[Senate Hearing 107-4]
[From the U.S. Government Publishing Office]



                                                          S. Hrg. 107-4

                 NOMINATION OF MITCHELL E. DANIELS, JR.

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



                                HEARING

                               before the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                 ON THE

NOMINATION OF MITCHELL E. DANIELS, JR. TO BE DIRECTOR OF THE OFFICE OF 
                         MANAGEMENT AND BUDGET


                               __________

                            JANUARY 19, 2001

                               __________

      Printed for the use of the Committee on Governmental Affairs


                   U.S. GOVERNMENT PRINTING OFFICE
70-055                     WASHINGTON : 2001


_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Sales Office
         U.S. Government Printing Office, Washington, DC 20402


                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   FRED THOMPSON, Tennessee, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
SUSAN M. COLLINS, Maine              CARL LEVIN, Michigan
GEORGE V. VOINOVICH, Ohio            DANIEL K. AKAKA, Hawaii
PETE V. DOMENICI, New Mexico         RICHARD J. DURBIN, Illinois
THAD COCHRAN, Mississippi            ROBERT G. TORRICELLI, New Jersey
JUDD GREGG, New Hampshire            MAX CLELAND, Georgia
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
                                     JEAN CARNAHAN, Missouri
             Hannah S. Sistare, Staff Director and Counsel
                       Johanna L. Hardy, Counsel
     Joyce A. Rechtschaffen, Democratic Staff Director and Counsel
                 Lawrence B. Novey, Democratic Counsel
         Peter A. Ludgin, Democratic Professional Staff Member
                     Darla D. Cassell, Chief Clerk


                            C O N T E N T S

                                 ------                                
                                                                   Page

Opening statements:
    Senator Lieberman............................................     1
    Senator Thompson.............................................     3
    Senator Carnahan.............................................     5
    Senator Voinovich............................................     5
    Senator Carper...............................................     9
    Senator Domenici.............................................    11
    Senator Stevens..............................................    13
    Senator Cochran..............................................    14
    Senator Collins..............................................    15
    Senator Levin................................................    30
Prepared statement:
    Senator Akaka................................................    43

                               WITNESSES

Hon. Richard G. Lugar, a U.S. Senator from the State of Indiana..    16
Hon. Evan Bayh, a U.S. Senator from the State of Indiana.........    17
Mitchell E. Daniels, Jr. to be Director of the Office of 
  Management and Budget..........................................    19

                     Alphabetical List of Witnesses

Bayh, Evan:
    Testimony....................................................    17
Daniels, Mitchell E., Jr.:
    Testimony....................................................    19
    Biographical and financial information.......................    44
    Pre-hearing questions and responses..........................    54
    Post-hearing questions and responses.........................    92
Lugar, Richard G.:
    Testimony....................................................    16

 
NOMINATION OF MITCHELL E. DANIELS, JR. TO BE DIRECTOR OF THE OFFICE OF 
                         MANAGEMENT AND BUDGET

                              ----------                              


                        FRIDAY, JANUARY 19, 2001

                                       U.S. Senate,
                         Committee on Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:35 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Joseph I. 
Lieberman, Chairman of the Committee, presiding.
    Present: Senators Lieberman, Levin, Carper, Carnahan, 
Thompson, Stevens, Collins, Voinovich, Domenici, and Cochran.

            OPENING STATEMENT OF CHAIRMAN LIEBERMAN

    Chairman Lieberman. Good morning. The Committee will please 
come to order. This morning we are holding a hearing to 
consider the nomination of Mitchell E. Daniels, Jr. to be 
Director of the Office of Management and Budget. Mr. Daniels, 
welcome to the Committee. We are very happy to have you with us 
today. I would also like to extend a warm welcome to Senator 
Carnahan, who along with Senator Carper are two new Members of 
our Committee. We are very pleased to have you join us and look 
forward to working with you on this Committee during this 
session.
    This is a weekend full of history, not the least of which 
is the fact that this hearing that I have the honor to preside 
over today is the one official act I will perform during this 
fleeting period of my chairmanship of this Committee. I am 
honored to have that honor, particularly in your case. I wonder 
if Senator Lugar and Senator Bayh have the time to hear Members 
of the Committee make opening statements. Then with the power 
vested in me as Chairman, I will proceed and then call on 
Senator Thompson.
    Mr. Daniels, as you well know, the job for which you have 
been nominated is a pivotal and demanding one. The Office of 
Management and Budget has authority far more sweeping than most 
people outside of government realize. As OMB Director, you will 
recommend where every Federal dollar is spent and help oversee 
how every Federal program is managed. You will have a leading 
role in shaping far more than just the annual budget. You will 
be formulating national policy. With that in mind, let me say 
that I hope one of your guiding principles will be the 
discipline that has normally come with this position, and I 
know that that is part of the very distinguished record of 
public and private service that characterizes your career.
    We have seen extraordinary growth over the last 8 years 
economically in this country, and I believe that has been 
fueled in no small part by the whittling of interest rates made 
possible by shrinking national debt, and growing governmental 
surpluses. I think it is wise counsel to continue as best we 
can, though the administration's political makeup is changing, 
with those policies, for which I think there is bipartisan 
support here in Congress, which means using the surplus to 
continue to pay down the debt, investing wisely in critical 
programs such as education and defense, and enacting tax cuts 
that give relief to the families of America, many of whom have 
continued to be hard-pressed, even in a good economy.
    For my part, you may not be surprised to hear, I find it 
difficult to justify a massive tax cut at a time when we are 
experiencing a modest economic slowdown and at a time when the 
exact size of the future surplus, though pleasing to 
contemplate, is uncertain, unclear. So I would offer at the 
outset a word of both caution and hope that, as the next OMB 
Director, you would emphasize the value of debt reduction, the 
brake it has put on inflation and interest rates, the wealth it 
has created and the confidence it has bred.
    Let us together use today's surplus to make the future of 
America and all Americans more secure. OMB's most pressing 
internal responsibility may well be managing the government's 
information policies, including the shift to digital 
governmental or, as it has come to be called, e-government. E-
government will harness information technology to bring 
government closer to its citizens and citizens closer to the 
government, stimulating a broader knowledge base, greater 
efficiency and we think financial savings along the way.
    I was pleased that both presidential candidates talked 
about high-technology's role in the operations of government 
during last year's campaign; even both vice-presidential 
candidates talked about that, as I recall. Senator Thompson and 
I have been working together on a range of e-government 
proposals, and I hope the Committee will report them out and 
Congress will pass bipartisan legislation on this subject this 
year, and we look forward to your guidance and counsel in this 
effort.
    As to management, one of OMB's chief duties is to ensure 
that agencies implement the performance and accounting laws 
designed to give taxpayers as efficient and muscular a 
government as possible. These laws, which include the 
Government Performance and Results Act, the Chief Financial 
Officers Act, the Clinger-Cohen Act and the Inspectors General 
Act create a framework that addresses nearly every aspect of 
agency operations of our government.
    This Committee is proud to have played a role, again on a 
bipartisan basis, in developing these laws. I know that Senator 
Thompson and I together, regardless of which one of us happens 
to be Chairman at any given moment, intend to pursue the 
oversight of the implementation of these laws with vigilance, 
because they are what will spur the government to high 
performance with clearly defined missions that end in visible 
and good results. Again, I hope the Committee, OMB and the 
agencies will work together as we have in the past to prepare 
for the management tests that lay ahead at a time when 
taxpayers reasonably expect the most value for the least cost.
    Finally, let me discuss OMB's oversight of the Executive 
Branch regulatory process. From my perspective, this is one of 
the most consequential roles played by OMB, though not one that 
is well known. Through the Office of Information and Regulatory 
Affairs, if confirmed, Mr. Daniels, you will supervise the 
review of rules that provide critical protections to public 
health, worker safety, consumers and the environment. This 
Committee was actively involved in sorting out problems in the 
early years of regulatory review, problems that at that point 
undermined public trust in the fairness of the process.
    This morning, I would ask you to be vigilant and to oppose 
those who would use the process as a conduit to influence rule-
making off the record and without disclosure. Regulatory 
agencies must have the capacity to do what Congress has asked 
them to do, in the full light of sunshine, to protect the 
public's interest. So, bottom line, we on the Governmental 
Affairs Committee and you at OMB have a lot of work to do 
together. We look forward to forging a partnership with you on 
these important matters in the public interest.
    Senator Thompson.

             OPENING STATEMENT OF SENATOR THOMPSON

    Senator Thompson. Thank you very much, Mr. Chairman. It is 
a great delight for me to be here today because of my 
friendship with the nominee, my personal regard for him, and 
the prospect of having someone with his background and 
capabilities working in this important job. A lot of the 
nominees, I think, are being told, ``You have a high level to 
live up to; we have peace and prosperity and things are going 
extremely well and so forth. So why would you take this job? 
You know you can only go downhill.''
    In terms of the management of the Federal Government, you 
do not have that to worry about. We had another GAO report. The 
Comptroller came and gave us his latest high-risk list just the 
other day. It is obvious that we still have problems that are 
going in the wrong direction, such as waste, fraud and abuse 
with regard to the Federal Government, our lagging behind in 
the use of information technology, financial management, the 
security of our computers, and the fact that we now have a new 
risk that we have not had before, human capital. We are losing 
so many good people within 4 years. One-third of our entire 
workforce will be eligible for retirement, and up to one-half 
if these early-outs are available.
    This is the mass below the water level that now you are 
going to have to deal with. So a fresh start, I think at this 
time, is extremely good. I don't mean that just from a partisan 
standpoint, but I think from time to time we need a fresh look, 
and this is an area where we certainly need new leadership and 
strong, aggressive leadership with regard to the management 
side.
    We have many budget experts at this table here, such as the 
Chairman of the Budget Committee, and he will have an 
opportunity to talk about those issues in detail, but on the 
management side of things, a few more specifics. I have 
mentioned that because of years of neglect, our infrastructure 
is basically eroding. Many of the departments and agencies of 
government are vulnerable to waste, poorly managed, and 
antiquated. We are losing many of our best people.
    Numerous reports by the GAO and IGs before this Committee, 
along with a parade of witnesses from the outside who have 
testified before this Committee make these assertions 
irrefutable. The results are billions of dollars of waste, an 
increasing lack of ability to provide basic services, and an 
increasing cynicism among the American people. For example, the 
Federal Government of today is a crazy-quilt of agencies and 
programs that have evolved randomly over time in response to 
the real or perceived needs of the moment.
    In just about every area of Federal activity, multiple 
agencies and programs stumble over themselves to fix the same 
problems. Few would dispute that the government in Washington 
cannot do effectively all that it is now charged with doing. 
Much of what Washington does is inefficient and wasteful, and 
we do not have a handle on which programs work and which 
programs do not.
    Most Federal agencies do not adequately track receipts and 
disbursements and cannot account for billions of dollars in 
property and equipment. No one knows how much waste, fraud and 
mismanagement cost taxpayers, since the Federal Government 
makes no systematic effort to keep track of it. Based on just a 
few examples from GAO and the IG reports, our Committee staff 
came up with a figure of $220 billion, $35 billion in just 1 
year alone.
    The Federal Government seems utterly incapable of using 
information technology to enhance its efficiency and 
effectiveness. One agency after another has wasted billions of 
dollars on failed information technology projects. Weaknesses 
in government information systems make them vulnerable to 
computer attacks from international and domestic terrorists, 
crime rings and everyday hackers. These weaknesses jeopardize 
government operations and threaten the privacy of our citizens.
    In recent years, the Federal Government reduced staffing 
without cutting back on anything that the government does. 
Federal downsizing usually is just a numbers game carried out 
randomly, rather than strategically. Consequently, many 
agencies now face severe shortages of employees with the 
necessary skills and expertise to carry out their mission. 
There is mounting evidence that workforce deficiencies are an 
emerging crisis in the Federal Government, and the Comptroller 
the other day, of course, acknowledged that was the case. It 
came as no surprise when he put it on the high-risk list.
    Agency regulatory programs impose tremendous costs and 
burdens on our businesses, State and local governments, and 
citizens. However, the Federal Government in general and the 
OMB in particular are not doing nearly enough to ensure the 
benefits of these rules justify their cost, and respect 
principles of federalism. Over the past decade, Congress 
enacted a number of laws designed to change how Washington 
works. Foremost among them was the Government Performance and 
Results Act, known as the Results Act. As its name implies, the 
act seeks to change the mind-set in Washington from what the 
government does--spending money, issuing regulations and so 
forth--to what actual results those activities produce. 
However, we still find that most agencies have trouble 
explaining what results they are trying to achieve and 
certainly in measuring how well they achieve them.
    Problems like these would attract the urgent attention of 
almost any executive in the private sector. They understand 
that investing adequate capacity and resources and then 
managing them effectively are key to achieving their missions. 
On the other hand, management problems are considered too 
mundane and too boring to warrant the attention of Washington 
leaders. Our leaders prefer to focus on policy issues. However, 
inattention to management and performance problems are just as 
devastating for the Federal Government as in the private 
sector, because they cost the taxpayers countless billions in 
waste, limit the capacities of agencies to achieve their stated 
and statutory missions, and threaten the ability of Presidents 
to carry out their policy agenda.
    The only answer to these problems is strong leadership from 
the top, and I believe it will be met with strong, bipartisan 
support. People implementing programs have to know what is 
important to people in charge. People they put in charge of 
government programs have to know that management is important. 
That has not been the case recently, and I hope it will be the 
case on your watch. Thank you very much.
    Chairman Lieberman. Thanks very much, Senator Thompson.
    Senator Carnahan, would you like to make an opening 
statement.

             OPENING STATEMENT OF SENATOR CARNAHAN

    Senator Carnahan. Yes. I want to welcome you to the 
Committee, Mr. Daniels, and certainly commend the President for 
sending us such a capable and respected nominee.
    Mr. Daniels. Thank you, Senator.
    Senator Carnahan. I am really quite intrigued by the 
possibilities of your position. You have the chance to change 
the perception of government. In a significant way, you can 
impact the quality of services that are delivered to our 
citizens by government. At a time when Americans hold the view 
that government is working against them, not for them, you will 
have the opportunity to restore the belief of the American 
people that their government is, in fact, working for them.
    Making government accessible, accountable and agreeable is 
a priority of mine. In order to achieve this goal and all the 
other priorities that will fall within your jurisdiction, I see 
it as an imperative that we work very closely together, and I 
look forward to that opportunity. Thank you very much.
    Chairman Lieberman. Thank you, Senator Carnahan.
    Senator Voinovich.

             OPENING STATEMENT OF SENATOR VOINOVICH

    Senator Voinovich. Thank you, Mr. Chairman. First of all, I 
would like to welcome our two new Members of this Committee, 
Jean Carnahan and Tom Carper. I got to know Jean through the 
Spouses' Organization of the National Governors' Association, 
and Tom and I served together as chairman and vice-chairman of 
the National Governors' Association. We look forward to working 
with you on this Committee, and I think share some of the same 
perspectives because we have had a little experience on the 
management side of government.
    I would like to welcome Mr. Daniels and say that you have a 
very difficult job ahead of you. Mitch and I have known each 
other for a long time. I got to know him when I was Mayor of 
Cleveland and President of the National League of Cities and he 
was a member of the Reagan Administration, and I found him to 
be bright, hard-working, a man of integrity and a man of his 
word.
    I just want to say that you do have your work cut out for 
you, and as Senator Thompson has said, we wonder why you are 
willing to take it on. I think my colleagues know that I am a 
debt hawk, and I shared that with you when you were in my 
office. One of the main reasons I ran for the Senate was to 
bring fiscal discipline to Washington, just as I tried to do as 
Mayor of Cleveland and Governor of Ohio.
    In the first 2 years of my Senate term, we have had some 
good news and bad news on that front. The good news is that we 
did not use the Social Security surplus in 1999, 2000, and 
2001, and we did not use the Medicare surplus in 2000 and 2001. 
For all intents and purposes, we lockbox those surpluses. I 
would hope that this year Congress would pass legislation 
formally lockboxing the Social Security surplus and the 
Medicare Part B surplus so we take it off the table and it will 
not be spent in the future.
    The bad news is that, in my opinion, we have spent far too 
recklessly during the past 2 years. Non-defense discretionary 
spending in fiscal year 2000 rose 9.3 percent over 1999, to 
$328 billion. Fiscal year 2001 discretionary spending rose 8.1 
percent and non-defense discretionary spending rose 12 
percent--think of that--this, despite an inflation rate of only 
2 percent. The only silver lining is that due to our roaring 
economy, we were able to see $87 billion of our on-budget 
surplus go for debt reduction. I have got to tell you that 
would not have happened had it not been for us doing hand-to-
hand combat to make sure that money was not spent.
    Fiscal year 2001 estimates show we will have a $98 billion 
on-budget surplus. That money cannot be used for tax reduction, 
but I can assure you that between now and the time this budget 
fiscal year ends, there are going to be lots of people out 
there wanting to spend that $98 billion.
    The Heritage Foundation has come up with some 
recommendations on how we could pass legislation to take that 
money now, write a check, and put it into an account so we 
guarantee that it will not be spent and that it will go to 
reduce the on-budget surplus this year. I am also concerned 
about the overconfidence being placed in 10-year budget surplus 
projections, projections that are being used to make far-
reaching policy decisions. Just recently we have seen it has 
been a ping-pong between the outgoing administration and the 
new administration.
    I think it is ridiculous to base this country's economic 
future on 10-year projections. The main problem is that those 
projections are prone to errors and they depend on Congress to 
rein in spending, something Congress has not been dong a very 
good job of lately. Remember that in 1997, CBO projected a $167 
billion unified budget deficit for fiscal year 2000. Last July, 
CBO re-estimated that it would be a surplus of $268 billion. 
That is a swing in 4 years of $435 billion--in 3 years. We 
should also remember that the budget surpluses can swing back 
to deficits just as quickly, decreasing our ability to pay for 
tax cuts or spending increases without increasing the national 
debt.
    Reducing the national debt has been a priority in this 
country for a long time, a long time we have talked about it, 
and now that we have the chance, I think we should get it done. 
We owe it to our children. We owe it to our grandchildren and 
we owe it to fiscal responsibility and the future 10-year 
projections that we have for Medicare and Social Security.
    Reducing the national debt would help decrease the 13 cents 
out of every dollar that is spent for interest costs, which is 
more than we spend on Medicare in this country. Paying down 
that debt would also shift investment capital to more-
productive uses in the private sector and stimulate economic 
growth, and I would say that it would work more quickly to deal 
with a downturn than even reducing taxes at this time, because 
it will take several years for the reduction to take effect.
    In fact, Alan Greenspan has said that to continue to pay 
down that debt is the best thing we can do for our economy. Mr. 
Daniels, I would hope you would present a budget that gives 
high priority to reducing the debt. I was pleased with what 
Senator Lieberman had to say about reining in the growth of 
Federal spending. Senator Stevens will tell you that a lot of 
this money is going to entitlements and securing our national 
defense and, yes, providing for tax reduction.
    Your budget submission and the budget resolution that 
Congress passes will be the first test of bipartisan 
cooperation and will set the tone for the rest of the 107th 
Congress. How we work that out, I can tell you, will set the 
tone for the rest of what we do. One other concern that I have 
is the need to implement a biennial budget process, and I 
applaud President-elect Bush's support of a biennial budget. I 
can tell you that Senator Domenici was the main sponsor of that 
in the 106th. He is going to sponsor it again in this session, 
and I am going to be glad to support that 2-year budget.
    Another area of concern is the GAO's high-risk list, which 
shows the Federal agencies or program areas most vulnerable to 
waste, fraud, abuse and mismanagement. I will not get into them 
because Senator Thompson has spoken to them eloquently. In 
1990, that list comprised 14 agencies or programs. The 2001 
list, which was published last week, has 22. The only addition 
to the list this year is the human capital crisis. I would hope 
that you tackle that high-risk list and develop a serious 
strategy on how you intend to work it down.
    Long ago, I concluded that because Federal employees and 
human capital management have been overlooked, for all 
practical purposes there is no M in OMB. Indeed, government 
management has not been a priority; perhaps dealing with our 
annual budget leaves no time and you spend all your time 
worrying about the budget every year. The ``A-team,'' the men 
and women who do the work, have been neglected for years. 
Instead of Federal workers being looked upon as something to 
cut, we should treat them as assets to be valued and nurtured. 
It is the only way we are going to get continuous improvement 
in government today. We have got to get at our workers and get 
them involved in quality.
    Many of the political appointees that run our Federal 
agencies will need to rely on the best management practices or 
experience, and one of the challenges for this next 
administration, that was not addressed by the outgoing 
administration, is ensuring that management gets attention.
    As Chairman of the Oversight and Government Management 
Subcommittee of this Committee, I have been able to look into 
the manner in which the Executive Branch manages its people. I 
held six hearings in the 106th Congress to examine the human 
capital management policies of the Federal Government. I have 
developed two goals for those hearings: One, to empower Federal 
employees, just like businesses have done. The businesses in 
this country that have empowered their employees in quality 
management are the ones that are successful today and 
competing. Two, deal with the human capital crisis that is 
draining talent and experience from the Federal Government. 
Again, Senator Thompson has laid that out for you.
    On the latter issue, the American people need to know the 
magnitude of this pending crisis. By 2004, 32 percent of all of 
our Federal workers will be eligible for retirement and another 
22 percent will be eligible for early retirement. Think of 
that, almost 50 percent of the Federal workforce could go out 
the door by 2004. I talked to Joe Allbaugh, who is the 
President-elect's designee for the Federal Emergency Management 
Agency, the other day and I told him that he could lose one-
third or up to one-half of his people. He had panic on his 
face, because floods and hurricanes do not wait for a 
government program. They come on you without any warning.
    This past Wednesday at Christie Whitman's confirmation 
hearing, I told her that over at the EPA, research and 
enforcement could be affected as scientists and lawyers retire. 
Last month, I released a report to help the new administration 
respond to this crisis before it reaches critical mass. OPM 
should tackle this emphatically and immediately, reaching out 
and teaming up with EPA to develop solutions to the crisis. One 
key component will be the selection of a strong Deputy Director 
of Management.
    In Congress, we stand ready to work with the administration 
to resolve this coming crisis. We must ensure that people 
understand how serious it is. In the meantime, Mr. Daniels, I 
hope you quickly familiarize yourself with the government's 
overall human capital needs and take quick action where you 
can, in order to respond to the challenge.
    Mr. Chairman, Mr. Daniels has his work cut out for him. I 
believe he will make a terrific Director of the Office of 
Management and Budget. I congratulate the President-elect for 
his choice and I want you to know we all look forward to 
working with you as you take on the challenge.
    Mr. Daniels. Thank you, Senator.
    Chairman Lieberman. Thanks very much, Senator Voinovich.
    Senator Carper, I welcomed you in absentia. It is a 
pleasure to now welcome you in person as a Member of this 
Committee. You bring your considerable experience as a Governor 
to this Committee, one of whose responsibilities is federalism, 
the relationship between the Federal and State Government. So 
thank you and we welcome an opening statement at this time.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. Chairman Lieberman, thank you very much for 
the warm welcome. I am delighted to be joining you and Senator 
Thompson, and other colleagues around the table. To our 
nominee, welcome. Congratulations on your nomination. We look 
forward to serving with you, and I suspect that some folks in 
this room today are your family, and we welcome them as well, 
and we thank you for your willingness to share a good man with 
the people of America.
    As Senator Lieberman had suggested during his remarks, 
before I was elected to the Senate I served as Governor of my 
little State for 8 years and served with Senator Biden, the 
National Governors Association, and with George Voinovich and 
with now-Senator Carnahan, as well. If you have been looking at 
me instead of watching Senator Voinovich speak, you would have 
seen my lips moving, and the reason why is because I agree with 
much of what he says, and that has been the case for a long 
time on a lot of subjects.
    I found as governor--I chose a great time to be governor--8 
years of economic expansion, robust revenue growth. Before I 
was Governor, I was a congressman for 10 years when we had a 
real tough time trying to balance our budgets. Before that, I 
was State Treasurer for 6 years, of Delaware, when we had the 
worst credit rating in the country, at a time when we initially 
would always underestimate spending and overestimate revenues, 
a classic recipe for running deficits and we were pretty good 
at that back in the 1960's and 1970's.
    I found, though, that with robust revenue growth in the 
last 8 years, that sometimes it is easier to budget when 
resources are scarce than when resources are plentiful. We are 
now in a time of plentiful resources. As Senator Voinovich had 
suggested, the Congress and the President have spent willingly. 
I know there are a lot of important nominees that the 
President-elect has sent to us for consideration. I really 
believe yours might be the most important, and I hope you are 
as good as your supporters and admirers say, because we are 
going to need someone with great skill and intellect and 
ability.
    I want to mention a couple of things I want you to think 
about, and when we get back to questions, I will follow up on 
these. We have, I think, a great opportunity before us in the 
form of a budget surplus of some great magnitude. The question 
for us is what do we do with it, and I would hope that we use a 
significant portion of it to pay down our debt and to really 
make us debt-free as a Nation over the course of the next 
decade. If you look at the tax cuts that have been proposed by 
the President-elect, many of those tax cuts, the biggest part 
of them kick in towards the end of this decade, which is when, 
a lot of times, a lot of our baby boomers want to kick out or 
step out or step down and to retire. We just have to be mindful 
of that.
    I hope as we go forward, Congress and the President and the 
new administration working together, we can decide to use a 
portion of these surpluses to pay down our debt with an eye 
toward making us debt-free as a Nation by the end of this 
decade. I hope we can use some of the savings that flow from 
that debt reduction to shore up, particularly, the Medicare 
trust fund.
    I am a Democrat who likes to cut taxes, and we cut taxes 7 
years in a row in my little State. We put in place a litmus 
test for those tax cuts that said they ought to be fair, they 
ought to stimulate economic growth, they should simplify the 
tax code, not make it more complex, and finally they should be 
sustainable throughout the full business cycle. We have had 8 
wonderful years--actually, 9 wonderful years of economic 
growth, but what was that Harry Truman used to say? The only 
thing we do not know today is the history we have forgotten--
something to that effect. I am sure you recall his actual 
quote.
    We are going to have recessions again, and the OMB and CBO 
forecasts that we see assume no economic recession. I think it 
is just important that we keep in mind that the laws of 
economics have probably not been reinvented, at least not on 
our watch.
    The last thing I would say, in addition to cutting taxes, 
that in accordance with some kind of litmus test, I hope 
roughly aligned with what I have laid out, I hope we can do 
something good for people who don't have health care. I applaud 
the President-elect's proposal for a refundable tax credit, 
which I think has a lot of merit. I also like the idea of 
putting in place a prescription drug program for folks that are 
older and who need prescription drugs, and finally to invest in 
our schools.
    As Senator Voinovich mentioned--maybe to do a little on the 
defense side to ensure our readiness and our ability to deploy 
forces does not diminish. That is a lot to do. We have a lot of 
money to do it with. At the end of the day, I hope we have 
acted wisely, rationally, and not foolishly, and have not 
frittered away a wonderful opportunity to do great good for our 
country with the dollars that are now at our disposal.
    Again, congratulations on your nomination, and Mr. 
Chairman, I would ask unanimous consent to add to what I have 
just said, a written statement for the record.
    [The prepared statement of Senator Carper follows:]

                  PREPARED STATEMENT OF SENATOR CARPER

    Mr. Chairman, Senator Thompson, and Members of the Committee, it is 
a privilege to be joining you today for the first time. I am grateful 
for the opportunity to serve on this distinguished Committee, with its 
distinguished Chairman and Ranking Member, and I am looking forward to 
working with all of you on the issues that lie before us.
    Certain of the President-elect's nominees are obviously attracting 
more attention from the media than others, and I can imagine that Mr. 
Daniels would count it as a blessing that he is among those who are 
attracting less rather than more attention in this regard. 
Nevertheless, let me just start off by saying that there is no more 
important post in the new administration--in my opinion--than the one 
to which Mr. Daniels has been nominated at OMB. When the President-
elect chose Mr. Daniels to head OMB, he let it be known that Mr. 
Daniels will be one of his key advisers and one of the people most 
responsible for ensuring that the Federal Government maintains fiscal 
discipline. Mr. Chairman, given the record of the last decade, and all 
that we have learned over the last decade about the importance of 
fiscal discipline to the health of our economy, this responsibility is 
clearly one of the more important responsibilities that will fall to 
the new administration.
    At this moment when the responsibility to manage fiscal and 
economic policy is being passed from one administration to another, I 
think we need to be clear about the role that fiscal policy has played 
in fostering the economic expansion of the last decade. As you know as 
well as anyone, Mr. Chairman, the current expansion has been fueled 
primarily by an unprecedented wave of private investment and 
innovation, unleashed in no small part as a result of the concerted 
effort that has been made, on the part of the President and the 
Congress--on the part of Republicans and Democrats together--to restore 
a modicum of fiscal discipline here in Washington.
    Now some of these days are espousing the view that a concern for 
fiscal discipline is an outmoded view--that fiscal discipline is ``no 
longer a problem.'' Indeed, some have even suggested that--as a long-
time fiscal conservative--I may soon need to find myself a new set of 
budget priorities, and a new economic outlook, now that the era of 
deficits has given way to a new era of surpluses. I want to use this 
opportunity, if I might, to make it very clear that, as far as I am 
concerned, fiscal discipline remains critically important--indeed, in 
certain respects it has never been more important than it is today.
    The rate of private savings in this country is currently negative, 
Mr. Chairman, and despite all the progress that has been made in moving 
the Federal Government from a position of a borrower to a position of 
generating net savings, our economy remains highly dependent on 
borrowing from abroad--and thus highly susceptible to a loss of 
confidence on the part of foreign investors in our commitment to 
maintaining a responsible fiscal posture. Many economists are warning 
that a loose fiscal policy--whether it comes from irresponsible tax 
cuts or from excessive spending--could potentially undermine confidence 
in the dollar, leaving the Federal Reserve with a lose-lose choice 
between raising interest rates in the face of a slowing economy or 
allowing the dollar to deteriorate unchecked, thus risking a return to 
the days of 1970's-style stagnation. When one considers that the 
retirement of the baby boom generation--with all that that implies for 
the Nation's long-term fiscal outlook--lies just around the corner, it 
seems to me, Mr. Chairman, that now more than ever, we need to proceed 
with a realistic view of the surplus that might be available to the 
President and the Congress for the purpose of tax cuts or new spending 
initiatives. It also suggests to me that we must make a point of paying 
off our national debt in this decade and shoring up Social Security and 
Medicare sooner rather than later.
    Mr. Chairman, I look forward to hearing from Mr. Daniels today and, 
particularly, to discussing his views with respect to the 
responsibilities of the Director of OMB for promoting fiscal discipline 
and presenting the public with an accurate picture of the Nation's 
long-term fiscal outlook.

    Chairman Lieberman. Without objection, so ordered. Thanks, 
Senator Carper. We are honored on this Committee to have a 
couple of the real powerhouses of the Senate seated next to 
each other.
    Senator Cochran. Just a couple? [Laughter.]
    Chairman Lieberman. Oh, yes. I am sorry. Excuse me. There 
are an unlimited number of powerhouses on this Committee. I 
will not enumerate the number, but one of them is Senator 
Domenici.
    Senator Domenici. Well, you're getting a bit cocky around 
here. [Laughter.]
    Senator Cochran. I really had in mind Senator Lugar.

             OPENING STATEMENT OF SENATOR DOMENICI

    Senator Domenici. First, I want to apologize for leaving. I 
have a very important engagement, and I came early in an effort 
to make sure that you heard my views on a few things, but most 
importantly my views about you. Congratulations. I commend the 
President on appointing you and I hope we confirm you quickly.
    I do want to say that I have observed, as you work to put 
together a staff, that you look for the very best. As a matter-
of-fact, you have taken some of my staff from the Budget 
Committee, and I just want to tell you enough is enough. I, 
too, have to produce a budget and do something, but in any 
event I think you're putting together an exquisite team and 
that is what is necessary. I will not comment today, Mr. 
Daniels, about management.
    These are experts at the various laws that we have. I tell 
you, though, it is not a very politically sexy thing, so it is 
left to lag. When you try to do it from the top, it does not 
work. You just have to dig at it and it is just not easy. I 
share Senator Voinovich's concern about the Federal workforce. 
He has worked hard on that and we ought to listen to him.
    I am here to tell you that the U.S. economy, U.S. fiscal 
policy, is in very good shape. By the end of this year, we will 
have applied to the national debt, $600 billion. There are some 
good friends of mine that would say, ``That is not enough. 
Every bit of surplus ought to go on the national debt.''
    I predict for everyone here that before we finish the 
debate this year on the size of the surplus, that there will be 
experts telling us we should not use the entire surplus to pay 
down the debt as quickly as it would mathematically permit. We 
are going to find that we are not going to be able to pay down 
a lot of the debt without an enormous cost. I can say to all 
three of you that are there that 20- and 30-year Treasury bonds 
are going to become so valuable that we are not going to want 
to buy them up, because people think they are the greatest 
investment in the world and the premium we are going to pay is 
going to be extremely high.
    Nonetheless, let me give you a few numbers and, in my 
statement, pose a situation for you. We need your estimates and 
your economic forecast sooner rather than later. We have talked 
about it. You need to do it right, but you need to do it 
quickly. What we are finding out, Mr. Daniels, through our 
investigation and what we think the Congressional Budget Office 
is going to tell the Congress, that the surplus over the next 
decade, whether my good friend from Ohio wants to use 10 years 
or not, we are going to do that and he can argue the fallacies 
in it, but it is going to be used and here is what it is going 
to show: It is going to show that the surplus accumulating over 
the decade is $5.7 trillion.
    Nobody in this room really understands that. That is a huge 
number, and the question really is over the next decade are we 
taking too much money from the American taxpayers or not? I 
think that is a very interesting question that should be 
debated. I have concluded that we are, because I think we can 
put every penny of Social Security on the debt, and you have 
already looked at that. It belongs on the debt and it will pay 
down the debt in 11 to 12 years. I happen to think that is very 
fast and maybe when we get near the end, it may even be too 
fast, in which event I do not know what to do with that.
    I tell you, if the Federal Government has cash after debt 
payment per year sitting around in a drawer, we have never 
heard of anything like that and nobody on God's Earth knows 
what should happen to it. In any event, you are going to 
prepare for us your budget, and then we are going to ask you to 
help us work with the Budget Committee to come up with a budget 
that the President of the United States can support, also.
    I just came today to tell you that we are going to try to 
work bipartisan, but there is also another player, and he got 
elected to be the President. I can tell you I am going to try 
as chairman to do as many things as I can in the budget 
resolution so that his desires for this Nation are met, and 
among those clearly are to look at this surplus from the 
standpoint of whether or not there is sufficient money in that 
surplus to give some of it back to the American taxpayers.
    Frankly, there has not been a lot said lately about whether 
the President's number of $1.3 trillion, which was the estimate 
of his tax cut is too big or not. I can tell you the amount of 
the surplus has grown so much since he put that on the table 
that it is a very different number versus the surplus.
    Just to put it in numbers, there will be $3.2 trillion left 
over after you pay Social Security, and if you were to give the 
President $1.3 trillion, just do the arithmetic, and you will 
have the rest of that to add to government, where government 
needs priorities, government needs defense, government needs 
education, government needs a lot of things. Let's hope we are 
not going to try to grow government astronomically, but rather 
relatively well.
    Those are the numbers. How we apply them and how soon you 
get to them is going to be your business, but I cannot see how 
you are going to be far off, because the Congressional Budget 
Office is very close to this, and they are the ones we normally 
follow. We hope you are close so we can follow both of you, 
because you understand there is an anomaly in the law. If you 
have to sequester, you sequester off your estimates, not off of 
CBO's, but we follow Congressional Budget Office in what we do. 
If they are close, we are on the same wavelength in terms of 
your responsibilities.
    Mr. Chairman, I am sure we will not be calling you that for 
very long.
    Chairman Lieberman. But I appreciate it.
    Senator Domenici. It is a pleasure to do that.
    Chairman Lieberman. Thank you, sir.
    Senator Domenici. Frankly, I mean that. Thank you for all 
your hospitalities, and to the new Senator--there is only one 
here--look forward to working with you on various assignments.
    Thank you very much.
    Chairman Lieberman. Thanks, Senator Domenici. I know you 
had a previous commitment. I really appreciate that you took 
the time to come and make that statement today. With regard to 
my previous statement, is there any Member of the Senate here 
who would disagree with the description of Senator Stevens as a 
powerhouse? [Laughter.]
    Senator Collins. Only at great risk.
    Senator Voinovich. I certainly would not.
    Chairman Lieberman. Any Member of the Senate who does not 
have matters pending before the Appropriations Committee? 
[Laughter.]
    Senator Stevens, thanks for being here.

              OPENING STATEMENT OF SENATOR STEVENS

    Senator Stevens. Thank you very much, Mr. Chairman. I, too, 
have some of your colleagues on the President's nomination list 
waiting in my office, but I wanted to be here to welcome you. I 
wonder if we could ask the Chairman's agreement that we ask 
your family to stand so we can say hello while we are still 
here?
    Chairman Lieberman. Please.
    Senator Stevens. Would you do that? I think that Cheri, 
Megan, Melissa, Meredith, Margaret--how many are here today, 
Mitch?
    Mr. Daniels. We have got about two-thirds complement, 
Senator.
    [Applause.]
    Senator Stevens. We welcome you and I welcome you as a 
former Hoosier, so that is why I am happy to see you here. When 
I was Chairman of this Committee, I tried to enforce the rule 
that opening statements were no longer than 3 minutes. I think 
we can all see the advisability of that rule this morning. I 
hope it will soon be restored. My only comment would be thank 
you for taking this on.
    I think you will spend more time with Senator Domenici and 
I than you want to spend, and our colleagues in the House, and 
our counterparts now, particularly here. Senator Byrd and I 
spend a great deal of time with the OMB. It is, as other 
Members have said, probably the most important position in 
government now, short of being the President. I think Vice 
Presidents--pardon me, Mr. Chairman.
    Chairman Lieberman. Under the circumstances, go right 
ahead.
    Senator Stevens [continuing]. Do not have the 
responsibilities that you will have, and I remember when you 
worked with Dick Lugar. We worked with you over the years and I 
commend you for having the commitment to our democracy to 
return, because it is an awesome obligation that you are 
undertaking. You have heard a little bit here about some people 
who think that the past has been a prologue of excess.
    I am afraid that the slowing down of the economy triggers a 
lot more expenditures than people realize. As a matter of fact, 
it is going to be very hard to deal with the budget, with the 
cap we have, that still lasts for one more year, and we have a 
50/50 split here in the Senate. I told the Vice President-elect 
that he is going to find that he is going to keep his own seat 
warm in the Senate for a long time this year. It is going to be 
a difficult thing to deal with your issues more than anyone 
realizes.
    I am delighted that you have the experience in government 
and business that you have. We need both right now. We need 
some common sense as to how to keep this expanding economy 
expanding even more, whether it is jobs we need for new people 
and for the residents that I think comes to the whole democracy 
if we are healthy. I look forward to working with you. I can 
tell you that there are some immediate problems on your desk, 
Mitch. So we will be seeing you next week early.
    Thank you very much.
    Mr. Daniels. Thank you, Senator.
    Chairman Lieberman. Thank you very much, Senator Stevens.
    Senator Cochran.

              OPENING STATEMENT OF SENATOR COCHRAN

    Senator Cochran. I am going to stay well within the 3 
minutes. I want to congratulate Mitch Daniels on his nomination 
as Director of Office of Management and Budget and wish you 
every success as you undertake this important responsibility. I 
have some concerns and some views on the subject that we will 
be discussing, and I will reserve those questions and comments 
until we get around to that part of the hearing.
    Chairman Lieberman. Thanks.
    Senator Collins.

              OPENING STATEMENT OF SENATOR COLLINS

    Senator Collins. Thank you very much, Mr. Chairman. I know 
that you and the once-and-future Chairman agree on many, many 
issues, but I did hope that during your short tenure as 
Chairman, you would reverse the previous Chairman's decision to 
buy water from Tennessee and go back to the pure New England 
water from Maine. [Laughter.]
    Chairman Lieberman. Right. I apologize to you and the 
farsighted, wise people of Maine for not having seen that 
momentary opportunity and seized it.
    Senator Collins. You could have seized the moment. I do 
commend you and Senator Thompson for holding this hearing today 
on what, as my colleagues have noted, is a very important 
position in the Federal Government. Mr. Daniels, it is always 
nice to see another former Senate staffer do so well, and I 
want to commend you on accepting the President-elect's request 
that you serve in his administration in this very critical 
position. With your experience in government, as well as your 
experience in business, and particularly the terrific service 
that you gave to Senator Lugar, I believe that you have 
abundant expertise to handle this very important position.
    Many Americans may not be that familiar with OMB, but its 
crucial role in the Federal Government in budgeting and 
management issues affects us all. The agency you are nominated 
to head plays a critical role in formulating the Federal 
budget, in setting priorities and in overseeing implementation 
by Executive Branch agencies. The work of OMB is often unseen, 
but your important mission includes a careful review of the 
effectiveness of government programs, as well as budget issues. 
Moreover, as we discussed in my office, my concern, which has 
been echoed by many of my colleagues this morning, is that 
previously OMB has neglected the critical management role that 
it plays in the Federal Government.
    I think that this neglect is very unfortunate, because 
neglecting management increases the cost of government 
programs, and it also means we are missing out on opportunities 
to improve their quality and make their delivery more 
effective. Reversing this is a heavy burden, but it is one I am 
confident you have the skills and the background and the 
commitment to undertake. So, again, I am delighted that you 
have been nominated for this important post. I am pleased to 
see your distinguished home-State Senators with you, as well, 
today. I look forward to working closely with you.
    Mr. Chairman, I do need to return to the Health Committee, 
which is holding a hearing on Governor Thompson's nomination, 
so I would ask unanimous consent that the questions I would 
have asked if I could stay be submitted for the record.
    Chairman Lieberman. Thanks very much, Senator Collins. 
Without objection, we will do that and we will ask Mr. Daniels 
to answer for the record. Thank you very much.
    Senator Lugar and Senator Bayh, our colleagues, thanks for 
your patience as Members of the Committee held forth. I think 
we view this as an opportunity to state our priorities to the 
nominee.
    Senator Lugar, I must tell you that I have not had the 
privilege of knowing Mitch Daniels personally before, but when 
I looked over his record, what jumped out at me was that he was 
a graduate of what might be called the Dick Lugar School of 
Public Service. That is a pretty proud school, so it spoke well 
for him and I am glad you are here this morning.

  STATEMENT OF HON. RICHARD G. LUGAR, A U.S. SENATOR FROM THE 
                        STATE OF INDIANA

    Senator Lugar. Thank you very much, Mr. Chairman, for 
inviting me. I appreciate Mitch inviting my colleague, Senator 
Evan Bayh, and me. This is a very rare privilege that each one 
of you will understand, that someone who has been a very close 
personal friend for 30 years is nominated by the President for 
this responsibility and is willing once again to serve.
    I want to describe just for a few minutes how this came to 
pass over that period of time. Mitch Daniels was a brilliant 
student in the public schools of Indianapolis, North Central 
High School; was designated for the Lyndon Johnson award as the 
outstanding high school scholar in our State in 1967; not 
surprisingly, succeeded with honors at Princeton University and 
subsequently received a doctorate of law at Georgetown.
    I found him through his family, and his parents, Mitch and 
Dottie Daniels, who are here today, and his wonderful sister, 
Debbie, who in herself is a distinguished attorney and public 
servant. They were a talented family, and still are in our 
town. He came to the mayor's office as a senior from Princeton 
University 30 years ago, a brilliant student but filled with 
idealism, a capacity for enormous imagination and a desire for 
public service.
    He proceeded to help me during a period of 
intergovernmental relations that was very exciting. We had 
revenue sharing in those days. We had new federalism. We had 
the whole proposition of the alternative model cities, in which 
we set up under the administration's guidance about every urban 
experiment known, at least at that time, and Mitch Daniels was 
at the forefront of those innovations.
    He came with me to Washington after the election of 1976. 
Each of us has been through that process, and I occupied Bill 
Brock's offices at his sufferance for awhile. Mitch determined 
to bring the best that he could for us and the best sense of 
our own budget in those days. He was remarkable in his 
administration of my Senate office for many years, until I 
succeeded in winning the chairmanship of the Republican 
Senatorial Committee after the election of 1982. He was my 
major domo, right here in this building on the fifth floor.
    Then he went on to political duties, to help me fulfill 
that situation in the political cycle of 1983-1984. It was 
inevitable that the White House would note his political 
prowess. The White House did, and seized Mitch Daniels shortly 
thereafter, when President Reagan was reelected, and he became 
the chief political strategist for the President of the United 
States and responsible for intergovernmental affairs in the 
White House, a remarkable responsibility in the second Reagan 
term.
    He returned to Indianapolis, because we had been successful 
in our town in obtaining the Hudson Institute. As he was 
looking for a permanent home, he became the chief executive of 
that remarkable think tank for 3 years, until he was identified 
by a very great firm in our city, Eli Lilly and Company. Mitch 
has served in the last capacity, and I will move in descending 
order, as senior vice president for corporate strategy and 
policy for the last 3 years and on the important policy 
committee of the company, its top management body. He served as 
president of the North American pharmaceutical operations from 
1993-1997, and joined the company originally in 1990 as vice 
president for corporate affairs. For 10 years, he has had a 
senior management position, and in the case of North American 
operations, the executive management position for a very great 
American firm.
    I mention that because the idealism that was true at North 
Central and at Princeton proceeded through the Senate and 
through his responsibilities at the White House, through his 
responsibilities at a great think-tank, and broad corporate 
responsibility at the highest levels for the last 10 years. 
These have been very successful years for that firm.
    Let me just simply add, in addition to that, Mitch has been 
a remarkable citizen, as you might anticipate, of Indianapolis 
and of the State of Indiana. The legion of boards on which he 
serves, the honors that he has received, are remarkable and 
have been noted by the Committee. I simply commend him to you 
as a very good person. I would say that Mitch is a person in 
whom I have trusted, who is not only honest along with his 
brilliance, but likewise caring about people. This is why he 
ran a good staff and why we had a good shop right here in the 
Dirksen building some time ago.
    I thank you for allowing me to make this statement and I 
appreciate the nomination.
    Chairman Lieberman. Thanks, Senator Lugar, for that very 
special, personal statement.
    Senator Bayh, thanks for being here and offering bipartisan 
Hoosier support for Mitch Daniels.

 STATEMENT OF HON. EVAN BAYH, A U.S. SENATOR FROM THE STATE OF 
                            INDIANA

    Senator Bayh. Thank you, Mr. Chairman. I am pleased to be 
with you today and the other Members of the Committee, and my 
esteemed colleague from Indiana, Senator Lugar, for whom I have 
enormous respect. I should also say, Mr. Chairman, that I am 
pleased to be here today to introduce and support the 
nomination of Mitch Daniels to be Director of the Office of 
Management and Budget.
    I find this exercise to be of some personal use, as well, 
following up on the comments of Senator Stevens, who had to 
leave. I am going to exercise some restraint in my own remarks 
when I am on the other side of the dais here. Someone came up 
to me not long ago and said, ``Senator, you know that in order 
for a speech to be immortal, it need not be eternal.'' I am 
going to try to bear that in mind.
    I am here today, Mr. Chairman, to support Mitch Daniels' 
nomination, because I think he combines the right set of skills 
necessary to do a good job, quantitative, analytical and 
interpersonal. Senator Voinovich, you will be pleased to know 
it is my strong belief that Mitch Daniels believes in fiscal 
responsibility. As a matter of fact, I believe he has 
previously embraced some of the very reforms that you mentioned 
in your remarks, such as biennial budgeting. I know he has 
written about the need for entitlement reform, in particular to 
address some of the concerns that you outline that will face us 
in the years to come if nothing is done.
    Senator Carper, I personally have discussed with him the 
need for sound budget analysis based upon solid numbers, not 
wishful thinking or political considerations, so that we do not 
undermine the credibility of our public policy decision-making, 
and he agreed with me along those lines, and I think would 
agree with you in the points you made.
    He has the business experience, Senator Thompson, that you 
indicated is important, and I agree. He knows how the decisions 
we make here in Washington will affect real people and real 
places across the country, and he will bring the kind of 
management expertise that Senator Lugar outlined to the task of 
trying to bring more coherence to the finances and the 
management of the Federal Government.
    Because of his private sector experience, he understands 
that we compete today in a global economy and he knows the 
importance of investing in research and technology so that we 
can have greater innovation in our society and create the high 
value-added jobs that are important to the future economic 
prosperity of America.
    Finally, I would note that Mitch Daniels has a long and 
honorable record, as my colleague mentioned, being an active 
participant in the Republican Party. I, of course, am a member 
of the other major political party. I am here today in the 
spirit of bipartisanship to support his nomination, because I 
think he will do a good job for the President-elect, he will do 
a good job for this country, and I wish him well in his public 
service.
    Mitch, I am pleased to wholeheartedly support your 
nomination and look forward to working with you.
    Thank you, Mr. Chairman.
    Chairman Lieberman. Thank you very much, Senator Bayh. 
Thanks to both of you for being here. You are free to stay or 
leave as your schedules dictate.
    Mr. Daniels, for the record, let me just indicate first 
that you have submitted responses to a biographical and 
financial questionnaire; that you have answered pre-hearing 
questions submitted by the Committee and additional questions 
from individual Senators, and that you have had your financial 
statement reviewed by the Office of Government Ethics. Without 
objection, this information will be made part of the hearing 
record, with the exception of the financial data, which is on 
file and available for inspection in the Committee's own 
offices. In addition, the FBI file has been reviewed by Senator 
Thompson and me, pursuant to the Committee rules.
    Mr. Daniels, our Committee rules require that all witnesses 
at nomination hearings give their testimony under oath, so I 
would ask you to please stand and raise your right hand.
    Do you solemnly swear that the testimony you are about to 
give will be the truth, the whole truth and nothing but the 
truth, so help you, God?
    Mr. Daniels. I do.
    Chairman Lieberman. Thank you. We would welcome any opening 
statement that you would like to make.

TESTIMONY OF MITCHELL E. DANIELS, JR.\1\ TO BE DIRECTOR OF THE 
                OFFICE OF MANAGEMENT AND BUDGET

    Mr. Daniels. Thank you, Mr. Chairman; a brief one, if you 
please. I think I am safe in saying this is the sixth-biggest 
day of my life. It is a five-way tie for first, as each of the 
five Daniels women came into my life, starting with my bride 
and partner, Cheri, and the four Daniels girls. The two 
interior members of that set are with us today. Their younger 
sister, Maggie, is stricken with the flu and otherwise would be 
lighting up this room today, and their older sister, Megan, is 
attending to her studies.
---------------------------------------------------------------------------
     \1\ The biographical and financial information appear in the 
Appendix on page 44.
      Pre-hearing questions and responses appear in the Appendix on 
page 54.
      Post-hearing questions and responses appear in the Appendix on 
page 92.
---------------------------------------------------------------------------
    I want to stress, Senator Voinovich, that she was prudent 
enough to choose a school in Ohio, Denison University. I would 
like to tell Senator Thompson that Melissa, who is here, was 
farsighted enough to choose a school in Tennessee, Vanderbilt 
University. In recent days, I have been drawing to the 
attention of our senior in high school, Meredith, several fine 
schools in Connecticut.
    Chairman Lieberman. Excellent. [Laughter.]
    Mr. Daniels. But we were unsuccessful in securing her 
admission in a timely fashion. [Laughter.]
    Chairman Lieberman. I wish you had called.
    Mr. Daniels. I thank the Committee also for welcoming my 
other family members. My Mom and Dad are here, my sister, 
Deborah, and my brother-in-law, Lyle. Of course, I thank my two 
home-State Senators for coming by on a very busy day.
    My fitness for this office is, of course, for this 
Committee to judge. I only say that to the extent I am 
prepared, I owe this to a string of people for whom I have had 
the pleasure to work or with whom I have been associated; 
beginning, as was remarked, with Dick Lugar, including 
President Reagan, the trustees of Hudson Institute, who 
entrusted me with responsibilities there, and the chairman of 
Eli Lilly and Company, who gave me increasing opportunities to 
learn and grow.
    I want to thank my predecessors in the office that I may 
soon hold. I was able to speak to most of my recent 
predecessors and expect to speak to all of them when schedules 
coincide, but let me single out Jack Lew, a fine public 
servant, obviously, and a gentleman who welcomed me in his 
office immediately after I got to town and with whom I have 
spoken on other occasions since. He has been very forthcoming 
in his advice and has offered to help us make a smooth 
transition.
    Last, I'd like to compliment the staff of this Committee, 
an unusually vigorous group which has helped me prepare, 
through the rare opportunity to answer a significant number of 
questions and also to visit the other afternoon at this table 
in what was a very helpful session in concentrating my thoughts 
on the interest of their principles.
    Let me say finally that this nomination would be a great 
honor for a person at any time. I think this is an especially 
unique moment for this honor to come. Much about this job will 
be new to me, of course. I guess I take some comfort in noting 
that much about this situation will be new even to the most 
seasoned veterans here.
    We are new in the area of surpluses. This is unfamiliar 
ground and it will take some getting used to. I believe that in 
its way, a time of surplus is a time of greater danger, 
imprudence, and mistake than a time of deficits. We are also in 
a rather unique moment with a closely divided Congress, and 
this will require, if progress is to occur, probably a greater 
level of cooperation and bipartisanship than has often occurred 
in our history.
    The President-elect has committed himself to that. We have 
heard it spoken of here this morning. I hope we will all 
maintain our resolve to do that in the days just ahead of us. I 
have been studying diligently the work product of this 
Committee, both its legislative and oversight capacities, and I 
do want to say that in full view of the difficulties that may 
attend it, I am resolved to try to capitalize the ``M'' in OMB. 
This Committee, as I read through the record, has built an 
extraordinarily strong foundation, or framework, as you put it, 
Mr. Chairman, of bills that offer the opportunity and the 
charge to the Executive Branch to try to uplift its standards 
of performance and accountability.
    I detect in the record that I have read some frustration 
that this framework has not been fully implemented, and I know 
that is so despite very sincere efforts on the part of my 
predecessors. I know they have encountered a reality that I 
have been advised about since the first moment I accepted the 
job, which is that in our current all-day, every-day, all-year 
budget process, the time and attention of people at OMB will be 
totally devoured in that responsibility.
    I do not deny that that may be our fate, too, but I am 
determined to try to do honor to your efforts and to this 10-
year history of important legislative breakthroughs to meet 
your expectations.
    Thank you for the opportunity to be here.
    Chairman Lieberman. Thanks, Mr. Daniels, for that excellent 
opening statement. I appreciate the last part, and we have 
talked about it a bit, the ``M'', the management part, and I 
thank you for that. To say the obvious, the Federal Government 
is an enormous enterprise that is, by its essence, free of the 
normal competitive pressures that tend toward efficiency and 
good management and the rest. There are internal forces, 
obviously, that do that, but one of the roles we have always 
seen here is to try to play that role and, of course, to ask 
the Director of OMB to do that every day, and I thank you for 
the emphasis you put on that.
    Let me say on the questioning that we are going to follow 
the 7-minute rule. My clock is already going, and I ask my 
colleagues, as the lights begin to flash, to try to keep within 
that time limit. I am going to start by asking certain 
questions that we ask of all nominees. So first, Mr. Daniels, 
is there anything that you are aware of in your background 
which might present a conflict of interest with the duties of 
the office to which you have been nominated?
    Mr. Daniels. No, sir.
    Chairman Lieberman. Do you know of anything personal or 
otherwise that would in any way prevent you from fully and 
honorably discharging the responsibilities of Director of OMB?
    Mr. Daniels. No, sir.
    Chairman Lieberman. 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. Daniels. Yes, I do.
    Chairman Lieberman. Thank you very much. Several of us 
asked questions or made statements along the way about Federal 
Government fiscal policy, and for those who may be watching on 
television who focus in on, ``I am not quite sure what OMB 
does,'' as you well know, the Director is essentially the chief 
fiscal adviser to the President of the United States and is the 
key bridge, or certainly has been in the years that I have been 
here, between the Executive Branch and Congress on the major 
fiscal questions that we determine.
    So these matters are going to be right--you are a lot more, 
for those who are watching, than an auditor or a kind of budget 
enforcer. You are a policy-setter. Let me ask you to first 
speak, if you would, about the surplus projections. These are 
obviously good news, numbers that, for most of us, are 
unimaginable, $5.7 trillion projected in surplus. Yet, I think 
many of us on both sides of the aisle here are concerned about 
how much validity we can give to a 10-year projection, and in 
that sense, how much of the surplus that is projected over the 
next 10 years is it--I am about to use a favorite Bush family 
word--prudent? Is it prudent to commit today, which is to say 
if we commit all of it during this 107th Congress, won't future 
Congresses have little in the way of fiscal flexibility to 
address either unforeseen problems or new priorities?
    Mr. Daniels. I think those cautions are well stated, Mr. 
Chairman, and with Senator Voinovich and others, I would 
certainly agree that--with Ben Franklin--we ought to resolve to 
doubt our own infallibility when it comes certainly to 
projections of the kind that we have made. I note that the 
error bars around even nearer-term projections have been very 
sizable, certainly when measured against the large base of the 
Federal revenue and spending structure that we now have. So I 
take the point.
    I guess I am impressed, and positively so, at the narrow 
range in which most forecasts do now trade. There is, to me, 
striking convergence certainly on the economic side. We are 
trading in a much narrower range than I might have expected 
coming to town. That is not a reason to believe we can take 
that money to the bank, but I think it does give some 
confidence that the long-term outlook is very strong, 
remarkably strong, and while we ought to keep an eye on it day 
by day to make sure it is not eroding, as we all know, the 
recent trend has been upward, not downward, and I take some 
heart from that.
    Chairman Lieberman. How about the priority that you would 
give or you would advise the President-elect to give to debt 
reduction? Not only has it value in itself, but in its way, if 
circumstances change over time and the surplus projections are 
not quite as rosy as we believe they are now, money set aside 
over the 10 years for debt reduction has a little bit more 
fungibility to it than money we have committed to spend. What 
priority would you give, in response to the statements Senator 
Voinovich, Senator Carper, I and others made about debt 
reduction?
    Mr. Daniels. I think I would give it a very high priority, 
and I believe that is pretty near a consensus view. Again, 
there may be what I would describe as relatively modest 
differences about the degree and the pace of debt reduction. 
Senator Domenici alluded to some rather striking and happy new 
problems that we might encounter if we are able to pay down the 
debt at a rate that soon tests our ability to actually do so in 
a practical matter.
    The answer to your question is, I think, debt reduction is 
the price of admission to the budget debate. It certainly is an 
important part of the fiscal mix that the administration will 
present the Congress, and we look forward to working with this 
Committee and others on the exact swiftness and degree at which 
that occurs.
    Chairman Lieberman. I appreciate that. As you know, the 
President-elect's tax cut proposal is controversial here on 
Capitol Hill, but I want to try to take it out of a partisan 
context and just ask you to comment from two points of view. 
One is consistent with the questions I have just asked you and 
your own comments; when you think about the priority given to 
debt reduction, about the uncertainty of 10-year projections, 
isn't $1.3 trillion, leaving aside whether we think it is not 
progressive enough or whatever, isn't that too large of a chunk 
to take out of the resources that are available to us?
    The second question about it builds somewhat on the latest 
arguments that I have heard for the proposed tax cut, which is 
it may help to take the economy out of the slowing down it is 
in now. I was interested in that regard to note the comments 
that Secretary of the Treasury-designate Mr. O'Neill made the 
other day, where he, as I read them, seemed to raise questions 
about--obviously, there are arguments he did make and one could 
make for the tax cut proposal--but he seemed to be saying, 
``Don't put too much emphasis on its ability to help us out of 
a slowdown, because it takes awhile, a tax cut of this kind, to 
work its way through the economy, and it is no substitute for 
the kind of action that the Federal Reserve has already begun 
to take in lowering interest rates, which immediately runs 
through the economy.''
    I wonder if you could offer responses to both of those 
questions.
    Mr. Daniels. Yes, Mr. Chairman. A tax cut along the lines 
the President-elect proposed during the campaign will be part 
of the budget and should be, in my judgment, for several 
reasons. The first is simply that it honors a commitment and a 
promise, and I think the American people have a right to expect 
that officeholders will honor faithfully those commitments on 
which they ran.
    Second, the American people today are taxed at record 
peacetime rates, and I think that level, now running closer to 
21 than to 20 percent, argues for some moderation over time. 
Third, I think, and perhaps here we will have a difference of 
opinion, but that the long-term growth of the economy can only 
be benefited by a well-crafted tax cut. If there is concern 
about the sustainability of the surplus numbers, which depend 
in large measure on steady, real growth in the economy, then 
this is an argument for, not against, a measure like that, that 
the President-elect will propose.
    Last, I would say that, in my judgment, the greater threat 
to the eventual reality of the large surpluses we have comes in 
some of Senator Voinovich's writings on this subject, can speak 
to this same point, really comes on the spending side. I do 
believe that the greatest danger to the surpluses of the future 
does not come from leaving more money in the hands of the 
people who earned it, but comes from leaving more money in the 
hands of people here in Washington, where we might be tempted 
to spend it at an imprudent rate.
    Chairman Lieberman. Let me ask you just briefly, because my 
time is up, to respond to Mr. O'Neill's statements the other 
day, about the major argument for this tax cut, its effect on 
stimulating the economy right now.
    Mr. Daniels. Yes, excuse me for answering that only 
indirectly. You notice I did not make a near-term stimulus 
argument among those that I listed. That does not mean that a 
tax cut could not have a near-term effect, and I think it would 
be a mistake to deny ourselves one of the two tools of economic 
policy, and rely simply on monetary policy. I will certainly 
defer to the Secretary-designate of the Treasury in his caution 
about making that claim, and I will simply stand on the 
statement that I think there are multiple, very sound reasons 
for the tax cut we will propose, even if one doubts that it 
will have a near-term effect.
    Chairman Lieberman. Thanks.
    Senator Thompson.
    Senator Thompson. Thank you very much. I had the privilege 
of discussing this very issue with Mr. O'Neill in the Finance 
Committee when he testified, and there is nothing inconsistent 
with what you have said and what he said in that context. I do 
think we should not make the mistake of trying to justify the 
tax cuts strictly on the basis of current economic conditions 
or make the mistake of relying totally upon the monetary side 
of the equation to correct things. That is always in response 
to something else and it is also something that we have no 
control over, basically, in terms of monetary policy.
    It looks to me that, in addition to what you said, the 
greatest danger to the debt retirement in the long run and the 
greatest danger to our ability to get a handle on the 
demographic time bomb that is facing us is lack of growth in 
the economy, and that the real justification for the tax cut, 
and especially the rate reduction, is the stimulation to 
investment and thereby creating growth, long-term growth of the 
economy.
    With that kind of growth, we can do something about all 
those things, and without sufficient growth, we cannot do 
anything about any of them. Although I think there is some 
justification for near-term considerations and current economic 
considerations, as you have said, and obviously it can be made 
so that withholding taxes can be adjusted and have an immediate 
effect, I would urge you to still put the major emphasis on the 
long-term benefit to the economy and the country in looking 
down the road and not simply trying to react to what is going 
on today or depending on the Fed to react to what is going on 
today.
    Getting back to these management issues, this is not 
something that we get a great deal of personal pleasure out of 
dealing with, at least I do not--these green eyeshade issues--
when you have more important things going on, but we are, if 
not the only, the main Committee that has to deal with this. In 
looking at it, we have no choice, and I have become more and 
more convinced that this is the fundamental underpinnings of 
everything else.
    It is like so many other things in government, long-term 
systemic problems, whether it is entitlement program reform--
the things we all know we have to do--are so difficult to do 
anything about. So we have to be extreme on the subject. That 
is why our staff may be the only staff that does such a formal 
pre-interview in the entire Congress, as you went through, and 
we appreciate that.
    We have to keep coming back and back and back again. A 
survey of historians and political scientists across the 
ideological spectrum recently ranked improving government 
performance as among the least successful of the Federal 
Government's 50 greatest endeavors over the past half-century. 
In looking at restoring OMB's management role, a case can be 
made that OMB, in some respects, has abdicated its management 
responsibilities and that it has provided little direction and 
leadership to agencies in implementing the Results Act, for 
example, that we talked about earlier.
    OMB's own Results Act strategic performance plans are among 
the worst in government. They are supposed to be supervising 
the Results Act and they are doing a worse job than almost 
anybody else in doing what the Results Act requires these 
agencies to do. That is not sustainable. One of the things we 
have looked at is this 1994 reorganization of OMB and the 
effect that has had.
    It shifted most of its management staff to the budget side. 
The reorganization eliminated most of the OMB positions 
dedicated to management and integrated them into the budget 
side, the theory there being that management issues would carry 
more weight if integrated with funding decisions. In practice, 
however, budget issues crowded out management issues. Now you 
have certain people in Congress suggesting that we ought to 
have a separate office of management, outside of OMB.
    So we are still reshuffling the chairs and organizational 
charts. Have you had a chance to look at all of that and come 
to an opinion, if not a conclusion, as to what we ought to do 
in terms of either reorganization or ensuring that the 
management side of the equation gets its due deference?
    Mr. Daniels. First, I have had a look and I have formulated 
what I reserve the right to call a preliminary view, and that 
is this is not an issue of structure. It may be an issue of 
resources. It certainly is an issue of management attention, 
that is, OMB management attention and follow-through. At least 
on the surface, prior to an opportunity to sort of count heads 
and, more importantly, assess talent levels. The 1994 
reorganization of the outgoing administration makes good common 
sense to me.
    Ideally, the authority vested in OMB to organize the 
President's budget, and negotiate it with the agencies and 
departments, offers the greater potential when unified with the 
management responsibility for driving through the necessary 
changes. At least up to this point, the least-promising idea I 
have seen would be to completely separate management and have 
it as a free-floating responsibility of an organization that 
might or might not have the clout and everyday contact with the 
agencies to get things done.
    My going-in attitude is that we need to make sure that the 
resources are there, that the talent levels are there and 
certainly that the attention is there. I do believe that it is 
not acceptable for this organization or the government, in its 
entirety, or the Executive Branch in its entirety, to be in 
default on so many counts, as apparently is the case today, 
across the range of this legislation that you have enacted 
here. I come across areas where reports have not been filed, 
where action has not been taken, therefore where the results 
you seek have not been achieved.
    I have a business customer who taught me the rule that if 
you are not keeping score, you are just practicing, and that is 
a pretty good rule. I'm careful not to too loosely analogize 
business and government, but there are respects in which I 
think the analogy is a good one, and that is one.
    Senator Thompson. I appreciate that. I think my time is up.
    Chairman Lieberman. Thank you, Senator Thompson.
    Senator Carper.
    Senator Carper. Thank you, Mr. Chairman. Let me follow up, 
if I could, on a couple of things that I mentioned in my 
opening statement, as well. Could we talk a bit about revenue 
forecasts over the next 10 years or so? I had asked a member of 
my staff to bring and to share with me a list of tax 
expenditures or tax credits that are expiring or have expired. 
The revenue assumptions prepared by CBO and OMB, I believe do 
not assume that these expired or expiring tax credits will be 
restored or extended, and if you look through this list, my 
guess is most of them will be. I think there is pretty broad 
support for extending them.
    There are some related concerns with the alternative 
minimum tax, that if we don't change the current law, then a 
lot of folks who are really middle-income families, and not 
much higher than that, are going to end up being caught up in 
the alternative minimum tax. Just share with me some thoughts 
you have about how much we keep in mind those expired or 
expiring tax credits and what we might need to do with the 
alternative minimum tax, and how that plays back against the 
revenue forecasts that we are going to be building our budgets 
on.
    Mr. Daniels. I think the answer comes at two levels, in 
terms of a baseline, and that is what you are probably reacting 
to, various baseline forecasts. They are not meant to be 
predictive of eventual outcomes. They are only a starting 
point, as we know, for making policy decisions, whether that is 
the renewal of existing tax advantages or spending programs, 
many of which are equally popular, but are not necessarily 
assumed in the baselines we use.
    I think that at a second level, the very practical 
political level to which you have directed our attention, we 
cannot take our eye off that ball. The President-elect's tax 
package at least partially responds to this by incorporating 
some, but not all of those expirations to which you allude, and 
partially, but not entirely, to the AMT issue.
    It is one we will have to work on together. Beyond that, I 
think it would be premature for me to comment about the 
eventual revenue forecast we will be making.
    Senator Carper. I hope this is a fair question, but have 
you had an opportunity to look at the budget surplus forecast 
prepared by OMB, the most recent, and by CBO? Are you familiar 
with those?
    Mr. Daniels. Yes, to an extent.
    Senator Carper. Could you just take a minute and share with 
me what you know, just in broad terms, of what the surplus is 
expected to be in either or both instances?
    Mr. Daniels. The difference, as you will have noted, is 
from just south of $5 trillion to just above $5.5 trillion 
aggregate surpluses over 10 years. These are very large 
numbers, although not so large in a 10-year context. I am 
struck less by the size of the differences than by the degree 
of general consensus in terms of the end point of these numbers 
and also the assumptions underlying them. The range of 
differences, certainly on economics, is narrower than we have 
often seen in the past. It does not mean they are right. They 
could all be wrong, but I think it gives us a reasonable basis 
for starting out the construction of a new budget, since the 
disparities between these various starting points are 
relatively modest.
    I do not know, after we have worked on the new OMB 
forecast, where they will fit, but I suspect they will fit in 
and around that range.
    Senator Carper. Those $5 trillion figures, do they include 
revenue inflows into and expenditures from the Social Security-
Medicare trust funds?
    Mr. Daniels. I am sorry. Again?
    Senator Carper. Are those revenues, the budget surpluses, 
inclusive of inflows and outflows from the Social Security and 
the Medicare trust funds?
    Mr. Daniels. Yes, I believe they are.
    Senator Carper. If we back those out, and they are rather 
substantial, do you recall what we are left with?
    Mr. Daniels. Somewhat greater than half would be in the so-
called on-budget accounts and somewhat approaching half in the 
Social Security accounts.
    Senator Carper. I am a boomer. I was born in 1947, 54 years 
ago next Tuesday. And in recognition of that, I have been 
assigned to, among other committees, not only this one, but the 
Aging Committee. Among a lot of us in my generation are going 
to be retiring and drawing down on Social Security roughly in 
10 years, and how will that affect those surplus numbers beyond 
this 10-year period of time and should we be mindful of that?
    Mr. Daniels. We should be more than mindful, Senator. When 
I think about this rather new era that we have entered, of 
large surpluses, I think of it as a window of opportunity 
which, if seized, can enable us to deal with the problems to 
which you are just drawing our attention, and if passed, will 
make addressing them a much more painful and severe process. As 
we all know, reform done early, certainly in the entitlements 
area, can be much more moderate and much less difficult than 
reform done at the eleventh hour.
    Now, our process has not always been known for long-term 
statesmanship and for acting before the wolf is at the door, 
and yet I hope, particularly presented with the opportunity of 
these large, impending surpluses, whether they are closer to 
five or closer to six or even somewhat lower than either 
number, I hope that we will find ways to work together to bring 
reform to the programs on which our generation will depend, and 
that would be a salutary accomplishment for all concerned.
    Senator Carper. One last question before my time expires. I 
hope we will be mindful as we go forward that, again, we need 
to show great caution about supporting substantial tax cuts, 
and I am going to support a number of tax cuts. I think we 
ought to return some of the money to the taxpayers. We need to 
be mindful of supporting tax cuts which kick in largely at the 
end of this 10-year period, at the same period of time when a 
lot of folks in our country are going to be retiring and 
drawing down on Social Security and Medicare.
    I would ask us to continue to be mindful that we probably 
have not seen the re-invention of the business cycle or the 
economic cycle. There will probably be downturns. We have been 
lucky for 8 or 9 years. For us to assume we are not going to 
have a recession for another 10 years may be the triumph of 
man's hope over experience. Last point, Senator Voinovich and I 
have served the National Governors Association, led it for a 
period of time. One of the entities we established within the 
National Governors Association to help governors be better 
managers was something called the Center for Best Practices, 
which I believe he chaired and which I chaired, as well.
    One of the great things about the National Governors 
Association is it really exists as an entity not just to lobby 
the Congress and so forth, but to enable us to identify what is 
working, to solve our problems in our various States and to 
enable us to steal those best ideas. Too often, it seems to me 
that Federal agencies exist to issue rules and regulations, but 
not so often to share ideas of what is working. As you go 
forward on the management side of your quest here, as others 
have spoken to earlier, you may want to keep in mind how we 
share best practices amongst governors and to see if perhaps 
the Federal agencies could not some how encourage that as well 
at the Federal level.
    Mr. Daniels. I appreciate that advice very much, Senator, 
and my interest in doing that is not conditional. It is clear 
to me that the ties between OMB and the new administration in 
general, and the State and local officials of this country 
should be much tighter than they may have been recently, and 
better management practices is a good place to start, but I am 
a Federalist, and I think we have seen a great reinvigoration 
of State Government, and also local government, over the last 
couple of decades. You were a leader and a participant in that.
    I think that, on a host of fronts, we will be well advised 
to consult very carefully and I plan to do so on a regular 
basis, with the National Governors Association and with like 
organizations, to make sure that, in all the ways in which we 
interact, in all the ways in which our fiscal policies are tied 
to each other, as well as the management successes that are 
happening there in the famous laboratories of democracy, are 
learned about and are brought home to the benefit of the 
Federal Government and Federal taxpayers.
    Senator Carper. Thanks very much.
    Chairman Lieberman. Thanks, Senator Carper. Thanks, Mr. 
Daniels.
    Senator Voinovich.
    Senator Voinovich. I can testify that you are a Federalist. 
I was President of the National League of Cities, and working 
with you as Mayor of the city of Cleveland, there is no 
question about it, and I am glad to hear you reaffirm your 
commitment to that. I would like to build on the questions that 
Senator Carper mentioned, the baby boomers. We talk about the 
10-year budget surplus and, by the way, one of the Senators 
pointed out that the end of that 10-year period is 2 years 
after President Bush will leave office. Also at the end of that 
10-year period is the baby boomers.
    We talk about global warming. I think we need to talk about 
global aging. It seems to me that any of the decisions that we 
make about our financial decisions ought to also have that in 
the backdrop of that decision-making, because 1 day we are 
going to have to pay the piper, and too often in this 
government we have not done that.
    Second, the projections--there is going to be a lot of 
debate about the projections, and I think Senator Carper 
mentioned the assumptions that some of the tax benefits that we 
have will go off. I do not think they will. I think most of 
them are pretty good. We will extend them, and that will change 
the number. You talked about the surplus in Medicare Part B. As 
you know, supposedly the Social Security surplus is not 
included and we have taken care of that, but the fact is the 
budget projections also include on the on-budget surplus Part A 
of Medicare, I think that, from a fiscal point of view, they 
ought to be taken off the table in calculating your on-budget 
surplus.
    You get the issue of growth in the economy, spending. There 
are certain presumptions about spending and I can tell from the 
last couple of years around here, God help us if we do not have 
a President that shows some restraint about spending. So all of 
those things, I think, are things you are going to have to 
contend with, because we will be debating those assumptions and 
those projections. Also, something maybe you have not thought 
about, but we do have a $98 billion projected surplus for the 
2001 budget.
    I heard Senator Stevens say he is coming over to see you, 
and I can assure you that you will get some supplementary 
appropriations bill suggested to you. Right now, we have 
already spent 12 percent more in the 2001 budget for non-
defense discretionary spending and 8 percent more for 
discretionary spending than last year. Any new supplemental 
spending is going to add to that percentage increase, and so 
you are going to have a battle with that.
    On the other side of the coin, I think you better look at 
the projections in this budget in terms of Medicare and 
Medicaid spending. When I became Governor of Ohio, Medicaid was 
the Pac Man in State Government, eating away at education, 
secondary and primary, and other State spending. We brought it 
under control, and the reform of the welfare system has helped 
us.
    In fact, in 1997, we spent less money on Medicaid than we 
did the year before, but last year, and Ohio is in a crisis in 
terms of Medicaid, 15-percent increase in Medicaid spending 
last year. I do not know what the projections were in this 2001 
budget, but the Federal Government has benefited from what the 
States have done, and now we are a 60-40 State. So you pick up 
60 percent of that Medicaid spending. I am saying there are 
some things right now that need to be looked at, and we have 
this tendency to just use these big numbers and forget about 
the details, and I think that is a real problem.
    The last thing is--in response to a question in your pre-
hearing questionnaire--you said that you planned, ``To make 
sure we retain and hire quality people at OMB and ensure they 
have the necessary resources to meet their responsibilities.'' 
As you will find, I think this is going to be easier said than 
done. Many talented young people view the Federal Government as 
an employer of last resort, and agencies across the government 
are finding it very difficult to attract the best and brightest 
people.
    The question I have is how you are going to accomplish your 
goal of hiring and retaining high-quality personnel at OMB, and 
then beyond that how are you going to deal with some the 
problems that other agencies are going to be having in the 
Federal Government, as we talked about in the report that we 
gave the President, ``The Crisis in Human Capital.'' GAO has 
also designated human capital management as a high-risk area. I 
would like to know your thoughts on it, and as Senator Thompson 
was asking, how do you manage that? Are you going to have a 
management czar? How are you going to make sure you do not get 
so involved in the budget side of this that management is 
neglected, as it has been for so many years around here?
    Mr. Daniels. All very fair questions. First of all, with 
regard to quality at OMB, and I do not for a moment want to 
underestimate the challenges we may have, I do suspect OMB may 
prove to be the exception that proves the rule. It is a place 
full of tremendously talented people today. I suspect they are 
there and that their successors can be recruited for reasons 
often mentioned at this hearing, the opportunity for service, a 
real service there, across the range of the budget, management, 
and regulatory policy, I hope will continue to excite and 
attract the top talent. That has certainly been the case in the 
past. It was my observation in my previous tour of duty and it 
is my impression in these few short days back in town that OMB 
is fortunate enough to reflect the highest standards of public 
service and the highest ethic of public service.
    That said, if it is true, I recognize we may be uniquely 
graced there, and everything I have read in your report on the 
human capital problem tells me there is not a moment to lose in 
trying to coordinate progress across the rest of the 
government. Moved by your words and this Committee's work, I 
added to my schedule of visits last week a lengthy visit over 
at GAO with David Walker. I plan to make that a very tight 
partnership. As far as I am concerned, their work, like your 
Committee's work, provides us with marching orders.
    I have told my potential colleagues-to-be we have got our 
hands full, but one problem we do not have is figuring out what 
to do. A roadmap has been laid out for us and our initial 
challenge will be deciding where to start. I thank you for your 
cautions on the spending side. I already have detected most of 
the visitors I receive are not there to help me get the $98 
billion figure up into three digits, that they are probably 
interested in using some of it to some good purpose.
    We like to say in Indiana, I was born at night, but not 
last night. Last, I, for one, believe that we ought to take an 
open stance, at least temporarily, on this whole matter of a 
supplemental, which you mentioned. This may again be sort of a 
newcomer's prerogative, but I hope that in some respects, and 
this may be a bad example, that as the new kid in town I will 
have the privilege for a little while to ask exactly why do we 
do things this way.
    One of the few instances I could give is the notion that 
before the ink is even dry on the budget just written, that we 
have suddenly discovered a lot of other things that have to be 
addressed in a supplemental appropriation bill. I recognize 
that events can intervene and there may be new needs, but I, 
for one, hope that we will at least ask this as a new question 
each time, not allow it to become, as it may have, sort of an 
annual rite of spring.
    Senator Voinovich. Thank you.
    Chairman Lieberman. Thanks, Senator Voinovich.
    Senator Levin.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Thank you, Mr. Chairman. First, let me add 
my congratulations to you on your appointment. Thank you for 
your willingness to serve again in government, and thank your 
family for their support of you again coming back into really 
one of the most difficult jobs that there is in government, to 
both spend the right amount of money and spend it wisely, the 
budget side and the management side both equally important.
    There is nothing more important at OMB than to tell it 
straight, no cookbooks, no shading, no politics in forecasting. 
OMB has done that recently. Your compliment of Jack Lew, by the 
way, your very gracious compliment of him in your opening 
statement is very much appreciated and is offered in the most 
bipartisan of spirits, and that is also appreciated.
    I have a couple of questions on the disclosure question 
that you answered in your answers to the preliminary questions 
that were submitted to you. When reviewing rules, the question 
is whether or not the public should know where that rule is 
being reviewed, and we had an experience at OMB many years ago 
where the office, the OMB, through its Office of Information 
and Regulatory Affairs, was playing a major role in the 
regulatory process, but it was secret. Nobody knew it. No one 
knew when a regulation was going from an agency to OMB, and 
therefore it happened too often that people who had access to 
OMB, who were using that access, while people who had no access 
were not even aware of the fact that the rule was at OMB.
    I happen to think it is legitimate for OMB to have that 
role because I think we ought to hold elected officials, the 
President, accountable for regulations. I believe in that 
accountability, so I have supported the OMB role. But we worked 
out finally, during the Bush years and during the Clinton 
years, a process to make sure that was an open process. The key 
question, your response to the question for the record was that 
documents that flowed between the agency and the OMB should be 
made public, but you left out of your answer the question of 
whether or not the public should be made aware, as it is now, 
that a rule has been forwarded to OMB for its review, so that 
anybody who wanted to weigh in with OMB would have the 
opportunity to weigh in with you or OIRA.
    So my question is whether or not you would support the 
continuation of that kind of openness? You, in general, said 
you favor disclosure, but specifically do you believe we ought 
to continue the current disclosure rules, including the notice 
to the public that a rule has been forwarded to OMB?
    Mr. Daniels. I will say, Senator, that I think that the 
moves that were made to have greater transparency in the 
process were necessary and useful and, in general, should be 
preserved. I will say that I have not yet had the opportunity 
to read through the current executive order in all respects. I 
cannot say there is not some respect in which it ought not be 
amended, but as a general rule, I think we are in better shape 
today, a better balance has been struck than may have been the 
case before, and I think these changes certainly took the 
process in the right direction. So I would like to stop short 
of a promise, but I am sympathetically inclined.
    Senator Levin. Thank you. Will you work very closely with 
this Committee before any changes are made in that process? It 
took a long time to put in place. Would you notify us and give 
us an opportunity--and we may not all be of the same view, I do 
not want to suggest that, but this Committee, as a Committee, 
has been deeply involved in this and before any changes are 
made, would you notify our Chairman and Ranking Member of any 
proposed changes in that?
    Mr. Daniels. Yes, I think that is not only appropriate, but 
necessary under the circumstances.
    Senator Levin. Well, it is an executive order, so it may 
not be--whether it is or not----
    Mr. Daniels. It may not be legally necessary, but I think 
that given the legitimate interest of this Committee and the 
way that responsibility is undertaken at OMB, that it is a 
more-than-appropriate request and we would consult.
    Senator Levin. Thank you. I know that Senator Carper and, I 
think, others have asked you about some of the budget 
projections, and I missed some of the earlier testimony perhaps 
on this. Senator Lieberman asked a number of questions for the 
record in which you addressed what the projected surplus is and 
how the Bush tax plan fits in with that and so forth. Let me 
start by asking you whether you believe that Medicare should 
enjoy the same protection of its surplus as Social Security 
does of its surplus?
    In answer to Senator Carper's question about that $5 
trillion, I think you left out the Medicare surplus in your 
calculation and only included the Social Security surplus. But, 
in any event, why should Medicare not receive the same 
protection in terms of its surplus as you want to give to the 
Social Security surplus, or do you agree that it should?
    Mr. Daniels. I do not agree. I think we need to be very 
careful, not talking too loosely about Medicare surpluses. 
Viewed in a unified fashion, Medicare does not run a surplus. 
Medicare costs more money than it raises in its dedicated 
revenue stream. Therefore, I think that we need to be careful 
not to delude ourselves about the long-term issues facing 
Medicare, which I think most people would agree may be even 
more foreboding and serious than those facing Social Security.
    So I think that a degree of real caution is in order. We 
could allow the concept of a Medicare surplus, which exists in 
Part A, but not in toto, to obscure the need for real reform, 
to which this administration will be committed as a fairly 
early priority. So for that reason, I would be very hesitant to 
see us treat those funds in the same way we do Social Security, 
which I think is quite in order.
    Senator Levin. Whether you treat them that way or not, you 
start with that approximately $5 trillion figure. If you are 
going to protect a Social Security surplus of $2 trillion, that 
leaves you $3 trillion. If you are not going to cut into the 
expenditures for Medicare or not cut into the surplus, however 
you want to frame it, you are down to $2 trillion, roughly. The 
estimate by OMB of the President-elect's tax cut, starting with 
fiscal year 2001, is $2 trillion, which leaves nothing for debt 
reduction, prescription drug program or any of the other things 
to which commitments have been made, including here, and I am 
glad to hear you make that strong commitment to debt reduction, 
by the way. I think that is absolutely essential and I was 
delighted to hear you phrase it the way you did.
    But if you are committed to debt reduction, as I believe 
you are, and if there is going to be any room for things like a 
prescription drug program, and unless you cut into the Medicare 
expenditures or surplus, however you want to frame it, and if 
you protect the Social Security surplus, there is no room for 
that full $2 trillion President-elect's tax cut. Something has 
got to give, and I would like to know what are your priorities, 
as between the tax cut proposed by the President and the debt 
reduction which you so strongly support. As between those two, 
which has the higher priority?
    Mr. Daniels. It's an essential priority that we deliver tax 
relief to the American people, and I am absolutely confident 
that can be done consistent with dramatic levels of debt 
reduction. The numbers you just cited, you will not be 
surprised to know, I don't subscribe to, at least from my 
preliminary look. I think that there will be substantially more 
flexibility than might have been suggested there. I already 
know a few reasons, perhaps honest errors in assumption, why 
that would be the case.
    To answer your question directly, I think these are both 
imperative priorities for the new administration and I think we 
can walk and chew gum.
    Senator Levin. Thank you.
    Chairman Lieberman. Thanks. Mr. Daniels, it strikes me that 
the fact we are sitting here and you are sitting there deprives 
you of the pleasure of watching your parents as you are 
testifying, and they are very proud. Your mother has a 
particularly maternal look of pleasure and pride, so I wanted 
to report that to you here halfway through your testimony.
    Senator Levin. Except for that last answer, where she 
totally agreed with me, I want you to know that. [Laughter.]
    Mr. Daniels. The Committee has no way of knowing this, but 
this is easily the longest my mother has ever sat this close to 
me without either giving me advice or talking in a way I can 
hear. So it is a measure of her respect for you all. 
[Laughter.]
    Chairman Lieberman. Ms. Daniels, if you would like to come 
up to the microphone---- [Laughter.]
    Thank you.
    Senator Cochran.
    Senator Cochran. Thank you, Mr. Chairman. One of the things 
that I have come to observe during my tenure here in the 
Congress since 1973, 6 years over in the House and the rest of 
the time here in the Senate, is that the budget process, like 
almost no other process in government, is the victim of a lot 
of political gamesmanship. A phrase you just used, I think, 
illustrates one of the problems.
    You talked about honest errors in assumptions being made. 
Well, in the budget process, I think there are a lot of 
dishonest errors in assumptions that are made, and not just by 
the Executive Branch, but by the Congress, as well. We are 
operating under a statute right now that prescribes limited 
caps on discretionary spending, the Budget Act of 1997, which 
the Congress passed and the President signed.
    The appropriations in this fiscal year exceed those 
statutory budget caps. The budget that is going to be submitted 
by the Executive Branch shortly for the next fiscal year has to 
be under the terms of that law, within the caps. That forces 
the administration to make dishonest errors in assumptions. And 
here is how some of that works, just from my previous 
observation as chairman of one of the Appropriations 
subcommittees, which I have had the responsibility of chairing 
for the last 12 years, the Agriculture Appropriations 
Subcommittee. The administration, in its budget request, will 
ask for funds for the Department of Agriculture, for 
discretionary spending within the budget caps, but it provides 
in the budget submission assumptions that there will be user 
fees imposed by Congress through the enactment of legislation 
for such things as meat and poultry inspection, egg production 
inspection, a wide variety of other user fees. In the Food and 
Drug Administration area, for example, which is funded also in 
this bill, there will be the assumption that the pharmaceutical 
industry, with which you are familiar, will have to pay new 
user fees in response to legislative enactments by the 
Congress.
    The Office of Management and Budget and the President 
himself have to know full well that the Congress is not going 
to enact those bills that are assumed to have been agreed upon 
by Congress or will be enacted and provide the revenues in time 
for them to be available to offset increases in expenditures 
that are being requested by the administration in its budget. 
So we start off the process with it being contaminated and we 
wonder why there is no credibility when Congress talks about 
balancing the budget, brags about it. The President brags about 
how his policies have forced a balancing of the budget and all 
these surpluses are being generated because of the Balanced 
Budget Act of 1997, and it is not on the level. It is not an 
honest error in assumption or pronouncement.
    So I hope that as you embark upon this new undertaking, 
which is enormous in its importance, in my view, that you lend 
a voice in the administration to suggesting that we at least 
start out talking in an honest, forthright way with the 
American people and with each other on the subject of 
budgeting. There are a lot of buzz words that capture 
imagination and people think this will fix it. Let's do 
biennial budgeting. That will fix it. It may help. I support 
that. Let's try that. There are other suggested fixes.
    Lockboxes have a great appeal. The pollsters will tell you, 
when you talk about putting Social Security trust fund monies 
in a lockbox, the American people respond favorably to that. 
So, if it feels good, do it. If it sounds good, say it. I mean, 
we have come to government by pushing buttons to see if 
something is warm or hot or cold, positive or negative, on some 
kind of graph. We are not thinking through to the realities of 
the process and what really is going to be required in order to 
achieve the results we want. It is about who gets the credit 
and who gets the blame.
    So I am hopeful that you can help breathe some new candor 
into the process as Director of the Office of Management and 
Budget. I wish I could promise the same for all the Committees 
and Subcommittees of the Congress or even the Senate, or even 
this Committee, but I do not have the power to deliver that. 
But I do want you to know that it would, I think, do a great 
deal to restore confidence in the integrity of the budget 
process and confidence in government, in general, if we could 
accomplish that in some way.
    A couple of other things that have been said--I am supposed 
to be asking you questions and not making a speech. So my 
question will be what is your response to that? [Laughter.]
    Let me get my other question asked and then you can respond 
to two things at once. There has been much said about restoring 
management responsibilities to your office and that, of course, 
is very important. But one thing I think ought to be 
encouraged, as well, and that is: Do not go too far to extend 
the ``M'' in OMB to the management of the judiciary or the 
legislative branch.
    This administration that is coming to an end now got off to 
a pretty shaky start by vetoing the first legislative 
appropriations bill that was submitted to the President. I am 
still trying to figure out exactly why it was done, other than 
to just say, ``We are going to be tough. We are going to 
require Congress to live within its means, too.'' It was a 
political signal, I think. It was part of the gamesmanship that 
we were going to endure or deal with for 8 years. It led to all 
kinds of difficulties, shutting down government, all kinds of 
things that we can look back on now and say should not have 
happened.
    The judiciary, for example, is required to submit a budget 
request, but the Office of Management and Budget has been 
massaging it and taking out things, deleting things from the 
Judiciary Committee's request to Congress for funds for 
courthouse construction, for example, and then adding the money 
for other things, to stay within the caps probably, if we go 
back to the real reason. It is not just to be mean or to 
exercise power, but I think there is some arbitrary exercise of 
power by OMB over the other two coequal branches of government 
that has been unnecessary and ill-advised.
    I hope as you embark upon these duties, you will look at 
that and see if that aspect of the job cannot be improved. What 
is your response to my two observations?
    Mr. Daniels. To thank you for two important questions, 
which I will answer, and a third you did not ask that I will 
answer by way of augmenting my response. First of all, I do not 
doubt that in this arcane world of budgeting, the processes and 
disciplines that have been put in place in recent years, that I 
will collide with brute reality on a regular basis. But I do 
want to say that my attitude as I embark would be to try to 
establish a reputation for candor and honesty and a starting 
point that either creates a consensus or is near the consensus.
    It has struck me recently that for the last 14 years in two 
different endeavors, I have lived in places where data really 
was held sacred. Integrity of data was decisive. In the company 
I may be leaving, we make life or death decisions over hundreds 
of millions of dollars in spending--small potatoes, I know 
here, but large to us--and trust the data and allow ourselves 
to be driven by it. We have a saying at our place: If you 
torture the data long enough, it will confess. I hope that to 
the extent data has been massaged or occasionally bent or 
misused here, we can begin to bring that down.
    With regard to the other branches of government, I guess I 
have two comments. One, that both constitutionally, and in the 
practices that we bring to the budget, OMB is not meant to have 
much to do with those levels. Two, as was illustrated 
throughout this hearing, we have got more than enough to do 
worrying about the parts of government for which we are 
responsible.
    So I take that caution and I will look into the subject. I 
am aware there have been some recent controversies and I would 
hope they would not be renewed in the future. One last comment. 
It seemed to me that as you pointed out, the caps, the 
disciplinary mechanisms that have been in place recently have 
led now--certainly in an era of surpluses--have led to these 
perverse situations and maybe some gamesmanship and so forth. 
My reaction looking at this in these last 2 or 3 weeks is we do 
need to work together with the Congress on some mechanism that 
is suited to the new era, but I think some mechanism will be 
needed, for the reasons I gave. The temptation to excess that 
we could face if the surpluses materialize, I think will be a 
risk if we do not find some new mechanism, some modernized, 
updated mechanism, to replace that which is due to expire next 
year.
    Chairman Lieberman. Thanks very much.
    Mr. Daniels, it is my intention to have myself and the 
other Members who are still here to have an opportunity for a 
7-minute round. Do you want to take a personal break or are you 
OK to go forward?
    Mr. Daniels. I am OK to go forward.
    Chairman Lieberman. Great. I wanted to get back to the 
question of economic growth and government policy toward it. It 
seems over time we have learned some things about all this, and 
one of them is government does not create jobs or economic 
growth, but it can certainly create the context in which the 
private sector can create growth. One of the best things we can 
do is what we talked about earlier, and that is debt reduction 
and a balanced budget.
    It seems to me the other thing we have learned, certainly 
in recent years, is the central role of innovation that has 
driven so much of the growth in our economy, and that is a 
critical area where the government, through supporting 
education or research and development grants for basic 
research, can actually plant the seeds that lead to economic 
growth. The second element of growth, of course, is to match up 
capital with that innovation, the money to make it go.
    So I have two questions in that regard. One is if you would 
generally speak about what you would take to be the position of 
the incoming administration on the question of governmental 
support of basic research and development. Talk about a subject 
that is not sexy, this is it, but it seems to me this is what 
has led to so many of the extraordinary new industries that we 
have.
    The second is about the availability of capital, and 
clearly balanced budgets, lower interest rates make access to 
capital easier, but tax policy can, too. For much of the 
1990's, I was involved in an effort to reduce the capital gains 
tax, which reached bipartisan fruition in the 1997 Balanced 
Budget Act, or as part of that, and I do think it has been one 
of the factors that has helped the growth over the last years.
    I am interested that President-elect Bush, as far as I can 
tell, has not included a capital gains tax reduction in his tax 
proposal. So my second question is whether you would urge him 
to consider a capital gains tax reduction in this next stage of 
our economic history?
    Mr. Daniels. On the subject of investments in R&D, it seems 
to me that a pretty strong consensus has grown up that at least 
through certain vectors, such as the NIH, as one example, these 
are excellent investments that ought to be increased. The 
President-elect has certainly committed himself to a policy of 
substantial further increases, and you can look for those in 
our budget.
    I think that these ought to each be examined individually 
as we move forward. The fact that some government spending on 
R&D has proven successful does not mean that it always does, 
and I think we have seen many examples in the past in which we 
went down a dead end, spent a lot of money, but in the end 
found that government was not particularly skilled at 
identifying the highest-return investments, long-term 
investments of this kind.
    Where we can see it is working, it ought to be reenforced. 
On the capital gains question, I will just associate myself 
with the comments of the Treasury Secretary-designate, who I 
believe indicated that we think that the reductions of recent 
years have proven themselves and there may be a time in which 
that is appropriate again. As a matter of priority, the outline 
of the President's tax proposals, we think, takes precedence, 
and we think that rate reduction, along with the other lesser 
pieces of that proposal, ought to come first.
    Chairman Lieberman. I understand what you are saying, but 
you are open to considering capital gains reductions in the 
future?
    Mr. Daniels. Within the context of preserving surpluses at 
an appropriate level.
    Chairman Lieberman. Let me just say a brief word in 
response to your answer on innovation, which is I agree that 
NIH has been a productive place to invest our funds. One of the 
things that I have learned around here over the last several 
years is that we have tended, I suppose for the reason we all 
as people naturally identify with NIH, because it is directly 
related to cures for illnesses that plague us, but that not 
only the new economy, but also, in fact, health depend as well 
on investments in the more traditional physical sciences, like 
chemistry and physics, for instance.
    I hope that the administration will--and that is the 
National Science Foundation and other recipients like that.
    Mr. Daniels. Yes.
    Chairman Lieberman. Let me go for a moment--one of my other 
major Committees is the Armed Services Committee, and to me 
this is one of the areas that is really crying out for 
additional support. Both candidates for President spoke to 
this, Members of both parties here have spoken to it. It was 
true of the hearing last week for Secretary-designate of 
Defense, Mr. Rumsfeld, but I must say the numbers that at least 
have been talked about thus far, seem to me to be below the 
need.
    The President-elect proposed a $45 billion increase over 10 
years for defense during the campaign, $9 billion for, roughly, 
pay increases and $36 billion for R&D. Vice President Gore and 
I, I do not know whether it suggests that we are hawks or big 
spenders, but doubled that to $110 billion over 10 years. You 
will find--maybe you already have--that the Joint Chiefs are 
well beyond either of those numbers and can make a pretty good 
case. In fact, Secretary Cohen just this week, in his fiscal 
year 2002 request, has recommended $52.7 billion additional 
funding for the 5 years.
    So I wanted to ask you what priority you would put on 
defense spending from the $5.7 trillion projected surplus that 
we have?
    Mr. Daniels. It is an easy question to answer in the first 
instance, Mr. Chairman. The national defense is the first 
priority of government, above and beyond all others. I think 
that is true constitutionally and in every other respect. With 
regard to how that plays out in the budget, I think it is 
premature to talk about numbers. The President-elect, I think 
quite correctly, in more than one context during the past year, 
talked about reform before resources, language to that effect, 
and I think that general approach ought to apply here, too.
    Now, there may well be some very immediate needs, some 
backlog, some problems that need to be addressed right now, and 
the appropriate officials in the administration will weigh 
that. But it is also the right moment for more than one 
reason--new administration, time for a quadrennial review and 
so forth--for a good bottom-up look. We are looking at a very 
different world, as more learned people than I have frequently 
talked about lately. We want to make sure, as we make these new 
investments, which undoubtedly will over time involve more 
spending, that we are designing and funding the true needs of 
tomorrow.
    Chairman Lieberman. I look forward to working with you on 
that. Thanks.
    Senator Thompson.
    Senator Thompson. Thank you very much. Your discussion with 
Senator Lieberman reminds me of some things that I have been 
concerned about for a long time, and that is how important it 
is to keep the focus on the real problem here, and that has to 
do with the mandatory spending side of things. I sometimes 
think that we, especially those of us who call ourselves 
conservatives, spend so much time on the discretionary part and 
how we are doing there that we convince people that is where 
the action is.
    The fact of the matter is the Federal Government needs to 
be spending more money in some areas on the discretionary side. 
We are in some respects letting our infrastructure crumble. You 
can go down to my State and see the Great Smoky Mountain 
National Park really deteriorating markedly because of 
environmental concerns. I am sure at other national parks the 
same things are happening. Regarding our weapons facilities, 
which people do not care much about these days, there is not a 
lot of discussion about them, but they are really in very bad 
condition.
    Research and development is one of the things the Federal 
Government does better. We have dozens of programs for juvenile 
crime, for example. We have no idea which ones are working and 
which ones are not. Why can't the Federal Government do more in 
terms of studying the problem--call it research, if you want 
to--and be a clearinghouse for all the things that are going on 
out here, all the programs that various States have and all the 
various programs that we have, and see what is working and then 
tell the States what the results of that are?
    We could do the same thing in education, I think. So 
research and development can save us money. All those things on 
the discretionary side where we really need more. I think the 
term investment is a legitimate term to use there, but none of 
it can be done. It is one-third of the budget now. Two-thirds 
are out here. Unless we reform that, unless we do something 
markedly different with regard to those two-thirds, the one-
third is going to continue to get squeezed out. The most ardent 
fiscal conservative needs to recognize that there are some 
things the Federal Government ought to be doing better and more 
of.
    So to the extent you can keep the focus where it needs to 
be and reminding people over and over again, as we should here, 
that we ought to keep our eye on the ball and how important it 
is to do something in terms of real reform with regard to some 
of these mandatory spending programs.
    Getting back to the management, you are familiar with the 
biennial GAO high-risk list. We mentioned that earlier. I know 
that you are aware of the fact we started keeping up with this 
in 1990. Since then, over half of the agencies that were on the 
list when we started out in 1990 are still on the list. What do 
you think about that? What can be done about that? I know when 
you look at that as a manager and as a businessperson and as a 
person experienced in how government operates, some thoughts 
come to your mind about what might be done about that. Can you 
share any of those with us now?
    Mr. Daniels. Yes, sir. I think disclosure and honest 
assessment is always the predecessor to accountability, and I 
think that, on the one hand, one cannot claim that some of 
these problem areas have not been amply disclosed before. Your 
reports point out several areas in which that disclosure has 
been incomplete, in the area of improper payments, for example. 
So I would look forward to more active, more aggressive, more 
candid assessment of where our problems lie. This alone can 
sometimes spur action on the part of the entity about whom the 
disclosures are being made, but this has to be followed up by 
intense focus. We will have to pick our shots. We will not be 
able to do all 25 or 26 of those areas, let alone those urgent 
areas you have marked off that are not yet on that list. We 
will look to start somewhere.
    Senator Thompson. It seems to me it is a matter of 
accountability. Clearly people are not concerned about 
remaining on the list. They are required to come up here once a 
year and get fussed on a little bit, and then they go back. We 
ought to do away with the list if we are not going to do 
anything about it, because we are sending a bad message. We are 
sending a message to managers that it doesn't matter, that 
nobody really cares, and they can continue. I would be 
embarrassed to be part of an organization that did not make any 
improvements in areas like that after a decade.
    Mr. Daniels. This is why I favor the continued and maybe 
strengthened integration of budget and management functions.
    Senator Thompson. I was exempting the U.S. Congress from 
that, of course, as I think about it.
    Chairman Lieberman. The record will so note. [Laughter.]
    Mr. Daniels. Again, I do not want to too blithely compare 
business and government, but in the businesses I have been a 
part of, a budget plan would not be welcome, would be sent back 
marked incomplete, if it did not indicate the results that it 
was intended to accomplish in some well-defined way that can be 
measured later on. Another of what I am sure is a long list of 
naive hopes I have, but on which I am going to try to act, is 
to inform my new colleagues in the Cabinet and elsewhere of the 
opportunity we have to do a little better if they will join 
with me, with you, in trying to behave in this way.
    Senator Thompson. You mentioned more people being required 
to report. As you know, most agencies do not even keep up with 
that. I think you are right as far as that is concerned. 
Regarding the area of personnel flexibilities, what role do you 
see for OPM? Should more agencies be granted personnel 
flexibilities outside the scope of the current framework? If 
so, do you favor an agency-by-agency approach, or do you 
believe we ought to develop a systemwide approach in granting 
flexibility--the IRS and others, as you know, and some ask the 
question, I think legitimately, where the more trouble you get 
into the more flexibility you get, is that good and if it is a 
good idea, why shouldn't we apply it government-wide?
    Mr. Daniels. Maybe we should. Obviously we deal with the 
trade-off here between flexibility and fairness to those who 
are the workers who live under the--maybe the relaxed rules. 
But from what I have read and learned so far about the urgency 
of the problems across these agencies, I think that flexibility 
may need to take priority. It is very hard for me to imagine 
that the Federal Government can even maintain, let alone 
restore the sort of productivity levels, high talent levels, 
attraction to new people and so forth that we obviously need 
with archaic rules that bind too tightly the hands of the folks 
who are supposed to get that done.
    Senator Thompson. Thank you very much.
    Chairman Lieberman. Thank you.
    Senator Voinovich.
    Senator Voinovich. On the high-risk areas, I think you and 
I talked about it--I did not talk to the Chairman about it, but 
I thought we would have early hearings on the high-risk area, 
then bring in the departments that are responsible for dealing 
with them, and then bring them back every 6 months to see what 
progress they are making, so that at the end of a period of 
time, we will find out whether or not we are making progress.
    In terms of the flexibility, the areas that have the best 
flexibility for hiring today are the IRS, the FAA, and GAO. As 
you know, Mr. Chairman, we have made some recommendations on 
how we would become more flexible, but my feeling is that 
perhaps you ought to identify those agencies that are most 
vulnerable and maybe come back to Congress and ask for the same 
kind of flexibility that you have in those other three agencies 
to get started, as we study your utilizing the tools you 
already have and then think about other ways that maybe we can 
go government-wide to deal with this hiring problem that we 
have.
    I used to have a saying when I was governor: If you cannot 
measure it, do not do it. I have got to tell you something. You 
have got a real problem measuring things here. I know in 
response to our questions about coordinating programs among 
agencies, that we looked into that early last year. In HHS and 
Education on early childhood, there was no coordination 
whatsoever. They subsequently put together a 40-member task 
force and finally came up with some really good things, but it 
seems to me that one challenge you are going to have is to see 
those agencies that have similar programs and see if you can 
get them to work together better, and then determine how you 
measure.
    We have 69 early childhood programs in 9 agencies, and I 
asked GAO, how do we determine whether any of them are doing 
any good, and they still have not come back with an answer as 
to how you evaluate whether they are working or not. All we do, 
it seems to me, is add programs and we never look at the ones 
that we already have to determine whether we still need those 
programs. You need to put something together, and I do not know 
whether you have thought about it or not, but I would be 
interested in your thoughts.
    Mr. Daniels. My thoughts are very parallel to those I read 
in the output of this Committee. You have spoken about results, 
not intentions, and that is really a good place to start. We 
have got to get away from a mentality in which the measurement 
of our commitment to progress in any of these areas is dollars 
of input. It needs to be insistence on output. I tried to 
respond to some of the written questions about measurement and 
metrics on the basis of mistakes I have made and seen made in 
the past, measurements that suffer from false precision, over-
complexity, measuring too many things. This can be a way to 
obfuscate the whole question.
    If, in fact, there are--and the number I memorized was 90 
early childhood programs in 13 agencies, or if there are 50 
homeless programs in 8, and that is the tally that I think you 
came to, then somebody has got to get about the business, even 
if it is in a rough-cut way, of figuring out which are the best 
10 or 15, which probably deserve more emphasis, and which are 
the worst 10 or 15 or 20 that ought to be scrutinized very 
severely?
    Our first goal, I think, ought to be to get the agencies 
themselves to live up to their responsibility under the Results 
Act, and where there are duplications, to try to get to some 
kind of reasonable conformity. But if they will not, maybe we 
can find a way to do it.
    Chairman Lieberman. Thank you, Senator Voinovich, for your 
contributions to the hearing.
    Mr. Daniels, it pains me to end this hearing, because with 
it also ends my brief, but, I am sure you will agree, 
impressive term as Chairman of this Committee. [Laughter.]
    Mr. Daniels. I feel uniquely privileged to have been the 
subject of your leadership.
    Chairman Lieberman. Mother Daniels, do you have anything 
you would like to say?
    Mr. Daniels. Please. [Laughter.]
    Mrs. Daniels. No. You have been very kind.
    Chairman Lieberman. Thank you. I was thinking, there is an 
old--I have heard it credited to Hubert Humphrey when he was 
once introduced with very flattering words; he got up and he 
said he wished that his mother and father had been there to 
hear the introduction. His father would have enjoyed it and his 
mother would have believed it. [Laughter.]
    I think both your mother and father have enjoyed and 
believed all the good words that had been said about you, and 
you have done very well this morning. I appreciate your 
testimony.
    Senator Thompson. I got the impression that you probably 
experienced some of the things that some of us experience 
sometimes, that our mothers are surprised how smart we are, 
supposedly.
    Chairman Lieberman. Mr. Daniels, the record will remain 
open for the rest of the day on this hearing for the submission 
of written questions for you and any written statements for the 
official record, and then we will try to act with dispatch to 
consider and I would guess approve your nomination and 
recommend it favorably to the Senate.
    I thank you very much for your testimony today.
    The Committee stands in recess.
    [Whereupon, at 1:02 p.m., the Committee was adjourned.]


                            A P P E N D I X

                              ----------                              


                  PREPARED STATEMENT OF SENATOR AKAKA

    Mr. Daniels, I join my colleagues in welcoming you and your 
family today. The office to which you are nominated is one of 
the most influential in any administration, and I believe you 
are well-qualified to carry out its responsibilities.
    Although we were unable to meet personally before today's 
hearing, I have reviewed your qualifications and understand why 
the President-elect has great confidence in your ability to 
serve as a senior economic advisor. As the Director of the 
Office of Management and Budget, you will influence all 
budgetary and policy matters within the Executive Branch. It is 
an undertaking that will require laying aside personal views in 
order to bring about policies that are not only effective, but 
fair and equitable as well.
    As the ranking Democrat on the Subcommittee on 
International Security, Proliferation, and Federal Services, I 
am interested in sitting down with you to discuss how to ensure 
that the Federal Government attract, retain, and train 
qualified employees to carry out the functions of government. 
There are many issues facing our Federal civil service, and I 
am committed to their well-being. I also look forward to 
working with you on the implementation of OMB Directive 15. I 
appreciate your candor in answering the Committee's questions 
this morning.

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