[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
              THE PRESIDENT'S BUDGET FOR FISCAL YEAR 2001

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

            HEARING HELD IN WASHINGTON, DC, FEBRUARY 8, 2000

                               __________

                            Serial No. 106-7


           Printed for the use of the Committee on the Budget

                               __________

                      U.S. GOVERNMENT PRINTING OFFICE
62-424cc                      WASHINGTON : 2000



                        COMMITTEE ON THE BUDGET

                     JOHN R. KASICH, Ohio, Chairman
SAXBY CHAMBLISS, Georgia,            JOHN M. SPRATT, Jr., South 
  Speaker's Designee                     Carolina,
CHRISTOPHER SHAYS, Connecticut         Ranking Minority Member
WALLY HERGER, California             JIM McDERMOTT, Washington,
BOB FRANKS, New Jersey                 Leadership Designee
NICK SMITH, Michigan                 LYNN N. RIVERS, Michigan
JIM NUSSLE, Iowa                     BENNIE G. THOMPSON, Mississippi
PETER HOEKSTRA, Michigan             DAVID MINGE, Minnesota
GEORGE P. RADANOVICH, California     KEN BENTSEN, Texas
CHARLES F. BASS, New Hampshire       JIM DAVIS, Florida
GIL GUTKNECHT, Minnesota             ROBERT A. WEYGAND, Rhode Island
VAN HILLEARY, Tennessee              EVA M. CLAYTON, North Carolina
JOHN E. SUNUNU, New Hampshire        DAVID E. PRICE, North Carolina
JOSEPH PITTS, Pennsylvania           EDWARD J. MARKEY, Massachusetts
JOE KNOLLENBERG, Michigan            GERALD D. KLECZKA, Wisconsin
MAC THORNBERRY, Texas                BOB CLEMENT, Tennessee
JIM RYUN, Kansas                     JAMES P. MORAN, Virginia
MAC COLLINS, Georgia                 DARLENE HOOLEY, Oregon
ZACH WAMP, Tennessee                 KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                RUSH D. HOLT, New Jersey
ERNIE FLETCHER, Kentucky             JOSEPH M. HOEFFEL III, 
GARY MILLER, California                  Pennsylvania
PAUL RYAN, Wisconsin                 TAMMY BALDWIN, Wisconsin
PAT TOOMEY, Pennsylvania

                           Professional Staff

                    Wayne T. Struble, Staff Director
       Thomas S. Kahn, Minority Staff Director and Chief Counsel




                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 8, 2000.................     1
Statement of Hon. Jacob J. Lew, Director, Office of Management 
  and Budget.....................................................     8
Prepared statement of Director Lew...............................    11
Director Lew's response to:
    Congressman Pitts' question about acquisition reform.........    35
    Congressman Pitts' question referring to a GAO audit of the 
      Navy.......................................................    36
    Congressman Toomey's question concerning Kosovo expenditures.    60
Prepared statement of Congresswoman Hooley.......................    75


                       THE PRESIDENT'S BUDGET FOR
                            FISCAL YEAR 2001

                              ----------                              


                       TUESDAY, FEBRUARY 8, 2000

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:10 a.m. in room 
210, Cannon House Office Building, Hon. John R. Kasich 
(chairman of the committee) presiding.
    Members present: Representatives Kasich, Chambliss, Shays, 
Herger, Smith, Nussle, Hoekstra, Radanovich, Hilleary, Sununu, 
Pitts, Knollenberg, Thornberry, Collins, Green, Fletcher, Ryan 
of Wisconsin, Toomey, Spratt, Rivers, Thompson, Minge, Bentsen, 
Davis, Clayton, Price, Markey, Clement, Moran, Hooley, Lucas, 
Holt, Hoeffel, and Baldwin.
    Chairman Kasich. OK. I want to welcome Jack Lew to the--I 
haven't thought about this--first budget hearing of the new 
millennium, and I would observe that the Director is somebody 
who--I mean, not unlike the Staff Director on this committee, 
Wayne Struble, you know, labored for many years in the 
vineyard; and it is always good to see somebody who does the 
work ultimately appointed to the position of authority.
    So I want to congratulate you, Jack, for the fact that you 
hold this position, and I think it is great that you had an 
opportunity not just to do the background work, but now you 
have a chance, you know, to be heard a little bit more and to 
be appreciated a little bit more. So I want to welcome you 
here.
    Let me just say a couple things. First of all, it would be 
easy, but I think frankly a little bit too partisan to come in 
and bemoan where we are today or predict dire circumstances in 
the future, because we have a very strong economy, and the 
great thing about a strong economy and the longer it stays 
strong, the better people, who really struggle, do. I don't at 
all feel badly--in fact, I feel great--that the people who are 
the investors and the movers and the shakers are doing well in 
this economy because the better they do, the more investment 
that occurs and the better that everybody does.
    The fact is, though, that with a strong economy it is just 
a wonderful thing for families, and we may be on the edge of 
really what is the idea revolution which really may cement 
these incredible productivity gains which result in a lot more 
money for everyone; and when people are more productive, that 
means they get higher pay, and that is what we have seen 
happening.
    You have got to go back, John, about a hundred years to 
take a look at what this period represents, and it is 
interesting historically. It seems as though there are giant 
technological advancements about every 100 years, and what 
results from it, from what I can tell, is that industries--you 
get basic industries. For example, you know the steel industry 
got created over 100 years ago, and then you saw industries 
flow from that industry, and that is what brought on the great 
industrial boom.
    In some sense, that is what we are seeing today with the 
incredible improvements in biotechnology and, obviously, the 
computer and the Internet; and you are beginning to see 
industries that flow from those major creations which leads one 
to believe that this is not something that is temporary, but 
rather something that is permanent in terms of the long-term 
strength of this economy.
    I think we need to celebrate the 1997 budget agreement. I 
remember the days when we passed it, and I remember trying to 
sell it inside the Republican Conference, and I can remember a 
number of the conservative publications having a lot of fun 
bashing some of us, including me, about what a mistake it was. 
I think it helped.
    I don't think it is the end all. I think the fact that the 
Berlin Wall came down and international trade has been expanded 
and the fact that technology has grown have been huge, huge 
reasons for this strong economy; but I think if you talk to 
Alan Greenspan, he will tell you that the ability of the 
Congress to indicate some sense of financial and fiscal 
responsibility also allowed him to pursue a path regarding 
interest rates that allowed this economy to grow. So I think 
that is what we ought to celebrate.
    I got a great opportunity to work with John Spratt on that 
1997 agreement, and since then, of course, now that we are 
running these huge surpluses, we have had profound 
disagreements. I mean, we had that one year, I have been here 
18 years, and we had one year when we could cobble together and 
get it done, and that was 1997; but in 1998 and 1999 we have 
essentially been in gridlock, and as you all know, I will be 
out of politics in less than a year. I will be a private 
citizen, and as a private citizen, I celebrate gridlock because 
that means things don't get done down here; because I don't 
think the answers to our problems lie in more government, and 
as a result of that gridlock, we have been able to pay down 
debt.
    Now, we have not had the tax relief that I would have liked 
to see, and I believe the 1997 capital gains tax cut was a huge 
part of what has spurred this economy, but nevertheless, we 
have paid down debt; and of course, the great news is we have 
not spent any of the Social Security surplus, something that 
many people thought we would do, and we did not do it, which 
has made space for the ultimate solution related to Social 
Security.
    At the same time, however, I have to tell you that I am not 
happy with the amount of government that has grown up since 
1997, and I know the argument is that we are a smaller 
percentage of GDP. Frankly, we are kind of stabilizing in 
relation to the size of the economy, but I am familiar with a 
number of businesses that in high profit times started 
celebrating by building more offices, more overhead, only to 
find themselves in deep trouble with the need to go back and 
cut that overhead. I believe that we have not been good 
stewards here in the good times, prioritizing programs and 
going back to fundamental governmental reform.
    This committee is going to have a hearing in the next 
couple of weeks on the issue of government reform, and I can 
tell you that in the areas of Medicare and Medicaid and food 
stamps and earned income credit, HUD, there has been virtually 
no improvement. Many of these systems are out of control, no 
accountability. We got off the reform agenda. We need to be on 
that reform agenda, because as Joseph in the Bible told the 
great king, in the good times it is a time to store, to stock 
the barns, to prepare for what happens in bad times, because 
over the time I have been in government, people say you don't 
need to reduce your overhead or control spending in good times. 
And then when you go into bad times, people say, well, my God, 
there is no way you can save money; in bad times the people 
need it. So the fact is, I think we have spent too much.
    Secondly, I think we have failed to do the basic kind of 
reform efforts that need to be done in the area of education. I 
do believe that education, without proper resources, will not 
work, but I don't believe that just spending money on education 
will fix it, and I think more and more of our children are 
falling farther and farther behind, and I am very disappointed 
that we have not done more in the area of education.
    But, Jack, I guess my greatest disappointment beyond the 
fact that you have got a net tax increase in your first year of 
the budget that you have passed out, distributed money to 
almost virtually every sector of the economy. You know, where 
we are today, as far as I can see it, it is an approach of 
Santa Claus. You just give every single group in America that 
could ask you for any spending, you give them some money, and 
people may support that, but what you get as a result of it is 
you get less tax cuts.
    You get more top-down rather than bottom-up in America, and 
you don't pay down the debt that you ought to pay down. That is 
what is so wrong about expanding the size of government; not 
just that, of course, but also the issue of a growing intrusion 
in the area of our liberties.
    But what has really astounded me--I can't figure this out, 
and I don't say it as I said it yesterday with a whole degree 
of anger or partisanship or whatever--but what I can't figure 
out is how you can be in the eighth year of your term as 
President and you virtually do nothing in the areas of Social 
Security and Medicare.
    Now, almost all the people that are sitting out here this 
morning are baby boomers. We talk about paying down debt over 
the next 10 or 15 years. We don't have 10 or 15 years to fix 
Social Security and Medicare. Medicare is in the emergency room 
right now. I hope to come up with a Medicare reform plan that 
isn't going to be a whole lot about good news.
    In the area of Social Security, we have a little bit more 
time, but it is going to require some really innovative and 
dramatic proposals, and the fact is that the President in the 
eighth year of his term--I mean, this business about putting 
more bonds in the fund, I mean, that is just more of a demand 
on every one of these people's and all of our pocketbooks. It 
doesn't solve the problem. There are no programmatic changes.
    How could you punt on Medicare and Social Security?
    I was saying this morning, it is almost like you are going 
to make your last tour around the major league baseball parks 
and you tell the coach at every city you go to, I am not going 
to play today. I mean, I don't understand how you could be in 
the eighth year of a presidency and ignore Social Security and 
Medicare reform and use a little political capital to move that 
reform agenda down the road before it swallows up the baby 
boomers and their children; and that is the biggest 
disappointment for me in the budget.
    We are going to offer our budget. It will pay down more 
debt. It will promise genuine tax relief and tax reform. I am 
hopeful we will have a provision that will say that if we pass 
a tax cut bill in the Congress and the President vetoes it, 
that money will go into a lock box; it will not be used for 
more spending, but will be used to pay down more debt.
    And I hope Republicans will set some priorities on defense 
and in streamlining education and improving health care. And 
finally, I hope that, at least in this committee, we can revive 
the reform agenda, not designed to point fingers necessarily at 
this administration, because this is a continuation of 
mismanagement in the Federal Government, to let people know 
that there is so much to be done, so much to be reformed, so 
much to be streamlined which would make people a little less 
frustrated.
    So, Jack, I am glad you are here today, and we are going to 
have a good round of questions for you, and there are some 
things we can really celebrate, but there are some things we 
can anticipate and some disappointments we have, but as we go 
down this year, 2000, getting ready for another President, let 
us work together as much as we can and see what we can get 
accomplished.
    Mr. Spratt.
    Mr. Spratt. Mr. Chairman, since we last met something 
significant has happened in the Kasich household, the arrival 
of twin girls, I believe, and I would just like to say on 
behalf of all of us, we are happy for you. We really are.
    Chairman Kasich. Well, I don't know--they are only 3 weeks 
old, but I will bet they are watching this morning. Their names 
are Emma and Reese, and they are doing well. They have got a 
little virus right now, but they are doing well.
    Mr. Spratt. The question is not how they are doing. How are 
you doing?
    Chairman Kasich. I have eaten more words in the last 3 
weeks than I ever thought I would, but you know, I want to--I 
guess this is an opportunity to thank so many of the doctors 
and nurses that we worked with in the hospital. I didn't have a 
chance. They were born in Ohio State University Hospital and, 
you know, just the doctors, the nurses, their dedication is 
just awesome; and then beyond that, I have never had so much 
joy in my life and people you know sharing in my joy, and my 
friends, Ed Markey, for example, sent me two little Teddy bears 
from Vermont with a note that says, ``This is one surplus we 
Democrats can't take credit for,'' which I thought was great.
    But I just want to thank everybody and tell all of you 
that, you know, I am beginning to believe in life that you 
don't really know anything unless you experience it, and John, 
with his daughters, they have done so well, and I shared a 
little bit in that joy, but now having my own kids, I can now 
really celebrate it.
    So it's a transformation, and I am thrilled, and this is my 
Achilles heel. Thank you very, very much.
    Mr. Spratt. Mr. Chairman, you took us back 100 years. I 
would like to go back just 8 years, to 1992, the last year of 
the Bush administration. We have come a long way. We have come 
from a budget that was $290 billion in deficit to a budget that 
was $176 billion in surplus. On this administration's watch, we 
have moved the budget $466 billion in the right direction. This 
budget continues that trend. It is the fourth surplus budget in 
a row for the Clinton administration.
    You know, Mr. Chairman, the year after Mr. Reagan came to 
office, the government's debt, owed to the public, stood at 
$920 billion. When Mr. Bush left office 12 years later, the 
government's debt held by the public had risen to the sum, the 
mountainous sum, of $3.2 trillion. I am not blaming them. We 
all have some responsibility for that. You and I were both here 
during that period of time, but on this administration's watch, 
by the end of this year, we will have retired $297 billion of 
that debt. It is a matter of record; and if we take the path 
proposed by this budget, we can repay over $2.5 trillion in 
debt held by the public by the year 2010. It is not that far 
away, and if we stay that course--this is phenomenal--we can 
retire the entire debt held by the public by the year 2013. Now 
that is phenomenal.
    But what is most notable about this budget is that it pays 
down the public debt, and at the same time it lays down a basis 
for extended Medicare solvency to 2025; that is what the 
transfer of the $300 billion will do. And it also lays the 
basis for extending the solvency of Social Security to 2050; 
that is what the eradication of net debt service will do to the 
overall prospects for Social Security. And it does both of 
these things while addressing a number of other priorities, and 
let me highlight a few because I don't think these are Santa 
Claus distributions:
    Prescription drug coverage for Medicare. I don't think 
anybody would design Medicare today and leave out prescription 
drug benefits. This budget fills that gaping omission in 
Medicare coverage, and it does it in a framework of a budget 
that stays in surplus and pays off public debt.
    Defense. This budget will take defense spending to $306 
billion. In nominal dollars, that is the most ever since the 
Second World War, and it is $24.4 billion, Mr. Chairman, above 
the level that we put in the baseline for defense in the 
Balanced Budget Agreement of 1997, $24.4 billion more than we 
provided for defense in 2001 when we did the BBA just 3 years 
ago, and it is $12.2 billion more than we budgeted for defense 
this year. That is a substantial plus-up in defense.
    You will probably want to match us and raise us one; you 
have in the past. You don't want to be one-upped on defense by 
the administration.
    Veterans. Closely aligned with defense are those veterans 
who have stood on the ramparts during the Cold War and won the 
Cold War and provided our defense. We made promises to them 
about health care; this budget keeps those promises. This 
budget increases veterans' health care discretionary funding by 
$1.5 million. That is the biggest single year increase in 
veterans' health care in history.
    Education. I have been out and about among teachers and 
parents since we broke last November, and I have yet to meet a 
parent or a teacher who didn't think that reducing class sizes 
in primary grades to 18 kids is a great idea.
    I ran into a third grade class in Ladson, SC, and I asked 
the teacher--she had had 32 kids the year before, she had 18 
this year--I said, what kind of a difference does this make, 
and she said night and day. Well, this budget extends the 
teacher/class size initiative. It expands the after-school 
program. It increases Head Start. It helps schools afford the 
cost of new school construction and old school renovation. It 
has $4.5 billion in discretionary education funds. If we can do 
$12 billion for the military, surely we can find a third that 
much for education.
    Farm safety net. Commodity prices are still low. They are 
at the lowest level since the 1970's. We had to help farmers on 
the brink of bankruptcy last year. This budget provides $11 
billion over the next couple of years for new safety nets and 
deficiency-type payments and better crop insurance until 
Freedom to Farm expires and is replaced with a farm program 
that really works.
    NIH. You mentioned the scientific breakthroughs that are 
occurring today that are truly phenomenal. We are on the cusp 
of some that could change the way that we live. A few years ago 
the Clinton administration dramatically proposed that we 
increase funding for NIH by 50 percent. The Senate, Republican 
majority, said, that is not good enough. They wanted double-
funding for NIH over 5 years. Well, this budget fulfills that 
commitment. It doesn't do it the way you did it last year. It 
doesn't say to NIH, here is more money, but you can only spend 
$7 billion of this increase after September the 29th, 2000. No 
gimmicks. This is a real plus-up.
    Mr. Kasich, you yesterday were decrying these initiatives 
and just now said this is sort of a return to the era of big 
government, and you would rather have smaller government.
    You also mentioned the fact that typically when you make 
that argument you are confronted with some numbers, namely the 
ratio of government spending to the size of our economy, our 
gross domestic product. Let me put this budget in context. Now, 
this, the last year of the Clinton administration, government 
spending will equal 18.7 percent of our gross domestic 
product--GDP, 18.7 percent. For comparison, let us go back to 
1983, the second year of the Reagan administration, because in 
that year, 1983, government spending peaked at 23.5 percent of 
GDP.
    When Mr. Clinton came to office, spending had tapered off a 
bit. It was 22.5 percent of GDP. Not only have the Clinton 
budgets brought the deficit down every year for 8 years in a 
row, but every year the budget as a percentage of GDP has gone 
down, too, so much so that today it is 3.7 percentage points of 
GDP below the Bush years and 4.8 percentage points below peak 
spending during the Reagan years. I am talking about 4.8 
percent of nearly $10 trillion, $500 billion less government 
spending than would have been the case if we were running the 
government at the levels of the Bush administration or the 
Reagan administration. If the path plotted by this budget is 
followed for the next 10 years, government spending will 
decline to 16.7 percent of GDP by the year 2010. That is 7 
percentage points lower than it was at its peak in the Reagan 
years.
    Now, these ratios show irrefutably that this budget 
downsizes government. Yet this budget also shows how we can 
provide more coverage for the health care of older Americans, 
drug coverage, more teachers for the education of younger 
Americans, more defense to keep our Nation strong, more for 
veterans, more for medical research and still pay down the debt 
and plus-up national savings by nearly $3 trillion.
    I have heard statements that this budget spends a large 
portion of the surplus. In truth, this budget begins, thank 
goodness, on a realistic note. The beginning point of any 
budget this year has to be a realistic projection of 
discretionary spending. CBO's report takes where we are right 
now and says, we don't know where we go from here, we will give 
you three choices. This year's budget is ridden with gimmicks 
because the discretionary spending caps have become so 
unrealistic that they don't know where to start and how to 
project into the future.
    They make three different assumptions. There is only one of 
these that is realistic. It is not realistic to assume that we 
will take discretionary spending from today's level down to the 
caps that we set in 1997. That would require a reduction in 
outlays this year and next year of $30 to $35 billion and a 
reduction in budget authority of probably $50 billion. You know 
and I know that is not going to happen; all it will do is 
invite more gimmicks.
    Nor is it realistic to assume that we are going to have 
discretionary spending frozen at this year's level for 10 
years. I have been here for 17 years. I have heard freezes 
discussed continually during that period of time. I have never 
seen one that lasted for any period of time, not a true freeze. 
And you and I know, in the face of the mounting surpluses, we 
are not going to have a 10-year freeze in discretionary 
spending.
    It is totally unrealistic. It would mean if we held defense 
harmless against inflation, let it increase with inflation, 
that at the end of that 10-year period of time what we provide 
for medical research and education and environment would be 40 
percent less in real purchasing power than it is today. That is 
not going to happen.
    The only realistic baseline, the place where we should 
begin our budget, and we do under Mr. Lew and President 
Clinton, we begin by realistically assuming that discretionary 
spending will roughly grow with inflation. Zero real growth, no 
real addition, simply holding harmless discretionary spending 
against inflation.
    By Jack Lew's calculation, that gives us a surplus of 
somewhere around $750 billion. By CBO's calculation, we get a 
surplus of around $838 billion. That is how much money we have 
to talk about, and in truth, we don't have that much in 
available surplus because if we spend it or tax-cut it away, we 
have to make an adjustment for debt service of about $125 
billion. We are really talking about, over 10 years, $700 
billion; and 80 percent of that surplus--80 percent of that 
surplus occurs in the second 5 years of that 10-year period of 
time.
    So all of this is to counsel caution; let us not plunge 
ahead with something dramatic. What we have got before us, I am 
sure we will disagree about. I don't embrace this budget 
entirely myself. I am not going to vote for additional tobacco 
taxes, additional net new taxes this year; and you are 
proposing once again user fees that have been around the track 
again and again and again and gone nowhere in the Congress. 
Maybe one day we will see the wisdom in it, but I don't think 
it is going to happen this year.
    So we are not going to embrace this budget in its entirety, 
but it is a good budget to build upon, and if we want to get 
away from the gimmick-ridden budget that we have got, get back 
to reality and get down to programs that really matter--saving 
Social Security, making it solvent, adding prescription drug 
coverage, putting money into accountable education programs--
this budget gives us a great basis to begin upon.
    Thank you, Mr. Chairman. And, Mr. Lew, I look forward to 
your testimony.
    Chairman Kasich. Mr. Lew, it is now your turn.

STATEMENT OF HON. JACOB J. LEW, DIRECTOR, OFFICE OF MANAGEMENT 
                           AND BUDGET

    Mr. Lew. Thank you, Mr. Chairman, Congressman Spratt. I 
would like to thank you for the very kind and generous 
introduction and to join in extending my congratulations to 
you, Mr. Chairman, on entering this most exciting part of life.
    It is really a pleasure to be here with the committee 
today.
    After turning around large and expanding deficits that 
threatened our economy, we face a new challenge: maintaining 
sound fiscal policy during a period of surplus.
    Budget surpluses and debt reduction are no longer 
projections. They are real accomplishments. In 1998 we ran a 
$69 billion surplus and didn't spend it. In 1999 we ran a $124 
billion surplus and didn't spend it. By the time this fiscal 
year ends we will have an even larger surplus, and between 1998 
and 2000, we will have paid off $297 billion of the public 
debt.
    After 12 years of spiraling debt, we are now paying it off, 
and by 2013 the United States will be effectively debt free for 
the first time since 1835 when Andrew Jackson was President. We 
must now continue a policy of fiscal discipline that is 
working.
    Our new challenge boils down to relying on realistic 
assumptions and baselines, setting priorities and making 
choices to maintain a balanced program. It requires that we 
begin by addressing our existing commitments. The President's 
budget relies on realistic assumptions and reflects balanced 
priorities.
    I think it is useful to begin by reviewing the state of our 
economy, because it shows how much is at stake. While the 
private sector is the engine for economic progress, fiscal 
policy can encourage or discourage growth. As this chart shows, 
fiscal discipline has helped achieve rapid growth of business 
investment, because the Federal Government has stopped draining 
the Nation's pool of capital, accommodating lower interest 
rates and reducing fears of inflation. Businesses have better 
access to capital and are better able to invest and innovate. 
Under this administration we have enjoyed the best sustained 
growth of business investment since the 1960's.
    Economic progress has reached almost every facet of our 
economic life, raising living standards for most Americans. The 
economy has 20.8 million new jobs since 1993. Unemployment is 
at its lowest in 30 years, and African-American and Hispanic 
unemployment rates are at the lowest level since we started 
keeping those statistics 25 years ago. Work pays more, 
reversing a two-decade decline in real wages, and 7.2 million 
people have moved off the welfare rolls. The number of poor 
people has declined by 4.8 million and a record number of 
Americans now own the homes they live in.
    When President Clinton took office 7 years ago, the budget 
deficit was $290 billion, the largest in history. Between 1980 
and 1992, the debt had quadrupled, from about $700 billion to 
$3 trillion. Without a change in policy, the 1998 deficit was 
projected to be $390 billion, rising to $639 billion by 2003. 
Nothing indicated that the vicious cycle would abate.
    Reversing these adverse trends required tough policy 
choices in 1993 and, on a bipartisan basis, in 1997. These 
tough policy choices worked. From 1994 through 1998, deficit 
reduction more than doubled over prior estimates and deficits 
fell by $1.2 trillion.
    As a percentage of GDP, spending in every year for which 
President Clinton has submitted budgets has been lower than 
during either of the preceding two administrations, declining 
from 22 percent in 1992 to 18.7 percent in 2000, the smallest 
share of the economy since 1966. This year we are proposing to 
spend 18.3 percent of GDP, which is still lower. Thanks to the 
strong economy, receipts have grown beyond expectations while 
income tax rates on typical households are actually the lowest 
since the 1970's.
    A typical family of four with a median income of about 
$55,000, will have lower income and payroll taxes this year 
than at any other time in a quarter century. A family with 
income at one-half the median level will pay the lowest share 
of income taxes since 1965. Even a family of twice the median 
income level, over $100,000, will pay less in income tax as a 
percentage of income than at any time since 1973.
    The bipartisan Balanced Budget Agreement of 1997 reinforced 
expectations of Federal fiscal responsibility. To continue our 
strong economic performance, we must continue along the path of 
fiscal discipline and prudent investments.
    From 1993 to 1999, almost 75 percent of the dollar 
increase, the nominal increase in spending, is attributable to 
honoring long-term commitments, Social Security, Medicare, 
Medicaid and interest on the debt. All other spending has 
actually declined in inflation-adjusted dollars.
    With a growing economy and a growing population, the 
Federal Government must continue to accomplish important 
missions. We need to maintain critical functions like air 
safety, law enforcement, the administration of Medicare and 
national security, both defense and diplomacy. Realistic 
projections also need to accommodate investments in education, 
families, protecting the environment, and research and 
development, all necessary to assure a better future.
    CBO served the policy process well this year by 
illustrating three potential discretionary baselines, only one 
of which I believe is realistic. A discretionary baseline at 
the 1997 spending caps is not realistic. Congress appropriated 
above those caps by tens of billions of dollars in both 1999 
and 2000. To bring spending down to the caps in 2001 would 
require an unachievable 1-year reduction from 2000 program 
levels of almost $70 billion, 11 percent.
    Likewise, a discretionary budget freeze over 10 years is 
unrealistic. The Congress increased discretionary budget 
authority by 7 percent in 1999 and 3\1/2\ percent in 2000. A 
nominal freeze in 2001 would require a reduction from 2000 
program levels of 3 percent. Extending such a freeze for 10 
years would require program level cuts of 23 percent by 2010, 
and this assumes that defense would be frozen along with 
nondefense.
    If defense spending increases within an overall freeze, the 
implications for all other spending would be far more severe. 
Within an overall freeze, appropriating the President's request 
for 2001 for defense would turn a freeze into a 9 percent cut 
from 2000 levels for all nondefense programs. Any addition to 
the President's request would make the effect on nondefense 
programs even worse. By 2005 the reduction would be 25 percent, 
and by 2010 the reduction would be over 40 percent. This is 
just not realistic.
    Our budget is based on the third CBO scenario, the most 
realistic. The discretionary baseline would not shrink in real 
dollars. It also would eliminate the gimmicks used in recent 
years to mask spending over the caps. A budget based on 
unrealistic assumptions is unlikely to stop unnecessary 
spending. What ultimately would suffer is fiscal discipline and 
the commitment to protect the Social Security surplus.
    If the surplus is exaggerated to make room for either tax 
cuts or spending increases, when discretionary spending cuts do 
not materialize, as I do not believe they will, the non-Social 
Security surplus disappears. This means that both fiscal 
discipline and the Social Security surplus would be 
jeopardized. Moreover, any perception that the fiscal 
discipline in Washington is on the decline would undermine our 
unprecedented economic progress.
    Our projection of the non-Social Security surplus of $746 
billion over 10 years provides substantial resources for a 
balanced program in the context of realistic assumptions. The 
President's budget continues the fiscal discipline that since 
1993 has fostered this era of prosperity and surplus. It uses 
conservative economic assumptions and a realistic baseline for 
discretionary spending and reflects balanced priorities. It 
eliminates the national debt, extends the solvency of Social 
Security and Medicare, and provides a tax cut and funds 
essential investments in our future.
    The President's budget projects a total surplus of $2.9 
trillion over the next 10 years. Of that, $2.2 trillion is from 
the Social Security surplus, and we put it into a solvency lock 
box to retire the Nation's publicly held debt.
    Beginning in 2011, interest savings will be used to extend 
Social Security solvency to 2054. These interest savings are 
substantial. In 1993 we projected that in 2010 interest would 
consume 23 cents out of every Federal dollar. Today, we project 
that interest will consume 3 cents out of every dollar in 2010. 
These savings permit the extension of Social Security solvency.
    The remaining on-budget surplus is $746 billion. Overall, 
$432 billion is allocated to Medicare; $299 billion is 
contributed to the Medicare Trust Fund to extend its solvency 
for 10 years to 2025, $98 million is used for Medicare 
prescription drug benefits and to permit uninsured older 
workers to buy into Medicare coverage, and $35 billion is 
reserved to augment the President's proposal for prescription 
drug coverage to provide catastrophic coverage for the elderly. 
Another $91 billion of the surplus is allocated to the 
President's initiative to expand health care coverage under the 
existing State Children's Health Insurance Program and to 
extend coverage to the uninsured parents of those children.
    The President's proposed tax cuts would help low-income 
working families support child care, reduce the marriage 
penalty, reduce the burdens of the alternative minimum tax, 
encourage savings for retirement, make higher education more 
affordable, aid in school construction and renovation, help 
those with long-term health care needs, and extend health 
insurance coverage. It would also promote philanthropy, 
encourage energy efficiency and protect the 
environment.Overall, these tax proposals would use $256 billion 
of the projected surplus.
    The balance of the President's policies yields a small net 
savings, and these policies include proposals to restore the 
farm safety net and have the budget savings that are associated 
with our tobacco policy. Discretionary spending is actually 
below the baseline, and net interest costs is part of this as 
well.
    A balanced approach requires that each element be properly 
sized. If a tax cut grows within the bounds of a realistic 
surplus projection, it precludes strengthening Medicare and 
extending health care coverage through the Child Health 
Insurance Program.
    Overall, the President's budget proposes a balanced set of 
investments in the context of fiscal discipline. It would 
reduce the size of government to the lowest level since 1966, 
and it would pay off our debt by 2013.
    It is a pleasure to be here, and I would be delighted to 
answer any questions that you have, Mr. Chairman.
    [The prepared statement of Jacob J. Lew follows:]

Prepared Statement of Hon. Jacob J. Lew, Director, Office of Management 
                               and Budget

       we must maintain sound fiscal policy in an era of surplus
    For 3 years now, we--the administration and the Congress--have 
faced a new challenge: maintaining a sound fiscal policy in an era of 
surplus. Having fought our way back from large and expanding deficits 
that threatened our economy, we now continue the fiscal discipline that 
has brought us the strongest economy in memory.
    Budget surpluses and debt reduction are no longer just projections. 
We ran a $69 billion surplus in fiscal year 1998, and did not spend it. 
We ran a $124 billion surplus in 1999, and did not spend it. Eight 
short months from now, we will have an even larger surplus in fiscal 
year 2000. From 1998 through the end of 2000, we will pay off $297 
billion worth of publicly held debt. It should be clear by now that we 
can run surpluses and pay down our public debt--if we create the right 
processes and policies to maintain that fiscal discipline.
    We must now continue a fiscal policy that is working. Our new 
challenge boils down to relying on realistic assumptions and baselines, 
setting priorities, and making choices to maintain a balanced program. 
It requires addressing our existing commitments before we make new 
ones.
    The President's budget relies on realistic assumptions and reflects 
balanced priorities.
              economic performance reflects fiscal policy
    It is useful to begin by reviewing the state of our economy, 
because it shows how much is at stake. Though the private sector is the 
engine for economic progress, fiscal policy can encourage or discourage 
growth.
    Our fiscal discipline has helped achieve a rapid growth of business 
investment, because the Federal Government has stopped draining the 
Nation's pool of capital. This has helped to accommodate lower interest 
rates, and has reduced fears of inflation. Businesses have better 
access to capital and are better able to invest and innovate.
    Under this administration, we have enjoyed the best sustained 
growth of business investment since the 1960's. We have seven 
consecutive years of double-digit inflation- adjusted growth of 
business equipment investment--which is unprecedented.
    Economic progress has reached almost every facet of our economic 
life, raising living standards for most Americans.
     The economy has created 20.8 million jobs since 1993, 
nearly all of them in the private sector--most of them full-time and in 
high-paying industries.
     The unemployment rate is the lowest it has been in 30 
years; for African Americans and Hispanics, unemployment is lower than 
at any time in the quarter-century for which statistics have been kept. 
A record percentage of adults are employed.
     Work has begun to pay more, reversing a two-decade trend 
of declining real wages and boosting household incomes throughout the 
economy. Cumulatively, since the beginning of the Clinton 
administration, real wages have increased by 6.6 percent.
     After two decades of decline and stagnation, Americans at 
the lower end of the income scale--those in the poorest 20 percent of 
households--have seen a rise in their real incomes. From 1993 to 1998, 
their incomes have risen by nearly $900 per household in 1998 dollars, 
a 10 percent increase. The median family's income has grown by 12 
percent.
     In the past 7 years, 7.2 million people have left the 
welfare rolls, a 51 percent decline. Welfare recipients now account for 
the lowest percentage of the U.S. population since 1967. Meanwhile, 1.5 
million people who were on welfare in 1997 are now working, and every 
State has met the overall work requirements mandated by the 1996 
welfare reform law.
     From 1993 to 1998, the number of poor people in America 
declined by 4.8 million, and the number of poor children by 2.1 
million. The poverty rate has declined sharply from 15.1 percent to 
12.7 percent, the lowest it has been in over two decades.
     Crime rates are at the lowest level in over 25 years.
     A record number of Americans now own their own homes, 
which was made possible by lower real interest rates and larger real 
incomes. The number of households that are homeowners increased by more 
than eight million since the President took office.
    The President helped to set off this virtuous economic cycle with 
his 1993 economic plan.
          we have made enormous, unprecedented fiscal progress
    In 1998 and 1999, we had the first consecutive balanced budgets 
since 1957. We expect a larger surplus in 2000, and we propose a still-
larger surplus in 2001. The 1999 surplus was the largest as a 
percentage of the economy since 1951. And the proposed 2001 surplus 
would be the ninth consecutive year of fiscal improvement--the first 
time ever.
    After 12 years of spiraling debt threatening to expand beyond 
control, we are now paying off the debt. By 2013, the United States 
will be effectively debt-free--for the first time since 1835, when 
Andrew Jackson was President. By the end of this year, the Treasury 
expects to have reduced our debt held by the public by about $300 
billion from where it was 3 years ago. Under the President's fiscal 
policy, debt held by the public by the end of 2004 will decline to the 
lowest ratio of our GDP since 1974--completely undoing the debt buildup 
of the 1980's. And by the end of 2007, the public debt will fall to its 
lowest share of the GDP since before the United States entered World 
War I.
    how we achieved this unprecedented economic and fiscal progress
    When President Clinton took office 7 years ago, the budget deficit 
was $290 billion, the largest in the Nation's history. Between 1980 and 
1992, publicly held debt quadrupled, from about $700 billion to $3 
trillion. It also doubled as a share of GDP, from about 25 percent to 
about 50 percent.
    Both CBO and OMB projected that these adverse trends would 
accelerate without changes in fiscal policy. OMB forecast the 1998 
deficit, in the absence of policy change, at $390 billion; by 2003, we 
expected the deficit to be $639 billion. Nothing indicated that the 
vicious cycle would abate.
    Reversing these adverse trends required tough policy choices, which 
the administration and the Congress took in 1993 and 1997.
    The President's initial economic plan cut spending and increased 
revenues in equal amounts. From 1994 through 1998, deficit reduction 
more than doubled prior estimates--instead of the projected cumulative 
$505 billion, deficits fell by $1.2 trillion.
    This administration has controlled Federal spending well beyond the 
record of its predecessors.
     In 1999, spending declined to its smallest share of the 
GDP since 1966.
     As a percentage of GDP, spending in every year for which 
President Clinton submitted a budget has been lower than in any year of 
the two preceding administrations.
    In 2001, our policy would further reduce spending to 18.3 percent 
of GDP. And thanks to the strong economy, receipts have grown beyond 
expectations, even though income tax rates on typical households are 
the lowest since the 1970's.
     A typical family of four with the median family income 
will pay a lower share of its income in income and payroll taxes this 
year than at any other time in a quarter century. Its income tax 
payment considered alone will be the lowest share of income since 1966.
     A family with income at one-half of the median level will 
pay the lowest share of its income in income and payroll taxes since 
1965. It will receive money back from the Federal Government because of 
the earned income tax credit.
     Even a family at twice the median income level will pay 
less in income tax as a percentage of income than at any time since 
1973.
    The historic bipartisan Balanced Budget Agreement of 1997 has 
reinforced expectations of Federal fiscal responsibility. This has had 
a positive impact on interest rates and has helped spur economic 
growth.
    In the last 7 years, we have enjoyed extraordinary economic 
performance in part due to sound fiscal policy. To continue our strong 
economic performance, we must continue along the path of fiscal 
discipline and prudent investments.
  we need a realistic baseline, with adequate resources for a strong 
             defense and critical investments in the future
    Since 1993, discretionary spending has declined in inflation-
adjusted dollars. The Federal Government must continue to accomplish 
the missions assigned to it in a growing economy with a growing 
population. We often take for granted the need to maintain critical 
functions like air safety, law enforcement, the administration of 
Social Security and Medicare, and national security--both defense and 
diplomacy. We need realistic budget projections to provide funding for 
these essential functions that the Nation has a right to expect its 
government to perform well.
    Realistic projections also needed to accommodate investments in 
education, families, protecting the environment, research and 
development and national security--all necessary to assure a better 
future. CBO served the policy process well this year by illustrating 
three potential discretionary baselines--only one of which I believe is 
realistic.
    A discretionary budget baseline that would retain the 1997 spending 
caps is not realistic. Congress appropriated above those caps by tens 
of billions of dollars in both 1999 and 2000. To bring spending down to 
the caps in 2001 would require an unachievable 1-year reduction from 
2000 program levels of almost $70 billion of budget authority--11 
percent.
    Likewise, a discretionary budget freeze over 10 years is 
unrealistic. The Congress increased discretionary budget authority by 
7.0 percent in 1999, and 3.5 percent in 2000. A nominal freeze in 2001 
would require a budget authority reduction from 2000 program levels of 
3 percent. Extending such a freeze for 10 years would require program 
level cuts of 23 percent by 2010--assuming that defense would be frozen 
along with non-defense. Such reductions should not, and I believe would 
not happen.
    If defense spending increases within the overall freeze, the 
implications for all other spending would be even more severe. Within 
an overall freeze, appropriating the President's 2001 defense request 
would turn a hard freeze into a 9 percent cut from 2000 levels for all 
non- defense programs. Any addition to the President's defense request 
would make the effect on non-defense programs even worse. This is just 
not realistic.
    In contrast, a baseline that maintains the program levels enacted 
by the Congress last year would provide a sound basis to plan for the 
future. It would allow for continued investments in key program areas 
and for the maintenance of vital government functions.
    A budget based on unrealistic assumptions is unlikely to stop 
necessary spending. What ultimately would suffer are fiscal discipline 
and the commitment to protect the Social Security surplus. If the 
surplus is exaggerated to make room for either tax cuts or spending 
increases, when discretionary spending cuts do not materialize, the 
non-Social Security surplus disappears. This means that both fiscal 
discipline and the Social Security surplus would be jeopardized. 
Moreover, any perception that fiscal discipline in Washington is on the 
decline would undermine our unprecedented economic progress.
    Our projection of the non-Social Security surplus of $746 billion 
over 10 years provides substantial resources for a balanced program, in 
the context of realistic assumptions. The President's budget continues 
the fiscal discipline that since 1993 has fostered this era of 
prosperity and surplus. It uses conservative economic assumptions and a 
realistic baseline for discretionary spending. To stay on our 
successful budget track, we urge the Congress to consider this 
approach, and the President's specific policy choices as well.
     the president's budget framework relies on a balanced approach
    The President's budget relies on a balanced approach, which 
maintains fiscal discipline, eliminates the national debt, extends the 
solvency of Social Security and Medicare, provides a tax cut and funds 
essential investments for our future.
     The President's budget projects a total surplus of $2.9 
trillion over the next 10 years. Of that, $2.2 trillion is the surplus 
from Social Security, which is put in a Social Security solvency lock 
box and used to retire the Nation's publicly held debt. Beginning in 
2011, interest savings because of the Social Security surplus will be 
transferred from the on-budget surplus to the trust fund, to extend 
Social Security solvency to 2054. These interest savings are 
substantial. In 1993, we projected that in 2010 interest would consume 
23 cents out of every Federal dollar. Today we project that only three 
cents out of every dollar will go to interest. These savings permit the 
extension of Social Security solvency.
     The remaining on-budget surplus is $746 billion.
     Overall, $432 billion is allocated to Medicare: (1) $299 
billion is contributed to the Medicare trust fund to extend its 
solvency for 10 years, to 2025; (2) $98 million is used for Medicare 
prescription drug policy along with several other health initiatives 
(including allowing uninsured older workers to buy into Medicare); and 
(3) $35 billion is reserved to augment the President's proposal for 
prescription drug coverage under Medicare, to provide for catastrophic 
costs to the elderly. Pending enactment of that policy, this sum, too, 
retires debt. (This debt reduction, combined with the Social Security 
surplus, allows the President to make the Nation effectively debt-free 
by 2013.)
     Another $91 billion of the surplus is allocated to the 
President's initiative to expand health-care coverage under the 
existing State Children's Health Insurance Program (SCHIP) and extend 
coverage to the uninsured parents of those children.
     The President's proposed tax cuts--to help low-income 
working families with children, to reduce the marriage penalty and the 
burden of the Alternative Minimum Tax (AMT), to encourage saving for 
retirement, to make higher education more affordable, to aid in school 
construction and renovation, to help those with long-term health care 
needs and to extend health insurance coverage, to promote philanthropy, 
and encourage energy efficiency and protect the environment--use $256 
billion of the surplus. (The tax cuts alone total $351 billion, but 
they are partially offset by proposals to limit the benefits of 
corporate tax shelter transactions, and end other unwarranted tax 
benefits.)
     The balance of the President's framework policies yields a 
small net savings. These policies include the President's proposals to 
restore the farm safety net, the net interest cost of all of these 
initiatives, and the budget savings that result from the President's 
tobacco policy.
    A balanced approach requires that each element be properly sized. 
If a tax cut grows within the bounds of a realistic surplus projection, 
it precludes strengthening Medicare and extending health care coverage 
through the Children's Health Insurance Program (CHIP).
    The following discussion explains the various elements of the 
President's framework in more detail.
               the president's budget eliminates the debt
    The President's plan will eliminate the publicly held national debt 
by 2013. That would be the first time our nation has been debt-free 
since 1835--when Andrew Jackson was President. The President's 
successful policy of fiscal discipline and deficit reduction has 
already allowed us to pay off $150 billion in debt, increasing to about 
$300 billion by the end of the current fiscal year. If we maintain our 
fiscal discipline, and eliminate the public debt, we can devote the 
savings from debt reduction to Social Security. Last year, the 
government paid $230 billion in interest costs to finance the national 
debt--payments that, under the President's plan, will become 
unnecessary.
           the president's budget strengthens social security
    The President's commitment to Social Security has resulted in 
general acceptance of the need to protect the Social Security surplus. 
Now, we must meet the next challenge by strengthening Social Security 
for the future. The President's framework transfers part of the on- 
budget surplus--$100 billion in 2011, rising to $211 billion in 2020 
through 2050--to Social Security, to extend its solvency to 2050 (2054 
with the President's proposed investment in equities). The President's 
plan to pay down and eliminate the national debt results in savings in 
interest costs, which fully justify these transfers for the solvency of 
Social Security.
              the president's budget strengthens medicare
    The President's framework extends the solvency of Medicare until 
2025, with transfers of part of the on-budget surplus--$299 billion 
from 2001 to 2010, and further transfers in the next 5 years.
    The framework also modernizes Medicare with a needed prescription 
drug benefit. This plan ensures that seniors get the drugs they need, 
as prescription drugs are now more central to medical treatment than 
they were when Medicare was established thirty-five years ago. 
Prescription drugs can save money by obviating the need for more-
expensive subsequent in- patient treatment. Most elderly lack 
comprehensive and reliable prescription drug coverage. The budget 
expands access to preventive benefits, and improves Medicare 
management.
          the president's budget expands health-care coverage
    The President's budget framework addresses other health-care needs 
as well. For example, the budget expands the successful health 
insurance program (State Children's Health Insurance Program) for low-
income children, and extends it to their working parents. Established 
with bipartisan support as part of the 1997 Balanced Budget Act, SCHIP 
has already enrolled two million children of working low-income 
parents.
         the president's budget addresses needs in farm country
    The budget also provides a comprehensive farm aid package of $11 
billion over the next 2 years, until the next farm bill is enacted. The 
President's package includes income assistance that responds to falling 
crop prices; a major farm conservation program; and targeted assistance 
to certain segments of the farm and rural communities.
         the president's budget has fair middle-class tax cuts
    The President's plan proposes $350 billion for tax cuts ($250 
billion in net tax cuts) for America's working families.
     It reduces the marriage penalty for two-earner couples, by 
increasing the standard deduction and introducing an exclusion for part 
of the earnings of a second working spouse.
     It expands the Earned Income Tax Credit, to help America's 
hard-working low income families, especially larger families which are 
more likely to be poor than families with only one or two children.
     It helps families finance higher education, child care and 
long-term care, as well as expanding health insurance options for those 
facing unique barriers to coverage.
     The President's plan also establishes Retirement Savings 
Accounts, to give 76 million Americans the opportunity to build wealth 
and save for their retirement.
       the budget continues the president's policy of investment
    Education, in our competitive global economy, has become the 
dividing line between those who are able to move ahead and those who 
lag behind. Over the last 7 years, we have worked hard to ensure that 
every boy and girl is prepared to learn, that our schools focus on high 
standards and achievement, that anyone who wants to go to college can 
get the financial help to attend, and that those who need another 
chance at education or to improve or learn new skills can do so. The 
budget builds on the sustained commitment to make college more 
affordable by increasing the tax credit than funds higher education and 
increasing Pell grants and other college scholarships from the current 
record levels. It reduces class size by recruiting and preparing 
thousands more teachers and building thousands more new classrooms, as 
well as providing for urgent and essential repairs.
    The budget expands access to after-school learning opportunities to 
help children, especially in the poorest communities. It recruits 
teachers in high-poverty areas and encourages school districts to pay 
teachers more through peer review. It ends social promotion by 
expanding after school learning hours to help students to earn 
advancement. The budget funds monetary awards to the highest-performing 
schools that serve low-income students, and helps States to identify 
and change the least successful schools. It invests in programs 
targeted to Hispanic students. It narrows the digital divide through 
technology centers in low income areas.
    The budget promotes early learning by significantly increasing 21st 
Century Learning Community Centers. It makes child care more affordable 
by expanding tax credits for middle- income families, and establishes a 
tax credit for businesses to establish child care. It assists parents 
who attend college to meet their child care needs, as well as parents 
who choose to stay at home to raise a young child, and makes the Child 
and Dependent Care Tax Credit refundable. The budget proposes an 
expansion of the Early Learning Fund and builds on the expansion of the 
successful Head Start program to help meet the goal of serving one 
million children by 2002. It increases funding for the Child Care and 
Development Block Grant for poor and near-poor children.
    Supporting families. The budget promotes responsible fatherhood by 
enforcing child support, and aiding the employment and training of low-
income parents. The budget allows low-income working families, who need 
transportation to work, to own a modest vehicle and retain food stamp 
eligibility. And it provides health care to legal immigrant children, 
and restores Supplemental Security Income benefits to legal immigrants 
with disabilities and to legal immigrants in families with eligible 
children.
    Extending prosperity to all of America. The New Markets Initiative 
provides tax credit and loan guarantee incentives to stimulate billions 
in new private investment in distressed rural and urban areas. It 
builds a network of private investment institutions to funnel credit, 
equity, and technical assistance into businesses in America's untapped 
markets, to target small businesses and help them to grow. The budget 
increases the number of Empowerment Zones and Enterprise Communities, 
which provide tax incentives and direct spending to encourage private 
investment, and provides more capital to the Community Development 
Financial Institutions program. The budget also includes significant 
funding increases for Native American communities, for enforcement of 
the Nation's civil rights laws, and for the partnership we have begun 
with the District of Columbia.
    Fighting crime. The budget adds funds to hire 500 new ATF agents 
and 1,000 State and local gun prosecutors. It funds smart gun 
technology development. The budget also provides funds to prevent 
violence against women, and to address the growing law enforcement 
crisis on Indian lands. The budget strengthens border enforcement in 
the South and West. It combats illegal drug use, particularly among 
young people, through treatment and prevention, law enforcement, 
international assistance, and interdiction.
    Research. The budget introduces a Science and Technology Initiative 
for high-priority long-term basic research, including nanotechnology--
the manipulation of matter at the atomic and molecular level, offering 
the promise that medical science may one day be able to detect 
cancerous tumors when they comprise only a few cells. The budget also 
increases the Information Technology Initiative to invest in long-term 
research in computing and communications. It will accelerate 
development of extremely fast supercomputers to support civilian 
research, enabling scientists to develop life-savings drugs, provide 
earlier tornado warnings, and design more fuel-efficient, safer 
automobiles. The budget provides strong support for the Nation's two 
largest funders of civilian basic research at universities: the 
National Science Foundation and the National Institutes of Health.
    Environment. The Nation does not have to choose between a strong 
economy and a clean environment. The past 7 years are proof that we can 
have both. The budget establishes dedicated funding and increases 
resources for the historic interagency Lands Legacy initiative to 
preserve the Nation's natural and historic treasures. The budget also 
supports the Clean Energy initiative, to reduce the threat of global 
warming, and Greening the Globe, to save tropical and other forests 
around the world. It supports farm conservation to upgrade water 
quality, the Clean Water Action plan to clean up polluted waterways, 
climate-change technology to increase energy-efficiency, and renewable 
energy to strengthen our economy while reducing greenhouse gases.
    National security--diplomacy and defense. Our Nation now has the 
greatest opportunity in its history to advance American interests and 
values while building a better and more peaceful world. However, doing 
so requires leadership and engagement. This budget supports a 
democratic society and stronger economy in Kosovo. It proposes 
increased funding to ensure the continued protection of American 
embassies, consulates and other facilities, and the valuable employees 
who work there. It supports significant increases in funding for State 
Department programs to address the threats posed by weapons of mass 
destruction. In a fiscal year 2000 emergency supplemental, the budget 
provides critical assistance to the Government of Colombia in its fight 
against narcotics traffickers. It proposes funding to promote 
international family planning, contain the global spread of AIDS, and 
promote debt forgiveness for the world's poorest countries. The budget 
also increases programs that support U.S. manufacturing exports and 
continues our long-standing policy of opening foreign markets.
    This budget builds upon our major commitment last year to maintain 
our military readiness. It provides additional resources to ensure that 
the military services can recruit and retain quality personnel, meet 
training standards, procure new equipment and spare parts, and maintain 
equipment in top condition. In addition, this budget provides resources 
for the Department of Defense and other agencies to combat emerging 
threats--including terrorism, weapons of mass destruction, and cyber-
crime against critical infrastructure. It supports counternarcotics 
efforts, including a 2000 supplemental to increase assistance to the 
Government of Colombia in their fight against narco-traffickers. It 
also provides additional funding for contingency operations in Kosovo.
    the budget continues the president's drive for better management
    This administration set out to create a government that works 
better, costs less and gets results Americans care about. We have 
streamlined Government, cutting the civilian Federal work force by 
377,000, giving us the smallest work force in 39 years. While we have 
made real progress, there is still much work to do. We have set a list 
of the highest priorities: 24 Priority Management Objectives are listed 
in this budget. It is a mark of our success that in early 2000, we were 
able to remove last year's number one objective from the list: Manage 
the Year 2000 (Y2K) Computer Problem. We will continue to address other 
priorities, including modernizing student aid delivery and completing 
the restructuring of the Internal Revenue Service. The steps we have 
taken to change and improve the way government works have also changed 
the way Americans view their government, increasing the confidence and 
trust of the American public.
            we must choose now to maintain fiscal discipline
    The President has recognized the need to maintain the fiscal 
discipline that has brought us not only unprecedented budgetary 
progress, but also the strongest economy in memory.
    Under the President's leadership, we have maintained the surplus 
for the last 3 years. We can do it again. In the face of the 
demographic pressures that will begin to burden the budget in less than 
a decade, we must stay on this course--and create the right processes 
and policies to maintain that fiscal discipline.
    Again, the President has measured the future in realistic terms, 
set his priorities, and made balanced choices. We are proud of our 
budget, and we commend it to your consideration.

    Chairman Kasich. Thank you. Let me just ask you really two 
questions.
    The first thing is, last year we had a vote on the Clinton 
budget up here in the House of Representatives, not much 
different than the budget you have presented to us today, and 
Mr. Spratt said the tobacco increase, additional fees, these 
loophole closings. I think the vote in the House last year was 
425, no, and two, yes; and you sent us just about the same bill 
that you sent us last year.
    So why would you do that? Why wouldn't you attempt to go 
back to the drawing board and send us something that has some 
chance of being enacted or some chance of making some progress? 
Maybe you will get four or six votes this year, I don't know. 
We will see. We are certainly going to have a vote at some 
point.
    Why not change course? Why send us something that virtually 
has no support even among your Members?
    Mr. Lew. Mr. Chairman, my recollection of last September, 
October and November is a little bit different. I recall 
negotiations where we prevailed on many important priorities in 
education, research and development, many, many areas. I think 
the President's budget last year and the year before served as 
the basis for much of the work the Congress accomplished, and 
we worked together on a bipartisan basis to reach agreements. I 
am quite confident that that will happen again this year.
    We feel that the record we have had over the last number of 
years establishes that our budget is a good starting point, and 
our success in the end establishes that we prevail quite well. 
I think that we might not agree today and we may not agree over 
the next few days, but I am confident that by the time we come 
to September we will actually agree on many of the things in 
this budget; and I look forward to working on a bipartisan 
basis to get a lot of things done this year.
    Chairman Kasich. Let me ask you about the Social Security 
and Medicare. What you essentially do in Social Security and 
Medicare is to put IOUs in these accounts, which represent a 
claim on future taxpayers. In other words, we as Americans owe 
the Social Security fund or the Medicare fund more dollars. So 
that extends the life of the program; it doesn't change the 
program. It doesn't reform the program.
    We know by, I think, 2012 Medicare runs out of money. We 
know that soon after that we are going to be faced with Social 
Security--if we wait that long. I don't think we will. I think 
somebody will step up to the plate and show some leadership. 
How could you duck Medicare and Social Security another year?
    Mr. Lew. I think we have actually done quite the opposite. 
We have proposed a budget that tackles many of the important 
issues regarding Social Security and Medicare.
    Chairman Kasich. Such as?
    Mr. Lew. In the case of Medicare, the President has 
proposed substantial reforms in the Medicare program to 
modernize the program, to increase competition that would 
partially offset the cost of the prescription drug benefit 
program. We think the prescription drug benefit ought to go 
hand in hand with modernizing the program and achieving some 
realistic and prudent savings.
    Chairman Kasich. Jack, let me ask you, the extension of the 
life of Medicare is based on paying down debt and putting IOUs 
in the Medicare Trust Fund. What programmatic improvement or 
reforms have you put in place that extend the life of Medicare?
    Mr. Lew. We have obviously taken the savings associated 
with the reforms and modernization and used them to offset the 
cost of the prescription drugs.
    Chairman Kasich. That's not an answer.
    Mr. Lew. It is an answer. We could have presented a budget 
that showed those savings extending solvency. The money can go 
either way. We have real reforms, we have real savings, we have 
real modernization.
    Chairman Kasich. Which of those reforms have extended the 
life of Medicare?
    Mr. Lew. On their own, the proposals that would promote 
competition on the fee-for-service side of Medicare, the 
proposals that would extend modest cost constraints after the 
expiration of the Balanced Budget Act beyond the life of the 
current provisions would all extend solvency.
    Chairman Kasich. Aren't those savings spent?
    Mr. Lew. They reduce spending of the trust fund. We 
separately have proposed the prescription drug benefit, and 
net, the combination of surplus dollars committed plus the 
savings, extend solvency to 2025.
    Chairman Kasich. That is because you just put more IOUs in 
the fund. All of the programmatic savings that you make you use 
up in more spending.
    Let us not argue then. We can go round and round for weeks. 
Let us go to Social Security.
    What programmatic changes have you made in Social Security 
that has extended the life of Social Security?
    Mr. Lew. I think if you look at the proposal that we have 
made to take the interest associated with paying down the debt 
and dedicating it to Social Security, there are two important 
things to point out. First of all, the interest reduction is 
coming as a result of taking the Social Security surplus and 
not spending it for any other purpose. No lock box will do any 
good for Social Security solvency unless it extends solvency by 
putting money back into the trust fund. We think that is an 
appropriate thing to do.
    Chairman Kasich. IOUs. There is no money put in, correct?
    Mr. Lew. The commitments are current law commitments to 
Social Security. There is nothing about our policy that does 
anything to increase a penny of commitments to Social Security. 
Unless one wants to advocate cutting Social Security benefits, 
those commitments are there. What we are saying is, before we 
undertake new commitments--and I don't personally care in terms 
of the analysis whether it is for tax cuts or for spending--you 
have to put the resources in keeping the commitments to Social 
Security, and that is what we have done. We have run a fiscal 
policy that produces surpluses. If we don't spend the money 
twice, if we don't spend it on a tax cut or on other new 
programs, we can put money aside for Social Security.
    I think the reduction in interest payments is so dramatic 
that it bears repetition. When we started doing budgets in 
1993, we expected to be spending 23 cents out of every dollar 
in 2010 to pay interest on the debt held by the public. When we 
reduced that 23 cents down to 3 cents, the question is what do 
you do with the remaining 20 cents. We are saying we should use 
that to extend Social Security solvency.
    We are making a second proposal. We are saying that, of 
that money we put into the trust fund, half of it should go 
toward equity investment, half of it should go toward Treasury 
bonds, up until the point when equity totals 15 percent of the 
trust fund. We believe that is an important reform in Social 
Security financing. It is one that we look forward to a debate 
on.
    Now, I can't challenge your proposition that there is a 
need for other policy changes. The President has spoken to 
that. He has spoken to the need for it to be undertaken on a 
bipartisan basis. We remain prepared to work with the Congress 
on a bipartisan basis toward those kinds of program reforms; 
but I think realistically we have to assess the year before us, 
and if we can take the first step of taking the interest 
savings associated with not spending the Social Security 
surplus, and we can dedicate that to extending solvency, we 
will have accomplished something very important.
    Chairman Kasich. Well, Jack, then essentially there are no 
programmatic changes in either of these programs where the 
people who estimate the life of these programs will give you 
one nanosecond worth of extension of these programs. The fact 
is, Mr. Stenholm and Mr. Kolbe have a Social Security proposal, 
Mr. Archer has a Social Security proposal, I have a Social 
Security proposal, Mr. Smith has a Social Security proposal 
that deals with comprehensively creating private accounts--in 
my case, saying the baby boomers in the short run will have to 
give something up for their children in the long run.
    The President doesn't have one single plan on that, not one 
single proposal. He has done nothing other than put more IOUs 
that everybody in this room owes the government without making 
one change in the outflow of dollars, not one single dime worth 
of change. And I have got to tell you, if I were the budget 
director--and I wouldn't have that job.
    If I were the budget director and my President didn't want 
to be in a position to tackle the two biggest challenges that 
we have in the country--I would just tell you, we are all going 
to get out of this business and we are going to meet one day 
and maybe have a cold beer and kind of look back, and I think 
you are going to regret the fact that you really didn't have 
the courage on these programs. Oh, yeah, we paid down some 
debt, thank God we did. We are the ones who told you to keep 
your mitts off Social Security, let us not forget that.
    The fact is, politicians today don't want to deal with 
these issues; some do, but most don't. Some on a bipartisan 
basis do, but we are punting on Social Security and Medicare; 
and it is tragic because what it is going to mean is, right 
now, if we got on it, we could do it, we could handle it, but 
every day you wait you get yourself deeper and deeper in a 
hole.
    And I am disappointed that you have done it, that you have 
done this, and I guess we will turn it over to the next 
administration and kind of duck it again this year. We will get 
back to it because we will be forced to.
    Mr. Spratt is recognized.
    Mr. Spratt. Mr. Lew, basically what we are doing is 
allowing Social Security to not only keep the $2.2 trillion 
that will accumulate over the next 10 years, but by not 
otherwise spending it, by paying down corresponding public 
debt, we are adding to net national savings----
    Mr. Lew. That is correct.
    Mr. Spratt [continuing]. In the same amount of money.
    Now, nobody has tried to estimate the impact on our economy 
because it invites a lot of very judgmental decisions about 
exactly what that will do to the economy, but surely $2.2 
trillion in additional savings over the next 10 years, $3 
trillion before we begin to really experience the onslaught of 
the baby boomers, is bound to have a solid impact on the growth 
of the economy, bound to be a boost. Wouldn't you agree?
    Mr. Lew. Yes, I would agree; and I would also point out 
that by using conservative economic assumptions, we have not 
taken credit for any of those kind of effects.
    Mr. Spratt. I understand and you shouldn't.
    Mr. Lew. I don't believe we should.
    Mr. Spratt. And secondly, if we do follow the path that you 
have plotted, we will go from 18.7 percent of GDP in government 
spending to 16.7 percent. Instead of being at 23 percent as we 
were at the peak of the Reagan years, we will be 7 percentage 
points lower; and if we have to raise money from the economy to 
meet obligations of Social Security and Medicare, we will be 
far better positioned in the Treasury to do it because we have 
taken these steps now.
    Mr. Lew. I would actually go a step beyond that, Mr. 
Spratt. We do long-term projections, and the long-term 
projections that we currently have show that we are running 
unified budget surpluses until I am roughly 100. That, to me, 
is the definition of a pretty sound fiscal forecast. We are not 
looking at going back into deficits anytime soon, and we 
factored in paying all of the bills we owe--all the bills to 
Medicare, all the bills to Social Security.
    The only thing that could jeopardize that is if we make 
other commitments that make the resources not be available. If 
we have too large a tax cut or too large a set of new 
programmatic initiatives that throw those projections off, then 
the question would arise, can we pay the bills.
    I think one of the things that we need to do as prudent 
fiscal stewards is take a look ahead and make sure that 
everything fits, without putting us back into a deficit; and if 
that is the case, we have actually done quite a bit we can be 
proud of in terms of managing the budget and our fiscal 
affairs.
    Mr. Spratt. Let me turn to the other end of the budget, 
nonentitlement spending, discretionary spending. I think you 
would agree in the budget equation this year that is the 
biggest variable.
    Mr. Lew. I think in terms of where we begin it is certainly 
the biggest variable, and I am proud we are presenting a budget 
that invites the kind of honest decision making where we all 
look at each other and ask, what is and is not possible. I 
tried in my opening remarks to point this out, but if I could 
just underscore, the notion that we would sit here today with 
the kind of surplus we are looking at and make cuts that would 
reduce our ability in the country either to provide for our 
national defense or invest in our children for the future is 
just not realistic.
    On the other hand, we do not believe that discretionary 
spending should be unconstrained. We have proposed extending 
discretionary caps for 10 years, but at realistic levels, 
levels that we can all live with and levels that give us the 
ability to make balanced judgments on the other part of the 
budget.
    Mr. Spratt. Specifically, how much of an increase in 
discretionary spending are you talking about between this year, 
2000, and next year, 2001, and then over the 10-year period of 
time?
    Mr. Lew. Well, over the 10-year period of time we are 
actually projecting growth at slightly below the current 
service's inflation level. So we would save $33 billion over 10 
years compared to a simple inflated baseline. That obviously 
over 10 years is pretty close to the no-real-growth projection.
    In the first year, our outlays are actually below the no-
real-growth level, and our budget authority is a little bit 
above. The reason is largely defense. Our defense path, as you 
noted in your opening remarks, had very significant increases 
from 2000 and 2001. We have stuck to that level of defense 
policy. We have provided additional funding in defense for 
unforeseen circumstances in last year's budget, in particular 
Kosovo and fuel price increases. So we think that the best way 
to look at the budget is over the 10-year period.
    Mr. Spratt. Let me ask you about one other aspect and I 
will turn it over to other Members.
    Tax cuts. Your budget provides for spending increases that 
would keep discretionary spending pretty consistent with 
inflation, zero real growth over a 10-year period of time. It 
also provides for returning some of the surplus to the American 
taxpayer.
    What sort of tax cut are you seeking? How much is it? What 
is the gross amount? What is the net amount? And who benefits 
from it?
    Mr. Lew. Well, the net tax cut, the amount of the tax cut 
that we financed from the surplus is $256 billion. The design 
of the tax cut, as the President made clear in the State of the 
Union, and as I have tried to make clear in my remarks today, 
is really to target working families, to take care of the needs 
that working families have to provide for child care, health 
care, to provide communities the resources to invest in a clean 
environment and new schools; and they are not a kind of across-
the-board tax cut. We have a marriage penalty provision which 
we think is properly sized, and we have tried to come up with a 
balanced approach.
    The alternative of a much larger tax cut, we think forces 
one to make judgments about how to allocate the existing 
resources. We think that if the tax cut grows much larger than 
$256 billion net in terms of the draw on the surplus, then it 
puts in real question whether one could finance the increases 
in Medicare for prescription drugs or in the child health 
program so the kids and their parents could be covered. These 
are the kinds of priorities we ought to be debating this year.
    We think we have the right balance. We think we have the 
right priorities. It is not a question of who is for or against 
a tax cut. It is a question of how big it can be and what it 
squeezes out.
    Mr. Spratt. One final question: You estimate the net 
surplus that you provide for discretionary, roughly the rate of 
inflation, as $746 billion over 10 years. CBO, using basically 
the same baseline for discretionary spending, comes out with 
$838 billion. Will a surplus in that range sustain a tax cut of 
$400 or $500 billion over the next 5 years?
    Mr. Lew. I don't believe it would, Mr. Spratt. The 
projection that we have of $746 billion and the projection that 
CBO has of $838 billion are really quite comparable. Over 10 
years it is rare for forecasters to come out that close.
    I think that is a realistic range. If we were in a debate 
over that range of difference, I think we would be at a good, 
fiscally prudent starting point. Within that box there just 
isn't room for a $500 billion tax cut without completely 
eliminating the opportunity to invest in other important things 
like Medicare, prescription drugs and child health and parents' 
coverage.
    I think that to go outside of the box puts at risk our 
fiscal policy. I don't believe the savings will materialize, 
and I think we would end up spending more money than we really 
have. I think if we are in a debate of $750 to $800 billion, we 
are in the right range of surplus to be talking about. If we 
are talking about $1.8 or $1.9 trillion, I think that is not 
realistic.
    Mr. Spratt. Thank you very much.
    Chairman Kasich. Mr. Chambliss is recognized for 5 minutes.
    Mr. Chambliss. Thank you, Mr. Chairman, and I know you 
referred to this budget as being the first budget of the new 
millennium, but I have to be honest with you, I look at this 
budget as being, more importantly, the last budget of the 
Kasich era. You know, we have been through some very difficult 
times over the last 5 years, and I think it goes without saying 
that this administration--and, Mr. Lew, you obviously were a 
part of it back then--was under the public commitment that the 
budget of this country could not be balanced over a 5-year 
period.
    Thank goodness for John Kasich, who led this committee down 
the path of believing that the budget could be balanced in 5 
years; and after a severe fight in 1995 and another one in 
1996, another one in 1997, John, you did magnanimous work in 
getting us to a balanced budget that nobody in the 
administration really thought we could accomplish.
    Mr. Spratt has already stolen my thunder about little Emma 
and Reese, but I think their legacy is what this is all about, 
because we talk a lot about what we are going to do for our 
children and grandchildren. But, John, you have certainly lived 
up to your word in trying to make sure that your children are 
not left with a huge deficit out there that we have been 
spending for all these years.
    And I guess I am not surprised to hear you say, Mr. Lew, 
that you don't think that holding down spending is realistic. I 
am not surprised at that statement because it is very obvious, 
looking at--every single budget that this administration has 
presented since I have been in office has called for an 
increase in spending every single year, and this year is 
certainly no exception, but you know, we can't continue to go 
down that path. And what really disappoints me with this budget 
is that instead of looking at some way to reduce Federal 
spending and to make reforms and programs, this administration 
thinks that the answer to the problems out there are to 
continue down that road of increasing spending.
    Now, there are real reforms that can be made in every 
single agency in the Federal Government. We all know that. We 
say it over and over again, but this is the real opportunity 
that we have to insist that every agency examine themselves and 
make real reforms; and if we don't do that, then what we are 
going to do is take the attitude that this administration has 
of solving problems simply by throwing money at it. Now that is 
not going to work.
    Now, there are two particular areas that I have an interest 
in, and that is defense and agriculture, and even though I am 
the biggest defense hawk in America--there you go, John--and I 
am certainly a strong advocate for farmers all across America, 
and I believe that we have got to look out for those folks, at 
the same time I have a strong recognition of the fact that 
there is waste, fraud and abuse going on at the Department of 
Defense, and there is waste, fraud and abuse going on in the 
Department of Agriculture, and we are going to look at some of 
those issues and some of those areas in the coming weeks.
    But, you know, when you look at the budget that the 
President has come forward with this year, the defense budget, 
it is obvious to me that there is a clear admission on the part 
of the administration that they have been wrong for 7 years and 
the Republicans have been right, and that they have not been 
spending enough money on defense. You have made admission after 
admission in this budget that recruiting is down, retention is 
down, purchase of weapons systems is not what it should have 
been, spare part inventory is not what it should have been. We 
have got too much cannibalization going on out there. We are 
not flying airplanes that ought to be flying, we are not 
sailing ships that ought to be sailing, and we have not done a 
good job with defense.
    With respect to agriculture, I think you have done the same 
thing. You have not looked at reform of programs like crop 
insurance. You have simply thrown money at the problem, and I 
will have to tell you, Mr. Lew, that our farmers don't want 
handouts. Our farmers want a fair market in which to sell their 
goods, and if you travel down the path of trying to create a 
fair market for our farmers, then you will go a long ways 
toward solving the problem that we have in agriculture today as 
opposed to simply throwing more and more money at the problem.
    There is not one single aspect of this budget that deals 
with the issue of regulatory reform that will save our farmers 
money. There is not one single aspect of this budget that looks 
at trade so that we drop some of the barriers out there to try 
to improve trade so that our farmers can sell their products at 
a fair price across the world. So, very honestly, I am 
disappointed in this budget.
    You may be right that at the end of the day, next fall when 
you come back, there will be tax increases in here, there will 
be more spending in here; but I just guarantee you today, Mr. 
Lew, this Member of Congress is not going to vote for your tax 
increases. I am not going to vote for your increase in 
additional spending that is going to be a burden upon my 
children and my grandchildren.
    Thank you, Mr. Chairman.
    Chairman Kasich. Mr. Minge is recognized for 5 minutes.
    Mr. Minge. Thank you, Mr. Chairman.
    I would like to join in welcoming you, Mr. Lew. We 
certainly appreciate the care that you have gone to to work 
with our committee and to present in a very lucid fashion the 
budget proposals from the administration over the last several 
years.
    I would also like to thank the chairman of the committee 
for the leadership and the challenge that he has issued to us 
continuously, not that we have always agreed with the nature of 
the challenge but certainly it has made all of us think very 
carefully about our responsibilities here in Congress.
    I would like to turn to two factors which I believe have 
been emphasized in this budget proposal which I think are 
important for our country. The first factor is paying down on 
the national debt. This has become a mantra that people on both 
sides of the aisle have embraced. And, secondly, dealing 
responsibly with the other opportunities that we then have to 
reduce taxes and to strengthen programs.
    I would like to sort of have you put in framework the debt 
reduction piece of this effort and tax reduction, because, as I 
understand it, we are apt to have on the floor within a week a 
fairly significant tax reduction proposal which would cost 
close to $200 billion. I am wondering, can we fit this type of 
a tax reduction proposal into our budget efforts and still 
expect to pay down on the debt and achieve the savings in 
interest rates and other things which I understand are a very 
important dividend for the American people?
    Mr. Lew. Congressman Minge, I don't believe that if the tax 
cuts total a very large number, whether that is $500 billion or 
a trillion, whatever they add up to, you can accommodate the 
kind of fiscal policy we are talking about. The bill that has 
moved out of the Ways and Means committee is just one element 
of it. It is just the first installment. It is a policy that I 
think we all agree on, that there ought to be action taken to 
address the marriage penalty. But the size of it, $182 billion, 
suggests that when you get done adding each of the other pieces 
that it will just be an enormous package.
    What we keep emphasizing is not whether one is for or 
against a marriage penalty provision, because I think we agree 
that we all want to address the marriage penalty. The question 
is, how big should that be as part of an overall balanced tax 
package and as part of an overall balanced economic program?
    I think that you look at the substance of that bill, and in 
fact many of the dollars go not to people who pay a marriage 
penalty but people who actually get a marriage bonus. So I 
don't think it's a terribly well-crafted proposal, and the size 
of it is just not compatible with other tax proposals and other 
spending priorities. That is why Secretary Summers sent a 
letter to the Congress last week, and we've indicated that we 
have very, very serious problems with it.
    I think that the notion of tax relief being part of the 
balanced use of the surplus is a given. We have put $256 
billion of the surplus into tax relief. We think that is the 
right size. We think that one can address a variety of very 
legitimate needs for tax relief while addressing Medicare and 
health care coverage.
    If I could just go back one moment to something Mr. 
Chambliss said, to correct something, we have not proposed 
increased spending. The chart that I have up there shows we 
proposed lower spending every year as a percentage of the 
economy from when we came in. I think the question is, how do 
you take all of the different pieces and keep them together in 
a balanced way? I think we have done that. I think there is a 
real danger if you go piece by piece and let the pieces at the 
front end get very large, that it just won't add up.
    Times of surplus require that we exercise fiscal discipline 
just as times of deficit do. It is actually in a funny way more 
difficult. Because when there is a surplus, it seems like 
everything is possible. When there was a deficit, everyone was 
focused on getting to zero and we worked together. I am very 
proud of having worked with the chairman and the ranking member 
in 1997 on a bipartisan basis to take some very important 
steps. We may have to work together on a bipartisan basis with 
the surplus but to have a realistic balanced use of it, we must 
be prudent in terms of how we do it.
    Mr. Minge. I certainly feel it is a slap in the face at 
this committee to have a very large and actually in some 
respects a very attractive tax reduction proposal come to the 
floor without at least considering how we craft a budget first. 
We are putting the cart before the horse. I know it is 
Valentine's Day. We all would like to give a valentine to 
people contemplating marriage. Certainly this is something we 
should try to work on.
    Thank you very much.
    Chairman Kasich. Mr. Shays is recognized for 5 minutes.
    Mr. Shays. Thank you, Jack. It is nice to have you here.
    I do agree in the end we can find some common ground and 
work on a bipartisan basis, but there will clearly have to be 
some changes from what the President has proposed to ultimately 
what we agree on. I would like to know, how many Federal 
programs does your budget propose eliminating or reforming?
    Mr. Lew. I can't give you a count of programs. We proposed 
very different funding levels for every different Federal 
program. We have some things that we have reduced 
substantially.
    I can give you some examples, and we may not agree on them, 
but things like local law enforcement block grants, we have 
proposed lower funding levels, eliminating some things. We put 
more money into our COPS program. We think that is the right 
way to make priorities. In the area of EPA, we have reduced 
funding for the State revolving funds because we have reached a 
level of capitalization. We no longer need the same level of 
contributions. We have removed funding for many earmarks 
because we think that is not the highest and best use. I 
haven't done a count of them, but we have gone through the 
budget item by item making case-by-case judgments--what should 
go up, what should go down.
    Mr. Shays. But, by your count, how many new programs have 
been established?
    Mr. Lew. I haven't done a count. We tried very hard to 
design a budget that would, to the minimum extent, require new 
authorizing legislation, very conscious of the time pressures 
this year. We have tried to do everything within existing 
authorizations. There may be a few exceptions to that. But in 
general we were very conscious of the fact that we wanted to be 
able to work through the appropriations process to fund our 
priorities.
    Mr. Shays. Last year you set aside 62 percent of the 
unified budget to pay down the debt of Social Security. How 
much do you set aside this year?
    Mr. Lew. We have taken the entire Social Security surplus 
and set it aside in a lockbox. It is $2.2 trillion out of a 10-
year total of $2.9 trillion. I haven't done the percentage, but 
it is $2.2 trillion out of $2.9 trillion.
    Mr. Shays. With defense, have you identified any wasteful 
programs that you could eliminate?
    Mr. Lew. In defense, we have worked with the Defense 
Department very, very hard to design a budget that would meet 
the needs of the policy set forth last year. That means some 
things go up and some things go down. I think that we are very 
proud of the management reforms that the Department of Defense 
has undertaken in the areas of procurement, in the way it 
manages many aspects of the day-to-day business.
    Mr. Shays. But the bottom line is there is no major program 
that----
    Mr. Lew. We have reduced funding for things that weren't 
requested in prior years. We have provided resources to pay for 
the cost of operations that we couldn't expect. Like every 
other aspect of the budget, we worked with the Defense 
Department item by item.
    Mr. Shays. I only have 5 minutes. I need you to be a lot 
more punctual here.
    With the Japanese, they pay over $3 billion, 75 percent of 
it nonsalaried costs of our troops in the Pacific theater. The 
Europeans have 100,000 troops. The Japanese have about 40. The 
Europeans pay less than $200 million. Have you made any effort 
to do the same kind of burden-sharing in Europe that we require 
of the Japanese?
    Mr. Lew. Congressman Shays, I can't address the specifics 
of burden-sharing in Europe. I can tell you that with the 
Pentagon and the State Department----
    Mr. Shays. Let me get to taxes then.
    Mr. Lew. If I could just give you half a minute of an 
answer. We have worked very hard to try and keep burden-sharing 
in mind because we know that we have to improve burden-sharing.
    Mr. Shays. We have the highest level of tax revenue coming 
into the Federal Government. Basically, it was 20.4 percent of 
GNP in 1945. We are now at 20.7 percent. Your tax cut--your net 
tax cut when you add fees in the next 10 years is only $77 
billion. It is only $28 billion net tax cut in 5 years. Why so 
little?
    Mr. Lew. I don't think I would do the calculation the way 
you did. I think you are adding together things that we don't 
think appropriately should be added in figuring out the net tax 
cut.
    Mr. Shays. Even if you take out fees you are only cutting 
in 10 years $146 billion.
    Mr. Lew. You are counting our tobacco policy as a tax 
increase. I would argue very strongly that our tobacco policy 
is, first and foremost, an effort to stop youth smoking in this 
country, if you take away the profits associated with selling 
cigarettes in general.
    Mr. Shays. My time is up. The bottom line is it is a tax 
increase. Please don't come here and say you are not increasing 
taxes.
    Mr. Lew. We have designed a youth penalty to make it not be 
profitable to sell cigarettes----
    Mr. Shays. But is it not a tax increase?
    Mr. Lew. It is receipts to the government. Whether or not 
it is a tax increase is something we could debate.
    Mr. Shays. I don't think we could debate it. It is a tax 
increase.
    Chairman Kasich. Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman.
    First of all, let me just say, Mr. Lew, I think the budget 
here today--there are really two budgets. There is the 
macrobudget that lays out the Nation's fiscal policy as the 
administration would like to see it, and I think--I appreciate 
the fact that you have put such great emphasis in paying down 
the debt.
    I would remind my colleagues on the committee, last year 
when we marked up the budget in this committee, the budget that 
ultimately failed, I offered an amendment that would have 
extended the paygo rules, would have extended the spending caps 
forward and would have committed all of the surplus to paying 
down the debt. Needless to say, that amendment was defeated 
overwhelmingly by this committee.
    Now, my colleagues have decided that maybe something along 
those lines isn't such a bad idea, so maybe I am smarter than I 
think I am. I appreciate what you have done there.
    I think the second part of your budget is the micro part of 
the budget where you talk about new ideas. Some of them are 
good, and some of them aren't. But I have a little bit of 
problem when my colleagues stand up and say, well, you gave 
every special interest something in this budget.
    I have got a young woman who lives in my district named 
Carolyn Rawley who has juvenile diabetes. Her outlook is not 
particularly that great. I have two kids, two daughters. I am 
fortunate that they don't have that problem. They don't have to 
take insulin every day. This budget increases NIH. My 
colleagues have come a long way on that. They weren't for that 
in 1995, and they have come a long way on that.
    This budget addresses the problem of kids who should be in 
the Medicaid program but can't get in there because the States 
have made it so hard to sign up. The State of Texas--and we all 
hear a lot about the great State of Texas where I am from--the 
State of Texas has the highest number of children who are 
Medicaid eligible and not enrolled in the program, 800,000. 
That number has been going up over the last couple of years. 
That is a national tragedy. Who pays for that? The taxpayers in 
my district through the public health system, the public 
hospitals.
    The Republican county judge has just announced that they 
are going to raise taxes in Harris County to pay for indigent 
care because these kids aren't signed up for Medicaid. So you 
address that. The woman who needs treatment for breast cancer 
is addressed in this budget. Those are things that are on 
target. I think it makes sense.
    The clinical trials, I have introduced legislation on that. 
I met a woman whose insurance company wouldn't pay for the 
clinical trials. She is in Medicare, has an HMO. Her last 
chance is through a clinical trial at M.D. Anderson Hospital in 
my district.
    Those are good things. Yeah, there are things in Medicare 
that I don't care about, but the other thing, I would remind my 
colleagues, it is not do as I say, not as I do.
    My colleagues, the chairman talks about no Social Security 
plan. I think paying down the debt is one of the best things we 
can do for Social Security from an economic perspective. The 
fact is, what happened to the Archer-Shaw plan? You are in the 
majority. Bring it to the floor. But you didn't bring it to the 
floor. The fact is that you have put ideas in here. Some of 
these are good and some that aren't.
    I also want to ask about the funding issue. Because my 
colleague, Mr. Chambliss, made the point there are two issues 
that he cares a lot about, defense and agriculture, two areas 
where we increased spending last year, $17 billion in defense 
and about 7 or $8 billion in agriculture, over what the caps 
were that we set in 1997. It is Congress who makes these laws. 
The President sends up the budget, it gets beat around, and 
Congress ultimately makes the laws. All my colleagues 
understand that or should understand that. That is why you ran 
for this office.
    If you go around the horn here, every Member will raise 
their hand and say what program they think needs to be funded, 
that you have to put more money in. The problem is you get to 
the end and it tends to be more than caps. Can you tell us what 
the historical annual growth rate in discretionary spending, 
both defense and nondefense, has been since 1995 when the 
Republicans took control of the Congress? And also can you tell 
us are you eliminating the spending caps and paygo rules in 
this budget or are you maintaining fiscal discipline in this 
budget?
    Mr. Lew. The increases in spending have been present on a 
year-to-year basis every year. The numbers I can give you off 
the top of my head, 1998 to 1999 through the present. 1998 to 
1999 it went up 7 percent, 1999 to 2000 it went up 3.5 percent. 
We are proposing for 2001 that we go up 3.9 percent, so that it 
is roughly last year's levels, far below the 1998 to 1999 
level.
    I think that you have put your finger on what the real 
definition of realistic discretionary levels are. If no one is 
willing to advocate what it would take to reduce spending for 
veterans, for health care, for education, as I don't believe 
they should have to where we are right now, then we ought not 
to assume that in the aggregate we are going to spend less. The 
burden is really on those coming forward with lower levels I 
think to say what it is they would reduce. I think we have come 
up with balanced priorities, but reasonable people could 
disagree. We would welcome a discussion on that.
    In terms of the caps, what we have done is we have looked 
ahead not to getting rid of the caps but to having realistic 
caps that could actually be in force from year to year. Caps do 
more good if you use them as a planning tool and an enforcement 
tool than if you spend most of the year trying to figure out 
how to get around them.
    Last year and the year before, it taxed all of our 
creativity to understand what we were doing to get around the 
caps. I have got to tell you, sitting down to do this year's 
budget, it was a challenge just to figure out what happened in 
2000. That is not the right way to do budgets. It is not the 
right way to enforce fiscal discipline. We have tried to get 
back on a clean slate. I am not sure we got all the way there. 
It was very complicated. But I think we made a very, very big 
step. We would like to work together to try to get all the way 
there.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Chairman Kasich. Mr. Nussle.
    Mr. Nussle. Thank you, Mr. Chairman.
    What a difference a few years makes. As late as last year 
the President submitted a budget that wasn't balanced, spent 
the Social Security Trust Fund and broke the spending caps. 
Now, all of a sudden the President rushes in in here in his 
final year as President and took 8 years to get to this point 
but finally proposes the first balanced budget, proposes not to 
touch the Social Security Trust Fund and offers a tax cut.
    You are not good at it yet, but you have finally come 
around to our way of thinking. We want to appreciate you for 
that. We think we can help you with your goals about keeping 
the budget balanced and paying down the debt and Social 
Security, keeping your mitts off of that and providing the tax 
cut. We are going to introduce a budget that can do just that. 
You are not used to it yet.
    After 8 years of trying, you have, as I say, finally come 
around to a way of thinking that I think this committee, in a 
majority sense, appreciates. We do have to commend you for 
that. But I think we also have to look at whether or not your 
budget is realistic, even within that framework.
    First of all--I guess the first question I have that I 
would ask my constituents, is this a time when we ought to be 
raising taxes? Well, most of my folks back home tell me that, 
no, if anything they are taxed enough or they are taxed too 
much. But I don't think anyone is suggesting back home that 
they are not taxed enough.
    So then the next question I would ask is should we add 
about 85 new programs? I know there is a cute little thing in 
here, is there anything that needs to be newly authorized? You 
and I both know that is a game that they may not understand 
back home in Iowa, but there are 85 new programs that we have 
found so far, since you have submitted your budget, and we are 
still looking. Eighty-five new programs and proposals. Is that 
a time we ought to be doing that here in this country?
    Most of my constituents think that government in Washington 
is probably already big, spends too much, and the government 
back--closer to Manchester, IA, and Des Moines, IA, and Iowa in 
general and across our country at our State and local level is 
probably better government.
    So then the third question I would ask my constituents back 
home is, is this a time when we finally have gotten to a 
surplus that we ought to tackle big issues such as Social 
Security, such as Medicare reform, such as paying down the 
national debt? And to a one in my town meetings that I held 
during the month of January they said exactly, this is time to 
focus in on paying down the national debt, not more government 
spending. This is the time that we ought to focus in on Social 
Security reform, not this gimmick of IOUs. You can IOU yourself 
to death out here with all of this banter you had with the 
chairman.
    The fact of the matter is, it is still paper. It is not 
money that is available for future generations. There are kids 
and grandkids that came to my town meetings that said now is 
the time to focus in on that.
    Finally, Medicare reform. Not one thing in here for rural 
health concerns of Medicare where most of our seniors are 
located right now. And there are hospitals closing across our 
country, having a difficult time making ends meet. Not one 
scintilla of reform for those hospitals, for those providers 
that are on the front lines of providing quality health care in 
rural America. Not one bit--except for more IOUs and a 
prescription drug benefit that doesn't even phase in for 4 
years.
    Now, I think we ought to have five proposals or five 
principles. We ought to first balance the budget and pay down 
as much national debt as we can, we ought to continue to 
protect Social Security, and we ought to look at some of these 
proposals that are out there for reforming Social Security. We 
need to provide tax relief, not tax increases, but not just 
relief for the sake of relief. It has to be fairness.
    I think the marriage penalty is unfair. You can talk about 
it in terms of numbers, but when it comes right down to it 
these are people that are dealing with it as married couples.
    There ought to be a real prescription drug benefit, not one 
that is put in there on the backs of rural America in 
particular because you don't have real reform in Medicare.
    Finally, we ought to continue our commitment to education 
and national defense. The increase that you have in here with a 
40 percent mandate for special education is almost criminal. 
The reason our folks back home in education are having a 
difficult time building schools and repairing schools and 
buying textbooks is because you keep forcing down a mandate on 
special education without proposing the kind of increases that 
the Republicans did last year. We are going to continue that 
commitment.
    Those five principles I think are the ones that we should 
focus on, Mr. Chairman, as we write our budget. Thank you.
    Chairman Kasich. Mr. Davis.
    Mr. Lew. May I respond?
    Chairman Kasich. If you want.
    Mr. Lew. Mr. Chairman, Congressman, I would respond, first 
of all, by saying that we have presented the first two balanced 
budgets in a row since the 1950's. So we consider this a 
reprise, not the first balanced budget.
    Mr. Nussle. You used the Social Security Trust Fund last 
year, did you not?
    Mr. Lew. We balanced the budget without using the Social 
Security surplus. This is the first time----
    Mr. Nussle. This year.
    Mr. Lew. Last year we accomplished it.
    Mr. Nussle. No, no. You accomplished it at the end of the 
year because we passed it. You did not accomplish it when you 
proposed it.
    Let's talk about what the President has proposed. He has 
never proposed a balanced budget without dipping into the 
senior Social Security benefits. You and I both know that.
    Mr. Lew. Last spring we proposed a modified budget in order 
to address that concern. I think that we proposed balanced 
budgets for 3 years running.
    Mr. Nussle. Jack, you and I both know the President has 
never done that.
    I didn't ask a question, Mr. Chairman. If we want to debate 
this, I am going to have to ask for more time.
    Chairman Kasich. Why don't we let the witness go ahead and 
respond?
    Mr. Lew. If I could respond, I would just say that the 
notion we are raising taxes I just don't think is by any 
measure fair. It is not what we----
    Mr. Nussle. Let me ask a question. Is it going to require a 
bill through the Ways and Means Committee in order for this to 
be accomplished?
    Mr. Lew. Everything that would change policy requires----
    Mr. Nussle. Read your Constitution. That is a tax increase.
    Mr. Lew. That is not correct. Tax cuts require legislation.
    Mr. Nussle. Then it doesn't have to go through the Ways and 
Means Committee if it isn't a tax increase.
    Mr. Lew. I would actually suggest, with all respect, that 
tax cuts require legislation just as well. You have tax 
legislation on the floor I believe today on the marriage 
penalty.
    Mr. Nussle. Your increases will have to go through just 
like our tax reduction.
    Chairman Kasich. I would ask the gentleman from Iowa----
    Mr. Nussle. I didn't ask for a question, Mr. Chairman. He 
had his opportunity to present his budget. I have presented 
ours.
    Chairman Kasich. The witness has a right to be able to make 
a few comments in terms of the comments of our Members. If the 
gentleman would keep it short, we could come on to Mr. Davis.
    Mr. Lew. Thank you, Mr. Chairman. I appreciate the 
courtesy.
    I would make two other brief points. The question of what 
proposals we have for spending really ought to come down to the 
question of what is it for. We think that additional resources 
to reduce class size, to build and repair classrooms, those are 
good investments. We think that the American people want them. 
We should be in a debate about what we are trying to 
accomplish, not into just a count of what is new.
    Chairman Kasich. Mr. Davis is recognized for 5 minutes.
    Mr. Davis. Thank you, Mr. Chairman.
    Let me start by saying that I agree with you, Mr. Lew, 
about erring on the side of caution in terms of your 
projections, the $746 billion you have used as far as the 
projected surplus.
    I also agree with what I hear you saying, that we need to 
devote the lion's share of this projected surplus to paying 
down this massive $3.7 trillion publicly held debt.
    I further agree that I think it is credible to suggest that 
we set aside some of those funds to extend the solvency of 
Medicare and Social Security. After all, the baby boomers who 
were generating a lot of this income tax revenue in this 
general revenue are the same people whose retirement will drive 
up the cost of Social Security and Medicare and test its 
solvency.
    I think that the standard of using the lion's share of the 
surplus to pay down the debt ought to be the standard against 
which we judge any tax cut or any spending proposal in this 
Congress.
    In my State of Florida and in my community, the benefits of 
lower interest rates have provided dividends to homeowners and 
others far beyond any of the tax cuts that were proposed last 
year and the tax cut bill that the President threatened to 
veto. I would like to ask you to first elaborate on your views 
about the relationship between using the lion's share of this 
surplus to pay down debt and lower interest rates and the 
benefits to consumers.
    Mr. Lew. I think you have really put your finger on what is 
the fundamental policy decision or the two fundamental policy 
decisions that we will collectively be making this year. One 
is, how big is the surplus and are we doing it in a prudent, 
conservative way? Secondly, what are the trade-offs we are 
making to allocate that surplus? I think, setting the lion's 
share of the surplus aside, we have proposed $299 billion to 
augment the Medicare Trust Fund, to extend solvency, is a very 
high priority; and we should do it.
    I think there is an additional point, that if you were to 
spend that money on a tax cut or on new benefits you are doing 
something very different in terms of economic policy. You are 
consuming instead of saving. You are not paying down debt by 
that amount. We think that that will have an effect on the 
economy, on interest rates; and it is not the right way to go.
    In terms of conservative projections, we think $746 billion 
is the right number. But it is very different if we put $300 
billion into the Medicare Trust Fund than if we have spent or 
tax cut $300 million if the projections are off a little bit. 
It is not prudent to spend up to the very limit on new 
commitments. We think Medicare benefits are a commitment in law 
that we are bound to and we should honor. We think that taking 
surplus dollars and using them to pay those commitments is a 
very prudent and responsible thing to do.
    We could work through the mechanics of how it works and 
confuse people quite a lot, but the simple fact is that you 
could spend the dollar or save the dollar. By putting it into 
the Medicare Trust Fund, we save the dollar.
    As far as interest rates go, I think that your observation 
again is very correct. The average American family saves $2,000 
a year right now because of lower interest rates that are, in 
large part, related to our fiscal policy. The amount of Federal 
borrowing is down. Federal pressure on interest rates is down. 
We have a monetary policy that has been managed, taking account 
of our fiscal policy. I think we have done an enormous amount 
of good both directly and indirectly with a prudent fiscal 
policy. We should stick to that course because I think most 
Americans consider the lower interest payments they are paying 
on their mortgage the best kind of tax cut of all.
    Mr. Davis. One further question, Mr. Lew. As you know, this 
is the only committee in the House of Representatives that has 
the opportunity and I believe the responsibility to make the 
decision as to how we allocate this projected surplus as far as 
paying down the debt. I share my colleague Mr. Minge's concern 
that we are on the verge of shirking that responsibility, 
because we all know that the bottom line question we are about 
to address here is the magnitude of the tax cut proposed by the 
Republican leadership. I am concerned that we are about to see 
that broken into installments.
    Last year, that proposal was for roughly about $800 billion 
over 10 years. There is another proposal out there that is far 
in excess of that sum. I would like you to comment on what 
situation would we find ourselves in right now had we passed 
that $800 billion tax cut last year and if there is an attempt 
to pass it again this year.
    Mr. Lew. I think the numbers speak for themselves. If we 
are looking at a $746 billion surplus, it is impossible to 
accommodate an $800 billion tax cut because, as Congressman 
Spratt pointed out, there is over $100 billion of extra 
interest costs that you have to subtract out before you are 
spending the Social Security surplus. I think that if you use 
realistic starting points, a realistic baseline, there just 
isn't room for it.
    Within the realistic assessment of what the surplus is, it 
is a question of priorities. I don't believe a tax cut should 
be the entirety of our economic program right now. It should be 
a balanced part of it.
    I will defer to you on the prerogatives of this committee 
and on the proper process of the Congress, but I would just 
argue, in terms of fiscal policy, that the key is to make 
balanced judgments, to have everything fit together and not to 
just do it piece by piece not knowing how it all adds up. I 
think that the budget process in this Congress is much aided by 
this committee and the Senate budget committee doing its work. 
We look forward each year to working with you to do it in that 
kind of a comprehensive way.
    Mr. Davis. Thank you.
    Thank you, Mr. Chairman.
    Chairman Kasich. Mr. Pitts is recognized.
    Mr. Pitts. Mr. Lew, according to GAO audits, the Navy alone 
has simply written off about $3 billion worth of in-transit 
items as lost over the past 3 years. They could have been lost. 
They could have been stolen. What is the administration doing 
to improve this obviously cumbersome, inefficient system, call 
it a defense transportation network?
    Mr. Lew. Congressman, I would have to get back to you on 
the specific issues regarding that specific GAO finding. But I 
know that, as a general principle, we take very seriously the 
need in each department, and the Defense Department is no 
exception, to manage things well.
    There is a lot of work to do. In our budget, we highlight 
24 priority management objectives that we suggest are major 
concerns. But we do take very seriously all those reports.
    I think that over the past few years the Defense Department 
has done much better both in terms of putting its audited 
financial statement in shape and in terms of accounting for the 
various transactions. But they are not where they should be, 
and they know they are not where they should be. They are still 
working on it.
    As to the specific finding, I would have to go and look at 
it. I don't know whether it has merit or not, but I know I 
would take very seriously any questions it raises.
    [The information referred to follows:]

    During OMB testimony before the House Budget Committee on February 
8, 2000, Congressman Pitts raised questions about the Administration's 
acquisition reform effort in the context of the Army's program to 
procure High Mobility Trailers (HMT) for High Mobility Multipurpose 
Wheeled Vehicles (HMMWV). He also asked about reports that billions of 
dollars of Navy materials were lost in transit.
    Like the Congress, the Administration is concerned about wasteful 
spending in the Federal Government. The Office of Management and Budget 
has been working closely with all agencies, including the Department of 
Defense, to develop and improve efficient, cost-effective procurement 
strategies and ensure that our systems properly track government 
assets.
    To date, the Army has procured 6,700 high mobility trailers for 
about $57 million out of a total acquisition goal of 25,112 trailers; 
the last of these 6,700 trailers were delivered in July 1999. However, 
the HMT program has experienced several problems since its inception. 
At this point, the Army is unable to use the delivered trailers as 
intended because of safety and reliability problems associated with the 
trailer's drawbar and brakes. The Army is considering several options 
ranging from limiting trailer payload to retrofitting trailers and 
HMMWV bumpers so they can be used for their intended purpose. Final 
costs will not be known until a decision is made.
    The Army did not include warranty requirements in the 1993 trailer 
contract because the estimated additional costs to the government to 
purchase, administer and enforce a warranty outweighed expected 
benefits. The trailer industry does not maintain an international 
distribution, maintenance, and repair capability. Any trailer warranty 
would have required the government to perform actual warranty repairs 
and then to seek reimbursement via a claims process from the original 
manufacturer.
    The trailer design approved for production in 1994-1995 met all 
stated contract performance requirements and testing of the first 
production units was designed to focus on verifying the trailer's 
compliance with these requirements. Later, during more rigorous system-
level testing, i.e., HMMWV and trailer operating in concert, the Army 
first detected structural weaknesses in the trailer drawbar and brake 
system.
    The Army does not intend to procure any more trailers of this 
design. The remaining HMMWV trailer requirement (18,412 additional 
units) will be met with a new trailer design. Further, the Army has 
established an Integrated Product Team comprised of representatives 
from the user, safety and maintenance, program management, testing and 
procurement communities to ensure that the new trailer meets both its 
subsystem performance requirements, as well as those established for 
the HMMWV/trailer system.

    Mr. Pitts. Another problem. The GAO reported that the Air 
Force had a parts inventory of $7.8 billion that exceeded 
requirements, and there was no reported demand to use them. In 
other words, they had $7.8 billion of parts sitting in storage, 
while at the same time we hear of the growing number of combat 
aircraft that are unusable because of lack of spare parts. What 
is the problem here? Is this a management problem or a money 
problem? Would you comment on that?
    Mr. Lew. Let me break that apart into several pieces. The 
question of spare parts and the readiness of our forces is 
something we have been very concerned about and working with 
the Department on. We have tried very hard to make sure that 
our funding levels will provide the resources necessary to have 
aircraft in the air, at the rates they should be.
    I have met with the senior military officials at the 
Department very recently. I think they feel quite comfortable 
that we have taken care of readiness, we have taken care of 
personnel requirements, and the buildup that we proposed last 
year carried forward this year, with the increases I described 
earlier, provide for the readiness that we need.
    On the question of whether there are spare parts that they 
don't need, I would suggest you have to look item by item and 
ask some questions. I know of instances where some of the spare 
parts are not things the Department asked for, where they are 
appropriated for one reason or another. I have no doubt that 
there are spare parts that the Department and we haven't 
requested. I don't know the extent to which that explains all 
of the issues the GAO found, but I suspect it is a part of it.
    [The information referred to follows:]

    The concerns about materials lost in the defense transit network 
are based on the results of a March 1999 General Accounting Office 
(GAO) audit of the Navy's handling of materials transported to various 
storage sites. GAO found that from 1996-1998, the Navy could not 
account for $3 billion in assets and that the Navy had categorized them 
as lost in transit. The Navy promptly responded to these concerns and 
determined that 80 percent of these assets were not misplaced, but were 
instead accounted for improperly. However, GAO's subsequent small 
sampling of lost items determined that 16 percent of those items it 
sampled could be accounted for. To help rectify their accounting 
procedures, the Navy has formed several teams to review their in-
transit practices and create a plan of action for attacking the 
shortcomings in the reporting system. GAO is following the progress of 
these initiatives. New Navy reporting procedures and software tracking 
systems will be operational by December 2000. With these reforms in 
place, and with OMB oversight, the Administration believes that this 
situation will improve and that it will continue to make progress to 
ensure efficient tracking of these materials.

    Mr. Pitts. A few years ago, the President mentioned 
acquisition reform in his defense budget. I don't want to 
neglect the Army. The GAO in a recent audit said that the Army 
spent $50.6 million for 6,700 two-wheel trailers that cannot be 
used. Most of the trailers have a safety problem, and they 
damage the trucks towing them. They plan to spend an additional 
$640 per trailer to correct the flaw. The service doesn't 
require a warranty up front. They still want to purchase 18,000 
additional trailers. What is the administration doing about 
acquisition reform?
    Mr. Lew. We have been working on acquisition reform, 
governmentwide as well. We have been moving as quickly as 
possible toward commercial, off-the-shelf acquisitions. We have 
tried to put in place the kinds of controls that prevent 
situations arising that none of us like, whether it is the 
military or other branches of the government paying more than 
they should for things.
    I think that, in the case of the military, it is important 
to realize that there are many things that they do that no one 
else does. They have equipment that no one else needs. And I 
don't think we can hold them to the standard of having 
everything be just something that you or I could go out and buy 
for ourselves. Many of the things that they use have higher 
costs because the number of units are small, and they are the 
only consumer of them.
    Again, I try to track very closely what is going on in the 
Defense Department. You are using examples that are really 
quite small. I would be happy to go back and check.
    One of the things that I think is important is that, as we 
build up defense which we have proposed and Congress has gone 
above us, that we ask the kinds of questions you are asking. 
Because, within a buildup, we have to make sure that we are 
spending the dollars wisely. We have worked on a 5-year plan to 
make sure we have what we need to have the warfighting and the 
peacekeeping capacity that we need to have. In order to get 
what we have proposed, we have to be careful about our use of 
each of the dollars, and we shouldn't be tolerating waste. I 
think we have to be realistic. In a budget that is roughly $300 
billion, there is not going to be 100 percent control. We have 
to find the right balance. But we look forward to working on 
issues like that.
    Mr. Pitts. I appreciate that.
    That is all the questions I have, Mr. Chairman.
    Chairman Kasich. Mrs. Clayton.
    Mrs. Clayton. Thank you, Mr. Chairman.
    I also want to join the chorus of praise for you submitting 
a budget that indeed will reduce the deficit in 10 years. It is 
amazing that on both sides of the aisle we seem to know the 
value of that but just don't know who we want to give credit 
to. If we could celebrate the fact that the budget says so many 
important things about the priorities of our country I think we 
may begin to know that we have differences of approach but the 
budget says to us who is important and who is not; it says what 
we believe in the future. It also indicates how we can balance 
some of our pressing needs.
    The fact that you will be reducing the deficit in 10 years 
allows, I think, for some of our resources to go for some of 
our pressing needs. Obviously, there are pressing needs that 
all of us know in terms of Medicare as well as Social Security, 
and we must find ways not only to reinsure those--there is some 
reform there needed and obviously more reform perhaps than the 
budget indicates--but you must admit the President is indeed 
committing part of that to the security of Social Security as 
well as for Medicare.
    I am also pleased about some of that spending going to 
health care, because it means that some of the needs that we 
have not met because we have been fiscally responsible we are 
now in a position to respond to some of the needs that the 
American people say they need.
    I live in rural America. I share the disproportionate care 
that are in hospitals. I am concerned there ought to be 
resources there to make sure that rural Americans have that 
opportunity.
    I also want to express appreciation for knowing that our 
investment in education equally talks about the future of our 
country. Again, paying down the debt allows us to be not only 
in a good position now but also in the future to continue that 
investment to education. Investment in education means an 
investment in our children. It means the kind of education and 
the productivity of our workforce that we wouldn't have unless 
we make those investments.
    As we look at the expenditure in our discretionary fund, we 
shouldn't just see that as more government spending. We should 
see that as an appropriate use of our government resources 
going back to the people who need those resources.
    There is a role for the Federal Government with our 
education system. Obviously, an appropriate role should always 
be examined, but there is a role, and to shirk that 
responsibility under the disguise that we are spending more 
Federal dollars is I think unworthy of our Federal 
responsibility and opportunity.
    Finally, I also understand that there will be a 
supplemental budget coming up that has resources for all those 
people who were devastated not just in North Carolina but from 
Florida to New York, some $304 million. I want to thank you for 
that consideration and say that all of us in all of those 
States could benefit from that. I can tell you, eastern North 
Carolina can benefit from that.
    I just want to take you a little further beyond relief, 
because indeed I think Americans are at their best when they 
respond to Americans who are in the worst need. But this 
economy, this budget also says something else to us, that we 
have been marvelously blessed. We have got to think part of 
that is not our wisdom, by the President or Congress. We have 
been very blessed to have the most prosperous period of time, 
to have the best economy.
    But in spite of that economy being robust for most 
Americans, there are some disconnections. Part of that is in 
rural America. Part of that is in eastern North Carolina where 
we had the flood. They weren't doing too good before we had the 
flood. So the opportunity to see how we can get some of this 
good fortune that we are using to invest and to demonstrate 
that if we invest in a comprehensive way we can make that 
opportunity for those who happen to be living in eastern North 
Carolina or rural America prosper from that.
    I would just remind you of a recent article that was in the 
New York Times, I think it was last week, where they visited a 
young girl who was living in Femerville, in a trailer. She 
said, ``I study my homework in the snow because it is too 
crowded, and I can't breathe in the trailer.'' Six people in 
one of these little recreation trailers, six people. Sometimes 
heat it too much, other times it is too cold. She goes out in 
the snow to study because she is relegated to live like that. I 
can tell you that more than 9,000 such persons are living like 
that.
    The opportunity, it seems to me--and when we look at this 
budget I just want to say there ought to be an opportunity that 
we can use our resources, and I hope you have some ideas for 
us, how we can do more than relief. I understand the relief 
package. I am grateful for that. But I think we can use some of 
these resources to say how rural America and particularly in 
eastern North Carolina--by the way, I would remind my 
colleagues that that area is larger than the whole State of 
Maryland, affecting more than a million people who have been 
affected. We have some 11,000 homes destroyed.
    So how in this robust economy can we find some of these 
resources that are already allocated perhaps, already 
appropriated, to see how we can direct it to make sure that 
this economy makes some difference in their lives as well?
    Mr. Lew. Congresswoman, if I could just briefly respond, as 
you know, the President when he came back from the area that 
was most severely affected, was very moved. We worked together 
last year on the first stage of recovery, and we have put into 
this budget a $304 million supplemental to provide further 
relief.
    I would respond on the question of what we are doing for 
economic development----
    Mrs. Clayton. What can we do?
    Mr. Lew. That it is really a broader question. Because you 
are absolutely right. There was a need for economic development 
before Floyd came along. We have proposed in this budget a 
variety of initiatives, which I hope will get bipartisan 
support, to give the kinds of incentives to invest in American 
markets that we give to investing in underdeveloped markets 
overseas. We have opportunities in this Congress, and the New 
Markets Initiative that the President has proposed gives us the 
opportunity to tap those opportunities, to give people a chance 
to invest there in their own businesses, hire people in their 
own communities and have the American economy do what it does 
best, to bring about that kind of economic recovery.
    I think that the proposals we have put in this budget are 
very solid, the conversations the President has had with the 
Speaker are very encouraging, and I hope that this is a year 
when we can actually work together to get that done and in that 
context deal with the problems in this area as well. But not 
just because there was a hurricane. Because here we have the 
best economy in recent memory. There is no better time for us 
to reinvest in our own communities.
    Mrs. Clayton. Thank you, Mr. Chairman.
    Mr. Chambliss [presiding]. Mr. Thornberry.
    Mr. Thornberry. Thank you, Mr. Chairman.
    Mr. Lew, you have made two comments today that really 
surprised me a little bit. One was, you said essentially that 
tax relief and more government spending are both consumption 
essentially of equal consequence to the economy. As I 
understood your point, you have debt reduction, which results 
in savings; and anything else you do with money, spending it or 
letting people keep more of their money, is about the same sort 
of thing.
    I realize there have always been people who believe that 
government can spend someone's money better than an individual 
can, that people can't be trusted to spend their money in the 
way that best benefits them and their families. But it does 
surprise me quite a bit that you would automatically assume 
that if people were able to keep more of the money that they 
earned that none of it would go to savings for their children's 
education, that none of it would go to savings in a medical 
savings account, if that were available, that none of it would 
go into personal savings and that, as the economy goes, that 
government programs and that kind of relief for people are all 
the same.
    The second thing that I was surprised at, in response to 
Mr. Pitts' question, was you argued at the end that we are 
never going to get 100 percent of the control of the money the 
government spends and that we just kind of have to find the 
right balance, that you can't have your expectations too high.
    Yesterday in one of the papers here was an article which 
said that to make the fiscal 1998 financial statement of the 
government balance, the Treasury had to record a $24 billion 
plug for unreconciled transactions. We don't know where $24 
billion, an amount greater than the budget of the Department of 
Education, was spent in fiscal year 1998 because our accounting 
system is so bad we don't know where that money went.
    Of course, this article goes on to talk about something 
that has concerned all of us concerned with Medicare, and that 
is over about a 3-year period, I believe, HCFA paid out more 
than $56 billion in payments that they could not show were 
proper payments.
    So it does seem to me, and I know you have said we are 
concerned about this, we have got 24 management initiatives, 
that we are going to try and do something about it, but if we 
have got errors or an inability to track money on a scale like 
this it seems to me that more than a few management initiatives 
are going to be required.
    I want to ask----
    Mr. Lew. I would like to respond just on that one question. 
I think it is a very important one.
    Mr. Thornberry. Sure, but I have got one other area I want 
you to respond to.
    Mr. Lew. We are in the process of working on the first 
audited financial statement that will come out clean in the 
history of this government. We did the first audited financial 
statement at all. We were going back 200 plus years and try 
trying to account for things that had hundreds of different 
bookkeeping systems in order to make it add up.
    You are asking a very good question and something that we 
agree on, we should be able to account for everything. But what 
I was saying in response to Congressman Pitts is where we have 
started we have made enormous progress. To say that it is going 
to get to 100 percent, I wouldn't mislead you on expectations. 
We are getting very close. That is a real accomplishment that 
we are very proud of.
    In terms of HCFA, we have actually done more to reduce 
fraudulent payments and wasteful payments in HCFA than ever 
before. We are very proud of our record on that. We are now 
hearing from hospitals and other providers who are saying that 
that is causing a problem because they don't get enough revenue 
from the government. We are doing the right thing, and we have 
to figure out what are the right ways for reimbursements. We 
take these challenges very seriously and work very hard on 
them.
    Mr. Thornberry. Let me just say, on HCFA squeezing down 
everybody does not root out----
    Mr. Lew. That is not what I meant.
    Mr. Thornberry. According to Mr. Nussle, his comments and 
Mrs. Clayton's, in rural areas you are squeezing down so much 
that the people who are fighting to stay in business are not 
having----
    Mr. Lew. I am talking about the payments that shouldn't be, 
that we would all agree are wrongful payments.
    Mr. Thornberry. I hear what you are saying. I don't doubt 
your sincerity at all.
    On the other hand, when this budget creates 80 new 
programs, it does lead you to question whether the 
administration is serious about keeping track of where the 
money goes or whether we are just adding to the monstrosity. I 
think that the American people share a similar concern.
    Let me ask you about one final thing. One of the issues 
that has been most concerning in the area of national defense 
is recruiting and retaining top quality people. A key to that 
is keeping the promises that we have made to those who have 
served. I am talking primarily about health care for military 
retirees.
    The Joint Chiefs of Staff, it was widely publicized, went 
into the tank a few weeks ago and worked and worked and came up 
with all these proposals on what this budget proposal would do 
to help keep the commitments that we made to people who have 
served in the military. Then when it comes out, there is 
essentially nothing there for military retirees. There is a 
couple of things to help active duty folks but, as you suspect 
in Washington, a lot of what they wanted to do has been leaked 
and all of these suggestions that they had, including mail 
order pharmacy, MediGap insurance, expand TRICARE Prime, end 
enrollment fees, was taken out by OMB.
    Do you think that there is a commitment? Do you think, to 
the retirees to take care of their health care needs, is it 
such a low priority that you in the Office of Management and 
Budget took those things out after they came from the Pentagon? 
How are we ever going to get there to keep the commitment? And 
if we don't keep the commitment to them, how are we ever going 
to get the young people that we have got to have?
    Mr. Lew. Let me respond if I may.
    First of all, just to correct something, there was never a 
proposal that came to us for us to accept or reject. So this is 
not a question of the Office of Management and Budget in some 
way being at odds with the Pentagon. It is a serious issue, an 
issue that I have met with military leaders on.
    I would say, that when we meet with military leaders, they 
tell us that we have made tremendous progress in terms of 
recruitment and retention. The pay raise, the improvements in 
living conditions, all the things that we have done together 
over the last few years have made a difference.
    I heard from each service last week. It made me feel good 
that we have actually done something that made a difference. 
The retention is up. The recruiting is turning around.
    On the question of the health benefits, Secretary Cohen has 
a review under way within the Pentagon to look at this question 
very seriously. There are all kinds of different proposals. I 
have spoken with General Shelton about it as recently as 
Friday. I know how strongly the Chiefs' concerns are.
    I think we have to look at the cost of some of the 
proposals and ask what can we realistically do within the 
constraints of a budget. Some of the proposals cost 
multibillion dollars a year. I think that if that came out of 
our defense readiness, that would be a problem. We have to be 
careful within a realistic set of resources to make planned 
judgments. For that process to continue, I have made the 
commitment to work with General Shelton and with Secretary 
Cohen to look at this question seriously to see what we can do 
working together to find a solution to the problem.
    I fear that some people may have been advised of benefits 
that were not legally provided at the time of their enlistment. 
That is no fault of theirs. If there was anything in recruiting 
10 years ago, 20 years ago that shouldn't have been said that 
was, people have expectations. We need to go back and work 
through it. We have to do it within a budgetary context that we 
all understand and working together. The reason I started with 
a correction is we have not reached the point of a disagreement 
because we are in a process that hasn't concluded yet.
    Mr. Chambliss. Mr. Price.
    Mr. Price. Thank you, Mr. Chairman.
    Mr. Lew, I would like to add to the expressions of my 
colleague, Mrs. Clayton, my gratitude also for the inclusion in 
this budget of the supplemental relief package for eastern 
North Carolina, the inclusion of items in many cases that were 
rejected last fall by the House leadership but which I am 
hopeful we can enact this winter, particularly the direct 
grants for damaged farm structures, the assistance for 
marketing cooperatives and additional funds for replacement 
housing. We are grateful for that and eager to work with you on 
it.
    I also want to congratulate you on the broad outlines of 
this budget that anticipates paying down the publicly held debt 
by 2013, that does restrain spending and that provides for a 
modest and targeted tax cut within the context of a budget that 
not only has no deficit but actually systematically pays down 
the debt.
    I would like to ask you about your proposal with respect to 
spending levels and approach this through the way this has been 
handled in the Congress over the last couple of years. As you 
know, we have these budget caps in place from the 1997 
bipartisan agreement. Our spending, as I understand it, has 
gone well over those caps in fiscal 1999 and fiscal 2000 
largely through the device of emergency designations for such 
things as the census, through forward funding proposals that 
have pushed spending into the next fiscal year and so forth. 
Could you tell us just in brief how much over the caps our 
discretionary spending is in fiscal 1999 and 2000 according to 
your estimates and what kind of adjustments you are proposing 
for fiscal 2001 in those caps?
    Mr. Lew. Let me talk about fiscal 1999 and 2000, because 
that is really the base off which we are building for 2001. In 
1999, appropriations were $38.5 billion above the caps. In 
2000, they were $54 billion above the caps. There were many 
devices employed to try and fit in a technical way within the 
caps, calling things like the census an emergency, doing all 
kinds of unusual budgetary approaches to try and technically 
comply with the caps. But if you just add up the 
appropriations, that is where we ended up. We are proposing 
that we not scrap the caps, but we set the caps at a realistic 
level and that we have caps that we can use as a planning tool 
in the appropriations process, in the budget resolution process 
and as an enforcement mechanism.
    One of the things that we proposed doing is to try to go 
back to 2000 and restore budgetary conventions. We have a table 
in the budget, S7, that tries to show how we would move things 
back where they belong. It is very, very difficult to even 
answer the question of what happened in 2000. It is the most 
complicated set of budgetary decisions I have ever seen. We 
have tried to attach all of the spending in 2000 that was 
really intended by the appropriations with the 2000 levels, 
pull it out of 2001, put it back in 2000. On that basis, we 
have projected that the requirements for next year are $614 
billion in budget authority.
    Mr. Price. How does that compare to the statutory amount 
from the 1997 agreement?
    Mr. Lew. I guess it is $72 billion above the statutory 
agreement. And we started at $54 billion above last year so 
there are year-to-year increases that are consistent with the 
past. It is largely allowing for inflation.
    Mr. Price. Your assumption is that with this adjustment in 
the caps, unlike the last 2 years, we can pass a budget 
resolution that actually offers some guidance in passing the 
appropriations bills and lets us pass those bills on budget and 
on time?
    Mr. Lew. I think that the way for the appropriations 
process to work smoothly and for judgments to be made in an 
orderly way is to start with a realistic beginning point. I 
have the greatest respect for the chairmen and ranking members 
of the Appropriations Committees, but I don't envy them the 
task of putting together appropriations bills when their 
targets don't permit them the room to make the kinds of 
judgments that each of us expect them to make. Where you start 
has a lot to do with where you end up, both in terms of your 
ability to put together appropriations bills and in terms of 
maintaining fiscal discipline.
    Mr. Price. Thank you.
    Mr. Chambliss. Mr. Knollenberg.
    Mr. Knollenberg. Mr. Chairman, thank you very much.
    Mr. Lew, welcome. I have a couple of questions, but I want 
to relate specifically to the climate change initiative and 
particularly the climate change initiatives that you have in 
this budget just to give you an idea about what bothers me on 
this whole thing. By the way, somebody said that this gives us 
a budget to build on. It also gives us a budget to subtract 
from. I am more interested in subtracting from some of these 
things that concern me.
    For example, the proposals in the area of climate change 
include approximately $4 billion in funding. But that just 
tells you part of the story because hidden within some of 
this--and I'll bring those up--are some expenses and some 
potential problems of expending money that I have concerns 
about.
    Here are some of the increases:
    $333 million, a 30 percent increase in the climate change 
technology initiative.
    A 5-year, $4 billion tax credit initiative for biomass 
generation of electricity, including solar homes and hybrid 
cars, et cetera. Interestingly, that is $201 million in the 
2001 fiscal year, but they have got it up to almost a billion 
in each of the 4 years thereafter, which means this is funding 
in another administration at another time. It is not now.
    A $39 million increase in global change research. There is 
a 100 percent increase in the USDA budget relative to climate 
control measures. In fact, following that, there is $176 
billion for the global environmental facility. That was $36 
billion in the 2000 budget.
    A lot of money just coming across, and it is concerning us 
who look at the emphasis that the President is putting on 
climate change in his State of the Union address and the 
substantial increases in his budget. Our concern is that it 
would appear that the administration is doing its best to 
implement the Kyoto protocol before providing the U.S. Senate 
with an opportunity to debate and vote on that treaty.
    So my question, although many of these initiatives are good 
and they are research driven, but you wonder are they aimed at 
improving the global climate behavior, or are they geared 
toward pushing consumers in the direction of costly and 
possibly unnecessary programs? My first question is, in your 
opinion, do you believe any of these initiatives are aimed at 
implementing the Kyoto protocol mechanisms here in this country 
without first having the Senate review the process and vote as 
mandated by the Constitution?
    Mr. Lew. Congressman, I believe that all the proposals we 
have made on climate change make good policy sense for the 
United States, with or without Kyoto. The President spoke in 
his State of the Union about improving efficiency of cars and 
through the miracles of technology that give us the ability to 
have economic growth without having to compete with our 
environmental objectives. This is a budget that is designed to 
move us down that path because that is what we believe is the 
right thing to do.
    Mr. Knollenberg. But the question is, do you think any of 
this could be used to actually implement the Kyoto treaty in 
this country?
    Mr. Lew. You and I both know the history of debate on this 
subject. I am trying to choose my words carefully because I 
don't want us to have any misunderstandings.
    Our goal is to have policies that help us reduce emissions. 
We want to have cleaner technology, and we want to reduce 
emissions. That doesn't mean we are implementing the Kyoto 
protocols. It may mean that when the Kyoto protocols are 
ratified that we have an easier time meeting the targets. These 
are things we should do as a country just to use our resources 
wisely.
    Mr. Knollenberg. I don't disagree with that. I think we 
should look at some of those alternatives.
    Let me go to my next question. My real question to you is, 
you say you are not going to implement. Do I read that you are 
not implementing the Kyoto protocol?
    Mr. Lew. We have said repeatedly that, to the extent that 
there is requirement of Senate ratification of a treaty, we are 
not proceeding absent ratification.
    Mr. Knollenberg. Let me go to a second section here. 
Because, on the energy front, this whole idea of the area in 
which these investments are being made, as you called them, for 
R&D, I am concerned about the money that goes into certain 
research, like wind, solar, and biomass. There is a whole lot 
of money in this budget forecasted for spending in future years 
on biomass.
    Here is my concern. There are many articles that 
substantiate this, the whole idea of R&D is to ensure that 
reliable and safe power is available for the U.S. consumer. 
Here are some figures. These aren't mine. These are validated. 
I can give you the sources on all of this. This is based on a 
1997 study.
    The ratio then was 5 cents spent on R&D for every megawatt 
hour of either coal or nuclear generated electricity. At the 
same time, this study showed that 41 cents was spent for gas, 
58 cents was spent for oil, and here is where we get into some 
numbers. And there is more money being put into the renewables 
than any other sector of this budget. The same figures there 
for a megawatt hour of electricity generated was $4,769 for 
wind and $17,000 for voltaic.
    Now, here is the thing that concerns me. If you looked at a 
graph 10 years ago you would have found that we were at the 
very same position then, 10 years ago, in terms of where our 
energy come from. It does not come from solar or wind; it 
doesn't come from biomass. In fact, they have had a number of 
years to prove themselves.
    Now, perhaps they will never get there. I hope they do. I 
hope there is a breakthrough, and a lot of people are hoping 
for this breakthrough. In fact, they are spending money with 
the expectancy that there will be a breakthrough, but there 
hasn't been. You can't just say, as they say, this is a recent 
circumstance; this is a 10-year study, and the question I have 
for you is, when will self-sufficiency be attained or is it 
even in sight? And this is an era of high technology.
    I am focusing now on those areas that haven't produced, 
they haven't come through, and I would like you to comment on 
how in the world we can continue within government--we can 
certainly transfer it to the private sector--but within 
government how do we continue working at such a high level of 
expenditure when we get less than 1 percent of our electrical 
energy from those areas that get most of the R&D money. I would 
just point out, that this is less than 1 percent for the solar, 
the renewable and the biomass.
    It is interesting that for nuclear energy, they only spent 
something like $306 million, and it is way, way less than that 
over a period of time. The difference is 1 percent of our 
electricity versus 20 percent, and we are spending huge amounts 
of money to get that 1 percent working and commercially viable.
    So the question is yours.
    Mr. Lew. Congressman, I think you have made a very 
compelling case for our budget.
    Mr. Knollenberg. I have made a case for looking at the 
alternative-type fuels, but I wonder, are we as a government 
succeeding; and secondly, should we think about transferring 
this to the private sector.
    Mr. Lew. I think that we, as we have in the case of the 
partnership of new generations in vehicles, we have looked 
toward partnerships with the private sector because that is the 
way for the research to become applied technology that works.
    Mr. Knollenberg. Is there a breakthrough coming?
    Mr. Lew. I think in many of these areas there are 
breakthroughs coming.
    Mr. Knollenberg. When?
    Mr. Lew. I think if you look at solar and biomass electric 
generation, this is actually relying on old memories--I used to 
practice law in this area 15 years ago--we have made progress 
from where we were. And frankly we wouldn't have got into the 
marketplace without----
    Mr. Knollenberg. Members just told you, you are not making 
progress. That is the concern I have.
    Mr. Lew. I think it depends which technology you are 
looking at and----
    Mr. Knollenberg. I am looking at wind and I am looking at 
solar.
    Mr. Chambliss [presiding]. Gentlemen, we need to move on 
now. Let us let him comment and move on.
    Mr. Lew. There are many examples of technology that have 
promise that are improving. I think that we, perhaps outside of 
this hearing, should have a longer conversation about it, but I 
think the fact that there is still a steep hill to climb in the 
case of many of these technologies is why we need to be putting 
Federal research dollars into them to get things to the point 
where they can reach commercialization. It is important that we 
develop these technologies, not for any international 
commitments, for our own good in terms of using our resources 
wisely and having growth and domestic environmental standards 
that we as a people want. I don't think we really disagree in 
terms of where we want to get to. It may just be how to get 
there.
    Mr. Knollenberg. I think that is right.
    Mr. Lew. And I hope we can work together to find 
appropriate funding levels because, frankly, had we put more 
resources into some of these technologies over the last 15 
years, we would have made more progress.
    Mr. Knollenberg. I will be happy to work with you.
    Mr. Chambliss. I would remind Members that we have got a 
lot of other folks we have got to get to, and if you will, 
please try to ask your long questions first.
    At this time, I would like to recognize the best two-handed 
set shot artist this side of Massachusetts, the gentleman from 
Massachusetts, Mr. Markey.
    Mr. Markey. I thank the Chairman very much. I would have to 
stipulate, as the chairman knows, that that is if nobody is 
covering me. Once someone covers me, unfortunately my accuracy 
goes down dramatically.
    I think that the last discussion is very helpful because 
Joe Knollenberg was focusing on kind of the issues of Kyoto, 
the greenhouse effect, and there is a big debate that goes on 
there. I would add parenthetically that we built the Internet, 
the Federal Government, and in 1992 after 25 years, we actually 
had to have a vote in Congress after we had built it to 
transfer it over to the private sector. The same thing is true 
for NIH.
    The same thing is true for satellite technology. We built 
it all. We have to then finally vote to pass it over to the 
private sector. So we wouldn't even have this 
telecommunications revolution, this wonderful prosperity 
without the Federal Government having made the fundamental 
research. So this whole greenhouse effect is a good debate as 
well.
    But unfortunately, just to take the metaphor a little bit 
further, the Republicans kind of use the terms of winter, you 
know, it is a freeze, caps, it is cold outside, you know. 
Meanwhile, we are living inside of our own monetary greenhouse 
effect, or our ``Greenspan effect'' we will call it. There is 
great prosperity out there, and the country is doing very well.
    Now, Dan Crippen, who is the handpicked head of the 
Congressional Budget Office by the Republicans, has said that 
there is an $800 billion surplus over the next 10 years. The 
Republican tax cut proposal last year, and if passed as 
prologue this year, was for $800 billion. So that basically 
wipes out the surplus for the next 10 years, and while we have 
created in the 1990's 8 million millionaires who are all 
sitting snugly by their country club fires right now, very warm 
in this great Greenspan effect, the Republican tax cut sent 70 
percent of the tax cut, 75 percent of the tax cut to their 
homes, throw another log on that Greenspan effect for the 
wealthy in America.
    What do they leave over for poor children? What do they 
leave over for poor seniors? What do they leave over for the 
environment? They leave over a freeze. For them we pretend that 
we can't afford to give them anything.
    Now, not only is that a fantasy, it is morally wrong, 
morally wrong for the United States of America, enjoying the 
greatest prosperity in our country, to take the entire surplus 
and give it back to people who have become millionaires in the 
1990's. They are those who have been the greatest beneficiaries 
of this enormous wealth effect. The proposal of the 
Republicans, though, is to give them $800 billion, or a huge 
percentage of that, and to leave nothing over, freeze social 
programs for poor people, for elderly, for children. Morally 
wrong.
    Now, the reality is that in fact there is plenty of money 
left over to pay down the debt. Two-thirds, three-quarters of 
the entire surplus over the next 10 years under the Democratic 
plan goes to do that; but then we have to decide what to do 
with the remaining quarter, the remaining piece of money that 
is left over, and we say it has got to be shared, got to be 
shared between the millionaires and ordinary people, and that 
is what the Republican Party doesn't do.
    Now, Jack, you mentioned that you are proposing a limited 
plan to deal with the Social Security insolvency issue. The 
chairman of the committee said you have no boldness, the 
administration really hasn't focused on the need to reform 
Social Security. I see inside of your budget a proposal that 
Roscoe Bartlett and I have made which is to allow for the 
Federal Government to invest in index funds that will be 
managed by the private sector, by Fidelity, by Putnam, that 
will increase dramatically the solvency of the Social Security 
Trust Fund. Now, I know the Republicans pose that, but it seems 
to me if we had begun that a year ago, since the NASDAQ index 
went up 84 percent last year, the S&P index went up 20 percent 
last year, we would already be well on our way to helping to 
solve this Social Security issue and pushing back the solvency 
another 5 or 10 years.
    So I would like to propose to you that we all work together 
to raise this issue once again, because I think it is foolish 
that we don't take advantage of the stock market, that we don't 
ensure that we are getting the benefits for ordinary people of 
having invested in the stock market. And I would just like to 
hear your comments in terms of the likelihood, given your 
conversations thus far, that the Republicans will be responsive 
to this notion.
    Mr. Lew. Well, I must say that we are at the very beginning 
of the process, and I begin optimistic that we are able to 
persuade the Congress, and the majority in the Congress, that 
our proposal is a wise one. We, I think, have taken a prudent 
approach toward equity investment. It may not be as aggressive 
as some have proposed. It may not be as aggressive as what you 
have proposed, but we think it is a step in the right direction 
by taking the surplus dollars, using the reduction in interest, 
saying that in 2011 we begin putting money in the Social 
Security Trust Fund that just reflects the savings because we 
paid down the debt using the Social Security surplus, that half 
the dollars go into equities, and until we hit 15 percent of 
the total trust fund, we continue.
    I think it is a highly reasonable, modest proposal that is 
real reform in terms of Social Security financing. We hope we 
can work toward that this year.
    Mr. Markey. I hope we can, as well, and again, with Roscoe 
Bartlett and I agreeing upon it, OK, only the centrists in 
Congress are the obstacle, but I think it is highly possible 
for us to achieve that goal.
    I thank you, Mr. Chairman.
    Mr. Chambliss. I would remind my good friend from 
Massachusetts that the example he used is one of the three 
paths that CBO said we might go down, and they laid out the 
facts on each of the three. Now, CBO is not committed to any 
one of those paths, but there were three of them out there.
    The gentleman from New Hampshire, Mr. Sununu.
    Mr. Sununu. Thank you, Mr. Chairman. While I don't want to 
make it a habit of using any of my time to respond to Mr. 
Markey's comments, I do think it is worth noting in response to 
a lot of the traditional class warfare rhetoric that he put 
forward so eloquently, that the kinds of taxes or tax relief he 
refers to as being tax relief for the rich, I think is not a 
matter of rich or poor. Getting rid of the marriage penalty, 
for example, Mr. Lew talked about how there is just not 
necessarily enough money to do it in this particular budget 
context if we want to spend all the money we want to spend. It 
is not a question of that; it is a question of fairness. Either 
you are for making the code more fair or you are not.
    Getting rid of death taxes--it is true that death taxes 
apply to upper-income families, by and large, but I don't think 
any American, rich or poor, really believes that it is right 
for the Federal Government to take half of what a family owns 
because the owner of a business happens to pass away. It is a 
fundamental matter of fairness.
    And I think it is unfortunate if we start using a lot of 
rhetoric to try to pit rich and poor against one another. We 
can't legislate our way out of poverty. We need to invest in 
the right things, we need to create the right opportunity, and 
that, more than anything else, is going to make a long-term 
difference.
    What I do want to focus the bulk of my time on, though, are 
some broad points about this budget. It is worth reinforcing 
that this budget does dramatically expand spending. There is 
over $35 billion in new budget authority above what we had in 
fiscal year 2000, and we can and should talk about priorities. 
But this budget dramatically expands the size and scope of the 
Federal Government. More to the point, or more problematic, it 
relies on tax increases to do this. Mr. Shays pointed out that 
next year alone it has $9 billion in tax increases, $160 
billion in tax and fee increases over 10 years.
    And this is not a partisan point. The minority leader of 
this committee pointed out that these tax and fee increases 
simply are not going to happen. And for those that might harbor 
some belief or hope on hope that they will happen, we put these 
very same proposals up for a vote last year on the floor of the 
House, and it was defeated, not on a party line vote, but by a 
vote of 416 to nothing. I think we do a disservice to the 
process when we construct the budget around tax increases and 
fee increases that aren't going to happen.
    And I know Mr. Lew feels that it is not a tax increase. In 
this hearing you have been quoted as saying, we are changing 
tax policy, revenues will increase. Yet you suggest these 
aren't tax increases, and I think it is not necessarily 
constructive to hold to that position.
    Mr. Price made some good points about getting rid of the 
gimmicks in the budget process, and I think that is something 
we can and should agree on as a Budget Committee. It is an 
important goal to have, but I think we need to be clear on 
where the budget that you have proposed is. It is based on 
these tax and fee increases that I firmly believe will never 
happen, but it also relies on some gimmicks of its own, some 
timing shifts.
    You show roughly $8 billion in offsetting receipts and 
timing shifts in order to get to your total discretionary 
number of $614 billion, and the biggest single one of these is 
a timing shift of deposit of earnings for the Federal Reserve. 
Now, that may or may not be an appropriate offset, but I think 
most people on this committee and certainly our constituents 
back home would view that as a bit of a gimmick.
    I would like you to respond to whether or not you are 
really willing to submit a budget without any gimmicks and, 
two, to respond to the very serious concern that the minority 
leader and others have stated that these tax increases aren't 
going to happen; and if that is the case, this house of cards 
comes down.
    Mr. Lew. Let me start, if I can, by correcting two things 
where I think you were quoting me incorrectly.
    First of all, I didn't say there is no room for a marriage 
penalty. I said there is room for a marriage penalty. Our 
budget has a legislative proposal to reduce the marriage 
penalty. What I said was, it has to be properly sized as part 
of an overall, balanced package.
    Mr. Sununu. And my point was that it is not a question of 
whether you are for the First Amendment but not in certain 
cases, or free speech is good, but not all the time. This is 
about fairness. Either you have a penalty in the code that 
affects a couple when they choose to get married or you don't.
    Mr. Lew. But, Congressman, there are many aspects of the 
legislation the Ways and Means Committee wrote that have 
nothing to do with penalties for married couples. There are 
benefits that go to individuals that don't pay a marriage 
penalty, and we can have a serious debate about what is 
required to eliminate the marriage penalty.
    Mr. Sununu. The biggest single provision that goes to 
couples that aren't currently paying the marriage penalty goes 
to couples that are penalized by the phaseout of the earned 
income tax credit. So in the case where we are focusing on 
couples that aren't necessarily hit by the marriage penalty, it 
is for those at the lowest end of the income spectrum, which 
Mr. Markey is appropriately concerned about.
    Mr. Lew. I don't think we are going to resolve at this 
hearing the proper design of a marriage penalty provision. I 
just want to establish for the record that we are all for 
addressing the marriage penalty and, hopefully, we can work 
together on a bipartisan basis; and at $182 billion, it will 
squeeze out an awful lot of things that we also all support.
    Secondly, I didn't say that there were no provisions in 
this that are tax increases. We have many loophole closures 
where we are very pleased to be proposing policy that would 
reduce loopholes that provide for sham transactions and other 
things that we shouldn't tolerate in the Tax Code. We are 
deliberately closing loopholes and using that to give tax cuts 
for families.
    The only thing that I said was that I think our tobacco 
policy needs to be viewed not as a tax policy but as an attempt 
to take the profits associated with selling cigarettes to kids 
and saying we won't tolerate that.
    Mr. Sununu. In direct response to Mr. Nussle's question 
about the tobacco policy, you said we are changing tax policy 
and that revenues will increase, and that is why I jumped to 
the conclusion that that is a tax increase.
    Mr. Lew. I will go back and check the transcript. I 
appreciate that, and I don't think you would deliberately take 
anything I said out of context. I will go back and check.
    To respond to your sort of fundamental question about 
reliance on revenues----
    Mr. Sununu. Gimmicks, timing shifts.
    Mr. Lew [continuing]. I think that you have pointed to 
something that is a real policy. We did last year in the 
Appropriations bill include a one time provision to have the 
Federal Reserve deposit more of its reserves with the Federal 
Government. It didn't really make sense to do it on a one time 
basis. There has been a long discussion, there have been GAO 
reports on the subject, that the reserves were too high. All we 
proposed in our budget is that we take the provision and make 
it permanent. It does have revenue effects in 2001. We use them 
for 1 year.
    It is not a gimmick. It is a real policy, and frankly, I 
think the right way to do it is not to go year from year, 
different levels, but just to set a policy and say this is 
where the Federal Reserve deposits should be.
    As far as the tax levels go, I point out that in 2001 we 
have a surplus of $9 billion. It does not rely on any tax 
increases to run that surplus. So we haven't spent a penny of 
any new tax, as you suggest we do in 2001. I think that there 
are----
    Mr. Sununu. But the net tax increases in that year also 
happen to be $9 billion.
    Mr. Lew. Then I go to the policy, because we do have a 
tobacco policy that starts right away. As I said, I am pleased 
to have a debate on our tobacco policy. Not everyone on this 
committee will agree with us, but we think it is the right 
thing to do.
    In other areas, there are user fees where we think they are 
different from regular tax provisions. We think that where 
there are special services provided there should be user fees 
charged; and we will go through those on a case-by-case basis. 
I offered this last year; I offer it again. I am happy to go 
through the list with you, item by item.
    Mr. Sununu. Thank you, Mr. Chairman.
    Mr. Chambliss. The gentleman from Tennessee, Mr. Clement.
    Mr. Clement. Thank you, Mr. Chairman. Good to have you 
here, Mr. Lew. I have sat through the entire testimony, and you 
have made an excellent presentation on behalf of the President 
and the administration.
    CBO uses three different baselines for appropriated 
programs in its recent forecast of the surplus. Are any of 
these baselines realistic, and what baseline did the 
administration choose to use?
    Mr. Lew. Congressman, I think as I mentioned in my opening 
remarks, the CBO did a real service to this process by 
suggesting the three alternative baselines. I only believe one 
of the three alternatives is realistic, but I think all three 
really warrant our consideration, and in order to make a 
sensible judgment, I think we have to understand why two of 
them are not realistic.
    They have suggested we look at a freeze, sticking at 2000 
levels for 10 years; returning to the 1997 caps which would 
require almost $70 billion of cuts from 2000 to 2001; or 
looking at an inflation-adjusted or no-real-growth path.
    If you look at the experience over the past number of 
years, it is clear that we haven't complied with the caps. 
Congress hasn't complied with the caps in 1998 or 1999 or 2000. 
In 1999, spending increased 7 percent over 1998; in 2000, 
increased 3.5 percent over 1999. I don't think saying we are 
going to freeze at 2000 levels is any more realistic.
    We have suggested as a baseline that we use the inflation-
adjusted, zero-real-growth path, but our policy over 10 years 
is actually slightly below that. We have said we should 
continue to have some constraints on the growth of 
discretionary spending. I think to assume that we can make 
savings that we can't make is going to put us directly at odds 
with the fiscal policy that has brought us where we are today 
with the economy growing, with low inflation, low interest 
rates and high employment.
    We have to use realistic numbers. If we end up spending 
more than the surplus that materializes, what we have 
effectively done is we have spent the Social Security surplus 
that we all said we wouldn't spend; or we have gone back into 
debt, and that is not the measure of fiscal discipline in a 
time of surplus.
    I think that the suggestion has been made that we put the 
government on autopilot. Nothing could be further from the 
truth. We have just said that for the purpose of making an 
allocation of a surplus, you have to start from a realistic 
total. Many things will go up and many things will go down. It 
is not autopilot by any stretch of the imagination, and I would 
oppose any budget that went on autopilot, because items should 
be considered item by item, year by year. That is what we did 
in 2001, and that is what should be done in each of the 
succeeding years.
    Mr. Clement. Second question. The President's budget calls 
for eliminating the publicly held debt by 2013 for the first 
time since Andrew Jackson, my President from Tennessee, was 
President in 1835. Some economists have said that completely 
eliminating the debt would actually be detrimental to the 
economy. What is your opinion of that?
    Mr. Lew. Well, let me make a couple of observations because 
it has been, I think, quite interesting over the last few weeks 
to watch the discussion in this area and the general press and 
amongst observers.
    I think we have finally reached the point where people 
outside of government, outside of this room actually believe 
that we are reducing the debt, we are paying down the debt, and 
they are trying to figure out what does it mean in terms of 
managing national economic decisions. There are very different 
needs in terms of Federal financing if we pay down the debt. We 
are not going to need to be issuing the same amount of 30-year 
debt that we needed to issue when we were running up deficits 
and having the national debt go through the roof. That is a 
pretty high-class problem to manage.
    The Treasury Department, I think, has taken the first 
important step by coming out with rules and announcing its 
plans to buy back debt, to manage the financing of the Federal 
debt. There are all kinds of technical issues that, frankly, we 
are discovering as we go along; that is, some of the debt is 
not callable on the date when you run out of the need for it, 
and we may have to come up with some other financing mechanisms 
to deal with realities like that. We will work through those 
problems.
    I hope that whoever is sitting here next year and for the 
next 10 years can come to you and say we have accomplished our 
goal and here is how we are dealing with it. We have gone down 
that road for 3 years. We should stay on the road and eliminate 
the net debt held by the public by 2013.
    Mr. Clement. My last question. What does the President's 
budget provide for the veterans' health care system?
    Mr. Lew. We have provided an increase of $1.5 billion for 
the veterans' health system. It was, as was noted earlier, the 
largest increase proposed. Last year there was a long debate 
about veterans' health spending levels. What we have done this 
year is maintain the program commitments made last year.
    One thing I would point out is that anyone who talks about 
a freeze has to ask what would you do with that $1.5 billion: 
Would you not provide it? Would you freeze it at last year's 
level? If you do increase veteran spending, where are you going 
to take it from, education, child care?
    It is not realistic to say we are going to freeze because 
some things are going up because of policy judgments that 
Congress has made, policy judgments that we share in, in many 
cases like this one. We have to be honest about the numbers we 
use, and with a surplus, with honest projections, we have 
plenty of resources available for balanced judgments. The 
burden on us is to make balanced judgments, not just rush off 
into putting all the resources in one or another place.
    Mr. Clement. Thank you, Mr. Lew.
    Mr. Chambliss. Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman. Mr. Lew, I have 
listened to a number of comments about who is to take credit 
for this economy, but I recall the President's State of the 
Union a couple of weeks ago. He said, we need to thank the 
American people for this economy because it is those who have 
worked and are enjoying the fruits of that labor and those who 
continue to work who thrive and make this economy.
    Mr. Lew. Absolutely.
    Mr. Collins. You know, I look at this budget, and I not 
only listen to you talk about programs and spending, but I hear 
others talk about programs and spending, and it is not just one 
group in town here. It is most everyone.
    I am reminded of the fellow who becomes payday rich. In my 
estimation--in the eyes of the majority of the people that I 
represent in the Third District of Georgia, we don't believe we 
have a surplus. We are facing a $5.5 trillion debt. We have 
unfunded liabilities that are ahead of us, especially in the 
area of the Social Security and Medicare, and those things are 
going to come due some day. It is like the guy who draws a 
paycheck every week and he pays all of his bills--his house 
mortgage, his car payment, his insurance, everything--out of 
the first 3 weeks, and the fourth one he considers to be a 
surplus; but yet, if he had a layoff, he would need those 
moneys to make those payments in the out-months.
    We are going to need all the funds we have coming, so I 
think we have to be very careful in how we deal with the 
people's money here. And with interest--your comment about low 
interest rates equating to the same thing as a tax cut, I 
believe I am right in your comment there?
    Mr. Lew. I made the point that mortgage payments have gone 
down for the average family by $2,000, which is the equivalent 
of a tax cut.
    Mr. Collins. Well, we just recently experienced several 
rate increases. Do you consider those tax increases because you 
know someone is going to pay a higher interest rate now? In 
fact, I received a little notice the other day, due to the 
change in interest rates, your amount of interest has just gone 
up another quarter percent. Was that a tax increase on me?
    Mr. Lew. Interest rates will go up and down.
    Mr. Collins. I know, but you are considering them the same 
as a tax, tax relief, a tax increase.
    Well, you are not going to answer that one, I can see.
    Mr. Lew. I don't think you want me to respond to that.
    Mr. Collins. When I look at this debt, I hear a lot about 
paying down this public debt. We actually have two debts, 
right, government debt, public debt?
    Mr. Lew. Congressman, we do have two measures of debt. I 
think only one of them impacts on the economy.
    Mr. Collins. That is right. In the lock box, we not only 
set aside the payroll tax for the Social Security, but the 
interest owed to the trust fund from the general fund because 
of the government securities that it holds, right?
    Mr. Lew. Well, Congressman, the way Social Security 
financing has worked for decades is that we credit to the trust 
fund on a daily basis interest on the securities held.
    Mr. Collins. Well, that is the same thing, you know, but 
now, as you pay down this public debt and you are increasing 
the government-held debt with those Social Security trust 
funds, are you not? So how can you credit the interest that you 
talked about to the Social Security because you owe Social 
Security interest?
    Mr. Lew. In terms of the effect of the Federal budget on 
the economy, what we have used for years as the measure is net 
interest and unified budget analysis, because that is the 
presence of the Federal Government out in the credit markets 
competing with others.
    Mr. Collins. I understand all of that. That is good Wall 
Street talk. I am talking about Main Street in the Third 
District of Georgia. I mean, we understand debt is debt. But 
let us go one step further, and I am not trying to cut you off, 
the light has changed already. But I have one other thing.
    You said if we do all of these things--and Mr. Spratt, I 
believe, agreed with you or you agreed with Mr. Spratt--in 
order to meet these obligations that we are creating, because 
in your budget you create some new entitlement obligations out 
there, that we would raise money from the economy. How? Because 
if I understand right, in order to meet the obligation of 
Social Security and Medicare in the out-years, unless something 
happens to transform them, the payroll tax will almost double 
to cover those liabilities.
    Is that how you are talking about meeting--raising money 
from the economy, more taxation?
    Mr. Lew. I will let Mr. Spratt speak for himself, though I 
did agree with a comment he made, which was that if we succeed 
in continuing down the path of debt reduction, eliminating the 
debt held by the public by 2013, that that will have beneficial 
effects on the economy which will lead to greater growth; and 
to the extent that there is greater growth, there are greater 
revenues available because growth is income, and that is a good 
thing.
    So I was only agreeing that we haven't taken account of 
that, but there are benefits to paying down debt that we should 
realize.
    Mr. Collins. I know you agree with him, and I was just 
asking a question of how.
    One other thing, GDP, you know, that is understandable 
here, in the beltway of the District of Columbia here, but GDP 
at home doesn't ring a whole lot of bells. What rings the bell 
at home is the bottom line on a paycheck after the payroll tax, 
the FICA, after the State withholding, after the Federal 
withholding. You know, that is what counts; and I am not seeing 
a whole lot of relief right there.
    Mr. Lew. I agree with you, the term GDP doesn't mean much 
on Main Street, and I think we should simply say the size of 
the economy, so people can know what we are talking about; and 
I will try to do that.
    Mr. Collins. Well, people refer to the size of their 
paycheck, you know; and we hear a lot about we are giving tax 
breaks to the rich, you know. Lord knows, if you are going to 
use percentages around this place, you ought to use the one 
that 25 percent of the taxpayers pay about 80 percent of the 
taxes.
    So, you know, we talk about fairness and relief and all 
that--my light has done turned red, Mr. Lew, and I am sorry. We 
could enjoy a good conversation for about 30 minutes, you know. 
Thank you.
    Mr. Chambliss. Ms. Hooley.
    Ms. Hooley. Thank you, Mr. Chairman.
    Mr. Lew, thank you for the patience that you have had at 
this hearing. It must be a little discouraging at times when 
you bring in a budget to find out that it is dead on arrival, 
but I think this is a Congress hopefully that can work together 
on some of these issues and come up with what is best for the 
American public.
    One of the things that I appreciated in the President's 
budget is the increase in education and particularly trying to 
get our classroom sizes down. I have spent a lot of time--I am 
a former teacher. I have spent a lot of time visiting 
classrooms, and I know that it makes a real difference, not to 
go from 27 students per classroom to 25, but to go from 27 down 
to 18; and the learning that takes place and the number of 
years that sticks with that child, having that good start in 
the first--kindergarten through third grade, and how that 
follows through with their achievements, not only for the rest 
of grade school, but in junior high, high school and college.
    When I look at the President's budget, how close are we 
going to get to our goal of reducing classroom sizes, putting 
at least 100,000 teachers into our classrooms? Where is that 
going to get us?
    Mr. Lew. Well, the funding level that we proposed would get 
us to 49,000, which is just about halfway to our goal in the 
third year of the program. We are very pleased by being able to 
make that progress so quickly, and we are committed to staying 
with that right through the end and having that as an 
accomplishment to show for the year.
    I think while others might choose to describe our budget as 
not being terribly relevant, I am very, very comfortable 
looking back over our track record over the last 2 years. The 
priorities the President has put forward have stuck right until 
the end. We have been there in September, October, November.
    This is an election year. I hope we finish it early, but we 
are going to stick with it until the end, and we are going to 
get smaller class sizes, and I think we are going to get 
funding for school construction, and that is what we are 
committed to doing; and we want to work with the Congress to 
get it done. I believe we can.
    Ms. Hooley. How far are we going to get with the school 
construction modernization piece? I mean, how much of the 
problem does that take care of? I am one of these believers--by 
the way, I need to tell you when I am back home sometimes 
people say, well, boy, is she being--18 per classroom is a 
really tough goal, and how do we do that; it means new 
buildings to put our teachers in.
    I am a believer that if you don't start someplace, you will 
never reach your goals. So, tell me, on the modernization piece 
or school construction, how far do we get on what the real 
problem is out there?
    Mr. Lew. We have this year modified the proposal from the 
past several years, which in the past was just a tax proposal 
where we provided a substantial amount of tax assistance to 
leverage bonding to build new schools. That is still part of 
our proposal, and we hope that will get us--I forget if the 
number is 5,000 or 6,000, but it is on that order, schools 
built.
    What we have done on the spending size side this year is 
tried to address this very real need for renovations in 
thousands more schools, and I think the funding we put in the 
budget for the spending side, $1.3 billion, would get us to the 
point where we could renovate 5,000 to 6,000 schools with that 
funding.
    I think it is not a question of choosing. We need to 
modernize classrooms, we need to build new schools. We need to 
have smaller classes, which means more classrooms. Every 
teacher is going to need a classroom for their 18 kids, and we 
just need more capacity than we have; and we have proposed an 
approach that is going to help us to take the resources we have 
and bring them into the 21st century and to build resources 
that we need for the future.
    Ms. Hooley. One other question, if I may. Last year I 
introduced with a Republican, Greg Walden from Oregon, a tax 
cut proposal including the marriage penalty. Yours is less than 
the Republican proposal. What is the difference and where is 
the cap? Where is that level that we give marriage penalty 
relief to?
    Mr. Lew. I would say that our marriage penalty provision 
was designed to be just that, a marriage penalty provision. We 
defined the policy as trying to deal with the problems 
particularly of moderate income levels where there was extra 
tax burden for a couple, as opposed to two individuals who were 
unrelated. The provisions that are in the much larger bill have 
a substantial amount of resources going to individuals who have 
actually a bonus, where their taxes are lower because they are 
married than if they were individuals.
    I would have to go through the individual items item by 
item to answer your question carefully, but I think that the 
aggregate number kind of speaks for itself.
    If we are going to have a balanced approach, and we think 
there is room for a $256 billion tax cut, then we have to be 
careful how we design each component; and we all agree that 
there ought to be legislation that addresses the real marriage 
penalty, but we need to be careful and have what we do in the 
name of the marriage penalty be dealing with the marriage 
penalty.
    Ms. Hooley. OK. Thank you.
    Mr. Chambliss. Mr. Fletcher.
    Mr. Fletcher. Thank you, Mr. Chairman.
    And, Mr. Lew, certainly we have enjoyed your presentation. 
This is the second budget that I have heard presented, and as 
the gentlelady said, the second one is probably dead on 
arrival. It does seem more like campaign promises and a budget 
that is projecting to make sure you give something to everyone; 
and I am disappointed in this last year that the President 
hasn't put forth something that is a responsible budget that we 
can begin from to negotiate--as you said, you would like to get 
out early, election year--but something we can really work 
with.
    Now, last year you presented a budget with $82 billion of 
tax increases. This one has $11 billion of tax increase in the 
first year. You may call them taxes and fees, whatever--if 
interest is considered taxes, I guess we can throw all of that 
into that--but there are several things I am concerned about.
    As I look at Social Security, last year I remember at the 
State of the Union, 62 percent was all he wanted to save on 
that. And now you have come our way, 100 percent, and I imagine 
there is some discussion in the West Wing, how do we one-up 
them this time so we add a little interest in there? And we are 
glad that you have come that way, that you want to save all the 
Social Security, but in fact, there is no change in the system 
there.
    Last year you presented something, to invest it in stock, 
government-owned companies but by and large, a majority of the 
people see the fallacy and the error in that policy, but there 
is no real change. All we have done is put in more IOUs. Yes, 
we pay down the debt, and because of the economy and because of 
what Congress and the President worked together to do, we do 
have a balanced budget and a surplus.
    Medicare is another thing. You talk about making changes 
with that and putting more in the trust fund, but there is 
really no money, just more IOUs, more commitments. In the 
future, we are going to either have to raise taxes more or go 
more in debt. There is no option there. There is no change in 
the form.
    You have also put forward a prescription drug benefit, and 
many, like myself, would like to see us provide prescription 
drugs--a change of medicine is very necessary. But it provides 
a broad spectrum of benefits that benefit those who can most 
afford it, and 65 percent of the folks have benefits at this 
time, and it displaces a tremendous amount of private money 
with taxpayers' money.
    I think we can focus that, and I would like to know, as I 
finish here, whether or not you would look at something more 
targeted and something more fiscally responsible, because I 
think your projections do not include any increase in 
utilization and, therefore, are far short of what that is going 
to cost.
    Tax fairness package, we talk about marriage penalty. You 
do add, and you talk of, a bonus that goes to those moms that 
are not working, that are, say, staying home, or fathers, that 
it provides a benefit for them, and you call it a ``bonus'' or 
whatever.
    I know you all do provide an additional tax credit for 
taxpayers with infants, but it stops at 1 year and do you 
think--is that adequate? Is a child on its own after 1 year? 
And you are sending the message that mom or dad go to work 
after 1 year instead of staying in the home and caring for that 
child? So I would like to see if you are willing to move on 
that and to really eliminate the marriage penalty tax instead 
of just using it as a political issue and say we are for it, 
but we are really not going to address it.
    The other thing is just more and bigger government--82 new 
programs, 149 programs increased in spending--and it doesn't 
seem like a realistic budget. You can't even get your side to 
support it at this time, and I wonder, would you be willing to 
come back with something that is reasonable?
    Can you address those questions that I have asked?
    Lastly, our farmers in Kentucky with your policy are 
getting killed. Since 1992, since President Clinton was 
elected, our farmers have had devastating effects. They are 
about to go bankrupt, and I wondered what you would be willing 
to do for them.
    Mr. Lew. Well, I am not sure I can address all the 
questions you raised in the 30 seconds to a minute that I have 
left. I am going to do my best.
    First of all, last year we proposed using over the period 
of our budget 100 percent of the Social Security surplus for 
Social Security.
    Mr. Fletcher. I was just quoting the President from his 
State of the Union.
    Mr. Lew. That was 62 percent of the unified surplus.
    Mr. Fletcher. At that time it was only Social Security 
surplus. You are talking about 10 years, and we were talking 
about the fiscal year 2000.
    Mr. Lew. That was a 15-year projection, and over 15 years, 
it was 100 percent of the Social Security surplus; on a year-
to-year basis, it wasn't. We came back; we revised it on a 
year-to-year basis.
    Mr. Fletcher. In the Year 2000 it was only 62 percent of 
the Social Security surplus. That is what we are talking about.
    Mr. Lew. I have described correctly last year's budget. We 
could debate it, but I am going to say the same thing. Last 
year's budget was as I described it.
    In terms of prescription drugs, I think ours is a fiscally 
responsible proposal. I would be happy to discuss with you the 
questions of utilization and price, but we have adjusted our 
estimates to reflect changes in utilization and price. We think 
our estimates are right.
    I think what we believe in prescription drugs is that it 
should be available to all who want to participate in it. There 
are premiums, so not everyone will. We ought to try and make it 
attractive so people will participate; and we think that that 
is the right way to extend prescription drugs.
    I would just conclude--I see the red light is on for me as 
well. On questions like agriculture, we have put in this budget 
resources to have farm security policies in place between now 
and the reauthorization of the Freedom to Farm bill. The 
President has raised very serious concerns--we have raised very 
serious concerns about the adequacy of Freedom to Farm. We 
didn't believe that it provided a safety net.
    Mr. Fletcher. Let me interject this. The issue here is our 
tobacco farmers back home, and it is not a Freedom to Farm 
issue. We can open up markets, but it is more of a policy that 
hasn't taken into account--and I don't want to debate your 
tobacco policy. What I am talking about is, how do you 
compensate for your tobacco policy to those farmers whose 
livelihood depends on it?
    Mr. Lew. If I can just give one quick response to that, one 
of the proposals we have in this budget--which may or may not 
meet with your approval, but we think it is very important--is 
the Federal Government continuing the course of engaging in a 
lawsuit to recover for the Federal Government the excess 
payments that have been made by Federal programs for tobacco-
related illness. We have said that one of the uses of those 
funds should be to compensate the tobacco farmers, and we have, 
since we proposed our initial tobacco policy, tried to include 
as we go along the concerns of tobacco farmers, who are not the 
problem. We are focused on the companies that are selling 
cigarettes to kids.
    Mr. Fletcher. Thank you, Mr. Chairman.
    Mr. Chambliss. Mr. Toomey.
    Mr. Toomey. Thank you, Mr. Chairman.
    And thank you, Mr. Lew, for joining us. I just want to make 
a couple of observations and then ask a couple of questions.
    First, on the topic of taxes, I just have to say that I 
find it amazing. Here, the Federal Government is taking in more 
money from the American people who have earned it and own it 
than it takes to pay for a record-high level of spending. We 
set an all-time record last year. There is more than enough to 
not touch any of the Social Security money. We are not going to 
spend any of that; that is going to get retired. And despite 
taking in all of that money, the President proposes that we 
increase taxes another $10 billion in the first 2 years of this 
budget.
    I find that amazing, and I will be proud to be part of this 
Congress that makes sure that that just doesn't even come close 
to happening.
    On the spending front, again last year we had a record-high 
level of spending in dollar terms certainly. 2001, the 
President proposes a huge increase in spending; and last month 
the Government stumbles upon some extra money for fiscal year 
2000, this newly found surplus, and I see that the President 
wants to spend most of that also.
    I wish the administration would support my effort, which is 
to take 100 percent of the fiscal year 2000 surplus, just that 
little bit of money that we didn't spend because we didn't know 
we had it, and either lower taxes immediately or pay down debt. 
Instead, apparently the administration wants to spend most of 
that, and I know that some people think and my colleague from 
Massachusetts believes there is a moral obligation to keep 
spending more money. I just have to disagree. I think the moral 
obligation is for the Government to take as little money as 
possible from the people who own it and who earned it.
    The question I wanted to ask you has to do with Kosovo, 
actually. As you know, the President committed American forces 
to a massive and sustained attack on Serbia. Our forces bore 
the overwhelming majority of the military burden, anywhere from 
70 to 90 percent, and because the President failed to secure 
financial commitments from our allies in advance, when he asked 
for an appropriation to fund this, we passed that funding 
request for the President, but we included with it specific 
language that I authored and that was signed into law that 
required the President to seek reimbursements from our European 
allies who clearly were not paying anything close to their fair 
share.
    He was also required, the President, to report to Congress 
on the status of his effort to collect those reimbursements by 
September 30th of 1999. As best as I can determine, the 
President is not in compliance with that law, but not only has 
the administration failed to collect any reimbursements, the 
President now wants an additional $2.5 billion for Kosovo. So I 
have several questions.
    First, could you tell us what is the status of collections 
from our European allies to begin to approximate a fair share 
of the cost of that burden?
    Second, when can we expect to see the report that is now 4-
1/2 months overdue?
    Third, do you think it is too much to ask on behalf of 
American taxpayers that the administration at least try to get 
our European allies to pay their fair share?
    And lastly, why should Congress authorize another dime for 
this when the administration is not in compliance with the law 
that requires the Europeans to kick in their share?
    Mr. Lew. Well, I think the record is substantially 
different from what you just described, and I would be 
delighted to describe what we have done.
    At the November 17th donors conference in Brussels, the 
international community pledged a total of $1.06 billion, of 
which the U.S. share was $156.6 million, or 14.8 percent. So we 
have done about exactly what we said we would do, which is to 
go to the international community and seek the kind of burden-
sharing that is appropriate.
    Mr. Toomey. How much of that has been collected?
    Mr. Lew. We are working on the collections. I can get back 
to you with a report on the collections to date, but you start 
with the donors conference where pledges are made, and then you 
make sure the pledges are paid.
    Mr. Toomey. How much has the total U.S. expenditure been on 
the effort in Kosovo, approximately?
    Mr. Lew. Well, obviously the military piece has been and 
continues to be substantial. We have continuing requests to 
fund the military and the international component.
    Mr. Toomey. Ten billion dollars, $12 billion?
    Mr. Lew. I don't think it has been $10 billion. Rather, 
than answering it off the top of my head, why don't I get back 
to you with an exact tally?
    Last year, there was far more appropriated for Kosovo than 
we requested, more than was needed. Much of that money in the 
final appropriations bill was moved into other defense 
purposes. I have to go back and unravel them in order to give 
you an exact answer.
    [The information referred to follows:]

           A Comparison of U.S. and Allies' Costs for Kosovo

    The Allied victory in Kosovo is a major U.S. foreign policy 
accomplishment. NATO forces stopped ethnic cleansing of Kosovars by 
Milosevic's forces. In addition, hundreds of thousands of Kosovars who 
had been driven from their homes were provided food, shelter and 
medicine, then repatriated to their communities. The follow-on task of 
rebuilding and revitalizing Kosovo itself is as important if we are to 
foster peace, stability, and democracy. As with the military campaign, 
it is and should be an allied effort, but as both we and European 
leaders have acknowledged repeatedly, the European Union will provide 
the ``lion's share of the necessary resources.''
    We are firmly committed to ensuring that the allies shoulder most 
of this responsibility. As the President noted in a letter to House 
Appropriations Committee Chairman Young on August 17, 1999, ``other 
donors will shoulder the bulk of the bricks-and-mortar reconstruction 
effort.'' The Administration continues to press the case with our 
allies at the highest levels. In public and private, we have urged them 
to meet their obligations in Kosovo, and to increase their 
participation as demanded by circumstances. In various settings this 
year, Secretary Albright, Secretary Cohen and Ambassador Holbrooke have 
all made this point directly. The President is contacting the leaders 
of the major European powers to note that as we continue to evaluate 
our own contribution to the stabilization and development of a peaceful 
Kosovo we expect them to do the same.
    This effort has paid off. At the Donor's Conference in Brussels on 
November 17, nations other than the U.S. accounted for over 85 percent 
of all pledges. The U.S. Government pledged 14.8 percent of the total 
pledge of $1.058 billion. Combining these pledges and other assistance 
provided separately brings the current total to just over $1.2 billion. 
Therefore, our current estimate is that the U.S. share is 13.9 percent 
for FY 2000 spending on Kosovo revitalization. Absent any additional 
funding assistance from European or other allies, the requested FY 2000 
supplemental would increase the U.S. ratio to 20 percent. We believe, 
however, that other countries will continue to pledge additional 
resources. The European Union and the government of France, for 
example, have both recently pledged additional resources to help the UN 
Interim Administration Mission in Kosovo (UNMIK) administration in 
Kosovo. The U.S. will continue to press its allies to provide greater 
assistance to Kosovo.
    In other areas, the U.S. share of costs has varied. Our share of 
humanitarian assistance has been about 20 percent, reflecting the 
traditional generosity of the American people in providing resources 
for refugees and others in need. Congress appropriated more for 
humanitarian relief than the Administration originally requested. Our 
costs for UN peacekeeping through UNMIK have been at the 25 percent 
share mandated by U.S. law, and costs for the U.S. share of 
peacekeeping through the Organization for Security and Cooperation in 
Europe (OSCE) have ranged from 10.1 (FY 1999) to 16.9 percent (FY 
2000).
    The military campaign involved higher ratios, due to superior 
warfighting capability and the desire to protect American soldiers with 
the best weaponry and the best communications, control, intelligence 
and logistics support available. Our estimates almost certainly 
understate the allied burden: some estimate NATO allies may have 
absorbed up to one-third of U.S. stationing costs by paying or 
deferring rents, taxes, surcharges and other indirect costs. Also not 
included are economic costs many neighboring countries suffered as a 
result of the air campaign. Regarding the Kosovo (KFOR) military 
peacekeeping force, the U.S. has provided a sensible share of the 
troops--only about 15 percent. The U.S. share of total dollars spent 
has been higher, largely because we choose to provide our troops with a 
better quality of life and greater force protection than other 
countries. In addition, the U.S. peacekeeping effort has other unique 
costs: extensive intelligence gathering and communications activity; 
naval and air presence to support our mission; and greater costs simply 
because we are farther from Kosovo than our European allies.
    This analysis provides the best available information about U.S. 
and allied efforts in a variety of categories. Several caveats are 
important. Budget comparisons with other countries are difficult. Other 
countries have different fiscal years, making annual comparisons 
difficult. Information frequently is not readily available and not 
compiled in the same manner as the U.S. budget, making accurate 
comparisons tricky. Numerical estimates cannot always capture in-kind 
contributions, regional costs suffered or other meaningful 
contributions. Therefore, the burdensharing estimates provided below 
should be recognized as the best estimates possible with imperfect 
data. The true measure of burdensharing must include an appreciation of 
contributions not measured numerically or understated because of 
incomplete information.

                     International Affairs Spending

    This section provides our current estimates of total international 
affairs spending in four categories. In estimating burdens shared 
between the U.S. and other countries, this report has not included 
funding for the operating expenses of either the State Department or 
the Agency for International Development. Those amounts would not 
normally be considered in accounting for total assistance for Kosovo, 
nor are the equivalent expenses of other donors included in the charts 
below.
                kosovo stabilization and revitalization
    Donors other than the U.S. account for over 86 percent of the 
resource commitment for stabilization and revitalization so far this 
fiscal year. As the table below shows, the U.S. share would rise to 20 
percent of total resources if the requested FY 2000 supplemental were 
enacted, and the Europeans and other donors pledged no additional 
resources. As noted above, we expect the Europeans and others to commit 
additional resources.

                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                                                   Other donors'   Other donors'
                                    Total cost       U.S. cost      U.S. share        funding        share \1\
----------------------------------------------------------------------------------------------------------------
FY 1999.........................          $614.0          $105.0           17.1%          $509.0           82.9%
FY 2000.........................        $1,210.7          $168.0           13.9%        $1,042.7           86.1%
FY 2000 including supplemental..        $1,303.5          $260.8           20.0%        $1,042.7           80.0%
----------------------------------------------------------------------------------------------------------------
\1\ For other donors, the cost of contributions to CIVPOL is estimated as a factor of $50,000 per policeman.
  Further, this number assumes no further funding from other donors. In fact, we expect other donors will pledge
  more.

    Spending in Kosovo covers several areas, including near-term 
stabilization and peace implementation as well as large scale 
reconstruction and longer-term economic development Near term needs 
include contributions for UNMIK's Kosovo consolidated local budget, 
police deployments, stand-up of the Kosovo Protection Corps, creation 
of a civil registry, and immediate economic revitalization. Given the 
urgency of these tasks and their direct relationship to the security 
environment in which our troops operate, the U.S. has focused its 
contributions on this area. The European Commission, EU member states, 
and other UN members have also provided assistance in this area.
    A 4 year reconstruction program prepared by the World Bank and the 
European Commission was submitted to donors at the November 17, 1999, 
Donor's Conference. The first phase (which goes through December 2000) 
priorities are housing, energy and industry. European countries' 
contributions cover the vast majority of those costs. For large-scale 
physical reconstruction, European and other donors bear the entire 
burden, since the U.S. is by law precluded from funding such 
reconstruction
    Assistance data on the reconstruction effort as well as all other 
assistance was gathered from the World Bank and directly from other 
donors. Estimates of police costs are based on pledges by the 
individual countries involved, which currently totals 3,530 personnel. 
The total cost should increase as the force builds toward the UN's 
approved strength of 4,718 personnel.
    In FY 2000, the U.S. will provide $81 million for peace restoration 
efforts which include: $52 million to fund the U.S. contingent (550 
personnel) of the International Police Force deployed in Kosovo, $15 
million to help train a Kosovar civilian police force, $5 million to 
help support the Kosovo Protection Corps, and $9 million for demining, 
human rights and war crimes programs. Almost $20 million will be used 
to support democratization programs such as the development of 
independent media, judicial reform and political party building. An 
additional $12 million is being provided to support UNMIK's support to 
the local government budget from which the costs and salaries of local 
authorities including teachers, judges and municipal employees are 
paid. Lastly, $55 million in economic and social recovery programs will 
help rebuild Kosovo's basic infrastructure, create jobs, and generate 
income necessary for a self-sustaining economy.
    Funding the FY 2000 budget supplemental request would allow the 
U.S. to join the international community in addressing the immediate 
needs of the international authorities in Kosovo. Recent violence 
continues to jeopardize the success of the peacekeeping mission. U.S. 
soldiers will face greater risks unless order and viable economic 
opportunities are brought to the province. Increased support is 
necessary to maintain and strengthen local institutions and governance, 
repress ethnic violence and restart the economy. An increase of $12.4 
million for additional civilian police would maintain the U.S. share of 
the UN International Police Force at original levels as the 
international civilian police presence expands to help address the 
continued unrest in Kosovo.
    An additional $63.6 million in economic reform would assist the 
stimulation of private sector growth to absorb workers from the 
downsized or closed public firms. The inability of these individuals to 
find employment could weaken support for reform and complicate the 
mission of U.S. troops in KFOR. U.S. and other KFOR forces can gain 
better cooperation with local citizens if jobs are created in areas 
where unemployed refugees or former militiamen might otherwise turn to 
crime or take revenge against Serbs. The remaining $16.8 million of the 
supplemental request would cover further efforts to strengthen the 
judicial, human rights and municipal authorities as well as supplement 
the revenue collected by UNMIK's local authorities to cover the gap in 
the budget of this local administration.
                     kosovo humanitarian assistance
    In response to the plight of hundreds of thousands of Kosovars 
forced to flee for their lives, global allies, including the U.S., 
provided more than $3.4 billion in food, shelter, medicine and other 
forms of urgent assistance. In the FY 1999 Kosovo supplemental, the 
Congress provided substantial amounts of assistance, reflecting its 
concern for the welfare of the Kosovars.

                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                                                   Other donors'   Other donors'
             Program               Total funding   U.S. funding     U.S. share        funding          share
----------------------------------------------------------------------------------------------------------------
FY 1999 Humanitarian Assistance.        $3,313.9          $571.0           17.2%         $2742.9           82.8%
FY 2000 Humanitarian Assistance.             n/a           $95.6             n/a          n/a\1\             n/a
----------------------------------------------------------------------------------------------------------------
\1\ Complete data on contributions from other donors is not yet available, although at least $97.6 million has
  been pledged to date in response to the UN Consolidated Appeal in 2000.

    These costs include refugee assistance in first asylum countries, 
refugee repatriation, and some support for third country resettlement, 
including to the U.S. The costs also include food aid, medical 
assistance (including psycho-social services and special programs for 
women and children), emergency shelter, infrastructure repair, and 
winterization materials. Costs for FY 1999 include assistance to 
Kosovars in Macedonia and Albania, as well as other minor costs to 
assist impacted communities in those countries, and for Montenegro. 
U.S. financial support for these efforts is provided through both 
international organizations and private voluntary organizations. 
Following refugee returns to Kosovo, U.S. assistance has focused on 
health programs, shelter and winterization materials, and efforts to 
help restore Kosovar agriculture. U.S. assistance also has supported 
small scale projects such as repairing schools and markets, cleaning 
wells, and restoring small scale infrastructure. Included within this 
estimate is $124.6 million of DOD costs for refugee relief operations.
    For FY 2000, U.S. humanitarian assistance to Kosovo consists of $67 
million of PL480 and $7 million of 416(b) food aid donations, as well 
as $22 million of aid via the Office of Foreign Disaster Assistance. 
Food aid costs include the total required to procure, ship, distribute 
and manage U.S. contributions. Other donors contribute primarily though 
the World Food Program and many donors contribute cash that can be used 
for local procurement. Since most other donors are closer to Kosovo and 
therefore incur lower shipping costs, the amount of food they are able 
to provide per dollar is higher. Nevertheless, the U.S. is the largest 
donor of food aid to Kosovo in terms of both value and volume.
    united nations interim administration mission in kosovo (unmik) 
                             assessed costs
    As determined by U.S. law, the U.S. has paid 25 percent of the 
assessed peacekeeping costs. The U.S. contribution is paid from the 
Contributions for International Peacekeeping Activities (CIPA) account.

                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                   Total cost to    U.S. cost--                    Other donors'   Other donors'
                                        UN             CIPA         U.S. share        funding          share
----------------------------------------------------------------------------------------------------------------
FY 1999.........................          $266.5           $66.6           25.0%          $185.5           69.6%
FY 2000 \1\.....................      \2\ $712.6           $87.0           12.2%          $496.7           69.7%
FY 2000, including Supplemental.          $712.6          $178.0           25.0%          $496.7           69.7%
----------------------------------------------------------------------------------------------------------------
\1\ Represents amount allocated to UNMIK at the time of the preparation of the FY 2001 budget.
\2\ Includes all assessments expected during U.S. FY 2000.

    The UN Security Council established the UNMIK in June 1999. The 
mandate of the mission is to: provide civilian administration of the 
province; organize and develop provisional institutions for a 
democratic and autonomous self-government, including the holding of 
elections; facilitate a political process to determine Kosovo's future 
status; support economic reconstruction; support humanitarian and 
disaster relief; maintain law and order; protect and promote human 
rights; and assure the return of refugees and displaced persons.
    To fulfill these myriad tasks, UNMIK is organized into four 
``pillars'': civil administration, humanitarian affairs, institution-
building, and reconstruction. UNMIK works with the UN High Commission 
for Refugees, the Organization for Security and Cooperation in Europe, 
and the European Union to administer these functions.
    As seen in the table above, the supplemental request reflects the 
additional amount needed to pay the expected assessments (at a 25 
percent rate) for UNMIK in Fiscal Year 2000.
 peacekeeping with organization for security and cooperation in europe 
         (osce) [both assessments and voluntary contributions]

                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                   Total cost to    U.S. cost--                    Other donors'   Other donors'
                                       OSCE            OSCE         U.S. share        funding          share
----------------------------------------------------------------------------------------------------------------
FY 1999.........................          $115.0           $11.6           10.1%          $103.4           89.9%
FY 2000.........................          $177.5           $30.0           16.9%          $147.5           83.1%
----------------------------------------------------------------------------------------------------------------

    The OSCE mission in Kosovo began in CY 1999 as a verification 
mission attempting to contain the building crisis. The U.S. cost for 
the 1999 mission was comprised of a formal assessment of $5 million 
(12.4 percent of the total OSCE assessment) and the U.S. costs for its 
seconded employees at an average estimated cost of $100,000 per 
seconded employee. Estimates for the mission costs in FY 2000 are based 
on the same methodology with the added costs of registration and 
municipal elections, scheduled for the Fall. The OSCE formal assessment 
for the U.S. is $12.4 million in 2000, with the costs for seconded 
employees, registration, and support for municipal elections planned 
for this year totaling an additional $17.65 million.

                           Military Spending

    Operation Allied Force, the air campaign against Serbia, was a 
North Atlantic Treaty Organization (NATO) operation. The United States, 
along with 13 other NATO nations, conducted a 78-day air campaign. 
Following the air campaign, approximately 47,000 peacekeeping ground 
forces from 35 different nations deployed into Kosovo as part of 
Operation Joint Guardian--NATO's peace implementation force or KFOR.
    Each nation participating in NATO military operations assumes the 
cost of its own operations. NATO does not provide estimates of the 
total cost of the Kosovo operation or of each member's military 
contribution. To assess the United States' contribution relative to 
other NATO countries, the DOD and Department of State attempted to 
obtain information on contributions made by our NATO allies. Based on 
the data obtained and reasonable estimates for unavailable data, 
comparisons were developed for two categories: (1) the air war from 
March 1999 through June 1999, and (2) the peace implementation force 
from July 1999 through September 2000. Not included are estimates of 
the value of in-kind support because they were too difficult to 
estimate with the information available. Subject to these 
methodological limitations, the DOD estimates that the United States 
contributed no more than 58 percent of the total cost of the air 
campaign. For peace implementation activities, the DOD estimates the 
U.S. will provide 15 percent of the total force; because support costs 
per U.S. soldier are higher than for other countries' troops, the U.S. 
share of KFOR's costs is estimated to be about 36 percent. This 
differential occurs because we choose to provide our soldiers a better 
quality of life and greater force protection than do other nations. It 
also occurs because the U.S. has unique and superior capabilities, such 
as communications and intelligence assets.
                         operation allied force
    The United States' share of the air campaign was driven largely by 
NATO military requirements for the technically superior capabilities of 
U.S. weaponry and the need for communications, control, intelligence, 
and logistics assets unique to our forces. As a result, the U.S. 
shouldered the lion's share of NATO's air campaign costs.
    All NATO allies, except one, reported a cost for the air campaign. 
Reported costs include deployment, sustainment, and redeployment of all 
aircraft used during the air war. It is not clear, however, that the 
allies calculate these costs in the same manner. The U.S. cost also 
includes: reconstitution of aircraft assets used during the campaign, 
incremental costs associated with the deployed aircraft carrier, and 
the cost to establish base camps for Army Apache helicopters deployed 
to Albania. As shown below, the estimated share of costs closely 
corresponds to the share of sorties flown.

                                             AIR CAMPAIGN COMPARISON
----------------------------------------------------------------------------------------------------------------
                             Metric                                    U.S.         Allies \1\         Total
----------------------------------------------------------------------------------------------------------------
Dollars in Millions.............................................          $1,776          $1,292          $3,068
Percent of Dollars..............................................             58%             42%  ..............
Percent of Sorties..............................................             67%             33%  ..............
----------------------------------------------------------------------------------------------------------------
\1\ For the nonreporting nation, the Department estimated the cost of their contribution using a factor of $2.5
  million per aircraft.

    The FY 1999 amount for this funding is not included in this cost 
comparison for the value of munitions used during the campaign and the 
value of in-kind support because they were too difficult to estimate 
with the available information. However, some sources have shown that 
our NATO allies absorbed nearly one-third of U.S. stationing costs in 
the region by paying or deferring rents, taxes, surcharges, and other 
indirect costs. Also not considered in this comparison is the economic 
loss that many neighboring countries absorbed as a result of the air 
campaign. Again, little data is available to quantify this effect of 
the air campaign. If these in-kind contribution and economic losses 
were considered, the estimated U.S. share of the air campaign would 
decline, probably significantly.
                     operation joint guardian/kfor
    Given the need for our European partners to share a greater burden 
of sustaining peace in Kosovo, the U.S. has limited its participation 
in KFOR to supplying only 15 percent of total troop strength. DOD 
sought to compare FY 1999 costs and FY 2000 estimates for KFOR with 
other participating countries for a similar time period. However, the 
Department had to generate estimates for many of the participants due 
to their reluctance to provide cost projections. To develop an 
estimated peacekeeping cost for non-reporting nations, the Department 
used a factor of $10,000 per soldier per month. This cost factor is 
modest and should not overstate the total contribution by other 
nations. Shown below is a comparison of costs from July 1999 through 
September 2000 and troop contributions to KFOR.

                                          PEACEKEEPING FORCE COMPARISON
----------------------------------------------------------------------------------------------------------------
                             Metric                                    U.S.         Allies \1\         Total
----------------------------------------------------------------------------------------------------------------
Dollars in Millions.............................................          $3,244          $5,800          $9,044
Percent of Dollars..............................................             36%             64%  ..............
Total Authorized Troops.........................................           7,200          39,845          47,045
Percent of Total Troops.........................................             15%             85%  ..............
----------------------------------------------------------------------------------------------------------------
Total U.S. troop strength is the sum of 6,200 troops in Kosovo plus 1,000 troops in the rim countries. This
  figure is within the 7,005 ceiling for U.S. deployed in Kosovo discussed with Congress.
These costs include the deployment, start-up and sustainment of troops committed to the KFOR. Figures for allies
  include non-NATO countries that have contributed forces to KFOR. (Note: DOD generated estimates for about one-
  third of the countries participating in the KFOR).

    Key Differences Between U.S. Costs and Allied Military Costs: 
Differences between the U.S. cost of Kosovo operations and the costs 
experienced by other countries fall into two main categories: (1) cost 
which vary with the size of the forces and (2) costs unique to the U.S. 
because of capability and geography.
    Costs that Vary with Force Size: During FY 2000, the Department of 
Defense will spend approximately $17,500 per soldier per month for 
ground operations in Kosovo. The Department estimates the basic cost 
incurred by other countries participating in Kosovo peacekeeping 
operations is $10,000 per soldier per month. While the lack of cost 
details prohibits an exact comparison of U.S. and the Allies' costs, 
there are factors that explain why the U.S. cost per soldier per month 
is higher than the estimates of other countries. These factors are (1) 
an increased emphasis on force protection, (2) a deliberate focus on 
soldier quality-of-life, and (3) significant use of reserve (vice 
active) personnel.
    Force Protection: The most important difference in cost is driven 
by U.S. efforts to protect our forces. Since U.S. forces are prime 
targets for many terrorist and dissident forces around the world, U.S. 
forces deploy with a more robust inventory of equipment--both weapon 
systems and support equipment--in order to adequately protect our 
soldiers. Other countries may not provide this level of protection to 
their military and, if they do, it would not necessarily be in their 
troop strength cost. Moreover, though other nations house their forces 
among the population (e.g., in local hotels), the two U.S. base camps 
are located away from populated areas and have more extensive force 
protection features. A perimeter security area surrounds each camp to 
ensure an adequate set back from any potential bomb blast; the camp's 
perimeter is protected by roads, towers, lighting, a perimeter berm, 
fencing, concertina wire, and fighting positions (should they become 
necessary).
    Quality-of-Life: The Department of Defense has a strong commitment 
to quality-of-life programs that is reflected in its deployments. In 
addition to the force protection element, camps include morale and 
recreation facilities. Off-duty travel outside of the base is severely 
restricted for safety reasons, so entertainment, shopping, and physical 
fitness activities are provided on the base.
    The U.S. forces are also entitled to special pays and allowances 
such as imminent danger pay, family separation allowance, and 
subsistence. Some nations do not make these payments, or pay a lesser 
amount. Finally, force rotations are an important quality-of-life 
element. The U.S. forces rotate on average every 6 months. To the 
extent forces of other nations have a longer period of time between 
rotations, their costs will be less.
    Reserve Personnel: The United States relies on personnel from guard 
and reserve forces for peacekeeping operations because the Reserve 
Components perform many of the combat support services that are 
required for these efforts. When guard and reserve forces are brought 
onto active duty, there is an incremental cost to the military 
personnel appropriations because only their pay for weekend drills and 
2 weeks active duty are budgeted. Other nations have minimal if any, 
costs for reserve personnel.
    U.S. Unique and Superior Capabilities Costs: In addition to the 
troop strength-based costs, the United States incurs unique costs to 
execute the peacekeeping mission (as well as the air campaign and 
humanitarian operations). These costs are related to capabilities that 
the U.S. military alone possesses and to geographic realities, and are 
in addition to the cost per soldier per month of $17,500.
    Intelligence and Communications: The U.S. operates extensive 
intelligence gathering, intelligence processing, and communications 
activities. These activities require satellite technology and the 
establishment of an infrastructure on the ground.
    Naval and Air Presence: In addition to ground troops, the United 
States will deploy Navy, Marine Corps, and Air Force assets to assist 
in the operation, primarily to fly surveillance and reconnaissance 
missions. These costs are driven by the number of platforms deployed 
and the tempo of operations.
    Geographic: Because of the extensive distances between Kosovo and 
the United States compared to European nations, the United States 
spends more on transportation than other nations; especially to rotate 
forces and to transport troop-related and U.S. produced sustainment 
supplies and material.

    Mr. Toomey. But is it still true that we have not collected 
any reimbursements and, so far, the entire cost of America's 
military burden in that war has been borne by the American 
taxpayer?
    Mr. Lew. Each party in the allied effort paid their own 
burden. We did not fly all the sorties. We did not provide all 
the troops. We paid for ours.
    Mr. Toomey. I said the American, and we still haven't been 
reimbursed, and the President has not submitted this report?
    Mr. Lew. I will check on the report. We may have, we may 
not have; I have to check.
    Chairman Kasich. Mr. Hilleary.
    Mr. Hilleary. Thank you, Mr. Chairman.
    Thank you, Mr. Lew, for coming and staying so long.
    Real quickly, your budget has spending increases, both 
mandatory and discretionary, of how much for next fiscal year?
    Mr. Lew. The total levels that we have proposed for 2001 is 
$614 billion. That is $7.4 billion above the baseline, and as I 
described earlier, it is largely because of the defense 
spending levels.
    Mr. Hilleary. And mandatory, how much is the increase?
    Mr. Lew. The total mandatory spending in 2001 is $993 
billion. I mean, the aggregate of all outlays, outlays in 2000 
is $1.79 trillion; in 2001 they are $1.835 trillion. As a 
percentage of GDP, it comes down from 18.7 to 18.3.
    Mr. Hilleary. I am not worried about the percentage of GDP. 
What I am concerned about is what happens when that--that is 
being funded by the surplus partially, as well as other nontax 
tax increases in your budget. What happens when the economy 
goes down and those surpluses are no longer there, yet we have 
increased our spending levels? Regardless of what percentage of 
what economic phraseology you have got, what do we do?
    We have two or three choices there. We have a choice of 
increasing taxes, borrowing the money again or cutting the 
spending at that point; is that not correct? That is pretty 
easy.
    Is that not correct? Those are our three choices.
    Mr. Lew. I actually think you have made some assumptions 
that I don't think are correct. Let me just work through it. We 
have made projections that do not require any policies outside 
of what we proposed in the budget. Obviously, to the extent 
that any projections are wrong, there will be changes.
    One of the things that we are saying is that we have to 
start with conservative projections. We think we have started 
with conservative projections. Any assumption that there is 
more money to spend, we think would create a problem. So if you 
look at our allocation of the surplus, by setting $299 billion 
aside for Medicare solvency, we have taken the lion's share of 
what we think is available and not made new commitments with 
it.
    Mr. Hilleary. I know that you are using conservative 
estimates of increases in revenue, but what I am saying is, 
with the economy going up to a certain level. But if the 
economy decides to take a downturn, which at some point it 
must, there are three things that can happen--I will just state 
it for you since you won't go ahead and state the obvious--
three things that can happen: You can have a tax increase, you 
can borrow the money, or a spending cut.
    And what kills me is that every year that you have sent a 
budget over, it just seems like the chief goal of it--which I 
am sure you will disagree with, but the chief goal is to create 
opportunities for pounding us politically. And let us say that 
the economy comes down--you know, we don't want to raise taxes; 
no one is going to want to raise taxes--we may end up borrowing 
the money. That may be politically the least painful thing to 
do.
    We sure don't want to cut spending at that point, because 
then we get all the commercials saying how we hate kids and how 
we hate education and how we hate this and how we hate that, 
and how mean spirited we are--just opportunities for 
demagoguery.
    It seems to me that that would be the more responsible 
thing to do here. And it is kind of like what this 
administration has done on defense spending all these last many 
years that they have been in office. They have basically gutted 
defense, and I think there are some savings to be made after 
the Cold War was over, but that is long well past, and in my 
view, the reason was--with all due respect, is that it is hard 
to get an emotional response from that soldier that you can't 
see, that is over in some other country, that maybe doesn't 
have as many flying hours, maybe doesn't have as many bullets, 
maybe doesn't get as much training. It is so easy to get a 30-
second emotional response from some person on the front porch 
saying, I have got this terrible disease, and those mean, old 
Republicans weren't interested in increasing my budget.
    So this year, I finally see, well, geez, after being gutted 
all these many years and being able to use that money when you 
lower defense spending; and increasing other spending, and us 
having to do the responsible thing, and then cutting back on 
your increases and all these other programs, I finally said, 
well, they are increasing spending in defense for the first 
time, that is great--significantly, for the first time.
    And then I look over, and I see what we have now as the 
gimmick is, all these--it is actually $10.7 billion in tax 
increases over the next 10 years, which you all know are not 
going to happen. You know are not going to happen--in a 
bipartisan way, they are not going to happen; this has nothing 
to do with Republican or Democrat.
    But then we, in having to do the responsible thing, will 
have to take all those areas where you have plussed up, because 
now you are depending on a $10.7 billion increase in taxes over 
the next 10 years that isn't going to be there. It falls on us 
once again to do the responsible thing and cut back; and so 
then we are all susceptible to that demagoguery again next fall 
about how those mean-spirited Republicans, they didn't care 
about me, and I had this terrible disease. They didn't care 
about me, and I couldn't get after-school, whatever.
    It just seems to me, regardless of which party is in power 
over there at the White House, it would be nice to have a 
budget that comes over that is realistic.
    I don't get any pride in saying that it is dead on arrival. 
That doesn't give me a little warm fuzzy inside to say that, 
but you all created one on purpose that was going to be dead on 
arrival because you used revenue enhancements--whatever it is; 
it doesn't matter what you call it. Revenue is going to go up, 
and you know that is not--in a bipartisan way, that is not 
going to happen; and we have the responsibility of cutting 
those things back.
    And you are more than welcome to respond.
    Mr. Lew. I don't think that the test of a good budget is 
one that we propose that you accept 100 percent. We may 
disagree on some things, and you can make fun of the words we 
use to describe our tobacco policy, but we have tried very hard 
this year to present a tobacco policy that will present, 
foursquare, what we think is a moral issue.
    It is wrong to sell cigarettes to children. It is just 
wrong. Maybe you have a better idea about how to stop it than 
we do. But we can work together on a bipartisan basis to stop 
tobacco companies, from selling cigarettes to kids, forget the 
name you call it, it would be one of the most important things 
we can do. It is just wrong.
    Now, you can call it a tax increase if you want and you can 
try and parody our policies, but we are not trying to make a 
fight on this. We want to get it done. We really do want to get 
it done. We think it is one of the most important things we can 
do as a public health matter.
    I was talking earlier in the exchange with Congressman 
Sununu about some of the fees. We believe that when there are 
extraordinary services provided that help an industry, they 
ought to pay for it; that is a perfectly reasonable thing. 
Republican administrations have proposed it. Democratic 
administrations have proposed it.
    So I think our budget is realistic. I look forward to 
September when it is proven to be correct.
    Chairman Kasich. Mr. Smith is recognized.
    Mr. Smith. Thank you, Mr. Chairman.
    Thank you, Director Lew. It is a long session for you. You 
do a very good job.
    I think both sides need to be careful about spending and 
aware of the real budget challenges in our future. The way our 
budgeteers have told me, you increase net taxes and fees by 10 
billion the first year, and another 5 billion the second year. 
Over 10 years you increase taxes and fees by 237 billion. You 
know, the other side of the aisle says, look at all these good 
things we are creating, but nobody is going to vote for this 
kind of tax increase. We didn't do it last year; we are not 
going to do it this year.
    So I would like you to report back to the committee, 
assuming that we are not going to pass these taxes and fees, 
where are you going to cut back? It is so easy to say, let us 
expand government spending for everybody because everybody is 
happy.
    The Wall Street Journal this morning says, look, 
politically the President has done a lot for California for the 
Vice President in his campaign out there. He has done a lot for 
New York for his wife's campaign up there. So the Wall Street 
Journal suggests there is a little politicizing of this budget. 
In light of this, the misrepresentation of what the debt of 
this country is and where we are going particularly concerns 
me.
    You say in your testimony, and I quote, ``By 2013, the 
United States will be effectively debt free,'' and what you are 
really suggesting is, the debt held by the public is going to 
be paid down a great deal. But do you agree that the total debt 
of this country, the total public debt as defined in law, is 
going to be going up, and by 2013 the total public debt is 
going to be $6.815 trillion?
    Mr. Lew. The debt subject to limit and the public debt are 
different. The public debt, the debt held by the public----
    Mr. Smith. No, no. In law the way we define public debt is 
the gross debt of this country.
    Let me ask you another question, then. Do you think the 
debt that we owe the Social Security Trust Fund is less 
important than the so-called Wall Street debt or the debt held 
by the public?
    Mr. Lew. No, I think that the commitments we make to the 
Social Security and Medicare Trust Funds in the form of 
treasury securities are real.
    Mr. Smith. You think that debt to the Trust Fund is just as 
important?
    Mr. Lew. Let me answer the question if I might.
    Mr. Smith. Yes, but you have got to answer my question.
    Mr. Lew. It is just as important, but it is very different. 
Because there are two sides of the ledger. We are also already 
carrying the outlays in the budget associated with paying back 
that debt. We assume we are going to pay all our bills.
    Mr. Smith. Do you agree that the total debt of this country 
increases right up through your years up through 2013?
    Mr. Lew. I don't agree that the debt, as measured in 
economic terms, goes up.
    Mr. Smith. No, no, the total debt of this country as 
defined by law. The debt subject to the debt limit, do you 
agree that that increases up through year 2013?
    Mr. Lew. There is no doubt that that subject to limit goes 
up----
    Mr. Smith. That is because, I would suggest, we are taking 
the dollars out of the Social Security Trust Fund. We are using 
those cash dollars to pay down the T-bills. That is what we are 
doing. We are taking money. It is like moving boxes around and 
pretending we are accomplishing something.
    But the fact it seems to me is, and I am disappointed that 
you don't agree, that the debt that we owe these Trust Funds 
means that sometime in the future we are going to have to 
increase taxing or increase borrowing if we are going to pay 
back the money to those Trust Funds.
    Let me say this. Your proposal, as I understand it, can be 
analyzed as extending the life of Social Security till 2050 or 
2054. You suggest we use the interest savings from paying down 
the debt held by the public and put that into the Social 
Security Trust Fund. Let me ask you this question: Are you 
spending the interest savings every year for the next 10 years 
of this budget? Are you spending it on other government 
programs?
    Mr. Lew. We are treating the interest savings as we do 
currently under present law----
    Mr. Smith. And the answer is yes? You are spending the 
interest. Then on the 11th year, in 2011, where do you come up 
with the money to somehow magically re-create this money that 
is already spent?
    Mr. Lew. I don't think we do the public a service by making 
this more complicated than it is. Respectfully, I think that 
you have just made it more complicated than it is.
    Mr. Smith. You spend the interest savings every year on 
other government spending?
    Mr. Lew. If I could just take a minute to answer--I would 
like very much to answer. What we do until 2010 is we pay down 
the debt, and we are paying down debt in an amount that is 
equal to the Social Security surplus. Last year, we proposed 
starting Social Security transfers earlier. We were told by 
many on both sides of the aisle, pay down the debt first before 
you talk about putting general revenue into Social Security. 
This year's proposal reflects those concerns, and we wait until 
we have actually accomplished the debt reduction. It is very 
real.
    What we are proposing is the only proposal out there that 
would take any of the benefits and put it into the Trust Fund 
for solvency. If you would like to discuss doing it earlier, we 
would be happy to engage in that discussion, but we are 
criticized whichever way we go. We are trying to take care of 
this problem. It is complicated accounting. The current system 
is complicated, but I think our proposal is quite 
straightforward.
    Mr. Smith. In 2011, where are you going to come up with the 
$200 billion plus?
    Mr. Lew. I know that we are running late, but our long-term 
projections have on-budget surpluses adequate to pay this back.
    Chairman Kasich. Mr. Ryan for the final questions.
    Mr. Ryan of Wisconsin. Thank you, Mr. Chairman.
    Thank you, Mr. Lew, for coming. I appreciate you spending 
the time here. I will try to be brief so we can get going with 
our day.
    I was intrigued with something you just said a few minutes 
ago. You said that this year's discretionary number is only $7 
billion above the baseline, meaning 614 minus 7 assumes the 
baseline is at a $607 billion mark. Is that an accurate 
reflection of what you said?
    Mr. Lew. Correct.
    Mr. Ryan of Wisconsin. If you look at what we spent last 
year in discretionary spending and add the forward funding that 
occurred and then add the one-time emergencies we spent, that 
number would be $586 billion. So with the math that we are 
seeing from the OMB, that means you are assuming $21 billion 
exists, was new money that was spent. Forward this to 10 years, 
take this math that you are saying, $607 billion is our 
baseline when actually, arguably, 586 is our baseline, take 
that out 10 years, and then you see that you are consuming $800 
billion of new discretionary spending built into your baseline.
    What I wanted to ask you is this. Yesterday the 
administration said that this budget simply increases spending 
by $300 billion. If you look at real math, where I come from in 
Wisconsin, if you spend more money one year given the next 
year, you spend more money. If you spend money from $586 
billion last year and then go to $614 billion this year, you 
are spending more money. If you take that common sense 
mathematical approach to this budget, you are actually 
increasing spending by $1.3 trillion over the next 10 years, 
not by $300 billion. So what we are looking at is a difference 
in the discretionary side of the budget where you are actually 
increasing spending by $800 billion.
    So that is what the American consumer sees. I had 60 town 
hall meetings on these very topics. I asked my constituents 
this question. After we lock away Social Security, after we 
dedicate 100 percent of the Social Security surplus to paying 
down public debt and Social Security, which we are all fairly 
much in agreement here, what about that non-Social Security 
surplus? Looking at your budget, you are simply saying that we 
are going to spend 70 percent of the non-Social Security 
surplus here in Washington on entitlement programs, on creating 
84 new programs, and you are saying that it is not actually 
happening because your baseline hides that fact.
    If my constituents are posed with the question of what 
would you rather have with the non-Social Security surplus, 
your money back to you in the form of tax cuts or in the form 
of more debt reduction, I would probably get mixed results. 
Half of them would say more debt reduction, half of them would 
say give me my money back. But if you ask constituents around 
this country, would you want to see more spending with your 
non-Social Security surplus and your income tax overpayments be 
plowed into more spending in Washington or given back to you, 
it is an overwhelming result. People want their money back.
    By looking at your budget and seeing that you are actually 
increasing spending not $300 billion but by $1.3 trillion, $800 
billion of which comes from discretionary spending, that is in 
a sense taking this on-budget surplus off the table before we 
even get a crack at it. It is saying the government gets the 
money first, the taxpayer last. That is something that I think 
is very important in this discussion, as we compare apples to 
apples instead of apples to oranges.
    I would appreciate if you could comment, and then I have 
one more question.
    Mr. Lew. I would be happy to comment.
    I think that most of what you have just been discussing 
really gets down to which baseline you choose to begin with. 
Our definition of the current service baseline is very close to 
the Congressional Budget Office. It is based on the statute, 
the Budget Enforcement Act. The reason that our projection of 
$746 billion is so close to $838 billion is that we are using 
the same definitions with relatively small forecasting 
differences.
    I think that if you look at the two alternatives that they 
proposed, they are just not realistic. We are not going to 
freeze for 10 years. We haven't done it in the past. I don't 
believe we will do it in the future. We are not going to go 
back down $70 billion. It may be that we disagree as to how 
much it should be. But to start with either of those other 
starting points I think is fooling ourselves. It is not a good 
way to make fiscal policy to pretend that we can have savings 
that we haven't been able to make in the past.
    Mr. Ryan of Wisconsin. Reclaiming my time, even if we don't 
go down $70 billion, which I think I would agree with you, we 
are not going to go back down to 541 or whatever the number may 
be. You are still spending $800 billion more over the next 10 
years.
    Basically, the point is this. By assuming the government 
will grow and discretionary spending will increase every year 
and then calling that a freeze, it is just dishonest. But also 
the fact that you include a current services baseline which, if 
you use CBO numbers like you just referenced, you are 
increasing spending by $800 billion over the next 10 years. 
More importantly, that basically assumes that there will not be 
any wasteful spending in this country over the next 10 years, 
there won't be any unnecessary, duplicative or redundant 
programs that should be weeded out, that should be cut. Simply, 
we are going to spend more money every year to the next, and it 
is going to consume 70 percent of the non-Social Security 
surplus, 70 percent of the income tax overpayments from the 
American taxpayer for the next 10 years. That is basically what 
this budget is. It is very clear, in black and white, and it is 
clear by the CBO baseline numbers.
    One more thing I wanted to ask you is, can you describe to 
me exactly what your Social Security lockbox proposal is?
    Mr. Lew. Yes. First of all, I would agree that our budget 
is clear and that it is in black and white. I don't think that 
I would agree with your description of what it says. Our Social 
Security lockbox proposal is different in an important way from 
some of the proposals that you have debated in the Congress.
    I agree with you, that mostly we have been agreeing that we 
should set aside those funds. In addition we are saying that 
for the benefits of debt reduction that are coming about by 
setting aside those funds, we need to provide for extending 
Social Security solvency. We take the interest savings, that 
is, the lower net interest payments by the Federal Government 
and, beginning in 2011, we dedicate those to the Trust Fund.
    Mr. Ryan of Wisconsin. How do you enforce the lockbox?
    Mr. Lew. How do we enforce the lockbox?
    Mr. Ryan of Wisconsin. How do you make sure somebody can't 
pick the lock?
    Mr. Lew. We require in law that the transfers be made, and 
it would be up to Congress if they wanted to vote to repeal it.
    Mr. Ryan of Wisconsin. Are you opposed to lowering the 
publicly held debt limit as Social Security surplus payments 
are made toward paying down the public debt?
    Mr. Lew. I think the last year we saw some proposals in 
that regard that we worried very much about in terms of their 
workability.
    Mr. Ryan of Wisconsin. Cash management positions on a 
month-to-month basis?
    Mr. Lew. Cash management positions. We have got to be very 
careful what we do in terms of the public debt that we not roil 
the markets.
    Mr. Ryan of Wisconsin. If those concerns are addressed on 
this month-to-month cash management position, would you then 
take a look at this proposal again?
    Mr. Lew. I don't believe that using the public debt as a 
budgetary enforcement tool is wise. I think that it is 
inherently risky in terms of managing our very important role 
in the financial markets. I think we need to have strong 
enforcement tools. I would look forward to working to try to 
find tough tools that we could agree on.
    Mr. Ryan of Wisconsin. The administration is agreeing that 
we should pay off the publicly held debt by the year 2013, 
correct?
    Mr. Lew. Yes.
    Mr. Ryan of Wisconsin. But you are opposed to lowering the 
statutory limit of the public debt? You are opposed to lowering 
that ceiling as you pay off that public debt?
    Mr. Lew. They are different measures. Let me give you an 
example. Let's just say that the economy grows faster than we 
projected. Payroll taxes come in, Social Security reserves go 
up. So far it is all good. That is debt subject to limit. You 
don't want to be in a position where you are unable to go out 
and do the month-to-month financing needs of the Federal 
Government because you had a good economy and your payroll 
receipts went up and your Trust Fund is doing well. It is very 
difficult, it is impossible to predict over a long period of 
time the month-to-month needs that closely. I don't think the 
debt held by the public measure necessarily serves us well now. 
I think that would make it a very difficult tool.
    Mr. Ryan of Wisconsin. Reclaiming my time, Jack, those cash 
management concerns I think can be adequately addressed. I am 
new in Congress, but I wasn't born yesterday. I realize that if 
we don't have any artificial discipline in this institution 
between Congress and the President, it won't get done. They 
will spend the money. It happened last year. You are proposing 
it to happen for the next 10 years. If we do not reduce the 
publicly held debt limit ceiling as we try to reduce the 
publicly held debt, there is a good chance it won't happen.
    I would like to just conclude with one quick observation 
that I hope you can take into consideration. You are using a 
different measuring stick in measuring spending for the next 10 
years. You are simply assuming that the overpayment of income 
taxes over the next 10 years, 70 percent of which will go into 
new spending, new spending above next year, above the next 
year's new spending--that is where I come from. If you spend 
more money next year than you spent last year, that is 
additional spending. By rejecting that and by suggesting that 
this budget is only calling for a $300 billion spending 
increase over the next 10 years is just simply wrong. You are 
calling for a $1.3 trillion spending increase over the next 10 
years.
    That is by CBO numbers. I hope that we can reconcile these 
numbers. I hope that when you analyze the product that this 
committee puts out that you will use the numbers we used, the 
CBO numbers, so that we can tell--we can compare our budgets on 
an apples-to-apples basis.
    Thank you.
    Chairman Kasich. Just as an observation, I think it is 
interesting that we dismiss the spending caps, as staying with 
them is kind of being viewed in this city as absurd, even 
though it was just an agreement that was made less than 3 years 
ago. And then we say it is kind of ridiculous to think that we 
could freeze spending at last year's level because we don't 
have the will to do it. And then we reject all other artificial 
means of trying to get us on a bipartisan basis to do what I 
think--when we say we can't do it, that should be woe is us. So 
we can't control the spending, and we also can't put in the 
artificial means that would help us to do what we all think we 
ought to do.
    This is not directed at you, Jack. It is just an 
observation. It is going to be interesting.
    I am going to have a provision that is going to say that if 
we pass a tax cut and you veto it that we would take that money 
and put it in a lockbox and use it to pay down debt. It is 
going to be very interesting to see whether I can enact that 
provision.
    And Paul Ryan--as I mentioned yesterday, Paul has been very 
strong on this. It will be very interesting to see whether I 
can work that through my own party. Because the tougher you 
make it, the more money it takes off the table, and it starts 
to get people nervous that we might not have enough money to 
spend. It is just very interesting, our inability sometimes to 
be able to control spending.
    Mr. Spratt.
    Mr. Spratt. Let me just make an observation. For the 
spending caps to have a real constraint, they have to be 
realistic. If they aren't, they only invite circumvention, 
evasion, gimmicks, from both sides. If they are so tight that 
you can't possibly meet them, then they really get honored in 
the breach. We first set them in 1990 and, as a result, 
throughout the 1990's real spending, discretionary spending is 
11 percent less than it otherwise would have been. That is one 
of the reasons we are where we are. We have found that we can't 
abide by the very tough and tight caps set in 1997.
    One is the reason I mentioned in my statement, defense. 
What we are providing for defense, and I think your side of the 
aisle and mine both share this commitment, we have found it is 
not enough. We are stretched out. We have got recruitment 
problems, we have got retention problems, we have got 
modernization problems that need to be met. We are providing 
$24.4 billion more than we had in the baseline. That in itself 
is half of the increase in discretionary spending.
    Chairman Kasich. I agree that defense was underfunded, 
which was a significant reason why discretionary spending went 
down. But a pox on everybody's house when it comes to the need 
to reform defense.
    I have been off this kick for a few years because, 
frankly----
    Mr. Spratt. There is another hearing right now in our 
committee, the House Armed Services Committee, where the 
witness will testify that defense is underfunded by $100 
billion.
    Chairman Kasich. Let me tell you, there isn't any question 
that our troops, our soldiers, are in a dire circumstance. But 
there is no question that you have a Pentagon that can't 
reconcile $1.7 trillion worth of spending to make the books add 
up, that we are incapable of disbanding the depot caucus 
because that is about what I can take home, it is about a 
Congress that appropriates money for weapons systems that the 
people who fight the wars don't want, it is about the inability 
of us to bring about any significant reform in that building. 
We tried it under Republicans. We didn't get very far. We tried 
it under Democrats. It doesn't get very far. They have been 
trying it since Washington commanded the Army. It is a very 
frustrating effort that needs to constantly be engaged in.
    Mr. Lew. Some of the accounting problems go all the way 
back to the beginning.
    Chairman Kasich. You are absolutely right.
    But, to make a long story short, I just wish that sometimes 
we could accomplish a few of these things. Yet you don't want 
to pour rain on what we have accomplished, as I think John is 
pointing out.
    Mr. Lew, I want to thank you for your patience, your energy 
and for being here for the whole duration. I look forward to 
being with you the rest of this year.
    Mr. Lew. Thank you, Mr. Chairman.
    [The prepared statement of Ms. Hooley follows:]

Prepared Statement of Hon. Darlene Hooley, a Representative in Congress 
                        From the State of Oregon

    Thank you Mr. Chairman--and thank you Mr. Lew for the patience you 
have demonstrated throughout this hearing.
    I know that for the last several months you and your colleagues 
have been working hard to craft the President's budget request. It must 
be frustrating to see all your hard work declared ``dead on arrival'' 
before even getting a chance to present it to the committee.
    That's unfortunate. Regardless of which political party controls 
the White House or Congress, every one of us knows that in the next few 
weeks we're going to have our share of disagreements. But in the long 
run, I would hope we can work together and craft a spending resolution 
that gives the men and women in this country the sense that we can get 
things done here in Washington.
    And I think the President's budget proposal is a step in the right 
direction. Not only would this budget pay off our national debt 2 years 
ahead of schedule (2013 as opposed to 2015), it offers a number of 
common sense, substantive solutions to fund the priorities that 
Americans care about.
    Foremost among them is the President's $40.1 billion dollar request 
for the Department of Education--a $4.5 billion increase over FY 2000 
spending. As a former teacher, I know how important it is to give our 
kids the attention they deserve. If enacted, this would be the largest 
jump in discretionary spending in the history of the Department, and 
would give our communities the help they need to create smaller, safer 
and better public schools.
    I'm also excited about the administration's determination to 
provide the American people common sense tax relief. All of us can 
agree that we need to create family-focused tax credits and eliminate 
the marriage penalty. But we also know that how we do that is 
important--because we have to save enough of the projected budget 
surplus to extend the life of Social Security and Medicare.
    I'm pleased to see the President's tax-cutting proposals are 
similar to the ones that Oregon Republican Congressman Greg Walden and 
I included in our bipartisan tax plan last spring. The President's 
proposal rightly takes aim at the marriage penalty by providing $45 
billion in tax relief over the next 10 years. At the same time, this 
budget would set aside and save 100 percent of the Social Security 
surplus and ensure the long-term solvency of Medicare. While we might 
disagree on the size of the tax cut, we can all agree that we need to 
keep our hands of Social Security and revitalize Medicare.
    Mr. Chairman, speaking of Medicare--I would like to point out that 
prescription drugs are not supplemental to basic health care, they are 
integral to it. Yet the high cost of these drugs--and the inability of 
Medicare to help our seniors cope with them--are a looming public 
health crisis. As a matter of fact, some seniors in my district--as I'm 
sure in yours--have been forced to travel to Canada and Mexico to 
obtain cheaper medicine. Others have had to cut corners by buying less 
groceries or even not heating their homes.
    Quite frankly, these are men and women that have worked hard and 
sacrificed an enormous amount to get us where we are today. They 
shouldn't have to make a monthly or bimonthly trip to another country 
just to buy the medicine they need to stay healthy.
    As elected officials, it is imperative that we look out for the 
welfare of every constituent, regardless of their age or health. 
However, it's especially unfair that so many of our seniors should be 
forced to suffer. While I am pleased to see that the President has 
proposed adding a voluntary prescription drug benefit to Medicare, I 
urge all of my colleagues here today--and the witnesses from the 
administration--to undertake an honest effort in the remainder of this 
session of Congress to give our seniors the relief they so badly need.
    Thank you Mr. Chairman.

    Chairman Kasich. The committee will stand adjourned.
    [Whereupon, at 1:30 p.m., the committee was adjourned.]

                                
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