[Senate Hearing 107-5]
[From the U.S. Government Publishing Office]




                                                          S. Hrg. 107-5

                 ANTICIPATED NOMINATION OF PAUL O'NEILL

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                 on the

                       ANTICIPATED NOMINATION OF

              PAUL O'NEILL TO BE SECRETARY OF THE TREASURY

                               __________

                            JANUARY 17, 2001

                               __________

                                     
                                     

            Printed for the use of the Committee on Finance


                    

                                 ______

                     U.S. GOVERNMENT PRINTING OFFICE
69-892--CC                   WASHINGTON : 2001




                          COMMITTEE ON FINANCE

                  CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah                 MAX BAUCUS, Montana
FRANK H. MURKOWSKI, Alaska           JOHN D. ROCKEFELLER IV, West 
DON NICKLES, Oklahoma                Virginia
PHIL GRAMM, Texas                    TOM DASCHLE, South Dakota
TRENT LOTT, Mississippi              JOHN BREAUX, Louisiana
JAMES M. JEFFORDS, Vermont           KENT CONRAD, North Dakota
FRED THOMPSON, Tennessee             BOB GRAHAM, Florida
OLYMPIA J. SNOWE, Maine              JEFF BINGAMAN, New Mexico
JON KYL, Arizona                     JOHN F. KERRY, Massachusetts
                                     ROBERT G. TORRICELLI, New Jersey
                                     BLANCHE L. LINCOLN, Arkansas

             Kolan Davis, Staff Director and Chief Counsel

                 John Angell, Democratic Staff Director

                                  (ii)




                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Baucus, Hon. Max, a U.S. Senator from Montana, Chairman, 
  Committee on Finance...........................................     1
Daschle, Hon. Tom, a U.S. Senator from South Dakota..............     7
Murkowski, Hon. Frank H., a U.S. Senator from Alaska.............     8
Breaux, Hon. John, a U.S. Senator from Louisiana.................     8
Kerry, Hon. John F., a U.S. Senator from Massachusetts...........     9
Snowe, Hon. Olympia J., a U.S. Senator from Maine................    11
Lincoln, Hon. Blanche L., a U.S. Senator from Arkansas...........    12
Rockefeller, Hon. John D., IV, a U.S. Senator from West Virginia.    13
Jeffords, Hon. James M., a U.S. Senator from Vermont.............    15
Thompson, Hon. Fred, a U.S. Senator from Tennessee...............    16
Lott, Hon. Trent, a U.S. Senator from Mississippi................    24

                         ADMINISTRATION NOMINEE

O'Neill, Paul, Secretary-designate, Department of the Treasury...    17

                         CONGRESSIONAL WITNESS

Specter, Hon. Arlen, a U.S. Senator from Pennsylvania............     6

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:
    Opening statement............................................     1
Breaux, Hon. John:
    Opening statement............................................     8
Daschle, Hon. Tom:
    Opening statement............................................     7
Hatch, Hon. Orrin G.:
    Prepared statement...........................................    57
Jeffords, Hon. James M.:
    Opening statement............................................    15
Kerry, Hon. John F.:
    Opening statement............................................     9
Lincoln, Hon. Blanche L.:
    Opening statement............................................    12
Lott, Hon. Trent:
    Opening statement............................................    24
Murkowski, Hon. Frank H.:
    Opening statement............................................     8
O'Neill, Paul:
    Testimony....................................................    17
    Prepared statement...........................................    57
    Biographical.................................................    59
    Responses to questions from committee members................    66
Rockefeller, Hon. John D., IV:
    Opening statement............................................    13
Santorum, Rick:
    Prepared statement...........................................    78
Specter, Hon. Arlen:
    Testimony....................................................     6
Snowe, Hon. Olympia J.:
    Opening statement............................................    11
Thompson, Hon. Fred:
    Opening statement............................................    16

 
 ANTICIPATED NOMINATION OF PAUL O'NEILL TO BE SECRETARY OF THE TREASURY

                              ----------                              


                      WEDNESDAY, JANUARY 17, 2001

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 9:30 a.m., 
in room SD-106, Dirksen Senate Office Building, Hon. Max Baucus 
(chairman of the committee) presiding.
    Also present: Senators Rockefeller, Daschle, Breaux, 
Graham, Kerry, Lincoln, Grassley, Murkowski, Gramm, Lott, 
Jeffords, Thompson, Snowe, and Kyl.

   OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM 
            MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. Good morning, everybody. I am pleased to 
convene the committee for the 107th Congress.
    We have a great opportunity. We have a new President, a new 
Congress, a new Chairman, soon to be followed by another 
Chairman. We have an unprecedented situation in the Senate with 
50-50 membership, requiring us, in essence, to accomplish our 
work together, or not at all. It is an invigorating challenge, 
one I know this committee is up to.
    With that in mind, I would like to welcome our new members. 
First of all, we are rejoined by the Majority Leader, Tom 
Daschle. And, I might say, we are fortunate to have both our 
Leaders on this committee. It helps us because the committee 
will benefit from the judgment of both the Majority Leader, and 
the next Majority Leader.
    We are also joined by Senator Bingaman, Senator Kerry, 
Senator Snowe, Senator Kyl, Senators Torricelli, and Lincoln. 
We are delighted to have such strong, new members on our 
committee and I look forward to working with each of you.
    I would also like to welcome the new Ranking Member, 
Senator Grassley, who will become our Chairman in approximately 
3 days, 2 hours, and 30 minutes. [Laughter.] And who is 
counting?
    I have worked with Chuck Grassley for more than 20 years on 
everything from rural health, to agriculture, to international 
trade. Chuck is man of strong convictions. He is a man of 
balance, civility, and good judgment. I know that I speak for 
all of us on this side when I say we look forward to working 
with Chairman Grassley.
    I must confess one misgiving. The prior Chairman, Bill 
Roth, and I are actually graduates of the same high school, 
that is, Helena High in Montana. So when he becomes Chairman 
next week, Senator Grassley will unfortunately bring an end to 
this precedent. But I am very confident, Mr. Chairman, that you 
are up to the task as a graduate of New Hartford Community 
High.
    Let me now turn to the subject of today's hearing, the 
nomination of Paul O'Neill to be our Nation's seventy-second 
Secretary of the Treasury.
    Mr. O'Neill, you have been nominated to one of the most 
important jobs in this country. After all, maintaining the 
integrity of our Nation's public finances is one of the primary 
functions of government.
    That is why the Treasury Department was created at the very 
beginning, back in 1789, just a few months after the first 
Congress convened. That is why the position of Treasury 
Secretary has attracted some of our most distinguished public 
servants: Alexander Hamilton, John Sherman, Henry Morganthau, 
Douglas Dillon, and Lloyd Bentsen.
    In fact, I note that, like Mr. O'Neill, some of our 
greatest Treasury Secretaries were Pennsylvanians, including 
Albert Gallatin and Andrew Mellon. That bodes well.
    In any event, you will have not only an important job, but 
a very difficult one. The new administration will inherit the 
longest economic expansion in history. We have had low 
unemployment, low interest rates, higher family incomes, and 
very little inflation. It did not happen overnight and it did 
not happen easily, it took tough decisions, hard votes on both 
sides of the aisle.
    That is why I am concerned about how we handle the upcoming 
debate about budget and taxes. Yes, there are some troubling 
economic signs, but let us not overreact. I was here in 1981 
during the last big tax cut, where I think we overreacted.
    Now, others on the committee may disagree, but in 
retrospect I think, at that date, we went too far. We cut taxes 
too deeply and that played a part--not the entire part, but a 
part--in creating the budget deficits that bedeviled us for the 
next 15 years.
    Keeping this history in mind, I think we should proceed 
carefully. We should be, if you will permit me, 
``conservative.'' Maybe we need a fiscal stimulus to prevent an 
economic slump. I would like to reserve judgment. I hope that 
we can hold hearings quickly on that subject so we can hear 
what leading economic thinkers have to say.
    But if we do need a tax cut, it should be a tax cut that 
provides the right kind of economic medicine. It must leave 
room for other important priorities like Medicare, education, 
and of course, paying down the national debt, and must be fair. 
So, I look forward to a careful debate about the size and the 
structure of a tax cut.
    Let me mention two other issues. First, the international 
economy. The world trading system will face serious challenges 
during your tenure. The Treasury Secretary will increasingly 
have to deal with the tension between the United States and the 
international economy.
    We need to work together to rebuild our domestic consensus 
on trade liberalization, we need to work together to deal with 
our ballooning current account trade deficit, and we need to 
work together to expand the benefits of trade.
    Second, the tax system. Under the leadership of former 
Chairman Roth, Senator Bob Kerrey, and Senator Grassley, this 
committee took the lead reforming the IRS. Now we need to 
follow through. We need to continue to make the tax system more 
simple, more administrable, and more fair. All in all, Mr. 
O'Neill, a tough job.
    But in you, the President-elect appears to have found the 
right person for the job. You have impressive credentials, both 
in government and at the highest levels of the business world. 
You have an unchallenged reputation for hard work and straight 
talk.
    I look forward to hearing your views this morning on the 
economy, tax policy, and other matters. But, more importantly, 
I look forward to working with you to address the challenges 
ahead.
    I spoke earlier about tradition, and there is another 
tradition here on this committee, a tradition of 
bipartisanship. Sometimes we fall short, sometimes partisanship 
gets the best of us. For example, right now, partisan ads are 
being run against me and Senator Conrad about a tax cut we have 
not even yet seen.
    So we need to rise to a higher standard and put the 
interests of the country first and partisan differences aside. 
That is what we did last Congress when we led a bipartisan 
effort to establish permanent normal trade relations with 
China, a tradition we should follow with this new Congress. I 
look forward to working in this tradition with you, Mr. 
O'Neill, and my friends on both sides of the aisle. I 
particularly thank my colleagues for their attention, and now 
recognize Chairman Grassley.
    Senator Grassley. Congratulations to you, Mr. Chairman, for 
your outstanding statement, more importantly your leadership on 
this committee, even before assuming the chairmanship.
    It is a delight to work with you, both in the capacity 
these few days as a Minority member and as Chairman. It might 
seem, to say a delight, in a time when the Senate is 50/50 
divided, that maybe I am not living in the real world.
    But following on the tradition you have spoken of, this 
committee doing things in a bipartisan way and very seldom 
things reported out of this committee that were partisan not 
moving on the floor of the Senate, continuing that relationship 
with an even division or even with a Republican majority would 
be the vein in which we must proceed in order to accomplish the 
good that must be accomplished.
    I think of working with you on rural health issues, I think 
of working with you on agricultural tax issues, and probably 
trade issues in most areas as well, as a relationship that we 
have had that, now in our positions of leadership, we can 
continue and hopefully even do more good.
    So it is a delight, and also a challenge, but one in which 
power sharing also brings responsibility for the Minority as 
well as for the Majority. So I think, whether it is power 
sharing, balanced with sharing the responsibility, then that 
means that we will get things done.
    I also have the privilege of welcoming people from your 
side of the aisle that are new to the committee: Senator 
Bingaman, who I have not served on any committees with before 
in the years that we have been together in the U.S. Senate, but 
I felt a close friendship with him, regardless.
    Senator Kerry. I worked with him very closely a few years 
ago on the P.O.W./M.I.A. committee. We practically lived 
together for a couple of years on that committee. I look 
forward to resuming that sort of relationship.
    Senator Torricelli and I worked on one of the major pieces 
of legislation that passed the Congress last year, the 
Bankruptcy Reform bill, and that was a very pleasant 
experience.
    Senator Lincoln was a faithful member of the Senate Aging 
Committee that I chaired, and I enjoyed that relationship and 
welcome this opportunity to work with her.
    Senator Daschle and I, hopefully, have been spokesmen for 
mid-America, and particularly for agriculture, and that has 
been represented in our cooperation, whether it has been on 
this committee when he served previously or whether it has been 
just in the years that he has not been on the committee 
intervening.
    Obviously, I welcome Senator Snowe and Senator Kyl. I know 
from their activities on other committees they have served on 
that they are going to be outstanding members of this committee 
as well.
    I also would advise them that I had the opportunity in the 
12 years that I serve in the Senate to be at that end of the 
horseshoe. I looked up here and thought, ye gods, I will never 
get to be chairman of this committee. I never really thought I 
ever would be, but things happen. So hold out hope and let us 
hope it does not happen because a lot of Republicans are 
defeated in the process. [Laughter.] So we welcome you to the 
work of this committee.
    There is an old saying, Mr. Chairman: may you live in 
interesting times. I think there is no question that, for the 
Finance Committee, these certainly will be interesting times. 
The committee will be the focus of many of the legislative 
goals of President-elect Bush.
    Here, I am referring to three objectives, among many that 
maybe we could list: (1) tax relief must be provided to over-
taxed American people; (2) Medicare must be modernized, and 
coverage for prescription drugs need to e a part of that 
effort; (3) we must enhance retirement security, both on the 
pension side and the modernization of the Social Security 
system. I believe that we can find a lot of common ground on 
these matters and also realize our new President's goals.
    However, I do not intend to sit by waiting for the phone to 
ring with a call from the other end of Pennsylvania Avenue. The 
Finance Committee, in the previous Congress, successfully 
crafted bipartisan tax relief on a very large number of 
important issues.
    I am referring to a few of these, like the retirement 
security package, the Education Tax relief, elimination of the 
death tax, and other measures. Unfortunately, either a 
Presidential veto or a legislative gridlock prevented us from 
getting that tax relief to the people.
    I look forward to working with you, Mr. Chairman, the 
members of the Senate Finance Committee, as well as the 
administration on improving and approving these bipartisan 
bills as quickly as possible.
    I am confident this work can be done, while at the same 
time the committee acts on the President's important 
initiatives, as well as a lot of other initiatives that Senator 
Baucus has described in the area of trade, as an example.
    Today, the Finance Committee considers the nomination of 
Paul O'Neill to be Secretary of the Treasury, and tomorrow we 
will have the nomination of Governor Thompson to be Secretary 
of Health and Human Services. Mr. O'Neill has run an 
international company through some very tough times and I think 
that he will be a good one to be serving as a Treasury 
Secretary who is comfortable at the controls.
    Now, I would like to note that Mr. O'Neill's mother was 
born in Seymour, Iowa, his brother-in-law was a distinguished 
professor at Iowa State University, his wife was born in Iowa 
City. So Mr. O'Neill already has strong points, or three strong 
points, on his side as far as I am concerned.
    Mr. O'Neill's first task as Secretary of the Treasury will 
be to help get our Nation's economy back on track. Recent 
reports indicate that the economic outlook is uncertain, with 
many troubling indicators such as reduced orders and profits, 
as well as declining consumer confidence.
    It is important to note that the concerns about the economy 
are bipartisan. Even House Minority Leader Gephart recently 
stated his concerns that a recession was looming. Happy talk 
and spin control will not make these very real problems with 
the health of our economy go away. Fortunately, President-elect 
Bush and his nominee, Mr. O'Neill, recognize that they must 
look towards immediate steps to improving the economy.
    So, Mr. Chairman, I am sure that Mr. O'Neill and Mr. 
Thompson, two highly-qualified individuals, will receive the 
support of the committee and will be confirmed by the Senate. 
Thus, Mr. Chairman, you will be two-for-two, batting 1.000 
during your brief tenure as Finance Chairman; a remarkable 
feat. Maybe it is good that you are having to stop while you 
still have a very perfect record.
    Mr. Chairman, I am pleased that we will be together during 
these interesting times, and it is my hope that, when I hold 
the gavel, we can continue the committee's winning streak that 
you have established. Thank you.
    The Chairman. Thank you very much, Senator.
    Now I would like to turn to the Majority Leader of the 
Senate.
    Senator Specter. Mr. Chairman?
    The Chairman. Yes.
    Senator Specter. I wonder if I might request special 
permission to speak early. The Judiciary Committee is convening 
at 10:00, and I am one of the early questioners.
    The Chairman. Well, let us see. Maybe I can ask my members' 
permission. They seem to indicate it is all right. Why do you 
not go ahead, Senator?
    Senator Specter. I thank you very much. I am really very 
pleased.
    The Chairman. Senator Gramm is not sure yet. I had better 
temper that. [Laughter.]

     STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM 
                          PENNSYLVANIA

    Senator Specter. Senator Grassley and I have sat together 
for 20 years on the Judiciary Committee, so I can understand 
his doubts.
    It is a great pleasure to appear before this very 
distinguished committee where there is not only talk, but 
action, on bipartisanship. I will leave here to go to the 
hearings on Attorney General-designate John Ashcroft, and there 
is a fairly substantial different atmosphere. So, it is 
pleasant to be here for even a short time.
    It is a pleasure for me to introduce Paul Henry O'Neill to 
this committee for the position of Secretary of the Treasury. 
He has an outstanding background. He has midwestern roots, and 
he is a Pennsylvanian, a background which I share.
    He brings to this job an extraordinary combination of work 
in the public sector and work in the private sector. Pittsburgh 
is a corporate community which is almost unparalleled in 
America, and one of the corporate giants has been Alcoa, which 
has seen some difficult times. However, for the past 13 years, 
or up until last year, Paul O'Neill led Alcoa into a tremendous 
turnabout and rejuvenation.
    Prior to that time, he was the President of International 
Paper and interspersed with government duties, as Deputy 
Director of the Office of Management and Budget and computer 
analyst many years ago with the Veterans Administration. It 
really is an extraordinary combination.
    I have observed Paul O'Neill do really outstanding work in 
the private sector and know of his work in the public sector. 
In conversations with him yesterday talking about the issues of 
trade and the problems which the steel industry has, some of 
his experience and achievements in the aluminum industry may be 
a guideline, where he took the lead in very sensitive and 
delicate matters to decrease worldwide production of aluminum, 
which was a key factor in rejuvenating Alcoa. That may be a 
model for the steel industry, which is in deep need. I look to 
my co-chairman of the Senate Steel Caucus, Senator Rockefeller, 
on that subject.
    We talked a little bit about a subject which you would not 
ordinarily expect, and that is medical errors and the 
experience which he has brought with his company in disclosing 
problems and finding cures when people around the world know of 
similar problems which have been solved. These are only two 
very brief illustrations of the kind of backgrounds and 
insights which I think Paul O'Neill brings to this job.
    I am pleased to see the lay of the land here with Senator 
Grassley's prediction that Chairman Baucus will be two for two, 
and that includes the confirmation of Paul O'Neill. I thank the 
committee very much, and you, Mr. Chairman, for affording me 
the courtesy of speaking out of sequence.
    The Chairman. Well, thank you very much, Senator. I 
appreciate your introduction, and I know Mr. O'Neill 
appreciates it even more than we. Thank you very much.
    Senator Specter. Thank you.
    The Chairman. Next, we turn to our Majority Leader, Tom 
Daschle.

  OPENING STATEMENT OF HON. TOM DASCHLE, A U.S. SENATOR FROM 
                          SOUTH DAKOTA

    Senator Daschle. Well, thank you, Mr. Chairman. Let me 
congratulate you and our soon-to-be Chairman, Senator Grassley, 
for your new leadership. I look forward to working closely with 
both of you. I have the highest regard for both of you. I might 
say, it has been a long time since this committee has been led 
by members from our part of the country, Montana, Iowa.
    I do not know if it is any indication of the enthusiasm 
with which you have been received, but a lot of my people are 
already buying pick-ups, tractors, combines. [Laughter.]
    But I really do look forward to working closely with both 
of you. It is an honor and I am grateful to have the 
opportunity to work again on this committee.
    I also want to welcome, as you have, our nominee this 
morning. Two weeks ago, Mr. O'Neill and I had the chance to 
meet. That meeting confirmed for me that all of the good press 
that he has been getting is well-deserved. President-elect Bush 
is to be commended for nominating a Treasury Secretary who has 
such broad knowledge and experience in both the public and the 
private sectors.
    It is important that you are the strong nominee that you 
are, because you have very big shoes to fill. Your predecessors 
in the current administration, our former Chairman Lloyd 
Bentsen, Bob Rubin, and Larry Summers, played critical roles in 
restoring the fiscal strength of the United States and 
responding to the financial crises around the globe.
    In many ways, they redefined the job of Treasury Secretary 
for our increasingly global age. As a result, in significant 
measure of their insight and action, you are inheriting a 
remarkably strong fiscal situation; where Bob Rubin inherited 
record deficits, you will inherit record surpluses.
    As you prepare to assume your new office, we should 
remember how hobbled our economy was a decade ago and how that 
economic weakness chipped away at Americans' faith in the 
future and Americans' influence around the world.
    It is important to remember how hard Americans worked to 
put our economy back on a sound footing. We must also look to 
the future. In less than a decade, the first baby boomers will 
retire. Their retirement will have profound social and economic 
consequences for our Nation. We must prepare for it now. We 
cannot afford to dig ourselves into a fiscal hole, as we did in 
the 1980's.
    We can afford to cut taxes, we can afford to provide the 
opportunities for prescription drug benefits under Medicare, 
but we all know we must not go too far. We cannot afford to 
return to the fiscal irresponsibility and weakness of times 
past.
    So, Mr. O'Neill, we are ready to work with you to find 
bipartisan solutions to the challenges on America's horizon. I 
look forward to working with you on all of the challenges that 
we face as a country, and that you will face as Secretary.
    Again, I commend President-elect Bush for sending us such a 
strong nominee, and I thank you, Mr. Chairman.
    The Chairman. Thank you, Mr. Leader.
    The Chair now recognizes Senator Murkowski.

 OPENING STATEMENT OF HON. FRANK H. MURKOWSKI, A U.S. SENATOR 
                          FROM ALASKA

    Senator Murkowski. Good morning, Mr. Chairman, Senator 
Grassley, and my fellow colleagues. It is certainly a pleasure 
to be here today to participate in the confirmation hearing for 
Paul O'Neill.
    You know, after I met Paul a couple of weeks ago I came 
away from our meeting with a view that Paul is surely one of 
the most outstanding choices of all the President-elect's 
cabinet selections. In looking at his resume, as outlined by 
Senator Specter briefly, he is a superbly talented individual.
    His record at Alcoa speaks for itself. I think his deep 
background in the bureaucracy here in Washington as Deputy 
Director of the Office of Management and Budget will serve him 
well in his new position.
    I think we have an individual who knows how tax law changes 
can impact the American economy, having served in two capital-
intensive industries just before and after the 1986 Tax Reform 
Act.
    I certainly have no doubt that Paul will be able to handle 
the challenges of the Treasury Department, especially the 
complex tax and international financial issues.
    Now, I am not going to be outdone by Senator Grassley in 
his reference to Iowa, because there are some unique things 
about Paul that I would like to share with you. He is a 
graduate of the Anchorage, AK high school system. His wife, 
Nancy Jo, is an Alaskan.
    When he started his career in Alaska, he was employed by 
Morrison-Knudsen as an engineer involved in the construction 
and siting of the White Alice system. That was a communication 
system that, although I am sure not too many people on this 
committee have ever heard of it, served this country well.
    There were some 25 stations, a telecommunications system 
that was used from about 1956 to 1979. It linked the aircraft 
control and warning stations throughout Alaska and served as an 
interface point for what was referred to at that time in the 
Cold War as the DEW line, or the Distant Early Warning.
    I am sure that your White Alice construction experience in 
some of the most remote and harshest places on the planet has 
served you well, Paul. I suggest to you that, when tensions and 
tempers begin to rise later this year when we begin to debate 
the tax cuts, when you are in the middle of the fray, think 
back to your days at White Alice and Ft. Yukon, or Galena, 
where among your concerns might have been frostbite. But I do 
not want to mislead you; there is some of that around 
Washington, DC as well. [Laughter.]
    At any rate, Paul, I know you will serve with distinction 
as the Secretary of Treasury, and it is my pleasure to support 
your nomination.
    The Chairman. Thank you, Senator.
    The Chair recognizes Senator Breaux.

  OPENING STATEMENT OF HON. JOHN BREAUX, A U.S. SENATOR FROM 
                           LOUISIANA

    Senator Breaux. Thank you very much, Mr. Chairman, and 
soon-to-be Chairman. Thank you very much. I look forward to 
working in our committee with a 50/50 split. I think it offers 
unique opportunities to get some things done.
    Welcome to Mr. O'Neill. Paul, we had a good visit. I always 
try to identify, as much as I possibly can, with someone who 
would be as important as the Secretary of the Treasury, as the 
Senator from Alaska was pointing out all of the connections in 
Alaska with the Treasury Secretary-to-be.
    I have never run a Fortune 500 company, so I do not have 
anything in common there. You are not from Louisiana, but you 
were president of International Paper, and we have got trees in 
Louisiana. [Laughter.] So, we are making progress there. He was 
chairman and CEO of Alcoa, and you have located down there as 
well.
    But I think the thing that I noted in your statement that 
we had the most in common, we both got to Washington in sort of 
the same way. You mentioned in there, your first trip you put 
all of your belongings into a U-Haul trailer.
    I did the same thing, except I was probably doing better 
than you because I had a truck. It was a U-Haul truck, and two 
kids, and everything we owned, and came up in 1967, I think. 
Interestingly, I went back in a U-Haul truck, too, after I left 
Washington the first time. [Laughter.] So, we do have some 
things in common.
    But I have admired you, your government service. What you 
have been able to do in the private sector, I think, speaks 
very well of your ability to run a department as important as 
the Treasury Department.
    What you did with Alcoa is nothing short of absolutely 
remarkable. It was a miraculous turnaround at a time when 
everybody else was going in the opposite direction.
    Finally, I would just say how good it is for people who 
have been immensely successful in the private sector to have 
the willingness, the patience, and all that that entails in 
terms of sacrifice to come back into government and to offer 
your services. That is very, very notable. This committee will 
be better off for it, and I think, ultimately, the country will 
be better off.
    Thank you.
    The Chairman. Thank you, Senator.
    Senator Kerry, you are next. Just for the information of 
all members and others who might be interested, we are 
following what we call an Early Bird Rule. That is, Senators 
are recognized in the order of their appearance.
    Senator Kerry?

 OPENING STATEMENT OF HON. JOHN F. KERRY, A U.S. SENATOR FROM 
                         MASSACHUSETTS

    Senator Kerry. Mr. Chairman, thank you very, very much. 
First of all, I want to thank you for your generous words of 
welcome, and also, Chairman Grassley, thank you for your words 
and remembering our travails with some other members here, 
Senator Daschle and others.
    I am thrilled to be here on this committee. I was just 
thinking a moment ago, when I was on the Banking Committee I 
sat where Senator Daschle sits, so some might argue I am moving 
in the wrong direction.
    But I think, in point of fact, given the issues in front of 
this committee and the remarkable opportunity this committee 
has to contribute to the economic well-being of the country, I 
am really delighted to be here and to join it.
    Mr. O'Neill, welcome. I am delighted to support you, as 
others are here. As I mentioned to you earlier, you come with 
the highest recommendation in my world, that of my wife, from 
Pittsburgh.
    I see you have a strong representation here from your 
family. I saw, I think, one of your grandchildren has already 
figured out this is pretty boring. He was doing the long 
stretch. [Laughter.] But that is perfectly understandable; it 
is.
    If I could just share a very quick thought or two with you. 
Today's Washington Post has an article about the questions on 
the surplus. When you take the Social Security reserve and 
Medicare reserve and factor in inflation and some of the so-
called temporary programs we may re-fund, it is argued that 
there may only be a surplus, over 10 years, of $1.6 trillion.
    I think most members of this committee would argue very 
strongly that what is important is not that we have political 
numbers, but that we have real, sound economic numbers.
    We look to you, and we will look to your leadership and 
your extraordinary representation for probity that will help us 
to make certain that we have those kinds of numbers in front of 
us to make our decisions.
    Many of us on our side of the aisle are well-disposed to 
vote for a tax cut, in the interest of assisting the economy to 
grow, if indeed we are on the brink of some difficulties, as 
some have suggested.
    But I think if you measure that against the Bush tax cut, 
which is considerably back-ended, you have to question whether 
that is going to have the impact desired and whether it is 
directed in a way that will affect as desired.
    Second, and finally, I just very quickly would say to you, 
there are also other ways to stimulate the economy, as we know. 
There are, despite these wonderful economic times--it has been 
referred to by my colleagues that you are coming in at a really 
prime moment.
    I think Fortune magazine suggested that it is like taking 
over the Yankees after 3 years of winning the World Series. I 
hope I can dispel any doubts that some of us Democrats actually 
read Fortune magazine when I say that.
    But, in point of fact, there are a huge set of demands, as 
you know: in 10 years, baby boomers retiring; 44 million 
Americans without any health care at all; huge demands for 
seniors to have a prescription drug plan; major demands for our 
education system, which I know and the corporate community have 
been a leader, arguing that it is one of the mainstays of any 
economic future for the country.
    All of that, and including a shortage of nurses, these are 
major choices we have to make. I simply want to emphasize to 
you that I hope you will continue to be the voice of reason and 
independence that you have been in the corporate community 
where you have earned these plaudits to help this 
administration to present us with a set of balanced, fair-
minded, and thoughtful long-term choices for the country.
    If so, I suspect we will all be able to work in the 
bipartisanship that so many have heralded, and I look forward 
to doing that. I certainly look forward to supporting you and 
to working with you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    The Chair now recognizes the Senator from Maine, Senator 
Snowe.

OPENING STATEMENT OF HON. OLYMPIA J. SNOWE, A U.S. SENATOR FROM 
                             MAINE

    Senator Snowe. Thank you, Mr. Chairman. I am delighted to 
be part of this committee. I am delighted, as well, to work 
with the future Chairman, Chairman Grassley, with whom I first 
served in the House of Representatives back in 1979 and 1980.
    But, most especially, I am pleased to be part of this 
committee that will be addressing many of the key priorities, 
not only for President-elect Bush and the Congress, but also 
for the American people, whether it is tax cuts, prescription 
drugs, Social Security, and Medicare.
    Mr. O'Neill, I want to welcome you as well to this 
committee. When President-elect Bush nominated you, he cited 
the fact, given the signals of a slow-down in the economy, that 
he would need somebody with vast experience, who had a steady 
hand, and could speak with conviction, knowledge, and 
authority.
    And as others have mentioned on this committee, with your 
impeccable credentials from a long and distinguished career in 
both the public and the private sector, he clearly has chosen 
wisely.
    As chairman of multinational companies, including 
International Paper, which is also located in my State, I know 
that you have done an outstanding job. But, most particularly 
is the fact that you chaired these companies at a time during 
economic boons, as well as downturns, so you have understood 
and felt the impact of differing economic policies both on 
businesses as well as workers.
    I think that perspective will serve the Nation well as you 
confront your most critical responsibility as Treasury 
Secretary, and that is, of course, to manage a softening 
economy, as well as averting a recession. That is a challenging 
task, given the fact that this is the first real downturn since 
the advent of the new economy.
    I think the numbers speak for themselves. I mean, whether 
we look at the precipitous drop in the GDP in a single quarter 
of the retail sales, and while economists may disagree or have 
difficulty predicting whether or not this downturn would 
actually lead to a recession, I think the fact of the matter 
is, we can ill afford a miscalculation, the consequences of 
which I think are very apparent, most notably the impact it 
would have on projected budget surpluses.
    The surplus is the bedrock of our future, so we have a 
mutual obligation, the President and the Congress, to work 
together to ensure the responsible stewardship of these 
surpluses.
    Most of them are projected, and even though they are 
estimated to be $5 trillion over the next 10 years, we realize, 
according to CBO, in any event, we will have to sustain an 
average growth rate of 2.7 percent.
    However, on the same token, recognizing the economic 
uncertainty, I do hope, Mr. Chairman and members of this 
committee, that we will be able to achieve a bipartisan 
agreement on tax cuts that serves as a fiscal stimulant, but at 
the same time being fiscally responsible.
    Two years ago we were unable to achieve a bipartisan 
agreement and address some of the concerns that people had that 
it would over-stimulate an already robust economy. But I think 
that outcome, now, is unacceptable, and even many economists 
agree that a tax cut would probably be the right thing to do at 
this moment in time.
    The bottom line, I think we all recognize very clearly: we 
need to have strong and sustained economic growth if we are 
going to address the future challenges associated with an aging 
population.
    If we fail to find that common ground in bolstering the 
economy, we will not only be guilty of fiddling away while Rome 
burns, but we will fiddle away the surplus, which is our one 
best chance to strengthen and preserve Social Security, 
Medicare, and do the other things that will be so important to 
strengthen the future of this century of the American people.
    So, Mr. O'Neill, I welcome you. I am looking forward to 
your testimony, as well as working with you in the future.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator, for that thoughtful 
statement, particularly trying to find ways to sustain growth 
and maintain surpluses. I appreciate your comments.
    Senator Snowe. Thank you.
    The Chairman. The Chair will now recognize the Senator from 
Arkansas, Senator Lincoln.

 OPENING STATEMENT OF HON. BLANCHE L. LINCOLN, A U.S. SENATOR 
                         FROM ARKANSAS

    Senator Lincoln. A very special thanks to you, Mr. 
Chairman, for your leadership in this committee. I am pleased 
and honored to be able to join the Finance Committee, along 
with my other colleagues.
    I want to also thank the incoming Chairman, Senator 
Grassley, who I did serve with and continue to serve with on 
the Aging Committee, an area where I have spent a great deal of 
time and research, and I appreciate his work there with me. 
Those issues are of particular interest to Arkansas, and I know 
that here on the Finance Committee we will be able to work even 
further on much of that.
    My colleagues have expressed many of the concerns that I 
also hold, Mr. O'Neill. As Senator Breaux said, I guess my one 
link to you is trees and bauxite in Arkansas. [Laughter.]
    But I, too, have a particular concern and would like to see 
us on this committee and in this Congress emphasize the 
importance of sound, responsible, and consistent fiscal policy, 
to act responsibly with the surplus, as Senator Snowe has 
mentioned, being a one-time opportunity for us to actually be 
able to bolster the economy and move forward.
    I have mentioned to you in our conversations the importance 
of debt reduction, and how I feel that that can be an enormous 
part of that stimulus. The issues that are of particular 
importance to Arkansas, when you talk about prescription drugs, 
we talk about caring for the elderly, the programs of Medicare, 
Social Security, how absolutely vital they are to the people of 
Arkansas, those are programs and issues that we cannot really 
discuss or deal with in this committee unless we do maintain a 
strong economy, because we do not have the luxury of being able 
to reinvest and make the kinds of changes in those programs 
that we need in order to keep them solvent and productive for 
the people that depend on them.
    I look forward to working with you. I look forward to 
hearing your testimony and your input on these issues that are 
important to me and to my constituents in Arkansas, and 
certainly my colleagues on this panel.
    But, to the Chairman, I thank you very much. To Senator 
Grassley, who mentioned having sat at this end of the horseshoe 
and watched himself climb up, I remember sitting in the 
audience, and I am just glad to be at this end of the 
horseshoe, quite frankly. [Laughter.]
    So, thank you, Mr. Chairman, and thank you, Mr. O'Neill.
    The Chairman. Thank you, Senator.
    The Chair now recognizes the Senator from the great State 
of West Virginia, Senator Rockefeller.

   OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV, A U.S. 
                   SENATOR FROM WEST VIRGINIA

    Senator Rockefeller. Thank you, Mr. Chairman, Chairman 
Grassley. I certainly echo all of the laudatory comments that 
have been passed around in welcoming new members, and 
everything else.
    Mr. O'Neill, we have had a chance to talk, and I enjoyed it 
very much. The Secretary of Treasury is obviously one of the 
two or three key positions in the administration. You will have 
a broad range of responsibilities: trade, tax policy, fiscal 
policy, all kinds. You have been very active in Medicare and 
Social Security on your own.
    I am, on the Democratic side, Ranking on our Health 
Subcommittee, so the question of outpatient prescription drug 
benefits and other matters are very important, the reform of 
Medicare, all of these things.
    I share with others some concern about tax cuts, and I will 
get to that in my questioning, as proposed by the President. On 
the other hand, that may be changing, and I am not sure. I 
think it is important that it affect those who will use it, not 
those who will save it.
    I think it is also important that it have, in a $10 
trillion economy, an effect in order to justify whatever damage 
the size of it might do to paying down the national debt, which 
I consider the best tax cut of all, and the longest term tax 
cut. But that, we can talk about.
    I want to focus my comments, and also my questions on what 
we discuss, and that is, steel. Your record, as has been 
pointed out, at Alcoa was extraordinary. You took it from 
essentially, I would judge here, a $5 billion company up to a 
$40 billion. You took it from 49,000 employees up to 127,000 to 
130,000 employees. That was during the period of 1985 to 1999.
    This is exactly the opposite of what has happened to the 
steel industry, as you very well know, coming from Pittsburgh. 
You know my State, coming from Pittsburgh, also.
    I am going to need to know, because it is my judgment, in 
the next 4 years or 8 years, whatever the political realities 
bring President-elect Bush, that we are either going to have a 
steel industry or we are not. I think we are at the point where 
we can count on our fingers the years that will happen, unless 
public policy decides that we want to have a steel industry.
    Therefore, the question of, do we want to have, do we need 
to have a steel industry in this country, is a question I will 
ask you. If we do, what policies can we adopt to make sure that 
it happens and that all of the productivity gains that have 
been made in the steel industry have been paid for entirely by 
the steel industry, unlike any other steel industry in the 
entire rest of the world.
    It has all been done by us, and therefore you cannot ask a 
whole lot more of the steel industry, except, as you discussed, 
using more of the new economy, so to speak, to increase 
productivity.
    I stressed in our conversation that we have an oil industry 
that imports two-thirds of its product from overseas, and yet 
we would never consider for a moment in this country not 
producing the one-third that we do, much less alternative 
fuels.
    We seem to be in the process of deciding that, although we 
import at this point 30 percent of our steel, it is, 
nevertheless, in the worst import and dumped import crisis in 
history, and has stayed that way and is getting worse.
    We seem to be in the process of deciding, through 
inadvertent inaction, that we do not want a steel industry. 
That appears to be the direction, in the name of globalization, 
and the market will decide. So do we want it or not? If we do, 
then I think we are going to have to take action. I know we are 
going to have to take action, very strong action, very quick 
action.
    I am going to probe with you a little bit about Section 
201, which can be initiated by the President, by us, by a 
number of groups, but it goes to the International Trade 
Commission.
    If they find injury, it goes on to the President, so the 
President always does have the final say on what he decides to 
do. But it is the only thing at this point that I can think of 
which addresses broadly the question of what other countries 
are doing.
    You had suggested in our conversation that, in aluminum, 
that you had sort of brought other countries to decide 
together, let us reduce the total output. My suggestion would 
be, in the steel industry, that is going to be a very, very 
hard thing to do based upon the countries that I know.
    So, I will be asking you a couple of questions about that, 
but within the context of an enormous amount of respect of you 
as a hands-on person who has produced goods during your 
lifetime, and understand the importance of the production of 
goods and the employment of people.
    I thank you, sir.
    The Chairman. Thank you, Senator.
    The Chair now recognizes Senator Jeffords from Vermont.

  OPENING STATEMENT OF HON. JAMES M. JEFFORDS, A U.S. SENATOR 
                          FROM VERMONT

    Senator Jeffords. Thank you, Mr. Chairman.
    Mr. O'Neill, I really enjoyed our meeting yesterday and 
enjoyed talking with you. I admire what you have done and look 
forward to working with you.
    I am presently a chairman-in-waiting, or in exile, I guess, 
of the Health, Education, Labor and Pensions Committee. I got 
on this committee because we have so much joint jurisdiction 
that I found it very valuable to be able to assist in making 
sure we do the best job possible.
    The issues that I am most concerned about pertain to health 
care coverage and retirement security. I believe that, as a 
Nation, we must ensure that all Americans have health care 
coverage.
    Members of the Finance Committee and my Health, Education, 
Labor and Pensions Committee will be hearing a lot about health 
care issues in Governor Thompson's confirmation hearings.
    But, as you know, Mr. O'Neill, our Nation's private health 
insurance system is built on employer-based coverage that grew 
out of the wage and tax laws during World War II that favored 
and encouraged the growth of employer-based benefits.
    Thus, the Treasury Department will play a critical role in 
determining whether we address the problem of the uninsured. 
Although we are a wealthy Nation with a strong economy, there 
are still 43 million Americans who have no health insurance. 
These 43 million Americans are hard-working people who tend to 
work in industries or for small employers that traditionally do 
not offer health care benefits.
    Not only do these workers miss out on the advantages of 
group benefits in employer contributions, but if they buy 
health insurance on their own they must do so with after-tax 
dollars.
    So, there are serious tax equity issues with respect to the 
tax treatment of health care benefits that I would like to 
pursue as we go into the process this coming year.
    Last year, I introduced legislation with Senators Breaux, 
Frist, Snowe, and Lincoln that would provide a refundable tax 
credit to low- and moderate-income Americans who do not have 
employer-subsidized coverage. President-elect Bush included a 
similar proposal in his platform.
    I look forward to working with President Bush, and you, on 
addressing the issue of health coverage. I believe our efforts 
should seek to achieve the dual policy goals of expanding 
health coverage and addressing the inequities in the tax 
treatment of health coverage.
    I also believe that this proposal should be a central part 
of any major tax package, and which will provide tax relief to 
many moderate-income Americans, while simultaneously addressing 
the issue of the uninsured. Such an approach is essential to 
gaining the bipartisan support necessary to enact tax cut 
legislation.
    As a former private sector employer, you are probably aware 
of the challenges of providing retiree health benefits, 
particularly for the pre-Medicare-eligible populations ages 55 
to 64. Indeed, the GAO has found that employer-sponsored 
retiree health coverage continues to decline and could reach 
crisis proportions in the near future.
    I mention that here because, in addition to the tax credits 
for health insurance, there may be some additional things we 
can do in the pension area to help sustain and encourage 
employer-sponsored retiree health benefits.
    A final concern I have that did not receive much discussion 
during the President campaign is the issue of retirement 
security. In the Congress, it has been a focal point and a 
point of real bipartisan cooperation. Unfortunately, last year 
we were not able to get a clean pension bill through the 
Senate.
    There are a number of us on the committee who look forward 
to working with you and Labor Department Secretary-designate 
Elaine Chao on the important issue of retirement savings. We 
need to address the Nation's embarrassingly low savings rate, 
generally, but particularly for the baby boom generation who 
will be retiring in about 10 years.
    In conclusion, I have long admired your work and have 
followed you at times in Vermont with some very interesting 
situations, but overall I am generally enthusiastic about IPC 
and what you have done. I am looking forward to working with 
you as we move into the future.
    The Chairman. Thank you, Senator.
    The Chair recognizes Senator Thompson.

 OPENING STATEMENT OF HON. FRED THOMPSON, A U.S. SENATOR FROM 
                           TENNESSEE

    Senator Thompson. Thank you very much, Mr. Chairman.
    For the uninitiated, I guess you are wondering, when does 
the nominee get to talk? That time is just about to arrive.
    But I did want to tell you how much I appreciated our 
conversation that we had. I think you bring a unique 
perspective to the job that you are undertaking which is so 
crucial, probably the most important one, with regard to 
maintaining a strong economy.
    You come from a background that gives you insight into 
issues such as health care, regulatory policy, and government 
management. I was especially pleased to learn of your 
background with the OMB. I am sure that makes you aware that, 
in many respects, our government management operations are 
still in the 19th century, in some respects.
    All of that is going to be very, very helpful and useful to 
you, I think, as you take on your duties at Treasury. I hope 
the President will allow you to have somewhat of an expanded 
portfolio that takes advantage of your expertise in these other 
areas.
    As my colleagues have pointed out, of course, we are in 
many respects in good times and having to deal with surpluses 
instead of deficits. But I think, for you, it is probably a 
more challenging time than others of your predecessors have 
faced.
    We have lulled ourselves somewhat into a false sense of 
security. We talk about problems looming ahead and challenges, 
and so forth, but there are a few of those that are extremely 
important and we do not seem to be making any progress at all. 
Others, again, have referred to the demographics; they are 
going to catch up with us.
    We all want more of all things that are good for the 
American people, but there are very few things where you can 
look down the road and actually see where the lines cross. It 
is there. We all talk about it, and we spend a lot of time 
agonizing over it, and we form commissions, and we do not do 
anything about it. We have got to have reform in those areas, 
but we also have to have a strong economy.
    There is nothing that we can do that would make for a more 
sound, long-term Social Security and Medicare system than to 
maintain a strong economy. Without that, nothing is really 
possible. With that, all things are possible in terms of 
looking at the reform measures we are going to have to take.
    Of course, that has to do with sound monetary policy, but 
it also has to do with sound fiscal policy and sound tax 
policy, and a tax policy that encourages and rewards 
investment, which leads to growth, which of course we are going 
to have to have for that strong economy.
    So you are going to be at the absolute center of what I 
think are the most important issues facing us domestically over 
perhaps the next several decades. I am glad we are going to 
have a person like you manning that chair. So, thank you for 
your service to your country.
    The Chairman. Thank you very much, Senator.
    Mr. O'Neill, the hour has arrived, finally. We would very 
much like to hear from you.

 STATEMENT OF PAUL O'NEILL, SECRETARY-DESIGNATE, DEPARTMENT OF 
                          THE TREASURY

    Mr. O'Neill. Chairman Baucus, Ranking Member Grassley, 
members of the committee, it is a great pleasure to appear 
before you, and I thank you for giving me the opportunity to 
appear in connection with my nomination to be the Secretary of 
the Treasury.
    I am honored to have been nominated by President-elect 
Bush, and I look forward very much to working with you all, if 
you do choose to confirm me in this position.
    I noted, in the last few weeks since my nomination was 
made, lots of media attention to a couple of issues. I thought, 
in the interest of not wasting a lot of television footage, I 
should say at the very outset, I am in favor of a strong 
dollar. I cannot imagine why anyone would think to the 
contrary, but perhaps we will get to that in your questions.
    The Chairman. Well, Mr. O'Neill, before you go any further, 
it might be more appropriate at this time, if you would like, 
to introduce your family.
    Mr. O'Neill. Thank you so much.
    Let me start with my brother and sister and spouses, and 
children and spouses. Yes, that is you. [Laughter.] Now we 
cannot see the grandchildren. Grandchildren, please.
    The Chairman. There is one.
    Mr. O'Neill. This is only half of the grandchildren. And on 
the end is my wife of 45 years. It was mentioned by Senator 
Murkowski that my wife and I met in Alaska. I started junior 
high school in Hawaii, then went to New Mexico for a little bit 
more junior high school and some high school, and then to 
Fresno, California for 9 months for high school, and ended up 
in the middle of my junior year in Alaska. My wife and I were 
students in the senior English class together. So, we have been 
partners for a long time.
    We are pretty proud of the associates that we have of our 
wonderful children and grandchildren, and their spouses. The 
grandchildren who are not here are either too old and busy with 
their own lives or too young and would be pretty restless here. 
But thank you for giving me the opportunity to introduce them.
    [Applause].
    Mr. O'Neill. You probably cannot tell, but there are other 
people we brought as part of the cheering section, friends, 
acquaintances, and working colleagues.
    The gentleman sitting here in the second row now is the 
chairman and CEO of Alcoa. He is a 28-, 30-year Alcoa employee. 
He was born in French Morocco. He was in Brazil when I came to 
Alcoa. About 5 years ago, I convinced him that he should leave 
Brazil and come to the U.S.
    Over the years, he has had increasing responsibility. It 
follows on a notion that I really think is quite important in 
leading a major organization, and that is, the person who 
succeeds you should be better than you are.
    I might say in that regard, Mr. Belda, even though I was 
still chairman until the 31st of December, he and his 
associates just turned in a 42 percent increase in profit, the 
best-ever profitable year in Alcoa.
    It is a place where we make real things and real money. In 
fact, we made $1.5 billion last year, which is really quite 
good, and it is because of the wonderful leadership of Mr. 
Belda and his associates. So, I thank you for letting me make 
introductions.
    The Chairman. You are welcome. I know they are very, very 
proud of you, and we are glad to have them here. Thank you.
    Mr. O'Neill. Thank you.
    I do have a prepared statement. It is fairly brief, but you 
have all had an opportunity to read it. I think I will just 
submit it for the record, if that pleases the Chair.
    The Chairman. That is fine.
    [The prepared statement of Mr. O'Neill appears in the 
appendix.]
    Mr. O'Neill. At the outset, before we do Q&A, I suppose it 
would be useful for me to say, so there is no ambiguity about 
the President-elect's view about tax policy, and maybe as well 
about Social Security.
    He has made it very clear to me, it is his intent for us to 
put his tax reduction ideas into legislative form and to send 
it to the Congress as quickly as we can do that.
    I think we all understand that there will be other views, 
some have been expressed here, about how exactly one deals with 
the tax system in the early days of this administration. But 
have no doubt, we will send you the President's tax proposals.
    I might say in that regard, there are some important 
elements of those tax proposals that I think have not been well 
drawn out in the tax proposals that he has spoken about over 
them any months and formulated into a policy recommendation.
    Four-person families with incomes under $35,000 would be 
taken off the tax rolls, four-person families with incomes 
under $50,000 would have their Federal taxes reduced by 50 
percent, and four-person families with incomes under $75,000 
would have their taxes reduced by 25 percent.
    So, again, I am really quite amazed at some of the things 
that I read and see on the television characterizing the ideas 
that were central to his campaign, because they do not comport 
at all with the facts that exist on the record.
    The second thing I would say is this, and it is very much 
in the context of what several of you said, particularly 
Senator Thompson said quite sharply, pointing at the issue of 
Social Security.
    I remember really quite vividly being here in January of 
1973 with George Schultz to testify before the Senate 
Appropriations Committee and listening to George Shultz say, we 
are headed for a train wreck between the generations because 
one can look at the demographics and see we are not going to be 
able to deliver on our Social Security promises to future 
generations unless we attend to the issues of the inconsistency 
between the benefit structure and the revenue structure for 
Social Security, and if one holds the benefits constant, it is 
going to be necessary to raise the payroll taxes for the 
current working population so high that the younger generation 
is simply going to rebel.
    I think it really is quite telling that 28 years have now 
passed and we are still facing a difficult problem of Social 
Security, and the intersection of the trains is coming in the 
year 2015.
    Honestly, a part of the thing that convinced me that it was 
appropriate for me to accept the challenge of returning to 
public service is I do think that there are issues like this 
one that are really quite important. If we can draw ourselves 
together around principle, it should be possible for us to do 
our duty for future generations and not leave this train wreck 
to happen.
    I must say, with all of the conversations I have had with 
individual members, I have been very heartened by the sense of 
principled approach to the issues that are in front of us right 
now.
    I am very hopeful that I can play a useful role in working 
with all of you so that, when we are measured, people will say 
they did the right thing and they did it well when they had the 
responsibility.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Mr. O'Neill.
    At the outset, I have three standard questions that we ask 
every nominee, which I will now ask.
    First, is there anything you are aware of in your 
background that might present a conflict of interest with the 
duties of the office to which you have been nominated?
    Mr. O'Neill. No, sir.
    The Chairman. Thank you.
    Second, do you know of any reason, personal or otherwise, 
that would in any way prevent you from fully and honorably 
discharging the responsibilities of the office to which you 
have been nominated?
    Mr. O'Neill. No, sir.
    The Chairman. Third, do you agree without reservation to 
respond to any reasonable summons to appear and testify before 
any duly-constituted committee of Congress, if you are 
confirmed?
    Mr. O'Neill. Yes, sir.
    The Chairman. Is that a yes?
    Mr. O'Neill. I said, yes, sir. In the trial runs I said no, 
and they just went right along. [Laughter.]
    The Chairman. The Chair notes a yes.
    What I am struggling with, Mr. O'Neill, as I listen to the 
general question about the tax cut, is really the size. It is 
not whether, but the size of the cut, and also its composition.
    As you know, we have been on a path of surpluses and debt 
reduction generally in the last seven, 8 years, and I think 
that has helped to stimulate the economy. It has given the 
market some security, some sense that those folks in Washington 
have some sense about our public finances, and it has certainly 
helped. Low jobless rates, moderate interest rates, and also 
strong investment, I think it has helped.
    We now seem to be hearing some signals from the President-
elect that maybe the emphasis on surpluses and debt reduction 
might not be as strong or as important, which could possibly 
have a negative effect on interest rates and on the strength of 
the economy.
    Tied with that, is how do we accommodate a $1.6 trillion 
tax cut--or who knows exactly what it is; as you say, it has 
not been submitted--along with other priorities like 
prescription drug benefits, expanding health insurance 
benefits, investments in education which are very important in 
this country, Social Security, as you mentioned, Medicare, 
increased military spending.
    If you total all of that up, it equals about $2-3 trillion 
over 10 years, right off the top, out of non-Social Security 
surplus. Add to that the uncertainty of budget projections. We 
do not know what the future has in store for us. It could be 
unforeseen military expenditures or natural disasters.
    One of the biggest problems, frankly, is the unknown. It is 
what you do not know. I would just like your reaction of how 
you fit all of that together--that is, all those priorities--
and still have a non-Social Security budget surplus? They 
really do not add up.
    Mr. O'Neill. All right. Let me begin by saying I am a great 
admirer of what Senator Bentsen, Bob Rubin, and Larry Summers 
have done as Secretaries of the Treasury. I think there is much 
to be admired. I think they have done a great job.
    Particularly, when I talked to Bob Rubin, I was telling him 
what a great job he had done and what a great record he had. He 
said, do not discount the fact, Paul, that an awful lot of it 
was luck. So I said to him, well, wish me luck, then.
    I say that at the beginning simply to make the point that 
again was made by many of you. Perhaps the single most 
important thing in economic policy is that we work to keep 
ourselves on a track of real growth rates at the upper end of 
what most people believe is possible, because without that we 
are so hobbled in doing the other things that we should care 
about as a society.
    So I would stipulate, it is very, very important that we 
work in such a way that we create a sense of political 
confidence in the world, a reliability as people look in at the 
United States from outside, that we work very hard to keep the 
inflation rates where they are. This morning's report, if you 
take energy out, was a 0.1 percent increase in the CPI month-
to-month, which is wonderful.
    Then to your point of fiscal responsibility. I must say, I 
was here when we sent the 1969 fiscal year budget to the 
Congress. It was the last balanced budget until the ones of 
recent times. We were in a very long period of fiscal 
imbalance, and I personally would not like to see us return to 
that position, so I respect the point that you make.
    One other thing. I would make just an observation. It is a 
little daunting, since I left, you have added three zeroes to 
everything. When we were talking about billions, we are now 
talking about a $10 trillion economy, and that is really quite 
different from where we were in the past.
    We have also adopted a convention, and I understand this 
was done some years ago, that we talk about these numbers in 
10-year terms. So we take a number and then we multiply it 
times 10, and that is how you get $1.3 trillion, or $1.6 
trillion. I am used to dealing with big numbers and I know 
about how to do billions and all the rest of that.
    I must tell you, I do not run into very many human beings 
that resonate to $1.6 or $1.3 trillion. It does not make any 
sense to them, it is just an abstract concept. Then I would 
add, as one who necessarily has to make estimates about things, 
if one does not have humility with estimates one has not done 
enough estimates.
    So I am not here to tell you that I can give you an exact 
glide path about where the economy is going to go. In truth, 
this is responding in a way to the point that was made. Someone 
said, we hope you will continue to be straight and clear in 
what you say. I very much want to do that. I would say, 
estimates are estimates.
    But one has to make decisions in the context of estimates, 
and the estimate that I have looked at so far--and I have not 
had as much time as I will need or would like to examine this 
in the level of detail that I am accustomed to--that there is 
room to fit the President-elect's tax proposals into even the 
low end of economic assumptions and growth rates that I have 
looked at without touching any Social Security money. For him, 
this is an inviolate principle.
    Now, if you examine the pieces of his----
    The Chairman. I will have to ask you to sum up. My time has 
expired.
    Mr. O'Neill. I am sorry.
    The Chairman. I want to be fair to all of the Senators.
    Mr. O'Neill. If you examine the pieces of his tax cut 
proposal, it has been observed that the weight of his tax 
proposals are what is called back-loaded, which is to say, they 
begin to take effect in the out years.
    The amount of money associated with the marginal tax rate 
cuts that I spoke about earlier consolidating into four rates 
and eliminating taxes for people under $35,000, on its initial 
basis, would have cost $448 million.
    So the question of acceleration, I think, is the question 
related to marginal rate reductions. For sure, there is room to 
put some marginal rate reduction even earlier than when he 
proposed, if that is what he decides to do. He has not yet made 
a decision to do that.
    The Chairman. One quick question. How important is it to 
continue to pay down the debt?
    Mr. O'Neill. I think it is one of the things that we should 
resolve that we will continue to do, that we will pay down the 
debt. In a way, if you look at the issue of marginal rate 
reductions and you look at the composition of family incomes 
and family obligations, it seems fairly clear now, if we were 
to provide marginal rate relief, the people probably under 
$100,000 would choose to use a substantial part of that to 
reduce their outstanding credit card debt, so that from an 
economic point of view one could argue that the savings effect 
and the balance sheet effect would be stronger with marginal 
rate reductions than one would expect to see from a diffused 
reduction in the national debt.
    The Chairman. Thank you.
    Senator Grassley?
    Senator Grassley. President-elect Bush's tax plan does not 
include any retirement security incentives. Yet, on the 
campaign trail he had expressed some need of doing some things 
in that area, without being very specific.
    Mr. O'Neill, enhanced retirement security being a goal of 
President-elect Bush, and also members on both sides of the 
aisle on this committee, is something that I want to look at.
    A few months ago, this committee had unanimously approved a 
package of retirement security incentives. Unfortunately, we 
were not able to secure floor time on the Senate to get it 
passed. The House had passed a similar package with an 
overwhelming bipartisan vote.
    These proposals generally would enhance individual 
retirement accounts and employer retirement plans. I, Chairman 
Baucus, and other members of the committee intend to 
reintroduce that popular legislation shortly.
    Will the incoming administration consider these proposals?
    Mr. O'Neill. Indeed. We will take a look at all aspects of 
the Code, and particularly ideas advanced by yourself and 
Chairman Baucus, and see how these ideas can be considered in 
the broader scheme of things.
    Senator Grassley. Mr. O'Neill, like enhancing retirement 
security, improving the Nation's education system is a priority 
for President-elect Bush and members on both sides of the 
aisle.
    Last year, the Senate approved a Finance Committee bill 
that included a broad array of education tax relief measures. 
Most of these proposals carry strong bipartisan support and 
have been improved several times.
    As incoming administration's top tax policy official, could 
you indicate whether President-elect Bush's education tax cut 
agenda could be expanded to include these bipartisan proposals?
    Mr. O'Neill. We will take a look. In candor, I have been 
sufficiently busy, I have not had an opportunity to really look 
at the things that have been proposed in the last year or so. 
But, indeed, I will commit to you that we will look at all of 
the ideas that are abroad about Tax Code changes.
    Senator Grassley. In 1999, you gave a speech to the 
Aluminum Association. You characterized the tax system as a 
disaster due to its complexity. Of course, every member of this 
committee hears from its constituencies that the tax situation 
is complex.
    I believe a person of your stature speaking of this 
complexity does public good. There is no question that, for the 
American taxpayer, these blizzards of forms and filings are a 
nightmare. The need for simplification is perhaps one of the 
few areas where the taxpayers and the IRS find some common 
cause.
    When I served on the National Committee on Restructuring 
the Internal Revenue Service it was clear that complexity of 
the Code was one of the major difficulties that the IRS faced 
in administering tax collections.
    The Joint Tax Committee has currently prepared 
recommendations on addressing complexity and simplifying the 
Tax Code. Those recommendations will be released, we believe, 
in about two to 3 months. The committee looks forward to that 
report and working with the administration on this matter.
    So I would hope that we could count on your support and 
efforts to simplify the Code, and I would be interested in any 
specific areas of the Tax Code that you believe should be a 
point of focus for simplification.
    Mr. O'Neill. Some members of the committee will know, when 
Senators Nunn and Domenici were proposing Tax Code change, that 
I worked with Bob Lutz, who was then the president of Chrysler 
Corporation, to provide support and try to create interest for 
fundamental tax reform.
    So, I am very much of a mind that we need fundamental tax 
reform, but I will tell you how I get to it. I get to it in two 
ways, the need to do something about this.
    On the one hand, when I look at the cost that we impose on 
our society to operate our Tax Code and I look at the work that 
has been done, principally at the University of Michigan in 
costing the Tax Code impact on our economy, the numbers range 
between $150 and $200 billion a year that we are costing the 
economy in the form of some of the brightest minds in the 
country that, as I have said in other places, could otherwise 
be employed as engineers making things.
    One could say that is the right of our society to impose 
costs and to create jobs of this kind, and we can afford it. As 
one who has spent most of the last two decades working around 
the world, I must tell you, every place that I see that we are 
imposing costs on our society that does not add value, I see it 
as a weakness in our ability to maintain our leadership 
position in the world, because others are getting better. I 
think we need to examine everything that we do that adds cost 
without value, and for me, this is one.
    I have said, and I suppose as I am in transition I can 
still say it without getting too many brickbats, I think our 
tax system is not worthy of an advanced society and I really do 
think we need to do something about it.
    The Chairman. If the Senator would yield. Did I hear you 
say some other countries are getting better in simplification?
    Mr. O'Neill. No, no, no.
    The Chairman. I misunderstood.
    Mr. O'Neill. Some other countries are getting better at 
picking up the pace of productivity improvement.
    The Chairman. Generally.
    Mr. O'Neill. Yes. I would take you back to 1980. There were 
lots of us out there in the world that makes things that went 
and looked at the rate of progress in some other countries 
around the world and were startled to find that, while we were 
beating our breasts about how good we were, we were not good.
    One of the things we have done out there in the world where 
we make things, in the last 20 years many of us have recaptured 
the lead and we are not ever going to back down again, we are 
determined to lead the world. That is how we have actually 
gotten the huge tax surpluses that have come from people who 
make things and create productivity.
    The Chairman. Thank you. I note that Majority Leader, 
Senator Lott, is here. The Chair is very honored to recognized 
the Senator.

   OPENING STATEMENT OF HON. TRENT LOTT, A U.S. SENATOR FROM 
                          MISSISSIPPI

    Senator Lott. Mr. Chairman, let me just thank you for 
giving me this opportunity. I came to listen and learn. I am 
looking forward to working with our new Secretary of Treasury. 
Several of the questions that I had in mind, I understand have 
already been asked about tax policy.
    Just to welcome you and assure you of my support, and I 
look forward to working with you for the betterment of our 
economy in this country. Good luck.
    Mr. O'Neill. Thank you.
    The Chairman. Thank you, Senator.
    Senator Murkowski?
    Senator Murkowski. Thank you very much, Mr. Chairman.
    Mr. O'Neill, some of us believe there is an energy crisis 
occurring in this country. As you know, Southern California 
Edison technically defaulted on somewhere in the area of a half 
a billion dollars' debt. Some analysts suggest that PG&E, 
Pacific Gas & Electric, is in even worse shape.
    I suppose we can argue the merits of California 
deregulation to some extent, a scheme that freed wholesale 
prices from regulation but maintained regulation on retail 
prices.
    But in any event, whoever is to blame, we have a reality 
here that the sixth largest economy in the world, namely the 
State of California, is in an energy crisis.
    Now, in the past Congress has bailed out some corporations, 
Chrysler for one. Five years ago, you will recall the former 
Secretary of Treasury proposed we bail out the Mexican tesobono 
holders, a debt held to a large degree by U.S. firms.
    My question is, do you think Federal assistance should be 
used to help bail out these California utilities, and what 
role, if any, should guarantees play or should we just leave it 
up to the State of California to work out of this mess?
    Mr. O'Neill. I want to be really careful with what I say 
here, because I am reading in the newspapers that Governor 
Davis is fashioning an intervention which he believes will 
work.
    Again, I have not sat down and read the FERC rules and 
regulations myself, so I do not think I am an authority on the 
scope of possible Federal action. Therefore, I do not have a 
judgment about what, if anything, the Federal Government needs 
to be out doing.
    But I am reminded of something, again, that one of my 
mentors from OMB told me one time. I have forgotten what the 
issue was, but he said, basically, the President and the 
Congress have to be really careful when they hang out their 
shingle, because when they do they get all of the business.
    So I think one needs to be cautious in a situation where I 
believe it is true, the State of California assumed that they 
could defeat economics, which is to say, telling someone that 
they could sell their goods on a free basis at wholesale and 
the retailers cannot accommodate what to them is a cost, is 
lunacy, frankly.
    I mean, you do not have to have an economics degree to 
understand that this is an unworkable situation unless--
unless--there is a great surplus of goods, which means the 
market will trade wholesale prices down, then you do not need 
to push at the retail level. But what was done makes no sense.
    Who should deal with it? I think the first line of defense, 
obviously, rests with the Governor of California. It appears to 
me that he has the tools that he needs to fashion a solution, 
and it is not clear to me that there needs to be a Federal 
intervention, although, again, as I understand the FERC 
possibilities, there are some things that one might do to speed 
up environmental clearances so that it does not take so long 
once there is a decision on the part of the State to permit 
additional generating facilities, which they have not done for 
the last 10 years. That FERC could be very responsive. There is 
no reason why it ought to take 18 months, it ought to take 18 
days.
    Again, one of the things that is really interesting to me 
on the contrast between private sector and public sector, is I 
frankly think we have been too tolerant in accepting the length 
of time it takes to get anything done; under conditions of 
emergency, one should be able to act. I think, if there is a 
need for FERC action, it should be quick.
    Senator Murkowski. Mr. O'Neill, Congress created the Office 
of the Taxpayer Advocate at the IRS. In its annual report to 
Congress, the advocate cited the complexities of the individual 
Alternative Minimum Tax and recommended that the individual AMT 
be repealed.
    Would you support repeal for individuals or would you 
support repeal for corporate AMT?
    Mr. O'Neill. That is something I think we are going to have 
to look at very, very hard. If you accept the President-elect's 
recommendations on the marginal tax rate cuts, while his 
proposals would take people off the tax roles, the AMT would 
put them back on in a way that would mystify them beyond 
belief. So I think, yes, we need to look at the AMT, it is a 
great complexifier, and we will do that.
    Senator Murkowski. Finally, what areas of the Tax Code do 
you think would best encourage more business investment? 
Changing the depreciation schedule? Cutting the corporate rate 
or a combination of both?
    Mr. O'Neill. I am thinking about whether I can get away 
with still being a maverick for another couple of days.
    Senator Murkowski. Oh, you have got a couple of more days. 
Sure.
    Mr. O'Neill. Let me answer you this way. I guess I will be 
a maverick for the moment and tell you what I think about this. 
I never made an investment decision based on the Tax Code. If I 
did not think I knew how I was going to cover the cost of 
capital with an investment, whatever the effective tax rate 
was, I took that into consideration.
    Frankly, with investments--not everyone is like this--but 
if you make an investment for 20 years and you do not know 
pretty well how that investment is going to pay for the cost of 
capital, assuming the status quo ante with the tax system, then 
you are not a businessman, you are a gambler.
    Maybe I should say more directly to you, if you are giving 
money away I will take it. If you want to give me inducements 
for something I am going to do anyway, I will take it. But good 
business people do not do things because of inducements, they 
do it because they can see that they are going to be able to 
earn the cost of capital out of their own intelligence and 
organization of resources.
    Senator Murkowski. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Breaux?
    Senator Breaux. Thank you very much, Mr. Secretary-to-be. 
You are entering into a job which is going to be one of the 
toughest in government. You have to predict the economy, and it 
is easier to predict the weather than it is to predict the 
economy.
    A story in the Washington Post this morning talked about 
how all of the Presidential and private sector experts over the 
last nine recessions since the end of World War II have failed 
to predict accurately that they were forthcoming. Yet, we now 
are faced with a similar situation; whether it is private 
sector, public sector, or independent economists, they just 
miss it more often than they get it right.
    So you are in a position to have to take actions to address 
these things which are so very unpredictable. Hopefully you 
will be in a position with good advisors to make the proper 
decisions.
    Let me ask a question. It seems to me that if you talk 
about a slow-down in the economy there is a difference in 
opinion as to the best way to address it. I mean, some would 
argue that, well, the best way is an across-the-board tax cut, 
others would say that, no, a better way to address that is 
monetary policy through the Federal Reserve, through a 
reduction in interest rates.
    For those who say that it is better for a tax cut across 
the board, those who disagree point out that much of such a tax 
cut basically stimulates more savings for people in the upper 
income as opposed to spending it and moving the economy 
forward, whereas, interest rate reductions would tend to 
stimulate all forms of business investment.
    So when you have the choice, in your position, to make a 
recommendation for an economy that is slowing down, does Paul 
O'Neill say I think we should move towards a monetary policy 
fix or towards a broad-based tax cut fix?
    Mr. O'Neill. I think I would liken my answer to what I call 
a belts and suspenders approach. What I mean by that, is this. 
First of all, with regard to where the economy is, there is no 
doubt that we are experiencing a slow-down. You do not have to 
get the 40 CEOs that the President-elect had in Austin to find 
that out.
    In talking with many of you, you are hearing from your own 
constituents that order books are not what they were. I think 
there is a consensus among people who know about these things. 
I would say from my own experience, observations, and an 
opportunity to look into individual companies, there is a slow-
down in order rates.
    Now, if you looked beyond the slow-down in order rates and 
see what occasioned that, there are some industries that I 
would say to you that have, in effect, borrowed from the 
future; they provided financial incentives that brought forward 
demand that was probably going to occur in the first 6 months 
of this year and they got it actualized in the last 6 months of 
the year.
    Senator Breaux. Let us assume, Mr. O'Neill, for the sake of 
argument, that there is a slow-down.
    Mr. O'Neill. All right.
    Senator Breaux. Let us assume that. The question I am 
really trying to get at is, does Paul O'Neill view monetary 
policy in the Federal Reserve as a better and quicker way to 
address that, or do you think a broad-based tax cut can 
accomplish that? If so, how does that work?
    Mr. O'Neill. I think the first line of action is monetary 
policy. My point is this. If we are going to have a tax 
reduction, which I am hearing more and more people say they are 
in favor of a tax reduction, then I do not know why we would 
not want it now. Not because it is a major component to drive 
the economy, but because it will not hurt.
    Six months ago if you had asked this question, you would 
have been able to get 98 percent of the knowledgeable people to 
say, oh, my God, we cannot have a tax cut because we are going 
to fuel added demand, and that means we are going to have 
inflation, so we should not do it. That argument is off the 
table from people who know what they are talking about.
    So the question, to me, is if we are going to have a tax 
cut anyway, why do we not reduce the risk that what may be an 
inventory correction turns into a recession by front-ending the 
marginal tax rates, helping individuals with low and middle 
incomes to improve their balance sheets by reducing their 
outstanding credit debt, and we'll get ready for the next round 
of expansion in our economy.
    Senator Breaux. Would you favor targeting it to low and 
middle income, if it is across the board?
    Mr. O'Neill. Well, the rate reductions do that. The rate 
reductions do that. As we discussed, and I discussed with many 
of you, again, my amazement at the way the conversation is had 
about the tax system. If you look at what has happened to our 
tax system in the last 9 years, we have permitted the marginal 
rates to go up substantially so that, 9 years ago, 8 years ago, 
the top marginal tax rate was about 31 or 32 percent, and today 
it is almost 40 percent. This creep has happened through the 
whole tax curve.
    Then I say to myself, we have this convention that we say, 
oh, we cannot lower the taxes for high-income people; they sent 
the money in. We have this notion somehow that I must say, even 
with my experience in Washington, I still do not quite 
understand. That is, people send their money in and, depending 
on where you are in the rate structure, you send in your 
proportional amount.
    But when we talk about, how are we going to provide relief, 
then we turn around and say, well, we cannot send it back to 
the people who sent it in. We want to change the distribution 
on the way back.
    That is not to say that it is inappropriate to have a 
conversation about equity in the incidence of how we impose the 
cost of public goods and services on the population, but as a 
starting position it really is quite startling to me that we 
have this convention that says, once it gets here, the 
government owns it.
    Somehow, the government is not ``we, the people,'' it is 
some other floating institution that performs this magic act 
of, we are going to change where it came from, we are not going 
to give it back to those people, we are going to give it to 
somebody else.
    Senator Breaux. And the answer to my question was a yes or 
a no?
    Mr. O'Neill. I am working really hard to figure out how 
Alan Greenspan says all these things and nobody is really sure 
what he has said. [Laughter.]
    Senator Breaux. I think you are doing really well. 
[Laughter.]
    The Chairman. That is true, but that is a separate function 
in government, too. He is supposed to be ambiguous, as others 
are not supposed to be ambiguous.
    Mr. O'Neill. All right.
    The Chairman. At least, it does not help if they are.
    Senator Snowe?
    Senator Snowe. Thank you, Mr. Chairman.
    Mr. O'Neill, to follow up on the tax cut issue, do you 
think that President-elect Bush is going to adjust his strategy 
in response to this slowing economy, for example, by making it 
retroactive?
    I noted that, for example, Robert Samuelson, in his column 
recently, who had been initially opposed to a tax cut, now says 
that it makes eminent sense and that it should be retroactive, 
and compressing some of those tax cuts, especially when it 
comes to marginal tax rates, into 2 years.
    Is that something that is being considered by President-
elect Bush and you?
    Mr. O'Neill. You asked, first, was he going to do it. I 
cannot give you a straight answer to that; it has not been 
decided yet. Is he considering it? Yes.
    Senator Snowe. So it is obviously part of redesigning this 
strategy.
    To what extent do you think this tax cut will serve as a 
fiscal stimulus, and how important is it to do it, assuming or 
anticipating there will be a further reduction in interest 
rates, which some people say that it may take 6 to 12 months to 
feel the impact of an interest rate reduction?
    Mr. O'Neill. First, and you all know more about this than I 
do because you have dealt with tax relief on a retroactive 
basis before, but again, I have played on this ground sometimes 
in the past. It is my recollection that it is possible to 
fairly quickly change the withholding rates so that you could 
have quite a quick impact if the President-elect chooses to 
propose that.
    With the marginal rate reductions included in his 
discussion over the last couple of years, for low- and 
moderate-income people the amounts could be significant and 
they could be quick.
    Now, would I do it with an expectation that this would 
somehow provide the boom economy? No, I would not do it for 
that reason, but I would go back to what I said in answer to 
Senator Breaux.
    I guess I am conservative. I think, if there is a way that 
you can take action that is directionally correct for the 
economy and it does not have any of the negatives that people 
were saying 6 months ago of over-stimulation and creating 
inflation, then I say, why not? What is the reason not to give 
the taxpayers back some of their money? I do not know that.
    Senator Snowe. What about household debt and business debt 
that obviously has been rising considerably? As you well know, 
consumer spending and business spending are really the engine 
that drives the economy. How will these tax cuts factor into 
alleviating that debt and, again, reigniting the economy?
    Mr. O'Neill. Well, for individuals, money could be applied 
directly to what looks like a stretched consumer. I promise 
you, when I come back I will have all of the numbers in my head 
and be able to adroitly deal with classifications of income 
structure and outstanding debt. I really have not had time to 
make that switch from what I have been doing to what I will be 
doing.
    But my sense is that, over the last 6 months, consumers 
have been accumulating a credit, or taking credit, at an 
unsustainable rate.
    In fact, the average outstanding consumer credit is equal 
to disposable income, from one piece of evidence I saw, and 
that says that says consumers are stretched out. So one should 
not be too surprised that they have backed down from their 
consumption pattern.
    So one would think that, with a marginal tax rate reduction 
early on, that people would take advantage of the opportunity 
to reduce their outstanding consumer credit and, as I said 
earlier, get ready for the next expansion of the economy.
    Senator Snowe. One final question. Based on the article 
this morning concerning conflicts in numbers over the estimated 
surplus and projection of economic growth, which frankly, I 
think, is going to be a very fundamental issue here as we 
design the budget resolution and upon which we predicate our 
assumptions.
    There really is a vast difference currently between CBO and 
OMB. I mean, OMB has much higher economic projections and 
probably $1 trillion less in terms of estimated surpluses over 
the next 10 years, compared to CBO's, as mentioned earlier, 
suggesting a 2.7 percent annual economic growth over the next 
10 years in order to sustain a $5 trillion surplus.
    So I think it is going to be absolutely important that we 
have confidence in the numbers, and with the new administration 
designing those numbers, so we make sure they are absolutely as 
sure as possible under the circumstances.
    We understand how there is a lot of uncertainty when we are 
calculating these projections, but we need to be absolutely 
certain of those numbers as we proceed with a tax cut and other 
spending assumptions.
    Mr. O'Neill. Shall I respond?
    Senator Snowe. Yes.
    Mr. O'Neill. I remember how important numbers are in this 
town, and people latch onto them and hold onto them like pit 
bulls, so I appreciate their importance.
    But I hope you all will forgive me going forward of also 
being a truth-teller, in telling you that while I think at the 
end of the day, as Tom Korologus--all of you know Tom 
Korologus--said to me, you know, Paul, at the end of the day 
they cannot vote ``maybe'' in the Senate, which is an important 
way of saying, at the end of the day you have got to say, in my 
best judgment, this is the stream of numbers we should pay 
attention to.
    I hope you will forgive me if I make your life more 
complicated by showing a range and tell you why I am where I 
am, because I do not think it is intelligent for us to act as 
though we got our numbers from God, because we did not. So you 
will see a range of numbers. I will stand up and maybe say as 
forcefully as I know how, this is what I believe and this is 
why I believe it.
    Senator Snowe. Thank you.
    The Chairman. Thank you.
    Senator Lincoln?
    Senator Lincoln. Thank you, Mr. Chairman.
    I would like to echo some of what was brought up by Senator 
Murkowski. I was pleased with your answer in terms of the 
Alternative Minimum Tax. I certainly do feel like the Hope 
scholarship, the dependent child care credit, credit for 
elderly and disabled, and adoption credits are very important.
    I would really hate for us as a Nation to lessen the 
importance of those credits by not paying attention to the 
complexity that has evolved in that situation and not doing 
something about the Alternative Minimum Tax. So, I am 
encouraged by what you had to say there, but hope that you will 
work further with us on that this year.
    I, for one, believe it is something we can do, and should 
do, on behalf of the American people who are getting caught, 
especially the middle income people, between those cross-hairs, 
as I do not think that they should be.
    I would also like to touch just a little bit about the tax 
cut when we talked briefly yesterday, as well as what you have 
said here today.
    Your comments about the marginal rate reductions and tax 
cuts should happen relatively soon, but as Senator Snowe was 
talking and seeing the rate reductions from the Federal 
Reserve, does it not seem fair that we would want to give that 
time, understanding the length of time that it takes us here in 
the U.S. Senate to pass tax law, that we would not want to rush 
into something without being able to give the time necessary to 
see what the results are going to be from those reductions and 
what it could possibly do for the economy?
    I will just link that with another comment that you have 
made a couple of times, and that is that we have these numbers, 
then we multiply them by 10. A lot of that comes from the fact 
that, really from the corporate community, we get the word that 
it is so important to be able to depend on tax policy.
     You certainly do not make your decisions and investments 
strictly on policy, but without a doubt, being able to have 
some consistency in what you can expect from the Federal Tax 
Code over a period of 10 years is important, and we cannot make 
those decisions unless we can make those projections.
    So I would just say, to get from you an idea whether it 
would not be wise or prudent to be somewhat cautious to see 
what those rate reductions are going to do before we jump into 
tax policy that is not easy for us to move or to change.
    Mr. O'Neill. I know it is difficult, but the tax proposals 
that the President-elect has made and the ones that I have 
spoken about this morning do not touch corporations, they all 
have to do with individuals.
    Senator Lincoln. Right.
    Mr. O'Neill. So corporations are not going to be 
destabilized as this conversation goes forward with the things 
that he has proposed.
    Senator Lincoln. Those that invest in them.
    Mr. O'Neill. Pardon me?
    Senator Lincoln. But those that invest in them, obviously, 
are going to be affected by the tax structure that we are 
talking about.
    Mr. O'Neill. From an individual, personal point of view, 
people, hopefully, will be positively affected. I am thinking 
hard again about how deeply I want to get into this.
    In an ideal system, and personally I like to think about 
ideal systems because it tells you how far away you are from 
what is possible, we should not change the tax system often, in 
my judgment. It should be as simple as it is possible to be.
    I honestly think we know how to do that. Individually, 
every one of you would agree with me, but somehow we have not 
been able to approach the subject of how we get real 
simplification. We maintain the fiction that corporations pay 
taxes. As many of you have observed, I have run two Fortune 50 
companies. Corporations collect taxes, they do not pay them.
    The idea somewhat that capital will stand still for the 
idea of getting less than the market rate of return because 
some government chooses to impose taxes is a fiction and it is 
more and more a fiction if you live in the world that I do, 
with operations in 36 countries, with something some of you 
have worried about, hot money, current account deficits, and 
all of the rest of that. The world that we entertain ourselves 
with is simply not a real world.
    The idea that corporations pay taxes, from that follows the 
notion that we have some of the brightest minds in America out 
there trying to figure out how to cope with a corporate tax 
system, because it is not all right for us to say to each 
other, at the end of the day, individual human beings pay all 
of the taxes.
    If corporations do not make enough money to service the 
cost of capital and pay taxes, they go out of business. I am 
probably going to get into trouble for telling you the truth, 
but I am going to continue to tell the truth until somebody 
tells me, shut up, do not do that anymore.
    The Chairman. Senator Rockefeller.
    Senator Lincoln. Has my time expired? I had one more 
question.
    The Chairman. It has expired.
    Senator Lincoln. Thank you, Mr. Chairman.
    The Chairman. There will be another round.
    Senator Lincoln. All right.
    Senator Rockefeller. Thank you, Mr. Chairman.
    Continuing a little bit on that line, if you go out of 
business, you go out of business. That is one prospect. 
Another, is do you get into business, and where would you 
choose to?
    Chairman Baucus and I, as we discussed, come from the two 
States that have the lowest per capita income of any of the 50, 
so the question of, do people choose to go into business is 
also important.
    Mr. O'Neill. Right.
    Senator Rockefeller. We passed, in the last session, and it 
is now law, the New Markets Tax Credit bill. It is specifically 
designed for under-served areas across this country where 
companies could come and would come because of the ability of 
the labor force, which would be associated with poorer States, 
but would not come because of the cost of capital.
    Now, that is law already, so I am not asking, so much, your 
view on it. What I want to know is that you will make this 
program, already law, Mr. O'Neill, a priority during your 
administration.
    Mr. O'Neill. I do not know about it, but I will. Maybe it 
does not need to be said, but you can count on me following the 
law and doing the things that you, as representatives of the 
people, have decided we should do, without fail.
    Senator Rockefeller. I thank you for that.
    I would note also simply for the record, but it is much 
more than that to me, the conversation we had when we talked 
about retired coal miners' health benefits. I would just put 
that on the record.
    Now, for steel. Do you believe that the United States 
should have a healthy or significant steel industry, that it 
needs it?
    Mr. O'Neill. I do.
    Senator Rockefeller. Secretary Cheney was in Wierret, West 
Virginia just before the campaign and said that we cannot have 
a country that does not have a steel industry because we cannot 
have a national defense which does not have access to a 
domestic steel industry. Do you agree with him?
    Mr. O'Neill. I said yes to the first question. I would not 
tie it so much to national defense as I would for a need for a 
balanced economy, to have a representation in the things that 
are fundamental to the society, and certainly, steel is still a 
very basic and fundamental material. It is all right with me to 
reach for the national defense connection, but I would not 
necessarily do that.
    Senator Rockefeller. Your first question, in a sense, 
subsumes the second one.
    Mr. O'Neill. It does.
    Senator Rockefeller. I am pleased with that.
    Following on that then, I need to ask you, will you be, as 
Treasury Secretary, an advocate for your first answer, that is, 
a steel industry?
    The reason I ask that, is what we had in our discussion. 
That is, that the people I represent, where steel is not only 
steel but also metallurgical coal and is the psychology of the 
whole State--one accepts that, and you understand that because 
of where you come from--that the same Mr. Rubin that you were 
praising, and others, more or less in their desire for 
globalization put it so far ahead--that is, globalization--of 
everything else that the health of the steel industry, and in 
some ways the health of other industries, but I am talking now 
about manufacture, job-creating, hands-on steel industry, was 
something they simply did not want to hear about. I would have 
to assume then that I can approach you with the expectation of 
more sympathy than I could them.
    Mr. O'Neill. If you do not mind, I am going to give you an 
answer that may take me four or 5 minutes that broadens the 
subject.
    Senator Rockefeller. I do mind.
    Mr. O'Neill. How much time can I have to answer your 
question?
    Senator Rockefeller. The Chairman is quite strict.
    Mr. O'Neill. Two minutes. All right. Let me do it as 
quickly as I can.
    The Chairman. It will have to be about two because we have 
other Senators.
    Mr. O'Neill. First of all, I do not think some of the 
problems that are attendant to the question you are asking 
about the steel industry can be truly solved in the microcosm. 
If you look at where the world is in steel on an around-world 
basis, we simply have too much manufacturing capacity for steel 
in the world.
    What we have demonstrated in the last 20 years is, left to 
its own devices with a lack of reinvestment in the most modern 
technology and the utilization of the best leadership ideas 
about how to combine resources, the world is going to do a 
brutal job of reconfiguring the world's steel industry.
    As it does that, it is going to do significant damage to 
individual human beings. It is going to basically run companies 
down to the point where we are now, where the price of steel is 
being set at the operating cost of the lowest cost producer in 
the world. That means everyone who is making product in the 
world, except the low-cost producer, is giving their capital 
away.
    Now, because of the laws that we have that deal with 
antitrust, it is not all right in the conventional thought 
process for steel companies to talk to each other, even in the 
presence of lawyers, about, how do we reconcile this huge 
overhang of capacity, because we have all these rules made by 
men that end up torturing individual human beings? So we cannot 
even have a conversation about how we solve the right problem 
rather than, how do we create protection for our people and 
things like that.
    Senator Rockefeller. Mr. O'Neill, my time is up and I just 
need to conclude on this statement.
    Mr. O'Neill. All right. Fine.
    Senator Rockefeller. I think the difference between what 
you are saying and what I am strongly feeling is that supply 
and demand, when we say them, ordinarily imply equity and fair 
behavior on all parties. They normally do.
    Americans are unique in not so thinking. We allow dumped 
steel, circumvented steel, through third or fourth country 
steel to come into this country in many, many forms, and thus 
undermine what would be called a sound economic principle, that 
is, a market system. That is a matter of law, the 1974 trade 
law. It is not a matter of sort of opinion, it is a matter of 
law. I just choose to make that distinction while honoring your 
answer to my very first question.
    The Chairman. Thank you, Senator.
    Senator Rockefeller. Thank you, sir.
    The Chairman. Senator Jeffords?
    Senator Jeffords. Thank you, Mr. Chairman.
    I would like to take a look at the area of where our public 
policy and business policy seems to be somewhat in conflict. 
First, the Nation has abysmally low savings rates. Life 
expectancies are increasing such that, through the middle of 
this century, it will be 84 for women and 80 for men. The 
national savings rate indicates that these people are likely to 
outlive their savings.
    Second, the early retirement policies of corporations 
encourage workers to leave their jobs earlier, and the decline 
in defined benefit retirement plan coverage means there are 
fewer guaranteed benefits retirees can rely upon, in part 
because defined contribution plans have the problem of market 
risk. In addition, employer-sponsored retiree health coverage 
is declining for early retirees age 54-64. Indeed, the GAO has 
found that a steady decline in coverage could reach a crisis 
situation down the road when current workers retire.
    Third, our public policy provides Medicare benefits 
starting at age 65, and the Social Security eligibility age 
will be increasing from age 65 to 67 in the future. Thus, we 
are building a big gap between retirement age and our social 
programs, and therein lies the conflict.
    I realize that this is a complex set of concerns, and I am 
not going to ask you what the answer is. But sitting on the two 
committees that deal with these issues, I find myself with some 
responsibility for trying to pull all the pieces together 
before things blow up. I would like to hear your comments on 
these concerns.
    Mr. O'Neill. I agree with you completely. I think we should 
put these issues together and we should look at them in their 
totality.
    But it also causes me to say to you, one of the things that 
I find really appealing about the notion the President-elect 
has proposed with regard to creating individual ownership for 
accounts, is the notion that is associated with the magic of 
compounding, which is to say, over a lifetime of work, small 
sums can grow to very large sums.
    Importantly, as distinguished from Social Security, one 
could look forward to the creation of a substantial nest egg 
that could be passed on. It need not be consumed as Social 
Security ends when you die. The idea of filling out retirement 
protection for human beings seems to me to be a really 
important thing, and it fits very nicely into the context of 
what you are saying.
    Senator Jeffords. Thank you, Mr. Chairman.
    Senator Lott. Mr. Chairman?
    The Chairman. Senator Lott.
    Senator Lott. I think Senator Thompson would allow me to 
just ask a couple of questions.
    The Chairman. Sure.
    Senator Lott. I found this very interesting, and we are 
going to have to have a lot more discussions. But within the 
next few weeks or months, we are going to have to make a 
decision here on this committee, from the leadership of the 
committee on down the line, as to exactly how we are going to 
proceed with a tax cut proposal.
    It will take a lot of forms. One, exactly how much is it 
going to be, then what would be the make-up? President-elect 
Bush has got some specific proposals. But events are beginning 
to affect that now. For the state of the economy, new 
suggestions are being raised. One of them, of course, is that 
some portions of it be retroactive.
    One of the decisions we are going to have to make, is how 
much of this is going to be focused at trying to make the Tax 
Code fairer and how much of it is going to be focused on trying 
to help the economy and help the economy grow?
    I mean, we can all come up with a long list of things we 
want to do to make the Tax Code fairer. We have been arguing or 
talking, I do not know, 10 years, about how we are going to do 
something about the marriage penalty. Last year we came close 
to it, but not quite any cigar. How you do that also affects 
who gets it and how much it costs, and whether it is phased in, 
how fast it is phased in. Of course, the death tax. We have 
talked a lot about that.
    We probably could have gotten both of those done last year 
if the circumstances had been a little different politically. 
Then there is a long list of other things, health care tax 
credits, the Coverdell savings accounts for education.
    I like that, because you get triple benefits there. You 
encourage people to save a little bit more, it helps the 
family, and it also helps with the education of America and we 
get the benefit from the education. That is all well and good, 
but in terms of helping the economy grow, that is of dubious 
value, I would presume.
    Then the other question is, what do we do that has a 
positive economic impact? Obviously, most economists--and I 
presume you--would say that you do that better with across-the-
board rate cuts.
    Mr. O'Neill. Right.
    Senator Lott. So I would have two questions. One, in terms 
of trying to focus the benefits, what is the most important 
thing that we do?
    Second, while you are at that, I raised the other day, and 
others have raised, a suggestion that if we really want to have 
an impact on the economy, some reduction of the capital gains 
rate would be helpful. It helped in the Kennedy Administration, 
the Reagan years, and even when we did it in 1997. Would you 
focus on that part of this equation: what is the best thing we 
can do that would have the most possible benefit for the 
economy?
    Mr. O'Neill. I think, far and away, the marginal rate 
reductions are the cleanest and simplest instrument that we 
have available to have an impact quickly.
    As I said, and perhaps you were out of the room when I was 
talking to Senator Lincoln, I would not make a huge case that 
this is the instrument to ensure that we do not go into a 
recession. But it is an added instrument that I think we would 
be well-advised to employ because there is room for it. If we 
are going to do rate reductions anyway, in a way, the sooner, 
the better.
    Now, in saying that I also want to say that the President-
elect has not yet made a decision about what he is going to 
recommend about starting date. But if you look at what he has 
said over the last couple of years, the marginal rate 
reductions were early on in his idea of what we should begin 
doing, and the so-called death taxes, the marriage penalty, and 
the child credit were phased in over time. It seems to me the 
logic of that still holds.
    Senator Lott. You want to talk about capital gains?
    Mr. O'Neill. Capital gains taxes. I guess I would say, 
anything that reduces the effective tax rate when it is all 
rolled together reduces the cost of capital over time. So, I 
would expect capital gains rate tax reductions to have a useful 
effect in the context of decisions that are made in companies 
like mine, but it would be over time.
    Senator Lott. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Thompson?
    Senator Thompson. Thank you, Mr. Chairman.
    Mr. O'Neill, following up on Senator Breaux's questions 
about monetary policy and fiscal policy, it seems to me like 
there is an important distinction there and that monetary 
policy has to do with something that we have very little 
control over. Fiscal policy has to do with something that we 
have a great deal of control over, number one. Monetary policy 
has to do with reacting, usually. The policy can change in ways 
that we cannot predict.
    With regard to fiscal policy, I wonder sometimes whether or 
not we, in our conversations that we are having now, are paying 
too much attention to the reactive aspect of it. We are talking 
about it almost totally in terms now of a downturn in the 
economy and, therefore, we need a tax cut. I think that is a 
valid observation.
    But when considering our fiscal policy, how much should we 
be trying to affect current circumstances versus just sound, 
long-term fiscal policy in terms of making our Nation stronger, 
making our economy stronger over the next decade? It looks to 
me like that is the real case for tax cuts.
    I would be interested in your thoughts about that. I would 
also be interested in your thoughts about the significance of 
tax policy in terms of that because, as we know, regulatory 
policy enters into that equation, trade policy all enters into 
that equation.
    So the second part of that would be importance of tax 
policy as opposed to these other important policies in looking 
long-term.
    Mr. O'Neill. Thank you very much for your question. Again, 
this reflects forty years' worth of being in the system and 
receiving the decisions of the system. As a matter of policy 
and as a matter of principle, I believe that our tax system 
should be structured so that, at growth rates of, say, zero or 
1 percent, we are in balance.
    That is to say that the tax system produces enough revenue 
under conditions of low or no growth that we are not borrowing 
from our children, that we are paying on a current basis for 
the things we have said are the appropriate object of public 
spending.
    What that means, in logic, is that when we are experiencing 
growth rates that we want, more than 2 percent, more than 3 
percent, that we will, in effect, have more revenue than we 
have agreed public purposes for spending.
    Then I would argue that it would be a pretty intelligent 
thing to do, to say to people in our society, when our economy 
is running well at, say, 2.5 or 3.5 percent real growth and the 
revenue system produces more than we need for agreed public 
spending, we ought to send back the marginal amount to the 
people who sent it in.
    Doing that would create a constituency against decisions to 
add more targeted tax reductions or to add more spending, 
because the citizens out there would have a basis for saying, 
if they do not spend everything we sent in we are going to get 
it back, which I think would be a desirable involvement of the 
polity in the decisions that we make.
    Then I would say, other uses besides sending it back to the 
people who sent it in when we are running at good growth rates 
is to deal with issues like Social Security, prescription drugs 
for Medicare, and other emerging agreed purposes of shared 
public spending. But, under ideal conditions, we should be in 
balance when the economy is not doing very well.
    Senator Thompson. We hear a lot of talk about our savings 
rate, our private savings rate or lack thereof. I do not know 
if we are in a negative state now or what, but close to it. I 
know in times past we had the lowest personal savings rate, 
certainly among our competitors worldwide.
    What is the significance of that; does that really matter 
that much, in your opinion?
    Mr. O'Neill. I grew up, like most of you did, with the 
benefits of the invention of Simon Kusnutz and his associates 
in the late 1930's and early 1940's, which is when we created 
the national income accounts.
    As a consequence of creating the ideas of the national 
income accounts, we got people started worrying about what I 
would call third derivatives of national income accounts, which 
means there are people who are really alarmed out there in 
society about current account deficits. The current account 
deficit is really a function of the fact that people in other 
countries are sending their money here.
    Now, as a capitalist, I must say to you I am really glad 
they are sending their money here, because it is a signal that 
they think this is a place of political stability, where money 
is going to be treated well, and the possibility of achieving 
the highest rate of real return is in the United States.
    I think we should love that. This is a marker from the 
world that is translated every day with people sitting in front 
of green, flickering screens and deciding where the money is 
going to go.
    Senator Thompson. As long as they do not decide to stop.
    Mr. O'Neill. All right. And why would they decide to stop 
it? Because we show a lack of stability, because we show we 
cannot manage fiscal affairs, inflation is getting out of 
control.
    As long as we do a great job down on the ground of 
increasing relentlessly our productivity rate, leading the 
world in productivity growth and providing goods and services 
that people want, the money will keep coming. It is the way 
capitalism is supposed to work.
    So, no, I am not alarmed. Hundreds of millions of 
individuals in the United States are deciding every day to buy 
or save. What we have got, is a composite decision, and it 
seems to me, that is the way markets are supposed to work. 
Individuals can make their own decisions. I think we just need 
to be careful at the Federal level that we do not create 
destabilization with the best of intentions.
    There was a recent piece of work done by Alan Sinai. It is 
a study about that thick that I read the other night, and 
believe me, it was not quite as good as some other things I 
have read for entertainment, because it is all econometric 
tables.
    But it is an examination of what would have happened to our 
economy if we had decided as a deliberate matter of policy that 
we were going to reduce the current account deficit. Every 
econometric trial that they did to show what would happen if we 
deliberately reduced our current account deficit resulted in 
lower real growth in the United States.
    Senator Thompson. Japan has a rather high rate and it is 
not doing them much good today, is it?
    Mr. O'Neill. I look at that and say, why would we 
deliberately reduce our real growth rate in the United States 
out of some slavish interpretation that the current account 
deficit is a bad thing? I do not think that is an intelligent 
policy.
    Senator Thompson. Thank you very much.
    The Chairman. Thank you, Senator.
    On that point, I think, though, it is a little, not 
bothersome, but one should note the rising trend in our current 
account deficit.
    Mr. O'Neill. Sure.
    The Chairman. I am not saying it is like a Japanese bubble 
or a stock market bubble, but the more this continues, I have a 
hunch that something is going to happen and it is not going to 
be good. That is, it is a trend, whether it is a soft landing 
change, or whatnot.
    But at some point, all that borrowing is going to add up 
just to a heavy load, a heavy burden on this country, and it 
seems to me that is something we have to be very cognizant of.
    Now, having said that, it does not answer how we deal with 
it. One way, I think, to deal with it is to be a lot more 
aggressive in our trade laws. We do not wear a white hat. We 
are not Simon Pure when it comes to trade, and other countries 
are not Darth Vaders and only wear black hats, but I think it 
is clear that the shade of gray of our hats is still a lot 
lighter than the shade of gray of theirs.
    There is a lot we can do to have a stronger economic policy 
to make sure we can export products, or the manufactured 
products, or whatnot, or agricultural products, or services 
overseas and knock down a lot of these trade barriers.
    Let me give you an example in agriculture. I think 85 
percent of the agricultural export subsidies are EU. We 
Americans only have about 4, 5, 6 percent, something like that. 
Even though agriculture is a surplus in trade, it could be a 
lot greater surplus if some of these trade barriers were 
knocked down.
    I mention that because, as you well know, there is some 
talk during the selection of the USTR that the position of USTR 
be downgraded. I was very glad to see the President-elect 
finally say, after a lot of talk around town, at least in trade 
circles--well, first of all, he is going to appoint Bob 
Zoellick, a very good appointment. Second, the status will not 
be downgraded, and will still retain the cabinet position.
    But the mere mention or the signals in the transition 
office from somebody around the President-elect of that 
possibility sent signals that trade might not be as important 
as it has been in the current administration, or as important 
as I think it should be. It sends a very negative signal to 
countries around the world; hey, we could handle those 
Americans. All we have to do is just be tough, stiff-arm them, 
and we can keep them away.
    I mention that also because trade has often been the 
handmaiden of foreign policy in this country. USTR has done a 
great job--Carla Hills, under previous administrations, et 
cetera--but the office is often trumped by the State 
Department, by Treasury, by the Defense Department.
    Now, you have a great, strong history in manufacturing and 
know the value of trade. I wonder if you could just tell us a 
little bit about how you see the role of Treasury in trade, or 
how strong U.S. trade policy should be, given the burgeoning 
trade deficit, the potential downgrade of USTR, the steel 
industry.
    What are your thoughts, please?
    Mr. O'Neill. All right. Those of you who know Bob Zoellick 
will appreciate my comment that trade has for sure has not been 
downgraded. Bob Zoellick will take care of representing the 
importance of trade in this administration.
    I am a free trader. Ten years ago, I testified before this 
committee about a concept that I believe in, which is what I 
called zero-for-zero, which means in an ideal world the United 
States has no trade and tariff barriers and no one in the world 
has trade and tariff barriers.
    It seems to me so obvious that we are sufficiently good and 
should hold ourselves to a high enough standard that we should 
not fear absolute free trade. I know that is a problem for some 
of you because of the circumstances that are represented in 
industries that are in your constituencies. But in the right 
kind of world, in the world that we should dream of, we should 
be thinking free trade, absolute free trade without trade and 
tariff barriers, anywhere.
    I do not think you need to be concerned about this 
administration's devotion to the idea of free trade. I think, 
also, I know there is not fair trade in some places and you 
should expect that there will be vigorous enforcement of trade 
laws where there are violations and people are dumping them and 
doing things that are of economic disadvantage to us.
    I wonder if I may return for a moment to the conversation 
about the current account deficit and to create this picture in 
your mind. If you can imagine applying the current account 
deficit idea to the 50 States, you would find lots of 
imbalances, and they are longstanding imbalances.
    As you think about that, you can imagine, why in the world 
would you go do something between the 50 States to change the 
trade balances that exist between our 50 States? You would not.
    I believe, in the world that we live in now, it is not 
perfect, at least the world I have worked in in 36 countries 
for the last 13 years, and 23 counting International Paper, 
these concepts of economic nationalism are not the real world 
anymore for those of us who live in the world, who are not 
anchored to the ground here.
    I do not want to ship aluminum for some applications from 
here to Hungary, because I can make it in Hungary. We are 
privileged to have U.S. capital that is--I want to say this 
carefully--an important force in Europe with ownership of 
positions in Spain, Italy, and Hungary.
    And recognize, now, we have the largest company. If you add 
up all of Europe, we are the largest company in Europe. We are 
the largest company in America. Our ambition is to be, not out 
of a sense of dominance or monopoly, but to be so good at what 
we do that we are the best everywhere, and we own it 
everywhere.
    If you think about where this world is going 100 years from 
now, America needs to be represented everyplace, not as a 
nationalistic force but as an exporter of a value system that 
lets people all over the world live at the standard of living 
that we have achieved, and beyond. The way to do that is to 
export our values and use our capital to help other people 
develop.
    As we do that, we should know that people will be producing 
goods and services. The magic of the economic system will help 
to raise everybody's standard of living.
    I guess what I'm saying to you is, I do not believe that 
the world is a zero-sum game, and that for us to do well others 
need to do badly. I just do not believe it. I demonstrated, I 
think, with what I have been doing for the last 23 years, that 
doing good creates great wealth and economic benefit to the 
whole world.
    The Chairman. Well, I appreciate that. I do not think 
anybody here thinks it is a zero-sum game. Clearly, it is not. 
I understand, with the forces of globalization, some questions 
of nationalism arise. That is, what is the role of economic 
nationalism?
    But we have to remember that we are still Americans, first, 
and we are here to represent American people. I mean, I am 
elected or un-elected by Americans, Montanans, as is everybody 
else up here on the dais, as is the President by the country.
    So I just urge us, as we are looking at global questions 
like this and recognizing the value of globalism and that 
capital travels at the speed of light and irrespective of 
national boundaries and seeks the greatest rate of return, you 
have to remember, we are Americans. There is a backlash against 
globalization in this country, a big backlash, among the people 
who feel they are not part of the deal. Companies are, but a 
lot of the people feel they are not.
    So, as Treasury Secretary, I urge you very strongly, when 
we are talking about all this big, high-falutin' economic 
stuff, is to remember that all this really comes down to the 
basics. The basics are, more American people get more jobs and 
more high-paying jobs while we are trying to solve these 
problems. I know you believe that.
    Mr. O'Neill. I do.
    The Chairman. But I think it is as important to remember 
it.
    Senator Kerry?
    Senator Kerry. Thank you, Mr. Chairman.
    I was interested in your answer to Chairman Baucus a moment 
ago about not wanting to change any of the relationships 
between the States with respect to trade. Obviously, that is 
more than true.
    But I think it is also worth pointing out that it took us 
quite a few years in this country to get to the point where we 
did not have to.
    I mean, we have got a lot of roads connecting Connecticut 
and Massachusetts still called toll roads, and there is a 
reason they were toll roads. We had different currencies 
between the States. We actually had tariffs. Then we sort of 
worked through all that.
    But it took the Supreme Court of the United States, one 
currency, and an arbiter, the interpretation of the Commerce 
clause, and a whole lot of other things to get us there. That 
is obviously where we are with the WTO today and sort of 
struggling to set the rules of the road.
    But, for a lot of industries, as you well know, and for a 
lot of entities, those rules are not clear. A lot of countries 
still do not practice the same openness or the approach that we 
do.
    So half of the battle has been breaking down those 
barriers, and that will be a remaining significant challenge, I 
think, for you to help us create the broad-based acceptance 
internationally that allows us to get to that ultimate point of 
acceptability.
    I say that because I think one of the tensions increasingly 
is going to be, we talk about the export of our values and 
economic nationalism. I have attended, I think, gosh, about 10 
years, the World Economic Forum, and I will be going over again 
in the next few days.
    I find that one of the best places to get a quick take, 
one-stop shopping, if you will, on what is happening with 
industrialized countries, developed countries, developing 
countries, less-developed countries.
    An awful lot of the leaders that I talk to in those places 
are finding their leadership challenged by some of the cultural 
invasion that comes with this global world. The export of our 
values may be terrific for us, but it ain't so great for some 
of them in some ways. It presents each of those countries with 
their own set of challenges.
    The reason I have not been here for this whole hearing, Mr. 
O'Neill, is that we are upstairs with Colin Powell in the 
Foreign Relations Committee talking about some of these impacts 
and the way it will affect our policy.
    So I would like to just sort of touch on a couple of those 
things, if I may, and get your sense of where we are heading. 
Obviously, the departing administration intervened in Mexico, 
against the desires of everybody in this institution--most 
people, but no everybody--and they did so at risk. They bailed 
out Mexico with an enormous loan, and it has been providential. 
It has been repaid, and it has been critical, I think, to 
stability in this hemisphere.
    We have just now seen a major loan to Argentina. There may 
be increasing lack of stability in Latin America. Asia has 
recovered to some degree, but there are still signs of 
weakness. All of this is critical to our economy, too.
    So would you share with the committee, perhaps, how you 
anticipate weighing in on and how you view our responsibility 
with respect to this global society we live in, and 
particularly with respect to the potential of intervention and 
the world financial institutions and the role you might play 
with those.
    Mr. O'Neill. All right. I am glad you cite the Mexican 
experience, because I think there is an important lesson to be 
learned. It does seem very, very clear that Secretary Rubin was 
right, in retrospect. Yet, he had to go to extraordinary 
lengths. As I recall, he used the Exchange Stabilization Fund, 
and there were some legal questions about whether he really had 
the power to do that.
    I hope, when my Mexico occurs, you will give me enough free 
board to do the thing that seems necessary to do. I think if 
you had prevented Secretary Rubin from doing it, the 
consequences could have been really quite serious.
    So, believe me, to go back to the more basic part of your 
question, when a Mexico occurs, or an Indonesia, or even an 
Argentina, I think we should take that as a failure of our 
system, because these things do not truly happen overnight. 
They are a consequence of a build-up of circumstances, and when 
we read about it in the media, it has been happening for a long 
period of time.
    So my notion--I may have to eat these words--of what we at 
the Treasury should do, is to work hard to perfect the sensing 
mechanisms that we have and to raise the alarm before we have a 
crisis condition.
    Stopping a crisis from spreading is a lot harder, in my 
judgment, than getting at a problem and causing some change to 
be made before it turns into a crisis that has the danger of 
infection for the world financial system.
    It is my hope that we do not have triggers that get us into 
these kinds of problems. We may have some down the road, but 
again, in an ideal sense, our information systems, I think, 
should be good enough that we can see it coming and intervene 
without a crisis having to unfold.
    Again, this is going to take wilful cooperation on the part 
of those in the executive and the Congress, because it may mean 
taking some action that is not apparent to everyone needs to be 
taken.
    Senator Kerry. So you would envision, to some degree, a 
proactive role with respect to that.
    Mr. O'Neill. Absolutely.
    Senator Kerry. In keeping with that view of things, I have 
admired your leadership with respect to the global warming 
issue as a corporate chieftain. I think you have exhibited, 
through your company, significant--oh, is my time up? I 
apologize. I am sorry. I did not realize. Thank you.
    The Chairman. Senator Gramm?
    Senator Gramm. Thank you, Mr. Chairman.
    Let me say, Paul, that I was chairing a hearing at the 
Banking Committee. We are in the process of holding hearings 
for the new HUD Secretary, so I have been forced to run back 
and forth.
    Let me just raise a couple of issues. First of all, our new 
President ran on a campaign platform of cutting taxes, really 
three major changes: reducing marginal rates, repealing the 
marriage penalty, and repealing the death tax.
    Since he was elected, it seems to me that you could make a 
strong argument the economy is weaker today than it was on 
election day. The Congressional Budget Office will be out in a 
couple of weeks with its new revenue estimate, and it is clear, 
they have already announced, in essence, that the surplus, even 
with the slower economy, will be over a half a trillion dollars 
bigger than the OMB estimate.
    Finally, now that we are beginning to total up spending for 
last year, it is clear that, despite all of the talk about 
paying down the debt, if you take the spending growth of the 
last 3 years and project it into the future, we have more than 
spent the Bush tax cut on new government programs. There is 
every reason to believe that if we do not give some of this 
money back to the taxpayers, that we will end up spending it.
    So as I look at these three changes, it seems to me that 
the argument for the Bush tax cut is stronger than it was on 
election day and that, in fact, speeding up the tax cut which 
would cost more money during the 10-year period but have no 
impact on the long-term effect of the tax cut in terms of the 
fiscal policy of the country, that a strong argument could be 
made for doing that.
    I would like to get your response to that.
    Mr. O'Neill. I agree with you. I think you have said it 
well and correctly. The President-elect, as I said earlier, has 
not yet made a decision about implementation dates, but I 
expect that we are going to be able to present something to you 
within six weeks or so, converting the proposals that he made 
during the campaign into a legislative proposal so that we can 
deal with it quickly.
    Senator Gramm. Well, let me say that I think looking at 
speeding up some parts of it is a good idea. Let me make it 
clear that I do not buy into the idea that you have got to put 
money in people's hands for it to have an economic impact.
    One of the driving forces behind consumer spending in the 
last five or 6 years has been the run-up in equity values, 
where people have looked at their IRAs, their 401(k)s, their 
various retirement programs and basically concluded that they 
were potentially much wealthier than they expected to be, and 
as a result the savings rate has been minus 2 percent, on 
average, for the last three years, living proof that if people 
know something is different they'll respond to it whether they 
have the money in hand or not.
    So if we are going to eliminate the marriage penalty, the 
death tax, and reduce everybody's rate whether or not it gives 
them more money in their pockets today, we have living proof 
from this wealth effect that they will respond.
    I want to say something and pose a question about economic 
nationalism. I would say the role of economic nationalism is 
creating poverty, misery, and death in the world. Few concepts 
have been more abused in the economic history of mankind than 
economic nationalism. But it is incredible to me that there are 
still people who believe that, for example, if Japan is richer, 
we are poorer, that somehow developing eastern Europe threatens 
us.
    My conception of the world is that having poor neighbors 
lowers your property values. [Laughter.] I want rich people 
living next to me. It seems to me that whatever we do to create 
world wealth ultimatly accrues to our benefit as the greatest 
trading Nation in the history of the world.
    I would like to just get your response to the following 
point. One of the problems the Clinton Administration had was 
that on the big, national issues on trade they were good, on 
all the little issues, they were bad. So they were protecting 
avocadoes while they were claiming that they wanted trade. They 
put us in a position of being hypocrites constantly.
    I just want to pose the following question. Does it seem to 
you, given that we are the world's largest exporter and the 
world's largest importer by a big margin, does it seem to you 
that we could gain more if we stop cheating and demand that 
others open up their trade than we gain from the benefit to one 
particular part of our economy by violating the very rules we 
preach?
    Mr. O'Neill. Conceptually, I am with you. I think in some 
ways we have not closed the circle because, even though long 
ago we developed and implemented the idea of trade adjustment 
assistance, I think if one looks at the profound effects that 
some decisions can have on individuals or local communities, we 
have not been willing to face up to a societal responsibility 
to deal with a change in policy. Conceptually, I am exactly 
with you.
    I would get rid of all trade and tariff barriers, and then 
I would assign to the society--which means all of us as we 
collect money to do public purposes--and would buy out the 
interests that are affected by a change in trade policy.
    I personally believe that it would greatly strengthen our 
hand in the world to be able to say you cannot find the 
deviation from what we believe to be the right policy that will 
permit people in every place in the world to advance their 
standard of living. I think what we do weakens our negotiating 
stance.
    Senator Gramm. Well, Mr. Chairman, let me conclude by just 
simply saying that I think the good news that I observe in 
looking at the country that we are privileged to live in, is 
that many of the areas which have lost industry as a result of 
trade have become far more prosperous as a result of trade than 
they ever were, whether you are talking about New England which 
lost textiles to the South, or the South which lost textiles to 
Asia, to Korea, and Korea, which lost textiles to Indonesia and 
China. I mean, the whole history of the world is the history of 
high-wage areas losing the textile industry.
    But the good news is, if you look at South Carolina, South 
Carolina has become a beacon for foreign investment. Jobs at 
the BMW plant are better than the jobs that were lost in 
textiles ever were. So I agree with you that we want to try to 
cushion the impact of foreign trade and the negative side that 
it does have. There are clearly winners and losers, no question 
about it.
    But I think the good news, at least in terms of casual 
empiricism, is that areas that were ``blighted'' by losing a 
particular industry have often been the very areas that have 
developed new industry from international trade and investment 
that far exceeds what the old industry produced in terms of 
happiness, wages, prosperity, and fulfillment.
    So, I commend you, Paul, and I look forward to supporting 
your nomination and working with you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Mr. O'Neill. Thank you.
    The Chairman. Senator Snowe?
    Senator Snowe. Thank you, Mr. Chairman.
    Just a couple of additional questions, Mr. O'Neill, getting 
back to the impact of interest rates cuts and the timing of a 
tax cut.
    What is the risk inherent in a wait-and-see attitude on our 
part, or if there is a delay in implementing a tax cut if we 
were just to determine, anticipating a further rate reduction, 
what impact that would have on the economy?
    Particularly, I ask that question because, obviously, we 
are in a global economy. I was reading an article the other day 
that suggested that Singapore, for example, is predicating 
their economic growth on our economic growth. I guess that is 
not a surprise, but the global economy is intertwined ever more 
so because of what we have been able to do.
    So what would be the risk inherent if we were to wait and 
see on what the true effect would be of an interest rate cut or 
a further reduction in addition to the one that occurred in 
December?
    Also, I should add to that the fact that we have failed to 
predict the last nine recessions, so obviously the forecasting 
of a recession is very difficult. So what are the risks 
involved if we fail to take action or reach an agreement in a 
timely fashion?
    Mr. O'Neill. I am thinking about how one quantifies the 
risk. I would maybe start with your observation about 
Singapore. Singapore is not the only place in the world that 
uses the U.S. and the U.S. rate of real growth as a basis for 
thinking about their own policy.
    More and more, the world is connected and governments 
everywhere are making decisions about what their rate of growth 
will be as a derivative of what we are doing in the United 
States, and what is happening in Western Europe and Japan.
    So I think, to the degree that there is a lingering 
uncertainty about whether this is an inventory correction or 
the possible unfolding of a recession, it will cause caution 
and people will have a tendency to wait and see. Again, I am 
really mindful of the fact that monetary policy and interest 
rates are Alan's province, and I dare not tread there.
    But I think, on a fiscal policy side, that you and your 
colleagues have responsibility for what I said earlier I would 
stand by. It is not that I think fiscal policy or rate 
reductions are the be all and end all, but if we are going to 
do it, it is not clear to me why one would wait 6 months or 12 
months while we go about our normal deliberations if there is 
even a suggestion that some rate reduction would be beneficial 
to assuring that this is only an inventory correction and we 
are sailing back into a 3 to 3.5 percent real growth fairly 
soon, because it is so fundamentally important to everything 
else.
    Senator Snowe. One other question. On this new economy, is 
there anything we should be looking at differently or regarding 
in terms of indicators? I know Senator Gramm mentioned the 
wealth effect. Obviously more households than ever have 
investments in the stock market, so we know that that has made 
a difference, but also, with the information technology.
    So should we consider the new economy consistent with the 
traditional business cycles or is there something else we 
should be looking at with respect to the economy in that 
regard?
    Mr. O'Neill. Oh, boy. That opens up a torrent of ideas. 
First of all, I find it strange to say we have an old economy 
and a new economy, and I will illustrate that for you.
    Do you know who closes their books faster than any other 
company in the country? Alcoa. Motorola closes three or 4 days 
after we do, and there are other people stretched out. Today is 
the 17th, and General Electric announced their earnings today; 
Intel announced theirs yesterday.
    Do you know how we close the books in two and a half days 
and we are working on what we call a virtual close? We have a 
worldwide information system that connects 270 locations. In 
order to do this really fast we had to simplify the systems and 
make them human-friendly so that people did not have to do what 
we call re-work. If you go look at why it takes people so long 
to close their books, it is because the systems were not 
designed for human beings, they were designed to torture 
intelligent human beings, and then they do re-work, and re-
work, and re-work.
    There are a couple of things really important about this. 
The people who have to do the re-work resent it. It is an 
affront to their right to make a contribution and have meaning 
in their life, and the systems take it away from them because 
that is the way it is in most places.
    So it is important from a human point of view. It reduces 
the amount of time that people spend doing this chore by a huge 
amount, from 10, 11, or 12 days to 2 days, so that they are 
free to use their intelligence for something that improves 
profitability.
    So when I see this distinction about new economy and old 
economy, I say I do not really know what this is all about, 
except for one thing. Those who, when they say new economy, 
think about the bubbles of billions of dollars' worth of market 
capitalization that disappeared, I do not know why anybody is 
confused about that. That is because there is not a new 
economy. The standards of people who have capital, the 
requirement to have their capital service, never changed.
    What we have seen happen is they called in their chips. 
When they did, it still turned out to be true that it is not 
all right to have revenue without knowing when you are ever 
going to have profitability, because eventually the people who 
supplied the capital say, wait a minute, I could do better in a 
bank. This is all a fiction. You see share prices go down from 
$165--I have a company in mind--to $2. Two dollars is probably 
over-valued. [Laughter.]
    I have watched with amusement. Maybe I am getting too old. 
I watch with amusement all of this hot talk, the magazines are 
full of all of this stuff. If you believe it, you have not been 
around long enough.
    Senator Snowe. Thank you.
    The Chairman. Senator Lincoln?
    Senator Lincoln. Thank you, Mr. Chairman.
    Mr. O'Neill, I just have three, what I hope will be brief, 
questions.
    In the last question I presented we got into the corporate 
tax, which I did not intend to do, but I just wanted to make 
sure that I was reading correctly what your response was. That 
would be that we should make the corrections to the economy 
with the difficult-to-change fiscal policy and not wait and 
see. As Senator Snowe asked that question, you pretty much 
confirmed that.
    But what I would ask you, is there a risk on the flip side 
of that? Is there a risk in those tax cuts preventing an over-
stimulation?
    Mr. O'Neill. I cannot imagine that in the current context, 
if it is done quickly. The amounts of money in a $10 trillion 
economy that might be put into the front end are relatively 
small. Again, I would represent this to you as a belts and 
suspenders approach.
    Senator Lincoln. Right.
    Mr. O'Neill. It is not something that, by itself, will make 
a huge difference. It could make a contributing difference.
    Senator Lincoln. It is an awfully large amount when you 
look at the amount of debt that we are servicing.
    Mr. O'Neill. Well, that is, again, because we are 
multiplying it times 10 and we are including in it things that 
will not take effect for 5 or 6 years.
    Senator Lincoln. You mentioned, and I agree with Chairman 
Baucus, that it is not a zero-sum game. You looked at 
international versus our interstate trade. There is a sizeable 
difference. We do have a central bank, we have a common 
currency, we have a common government, so it is not exactly 
parallel.
    I would just ask, in terms of those trade issues, 
representing a State where well over 25 percent of our economy 
is based in agriculture, do you see in those trade perspectives 
any one area of trade that may need some different 
considerations or dealings when you are talking 
internationally? We tend to be the ping-pong ball, lots of 
times, in policy in terms of agriculture.
    Mr. O'Neill. Yes, I think you are right. It does bother me, 
as was suggested by Senator Gramm, that our house is not as 
clean as it might be, because I do think it weakens our 
position in dealing with other trading partners.
    The parts of the economy that I think I know something 
about, and I know a little bit about agriculture, I think as I 
go around the world and look at what other people do, we really 
do have a great standing.
    A year or so ago I had an opportunity to go out at 
harvesting time and ride on a combine out in Iowa with one of 
my wife's relatives and see how information technology is being 
deployed.
    As the harvest is being done, it is sensing what the 
moisture content is, putting it into the computer, and 
assessing how much fertilizer needs to be put down on the next 
pass. It is just astounding, what is going on. So I believe, 
from what I have seen in agriculture, that we are the world 
beacon of excellence.
    Senator Lincoln. But it costs to be that beacon.
    Mr. O'Neill. Well, not in the sense that it matters in the 
marketplace. The fact that we are a beacon comes from our being 
the most productive and increasing our productivity at a faster 
rate than other places.
    I mean, if you go out and look in Siberia at how they are 
farming and how they are trying to feed their people, or go to 
Guinea in Northwest Africa and see how they have become an 
importing nation since colonialism stopped and the people are 
destitute beyond our belief, you have no doubt about our 
standing in the world in this important part of civilization.
    I, frankly, do not think we have anything to fear from the 
rest of the world because of the momentum we have, and the 
experience and productivity we have in agriculture. We have 
nothing to fear at all, we only have opportunities in front of 
us.
    Senator Lincoln. I hope that is true. But when I look at 30 
and 40 percent of our farmers going out of business in our 
State, it is sometimes really difficult to see that.
    But just to get to my last question before my time is up. I 
know you are aware of the existing moratorium on the Internet 
access taxes that expires in October of 2001. I just wanted to 
see a few of your comments about, do you believe the incoming 
administration should encourage an extension of this 
moratorium?
    Mr. O'Neill. I think so, but I have not studied it 
carefully.
    Senator Lincoln. All right. Or should the legislation be 
used as an opportunity at some point to put Internet and local 
sellers of goods on a level playing field, help States enforce 
their current tax laws?
    Mr. O'Neill. I do not know enough about it to have an 
informed opinion yet, but I will for you.
    Senator Lincoln. All right. Great. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Kerry?
    Senator Kerry. Mr. O'Neill, I happen to agree with Senator 
Gramm's judgment about the impact of transition in trade. I 
have voted for fast track, for NAFTA, for MFN, and so forth, 
but increasingly I find that some of the dislocation taking 
place may have certain kinds of longer term implications for 
us.
    I wonder if there are any industries, any disciplines 
within manufacturing that you believe are essential to national 
security and might somehow be separated out and treated 
differently in any context?
    Mr. O'Neill. Clearly, there are some industries that are 
essential to national security, the leading-edge things that 
are being done in information technology, communications.
    I was on the Eastman Kodak board, and the things that are 
being done with satellite imagery and things of that nature are 
important; it's important that we have a home capability to 
stay on the leading edge of technology and deploy technology.
    Senator Kerry. Do you view any so-called low-tech 
enterprises that are the first to go as you go through this 
sort of pure market, transitional process, as something worth--
I mean, Senator Rockefeller raised steel, for instance, as a 
concept.
    Mr. O'Neill. Indeed, I think there are some. I do not think 
they need Congressional action, they need leadership. Where we 
are going to win is on the ground with people who have skill in 
organizing complex systems, even in low-tech industries. By 
complex systems, I mean the human beings who bring capability 
to adjust and respond to outside influences, along with the 
appropriate level of technology. I really do believe our great 
strength and an essential thing we need to work on is 
constantly elevating the educational attainment of our 
population and better equipping it to go forward, because at 
the end of the day that is going to determine where the best 
living standard in the world exists, is what we have in 
people's brains.
    Everybody can buy equipment. I can take you to the 36 
countries where we are and show you the same piece of 
equipment, and actually equipment that was run by other 
companies before we bought it. The difference between their 
inability to service the cost of capital and to provide a 
decent level of living for their people is leadership.
    Senator Kerry. Now, with respect to both leadership and the 
values that you talked about exporting, a significant component 
of the debate with respect to trade has been the unfairness of 
the playing field.
    Many American workers are particularly sensitive to the 
lack of standards, work standards, children, and so forth, the 
level of pay, the lack of any kinds of requirements within 
manufacturing firms abroad for safety standards, work 
standards, and so forth, unlike the requirements here, 
obviously. Likewise, with respect to the environment, the lack 
of standards, so that they particularly feel an unfairness in 
the transition they are forced to endure.
    It would seem to me--and this has always been a tension up 
here between sort of the pure free trader and those who want to 
try to find some sensitivity to those things--that part of the 
export of our values is to try to promote in some way adherence 
to the highest standards of engagement and capitalism.
    There is a difference between robber baron capitalism and 
enlightened capitalism, and we obviously, in our value system, 
want to promote enlightened capitalism.
    In that regard, are there any innovations, any feelings 
about how we can maintain our ``purity'' with respect to the 
trade effort, but eliminate the potential for global backlash 
such as we saw in Seattle and here in Washington, and this may 
grow elsewhere, particularly if there were an economic downturn 
globally, on those issues which I know concern you, both the 
labor and environment issues?
    Do you see this administration trying to bridge that gap a 
little bit and find a way of formalizing, while not necessarily 
directly within WTO, some dual track that begins to export our 
values more effectively?
    Mr. O'Neill. I honestly do not know yet how, if in any way, 
we should be involved in projecting these values from a 
governmental point of view. But it really is very clear to me 
from my own experience now with Alcoa and with International 
Paper, but more particularly with Alcoa, that it is really 
important to take your values with you.
    The standard we thought of, if I have a couple of minutes 
to tell you about this, is basically to say, we do not need a 
government to tell us what we should do. We can figure out, and 
we should personally be responsible for assuring that we are 
not doing damage to the environment and that we are not using 
equipment that we could not use, or would not in the United 
States.
    If you go look at our places around the world, you could 
eat off the floor in all of them. You would find that the level 
of workplace safety is so good, that we are in a class by 
ourselves everywhere in the world--not just in Davenport, Iowa, 
but in every place we have in Spain, in every place we have in 
Brazil, in every place we have in Mexico. These places are 
world-class. It is not just Alcoa.
    Again, Eastman Kodak. I was in Shao-Minh in China a couple 
of months ago. The plant they have in Shao-Minh in China is 
absolutely beautiful. They did not export a robber baron 
capitalism, they took the very best technology, they did a 
magnificent job of training the people, and they are making 
film for the Chinese market now. Lots of American companies 
have exported the values, environmental values, workplace 
safety values.
    Now, one point about level of compensation. You cannot live 
far outside the level of compensation that is associated with 
the political leadership and the financial system that exists 
in the country.
    That is to say, there is an imaginary line in the sand 
between the United States and Mexico. It is not a real line, it 
is just an imaginary line. The difference in the living 
standard on the two sides of that line is really quite amazing. 
Why is that?
    The easy answer, or the true answer, is it is a function of 
an accumulation of political experience and system, or lack of 
political experience and system. There is nothing bad about the 
people, there is nothing wrong with the people. There is 
nothing about their inability to learn things. A general 
proposition: every place in the world, with the right kind of 
enablement, people can do what we do here.
    The Chairman. Thank you.
    Senator Grassley?
    Senator Grassley. Before I ask a question about Social 
Security and another one about international finance, he has 
already emphasized a point that I would like to follow-up on.
    In his opening statement, he spoke about the work of this 
committee on trade. He and I will have a lot of work to do to 
get the legislation, at least the encompassing legislation that 
is needed, passed. He and I start out as free traders, so it 
might not be easy for us to do, but we are going to at least be 
working for the same goal.
    In the meantime, I hope the administration will not wait 
for significant legislation to get passed. I would like to see 
the President of the United States, in the first couple of 
months or earlier in office, make a major speech on foreign 
trade, international trade, his attitude for it, which I think 
is very much like the work of this committee and the leadership 
of the United States for the last 50 years, that he would ask 
for a new round of WTO talks.
    He can institute some negotiations, he just cannot conclude 
negotiations without legislation--some people would dispute 
that he cannot conclude it, but I think anything as major as a 
WTO is very much more difficult than some bilateral things he 
could do without legislation--so that the world knows that the 
United States is ready to resume leadership under a new 
President on international trade, promoting it and 
accomplishing a great deal, specifically, about a WTO round at 
the next ministerial and his belief in the multilateral trade 
negotiating regime we have had since 1947.
    Another thing that I think would be very beneficial for the 
President to do would be to personally appear at Quebec City at 
the Free Trade of the Americas meeting that is going to take 
place. To the extent to which you are advising the President on 
international trade issues beyond Mr. Zoellick doing it, 
because it is a multidiscipline sort of thing, it does not just 
affect one department, that you will encourage him to do that 
if you think it is a good idea. I hope you think it is a good 
idea. You do not have to respond whether or not you think it is 
a good idea.
    On Social Security, President-elect Bush intends to convene 
a commission to examine Social Security reform. How would you 
interact with a commission as Secretary of Treasury, and what 
would your role be in improvement of Social Security?
    A related question, but kind of a follow-on question as 
well. Some policymakers fear that modernizing Social Security 
by including personal accounts in which workers could invest a 
small portion of their contributions in stocks, bonds, money 
markets, something outside of Treasury bills, would inject too 
much risk into the retirement income safety net program. Do you 
have some concern about that, and how would you respond to 
that?
    Mr. O'Neill. I am the statutory chairman of the Social 
Security Trust Fund boards, which includes the Secretary of 
Labor and the Secretary of HHS. So, for sure I will have an 
opportunity to express a point of view about these things.
    The President-elect has made it clear; he has laid down the 
principles that he thinks should govern our approach to 
securing Social Security.
    I am quite certain that, as he appoints a commission, he 
will expect that they will bring back a solution that is framed 
within those principles, which basically say we will not reduce 
benefits to people that they are expecting, that we will take 
care of people with disabilities, that we will not raise the 
payroll taxes, and somehow we must fashion a solution that 
brings all of these things to reality, and at the same time, 
moves in the direction of creating asset holdings for people in 
a new, what I would call top-off retirement account for 
individuals. I know there has been enormous debate within the 
Congress about how one deals with these things.
    My expectation is that this commission will not go on for 
too long, but will rather be paced to bring this issue before 
the Congress fairly soon, because there has been so much work 
done on these issues over the last 30 years. I think it is more 
a question of assorting and refining than it is looking for a 
new discovery.
    Senator Grassley. And on international finance, one of the 
problems that we have not dealt with very successfully on the 
international front is the use of subsidies by countries to 
underwrite expansion of industries, and steel would be probably 
an outstanding example, particularly in industries where there 
are already global excess capacities that distort markets.
    So you are very much involved with the financial 
international institutions like the IMF and World Bank. How 
will you, as Secretary of the Treasury Department, ensure that 
these financial institutions do not further subsidize global 
excess capacity?
    Mr. O'Neill. I need to spend some time understanding where 
the levers are in these organizations. I know we are providing 
a substantial amount of the economic resources, but not enough 
to have a majority. My understanding is, these institutions are 
very sensitive to the opinions that they get from the U.S., and 
particularly from the Secretary of the Treasury.
    I must tell you, even in my own personal experience, I have 
seen cases where they were proudly providing financing for 
capacity that was not needed in the world, but they were doing 
it because they had a narrow view of the world. They had a view 
that material produced in one country that needed economic 
development, somehow, their product was not going to end up in 
the world. It is just hard to understand how anyone could 
intentionally do this kind of thing.
    But I think it is not an unusual example of mistakes made 
with the best of intentions without an understanding of the 
collateral consequences. It is not an unheard of story. Many of 
the things we have done in the last 30 or 40 years we have done 
with the very best of intentions and without understanding what 
the consequences were going to be, and we reaped the harvest.
    I think this idea is true in what we have done in our 
international financial organizations and, where we do that 
kind of thing, we need to do it intentionally with an 
understanding of the consequences rather than accidentally and 
somehow let the system pick up the pieces from the 
consequences.
    Senator Grassley. I will ask my remaining questions in 
writing, and would appreciate your answers.
    Mr. O'Neill. Thank you.
    [The questions and answers appear in the appendix.]
    The Chairman. Thank you.
    Mr. O'Neill, I would just like to explore a little bit more 
the rationale for a tax cut, how much. Generally, in the last 
40 years, President Kennedy suggested reduction, reduce capital 
gains; President Reagan, tax cuts. But, otherwise, this 
Congress has never used taxes as fiscal policy to either 
stimulate or to retard the economy. It just has not. Tax 
legislation has been enacted for other purposes, to get people 
money, to try to accomplish certain social objectives, and so 
forth.
    When one looks at the only real effort to stimulate the 
economy in modern times, that is, in the last 40 years, as the 
Reagan years, I am sure that the tax cut did stimulate the 
economy. We had some high interest rates we were facing at that 
time, and I am sure the tax reductions helped.
    But, arguably, they went a little far because in subsequent 
years we had to raise taxes because we had these huge budget 
deficits in the 1980's, and they were huge, $280 billion, close 
to $300 billion annually, which accounts for the huge national 
debt that we are now facing.
    So we really have two reasons for a tax cut: one is a 
fiscal stimulus reason, the other is to give money back to 
people or to accomplish other social objectives, that is, non-
stimulus reasons. There really are only two basic reasons. We 
have only used the stimulus, in the last 40 years, once.
    Now, if we use tax cuts as a stimulus, my guess is it will 
not go into effect, or at least legislation will not pass, 
until June, July, August of this year. I say that because we 
will probably go through this process, as you know, called 
reconciliation.
    We have to wait for that process, and to get there we have 
to wait until the budget. We do not have to, but my guess is 
that by then President Bush will want to wait because there is 
more control over the process, which means it does not get 
signed into law until sometime later.
    I am just wondering what the condition of this country will 
be in June, July, August, September, and how much of a stimulus 
really makes sense. I say that in conjunction with, I think, 
the very salutary efforts of Chairman Greenspan at the Federal 
Reserve.
    As you know, the Federal Open Market Committee meets every 
six weeks to determine the Federal discount rate, or Fed funds 
rate, and they also have the authority in the interim to adjust 
rates if they so choose.
    Right away, saying the Fed funds rate, that gives 
immediately stimulus to businessmen if the rates are cut, 
because capital is just a lot cheaper. You can invest more 
easily.
    It is because of the frequency with which the Fed operates, 
and because it has a wealth of data. It is incredible, the data 
that the Federal Reserve system has, not only inflation rates, 
but it is just disaggregated down to all kinds of different 
sectors.
    Arguably, they have got a better handle on the economy than 
anybody here in Congress, much more data, much more 
independent, theoretically able to do what is right, and 
looking at lots of factors that can go into what is the right 
thing to do.
    So I am just curious, looking only at the reason of fiscal 
stimulus, in comparing the two, monetary versus fiscal, does it 
not make sense to kind of go a little light on tax cuts for the 
purposes of fiscal stimulus?
    Now, we could also be a little heavier on tax cuts and put 
money back in people's pockets because we have more revenue 
than we need, consistent with meeting our budgetary goals and 
consistent with continuing to pay down the debt.
    But just isolating tax cuts only from the point of view of 
fiscal policy, it just seems to me it might make a little more 
sense to lead a little more toward what Chairman Greenspan 
continues doing, what he has been doing so well, as he has a 
better handle on it, more closely than we have, than worrying 
about a tax cut which will not go into effect until quite a bit 
later.
    Economic conditions could be different later; it is very 
hard to predict. The models are very, very difficult in trying 
to predict, what is the fiscal effect of individual income tax 
cuts? They are very, very squishy.
    Mr. O'Neill. I think it is a very good question, and I 
think you framed it very well.
    When I think about the answer, I roll myself forward to 
August or September. Out there in August and September I can 
see two possibilities. One possibility, is we have gone through 
an inventory correction and everything is great and we are back 
up to 3 or 3.5 percent annualized growth rates, and that is all 
fine, and we did not do anything about accelerating by giving 
people back some of their money.
    The other alternative, is we get out there in August and 
September and we have not done anything, and what we have got 
is more than an inventory adjustment. Then we say to ourselves, 
well, we could not act in time.
    Coming out of where I am coming from, I must tell you, it 
is really hard for me to accept what I know are probably 
imperatives about how this all works. But I have got to tell 
you, if I had a fire in one of my mills I would not say, well, 
we are going to deal with it when the shift comes in because 
they only work 9:00 to 5:00.
    If you think there is any legitimacy to the idea that this 
could be more than an inventory correction, then I think it 
makes great good sense to think about acting outside of the 
normal process. I do not know why one would say we are a slave 
to the normal process and we just cannot do anything about it. 
I really do think the economy is slowing down.
    The Chairman. That is my question. Do you think there is 
enough of a slow-down or enough of an emergency to act on it?
    Mr. O'Neill. I do not know yet. I would like to have more 
data.
    The Chairman. To act outside of the normal process.
    Mr. O'Neill. I would like to have more data. I will tell 
you why I would like to have more data, because one thing is 
true, and I am sure you all know this. When things like this 
start to occur, people, as I say, take in each other's laundry. 
You go talk to somebody and it is like they are passing around 
the same story.
    I am one who really likes facts and I would like to be more 
sure of the facts. But we are not going to get extra time and 
the luxury of waiting. Either we are going to do something 
fairly soon or we are going to take the consequences of not 
acting. I think those are the choices.
    The Chairman. Senator Grassley?
    Senator Grassley. If I had a chance to answer the 
Chairman's question, I would also----
    The Chairman. You have a chance right now.
    Senator Grassley. I would also factor in that, considering 
lower interest rates' impact on the economy, we had much higher 
rates during the mid-1980's, and for a couple of years we had 
much more economic growth than we did during this period of low 
inflation rate. It was not quite as steady of growth as we had 
this decade, but we had much higher growth at higher interest 
rates, and much higher interest rates.
    The second thing, is the prudence of the issue of tax cuts. 
It seems to me that it is necessary for Congress to build 
confidence and respect for our fiscal policy and tax policy, 
the same way Greenspan has built confidence in the economy, 
more so than specifically raising or lowering interest rates by 
one-quarter. I think the confidence that people have in him has 
more to do with economic growth than specifically what he does.
    The prudence for some sort of change in taxes, outside of 
the fairness issue, is related to the fact that now recent 
estimates are bringing in more income than we have had before, 
so there is more justification for letting the taxpayers spend 
their money, not just because we want to be good to the 
taxpayers but because their spending the money does more good 
and turns over many more times in the economy than if we make a 
political decision of how to divide up the goods and services. 
I think that is a prudent reason.
    Another prudent reason for doing it is because we are an 
historical higher level of taxation, 20.6 percent of gross 
national product. Historically, we have been between 18.5 and 
19 percent, and I think we would be better off if we had our 
taxation coming in at that level for the reason that there is a 
tolerance of people of taxation at that level, and there is 
also no harm to the economy since we have done so well at that 
level of taxation, whereas, we are inhibiting investment by 
Congress making a determination.
    The last thing is related to the fact that economic 
stimulus is probably need, and with these other two factors 
being in place, even if it does not have the impact that we 
might intend, and he can legitimately ask a question about 
because there is nothing intellectually wrong with these 
questions, we have got it in place then because there are two 
other good reasons for doing it, so even if it does not work I 
do not see harm being done as a result of more economic freedom 
for our people.
    Also, though, I think we saw, with the growth of domestic 
spending last time at 13.4 percent this year over last year, 
that when there is more money coming in then Congress is going 
to spend more, and you have a chance of building up your level 
of spending beyond the 18.5 to 19 percent of the income that 
normally comes in.
    So I would like to keep it within that historical point, to 
make Congress responsible to build confidence in our system of 
taxation and fiscal policy of the Federal Government, so that 
we can help the economy somewhat the same way Greenspan has 
helped the economy, confidence building as opposed to just the 
statistical things we have done.
    Mr. O'Neill. I think your answer is much better than mine. 
Thank you.
    Senator Grassley. Well, I did not think it was better than 
yours. I guess, really what I want to do, is to give my 
colleagues some food for thought.
    The Chairman. Good. Give it to me.
    Senator Snowe?
    Senator Snowe. I am done, Mr. Chairman.
    Senator Grassley. And I should have mentioned, too, for our 
side, that the reason Senator Hatch was not here, Mr. O'Neill, 
is because he is Ranking Republican on the Judiciary Committee 
in the very important Ashcroft hearings. I just came from 
there, because I was asking my questions on antitrust. He asked 
if I would be remembered to you, then tell his constituents why 
he is not at this hearing.
    Mr. O'Neill. Thank you.
    The Chairman. Mr. O'Neill, I think it has been a good 
hearing and I very much appreciate your responses.
    I would mention one point, though, not being partisan at 
all. It just seemed to me that this last administration, 
compared with previous administrations, Republican or Democrat, 
was a little more honest with its data, with its figures.
    When we looked at OMB data and projections, they were more 
honest, I thought, about the assumptions that they used, 
unemployment rates, inflation rates, GDP, et cetera, and I just 
very much appreciate it. I think I can speak for all members of 
this committee.
    Senator Grassley. I would support you in that.
    The Chairman. I would just encourage you not to get 
political with the assumptions, but just be straight with the 
facts, as you mentioned, because we will go a lot farther if 
you do. Again, it is deeply appreciated.
    Senator Grassley. I would agree with him, but I would add 
that I am not sure it is a case of being honest or dishonest. 
It is a case that I think enough of us on the Budget Committee, 
over the last 20 years, have finally preached enough not to 
have the rosy projections that we had during the decades of the 
1980's, and people have refined the process of making these.
    For instance, we have projected growth for our current 
budget projections, CBO, administration, blue chip, assuming an 
economy slowing down from 5.2 percent in the year 2000 to 3 
percent in the year 2001, and then CBO has done estimates based 
on a recession of average duration with real growth of only 1.3 
percent in the year 2003. You would have never had those 
assumptions in the 1980's. We have those assumptions now, and 
it does bring the results he suggests.
    Mr. O'Neill. Right.
    The Chairman. Thank you.
    I might say for all members of the committee, those who 
wish to prepare more questions, written questions, I would like 
to have them in by the close of business today, and answers, if 
we could, Mr. O'Neill, by Friday.
    Mr. O'Neill. All right.
    The Chairman. I look forward to a very good term serving 
with you.
    Mr. O'Neill. Thank you for such a gracious morning. I 
really appreciated what you all said and the questions you 
asked, and I look forward to working with you.
    The Chairman. I appreciate that.
    One question I did not ask, is why do you want this job? 
[Laughter.]
    Mr. O'Neill. Do not ask my wife. [Laughter.]
    The Chairman. All right. The hearing is adjourned.
    [Whereupon, at 12:47 p.m., the hearing was concluded.]
                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              


               Prepared Statement of Hon. Orrin G. Hatch

    Thank you, Mr. Chairman. I appreciate your scheduling today's 
hearing on the confirmation of Paul O'Neill as Treasury Secretary 
quickly so we can hopefully have the full Senate vote on Saturday. I 
believe it is critical that we have the Treasury Department up and 
running from the first week of the new Administration.
    I applaud President-elect Bush's choice of Paul O'Neill as Treasury 
Secretary. Mr. O'Neill has a strong track record of high-level 
experience in both government service and in the private sector. He has 
worked in the highest levels of the White House, and he has done a 
remarkable job at the helm of two major corporations. Moreover, Paul 
has shown that he has what it takes to lead a major organization 
through a difficult transition to meet a changing environment. Perhaps 
most important, he knows the importance of surrounding himself with the 
best people, which is an attribute President-elect Bush is also 
demonstrating with his cabinet choices.
    We need Paul O'Neill's kind of experience and leadership at the 
helm of Treasury. Our economy is strong, but there is little doubt that 
major challenges lie ahead. The Bush team will need a strong hand in 
pushing a major tax cut through Congress, in dealing with the other 
industrialized nations, and in helping to keep American businesses 
competitive in the face of ever-increasing globalization.
    I look forward to the hearing and to a strong favorable vote in 
this committee for the nominee. Thank you, Mr. Chairman.

                               __________

                 Prepared Statement of Paul H. O'Neill

    Chairman Baucus, Ranking Member Grassley, and members of the 
Committee on Finance, I am grateful for the opportunity to appear 
before you today in connection with my nomination to be the Secretary 
of the Treasury. I am honored that President-elect Bush has asked me to 
serve in this important position.
    If I am confirmed, this will be my second tour of duty in the 
Federal Government. Nearly forty years ago, my wife and I came to 
Washington to begin my first government career as a management intern 
with the U.S. Veterans Administration. In that first trip, all of our 
belongings fit into a 4x6 U-haul trailer. In 1967, I moved to the 
Bureau of the Budget and spent ten years there, rising through the 
ranks to become the Deputy Director of the Office of Management and 
Budget in 1974.
    With the change of administration in 1977, I entered the private 
sector, joining the International Paper Company in New York as Vice-
President, Strategic Planning. Through a series of promotions, I became 
President of International Paper in 1985.
    In 1987, I was asked to join Alcoa to assume the position of 
Chairman of the Board of Directors and Chief Executive Officer.
    Over this forty-year period, I have had the extraordinary privilege 
of having the opportunity to make a difference. No work I have done was 
more difficult and demanding than the work I did when I worked in the 
Executive Office of the President. In fact, I have frequently said, 
``leading a Fortune 100 company is a walk in the park compared to the 
top jobs in government because the consequence of decisions in the 
government can be so much greater than those that impact even a large 
company.''
    On the other hand, no work has been more fulfilling than the work I 
have done over the last 23 years in the private sector because it has 
been possible to create exceptional organizational performance based on 
a values calculus that begins with treating every person with dignity 
and respect.
    I have decided to accept the challenge of public service again 
because I believe in the visions President-elect Bush has outlined for 
economic prosperity and security for our nation. I strongly support the 
tenets of his plan: tax cuts that tear down the barriers to the middle 
class, debt reduction, increased incentives for saving and investment, 
a secure Social Security system. Those are principles upon which I am 
certain we can agree. I look forward to working with you on turning 
these principles into legislative reality.
    Many of my predecessors in their confirmation hearings have laid 
out their goals. Secretaries Robert Rubin and Larry Summers talked 
about maintaining fiscal discipline, promoting productivity, supporting 
international cooperation, ensuring the safety and soundness of our 
financial system and continuing Treasury's history of professional 
excellence. I share these goals, and pledge to you today that I will 
work to achieve them.
    Thank you once again, Mr. Chairman, for bringing me before the 
committee. I welcome the chance to participate in this process, and I 
look forward to working closely with you and the members of the 
Committee in the coming months. I would be pleased to respond to 
questions.
















              Responses to Questions From Chairman Baucus

    Health Question: Mr. O'Neill, I understand that during the 2000 
campaign Candidate Bush proposed about $10 billion per year in tax 
subsidies to reduce the number of uninsured, by providing a $1000 per-
individual and $2000 per-family tax credit for health insurance. Taken 
over 10 years, that would amount to about $100 billion of his proposed 
$1.6 trillion tax cut, or just over 6% of the package.
    A study released last year showed that a $4000 per-family tax 
credit twice the size of the President-elect's proposal--would only 
reduce the uninsured by about 7 or 8 million people, leaving another 35 
million or so uninsured. And Dr. Mark Pauly, an expert in this field, 
said last week that the Bush proposal would need to cover at least 50% 
of the cost of a basic policy to make a significant dent in the number 
of uninsured.
    Mr. O'Neill, given the data we have on tax credits as a means for 
reducing the number of uninsured, I am concerned that they may not be 
the single most efficient means of extending health care coverage. Are 
you prepared to work with me to complement tax credit legislation with 
expansions of Medicaid and CHIP, in order to make significant progress 
in the problem of the uninsured?
    Answer: The President-elect is committed to making significant 
progress in the problem of the uninsured. That is why he has promoted 
the idea of a health tax credit for low- and moderate-income 
individuals and families that are caught in the gap between government 
programs and employer-provided insurance. The details of such a 
proposal are still under discussion. The Administration will, of 
course, be willing to work with you on an overall strategy to address 
this pressing problem.
    Trade Question: One of the little recognized trade achievements of 
the Clinton administration in 1994-1995 was the negotiation of a global 
aluminum market sharing agreement. Political changes in Russia brought 
their enormous aluminum capacity onto the world market, threatening to 
depress prices dramatically.
    Treasury Bob Rubin negotiated a market sharing agreement among the 
world's major aluminum producers so that Russian capacity could slowly 
enter the market while preserving market shares for traditional 
producers, notably U.S. companies. The agreement had the largely 
unforeseen consequence of U.S. companies purchasing much of the Russian 
capacity.
    This departure from pure free market principles is an interesting 
precedent. It was supported by all major U.S. aluminum companies; 
including Alcoa, and received virtually no criticism. It now raises the 
question of whether a similar agreement could be negotiated to address 
the current steel import crisis, which is similar in that it is largely 
the result of Russia and China entering the world steel market. I would 
appreciate your thoughts.
    Answer: I agree that it is important for America to have a viable 
steel industry. However, the U.S. steel industry is subject to the 
effects of severe worldwide production overcapacity. I believe that any 
approach to the steel question must recognize that underlying 
phenomenon and the resulting world market dynamics. The agreement 
reached by then Secretary of Treasury Robert Rubin regarding aluminum 
production was made at a time when Russia and the former Soviet Union 
countries were beginning to open their economies to the rest of the 
world. The approach taken was appropriate to the time and the 
circumstances that existed after the Soviet Union broke apart. A 
similar concept might be explored for the steel industry but it would 
have to take into account the differences that exist now in the current 
economic situation and the differences in the steel industry.

          Responses to Questions From Senator Charles Grassley

                      IRS REFORM AND RESTRUCTURING
    Question 1: Mr. ONeill, this Committee has spent a significant 
amount of time recently performing oversight of the IRS and in passing 
legislation to restructure and reform the IRS.
    The Committee's goal has been, in part, to make dealing with the 
IRS an easier and fairer process. With the IRS being for millions of 
Americans, their only extensive contact with the federal government, 
this is critical.
    While recent Treasury Secretaries have each brought to the position 
their own unique set of talents, you will be the first Secretary in 
some time who brings to the Department significant management 
experience on a large scale.
    As CEO of Alcoa you oversaw a workforce of approximately 140,000 
and were successful in turning the company around.
    While Mr. Rossotti, the Commissioner of the IRS, also has strong 
management experience and is making good efforts at the IRS, I hope we 
can count on you bringing your wealth of knowledge to bear on the 
problems facing the IRS--and that management of the IRS is a priority 
during your time as Secretary.
    Answer: I can assure you that management of the IRS and support for 
IRS reform and moderization will be a priority for me, should I be 
confirmed.
    Question 2: Mr. O'Neill, in your visit to my office a couple of 
weeks ago, you expressed a strong commitment to improving the 
environment. That's a commitment I share with you. As you know, there 
are many tax incentives for the production of energy from conventional 
sources such as oil and gas. There are also incentives for the 
production of environmentally friendly energy, like ethanol.
    One environmentally friendly incentive deals with production of 
electricity from wind, closed loop biomass, and poultry waste. This 
provision expires at the end of 2001. There is bipartisan support on 
this committee for a proposal of mine to extend this tax credit and 
expand it to include all renewable energy sources.
    With your interest in environmental protection, would you consider 
this proposal to provide more tax incentives for renewable energy 
worthy of the incoming Administration's support?
    Answer: I would be pleased to work with you on tax matters that 
would both benefit the environment and contribute toward the nation's 
energy needs.
    Question 3: Mr. O'Neill, over the past year this Committee has 
issued two bi-partisan proposals to address the growing problem of tax 
shelter transactions. This month, the Department of Treasury issued 
proposed regulations under Circular 230 to modernize tax opinion 
standards, limit contingent fee arrangements, and impose other 
requirements in an attempt to discourage tax advisors from 
participating in or furthering tax shelter arrangements. Treasury also 
issued additional regulations last year to address the shelter problem.
    I am concerned about the growth of tax shelters and I am deeply 
disturbed by the participation of tax professionals in those shelters. 
Do you anticipate that your Treasury will continue its efforts in this 
area?
    Answer: I believe that the government should pursue aggressively 
those who would market or implement illegal tax schemes. I would be 
pleased to review the Finance Committee proposal in that context.
         TRADE POLICY & THE ADMINISTRATION'S ECONOMIC STRATEGY
    Question 4: Mr: O'Neill, a major reason why the United States has 
enjoyed such a robust economy is that international trade has 
contributed significantly to the longest and most remarkable expansion 
in American history. In 1975, trade in goods and services as a 
percentage of our Gross Domestic Product was just under 16 percent. 
Today, goods and services trade is just over 24 percent of GDP, and 
growing.
    Because of this economic performance, every American family is 
better off. Millions of new jobs have been created. Lives all across 
America have been improved.
    Yet in spite of the astonishing economic contribution of 
international trade to the American economy, we have not always done 
such a good job of putting trade policy at the center of our overall 
economic strategy.
    The failure of the Seattle WTO Ministerial last year is a good 
example. The Seattle talks didn't collapse just because of what 
happened in Seattle. The failure in Seattle began long before we needed 
to accomplish for our long-term economic well-being.
    President-elect Bush said that the Treasury Secretary is the ``CEO 
for the American economy.'' Given that role, how will you work to make 
certain that trade policy goals are part of our overall national 
economic strategy?
    Answer: You correctly point out the significant role of 
international trade in contributing to the sustained growth of the 
American economy over the last few decades. I firmly believe that free 
trade is in the interest of every American and that it raises the 
standard of living for everyone. You will be glad to know that 
increased free trade has been a central theme of the President-elect's 
campaign and will be a high priority under his leadership. I will work 
closely with the U.S. Trade Representative and the other agencies 
involved as we help the President advance his very ambitious trade 
agenda.
               MANAGEMENT ISSUES AND THE CUSTOMS SERVICE
    Question 5: The Customs Service has faced tremendous growth in its 
workload and service demands since 1995. As a result of this increased 
workload, and higher position costs in its work force, Customs has been 
forced to find new ways to make up for budget shortfalls. Some have 
suggested that we need to develop more effective long-term strategies 
on how Customs can make better use of its resources, as well as to 
develop new ways to increase available funding for this like 
inspectional services, and the procurement of new technology and 
equipment.
    How will you respond to these needs, and what strategies will you 
put into place to deal with them?
    Answer: Cross-border commerce and international travel have 
increased exponentially in recent years. This trend is expected to 
continue and it presents challenges for Customs' enforcement 
capabilities and its ability to facilitate the free flow of goods and 
people across the border. A strategy to deal with this situation will 
have to look at both modernization of Customs' automated systems and 
the capacity for inspections at border ports of entry. I look forward 
to an opportunity to reviewing this issue more in depth and working 
with you towards a solution.
    Question 6 (Part I): Alcoa has a very sizeable plant near 
Davenport, Iowa, located in Riverdale, Iowa. The Mississippi river 
suffered from PCB contamination traced to the Alcoa Davenport Works 
plant. Recently, the Iowa Department of Natural Resources stated that 
after significant cleanup efforts, paid for by Alcoa, the river's water 
quality has improved to a level where fish consumption of carp and carp 
suckers from the Mississippi River between Davenport and LeClair are 
now allowed.
    Please inform me of what steps Alcoa is taking, or has taken, to 
ensure that there is not a repeat of the Alcoa Davenport Works plant 
unlawfully contaminating the river.
    Answer: This problem had its origins decades ago. PCBs were 
lawfully used by many businesses, including Alcoa, as a fire retardant 
fluid to protect life and physical structures for many decades. Alcoa 
began so using PCBs at its Davenport Iowa Operations in the mid 1950's. 
After PCBs were later banned in the 1970's and Alcoa identified the 
presence of PCBs in its Davenport facility, it engaged in an extensive 
effort to eliminate any releases to the environment and to control or 
remove PCBs at the facility. The plant, comprising more than 120 acres 
under roof, spent more than $10 million to install water treatment 
systems to virtually eliminate industrial process water discharges so 
that a future release will not occur. This state-of-the-art closed 
treatment system is the best way known to prevent any problems going 
forward.
    The company's efforts first began when it discovered the presence 
of PCBs and conducted extensive investigations to identify sources and 
appropriate solutions. Results intensified during the past decade as 
treatment systems have been installed. In addition to the new water 
treatment systems, the company spent substantially more than $10 
million during the past decade in an aggressive effort to remove and 
control contaminants at the plant. These efforts have borne fruit 
during 2000 as the Iowa Department of Natural Resources determined that 
PCB levels in fish in the Mississippi River pool adjacent to Alcoa's 
plant had decreased dramatically, sufficient to lift the previous 
advisory on fish consumption due to PCBs.
    Question 6 (Part II): Several years ago, the Alcoa Davenport Works 
plant was, unfortunately, subject to charges of discrimination and the 
creation of a hostile work environment. In settling this litigation in 
1997, newspaper reports state that Alcoa provided a monetary settlement 
to the plaintiffs, African-American employees at the plant, and that 
Alcoa also established a program at the Davenport plant to emphasize 
Alcoa's zero-tolerance of racial and sexual harassment.
    Please inform me of Alcoa's ongoing efforts to ensure that the 
company's zero-tolerance against racial and sexual harassment is 
practiced at the Davenport plant.
    Answer: Alcoa's Davenport (Iowa) Works now has a continuing, 
comprehensive program to ensure that the company's zero-tolerance 
against racial and sexual harassment. The many components of this 
comprehensive plan include:
   Communication, distribution and posting Alcoa's zero-
        tolerance policy, which includes discipline, up to and 
        including termination, for any racial or sexual harassment.
   Institution of plant-wide diversity and racial tolerance 
        training for all employees.
   Institution of Conflict Resolution Training.
   Use of a consultant to review and make recommendations on 
        certain employment practices, including testing and hiring of 
        African-American applicants.
   Establishment of an Equal Access Committee to review and 
        resolve incidents involving harassment or discrimination. There 
        are five members from management, including one African-
        American male and one African-American female. Included in its 
        responsibilities is the review of any proposed terminations of 
        African-American employees.
   Establishment of a First Response Team in every department, 
        which involves hourly employees in investigating any 
        allegations of racial or sexual harassment.
   Creation of the position of Diversity Advisor to whom 
        African-American employees may go to for help with employment 
        concerns or harassment, discrimination and equal employment 
        opportunities.
   Institution of a mentoring process for all new employees, 
        both hourly and salary.
   Creation of an Assessment Center for first-line supervisors.
   Make the plant's Diversity Plan part of the operating plan; 
        and create a Diversity Deployment Team.

           Responses to Questions From John D. Rockefeller IV

    Tax Question: I want to express to you my strong doubts about the 
wisdom of President-elect Bush's proposed tax cut. I have two main 
concerns. First that the tax cut is far too large; it is unsound fiscal 
policy that threatens our ability to pay down the national debt. 
Second, that the tax cut is far too weighted toward higher income 
families.
    The state I represent, West Virginia, ranks near the absolute 
bottom in national income. It is clear to me that we just are not going 
to get much benefit from a tax cut where 60% of the lost revenue cost 
goes to families with incomes in excess of $100,000. I support 
responsible tax cuts that can be reasonably accommodated within the 
projected budget surplus, but I cannot support a tax cut that is so 
weighted toward the most comfortable people in society; the very same 
people who have done so well financially over the less few years.
    In recent days there has been a lot of talk coming out of the Bush 
transition about the slowdown in the economy and the need to use the 
Bush tax cut as a means of economic stimulus. There has been talk in 
the transition and among the Republican Congressional leadership about 
speeding up the tax cut, perhaps making it retroactive to the beginning 
of this year.
    I can understand your desire to build political support for your 
tax plan but it seems to me your reasoning does not make economic 
sense. I believe you will agree that it is a given among economists--
from the right to the left--that wealthier people save more than those 
of modest means. And following that, economists are in complete 
agreement that the wealthy will save, rather than spend, their tax cut. 
If you want to create economic stimulus, more of your tax cut needs to 
go to middle income families.
    According to the economist Allen Sinai who is quoted in last 
Thursday's Washington Post, people in the income range over $100,000 
(and that is where approximately 60% of the revenue cost of the Bush 
plan goes) save about 90 percent of a tax cut. Dr. Sinai estimates that 
only about 40% of the Bush tax cut will find its way back in the 
economy in the form of additional consumer spending.
    Here's what I would recommend. Reduce the cost of the Bush tax cut 
and target it more to middle and lower income families. This will be 
the most fiscally responsible approach. It would be much fairer. And, 
it would create the kind of economic stimulus that the President-elect 
has recently identified as a justification for the tax cut.
    Do you have any reaction to that?
    [The Washington Post article, referred to above, appears at the end 
of Mr. O'Neill's answer.]
    Answer: I appreciate your thoughtful question. However, I want to 
make clear that I fully support the President's tax cut plan was the 
right thing to do for America both back when it was proposed last year, 
and even more so now in the face of an economic slowdown.
    The tax cut plan is the right thing to do first and foremost as an 
issue of basic fairness. The President-elect's tax cut plan starts from 
the premise that Federal taxes are the highest they have ever been 
during peacetime. High taxes unfairly limit the participation of low-
income earners, middle-class families, and seniors in today's 
prosperity, and act as a success tax on entrepreneurs. It is beyond me 
why the government should continue to take in more money than it needs 
to finance agreed upon public purposes. That is why we need to return 
at least some of this money--roughly one-quarter of the surplus--to the 
people who earned it and sent it to Washington to begin with. 
Otherwise, the temptation to spend it will be overwhelming. The 
President-elect has proposed a bold tax cut plan that will ensure 
continued prosperity while leaving the Social Security surplus 
untouched. His plan will promote economic growth and increase access to 
the middle class by cutting high marginal rates. It will also double 
the child credit, eliminate the death tax, reduce the marriage penalty, 
and expand Education Savings Accounts and charitable deductions. The 
largest percentage cuts will go to the lowest income earners. As a 
result, 6 million families will no longer pay federal income tax. The 
highest percentage cuts will go to taxpayers with the lowest incomes. 
For example, a family of four making $35,000 a year will receive a 100 
percent income tax cut. A family of four making $50,000 a year will 
receive a 50 percent income tax cut. A family of four making $75,000 a 
year will receive a 25 percent income tax cut. Overall, the marginal 
income tax rate on low-income families will fall by over 40 percent, 
and six million American families--one in five taxpaying families with 
children--will no longer pay any income tax at all.
    The tax cut plan is even more appropriate now in the face of an 
economic slowdown. As U.S. economic growth continues to slow sharply 
now at the end of the Clinton Administration, the tax cut plan is a 
meaningful way to improve consumer confidence and encourage more 
spending. That is why the President-elect and I are reviewing options 
for speeding up the tax cut into this year. No decisions have yet been 
made. However, I believe that we will regret it if we look back nine 
months from now and find that we could have acted on the clear warning 
signs in the economy when we had the chance.

                    [Washington Post, Jan. 11, 2001]

    GOP Chiefs Consider Fast Action on Taxes
    Early Cuts Eyed as Economic Stimulant
    By Eric Pianin and Glenn Kessler
    Washington Post Staff Writers
    Thursday, January 11, 2001; Page A01

    Support is building among Republican leaders for overhauling 
President-elect Bush's tax cut plan and for seeking early congressional 
action as a means of stimulating an economy that appears headed for a 
downturn.
    Bush advisers and Republicans on Capitol Hill acknowledge that 
Bush's plan would do little to spur the economy this year because it 
was designed to be phased in slowly. As a result, congressional 
Republicans are considering several measures--including increasing the 
$500-per-child tax credit, providing tax rebates and decreasing 
withholdings from workers' paychecks--to complement Bush's across-the-
board tax cut and possibly attract Democratic support.
    The slowdown in the economy has scrambled much of the GOP thinking 
about the importance of a tax cut. During the campaign, Bush said a tax 
cut was necessary to return growing budget surpluses to taxpayers. Now 
he says a tax plan is necessary as part of an ``economic recovery,'' 
and Republican congressional leaders who just weeks ago advised Bush to 
take a piecemeal approach are climbing aboard.
    Yesterday, Senate Republican Leader Trent Lott (Miss.) signaled his 
support for a proposal this week by House Majority Leader Richard K. 
Armey (R-Tex.) for a rapid reduction in income tax rates and an 
expansion of individual retirement accounts and 401(k) savings plans to 
help head off a recession.
    In hopes of giving the economy an immediate boost, Lott told 
reporters he favors making any tax cuts retroactive to Jan. 1, an idea 
also backed by Armey. Lott said he is urging the incoming 
administration to consider making a tax cut one of its first orders of 
legislative business.
    ``I think that's actually the way to go. . . .I think to make it 
retroactive--or parts of it retroactive--is a very good idea,'' Lott 
said. ``I assume and hope that President-elect Bush will recommend 
that.''
    A spokesman for House Speaker J. Dennis Hastert (R-IL) said the 
speaker also is interested in using a tax cut to stimulate the economy. 
``We don't want to dip into a recession, and the best way to avoid that 
is to keep paying down the debt and providing immediate and meaningful 
tax relief,'' said Pete Jeffries, Hastert's communications director.
    Bush spokesman Ad Fleischer said Bush and his advisers are 
``reviewing a number of options'' on the tax cut plan. ``The president-
elect is committed to the plan on which he ran,'' Fleischer added. ``He 
is aware of some of the discussions about trying to speed it up. He has 
made no determination about whether he would do that or not.''
    Republican leaders will face a series of procedural hurdles if they 
try to tackle a tax cut before a budget blueprint is enacted, budget 
experts say. Moreover, efforts to speed up the tax cut will run into 
resistance from Democrats. Although support among congressional 
Democrats for a larger tax cut has grown as a result of worrisome 
economic signs, Democrats say the Bush tax plan is too costly.
    At a news conference Tuesday, Senate Democratic Leader Thomas A. 
Daschle (S.D.) rejected the notion of a retroactive tax cut, saying it 
could harm the economy. He said retroactive cuts are difficult to pass 
and are rarely done. ``In this case, it would be even more harmful to 
the economy,'' he said.
    Senate Democratic Whip Harry M. Reid (Nev.) said yesterday that ``I 
can't imagine we would be talking about a big tax cut before we even do 
a budget . . . . I think we have the cart before the horse.''
    The Bush tax cut plan likely will need to be significantly altered 
if it is to have much impact on the economy, economists said. While the 
Bush plan is estimated to cost $1.6 trillion over 10 years, it was 
designed to be phased in slowly because Bush officials were trying to 
boost spending in other areas and not eliminate the budget surplus.
    According to the Joint Committee on Taxation, an arm of Congress, 
the Bush plan would reduce revenue by $21.1 billion in the first fiscal 
year and by $57.4 billion in the second year--a small portion of the 
$10 trillion U.S. economy.
    If the tax cut were made retroactive to Jan. 1, as Armey and Lott 
suggested, it would deliver only about $37 billion to taxpayers.
    Moreover, almost 60 percent of Bush's tax cuts would go to people 
making more than $100,000, who would be more likely to save and thus 
not provide the economy much of a spending boost. Allen Sinai, chief 
executive of Primark Decision Economics, said people in that income 
range generally save about 90 percent of a tax cut. He estimated that 
only about 40 percent of the Bush tax cut--about $15 billion--would 
find its way back into the economy in the form of additional consumer 
spending in the first year.
    ``That's a minuscule tax cut,'' said Sinai, who estimated it would 
add perhaps one-tenth of 1 percent in growth to the economy, similar to 
the impact of the Federal Reserve's recent cut in interest rates. ``It 
would be one of the smallest tax cuts in history.''
    Fleischer said that even if the tax cut were not phased in faster, 
it would provide a boost to the economy. ``There is a psychological 
boost that comes with it,'' he said, because people will know they will 
get more money over time in their paychecks. ``That should not be 
minimized as a factor.''
    The Congressional Budget Office estimates that the budget surplus 
in fiscal 2002, which begins Oct. 1, will be about $126 billion, 
excluding Social Security. This would seem to give the Bush 
administration and Congress room to enlarge the tax cuts. But 
increasing the cuts in the early years would inflate the size of the 
overall cut and crowd out other spending priorities.
    During his meeting with reporters yesterday, Lott dismissed the 
Democrats' idea of a $700 billion package of targeted tax cuts over the 
coming decade, saying, ``We could wind up with a great big package of 
little targets that are fine and good except that they don't add up to 
much in terms of impact on the economy. That should be the highest 
priority right now.''
    Lott said he has discussed with Bush officials the option of taking 
up a tax package next month. But the Bush team has to weigh the fact 
that if it acts before Congress approves a budget plan for fiscal 2002, 
it will face amendments and a possible filibuster by Democrats. ``There 
are certain risks involved and we need to evaluate that,'' Lott said.
    He stressed that the new administration must decide the timing 
quickly. ``I told them . . . they better start thinking about it now, 
not in three weeks.''
    Bush conferred with his budget advisers yesterday to begin mapping 
out a strategy for getting his budget through Congress.

            Responses to Questions From Senator Tom Daschle

                FISCAL AND MONETARY POLICY COORDINATION
Background
    One of the hallmarks of economic policy in recent years has been 
the effective implicit coordination between monetary and fiscal policy. 
Our policy of fiscal restraint and responsibility has provided the 
Federal Reserve with tremendous flexibility on the monetary side of the 
policy ledger.
    It is very welcoming to read that you and Federal Reserve Chairman 
have had a long and solid relationship since the two of you worked 
together in the 1970s. Your relationship should help continue the 
effective policy coordination of recent years.
    Question: Mr. O'Neill, do you agree that we must avoid doing 
anything on the fiscal side that will make it harder for the Federal 
Reserve to address aggressively any economic slowing now or in the 
future?
    Answer: Let me start by saying that I strongly support the 
independence of the Federal Reserve with regard to its decisions on 
monetary policy. It is my intention to work closely with Chairman 
Greenspan to ensure that the Treasury Department and the Federal 
Reserve work together in a complementary and not counterproductive 
manner. I do not believe that any of the President-elect's proposals, 
including the tax plan, will have a negative impact on the Federal 
Reserve's ability to address a slowing economy. Finally, I do agree 
that the Administration should not do anything that would inhibit the 
Federal Reserve with regard to its conduct of monetary policy.
    Question: Mr. O'Neill, do you agree that there is a risk that if we 
go too far on the tax or spending side, especially in the out-years, 
that this will place upward pressure on long-term interest rates and 
the fiscal policy could end up effectively fighting the Federal 
Reserve's monetary policy?
    Answer: There are many factors that influence long-term interests 
rates, including inflation expectations and the overall direction of 
the economy. The greates challenge at this point is to raise the 
confidence level of consumers and businesses in the near-term state of 
the economy. A tax cut would help with this goal and improve the long-
range growth prospects of the nation. It is important to remember that 
any tax cut proposal will be financed from the non-Social Security 
surplus. The President-elect has pledged to save the Social Security 
surplus. This means that even with our tax cut, debt will still be 
falling sharply under the President-elect's overall budget plan, 
leading to lower interest rates, not higher ones.
                CONSENSUS ON TRADE AND WORKER ADJUSTMENT
Background
    In reading about your record in preparation for this hearing, I was 
struck with how you as a CEO of a major company were able to work and 
communicate so effectively with average workers. George Becker, the 
longtime President of the steelworkers, had this reaction to your 
nomination: ``Most of our relationships with employers are 
confrontational by nature. But we found that Paul had a very keen 
interest on the side of working people.''
    I hope you will bring some of the success you have had and help us 
address what I see as a key problem. While elite opinion in this 
country is strongly in favor of globalization, there is not a consensus 
among average Americans.
    In a recent study, ``Americans on Globalization,'' Steven Kull 
found that people would be much more supportive of increased 
globalization if the government did more to help people who lose out 
from trade.
    Question: Mr. O'Neill, I hope this is an issue that you will take a 
look at. I know you will be busy on many fronts but I believe it is 
important. I feel strongly that we must do more to help people who lose 
from trade and we must do more to empower people to be in a position to 
seize the increased opportunities that exist today.
    Do you agree?
    Answer: I am convinced that free trade is not a zero sum game but 
instead will increase the standard of living for millions of Americans. 
I believe that on a level playing field the American workers and 
farmers win. I intend to do as much as I can to open new markets and 
further open existing ones. However, I agree that we have to be 
sensitive to the negative effects of trade on real people and their 
communities that may occur in some cases. However, we are now finding 
that in many parts of the country affected by declines in trade 
sensitive industries are the beneficiaries of new investment, including 
foreign investment, and resulting job growth. State governments have 
been especially aggressive in seeking out these new opportunities. I 
believe that we should coordinate as much as possible at the Federal 
level with the states in this regard. I would be happy to take a look 
at this issue and look forward to working with you on it.
                 MARRIAGE PENALTY AND LOW-INCOME PEOPLE
Background
    One tax priority on all sides of the dais this morning is to 
address the marriage-tax penalty. There is a consensus that the 
marriage penalty needs to be addressed.
    As you begin to focus on this issue, I just wanted to ask you to 
take a look at how many low-income people face some of the highest 
marriage penalties.
    This is because many low-income people lose the EITC when they get 
married.
    In my view, the earned income tax credit is one of the most 
important features of the tax code. It represents welfare reform at its 
best. A better name for it would be the ``make work pay tax credit.''
    In my view, we need to make sure that we encourage people to work 
and make sure that people who work full time should not have to raise 
their families in poverty. While we encourage work, we must not 
discourage marriage, especially at the bottom of the income scale where 
we need to do all we can to encourage marriage. Therefore, it is 
critical that any marriage penalty relief address these low-income 
families.
    Question: Mr. O'Neill, you do not need to respond now, but I hope 
you will focus on this issue.
    Answer: I would be happy to review the issue of marriage penalty 
relief and the EITC. I believe that there are many areas in which the 
EITC needs to be reviewed, and this is one of them. For example, the 
25% EITC payment error rate was also just cited by GAO as a top area of 
concern.
                       RURAL ECONOMIC DEVELOPMENT
    Mr. O'Neill, in my view one of the most important responsibilities 
of the Treasury Department concerns the administration of laws dealing 
with community economic development. I am from a rural state and for 
that reason I am quite interested in issues involving rural economic 
development. I strongly support existing laws and programs that 
encourage the private sector to make capital available in areas of the 
country that have suffered from a lack of investment, particularly 
rural areas.
    I am especially concerned that the Treasury Secretary gives 
appropriate attention to the offices within the agency responsible for 
administering such programs as the Community Reinvestment Act, 
Community Development Financial Institutions Fund, and the recently 
enacted New Markets Tax Credit.
    These are valuable programs that help ensure that the lifeblood of 
our economy--investment capital--is available in poorer communities.
    Question: First, let me ask you; are these issues that you have 
thought about?
    Answer: The Bush Administration will fully enforce all laws 
currently on the books including the Community Reinvestment Act, 
Community Development Financial Institutions Fund, and the New Markets 
Tax Credit. As you may know, the President-elect supported these 
initiatives throughout his campaign and I agree with his views. In 
general, I am supportive of measures that encourage the private sector 
to invest in underserved communities.
    Question: Although the CRA has been a tremendous success in 
ensuring that capital is available for investment in communities 
throughout the country, there have been recent attempts in Congress to 
effectively kill the program. Fortunately, those efforts were turned 
back. Mr. O'Neill, are you very familiar with the Community 
Reinvestment Act, and if so, do you intend to fully and vigorously 
support the program?
    Answer: The Bush Administration will fully enforce all laws 
currently on the books, including the CRA. In general, I am supportive 
of measures that encourage the private sector to invest in underserved 
communities. Throughout the campaign, the President-elect expressed his 
support for the CRA and promised to vigorously enforce the laws on the 
books related to the CRA. I am familiar with the Community Reinvestment 
Act (CRA) and agree with the President-elect's position on this issue.
    As I hope you are aware, Congress recently passed legislation with 
strong bipartisan support, the Community Renewal Act, which is designed 
to encourage capital investment in lower-income communities. The 
legislation includes an expansion of empowerment zones, an increase in 
the Low-Income Housing Tax Credit cap, and the creation of a New 
Markets Tax Credit program. The latter program will require the 
issuance of regulations this spring by the Treasury Department. I 
understand the Community Development Financial Institutions Office at 
Treasury is now working on those regulations and I just want to take 
this opportunity to stress the importance of providing guidance for 
this program on a timely basis.
    Answer: I would certainly intend to provide the necessary guidance 
to implement this important program in a timely manner.

             Responses to Questions From Senator Bob Graham

    Question: The Administration should establish as a policy goal that 
every American has the opportunity to have income in retirement of 
between 70 and 75 percent of pre-retirement income. This goal would 
then necessitate that Congress and the Administration think in terms of 
``retirement reform'' which emcompasses Social Security, employer-
sponsored retirement plans, and individual savings. Each of these three 
components will be critical to reaching the 70-75% goal. Do you agree? 
Would the Administration be willing to consider broadening its Social 
Security Commission to encompass employer-sponsored retirement plans 
and individual savings as well?
    Answer: The President-elect has stated his support for a bipartisan 
commission on Social Security. The exact details of such a proposal are 
still being developed. I will make sure your views on retirement 
secruity are considered in that process. However, the task of saving 
Social Security itself is probably a sufficiently broad enough purview 
for such a commission.
    Question: Because more and more Americans are exposed to the risks 
and rewards of the financial markets through the advent of IRAs and 
401(k)s, would you agree that Social Security should remain a 
guaranteed benefit which provides a safety net for retirement?
    Answer: Social Security is a defining American promise that must be 
kept. We will not change benefits in any way for current retirees or 
those near retirement.
    Question: President Bush's tax plan did not include any proposals 
to encourage more employers to offer retirement plans to their 
employees. The Finance Committee unanimously approved a bill that made 
several changes to the pension laws that would make it easier for 
employers, particularly small employers, to offer such plans. That bill 
also included tax credits for low-income individuals who save for their 
retirement. Would the Administration support that package?
    Answer: Retirement security is an important issue for Americans, 
especially as the baby boom generation nears retirement age. I would be 
happy to review these proposals and work with you in this critical 
area.
    Question: Proponents of reforming Social Security through the use 
of individual accounts argue that investing in private-sector 
securities would help fill part of the long-term funding gap in the 
Social Security program. This can also be accomplished by diverting 
part of the existing Social Security surplus into stocks and bonds 
without establishing individual accounts. What are your thoughts on the 
Social Security Trust Fund holding private-sector investments?
    Answer: I agree with Federal Reserve Board Chairman Alan Greenspan 
that the government should not invest Social Security funds in the 
stock market. Virtually all proposals recognize that one key to reform 
is to incorporate investment-based options, which would provide an 
opportunity for higher rates of return. I believe that the investment 
decisions must reside with individual workers and retirees, not the 
federal government.
    Question: During the campaign President-elect Bush supported 25% 
tax credit to help the uninsured purchase health insurance. I am 
concerned that tax credits alone will do little to help low-income 
individuals purchase health insurance in the individual market. I am 
intrigued by the proposal put together by HIAA and Families USA, which 
provides tax credits for employers to encourage them to offer health 
insurance to their employees. In addition, the HIAA/Families USA 
proposal builds on existing federal programs--Medicaid and SCHIP--to 
expand coverage to very low-income families. I believe this 
comprehensive approach will be much more successful in expanding health 
coverage than individual tax credits alone. Has the Administration 
looked at this proposal, and if so, what thoughts do you have on it?
    Answer: As you know, the President-elect is committed to making 
significant progress in the problem of the uninsured. That is why he 
has promoted the idea of a health tax credit for low- and moderate-
income individuals and families that are caught in the gap between 
government programs and employer-provided insurance. The details of 
such a proposal are still under discussion. I have not had an 
opportunity to examine the proposal you discussed, but I would be happy 
to do so in this context.
    Question: During the campaign, Vice President-elect Cheney 
expressed support for a bill I introduced in the 106th Congress, S. 
526, that would make it easier to develop public-private partnerships 
for the provision of school infrastructure. The bill allows such 
public-private partnerships to gain access to tax-exempt financing. 
Will the Administration support this proposal and include it in its FY 
2002 budget?
    Answer: I agree with the general concept that private sector 
involvement in this area may have certain advantages. I have not had an 
opportunity to examine the specific proposal you discussed, but I would 
be happy to do so in this context of developing the Administration's 
legislative program.
    Question: I am very interested in leveling the playing field 
between local merchants and remote sellers with respect to the sales 
tax collection. The moratorium on the imposition of access taxes of 
multiple or discriminatory taxes on the Internet expires on October 21 
of this year. As a former Governor, and coming from a state that relies 
heavily on sales tax revenues, President-elect Bush should have a keen 
interest in this matter. Will the Administration oppose a continuation 
of the existing moratorium if it does not also rectify the sales tax 
collection inequity that exists today?
    Answer: The President-elect has stated that he would support 
extension of the moratorium on Internet taxes to October 2006, and that 
he would prohibit access taxes on the Internet. However, I would be 
happy to work with you on the concerns of local merchants and the 
States.
    Question: During the campaign President-elect Bush expressed 
support for enriching the tax deduction for long-term care premiums. 
Chairman Grassley and I introduced legislation last year that included 
this proposal as well as an income tax credit for individuals with 
long-term needs. This was originally proposed by HIAA and AARP, both of 
which endorsed our bill. The bill addresses two public policy goals: 
(1) helping those with significant longterm care burdens today, and (2) 
preparing for the future by encouraging individuals to purchase long-
term care insurance. Will the Administration support this proposal?
    Answer: Thank you for bringing this proposal to my attention. As 
our population ages, I agree that we should encourage families to 
prepare for long-term care expenses before they occur. Efforts to 
increase participation in long-term care insurance would contribute to 
that goal. I look forward to working with you in this regard.

             Responses to Questions From Senator John Kerry

    Question: The attached recent AP story (December 22, 2000), 
reported that Alcoa paid no taxes in 1996 and over the three-year 
period from 1996-1998 paid only $266 million in taxes, a tax rate of 
15.9 percent. This was based on an October study by the Institute on 
Taxation and Economic Policy. However, the company's SEC filings 
indicate an effective tax rate over this period of 32-33 percent. 
Please explain this seeming discrepancy.




    Answer: Under my tenure, Alcoa has fully complied with the Federal 
tax laws and paid all taxes due. The instance cited in 1996 was the 
result of net operating losses from prior years and the tax treatment 
of employee stock options. The SEC filing cited do not contain the 
necessary data with which to determine tax liability and are not an 
appropriate source for this purpose. The tax benefits associated with 
the net operating losses are recorded in prior years for financial 
reporting purposes, and therefore would not be reflected in the SEC 
filings.

          Responses to Questions From Senator Blanche Lincoln

    Question: As I am sure you are aware, the Office of the National 
Taxpayer Advocate recently issued its Annual Report to Congress. Listed 
as a number one on the list of most serious problems faced by taxpayers 
was ``the complexity of the tax laws affecting individuals'' and 
specifically the Individual Alternative Minimum Tax was highlighted. 
The Alternative Minimum Tax has become, or will soon become, a surprise 
burden for millions of middle-income taxpayers unless meaningful 
changes are made to our tax code. Do you advocate reform for the 
Individual Alternative Minimum Tax to prevent its burden from falling 
upon middle-income families, and if so, do you have an insight as to 
what course of action our government should take in reaching this 
reform?
    Answer: I absolutely agree that the individual AMT must be reformed 
so that individuals aren't trapped in what's been referred to as a 
``ticking tax time bomb.'' I will certainly work with you to fix this 
problem that will ensnare millions of middle-income Americans.
    Question: As you may be aware, the existing moratorium on Internet 
access taxes will expire in October 2001. Do you believe the incoming 
Administration should encourage an extension of this moratorium and, if 
so, should such legislation be used as an opportunity to put Internet 
and local sellers of goods on a level-playing-field as to sales and use 
tax collection?
    Answer: The President-elect has stated that he would support 
extension of the moratorium on Internet taxes to October 2006, and that 
he would prohibit access taxes on the Internet. However, I would be 
happy to work with you on the concerns of local merchants and the 
States.

                               __________

                Prepared Statement of Hon. Rick Santorum

                     U.S. Senator From Pennsylvania

    Distinguished Members of the Finance Committee, I regret that I am 
unable to be here in person to speak to the nomination of Mr. Paul 
O'Neill for Secretary of the Treasury.
    As you know, Mr. O'Neill hails from the Commonwealth of 
Pennsylvania, where since 1987 he served as the Chairman of Alcoa 
Corporation, the world's leading producer of aluminum, and 
headquartered in Pittsburgh.
    Based on his long and distinguished career in both the public and 
private sectors, his experience as an international businessman who has 
wrestled with the challenges of the new economy, combined with his 
government budget expertise, gives Mr. O'Neill the deep understanding 
and broad perspective on both the U.S. economy and global markets that 
the new Administration's top economic post requires.
    Mr. O'Neill's understanding of the federal budget process and 
procedures stems from his accomplished 10-year tenure at the U.S. 
Office of Management and Budget (OMB), one of the epicenters of 
Washington policy-making. From 1967 to 1977, he served in a variety of 
capacities at OMB, starting off as a policy analyst, then moving his 
way up to associate director in charge of social programs and policies, 
and eventually his work merited him the position of deputy director for 
the agency. He began his public service career as a computer systems 
analyst with the U.S. Veterans Administration, where he served from 
1961-1966.
    After serving in top executive posts at International Paper Company 
from 1977 to 1987, Mr. O'Neill brought his business and financial 
acumen to Alcoa, where under his financial and managerial stewardship 
the company dramatically increased in profitability and broadened its 
global reach.
    In addition to his professional accomplishments, Mr. O'Neill has 
offered his energies and intellect to blue-ribbon commissions on health 
care, education and the operation of Pittsburgh's city government, and 
he has served on the boards of several prominent think tanks.
    Mr. O'Neill certainly comes to the Treasury Department with 
impressive credentials in both the public and private sectors, with 
respect from colleagues and peers, and with a solid reputation for hard 
work, effectiveness and sincerity. He is eminently qualified to meet 
the many and varied policy challenges that will be incumbent on the 
next Treasury Secretary, ranging from sustaining and expanding 
America's engine of global economic growth, to assessing options on how 
best to put Social Security on sound financial and actuarial footing 
for the long term.
    The American people have in Paul O'Neill a valued and committed 
public servant. Through your hearing today, I believe that you will 
come to recognize his abilities to guide the dynamics of the American 
economy.

                                
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