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



     PREDICTABILITY AND CONTROL: TWIN REASONS FOR RESTORING BUDGET 
                              DISCIPLINES

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, APRIL 25, 2002

                               __________

                           Serial No. 107-28

                               __________

           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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                            WASHINGTON : 2002
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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       BENNIE G. THOMPSON, Mississippi
GIL GUTKNECHT, Minnesota             KEN BENTSEN, Texas
VAN HILLEARY, Tennessee              JIM DAVIS, Florida
MAC THORNBERRY, Texas                EVA M. CLAYTON, North Carolina
JIM RYUN, Kansas                     DAVID E. PRICE, North Carolina
MAC COLLINS, Georgia                 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                 MICHAEL E. CAPUANO, Massachusetts
KAY GRANGER, Texas                   MICHAEL M. HONDA, California
EDWARD SCHROCK, Virginia             JOSEPH M. HOEFFEL III, 
JOHN CULBERSON, Texas                    Pennsylvania
HENRY E. BROWN, Jr., South Carolina  RUSH D. HOLT, New Jersey
ANDER CRENSHAW, Florida              JIM MATHESON, Utah
ADAM PUTNAM, Florida
MARK KIRK, Illinois
[Vacancy]

                           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, April 25, 2002...................     1
Statement of:
    Thomas J. Donohue, president and CEO, U.S. Chamber of 
      Commerce and chairman, Americans for Transportation 
      Mobility...................................................     5
    Hon. Bill Frenzel, co-chairman, the Committee for a 
      Responsible Federal Budget and former ranking member, House 
      Budget Committee...........................................    23
    Barry B. Anderson, Deputy Director, Congressional Budget 
      Office.....................................................    31
    Richard Kogan, senior fellow, Center on Budget and Policy 
      Priorities.................................................    34
    Susan J. Irving, Director for Federal Budget Analysis, U.S. 
      General Accounting Office..................................    43
Prepared statement of:
    Mr. Donohue..................................................     7
    Mr. Frenzel..................................................    25
    Mr. Anderson.................................................    32
    Mr. Kogan....................................................    41
    Dr. Irving...................................................    46

 
                      PREDICTABILITY AND CONTROL:
                       TWIN REASONS FOR RESTORING
                           BUDGET DISCIPLINES

                              ----------                              


                        THURSDAY, APRIL 25, 2002

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 9:10 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Moore, Spratt, 
Collins, Brown, Putnam, Gutknecht, Culberson, and Hilleary.
    Chairman Nussle. Good morning, we were just joking a little 
bit. There are quite a few of us in the room here, and this is 
probably one of the most exciting topics, and the most 
important topic of the day.
    Yet, there are not too many television cameras or too many 
people looking around to find out how you enforce the budget. 
This is probably one of the least glamorous topics on Capitol 
Hill these days, but probably one of the most important that we 
can discuss.
    Today's full committee hearing is called ``Predictability 
and Control: Twin Reasons for Restoring Budget Disciplines.'' 
We have an excellent panel of witnesses to talk to us today, 
and this hearing is probably on the easily overlooked and yet 
very important issue of extending discretionary spending and 
other budgetary controls.
    For the first time in 17 years in Congress, the Congress is 
facing the prospect of entering a budget cycle without a 
conference report on a budget resolution or any other kind of 
control on discretionary spending.
    To date, the Senate majority leader has given no firm 
commitment that the Senate will consider a budget resolution, 
even though Congress was required to do so by April 15, and the 
House passed its resolution now, I believe, a month ago today.
    This comes at a time when we all should be, I believe, much 
more concerned, and I know this committee is much concerned 
about its fiscal health; not less concerned. We are faced with 
the triple threat of a domestic emergency, a war against 
terrorism, and a still weakened economy.
    Our surpluses have largely disappeared for the short term, 
and if we are going to re-invigorate our economy, it is 
imperative that we take steps to control spending, to ensure 
that resources intended for waging the war on terrorism and 
defending the homeland are not diverted to less critical needs.
    The first test will come when the House takes up the 
supplemental appropriations requested by the President. In the 
view of the amount of resources we, by necessity, have had to 
devote to the war on terrorism and homeland defense, I believe 
it is important to ensure that Congress stay within the overall 
discretionary levels recommended by the President.
    Let me be even clearer on this. The President has requested 
$27.1 billion of emergency spending for homeland defense, and 
for the war on terrorism. He has declared that this is an 
emergency. It is an emergency. It fits the definition that all 
of us in a bipartisan way, I would suggest, could defend and 
define emergencies.
    But it should not be one penny more than that. I heard, as 
we probably all have heard, over the last 24 or 48 hours, about 
the Appropriations Committee, with their bid of $39 billion as 
their opening bid to this emergency supplemental.
    Let me be very clear: That will not fly. That dog will not 
hunt, as far as the Budget Committee is concerned, if I have 
anything to do with it. It should be not one penny more than 
the President requested as an emergency.
    The President should make the determination at this time of 
emergency what an emergency is, and that message should be 
delivered both to the Appropriations Committee and to our 
leadership.
    The inability of the Senate to consider a budget resolution 
makes the subject of extending the caps in PAYGO all the more 
important. The appropriation caps in PAYGO were initially 
adopted in 1990, and were extended again in 1993 and 1997.
    Last year, on a bipartisan basis, the committee reported 
legislation to revise the caps for the current year to, among 
other things, respond to the events of 9/11. At the end of the 
fiscal year, the caps will expire.
    Without a budget resolution in place, the Congress will 
have little ability to control spending, unless we adhere to 
the House-passed level of spending and the revenue levels, and 
extend the discretionary spending limits.
    On this point, again, I would like to be perfectly clear. 
The House must agree to adhere to the levels in the House-
passed budget resolution, and to extend the caps before it 
considers any regular appropriation bill.
    Additionally, we must revise the highway cap to forestall a 
sharp reduction in highway spending as a matter of critical 
importance, both to the States and to our economy, as a whole.
    Under the terms of the Transportation Equity Act of 1998, 
which tied transportation spending to receipts in the Highway 
Trust Fund, the administration is required to reduce the 
highway obligation limitation and the highway outlay limits.
    It is now clear that the States cannot sustain this 
reduction. To that end, the House-passed budget resolution took 
steps to restore more than $1 billion in outlays to the highway 
category.
    If we are to forestall these cut-backs, however, it is 
imperative that we also revise the highway cap and the way in 
which the cap is annually adjusted to reflect revenue flowing 
to the Highway Trust Fund.
    The appropriators introduced legislation in their attempt 
to ``fix'' this solution or this particular predicament. I 
would suggest it is a half solution that fixes the problem 
possibly for 2003, but it leaves undone the challenge in the 
out-years.
    So I should inform my colleagues that next week, I intend 
to introduce legislation that will extend both the 
appropriation caps and address the shortfall in the Highway 
Trust Fund. I would enjoy working with any Members who would be 
interested in continuing this in a bipartisan way.
    Today, we have got two great panels of witnesses. On our 
first panel, we are very pleased to hear from Tom Donohue, the 
President of the Chamber of Commerce, as well as former Member, 
Bill Frenzel, who is the co-director of the Committee for 
Responsible Federal Government.
    I am very pleased that Mr. Donohue is available to give us 
perspective from the business community on extending the caps. 
It is, of course, always a pleasure to hear from our former 
colleague, Bill Frenzel.
    On our second panel, we will be pleased to hear from Susan 
Irving, the Director of the Federal Budget Analysis of the GAO, 
the Government Accounting Office; Barry Anderson, the Deputy 
Director for the Congressional Budget Office; and our own 
Richard Kogan, who served on the Budget Committee staff for 
many years, and is the patron saint--you might say--of Budget 
Enforcement Act endeavors, or at least some might call him 
that. [Laughter].
    Well, I just called you that. I guess that is good enough.
    These witnesses are not only equipped to discuss the 
broader issues surrounding the extension of the caps in PAYGO, 
but also to advise us on what other controls might be designed 
to meet the fiscal needs of our country.
    So we are pleased to have this hearing. Again, as I said, 
it may not be the most glamorous in town, but it will have 
direct impact on the fiscal success of this year.
    With that, I would turn to my friend, Mr. Spratt, for any 
opening comments that he would like to make.
    Mr. Spratt. Quickly, Mr. Chairman, we did not come to an 
agreement on a budget resolution, at least not yet; but I think 
there is agreement that we need a budget process. We are 
witnessing the slow death of the budget process as we have 
known it for the last 30 years and, in particular, for the last 
dozen years.
    The budget process has a kind of a policy wonk reputation. 
A lot of people inside and outside the Congress disdain it, and 
for good reason. It is often honored in the breach. But it has 
served us well since 1990, when we met finally at a Budget 
Summit, which we had called for repeatedly with President Bush.
    We not only came up with a budget plan that was a 5-year 
plan, but we came up with budget rules to enforce that plan. We 
got away from projections of a deficit, which were our target, 
and we put real caps on discretionary spending, and we put a 
restraint on tax cuts and entitlements, too, called the PAYGO 
rule, which we observed.
    It was not a neat process. It was not, as I like to say, 
``Euclidian geometry.'' But nevertheless, we basically agreed 
with this process. We fudged on it, but throughout the 1990s, 
in 1990, in 1993, and 1997, when we came back to the budget 
agreement and laid down another 5-year plan, we always, always 
backed it up with budget process rules.
    This year, we are about to see those rules expire. The 
PAYGO rule will expire. The discretionary spending caps, may be 
for 1 year, but certainly not for 5 or 10 years, will be a 
thing of the past.
    That is not only sad to see, but it is very worrisome for 
those of us who are deeply concerned about the projection of 
the budget, as it stands today.
    I do not see how we get back to the surpluses we were 
enjoying without some discipline in the process, some starch in 
the process, and some budget rules that are adhered to.
    Let me say that I would agree with you, we have got to have 
some restraint, not just on the regular budget process, but on 
the supplementals, too. Otherwise, they will flout and make a 
mockery of the regular budget process, winking and knowing that 
they can always ask for this now and get more later. It is 
critically important that we have some restraint on the 
supplemental process, as well.
    But let us not forget that the bottom line is affected by 
tax cuts, as well as spending increases. Last week, we had a 
$400 billion to $500 billion tax cut provision on the floor, 
which was not provided for in the Budget Resolution, and which 
required a waiver of the PAYGO rule.
    The PAYGO rule is meaningless, if you can simply, ``willy-
nilly,'' waive it for a piece of legislation of that magnitude.
    So I am pleased to see this hearing, pleased to see our 
witnesses. I know they will bring different points of view, but 
we need all the points of view on the table, and I hope that we 
can come to some resolution and renew the budget process for 
the future, before this fiscal year is out.
    Thank you, Mr. Chairman.
    Chairman Nussle. Thank you, Mr. Spratt.
    Without objection, members will have 7 days to submit 
written statements for the record.
    At this point, Mr. Donohue, welcome home. We were visiting 
before the hearing, and you said that you just came back from 
Russia. In fact, my understanding is that you just flew in 
yesterday and last night.
    The fact that you are here today to talk about this not 
only demonstrates your deep interest in the subject, but also 
your personal physical fortitude, to put up with the time 
changes, and everything else that needs to be done, to be here.
    So we are honored that you are here to talk to us today, 
and we are pleased to receive your testimony at this time.

STATEMENT OF THOMAS J. DONOHUE, PRESIDENT AND CEO, U.S. CHAMBER 
    OF COMMERCE AND CHAIRMAN, AMERICANS FOR TRANSPORTATION 
     MOBILITY; BILL FRENZEL, CO-CHAIRMAN, COMMITTEE FOR A 
  RESPONSIBLE FEDERAL BUDGET AND FORMER RANKING MEMBER, HOUSE 
                        BUDGET COMMITTEE

                 STATEMENT OF THOMAS J. DONOHUE

    Mr. Donohue. Well, thank you very much, Mr. Chairman and 
members of the committee. It is a pleasure to be home. It was 
an extraordinary experience to be there. I was in Russia 3 
years ago, and the changes that are taking place are mind 
boggling, and perhaps another time we could talk about that.
    I am here today on behalf of the Chamber of Commerce of the 
United States, and I also here as Chairman of Americans for 
Transportation Mobility, a coalition of business groups and 
labor organizations in support of continued investment in the 
Nation's transportation infrastructure, using dollars paid for 
by the citizens that use the transportation network.
    This morning, I would like to stress the importance of 
fiscal responsibility, and offer ideas on how we can achieve 
it.
    The U.S. Chamber has long supported the controls on 
government spending, and the processes that both the chairman 
and the ranking member just commented on.
    Unforeseen events, however, have made that challenge more 
difficult than ever before. Our Nation must spend valuable 
resources to fight global terrorism and bolster homeland 
security, so that our borders, public buildings, transportation 
and infrastructure are safe and sound.
    No one would argue against increased government spending 
for these purposes, nor would our citizens, and certainly not 
the Chamber of Commerce.
    But that means that it is absolutely essential to keep 
discretionary spending in check. The current growth in spending 
simply cannot be sustained without running up deficits and 
damaging our Nation's future in the out years.
    In this environment, it is increasingly important for 
government to enact policies that will spur long-term 
sustainable economic growth which, in turn, will significantly 
boost government revenues, and put us back on the path toward a 
balanced budget.
    The Chamber believes that several pieces of legislation 
pending before the Congress are critical to long-term growth 
and fiscal responsibility, and I would like just to mention 
them:
    A comprehensive energy policy that will ensure a reliable 
and affordable supply of energy, create thousands of new jobs, 
and make us less dependent on unstable and unfriendly countries 
for our oil is essential.
    Trade promotion authority for the President, so that he is 
able to make deals with our trading partners, create untold 
numbers of new jobs and opportunities for American workers is 
essential.
    Making last year's tax cut permanent, which will encourage 
continued savings, investment, and consumption would be 
helpful. Finally, we need continuous, predictable investment in 
our transportation infrastructure, so that it is safer, more 
efficient, and reliable.
    I would like to focus on that, although I would be glad to 
enter the other subjects and the questions. It is related, 
transportation, clearly to the Budget Committee's problems. It 
might be worthwhile to spend just a moment describing our 
needs.
    Right now, our transportation system is ill-prepared to 
handle higher and higher volumes of freight and people. Air 
cargo volumes are expected to triple by 2015, and passenger 
traffic is expected to increase by 50 percent over the same 
time.
    Yet, new airport and runway projects never get off the 
ground due to lack of funds, or because they are buried under 
an avalanche of bureaucratic red tape.
    Our Nation's highway system is facing a similar capacity 
crisis. In just 25 years, from 1970 to 1995, passenger travel 
in the U.S. nearly doubled. But improvements in expansion of 
highway systems are not keeping up.
    Since 1970, vehicle miles traveled in this country have 
gone up 123 percent, while road capacity has increased a 
massive 5 percent.
    Our system of channels, ports, and marine terminals is no 
better off. Every major U.S. container port will experience a 
doubling or tripling of container volume by 2020; but as of 
right now, many are not even equipped to handle these new mega-
ships that are carrying the containers.
    Modernization of our transportation infrastructure meets 
several needs, chief amongst them for your consideration is 
economic growth. Each billion dollars spent on the construction 
and maintenance of the Nation's transportation infrastructure 
creates approximately 42,000 jobs.
    In addition, every $1 billion invested in transportation 
infrastructure creates more than $2 million in economic 
activity. Improvements to the system also improve the Nation's 
air quality by cutting down on highway congestion that causes 
millions of gallons of unnecessary gasoline consumption, as 
well.
    Finally, the importance of a robust transportation system 
to national security can never be emphasized enough. Outfitting 
the Nation's border crossing points, airports, railways, and 
seaports with top-of-the-line technology is critical to our 
Nation's safety and well being.
    Given the tremendous long-term economic, environmental, and 
security benefits of a modernized transportation system, the 
Chamber strongly believes that the government should invest the 
maximum sustainable amount into the transportation trust funds.
    We also need to look at creative ways to grow the 
infrastructure investment. There may be valid political and 
environmental reasons, for example, for using ethanol in 
gasoline, but doing so without taxing ethanol at the same rate 
as gasoline, and without transferring these revenues to the 
Highway Trust Fund will make it impossible to maintain, let 
alone modernize, our infrastructure in the years ahead.
    Some will continue to say this statement is contradictory 
to the Chamber's desire for fiscal responsibility; but the two 
are not mutually exclusive. As I hope I have made clear today, 
the additional revenues and savings reaped from the 
transportation investment will help regain fiscal discipline 
and lead us back to a balanced budget. I will be finished in 
just a second.
    So we ask this committee to reauthorize the Budget 
Enforcement Act and the TEA-21, and to protect the important 
transportation funding mechanisms contained in them. These 
mechanisms will maintain minimum funding levels in the Surface 
Transportation Trust Fund, while guaranteeing that all of those 
revenues are spent for their intended purpose of highway and 
transit investment.
    We ask the committee to continue to work with the House 
Transportation and Infrastructure Committee to restore a 
portion of the $8.6 billion reduction in the Highway Funding 
Program for fiscal year 2003.
    This shortfall was clearly not envisioned by anyone, and 
clearly was not the intent of Congress, upon enacting the 
formula in 1998.
    If this reduction is allowed to stand, 350,000 Americans 
will lose their jobs, and dozens of States will freeze or 
cancel road construction projects.
    Mr. Chairman, we appreciate your leadership and that of the 
other members of this committee on this issue. We look forward 
to working with both you and the leadership in the House and 
the Senate, to come to some reasonable conclusion.
    Mr. Chairman, the United States Chamber of Commerce and the 
ATM Coalition strongly believe in fiscal responsibility. We 
believe that long-term, sustainable economic growth is the best 
and surest way to get there.
    To trigger that kind of growth, government has to make wise 
investment choices; and as the old saying goes, ``You have to 
spend money to make money.'' Investment in our highways, 
airports, seaports, and waterways will get us there.
    I very much appreciate the opportunity to be here, and I 
look forward to answering your questions.
    [The prepared statement of Mr. Donohue follows:]

  Prepared Statement of Thomas J. Donohue, President and CEO, United 
                       States Chamber of Commerce

    Mr. Chairman, Ranking Member Spratt, members of the committee, 
thank you for allowing me to appear before the committee to discuss the 
importance of fiscal responsibility and maintaining guaranteed funding 
protections for Federal highway and mass transit programs. I am Thomas 
J. Donohue, President and CEO at the United States Chamber of Commerce, 
which is the world's largest business federation. I also appear before 
you as the chairman of the broad-based Americans for Transportation 
Mobility (ATM) coalition. My testimony will address the importance of 
reauthorizing the Budget Enforcement Act of 1990 (BEA) [P.L. 101-508], 
with particular emphasis on the guaranteed spending categories added to 
the BEA with enactment of the Transportation Equity Act for the 21st 
Century (TEA-21) [P.L. 105-178] in 1998 that provides predictability 
and control to investment from a dedicated Highway Trust Fund.
                 americans for transportation mobility
    Last summer, the U.S. Chamber helped launch a new coalition called 
Americans for Transportation Mobility, or ATM. ATM is a broad-based 
organization of transportation users and providers, State and local 
organizations, and State and local government officials. The coalition 
has more than 300 organizations presently, and we hope to increase that 
figure significantly in the coming months.
    The coalition's objective is simple: to build public and political 
support for a safer and more efficient transportation system. We hope 
to achieve our objective through a two-pronged attack: 1) fighting to 
ensure that Congress fully dedicates Federal transportation trust fund 
revenues for their intended purpose, and 2) accelerate the project 
review process by removing redundancies. All the money in the world 
will not help if we are not efficient in the planning and approval for 
much-needed improvement projects.
    The coalition is bringing together for the first time the business 
and labor communities in educating lawmakers on the importance of 
improved mobility and safety to future economic growth. Six major labor 
organizations are members of the coalition as well, with Laborers 
International Union of North America General President Terry O'Sullivan 
serving as a vice chairman. They serve on the front lines in the 
building and maintaining of the Nation's transportation infrastructure 
and are welcome partners in ensuring a national transportation system 
that provides the mobility our country demands.

           BUDGET ENFORCEMENT ACT AND TRANSPORTATION FUNDING

    The BEA expires at the end of fiscal year 2002 (September 30, 
2002). The BEA has provided the basic enforcement framework for 
budgetary matters. This framework has provided fixed domestic caps in 
Federal Government spending along with procedures for controlling 
deficits. The BEA established statutory limits on discretionary 
spending and a pay-as-you-go (PAYGO) requirement [only spending 
revenues collected] for new mandatory spending and revenue laws.
    In Title VIII of TEA-21, new discretionary spending categories were 
formed to create firewalls for highway and transit spending. These 
firewalls guarantee that all revenues paid into the Highway Trust Fund 
(HTF) must be spent for their intended purpose of highway and transit 
investment. Previously, the highway and transit discretionary programs 
competed for annual budgetary resources with most other domestic 
programs. The firewalls created a ``floor'' for highway and transit 
spending over the fiscal year 1998-2003 period of $162 billion for 
highways and $36 billion for transit programs.
    The U.S. Chamber and many members of the ATM coalition, strongly 
supported the effort to bring ``truth in budgeting'' to the Highway 
Trust Fund. Before the enactment of TEA-21, the HTF had a balance of 
$28 billion. This surplus was used to mask the overall budget picture. 
With enactment of the TEA-21 budget firewalls, the Federal Government 
could no longer run up surpluses in the HTF and for the first time 
ensured that all dedicated taxpayer revenue paid into the HTF is used 
for much needed highway and transit maintenance and improvement.
    The domestic discretionary caps were raised by TEA-21 to 
accommodate the increased transportation spending. Although the overall 
discretionary spending caps expired last fall, the Highway and Transit 
outlay caps established under TEA-21 continue through 2003.
    The creation of the highway and transit categories, combined with 
BEA provisions that prevent Congress from moving funds from one budget 
category to another, has been the main mechanism for assuring under 
TEA-21, that all user fee revenues into the Highway Trust Fund are used 
solely to finance Federal investments in highways and mass transit. 
Without the separate budget categories, there would have been no 
limitation on the incentive for the Federal Government to cut highway 
and mass transit funding below the TEA-21 guarantee and use the savings 
for other programs. This means there is no incentive for the TEA-21 
highway and mass transit investment levels to be underfunded, because 
those funds by law cannot be used for any other purpose. 
Reauthorization of the BEA must retain the separate highway and transit 
budget categories to ensure the continued guaranteed investment in our 
Nation's transportation system.

                    REVENUE ALIGNED BUDGET AUTHORITY

    The enactment of TEA-21 also created a funding mechanism [Revenue 
Aligned Budget Authority (RABA)] to ensure that Federal highway 
spending was linked to revenues paid into the HTF. This mechanism, 
beginning in fiscal year 2000, has used projections of Highway Account 
receipts into the HTF to adjust highway spending to the amount 
estimated to be collected. The Transit Account of the HTF is not 
included in the RABA calculations.
    The RABA mechanism was created to ensure that all revenues paid 
into the HTF were utilized as they were being collected for needed 
transportation investment. Since fiscal year 2000, this mechanism has 
generated an additional $9 billion in highway spending over the 
guaranteed minimum amount in TEA-21. These additional funds have 
allowed States like Iowa and South Carolina to move forward with much 
needed surface transportation projects.
    With vehicle miles traveled (VMT) continuing to rise every year, it 
came as quite a jolt to the business and transportation community that 
the RABA formula called for an $8.6 billion reduction in the Federal 
highway program for fiscal year 2003. When the formula was created, it 
was not believed that revenues into the HTF would ever experience such 
a drastic reduction. According to the Treasury Department, the $8.6 
billion reduction figure came from two calculations of the formula. 
First, according to the ``lookback'' component of the calculation, it 
was estimated that revenues from fiscal year 2001 were actually $4.369 
less than the amount estimated to be collected. The second component, 
the ``look forward'' provision, was also reduced by over $4.2 billion.
    While the intent of Congress when enacting the RABA formula was to 
ensure full funding of the highway program, the effect of the formula 
in fiscal year 2003 to reduce program spending was not an intended 
consequence and must be adjusted when TEA-21 is reauthorized next year 
and incorporated into the BEA reauthorization.

                         OTHER TECHNICAL ISSUES

    When Congress reauthorizes the BEA and TEA-21, two technical issues 
should be addressed:

                     BALANCED BUDGET ACT ADJUSTMENT

    The Balanced Budget Act should adjust the highway category in 
section 251(b) to reflect the fiscal year 2003 budget resolution by not 
less than $4.369 billion. The reason this needs to be done is that even 
though the budget resolution provides room to add back $4.4 billion for 
highways, the highway guarantee is still only $23.2 billion absent a 
change in the Balanced Budget Act. While the Appropriations Committee 
has received an additional $4.4 billion via the budget resolution, 
there is no requirement that it be used for the highway program or 
distributed according to the highway program formulas. Revising the 
highway category to reflect the budget resolution clarifies the intent 
of the House to distribute the additional funding to each State via the 
Federal funding formula.

              IMPACT OF HIGHWAY PROGRAM FUNDING TRANSFERS

    Occasionally, the President or Congress will propose to move some 
core highway program funds to another program within the highway budget 
category, such as the National Highway Traffic Safety Administration 
(NHTSA) or the Federal Motor Carrier Safety Administration. Programs in 
these areas have a faster spendout rate than the core highway program, 
meaning higher outlays during the budget year. Section 251(b) of the 
Budget Act, however, puts a strict limit on total highway budget 
category outlays for each fiscal year. To prevent the fund transfer 
from increasing outlays, section 251(b) requires that the highway 
obligation limitation be reduced to offset the increase. This offset 
can be significantly larger than the proposed fund transfer, thus 
cutting highway investment even more.
    The following example should explain the problem: Let's say 
Congress wants to take $100 million from the core highway program, 
which spends out over 7 years, and give it to NHTSA for a safety 
education program that spends out immediately. According to the highway 
program spend-out formula, $100 million for highways in a fiscal year 
results in $27 million of outlays during that fiscal year. But $100 
million for NHTSA results in $100 million of outlays, an increase of 
$73 million. Section 251(b) requires that highway funding be reduced 
enough to offset the additional $73 million of outlays. Since it takes 
a $100-million cut in highway funding to reduce outlays $27 million, a 
$73 million cut in outlays would require a $270 million cut in highway 
funding. The net cost to the highway program of a $100 million transfer 
to NHTSA would thus be $370 million--the initial $100 million transfer 
plus the $270 million needed to offset the increased outlays. The $100 
million gets spent by NHTSA and presumably accomplishes something, but 
the $270 million simply vanishes and is thus a cost to the highway 
program with no benefit to anyone.
    While this is just an example, it is important to note that budgets 
submitted by the Clinton administration as well as the fiscal year 2003 
budget submitted by the Bush administration included fund transfer 
proposals that involved precisely this kind of problem.
    If Congress wants to use core highway funds for something else, it 
should not result in an unnecessary multiple cut in highway investment. 
The relevant provisions of section 251(b) need to be revised so that 
any loss is at most dollar-for-dollar.

                    HIGHWAY FUNDING RESTORATION ACT

    Faced with a possible $8.6 billion shortfall in fiscal year 2003 
highway funding, the bipartisan, bicameral leadership of the House 
Transportation and Infrastructure Committee and the Senate Environment 
and Public Works Committee introduced the Highway Funding Restoration 
Act (H.R. 3694/S. 1917). The legislation would at a minimum restore 
$4.4 billion of the $8.6 billion reduction for fiscal year 2003. This 
restoration would bring Federal highway funding to the minimum level 
authorized in TEA-21 ($27.7 billion). With a balance in the HTF of over 
$20 billion, there has been overwhelming support in Congress to address 
the fiscal year 2003 funding shortfall with 315 House Members and 71 
Senate members co-sponsoring the legislation.
    What would happen if the $8.6 billion reduction took place? Studies 
that link spending to jobs suggest the loss of up to 350,000 jobs for 
starters. These jobs are held by hard working men and woman who could 
ill afford to lose their job as our country is recovering from an 
economic slowdown. How about the impact on State highway projects? 
Several States have already frozen new projects until the Federal 
funding situation is clarified. In Iowa, an $8.6 billion reduction 
would delay approximately $50-$60 million in State highway and bridge 
projects in fiscal year 2003. South Carolina would be forced to delay 
$25 million in pavement and reconstruction contracts, $22 million in 
Interstate highway upgrades and $15 million in safety upgrades. A 
significant reduction in Federal funding would put a great strain on 
State resources during a time when State tax revenues are declining.
    Special thanks goes to you, Mr. Chairman, for understanding the 
negative consequences of inaction and including the intent of H.R. 3694 
in the House Budget Resolution. While the Senate Budget Committee 
approved a higher highway number ($5.7 billion restored), we look 
forward to working with both the House and Senate leadership to restore 
highway funding to the maximum sustainable amount. On March 20, the 
Congressional Budget Office (CBO) announced that the HTF could sustain 
spending for the highway program at a $30.1 billion level. We will 
continue to work with this committee, the Transportation and 
Infrastructure Committee, the Appropriations Committee and your 
counterparts in the Senate during the budget process to ensure the 
intent of TEA-21 to invest all HTF revenues collected for its intended 
purpose of surface transportation investment.

       THE IMPORTANCE OF TRANSPORTATION INFRASTRUCTURE INVESTMENT

    While this committee spends much of its time reviewing the 
mechanics of the Federal budget process, I would like to take a minute 
to explain the importance of investment in our Nation's transportation 
system.
    Our Nation's transportation system is the lifeblood of our Nation's 
economy. It provides the mobility to move people and freight better 
than any country in the world. Unfortunately, our transportation 
infrastructure system is ill-prepared to handle higher and higher 
volumes of freight and people. Only two major hub airports have been 
built in the United States in the past 25 years, and new runway 
projects like the one in San Francisco can take as long as 15 years to 
build. Unless something happens soon, our aviation system will be 
virtually grounded by an expected tripling of air cargo volume by 2015, 
and a 50-percent increase in passenger traffic during that same period.
    On our Nation's highway system, a similar crisis is facing it. In 
just a 25 year span--1970 to 1995--highway passenger travel in the U.S. 
nearly doubled. But improvements to and expansion of our highway system 
are not keeping up. Since 1970, vehicle miles traveled have soared 123 
percent while road capacity has increased just 5 percent.
    The U.S. Marine Transportation System, which is 25,000 miles of 
navigable channels, 300 ports and nearly 4,000 marine terminals, 
annually moves more than a billion tons of domestic and international 
freight. At the current rate, every major U.S. container port will 
experience a doubling or tripling of container volume by 2020, but as 
of right now, many aren't even equipped to handle the new mega 
container ships.
    There are many consequences of a subpar system: congestion, 
decreased productivity, more accidents and diminished global 
competitiveness. The cost of road congestion to the U.S. economy was 
nearly $78 billion in 1999; more than triple what it was 20 years ago! 
Billions and billions more are lost to companies when their products 
don't reach their destinations on time.
    Our ports simply don't compete on an international level. When you 
compare our seaports with some of those in Asia, you'll have difficulty 
figuring out which ones belong to the most advanced nation in the 
world, and which belong to a developing country. Failure to modernize 
seaports has increased costs for shippers, carriers, and ultimately, 
consumers, and threatens our status as the world's strongest trading 
partner.

            FUNDING REQUIREMENTS FOR SURFACE TRANSPORTATION

    U.S. Department of Transportation (DOT) data show that a minimum 
$50 billion per year Federal investment in highway improvements is 
necessary to simply maintain the current physical conditions and system 
performance of the Nation's highway and bridge network. To actually 
produce improvements, DOT reports that a $65 billion per year Federal 
investment is needed. On the transit side, DOT estimates that $17 
billion in capital investment is needed annually just to maintain and 
improve current public transportation services.
    To meet these current challenges, we must invest our limited 
resources in a better, more efficient manner. We must look at 
innovative financing and public-private partnerships to supplement the 
Federal user fee system. That is why it is of critical importance to 
ensure the investment of all HTF revenues into much needed surface 
transportation programs.

                               CONCLUSION

    In conclusion, Mr. Chairman, the U.S. Chamber of Commerce and the 
ATM coalition believe that the Federal Government should operate with 
the fiscal controls that BEA reauthorization would bring. The BEA has 
proven to be an effective means of controlling government spending.
    The funding of transportation projects requires long-term, 
predictable funding. Without a timely reauthorization of the BEA and 
TEA-21, the Federal surface transportation program will experience an 
uncertainty that will curtail the ability of State DOT's to finance, 
design, and execute multi-year, multi-million dollar construction 
projects. The transportation trust funds are inherently fiscally 
responsible due to their self-financing through revenues generated 
solely by users of these networks.
    The impact of doing nothing will be increased congestion, decreased 
safety on our roads, and setbacks in our ability to improve air 
quality. The U.S. Chamber and the members of the ATM coalition look 
forward to working with Congress and the President to bring 
predictability and control to the Federal budget process that will 
bring about continued, predictable investment in our Nation's 
transportation system. Investment in our national transportation system 
will ensure we remain a leader in the global marketplace and should 
remain a priority during the budget process.
    Thank you, and I am happy to answer your questions.

    Chairman Nussle. Thank you very much for your testimony. 
Let me go back, first and foremost, to the issue of restraint 
and fiscal responsibility.
    There are those who would say that reimposing caps on 
spending, as an example, extending, as you and I both are 
interested in doing, is inside baseball; it is politics; it is 
government.
    How do you connect this with some of your members in the 
business community? How do you make this make sense to them out 
there, so that they are paying attention to what we are doing 
here with regard to budget enforcement?
    Mr. Donohue. Well, Mr. Chairman, you might be surprised to 
learn that at our last board meeting, in my comment to the 
Chambers' Board, I vigorously supported the expenditures for 
national defense and homeland security.
    I told our members that if we wanted ever to keep our 
commitment about reducing government spending or controlling 
government spending, that we had to avoid lining up for a free 
lunch on these new dollars; and that those monies should go to 
the essential matters of national defense and home security.
    We heard that the Appropriations Committee has a much 
larger number. A lot of that are things that maybe we do not 
need.
    You cannot run this committee, and you cannot control the 
Federal spending of this country, without a process that gives 
the Members of the Congress and the Senate some place to go.
    The gentlemen and ladies in these bodies listen every day 
to constituents that want more money for something. The budget 
discipline that has been in place, for the most part, as a part 
of the processes that we have been following, is clearly a way 
to get there, and one of the important steps in protecting the 
members from the ever-demanding increase in support from 
constituent bodies.
    I think it is absolutely essential that we have a budget 
process here that is the same that we have in our homes and the 
same that we have in our businesses, that says we can go about 
as far as we can go; and then we cannot go any further without 
additional revenues or without additional changes in the way we 
do business.
    I absolutely support a process that gives you, the 
Congress, and the American people a discipline in the behavior 
of the Federal budget.
    Chairman Nussle. Let me make sure I am not missing your 
point, too. Because you, on the one hand say, fiscal 
responsibility; and then in the last paragraph, you said that 
you have to spend money to make money.
    Some might suggest, well, wait a minute, that is what we 
are doing. We are spending money to make money. We are spending 
money as an investment, you know, in government expenditure, 
and priority is always in the eye of the beholder.
    We have probably seen the best example of that when it 
comes to homeland security. I had a Member joke with me but, 
you know, I do not think maybe they were that far off, when 
they were suggesting to me that you could even make an argument 
that dairy supports somehow were important for homeland 
defense, because it created strong bones, and our military 
fighting men and women needed strong bones. Therefore, let us 
not let the bastards win; let us support dairy supports, 
because that is for homeland security.
    Now, you know, I think a lot of people could make the 
argument about investment. I just want to make sure that they 
are not competing, or that they are not contradictory, when you 
say we have to invest in transportation; and yet, we have to 
have constraint.
    Mr. Donohue. Well, I think there are a number of 
fundamental issues here. First of all, as I said, I told our 
own board we are not going to add all those things under my 
leadership. We are not going to support those additions that 
have no real relationship to home security.
    What I am talking about, the transportation investments, I 
want to remind you of the difference. For the most part, these 
monies come from trust funds that are paid by people that ride 
on airplanes, that drive in cars, and operate trucks around 
this country, or buy trucks.
    By the way, one of the reasons you had a major shortfall is 
when the economy went in the can, you know, I used to run the 
Trucking Association. They know how to hunker down. Those guys 
can live in a drought, and they did not spend that money, and 
there is $19 billion or $20 billion in the Transportation Trust 
Fund right now, the Highway Trust Fund.
    What I am saying is that we need to continue to spend the 
highway money and the airport money, which is collected for a 
special purpose, held for that purpose, and available for that 
purpose.
    Those investments will return significant economic well 
being to this country by creating jobs, reducing accidents and 
fatalities, improving productivity, reducing the extraordinary 
cost of sitting in congestion.
    The Congress was very, very strong in moving forward to put 
these funds aside, and to spend them as best they could to keep 
the infrastructure improving at a rate somewhere near the 
economic and mobility growth demands that face us in this 
country.
    I am very clear on what I'm saying, although I maybe did 
not say it right the first time. That is, these are funds that 
have been set aside. Nobody expected this shortfall that came 
because of three issues.
    It came because of the extraordinary economic slow down; it 
came because of the result from people not traveling as much; 
and it came because of 9/11, when everybody shut off the key, 
and stopped moving and stopped traveling for a period of time.
    So you have a problem of a claw-back that says, ``hey we 
did not take in as much money'' and a claw-forward that says, 
``therefore, we have got to double that up and we cannot spend 
it next time.''
    Well, what I am saying is, that money is available, without 
going to get some other money. There is a surplus in the 
Transportation Trust Funds.
    I vigorously support this committee's difficult job to 
reign in spending. Much of that spending may be desired by some 
of my constituents. To limit extraordinary spending to the 
fight against terrorism and the protection of this Nation, you 
will have our support on that.
    Chairman Nussle. Well, let me tell you that I think our 
first test is coming within minutes, hours, and certainly no 
more than days, with regard to the emergency supplemental.
    The President requested $27.1 billion. The opening bid from 
the Appropriations Committee was $39 billion. They are now 
saying, well, no, it is probably closer to $33 billion.
    The point is that it is more than the President requested, 
and more than what the President designated as an emergency. I 
will just predict, we may lose. You and I may fight this 
battle, and there may be others who join with us, and we may 
lose. But if we do, Katie bar the door.
    There is nothing to stop the rest of the appropriation 
process from completely imploding or exploding if we do not 
stand our ground now with this emergency supplemental and say, 
not a penny more than what is designated as an emergency for 
homeland security and for national defense at this moment of 
dire emergency, and not a penny more than that, than has been 
requested by the President.
    I appreciate your help in that, and your communication with 
your members. Because as I say, if we do not do it now, the 
line will be crossed, and there will be absolutely no way to 
pull that back, given the fact that we have all of these 
provisions expiring this year, and no more budget fences that 
have been erected in the meantime. So I appreciate your help in 
that endeavor.
    Mr. Donohue. Thank you.
    Chairman Nussle. Mr. Spratt.
    Mr. Spratt. Mr. Donohue, you make a fairly radical 
statement for the Chamber of Commerce to a government 
committee: you have to spend money to make money.
    The clear thrust of your testimony is that infrastructure 
investments pay off, at least for now. We have got such a vast 
backlog and demand for infrastructure needs that wise 
infrastructure investments and additional investment in 
infrastructure will more than pay, in terms of its rate of 
return for the investment.
    In light of that, would you recommend or seek additional 
gasoline taxes, in order to fund additional infrastructure?
    Mr. Donohue. Sir, I thought that question might come up.
    Mr. Spratt. That is not a trick question.
    Mr. Donohue. I know it is not a trick question. It is one I 
have dealt with, with this coalition that we run.
    Let me give you my thoughts on this subject. First of all, 
I would not recommend an increase in taxes while we are 
struggling to get out of a recession. By the way, I am deeply 
concerned. You know, we are going to have maybe 5 percent 
economic growth in the first quarter, and then it is going to 
go down to three or maybe two.
    But I am deeply concerned, and I am on four public company 
boards, that companies now are holding their cash. With 11 
committees of the Congress investigating, appropriately, the 
events around Enron and Andersen, and with the SEC, and with 
everybody now, all over the country and States looking into 
this, what is going on in corporate boardrooms, the people are 
saying, ``let us hold our money.''
    We are going to change a lot of our accounting systems, you 
know, which are dictated to corporations. We have got insurance 
issues that are changing fundamentally, because of terrorism. 
We have a lot of questions here. So they are saying, let us 
hold our money.
    That is a real serious problem, because investment is what 
drives economic growth, improved productivity, and reduction in 
costs.
    So as I look at the question, first of all, in dealing with 
infrastructure costs, I say, thank goodness that the money 
comes out of special funds. It is not money we have to go and 
appropriate every year.
    Second, thank you that we have some money left in the can. 
Third, clearly, we need to have a system that makes sure that 
this does not happen again.
    That means that we have to do away with the extraordinary 
events. If we get down the road a little bit, and our demands 
are greater than our supply, then you will find me saying that 
those investments are absolutely critical to reducing air 
pollution, to getting rid of congestion, to improving 
productivity, to improving mobility; and very important, 30 
percent of the deaths on the Nation's highways come because of 
insufficient maintenance and care of our infrastructure.
    So I will be the first one up here, when it is time to do 
that. But right now, while we are trying to crawl out of this 
recession; while we are looking at serious challenges that 
companies are trying to meet; while we have additional 
resources still available; while I believe we are going to go 
back to buying more trucks, if we can figure out how to deal 
with the engine problems; and to traveling, and we are already 
traveling more than we were; and that the numbers will probably 
be a lot better next year--for now, I would say, I am very 
aware of the need, if it has to be there, and I would counsel 
about not doing it right now.
    There are some in our coalition that might think we should 
do it right now. But I think in the interest of this country, 
in getting this economy cooking, and putting revenues back into 
the system, improving productivity, improving safety, we can do 
it with current resources, with the help of this committee and 
others.
    I will be the first person back here, if the resources are 
not enough to support the Nation's needs and its economic 
growth, to say that we need to get more money for it.
    Mr. Spratt. Ironically, the programs that you are 
supporting right now were indirect beneficiaries of our efforts 
to reduce the deficit. Because as you will recall, these 
additional gasoline taxes that were imposed were imposed 
originally and dedicated to deficit reduction, and not to 
infrastructure.
    In time, when we got rid of the deficit, or nearly rid of 
the deficit, we took these funds and used them for their 
traditional purposes; that is, building infrastructure. But we 
had to get this tax increase in through the back door. That 
shows you how difficult it is.
    If the Chamber is not willing to come stand forthrightly 
for it, it is not going to happen. You have got to make the 
case for infrastructure investments, and for the return that I 
heard you make very distinctly in your testimony.
    Mr. Donohue. I have personally, and as a part of the 
Chamber, on previous occasions, supported those types of 
adjustments in tax increases that supported the Nation's 
infrastructure. I think you would agree with me, sir, that we 
should avoid it right now.
    Mr. Spratt. I would agree with you, sure, in a recession, 
and particularly with the price of gasoline going up, anyway, 
due to world conditions.
    Mr. Donohue. That is exactly right. By the way, having the 
circumstances in Venezuela, the lack of some of the stability 
in the Middle East, that is worrisome.
    Although I might say, having just returned from Moscow, 
there is a lot of gas and oil there. I think there are some 
pretty strong understandings that we might have another source 
of energy.
    Mr. Spratt. Let me ask you specifically: is the Chamber 
supporting what is in the bill, which is $4.4 billion; or are 
you supporting Senator Conrad's budget resolution with a $5.6-
billion increase?
    Mr. Donohue. The Chamber and the Coalition, first of all, 
appreciate the $4.4 billion. We have visited with Chairman 
Young at great length. We are certainly not going out trying to 
get the $8 billion.
    The difference between $4.4 billion and $5 billion, really 
is going to come down to when we do it and what it is. I am 
going to let the Congress resolve that. I think that they are 
in the position that they are going to do the right thing, 
because they understand this issue.
    Would I rather have $5 billion, because I have got $19 
billion the bank? Sure, because I am still trying to get out of 
this recession; we are. Whatever number comes, we are a lot 
better off than we would have been; and what I am most 
concerned about is that we have a plan and we have a system 
that says, we are going to fix this thing so it does not happen 
again.
    If at the end of that curve, it means more taxes, then we 
will be very willing to talk about it. But for right now, I 
think the infrastructure expenditure issue between the House 
and the Senate is the smallest--least difficult decision to 
come to. It is somewhere between $4.4 billion and $5 billion; 
whatever the number is, God bless us. Let us get it and go out 
and build the roads and keep on working.
    Mr. Spratt. So $5 billion or $5.6 billion; you are not 
willing to go up to $5.6 billion?
    Mr. Donohue. Well, this is a very good question. I will 
leave that with you. [Laughter]
    Mr. Spratt. Well, now you are the witness. You said you 
expected us to do the right thing. What is the right thing? 
Tell us.
    Mr. Donohue. Well, I think you have a balance here, sir. 
First of all, if you take $5.6 billion, alright, and that 
depends on whether you are going to do some things going 
forward on ethanol, there are a lot of questions.
    I can go with $5.6 billion, if what we are going to say is, 
we are going to make sure we are going to tax ethanol at the 
same amount of money going forward, and then put the money in 
the Highway Trust Fund and so on.
    If you have $5.6 billion, you will create more jobs. You 
will move faster on a system that we are way behind the curve 
on. You will move more aggressively to improve safety and 
mobility and reduce congestion and clean the air.
    Mr. Spratt. So the answer is $5.6 billion?
    Mr. Donohue. The answer is, I am saying here, I appreciate 
what has been done on this committee. I will look forward to 
working with the conference to get the best deal for the 
country and for us, and the higher number is better, but you 
laid it out, sir. You have a big time problem, and we are going 
to be there to do what is reasonable.
    Mr. Spratt. Thank you, sir.
    Chairman Nussle. Well, that is a non-starter, taxing 
ethanol. [Laughter.]
    We have a lot of talking to do, if that is the case.
    Mr. Donohue. Well, you do tax ethanol right now.
    Chairman Nussle. I am trying to inject a little humor.
    Mr. Donohue. I understand the problem. I saw what the 
President and Daschle did yesterday.
    Chairman Nussle. Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman, and welcome, Mr. 
Donohue.
    Mr. Donohue. It is nice to see you, sir.
    Mr. Collins. We have enjoyed our working association for 
several years, and hope to continue.
    You know, you make a very good point about additional 
revenues. But you know, Mr. Donohue, additional revenues do not 
necessarily have to come from additional taxes. You say you 
have to spend money to make money. Well, you are talking about 
infrastructure and actually fixed assets that belong to the 
U.S. Government.
    But you know, the thing about it, the revenue for this 
government comes from people. That was the purpose and is the 
purpose of tax relief at periodic times. You can go back 40-
plus years, and you can look at what happened when tax relief 
was put forth in a favorable way to the wage earner, and we had 
additional revenues come into the government.
    In the 1960s, you know, looking at the tables not too long 
ago, in 1961 the revenue into the government was something like 
$92 or $94 billion that year; substantial tax relief under the 
Kennedy administration, early in his administration. It led to 
over a doubling of revenue over that decade.
    Then when you look at the 1980s, when Reagan came in, and 
put forth a very substantial tax relief for wage earners, we 
had again almost a doubling, from $599 billion in 1981 to a 
little over $1 trillion in 1990 of revenues.
    I do not say you will have a doubling of revenues into the 
Treasury based on the tax relief that we put forth last year. 
We adjusted the cash flow of people, giving them more monies to 
spend in the marketplace, and that is where the taxes for those 
trust funds go, that you are so favorable of, and I am, too, 
having been in transportation for 39 years, that is where those 
funds come from.
    Mr. Donohue. Right.
    Mr. Collins. They come from the cash flow of people.
    Fortunately, we did put forth the tax bill that left more 
revenue in the earnings, and two, we had a drop in the cost of 
gasoline and fuel, which helped to keep this economy from being 
a lot worse than it was.
    So I think, in the long run, if the Congress would focus on 
the cash flow and the budget, and I am a cash flow nut, you 
know.
    I used to run my business every morning by going in the 
front door, pulling out the drawer with the checkbook in it, 
and I wanted to see what the balance was. Then I wanted to see 
what I had coming in, that I had earned the day before. I let 
those that I owe worry about that. But I knew where my money 
was.
    But if we would stay focused on the cash flow of our 
constituents, who are the wage earners in this country, by 
giving them relief from imposed taxation by this government, we 
not only help the revenues of this government, but we help the 
revenues of all entities and levels of government, because of 
sales tax and use tax and excise taxes that they receive.
    So, you know, I appreciate the fact that you say we need to 
spend money to make money, and we do. But we need to also allow 
the people to use more of their money as they see fit, and we 
will have additional revenues to expend on those transportation 
routes that are so needed.
    I am so glad that you brought this thing up about the 
engine, truck engines. The EPA rules that are going into place 
this October, supposedly to increase the fuel mileage, but it 
is going to work in reverse; lower mileage, more consumption, 
shorter internals in oil changes; it will be just the opposite 
of what those idiots over there at EPA think it is going to do.
    You know, there again, we are imposing regulations that are 
going to impose additional cost, which is an additional 
taxation that is levied by this government on people out there, 
trying to earn and make a living.
    There were over 200,000 repossessions since this recession 
started last year in independent owner operators, and there 
will be more. People are trying now to buy new trucks, based on 
the current market and what we have available, because they do 
not want those new trucks coming in October.
    Mr. Donohue. Mr. Chairman, you have probably concluded that 
Mr. Collins and I have had some business going on for a long 
time.
    When I used to run the American Trucking Association, I 
would always come to him for advice. Because if you can run a 
trucking company in these days, you can run just about 
anything.
    In fact, the reason he came in to look at his checkbook is 
not what he had in it, but what was coming in, because of what 
he had already spent.
    Mr. Collins. That is right.
    Mr. Donohue. Let me make two comments, if I can, Mr. 
Collins. First of all, I do not know if everybody appreciates 
it, but when this tax cut was put in place, the part that the 
Chamber supported vigorously, and a lot of folks were saying, 
``what are you doing for big companies,'' was the reduction in 
the individual rate.
    Here is the reason: Millions and millions of small 
companies pay their taxes, either as individual business 
people, as sub-Ss or LLC companies. So they are the people that 
got the tax cut.
    By the way, that tax cut and the reduction in oil prices, 
which was either good, smart performance, or luck, and we will 
figure out what it was, is the thing that kept this recession 
from going into a real hole in the wall.
    I will be glad, at another time, to have a long talk with 
you about EPA and engines and those kinds of things. As you 
know, since I have come over here, I have left that to others. 
But I have still got a whole lot of opinions about it.
    Mr. Collins. Well, we all have, and I appreciate that. 
Maybe sometime, we can talk about the ANWR situation too, 
because I do not think people have actually thought that ANWR 
situation all the way through.
    You know, we have got people that have focused on the 
environmental risk on 2,000 acres of barren land, which is a 
minimum risk. It has been proven by technology and the 
exploration already that we have done in that area.
    This is 2,000 acres of barren land, with little risk 
involved versus, look at the risk 10 years ago, when the Iraq 
invaded Kuwait, and we had to send 500,000 soldiers in there, 
and the loss of life and billions of dollars; and we know that 
is coming again. That risk is real, and I do not think we are 
focused on the real risk when it comes to ANWR.
    I say, shame on those who voted against the exploration in 
the northern slopes of Alaska, especially those from Georgia. 
Thank you.
    Mr. Donohue. Well, thank you; I would just say, Mr. 
Chairman, the Chamber vigorously supported controlled, measured 
exploration in ANWR, and I believe will eventually get to it, 
when the need dictates.
    Chairman Nussle. Mr. Moore.
    Mr. Moore. Thank you, Mr. Chairman, and thank you, Mr. 
Donohue, for your testimony. Like Mr. Collins, I hope I have a 
long time in the future to work with you, as well.
    Everyone here today I think understands, Mr. Donohue, the 
gravity of the situation that our country is facing with regard 
to the current budget outlook, so I will not go into a great 
deal of detail about that.
    But I want to focus my comments and my questions on what 
steps we might take collectively to get us out of the deficit 
ditch and back on the path of fiscal responsibility.
    You know, when I talk to my constituents back home and ask 
them what it means to be fiscally responsible, they tell me 
Congress ought to operate the way families and businesses do.
    American families, I think, and Kansas families follow 
three common sense rules: No. 1, do not spend more money than 
you make; No. 2, pay off your debts; No. 3, invest in basic 
needs in the future.
    A few weeks ago, the majority party offered a budget that 
provided for basic needs quite well; but I think they fell 
short in the other two areas; that is, spending more money than 
we made and paying our debts off.
    I have heard a lot of talk the last few weeks that no one 
in the minority offered a plan, and that is not correct, 
either, because myself and three other of my colleagues 
submitted a plan to make sure we pay our debts and to make sure 
we do not spend money we do not have. But the majority denied 
us a hearing and a vote on the House floor on that plan.
    So later today, in the spirit of these hearings and in the 
spirit of doing what is right to get our fiscal house in order 
again, my Blue Dog colleagues and I will be announcing another 
plan to set us on the path of fiscal responsibility, to secure 
the financial future for America, for our kids, and for our 
grandkids.
    We are going to introduce four bills, Mr. Donohue, to 
return to what I call the ``ABCs'' of budgeting. ``A'' is 
assuring honesty and accountability by extending and 
strengthening the Budget Enforcement Act that expires this 
year, which I hope we all can agree to do.
    ``B'' is balancing the budget without using Social 
Security; by amending the Constitution to require Congress and 
the President to enact balanced budgets, without counting the 
Social Security surplus in receipts.
    ``C'' is climbing out of the deficit ditch by passing a 
short-term debt limit, through the end of this fiscal year, 
September 30, to meet current obligations to prevent a Federal 
default.
    Nobody wants a Federal default, and we certainly understand 
meeting those obligations. But I do not want to write a blank 
check for $750 billion.
    ``D'' is defending our children by passing legislation that 
requires Congress to obtain a three-fifths, 60 percent, vote to 
considering legislation that would require us to borrow money. 
This will prevent us from passing on huge debts to our kids.
    You know, there has been a lot of talk in Congress in the 
past several years about taxing and spending. We have also 
talked some about borrowing and spending, and neither can put 
us in the deficit ditch. I think we need to return to some 
fiscal responsibility.
    So in that context, I want to talk to you for just a 
moment, and try to draw an analogy here. I understand that I am 
going to run out of time probably, and I understand that there 
is no perfect analogy between business and government. But I 
think we can, in government, learn some things from the way 
business operates.
    Both entities, for example, must look at both sides of the 
balance sheet, revenues and expenditures. When revenues exceed 
expenditures, both entities are said to be running a surplus. 
In business' case, retained earnings or surpluses are often 
returned to shareholders in the form of dividends.
    Last year, when government was in surplus, we returned 
revenues to the taxpayers, and I voted for the President's tax 
cut proposal. But when expenditures exceed revenues, both 
entities, business and government, are in deficit.
    I think this should force responsible businesses and a 
responsible government to re-evaluate their financial position, 
and develop a plan to get us back on the right track, as far as 
fiscal responsibility, and get us back in balance, at least, as 
far as government goes.
    I think this is the situation we are in today. We should 
and we need to develop a plan to get us out of the deficit 
ditch.
    So I guess I want to ask you, and I just have limited time 
left, but would you agree that it would be a good idea to 
require that our business, and I am talking about our business, 
Congress' business of government, balance its budget? I am sure 
that you would.
    Mr. Donohue. Well, Mr. Moore, you left out a fourth issue 
in families and in companies. That is that some of our major 
expenditures we capitalize with loans. We buy our houses with a 
mortgage.
    Mr. Moore. That is true.
    Mr. Donohue. Many of us buy our car with a car loan, or 
some of us send our children to college with a loan.
    If we were to be operating on a cash basis, we would not be 
able to do this, under the argument that each year, what comes 
in and what goes out has to be the same.
    One of the problems that the ladies and gentlemen of the 
Congress face is that when there are large capital 
expenditures, and you want to deal with those on a cash or an 
annual basis, it is almost impossible to stay within the 
scenario which you structured.
    Now let me say, first of all, I have not read any of your 
bills, but I applaud you trying to keep the Budget Act in 
place.
    Second, we need a short-term debt limit, so that we do not 
let this government go into default. Third, there is no 
question that over time, we need to press the government to 
operate within its means.
    Now if you have a $2 trillion expenditure level, without 
any capital budgeting, and you decided, from time to time, 
because of war or pestilence or other reasons to, in fact, 
capitalize some of that, then you have to have some ability to 
do that.
    As I said, I do not know what I think about the three-
fifths and 60 percent, and all that sort of thing. We all know 
one thing. We are going to support this Congress and this 
administration to prosecute our war against these terrorists, 
and we are going to protect ourselves at home, and we are going 
to take care of that.
    Mr. Moore. Absolutely.
    Mr. Donohue. On the Social Security issue, you know, I am a 
student of demographics and entitlements. We have had an 
extraordinary, wonderful thing happen in this country over the 
last 100 years. We have extended our life expectancy by 30 
years. In the next 20 or 30 years, we are going to extend it 
another 10. So we have got a massive number of collectors.
    Our problem is, we do not have enough ``payers-in'' and 
enough taxpayers, and we are all going to have to work on that.
    For as long as I have had anything to do with government, 
for 30 years, we have been fooling around with, ``do we really 
have a Social Security Trust Fund,'' and ``how do we use that 
money that comes in?'' I would love to sit down and talk to you 
about that.
    But what we have to be very careful to do, when we have no 
capital spending, the government is different than families and 
businesses in the way that they have to go defend this Nation.
    Mr. Moore. I understand.
    Mr. Donohue. The analogies are helpful, but they are not 
pure.
    Mr. Moore. I have one last comment, and I do appreciate 
your remarks. I tried to say at the outset, it was not a 
perfect analogy, by any means.
    I certainly understand, and I think this Congress 
understands, the need to defend our country is the first and 
most important priority of any government.
    Mr. Donohue. Right.
    Mr. Moore. The last thing I would say though is, with 
regard to your remarks about mortgages, I understand that, as 
well. I have a mortgage. A lot of Americans have mortgages. We 
are going to pass on a $5.7 trillion mortgage to our children 
and grandchildren. We are giving them a great country, but we 
are passing on a heck of a mortgage.
    I think that Mr. Greenspan, if he were here right now, 
would tell us, and I have heard him say this several times, if 
we can practice fiscal responsibility and start to pay down our 
long-term debt, it is going to keep long-term interest rates 
down. That is going to be the ultimate tax cut for everybody 
who borrows money in this country.
    Mr. Donohue. I agree, and by the way, we always have to 
look at, in our families and our businesses, the amount of our 
debt in relation to the size of our enterprise.
    Mr. Moore. Yes.
    Mr. Donohue. I look forward to some further discussion with 
you on that.
    Mr. Moore. Thank you very much, Mr. Donohue.
    Mr. Donohue. Thank you.
    Chairman Nussle. Mr. Brown.
    Mr. Brown. Welcome, Mr. Donohue, we are glad to have you 
here.
    Mr. Donohue. Thank you.
    Mr. Brown. Certainly, you will serve us in America through 
the representation of the business community. Having come from 
the business community myself, I recognize the bottom line is 
very important in the continued existence of the corporation.
    You have raised a couple of good points, and I know that 
the chairman was not too happy with your first remark. But I 
think it is a debate that we certainly must look at; what are 
we going to do with the tax on the gasohol and ethanol or 
whichever?
    As I understand now, the gas is taxed at five cents a 
gallon. Is that right, Mr. Chairman?
    Mr. Donohue. Where is Mac?
    Chairman Nussle. That is not quite right.
    Mr. Brown. OK, what is gasoline, 18 cents or 17 cents? I 
have always taken the tax on gasoline as a user fee, which is 
intended to provide infrastructure for the user of the 
gasoline.
    It would appear to me, Mr. Chairman, that there is the lost 
revenue, which is impacting our trust fund, and also impacting 
the maintenance and the continued development of our 
infrastructure on highways across the Nation.
    It would seem to me, if we are going to supplement the 
gasohol, it ought to come from funds outside the trust fund. I 
know that is a debate that we are going to debate later. But I 
am just curious, how much revenue do you think we might be 
losing through that differential?
    Chairman Nussle. I would be happy to have an ethanol 
hearing, at some time, but I am not sure that that is 
necessarily the debate, today.
    Mr. Brown. I understand, Mr. Chairman.
    It was mentioned in this report, and since we were looking 
for new funds, not necessarily to raise taxes, but maybe to 
raise equity, but we will debate that another time, but thank 
you for that.
    Mr. Donohue. Mr. Brown, the issue there is not only the 
current situation; but if we expand the use of a particular 
product and exempt that from the trust fund, we would have a 
problem. I think the chairman will figure out a way to have a 
discussion on that.
    Mr. Brown. That is the reason I raised that. I am sure he 
has got some idea in mind.
    The other issue, as we look at raising the debt ceiling, 
and recognize that we are sort of bound by law, that the 
proceeds of the Social Security monies must be invested in 
Treasury instruments, which effectuates the increase of the 
debt limit.
    There is a move afoot in Congress to divide the different 
types of debt, the consumer debt, from the internal transfers, 
which would, in effect, lower the debt ceiling. Do you have any 
thoughts on that?
    Mr. Donohue. Mr. Brown, I want to be very careful here. I 
am quick to have thoughts on a lot of things. Sometimes I do 
not know exactly what I think until I hear what I have to say. 
But on this matter, where I am not an expert, I think I am 
going to be careful what I say.
    But let me just very clearly say, there is a three-part 
issue here. First of all, this committee is doing the right 
thing in establishing, maintaining, and supporting a process 
that makes sure we carefully analyze what our real expenditures 
are, and we have limits on what we can do in relation to what 
we bring in.
    Second, unfortunately, the debt business in this government 
in recent times has become very political. It is going to be a 
very close race in the Congress and the Senate, and everybody 
has a lot to say about that. That is why I appreciate Mr. 
Moore's suggestion that we might put some of that aside while 
we tend to our business.
    We have to really understand our true debts. You know, we 
have all kinds of off-budget kinds of issues. I mean, I believe 
the Enron thing is a very sad moment for American business.
    But many of our businesses, all the real estate businesses, 
many people have off-budget corporations, because that is how 
you do business. I have been waiting for somebody to finally 
say, and so does the government, lots of them. I do not know 
who your auditor is but, you know, it could be very 
questionable.
    I would support this Budget Committee and other Members of 
the Congress, outside the political environment, taking a real 
serious look at our debt. What should be our debt process; how 
do we go about it? We should not do everything in a cash-on-
cash basis. What is consumer debt versus entitlements, and how 
do we deal with those issues?
    I am prepared to put the Chamber behind a vigorous 
discussion. But I want to be very careful, at this sensitive 
time, getting out in front on that, right now. Although, if you 
and I want to walk down the hall, I will try to tell you what I 
think.
    Chairman Nussle. Are there other members who wish to 
inquire?
    If not, Mr. Donohue, thank you so much for your testimony 
here today. We appreciate your words of wisdom and, as well, 
your support in our endeavor to try and reign in the budget and 
provide some discipline. Thank you very much.
    Mr. Donohue. Well, Mr. Chairman, I appreciate being here. I 
want to remind the committee that yours is not the most famous 
and appreciated work in this Congress. But were it not done, we 
would find more significant gaps between what we take in and 
what we spend.
    I congratulate you on your work, and I am available, and 
the Chamber is, to help in any way possible. Thank you very 
much.
    Chairman Nussle. Thank you.
    Our friend and former colleague, Bill Frenzel, is also a 
part of this panel. We welcome him to the witness table, again. 
He has been a long-time supporter and warrior in the effort to 
reign in spending and provide control.
    We are happy to have you here today to provide yet again--
because this is not the first time you have labored in this 
vineyard. You have been here before and labored hard.
    We need your ideas, at this point in time, given the unique 
situation we find ourselves in, with the House having passed a 
resolution, and the Senate, as of yet, not passing one; with 
caps and PAYGO expiring; all the fences seem to be laid down. 
How we are going to get this under control is the thrust of 
this hearing, and we appreciate you coming to give us that 
testimony.
    Your entire written testimony will be made part of the 
record, and you may summarize as you would like. Welcome.

                 STATEMENT OF HON. BILL FRENZEL

    Mr. Frenzel. Thank you very much, Mr. Chairman, Mr. Spratt, 
and members of the committee. I appreciate the opportunity to 
testify again before this distinguished committee on the 
subject of budget discipline.
    I do so for myself and the Honorable Tim Penny, for the 
Committee for a Responsible Federal Budget, of which we are co-
chairmen.
    I want to talk mostly this morning about discipline, and 
mention two things, which I think are critical, right at this 
moment.
    No law can actually control fiscal policy, nor stop the 
Congress from spending, if it really wants to do it. Congress 
can only be restrained by the Constitution. The record is 
replete with less than successful efforts to control 
Congressional spending, each having modest success; but 
eventually being evaded by the Congress.
    Of all the restraints that we have tried to apply over the 
years, I believe the most enduring and most helpful have been 
discretionary spending caps and the PAYGO restrictions. So I 
recommend that the Congress extend these two primary control 
features, as early as possible this year, and I congratulate 
the committee for its good work in pursuit of that elusive 
goal.
    The chairman suggested the lack of a budget in the Senate 
is a problem, and I am not going to be the person who tells you 
how to get around that particular problem.
    But I do want to talk about spending caps and PAYGO. They 
are not perfect. They cannot force the Congress to do or not to 
do anything. However, when spending limits have been agreed to 
by the President and the Congress, they are the most effective 
budget enforcement mechanism the Congress has discovered yet.
    The caps and PAYGO were first employed after BEA 1990. They 
were revised in 1993 and again in 1997. The 1997 changes 
obviously needed more adjustment. The Committee for a 
Responsible Federal Budget and I have recommended a number of 
times in the last couple of years that you adopt new 
discretionary spending limits early in each budget cycle. 
Unfortunately we are without them at the moment.
    In the case of terrorism and our war against it, it is a 
good thing to waive limits, when it is necessary, in real 
emergencies. But it is also a good thing to re-establish the 
limits as soon as possible, and to preserve the priorities, old 
and new, which the Congress sets when it passes or modifies its 
Budget Resolution. The caps really need to be reset now.
    I am occasionally asked, Mr. Chairman, why we need PAYGO in 
addition to the caps. My own answer to that is that the urge to 
spend follows the path of least resistance. If discretionary 
spending is capped and entitlements are not, it is not hard to 
guess what kinds of new and changed spending programs we will 
have.
    In addition, discretionary spending programs are a little 
more easily dealt with, in the budget sense, and entitlements 
are forever. So not having some kind of entitlement 
restriction, I think, would be a real mistake.
    For those Members of Congress who are nervous about 
inhibiting urges to cut taxes through PAYGO, it is good to 
remember that when the President and the Congress want to 
exceed the caps, they find a way to do so. When tax cuts seem 
to be the right policy, they will find a way to accomplish 
them, too.
    Caps and PAYGO are not straight jackets. They are sign 
boards to remind Congress what its priorities were when it 
passed the Budget Resolution. In true emergencies, when the 
Congress and the President need to spend more, or to provide 
more tax cuts for economic incentives, it is always appropriate 
to reassess the priorities.
    Now except for my own personal wants, there is no level of 
Federal spending which is just right. The right level 
politically, at the end of the appropriations process, is the 
one on which the President and the Congress agree. That is 
where caps should be.
    We think Congress should reset them regularly; perhaps as 
often as biannually. They have to conform to political reality, 
or they will be ignored.
    As you know, Mr. Chairman, our committee also supports a 
binding Budget Resolution, passed by Congress and signed by the 
President. One important feature of that process is the regular 
opportunity for and an expectation of agreement between the two 
branches of government on spending limits.
    In this testimony, however, I really want to focus on 
spending caps and PAYGO as being the highest priorities right 
now, rather than to divert your attention by repeating other 
wonderful ideas previously presented, such as the Joint Budget 
Resolution. For the record, my testimony of last July 19 before 
this distinguished committee stands, but the twin spending 
limits are target number one for today.
    My final warning is to repeat that no amount of good law 
can substitute for Congressional commitment and Congressional 
leadership on this issue. It is not easy to set priorities. 
They reduce flexibility, but they do establish some order and 
discipline. Once set, based on history, they are a helpful and 
occasionally powerful reminder, which reinforces the original 
commitment.
    Mr. Chairman, and long-suffering committee members, thanks 
for your time and your interest. This is a terrible committee 
on which to serve. It is a political truism that nobody ever 
tears the cufflinks off of Congressmen who say no.
    Nevertheless, I suspect that future generations of 
taxpayers who will be obliged to live with the effects of 
today's fiscal policies may indeed honor the memory of those 
who occasionally said no.
    [The prepared statement of Mr. Frenzel follows:]

Prepared Statement of Hon. Bill Frenzel, Co-Chairman, the Committee for 
                      a Responsible Federal Budget

    Mr. Chairman and members of the committee, thank you for giving me 
the opportunity to testify again today on the subject of budget 
discipline. I do so for myself and the Hon. Tim Penny, and for the 
Committee for a Responsible Federal Budget, which we co-chair.
    No law, process, provision or formula can actually control fiscal 
policy, nor stop the Congress from spending if it seriously wants to do 
so. Congress can only be restrained by the Constitution. The record is 
replete with Congress' less-than-successful efforts to control its own 
spending, from debt limitation statutes, to the Budget Act itself, and 
to other fancier embellishments like Gramm-Rudman.
    Each of these had some early, modest success. Eventually, Congress 
found ways to get around them all. Of all of these restraints, the most 
successful, and the most durable budget control mechanisms have been 
discretionary spending caps and PAYGO, and so I recommend that the 
Congress extend these two primary control features as early as possible 
this year, and I congratulate this committee for its good work in 
pursuit of this elusive goal.
    Spending caps and PAYGO are imperfect instruments, and as noted 
earlier, they cannot force Congress to do, or not to do, anything. 
However, when the spending limits are agreed to by the President and 
the Congress, they are the most effective budget enforcement mechanism 
the Congress has discovered yet.
    Because their effectiveness wanes with age, they need to be 
reviewed and renewed every couple of years.
    First used after the Budget Enforcement Act of 1990, they have a 
pretty good record of keeping spending within the levels set by 
Congress in its Budget Resolution. They were revised in 1993, and again 
in 1997. Because the 1997 changes obviously needed further adjustment, 
this committee, and I, have recommended since 1998 that you adopt new 
discretionary spending limits early in each budget cycle.
    After the initial high caps set for fiscal year 1991, discretionary 
spending remained well below the inflation rate through the 90s. In the 
last two budget years, fiscal years 2000 and 2001, when the limits were 
pretty well ignored, discretionary spending increased at rates more 
than several times the rate of inflation.
    In the case of terrorism, and our war against it, it is good thing 
to waive such limits when necessary in real emergencies, but it is also 
a good idea to reestablish them, as soon as possible, to preserve the 
priorities, old and new, which Congress agrees to when it passes, or 
modifies, its Budget Resolution. The caps should have been reset at the 
end of last year, but now is a very good time to set the caps again.
    I am occasionally asked why we need PAYGO in addition to the caps. 
My answer is that the urge to spend follows the path of least 
resistance. If discretionary spending is capped, and entitlements are 
not, it is not hard to guess what kinds of new, and changed, spending 
programs we will have. In addition, discretionary spending programs are 
more easily dealt with in a budget sense since they can occasionally, 
admittedly not often, be reduced or even zeroed, while entitlements are 
forever.
    For those who are nervous about inhibiting urges to cut taxes, it 
is well to remember that when the President and the Congress want to 
exceed the caps, they find a way to do so. When tax cuts are the right 
policy, they will find a way to accomplish them, too.
    Caps and PAYGO are not straitjackets. They are signboards to remind 
Congress what its priorities were when it passed its Budget Resolution. 
In true emergencies when Congress and the President need to spend more, 
or to provide more tax cuts for economic incentive, it is always 
appropriate to reassess the priorities, and alter the limitations.
    Except for my own, there is no level of Federal spending which just 
right. The right level politically is the one on which the President 
and the Congress agree.
    That is where the caps should be. We think Congress should reset 
them regularly, perhaps as often as biennially, even if it may mean 
generally higher levels of spending. They must conform to political 
reality, or they will be ignored. A simple majority should be able to 
make changes as long as the votes are recorded. The transparency of 
free debate and clear-cut votes will have what we believe is a sobering 
affect on the Congress.
    As you know, Mr. Chairman, our committee supports a binding Budget 
Resolution, passed by Congress and signed by the President. One 
important feature of such a process is a regular opportunity for, and 
an expectation of, agreement between the two branches of government on 
spending limits.
    Even without a Joint Budget Resolution, Congress could 
automatically send a bill setting caps to the President when it passes 
its Budget Resolution, just as it used to do with debt ceiling bills 
under the old ``Gephardt'' procedure.
    In this testimony, however, I really want to focus on the spending 
caps and PAYGO, as being the highest priorities right now, rather than 
to divert your attention by repeating other wonderful ideas previously 
presented, such as the Joint Budget Resolution. For the record, my 
testimony of last July 19 before this distinguished committee stands, 
but the twin spending limits are target No. 1 for today.
    The final warning is to repeat that no amount of good law, or good 
process, or good restraint, can substitute for Congressional commitment 
and Congressional leadership on this issue. It is not easy to set the 
priorities. They reduce flexibility, but they do help establish order 
and discipline. Once they are set, they are, based on history, a 
helpful, and occasionally powerful, reminder which reinforces the 
original commitment.
    Mr. Chairman, and long-suffering committee members, thanks for your 
time and your interest in this matter. This is a tough committee on 
which to serve. It is a political truism that nobody ever tears the 
cuff-links off of Congressmen who say no. Nevertheless, I suspect that 
future generations of taxpayers who will be obliged to live with the 
affects of today's fiscal policies, may honor the memory of those who 
occasionally said no.

    Chairman Nussle. Thank you, Mr. Frenzel.
    Long-suffering is a new description that I have not heard 
before, but I think it is certainly applicable to some of the 
things that we are treading on today.
    Just to update you, on one example, and I could not agree 
more with your last comment, that certainly, you know, we put 
these rules into place, and they have been waived as many times 
as they have been enforced.
    The issue of leadership and the issue of authority, moral 
authority, or however you want to put it, technical authority, 
and the willingness of our membership to enforce agreements or 
budgets, is really what is at stake here, as much as anything.
    To give you an example of that, the President put forward a 
supplemental appropriation request of emergency for homeland 
security and defense, for obvious reasons. I think, in this 
case, you will see bipartisan support in the Congress to 
achieve this.
    However, the opening bid of the Appropriations Committee, 
after receiving the $27.1 billion request, was $39 billion. 
That was the opening bid from the appropriators, who found 
almost $12 billion of additional spending that, in their 
wisdom, was now all of a sudden emergency; or maybe better 
said, the train was leaving the station, and let us get on 
board, because this may be the only thing leaving in any short 
time.
    We are making it very clear that the President has 
designated an emergency of $27.1 billion. It should not be a 
penny more. It should not be a penny more than $27.1 billion, 
without the understanding and acquiescence of the 
administration in this regard, to designate additional items as 
emergencies.
    We have a definition. It is a bipartisan definition. It 
should be adhered to; otherwise, we might as well declare the 
entire Federal Budget an emergency, and pass it in the next 
month and go home. That is kind of where we are at right now.
    So we are taking a pretty hard line approach. As you know, 
emergencies are outside the process, and we are going to try, 
as best we can, to exert, or I guess I am speaking in the 
plural. I am going to do it myself, if I have to.
    I do not know if I am going to get any cufflinks for it, as 
you stated. But we are going to at least make the attempt to 
say no here.
    That is even before we get to the topic of whether the 
$27.1 billion is appropriate, and getting the right 
accountability and oversight that we need to start providing 
for homeland security and defense.
    Where I am going with all of this is also a question on how 
we should extend the caps, not just whether; and how we might 
extend PAYGO, not just whether.
    Would you propose or would you favor a single cap on 
discretionary spending, or would you support separate caps? Is 
this a matter of any cap is better than no cap? How would you 
approach that?
    I mean, one of the challenges we had with PAYGO, and for 
that matter, caps, is that all of these were designed and 
defined during periods of deficits. They were designed to get 
out of deficits, and they were not constructed very well to 
deal with an era of surpluses.
    So as a result, when we achieved a definition of surplus, 
all of a sudden, it became less relevant or much easier, you 
know, to ignore. I am wondering if you would change or reform 
any of those processes, given the opportunity to do so at this 
time?
    Mr. Frenzel. Mr. Chairman, that is a huge question, or a 
huge set of questions. I do pretend to be the last expert on 
the subject.
    First, I note that when you say the Appropriations 
Committee has bid already nearly a 50 percent upgrade, that is 
just the first Appropriations Committee you are running into. 
There is another one, as well, coming along behind.
    With respect to the question of what caps, my preference is 
to have discrete caps, at least separate ones for military, 
which I have always thought were appropriate. But now, I think 
they are even more appropriate. So that is my preference.
    On the other hand, is a single cap better than no caps? 
Yes, it is, but there is too much mischief that can occur 
within a large spending account. It seems to me that if setting 
of caps is to enforce Congressional priorities set in a budget 
resolution, you really ought to have a series of discrete caps.
    It is also true that the caps and PAYGO seemed to work much 
better when we were in deficit and there was some fear in the 
Congress that maybe we were not ever going to get out of 
deficit.
    My own judgment is that Congress has had really more 
difficulty dealing with surpluses than with deficits. I think 
we are not going to know the story on that until we see how 
caps perform through a little longer period of surpluses.
    But I think you ought to do them as soon as possible. Of 
course, legislative branch caps established in the Budget 
Resolution are good. Those established by negotiation with the 
President are better. Those established by law, in which both 
branches participate, are best.
    I recall, as I noted in my testimony, but did not say, in 
the old days, I think perhaps the late 1970s, we used the 
Budget Resolution to carry with it a bill that would extend the 
debt ceiling to fit whatever the budget resolution said we were 
doing. Dick Gephardt was the creator of this system, and it 
carried his name.
    When the Budget Resolution was passed, this auxiliary bill 
sticking to it was sent to the President for signature. That 
might be one way of establishing the caps and having the 
President entered into the system.
    But any way by law is the best, and if Congress does not 
want to share this with the President, but wants to keep those 
caps within the branch, it should do that, too. That is better 
than no caps.
    My guess is, the way I prefer it is to nail them down as 
tight as you can, because I do not think Congress can do the 
full job for itself. Too many spending butterflies fly by that 
are attractive to Congress, after the budget is passed. 
Congress is strongly tempted to have this one, and that one, 
and all the others.
    It is much better if the President can help in the 
discipline. But any kind of cap is better than no cap.
    Chairman Nussle. Thank you.
    Mr. Spratt.
    Mr. Spratt. Mr. Frenzel, thank you for coming. We remember 
listening to your wise advice on the House floor and from this 
committee. You do have one comparison to make service on this 
committee satisfying. It is better than being on the Ethics 
Committee. That is for sure. [Laughter].
    I read your testimony, and I listen to what you have got to 
say. It seems to me that you have a more permissive attitude 
about the PAYGO rule than you do about spending caps.
    Do you think that perhaps we should have one PAYGO rule 
that is applicable when we have surpluses, and by that, I mean 
surpluses outside Social Security, on-budget surpluses, and 
another when we have deficits?
    Mr. Frenzel. I have not thought about that a lot, Mr. 
Spratt. I am sort of reluctant to put my foot in that pool, 
just as Mr. Donohue was on a different question.
    Again, I believe in PAYGO in times of surplus and deficit. 
But there may be clever ways to structure it. Congress may find 
out that it can do a better job in ways different than with one 
across-the-board blunt rule. Until that is explained to me, I 
guess I will stick with a single PAYGO.
    Mr. Spratt. Let me suggest this to you, and get your 
reaction to it, because you have got a long perspective looking 
back. What we have here is a macro-economic problem, where last 
year, there were two projections of the 10 year surplus that 
totaled $5.6 trillion, which made it appear that we could have 
it all.
    As a consequence, there was a substantial tax cut, 
reminiscent of 1981. Within months, we found that we had an 
overstated, or some would say, bloated estimate of the surplus, 
looking out 10 years. We now know that it probably was 
overstated by economic and technical mistakes alone, to the 
tune of about 40 percent.
    Furthermore, that was the August update. Having discovered 
that we had an overstated estimate of the surplus, upon which 
the budget was based and the tax cuts were based, we then were 
overtaken by other events, overridden by terrorist attacks, 
contingencies that nobody expected or provided for in the 
budget.
    So we have got a fundamentally different foundation for the 
budget. But we have still got the budget with tax cut 
expectations, spending projections, that is based upon economic 
estimates and projections that no longer apply, in a world that 
no longer exists.
    What do you do to get out of this?
    Mr. Frenzel. That is a good question, Congressman Spratt, 
and I am probably not going to be able to help you out of that 
thicket.
    I have some thoughts about the 10 year budget estimates, in 
that I do not think they are very helpful. I think they are 
useful sometimes, in just trying to track where you are going; 
and useful, probably because of Congress' own, what would you 
call this desire to back-end load both spending and tax cut 
programs.
    Mr. Spratt. That is the tendency, if you do not have a 10 
year window to keep everybody honest about the out-years.
    Mr. Frenzel. That is true. But on the other hand, as you 
have already pointed out, a 10 year is taken at a slice of time 
that develops quite a different picture than if you take it 6 
months later, or 6 months before.
    Everybody has to understand that somebody is just 
extrapolating lines on a chart, and those figures do not really 
mean a whole lot. You know, we do it for 75 years on Social 
Security. You know, maybe it is right and maybe it is not. I do 
not really know that.
    I guess I would fight the tax cut wars on a little 
different basis. I am one of those that likes to look at the 
percentage of GDP that taxes take up, and I like to see that 
they do no get above 19 percent. But that is a personal thing. 
So for me, I would not need a 10 year surplus projection to 
make me want to cut taxes.
    Mr. Spratt. Let me simplify it to one choice.
    Mr. Frenzel. OK.
    Mr. Spratt. If we are running a deficit, an on-budget 
deficit, exclusive of Social Security, do you believe that the 
PAYGO rule, in most cases, should require an offset equal in 
amount to the tax cut?
    Mr. Frenzel. I do.
    Mr. Spratt. Thank you, sir.
    Mr. Frenzel. You asked a simple question, and I am a simple 
man.
    Mr. Spratt. And I got a straight answer; thank you.
    Chairman Nussle. Mr. Putnam.
    Mr. Putnam. Thank you for your testimony.
    Mr. Frenzel. Mr. Chairman, I apologize for arriving late. I 
proved myself to still be in that small percentage that does 
not get the word. All I can say is, I was lucky I arrived on 
the right date. [Laughter].
    Chairman Nussle. Your testimony is accepted and 
appreciated, no matter when it is given. We welcome you back, 
as a long-suffering alumnus, to the committee. So we appreciate 
your testimony, and we will work on these issues together. 
Thank you.
    Mr. Frenzel. Thank you.
    Chairman Nussle. With that, we have our second panel, which 
we will be joined today by Susan Irving, from the General 
Accounting Office; Barry Anderson, from the Congressional 
Budget Office; and Richard Kogan, from the Center of Budget and 
Policy Priorities.
    While they are joining us, I just want to welcome all of 
the young people who are joining us today as part of that 
special day when you get to bring your kids to work. We have 
Jack, Peter and Paul Wydler who are here today, and Yvonne 
Ochiri who is here from the Alexandria public schools. So we 
welcome them all today.
    Bud, your son's name?
    Mr. Newman. Dan.
    Chairman Nussle. Dan Newnam is here; we welcome him as 
well. He can be next up here, if he's interested. He can't ask 
any questions; they'll be better than ours. But we welcome all 
the young people who are here today.
    We also welcome our panel. They have all three testified 
before our committee before, on these and other topics. We will 
start and just move right down the witness table, with Barry 
Anderson first. We welcome your entire testimony; the testimony 
of all three witnesses will be made a part of the record, and 
you may summarize as you see fit.
    Mr. Anderson.

STATEMENT OF BARRY B. ANDERSON, DEPUTY DIRECTOR, CONGRESSIONAL 
 BUDGET OFFICE; RICHARD KOGAN, SENIOR FELLOW, CENTER ON BUDGET 
   AND POLICY PRIORITIES; AND SUSAN J. IRVING, DIRECTOR FOR 
    FEDERAL BUDGET ANALYSIS, U.S. GENERAL ACCOUNTING OFFICE

                 STATEMENT OF BARRY B. ANDERSON

    Mr. Anderson. Thank you, Mr. Chairman.
    Chairman Nussle, Ranking Member Spratt, and members of the 
committee, thank you for inviting me to this hearing. I am 
happy to be here this morning to discuss mechanisms of 
budgetary discipline, something that I have been actively 
involved with for more than 20 years.
    During those years I have seen the budget process change 
dramatically--from the 1-year budgets of the late 1970s, to the 
budget deals between Congressional leadership and President 
Reagan of the early- and mid-1980s, to the aggregate deficit 
control mechanisms of Gramm-Rudman-Hollings in the late 1980s, 
and finally to the three versions of the Budget Enforcement Act 
in 1990, 1993, and 1997.
    As an active participant in devising and enforcing many of 
those mechanisms for budgetary discipline--and, more recently, 
as an observer as other people have tried their hand at 
enforcement--I believe that I have a sense of what 
characteristics make a mechanism more likely to be effective or 
more likely to fail. On the basis of that experience, I offer 
four principles that are required for any budget enforcement 
mechanism to succeed.
    The first is shared goals. For a system of discipline to be 
effective, its overall goals must be broadly shared: by the 
Congress and the President, by Republicans and Democrats, by 
the Senate and the House, even by the major committees--Budget, 
Appropriations, Tax and Authorization.
    An example of the need for shared goals can be found by 
comparing the Budget Enforcement Act at its inception in 1990, 
with virtually the same BEA 7 years later. The goal of 
eliminating large and growing deficits through limits on 
spending was largely shared by the majority of political 
players in 1990 and during the first half of the decade. As the 
economy continued to expand, revenues came in at unexpectedly 
high rates, which--combined with the end of the cold war, the 
end of the thrift bailouts, and the BEA's limits on spending--
produced unanticipated surpluses. Suddenly, the shared goal of 
deficit reduction had been achieved, and the willingness of the 
President and the Congress to adhere to the restraints of the 
BEA withered, even though the law was virtually the same.
    The second principle is realistic assumptions. Budgetary 
assumptions, particularly for 5 or 10 years into the future, 
cannot be much more than educated guesses. Some demographic 
trends can be projected with good accuracy, but precision in 
forecasting has never been possible over more than a very short 
period of time. Nevertheless, overly optimistic assumptions 
about economic or technical factors, such as the timing of 
spending, can discourage policymakers as the unrealistic 
targets are missed by wider and wider margins.
    The third principle is appropriate sanctions. The BEA's 
mechanism of spending caps and PAYGO--and especially the 
sequestrations available to enforce it--was a big improvement 
over GRH's mechanism of deficit caps and sequestrations, 
largely because of the appropriate application of sanctions for 
those who had violated the limits. Under GRH, a sequestration 
might be required for discretionary programs, for example, 
because of economic factors unrelated to discretionary 
spending, even if the appropriators had not exceeded their 
appropriation targets. Under the BEA, by contrast, no 
sequestration of discretionary programs would occur unless the 
Appropriations Committee exceeded its limits.
    Note that the enforcement mechanism for the spending caps 
is weakened when lawmakers use special provisions to protect 
one class of programs from sequestration. Limiting the programs 
subject to sequestration makes the burden on the remaining 
programs heavier, thus providing a greater incentive to waive 
the sequestration entirely.
    The fourth principle is availability of safety valves. 
Exemptions for emergency spending--for example, for natural 
disasters, for wars, or for recessions--can strengthen a 
mechanism for budgetary discipline if the exemptions are 
applied fairly and honestly. For example, during the first 7 
years of the BEA, emergencies were limited to natural and 
economic disasters, as had been defined in 1991. That system 
broke down in the late 1990s, however, as the definition was 
discarded and any semblance of discipline abandoned.
    If the goal of the current Congress is to retain the 
discipline of the caps and the PAYGO mechanism but gear the 
specific targets so that all surpluses stemming from Social 
Security receipts are used to pay down debt--in other words, so 
that there is no on-budget deficit--I would remind the 
committee that an earlier model exists. The 1990 BEA was 
drafted with that same goal in mind. Besides the spending caps 
and the PAYGO mechanism, it also contained a provision that 
established declining targets for the on-budget deficit. That 
provision could be used as the foundation for procedures to 
enforce on-budget balance.
    The precise caps for a new mechanism would need to be 
worked out, of course, and the political agreement required to 
implement the new regime of budgetary discipline would not be 
easy to obtain. However, the laws to implement a new agreement 
that protects the Social Security surplus already exist, and 
except for the aggregate deficit mechanism, they were used 
successfully for the first several years of the BEA.
    A final point: I spoke to this committee, as others did, 
last year about a number of conceptual problems that I thought 
needed to be addressed by a new ``budget concepts commission.'' 
None of those problems have been addressed, and some of them 
have gotten worse in the past year. No matter what new regime 
of budgetary discipline results this year, I continue to advise 
that a new ``budget concepts commission'' is necessary.
    Thank you, Mr. Chairman.
    [The prepared statement of Barry R. Anderson follows:]

Prepared Statement of Barry B. Anderson, Deputy Director, Congressional 
                             Budget Office

    Chairman Nussle, Ranking Member Spratt, and members of the 
committee, thank you for inviting me to this hearing. I am happy to be 
here this morning to discuss mechanisms of budgetary discipline; 
something that I have been actively involved with for more than 20 
years.
    During those years, I have seen the budget process change 
dramatically: from the 1-year budgets of the late 1970s, to the budget 
deals between Congressional leaders and President Reagan of the early 
and mid-1980s, to the aggregate deficit control mechanisms of Gramm-
Rudman-Hollings (GRH) in the late 1980s, and finally to the three 
versions of the Budget Enforcement Act (in 1990, 1993, and 1997).
    As an active participant in devising and enforcing many of those 
mechanisms for budgetary discipline and, more recently, as an observer 
as other people have tried their hand at enforcement, I believe that I 
have a sense of what characteristics make a mechanism more likely to be 
effective or more likely to fail. On the basis of that experience, I 
feel that four principles are required for any budget enforcement 
mechanism to succeed.

                              SHARED GOALS

    For a system of discipline to be effective, its overall goals must 
be broadly shared: by the Congress and the President, by Republicans 
and Democrats, by the Senate and the House, even by the major 
committees (Budget, Appropriations, Tax, and Authorization). An example 
of the need for shared goals can be found by comparing the Budget 
Enforcement Act (BEA) at its inception in 1990 with virtually the same 
BEA 7 years later. The goal of eliminating large and growing deficits 
through limits on spending was shared by the majority of political 
players in 1990 and during the first half of the decade. As the economy 
continued to expand, revenues came in at unexpectedly high rates, which 
combined with the end of the cold war, the end of the thrift bailouts, 
and the BEA's limits on spending, produced unanticipated surpluses. 
Suddenly, the shared goal of deficit reduction had been achieved, and 
the willingness of the President and the Congress to adhere to the 
restraints of the BEA withered, even though the law was virtually 
unchanged.

                         REALISTIC ASSUMPTIONS

    Budgetary assumptions, particularly for 5 or 10 years into the 
future, cannot be much more than educated guesses. Some demographic 
trends can be projected with good accuracy, but precision in 
forecasting has never been possible over more than a very short period 
of time. Nevertheless, overly optimistic assumptions about economic or 
technical factors--such as the timing of spending--can discourage 
policymakers as the unrealistic targets are missed by wider and wider 
margins.

                         APPROPRIATE SANCTIONS

    The BEA's mechanism of spending caps and pay-as-you-go (PAYGO) and 
especially the sequestrations available to enforce it was a big 
improvement over GRH's mechanism of deficit caps and sequestrations, 
largely because of the appropriate application of the sanctions for 
violating the limits. Under GRH, a sequestration might have been 
required of discretionary programs, for example, because of economic 
factors unrelated to the caps, even if the appropriators had not 
exceeded their appropriation targets. Under the BEA, by contrast, no 
sequestration of discretionary programs would occur unless the 
Appropriations Committee exceeded its limits. Note that the enforcement 
mechanism for the spending caps is weakened when lawmakers use special 
provisions to protect one class of programs from sequestration. 
Limiting the programs subject to sequestration makes the burden on the 
remaining programs heavier, thus providing a greater incentive to waive 
the sequestration entirely.

                     AVAILABILITY OF SAFETY VALVES

    Exemptions for emergency spending (for events such as natural 
disasters, wars, and recessions) can strengthen a mechanism for 
budgetary discipline if the exemptions are applied fairly and honestly. 
For example, during the first 7 years of the BEA, emergencies were 
limited to natural and economic disasters, as had been defined in 1991. 
That system broke down in the late 1990s, however, as the definition 
was discarded and any semblance of discipline abandoned.
    If the goal of the current Congress is to retain the discipline of 
the caps and PAYGO mechanism but gear the specific targets so that all 
surpluses stemming from Social Security receipts are used to pay down 
debt (in other words, so that there is no on-budget deficit), I would 
remind the committee that an earlier model exists. The 1990 BEA was 
drafted with that same goal in mind. Besides the spending caps and the 
PAYGO mechanism, it also contained a provision that established 
declining targets for the on-budget deficit. That provision could be 
used as the foundation for procedures to enforce on-budget balance.
    The precise caps for a new mechanism would need to be worked out, 
of course, and the political agreement required to implement the new 
regime of budgetary discipline would not be easy to obtain. However, 
the laws to implement a new agreement that protects the Social Security 
surplus already exist. And, except for the aggregate deficit mechanism, 
they were used successfully for the first several years of the BEA.

                             A FINAL POINT

    I spoke to this committee last year about a number of conceptual 
problems that I thought needed to be addressed by a new budget concepts 
commission. None of those problems have been addressed, and some may 
have gotten worse. No matter what new regime of budgetary discipline 
results this year, I continue to advise that a new budget concepts 
commission is necessary.

    Chairman Nussle. Thank you.
    Welcome back, Mr. Kogan. We welcome your testimony at this 
time.

                   STATEMENT OF RICHARD KOGAN

    Mr. Kogan. Thank you, Mr. Chairman, Mr. Spratt. It is good 
to be home. Thank you for your exceedingly kind words.
    Unlike all the other witnesses, I speak only for myself, 
not for any organization.
    I would like to make four points this morning:
    First, the Budget Enforcement Act of 1990, which many have 
discussed, is a far better process, as many have said, than the 
Gramm-Rudman-Hollings process that preceded it.
    Second, no process--not caps, not PAYGO--which as I just 
said, is a far better process--can force bipartisan agreement 
when the actors don't want to agree. What the BEA did best with 
its caps and PAYGO rule, was to enforce an agreement that the 
two parties had already come to.
    In that respect, then, I would agree with the implication 
of what Mr. Frenzel said, which is that if you want to 
reestablish caps and PAYGO in any form, or anything like them, 
the first requirement is to negotiate a substantive agreement 
between the leadership of Congress and the President--have a 
budget summit--and then use a budget process like this one, 
which has proven that it is useful in enforcing agreements, as 
the enforcer after the fact. But a budget summit would be the 
necessary predicate.
    Third, I want to point out that the facts make it clear 
that excessively large tax cuts can lead to serious budget 
problems. There has been a lot of discussion by previous 
witnesses implying that there is an equation between lack of 
budget discipline and spending increases. As a matter of logic, 
it is equally true that lack of budget discipline can mean lack 
of discipline in tax cuts. As a matter of history, I think it's 
fair to say that lack of discipline in tax cuts has actually 
been the greater threat than lack of discipline in spending.
    Finally, I would like to reiterate a point that others have 
made today, which is that Congress has yet to figure out how it 
wants to deal with surpluses. I would like to offer a 
suggestion made by Robert Reichsauer, former director of CBO.
    OK. Let me go through my points and use these slides that 
magically appeared on the screen to illustrate them.
    First of all, slide one shows the amount by which the first 
Gramm-Rudman law of 1985 and the second Gramm-Rudman law of 
1987 were violated. They set six deficit targets declining to 
zero. Those targets were missed by incredibly large and growing 
amounts. The first GRH law, which was going to balance the 
budget by 1991, ended up missing its target by $356 billion in 
2002 dollars. The second GRH law, which was abandoned when it 
got too far out of whack, missed its 1991 target by $272 
billion in constant dollars.


    The next slide makes the same point in a different way. In 
the next slide you can see what the budget outcomes were under 
GRH versus the budget outcomes under the caps and PAYGO system. 
Now, the caps and PAYGO system did not require that we hit any 
specific target; it merely required that we behave ourselves 
with our appropriations, with our tax cuts, and with our 
entitlement increases. It let the chips fall where they may. It 
turned out that behaving ourselves over a long period of time 
was better than setting a dollar target for the deficit or 
surplus and trying to hit that target, or pretending to try to 
hit that target. As you can see, the total amount of deficit 
reduction under GRH from the beginning to the end of the period 
was 1.3 percent of GDP, but under the BEA it was 4.7 percent of 
GDP.



    OK, enough said about this, because I think all the 
witnesses are in pretty clear agreement that fixed deficit 
targets, as in GRH--and, I might add, as in lockboxes and 
constitutional amendments--really aren't a workable idea.
    So let me move on to my third point--which is perhaps the 
one that I should spend the most time on because it contradicts 
what earlier witnesses said--which is that tax cuts can be as 
fiscally irresponsible as spending increases, or more so. If 
you look at the slide that is up now, slide three, you will see 
the size of the tax cut that was passed by the last Congress, 
and the spending increases projected for about 10 years--as 
though they would continue forever--that were passed by the 
last Congress. You can see that the tax cut amounted to a very 
significant share--more than three-quarters--of the costs that 
the last Congress enacted. So if the total costs turned out to 
be excessive, excessive tax cuts were the culprit.
    As we move on to the next slide, you will see what happened 
to spending and revenues as a share of GDP since the creation 
of the Congressional Budget Act of 1974. You can see that there 
were long periods of time in which spending shrank; long 
periods of time in which revenues rose; and this led to the 
temporary surpluses, the 4 years' worth of surpluses that we 
actually observed. But you will also see something that is 
intriguing, which is that spending tended to rise when taxes 
were cut, and spending tended to fall when revenues were 
increased. There is an old line that is taken as a truism, 
which is that if you raise revenues, if you leave the money in 
Washington, ``they'' will just spend it. I never knew who 
``they'' were. But this slide indicates that the opposite is 
the case.





    The next slide corrects for the fact that there is a little 
bit of self-perpetuating results in the previous slide because 
of the fact that we're measuring as a percentage of GDP, and 
spending increases as a percent of GDP and revenues as a 
percent of GDP fall when there is a recession, and vice versa 
when there is a boom.



    In this slide, we use numbers prepared by CBO in which the 
business cycle is simply removed, so that we're talking about 
the underlying rate of revenues and spending as a share of GDP. 
You can see that spending as a share of GDP declined for 11 
consecutive years, starting with the enactment of the Budget 
Enforcement Act of 1990. This is not a coincidence. You can see 
also that the spending explosions that people are complaining 
about in 1999 and 2000--spending was still declining in those 
years. You can see also that the two biggest budget changes 
that happened during the entire period, other than the long 
spending decline, were the big tax cut of 1981 and the big tax 
cut of 2001. In the case of the 1981 tax cut at least, it led 
to very, very large deficits; deficits that were too large for 
the country to be comfortably dealing with.
    OK. If you move to the next slide, you'll see it examines 
the relationship between revenues and outlays that was 
indicated by the previous one. What this slide shows is that 
there is a clear inverse relationship, that the higher the 
level of revenues, the lower the level of spending, and vice 
versa. I know this contradicts conventional wisdom, but here 
you have 20 years of data that contradicts conventional wisdom; 
you have a correlation that is so strong that social scientists 
would stay awake at night celebrating if they found it in the 
rest of their data.



    OK. So if you move on to the next slide, you'll see it 
examines a different argument in favor of tax cuts. One of the 
arguments in favor of tax cuts, of course, was the one I just 
stated, the conventional wisdom that if you don't cut taxes and 
there are surpluses hanging around or revenues hanging around, 
``they'' will just spend it.



    The other contention is that tax cuts--and particularly 
reductions in marginal rates at the top--are good for long-term 
economic growth. I'm not talking about a short-term stimulus, 
when clearly tax cuts are useful, but rather over the long 
term, when reductions in marginal tax rates supposedly have 
supply-side benefits.
    The evidence seems to be that the supply-side benefits, 
though they are small, and that the harm done by making 
deficits larger than they were--or surpluses smaller than they 
would otherwise be--is as great, perhaps, as the supply side 
benefits, since the economy does not benefit in the long term 
from tax cuts.
    You see in the bottom part of the panel, ``real economic 
growth in the 1980s,'' measured from the peak of 1981 to the 
peak of 1990. In the 1980s, economic growth was 3.2 percent 
real growth per year on average. In the 1990s, when tax rates 
at the top were raised, and raised fairly substantially, real 
economic growth was 3.2 percent per year on average. The 1990s 
performed as well as the 1980s, even though they had very 
different tax rates at the top. The economic argument for 
lowering tax rates at the top, I think, simply doesn't exist on 
the basis of this evidence.
    So what are we left with, if the argument for tax cuts--the 
economic arguments, and the ``restraining spending'' arguments 
for tax cuts--have proved invalid on the basis of the 
evidence--we are left with the normal give-and-take of politics 
in which the level of spending and the level of taxes, the 
purposes of spending, and the nature of taxes, are public 
policy preferences. In this regard, then, any budget process 
should be neutral, I think, between taxes and spending. It 
should not be a budget process designed to control spending. It 
should be a budget process designed to control spending and 
control tax cuts. That's the essence of the points that I 
wanted to make by reviewing the evidence of the last 20 or 30 
years.
    With respect to the final point that I made, that the 
Congress doesn't know how to deal with surpluses, I want to 
offer a suggestion that Robert Reichsauer offered over a year 
ago, in which he said that basically you should discount 
projected surpluses. He offered this, perhaps, as an informal 
or formal rule that Congress could adopt: that if surpluses are 
projected into the future, make a point of not committing all 
of them. In fact, commit only a declining share of them in any 
given budget cycle or any given Congress. He suggested, purely 
for illustration, that you commit only 80 percent of the 
surpluses that you foresee in the first 2 years and only 60 
percent of the surpluses that you foresee in the next 2 years, 
and so on.
    The theory behind this suggestion is that if the surpluses 
really do materialize, if the projections prove accurate, if 
the good news really is good news, then you can pass successive 
tax cuts year after year, Congress after Congress. It won't get 
you in trouble back home if you pass tax cuts every other 
year--or spending increases. But if the surpluses prove to be a 
mirage, you will not have overcommitted them prematurely.
    That concludes my testimony. Thank you very much for your 
patience and for your willingness to let me go, even when the 
light said ``red/stop'' over there.
    [The prepared statement of Richard Kogan follows:]

 Prepared Statement of Richard Kogan, Senior Fellow, Center on Budget 
                         and Policy Priorities

    Mr. Chairman, Mr. Spratt, members of the committee, I am always 
happy to come home to the House Budget Committee. My prepared testimony 
is brief. With your permission, I would like that testimony and 
accompanying charts, graphs, and other material to be placed in the 
record.
    I will make four points this morning. First, the Budget Enforcement 
Act of 1990, which established appropriations caps and pay-as-you-go 
rule, is a far better budget process than some type of fixed dollar 
target for the deficit or surplus, such as under Gramm-Rudman-Hollings 
in 1986-1990 or under any version of the proposed ``lockboxes.''
    Second, no process--not even caps and PAYGO--can force bipartisan 
agreement when the principal budget players do not want to agree. Given 
how evenly balanced the government is between the two parties, a budget 
summit negotiation is probably the best budget process.
    Third, the facts make it clear that excessively large tax cuts lead 
to serious budget problems but do little or nothing to help the long-
term growth of the economy. This was true with the Reagan tax cut of 
1981 and is true of the Bush tax cut of 2001. One useful budget process 
reform would be to require that the reconciliation process be used only 
if some large portion of a reconciliation bill (such as three-fourths) 
consist of spending reductions and tax increases. No more than one-
fourth of the budgetary effects could be tax cuts or entitlement 
increases, so the bill in net could only be used to protect the public, 
not dissipate it.
    Finally, the Congress has yet to sort out how to deal with 
surpluses, especially since budget projections are just educated 
guesses. The simplest approach may be to develop a new consensus: agree 
to treat some share of projected surpluses as non-existent. At a 
minimum, we should be sure surpluses are real before we dispose of 
them. Better, we should try to preserve a noticeable share of any 
future surpluses to pay down the debt; that is the most direct and 
effective way to prepare for the inevitable cost of the baby boomers' 
retirement.
    I will illustrate each of these points by referring to graphs or 
charts that I have prepared.

                              GRH VS. BEA

    GRH set fixed deficit targets declining to zero. Through excessive 
gimmickry and the because the economy is far stronger than the budget, 
the targets were missed by amounts that became embarrassingly huge [See 
slide 1].
    The BEA, in contrast, was used to enforce a budget agreement made 
between a Republican president and a Democratic Congress, an agreement 
that all the leadership (except for the new wave of House Republicans) 
was committed to enforcing. The BEA gave the president and the 
leadership special tools to prevent backsliding. The BEA was extended 
twice and was closely adhered to until 1998, when surpluses first 
appeared and threw everybody for a loop. Slide 2 shows that budget 
outcomes were far better under the BEA than under GRH.
    I would also call to your attention to CBO's 1993 annual report. 
CBO devoted an entire chapter to a discussion of the budget process, 
focusing on the lessons learned over the prior 7 years. It concluded, 
as I have, that fixed dollar targets such as in GRH are a mistake. I 
have included that chapter as an attachment to my testimony. I can do 
nothing better than to quote CBO's conclusion:
    The past indicates that efforts to reduce the deficit are most 
likely to be successful if the President and the Congress first agree 
on policy actions and then set up processes to enforce them: deficit 
reduction does not work well if the process changes precede the policy 
actions. * * * Procedures are important, but they should not be asked 
to do what they cannot.
    If you are dissatisfied with the current state of the budget, if 
you are disconcerted by the fact that the President's budget calls for 
deficits outside of Social Security in every one of the next 10 year, 
then CBO's conclusions suggest that a budget summit is the best budget 
process, with new caps and a new PAYGO rule, or some equivalent rules 
of accountability, to enforce the summit agreement after it is reached.

                    TAX CUTS ARE THE PRIMARY CULPRIT

    I turn now to last year's tax cut. On its surface, this would seem 
to be an issue of policy, not process. But issues relating to the tax 
cut have a bearing on process precisely because many people, possibly 
including some on this committee, mistakenly believe that controlling 
spending through a more rigid budget process is the boulevard to fiscal 
responsibility. That belief misses the key point: excessive tax cuts 
got the Nation's finances in trouble in 1981 and may also have done so 
in 2001. History suggests that budget process is more likely to produce 
sustained debt reduction if it is geared to stopping tax cuts than if 
it ignore tax cuts. That is why I would like to turn your attention to 
the historical record.
    Slide 3 makes clear that last year's tax cut is far more 
significant than the spending increases enacted last year in causing 
projected surpluses to melt away. Focusing just on legislation, we see 
that more than three-fourths of the shrinkage in the 10-year surplus 
was caused by the tax cut.
    There were at least four appealing arguments made for last year's 
tax cut:
    1. Surpluses were so large that we could pay off the entire debt in 
a decade even with the tax cut.
    2. If we didn't get rid of the surplus through a tax cut, ``they'' 
would just spend it. (Who are ``they'')?
    3. The tax cut would promote long-term economic growth by 
encouraging ``supply-side'' decisions, such as to work more hours and 
to save more of one's paycheck.
    4. Americans were over-taxed.
    Each of these arguments was and is false. First, it is evident from 
this year's budget that promises of debt reduction were a mirage.
    Second, the notion that tax increases lead to spending increases is 
contradicted by a mass of evidence. Slide 4 shows the path of spending 
and revenues since 1976, when the Congressional Budget Act first went 
into effect and the first congressional budget was agreed to. In only 
three of the years since then have there been both tax increases and 
spending increases in the same year. Far more often than not, spending 
goes up when revenues go down, and vice versa.
    To a small extent, the data reflect not congressional policy but 
the economy. When the economy is in a recession, for instance, GDP is 
abnormally small but revenues fall even faster. Meanwhile, spending 
rises slightly if only because of unemployment benefits; primarily, 
though, spending grows as a percent of GDP because GDP shrinks, not 
because spending grows. To correct for the effects of the economy, 
slide 5 shows the data after CBO has adjusted it to remove the effects 
of the business cycle. Slide 5 shows what spending and revenues as a 
percent of GDP would have been if the economy had always been running 
at full employment, no busts and no booms. As you can see, the story is 
the same, though not quite as extreme; when revenues go up, spending 
goes down, not up. The two notable exceptions are right after the huge 
1981 tax cut, which was accompanied by major increases in defense 
funding, and right after the huge 2001 tax cut, also accompanied by 
major increases in defense funding.
    Slide 6 shows this inverse relationship between revenues and 
spending even more clearly. From 1983 through 2003, there was a very 
strong negative correlation between revenues and expenditures (it is a 
``negative'' correlation because spending goes down when revenues 
rise). Statisticians would tell you that the correlation is extremely 
statistically significant. In short, Congress has spent most of the 
last 20 years demonstrating that conventional wisdom is wrong: in at 
least two cases, tax cutters were also big spenders, and in more normal 
times, when those who care more about the Nation's fiscal health are in 
control, revenues grow and spending shrinks. I would also remind you 
that slide 2 showed that, during the period from 1990 to 1998, when the 
BEA was ascendant, spending cuts were greater than tax increases.
    The third argument for the tax cut was that low marginal tax rates 
promote long-term growth, especially by providing incentives to save 
more and work more. There are two problems with this argument:
     Big tax cuts lead to larger deficits or smaller surpluses, 
of course, and that reduces the stock of capital available for 
investment, thereby harming long-term growth. William Gale and Samara 
Potter of the Brookings Institution recently concluded that, precisely 
because of its budgetary effect, last year's tax cut is more likely to 
harm long-term growth than help it.
     While some people may choose to work more hours or save 
more of their salary in response to lower marginal rates, others choose 
just the opposite. Because their take-home pay goes up, they can afford 
to work fewer hours; because their savings accounts grow faster, they 
can afford to save a smaller share of their paychecks and still meet 
their savings targets. This is why supply-side effects are so weak.
    Slide 7 illustrates this point by comparing rates of real economic 
growth during each period since 1960. It can be seen that average 
growth rate in the 1980s, when the top marginal tax rate was twice 
reduced very substantially, are the same as growth rate in the 1990s, 
when the top marginal tax rate was substantially increased. What is 
more, the 1990s achieved the same growth rates as the 1980s even though 
the size of the working-age population was growing more slowly during 
the 1990s. The conclusion must be that productivity was growing faster 
in the 1990s than in the 1980s, labor force participation rates were 
rising faster, or the number of hours worked was rising faster. These 
facts must be disconcerting to supply-siders since lower marginal 
rates, not higher rates, are supposed to produce these effects.
    The question of whether the Nation is over-taxed is a judgment 
call, not subject to scientific measurement. But I call your attention 
to slide 8, which shows some facts that may inform one's judgment about 
the levels of taxation of middle-income families and of the very well 
off.

                       THE CONUNDRUM OF SURPLUSES

    Congress has demonstrated it does not know how to deal with 
surpluses. Lockbox legislation tried to define the surpluses out of 
existence. The cause was good since current surpluses can help us pay 
for the inevitable costs of the baby boomers when they retire, 
pretending that part of the surplus ``doesn't count'' (and relying on 
the natural public instinct to object to deficits in normal times) 
would lead to the salutary effect of paying off the debt and, if we are 
lucky, building up some reserves. But lockbox proposals are just GRH-
light with a different target, and so cannot form the basis for a 
meaningful budget process.
    Better than defining away the surpluses might be to adopt a rule 
first proposed by Robert Reischauer more than 1 year ago. He suggested 
that budget plans account for the reality that projections are 
uncertain and for the fact that the degree of uncertainty grows as one 
looks farther ahead by putting an increasing faction of any projected 
surplus off the table. He posited a rule under which 20 percent of the 
surplus for the next 2 years would be off limits, 40 percent of the 
surplus in the following 2 years, and so on. This would have provided a 
widening margin against over-optimistic projections or unforseen 
events. If Congress had adopted that approach last year, the tax cut 
would have been smaller, especially in the outyears, and the Treasury 
and the budget would today be better off. If surpluses keep growing in 
reality, as they grew in last year's projections, successive Congresses 
could adhere to the rule and still pass successive tax cuts.

                               CONCLUSION

    My general conclusion is to recognize, in designing any budget 
process, that large tax cuts are problems, not solutions, and therefore 
to design budget processes accordingly.
    Specifically, I recommend a budget summit, backed up by caps and a 
PAYGO rule--or the equivalent as enforcement tool--if a bipartisan 
agreement is reached.
    Second, I recommend returning reconciliation to its original 
intention, as a procedure to reduce deficits or increase surpluses.
    Third, I recommend a formal or informal but public agreement to the 
Reischauer plan, under which projected surpluses would be taken with 
ever-growing grains of salt, and not dissipated before they 
materialized.

    Chairman Nussle. Thank you. And we have obviously made some 
changes since you testified before----
    Mr. Kogan. I find them remarkable. I tried to take 
advantage of them.
    Chairman Nussle. Susan Irving, welcome back to the 
committee, and we are pleased to receive your testimony.

                  STATEMENT OF SUSAN J. IRVING

    Ms. Irving. Thank you, Mr. Chairman, Mr. Spratt, Mr. 
Putnam. It is a pleasure to be back.
    About a year ago some of us sat here to talk about how to 
think about controls in a time of surplus, or rather in a time 
when the surplus projection continued out about 10 years. Even 
last year, when you moved out past that time horizon, both the 
good and the bad news for the children visiting here today is 
that my generation is getting older and will live forever.
    I think it is important to recognize that we are looking 
ahead at how to think about a budget process that offers us a 
guidepath for the near term, where we really don't know how 
long we're going to be in deficit or what challenges we're 
going to face, for the medium term, where we expect to return 
to surpluses, and for the longer term where with a certainty 
much greater than any budget forecast--absent something that my 
generation would view as a cataclysm--you are facing a 
demographic tidal wave which will overwhelm the budget and make 
the debates we have today about budgetary flexibility look like 
a picnic.
    I will try to not merely repeat everything that the people 
before me have said. I think it is useful to stand back--and I 
here will repeat what some others have said--that a process 
will never force agreement where there is fundamental 
disagreement. You don't have to agree on every item. I think a 
process can provide you a focal point for debating priorities, 
for attempting to reach some compromise over the many 
conflicting demands that the American people express about what 
they want their Federal Government to do.
    I worked for a member of the other body at one point who 
used to say, ``All of American political history could be 
summed up in two sentences: Get the government off my back, and 
there ought to be a law.'' One of the challenges you face is 
that the ``ought to be a law'' part usually comes with dollar 
signs attached.
    We ask a great deal of our budget. We ask it to make a 
statement of aggregate fiscal policy--the burden that we will 
place on the economy by taking wealth out of the economy for 
our collective use. We ask it to give us a way to allocate 
resources across competing claims. At the agency level, we use 
it to drive program management; and recently, in the world of 
the Government Performance and Results Act, we like to see 
whether we can tighten and make more explicit the links between 
performance and how we allocate resources, which requires us to 
find a way to measure that link.
    I think it will be hard to find anyone who would disagree 
with Barry's four fundamental characteristics. Let me add just 
a few additional principles that we have articulated in the 
past.
    You would like to find a way, while recognizing that long-
term projections are really uncertain, to keep in mind the long 
term while you deal with the near term. You would like to find 
a process that facilitates making trade-offs between missions. 
It would be helpful to be able to look across both spending and 
tax incentives, and to make trade-offs across tools so that 
when you select a goal, you can select whether a loan program, 
a grant program, a direct spending program, or a tax incentive 
is the best way to address it. At the same time, just for full 
measure, you would like for the process to be enforceable, 
offer controls, hold people accountable, and be transparent.
    I believe, as my colleagues have mentioned, that the 
history of the Budget Enforcement Act shows us that controlling 
actions works a lot better than controlling final outcomes. 
Caps, in fact, do constrain appropriations when they are viewed 
as reasonable, when there is general acceptance that the caps 
represent a reasonable path toward a goal. By ``reasonable,'' I 
don't mean happy; in order for caps to feel binding at all, 
they are probably a little tighter than you would like, but 
they can't look to be ludicrous, and they cannot appear to have 
been set at a time of completely different circumstances.
    I think in the last few years, two things happened. 
Frankly, the caps for the last few years were a little bit 
over-tight when they were set because they assumed that we 
would hold discretionary spending to a slower rate of growth 
than had been true for the earlier part of the decade.
    When on top of that, surpluses arrived earlier than you 
expected, the caps became totally unrealistic to people, and 
what you saw was increasing amounts labeled ``emergency,'' a 
broadening definition of emergency, and then finally, a 
situation where, when you are on your way out the door, you 
raise the caps to what you have already decided.
    PAYGO similarly, I think, worked to limit expansion. It is 
important to remember that the PAYGO structure did not seek to 
re-examine existing programs. It grandfathered their structure. 
It sought to prevent Congress from adding new programs, or from 
cutting taxes without offsetting the revenue loss. It has 
worked admirably well as a restraint on adding programs, and 
until the very recent past, when again surpluses made this 
argument less credible to more people, it also forced most tax 
cuts to be offset.
    PAYGO, I would argue, going forward--whether in surplus or 
not--as its fundamental design, needs to be re-examined because 
I think it is not tenable, looking at the future, to leave the 
base home free, because the drivers of the future have been 
exempt: the current structure of those programs. And if you 
leave them ``home free,'' you force the competition to be 
between new proposals. Similarly, on the discretionary side, 
you need to think about ways to enforce competition to be not 
merely between new proposals, but across both new proposals and 
existing programs. Just because something has been in existence 
since before I was born, that doesn't mean it should have 
priority over a new, better idea.
    Looking ahead, what do I think? I think you probably want 
caps. Caps have a lot of advantages. It's easy to measure 
compliance. They meet the call of transparency. Depending on 
the way you design them, they permit trade-offs across 
boundaries. The more separate subcategories you create, the 
narrower the range of trade-offs. That's a policy decision.
    When you go to setting the caps, given the uncertainty of 
today's world, I would suggest setting them for a relatively 
short time. You don't want another 10-year caps deal because 
you don't know what the world will look like--any more than you 
did 10 years ago. It is important to think about how you will 
deal with the safety valve issues. How much of ``emergency'' 
should be totally exempt? And I would like to note here, I am 
talking about what I would call run-of-the-mill normal 
emergencies; floods, pestilence, earthquakes--not cataclysmic 
events like September 11.
    How do you design the caps to work on the incentives for 
sort of working around them? The increase in user fees in the 
recent past seems to me, quite likely to be in part, due to the 
structure of the caps.
    How can you define a PAYGO goal that replaces budget 
neutrality? This will be especially important when you return 
to surplus, where saving the entire surplus is not going to be 
accepted by most people. But how do you set aside some portion 
of the surplus and design a path that gets you there?
    Will you--and if so, how--permit trade-offs across those 
walls, between discretionary and PAYGO walls? And how will you 
keep that from being the same as having no controls?
    I think with that, I will stop and say it's a pleasure to 
work with you. Thank you for letting me run into the red, as 
well. We look forward to dealing with you and your staff in the 
future.
    [The prepared statement of Susan J. Irving follows:]

    Prepared Statement of Susan J. Irving, Director, Federal Budget 
                  Analysis, General Accounting Office

    Mr. Chairman, Mr. Spratt, members of the committee, it is a 
pleasure to join you today as you think about how to extend and adapt 
the Budget Enforcement Act (BEA) regime. The discretionary spending 
limits and pay-as-you-go (PAYGO) mechanism established by BEA will 
expire this year [Footnote 1].
    Last summer when I appeared before this committee, we were 
discussing what kind of process and controls made sense in a time of 
surplus. Today--for a variety of reasons--we face a different outlook. 
The events of September 11 imposed a new set of demands on the Federal 
budget. At the same time, the pent-up demands kept in abeyance during 
years of fighting deficits remain. The question before you is: what 
kind of process and controls will permit Congress and the President to 
respond to the needs of today while keeping in mind the need to deal 
with the budgetary challenges looming over the horizon.
    Later in this statement I will talk about some particular elements 
and ideas that have been proposed for adapting and extending budget 
enforcement mechanisms. Before doing that, however, I would like to 
step back and talk a bit about what a budget process can and cannot do.
    A budget process can surface important issues; it can seek to focus 
the debate on the important choices. But it is not a substitute for 
substantive debate--no process can force agreement where one does not 
exist.
    We ask a great deal of our budget process. We use it to determine 
aggregate fiscal policy and to allocate resources across different 
claims. We use it to drive program management. In the context of the 
Government Performance and Results Act, we turn to the budget to tell 
us something about the cost of obtaining a given level of results.
    BEA, when first developed and later when it was extended, was a 
process established to enforce a previously reached substantive 
agreement. Last year, given 10-year projections showing fairly sizable 
surpluses, there was a good deal of discussion about how much of the 
surplus should be spent--or used for a tax cut--and how much of it 
should be used for debt reduction. At that time, Congress and the 
president seemed to have reached a tacit agreement that the Social 
Security surplus should be used for debt reduction. While this did not 
eliminate disagreements about tax or spending policy, it did provide a 
fiscal target to replace ``zero deficit'' or ``balanced budget.'' It 
set the outside parameters for the budget debate.
    As I have testified before, the budget represents the decisions 
made about a large number of often conflicting objectives that citizens 
want the government to address. We should not be surprised that it 
generates controversy. As BEA expires, you face a wealth of options and 
choices. I appreciate the invitation to talk about some of these today. 
Some of these points are discussed more fully in the BEA compliance 
report [Footnote 2] that we did last year at your request, Mr. 
Chairman.

                    PRINCIPLES FOR A BUDGET PROCESS

    In the past, we have suggested four broad principles or criteria 
for a budget process [Footnote 3]. A process should:
     Provide information about the long-term impact of 
decisions, both macro--linking fiscal policy to the long-term economic 
outlook--and micro--providing recognition of the long-term spending 
implications of government commitments;
     provide information and be structured to focus on 
important macro trade-offs--e.g., between investment and consumption;
     provide information necessary to make informed trade-offs 
between missions (or national needs) and between the different policy 
tools of government (such as tax provisions, grants, and credit 
programs); and
     be enforceable, provide for control and accountability, 
and be transparent, using clear, consistent definitions.
    The lack of adherence to the original BEA spending constraints in 
recent years and the expiration of BEA suggest that now may be an 
opportune time to think about the direction and purpose of our Nation's 
fiscal policy. The surpluses that many worked hard to achieve--with 
help from the economy--not only strengthened the economy for the longer 
term but also put us in a stronger position to respond to the events of 
September 11 and to the economic slowdown than would otherwise have 
been the case. Going forward, the Nation's commitment to surpluses will 
be tested: a return to surplus will require sustained discipline and 
difficult choices. It will be important for Congress and the president 
to take a hard look at competing claims on the Federal fisc [Footnote 
4]. A fundamental review of existing programs and operations can create 
much needed fiscal flexibility to address emerging needs by weeding out 
programs that have proven to be outdated, poorly targeted, or 
inefficient in their design and management. Last October, you and your 
Senate counterparts called for a return to budget surplus as a fiscal 
goal [Footnote 5]. This remains an important fiscal goal, but achieving 
it will not be easy. Much as the near-term projections have changed in 
a year, it is important to remember that even last year the long-term 
picture did not look rosy. These long-term fiscal challenges argued for 
continuation of some fiscal restraint even in the face of a decade of 
projected surpluses. The events of September 11 reminded us of the 
benefits fiscal flexibility provides to our Nation's capacity to 
respond to urgent and newly emergent needs. However, as the comptroller 
general has pointed out, absent substantive changes in entitlement 
programs for the elderly, in the long term there will be virtually no 
room for any other Federal spending priorities--persistent deficits and 
escalating debt will overwhelm the budget [Footnote 6]. While the near-
term outlook has changed, the long-term pressures have not. These long-
term budget challenges driven by demographic trends also serve to 
emphasize the importance of the first principle cited above--the need 
to bring a long-term perspective to bear on budget debates.
    There is a broad consensus among observers and analysts who focus 
on the budget both that BEA has constrained spending and that 
continuation of some restraint is necessary both in times when near-
term deficits are accepted and when we achieve surpluses. These views 
have been articulated by commentators ranging from Federal Reserve 
Chairman Alan Greenspan, to former CBO Director Robert Reischauer, the 
Concord Coalition, and President Bush. Discussions on the future of the 
budget process have primarily focused on revamping the current budget 
process rather than establishing a new one from scratch.
    Where the discussion focuses on specific control devices, the two 
most frequently discussed are: (1) extending the discretionary spending 
caps and (2) extending the PAYGO mechanism.

               RECENT HISTORY OF BUDGET ENFORCEMENT RULES

    The Budget Enforcement Act of 1990 (Title XIII of P.L. 101-508) was 
designed to constrain future budgetary actions by Congress and the 
president. It took a different tack on fiscal restraint than earlier 
efforts, which had focused on annual deficit targets in order to 
balance the budget [Footnote 7]. Rather than force agreement where 
there was none, BEA was designed to enforce a previously reached 
agreement on the amount of discretionary spending and the budget 
neutrality of revenue and mandatory spending legislation. The law was 
extended twice.
    While there is widespread agreement among observers and analysts of 
the budget that BEA served for much of the decade as an effective 
restraint on spending, there is also widespread agreement that BEA 
control mechanisms were stretched so far in the last few years that 
they no longer served as an effective restraint. In part, recurring 
budget surpluses undermined the acceptance of the spending caps and 
PAYGO enforcement.
    Figure 1 illustrates the growing lack of adherence to the original 
discretionary spending caps since the advent of surpluses in 1998. The 
figure shows the original budget authority caps as established in 1990 
and as extended in 1993 and 1997, adjustments made to the caps, and the 
level of actually enacted appropriations for fiscal years 1991 through 
2002. As we reported in our last three compliance reports, the amounts 
designated as emergency spending for fiscal years 1999 and 2000--$34.4 
billion and $30.8 billion respectively--were significantly higher than 
in most past years [Footnote 8]. In addition to the larger than normal 
amounts, emergency appropriations in both 1999 and 2000 were used for a 
broader range of purposes than in most prior years [Footnote 9].



    Emergency spending designations have not been the only route to 
spending above the discretionary spending caps. For fiscal year 2001, 
Congress took a different approach--one that also highlights the 
declining effectiveness of the BEA discretionary spending limits. The 
Foreign Operations Appropriations Act (P.L. 106-429) raised the 2001 
budget authority cap by $95.9 billion, a level assumed to be sufficient 
to cover all enacted and anticipated appropriations. Also, in January 
2001, CBO reported that advance appropriations, obligation and payment 
delays, and specific legislative direction for scorekeeping had been 
used to boost discretionary spending while allowing technical 
compliance with the limits [Footnote 10]. In 2002, Congress once again 
raised spending limits to cover enacted appropriations. The Department 
of Defense and Emergency Supplemental Appropriations Act for 2002 
[Footnote 11] adjusted the budget authority caps upward by $134.5 
billion.
    Nor has PAYGO enforcement been exempt from implementation 
challenges. The consolidated appropriations acts for both fiscal years 
2000 and 2001 mandated that OMB change the PAYGO scorecard balance to 
zero. In fiscal year 2002, a similar instruction in the Department of 
Defense and Emergency Supplemental Appropriations Act eliminated $130.3 
billion in costs from the PAYGO scorecard. Both OMB and CBO estimated 
that without the instructions to change the scorecard, sequestrations 
would have been required in both 2001 and 2002.

                EXTENDING CAPS ON DISCRETIONARY SPENDING

    BEA distinguished between spending controlled by the appropriations 
process--"discretionary spending"--and that which flowed directly from 
authorizing legislation--"direct spending,'' sometimes called 
``mandatory.'' Caps were placed on discretionary spending--and 
Congress' compliance with the caps was relatively easy to measure 
because discretionary spending totals flow directly from legislative 
actions (i.e., appropriations laws).
    As I noted above, there has been broad consensus that, although the 
caps have been adjusted, they did serve to constrain appropriations. 
This consensus, combined with the belief that continuing some 
restraints is important, has led many to propose that some form of cap 
structure be continued as a way of limiting discretionary 
appropriations. However, the actions discussed above have also led many 
to note that caps can only work if they are realistic; while caps can 
work if they are tighter than some may like, they are unlikely to hold 
if they are seen as totally unreasonable or unrealistic. If they are 
set at levels viewed as reasonable (even if not desirable) by those who 
must comply with them, spending limits can be used to force choices. In 
the near term, limits on discretionary spending may be an important 
tool to prompt re-examination of existing programs as well as new 
proposals.
    Some have proposed changes in the structure of the caps by limiting 
them to caps on budget authority. Outlays are controlled by and flow 
from budget authority--although at different rates depending on the 
nature of the program. Some argue that the existence of both budget 
authority and outlay caps has encouraged provisions such as ``delayed 
obligations'' to be adopted not for programmatic reasons but as a way 
of juggling the two caps. The existence of two caps may also encourage 
moving budget authority from rapid spend out to slower spend out 
programs, thus pushing more outlays to the future and creating problems 
in complying with outlay caps in later years. Extending only the budget 
authority cap would eliminate the incentive for such actions and focus 
decisions on that which Congress is intended to control--budget 
authority, which itself controls outlays. This would be consistent with 
the original design of BEA. The obvious advantage to focusing decisions 
on budget authority rather than outlays is that Congress would not 
spend its time trying to control the timing of outlays.
    However, eliminating the outlay cap would raise several issues--
chief among them being how to address the control of transportation 
programs for which no budget authority cap currently exists, and the 
use of advance appropriations to skirt budget authority caps. However, 
agreements about these issues could be reached--this is not a case 
where implementation difficulties need derail an idea. For example, the 
fiscal year 2002 budget proposed a revision to the scorekeeping rule on 
advance appropriations so that generally they would be scored in the 
year of enactment. Such a scoring rule change could eliminate the 
practice of using advance appropriations to skirt the caps. The 2002 
Congressional Budget Resolution took another tack; it capped advance 
appropriations at the amount advanced in the previous year. This year 
the administration proposed that total advance appropriations continue 
to be capped in 2003 and the President's budget assumed that all 
advance appropriations would be frozen except for those that it said 
should be reduced or eliminated for programmatic reasons.
    There are other issues in the design of any new caps. For example, 
for how long should caps be established? What categories should be 
established within or in lieu of an overall cap? While the original BEA 
envisioned three categories (Defense, International Affairs, and 
Domestic), over time categories were combined and new categories were 
created. At one time or another caps for Nondefense, Violent Crime 
Reduction, Highways, Mass Transit and Conservation spending existed--
many with different expiration dates. Should these caps be ceilings, or 
should they--as is the case for highways and conservation--provide for 
``guaranteed'' levels of funding? The selection of categories--and the 
design of the applicable caps--is not trivial. Categories define the 
range of what is permissible. By design they limit tradeoffs and so 
constrain both Congress and the president.
    Because caps are defined in specific dollar amounts, it is 
important to address the question of when and for what reasons the caps 
should be adjusted. This is critical for making the caps realistic. For 
example, without some provision for emergencies, no caps can be 
successful. In the recent past it appears that there has been some 
connection between how realistic the caps are and how flexible the 
definition of emergency is. As discussed in both our 2000 and 2001 
compliance reports, the amount and range of spending considered as 
``emergency'' has grown in recent years [Footnote 12]. There have been 
a number of approaches suggested to balance the need to respond to 
emergencies and the desire to avoid making the ``emergency'' label an 
easy way to raise caps. The House Budget Resolution for fiscal year 
2002 (H. Con. Res. 83) established a reserve fund of $5.6 billion for 
emergencies in place of the current practice of automatically 
increasing the appropriate levels in the budget resolution for 
designated emergencies. It also established two criteria for defining 
an emergency. These criteria require an emergency to be a situation 
(other than a threat to national security) that (1) requires new budget 
authority to prevent the imminent loss of life or property or in 
response to the loss of life or property and (2) is unanticipated, 
meaning that the situation is sudden, urgent, unforeseen, and 
temporary.
    In the past others have proposed providing for more emergency 
spending under any spending caps--either in the form of a reserve or in 
a greater appropriation for the Federal Emergency Management Agency 
(FEMA). If such an approach were to be taken, the amounts for either 
the reserve or the FEMA disaster relief account would need to be 
included when determining the level of the caps. Some have proposed 
using a 5- or 10-year rolling average of disaster/emergency spending as 
the appropriate reserve amount. Adjustments to the caps would be 
limited to spending over and above that reserve or appropriated level 
for extraordinary circumstances. Since the events of September 11--and 
the necessary responses to it--would undoubtedly qualify as such an 
``extraordinary circumstance,'' consideration of new approaches for 
``emergency'' spending should probably focus on what might be 
considered ``more usual'' emergencies. It has been suggested that with 
additional up-front appropriations or a reserve, emergency spending 
adjustments could be disallowed. No matter what the provision, only the 
commitment of Congress and the president can make any limit on cap 
adjustments for emergencies work. States have used this reserve concept 
for emergencies, and their experiences indicate that criteria for using 
emergency reserve funds may be useful in controlling emergency spending 
[Footnote 13]. Agreements over the use of the reserve would also need 
to be achieved at the Federal level.
    This discussion of issues in extending the BEA caps is not 
exhaustive. Previously, we have reported on two other issues in 
particular--the scoring of operating leases and the expansion of user 
fees as offsets to discretionary spending. I would like to touch 
briefly on these.
      miscellaneous discretionary challenges: leases and user fees
    We have previously reported that existing scoring rules favor 
leasing when compared to the cost of various other methods of acquiring 
assets [Footnote 14]. Currently, for asset purchases, budget authority 
for the entire acquisition cost must be recorded in the budget up 
front, in the year that the asset acquisition is approved. In contrast, 
the scorekeeping rules for operating leases often require that only the 
current year's lease costs be recognized and recorded in the budget. 
This makes the operating lease appear less costly from an annual 
budgetary perspective, and uses up less budget authority under the cap. 
Alternative scorekeeping rules could recognize that many operating 
leases are used for long-term needs and should be treated on the same 
basis as purchases. This would entail scoring up front the present 
value of lease payments for long-term needs covering the same time 
period used to analyze ownership options. The caps could be adjusted 
appropriately to accommodate this change. Most recently this issue has 
arisen in authority provided to the Air Force to lease 100 Boeing 
aircraft to be used as tankers for up to 10 years when the underlying 
need for such aircraft is much longer--in fact, the need would likely 
encompass the aircraft's entire useful life. Changing the scoring rule 
for leases would be in part an attempt to have the rules recognize the 
long term need rather than the technical structuring of the lease.
    Many believe that one unfortunate side effect of the structure of 
BEA has been an incentive to create revenues that can be categorized as 
``user fees'' and so offset discretionary spending--rather than be 
counted on the PAYGO scorecard. The 1967 President's Commission on 
Budget Concepts recommended that receipts from activities which were 
essentially governmental in nature, including regulation and general 
taxation, be reported as receipts, and that receipts from business-type 
activities ``offset to the expenditures to which they relate.'' 
However, these distinctions have been blurred in practice. Ambiguous 
classifications combined with budget rules that make certain designs 
most advantageous has led to a situation in which there is pressure to 
treat fees from the public as offsets to appropriations under BEA caps, 
regardless of whether the underlying Federal activity is business or 
governmental in nature. Consideration should be given to whether it is 
possible to come up with and apply consistent standards--especially if 
the discretionary caps are to be redesigned. The administration has 
stated that it plans to monitor and review the classification of user 
fees and other types of collections.

                      EXTENDING AND REFINING PAYGO

    The PAYGO requirement prevented legislation that lowered revenue, 
created new mandatory programs, or otherwise increased direct spending 
from increasing the deficit unless offset by other legislative actions. 
As long as the unified budget was in deficit, the provisions of PAYGO--
and its application--were clear. During our few years of surpluses, 
questions were raised about whether the prohibition on increasing the 
deficit also applied to reducing the surplus. Although Congress and the 
executive branch both concluded that PAYGO did apply in such a 
situation--and although the question is moot currently, it would be 
worth clarifying the point if PAYGO is extended. Last year the 
administration proposed--albeit implicitly--special treatment for a tax 
cut. The 2002 budget stated that the President's tax plan and Medicare 
reforms were fully financed by the surplus and that any other spending 
or tax legislation would need to be offset by reductions in spending or 
increases in receipts. Ultimately, the Department of Defense and 
Emergency Supplemental Appropriations Act for 2002 eliminated the need 
to offset any of the PAYGO legislation by resetting the 2001 and 2002 
scorecard to zero. While this action was undertaken for a number of 
reasons, when surpluses return and Congress looks to create a PAYGO 
process for a time of surplus, it might wish to consider the kinds of 
debt targets we found in other nations [Footnote 15]. For example, it 
might wish to permit increased direct spending or lower revenues as 
long as debt held by the public is planned to be reduced by some set 
percentage or dollar amount. Such a provision might prevent PAYGO from 
becoming as unrealistic as overly tight caps on discretionary spending. 
However, the design of such a provision would be important--how would a 
debt reduction requirement be specified? How would it be measured? What 
should be the relationship between the amount of debt reduction 
required and the amount of surplus reduction (i.e., tax cut or direct 
spending increase) permitted? What, if any, relationship should there 
be between this calculation and the discretionary caps?
    While PAYGO constrained the creation or legislative expansion of 
direct spending programs and tax cuts, it accepted the existing 
provisions of law as given. It was not designed to trigger--and it did 
not trigger--any examination of ``the base.'' Cost increases in 
existing mandatory programs are exempt from control under PAYGO and 
could be ignored. However, constraining legislative actions that 
increase the cost of entitlements and mandatories is not enough. GAO's 
long-term budget simulations show that as more and more of the baby 
boom generation enters retirement, spending for Social Security, 
Medicare, and Medicaid will demand correspondingly larger shares of 
Federal revenues. Assuming, for example, that last year's tax 
reductions are made permanent and discretionary spending keeps pace 
with the economy, spending for net interest, Social Security, Medicare, 
and Medicaid consumes nearly three-quarters of Federal revenues by 
2030, leaving little room for other Federal priorities, including 
defense and education.
    The budget process is the one place where we as a Nation can 
conduct a healthy debate about competing claims and new priorities. 
However, such a debate will be needlessly constrained if only new 
proposals and activities are on the table. A fundamental review of 
existing programs and operations can create much-needed fiscal 
flexibility to address emerging needs by weeding out programs that have 
proven to be outdated, poorly targeted, or inefficient in their design 
and management. It is always easier to subject proposals for new 
activities or programs to greater scrutiny than that given to existing 
ones. It is easy to treat existing activities as ``given'' and force 
new proposals to compete only with each other. However, such an 
approach would move us further from, rather than nearer to, budgetary 
surpluses [Footnote 16].
    Previously we suggested some sort of ``lookback'' procedure to 
prompt a re-examination of ``the base'' in entitlement programs. Under 
such a process Congress could specify spending targets for PAYGO 
programs for several years. The President could be required to report 
in his budget whether these targets either had been exceeded in the 
prior year or were likely to be exceeded in the current or budget 
years. He could then be required to recommend whether any or all of 
this overage should be recouped--and if so, to propose a way to do so. 
Congress could be required to act on the president's proposal.
    While the current budget process contains a similar point of order 
against worsening the financial condition of the Social Security trust 
funds, [Footnote 17] it would be possible to link ``tripwires'' or 
``triggers'' to measures related to overall budgetary flexibility or to 
specific program measures. For example, if Congress were concerned 
about declining budgetary flexibility, it could design a ``tripwire'' 
tied to the share of the budget devoted to mandatory spending or to the 
share devoted to a major program.
    Other variations of this type of ``tripwire'' approach have been 
suggested. The 1999 Breaux-Frist proposal (S. 1895) for structural and 
substantive changes to Medicare financing contained a new concept for 
measuring ``programmatic insolvency'' and required congressional 
approval of additional financing if that point was reached. Other 
specified actions could be coupled with reaching a ``tripwire,'' such 
as requiring Congress or the president to propose alternatives to 
address reforms. Or the congressional budget process could be used to 
require Congress to deal with unanticipated cost growth beyond a 
specified ``tripwire'' by establishing a point of order against a 
budget resolution with a spending path exceeding the specified amount. 
One example of a threshold might be the percentage of gross domestic 
product devoted to Medicare. The president would be brought into the 
process as it progressed because changes to deal with the cost growth 
would require enactment of a law.

           IMPROVING THE RECOGNITION OF LONG-TERM COMMITMENTS

    In previous reports we have argued that the Nation's economic 
future depends in large part upon today's budget and investment 
decisions [Footnote 18]. In fact, in recent years there has been 
increased recognition of the long-term costs of Social Security and 
Medicare [Footnote 19].
    While these are the largest and most important long-term 
commitments--and the ones that drive the long-term outlook--they are 
not the only ones in the budget. Even those programs too small to drive 
the long-term outlook affect future budgetary flexibility. For 
Congress, the president, and the public to make informed decisions 
about these other programs, it is important to understand their long-
term cost implications. A longer time horizon is useful not only at the 
macro level but also at the micro-policy level. I am not suggesting 
that detailed budget estimates could be made for all programs with 
long-term cost implications. However, better information on the long-
term costs of commitments like employee pension and health benefits and 
environmental cleanup could be made available. New concepts and metrics 
may be useful. We developed them before for credit programs and we need 
to be open to expanding them to cover some other exposures. I should 
note that the president's fiscal year 2003 budget has taken a step in 
this direction by proposing that funding be included in agency budgets 
for the accruing costs of pensions and retiree health care benefits.
    The enactment of the Federal Credit Reform Act in 1990 represented 
a step toward improving both the recognition of long-term costs and the 
ability to compare different policy tools. With this law, Congress and 
the executive branch changed budgeting for loan and loan guarantee 
programs. Prior to credit reform, loan guarantees looked ``free'' in 
the budget. Direct loans looked like grant programs because the budget 
ignored loan repayments. The shift to accrual budgeting for subsidy 
costs permitted comparison of the costs of credit programs both to each 
other and to spending programs in the budget.
    Information should be more easily available to Congress and the 
President about the long-term cost implications both of existing 
programs and new proposals. In 1997 we reported that the current cash-
based budget generally provides incomplete information on the costs of 
Federal insurance programs [Footnote 20]. The ultimate costs to the 
Federal Government may not be apparent up front because of time lags 
between the extension of the insurance, the receipt of premiums, and 
the payment of claims. While there are significant estimation and 
implementation challenges, accrual-based budgeting has the potential to 
improve budgetary information and incentives for these programs by 
providing more accurate and timely recognition of the government's 
costs and improving the information and incentives for managing 
insurance costs. This concept was proposed in the Comprehensive Budget 
Process and Reform Act of 1999 (H.R. 853), which would have shifted 
budgetary treatment of Federal insurance programs from a cash basis to 
an accrual basis.
    There are other commitments for which the cash and obligation-based 
budget does not adequately represent the extent of the Federal 
Government's commitment. These include employee pension programs, 
retiree health programs, and environmental clean-up costs. While there 
are various analytical and implementation challenges to including these 
costs in budget totals, more could be done to provide information on 
the long-term cost implications of these programs to Congress, the 
president, and the interested public. We are continuing to analyze this 
issue.

                               CONCLUSION

    To affect decision making, the fiscal goals sought through a budget 
process must be accepted as legitimate. For many years the goal of 
``zero deficit"--or the norm of budget balance--was accepted as the 
right goal for the budget process. In the absence of the zero deficit 
goal, policymakers need an overall framework upon which a process and 
any targets can be based. When the deficits turned to surpluses, there 
was discussion of goals framed in terms of debt reduction or surpluses 
to be saved. As difficult as selecting a fiscal goal in times of 
surplus is, selecting one today may seem even more difficult. You must 
balance the need to respond not only to those demands that existed last 
year--demands kept in abeyance during many years of fighting deficits--
but also demands imposed on us by the events of September 11. At the 
same time--in part because of the demographic tidal wave looming over 
the horizon--the events of September 11 do not argue for abandonment of 
all controls.
    Whatever interim targets Congress and the president agree on, 
compliance with budget process rules, in both form and spirit, is more 
likely if end goals, interim targets, and enforcement boundaries are 
both accepted and realistic.
    Enforcement is more successful when it is tied to actions 
controlled by Congress and the president. Both the BEA spending caps 
and the PAYGO enforcement rules were designed to hold Congress and the 
president accountable for the costs of the laws enacted each session--
not for costs that could be attributed to economic changes or other 
factors.
    Going forward, new rules and goals will be important to ensure 
fiscal discipline and to prompt a focus on the longer-term implications 
of decisions. The Federal Government still needs a decision-making 
framework that permits it to evaluate choices against both today's 
needs and the longer-term fiscal future that will be handed to future 
generations. What process will enable policymakers to deal with the 
near term without ignoring the long term? At the same time, the 
challenges for any budget process are the same: what process will 
enable policymakers to make informed decisions about both fiscal policy 
and the allocation of resources within the budget?
    Extending the current BEA without setting realistic caps and 
addressing existing mandatory programs is unlikely to be successful for 
the long term. The original BEA employed limited actions in aiming for 
a balanced budget. It left untouched those programs--direct spending 
and tax legislation--already in existence.
    Today's situation may argue for an interim step in extending and 
modifying BEA. However, going forward with new challenges, we believe 
that a new process that prompts Congress to exercise more foresight in 
dealing with long-term issues is needed. The budget process appropriate 
for the early 21st century will have to exist as part of a broader 
framework for thinking about near- and long-term fiscal goals.
    This concludes my statement. I would be happy to respond to any 
questions you or other members of the committee may have at this time.

                               FOOTNOTES

    [1] Although the overall discretionary spending caps expire in 
2002, the Highway and Mass Transit outlay caps established under the 
Transportation Equity Act for the 21ST Century (TEA-21) continue 
through 2003, and the conservation caps established as part of the 
fiscal year 2001 Interior Appropriations Act were set through 2006. In 
addition, the sequestration procedure applies through 2006 to eliminate 
any projected net costs stemming from PAYGO legislation enacted through 
fiscal year 2002.
    [2] U.S. General Accounting Office, Budget Issues: Budget 
Enforcement Compliance Report, GAO-01-777 (Washington, D.C.: June 15, 
2001).
    [3] For a fuller discussion of these criteria see U.S. General 
Accounting Office, Budget Process: Evolution and Challenges GAO/T-AIMD-
96-129 (Washington, D.C.: July 11, 1996), Budget Process: History and 
Future Directions, GAO/T-AIMD-95-214 (Washington, D.C.: July 13, 1995), 
and Budget Process: Comments on H.R. 853,GAO/T-AIMD-99-188 (Washington, 
D.C.: May 12, 1999).
    [4] See U.S. General Accounting Office, Homeland Security: 
Challenges and Strategies in Addressing Short- and Long-Term National 
Needs, GAO-02-160T (Washington, D.C.: Nov. 7, 2001); Congressional 
Oversight: Opportunities to Address Risks, Reduce Costs, and Improve 
Performance, GAO/T-AIMD-00-96 (Washington, D.C.: Feb. 17, 2000) and 
Budget Issues: Effective Oversight and Budget Discipline are 
Essential--Even in a Time of Surplus, GAO/T-AIMD-00-73 (Washington, 
D.C.: Feb 1, 2000).
    [5] House and Senate Budget Committees, Revised Budgetary Outlook 
and Principles for Economic Stimulus (October 4, 2001)
    [6] U.S. General Accounting Office, Budget Issues: Long-Term Fiscal 
Challenges, GAO-02-467T (Washington, D.C.: Feb. 27, 2002) and Long-Term 
Budget Issues: Moving From Balancing the Budget to Balancing Fiscal 
Risk, GAO-01-385T (Washington, D.C.: Feb. 6, 2001).
    [7] For more on history, see GAO/T-AIMD-96-129.
    [8] See U.S. General Accounting Office, Budget Issues: Budget 
Enforcement Compliance Report, GAO/AIMD-99-100 (Washington, D.C.: Apr. 
1, 1999); Budget Issues: Budget Enforcement Compliance Report, GAO/
AIMD-00-174 (Washington, D.C.: May 31, 2000) and GAO-01-777.
    [9] Additional information on issues related to emergency spending 
can be found in the Congressional Budget Office report Emergency 
Spending Under the Budget Enforcement Act, issued in December 1998, the 
update to that report issued in June 1999, the CBO report Supplemental 
Appropriations in the 1990s, issued in March 2001, and U.S. General 
Accounting Office reports Budgeting for Emergencies: State Practices 
and Federal Implications, GAO/AIMD-99-250 (Washington, D.C.: Sept. 30, 
1999) and Emergency Criteria: How Five States Budget for Uncertainty, 
GAO/AIMD-99-156R (Washington, D.C.: Apr. 20, 1999).
    [10] For a slightly longer discussion of these issues, see GAO-01-
777.
    [11] The full name of the act is the Department of Defense and 
Emergency Supplemental Appropriations for Recovery from and Response to 
Terrorist Attacks on the United States Act, Public Law 107-117, 115 
STAT.2230 (2002).
    [12] See GAO/AIMD-00-174 and GAO-01-777.
    [13] GAO/AIMD-99-250.
    [14] U.S. General Accounting Office, Budget Issues: Budget 
Scorekeeping for Acquisition of Federal Buildings, GAO/T-AIMD-94-189 
(Washington, D.C.: Sept. 20, 1994).
    [15] See U.S. General Accounting Office, Budget Surpluses: 
Experiences of Other Nations and Implications for the United States, 
GAO/AIMD-00-23 (Washington, D.C.: Nov. 2, 1999).
    [16] GAO-02-467T.
    [17] 2 U.S.C. 632 (i), and U.S. General Accounting Office, Medicare 
Reform: Issues Associated With General Revenue Financing, GAO/T-AIMD-
00-126 (Washington, D.C.: Mar. 27, 2000).
    [18] See GAO/T-AIMD-96-129 and U.S. General Accounting Office, The 
Deficit and the Economy: An Update of Long-Term Simulations, GAO/AIMD/
OCE-95-119 (Washington, D.C.: April 26, 1995), among others.
    [19] OMB, Budget of the United States Government, Fiscal Year 2002, 
April 9, 2001; CBO, The Budget and Economic Outlook: Fiscal Years 2002-
2011, January 2001; GAO-01-385T; and U.S. General Accounting Office, 
Medicare: Higher Expected Spending and Call for New Benefit Underscore 
Need for Meaningful Reform,GAO-01-539T (Washington, D.C.: March 22, 
2001).
    [20] U.S. General Accounting Office, Budget Issues: Budgeting for 
Federal Insurance Programs, GAO/AIMD-97-16 (Washington, D.C.: Sept. 30, 
1997).

    Chairman Nussle. Mr. Spratt.
    Mr. Spratt. Let me say to all three of our witnesses, you 
made an excellent contribution to this hearing. I have to go; I 
don't have questions to put to you, but I particularly want to 
thank Mr. Kogan for coming and then enunciating ``Kogan's 
Rule,'' that only Richard Kogan can show how, as revenues go 
up, spending comes down. [Laughter].
    Thank you very much.
    Chairman Nussle. That was actually my observation, too.
    But, you know, I guess going to what--I do think he did 
make a very good point about ``they'll spend it,'' first of 
all. We all know who ``they'' are; all we have to do is look in 
the mirror and we can see who that is.
    If you are interested in a revision to, ``if there is a 
surplus, they will spend it and they will tax-cut it,'' I am 
willing to stipulate that that is true, that there is that 
desire on both ends.
    I guess I would add one other thing, and you did state 
this, that when there is lack of control--varying degrees of 
lack of control, but I do think that you would also agree that 
if not all of the controls were in force, whether it's budget 
caps, PAYGO, or as you stated--I do agree with you that caps 
and PAYGO after 1990 were much more effective than Gramm-
Rudman-Hollings or deficit target practice.
    But I guess that is the point that I'm concerned about, and 
the reason for this hearing is that we're losing all of them at 
this point in time. It's not a matter of just losing some. We 
don't have a budget, we won't have caps, we won't have PAYGO, 
we'll have nothing, and as you said, it will be down to a 
budget process that will not be able to control spending or tax 
cuts or whatever. It's a matter of, can we even put a process 
in place that can control us? And that's what we're trying to 
do, and I think all of us have correctly stated today that when 
it comes right down to it, the ability of Representatives 
themselves to control themselves, either in a partisan or a 
bipartisan way, is about the only way to get this done.
    So you have all made excellent points. Some of them have 
been--and I apologize to make it seem as though this was a 
retreat job from last year; it's still important to talk about 
it, and we wanted to give you the forum to do that because we 
believe it's at a pretty important juncture, to discuss that.
    With that, are there any other members who wish to make any 
comments or have any questions? Mr. Gutknecht.
    Mr. Gutknecht. I don't so much have questions. I want to 
thank the witnesses for coming. I want to thank you for this 
hearing. My observation is that we are very soon going to be 
fighting two wars. One is the war against terrorism, which I 
think everybody agrees is important and we have to give our 
troops and the Defense Department what it needs to execute that 
so that Americans feel secure in their homeland.
    But the other war that we're going to be fighting is over 
spending. And frankly, I am pretty encouraged by the way the 
war on terrorism is going; I am not encouraged about how our 
war against wasteful spending is going. We are going to need 
help, and I frankly wish that more of our Democratic friends 
were here because I think we're going to have to do this on a 
bipartisan basis. We have to have some way to put discipline 
back into the budget, because we're going to have a fight here 
in the next several weeks about whether or how much of an 
emergency supplemental we're going to have; if we don't have a 
farm bill, we're going to have to have another emergency 
supplemental to deal with farm issues. It really strikes me 
that we've got some very, very serious budget issues that we're 
going to have to resolve, and anything that groups on the 
outside can do to help us in that ware, we would very much 
appreciate. Otherwise, I think we're going to be back in a very 
difficult circumstance in another year or so, where we're going 
to be back into significant deficits that I think are going to 
be indefensible with the American people and indefensible with 
future generations of Americans.
    So I will help in every way I can, Mr. Chairman, and I know 
that you are more than acutely aware of the problems we face 
relative to the budget battles and where we're going to go, but 
we're going to have to have some help from folks on the outside 
to get that story told.
    Chairman Nussle. I thank the gentleman.
    There were other members here earlier. I do believe it's a 
bipartisan struggle; I get that sense from my conversations, 
and I think Mr. Spratt would echo that as well. And like I say, 
I did not mean that in a disparaging way; I really meant that 
we have to sit down and work together on some kind of spending 
caps or some kind of formulas or some form of spending 
discipline. Otherwise, this thing is just going to continue to 
spin out of control, because it will get worse from here.
    Mr. Culberson, do you have anything you would like to add?
    Mr. Culberson. Mr. Chairman, just to say how much I 
appreciate the focus you have maintained as the chairman of the 
Budget Committee on preserving budget discipline and making 
sure the Congress--particularly the members of this committee--
understand how important it is that we maintain budget 
discipline and to recommit to you, as to the people I 
represent, my complete support for your efforts and my 
admiration for the work you've done as chairman and my 
appreciation to the witnesses for being here. We've all had a 
number of committee hearings going on at the same time this 
morning, but I am completely committed to supporting Chairman 
Nussle and doing whatever is necessary to preserve budget 
discipline, because that is what gave us the balanced budget 
and the tax surplus that we have enjoyed these last several 
years. It is only by continuing that discipline that we will be 
able to see a tax surplus return in the future. I just thank 
you for your good work, Mr. Chairman, and I am committed to 
helping you in any way that I can.
    Chairman Nussle. Do our witnesses have anything else they 
would like to add?
    Ms. Irving. I might just add one thing.
    Chairman Nussle. Certainly.
    Ms. Irving. When you talk about the need for caps to 
control yourselves, you sell yourselves a little short. One of 
the arguments for caps in an overall deal, as opposed to just 
letting discretionary spending be the result of 13 
appropriations bills, is I think it strengthens Congress' hand 
vis-a-vis the executive branch. And as an employee of the 
legislative branch, I am always interested in the Congress 
being able to assert its legitimate role in fiscal policy.
    Chairman Nussle. Well, I would agree, and there are other 
reforms that could help us do that, too, as Mr. Frenzel had 
suggested earlier. I happen to believe that a joint resolution, 
putting any of this--whether it's caps, or the budget, or 
however we can accomplish that--and giving it the force of law 
does not cede power to the administration, but rather brings 
them in as an accountable player in this process and requires 
accountability on their part.
    So I think, as you stated, there are many ways that we can 
help ensure that and strengthen Congress' hand, and I would 
agree that this may in fact be one of them. And I particularly 
enjoyed and appreciated your comments on PAYGO. I think you are 
exactly right; the trade-off, when PAYGO was first put into 
place, did not anticipate some of the challenges that we had, 
and I think a revision and a new understanding of how that 
might work--not to game the outcome, but rather to have more 
consideration of the outcome--would be appropriate.
    Anything else? Mr. Kogan.
    Mr. Kogan. I'd like to make a point which I think follows 
logically from my suggestion that if we really want to do 
something about the present fiscal situation, we need to start 
with a summit and then use a budget process, like caps and 
PAYGO, to enforce the outcome of the summit.
    My point is that the Budget Committee is only as effective 
as the leadership above it wants it to be. I was struck 
forcibly by this when I went back and opened the report on the 
first budget resolution I worked on, the budget resolution for 
fiscal year 1979, I believe. And at the time, Congressman 
Giaimo, a longtime and senior member of the Appropriations 
Committee, was chairman of the Budget Committee, which means 
that appropriations and the budget had a natural senior person 
speaking with one voice. And the next three Democrats on the 
Budget Committee at that time were Tom Foley, Jim Wright, and 
Dick Gephardt. Those were the next three in line. What that 
indicated to me was that at that time, the Democratic 
leadership believed that it had a big stake in getting a budget 
that its party could live with, and then enforcing that budget. 
The leadership and the Budget Committee were not working in 
opposite directions then.
    I think that times have changed a lot. It was very gradual, 
over the course of 20-plus years, but now I think that you 
don't get the support from the leadership, and I think that no 
committee chairman, in fact, in this Congress gets the support 
from the leadership that used to be the norm. It used to be the 
case that committees ran the place, and it is now the case that 
the leadership runs the place. So no matter how good a job you 
do, the Rules Committee, it turns out, at the behest of the 
leadership, simply waives everything. For the last 4 years, all 
points of order against appropriations bills and against tax 
cuts have been waived. Last year's tax cut, for example, 
violated the budget resolution that this Congress agreed to--
not by a lot, but it did--and the leadership waived the points 
of order, instead saying, ``Make it fit.'' Likewise with all of 
the appropriations bills for 4 years.
    So there is just a limit to what this committee can do. I 
don't know how you get the President directly engaged and the 
leadership directly engaged, but I think that that's what it 
would really take to restore the prominence that the Budget 
Committee once had, when I first started.
    Thank you.
    Chairman Nussle. Point well taken I'm not sure I would 
agree totally with your characterization. I believe we do have 
the support of the leadership in many regards, but I think your 
point is well taken. It certainly was a different Budget 
Committee back in the 1970s and early 1980s, and I think we can 
get back to that. We will have to if, in fact, the budget 
process is going to be meaningful in the future. And that's not 
only with regard to taxes, but with regard to spending. We're 
trying to do that.
    Let me give you one example. For one of the first times, 
the Budget Committee was appointed to the Farm Bill Conference 
Committee, and the sole purpose of that was to enforce the 
budget. And at least from what we've been able to glean from 
the tea leaves, that has been accomplished. Now, there may be a 
couple more runs at the fence before we're done, but at least 
to start with, I think that's a good indication of not only the 
willingness of the leadership to appoint members of the Budget 
Committee to conferences in order to rein in--or to enforce the 
budget, but also I think it demonstrates, at least to some 
extent, the kind of support that I do get from the leadership 
on these issues. Not always; that's part of the process, but 
just for your information.
    Anything else?
    With that, we appreciate the testimony of the witnesses 
today. This is obviously a continuing battle that will not 
cease with today's hearing, and we will be back in touch.
    The hearing is adjourned.
    [Whereupon, at 11:15 a.m., the committee was adjourned, to 
reconvene at the call of the Chair.]

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