personal property, transportation, medical care, and
funeral expenses. FEMA may also provide unemployment benefits and
reemployment services to people who are not covered by other
unemployment compensation programs, as well as assistance with rental
or mortgage payments for as long as 18 months. The Stafford Act
currently limits cash assistance to an individual or a household to
$26,200, an amount that is adjusted annually for inflation.
Public assistance consists of grants to state and local governments
to help cover the cost of repairing, rebuilding, or replacing
infrastructure. It may also support debris removal, emergency
protective measures, and the provision of public services. Certain
types of nonprofit organizations may also qualify for public assistance
if they provide education, utilities, irrigation, emergency care, or
other essential services to the general public.
FEMA performs much of its work on a reimbursable basis; that is, it
arranges for other agencies to provide goods or services and reimburses
them for their costs. For example, state agencies usually administer
disaster unemployment assistance, and FEMA often works closely with the
Department of Defense and the Army Corps of Engineers to address a
community's infrastructure needs.
Over the past 50 years, the Congress has gradually expanded FEMA's
authority under the Stafford Act, sometimes as a result of a specific
event. For example, following the terrorist attacks on the World Trade
Center of September 11, 2001, the Congress authorized FEMA to reimburse
New York City for economic losses from reduced tourism, a cost that
would not ordinarily qualify for reimbursement. FEMA also has broad
discretion in how it administers programs under the Stafford Act, and
after September 11, the agency expanded the eligibility guidelines for
many of its programs.
To date, the President has requested and the Congress has
appropriated $62.3 billion in emergency assistance in response to
Katrina. Almost all of that amount--$60 billion--was provided to FEMA's
disaster relief account; as a result, some of those funds may be used
if necessary for assistance in response to Hurricane Rita or other
disasters. (That account also held about $2 billion in unobligated
funds provided in previous appropriations.) CBO estimates that outlays
from those supplemental appropriations will total about $30 billion in
fiscal year 2006 and that most of the remaining money will be spent
over the following 3 years. Although billions of dollars were obligated
in September (that is, during fiscal year 2005), most of the checks are
likely to be written in subsequent months. The bulk of the spending on
reconstruction activities will occur over a period of several years.
As of September 27, FEMA had obligated about $14.5 billion for
activities related to Hurricane Katrina and had allocated another $3.8
billion for obligation in the future. Of that $18.3 billion, $8.0
billion has been allocated to housing assistance and the acquisition of
manufactured housing, $3.5 billion has been committed to states in the
form of goods and services for relief activities, and $3.5 billion will
be used to reimburse other Federal agencies--in particular, the Army
Corps of Engineers and the Department of Defense (DOD)--for their
disaster relief efforts. (Those agencies have also received funding of
their own: the Congress provided $400 million to the Corps and $1.9
billion to DOD for costs associated with the deployment of military
personnel in support of relief efforts, for the evacuation of military
personnel and their families, and for short-term repairs to military
facilities.)
In addition to the disaster relief fund, FEMA also administers the
National Flood Insurance Program. Premiums provide most of the
resources to pay claims under that program, which also has the
authority to borrow from the Treasury if those amounts are not
sufficient. Shortly after Hurricane Katrina, the Congress increased the
program's borrowing authority by $2 billion, bringing the total
authority to $3.5 billion. Although CBO does not have sufficient
information at this time to estimate the total value of the hurricane-
related claims that FEMA is likely to face, information from the agency
about the amount of flood insurance in force in affected areas suggests
that those losses will significantly exceed the sums currently
available to pay claims. CBO expects that the agency will exhaust its
existing resources quickly, bringing net outlays for the program to
almost $4 billion. At that point, additional funding is likely to be
necessary to enable the program to quickly pay outstanding claims.
By one measure, the Federal Government has committed a historically
high level of resources for relief and recovery from Hurricanes Katrina
and Rita. The recent emergency supplemental appropriation of more than
$60 billion is almost double the emergency supplemental appropriation
provided for the September 11, 2001, terrorist attacks and more than 10
times the emergency appropriation after Hurricane Andrew.
OTHER CONGRESSIONAL ACTION TO DATE
In addition to supplemental appropriations for disaster relief, the
Congress and the President have enacted a number of other laws to
assist those affected by the hurricanes. The TANF Emergency Response
and Recovery Act of 2005 (Public Law 109-68) provides additional funds
to states that were damaged by Hurricane Katrina and those that are
hosting evacuees from the hurricane to provide benefits to needy
people. That legislation will cost about $400 million, CBO estimates,
mostly in 2006. The Congress and the President have also enacted laws
authorizing flexibility in the use of disaster aid for displaced
workers, changes to student loan programs, and priority funding for
programs to aid individuals with disabilities. Much of the costs of
those activities will be paid for with previously appropriated funds,
but about $260 million will flow from the reappropriation of funds that
otherwise would not have been spent.
The Katrina Emergency Tax Relief Act of 2005 (Public Law 109-73),
which was enacted on September 23, provides tax relief in a number of
ways to businesses and individuals. The Joint Committee on Taxation
estimates that the law will reduce revenues by about $6 billion, almost
entirely over fiscal years 2006 and 2007. The provisions with the
biggest effects on revenues allow taxpayers to deduct more personal
property losses from taxable income, allow taxpayers more time to
replace damaged property without being assessed income taxes on the
insurance proceeds, and allow businesses and individuals to deduct more
charitable donations from taxable income.
THE ROLE OF OTHER FEDERAL DEPARTMENTS AND AGENCIES
A number of other Federal agencies can and do assist individuals,
businesses, and local governments affected by a disaster.
Loans to Individuals and Businesses. The Small Business
Administration (SBA) makes subsidized loans to residents and businesses
in a disaster area. Homeowners may borrow up to $200,000 to repair or
replace their home, and SBA provides loans of up to $40,000 to renters
and homeowners to cover losses to personal property, such as clothing,
appliances, and furniture. SBA provides loans of up to $1.5 million to
businesses to cover damages to their physical property, and the agency
also lends money to businesses that have suffered economic injury as a
result of a disaster and need help paying their bills or meeting
operating expenses.
In 2005, SBA's disaster loan program received a supplemental
appropriation of $501 million, and the President requested $83 million
for fiscal year 2006. In the Federal budget, entries for such funds
reflect the net value of the Federal subsidy over the life of the
loans. CBO estimates that the appropriated credit subsidy provided for
2005 will support a total loan level of $3.9 billion.
Temporary and Permanent Housing. Following past disasters, the
Congress has transferred FEMA resources or appropriated new funding for
the Department of Housing and Urban Development (HUD) to assist
individuals in their transition from emergency shelter to permanent
housing options using existing HUD programs. Individuals may receive
direct assistance through the Section 8 housing choice voucher program
or through public housing, and states may use funds from the community
development block grant (CDBG) and the HOME Investment Partnership
programs to repair damaged homes and finance long-term redevelopment.
After the five hurricanes in August and September 2004, for example,
HUD provided $26 million in emergency funds to repair public housing
units, $10 million to repair housing units for the elderly and the
disabled, $40 million in additional Section 8 vouchers, and $16 million
to relocate displaced families. In addition, the Congress appropriated
$150 million in additional CDBG funds for states.
A presidential disaster declaration allows the Federal Housing
Administration (FHA) to call for a 90-day moratorium on foreclosures of
FHA-insured mortgages. The agency may also encourage FHA mortgage
lenders to offer special forbearance to affected borrowers and may
relax its underwriting guidelines to permit disaster victims to qualify
for certain loan programs that provide 100 percent financing for the
cost of reconstruction or for replacement residences when residences
have been destroyed or severely damaged by the disaster.
Rebuilding or Repair of Roads and Bridges. State and local
governments receive assistance for rebuilding roads and bridges that
are part of the Federal-Aid Highway system through the Emergency Relief
(ER) program of the Federal Highway Administration (FHWA). The ER
program has direct spending authority of $100 million per year;
however, the FHWA currently reports about $124 million of unfunded
requests for aid through the program and anticipates that additional
requests--not including those related to Hurricanes Katrina or Rita--
will total more than $500 million. Currently, the FHWA has no estimate
of how much the damage caused by those hurricanes will add to its
backlog. The recent highway act (Public Law 109-59) authorized the
appropriation of additional sums as necessary for the ER program,
although to date, no additional funds have been appropriated. In 2005,
the Congress appropriated $1.2 billion for that program for emergency
expenses resulting from the 2004 hurricanes.
Restoration of Public Water Systems. The Department of Agriculture
has two programs for rebuilding public water systems after disasters.
The Emergency Watershed Protection Program provides funds to state and
local governments to remedy emergency situations in local watersheds
that present substantial danger to the public health. Spending is
dependent on emergency supplemental legislation. In 2005, Florida
received $120 million to repair damage and remove watershed debris
caused by the 2004 hurricanes. Funds from the Emergency and Imminent
Community Water Assistance Grant Program are available only to rural
areas; the Congress appropriated $23 million in 2005 for such grants.
In addition, public water facilities receive loans from state revolving
funds that are eligible for grants from the Environmental Protection
Agency, and some of those loans may be available to repair hurricane
damage.
Cash Benefits and Other Assistance. The Federal Government operates
assistance programs that automatically respond in emergencies to the
loss of income and other services, and many agencies have the authority
to waive certain program requirements in the event of disasters. The
loss of employment in areas affected by the hurricanes will result both
in emergency unemployment benefits paid through FEMA (as mentioned
above) and increased claims for regular state unemployment benefits,
which CBO expects could reach $600 million in the coming months.
Likewise, emergency Food Stamp assistance is available through at least
October, and school children dislocated by the storms will receive free
school lunches and breakfasts through the child nutrition program
regardless of whether they had to pay some or all of the costs of meals
before the storms. Higher expenditures for Medicaid in the coming
months can also be expected because the employment and income losses
resulting from the storms will increase the eligible population.
Some Federal agencies can waive program rules for a limited period
after a disaster. For example, in 2004, the Secretary of Education
announced a policy of forbearance regarding interest on student loans
for borrowers affected by hurricanes and other catastrophic events. For
some assistance programs, rules for documenting and verifying the
income and resources of applicants have been loosened pursuant to
existing administrative authority.
The effects of the hurricanes will also be felt by recipients of
the major cash benefit programs. The surge in energy prices will
increase consumer inflation for September and as a result boost the
annual cost-of-living adjustments to those programs' benefits in
January 2006 by perhaps 0.3 percentage points. Such an increase would
increase spending in 2006 by $1.6 billion.
STATES' EMERGENCY RESOURCES
Like most states, those affected by Hurricanes Katrina and Rita
have procedures for funding disaster assistance programs that parallel
current Federal practices; that is, state legislatures typically
appropriate small sums to emergency-response accounts annually. None of
the states provides funding in advance for those accounts at a level
sufficient to cover large-scale emergencies, a practice that reflects
the expectation that the Federal Government will step in to help when
large-scale disasters occur.
States tend to plan for two types of fiscal emergencies: economic
downturns and natural disasters. States establish a variety of
contingency and emergency accounts (referred to in one state as the
Stormy Day Fund) to prepare for unforeseen disasters, either natural or
man-made, which can occur at any time. The purpose of those accounts is
to earmark money for emergencies or other unanticipated or hard-to-
estimate one-time expenditures that may occur within a given fiscal
year. For the most part, the amounts allocated are relatively small,
requiring the governor to go to the state legislature in the event of a
large-scale emergency. Occasionally, a governor has the emergency
authority to bypass the legislature entirely and borrow from almost any
other state budget account. In Louisiana, for example, policy states
that funds for disasters and emergencies are always to be available;
the governor, in effect, has the authority to borrow from any
appropriated funds to address an emergency.
The amount of money that states commit to emergency accounts varies
greatly, ranging from a few hundred thousand dollars to several hundred
million dollars. Louisiana has an Interim Emergency Board fund into
which up to 0.1 percent of total state revenue collections can be
appropriated. For fiscal year 2005, the fund contained $15.5 million.
The state also has an Oilfield Site Restoration Fund, which contained
$8.4 million in 2005, and an Environmental Trust Fund, which contained
$69 million.
Mississippi does not have a statutorily created emergency fund; it
does, however, have an Emergency Management Agency that administers a
disaster relief fund. In fiscal year 2005, the Emergency Management
Agency's budget was just under $1 million, and the Disaster Relief fund
contained about $1.6 million. The goal in most states is to have enough
money in those types of emergency accounts to provide the necessary
match for Federal disaster assistance.
Government Policy and the Response to Disaster
September's hurricanes inflicted tragic amounts of human misery and
loss of life. Together, they were unique in the scale and scope of
dislocation, destruction of physical capital, and loss of income.
However, investing in new capital and raising the standard of living
are things that the U.S. economy does as a matter of course. The
financial markets, as they always do, will steer debt and equity
investments to profit-making opportunities. In addition, payouts on
insurance contracts will serve as a source of funding for new
investment as well as provide compensation for some of the lost
capital. And given government support for necessary public
infrastructure, as discussed above, many of those attractive investment
opportunities will be found in the affected areas of the nation's Gulf
coast. The effects of Katrina and Rita do not require a major
reexamination of Federal policy toward national or regional economic
growth.
The magnitude of the Federal response to Katrina and Rita and the
recurrent nature of natural disasters do raise related policy issues:
the financing of current Federal assistance and budgeting for future
disaster aid, and options for reducing the costs of future disasters.
BUDGETING FOR RECENT AND FUTURE DISASTERS
The Federal Government's additional spending for disaster
assistance in the wake of Hurricanes Katrina and Rita will ultimately
be paid for through some combination of reductions in other Federal
spending and increases in tax revenues, either now or in the future. An
important issue for policymakers is the extent to which payment for the
current assistance should be made now rather than postponed through an
increase in the deficit.
Beyond that decision lies the question of how to budget for the
costs of future disasters. Under current practice, most Federal funding
of disaster assistance is provided through supplemental appropriations
that are enacted as emergencies arise. Emergency supplementals require
no offsetting rescissions (cancellations of previously provided budget
authority) and are typically provided without lengthy legislative
delays. Consequently, Federal assistance can be quickly provided to
disaster victims and state and local governments. However, many
analysts believe that current Federal budget procedures can lead to
inappropriate evaluations of the trade-offs involved in providing
assistance and can reduce incentives for mitigation and recovery
efforts by state and local governments. Encompassing disaster aid
within the regular budget process of weighing Federal spending
priorities could lead to more-deliberate evaluation of standards of
need and more consistent incentives for state and local governments and
businesses to cover their losses.
Federal budget procedures could make the real costs of current
disaster policy clearer. One option--similar to the approach the
Congress uses to fund Federal firefighting programs--would be to
appropriate money for disaster programs in regular appropriation bills
in amounts equal to the expected funding need for each program. (As a
string of expensive emergency supplemental bills for natural disasters
over the past 15 years demonstrates, spending on disasters has a
predictable component.) Under such an option, unused funds would be
available with no further action by the Congress when needs arose.
Increasing regular appropriations would reduce, but certainly not
eliminate, the need for emergency supplemental appropriations.
Another option would be to use annual appropriations to create a
rainy-day fund to cover future expenses for Federal disaster relief.
Spending from such a fund could be made subject to further
Congressional action when a need arose an important difference from the
preceding option. Thus, the Congress could retain greater control over
the use of the funds.
Almost all states have some kind of contingency or emergency
account; however, few provide funding in advance for those accounts at
a level sufficient to cover large-scale emergencies. Furthermore, most
states count on the fact that the Federal Government will step in with
assistance when large-scale disasters occur. A major hurdle for the
success of a rainy-day fund at the Federal level therefore would be to
preclude the use of the fund for other purposes, as has happened at the
state level.
REDUCING THE BUDGETARY AND ECONOMIC COSTS OF FUTURE DISASTERS
Policymakers may also wish to consider options to reduce the costs
of future disasters. Although the underlying natural forces cannot
always be controlled, it is possible to adapt investment strategies and
economic activities to reduce the financial and personal toll such
forces may exact.
One goal calls for minimizing the sum of four types of costs
associated with disaster risks: disaster losses, the costs of reducing
those losses through mitigation (used broadly here to include
preparedness and ``passive mitigation'' that simply forgoes risky
activities), the administrative costs of reducing uncertainty through
insurance, and the psychic costs of the remaining uncertainty. A second
objective is to allocate disaster costs fairly.
The two basic approaches for controlling the costs of future
disasters--mitigation and insurance--work in different ways. Mitigation
seeks to reduce injuries, deaths, and physical destruction by avoiding
exposure to hazards, improving disaster resistance, and making plans to
minimize losses after the event through timely and effective
responses.\2\ By contrast, insurance does not reduce the damage caused
by an event but spreads the costs of that damage to reduce the
financial burden on the victims. To some degree, the two approaches are
substitutes for each other: the more mitigation reduces exposure to
risk, the lower the demand for insurance; conversely, the more complete
the insurance coverage, the lower the incentive to undertake mitigation
and avoid risky activity. The two approaches work best together when
insurance premiums can be finely tailored to individual risks. In that
case, policyholders who take effective mitigating action see the full
financial benefit of their efforts through discounts in their premiums.
Conversely, insurance prices that poorly reflect actual risks--
especially insurance that is subsidized, or even free--undermine
mitigation incentives the most.
---------------------------------------------------------------------------
\2\ However, mitigation can never eliminate all risks of loss from
all sources, and a particular project may be counterproductive if the
residual risk is not acknowledged and taken fully into account.
---------------------------------------------------------------------------
Implicit or explicit insurance subsidies are a major feature of
current Federal disaster programs. In the National Flood Insurance
Program (NFIP), explicit subsidies are given to policies on structures
built before the issuance of a participating community's flood rate map
or before 1975, whichever is later (and not ``substantially damaged''
or ``substantially improved'' since then). Although those subsidies are
not a factor in encouraging new development in flood-prone areas, they
probably do tend to retard the rate at which residents and businesses
move out of existing structures, thus keeping the level of risk and the
likely cost of future disasters higher than they would be otherwise.
Other Federal subsidies for disaster insurance are implicit, but
they still have the effect of supporting risky behavior and
discouraging mitigation. One example is assistance to individuals and
businesses beyond payouts on flood insurance claims--for example, low-
interest reconstruction loans from the Small Business Administration.
Another example is FEMA's Public Assistance program, in which the
Federal Government pays a minimum of 75 percent of the eligible cost to
rebuild public facilities owned by state and local governments, Indian
tribes, and certain nonprofit organizations. Both of those programs
effectively provide a form of unpriced insurance.
A detailed analysis of the incentive effects and implications for
efficiency and equity of current Federal programs and alternative
policy options is beyond the scope of this testimony. However, three
categories of available options can be sketched out.
The government could try to promote efficient mitigation
and risk sharing by looking for ways to strengthen the market for
private insurance. Current regulation at the state level often keeps
premiums below actuarially expected losses in high-risk areas to keep
insurance ``affordable.'' In addition, Federal tax laws discourage the
private provision of disaster insurance by not allowing the
accumulation of reserves in advance of catastrophic events.
The government could try to lessen the incentives it now
provides for risky behavior. For example, it could phase out the NFIP
subsidies on grandfathered properties, charge user fees for the
implicit insurance it now provides to individuals and businesses in
high-risk areas, or reduce the Federal share of costs in the Public
Assistance program, particularly for projects to rebuild structures
that would remain exposed to the high risk of damage in future
disasters.
The government could go beyond reducing disincentives to
mitigation in its own disaster programs by providing more funding for
mitigation or by imposing new mitigation requirements.
Chairman Nussle. Thank you, Director Holtz-Eakin. Your
testimony confirmed a lot of the work that you have been doing.
You have kept in good touch with us in the Congress and the
Budget Committees, and I appreciate the work that you and CBO
have done to give us the information. It is not easy at all to
make the kinds of predictions or judgments about how things are
going in the midst of these disasters as they unfold, but you
have done that, and they have been very helpful as we have
moved forward.
Your discussion of the family budget, it should not be all
that revealing to us, but it really is, and it should give us
all pause. Because we, as family members of this Federal
budget, sitting around the kitchen table trying to decide as a
family and as a Nation how to deal with this, no different than
any family, are not allowed to just push their chair back from
the table and walk away and say I do not like your plan. I do
not like your ideas, or your plan is no good. If you want to be
a responsible member of the family, you need to present your
options.
If you do not like the spending cuts, then tell us where
you want to cut spending in other areas. If you don't like the
programmatic performs, then tell us how you would reform the
programs. If you don't believe any spending reductions are in
play or necessary, than tell us how you are going to raise
taxes.
But to just look at the plan and to say it is no good--and
I will admit, I put a plan on the table. I understand the first
person to stick their head out of the foxhole is going to get
shot at. That is fine, go ahead, but shoot with your options.
Shoot with your plans, and your family budget discussion I
think was an excellent one.
Second, in just a brief response to my friend, Mr. Spratt,
who talked about the difference between planning for and paying
for Biloxi versus Baghdad. I could not agree more, which is the
reason why we did budget for Baghdad, in addition to what I am
suggesting now is budgeting for Biloxi, and it is a very
serious effort.
I was very frustrated with the administration's
unwillingness over the last number of years to budget for what
we believed--we at least had some inkling--was going to be the
cost of the war; and that is the exact reason why we did budget
for Baghdad. We have found the offsets in this process, as we
have not only held the line on spending but we have put pro-
growth policies in place that got us $100 billion worth of
savings as a result of growth in the economy from this year
alone.
So we have budgeted for the war on terror. It is not
perfect, it is a down payment only. It is rare that you ever
fully offset, whether it is emergency spending for natural
disasters or emergency spending for wars that have occurred in
our history, but we have made those plans. That is what we
intend to do now.
Let me direct you to a comment or a revelation that I have
had that I am both surprised about, but I need some information
on. That is, how is it that two-thirds of the money that has
been dedicated to FEMA is sitting in their accounts? How long
will that last? What is the spend-out rate, if you will? How
long will this be enough to deal with the disaster itself?
There are some who are suggesting--and possibly
appropriately so--that there are resources available in the
FEMA accounts to meet the needs of some of the Federal
reconstruction efforts that will be necessary and certainly
very appropriate under the Stafford Act for rebuilding as a
result of what has occurred. Do you have any information or
would you like to comment on that?
That is the basic thrust of my questioning for today.
Mr. Holtz-Eakin. The simple accounting of what has gone on
is, of the $60 billion that was appropriated, about $14\1/2\
billion has been obligated, as of the latest data that we have,
and that a little bit more has been allocated for obligation in
the future. So a total of about $18 billion has been allocated.
Of that, $8 billion has gone for housing purposes and about $7
billion for relief and reimbursement of other agencies for
relief purposes; and I think that is indicative of the kinds of
things that one can expect.
We anticipate that, overall, about half of the moneys will
be spent out over the course of fiscal year 2006. So for every
dollar that goes into the Disaster Relief Fund, half comes out
in 2006. That is a bit above the historic rate, but we
anticipate that would be appropriate in this circumstance, and
that past the first year you might get, with less certainty,
say, 30 cents, and then the remainder would fall out in the
years to follow. That is because the money applies to many
different kinds of activities.
The direct assistance for housing families can get up to a
bit above $26,000 over 18 months. That might go out a bit
faster, but it is still a spend-out over a year or more. That
is very different than the money that will go for
reconstruction of infrastructure, where it is not even feasible
outside of those areas where they had to restore infrastructure
just to get in for relief. In most cases, it is not feasible to
even get in and assess damage at this point. It will take much
longer to assess, identify what will be built, hire people, get
the construction projects going.
It is a very slow process; and, for that reason, one should
not expect those moneys to flow immediately out once they are
put in the Disaster Relief Fund. They will be there. They will
be available for a wide variety of needs. The money
appropriated for Katrina was available for Rita, and it will be
possible for the Congress to monitor the evolution of both the
needs on one hand, as we find out more about the area, and the
existing funding on the other hand.
If it turns out to be the case that the money flows out
faster than these projections anticipate, the Congress has
shown that it can come back and move quickly to provide more
funds. But I think it is sensible to use the guide of history
and the guide of the kinds of activities to expect the money to
go out over a fairly long period of time and to monitor it as a
result.
Chairman Nussle. I appreciate the very strong interest in
attendance of members today coming back before votes this
evening, and I respect them and appreciate that. I will save
any more questions I have for the end, and Mr. Spratt is
recognized for any questions he has.
Mr. Spratt. Thank you, Mr. Chairman.
Thank you, Director Holtz-Eakin, for your testimony.
Let me ask you, based upon what you know now and what you
know about previous disasters of this kind, can you extrapolate
or estimate what the likely cost to the Federal Government will
be for the Katrina disaster, in particular?
Mr. Holtz-Eakin. I think that is one of the two most
dangerous questions you can ask me. No, I cannot give you a
scientific answer yet about the scale of the damages; and it
will be a policy call in the end as to what fraction of those
damages that the Federal Government will choose to use its
powers to pick up. That is the truthful answer.
What we know so far is that if one looks at other events--
the three I have are 9/11, Northridge, and Hurricane Andrew:
The damages for 9/11 were, rough estimates, $87 billion;
supplemental appropriations total were about $35 billion.
Damages in the Northridge earthquake were about $50 billion;
$12 billion in supplemental appropriations. Damages for
Hurricane Andrew, about $40 billion; a little under $6 billion
were supplemental appropriations.
We have only guesstimates, as I said, about the damages in
this particular event--combination of events, actually--$70
billion to $130 billion for capital losses, but there could be
other costs like debris removal; and there is about $62 billion
in direct appropriations so far and some other legislation that
is intended to provide help.
So on both sides of that ledger I can give you some
information, but I cannot tell you where we will end up. One is
in the hands of the damage assessment, the other is in the
hands of the Congress and the administration.
Mr. Spratt. We hear the number $200 billion as a seat-of-
the-pants estimate, and I think that $200 billion means the
total cost of Hurricane Katrina and not necessarily the Federal
Government's share of that cost. That is the total that
insurance companies must share and others. Do you have any
light to shed upon that?
Mr. Holtz-Eakin. We have tried to fairly carefully
disentangle two kinds of losses. One kind of loss is just
things that were in place and were damaged, buildings, and they
are gone; and the second is losses of flows of income. Now they
are not related obviously, but the wages that go away with the
jobs and the profits that go away.
The insurance companies often insure both, both the
structure and business interruption insurance, you lose some
business income. The insurance company estimates of total
losses run a bit higher as a result. We have seen $140 billion
as an estimate out of RMS, a risk management firm. There are
some comparable estimates out of some of the other insurance
groups.
So estimates that include sort of a broader scope of things
are north of ours, but they are all south of $200 billion, but
all in the range of $150 billion, say.
Mr. Spratt. Which would mean that the Federal share is
likely to be under $150 billion itself then?
Mr. Holtz-Eakin. Yes. Well, I mean, if the private
insurance pays out part of that, the Federal share, what is
over, over by definition, is well below that.
Mr. Spratt. If we decided to have a 1 percent across-the-
board cut in discretionary spending and backed out defense and
homeland security, which I think would probably be the
formulation most likely, how much would 1 percent shaved across
the board in the domestic discretionary accounts produce?
Mr. Holtz-Eakin. We can get you the exact number, but it
has got to be on the order of $4 billion.
Mr. Spratt. About $3 or $4 billion. Not a great deal of
money if you look at the magnitude of what we have got to do
then.
Mr. Holtz-Eakin. Small in comparison to these losses.
Mr. Spratt. Back in August, when CBO came before us with
its update of the budget and its update of the economy, we
asked CBO to take that a step further and to adjust it for
certain assumptions about likely actions by the Congress and by
the administration. In particular, we asked you to assume that
the tax cuts passed in 2001 and 2002 and 2003 for the most part
would be extended when they expire--most of them in 2010, some
before--and that other tax cuts on the administration agenda--
at least its agenda--at least of its July update mid-session
review--would also we enacted.
We asked you also to assume that the alternative tax will
be fixed such that it didn't apply to more than the percentage,
around 4 percent, of tax filers who now get affected by it. We
asked you to take the President's budget, which applies the
cost of Social Security privatization, partial privatization,
in 2008 and 2009 and carry that out through 2015. And, finally,
we asked you to plug into the forecast CBO's own model of what
Iraq and Afghanistan are likely to cost, assuming a drawdown of
troops after 2006 to a steady state of about 20,000 in each
theater.
I have got an electronic chart here that shows the impact,
my point being that we had a serious problem before Katrina.
Katrina worsens it, but the heart of the problem was there
before Katrina. Katrina's worsening of the problem is not
exactly marginal, but the problem was already extremely serious
before Katrina hit us.
Your estimate of deficit for this year was $331 billion
when we close the books on September 30. You assumed that this
would decline to $57 billion by the year 2015, but that rested
on the various substantial assumptions that the tax cuts would
not be renewed when they expired in 2010.
We have gone back, using your projections, added in the
President's budget, per your estimates. When we do this, we see
that the total changes--and this is basically your study--are
dramatic. The deficit of $331 billion per the assumptions that
we used to adjust your forecast would grow to $640 billion,
would double. Debt service is not shown on there, but it would
grow from $182 billion this year to $458 billion in 2015,
almost triple. The national debt held by the public would
increase from $4.6 trillion to $9.2 trillion.
Now those are the numbers before Katrina. What we have done
since then is try to add to where you left off the likely cost
of Katrina using, as I understand it, your spend-out ratio,
your outlay ration. If you will just take a moment to look at
that, can you tell us, does that look like it is in the ball
park for what Katrina's likely input is to be? We have assumed
$200 billion total cost to the Federal Government, which is a
substantial assumption. You can whittle that back $50 billion
and adjust the bottom line. But do those numbers like credible
to you?
Mr. Holtz-Eakin. Yeah. The only line that we have never
really looked at is the one which is the additional to reach
$200 billion. But the spend-out rate on what we have got over
the first couple of years is about right, and the large patch
of zeros to the right I think is the key way to think about
this. Most of what is true about the budget before Katrina will
be true after, because these are, in a budgetary sense,
transitory.
Mr. Spratt. But at the end of the period, instead of a $640
billion deficit, we have a $655 billion deficit, still serious
but still in the same ball park.
Mr. Holtz-Eakin. Most of that is the debt service and will
depend on how much is done, whether that $200 billion target
you chose is appropriate or not.
Mr. Spratt. Thank you very much, sir.
Mr. Ryun. Mr. Chairman, thank you.
First of all, I want to compliment you on having this
hearing and also your leadership. I appreciate your willingness
to look for and lead us on fiscal responsibilities. I know that
I can subscribe to the same thing you feel, a difficult
decision put off today only makes it more difficult tomorrow.
We are talking about our children, our grandchildren, and the
future of this country. So I thank you for your time.
Mr. Director, my question relates to a call that I am sure
that many of us have had in our offices. It relates to the cost
of fuel in this country when we go to the gas pumps and pay a
lot more than what we ever have before. As we look ahead to the
winter heating oil, there is going to be a lot more expense
involved in that. My question relates to what can we look at in
terms of when this, the higher energy costs, might begin to
change. And if you could respond in terms that the person on
the street can understand, different indicators that if they
see those changes coming, they might begin to feel some relief
of some of these higher energy costs.
Mr. Holtz-Eakin. I think the bills that people are paying
attention to are their gasoline bill when they fill up at the
pump; and there, you know, we are now running--instead of $1.80
to $2, we are running north of that, somewhere at $2.75 or
higher, depending on where you are. We anticipate that it will
not go back entirely to the $2 level. We are expecting the
damages to refineries and the gulf production to have impacts
that last through early next year.
So the first lesson is, not all of this goes away. Not all
of it goes away quickly. But we expect a lot of it to dissipate
over the next 3 months so that, beginning next year, the big
bulk of the gasoline price impact has largely gone away. Not
entirely. The heating oil is likely to be substantially higher.
There has been a lot of attention paid to that. Most of the
increase in heating oil is the derivative of the fact that oil
is more expensive and most of that preceded Rita and Katrina.
So that is true. One would not expect it to entirely reverse.
The good news there, to the extent there is some, is that that
is not the main source of winter heating in most of the
country, it is a small fraction of heating.
The third big impact is electricity. Underneath that
natural gas, where natural gas powers electricity and natural
gas as a direct heating source, natural gas prices are expected
to remain higher.
That I believe is the major energy event that has happened.
Eighty percent of production of natural gas is domestic. It is
very different than the large imports of oil, and we damaged a
lot of our capacity to both produce and distribute it. So that
is the bill to watch, and I think that will be the one that
most people will notice as time goes on.
Mr. Ryun. So you are saying maybe by next spring we might
see some relief, but there is never going to be a return to
some of the lower prices we have become accustomed to.
Mr. Holtz-Eakin. I think oil and gasoline next spring is on
a path where we would go back to something that looks like pre-
Katrina and Rita, maybe even lower for oil. For natural gas, I
am far less confident in that.
Mr. Ryun. I have a second question. I want to tag team off
of what Mr. Spratt had to say. I know we are all concerned
about the cost of Katrina and Rita. While you at this point
cannot be pinned down--I understand that to a certain extent--
what I would like to have you do is respond to what you see as
possibly a way to help control some of the costs by perhaps
giving some incentives to the private sector, some things that
might help control some of the costs. Because that is something
that we are all concerned about. We want to be compassionate,
but we also want to be responsible.
Mr. Holtz-Eakin. I think there are two issues in
controlling cost. The first is, for those events that have
already transpired, Katrina and Rita, these are instances where
one would like to rebuild at minimum cost, one would like to
provide efficient financing, and to the extent that the
standard mechanisms of bidding and oversight and good
enforcement of contracts are brought to bear, that is the key.
And that is very much what we would hope would be business as
usual.
I have another question, whether going forward there could
be incentives in insurance markets, making them function a
little better so that people would not put themselves in a
position to suffer such exposed losses from other disasters.
And that is a set of questions that we try to address at the
end of the testimony.
Ms. DeLauro. Thank you very much, Mr. Chairman.
Thank you for being here today. Just a couple of comments
and a question.
First of all, I think the discussion around family budgets
is appropriate except that when families do sit around and
create their budget they are trying to deal with what
priorities their families have and their budgets reflect those
priorities. And I think quite frankly the American public takes
a look at the Federal budget and gets a very clear indication
of where our priorities are and how it is that we would spend
their dollars.
I would also add something to what Mr. Spratt said about
the need for why are we offsetting the cost for Biloxi and not
Baghdad, but in addition to that, other kinds of spending,
ongoing military operations, Iraq, Afghanistan, the energy
bill, the new tax cuts, none of which are offset. So that leads
me then to my one or two questions.
The other piece is given the $332 billion deficit, the
third worst in American history, what sense does it make to
increase the deficit by another $34 billion for big tax cuts
for people earning over $200,000 a year? So does it make sense
to consider freezing the estate tax at the current marginal
rate and exemption level?
As I understand it from your June report on this issue,
with a 46 percent tax rate and an exemption rate of $2 million
scheduled to take effect next year, only about 21,000 estates
would have to file a return. But the revenue that would come to
the treasury would still be more than $105 billion over the
next 5 years, about half of what may be needed to pay for the
Katrina cleanup. In contrast, full repeal of the estate tax
would in 2010 benefit exactly 384 families in Louisiana,
Mississippi, and Alabama, and would cost the Treasury almost $1
trillion in foregone revenue and interest on the debt. Which of
those two options do you see having the greater public benefit?
Mr. Holtz-Eakin. This is the central question about the
appropriate scale of offsets and the composition and it is the
one that I will carefully not answer. I will do my very best to
provide some guidance in how one might think about this. There
have been a variety of principles that one might toss out to
guide the search for offsets. One might be a rule that simply
says I am an old-fashioned deficit hawk and the net increase on
the deficit should be zero, full offsets somehow.
Another principle that one might operate by and which I
have heard people discuss is one that says, well, we should
offset except for those things where the benefits do accrue
somewhere down the line to our children. If there is a genuine
infrastructure project that produces benefits over a long
period, it might be appropriate to allow them to pick up a
little bit of that but offset the rest.
The third possibility which I have heard is this is a
temporary economic event that should be addressed with
temporary economic policies so you do not change permanently
policies such as an estate tax in response to a transitory
economic event. That says debt finance everything.
That brings me to the second thing worth thinking about,
which is that that kind of guidance assumes that the underlying
budget starts from a position that on average balances and
financing is put in place for the programs that the Government
has undertaken, and that is not where we are. And so it may be
the case that we will have to intermix the long-term process of
getting the budget back into alignment with its objectives and
the response to these transitory events.
That is as best as I can give you a set of guidelines of
how you might think about it without actually answering the
question.
Ms. DeLauro. Therefore, no answer to the question about
another $34 billion through tax cuts for people earning over
$200,000 a year. Does it make sense for us to go down that
road?
Mr. Holtz-Eakin. As you know that is a policy call and we
seek to guide you with the numbers and their impacts and we
hope it is useful.
Ms. DeLauro. Quick question. Ahead, fiscal year 2007, the
purpose of this hearing, the administration's budget includes
no funding for 2006 for Iraq, or Afghanistan. Have you
calculated how much future war spending may occur? If so, how
much in 2007, how much over the 10-year budget window?
Mr. Holtz-Eakin. Again we do not know for sure. As Mr.
Spratt mentioned, we have tried to gauge the rough magnitude of
scenarios which involve a continuation of the current level of
forces in Iraq and Afghanistan and the support troops in
surrounding states and a ramping down due to the acknowledgment
that keeping that scale there over the long term is simply not
sustainable. That ramping comes down to about 50,000 troops
somewhere abroad by 2010 and remains at that level for the
remainder of the budget window. If one takes that scenario at
face value, outlays would total about $380 billion over the
2006-2015 period. So some number like that seems appropriate
for a continued involvement in a war of this type somewhere
over the long term.
Ms. DeLauro. Thank you very much. Thank you, Mr. Chairman.
Chairman Nussle. Mr. Crenshaw.
Mr. Crenshaw. Thank you, Mr. Chairman. Thank you for your
testimony today. It seems to me that it has helped put our
particular problem here in the Budget Committee more in
perspective because while the hurricane devastated the region
along the gulf coast, and being from Florida I can understand,
we went through Hurricane Andrew, which up until this time was
the largest natural disaster. And it certainly is awful and
terrible as it relates to those localities and the local
economies. But I guess you give us a ray of hope in the sense
that because of the strength of our national economy, being the
largest and strongest economy there is, $13 trillion, that we
can handle from an economic standpoint a situation like this.
And that is I think relatively good news that we have not seen
long-term treasuries spike up. Most of the economic indicators
are kind of still on track. I think you said that maybe we will
expect economic growth to slow down maybe a half of percent
this year but kind of get back on track.
It has been pointed out that our public debt is going to go
up obviously, but I read not long ago the Federal Reserve has
said now we have about a $50 trillion net worth in terms of our
families and our economies. So $4 trillion over $50 trillion is
a pretty good debt to equity ratio, that we are handling that
pretty well. But I still think that we are all concerned about
the deficit.
That is the one thing. The good news is the economy is
strong and getting stronger, and it will have a little blip
because of this. But still people are concerned about the
deficit. And we cannot help but recognize that if we spend $60
billion, which we have already done, and another $60 billion or
up to $200 billion it will have an impact on the deficit.
I guess the good news there is, as the chairman pointed
out, just this year that estimate was reduced $90 billion. We
are talking $330 billion deficit, which is about 2\1/2\ percent
of GDP, down from maybe 4 percent. So if you add another $200
billion it maybe goes back to up to 4 percent, but overall it
is kind of well within the range.
My question is kind of theoretical. Because I know being
from Florida when we went through this kind of terrible
disaster the local economies suffered, particularly in south
Florida with Andrew, but there was a tremendous windfall in
terms of sales tax revenues as the economy came back and all
the building took place. I am sure you can quantify that in the
region along the gulf coast that they will go through that
cycle.
My question is, is there any way that we can understand the
investment that we will make at the Federal level, whether it
is $60 billion, $100 billion, or $200 billion that is pumped
back into the economies and in particular those local
economies? Is there any way to quantify what kind of return on
investment we might receive as a nation? Is that something that
you can help us with?
Mr. Holtz-Eakin. If it is a theoretical question I can give
you a theoretical answer, yes. Now, actually doing it turns out
to be pretty hard. There have been a large number of studies
that attempt to look at the rate of return on Federal spending
for capital projects, and they run into a variety of--they do
not always produce particularly cheerful results, but they run
into a variety of obstacles in getting the rate of return
right. No. 1, there are a lot of things put in place which are
not intended to produce economic benefits. They are simply
meant to make people's lives better, and quantifying the degree
to which people's lives are better is pretty hard. So you do
not get the answer right from doing that.
No. 2 is that there is a big difference between history and
the future. The destruction that is evident from looking at the
photographs suggests that the rate of return of putting some
basic things in place down there is going to be very different
than the same highway in some other location.
And that brings No. 3, which is, is it the case that we
have always spent our Federal capital dollars wisely? Have we
chosen things in an economically efficient fashion to put them
to the best bang for their buck? Well, I think most of the
studies would suggest no, and that is an ongoing issue.
Mr. Crenshaw. But you would say, for instance, in terms of
some people would argue that the economic growth that has taken
place as the economy has recovered is due in part to letting
people keep more of what they earn, cutting corporate taxes,
business taxes, that kind of has a positive impact. So some
would say that is theoretical. Some would say that is pretty
practical.
Mr. Holtz-Eakin. It is far from theoretical that the key
question is what are the incentives for a robust growth for
economic environment. I think that there are--this is an
economy that relies on the private sector extensively for that
and it requires a bit of support from the government sector.
And one of those places is putting in place the basic
foundation in terms of both legal institutions and contractual
institutions but also physical infrastructure to do the work,
and getting that right is a key part of the job.
Mr. Crenshaw. So the good news is at least theoretically
that some of the money that we are spending now to solve these
problems, there will be some sort of return on the investment
which might help our economy grow?
Mr. Holtz-Eakin. Yes.
Mr. Crenshaw. Thank you very much.
Chairman Nussle. Mr. Cooper.
Mr. Cooper. Thank you, Mr. Chairman. I want to first thank
Douglas Holtz-Eakin for speaking to the Nashville Rotary Club.
I am sorry I was not there to personally greet you but I
appreciate you making the effort.
Mr. Holtz-Eakin. I was there the day Katrina hit. I hope it
was a coincidence.
Mr. Cooper. I think most Americans are getting more and
more concerned about the deficit, and I think if there is a
silver lining in the Hurricane Katrina it is that people are
more sensitive to deficit issues than they were in the past. I
think most Americans are looking for accurate information about
the deficit, and I have run across a couple of things recently
that I thought were interesting.
One is from the Cato Institute, October 2005. The headline
is ``Bush Beats Johnson,'' comparing the Presidents. It points
out that President George W. Bush has expanded Federal
nonentitlement programs in his first term almost twice as fast
each year as Lyndon Johnson did during his entire presidency.
So already President Bush is beating Johnson two to one and he
still has most of his second term to go, so it could be a four
to one margin.
The one area in which President Bush is not exceeding
Johnson's spending levels is in entitlement spending. But of
course the new Medicare drug bill has not kicked in yet and it
will start kicking in on January 1. As Senate Budget Committee
Chairman Judd Gregg says, that bill is $43 billion over budget
and it has not even started yet. Not a good omen.
That is at the macro level. At the micro level more and
more of my constituents are sensitive to earmarking projects in
the Federal highway bill recently passed. There is an
interesting article in today's Roll Call newspaper that looks
at the last 50 years of highway bills and it says this: ``over
the past 50 years there have been 9,242 earmarks in highway
bills. Of these, 8,504, or 92 percent, have been inserted in
the three highway bills enacted since Republicans took the
House 10 years ago, 92 percent of all earmarks in the last half
century just in the period in which our Republican friends took
over the House of Representatives.
Now, there are some very worthy efforts going on across the
aisle. The Republican Study Committee (RSC) has Operation
Offset. We appreciate that. But for folks back home it is
results that count. I am going to be appearing with Senator
McCain tomorrow in an effort that I think was pioneered by Mr.
Flake on your side of the aisle to delay the Medicare drug bill
for at least 1 year in the hopes that at least some of it could
be paid for.
I believe in Mr. Flake's estimate that alone would save
about $40 billion, and since it is so hard to get a handle on
the cost of these entitlement programs and, as I said,
according to Senator Gregg that program is already $43 billion
over budget when it has not even started yet, that would seem
like a good area to begin looking for real savings. Because we
all know that no matter how much you get highway earmarks cut
or trimmed that is small potatoes in comparison to the numbers
we are facing with Katrina or Iraq or other out of control
areas of Federal spending.
So I thought it might be useful for the committee members
and the public at large to look at some of these things. I
think the average member of the Rotary Club back home would be
startled to think that George W. Bush was twice as liberal as
Lyndon Baines Johnson at least in terms of domestic
discretionary spending, maybe twice as liberal in terms of
entitlement spending. That is a hard thing for a lot of folks
to grasp. At least if the Cato Institute is right and they seem
to have a pretty sound analysis here, that is the way things
are heading.
So to me it is not just a question of whether Harriet Miers
is a conservative or not. It is becoming a question of whether
this President is a conservative or not. Because, as you know,
he is the first President since James Garfield in 1881 never to
have vetoed a bill. He is the first President since John Quincy
Adams to serve full terms never to have vetoed a bill. He is
the first President since Richard Nixon to never have rescinded
any spending. President Reagan rescinded 600-plus items.
President Clinton rescinded over 163 items. But this President
has rescinded zero items even though there are three
congressional districts in the highway bill that got about $2
billion in combined total. One congressional district alone got
$760 million in the highway bill. That is a Congress that is
spendthrift and out of control. I thank the Chair. I see that
my time has expired.
Chairman Nussle. Mr. Putnam.
Mr. Putnam. Mr. Chairman, I am sure it will be of great
comfort to people of the gulf coast to have the tutorial on
presidential veto history, but let me ask you a question, Mr.
Director. At the macroeconomic level in your report you touched
on the inflation effects and the employment effects of
reconstruction. But what you did not touch on and I am curious,
because anecdotally we are hearing an awful lot at home about
inflationary and employment pressures, as we see what was
already a shortage of building supplies in the country, with
steadily increasing prices as a result of the fact that they
are petrochemical in nature, asphalt, shingles, things of that
sort, and increased international demand; in other words, all
the cement and copper and rebar going to China.
Will this huge influx of construction needs in the gulf
coast region put substantial inflationary pressures on the rest
of the housing market, which has created I think half of our
GDP growth in the last year, and what effect will it have on
labor markets as skilled labor sees an opportunity and flocks
to the gulf coast to be a part of the rebuilding efforts?
Mr. Holtz-Eakin. The analysis is directly on the mark. We
focused in our report on the broadest macroeconomic impacts,
overall levels of consumer prices, overall levels of economic
activity, touching only lightly on particular sectors. I do
think we noted, at least I hope we have in this and in
particular what we have in others, that the rebuilding effort
will place particular pressures on the construction industry. I
think the dynamics you described were exactly on the mark. One
would expect the resources used intensively to become more
valuable. You will see some pressure on prices there and you
will see the skilled construction workers being in demand. I
think that is exactly right, and it will in fact influence the
pace of the reconstruction in the gulf area and it will
influence building elsewhere.
Mr. Putnam. Your report specifically says that by early
next year the pace of reconstruction will probably cause the
net effect of the hurricanes on jobs nationwide to be minimal.
And the effects on inflation, you said higher prices for
construction materials and higher energy prices through
transportation costs will tend to temporarily increase growth
in the prices of non-energy related goods as well as airline,
bus, and rail, et cetera. You mention it but you make it sound
like it is really not going to be that noticeable. And as
somebody who had to wait 10 months to get a new roof after last
year's hurricanes in Florida because of a shortage of materials
and because these roofers have literally a 1-year waiting
list--they have not caught up in Florida yet, and this is an
exponentially larger event than what we had in Florida a year
ago. Again, I am not taking issue with your numbers, but I have
to believe it is more than a minimal or a temporary increase. I
am curious to dig a little deeper with you on that.
Mr. Holtz-Eakin. Sure. I think that you have said more
clearly than we have the essence of the fact that these are bad
for the economy. People's roofs are gone. The fact that there
is money to be made putting them back on does not disguise the
fact that people are worse off, and waiting 10 months for a
roof is a bad thing. The essence of the numbers in the report
is on average, across all States, across all industries, those
doing better, those doing worse, what would be the national
economic impacts and they are noticeable certainly in the next
quarter or so, thereafter averaging out to be back to where we
might have been otherwise and maybe a bit above. That does not
disguise the fact that in some cases people will be
demonstrably worse off, and there will be some long-term
unemployment in the gulf coast from this. That will be an
example. There will be people with long waits to get their work
done. That is also true.
To the extent that we have underestimated that mix, that is
one of the risks in what we have done. I would acknowledge at
the outset that the balance of how quickly some of this
rebuilding gets done versus some of the other adverse effects
is a key part of the risks.
Mr. Putnam. Well, I agree that there is risk built into all
of these models, but I am substantially more pessimistic than
your report. I think we have already seen shortages of
agricultural labor in California because of the movement of
labor to the gulf coast regions who see opportunities
inconstruction jobs. As I sit next to my friend from
Mississippi, and I do not want to make it sound like I whine
about waiting 10 months for a roof when these people do not
even have a house, so you are faced with not one specialty in
construction but entire new construction. With the inflationary
pressures that means insurance dollars are not going to go as
far. It means that everyone is going to see an increase in the
price of goods, even housing markets in the Northeast or far
West. And knowing what role housing has played in GDP growth, I
think that is a real problem, but I appreciate your efforts.
Chairman Nussle. Mr. Case.
Mr. Case. Thank you, Mr. Chairman. Sir, what has amazed me
just listening to the discussion from a fiscal stewardship
perspective with respect to Katrina and Rita as we have sat
through the last couple of years watching, I think, the worst
and I guess, more importantly, the most avoidable deterioration
in our Federal fiscal condition, maybe in our history, we were
not going through a world war. We were not going through a
classic depression. We were going through some difficulties but
not anything that amounted to the kind of deterioration in our
kind of fiscal situation that happened in some of those other
situations, and we went through a series of tax reductions
which starved revenue, which did not generate the projected
dynamic impact. We went through, as my colleague Mr. Cooper has
stated, one of the fastest accelerations in domestic spending
in recent history. We went through the difficult fiscal
conditions of Iraq and Afghanistan, and it took us somehow
Katrina and Rita to approach a serious discussion of the
budget. That is amazing to me, and that is a prelude to my
question.
Is there any fundamental difference between the budget
balancing involved with Katrina and Rita versus the budget
balancing that should have been involved with any of the other
conditions that I have talked about over the last 4 years,
whether it be Iraq, Afghanistan, whether it be an economy that
did not come back faster than projected, whether it be the
budgetary impacts of tax cuts? Is there anything fundamentally
different going on here or did we just reach some point here
when there seemed to be a critical mass of enough is enough?
Are we in some different budgetary situation now just because
of Katrina and Rita?
Mr. Holtz-Eakin. There are things which are different and
there are things that are the same. As I said to this committee
before, I think if one looks backward from the vantage point of
2003 or 2004, whatever you pick as the right date, look back at
the big swing in the budget from about 3 percent GDP surplus to
a 3-percent GDP deficit, a 6-percentage point swing, dramatic
in its economics, it is hard to make the case that this was
economically damaging. I know there is the policy fight about
whether it is the right composition. But at a time when the
world economy was weak and there were a whole variety of
domestic shocks from Sarbanes-Oxley to 9/11, you can go through
the list, I think the broad consensus is that swing did not
damage the economy. It may have supported it at a time when
there was not a lot of spending from other sources.
That said, what is different now is that we are looking
forward in a situation where we have a strong economy both in a
cyclical sense, the impacts of the hurricanes notwithstanding
in our view, and over the long term certainly, so that the
budget is now being driven by policy decisions, and in that
case I do think one thinks about it differently, the sustained
large mismatch between spending and given the scale over
decades, potentially worse. So that is different.
What is the same is if you are looking forward and you are
looking at spending outside of the normal process for Iraq,
Afghanistan, Katrina, and Rita, no, they are not different. The
policy tradeoffs are required. The same economic issues are in
play and they are balanced.
Mr. Case. From a perspective of the offsets of our
colleagues in the RSC, my understanding at least, is just
another form of the PAYGO debate limited to the spending side.
Would that be a fair characterization? We have had this debate
over PAYGO for a long time now. I have not heard a whole bunch
of disagreement with PAYGO as a principle. Where the
disagreement is, is what is on the table when you talk PAYGO.
The interpretation I have of the offset proposals is it is a
spending only PAYGO. If you have got to increase spending
because of Katrina and Rita, not because of Iraq and
Afghanistan, not because of anything else, we are going to
focus on Katrina and Rita, then we are going to offset that by
spending in other areas. That is just another form of PAYGO.
Would you agree with that?
Mr. Holtz-Eakin. I will be honest I have not read the
particular document that lots of people talk about, so I will
not characterize it. That notion of a PAYGO rule is one of the
principles I have heard people talk about without labeling it
that way, to have a net zero impact on the deficit.
Mr. Case. Again getting back to the question of the cost of
Katrina and Rita, I accept and understand your answer that you
cannot project certain things. You cannot project what Congress
is going to do. You cannot project how much of the insurance
proceeds are actually going to be paid. You cannot project how
much Congress will choose to make up. But there are things that
can be projected with the costs of Katrina and Rita. For
example, you made projections about the impact on the economy.
When you talk about the impact on the economy, you are talking
about impact on Federal tax revenues given the current tax
scheme. Have you calculated out the impacts that can be
reasonably predicted within a range of assumptions on Federal
tax revenue losses? I assume it is not just if any. There are
going to be Federal tax revenue losses on the cost of funding
outright Federal obligations which are in existence today. For
example, the chart you had up there on FEMA obligations that
are not dependent necessarily upon direct additional Federal
appropriations, on increased calls from State and local
governments for assistance with Medicaid and TANF and just
right down the list. Has there been any projection on the costs
that assume we met those obligations, we would in fact have a
dollar amount that we could affix to it?
Mr. Holtz-Eakin. Yes, in some fairly incomplete ways.
Certainly the impacts of the hurricanes on the economy have
feedbacks to the budget. So for example, our guess is growth
lower by a half a percentage point in the second half of this
year. That has revenue consequences that look to be something
on the order of $5 billion. Not a dramatic impact in a $2.6
trillion budget, but it will have something to that effect. The
damages also effect the ability to remit taxes so there has
been some waivers and some money that would have come in this
year that come in next year. There will be some things like
that on both the tax side and on the spending side. Those turn
out to be small compared to the other moneys that are at stake
in the budget.
Medicaid would be $1 to $2 billion, say, for the 700,000
people that appear to be affected. The direct appropriations to
the FEMA Disaster Relief Fund are $60 billion, $30 billion of
spending next year. Those are the magnitudes involved.
Mr. Case. So just a final question, Mr. Chairman. If we
talk about the range that has been tossed out there, whether it
is accurate or not, of $100 to $200 billion total cost, would I
be correct in saying that most of those moneys would be the
result of direct actions by Congress over and above the
consequential loss of revenues and the vast majority is the
decisions that we are going to make, affirmative decisions we
are going to make in terms of funding Katrina and Rita relief?
Mr. Holtz-Eakin. Yes, those will dominate the budgetary
impacts and play out over a number of years.
Mr. Case. Thank you.
Chairman Nussle. Mr. Wicker.
Mr. Wicker. Thank you, Mr. Chairman. It is always good to
see the chairman allowing a little leeway in time to the
questioner right before me. I have a question but I cannot
resist responding to a couple of the things my friends across
the aisle have said. I disagree that the tax cuts have starved
the Treasury and have not had a positive effect on economy and
on revenue, and I think that the chairman mentioned that when
the chairman mentioned revenue had actually increased and that
he was touting that fact at the last hearing we had. Indeed, I
think tax cuts are responsible in large measure for that.
My friend from Tennessee, Mr. Cooper, has had to leave the
room. I will simply respond to what he had to say about the
prescription drug benefit. I am almost certain the Democratic
alternative to the Republican plan that was actually enacted
was much more expensive than the law which we actually have in
place. Similarly, I am impressed that there seems to be a
willingness on the part of my colleague and friend to adopt
some of the cuts that might be suggested by the very
conservative Cato Institute. I would only hope that my friend
from Tennessee can bring a few Democratic votes along.
Finally, with regard to the idea of delaying for 1 year the
implementation of the full rollout of the prescription drug
benefit, I will congratulate Mr. Cooper on that and say that if
he can get up a substantial number of Democratic votes for that
idea I would be happy to join him on the floor and call the
question. I would suspect that any delay in the prescription
drug benefit would have to be done almost entirely by
Republicans, and upon doing that this seemingly deficient
prescription drug benefit that we have passed would start
sounding better and better since it would have been Republican
votes that would have postponed it.
Nevertheless, I look forward to working with the gentleman.
But my question is about homeowners and business insurance,
Dr. Holtz-Eakin, and the very, very real problem that we have
on the gulf coast with property owners who had no flood
insurance, who did not think they needed flood insurance
because they were not in a flood plain. Many of them had their
property mortgaged. Many mortgagees did not require flood
insurance of these individuals. Many of them had hazard
insurance. As a matter of fact, many of these property owners
had all of the coverage that a reasonably prudent person
relying on Federal FEMA maps could have been expected to have
under the circumstances, and yet they find that they are not
covered because the damage is deemed to be flood coverage. In
many cases that is subject to litigation but we know that in
many cases that will be the case, Dr. Holtz-Eakin.
Now, there is legislation that has been sponsored by some
members of this committee entitled the Hurricane Katrina and
Hurricane Rita Flood Insurance Buy-In Act. Are you familiar at
all with that, Dr. Holtz-Eakin?
Mr. Holtz-Eakin. I am not familiar with the specifics of
it.
Mr. Wicker. Let me tell you a little bit about the
specifics. It would allow property owners affected by
Hurricanes Katrina and Rita who did not live in places
designated on the maps as flood plains but who did not have
flood insurance, and who were then destroyed by water, to
purchase coverage under the National Flood Insurance Program
retroactively through the use of a buy-in. The property owner
would be required to pay the equivalent of the national flood
insurance premiums for 10 years with a 5 percent penalty,
premiums to be set at a rate equal to the prevailing premium
charged in the area. I can get you the details of that, but I
think you get the gist of it.
What would be the implications for the Flood Insurance
Program if the Congress were required to pay for losses
incurred by people who did not have flood insurance?
On the other hand, what are the implications for the
economy if these property owners are not in some way made whole
for their losses? After all, they through no fault of their own
relied on the Federal maps, had all the insurance that anyone
could have been expected to have. What are the implications on
the economy in general, on the banking and credit union
industry, on property tax collections if we are not able to
build those homes and businesses back, and what experience do
we have based on other hurricanes that could be of benefit to
us in trying to formulate some sort of fiscally responsible but
fair and compassionate response to this terrible situation?
Mr. Holtz-Eakin. Well, that is a good and very difficult
question which I think probably we owe you a very careful
answer for the record. Let me sketch briefly some of the issues
that arise that we could flush out if you would like. The first
is of course you ask what would be the consequences, and there
would be budgetary consequences. I cannot do those in my head.
We could try to work through that.
The second would be the implications on an ongoing basis
for an insurance program when people are allowed to buy
insurance after the fact. That is not a particularly great set
of incentives from an insurance point of view. That would have
detrimental impacts on overall functioning of an insurance
program. We could work through the details of that.
Third is to recognize that insurance is not the only
financial flow that can be used to allow people to recover from
the loss of their home. There is self insurance which is
saving; there is debt insurance; they can go borrow; and there
are government loans. The Small Business Administration (SBA)
provides loans to individuals as well as businesses. Those
loans are subsidized by the taxpayers. And as usual when there
are many policy instruments available, it is a mistake to rely
on one, in this case flood insurance, to solve all problems.
If this is an area where you would like a more detailed and
careful answer we would be happy to work with you.
Mr. Wicker. Yes, as a matter of fact, I would appreciate
that. I would simply say to you and members of the committee
that I have my questions about the legislation that I mentioned
to you, although it may be an approach that I might take a look
at later on. But I am working with insurance, business, and
governmental experts in my home State of Mississippi and in
other locations to try to devise some sort of recourse for
these property owners who are in my opinion blameless in terms
of getting all the insurance that they could possibly get which
they could reasonably be expected to get, and yet are just
found in a devastating position having lost basically almost
their entire nest egg.
So I would appreciate a comprehensive answer on the record
and I will be happy to provide staff with your staff to work on
this.
Mr. Holtz-Eakin. Thank you very much.
[The information referred to follows:]
CBO Response to Congressman Wicker for the Record
We can only guess at the Federal cost of the buy-in program. The
amount of flood damage by hurricanes Katrina and Rita to structures
that both lie outside FEMA's 100-year flood plains and were not covered
by flood insurance is not known with any precision. A recent estimate
of the total damage to the housing stock in Louisiana, Mississippi, and
Alabama, both inside and outside of the 100-year flood plains, is more
than $40 billion, with $17 billion of that damaged uninsured. Assuming
that all of the uninsured loss was due to flooding and that the large
majority was to homes outside the 100-year flood plains (because such
homes greatly outnumber those in the flood plains and are less likely
to have carried flood insurance), further assuming that the required
payments (equivalent to 10 years of insurance premiums, scaled up by 5
percent) would total less than $1 billion, and making some allowance
for non-residential structures (which account for roughly 10 percent of
flood coverage in force), the net cost of the buy-in proposal to the
Federal budget would be in the range of $10 billion to $15 billion.
As noted in the testimony, the buy-in proposal would undermine the
flood insurance program. It would encourage at least some current and
potential policy-holders to forego flood coverage, on the expectation
that the government would provide a similar buy-in opportunity in the
event their homes or businesses were flooded in the future. That
encouragement would be strongest for property owners outside the 100-
year flood plains, who currently account for 30 percent of flood
policies. However, those inside a flood plain also might forego
coverage; some of them might simply be unaware that the program applies
only to structures outside the flood plains, while others might
anticipate that the eligibility requirements would be loosened in the
future. Once the precedent for a post-event buy-in is established, one
could argue for extending it on the grounds that the set of property
owners who were not required to have flood insurance includes not just
those outside the flood plains, but also those inside the flood plains
who do not have federally-regulated or federally-backed mortgages. From
there, one could argue further that it would be unjust to allow some
neighbors to buy in after a disaster but exclude others simply because
they had certain types of mortgages.
The buy-in proposal also would undermine market incentives for an
efficient allocation of resources. In this case, efficiency requires
that property owners fully recognize and be expected to pay an
actuarially fair price for the risks they assume. But if people expect
another buy-in proposal or a similar program that indemnifies property
owners after a future flood, they will be more likely to continue
living in flood-prone areas and to undertake fewer mitigation projects
to reduce potential flood losses. Consequently, the proposal would
encourage excessive (relative to the assumed risks) development in
flood-prone areas along the Gulf Coast and nationwide and discourage
worthwhile mitigation efforts, both of which would raise the damages
and hence costs of future floods.
In the absence of any additional Federal aid for building repair
and reconstruction, the $17 billion of uninsured losses would be borne
by property owners, lenders who hold the mortgages on those properties
directly, investors who hold the mortgages indirectly in mortgage-
backed securities, government entities that guarantee mortgage loans or
mortgage-backed securities (FHA, VA, and Ginnie Mae), and taxpayers
through existing aid programs. The share of the losses experienced by
each group depends on a number of as yet unknown factors, such as the
amount of homeowner equity in the affected properties; the amount of
mortgages sold in secondary mortgage markets and not retained by
lenders; and the number of homeowners who will file for bankruptcy as a
result of their losses. The effects could be acute for some individual
homeowners and their families, particularly those who had a substantial
amount of equity in their homes. The effects of mortgage defaults on
those properties are not likely to be significant for FDIC-insured
institutions in the area because, taken together, they have enough
capital to cover the losses, although some individual lenders may
experience some difficulties. (The effects are negligible at the
national level given that the amount of home mortgage loans owed by
households nation-wide is almost $8 trillion.) Fannie Mae believes that
their share of the losses from Katrina and Rita will be between $250
million and $550 million, while Freddie Mac expects between $150
million and $300 million in losses.
As discussed in the testimony, the loss in the value of the housing
stock would greatly reduce property tax revenues in the most heavily
affected communities. To the extent that those communities remain
viable places to live and work, that effect would diminish over time as
new capital flows in to take advantage of attractive investment
opportunities and the local population stabilizes and rebounds.
Chairman Nussle. Thank you. Ms. Capps.
Mrs. Capps. Thank you, Mr. Chairman. And Director Holtz-
Eakin, thank you for spending time with us this afternoon on
this topic. After the hurricanes, and interestingly following
the last discussion, many of my colleagues are focusing now on
our record high deficit. That is on target for me even though
in fact in the long run Katrina's recovery costs are not really
a huge factor in our deficits. But as Mr. Spratt has pointed
out, the deficit has been a major problem over a number of
years. And now we have many of my constituents, at least, who
are saying as they watch us appropriate, appropriately, $60-
plus billion for Katrina efforts, wait a minute. They are
saying, look at the war costs. Now it is Katrina. And our
deficit. What gives?
So President Bush rushes to ask Congress to balance
additional hurricane relief and reconstruction spending with
substantial cuts to both discretionary and nondiscretionary
programs, and ironically those cuts we would be making are to
the very programs needed by the victims, many of them.
As we all know, Hurricane Katrina has created a health-care
crisis for almost all of its victims, capacity crisis for many
health-care providers, and serious fiscal problems both for the
States directly affected and those hosting large numbers of
displaced people. I believe that Medicaid is the appropriate
vehicle to provide essential health-care services to low income
Katrina survivors over the next month.
My question to you is what is your estimate, Mr. Holtz-
Eakin, of how many people are now newly eligible for Medicaid
given their change in circumstances post Katrina? That is, now
will we see large numbers and can you help us with what the
number might be, under current eligibility rules, because of
their loss of income or other change of status?
Mr. Holtz-Eakin. I can check and get the exact number. I
think the ballpark is about 700,000.
Mrs. Capps. About 700,000 new individual enrollees under
the current regulations for Medicaid.
Another question, as you know, Senators Grassley and Baucus
have proposed legislation to provide immediate access to
Medicaid for displaced individuals. That would be an
appropriate response on the minds of many people that we would
want to make it easier and faster for people to get relief in
enrollment. And they also are wanting to shift some of the
burden to the Federal Government. So far the leadership in the
House has not wished to see this legislation brought up here,
but I am wanting to know because it is certainly gaining
interest by the public. Allowing this in many of our States,
how many additional low income Katrina survivors would enroll
in Medicaid under the Grassley-Baucus legislation?
Mr. Holtz-Eakin. I actually do not know the number of
enrollees, but we would be happy to get that back to you.
Mrs. Capps. But it would clearly be more than the 700,000
that you indicate?
Mr. Holtz-Eakin. I know that the dollars involved in the
net effect of that legislation are much larger than the ongoing
cost of new enrollees under current law. Details beyond that I
will be happy to get back to you.
Mrs. Capps. It seems to me with the hundreds of thousands
of people now newly in need through no fault of their own, it
is quite a strange time that we would be considering cutting a
program like Medicaid, the very program which many of them,
some of whom are constituents of our colleagues here, would be
turning to in this time of need. I think that is the time this
safety net would need to be strengthened rather than
dismantled.
Now maybe in the time remaining, it is hard to pin these
issues down, but if we were to cut Medicaid by $10 billion,
which is the minimum proposed I believe, it was desired to be
more than that, but if we were to cut it by $10 billion over 10
years and then we added these additional enrollees, could you
describe that kind of scenario for us?
Mr. Holtz-Eakin. I probably will fail you again on that but
the staff has helped me with your question about the Grassley-
Baucus legislation. That legislation, in addition to the
baseline coverage, would bring 250,000 new enrollees into the
program.
Mrs. Capps. So we are getting all these new enrollees at a
time when we are expected, this committee has asked our
Congress, to cut at least $10 billion from Medicaid over 10
years. I just find that kind of amazing. Thank you.
Chairman Nussle. Mr. Chocola.
Mr. Chocola. Thank you, Mr. Chairman. Mr. Holtz-Eakin,
thank you for being here today. Mr. Chairman, I would like to
thank you for, as you stated, sticking your head out of the
foxhole and offering some constructive options to increase our
fiscal responsibility.
I would also like to thank you for making the statement
that it is time that we have a rainy day fund, to try to
preplan for emergencies. And Mr. Holtz-Eakin, I think you said
in your opening comments that families hopefully budget for
emergencies. I think I would like you to expand on this, your
thoughts on the Federal Government's prudence of budgeting for
emergencies in the annual budget process and the economic
impact that might have.
Mr. Holtz-Eakin. The Federal Government does minimal
amounts in the current budget process. There are some
appropriations to the FEMA disaster account each year, small in
nature. And my suggestion was that one could think of an
insurance premium as being the average cost of the kinds of
payouts that occur, and if one translated that to the Federal
budget one could put into the budget a number each year which
was typical of the cost over recent history, pick a horizon for
the cost of disasters as appropriately designed, and count on
the possibility that that would happen on average and have it
compete with other budget priorities. That would be one
approach to doing it.
What would happen as a result is that in some situations
the costs would come in below that. And in that case, absent
some other change in the budget, this would result in a net
national saving, and that would be available to the economy,
which is the ultimate resource out of which all of this would
be paid, and it would make the savings, annual accumulation a
bit larger.
In the years where the reverse happened, you would draw
down on that, but it would be a way to allow for policy trade-
offs between disaster and non-disaster spending and within
disasters at different points of time, and then also provide
the economy with the resources to ultimately come up with the
costs of those disasters.
Mr. Chocola. I take it you think it would be a prudent
thing for us to do.
Mr. Holtz-Eakin. It strikes me as a sensible way to go
forward.
Mr. Chocola. In that same vein, I represent part of Elkhart
County, IN, which is the manufactured housing capital of the
country. There has been a lot of talk about temporary housing
needs, FEMA-related spending. And I do not know if this is in
your jurisdiction, but the concept of having contingency
contracts, using temporary housing as an example, in place
prior to disasters, whether it be temporary housing or some
other item that we know we are going to need to respond in an
efficient and effective manner in emergencies. Would that be a
prudent thing to do as well as have contingency contracts in
place that we could act upon by having the logistics, the
pricing and everything ready to go when we need it?
Mr. Holtz-Eakin. That is quite frankly beyond my area of
expertise. It is one of those issues that is on the list of
using the dollars effectively. Putting the dollars in place is
only the first step. Using them effectively in the sense of
providing the basic needs quickly and providing them in a cost
efficient fashion, those are important issues, and it is where
the oversight of the Congress I think is central. But it is not
a place where I can give you particular insight into that
aspect to it.
Mr. Chocola. Could you maybe give us a little bit of
historical perspective as to the governmental role and the
private sector role? You were talking about replacement
investment in the first slide you showed us. Is that private
sector investment or is that a combination of private and
public?
Mr. Holtz-Eakin. It would be both. The large Government
spending that is likely to take place will be the big
infrastructure projects, highways and buildings, of those
things, and those largely will happen later. So the bulk of
this and those which will happen quickest will be rebuilding in
the housing sector. Home building, commercial structures being
repaired or rebuilt, replacing the equipment damaged within a
business, that is going to be the key especially quickly.
Mr. Chocola. Is there a way to characterize in 30 seconds
or less kind of who does what, what you would expect based on a
historical basis the primary role of the private sector and
Government in this rebuilding effort?
Mr. Holtz-Eakin. It is the case that there are different
roles for writing the checks. Ultimately there is typically the
hiring of the private sector to execute the projects. In terms
of writing checks on the bulk of this, the damage will be in
the private sector and the bulk of it will in fact take place
in the private sector.
Chairman Nussle. Mr. Davis.
Mr. Davis. Thank you, Mr. Chairman. Mr. Holtz-Eakin, I
apologize for being here and prolonging you for few more
minutes. I will try not to take the full 5 minutes.
The only person I think that has testified before this
committee more than you in the last several years is Chairman
Greenspan. And one of the constant points that he makes when he
talks with us about fiscal responsibility is the need to couple
cuts in discretionary spending with changes in the revenue
side, better known as tax increases. And I think he said
several times before this committee that he thinks any kind of
a real strategy of addressing the deficit long term has to
include the revenue side. Is Chairman Greenspan wrong?
Mr. Holtz-Eakin. I cannot imagine a question I am more
afraid of. If the Chairman is wrong, A, I would not know. And
B, we might say things differently but I think the
straightforward public finance question is what programs will
the Government have and how large will they be and over the
long term then put in place a revenue system to finance them.
Mr. Davis. The reason I ask that is not to get a
theoretical answer. The debate the committee is obviously
having, we have a portion of the committee that has the mindset
that we absolutely cannot touch any of the President's tax
cuts. There is a portion of the committee that I think almost
has the belief that you somehow violate his theological
doctrine if you do that, that the tax cuts have to be kept in
place, are presumed to preserve the health of the economy.
That interestingly does not seem to be the opinion of the
person who is usually regarded as the principal expert on
macroeconomics in this country right now. So I want to give you
a chance to react to that.
Let me ask you a related question. In the early 1990s
President Clinton and Congress raised the marginal tax rates
and there was a lot of concern that that would damage the
economy, that it would move us into a recession. In fact, Mr.
Gingrich predicted that. Do you have any reason to think that
the structural health of the economy today is somehow less than
it was in 1992?
Mr. Holtz-Eakin. The structural health of the economy is
ultimately measured by the rate of productivity growth.
Mr. Davis. Is it less than it was in 1992?
Mr. Holtz-Eakin. It is in fact faster than it was in 1992.
Mr. Davis. So therefore a better position to resist any
change in the marginal rates?
Mr. Holtz-Eakin. It is the result of not just market rates
but all aspects of policy making. It has certainly been growing
robustly since 1995 and has survived the most recent downturn.
Mr. Davis. And my response to that is that I suspect you
are right. And I think that is something this committee should
be thankful for. If it is our mindset that we are going to have
deficit reduction strategy, then I think it has to include the
revenue side as well. The only reason to not do that in my
opinion would be if we felt that it would somehow do violence
to the economy. Again, some of us in this town still believe
that evidence is every now and then relevant to the argument.
So if we believe the economy is structurally stronger today
than it was in 1992, in fact, in your phrase, if it is
considerably structurally stronger, that suggests to me that we
are even better positioned to absorb a marginal change.
The other point I would make is probably consistent with
what Ms. Capps said. On one hand there is this notion that it
is courageous somehow to have a 2 percent discretionary
spending cut and that we are somehow asking everyone to share
equally in the sacrifice. That strikes me frankly as a very
curious proposition. Because if we performed a 2 percent
discretionary cut not only would it damage the Medicaid program
that Ms. Capps talked about, it would also damage the section 8
program that is being stretched even further because of
Katrina. It would also damage the Head Start program and a
variety of things that some of us think are still important to
a class of underprivileged people in this country. I am having
a hard time grasping the equity of imposing cuts on people in
groups least positioned to bear those cuts.
In my final 40 seconds I would simply make the observation
and ask you to takes it to the administration. I do not think
it is the tough minded, principled, responsible thing for
Congress to hide behind a veil of let us just cut everything
across the board. I think we ought to be straightforward and
make choices. I think we ought to say to the American people
that we think that program is more important than that program.
Those decisions ought to happen, sir, by doing it in a blunt
draconian way.
And the final point I would make as it relates to equity, I
think it is very hard to say to many of the people in this
country that you are going to share in the burden of sacrifice,
the people on Medicaid, the people on section 8, the people on
Head Start, but we are not going to in any way allow people who
have received the tax cuts to share in that burden. I think
there is something fundamentally wrong with that, and I think
it violates every notion of equity that I know.
Mr. Wicker [presiding]. Mr. Simpson.
Mr. Simpson. Thank you, Mr. Chairman. Let me ask you first,
you mentioned in your testimony that the allocation for the
funds for Hurricane Katrina could be used for Hurricane Rita.
Is that across the board of the $62.5 billion that we have
appropriated?
Mr. Holtz-Eakin. No, but the bulk, $60 billion, were
appropriations to FEMA. It is in the Disaster Relief Fund and
it is available for the use of Katrina as well as Rita.
Mr. Simpson. The Army Corps of Engineers told me they did
not have the ability to transfer some of their funds over to
use in Rita.
Mr. Holtz-Eakin. That is correct. There are small pieces of
appropriation as well for the Army Corps and for Department of
Defense (DOD). There is less flexibility with those.
Mr. Simpson. I happen to agree with Mr. Davis on one thing
and that is that I do not like across the board reductions in
spending. I think we should go in and make decisions. If we
were to propose to the Appropriations Committee the various
allocations for the Appropriations Committee that they had to
go in and reduce them by 2 percent, I think the Committee on
Appropriations could do that and make some priorities, and some
programs might be cut more than 2 percent and some might be
less than 2 percent, but we would be making decisions based on
the program and the need; and as you said when you are looking
at these things about how you are going to affect the future,
rather than just looking at a 2 percent across the board
reduction--and I could support some reductions in spending, but
if you look at it, if we spend $62 billion already on these
hurricanes, and our total discretionary spending is somewhere
in the neighborhood of $880 billion. So if we tried to offset
this whole thing through spending reductions, and you took in
all the discretionary spending, you are talking about a 7, 7.2
percent of your total discretionary spending.
If you limit it to just non-defense, non-homeland security,
you are talking upwards of 15 percent of your discretionary
spending, if you try to reduce spending that much to offset it.
Obviously, we are not going to do that. Unless we get into the
mandatory spending programs, how are we going to balance this
budget or get it back on track? And some people have suggested,
as I think Ms. Capps was suggesting, that we do not do
reconciliation. As you know, we are required to make some
savings in various mandatory programs in reconciliation. If we
do not do that, what will be the impact on the budget?
Mr. Holtz-Eakin. The budget resolution calls for
reconciliation savings of $35 billion over 5 years in the
mandatory programs. The mandatory programs are two-thirds of
Federal spending. And as a fraction of mandatory spending, that
is not a large number.
Mr. Simpson. If we talk about getting the numbers that Mr.
Spratt had up there about the budget in the future, if we talk
about getting that back in balance, we are necessarily talking
about addressing some of the mandatory programs, and the
further we put that off is that going to hurt our economy or
help our economy?
Mr. Holtz-Eakin. It is absolutely essential over the long
term to address the mandatory programs, Social Security,
Medicare, and Medicaid. Under current law with current spending
trends grow dramatically. They are over 50 percent of Federal
spending by 2015, and they become larger thereafter. And so it
is, as a matter of arithmetic, unmistakable that this is the
place that must be addressed in thinking about the long-term
structure of the Federal budget. In the absence of changing any
of those spending programs, the U.S. budget would grow
increasingly out of balance.
It would not in, I think, anyone's view be sensible or
feasible to continue to borrow ever increasing fractions of our
national income on international markets. The cost will go up
or simply become impossible to acquire. So that means that you
will either suffer some sort of mechanical debt crisis or you
will raise taxes to levels that are much, much higher than they
are today. That is the auto-pilot view of the fiscal future.
Mr. Simpson. One other thing that I wanted to mention.
Everybody here has mentioned how their constituents are
concerned about the budget deficit, just like mine are and I
think just like all Americans are. But I can tell you one thing
they have talked to me about more than anything, and I think
this is a policy question that is probably not in your purview
and you probably do not want to respond to it. But people are
concerned more about how we are going to spend this $63 billion
or the potential for $100 billion or $150 billion in this
hurricane related area, particularly New Orleans and stuff. If
we are going to rebuild this in the same area that is so
susceptible to damage in the future or if we are going to be
smarter in how we spend this, and that we are rushing out to
spend this money to help these hurricane victims before really
sitting down and thinking about what we will do in the future.
I appreciate the fact that in your report you put in some
language about things that we ought to be looking at maybe in
the future about mitigation and how we stop subsidizing the
cost of insurance in some of the areas, how we stop--I think
one of them was that the Federal tax law discourages private
provisions of disaster insurance by not allowing the
accumulation of reserves in advance of catastrophic events, and
so forth and so on. To me the disasters happen and we have to
take care of it, but I think it is almost as important, if not
more important, that we look at how we spend this money and how
it affects what we are going to do in the future in this area.
I appreciate that. Thank you very much.
Mr. Wicker. Mr. Jefferson, do you have questions? You
reappeared and surprised me.
Mr. Jefferson. I have lots of questions. Unfortunately I do
not have time to ask them all. I was here to hear the testimony
at the beginning of the hearing. But I had a Corps of Engineers
meeting about levies in my area so I had to step out for a
while. So I had to go take care of it.
I do not know how much Mr. Spratt had a chance to follow up
and it is very dangerous coming in not having had the benefit
of everyone else's question, trying to ask one. But he asked a
question starting out that I thought was very important in his
opening statement. It was about why we are, I know it is large,
I know it is a big ticket, but we are dealing with the issue of
paying for the Katrina disaster relief as against what we have
done with the other disasters.
You take them all together, I am confident that they
account for more money than we can ever contemplate spending in
the Katrina instance. Yet before we can talk about that amount,
we are trying to figure out how we can take it from some other
places. No one wants to spread the disaster around to other
people, particularly those who need help from the government
the most, which I think is the essence of what his remarks
were. I do not know how it got answered but why is it different
in this case? Why are we seeking offsets for the Katrina
disaster relief? And why is it different from the other cases?
And do not tell me it is larger than them. I know that. But to
take them all together, it is not larger than everything else
we have paid for around here.
Mr. Holtz-Eakin. I am sure I do not have a complete answer
to that, but from the perspective of they are independent of
the policy, No. 1, this is not different than other disasters.
One of the points of the testimony was to emphasize that while
the scale and physical spread of the destruction was quite
extraordinary, disasters do happen and in that respect this is
not different and one might want to think about regular
procedures that applied equally across all such occasions.
No. 2 was that at least what came up in the discussion was
the setting may be different as opposed to the event. And we
are starting from a position where the Federal budget is a
pressing concern. It is not going to improve as a matter of
economic growth. We are not going to grow our way out of the
mismatch between spending and receipts. So the policies will
have to come into play. This becomes a policy issue.
Mr. Jefferson. Yes. So if this has been true, as Mr. Spratt
also pointed out, perhaps he has got all of the answers on this
side.
There were already budget issues, have been budget issues
around this place for a good long time. And as we have tried to
deal with budget deficits and still deal with the Iraq
situation and other emergency expenditures, we have not
required payment for these offsets for these costs up front.
There have been budget crises here for a good number of years
now. So this is not a new circumstance. It may deepen it, but
it isn't new. I think that there has to be some consistency to
this policy, and we have got to have good reasons why it is not
happening if we are going to accept it.
Do you think it is good policy to pay for these--if we are
going to have to pay for these Katrina disaster relief--from
the must vulnerable of the population of this country, people
who we have already cut the Medicaid program tremendously in my
part of the world?
As you point out in your statement, Louisiana does not have
a tax base, at least the city of New Orleans doesn't have one
at all. Our school board doesn't have one. New Orleans is about
36 percent of the tax base of the State of Louisiana, so it is
suffering a great deal. And its citizens are spread out all
over the place, everywhere. And we are talking about Medicaid
cuts at a time when there are more people eligible for Medicaid
than ever before now, because of this disaster.
Is that a smart policy?
Mr. Holtz-Eakin. In the end, what becomes an appropriate
policy will lie in the hands of the Congress. The question is
whether the policy should be targeted uniquely on the costs
associated with Katrina or whether you want to spread them more
broadly to the issues facing the entire Federal budget.
The compositional issues will be a matter that are the
priorities of the Congress.
Mr. Jefferson. People like yourself who count and report on
the money and project about events that happen, you can project
here that if you do not take care of people who--not just have
the folks who used to be on Medicaid before, but a new
population of folks on Medicaid--you can calculate that if you
cut Medicaid more, with a growing population, that you are
going to have more people out there suffering.
And so my question isn't whether the policy you choose, or
whether if you are sitting trying to figure out what is the
best way to avert economic disasters from people around the
country--is it a good policy to avert economic disaster for
families that are going to be suffering from new circumstances
they were not suffering from before?
There are people out there now who have been eligible for
these programs and never would have been eligible ever in their
lives before. But they are now, and they will be for some time.
Mr. Holtz-Eakin. Indeed, part of the discussion that you
were unable to hear is that there are about 700,000 people who
will be newly eligible for Medicaid, for example, as it stands
under current law. The costs to the Federal Government of
providing Medicaid to those individuals will be a bit above $1
billion, between $1 and $2 billion. And there exists under
current law FEMA authority to provide housing and assistance,
up to $26,200 over 18 months, to individuals and families. So
that there are indeed current authorities and moneys to provide
some help to these families.
The question that will arise and which is at the heart of
your line of inquiry is whether that is sufficient. And that is
something that I think we will find as the months go forward.
Mr. Wicker [presiding]. Mr. Ryan from Wisconsin.
Mr. Ryan. I want to comment on the chairman's opening
statement which I have read a summary of, which I want to just
show strong support for his notion and his idea of amending the
budget resolution to come up with the savings from spending
control to pay for those large unforeseen expenditures. And
that is what we are going to be debating here.
First of all, we have heard some encouraging support for
this idea from the other side of the aisle. We heard some of it
right here for addressing this through spending control. But we
have heard probably a larger volume of ideas saying instead of
engaging in spending control, in accelerating the spending
control we have in the budget resolution, do not even engage in
the spending control that we have already in the budget
resolution, but undo tax cuts, or, more honestly, just raise
taxes.
Now, I wanted to ask you, Mr. Holtz-Eakin, about the tax
increases--or the tax cuts that we had in 2003. Do you have a
list or an estimate of what we thought the tax cuts would cost
when we passed them in 2003 versus the reality of the revenue
receipts that we have now seen since those tax cuts were
enacted?
Mr. Holtz-Eakin. We know that the Joint Committee estimated
at the time that over the roughly 2003 to 2008 window, this was
a budget impact of about $340 billion. And there has not been--
and it would not be analytically possible to go back and
disentangle from all of the other economic and budget impacts,
how much we can trace to that particular piece of legislation.
But, you know, we had an initial estimate. We have seen the
economy grow and have a strong cyclical recovery since. And we
lie in a position where indeed we have seen all of the cyclical
improvement, by and large, one could reasonably expect.
Mr. Ryan. The reason I ask this question is because some
are saying that the economy may be strong enough to absorb
another tax increase. I hope the economy is strong, but I
wouldn't want to risk that this economy could handle a tax
increase at a time when we are coming off of these disasters,
when we are experiencing a spike in energy prices, where we do
have some inflationary signs on the horizon that Mr. Greenspan
has pointed to, where we are going into a winter where we are
going to see large natural gas price increases, we see gasoline
price increases, home heating oil price increases, things that
are very tough shocks to our economy. I think the last thing
our economy needs right now is a tax increase.
I also serve on the Ways and Means Committee which wrote
that tax bill, and I have the 2003 Joint Committee on Taxation
release, which you used the Joint Tax estimates when you
incorporated the estimate of tax revenue effects of tax
policies.
The Joint Tax in 2003 when we passed that tax cut, it
estimated that the individual income tax rate cuts would cost
$46 billion this year. They also estimated that the corporate,
the business tax cuts that were enacted, would cost $32 billion
this year. Yet what we now find from reality is that over the
last quarter, individual income tax receipts are up 16 percent,
corporate income tax receipts are up 41 percent.
And so we are seeing that what we estimated then were going
to be huge revenue losers, big costers, have in fact been the
opposite. And that is largely because of the economic growth
that has occurred because of these tax changes. So when we
thought that reducing individual income tax rates would cost us
$46 billion in 2005, and reducing tax on capital and
corporations would cost us $32 billion, using the Joint Tax
spreadsheet in 2005, we have already seen just this year alone,
that in fact is not only not true, it is vastly untrue.
If you take a look at last year's numbers, they thought the
individual tax rates would cost us $88 billion. They thought
the corporate tax receipts would cost us over $50 billion. That
did not materialize. Revenues were up; income tax receipt
revenues, corporate tax receipt revenues.
So the point I am trying to make here is, I think what the
other side is arguing for is tax increases to raise revenue,
when in fact the tax increases they are calling for never cost
the revenue that we thought it would cost when we passed those
tax cuts back in 2003.
So I think it is important to look at reality, actual
performance, what actually happened to the Government through
receipts, what actually happened in the economy as we go
forward and make policy with respect to paying for Katrina.
The one thing we do know for certain is that if we do enact
an across-the-board 2 percent cut in discretionary spending, if
we increase--and it is less projectable--increase our mandatory
savings, we will save that money; and we can easily project 2
percent across the board will save us about $20 billion. Is
that not correct?
Mr. Holtz-Eakin. Yeah.
Mr. Ryan. So we know we can come up with the savings
through spending control.
People on the other side have said we have spent too much
money. I agree with that. That is where I think we ought to
place our emphasis, in making sure that we pay for this
disaster and not increase taxes because, No. 1, it is bad for
the economy; but, No. 2, it defies the logic, given the fact
that we have the reality in front of us, because these revenue
cuts, these tax cuts, have actually increased revenues. Thank
you.
Mr. Wicker. Dr. Holtz-Eakin, I just have a few more
questions I do not think will take long. On page 7 of your
prepared testimony, you say that Louisiana is expected to face
the most severe revenue problems from all of those affected by
the hurricanes.
Early information from Mississippi, Alabama, and Texas
indicates that the State general fund revenues may not suffer
significantly as a result of this storm. I really wonder what
you are basing that on and how you can say that, particularly
in light of the fact that you say the data from the State of
Louisiana have been hard to acquire.
The information that I received from the Governor's office,
after I read this testimony today, was that out of a projected
budget of $4 billion for my relatively small State of
Mississippi, revenue losses may amount to $400 million.
Now, later on in your testimony, you say that perhaps out
of projected revenue of $12 billion in Louisiana, the lost
revenues might be $1 billion to $3 billion. Well, if it is
nearer to the lower amount, then you would have to agree that
that would be about the same percentage of revenue lost as we
are expecting in Mississippi. Am I correct on that?
Mr. Holtz-Eakin. First, on the general issue of the quality
of these numbers, I want to emphasize that it was our hope to
identify the income losses in both the public sector and the
private sector, but to get some sense of this for the States as
well as the localities. But these numbers are extremely
difficult to pin down. And I won't pretend that they have any
undue precision.
In the case of Mississippi, we relied not exclusively, but
to some extent on the testimony of a State revenue officer in
front of the Mississippi legislature. And it was that testimony
that provided some official sanction to ballpark estimates.
Mr. Wicker. Do you recall the figure that he gave?
Mr. Holtz-Eakin. I believe it was a loss of less than 5
percent of Mississippi State revenues, something that one does
not want to pretend is nonexistent, and certainly given the
timing, introduces cash flow issues, but which in a sense of
trying to get a magnitude, we felt would be useful for people
to know. This is one area where we will learn a lot more as we
go forward. I would really emphasize that as opposed to what we
know now.
Mr. Wicker. Well, I would simply caution you on making a
statement such as that based on incomplete data irrespective of
the fact that you do base it on some testimony. I do expect it
to be larger than 5 percent revenue loss and will be delighted
if I am wrong on that.
The only other thing I want to ask about, Mr. Ryan from
Kansas asked about gasoline prices and about the oil and gas
industry.
Let me just ask on page 3 of your testimony you mentioned
platforms and pipelines being damaged, particularly one large
platform, the Mars facility, which on its own accounts for 10
percent of the gulf oil production and was damaged badly enough
to be out of service, early 2006.
In all of this, do you have any information about
environmental losses or damage as a result of damage to these
platforms or pipelines? Have there been any significant spills
that you have learned about because of this double lick that
oil and gas platforms have had in the Gulf of Mexico?
Mr. Holtz-Eakin. It has been a concern. It has been
expressed in a lot of circles. But we have no firm evidence on
that. And I know that it has been raised not just in the gulf
but also in various areas for rebuilding. We are looking
forward to finding out more as time goes on.
Mr. Wicker. If you have no information so far after 5
weeks, would it be fair to begin to feel that there in fact
have been no spills resulting from these two catastrophic
hurricanes in the Gulf of Mexico?
Mr. Holtz-Eakin. I would hesitate to draw these
conclusions. There are an enormous number of damages that we
know are likely to have occurred that we have not been able to
assess as a Nation. And certainly the CBO relies heavily on
other people's efforts to gather information.
Mr. Wicker. When you get anything on that, again I would
appreciate you getting it to me.
And lastly with regard to your statement that offshore
facilities may be able to resume operations in the next few
weeks. If they can, oil, natural gas production from the Gulf
of Mexico may average half its normal level for the rest of the
year.
And, of course, based--I guess it was based on that
information, in part, that you answered Mr. Ryan from Kansas'
question, about next year's gasoline prices coming back to a
pre-Katrina level. Am I correct that it is based on that fact
that you made such a guesstimate for us?
Mr. Holtz-Eakin. The gasoline prices are driven in part by
how fast crude oil production resumes in the gulf, but much
more heavily by the restoration of refinery capacity and full
functioning of the pipeline system.
Gulf production is 2 percent of the world crude oil market.
It is a world market. The particular blending of gasolines for
regions for air quality considerations means that there are
much tighter supplies of refinery capacity. That is the crucial
element in the pace at which gasoline prices might return to
pre-Katrina levels.
Mr. Wicker. And all of the data that you have obtained with
regard to gasoline availability and pricing, have you seen any
evidence of price gouging on the part of this industry?
Mr. Holtz-Eakin. It is not something that we have the data
to comment on in any meaningful way.
Mr. Wicker. Thank you very much. Mr. Jefferson.
Mr. Jefferson. I just have one or two. I hope we get the
numbers right for Louisiana and Mississippi. And so I do not
want to fuss about our problem being larger than yours. They
are big enough.
But I do want to ask a question about if we just consider
the economic effect of actions taken here, is there any
specific kind of spending in response to a disaster that has
more of an advantageous effect on the economy than another; for
example, for infrastructure, as a gauge to payments to
individuals?
And there is a lot of talk here still about making the tax
cuts permanent on dividends and capital gains. Will any of that
sort of extension help the hurricane survivors? Can you answer
that?
Mr. Holtz-Eakin. On the economic impacts of different kinds
of spending in the affected areas, infrastructure versus
payments to individuals for housing or Medicaid, health, things
like that, I think it is best to think of those as differences
in timing.
There are, you know--the provision of FEMA relief is
intended to provide for basic needs in the aftermath of such a
disaster. That has clear economic benefits where the goal of
any economic activity is to make people better off. So that is
the immediate needs. That is what that provides.
There is a different issue in providing a setting in which
the regional economic growth can recover these losses and
ultimately raise standards of living above where they were to
begin with. And the outlays for necessary infrastructure are
part of that. But that is an economic impact that is longer
term. So I do not think it is a competition so much at the
moment as in when those impacts might be seen.
Mr. Jefferson. The other question was whether making these
tax cuts permanent, particularly the dividend cut and the
capital gains cut, will that help the hurricane survivors in
this situation?
Mr. Holtz-Eakin. The second aspect to the economics of this
situation is the path of the national economy. And aggregate
tax policy of this type is really about what are appropriate
long-run incentives in the Tax Code for the aggregate economy.
To the extent that it helps the individuals who have been
harmed by these hurricanes, that will be through its aggregate
economic performance.
Mr. Jefferson. We talk a lot here about incentivizing, and
return of business and individuals to New Orleans--because I
represent New Orleans--to the gulf region.
What sorts of incentives do you think are most effective in
getting that sort of thing done, if you have had a chance to
think about that, both in terms of their effect and their
affordability?
Mr. Holtz-Eakin. I think that an important consideration
here is that there is a preexisting set of incentives that will
have powerful impacts and have proven to have powerful impacts
in the aftermath of past disasters.
They are the opportunities for individuals to make some
money rebuilding houses. They are the opportunities for firms
to supply those workers with the services they need to house
them. And there is an enormous amount of standard environmental
governmental policy that allows the private sector to function
and where private sector incentives take care of a lot of
things.
It may then be the case that particular additional policies
require Government help, and that may be the infrastructure
case. But I think those are the key things. Put in place the
infrastructure and the environment, and rely on the broad set
of incentives that are national economic policy.
Mr. Jefferson. Last thing. When you say rely on a broad set
of incentives, since this disaster is such a tough one, can we
rely on the normal incentives; or do we deepen them in these
cases to further incentivize the location of business?
I remember Manhattan after 9/11. People said no one is
going to go back there because they don't know if it is going
to be safe. Here, of course, that question is even larger,
because there is so much a broader effect and much broader
area. So are we thinking about deepening the incentives as
opposed to just relying on the ones that have been in place
before that, even if they worked before?
Mr. Holtz-Eakin. I think there will be an automatic
deepening of private sector incentives. The question is really
the degree to which it is effective to have targeted regional
incentives in the aftermath of an event like this.
There have been attempts of this sort after 9/11, attempts
in enterprise zones and various target policies within States.
I would say a fair reading of the literature is that those are
far from guaranteed for success, and certainly far from a
guarantee to be cost effective.
Mr. Jefferson. Thank you.
Mr. Wicker. Thank you, Dr. Holtz-Eakin. It has been a very
informative 2\1/2\ hours. This hearing is now adjourned.
[Whereupon, at 4:35 p.m., the committee was adjourned.]