[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]






 
               THE PRESIDENT'S BUDGET FOR FISCAL YEAR 2002

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, MARCH 1, 2001

                               __________

                            Serial No. 107-2

                               __________

           Printed for the use of the Committee on the Budget


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


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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
JOHN E. SUNUNU, New Hampshire        JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
PETER HOEKSTRA, Michigan               Ranking Minority Member
  Vice Chairman                      JIM McDERMOTT, Washington,
CHARLES F. BASS, New Hampshire         Leadership Designee
GIL GUTKNECHT, Minnesota             BENNIE G. THOMPSON, Mississippi
VAN HILLEARY, Tennessee              KEN BENTSEN, Texas
MAC THORNBERRY, Texas                JIM DAVIS, Florida
JIM RYUN, Kansas                     EVA M. CLAYTON, North Carolina
MAC COLLINS, Georgia                 DAVID E. PRICE, North Carolina
ERNIE FLETCHER, Kentucky             GERALD D. KLECZKA, Wisconsin
GARY G. MILLER, California           BOB CLEMENT, Tennessee
PAT TOOMEY, Pennsylvania             JAMES P. MORAN, Virginia
WES WATKINS, Oklahoma                DARLENE HOOLEY, Oregon
DOC HASTINGS, Washington             TAMMY BALDWIN, Wisconsin
JOHN T. DOOLITTLE, California        CAROLYN McCARTHY, New York
ROB PORTMAN, Ohio                    DENNIS MOORE, Kansas
RAY LaHOOD, Illinois                 JOSEPH M. HOEFFEL III, 
KAY GRANGER, Texas                       Pennsylvania
EDWARD SCHROCK, Virginia             RUSH D. HOLT, New Jersey
JOHN CULBERSON, Texas                JIM MATHESON, Utah
HENRY E. BROWN, Jr., South Carolina
ANDER CRENSHAW, Florida
ADAM PUTNAM, Florida
MARK KIRK, Illinois

                           Professional Staff

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




                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, March 1, 2001....................     1
Statement of Hon. Mitchell E. Daniels, Jr., Director, Office of 
  Management and Budget..........................................     7
Prepared statement of:
    Hon. Jim Nussle, a Representative in Congress from the State 
      of Iowa....................................................     4
    Mr. Daniels..................................................    10
    Hon. Ander Crenshaw, a Representative in Congress from the 
      State of Florida...........................................    69


                       THE PRESIDENT'S BUDGET FOR
                            FISCAL YEAR 2002

                              ----------                              


                        THURSDAY, MARCH 1, 2001

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Sununu, Hoekstra, 
Bass, Gutknecht, Knollenberg, Thornberry, Ryun, Wamp, Fletcher, 
Miller, Watkins, Hastings, Schrock, Culberson, Brown, Crenshaw, 
Putnam, Kirk, Spratt, Bentsen, Davis, Clayton, Price, Markey, 
Clement, Moran, Hooley, Holt, Hoeffel, Baldwin, McCarthy, 
Moore, Capuano, and Honda.
    Chairman Nussle. The committee will come to order. Today's 
full committee hearing is called the Blueprint for New 
Beginnings for the President's Budget for Fiscal Year 2002 to 
2011. The witnesses for today's hearings will be Mitch Daniels, 
the Director of the Office of Management and Budget, and then 
this afternoon at 3 p.m. the Honorable Paul O'Neill, Secretary 
of the Department of the Treasury.
    I ask unanimous consent that all members be allowed to put 
their opening statements into the record. Without objection, so 
ordered.
    The way we would like to conduct this today is that I have 
an opening statement that I would like to make, and then I 
would invite John Spratt to make an opening statement, and then 
we will get right to the director. We welcome you to the 
committee, and we are glad you are here.
    Let me begin by saying, first of all, that I am happy today 
to accept officially the President's budget. We received it in 
speech form, of course, on Tuesday night. We actually received 
the copy yesterday, and I pronounce it alive and in excellent 
condition, based on my first reading.
    I believe that we have a solid foundation to begin this 
budget process this year. It is a foundation without, or I 
should say, it is a foundation that didn't just start Tuesday 
night. Those of us that have been laboring on the Budget 
Committee on both sides recognize many of the different 
concepts in the budget as the President presented it, both in 
speech form as well as written form. We are building on a solid 
foundation of success of budgets.
    We are now in our fifth straight balanced budget, which, 
when I first came to Congress, was something that you almost 
could not even believe you could audit. To say that you had 5 
straight balanced budgets at that moment in time was something 
that no one would have believed.
    So we start with a very solid foundation.
    The way I like to look at budgets is that we are--I compare 
them to if you are going to go out and buy a home, if you are 
going to go out and build a home, the first you do is you hire 
an architect. An architect comes in and does the blueprint, 
does the drawing, the architectural drawing. He does not decide 
what the paint color is, certainly doesn't decide the draperies 
or the appliances that you are going to put in your home, 
doesn't necessarily decide the carpeting or the furniture, but 
does decide if you are going to have a one-car or two-car 
garage, whether you are going to have a basement or an attic, 
what exactly the sizes and dimensions are going to be.
    That is what the budget is. No, we don't get into the tall 
weeds of the specifics of every single policy decision that 
occurs, but the outline and the blueprint is something that has 
to be solid, and I believe that what we have received from the 
President is a very solid foundation and a very solid budget.
    It builds on some success in the area of tax relief. The 
Congresses of the last couple of years have provided as much as 
$316 billion worth of tax relief to the American people. That 
will be built upon in this budget with $1.6 trillion worth of 
tax relief, tax relief from a tax surplus for the taxpayers who 
created it. In fact, today, as we speak, the Ways and Means 
Committee is beginning the process of putting together the 
first draft of that tax plan. It is not the entire plan, it is 
not the entire portion of the budget as the President suggested 
it, but it not only fits within this particular budget, but 
interestingly enough, it fits within the current budget, the 
work that the Ways and Means Committee is doing.
    So we are excited that that is happening so that it can 
give a shot in the arm to the economy and give money back to 
the people who deserve it.
    This budget builds upon further debt reduction. I am 
excited to let people know that we have, by the end of this 
current budget, been able to pay down the national debt. This 
is work that we have already done as a committee. We have been 
able to pay down the national debt to the tune of $625 billion. 
Again, a concept that when I first ran for Congress and came to 
Congress, was unbelieved at that moment in time that we could 
even begin to pay down the national debt, and it is something 
that will be built upon in this budget with $2 trillion of 
additional debt repayment. In fact, debt repayment to a sum 
that can be accomplished within the term of this next 10-year 
budget.
    We are going to be improving Medicare by not only setting 
aside all of the Medicare Trust Fund, but we have added, 
according to the President's budget, $153 billion over 10 years 
for modernization in the prescription drug benefit. We are 
building on success in setting aside the Social Security Trust 
Fund, again, something that the last 3 Congresses have been 
able to do, locking up every penny of what will materialize to 
be about a $2.6 trillion Social Security surplus.
    But there are some other responsible portions of this 
budget that I believe are important to highlight. We are 
funding America's priorities and there are a number of them 
that we have had discussions and have set as priorities from 
this particular committee. National defense, bolstering 
national defense, but doing so in a responsible way, not just 
throwing money at it, not letting, as the President said, the 
money drive the strategy, but first setting the strategy and 
doing a top-to-bottom review of the Defense Department before 
we do more than just make sure that the quality of life of our 
soldiers and sailors is taken care of.
    This, I would suggest, is a model that all departments 
should consider following, and I would commend to the Director 
of the Office of Management and Budget, as he has told me so 
many times, that he is going to begin to emphasize the ``M'' 
word in his title, and one of the ways to do that is to do the 
review that is being done in the Defense Department. I would 
volunteer the Ag Department as the next likely suspect, Mr. 
Director, as the next place that you can go forward and begin 
work as a top-to-bottom review. Every department needs that 
scrutiny, but coming from farm country in Iowa, I think it is 
important for us, as we are sitting on the threshold of a new 
farm bill, to consider the Agriculture Department next.
    In education, we have some exciting news with not only the 
additional funding and flexibility, but the continued priority 
from this committee that we have had for special education is 
continued in this budget.
    There are a number of other items, but let me just 
highlight one final one, and that is the emergency reserve 
reform that is put in this budget. Particularly after 
yesterday's earthquake on the West Coast, we see yet again the 
need for this country to budget for national disasters and 
natural disasters that we know are going to occur. The 
President did not know obviously Tuesday night that there was 
going to be a natural disaster on the West Coast, but to step 
forward in this budget and to say it is a priority, it is 
responsible for us to begin budgeting for natural disasters in 
this budget, and I think it is an exciting development, and a 
$5.6 billion reserve annually for natural disasters in this 
budget I believe is important.
    What are the Achilles' heels in this budget? I think the 
biggest Achilles' heel in this budget is in spending. 
Everything fits right now. We have been able to separate the 
entire Social Security Trust Fund, all of Medicare, the tax 
cuts fit, the spending in this budget is responsible; it has 
increased over the increases of the last number of years, but 
as we have all seen, spending increases can wedge out a number 
of the other priorities quicker than probably any other item in 
the budget.
    So I believe our Achilles' heel, if there is one in this 
budget, is the desire to spend more money than we have. That is 
an area that can get us quickly back to where we found 
ourselves.
    There is a story that I have heard that I think summarizes 
what the American people are going through right now with 
regard to their Federal Government that I want to just end 
with. It is about a common experience that we probably all have 
had, walking late into a 7-Eleven store, pumping the gas into 
your car and coming in with a $20 billion and having a $15 
billion on your gas tank, coming in and also picking up a candy 
bar and a can of pop and going to the checkout counter, handing 
the clerk a $20 bill, and what happens? What happens next? 
Well, the first thing, she gives you your change. That is the 
first thing, because she doesn't think that your overpayment 
ought to go into the cash register or ought to be given to the 
person behind you in line because maybe it belongs to them 
somehow, or save it for maybe your next expenditure, or she 
doesn't even put it in her favorite charity and there are many 
of them that sit outside the 7-Eleven counter, she gives it 
back to you. In fact, in Iowa, maybe even in South Carolina, 
she would run out into the parking lot to give you your change, 
and just like the President said last night, or 2 nights ago, 
the American people want their refund, they want their change 
back. They are overpaying their taxes, and they deserve that. 
We are meeting the priorities of this country and the 
overpayment should go back to the people who pay the bills.
    [The prepared statement of Chairman Jim Nussle follows:]

  Prepared Statement of Hon. Jim Nussle, a Representative in Congress 
                         From the State of Iowa

    Today we begin the process of writing the budget for the United 
States Congress and ultimately for the American people. Our budget will 
serve as a blueprint to guide us through the decisions throughout this 
budget cycle. When you think of a blueprint, you think of the document 
produced by and architect that will tell you the basic design of the 
house, the overall square feet of the house and where the interior 
walls will go. Similarly, our budget blueprint will tell us the overall 
size of our government and the priorities of the Federal Government.
    I believe the first and most important step in writing a budget is 
to listen. I spent a considerable amount of time in my congressional 
district in Iowa last month listening to my constituents on what their 
priorities are for this budget. You know, I get my best ideas directly 
from my constituents. It was Iowans who sent me to Washington to 
balance the Federal budget. It was Iowans who told me to help stop the 
raid on the Social Security system to pay for other government 
spending. It was Iowans who told me to reform Medicare and provide a 
prescription drug benefit. And it was Iowans who told me our tax code 
is too burdensome and too costly.
    This week we listened to our new President in an address to the 
Joint Session of Congress outline his budget priorities for the next 
decade. The President told us his budget would be a responsible budget 
that restrains the recent rapid growth in spending. The President 
outlined an ambitious plan to virtually wipe out our national debt over 
the next 10 years. The President told us that he wants Congress to fund 
such critical priorities as improving our educational system, 
rebuilding our military and meeting critical health care needs. The 
President also said we are overcharging the taxpayers for these 
government services and that we ought to return a portion of the tax 
surplus to those who created it- the American taxpayers.
    I've also spent a lot of time over the past several weeks listening 
to my colleagues in the Congress to learn their priorities for the 
Federal budget. Like me, my colleagues in Congress from around the 
country have spent time in their congressional districts listening to 
the priorities of their constituents.
    Today our committee will hear the testimony of the President's 
Director of the Office and Management and Budget, the Honorable Mitch 
Daniels. Director Daniels will provide us with an overview of the 
entire budget submitted by President Bush and answer any questions we 
may have about this proposal. I want to thank Director Daniels for 
taking the time to appear before our committee.
    Additionally over the next several weeks, I intend to call before 
this committee members of the Bush Administration to discuss the 
portions of the budget under their jurisdiction. To date, we have 
schedules Secretaries Thompson, Paige, Veneman and Powell. We will also 
hear testimony from outside witnesses who are experts in the 
corresponding fields.
    When it comes to writing this budget, we are continuing the good 
work this Congress has done in recent years. While our budget is not 
yet written, we do know some of its key elements. Most importantly, our 
budget will be the fifth consecutive balanced budget. When I first ran 
for Congress, no one thought we could achieve a balanced budget in 1 
year let alone 5 in a row. Our budget will continue to pay down the 
national debt and add to the more than $625 billion of debt we've 
already retired. Our budget will return a portion of the tax surplus to 
the American people and add to the more than $300 billion in tax relief 
we've already provided since 1997. Finally, our budget will continue to 
lock away every penny of Social Security as we have since 1998.
    As we move through this process of writing the budget, I want to 
make sure we continue this important dialogue. I will keep listening to 
my constituents, my colleagues on both sides of the aisle and our 
President and his cabinet. I believe this process will result in a 
budget that reflects America's priorities, a budget that is real and a 
budget that this committee can help enforce throughout the year.

    Chairman Nussle. With that, let me recognize my good friend 
and colleague, the gentleman from South Carolina and the 
Ranking Member of the committee, John Spratt.
    Mr. Spratt. Thank you, Mr. Nussle. Let me say on behalf of 
my side that we are looking forward to working with you as 
Chairman of the committee and congratulate you on your 
ascension to this position. Mr. Daniels, we look forward to 
working with you, too. We appreciate your coming this morning. 
We look forward to a long and fruitful relationship.
    We have your budget, so-called, but everybody knows who has 
dealt with this budget before that this represents about 10 
percent in volume and backup and detail of the real budget, and 
so there are a lot of things we can't know until we see the 
full budget. We have done the best we could to understand from 
this booklet, and I know for you, having been on board just a 
matter of weeks, it has been a mighty struggle to get this 
done, and we appreciate that.
    We are concerned, though, for a couple of reasons. First of 
all, this is more than just your typical marginal budget year 
where we do some puts and takes. We have surplus projections 
now that will almost sweep you off your feet. We have to make 
decisions in this budget which will have major implications for 
priority allocations throughout the next 10, 15, 20 years, 
profound consequences for the future of this country. That is 
why we think this ought to be done with profound deliberation, 
and we are distressed to know that as we meet today, as we 
speak, the Ways and Means Committee is marking up rate cuts 
that the President has proposed, the better part of his tax 
package, even though we on this Budget Committee have not yet 
even scheduled a markup of the budget resolution.
    Now, the Chairman spoke about the importance of the budget 
process, which began in 1974. We tried then to bring some 
coherence to the manner in which Congress appropriates money 
and raises revenues, and we said before we undertake to do 
either one, we should have a blueprint, we should have an 
outline, we call it a budget resolution, and 303(a) of that 
budget resolution says that until a budget resolution is passed 
for a certain fiscal year, the Congress of the United States, 
the House of Representatives in particular, shall not adopt or 
consider, bring up any kind of legislation that provides for an 
increase or decrease in revenues during the fiscal year covered 
by that particular budget.
    So it looks like the first thing we are going to do out of 
the starting box is defy the most basic provision of the basic 
budget law that we are governed by and get the cart ahead of 
the horse by considering tax cuts before we have really 
considered the budget as a whole, and that is one point I want 
to emphasize.
    The tax cut proposal you are making is important. There is 
a strong case to be made for the American people to get back a 
large percentage of what they have been paying as excess to the 
government's immediate needs. There are a couple of things, 
though, that we would like to say about that.
    First of all, these surpluses are projections, and we 
shouldn't be swept away by them. Seventy-two percent of the on-
budget surplus that is projected for the next 10 years occurs 
in the second 5 years of that 10-year period. They may or may 
not pan out. Let us hope they do.
    Secondly, we shouldn't delude ourselves or the American 
people, because while we sit now on an island of surpluses, we 
are surrounded by a sea of debt. There is $5.7 trillion in 
statutory debt owed to all accounts, all people and purposes 
accumulated over the last 30 or 40 years, and in the 
foreseeable future, when the baby boomers begin to retire, 
long-term liabilities, as I think you and all of us would have 
to honestly agree, we haven't yet adequately provided for. So 
we are surrounded by this sea of debt, and we shouldn't get 
deluded into thinking that the surpluses we have now are a 
permanent state of our condition. Indeed, God has given us 10 
years to get ready for the retirement of the baby boomers and 
if we don't do it, we will be held accountable by our children 
for when we sloughed off on to them the responsibility for 
bearing the burden of their retirement.
    So that is one of the high callings that we have in the 
budget process this year. It is not just to look at the 
immediate gratification, but at the long-term needs of this 
country. We couldn't do it in the past. We had huge deficits we 
were coping with and struggling with. We didn't have the 
opportunity to do it. Now that we have the opportunity and the 
wherewithal to do it, we have the moral duty to do it as well. 
The way we do it is by looking at the budget as a whole, and 
the way we proceed is not by ramming this process through, but 
by doing it very, very deliberately.
    There are certain things in your budget that give me pause. 
I am glad to see you say in the final couple of chapters that 
you think we need to keep a pay-go rule, you think we need to 
impose discretionary spending ceilings, and I agree with you. I 
think we need those disciplines. They have helped us get from a 
deficit of $290 billion in 1992 to the surpluses we have today. 
You don't specify exactly how that is to be done.
    One of the devices that we have developed over the last 
couple of years between ourselves, both Houses and both parties 
have agreed, that we would take the surpluses in Social 
Security and Medicare, the HI trust fund, a statutorily created 
trust fund, we would take those surpluses and not invade the 
surplus and use it to fund government spending, but use it 
solely and only to buy up outstanding debt and add to the 
national savings. You are proposing something pretty 
revolutionary, something that departs from an agreement that we 
have reached in the House and the Senate, and a bill that we 
had on the House floor only a couple of weeks ago, brought to 
the House floor by the Republican leadership who bypassed this 
committee because they thought it was so impossible, and that 
was a lockbox for Social Security and Medicare. Now you are 
saying we should abound in that particular discipline at least 
with respect to Medicare. I think you need to bear the burden 
of explaining and defending that to us today.
    I have other things to say, but I have questions to ask as 
well. I am just being a good adversary and a hard-hitter. We 
will expect good answers from you, but we also expect to work 
with you in all good faith to get this job done.
    Mr. Daniels. Thank you, Congressman.
    Chairman Nussle. Thank you, Mr. Spratt.
    Before we begin, let me just say as well that when we first 
met with Director Daniels and projected the time line for 
submission of the budget document, there was a lot of concern 
whether or not that could be met. The budget director, of 
course, very prudently suggested, with the truncated transition 
and everything else that was going on, that he wanted to be 
realistic about it and I said, well, from our standpoint, we 
really hope that the President could meet the deadline of 
submitting this first document; interestingly enough, a 
document that is very similar to the one that was presented by 
President Clinton in 1993, President Bush in 1989, President 
Reagan in 1981. It is, in fact, more detailed than those 
previous submissions.
    I want to compliment you not only on the detail, but on 
your timeliness. You have met the deadlines, arbitrary as they 
were, and I compliment you on the work that you have done with 
all of our members in answering our questions throughout this 
period of time. We look forward to that today, and I invite you 
now to testify. Your entire statement will be submitted for the 
Record, but you may proceed as you see fit. Welcome to the 
committee.

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

    Mr. Daniels. Mr. Chairman, thanks to you and to Congressman 
Spratt and to all of the members of the committee for their 
hospitality. I will accept your gracious compliments only in 
the name of the people with whom I work, including the 
matchless career professionals at OMB, in my judgment, the 
finest civil servants the Federal Government has to offer.
    I will read excerpts from the testimony I have submitted, 
and then gladly engage in the question and answer session with 
you.
    It is a privilege to be afforded this opportunity to 
present on behalf of President Bush his proposed budget for 
fiscal year 2002. We earnestly hope that today marks the first 
step in producing a good product through a good process: A 
sound, responsible budget that matches the Nation's means to 
its goals and needs, and a process of cooperation and 
constructive give and take that conducts the public's business 
in an orderly and admirable manner.
    His proposal used as starting points a few basic 
principles. First, the conviction expressed by the President 2 
nights ago that our national government should be active, but 
limited. Accordingly, we are proposing that discretionary 
spending continue to grow, but at a more moderate rate than in 
the last few years. The President, by offering up his 
priorities and policy choices, means to start a healthy debate 
about how much to spend on what, and he recognizes that 
Congress will have its own, often very different ideas, but he 
believes firmly that the total spent must be limited to the 
amount he has recommended.
    Second, the idea that the budget should become more 
transparent and honest than its recent predecessors. We propose 
to limit tactical circumventions such as advance appropriations 
and bogus emergency spending that has served to evade legal 
expenditure limits and to confuse the public about how much its 
government is actually spending.
    Lastly, the commitment to match the openness and 
responsibility we urge on Congress with integrity in the 
crafting of our own proposal. We have attempted to ensure that 
the assumptions and the data underlying our budget are as 
prudent and justifiable as we believe the use of each taxpayer 
dollar should be. We have tried to resist the trap of false 
precision and provided ample room for the many large 
uncertainties that face us in planning for so many dollars over 
so many years.
    With that preface, let me summarize the proposal. The 
President proposes an overall discretionary spending level for 
2002 that is reasonable, but restrained. It contemplates 
spending growth of 4 percent over 2001, amounting to $26 
billion in new budget authority. Four percent is more than the 
average American's budget will grow this year, but it is ample 
to maintain and extend the useful activities of the Federal 
Government.
    The reasonableness of this recommendation becomes even more 
clear in the context of the recent run-up in Federal spending, 
what the Nation's press has variously characterized as a spree, 
a binge and an explosion. Discretionary spending has grown by 6 
percent per year on average for 3 years, and by 8 percent last 
year alone. Taken together, these budgets added $200 billion to 
spending above the caps Congress had set for itself. Extended 
over 10 years, the next 10 years, continued spending growth at 
this 6 percent spree level would add $1.4 trillion in new 
spending above and beyond inflationary growth. Thus, the 
President's 4 percent proposal comes on top of the largest 
spending base in U.S. history.
    Three years of large increases have raised the base of 
discretionary spending from $534 billion to $635 billion, and 
every department of the government has shared in the picnic. In 
fact, even after some agency budgets were held steady or even 
reduced somewhat to accommodate the President's new priorities, 
every department of government will be larger today, often much 
larger, than 2 or 3 or 4 years ago. Every department will show 
a healthy average increase for the last 4 years, taken 
together.
    It has become clear that this new era of surpluses is more 
dangerous to the taxpayer than the preceding era of large 
deficits. Today's situation calls for more, not less, 
leadership, from both the executive and legislative branches, 
if fiscal health is to be preserved.
    A principal goal of this President and his budget is 
dramatic reduction of the national debt. We have embarked on an 
historic reversal of the longtime trends of greater levels of 
Federal indebtedness with this year's reductions totally well 
over $220 billion. The President's budget aims to carry this 
program of repayment forward at unprecedented rates. Over the 
next 5 years, up to $1 trillion of debt can be repaid with 
another $1 trillion or more in the 5 years after that. This 
amounts to all the debt that matures in that time period, 
essentially all the debt it is financially practicable to 
repay. It will bring national debt down to its lowest levels in 
a century, drop interest costs from their recent level of 15 
cents of the Federal dollar to a mere 2 cents, and bring the 
Nation within a few years of total debt elimination.
    The President's course toward debt elimination will require 
both skillful cash management and fiscal policy. The enormous 
surpluses of the years ahead raise the prospect that extra 
revenues will exceed retirable debt and lead to the amassing of 
large cash balances in government hands and, consequently, 
their investment in private assets. In the administration's 
view, government ownership of a large piece of the economy is 
unacceptable on principle as a threat to freedom and 
unacceptable economically as a sure source of inefficiency. We 
would hope that this conviction is shared unanimously by the 
Congress.
    The President's budget, by definition, expresses his 
priorities for America. Coming as his first budget submission 
following a national political campaign, it incorporates the 
commitments he made during that effort. The outlying document 
we delivered to the Congress this week sets forth those 
initiatives, which I believe have been much discussed and I 
will not elaborate further until I receive your questions.
    In the new era of surging surpluses, Congress has become 
increasingly casual about using devices for escaping the tight 
discipline of its self-imposed caps. For instance, it has 
become common for the President and Congress to seize on 
emergencies or even to declare one where none arguably exists 
as an opportunity to pass massive supplemental spending bills. 
In the last 3 years, extra spending totaling over $80 billion 
has been passed in this way. In 2000 alone, the bill grew to 
$46 billion.
    Unforeseen emergencies requiring Federal resources will 
occur in almost any given year. Pretending they will not and 
then adding billions in nonemergency spending when the 
inevitable flood, hurricane or crisis does happen is not good 
practice. I thank the Chairman for taking note of a remedy or 
partial remedy that we have proposed in our budget in the form 
of an emergency reserve fund.
    The case has been forcefully made by advocates in both 
parties that the decade ahead or any like period cannot be 
predicted with great confidence. Factors affecting both the 
income and outlay sides of the budget sheet can and do shift in 
large and often sudden ways. The administration agrees with 
this concern and seeks to address it in the long term outlook 
of this budget by reserving an enormous sum, fully one-third of 
the entire on-budget surplus, for those contingencies that may 
arise and those new needs on which the Nation may agree.
    It is often pointed out that the over $5 trillion in 
expected surpluses on which at present all estimates concur may 
not come to pass. Of course, this is almost axiomatic when 
short-term forecasts are so rarely on target. The public 
discourse is dominated by worries that the actual surpluses 
will fall short of the estimates, and this a natural reaction 
to the novelty of massive surpluses after a long era of 
deficits.
    But the data suggests strongly that it is at least as 
likely that total surpluses, before policy changes, will come 
to more, not less, than today's projection. Along with 
forecasting risks, significant uncertainties attach to major 
program areas. The best example is national defense where most 
observers agree with the President that a fundamental review of 
both strategy and needs is urgently needed.
    A thorough and honest assessment is now underway led by 
Secretary Rumsfeld, and will require some time to complete. No 
one can know its outcome as to dollar requirements. It can 
range from today's spending levels to amounts substantially 
higher. Attempts to maintain farm income, particularly among 
smaller producers, have consumed some $21 billion in the last 3 
years alone. Again, the exact amounts in the future that may be 
spent above today's baseline levels are unknowable. For these 
and other reasons, the administration will set aside nearly $1 
trillion of the projected surplus as protection against 
contingencies and as a reserve for any future spending above 
the baseline. The first $153 billion of this fund is targeted 
for Medicare reform, including the opportunity for every 
Medicare recipient to have access to prescription drug 
coverage.
    Especially in view of the many large upside unknowns that 
could enlarge the available funds, it is clear that the budget 
reserves are more than an adequate sum to manage the 
unavoidable uncertainties ahead. The most likely eventuality is 
that at some future point, Congress will face another moment at 
which it becomes obvious that the government is vastly 
overfunded, that taxpayers are being overcharged, and that they 
should be allowed to keep more of their earnings.
    The last part of the President's budget is, of course, his 
plan for tax relief. I will not repeat either the tenets or the 
arguments for that plan; both are well-known and those 
arguments, of course, will continue. I will simply call to the 
committee's attention that after growing government spending at 
moderate rates, paying down a record amount of the national 
debt, fully protecting Social Security funds, and providing tax 
relief to working Americans, fully 15 percent of the surplus 
remains uncommitted. Given the security of this reserve, 
continuing to extract money from workers at today's levels of 
taxation would be as unfair as it is unnecessary.
    I thank the committee for its hospitality and will welcome 
your questions.
    Chairman Nussle. Thank you, Director Daniels.
    [The prepared statement of Mitchell E. Daniels, Jr. 
follows:]

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

    Thank you, Mr. Chairman, it's a privilege to be afforded this 
opportunity to present on behalf of President Bush his proposed budget 
for fiscal year 2002. We earnestly hope that today marks the first step 
in producing a good product through a good process: a sound, 
responsible budget that matches the nation's means to its goals and 
needs, and a process of cooperation and constructive give-and-take that 
conducts the public's business in an orderly, admirable manner.
    This proposal took as its starting points a few basic principles.
    First, the conviction, expressed by the President Tuesday night, 
that our national government should be active but limited. Accordingly, 
we are proposing that discretionary spending continue to grow, but at a 
more moderate rate than it has in the last few years. The President, by 
offering up his priorities and policy choices, means to start a healthy 
debate about how much to spend on what, and he recognizes that Congress 
will have its own, often different ideas, but he believes firmly that 
the total spent must be limited to the amount he has recommended.
    Second, the idea that the budget should become more transparent and 
honest than its recent predecessors. We propose to return to the spirit 
of the Budget Enforcement Act, by working with Congress on a budget 
that sets actual limits on spending, followed by appropriations bills 
that conform to those limits and pass in a timely fashion. We propose 
to limit tactical circumventions, such as advance appropriations and 
bogus emergency spending that has served to evade legal expenditure 
limits and to confuse the public about how much its government is 
actually spending.
    Lastly, the commitment to match the openness and responsibility we 
urge on Congress with integrity in the crafting of our own proposal. We 
have attempted to ensure that the assumptions and data underlying our 
budget are as prudent and justifiable as we believe the use of each 
taxpayer dollar should be. We have tried to resist the trap of false 
precision, and provided ample room for the many large uncertainties 
that face us in planning for so many dollars over so many years.
    With that preface, let me summarize the proposal we lay before this 
committee and the American people beginning today.
                     ii. reasonable but restrained
    The President proposes an overall discretionary spending level for 
2002 that is reasonable, but restrained. It contemplates spending 
growth of 4 percent over 2001, amounting to $26 billion in new budget 
authority. 4 percent is more than the average American's budget will 
grow this year, and is ample to maintain and extend the useful 
activities of the Federal Government.
    The reasonableness of this recommendation becomes even more clear 
in the context of the recent runup in Federal spending. In what the 
nation's press has variously characterized as a ``spree'', a ``binge'', 
and an ``explosion'', discretionary spending has grown by 6 percent per 
year on average for 3 years, and by 8 percent last year alone. Taken 
together, these budgets added $200 billion to spending above the caps 
Congress had set for itself. Extended over 10 years, continuing 
spending growth at this 6 percent ``spree'' level would add $1.4 
trillion in new spending above and beyond inflationary growth.
    Thus, the President's 4 percent proposal comes on top of the 
largest spending base in U.S. history. Three years of large increases 
have raised the base of discretionary spending from $534 billion to 
$635 billion, and every department of the government has shared in the 
picnic. In fact, even after some agency budgets were held steady or 
even reduced somewhat to accommodate the President's new priorities, 
every department of government will be larger today, often much larger, 
than 3 years ago. Every department will show a healthy average increase 
for the last 4 years taken together.
    It has become clear that this new era of large surpluses is more 
dangerous to the taxpayer than the preceding era of large deficits. 
Today's situation calls for more, not less, leadership from both the 
executive and legislative branches if fiscal health is to be preserved. 
In addition to insisting on a reasonable overall lid on spending this 
year, the President believes that a new set of caps or other limits 
must be negotiated between the administration and the Congress for the 
years ahead.
                          iii. debt reduction
    A principal goal of this President and his budget is dramatic 
reduction of the national debt. We have embarked on an historic 
reversal of the long-time trend to greater levels of Federal 
indebtedness, with this year's reductions totaling well over $220 
billion.
    The President's budget aims to carry this program of repayment 
forward at unprecedented rates. Over the next 5 years, over $1 trillion 
of debt will be repaid, with another trillion or more in the 5 years 
after that. This amounts to all the debt that matures in that time 
period, essentially all the debt it is financially practicable to 
repay. It will bring national debt down to the lowest levels in a 
century, drop interest costs from their recent level of 15 cents of the 
Federal dollar to a mere 2 cents, and bring the nation within a few 
years of total debt elimination.
    The rapid retirement of our national debt will soon raise 
intriguing practical problems never before contemplated. Are we 
prepared to terminate the U.S. Savings Bond program? The programs where 
states and localities temporarily house their bond issue proceeds? What 
premiums, if any, is it smart to pay to induce bondholders to turn in 
their securities ahead of time?
    The President's course toward debt elimination will require both 
skillful cash management and fiscal policy. The enormous surpluses of 
the years ahead raise the prospect that extra revenues will exceed 
retireable debt and lead to the amassing of large cash balances in 
government hands, and consequently their investment in private assets. 
In the administration's view, government ownership of a large piece of 
the economy is unacceptable on principle, as a threat to freedom, and 
unacceptable economically, as a sure source of inefficiency. We would 
hope that this conviction is shared unanimously by the Congress.
                           iv. new priorities
    The President's budget, by definition, expresses his priorities for 
America. Coming as his first budget submission following a national 
political campaign, it incorporates the commitments he made during that 
effort. The outline document we delivered to the Congress this week 
sets forth these initiatives with, I hope, sufficient clarity, and I 
will highlight only a few this morning:
     Education. The budget increases discretionary spending in 
the Education Department by 11.5 percent, the largest increase of any 
Department, with a particular focus on achievement, accountability, 
math and science, and reading.
     Defense. It increases defense spending $14. 2 billion, 
devoting additional resources to a pay raise, other quality of life 
improvements, and R&D.
     Medical R&D. It increases NIH by $2.8 billion, the largest 
increase in its history, toward the goal of doubling its budget.
     Veterans. It increases Veterans' discretionary spending by 
$1 billion.
     Conservation. It fully funds the Land and Water 
Conservation Fund, for the first time, at $900 million and increase 
National Parks funding by $100 million this year as a down-payment 
toward the elimination of its deferred maintenance backlog.
                  v. budgeting with the cards face up
    In the new era of surging surpluses, Congress has become 
increasingly casual about using devices for escaping the tight 
discipline of its self-imposed caps. For instance, it has become common 
for the President and Congress to seize on emergencies, or even to 
declare one where arguably none exists, as an opportunity to pass 
massive supplemental spending bills. In the last 3 years, extra 
spending totaling over $80 billion has been passed in this way; the 
2000 bill alone grew to $46 billion.
    Unforeseen emergencies requiring Federal resources will occur in 
almost any given year. Pretending that they will not, and then adding 
billions in non-emergency spending when the inevitable flood, 
hurricane, or crisis does happen, is not good practice.
    The President's budget proposes to plan for such contingencies in 
the same common sense way that any business would, by setting aside a 
reasonable sum for emergency purposes, to be drawn on when legitimate 
crises occur. The National Emergency Reserve will be funded with $5.6 
billion, an amount equivalent to the historical annual average for such 
events. Should true emergency needs for 2002 exceed that figure, 
supplemental spending would, of course, remain an option, but given a 
typical year, the nation would have provided responsibly in advance for 
unanticipated problems, and reduced the likelihood of runaway 
``Christmas tree'' legislation.
    Similarly, the practice of ``advance appropriations'' has spread 
rapidly in recent years. This funding beyond the next fiscal year 
likewise has been a means of caps evasion, and has tended to obscure 
the real amount of spending taking place in a given year. The Budget 
proposes to limit this practice to its proper purposes, primarily the 
spreading of funding for large-scale capital projects, as opposed to 
routine governmental activities.
    Again, the fundamental improvement would simply be to return to the 
kind of budgeting familiar to every American business or family, by 
determining clearly in advance the total amount that it is prudent to 
spend, then debating the best allocation of those funds, and then 
making sure to live within those limits through the end of the fiscal 
year.
                    vi. prudence about uncertainties
    The case has been forcefully made by advocates in both parties that 
the decade ahead, or any like period, cannot be predicted with great 
confidence. Factors affecting both the income and outlay sides of the 
budget sheet can and do shift in large and often sudden ways.
    The administration agrees with this concern, and seeks to address 
it in the long-term outlook of this budget by reserving an enormous 
sum, fully one-third of the entire on-budget surplus, for those 
contingencies that may arise, and those new needs on which the nation 
may agree.
    It is often pointed out that the over $5 trillion in expected 
surpluses on which, at present, all estimates concur, may not come to 
pass. Of course, this is almost axiomatic, when even short-term 
forecasts are so rarely on target.
    The public discourse is dominated by worries that the actual 
surpluses will fall short of the estimates, and this is probably a 
natural reaction to the novelty of massive surpluses after a long era 
of deficits. But the data suggest that it is at least as likely that 
total surpluses before policy changes will come to more, not less than 
today's projection.
    The pattern of recent years has been for all forecasters to 
severely underestimate Federal revenues, by amounts as high as $80 
billion in a single year. This has not been principally a function of a 
strong economy, but rather of persistent underestimates of revenue 
growth compared to GDP growth. Looking forward, consistent with our 
attempt to utilize conservative budgeting assumptions, OMB has forecast 
this critical variable at levels well below its long-term historical 
average.
    Also overlooked in most commentary about the amount of the 
aggregate surplus is the opportunity for the Federal Government to 
begin joining the rest of society in demonstrating real productivity 
improvement. Hundreds of billions of dollars of efficiency savings are 
clearly possible across the Federal structure. Here, too, we have made 
the most cautious assumption and projected zero progress. We should 
cooperate to pursue these savings with all the vigor with which we 
contest our policy differences, and I hope the Congress will join the 
administration in a sustained, sincere effort to capture them, and add 
them to the available surplus funds.
    Along with forecasting risks, significant uncertainties attach to 
major program areas. The best example is national defense, where most 
observers agree with the President that a fundamental review of both 
strategy and needs is urgently needed.
    A thorough and honest assessment is now underway led by Secretary 
Rumsfeld, and will require some time to complete. No one can know its 
outcome as to dollar requirements; it could range from today's spending 
levels to amounts substantially higher.
    Attempts to maintain farm income, particularly among smaller 
producers, have consumed some $21 billion in the last 3 years alone. 
This is a troubling trend and a major problem that the Congress will 
confront soon, both as to this planting season and as to the years 
ahead through a new Farm Bill. Again, the exact amounts that may be 
spent above today's baseline levels are unknowable.
    For all these and other reasons, the administration will set aside 
nearly a trillion of the projected surplus as protection against 
contingencies and as a reserve for any future spending above the 
baseline. The first $153 billion of this fund is targeted for Medicare 
reform.
    Especially in view of the many large upside unknowns that could 
enlarge the available funds, it is clear that the budget reserves a 
more than adequate sum to manage the unavoidable uncertainties ahead. 
The most likely eventuality is that, at some future point, Congress 
will face another point at which it becomes obvious that the government 
is vastly overfunded, that taxpayers are being overcharged and should 
be allowed to keep more of their earnings.
    The last part of the President's budget is, of course, his plan for 
tax relief. I will not repeat either the tenets or the arguments for 
the plan; both are well known. I will simply call to the committee's 
attention that, after growing government spending at moderate rates, 
paying down a record amount of national debt, fully protecting Social 
Security funds, and providing tax relief to working Americans, fully15 
percent of the surplus remains uncommitted. Given the security of this 
reserve, continuing to extract money from workers at today's levels of 
taxation would be as unfair as it is unnecessary.
    I thank the committee for its hospitality and am prepared to answer 
your questions.

    Chairman Nussle. My first question goes to the subject of 
economic forecasting. One of the statements you made in your 
testimony is that, of course, these surpluses are based on that 
forecast. How accurate should we consider those forecasts? How 
pessimistic are they compared to other forecasts? What comfort 
level can you give us with regard to these forecasts? Because 
we all know that unfortunately, they are never correct. Much 
like the weather report for tomorrow or even next week. It 
seems like the Farmer's Almanac gets it right for years in the 
future, but for some reason, the weathermen can't get it right 
for the next day. But how much comfort can we have in these 
forecasts, and why?
    Mr. Daniels. Mr. Chairman, I will say I did check the 
Farmer's Almanac, first for future GDP forecasts, and 
regrettably they are not issuing them, so we had to do our 
best.
    Obviously, no one can know the future. Certainly not 10 
years out. This administration did not invent the convention of 
trying to forecast 10 years out. For their own good reasons, 
the Congress and past administrations agreed to make that 
attempt, and so we honor that. What I can say about that 
assumption and other key assumptions is that we have tried to 
err on the side of caution and prudence and in contrast to 
previous budgets of both political parties, I should say, that 
took an optimistic view, at least versus the consensus of their 
day.
    Our long-term economic forecast is under the blue chip 
consensus and consistent with that of CBO. That doesn't mean 
that all forecasts cannot be wrong, they could be; only that we 
have tried to lean to the side of conservatism. I would also 
invite the committee to read those sections of the budget that 
treat with an even more powerful assumption in any budget, 
dealing with the amount of revenue growth compared to whatever 
the level of economic growth turns out to be.
    This has been the source of the enormous underestimation of 
revenue that has led to the surprising gusher of recent years, 
and here, too, we have made, I must say, pessimistic 
assumptions about the amount of revenue that is likely to come 
in. I will be glad to go through those in detail if any member 
should want, but let me just say this--if the revenue growth in 
the future simply matched its historical average, simply 
matched its 40-year historical average which we forecast it 
will not do, although it has for the last 9 straight years, if 
it did that, this surplus would grow by $2 trillion.
    Chairman Nussle. It has been a goal of mine and a number of 
members in a very bipartisan way here on this committee to 
reduce the national debt, reduce the debt held by the public. 
We have been able to, as I said in my statement as a committee 
and as a Congress, accomplish that, to the tune of about $625 
billion as of the budget that we are currently operating in.
    I want to pay down more debt, and you hold that at about $2 
trillion in this particular budget. Why? You mentioned 
financially practicable. How much debt is appropriate for our 
country to be holding in the opinion and advice of the people 
that you work with, in your opinion, and how is that met with 
the challenge of the budget that you have presented?
    Mr. Daniels. We propose to pay down all the debt that is 
fit to pay, I would say if The New York Times is here, and that 
is a little over $2 trillion by our estimate that will mature 
between now and 2011. That will drive, as I mentioned, the 
national debt to levels as a percent of GDP to levels we have 
not seen since the 19 teens and rarely seen in American 
history.
    The interest-carrying cost on the Federal Government, as I 
believe I mentioned, would be slashed from its recent level of 
14 cents or about a dime today to less than 2 cents. This is a 
tremendous achievement for which both political parties, 
particularly in the last few years of this--the last few 
Congresses deserve, I would say, each party deserves great 
credit.
    It may be possible to go slightly beyond $2 trillion. In 
part, this depends on whether--how the Treasury decides to 
manage its cash flow over the next few years. At some point 
soon, within a few years, it will no longer make any sense for 
them financially or mechanically to continue issuing, for 
instance, the 10-year security, which is the benchmark for 
financial markets today. It may be possible, on a very limited 
basis, to buy in some of the debt before it comes due, but not 
on any extensive basis. It has been done so far to the tune of 
a fraction of 1 percent of what is outstanding, but as is 
widely acknowledged and as Chairman Greenspan pointed out, you 
cannot engage in that on a long scale for very long until you 
begin paying unwarranted, unacceptable penalty premiums to the 
bond holders who will, quite naturally, demand a risk premium 
before they will turn over their security ahead of time and 
have to reinvest that money in something less secure.
    By our estimates, to bring in the remaining debt, that is, 
that has not matured by 2011, would call for something like 
$150 billion of what I would call wasted premium payments. 
These payments would flow to the bank of Japan, to the Bank of 
England, to wealthy bond holders. No administration of either 
party is going to do that. And what we should be doing instead 
is bringing down our debt at the maximum practical rate and 
celebrating that enormous success to which, as I said, both 
parties have contributed.
    Chairman Nussle. Spending in the last Congress, as you know 
and as you reported in the nondefense discretionary category, 
rose 14 percent and, overall, 8 percent. You mentioned that we 
not only cannot sustain that, an opinion that I think I share 
and members of both parties share, but in order to hold the 
line on spending, in order to hold the line that you have drawn 
at 4 percent overall and in order to accomplish that, we are 
going to need a partner down in the White House in order to 
accomplish that enforcement. It is a partnership that also has 
responsibilities here on Capitol Hill. We write the rules, we 
can change the rules, so all of the rules that we have are 
somewhat arbitrary and therefore flexible.
    What commitment are you aware of that the President is 
willing to make if we are willing to make the commitment of 
writing the budget within this, within this framework or at 
least within a small fraction of this framework? What 
commitment can we have from the administration with regard to 
their willingness to provide enforcement, possibly even as much 
as a veto pen, in order to hold the line on spending?
    Mr. Daniels. The President's commitment to this level of 
spending is pretty firm, and many members of both parties have 
had the chance to inquire of him about that over these last few 
weeks. I will say that I think we earnestly hope that it never 
comes to that. We have brought what we believe is a reasonable 
proposal, not for freezes, not for rollbacks; we have not 
challenged, on some large scale, the spending of the last few 
years. We recognize that some of it was deferred needs, and 
much of it undoubtedly could be viewed as a backlog.
    The question is, what do we do going forward? We sincerely 
tender our proposal to this committee and to the entire 
Congress as a constructive and reasonable proposal, somewhat 
more moderate in its growth rates than the last few years, a 
genuine effort not to throw up some artificial bargaining 
number, but to establish a number that we think matches the 
Nation's needs with long-term prudence.
    So we hope to have a good debate. We know a good debate 
will ensue about which priorities will be funded, and the 
President is a practical person who knows it is unlikely he 
will succeed in every particular, but he is sincere about the 
total number, and we hope we have offered a total number that a 
majority will find reasonable.
    Chairman Nussle. Thank you. Before I turn to my friend, Mr. 
Spratt, let me just report to him as well as to the rest of the 
members that in a perfect world and in a perfect growing 
economy, I would have made a different recommendation to the 
leadership and to the Ways and Means Committee with regard to 
moving a tax bill. It would have been nice in a perfect world 
and a perfect economy to wait until a budget is completed in 
order to lay that completely in line. That is not what we are 
facing right now, as we all know.
    So as a fall-back position I suggested that it needs to be 
within the framework of what we are currently operating under 
in the current budget, which it does. Therefore, I thought it 
was appropriate, and it is appropriate under the same effects, 
303, for the Ways and Means Committee to proceed with a tax 
bill, particularly since we all know it won't actually arrive 
at the President's desk before we have a budget and we have 
reconciliation instructions, because the Senate has a little 
bit different problem than we have here in the House with a 50-
50 split.
    So yes, as a Ways and Means Committee member and as 
somebody who is concerned about the budget process, I, too, in 
a perfect situation, would have said it would have been nice to 
wait for that. We can't wait. We need to send strong signals 
now and get the work moving on the tax bill, and that is why I 
felt it was important for us to suggest that they continue. 
Just as a way of an answer to one of your questions, I thought 
I should at least report that.
    Mr. Spratt.
    Mr. Spratt. Well, I appreciate your position, but as a 
matter of budget law, black letter law section 303 is pretty 
clear and unequivocal. The tax bill shouldn't come to the Floor 
before the budget resolution. There may be tactical reasons, 
political reasons, other reasons for doing it, but so far as 
the budget process and the black letter law is concerned, it is 
a violation of the Budget Act.
    Chairman Nussle. Would you yield?
    Mr. Spratt. Yes.
    Chairman Nussle. Doesn't it also allow, though, if the tax 
bill number and if its ramifications are in this current year, 
that the current budget does control the--under that same 
section, under the black letter of the law?
    Mr. Spratt. As I read it, if the fiscal year covered by our 
budget resolution, if revenues in that year are reduced, then 
we have to have a budget resolution before we have a tax bill. 
That is section 303.
    Chairman Nussle. Right. But the current budget that we are 
operating under, that we adopted as of the last Congress is 
controlling, unless or until there is a new budget, and as long 
as that is within that number, that is at least my 
understanding, according to the legal beagles that we checked 
with, that is appropriate, according to the black letter of the 
law.
    Mr. Spratt. Well, I don't think we need to have this--but 
the reconciliation provisions in the last year's budget 
resolution are way exceeded by the tax bill you are talking 
about, I believe.
    Chairman Nussle. Except that we didn't get any--we provided 
for an adjustment in that bill that allowed for the update, the 
updates that have occurred that occurred last August, that is 
part of the budget as well.
    Mr. Spratt. In the July update.
    Chairman Nussle. July. And that still fits.
    Mr. Spratt. Not the January update. They give you another 
billion dollars.
    Chairman Nussle. No, no, but it still fits within the July 
update.
    Mr. Spratt. All right.
    Chairman Nussle. Thank you.
    Mr. Spratt. I still maintain my position, but let us get on 
with the hearing.
    Chairman Nussle. Yes. That was fun.
    Mr. Spratt. Once again, Mr. Daniels, thank you for your 
testimony.
    Let me show you the way we put your budget together using 
your numbers. We did this yesterday, and we are using the 
numbers that are in this budget booklet you sent to us.
    Your estimate is at the total unified surplus, all accounts 
of the budget will be $5,644,000,000, and that is $34 billion 
more than CBO projected in its January estimates. We would 
deduct from that, in accordance with the lockbox bills we have 
had in both Houses supported by both parties, we would back out 
of that $2,591,000,000, which is the surplus that will 
accumulate in the Social Security Trust Fund over the next 10 
years. We would also back out of that, in accordance with the 
lockbox bills that we have passed, including one a week ago, 
$526 billion for the HI trust fund. That leaves what we call an 
available surplus.
    If you don't want to invade the trust funds, encroach upon 
these dollars which are put there in trust, that leaves 
available for our disposition a surplus of $2,527,000,000 of 
available surplus.
    Now, from that, we would deduct several things: First of 
all, by your estimate, your tax cut will cost $1,620,000,000. 
Now, as we look at the way you have displayed the effects of 
that tax cut in the booklet you have sent up, there is no 
entry, next to no entry for the fiscal year 2001, from which we 
infer that the tax cut is not retroactive; is that correct?
    Mr. Daniels. As submitted, it is identical to the 
commitment the President made and is prior to any 
retroactivity.
    Mr. Spratt. OK. This $1,620,000,000 without retroactivity, 
if you put in retroactivity and didn't cut the provisions of 
it, you would have to add a bit to that.
    Now, we contend that there are certain things in the Tax 
Code, popular provisions, that have a limited life when they 
expire, the practice in the Congress is almost always to renew 
them. If you assume that these extenders, these provisions will 
be renewed and extended and we recognize that you extend the 
largest one, you make permanent the R&D tax credit, but there 
is another $60 billion of expiring tax provisions, and if you 
also assume that sooner or later, Congress will be forced 
politically to deal with the problem of the AMT, the 
alternative minimum tax, simply because when we created this in 
1986, we set an income threshold which was not indexed, we are 
15 years from that date now, and more and more middle income 
couples, taxpayers, are going to be faced with the AMT, which 
they don't know about now, but when they find out about it, 
they ain't going to like it. Because, in effect, we are saying 
here is a benefit, a credit, a deduction, an exclusion, a 
preference, you can take this off your taxes. And then they get 
to the A&P section and we take back what we have just given 
them.
    We never intended for that to apply to middle income 
families, middle income taxpayers. We will adjust it sooner or 
later because we are going from 2 million taxpayers affected by 
it to as many as 20 million over the next 10 or 12 years. We 
put in a modest amount for fixing the AMT. It could be much 
greater. We put in $300 billion for the cost of extenders and 
fixing the alternative minimum tax. Then finally, we adjust the 
interest rates on the public debt by $400 billion, because if 
you use $1.6 trillion to reduce taxes, you will have $1.6 
trillion more debt on which to pay interest, and we add $400 
billion and, looking at your chart, you have $417 billion debt 
adjustment for the policy changes you make, and we think that 
is fair.
    That leaves, that leaves only $207 billion over the next 10 
years to provide for your defense increase, to provide for 
Medicare prescription drugs. The other night the President 
proposed a Medicare prescription drug proposal for low-income 
beneficiaries to which you have assigned a cost of $153 
billion. That would eat up just about all of the residual, $207 
billion, leaving nothing for defense, education, any number of 
other things.
    That is why we are concerned about your budget. We think 
you are cutting it awfully close to the margins, as close to 
the bone as you can possibly come. Are these numbers wrong?
    Mr. Daniels. I am delighted to say they are, Congressman. I 
appreciate your question, which offers the opportunity I think, 
to bring you great reassurance, which I will now do as 
concisely as I can. You asked, I am tempted to say all the 
right, the big questions, and I think they ought to be treated 
fully and fairly. Let us take them in this order.
    First of all, the Social Security fund, the President has 
made plain on innumerable occasions, the Social Security Trust 
Fund is only for Social Security, and as we have illustrated, 
$2 trillion more, perhaps a little more, but not much more of 
that is available for debt retirement. The rest can be 
considered as a further cushion against adversity, can be 
considered as potentially some further retirement before we run 
into bonus payments to bond holders, but we do not propose to 
spend it in this budget.
    Secondly, while there is a lot of sentiment we know for a 
larger tax cut than $1.6 trillion, and we commend the spirit of 
that sentiment, I didn't realize that it was extensive on the 
Democratic side. The President has proposed a $1.6 trillion tax 
cut. As he said again the other night, some think it is too 
big, some think it is too small, but he thinks it is just 
right, and we do. So we appreciate the gesture of offering 
hundreds of billions more, but that is not our idea.
    The AMT is an issue that is out there; we would work with 
the Congress if the Congress would prefer to address that 
sooner rather than later. You know, we didn't write the AMT.
    Mr. Spratt. But don't you agree that it will probably be 
addressed? Unless it is going to be repealed, it will have to 
be addressed.
    Mr. Daniels. It is partially addressed in the proposal we 
have made within the 1.6.
    Mr. Spratt. Even your joint tax commission said that there 
is $200 billion in your proposal that would be denied taxpayers 
by the AMT right now, in your proposal alone.
    Mr. Daniels. Well, we welcome your concern for the 
taxpayers, Congressman. No one would be taxed more, even 
through the combination of these provisions, but some at some 
point might be denied part or all of the tax relief the 
President proposes. That would be too bad, and it is a problem 
we could agree to work on. But it need not inflate, at this 
time, the total size of the tax plan that he has proposed.
    The interest costs you correctly pointed out are fully 
accounted for in our budget. This is a little bit of a strange 
convention of the way that we budget. We all agree to do it 
this way. It presumes it will have a large cash balance, that 
we think the government should never have, and they will be 
earning interest, but that is a subject I will return to.
    We agree with your accounting. That is why in our diagrams 
we show a $1.4 trillion reserve for new needs, contingencies 
and debt interest; and the 400, you are quite correct, refers 
to the debt interest associated with the tax cut.
    So now let me try to reassure you as to why there is so 
much more room than you have feared.
    Let me talk about Medicare. We lay out in our document, I 
hope with complete clarity, something that I hope all Members 
of Congress will soon come to recognize, certainly the 
journalistic community has, there is not a surplus in Medicare. 
Medicare costs on an annual basis substantially more than it 
takes in in payroll taxes and premiums, and it is a dilution--
perhaps it was an honest confusion, but it is a dangerous 
delusion to pretend otherwise.
    Over the next decade, viewed charitably, Medicare will cost 
$645 billion more than it takes in. On a cash basis, that would 
be more like $900 billion.
    We sincerely fear that to talk about a surplus is an 
invitation to procrastination. I realize in saying this I am 
speaking to people on the Republican as well as the Democratic 
side, but by no means, no intellectually consistent means, I 
think, can it be said that Medicare runs a surplus.
    That notwithstanding, if you choose to view it that way, we 
have not proposed to spend it. By our accounting at least, 
there is at least twice as much, and by CBO's at least three 
times as much, money set aside in the contingency reserve as 
the alleged Part A surplus. So the answer is, if you want to 
persist in this view and do not accept my assessment, the 
answer is, don't spend it. Just don't spend it.
    Now, here is the most important point of all. In talking 
about, as people so very loosely do, locking away and putting 
off the table all of Social Security, plus this so-called 
Medicare surplus, that comes to over $3 trillion, the question 
someone must soon answer is, when it goes off the table, where 
does it go? Where does it go? $2 trillion can go to debt 
retirement. You might push that up .1, maybe .2. Where does it 
go? There is not a mattress big enough.
    There is only one place it can go, and that is into private 
assets. If it is going to be held, if the government is going 
to insist on clutching this money, rather than leaving it with 
the people who earned it, it will have to go to private assets.
    Now, I am glad to see that this debate is being flushed out 
of the shadows and into the open. Let me just cite to you from 
yesterday's New York Times an economist, Dr. Krugman, who 
disagrees strongly with our budget proposal, and gives his 
honest reasons why, but then says the following:
    ``What is new is Mr. Bush's argument that since about a 
third of the Federal Government's debts is, in effect, subject 
to early repayment penalties, it would be irresponsible to run 
a surplus large enough to pay off the entire national debt.'' 
He means by 2011. Now it is right, says Dr. Krugman, that this 
is maybe an argument against repaying that part of the debt. 
But then he goes on to quarrel with our idea of leaving money 
with taxpayers, and he gets to the only conceivable point. In 
his view, ``The responsible thing for the Federal Government is 
to make alternative investments, and if this means that the 
Social Security and Medicare Trust Funds must buy stocks and 
bonds from the private sector, so be it.''
    Now, he has put his finger on the issue. If you push this 
money ``off the table'', you have to tell somebody what you are 
going to do with it. We say it stays in reserve. If you won't 
leave it there, you will have to invest it in General Electric 
and Motorola, and we have stated our unequivocal belief that 
this would be wrong on principle and wrong economically.
    So the right way to draw the pie chart, we insist, is as we 
have: $2.6 trillion of Social Security entirely devoted to 
Social Security; $600 billion of that as a further reserve; $1 
trillion of the on-budget surplus uncommitted, available for 
setbacks, available for new needs or emergencies.
    Having done that, with all that room as protection, we 
believe it would be inexcusable not to provide tax relief to 
the overcharged American taxpayer.
    I apologize for a lengthy answer, but it was an important 
question.
    Mr. Spratt. I didn't interrupt because I wanted to give you 
the opportunity to have a full and complete answer.
    Let me go back to some of the detail you mentioned. Let me 
start with this. The President the other night told us, and you 
have in your budget booklet, a contingency fund of around $1 
trillion.
    Mr. Daniels. Yes, sir.
    Mr. Spratt. The impression I got listening to the speech 
and even reading the language here is this is a cushion fund. 
If these projections don't pan out, we can fall back on that 
contingency. If we need further spending, we can dip into that 
contingency.
    If we go back to my chart here, the only reason--the only 
way I can come up with $1 trillion is by going to the Social 
Security Trust Fund and taking that $600 billion that you won't 
spend because you don't have enough debt to retire and redeem--
--
    Mr. Daniels. No, sir, that would be incorrect.
    Mr. Spratt. OK.
    Mr. Daniels. Keep on going.
    Mr. Spratt.--and the $527 billion in Medicare's Trust Fund. 
Those two together add up to a little over $1 trillion. 
Otherwise, how--what is the arithmetic for arriving at $1 
trillion?
    Mr. Daniels. It is pretty straightforward. You can get to 
it easier from the bottom. The 207 you have, the 300 in extra 
tax costs that is above and beyond the size of the--I am sorry, 
tax relief, above and beyond the size the President asked for 
repeatedly, and the $526 billion that you term the Medicare 
surplus, which in fact has already been spent on Medicare, but, 
as I said before, if you want to imagine that those funds were 
not but in fact are some kind of surplus, then the alternative 
is not to spend them.
    Mr. Spratt. Half of them is the Medicare ``Trust Fund'' 
money.
    Mr. Daniels. Thank you for putting quotes around it.
    Mr. Spratt. I did it for emphasis to you, because it is a 
statutory account. The people of this country, ever since they 
have paid the FICA tax for Medicare, have felt they were paying 
their payroll taxes into an account which would be dedicated to 
Medicare solely. We created that by law. It is black letter 
law. It is not some sort of device that we use for rhetorical 
purposes around here.
    In fact, let me read you a law, a bill we passed 16 days 
ago, what it says: It is the purpose of this Act to prevent the 
surpluses of the Social Security and Medicare hospital 
insurance trust funds from being used for any purpose other 
than providing retirement and health security and to use such 
surpluses to pay down the national debt until such time as 
Medicare and Social Security reform legislation is enacted.
    But you are telling me it would not be just used for reform 
purposes. It is part of the cushion that would be used for any 
number of purposes to cushion us against an adversity not 
foreseen.
    Mr. Daniels. I am telling you it is already being spent. 
That amount of money, and $645 billion more, will be spent on 
Medicare. Now, we can pretend to ourselves that that money 
somehow was not devoted to Medicare. We believe that every 
penny of Medicare receipts and more should be allocated to that 
purpose. We propose to spend more, as I indicated, for a 
prescription drug benefit and further modernization of the 
plan. But there is an alternative, which is, as I say, if you 
want to maintain this, I respectfully say, antiquated view of 
the system, then we need not spend that part of the 
contingency.
    By the way----
    Mr. Spratt. This is not antiquated. It is current law. It 
is still on the books. I mean, if you are going to abide by the 
law until it is changed, this is what the law says.
    Mr. Daniels. But that law can change, Congressman. You all 
changed it when you decided, because things were not looking 
too good for this concept, you decided to move home health 
care, presto-change-o, out of Part A, and overnight suddenly 
$200 billion of ``surplus'' materialized over 10 years. So, you 
know, I am tempted to use stronger language. I would just say I 
think this is a confusing way to talk to the public about a 
system which we should agree is urgently in need of reform, and 
soon. It is in bad fiscal shape, not excellent fiscal shape as 
these illusory surpluses suggest.
    Honestly, I think the biggest issue is not our good-faith 
differences about what this particular budget should look like. 
I think the biggest issue is the longer term, the invitation to 
procrastination, if we tell ourselves that we are sitting on 
some kind of surplus in Medicare, when quite the converse is 
true.
    Mr. Spratt. Let me go on. We will come back to that.
    Chairman Nussle. Let me just inform members there is a vote 
on the floor. We are going to continue the hearing during the 
vote. Members should be advised to go and vote. We will 
continue the line of questioning as the vote is occurring.
    So, Mr. Spratt.
    Mr. Spratt. Mr. Daniels, let me ask you about some other 
numbers, in trying to understand what you are doing with 
discretionary. I think you are wise to provide for a reasonable 
increase in the discretionary accounts. One of the reasons we 
are so far above the caps is I helped negotiate the BBA in 
1997. We realized they were unrealistic and tight. They were 
set so tight in the last two budget resolutions, they were not 
credible.
    Mr. Daniels. We appreciated your input, Congressman. You 
were one of the first people we consulted. I don't know if we 
got the right number or not. But it was trying to be responsive 
to input like that we received from you.
    Mr. Spratt. Let me express a concern, and you tell me if my 
arithmetic is correct. When we look at the accounts you are 
going to protect--Education, the Department of HHS--these 
accounts would get equal to or more than inflation. The Social 
Security Administration, the VA, International Affairs, when we 
look at that and then adjust discretionary by 4 percent, it 
seems to us, using your baseline, you would have to make about 
7 percent cuts in the remaining non-defense discretionary 
accounts. Is that consistent?
    Mr. Daniels. That is not a calculation I am familiar with, 
Congressman.
    First of all, we think comparing everything, that to 
inflation, is a little risky. The private sector doesn't work 
that way. In fact, in the rest of the world these days, thanks 
to the steady increase in productivity, a flat budget year to 
year represents about a 3 percent increase. So we think--we 
don't accept the sort of old convention that anything less than 
that should be viewed as a step back.
    But let me say this: Quite honestly, budgets are always 
about choices. They are about new priorities. The President has 
those, and you named each of the most important ones when you 
named education and defense and medical research and veterans 
and so forth. If you are going to accent some things and not 
simply have a sky-is-the-limit approach, then other things are 
going to have to take second priority.
    We were careful to point out in the budget that, viewed in 
the context of the spending increases of the last few years, 
every department is substantially larger than it was just 2 
years, 3 years, certainly 4 years ago; and this includes those 
for which we recommended either flat or even slightly declining 
budgets this year.
    Mr. Spratt. I don't want to cut you short. Let me give you 
for the record our analysis of the likely cuts required in the 
non-defense discretionary accounts. We come to 7.1 percent. 
That is before carving out a niche for transportation and other 
protected programs which, as you know, by virtue of law have 
gotten for themselves a place in the budget that is greater 
than just an inflationary year-to-year increase.
    When you set aside the money required for them that is over 
and above the 4 percent increase, you have gotten bigger cuts 
than 7.1 percent. We would like to know if our arithmetic, our 
analysis of your numbers, would lead to a 7 percent cut in all 
other NDD programs?
    Mr. Daniels. Well, I will be glad to take your arithmetic 
and get back to you quickly and see if there is some way to 
reconcile it. It doesn't sound as though it squares with what 
we have, but I don't doubt, as I have said on other occasions, 
if you torture the data long enough, it will confess, and 
perhaps somebody has been working over the data on your side.
    Mr. Spratt. If you had a big increase in defense, 050 as we 
call it around here, this fall, after the QDR, the Quadrennial 
Review has been completed, if you then come forward and say our 
defenses are in perilous conditions, we need more money, would 
you raise the baseline or require that be taken out of non-
defense programs?
    Mr. Daniels. We made no decision either way yet. I think 
there are probably multiple ways that could be dealt with. It 
would be certainly a feature, of course, of the next budget. 
Since I don't know what the Secretary will recommend or what 
the review will recommend, I don't know whether it can be 
accommodated, which would be our first instinct, frankly. But 
it might not prove practical. This is again why we try to be 
candid in suggesting that we have to have a very large reserve 
against contingencies, this being perhaps the first among 
those.
    Mr. Spratt. Are you going to tell me you are paying it out 
of Medicare?
    Mr. Daniels. No, sir.
    Mr. Spratt. I will leave it at that. Thank you very much.
    Mr. Hoekstra [presiding]. Thank you. Welcome. It is good to 
see you. I talked with your staff beforehand, and they 
indicated that you had already anticipated where I was going on 
my questioning, so we will see.
    Mr. Daniels. I didn't want to spoil the surprise, so I 
didn't read their memo.
    Mr. Hoekstra. That is good.
    One of the President's primary areas for increasing 
expenditures is the Department of Education. We were excited to 
hear when the President began his work on the Department of 
Defense that he said he would do a top-down, bottom-up review 
of defense priorities, defense issues and those types of things 
before you came out with really a complete analysis and a 
proposal on what to do in the Department of Defense.
    For the last 3 years, the Department of Education has not 
been able to get a clean audit. I believe that today they will 
again get a qualified opinion from their auditors, something 
less than a stellar performance for an agency that we have 
entrusted $40 billion to, an agency that also manages the loan 
portfolio of somewhere in excess of, I think, $60 to $70 
billion. But you have gone forward and proposed an 11 percent 
increase in this budget.
    How can we be proposing--other than identifying it as a 
national priority, how can we put another 11 percent into a 
department that over the last 2 to 3 years has clearly 
demonstrated that there is a significant amount of waste, fraud 
and abuse in the department and still cannot get a clean set of 
books?
    Mr. Daniels. That is an important and appropriate question, 
Congressman. I think the answer to it starts with the fact that 
we should make a commitment--the administration should make a 
commitment to a very careful review of this and, as Chairman 
Nussle suggested, other departments, too. Having produced or 
met our responsibility by producing this budget outline, we 
will now try to turn our attention to these larger and longer 
term questions.
    I would distinguish the two, I suppose, in this way. In the 
case of defense, the President recognized that it was time, 
after probably 50 years without a complete re-look at strategy, 
mission and therefore needs, for a look before we leap in the 
case of defense spending, and that is under way, as you know.
    In the case of education, it was both a first priority with 
him and he had some very clear ideas already about what needed 
to be done--accountability, reading at an early age and so 
forth. So I think that his decision was to move immediately, 
that time was wasting, that too many lives were being stunted, 
too many children lost along the way, to go into some lengthy 
period of study, when he already knew at least the first things 
to do.
    But I do believe that your point is well made that that 
department needs a look, needs to be near the front of the line 
in getting a look, and we will commit to do that.
    Mr. Hoekstra. You recognize when the department does not 
get a clean audit the auditor is telling us that we do not have 
a high degree of certainty that the money going into that 
department is actually being used for the things that Congress 
may have appropriated it for. So the President may be steering 
this money into the department for objectives that he believes 
are important, that he has identified based on the work that he 
has done in Texas, that he has done researching education on a 
national basis, but that when you put the money into that 
department there is no high degree of certainty that it is 
actually going to find its way through the process on the 
priorities that you have identified.
    Mr. Daniels. I recognize this, sir. Secretary Page 
recognizes this, and I think it is undoubtedly already about 
the business of identifying areas of mismanagement or 
opportunities for efficiency. I urge you really to persist in 
your advocacy for a good, close, hard look and to hold us to 
it.
    Mr. Hoekstra. We are continuing it. We are hoping you 
partner with us in that process and that the administration 
comes back and puts some benchmarks in place. Again, you came 
out of the private sector. You have got experience in the 
private sector.
    Mr. Daniels. Right.
    Mr. Hoekstra. You know that on a board or in the senior 
management in the private sector that kind of performance is 
totally unacceptable.
    Mr. Daniels. Yes.
    Mr. Hoekstra. That is what we have had for the last 3 
years, and that good bookkeeping is just the benchmark. That is 
where you start before you even start taking a look at the 
effectiveness of the programs. We would hope that the same 
energy that the President and the administration is putting 
into making sure we leave no child behind through the programs 
and the strategies, that you spend the same time and energy 
focused on doing the basics at the Department of Education.
    Mr. Daniels. Well, we will need to make the commitment to 
leave no dollar behind, too.
    Mr. Hoekstra. I would hope so.
    Great. Thank you very much.
    Mr. Daniels. Thank you for your questions.
    Mr. Hoekstra. I will yield to Mr. Sununu.
    Mr. Sununu. Welcome, Mr. Director. I appreciate your 
testimony.
    I want to begin by touching on a point made by the ranking 
member in discussing the reserve. I at least personally want to 
clarify this, and then if you want to add a brief comment, 
although I think your comments have already been quite clear.
    In the chart that was presented, the ranking member, Mr. 
Spratt, showed $200 billion at the bottom of his chart as a 
reserve. You made the clear point that he had included and in 
part argued for the need for $300 billion in tax cuts above the 
President's plan; and, of course, he had also highlighted the 
roughly $500 billion coming in Medicare taxes.
    So the point I want to be sure is clear is that there was 
agreement that in the President's budget there is a $1 trillion 
reserve. Because all of these elements added together would 
comprise this reserve that is being set aside.
    What bothered me most in the discussion was not that 
agreement, because I think that is very favorable, but the 
suggestion that was made that creating this reserve, $1 
trillion, which is hard to really comprehend, but $1 trillion 
over the next 10 years, that there was something fiscally 
irresponsible about creating this reserve. Setting aside all of 
these funds, not to be used initially for any tax relief, not 
to be used for any spending program, not to be used for any 
other purpose other than to set aside, understanding that the 
fact is forecasts are fallible, whether it is from the Farmer'S 
Almanac or the OMB Director or anyone else.
    Now, that is the point I want to drive home, that this is, 
as I understand it, an historic achievement. To the best of 
your knowledge, was any such reserve set aside in the previous 
administration?
    Mr. Daniels. No, sir.
    Mr. Sununu. To the best of your knowledge, was any reserve 
set aside under the Reagan or Bush administrations?
    Mr. Daniels. Not to my knowledge.
    Mr. Sununu. By doing so, we are achieving exactly what so 
many of the critics of this budget plan suggest needs to be 
done, and that is be fiscally prudent, be reasonable, be 
balanced in the approach.
    Let me get back to a point that you made earlier about 
projections, because I think it fits clearly into this same 
theme, this same principle or concept of being balanced, of 
being fiscally prudent. You talked about projections. You 
talked about revenue growth and revenue projections. You 
touched on the point very briefly. I want to go through it in 
some additional detail.
    In the President's budget, what is the approximate average 
revenue growth year on year that you have in your projections 
over the 10-year period?
    Mr. Daniels. Well, let's see, it will be something--let me 
do the math in my head here for a second.
    We are forecasting economic growth in the 3.1, averaging 
3.2 ultimately, over 10 years; and for the first several years 
we are forecasting--or assuming, I should say--revenue growth 
running as much as 1.5 points below that. So in any given year 
revenue growth would be at a rate in the 2s, I suspect. Those 
are probably real numbers. Five percent is the number, I am 
advised.
    Mr. Sununu. Two percent real, 5 percent nominal. The 
historic average, as I have seen it--looking at any 10-year 
period or the 40-year period you cite, it is actually quite 
consistent. The historic average for revenue growth is 7 to 7.5 
percent. That is a 2 percent difference in annual revenue 
growth that this budget has below the historic average, 2 
percent per year compounded. Looking at that figure, I think 
you ascribed a figure to that difference over the 10-year 
period in which you assumed revenue growth at the historic 
average, how much larger would the surpluses be?
    Mr. Daniels. $2 trillion.
    Mr. Sununu. $2 trillion. That is 33 percent larger--or even 
more--35 percent larger than currently forecast?
    Mr. Daniels. That is correct. Just to calibrate that for 
you, that would match or perhaps overwhelm a full percentage 
point lower economic growth throughout the entire time period. 
So you could be off by one-third on your economics and have 
that offset by the conservatism of this assumption.
    I will just give you one other data point.
    If revenue grows only with the economy, which it has 
consistently exceeded over recent years, given the structure of 
the tax system we have now, by the way, in a weak economy or 
weakened economy right now it is once again running ahead of 
projections, revenue is. But if it only runs with the rate of 
economic growth, it would add $750 billion to the 10-year 
surplus.
    Mr. Sununu. And to be clear that this is not a case of 
looking at only periods of economic growth or looking at only 
an optimistic scenario, the historic averages that you cite 
include recessionary periods, they include periods immediately 
preceding tax cuts, include periods immediately preceding tax 
increases, which obviously oftentimes have resulted in a 
slowing economy. So it doesn't leave out the bad times in order 
to arrive at this historic average revenue growth of 7 or 7.5 
percent.
    Mr. Daniels. No, that is quite correct, Congressman. That 
is the reason to reach back 40 years, is to try to incorporate 
a fair factoring in of all kinds of situations.
    Mr. Sununu. So you are using revenue growth projections 
below historic averages. You are creating a reserve of $1 
trillion that is not dedicated in any way, that I certainly 
would not want to see be used to create bigger government, but 
is there, in case projections in one area or another do not pan 
out--and now let's talk a little bit about in this context the 
tax relief package itself.
    Mr. Daniels. Could I just add one thing to your excellent 
summation? You might also add the $600 billion of Social 
Security surplus not committed in this budget as further 
reassurance.
    Mr. Sununu. So as a management tool to pay down additional 
debt if that is available and, even more important, to be used 
to support any costs associated, transition costs associated 
with a modernization program or a reform program to reform 
Social Security, you have that additional $600 billion. Is that 
correct?
    Mr. Daniels. That is correct.
    Mr. Sununu. Talk briefly about the size of the tax relief 
package. Given these projections by my rough estimates, it is 
about 30 percent of the total surpluses. I have been corrected. 
It is 28 percent.
    Mr. Daniels. Twenty-eight percent.
    Mr. Sununu. Thank you, Gil. Put that in a context, though, 
relative to the tax relief packages under President Kennedy in 
1960, under President Reagan in 1981, relative to our current 
economy or to current revenue collections.
    Mr. Daniels. The tax relief proposal at the size at which 
the President has consistently insisted is about one-third the 
size relative to the budget or economy of the Reagan proposal 
of 1981, more like it is about half the size of the Kennedy 
proposal of the '60's. Maybe the easiest way to think about it 
is to take note that at this baseline estimate, which may be 
low, could easily be low, the Federal Government will take in 
$28 trillion of revenue in the next 10 years; and, of that 
money, it represents about 6 cents on the dollar. So, viewed as 
a refund to taxpayers, the 6 cents will not strike most people 
as excessive.
    Mr. Sununu. So as a portion of our economy, it is smaller 
than the Kennedy package, smaller than the Reagan package, and 
in both of those eras we did not have the budget surpluses. In 
fact, of course, under Reagan there were deficits.
    Mr. Daniels. Right.
    Mr. Sununu. So it is more modest. We have a $1 trillion 
reserve.
    Finally, I want to close by having you talk a little bit 
about the debt retirement process, because, again, I think it 
is important that we look at these things relative to historic 
averages or historic perspective and relative to the size of 
our economy. By the end of this year, debt, our public debt, as 
a percentage of the economy, of the GDP, will be about 30 
percent. Do you know roughly when the last time was that we 
achieved that low of a debt burden as a percentage of our 
economy?
    Mr. Daniels. Actually, I have a chart I would be happy to 
display. It is something that, as I said, I think should be 
cause for celebration by all members in both parties since all 
have contributed to this turnaround. But, to sum it up, at the 
end of this decade, we will be down to 6.5 percent of GDP, and 
you have to reach back into the decade between 1910 and 1920 to 
find an equivalently low percentage. Of course, the difference 
is----
    Wrong again, Eric. Good chart, though. Put that up a 
minute. We like that one.
    This is the end of the interest burden on the Federal 
budget.
    Mr. Sununu. Which clearly corresponds to our debt level.
    Mr. Daniels. That is correct. And plummeting from a height 
just a little over 15 cents, not many years ago, beginning to 
drop now down toward 10, but headed for under 2 at the end of 
the budget period.
    There you go. So your figure is about correct for now, 
Congressman. The year 2000----
    Mr. Sununu. This shows in 10-year increments.
    Mr. Daniels. Yes, 10-year increments. You have to reach 
back here to the second bar from the left and the first two 
decades of the last century.
    Mr. Sununu. But even if we express concern about the length 
of these forecasts and say I really don't want to look out 10 
years, the further out we go, the tougher it is to predict, by 
my calculations. Or I guess it is data contained in your budget 
submission, in just 5 years, by the end of 2006, that debt as a 
portion of GDP will be 10 percent, and that is a level that we 
have not seen since well before the Second World War, is that 
correct?
    Mr. Daniels. That is correct, also. This whole era of 
surpluses and debt reduction is new to us all. There are some 
very intriguing new questions that policymakers will have to 
decide, that no one has been thinking about much until 
recently. We will soon have to decide, do you want to get rid 
of the U.S. Saving Bond Program? If you want to go to zero, you 
will have to do that.
    Mr. Sununu. Even without addressing that question, in the 
next 5 years, given the schedule of debt repayment laid out in 
the President's budget, we will take all of the Treasury notes 
with maturities between 1 and 5 years out of circulation, is 
that correct?
    Mr. Daniels. Yes. By every set of assumptions I have seen, 
the Treasury will stop issuing most of the instruments with 
which we are all familiar within the next 4 or 5 years, some 
think much sooner.
    Mr. Sununu. And within the 6-year period, or the 7-year 
period, before we start accumulating cash surpluses, it would 
be possible to take all of the even shorter term maturities, 
the 3- and 6-month bills out of circulation. I know for cash 
management purposes the Federal Government might not want to do 
that, but could you talk a little bit about how that is going 
to be addressed by both OMB and Treasury?
    Mr. Daniels. Thank you for the question.
    I think I should be very guarded, because, first of all, 
this will be a call for Treasury. Secondly, I think all of 
their options are open at this point; and they would not 
appreciate my speculating. So with your permission, I won't--
but you are highlighting one of the very interesting and 
somewhat sudden new challenges. These are positive problems to 
have as we contemplate the disappearance of national debt as a 
material factor in the business of the Federal Government, but 
I am not in a position today to give you an answer to the 
question.
    Mr. Sununu. I appreciate that. I simply wanted to highlight 
the point that, even with tax relief programs, even with the 
priorities for education and national defense, we bring the 
debt down to such a level, not in 10 years, but in 3 to 5 
years, a level where we have not been in really our history. We 
are paying down debt faster than at any point in our history 
and have already done so, $600 billion in the past 4 years, and 
all of that considered doesn't include the $1 trillion reserve 
that has been set aside to deal with the vagaries of 
forecasting.
    Mr. Daniels. That is quite correct, Congressman. And as 
Chairman Greenspan has pointed out, the problem of the excess 
balances, which I referred to earlier, if you take it off the 
table, exactly where does it go, that is going to be on us 
fairly soon, and there will have to be some decision. Perhaps 
many will agree with Professor Krugman and others that it would 
be fine for the Federal Government to become an active investor 
in the private markets. If so, we ought to start that debate 
soon, because it is not a distant issue.
    Mr. Sununu. I certainly don't agree with the notion of the 
Federal Government buying GE stock or Microsoft stock, and I am 
sure Jack Welch and Bill Gates don't either.
    Thank you for your time.
    Chairman Nussle [presiding]. We are going to go on the 5-
minute rule here. Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman.
    On that note, perhaps, we might want to have the States and 
municipalities divest of all their private assets holding as 
well. But that is a discussion for another day.
    Mr. Daniels, I appreciate your being here. I have a couple 
of comments, and I have a number of questions. Looking at the 
budget blueprint that you all sent out the other day, it would 
appear that the administration is asking us not only to make a 
bet on 10-year economic assumptions but, as best I can tell, a 
bet on 10-year political assumptions as well as it relates to 
offsets. I think that is somewhat of a gamble, and I think we 
ought to take a very close look at that.
    But I want to go to the discussion with respect to debt and 
the trust funds. First, with respect to Social Security, both 
with regard to what is in the document specifically, on page 
45, where it talks about using the Social Security Trust Fund 
surplus to reform the system and to pay down debt until reform 
is enacted and the comments made by your colleague, Mr. 
Lindsey, this past weekend indicating that perhaps this $600 
billion could not be used for debt paydown because debt might 
not be available at that time. Thus, it would be used for 
reforming the system.
    Furthermore, in the Medicare section, regardless of whether 
we accept what might be a somewhat specious argument on the 
legitimacy of the Hospital Insurance Trust Fund, it certainly 
is a legal trust fund and by law, it is invested in non-
negotiable Treasury securities, so it does have that legal 
trust structure.
    But regardless of getting into that argument, the fact is 
that you do in fact explicitly, I think, in your budget 
document, spend some of those trust fund moneys on new benefits 
or other benefits within the Medicare program or make the 
assumption.
    The problem that I have got is that it would appear to me 
that both of these funds are obligated funds. In fact, that is 
the argument we have had in the Congress over the last several 
years, longer than that really, since the unified Budget Act of 
1965 or 1968. But these are obligated funds to future retirees, 
and at some point, those funds have to be repaid.
    If you are taking those funds now and spending them on, 
quote-unquote, reform, particularly in the Social Security 
program, many members of this committee know from the hearings 
over the last several years that reform is going to take a 
great deal of outside capital to reform. In fact, Martin 
Feldstein testified I believe before this committee. Alan 
Greenspan and others have said, if you go to a privatization 
program like the President has proposed, it is going to take 
somewhere to the tune of $1 trillion on top of what the 
projected Social Security Trust Fund receipts to make that 
reform.
    But the fact is, it would appear that in Social Security 
and explicitly in Medicare you are taking those otherwise 
obligated funds and spending them as new capital infusion into 
the system. So you are really double counting those moneys, and 
at some point you are going to have to make those up.
    There is really only three ways you can do it: You can 
raise payroll taxes--and I know the President was pretty clear 
about that, that he doesn't want to raise payroll taxes; and I 
don't support it. I don't think there is much support in the 
Congress for that. You can cut benefits, but I haven't heard 
anybody talk about that, or you can add more debt.
    Furthermore, while we are talking about the debt going 
down, and I am a great proponent of that, we also have to 
remember that the gross Federal debt stays relatively constant 
over the 10-year period. Now, a lot of that is 
intergovernmental transfer debt, but the fact is if you go and 
spend some of this money on other programs or even if other 
programs would include structural changes in the Medicare-
Social Security program, at some point you are going to have to 
roll that intergovernmental debt into the public markets.
    So how do you size up the fact that you really are looking 
to double-count these moneys? Are you going to cut benefits in 
the future through your reforms? Are you going to add more 
debt? Mr. Feldstein said we can borrow in the future.
    Mr. Daniels. Thank you for your question.
    First of all, I get lost in the language of double 
counting. We have not proposed anything at this point for the 
$600 billion extra remaining except in the Social Security 
Trust Fund except to protect it for Social Security only. I 
cannot give you a cost estimate for the legislation resulting 
from the recommendations of a commission that has not been 
appointed yet. We have got great forecasters at OMB, but they 
are not up to that.
    The $1 trillion figure floats around, but when I have asked 
for details on it, the best I can understand is that it may set 
an outer boundary. That is to say, if you had such a system and 
had it in place tomorrow and everybody subscribed immediately, 
it might cost that much. I don't think anybody knows.
    Mr. Bentsen. Let me interject. I appreciate that. Most 
people in favor of reform have been sketchy on the details. But 
we have had testimony from every group, from Heritage to CATO, 
left-right, that came in and said you have to have an outside 
capital infusion. But the fact is in your budget you say you 
are going to spend some of this $2.6 trillion for reform, but 
the fact is we also know from the actuaries that that $2.6 
trillion is already committed just to get the program to 2037. 
So how can you spend it twice?
    Mr. Daniels. Well, we haven't proposed to spend it yet. I 
think the document quite clearly says it can be viewed in a 
variety of ways. It could be that we could use some of it for 
further debt reduction. It could be that there will be some 
smaller surpluses than we forecast. It could just as easily, I 
hasten to add, be more than $2.6. And it is certainly could be 
a starting point for the transition costs to reform. I remind 
you yet again, there is another $1 trillion by our reckoning 
which again could get larger for new needs unspecified.
    Mr. Bentsen. With all due respect, that $1 trillion though 
includes I believe half a trillion dollars of at least legal 
Medicare hospital insurance trusts. As you well know, there are 
two programs, there is the Part A program and the Part B 
program. The Part A program is funded by the FICA tax, and it 
is a legal entity under Federal law as a trust, the proceeds 
payout for just that portion of the Medicare program. But that 
is allocated to that contingency. So, again, there is a 
question of double counting.
    Then you are drawing down and explicitly transferring, it 
would appear, some of that money to the President's Helping 
Hand Program, which is hard to find in your baseline, because 
your baseline doesn't match the CBO baseline. It is $200 
billion below the CBO baseline for Medicare. But, more 
importantly, it is transferring from Part A, a trust fund 
program, to what would appear to be Part B, or a discretionary 
side program. So it does appear you have double-counted. At 
some point you have to make this up.
    As I said, there are only three ways you can do it. You can 
raise payroll taxes, you can cut benefits, or you can issue 
even more debt than you might otherwise have to issue.
    Mr. Daniels. I am tempted to say there is apparently a 
proud history of transferring things from Part A to somewhere 
else in the form of home health care, but, again, I think that 
is ancient history.
    Mr. Bentsen. Here you are transferring assets as opposed to 
obligations.
    Mr. Daniels. You have made a legitimate point about the 
statutory status of these trust funds, Congressman. My reaction 
is that ought to be changed. That ought to be brought current.
    The whole idea of Part A, Part B, reflects the era, now 
almost half a century old, a completely different era in 
medicine, when hospitals were viewed completely discrete and 
apart from the rest of health care. Nobody is practicing 
medicine that way. This is one of many vestiges in which 
Medicare trails the rest of health care. It is not good for 
patients; and it is very, very dangerous to the finances of the 
Federal Government. So perhaps the right answer is to unify 
these trust funds and modernize the legal status.
    Chairman Nussle. The gentleman's time has expired.
    Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman.
    Mr. Daniels, with all due respect, your numbers sound too 
good to be true. I hope the problems we have with paying off 
the debt that you subscribe to do come to materialize. I truly 
do.
    The job of this Budget Committee, Mr. Chairman, as you 
know, is to rein in the appropriators. That is why this 
committee was created.
    Chairman Nussle. That is a secret. You are not supposed to 
tell anybody about that.
    Mr. Davis. Well, the public is watching, Mr. Chairman. 
Where I come from, we have a saying that everybody is entitled 
to their own opinion but not their own version of the facts, 
and the job of this committee is to try to bridge the divide 
between the Democratic version of the facts and the Republican 
version of the facts.
    I am very distressed that as we sit here today to begin our 
work that the House tax writing committee is about to take up 
and pass an approximately $950 billion tax cut.
    Mr. Chairman, this is akin to someone starting an addition 
to their home without having a mortgage, without knowing how 
much money is going to be available to them to fund this tax 
cut versus spending priorities, including the President's 
spending priorities, and paying down the debt.
    Mr. Chairman, with all due respect, I could not disagree 
with you more strongly when you described earlier this tax bill 
as a strong signal. This is not a strong signal. This tax bill 
is potential law. It is our job as the House of Representatives 
to seriously debate that, and we will not do so, we will 
abrogate our responsibility if that tax cut moves forward 
without this committee even starting our work beyond today.
    So I think we are getting all tangled up in the process, 
Mr. Daniels, and I think that the actions that are about to 
occur with the support of the administration totally belie much 
of the good things upon which we would agree and discussed 
today.
    I would like to have presented to you a letter which has 
been signed by 214 Democrats in the House of Representatives, 
including many Democrats who voted for virtually every tax cut 
that has come before them in the last few years. That letter 
simply asks the administration to allow this Congress to 
proceed with the development of a budget resolution and an open 
and honest debate about the impact of this tax cut on spending 
and debt retirement.
    What I would like to do is to continue with the questions 
that Mr. Spratt posed to you. Regardless of how we describe 
this approximate $500 billion in Medicare, whether we use your 
terminology or his, the fact of the matter is this money exists 
because of a payroll tax that people believe they are paying to 
go toward Medicare. So if we subtract that from the figure up 
here, the $200 billion, and we also subtract the price tag the 
President has attached to his prescription drug plan, my 
question to you is, how do we begin to measure the cost and 
ability to pay the other priorities the President has 
identified?
    Many of us share his view about increased spending for 
defense, particularly for men and women and their compensation, 
education, a national missile defense program. Mr. Spratt has 
been a leading supporter of that. The conservation program. We 
don't even have retroactivity up there, Mr. Daniels, which is 
expensive as well. Could you please give us some guidance on 
how we are going to pay for these and still maintain the shared 
goal of debt retirement?
    Mr. Daniels. Well, first of all, in terms of what people 
believe about their Medicare payments, Congressman Davis, a lot 
of people still believe that their Social Security payroll 
taxes go in a drawer for their benefit in the future, which has 
never been the case in 60 years, 70 years. So we have allowed 
certain misconceptions, unfortunately, to, I believe, be 
prevalent among the American public. I just see this as just 
another one of those.
    Medicare is not in good shape. That money is not in a 
drawer waiting for the future. We need it all just to meet part 
of the obligations that Medicare costs today.
    I would return to my question: If in fact, standing on the 
legalisms and the trust fund status and so forth, you all want 
to take that--keep that money aside, then which stocks did you 
want to buy? Which piece of the economy? It could be 5 to 10 
percent by 2011, if that money is to be truly set aside. I 
realize there are some who feel that could be done 
appropriately. But that is a very important public policy 
debate that needs to be entered into soon if that is your 
position.
    Mr. Davis. Mr. Daniels, let me interrupt to ask you if it 
is fair to say that, under your proposal, using these funds, 
however you describe them, from the contingency fund, we ought 
to be prepared to use those funds for some purpose other than 
Medicare?
    Mr. Daniels. No, I don't agree with that.
    Mr. Davis. Why would they be included in your contingency 
fund then?
    Mr. Daniels. Well, we don't allow as how this is the same 
money at all, Congressman. I don't know how more candidly to 
tell it to you. We have tried to write it out clearly in the 
blueprint. But, as I say, if you choose to look at it that way, 
then you can reform Medicare from a piece of this, and we do 
propose--the only use we propose so far for the new needs fund 
is Medicare reform. And then you can simply work with us to 
constrain spending and not spend the rest. We will all go home 
happy.
    Mr. Davis. I know that our time is brief, but could you 
give us some numbers that we can associate with some of the 
other Bush promises that we put up here, things the President 
supports that many of us support--the defense, the education, 
the conservation?
    Mr. Daniels. Congressman, if I could, I would. You know, 
very sincerely, this was an attempt to recognize legitimate 
concern that we heard from both sides of the aisle that there 
were many uncertainties in the future and we ought not pretend 
that we can be precise about them. If I were to put a number on 
defense today, it would be a throw of a dart; and it would 
belie the instruction the President has given to the Secretary 
of Defense to look at this entirely in a strategic and 
comprehensive fashion.
    So what we have tried to do instead is to consider what we 
believe is the sort of outer limits of these things and then to 
overreserve against it, as any prudent business might.
    Mr. Davis. Mr. Daniels, are we being responsible to take up 
this tax cut based on our shared goals about debt retirement, 
when all we have is a throw in the dark to associate with the 
cost of these defense proposals?
    Mr. Daniels. Well, I just said I refused to throw a dart, 
but I understand your question. You know, I guess I would ask 
it this way: Why is it the taxpayer always comes last? Why is 
it always our spending--I say ``our'' now--why is it always 
Washington's spending, Washington's programs, Washington's 
possible future needs for spending, and if there are any table 
scraps left over, then the taxpayers may be entitled to them? 
That strikes me as being unfair.
    A better way to think about it really might be, let's 
attend to our needs, including all the debt we can practically 
retire. Let's put aside an overconservative amount against 
future uncertainties, referring that our total surplus here 
might well be bigger. It surprised us 5 years in a row being 
bigger. It is not an impossible thing. It could keep doing 
that.
    Why must the taxpayer always wait? Why must the taxpayer 
always bring up the tail of the line?
    Chairman Nussle. The gentleman's time has expired.
    Mr. Gutknecht.
    Mr. Davis. If I could respond to his question he responded 
to me?
    Chairman Nussle. I believe it was a rhetorical question.
    Mr. Davis. I don't think it was, Mr. Chairman.
    Chairman Nussle. The gentleman's time has expired. There 
will be other opportunities to inquire.
    The gentleman from Minnesota.
    Mr. Gutknecht. Mr. Chairman, first of all, I wanted to 
clarify something that I think you said, and that is over the 
last 40 years, if you took the 40 years average of growth and 
revenue, you are actually below that 40 year average, and if we 
exceeded that by some percentage--I want to make sure I am 
clear on this--that the revenues could actually be $2 trillion 
more over the next 10 years, is that correct?
    Mr. Daniels. All they would have to do to make that happen, 
sir, is to equal the 40-year average. They have been exceeding 
it, as our chart demonstrates, for the last several years, but 
I am not even offering a number for that. All they have to do 
is equal their 40-year average. But, again, we are trying to be 
cautious.
    Mr. Gutknecht. So if revenue growth just equals the 40-year 
average, we will actually have revenues in excess of $2 
trillion more than we are currently using in your budget 
projection. Is that correct?
    Mr. Daniels. Yes, sir, that is correct.
    Mr. Gutknecht. I want to make that clear, because I think 
you are being and we are being very conservative in our 
estimates.
    I want to pay a little bit of tribute to a gentleman that 
used to serve on this committee that came to the Congress with 
me and others still on the committee, Mark Neumann. A number of 
years ago, back in 1995, he began as a former math teacher to 
do some regression analysis on his own little computer and 
actually did a better job than the Congressional Budget Office 
in projecting how much revenue we were going to have. He said 
then and we began to work on the numbers together, that if we, 
the Federal Government, we the Budget Committee, we the 
Congress, could control the rate of growth in Federal spending 
to roughly the same as the growth in the average family budget, 
in other words, so that the Federal budget didn't grow at a 
faster rate than the average family budget, he projected back 
in 1995, and again the Congressional Budget Office didn't 
exactly share this view, but he said that you would not only 
begin to balance the budget very quickly, within a matter of a 
couple of years, but you would have a lot of money available in 
surpluses to actually do some things we should have done for a 
long time.
    His recommendation and my recommendation then was, as you 
began to create these surpluses by controlling the rate of 
growth and spending, that about one-third of it ought to go to 
debt repayment, the second third ought to go to Social Security 
and Medicare, and about one-third ought to go back to the 
people who pay the taxes.
    I am somewhat astonished that your formula looks extremely 
similar to the plan we talked about 5 or 6 years ago. I want to 
congratulate you for that. If anything, it is a little light on 
the amount that should go back to the people who pay the taxes.
    We are really only talking about 28 percent of the 
projected surplus, which I think is conservative, assuming we 
can control Federal spending; and I think it will be a little 
bit easier with this administration than it was with the past 
administration.
    But it seems to me really, for the benefit of all of the 
members, all of this discussion boils down to two basic simple 
questions. The first question is, does anyone believe the 
Federal budget ought to grow at a faster rate than the average 
family budget? If you do, that is fine. But let's have that 
debate.
    I think a lot of us believe the Federal budget ought to be 
controlled. I think you are right. For too long we have said 
the families are the ones that have to tighten their belt. 
Because when we start talking about budgeting and saying 
everything we spend today is legitimate and every dollar we 
spend on behalf of the taxpayers is well spent, I think we all 
know that is not true. The truth of the matter is there is an 
awful lot of waste in every department.
    I will just pick on one that is near and dear to the 
Chairman's heart and my heart, the Department of Education. I 
think there is a legitimate question, do we need 108,000 people 
in the Department of Education today? Is every dollar we are 
spending today on education well spent? This is a department 
that has failed its audit in I think 3 of the last 3 years. The 
Department of Education has failed its own audit. So we know 
that there have been literally millions, perhaps more dollars, 
that have been wasted.
    But the second and I think perhaps just as important a 
question is, shouldn't the people who pay the bills get to keep 
at least 28 percent of that tax surplus? You know, some people 
are going to say, you shouldn't pass the tax cut first. I think 
maybe we ought to look out for the taxpayers first.
    Because it seems to me one of the goals of this committee 
and Congress should be to get the economy moving again, because 
we all know this: In a stronger economy, it solves a world of 
other problems. Unemployment levels being down, it means we 
have less problems with some of our social spending; it makes 
less problems for the States. I mean, all the way around, 
getting the economy rolling and growing at a better than 3.1 
percent rate is something I think everybody ought to be in 
favor of; and cutting taxes on working people, on families, on 
business people, small business people and, yes, even on big 
business people, I think is a good idea. Let them keep the 
money. They will spend it smarter than we can.
    So I congratulate you and the administration on this 
budget. It is well-founded and constructed on simple basic 
principles that make sense not only to the majority of Members 
of Congress but clearly to the people out there who get up 
every day, who work hard, who pay the bills. We are simply 
saying 28 percent of that tax surplus ought to go back to you, 
and we are going to think about you first. Then the 
government--then the Federal Government will have to figure out 
ways to tighten its belt.
    I yield back the balance of my time.
    Chairman Nussle. Thank you.
    Mrs. Clayton.
    Mrs. Clayton. Thank you, Mr. Chairman.
    Thank you, Mr. Daniels, for being here.
    Mr. Daniels. Yes, ma'am.
    Mrs. Clayton. Two nights ago in the State of the Union the 
President raised a question about the size of the tax he 
wanted, whether it was too big or too low. He thought it was 
just right. He didn't raise a question about fairness, but I 
assume he believes his tax plan is fair because he has made the 
claim that those who want to move to the middle income level, 
this plan will help them.
    I want to raise the question of fairness. I want to raise 
the question whether the President's tax proposal is fair. I 
would like to answer that question, and give you my reason for 
answering it. Then, I would like your response.
    First, the President's tax proposal is indeed skewed toward 
the top 1 percent, where he provides anywhere from 36 to 43 
percent. Eighty percent of the taxpayers indeed will receive 
about 29 percent. In the case of the 1 percent who receive from 
36 to 43 percent, that is larger than their tax liability. In 
the case of the 80 percent who receive 39 percent, that is less 
than their tax liability.
    In defense of the fairness question, often people will 
raise questions and respond rhetorically to my question of 
fairness. You are now raising the income tax gap card. But a 
careful analysis of the impact of that tax package clearly 
shows, based on the current census, that the plan offers an 
average of $39,000 to the top 1 percent or thereabouts. And, 
the President has claimed that it would represent at least 
$1,600 to the average taxpayer by year 2006. That amount would 
represent 24 times as much to the average taxpayer.
    The Treasury Department has reported that the top 1 percent 
of the population pays around 20 percent of the Federal taxes 
and again, the President claimed that lower income families 
would get a higher percentage of the tax based on income.
    But when you focus on income, you really fail to recognize 
the real tax burden on the poor. It is--indeed, the largest 
Federal tax burden on the poor comes from the payroll taxes. So 
that is a very limited focus.
    Obviously, a family who makes $26,000, two earning, a 
family of four, indeed can have their entire income tax 
eliminated. So it would be correct to say that is a 100 percent 
tax break. But guess what? They didn't owe but about $25 in the 
first place. However, that same family would be owing, after 
the assessment for the income tax break, about $2,000 or more.
    So to suggest that this tax plan is indeed fair is not in 
my judgment, correct.
    A further analysis would indicate approximately one-third 
of the families with children of less than 18 years of age 
would not get anything at all. If you look at that one-third, 
more than one-half of them are African American families and 
again, Hispanic families. Fifty-five percent of them are 
African American families, 56 percent indeed are Hispanic.
    Therefore, I conclude, Mr. Daniels, that the tax plan is 
not fair.
    I would like to make reference to a recent statement you 
made on nutrition and table scraps. When you think of how much 
the very poor will get, that could be applied indeed to what is 
happening to the lowest income. Now, if my analysis is indeed 
wrong, I would like you to respond.
    Further, public housing will be cut by $700 million. The 
rural housing program is going to be further cut, because you 
say that is duplicative of the CBC. I am from rural America. I 
can tell you that we do not have enough housing, and the need 
is great.
    Further, HUD is being retained at its current level. It is 
acknowledged that the President himself wants to have more 
ownership. I don't know how you will achieve that goal. But, if 
I am wrong on any of these statements, I would like your 
response on my assertion that this a very unfair tax bill.
    Mr. Daniels. Well, the very broad assertion, Congresswoman, 
and I appreciate the opportunity to respond; I couldn't track 
each and every statistic. Some of them sound like they come 
from a recent analysis about which, or some analyses about 
which I would urge you to be careful. They make intriguing 
assumptions such as that tax benefits can be conferred on dead 
people, and in order to jimmy the numbers up at the top end.
    I guess I would simply say the following.
    Mrs. Clayton. Dead people?
    Mr. Daniels. I am not sure which analysis you were working 
from, but some of those that have been cited recently do things 
like confer the punitive benefits of the estate tax on the 
decedent, which is an interesting way to look at things.
    Mrs. Clayton. Very few people I know in the lower income 
and moderate income level pay the estate tax.
    Mr. Daniels. No, I know, but this how they tilt the 
apparent incidence maybe artificially to the other end, but 
that may or may not be a part of the analysis from which you 
were reading.
    I guess I would just say the following: obviously the 
President believes deeply that this a very fair proposal. 
People who are concerned about the wealthy should take some 
consolation from the fact that the wealthiest taxpayers would 
pay an even higher percentage of income taxes after this 
proposal than they did before.
    Mrs. Clayton. Is it written in the President's report from 
last year that approximately 1 percent of the taxpayers paid 20 
percent of the taxes? Is that an incorrect statement?
    Mr. Daniels. Well, that is probably correct. It may be at 
least that high. The Treasury report is not by a percentage, 
but by--in $100,000 income increments. But I think we all know 
that we have what could be called a very lopsided distribution 
these days in which, as I recall, something like the top 10 
percent pay 60-odd percent of the taxes and that figure would 
go up.
    Mrs. Clayton. Mr. Daniels, I want to interrupt because my 
time is short. How many persons or families would you estimate 
would actually get the $1,600 tax break that is proposed, the 
average family?
    Mr. Daniels. I am sorry, I don't have that number at my 
fingertips, but I am sure the Secretary of the Treasury will 
when you see him.
    Let me just maybe make this general comment, a couple of 
general comments. One is that the President is very mindful, 
and it always starts, this discussion, by thinking about people 
who are trying to make their way up in the world, and he makes 
the point repeatedly that it is not simply a matter of the tax 
relief a family might get today, but what is the effect on the 
next dollar that that person might earn? And you know, here the 
data is unassailable. The next dollar earned at very modest 
income rates is highly taxed under the system we have and we 
ought to try to fix that, and maybe that is something on which 
we can agree.
    My general comment would be that the fairness question is 
one in which there is sincere and deep disagreement, and there 
will be that disagreement right up to the point at which 
Congress finally acts, I know, one way or another on this bill. 
I would say that I take it as my mission obviously to advocate 
the President's plan, but my principal mission which I have, I 
believe our budget addresses, is to demonstrate that the size 
of this tax cut is not an issue. There is more than enough 
room, far more than enough room to do it. That leaves the 
question you have put: what is the right shape? What are the 
ways to ensure fairness, and that is a worthwhile debate, it is 
the central debate and one that I know will continue.
    Mrs. Clayton. Thank you, Mr. Chairman.
    Chairman Nussle. The gentlewoman's time has expired. You 
asked two questions about nutrition and housing, if you wanted 
to make a comment or response to that before we----
    Mrs. Clayton. The housing proposal in your budget 
eliminates, I believe $700 million for public housing. It keeps 
the housing HUD appropriation level at 2001. That concept is in 
contradiction to the President's desire to have homeownership 
and to meet the needs of housing.
    Mr. Daniels. Secretary Martinez is very confident that we 
will be able to continue increasing the number of people served 
and units served with these numbers. There are big unspent 
balances there, and in addition, with the public housing money, 
we are offering 34,000 new vouchers to add to the population 
served. This continues the trend begun in the last 
administration.
    Chairman Nussle. Thank you.
    Mr. Thornberry.
    Mr. Thornberry. Thank you, Mr. Chairman. Mr. Daniels, we 
appreciate you being here. I can't help but reflect that all of 
us are at a little bit of a different situation than we have 
been in in recent years, not just because of the numbers you 
show, but it is, in some ways, on this side of the table, a 
little easier and maybe more fun to take shots at a President's 
budget. We have had the opportunity on this side of the aisle 
to do that with lots of inviting targets over the past few 
years, and now the roles are kind of reversed. In previous 
years, we have not had a President's budget really taken 
seriously, and what we have already heard this morning are some 
very serious policy issues being discussed for the first time. 
I congratulate you on a budget that is taken seriously and I 
think it will be taken seriously all the way through the 
process. It is the first time that has happened in quite some 
time.
    Let me ask you to comment briefly. I don't remember hearing 
the question so far. How do you see the economy going now? As 
we look at a budget, and certainly we want to be mindful of Mr. 
Spratt's comments about being prudent and not being hasty, but 
the other side is there is a lot of concern about where we are 
headed now and that if we wait too long and if the whole 
process takes too long, that the economy may have a chance to 
go places we don't want it to go. So there is also some urgency 
to get this tax relief out there.
    How do you see the economy going?
    Mr. Daniels. Obviously, the economy is not what it was. I 
don't think anybody yet is prepared to hazard a guess as to how 
long the current uncertainty will last or how deep it might 
become. We did mark our economic growth estimate for this year 
down at the last moment before we had to lock our database, and 
it is consistent with current estimates, but those may go down 
further.
    I would tell you that in terms of the 10-year projections, 
this first year is relatively trivial. So whether the right 
number for this year turns out to be 2.4 or 2.1, I don't know, 
even lower, it wouldn't make a whole lot of difference in terms 
of the long-term projections. It would make a lot of 
difference, of course, in terms of what we ought to do about 
it, and this is where your question, I think, points.
    In addition to bringing greater fairness to the Tax Code, 
the marriage penalty, the child deductions and so forth, estate 
tax, the President has always said that to ensure the 
continuity or the long-term extension of our long, long 
economic growth period, a reduction in rates was very, very 
important, and I think that has been underscored by the wobble 
in the economy that clearly began some time last year.
    Mr. Thornberry. It seems to me we have at least 3 
circumstances coming together which make it such that if we 
can't do tax relief now, I don't know when it is ever going to 
come. Partly it is the surpluses, partly it is the economic 
situation we were just talking about. But the third factor to 
me is the level of taxation as a percentage of the economy. I 
notice that in your budget submission, you had a chart dealing 
with individual income taxes as a share of the economy. Could 
you discuss that with us for a second, please?
    Mr. Daniels. It is a simple statement of fact, and I 
believe we made a larger version of it. An individual--I mean, 
taxes total are at near all-time levels as a share of the 
economy, and individual taxes as a share of the economy also 
are at record levels. If you will forgive the colloquialism, it 
is the biggest tax bite in history. One can make of it what one 
will, but it does, to some of us, suggest that time for some 
relief is at hand.
    Mr. Thornberry. We have heard the statement made several 
times in the past couple of years that total Federal taxes as a 
percentage of the economy were higher than at any time other 
than the peak of World War II. But this chart indicates 
individual income taxes are the highest ever. Is that correct?
    Mr. Daniels. Yes. Higher than that period of World War II.
    Mr. Thornberry. Higher than that?
    Mr. Daniels. Yes, sir.
    Mr. Thornberry. Let me just ask finally a question that 
comes up. As we hear some of these fairness arguments go back 
and forth, I am reminded that the Joint Economic Committee in 
Congress a few years ago conducted a study which found that 
well over half of the folks in the top 1 percent bracket are 
small business owners, and that, in fact, a lot of small 
business owners, rather than incorporate themselves, run their 
businesses as a partnership or a sole proprietorship, and that 
that has some effect on who the 1 percent is.
    Have you all done any look as to the small businesses in 
this country and tax relief as to what it may mean for them?
    Mr. Daniels. The President has repeatedly made this point, 
that a principal reason that there should be relief for all 
taxpayers is that--is the one you have just made, that in S 
corporations and in proprietorships, we have close to 21 
million tax returns filed by those sorts of entities. These are 
people trying for personal autonomy, for ownership, to build 
businesses; which is where job creation predominantly comes 
from in our country, and I think it is sometimes overlooked in 
the to and fro about who gets what, and people sort of lump 
together under the rubric of the wealthy, both wealthy 
individuals, but also millions and millions of enterprises 
which only look wealthy when you consider the revenue of the 
company.
    Mr. Thornberry. Thank you, Mr. Chairman.
    Chairman Nussle. Thank you very much.
    Mr. Clement.
    Mr. Clement. Thank you, Mr. Chairman and Mr. Spratt, and 
members of the committee. Congratulations to you, Mr. Daniels, 
on your new position.
    Mr. Daniels. Thank you, sir.
    Mr. Clement. Several of us have been around here for a 
while and we remember the days when we had deficits as much as 
$290 billion annually, and we don't want to go back to that. We 
want to keep having, as the Chairman commented, we have gone 
for 5 straight years now with a balanced budget, and we sort of 
like that. We don't want to go back to those days.
    But we are also very concerned about forecasts, you know. I 
have people at home in Tennessee, you know, when you are trying 
to forecast 10 years or more, that is a long, long time, and 
then wondering, are we going to put ourselves in the same mess, 
in the same situation that we had previously. You know, it took 
us all the way from George Washington to Ronald Reagan to 
accumulate a national debt of $1 trillion, and in 8 years, we 
quadrupled that national debt. Now we have an opportunity to 
reduce that national debt, eliminate the national debt, and 
keep our priorities. I know Chairman Greenspan said as late as 
yesterday, he doesn't know the state of the economy, he doesn't 
know what is going to happen, and yet from what I have heard 
today, we seem to know what is going to happen in the future.
    Why would you oppose triggers? When I say ``triggers,'' I 
am talking about that if we do have something unforeseen happen 
in our economy, whether it be in the United States or 
internationally, and it could happen any time internationally, 
what is wrong with triggers, just as a protection for the 
future for our economy?
    Mr. Daniels. Well, I think several things are, Congressman. 
Let me, first of all, though, associate once again with your 
point that we cannot know the future with precision. We have 
tried to respond honestly to that concern, because we share it, 
and that is the reason for the extra padding and the extra 
cushion that we have attempted to build in here, apart from the 
President's priorities.
    I think triggers are unnecessary and problematic. In the 
first place, at least as presently proposed or initially 
proposed, once again, they hold taxpayers hostage to the 
spending habits of Congress, and if Congress spends until its 
tired and then if it went too far, that would block tax cuts or 
even raise taxes, I suppose. I think I would prefer to see it 
the other way around. The tax cuts ought to be provided and if 
there is more money left than some certain amount, that ought 
to trigger a further relief of the taxpayer. I might submit 
that as an alternative to what is out there now.
    I think there are other good reasons. Predictability is an 
important thing in the Tax Code, and businesses plan on it. We 
just talked about 21 million of these tax returns that are 
really enterprises as opposed to individuals, and trying to 
plan in business when your taxes are one of your key business 
factors is completely uncertain until the end of a budget cycle 
and until a number has fallen out of the great congressional 
whirring machine, I would think, cause a lot of problems, 
planning problems for business.
    We count on--we are hopeful of a positive economic effect 
from a steady reduction of tax rates, moderate reduction as the 
President has proposed. But part of that, economists would say, 
would come from the expectations people have and the rational 
behavior they would have, and if it is all uncertain, all 
subject to being shot at the pull of a trigger, I think you 
would forfeit all of that too.
    The President has sometimes pointed out that there is 
really two reasons why such a trigger would ever come into 
play. One is that Congress spent too much, and one is that the 
economy was far too weak. Those are both--those are not reasons 
for higher taxes, those are reasons for lower taxes.
    Mr. Clement. Well, let me ask you this, then. I know 
President Bush really feels very strongly that we should have a 
tax cut of $1.6 trillion. You know, a lot of Congressmen have a 
lot of ideas also, you know. What if that tax cut goes to $2.5 
trillion, or what if we exceed the spending limit? Is he 
prepared to move to veto such legislation, or what?
    Mr. Daniels. There are a few words that will not pass my 
lips this morning, and the ``V'' word I guess is one. But as I 
indicated in response to an earlier question also, he really 
believes that what he has proposed is reasonable. He wants to 
back up the budget committees and try to reinstitute an orderly 
process wherein your decisions are implemented and flow through 
the rest of the process, and I hope that will happen in a 
constructive way and a cooperative way. But he is resolved on 
that point, and he has made that plain, and I know he will 
continue to.
    The rest of your question? I am sorry.
    Mr. Clement. Well, I am talking about spending.
    Mr. Daniels. Yes, I am sorry, excuse me, a very important 
question. There is the danger that the tax cut sparking other 
ideas and the President has already put up the stop sign, as 
has been widely reported in face-to-face meetings with 
representatives of large business, for example, and in many 
meetings, I must say, with members of our own party, all of 
whom are overflowing with good ideas, the President has told 
them he is, in many cases, sympathetic to their ideas, but they 
will have to wait and not everything can be done, and there is 
a level that he thinks is appropriate, and that is the one that 
is in our budget.
    So we share your apprehension and would like to work with 
Members of Congress to make sure that the tax cut--tax relief 
bill, as it progresses, does not get out of hand as obviously 
has sometimes happened in the past.
    Mr. Clement. Thank you, Mr. Daniels.
    Thank you, Mr. Chairman.
    Chairman Nussle. Thank you.
    Mr. Hastings.
    Mr. Hastings. Thank you, Mr. Chairman. Mr. Daniels, thank 
you, and congratulations on your appointment.
    Mr. Daniels. I appreciate it.
    Mr. Hastings. I have to say that I find this hearing and 
this process absolutely refreshing. Refreshing from the 
standpoint that we have a President, a new President that is 
attempting to govern precisely as he campaigned, by talking 
about tax relief, by talking about prioritizing spending and 
education and defense and saving Social Security. Also, I find 
it absolutely refreshing that we are here in this era of 
debating the size of tax relief for the American people. I 
particularly like your response where you said that we should 
probably put the taxpayer first. I think that is a refreshing 
idea that we ought to frankly pursue more than anything else.
    You mentioned in your opening remarks about the first step 
of this process, and I appreciate that very much. What I would 
like to focus in on is a concern that I do have, probably from 
the standpoint of prioritizing spending, and I want to focus 
specifically on the Department of Energy and specifically 
within that, the environmental management account, because that 
affects certain areas of the country, and obviously it affects 
mine, and that is the nuclear sites that we have. We don't have 
a figure obviously because you haven't gotten to that point, 
but there are rumors floating around that there is a suggested 
cut of somewhere around 6 percent. I and others of the Cleanup 
Caucus have said to you that exactly the opposite should be 
there because the priorities ought to be on cleaning up these 
sites.
    I want to paint a picture, focus more on my site, but when 
I say this, the focus is on all the other sites. Savannah 
River, Oak Ridge, Hanford, which is my site, Idaho, Rocky Flats 
and so forth. In the last 6 years, Savannah River has had their 
employment cut by nearly one-half. That is a big driver of 
costs, as you know. At my site in Hanford in the last 6 years, 
we have reduced employment by about a third obviously a cost. 
But yet, with that reduction in manpower, we have accelerated 
the cleanup.
    Let me tell you what Hanford is all about. You know that 
big spike there where the big taxes went up in 1943, that is 
when Hanford came about. It became about because of the Second 
World War and our need to win the Second World War to develop 
the atomic bomb. In fact, the bomb that was developed in 
Hanford was the one that was dropped at Nagasaki that finally 
led to the surrender of the Japanese. We also won the Cold War 
because of the efforts of these sites.
    Specifically at my sites, there are 177 underground tanks 
that hold 53 million gallons of radioactive and hazardous 
material. Sixty-seven of those tanks have leaked. Yesterday we 
had an earthquake in Seattle. That rumble was felt all the way 
down to Salt Lake, which went right through the Hanford 
Reservation. DOE suspended operations out there, went out and 
checked the site, they found one tank had gone down a little 
bit, they found out it wasn't anything that was serious. But if 
any of those tanks were to rupture, this radioactive stuff; you 
can't be around it. I mean it is bad thing. So we have to get 
on with the cleanup in that regard.
    Again, within Hanford, and I want to focus on two projects, 
one is the--and these are the two main projects at Hanford. The 
first one is the K Basins. That is located 100 yards from the 
Columbia River. That is where spent nuclear fuel is sitting. It 
was supposed to have been there for a short period of time, but 
it has been there for 25 years because of a change in Congress 
not to recycle our nuclear fuel. That has to be moved. The 
spent fuel there is not leaking into the Columbia River, but it 
is breaking down within the basins. That has to be taken care 
of. This stuff is not like snow, it is not going to melt, it 
has to be moved.
    The other big project is the Office of River Protection 
that deals with the tanks. What both of these things have in 
common in the last several years, we have made some regulatory 
changes which I think were good, but also, the contractors that 
are doing the job there are based--are incentive-based 
contracts and they are incentive-based on milestones, 
regulatory milestones that several of the States have. We have 
one in Washington State called the Tri Party Agreement. If 
those milestones aren't met, you go to court right away, and 
probably lose because the EPA and the Department of Ecology 
within Washington are involved with these agreements.
    The reason that I bring these up is that we have to 
continue on, because these are veterans. These sites, all of 
these sites, are veterans of World War II and the Cold War. 
This Congress and I know this administration feels very 
strongly about taking care of veterans.
    I guess my question to you is in the prioritization process 
that I know you are going to go through when you present us 
with the final document, what comfort level can you give us as 
to making sure that we can make sure these sites are cleaned up 
adequately?
    Mr. Daniels. Well, we recognize it as a very high priority, 
Congressman, and I will be pleased to work with you and other 
interested members of both bodies on this. Secretary Abraham is 
very vocal about it. I will tell you quite honestly that 
between now and April, there are probably more details to be 
filled in in the energy budget than any of the others, in any 
other single department, specifically because he is looking for 
ways to meet the important needs at the cleanup sites, equally 
in terms of the stockpiles we have and their proper security 
and stewardship, and these things we have highly prioritized. 
Quite honestly, we view them as much higher priorities than for 
instance some of the subsidies of corporate research that have 
grown a lot in the department in the last few years.
    The question is the extent to which and how quickly we can 
sort of move from lesser to higher needs.
    But we are well aware of this one, and Secretary Abraham is 
working on it and we are going to work to help him.
    Mr. Hastings. Good. Mr. Daniels, I appreciate very much 
that, because as I mentioned, at all of these sites the--what 
we are trying to clean up is something that won't go away. The 
difficulty with radioactive material is you can't view it, 
because if you view it, you have a real problem, but yet that 
is what we are dealing with out here and specifically at 
Hanford, and the reason that the Office of River Protection is 
in place is that we have about 60 percent of the radioactive 
material in the country, and yet it is the only site that has 
no way to deal with that in a permanent basis. That is the 
reason for the Office of River Protection. Thank you very much.
    Mr. Daniels. Thank you.
    Chairman Nussle. Mr. Moran.
    Mr. Moran. Thank you, Mr. Chairman, and good luck, Mr. 
Daniels, making this budget and tax cut--don't smile, until I 
get through my question--making this budget and tax cut work. I 
have to share the skepticism on this side of the aisle, though, 
that I think it is problematic, what you are telling us, and 
for five reasons, I don't think it is going to work.
    The first is the unreliability of these surplus estimates. 
CBO has told us that they could be off by as much as 2\1/2\ 
percent of gross domestic product which, over the next 10 
years, is going to average about $10 trillion, so you are 
talking about 2\1/2\ trillion over the 5-year period, whereas 
John Spratt said, if 72 percent of the tax cut occurs, you 
could be off plus or minus by one and a quarter trillion 
dollar.
    Secondly, the cost of the tax cuts are clearly 
underestimated. There is no question but that you do not 
include the additional interest costs that are incurred because 
you are not using the surplus to pay down debt. You have to add 
that additional $400 billion to $500 billion to the cost of a 
tax cut, and then you have to deal with AMT. We are not going 
to let 27 million American households get stuck with that AMT 
by 2010.
    Thirdly, the amount of the debt that can be paid down, we 
would take issue with that, because the deputy--excuse me, the 
Under Secretary for Domestic Finance of the Treasury Department 
has written to us. Now, this is the person that was responsible 
for debt management in the Treasury Department right up until a 
month ago, and he tells us that $3 trillion of the currently 
outstanding $3.4 trillion of publicly held debt can be paid 
off, so we would rather see that paid off than only two-thirds 
of it. If we don't pay it off, our kids get stuck with it.
    Fourthly, after 2010, when the baby boom generation 
retires, the retirement population doubles and the budget 
implodes.
    If you are going to do the right thing now, it would seem 
that you would reform Social Security, I agree with the 
Commission, but they are going to need some money. So you have 
to put aside, I am sure you would agree with these numbers, at 
least $1 trillion if you are going to set up these individual 
retirement security accounts so that people can invest their 
own money. You are not going to take it out of current 
benefits.
    A last reason. Your spending estimates are substantially 
understated. Let us talk about defense, which is the major 
component now of spending and the one to which your President 
has committed himself to substantially increasing.
    Your defense budget is 99.97 percent of the Clinton's, 
President Clinton's budget, so there is virtually no new money, 
but that base does not include the $3.9 billion to carry out 
the military retiree health care, which is mandated as a result 
of legislation we passed last year, but is not covered in your 
budget. Plus, the President sat down in Georgia, Fort Stewart, 
and said that he was going to add another $1.4 billion in 
military pay, another $400 million in military housing, that is 
another $1.8 billion, so now we are up over $5 billion. I 
should slow down so we can get all of this down, but that is 
not included, and then in addition, I just read in The New York 
Times today that he promised another $2.6 billion for new 
research and development, about half of which would go to 
national missile defense.
    So now we are talking about a shortage in the defense 
budget of about $8 billion. And we are talking about another 
supplemental, which we--has become an annual tradition. So that 
new base isn't even included in your defense numbers.
    As you know, any kind of base closing process, which is 
talked about now, or any of the other ways in which we try to 
improve defense takes a long lead time. You haven't even 
started the process. I can't imagine how you are going to 
maintain the existing level of spending in defense, never mind 
maintaining--funding new initiatives. Can you?
    Mr. Daniels. Well, I am still smiling.
    Let us take them right off the top. I got no debate here 
about the unreliability of forecasts. That is why we brought 
you, as somebody pointed out, the first budget that ever 
admitted it didn't really know the future, admitted and 
provided for that with $1 trillion on the on-budget side and 
$600 billion on the other side. The CBO estimates, or report 
you mentioned is very interesting. It points out under the 
disaster scenario, the worst of the worst, $1.6 trillion of 
surplus over the time frame, a lot short of what we have, but 
imagine that, in the worst case they have proposed, a unified 
surplus of $1.6 trillion at the rock bottom. By the way, the 
top number is close to 9.
    Mr. Moran. As you know, if they are off by even eight-
tenths of a percent, $4 trillion of this surplus shrinks.
    Mr. Daniels. Actually, sir, that is not correct, but you 
know, the point is valid that there is a very wide range. I am 
just letting you know that the range is astonishingly on the 
surplus side, given the Electrolux tax collection system we 
have today.
    Let me talk about the underestimate. I am happy to reassure 
you that you are quite right, under our accepted accounting 
system, the interest we would not collect actually on these 
cash balances, $400 billion is provided for, when you see our 
chart with the contingency reserve, it says $1.4. You have 
heard me say over and over, $1 trillion is totally uncommitted 
money, the $400 million, you are quite correct, is associated 
with the tax cut.
    You know, AMT, the AMT argument point is a valid and 
interesting one, and if this is something Congress wants to 
address sooner rather than later, the President will be glad to 
do more than we are already proposing. It is interesting to 
talk, you know, in terms of sticking X million Americans with 
the AMT, some of the people say they want to stick all 103 
million taxpayers with no cut at all. You can prevent the 
problem that way. That is one way to avert it, but that is not 
our way.
    This business of how much debt can be paid. The last 
estimate from the Treasury Department that this gentleman left 
I have here, they issued it in January, is $1.2 trillion of 
debt remaining in 2011. That was their way of saying they 
didn't believe you ought to send bonus payments to bond holders 
and foreign banks in order to accelerate large amounts beyond. 
You know, they dabbled a little bit, perhaps we can again.
    $30 billion last year, that is less than, far less than 1 
percent of the what was outstanding, not talking about taking 
in 100 percent of the last pool of Treasuries in the world for 
which you would pay an exorbitant, multibillion dollar premium, 
you know. This is like somebody who played Go Fish for a nickel 
and thinks he can transport that to the World Series of poker, 
it will not happen.
    You talked about reform of Medicare and Social Security. 
Quite agree. It is--in fact, it is our point that we should 
move now, not wait and not imagine that it is a good idea to 
hold off reforming those programs so that they can be solvent 
over the long term.
    On the defense spending understated side, the Clinton 
budget proposal for--as you know, the Clinton budget for this 
year was 297. The baseline they left was 306. Walking out the 
door they left a piece of paper, not a budget proposal, that 
said 310. You wouldn't probably, as an advocate of defense, 
want to implement that budget, because the number for the next 
year, 2003, was also 310, and the number for the year after 
that was 317. This is an administration, or it was an era, at 
least, let me just say, in which defense was underattended and 
some repair are probably going to be in order. But our budget 
is not the Clinton budget. Finally, it does include health care 
and it does include the $4 billion of new spending which the 
President pledged in his campaign and honors in this budget is 
exactly where the pay, housing and R&D money comes from.
    Thank you for--it was more than 5 questions, but they were 
good ones.
    Mr. Moran. I think you will find that the economic growth 
is off by as much as eight-tenths of a percent; 4 trillion of 
the surplus does go away.
    Mr. Daniels. Well, I will check it. I have about 2 trillion 
off for one point. It is a big number. You are quite right. I 
think it is not quite the number you have, but it is very 
important to remember that. Please do also remember that there 
are other variables just as powerful, and we talked about the 
one on the revenue side earlier.
    Mr. Moran. Thank you. And again, good luck to you.
    Mr. Daniels. Thank you very much.
    Chairman Nussle. Mr. Kirk.
    Mr. Kirk. Well, thank you. I want to take the other tack 
about how the tax cut may be understated in costs rather than 
overstated. I don't want to disagree with my colleague from 
Virginia, because he is my other Congressman, and we do need 
some potholes fixed on Glebe Road, and I want to continue that 
bipartisan effort.
    The President noted that a waitress--I was a waiter--
earning $25,000 ends up losing a half of every additional 
dollar earned due to the tax system that we currently have. He 
called it the ``toll booth on the highway to the middle 
class.'' Reducing her taxes and those of everyone else provides 
an incentive to workers to work harder and get more training, 
more saving and investment, and, by the way, more Federal 
revenues. Martin Feldstein suggests that about a quarter of the 
static losses from the marginal rate cut would be made up this 
way.
    Does the administration's revenue projections take into 
account the taxpayer behavior that we reward them when 
changing?
    Mr. Daniels. No, sir, it doesn't. I would add this to the 
list of very conservative assumptions that are in this budget. 
It is a long-standing debate about static scoring versus 
something else, and we are not pursuing it in this budget. We 
are accepting the Washington convention that says that in this 
case, $1.6 trillion more would be left with taxpayers and 
absolutely nothing would happen.
    You know, I don't know what the right answer is, 
Congressman Kirk, but that is not it. So this should be treated 
as a further upside to the surplus estimates.
    Dr. Feldstein, in the account I saw that said $600 billion 
was his estimate, so that would be roughly 37 percent----
    Mr. Kirk. That is right.
    Mr. Daniels.--would come back in revenues. I don't know. I 
am guessing it is something north of zero, but zero is the 
number we used.
    Mr. Kirk. I might suggest that the Washington convention 
may be wrong, that it probably certainly is not zero, to lay 
down a marker, I think we ought to take a look at that in the 
budget resolution.
    We met ``Rosy Scenario'' during the Reagan administration 
and certainly the blue chip economists now agree that ``Rosy'' 
has left our midst in your budget. But I wonder if ``Gloomy 
Gus'' has taken her place. The concern is that the 
responsiveness of Federal receipts to growing GDP may be 
dramatically understated. Both Social Security receipts and 
personal income tax collections rise faster than the economy, 
and you pointed that out in your testimony. One estimate shows 
that it rises by 1.04 percent for every 1 percent increase in 
GDP. Others say it is as high as 1.18 percent. With the lower 
number, a tax cut is barely affordable. With a higher number, 
we afford twice the tax cut.
    What would you say is your number for the 10-year forecast?
    Mr. Daniels. I can just repeat that I believe this is among 
many very cautious assumptions. This is probably the most 
conservative of all, certainly in terms of its power and the 
sensitivity of revenues, and therefore surplus to this figure 
if we are low, and you know, you can draw your own conclusions 
from the chart that shows that for 9 years in a row, including 
the one we are in, revenue growth has outrun GDP growth, and we 
are forecasting that in the interest of prudence, that will 
suddenly be reserved and that we will spend 7 years below GDP 
growth. How much more careful you can get than that, I don't 
know.
    Mr. Kirk. I want to also commend our ranking democratic 
member for some of the political realities he points out in the 
upcoming action of the Congress.
    One of the things that I worry about that we certainly can 
see coming is the long-term outlook for the liabilities of the 
Federal Government and the contingent liabilities.
    Congressman Hastings talked about nuclear waste and other 
contingent liabilities. But we have some pretty firm long-term 
liabilities that we understand. Is it your understanding we 
face about a $9 trillion unfunded liability in Social Security?
    Mr. Daniels. It is on that order, yes, sir.
    Mr. Kirk. And about another $9 trillion for Medicare?
    Mr. Daniels. Clearly in the ballpark.
    Mr. Kirk. Would it be possible in the next budget that you 
put out, the one that you have your full hands around, to have 
a 20-year projection so we can begin to see the long outyears 
when the Social Security and Medicare bills become due?
    Mr. Daniels. Yes. Projections that go out even further than 
that as far as 75 years, you know, are conventionally made. I 
do think that there may be value in looking at what I would 
call more relevant time horizons tied closely to the 
demographic changes, just so we can just sort of see exactly 
where the worst pressure points are and keep very close tabs on 
those as they may shift and even worsen.
    Mr. Kirk. By worry, Mr. Chairman, is not in this budget, 
which I support or in this House, which I think will have some 
discipline, it is the other body which has a way of turning tax 
bills into Christmas trees and congressional earmarks out the 
yingyang. I think a long-term projection showing some of the 
liabilities that we know will fall due help restrain the other 
body's appetite. Thank you very much.
    Chairman Nussle. I thank the gentleman.
    Ms. Hooley.
    Ms. Hooley. Thank you, Mr. Chairman.
    Thank you, Mr. Daniels, for being here.
    I have one follow-up question and then some other questions 
or comments, and it really goes back to Mr. Davis's question 
and to Mr. Spratt's question, when you looked at where you got 
this $1 trillion contingency fund and you said well, you took 
for all of the other promises, $200 billion, you took the $300 
billion from where you weren't going to do the extenders or fix 
the AMT, and then you took another $500 billion from the Social 
Security Trust Fund--excuse me, the Medicare surplus. And then, 
I believe you said to Representative Davis, well, we are not 
going to spend any of the Medicare money.
    So I have a problem saying, you have a $1 trillion 
contingency fund, we are not going to take anything from the 
Medicare Trust Fund, and yet, that is how you get your 
contingency fund.
    Mr. Daniels. Well, I obviously didn't make myself clear and 
I apologize. I was trying to help the questioner work from his 
mathematics, which is not the mathematics I accept or even the 
approach I accept, but I was trying to reconcile the two. I 
wasn't taking money from anywhere.
    Ms. Hooley. Right. But you were using the $500 billion from 
the Medicare as you looked at those numbers.
    Mr. Daniels. Well, let me walk you through what I believe 
is the common sense and appropriate way. There is $5.6 trillion 
beyond our needs for today. We look to see how much could be 
spent retiring debt, and that was 2; that left $600 billion 
uncommitted on Social Security.
    Ms. Hooley. I just want to go through the contingency fund.
    Mr. Daniels. I am getting there. The President's tax relief 
plan is the size that it is. We attach to it, we assign to it 
the so-called foregone interest, and notice, that there is $1 
trillion uncommitted there which strikes us as an entirely 
appropriate cushion.
    Ms. Hooley. And $500 billion of that is Medicare.
    I really actually want to go on to some questions about 
education.
    I appreciate the fact that you want to be more honest and 
transparent than your predecessor, and yet when you look at the 
Department of Education's budget, it was stated, you stated, 
President Bush stated that there was an 11.5 percent increase 
over the prior year, and yet if you look at what the budget was 
of $42.1 billion in 2001 and you look at the proposed budget, 
$44.5 billion, that is a $2.4 billion increase, that doesn't 
add up to 11.5 percent, it adds up to 5.7 percent.
    Mr. Daniels. Actually it is 5.9. Our document spells that 
out two lines below the 11. It just depends which comparison 
you make. Congress, of course, has been active in a process, we 
think we ought to deactivate.
    Ms. Hooley. Well, we may want to deactivate that process 
and I don't disagree with you on that, but again, if we are 
going to be honest and transparent about the budget, we really 
have to look at what that increase is, which is 2.4 billion.
    Mr. Daniels. Well, as I say, people can pick the number 
they want and we put them both in the document.
    Ms. Hooley. Right. One of the things that President Bush 
said, and you stated, and it is in this document about they 
really want to include our obligation for disability programs, 
Individuals with Disability Act, the IDEA program. To get back 
to the 40 percent, which is where our obligation is, and when 
we make promises, I think we should keep those, it is going to 
take us $3 billion a year over the next 5 years to get to 
approximately that 40 percent obligation. Yet, if you look at 
the budget and all of the things you propose in the budget for 
new educational programs, it is $2.4, well short of just what 
we need for one single program.
    Mr. Daniels. Well, we are quite aware, and very committed 
to making progress in terms of the IDEA issue, the unfunded 
mandate that it inflicts on the States and the way in which it 
can crowd out other education spending. We have incorporated 
enough spending to keep up with the growing population of 
children identified, which, as you know, is racing ahead of the 
overall population of young people. And beyond that, we have 
taken a next long step in this direction by liberalizing the--
we propose to liberalize and make flexible $1.2 billion of 
other education spending.
    States have indicated they would rather use that money or 
large portions of it for the purpose you are suggesting as 
opposed to that for which it was initially intended. So we 
sympathize. You put your finger on an important problem that we 
all have to work on. It is a moving target, and getting all the 
way to 40 percent is, as you know, an enormously ambitious 
undertaking.
    Ms. Hooley. It is an ambitious undertaking, but I mean that 
obligation goes to your schools and to local communities and if 
we want to get there, it is going to take us $3 billion a year, 
and in your budget, with $2.4 billion increase, it doesn't even 
take care of that one single program, let alone all of the 
other initiatives that President Bush has proposed.
    Mr. Daniels. Well, Congress has struggled with this and 
Congress has never come close to advancing against that 40 
percent goal in the past, and we are going to have to work 
together to do better than we have in the past.
    Ms. Hooley. Right. But there is also no increase in the 
budget for this program, although it was mentioned in his 
speech and mentioned in his budget and he singled it out, and I 
know that you have given some flexibility to some other dollars 
which are also needed by our schools and our school districts 
when we have crumbling buildings, but you don't give a priority 
to this by specifying an amount of money of an increase; is 
that correct?
    Mr. Daniels. Well, we do not want to dictate to the 
Nation's schools whether they would rather take care of their 
problems with disability or fix facilities and therefore, we 
propose to be consistent with the President's general approach 
to give them that opportunity. I think a large percentage of 
that $1.2 billion will go as an important increase toward IDEA-
type funding, and we are going to look in future years for ways 
to do more of that.
    Ms. Hooley. Thank you.
    Chairman Nussle. Mr. Brown.
    Ms. Brown. Thank you, Mr. Chairman.
    Mr. Daniels, thank you very much for being able to bring to 
us almost on short notice a document that I think is absolutely 
on target to what this Nation needs. In South Carolina, we hear 
all about tax cutting, and I am real pleased to be able to come 
my first year as a freshman and talk about a budget that is 
focused on returning some of those proceeds back to the 
citizens of this great Nation. I commend you for taking that 
stand and for providing that leadership. I recognize that it is 
difficult to start projecting what is going to happen 10 years 
from now, but at least the future is going to be there, and we 
might as well prepare for it, and without a plan, I can see 
that the growth of government will continue to grow, so I 
commend you for the insight and for preparing this summary of 
the budget and I look forward to working out the details.
    When I look at the budget, I recognize there are a lot of 
special things that I am concerned about, particularly about 
the highways, and I recognize that you addressed some of that. 
We would hope that as the growth of those trust funds continues 
to increase, that those funds would not be convoluted back into 
big government, but go back to the areas that were designated 
for roads in the United States. So I would hope that would be 
one area that we could continue to work on as we develop the 
lockbox for the Social Security and Medicare trust funds.
    Mr. Daniels. Thank you, sir.
    Chairman Nussle. Mrs. McCarthy.
    Mrs. McCarthy. Thank you, Mr. Chairman.
    Welcome, Mr. Daniels. I am very new on this committee too, 
so this is our debut here.
    I want to follow through with my colleague on talking about 
education, because that is my other committee, and for the last 
4 years, we certainly have been trying to get to the point of 
where we can do full funding for IDEA, and it is something that 
I know certainly in New York State, if we could do that, it 
would certainly help all of the local communities probably to 
spend those moneys in other areas.
    I guess I need some answers from you on the President's 
proposed $2.5 billion increase for the Department of Education. 
$1.6 billion, as my colleague had said, is for elementary and 
secondary education, and $1 billion is for the Pell grants, I 
want to talk about the Pell grants, too. However, after the 
budget cut funding by $433 million through the elimination of 
one-time projects, which you know, I understand is what the 
President wants to do, it only leaves, and these are your 
figures, $333 million for higher priorities. I guess that is 
where my concern comes in on what are the higher priorities, 
special education, school renovation, or after-school programs 
being considered a higher priority.
    My concern is, and, you know, I have introduced a couple of 
bills over the last couple of years for after-school programs, 
and I know how expensive those programs are. IDEA alone, as Ms. 
Hooley has said how much it would cost for that; school 
construction we haven't even talked about, repairs. There is 
not a school in my district that is not over 60 years old. They 
don't have the money to even do repairs, even if they used the 
bonds, as the President is suggesting through the State. They 
don't have the money. We are taxed out to the limit, and I 
guess that is one of the concerns I have, because I keep 
hearing each and every one of us have a priority, I guess is 
the word, and personally, where I come from, I love tax cuts 
and I have always voted for tax cuts. But when we on the 
Federal level put these dollars to work, we have an even 
playing field.
    New York has always sent more money to Washington than we 
have ever, ever gotten back, and that will probably always 
continue for a long time, unfortunately. But the whole idea of 
the Federal Government is the moneys that have been taken in, 
spread over this whole country, whether it was education, 
whether it was health care, or anything like that.
    So basically, what I am trying to figure out, with only 
$333 million left over from what the projected budget would be, 
God help me, when I came here, I couldn't even say millions or 
trillions, because it wasn't in my vocabulary, and now we talk 
about $333 million to spend on high priorities for the country. 
That is really not that much when we see so many problems 
throughout this country. There is probably not a district 
around here in this whole country that doesn't need some sort 
of school repairs. And the States can't do it, because if they 
could, they would have.
    May I ask how you respond to that?
    Mr. Daniels. I guess I would start by saying that it is 
probably noteworthy that you have just come to the committee. I 
mean, I had to look also at the incredible run-up in spending, 
education being a great example, over the last 3 years. 
Education, well before the President's 11 percent or 6 percent, 
however one chooses to look at it, increase has enjoyed, if 
that is the word, a dramatic ramp-up in recent years. So I 
think that has to be borne in mind.
    As was pointed out by more than one questioner, there are 
big issues whether that money right now is being well spent. 
There are issues any time in a public or private organization 
that one infuses enormous amounts of new money over the short 
time whether that money can be spent wisely. We may need to be 
looking at that, as I was urged to do at the Department of 
Education.
    But I would also point out there is education spending 
outside the Department of Education and some of the President's 
commitments were honored elsewhere. Some, for instance, the 
increase in K-12 or elementary and secondary education is 
between 8 and 9 percent inside the department, but it is well 
over 10 percent when you count new initiatives elsewhere, like 
the National Science Foundation.
    Finally, with regard to other needs, school construction 
and the rest, again, the States and localities, the school 
districts are in the best position to decide which is their 
most urgent need, and listening to them, we have decided to opt 
for flexibility wherever possible. The needs in your district 
would not necessarily match those somewhere else. And I guess 
we will tend to as many as we can as fast as we can.
    I am tempted to observe that the Federal Government can't 
and shouldn't become the plumber of last resort or first resort 
for school facilities all over America, and that while it can 
help, and it will, we are still 7 cents on the education 
dollar, and our most rapid run-up will never be able to meet 
all of the needs. Those will always principally be the job of 
school boards and localities and governors. But we are 
committed to working with you. It is the President's highest 
priority.
    Mrs. McCarthy. I agree with that, and I do believe that 
local schools do have the control and I will say, because I am 
on the Education Committee, over the last several years, we 
certainly have given more flexibility to the States and to the 
schools. I never even understood what used to be said around 
here was government-run schools. I don't know one government-
run school. My local schools, believe me, have an iron hand in 
that.
    But the cost of the run-ups, you know, what you are saying 
in the States is obviously because they don't have the money to 
do what needs to be done, especially with special education. I 
mean it is costing them so much money because we are diagnosing 
children younger and earlier, and it is costing a fortune all 
the way through. As a nurse, I can say to you, obviously the 
earlier we get these young children, the more money we will 
save on the top end. Sometimes you do have to invest. But our 
schools are falling apart and they do need help, and it doesn't 
matter whether it is an urban area or even in my suburban area, 
which is considered a very wealthy area. I will debate that on 
another day.
    Mr. Daniels. OK.
    Mrs. McCarthy. Thank you for your time.
    Chairman Nussle. Thank you, Ms. McCarthy. You will find 
that you have many partners here on this committee when it 
comes to special education. It was really this committee in a 
bipartisan way that provided the leadership to increase the 
funding for IDEA over the last 3 years, and you will find a lot 
of friends and supporters are railroaded to that. That is an 
area we need to continue to address. I appreciate your line of 
questioning.
    Mr. Watkins.
    Mr. Watkins. Thank you, Mr. Chairman, members of the 
committee, and Mr. Daniels, welcome aboard, and I look forward 
to working with you. I have not studied every detail, to say 
the least, of the overall budget, but I do a little reading on 
it, a little nighttime reading, and also I am going to do a lot 
of airplane reading when I leave here tomorrow morning to go 
back to Oklahoma.
    I came to this Congress with a mission, and that mission 
has been to try to change the economic livelihood of rural, 
depressed areas. I understand that with a lot of my urban city 
brothers and sisters, the problems of economics may be not of 
their area, but I do know of the rural economic depressed areas 
which are not addressed a great deal in this budget.
    I represent an area where the per capita income is less 
than 50 percent of the national average. Most of my 
constituencies have probably less than 40 percent of the 
national average. And it has had huge out-migration, which has 
gone into a lot of large cities over the years. I have been a 
part of that. I had to leave the area 3 times before I was 10 
years of age with my family, and it destroyed my family. That 
made a burning impression on my life and I have tried to devote 
my life to try to provide economic opportunities and job 
opportunities in those areas.
    This is something that seems to me that has been ignored. 
As a result, we keep sending people to the big cities. They 
have more problems because our loved ones have to go there. We 
have problems because we lose our tax base, we have lost a lot 
of our families that will never be able to return. So I have 
tried to look at how we stimulate that economic condition.
    Now, I just left a committee that Mr. Nussle and I serve 
on, Chairman Nussle on Ways and Means add we are going over the 
tax bill. We are going through the first phase of the tax bill 
on marginal rates which will be about $982 billion, and we need 
it. I know we have to stimulate the overall economic conditions 
of this country. It may become close to the big R, a recession, 
if we don't do something about it.
    But there are areas in this country that already and have 
long been in recession, and that is in the rural, economically 
depressed areas.
    Now, I am looking at this budget from several angles, but I 
look at one and I say, Mr. Chairman, I know you have some 
concern, and we have agriculture. I have two degrees in 
agriculture. I am concerned about agriculture, but I know we 
cannot save small-town, rural America with just on-farm jobs. 
We have to have off-farm jobs in the society that we are living 
in in the 21st century. One of the things that has bypassed us, 
Mr. Chairman, out in small town rural America, has been the 
high technology. I reviewed this, and I know the rural 
telephone bank is being projected to be done away with by the 
administration. I am not totally against that, but I would like 
to offer a substitute for that. I would like for us to look at 
how we make, and I am offering some language that, and will be 
offering some language hopefully here in this committee, but 
also in other legislation, to convert that to information 
technology centers or incubators out in those areas.
    I have an industry that came to my State that said we could 
use 500 more jobs in high tech and I said, hey, let me try to 
help this economically rural depressed area, and they said, 
well, you don't have the people. I found out when I surveyed, 
we do have the people, but not in one town, but in technology 
you can spread that out.
    So I am going to be trying to work, trying to see if we can 
equip some of our small town rural communities so they can be 
considered for high-tech jobs. We have people out there who 
would like to stay and live and work and raise their families 
in those areas.
    Now, high-tech industry has basically looked at the larger 
cities because there is a pool of people. But yet they are not 
as stable a worker as that man or woman out there in the small 
town who are there because they want to live there. They are 
staying there because there is some acreage and things like 
that.
    So I hope you will look at that with us. We need that 
desperately in rural America. Like I say, over at the Ways and 
Means Committee, and I am willing to work through the first 
phase of this tax relief package based on only one thing, and 
that is that we have a second round of that tax relief that 
will be more targeted in trying to help us give some relief for 
the marriage penalty, the death tax, also some native American 
conditions that are out there, the worst economic conditions. 
Do we have a compassionate, conservative attitude? I think 
overall, we do. We need to address that. We have a real--I am 
willing to work and work and work to try to back, I think, the 
President's overall budget package, but there is going to have 
to be some of these other things addressed along the way.
    So I know my time is basically about up, but I am glad to 
be on this committee, and I hope to work with you very closely 
on some of these problems that are out there, because we have 
to make an investment, just as we are making an investment with 
some tax cuts, there are some things we have to tweak out 
across America if we are going to--I know would have to look at 
the big picture, the overall situation, but there are pockets 
across this country where the people are hurting and they need 
help and they are crying out for that help from this 
administration. So I look forward to working with you and I 
hope that you will be willing to help push some of our 
thoughts.
    But would you look at that on the rural economic depressed 
areas of this country?
    Mr. Daniels. Yes, sir, absolutely. It is mutual on our 
part, and we have enjoyed our previous discussions with you. 
There is no stronger advocate for rural America than you, and I 
think you know the President has a heart for this too, and if 
we can find effective ways working with you, we will.
    Mr. Watkins. I hope you will look at maybe how we might 
could tweak the rural telephone bank or convert that and try to 
move it into information technology so we can wire and equip 
some--maybe some of these buildings that are on main street in 
some of these small towns that will allow us to have some jobs 
in the high-tech area, Mr. Chairman. I hope that is one of the 
things--I noticed it when I was reading through it, so I ask 
you to help us there, full.
    Mr. Daniels. I made a note of the idea. Thank you.
    Mr. Watkins. Thank you.
    Chairman Nussle. Mr. Moore.
    Mr. Moore. Thank you, Mr. Chairman. Mr. Daniels, welcome to 
the committee. I am new here as well, so maybe we can struggle 
through this together.
    Mr. Daniels. Is that why you hung in all this time?
    Mr. Moore. Absolutely.
    Mr. Daniels. I appreciate you doing it; I thought maybe I 
just wasn't much of a draw there for a while.
    Mr. Moore. You are much of a draw.
    I am from Kansas, and back home people seem to follow three 
very simple rules which are not written, and I think people 
around this country generally follow these three rules too, 
they are just common sense. Number one, don't spend more money 
than you make; number two, pay off your debts; and number 
three, invest in basic needs for the future. The basic needs 
for a family, as I see it, are education, transportation, food, 
shelter, clothing, health care, and the basic needs for our 
Nation are certainly national defense, Social Security and 
Medicare, a transportation system of some sort, and other 
things that I think we all would agree on.
    People I think around this country don't understand why 
Congress can't follow those three simple rules as well. Don't 
spend more than you make, and certainly pay off your debts. 
Now, when we have the opportunity for the first time in a whole 
generation to start to pay down our debts, I think the question 
is becoming a little fuzzy here. It is not: Are we going to 
have a tax cut or no tax cut, it is: are we going to take a 
responsible approach with the $5.6 trillion projected surplus 
over the next 10 years, and are we going to use a balanced 
approach and have some tax cuts and some significant debt 
reduction, and some of the initiatives the President suggested 
that I really agree with, like stronger national defense, like 
education, like a prescription drug program.
    So again, it is not tax cut or no tax cut, and I think 
sometimes that gets out of focus here and I think we need to 
focus on that.
    In fact, the other thing that we have kind of skirted 
around and maybe somebody has mentioned here today is the $5.7 
trillion number, which is our national debt. We talked about 
$5.6, which is projected surplus, but the national debt is $5.7 
trillion. And again, I supported a tax cut last year, I intend 
to this year, but I think we need to be responsible in those 
tax cuts, along with debt reduction.
    When you asked the question, why does the taxpayer always 
come last, I submit to you, Mr. Daniels, that a $5.7 trillion 
national debt is a mortgage on the future of our children and 
grandchildren.
    I ask the question to you and of the administration, why do 
our children and grandchildren come last? I think it is 
important, and I am not saying one way or the other that we 
take a balanced approach here, and I get very concerned when I 
see--I hear your discussion and I understand your concern, and 
I have heard Chairman Greenspan, I am on the Financial Services 
Committee, and I had a chance to talk to him yesterday. He said 
his first priority still, notwithstanding all of the news 
reports, but still, is paying down our national debt, and he 
said tax cuts, we can afford some now, although he has not 
endorsed the President's tax cut plan or any other tax cut 
plan.
    I guess I would just get down to this: I think there are 
some excellent, good reasons why we should look at paying down 
debt, and it will accomplish some of the same things you want. 
Number one, we had more than $200 billion in interest on your 
national debt last year. And we could substantially reduce that 
figure if we can start to pay down that debt.
    Number two, I think it will keep the interest rates lower, 
and most economists I hear from and talk to, including Chairman 
Greenspan, say the same thing. And finally, it is absolutely 
the right thing to do for future generations in this country, 
and I think we owe them that. I guess I would just end up by 
saying this, and that was my little speech and I am going to 
turn to one question.
    I am a sponsor of a bill that has already been mentioned to 
you twice or at least the idea, and that is IDEA funding. I 
hear your conversation about the local control. In fact, 3 
weeks ago, I had the privilege to be invited to the White House 
and had a chance to say to President Bush, and I wrote him a 
letter on January 5, and I said I hope you will make this a 
budget priority, because it is so important, not just to 
special needs children, and God knows they deserve it and need 
it, but also to every kid in public schools in this country, 
because right now in my State and at least in 15 other States, 
according to the New York Times 2 weeks ago, 3 weeks ago, there 
is a shortfall of revenue. Governor Graves in my State didn't 
anticipate that, as did not the legislature, and right now they 
are scrambling to find funding for special education.
    My point to the President was, I don't want to get our 
Nation in that position by taking an--by making an over-
aggressive tax cut and finding we end up short because the 
projections didn't come true, and we are scrambling to fund 
some of the vital necessities for the people in our country.
    If you have any comments, I would appreciate hearing them. 
I do appreciate you being here today.
    Mr. Daniels. I appreciate all of our comments, Congressman. 
I like your three rules. I am from a place not very far from 
Kansas and people operate on a similar set of rules there, I 
think. I think what, at least for the moment may separate us, 
is simply a matter of degree and trying to find the balance, 
you spoke of balance. We thought a long and hard time, and the 
President gave a lot of reflection to what was an appropriate 
balance, given the excess of moneys in versus obligations we 
have right now, and we are going to have over the future. So we 
have submitted to you what we think is an appropriate balance, 
with a lot of protection beyond it. Obviously, you will have to 
decide if it is enough, if it is careful enough for you, and we 
certainly take the point.
    With regard to our long-term obligations, your mention of 
the gross debt as it is called as opposed to the publicly held 
debt, the gross debt including that which government sort of 
owes to itself, it is really a measure of the unfunded 
obligations of the future. To me, it is a daily reminder--it is 
important to look at. It is a daily reminder that time is 
wasting to begin reforming Medicare, to begin reforming Social 
Security and not to kid ourselves that this is something that 
can wait because we are OK for the present.
    Lastly, I would just say that the very best thing we can do 
for our children and grandchildren is to ensure a strong 
economy, and paying down debt is a very important part of that. 
It is a cornerstone of the plan we have brought. But so is 
trying to keep tax collection at a level that allows a strong 
economy to keep on growing and to--that is the best assurance, 
that is the best way to protect Social Security, it is the best 
way to protect Medicare, and we cannot take our eye off the 
need to do it.
    Mr. Moore. Thank you.
    Chairman Nussle. Mr. Culberson.
    Mr. Culberson. Thank you, Mr. Chairman.
    Director Daniels, I have the privilege of representing the 
people of West Houston. I succeeded Bill Archer, the former 
chairman of the Ways and Means Committee, and our district is 
one of the most highly educated, certainly in the State, if not 
the Nation. It is a wonderful district to represent. As well 
educated and informed as those folks are, I have discovered on 
several trips back home to the district after many of the 
excellent briefings we have had here on the Budget Committee 
that the people of my district are unaware that the government 
cannot pay down--pay off early some of the debt that we 
currently have. I just want to reiterate, after the comments 
that Congressman Moore made and I have heard others make as 
well, the President's budget pays off as much of the publicly 
held debt as can be paid off without incurring penalties, is 
that correct?
    Mr. Daniels. Yes, that is correct, Congressman. As I said, 
you may be able to push a little further, if so, quite 
possibly, that will happen. But that is our best estimate.
    Mr. Culberson. We have many people in my district that are 
either in retirement funds of various kinds that hold bonds 
individually, and I think it is vitally important that all of 
us, as we communicate to our constituents and to the Nation in 
general, if they are bond holders, anyone who understands the 
way bonds work, you cannot pay them off early without incurring 
a penalty. What you are telling this committee, and the 
President has said the other night in his address to the 
Nation, is that his budget will pay off all of the publicly 
held debt that can be paid off without incurring a significant 
penalty. That is just a vitally important point that the 
public, I want to make sure, understands.
    Mr. Daniels. I would just say quickly that I don't think 
the well-educated and informed citizens of your district or any 
district need to feel at all embarrassed that they hadn't 
thought about this. This is a new problem.
    Mr. Culberson. It is a new problem.
    Mr. Daniels. I have done a little digging around and as far 
as I can tell, the last time, maybe the only time in our 
history that the government confronted this problem, was in the 
Cleveland administration of the late 19th century. I commend 
for your entertainment at some point some speeches that 
President Cleveland made at the time, which but for the fact 
that he wrote in better English than we tend to use these days, 
could apply to our situation.
    Mr. Culberson. Thank you. I also wanted to if I could 
compliment our budget chairman, our leadership here in the 
House and the Senate, the research that they have done to 
determine that indeed the surplus we are discussing today is a 
tax surplus, and that it is important that the--I believe all 
of us in discussing this surplus use that terminology, because 
it is indeed a tax surplus, it is not a budget surplus. Budget 
surplus implies that it is extra money that we need to spend. 
The surplus, wouldn't you agree that we have today is a direct 
result of overcharges to the taxpayers and therefore it is 
accurate, whenever we refer to the surplus, that we call it a 
tax surplus so the listener understands precisely what it is 
and those who might want to edit our words cannot edit it, and 
that it is very clear that it is a tax surplus. I wanted to 
urge you, if you could, to please use that terminology if you 
agree with that reasoning.
    Mr. Daniels. I think each person can choose his own 
terminology, as long as we can remember where the money comes 
from and whose it rightfully is, until someone identifies a 
public need that justifies the taking of those funds.
    Mr. Culberson. Finally, if I could, Director Daniels, I 
wanted to reiterate for the benefit of the listeners, as well 
as to ask you to confirm, I know that Chairman Archer shared 
with me that he has run the calculations, and Chairman Archer 
estimates that the Reagan tax cut, if put in today's dollars, 
would be $5.5 trillion, to put the comparison in perspective. 
President Bush's tax cut of $1.6 trillion cannot be compared to 
the Reagan tax cut, because the Reagan tax cut was far, far 
larger and, of course, at that time we did not have a tax 
surplus.
    Finally, I also wanted to ask if you could also confirm the 
estimate that I have heard that the revenues generated by the 
Reagan tax cut that during the period of the 1980's, revenues 
increased twice, there was a doubling of revenues to the 
government as a result of the tax cuts, but that the Congress 
at the time increased spending by 3 times, which is the reason 
we had the deficits. Would you agree?
    Mr. Daniels. Those are roughly the proportions, that is 
correct.
    Mr. Culberson. So whenever we hear anyone complain about--
try to draw a comparison between what President Bush is so 
wisely doing today, paying off all of the available publicly 
held debt that can be paid off without incurring penalties, and 
that ensuring that the essential functions of the government 
are taken care of: military pay raise, readiness, setting aside 
contingency funds, that even after taking care of those 
contingencies, of course ensuring the solvency of Social 
Security and Medicare, that the Bush tax cut of $1.6 trillion 
cannot compare to the Reagan tax cut of $5.5 trillion, and that 
that tax cut in the 1980's resulted in a doubling of revenue, 
but while Congress was tripling spending. But today, under the 
Republican leadership in the House and the Senate and under 
President Bush's leadership, we are certainly going to hold 
spending in line, so that the comparison does not seem to me to 
be valid.
    Mr. Daniels. Well put, sir.
    Mr. Culberson. Thank you very much. I want to thank you for 
your leadership and working with you, Director Daniels, and 
supporting President Bush in this effort. I saw him succeed in 
this in Texas. I served 14 years in the Texas House and watched 
Governor Bush succeed in refunding the tax surplus in Texas to 
Texas taxpayers and saw the benefit to the Texas economy, and I 
look forward to the same result here nationally. Thank you, 
sir.
    Mr. Daniels. Likewise.
    Chairman Nussle. Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    I am going to try to jump around to something that I hope 
hasn't, I don't think, has been discussed. We could sit here 
all day long and talk about what debt can and cannot be paid 
off, and there would be differences of opinion, so be it. We 
can talk all day long about how big the tax cut should be or 
shouldn't be; that is all fair and well and good. We can talk 
about who should get the tax cut, all day long, all good 
discussions.
    I actually like the comment you made about Social Security 
and Medicare that we are wasting time not fixing it, and I 
actually wish you had come in with that first, so that we could 
fix it before we started doing things with the budget and tax 
cuts. But so be it. We are here today.
    There are a couple of areas that are important to my 
district and I think important to the country as a whole, and 
again, it is awfully hard for me, because I am also new to the 
Budget Committee, but I am not new to budgets. I understand, 
although I have nothing to compare it against, but all I have 
is this, and if there is more to it, I look forward to it 
coming. So in the meantime I have to ask questions and try to 
figure out what is going on here.
    For instance, I am looking at HUD right now, 2\1/2\ pages, 
actually two pages, because one page is a graph, and I look and 
I read and I see, and I see a small increase coming, but that 
increase doesn't come near the amount of money that pretty much 
everybody who looks at this thinks we need to simply maintain 
the level of services that we currently have. I look at it and 
I say to myself, OK, but where is the money going to come from? 
I read later on, I see HUD will improve its management 
instruments to get some of this money. That is great, that is 
wonderful. I hope you do and I hope it works.
    I also look down and see I guess a fair amount, I don't 
know how much, but a fair amount is going to come from tenancy 
incomes that are currently underreported, and they are going to 
grab some of that money that is currently given out, and that 
is a good idea. If any tenant is underreporting their income, 
they should be taken off the rolls, and we definitely should be 
doing something about it. But I don't see anything here that 
talks about how we are going to do that, whether there is any 
money to implement a plan to hire auditors; I know this year 
the number of audits have gone through the floor; there are no 
audits being done for all intents and purposes, and that is all 
well and good. Maybe that is what people want, but I actually 
like the idea of people paying their fair share, whatever that 
amount is. I don't see a plan here, so I have to wonder how you 
can base cuts on something you don't have a plan for. If you 
do, again, maybe it will come again and I will see it and I 
will ask those questions later.
    I look further and I see a $700 million reduction in public 
housing capital program, which is interesting when just last 
year we were being told that there is a $20 billion unmet 
capital needs. I understand that some people don't like public 
housing, and I appreciate that, and again, we can have 
differences of opinion on that, but most people who say that 
they don't like public housing think of it in terms of low 
income housing. Somehow, low income people should do something, 
I am not sure what, but again, that is another time. In my 
world, lowest low income housing is for senior citizens. It is 
not for the nonworking poor who are all chiseling our tax 
dollars or whatever they are supposed to be doing, it is the 
senior citizens, and we are going to be leaving them in 
buildings that can't meet code in many States, in many cities 
and towns.
    I saw in your background you used to work for a city. I was 
the mayor of a city as well. We have very strict codes, and I 
will not allow senior citizens to live in substandard housing, 
and yet we have public housing that is substandard, and we are 
not putting the money in to fix it. I say to myself, well, 
maybe you are going to come up with the money, maybe I am 
wrong. Maybe I am misreading this somewhere.
    I read further, I see the drug elimination program is 
going. Gee, I thought I was the whacko liberal who wasn't all 
worked up about drug elimination, but I guess not. I guess some 
other people don't care about it as well. I see later on, I see 
evictions are more effective than programs.
    OK. Let us evict everybody who gets convicted of a drug 
problem. Where are they going to go? Where are they going to 
go? More importantly, let us assume we evict somebody who has 
some children, what are we going to do with the kids? Where are 
they going to go? They have no place to live. They have nobody 
to take care of them and they have no social programs anywhere 
in this budget being increased to take care of it.
    Again, I have no problems convicting and throwing drug 
addicts out of public housing, yet it is a dead end. Every time 
I turn around on the housing budget, it is a dead end. We are 
not going to put money into capital programs, and we are going 
to let senior citizens live in substandard housing. But again, 
I hope that detail will come and we can go through this at a 
later time.
    Yesterday we had Mr. Greenspan in the Financial Services 
Committee and we were talking about the projections. In his 
projections he made it very clear that we are going to have 
increased unemployment in the foreseeable future. OK, I 
understand we don't like it. Yet, I look here and I see a cut 
in the Labor Department. I see no discussion whatsoever about 
doing anything about the unemployment insurance fund; I see no 
discussion whatsoever about retraining programs; I see no 
discussion whatsoever about adult education programs. So I say 
to myself, we are going to have millions of people, because we 
are going through an economic bump, whatever that is, we are 
all trying to fix it, we are all doing the best we can, when 
most of the observers, including Mr. Greenspan, thinks we are 
going to increase unemployment, yet this document talks nothing 
about retraining those unemployed people, it talks nothing 
about dealing with them, talks nothing about educating them.
    I say to myself, how is this not a dead end? What do I say 
to people who don't have jobs? I got to tell you, that doesn't 
deal with the people who still don't have jobs. And Mr. 
Watkins, I got to tell you, I have to bring him up to Boston 
because everything he said I agree with, though don't get me 
wrong, I don't come from a rural area, but all of his problems 
are very similar. We have pockets in many of our cities that 
meet all of those issues, and that is why we worked so closely 
last year on empowerment zones trying to get them funded.
    During yesterday's discussion also, and I read through 
this, our entire economy--that is a little overstatement. A big 
chunk of our economy is based on the fact that we are the 
leading edge of the world on innovations: medical and robotics 
and everything else. It is all based on R&D. It is all based on 
R&D. If we don't keep the cutting edge, they can make cars 
cheaper in Malaysia than they can here. They can make shoes 
cheaper in Central America than they can here. We need to stay 
up on R&D, otherwise this economy is going to go down the chute 
faster than we can imagine.
    Yet I look here and I see some good things here. I love the 
continued improvement of the NIH budget, good idea, support it 
100 percent. I love the idea of making the R&D tax credit 
permanent. Good idea, excellent idea. I like the idea of having 
DOD do some more R&D on the missile defense system. Although we 
have some differences on deployment, the R&D of it is 100 
percent correct, as far as I am concerned.
    Yet I look at the NSF budget and it is minuscule, 
minuscule. It is embarrassing. The NSF budget is the cutting 
edge of all of our R&D. We don't talk about the Energy 
Department. R&D gone, gone. I have people who are getting close 
to freezing on gas. Fine. Maybe we will drill in Alaska, maybe 
we won't, but we need new inventions to make sure that whatever 
oil and gas we do have is efficiently used. We are not going to 
be doing any R&D or very little of it.
    The U.S. Geological Survey, cut out. The Wall Street 
Journal itself talks about these things and quotes several 
leading Republican members of this House who think that some of 
these R&D numbers are, and I quote absurd, absurd.
    So I ask a long question. I ask very simply, are we or are 
we not committed to future research and development to keep 
this country's economy going so that we are ahead of every 
other competitor in the world? And if we are, how can you look 
at me and tell me that the NSF budget, the energy budget, the 
Commerce budget on R&D issues--again, if it is not here, I 
would love to see the documents, how can you tell me that that 
is a commitment to R&D?
    Mr. Daniels. Let me start at the top of your list of 
questions, because you asked a number of important ones, 
Congressman. I may have missed a couple, but let me get most of 
them. The way we wrote our document may have confused you. At 
one point in the HUD budget, we assume, as I mentioned earlier, 
no unspecified savings from anywhere. If we don't know where 
money is coming from, it is not in there. What you saw about 
the people concealing their income and so forth is in a section 
called ``potential reforms,'' where we think there may be 
important opportunities in the future, but we do not assume any 
costs for that.
    I would also mention that we proposed to give a substantial 
increase to the IRS, they have a modernization program going 
there. You are quite right, the number of audits is way down, 
and the Secretary of the Treasury and Commissioner of IRS are 
committed to bringing that into the 21st century. So on that 
score, I hope you will find some consolation.
    Let me turn to--well, let me mention on the drug 
elimination grant, it is just a good example of something. This 
program has been there for quite a long time, has a nice title, 
we are all in favor of eliminating drugs. It has nothing to 
show for itself in terms of results. The Congress has rightly 
insisted, and I would say, it is an unmet obligation of this 
administration, or our executive branch, to begin attaching 
results to all of the things you folks fund. The so-called 
Results Act, GPRA of the 1990's, has not been particularly 
honored. This is one where there has been measurement and there 
is nothing good to show.
    Meanwhile, there are dozens of other programs that can get 
at the same problem. We are spending $19 billion fighting 
drugs, much of it in areas like this. It is not that we are not 
committed to that, it is that there are plenty of tools 
available to housing authorities in ways that may be more 
effective, and it is just a matter of trying to move the money 
from the least effective program to the most effective if we 
can identify what that is.
    R&D is a big issue, and we appreciate your advocacy here. I 
would say that R&D budgets generally are up. Again, I encourage 
you to look not just at a 1-year snapshot, but 2, 3, 4 years. I 
also encourage that we not ever confuse ourselves that 
government can lead productivity and technology. It can help 
it; certainly at the end of basic research it can make a big 
difference. The commitment to the NIH is one of the largest 
ones the Congress has made and the President has associated 
himself with it, and I think everyone will be quite proud that 
it is occurring.
    I do hear voices, and yours now eloquent among them, that 
say let us be sure that we have balance in our scientific 
investments, let us make sure that we are not, in our present 
enthusiasm on, for instance, medical research, missing other 
opportunities, and we will work with you to try to identify the 
areas where we have to make equivalent progress. So thank you 
for your questions.
    Chairman Nussle. Mr. Honda, you have been very patient, and 
welcome to the committee. I haven't had the opportunity 
publicly to welcome you, and we welcome you to the committee, 
and we are glad you are here. You may inquire.
    Mr. Honda. Thank you, Mr. Nussle. I also want to 
acknowledge your patience, Mr. Chairman, and welcome Mr. 
Daniels here, and thank you for your patience. You are the one 
that had to stick it out.
    Mr. Daniels. Now I know what those folks who play chess 
against a whole roomful people at the same time feel like.
    Mr. Honda. Mr. Chairman, I would like to submit a couple of 
questions in writing at the end.
    Chairman Nussle. Actually, I will ask unanimous consent 
that all members have 7 legislative days to submit questions in 
writing for the record. Unless there is objection, that is so 
ordered, and you may do so.
    Mr. Honda. Thank you. For the record, the questions are 
regarding INS questions and other questions regarding science 
research funding.
    Mr. Daniels. Thank you.
    Mr. Honda. Mr. Daniels, a lot of discussion was centered 
around education and specifically, special education, and then 
most recently, Mr. Watkins brought up the issue of FCC funding 
being shifted over to Department of Education.
    The comments I have, and the question I have is number one, 
regarding the E-rate program, which is funded through the 
Telecommunications Act of 1996, which is a very specified, 
specific funding source which has shown quite a bit of success 
over the last 4 or 5 years. The question is, why would 
something that is very clear and specific and successful be 
shifted into the Department of Education where the funding--the 
budget process is up in the air, and then it is mixed also, I 
believe, as a block grant. If we are going to keep our promise 
and stay focused on the mission of making sure all of our 
schools, our classrooms and libraries are completely wired, 
which we are about 68 percent wired now, that we must complete 
it to 100 percent, and then the next step is making those 
schools and classrooms successful through the access.
    Mr. Watkins' concern, I think, is also about the equity of 
access to information which will provide youngsters with access 
to knowledge and, therefore, secure a good education. Why would 
we do that?
    And then number two, under special education, if we said 
under PL 14192 that we will fund 40 percent of the cost of 
special education, why don't we just move forward on a very 
specific plan over the next 3 or 4 years and do that? Because 
when you do that, it pushes out the general fund amendments of 
the local school districts who, by law, are required to meet 
those needs; it would free those general funds money at a 
percentage that will boggle the mind so that they can also 
redirect those moneys, and programs are discretionary for them.
    Mr. Daniels. With regard to the first question, I can only 
say that the President believes that we need a great deal more 
flexibility, that it is very difficult--that it is not 
difficult for Washington to identify important needs and assign 
funding to them, but it is very difficult for Washington to 
know, locality by locality, what the right mix is and where 
digital technology will be most useful or not.
    So I hope, and I am sure that all of us hope, that as these 
funds become more fungible and more flexible, that the need to 
make sure that all our areas and all our children have access 
to modern technology will be addressed by the people best 
equipped to address it.
    Mr. Honda. To the Chair, just to interrupt you for a 
second, the funding is very specific and it is very clear, the 
mission is very clear also. But to put it into a grant, block 
grant funding, it leaves it up in the air as to what schools 
will be using that money for, and it is mixed with other 
programs, such as modernization. Now, if we keep that discrete 
and use the other funds for the other purposes, at least that 
arena will be very clear, it won't be subject to criticism, 
because although we say we will give these moneys for local 
discretion, and then people turn around later on and say, what 
is wrong with our public schools?
    Mr. Daniels. I would encourage you to raise this issue with 
Secretary Paige, and he may well agree with you, and take pains 
to make sure that those funds----
    Mr. Honda. I am certainly hopeful, because it is one 
program that is very successful, and it promises 100 percent 
mission completion.
    Mr. Daniels. Thank you for drawing it to our attention.
    Mr. Honda. How about special ed?
    Mr. Daniels. I don't know how much more to say about 
special ed except that we agree completely, that that is an 
area where we have to make a lot of progress, it is enormously 
expensive to make that progress, particularly when the 
objective is receding before us like a mirage. It is very 
expensive simply to tread water, I have learned, in terms of--
which we will do, and then we will go further this year in the 
way I described.
    Next year I think we will go further still. But we are 
going to have to work with the Congress. And the supply of 
dollars is not inexhaustible, and the supply of good ideas is, 
but we all have to work together to reconcile competing 
interests. This one, for the President, is a very high priority 
and the question is, what are we prepared to do with a little 
less of.
    Mr. Honda. To the Chair again, if I may, just to respond, 
it is a special ed bill, and it is a distinct statute, and in 
terms of public policy, if we follow through at the national 
level, it will free up quite a bit of general fund 
discretionary moneys at the local level, and if we are saying 
we want local authority to our school districts, this is one 
way that the Federal Government can specifically be helpful 
with the law that we impose upon them. So they are faced with 
two things. One, they have to obey the law, and once they do 
that, they have to fulfill a law with money that is not coming 
down sufficiently and they have to cover it with their own. So 
they are caught in a Catch-22, not only with the law, but also 
with their community members. I think mixing this money with 
other funds that were allocated for modernization or putting 
them into a block grant funding mechanism will again deter the 
mission of PL 94142.
    Mr. Daniels. I understand your point, sir. We may have some 
philosophical difference in terms of the degree of flexibility 
that is appropriate, and in this area the President feels we 
should be reaching for greater flexibility in this area where 
school-to-school, let alone district to district----
    Mr. Honda. As an ex-schoolboard member I understand what 
that means, but there are distinct statutes that regulate FCC 
funding and also special ed, so those things are distinct.
    The other areas that you put block granting money in, I 
understand that there is some flexibility, but these two are 
very clear in statute.
    Mr. Daniels. Thank you for the point.
    Chairman Nussle. Thank you, Mr. Honda.
    Mr. Price, you have also been very patient. Thank you.
    Mr. Price. Thank you, Mr. Chairman.
    Mr. Daniels, let me add my congratulations on your 
appointment.
    Mr. Daniels. Thank you, sir.
    Mr. Price. I welcome you to the committee. I must say I 
don't really envy you your assignment today, because you have 
been asked, as OMB director, to come up here and tell the House 
Budget Committee that somehow it is OK to shout through a tax 
cut before we have a budget resolution. I would think that 
would put considerable strain on not just the budget law, but 
on your institutional role, and on this process that was set up 
25 years ago to protect fiscal responsibility.
    You asked Mr. Davis a rhetorical question. Who, in all of 
this, is looking out for the taxpayer. I do want to reassure 
you on that score. I think virtually every Member of Congress 
believes that tax relief ought to be a component of this 
budget. But we do have a debate, it is an honest debate, and I 
think you would be well advised not to belittle the debate, 
about three critical points. One is, should this tax cut be 
voted through before we have a budget resolution? Secondly, 
what is the affordable size of the tax cut? And thirdly, what 
was a fair distribution of the benefits of the tax cut? Those 
are all serious debates that deserve serious engagement.
    Now, you have assured us that we can afford a $2 trillion 
tax cut. Not only are you saying we can afford it, but we can 
still have a $1 trillion contingency fund at the end of the day 
to protect us against shaky or unreliable surplus estimates. 
And, by the way, the surplus projections that we are dealing 
with, as I understand it, two-thirds of those surplus 
projections are more than 5 years away. Two-thirds of those 
surplus estimates are in that especially uncertain category of 
the outyears, beyond year 5.
    If I could refer back to the chart that Mr. Spratt had up 
here initially, I just want to go back to what I thought you 
were saying and ask you to elaborate a bit on the $1 trillion 
contingency fund. You are saying that it is made up of $207 
billion from our chart that we acknowledge is available, that 
another $526 billion is taken from funds borrowed from the 
Medicare part A surplus. I must say, your points in some ways 
were quite compelling about the financial dilemma of Medicare, 
but it seems to me to be a strange response to that dilemma to 
then take the part A surplus and put it in a contingency fund 
when that is presumably available for other purposes. Then I 
guess the rest of the $300 billion is the cost of extenders and 
fixing the AMT, which you are acknowledging, needs to be done, 
but which does not figure in your budget math. That is where 
the $1 trillion comes from.
    Now, what are the claims on that $1 trillion? Well, if you 
adjusted the appropriations for population as well as for 
inflation, that is another $200 billion, and sometimes we need 
to do that. For example, with Head Start, if we funded just to 
keep it even with inflation, with the number of eligible kids 
increasing, then we would have a declining proportion who 
would, in fact, be served, and that is also true of law 
enforcement, building highways and so forth. So let us say we 
wanted to make some adjustments for population as well as for 
inflation. That is $200 billion. We have talked already about 
the extenders, the AMT, which I think you acknowledged were 
desirable, probably inevitable, another $300 billion. If we 
went above inflation spending on any of these priority items 
that are listed here, prescription drugs, defense, education, 
conservation, crime, transportation, on and on. Goodness knows 
in my area we need to do better than just maintaining current 
effort on building highways and getting transit on line.
    You have some of those items where you say you are going to 
go above merely adjusting for inflation, and I don't believe 
you denied Mr. Spratt's point that that would require the rest 
of the discretionary budget to go at about a 7 percent 
decrease. I don't know if we can sustain that 7 percent 
decrease. There are a lot of items that will make that quite 
difficult, and of course, other claims on this $1 trillion 
might be in case the surplus doesn't materialize, then that is 
designed as a cushion.
    So where is the cushion is the question? There seems to be 
a lot of potential claims on this $1 trillion. Is this $1 
trillion contingency fund real, and what is the range of 
possible claims on it?
    Mr. Daniels. Well, thank you for the several questions, 
sir. First of all, let me say that I hope nothing I said could 
be construed as belittling any piece of this debate. I think 
you mapped it out pretty well, and let me take it in the three 
pieces you broke it into. I have tried to engage as seriously 
as possible, and this budget does, with the size, what I would 
call the size of the tax cut. And I have insisted today and 
will continue to, there is more than enough room, far more than 
enough room for the American taxpayer to get some overdue 
relief.
    The other two pieces of it I think principally should be 
left to others, as I had the discussion with the Congresswoman 
I believe it was, the discussion about the shape of this tax 
cut and what is fair and what is right is one that will 
continue on, and I am happy to speak to it as the President 
would have us speak, but it is a different one than I think is 
my principal responsibility.
    As to the tactics, we don't tell the House of 
Representatives how to do its business and in what order. I 
understand the point that you have made, and I gather that 
there will be debate about that and possibly a different view 
in the other body.
    Let me answer a few of the other questions. Back to that 
chart, I know no one wants to put words in my mouth, but I 
didn't say, will never say, we are taking money from anywhere. 
I think the simplest way to explain it is the way I have here. 
I was trying to reconcile that for those who wanted to know how 
does it house the same amount of money, and to me it is as 
plain as day that there is $1 trillion of the $5.6 trillion 
that is utterly uncommitted, and I am not even counting the 
$600 billion of Social Security money, which can also be viewed 
as further protection. I did not and do not accept, you know, 
the addition to the President's tax cut of things he has not 
called for. We are prepared to work with the Congress on ways 
to deliver tax relief, but he has said steadfastly that it is 
$1.6, it is not $1.9 as suggested up there.
    Mr. Price. Since we are running out of time, Mr. Daniels, 
if I could interrupt you, I was simply repeating what you had 
said about the composition of the $1 trillion trying to 
reconcile it with this chart. But my main question has to do 
with the potential claims on the $1 trillion. Is my list there 
accurate, or is there something that we need to know further 
there about what the range of those claims might be?
    Mr. Daniels. Well, I think that is a very important point 
and I like your use of the word ``range.'' I think that is the 
way we would have approached it in the business I was a part 
of; I think it is the only correct way, and it is exactly the 
word I used as we began to think about what is an adequate and 
more than adequate reserve. What is the right range when you 
look at the variety of possibilities?
    We think the right range for Medicare modernization is $153 
billion, and that is in the plan now. We don't know the right 
answer on defense, we don't know the right answer on 
agriculture, which I don't think is on that particular chart, 
but when we look at them all together, we believe it is well 
short of $1 trillion, and you know, back to the quote which you 
recalled I made, it wasn't that no one is looking out for the 
taxpayer, I know you do and I know every member of this 
committee does every day. But what I said was that it sometimes 
seems as though the taxpayer gets considered last, and so to 
look at a chart like that and say well, after we have paid for 
drugs, paid for defense, paid for education, paid for 
conservation, paid for crime, paid for, paid for, paid for all 
of these items, maybe there will be something left, and I only 
suggested that, you know, that is maybe not the order in which 
we ought to take up the competing interests.
    Mr. Price. Well, thank you. I know my time has expired, but 
with all due respect, nobody is suggesting that the tax cut 
comes out of this $1 trillion. This is $1 trillion that is 
supposedly going to be there after your $2 trillion tax cut.
    Mr. Daniels. Right.
    Mr. Price. I think it is only prudent and responsible to 
ask, is that $1 trillion real and what are the possible claims 
that might be made against it? If it is there as a cushion, 
goodness knows we need a cushion with these projections as 
shaky as they are, but is that cushion going to really, in the 
end, be available to us?
    Mr. Daniels. Well, those are very appropriate questions and 
I think you framed them in the way we did, and you will have to 
judge whether we have been careful enough in this forecast and 
whether $1 trillion is cushion enough, in view of the way you 
might cost out these other items. As we cost them out 
carefully, we think, as I said before, we think we are 
overreserved here, but that is a fair debate.
    Chairman Nussle. Thank you, Mr. Price.
    Mr. Daniels, we have come to the end of the line. You have 
been testifying now for approximately 4 hours.
    Mr. Daniels. So soon?
    Chairman Nussle. We have some votes on the floor, so I 
think it is probably a good point in time here to recess.
    Mr. Bentsen. Mr. Chairman, what is the record?
    Chairman Nussle. I am not sure we have a record; I will 
look that up.
    Mr. Bentsen. Mr. Chairman, could I make one comment? I was 
going to ask a question, but I know we have some votes.
    Chairman Nussle. I am a little hesitant to give you the 
last word, but I will do it.
    Mr. Bentsen. You can always have the last word, Mr. 
Chairman.
    Mr. Daniels, I just want to make one comment. I have lots 
of questions, but we will get time to do that and I will submit 
a bunch for the record. But on the comment of the budget and 
how the House conducts its business as it sees fit, you have 
your responsibility and they have their responsibility. The 
other night, I stayed up late working with my 9-year-old 
daughter on a report she was doing on James Madison, and read 
through this biography of Madison and the forming of the 
Constitution and everything, and a discussion of the separation 
of powers and the checks and balances which was a major part of 
the debate at the constitutional convention.
    The fact is that the Bush administration inherited a 
fiduciary responsibility on behalf of all of the people of the 
United States, and you would certainly make that argument as it 
relates to refunding a surplus to the people, et cetera. But 
that same fiduciary responsibility applies to how the budget is 
constructed, and I don't think you all can just say, well, that 
is the House's responsibility, however they want to do it, when 
down the road, you have a Commission looking at Social Security 
and Medicare and all of these other things. I think you have a 
responsibility to the American taxpayers, as do we, that we 
don't let the cart get before the horse in how we are going to 
do this and find out we are in a jam.
    I know we can look back 40 years and say, well, in the 40-
year plain, things weren't so bad, the 1980's notwithstanding. 
We also have to look ahead 40 years and you know as well as I 
do, 15 years out from today, things don't look so good. There 
might not be a Treasury market over the next 15 years, but 
there sure will be a Treasury market beyond that when we see 
the debt to GDP ratio rise as the baby boomers, everybody 
except for Mr. Nussle and I, start to retire.
    So I think you all need to think about that going forward. 
I appreciate the politics of this and what you do, you need to 
do to try and get your package passed, but I think you all need 
to think a little bit about that.
    Thank you, Mr. Chairman.
    Chairman Nussle. I thank you, Mr. Bentsen.
    I want to thank you for your testimony on behalf of the 
committee, Mr. Daniels. We look forward to working with you 
over the next number of weeks as we put together this plan.
    Mr. Daniels. Thank you.
    Chairman Nussle. The committee will stand in recess until 3 
when we will hear the testimony of Secretary of the Treasury, 
Mr. O'Neill, as this review of the President's budget 
continues. Thank you.

Prepared Statement of Hon. Ander Crenshaw, a Representative in Congress 
                       From the State of Florida

    Mr. Chairman, I would like to thank you for holding this hearing, 
and Mr. Daniels, I would like to thank you for participating today. As 
a new member of the Committee, I look forward to working with you both, 
and with my other colleagues here today to set a responsible and fair 
course of action for Congress' work this year.
    I feel very fortunate to be representing Northeast Florida in 
Congress, particularly at this time of great budget surpluses. When I 
represented that area in the Florida Legislature, it was not always 
under such favorable circumstances, and my work there required very 
tough choices. But we prevailed and balanced the spending needs of the 
people of Florida with sound fiscal management.
    The projected $5.6 trillion surplus does not free Congress or the 
President from making tough choices. We still must balance the spending 
needs of the nation with fiscal discipline. But, we also have great 
opportunities to pay down a still larger portion of the debt, to 
prepare for the future, and to give the American people back the money 
that they need to pay their own debts and prepare for their own 
futures.
    The President's address earlier this week set out a very clear 
vision for using the surplus in these ways: We will continue to pay 
down the debt. We will meet our current spending needs and will shore 
up the programs that meet our needs in the future, such as Social 
Security and Medicare. And, we will give the American people a refund 
with what is left over. I share his vision, and look forward to working 
with President Bush and my colleagues here in Congress to follow this 
course of action.

    [Whereupon, at 2 p.m., the committee was adjourned.]

                                
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