[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
     PRESIDENT'S FISCAL YEAR 2004 BUDGET WITH OMB DIRECTOR DANIELS
=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 5, 2003

                               __________

                            Serial No. 108-1

                               __________

         Printed for the use of the Committee on Ways and Means





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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana               JIM MCDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania           LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona               EARL POMEROY, North Dakota
JERRY WELLER, Illinois               MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri           STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia

                    Allison H. Giles, Chief of Staff
                  Janice Mays, Minority Chief Counsel



Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
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                            C O N T E N T S

                               __________
                                                                   Page
Advisory of January 29, 2003, announcing the hearing.............     2

                                WITNESS

Office of Management and Budget, Hon. Mitchell E. Daniels, Jr., 
  Director.......................................................     5



















     PRESIDENT'S FISCAL YEAR 2004 BUDGET WITH OMB DIRECTOR DANIELS

                              ----------                              


                      WEDNESDAY, FEBRUARY 5, 2003

                          House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 2:05 p.m., in 
room 1100 Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
January 29, 2003
FC-2

                    Thomas Announces Hearing on the

                  President's Fiscal Year 2004 Budget

                       with OMB Director Daniels

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
the President's fiscal year 2004 budget. The hearing will take place on 
Wednesday, February 5, 2003, in the main Committee hearing room, 1100 
Longworth House Office Building, beginning at 2:00 p.m.

    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from the Honorable Mitchell Daniels, 
Jr., Director, Office of Management and Budget. However, any individual 
or organization not scheduled for an oral appearance may submit a 
written statement for consideration by the Committee and for inclusion 
in the printed record of the hearing.

BACKGROUND:

    On January 28, 2003, President George W. Bush delivered his State 
of the Union address in which he outlined a number of important policy 
objectives, including strengthening Medicare, reforming Social 
Security, and reducing taxes. The President's agenda will be detailed 
in his fiscal year 2004 budget, expected to be released on February 3, 
2003.

    In announcing the hearing, Chairman Thomas stated, ``I look forward 
to Director Daniels' appearance before the Committee to hear details of 
the President's budget and policy initiatives.''

FOCUS OF THE HEARING:

    The Director will discuss the details of the President's proposals 
that are within the Committee's jurisdiction.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

    Please Note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, by the close of business, Wednesday, February 19, 2003. 
Those filing written statements that wish to have their statements 
distributed to the press and interested public at the hearing should 
deliver their 200 copies to the full Committee in room 1102 Longworth 
House Office Building, in an open and searchable package 48 hours 
before the hearing. The U.S. Capitol Police will refuse sealed-packaged 
deliveries to all House Office Buildings.

FORMATTING REQUIREMENTS:

    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.

    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, in Word Perfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.

    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.

    3. Any statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.

    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman THOMAS. Thank you, and good afternoon. Thank you, 
Director Daniels, for being with us. The U.S. economy has 
weathered the recession and survived the economic consequences 
of the terrorist attacks on September 11, 2001. In many 
respects, this economy has shown a remarkable resilience. 
Overall, the economy grew by almost 3 percent last year, 
notably more than the Congressional Budget Office (CBO) or the 
President's budget assumed a year ago.
    Increases in the productivity of the American worker have 
been even more impressive, frankly, by growing 5 percent in the 
first three quarters of the last calendar year. We should not 
be satisfied with the current state of the economy, and for 
good reason. There are 1.8 million fewer jobs now than at the 
beginning of the recession, and the unemployment rate has 
climbed to 6 percent.
    While a rise in unemployment is typical following a 
recession, overall economic growth is still below the potential 
for our economy. We need to continue to press for fiscal policy 
changes to make sure that we promote growth to create jobs and 
raise the standard of living for all Americans.
    In fiscal year 2002, the government recorded a deficit of 
$158 billion. Our CBO estimates that under current law, the 
deficit this year will be $199 billion, which could be rounded 
off to $200 billion.
    However, as we learned from our discussions with the 
Secretary of the U.S. Department of the Treasury yesterday, 
there is no real concern that deficits of this magnitude, in 
the short run, pose a significant risk to the economy, or will 
automatically lead to higher interest rates.
    The largest cause of the current deficit projections is, in 
fact, the recession, which produces reduced revenue. Therefore, 
what we need to do is address this by making sure that we have 
economic growth.
    The President has proposed a set of initiatives to 
strengthen the economy. He has also offered very important 
measures in the jurisdiction of this Committee in the area of 
modernizing Medicare, including prescription drug for seniors. 
The President has also addressed health insurance and a number 
of other issues that are in the broader area of health for all 
Americans. The President's budget also included initiatives 
aimed at reauthorizing and improving the Temporary Assistance 
for Needy Families (TANF) program and other related programs.
    In addition, we are anxious to see how the new U.S. 
Department of Homeland Security is underway from a more narrow 
perspective, the Treasury with the changes in Customs and 
Alcohol, Firearms, and Tobacco. To provide us with such 
information, we have the Director of the Office of Management 
and Budget in front of us today. Rather than getting down in 
the weeds of the specific jurisdictional concerns as we 
normally would, I would urge you to provide for us the big 
picture of how the President's various budget proposals fit 
together and how collectively we will respond to the needs and 
concerns of all Americans.
    So, I do welcome you again before the Committee, but before 
I recognize you for your testimony, I would recognize our 
Ranking Member, the gentleman from New York, Mr. Rangel.
    [The opening statement of Chairman Thomas follows:]
     Opening Statement of the Honorable Bill Thomas, Chairman, and 
        Representative in Congress from the State of California
    Good afternoon. Thank you Director Daniels for being here today.
    The U.S. economy has weathered a recession and survived the 
economic consequences of the terrorist attacks of September 11th, 2001. 
In many respects the economy has shown resilience. Overall, the economy 
grew by almost 3 percent last year, notably more than the Congressional 
Budget Office or the President's Budget assumed a year ago. Increases 
in the productivity of the American worker have been even more 
impressive, growing by 5 percent in the first three quarters of 2002.
    But we should not be satisfied with the current state of the 
economy. There are 1.8 million fewer jobs now than in the beginning of 
the recession and the unemployment rate has climbed to 6.0 percent. 
While a rise in unemployment is typical following a recession, overall 
economic growth is still below the potential for our economy and we 
must continue to press for fiscal policy changes to better promote 
growth, create jobs and raise the standard of living for all Americans.
    In fiscal year 2002, the government recorded a deficit of $158 
billion. The Congressional Budget Office estimates that under current 
law the deficit this year will be $199 billion. However, there is no 
concern that deficits of this magnitude pose a significant risk to the 
economy or will lead to substantially higher interest rates. The 
largest cause of the current deficit projections is the recession--not 
tax cuts--and part of the cure for these deficits is to increase 
revenue through economic growth.
    The President has proposed a set of initiatives to strengthen the 
economy by reducing taxes, improve national security and homeland 
defense, combat HIV/AIDS in Africa, reduce the number of uninsured in 
the United States and strengthen Medicare.
    The President has also called for important modernization of 
Medicare including a prescription drug plan for seniors. The cost of 
health care continues to rise and drug costs are no exception. The 
world of medicine changes rapidly and I applaud the President's 
commitment to helping seniors get better care and presenting a budget 
that allows for a Medicare prescription drug plan. The President's 
budget also includes initiatives aimed at reauthorizing and improving 
Temporary Assistance for Needy Families (TANF) and other related 
programs. Finally, the new Department of Homeland Security is now law 
and critical reorganizations are underway affecting numerous agencies 
including the U.S. Customs Service.
    I would hope that today Director Daniels could pull together for us 
the ``big picture'' of how the President's various budget proposals fit 
together and how they individually and collectively respond to the real 
world needs of Americans. I would like to welcome Director Daniels back 
again and we look forward to your statement this morning. First I would 
like to recognize the Ranking Member, the gentleman from New York.

                                 

    Mr. RANGEL. Thank you, Mr. Chairman, and thank you, Mr. 
Director, for once again sharing your views with us.
    I am reminded of a director of Office of Management and 
Budget that served not too long ago that indicated after he 
left office, he said the best way to cut government programs is 
to cut revenues, and increase deficits and have the American 
people see that they are paying more for interest on the debt 
than they are for education and health programs.
    I thought it was a mean-spirited thing to say, but it looks 
like we are walking down a road that is similar.
    It seems like people are saying the deficit really doesn't 
matter that much, and that a $674 billion tax cut is for long-
term economic growth and that this is good for the country and 
good for local and State governments. Yet, no one seems to 
appreciate or support this, not the governors, not my State, 
not my mayor, not the hospitals, not the educators, and the 
amazing thing is that the programs that have been targeted the 
most, Social Security and Medicare, the worst days from a 
budgetary point of view is yet to come. That is when the baby 
boomers become eligible.
    There is no indication here as to whether or not the $1 
trillion that the President estimates it would take to repair 
that is included in this, and while I hope and pray that we are 
not going to go to war, I don't see how anybody in charge of 
the budget cannot fold in that potential as a possible 
expenditure that we would have to pay for. Yet the Secretary of 
the Treasury said that was not included in what we are talking 
about.
    So, having been one who has enjoyed borrowing all of my 
life, I hope that you can share with us how little we should be 
concerned about deficits and paying interest on the debt, 
because if that is the way for a great Nation like us to go, 
then we are going to need your guidance to share with our 
constituents and for those people who have programs that are 
going to be cut as a result of the crisis that we face as a 
Nation.
    So, thank you for coming. I look forward to getting some of 
the answers from you this afternoon.
    Chairman THOMAS. I thank my colleague. Mr. Daniels, any 
written testimony you may have will be made part of the record, 
and you may make any comments you wish to this Committee.
    Mr. RANGEL. When you say any comments, you don't really 
mean that, do you?
    Chairman THOMAS. I think that I am urging him to speak from 
the heart and the head.
    Mr. RANGEL. Okay. Let us restrict it to the head.
    Mr. DANIELS. Doesn't give me much to work with.
    Chairman THOMAS. I will tell the director that the 
microphone is very unidirectional, and you need to speak 
directly into it.

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

    Mr. DANIELS. Well, I thank the Committee, and I will--with 
respect to the Committee's time, if it will please the Chair, 
will stand on the written testimony I have submitted. It simply 
summarizes the President's priorities. He shares the concern 
about deficits, and places them near--but not at the top of his 
priority list, behind successful prosecution of the war 
defense, the homeland and growth of the economy, and these 
are--this is rank order that--about which honest people can 
differ, and I know we will. If it will get us more quickly to 
your questions, I will be happy to stop with that summary and 
await those questions.
    [The prepared statement of Mr. Daniels follows:]
 Statement of the Honorable Mitchell E. Daniels, Jr., Director, Office 
                        of Management and Budget
    Thank you as always for the privilege of appearing.
    This week we are presenting the President's program for fiscal year 
2004. No such presentation lacks for long-term importance to our 
Nation's future, but few in our history have directed the Nation's 
public resources at more fundamental challenges.
    The President plans to prosecute the war on terror relentlessly. 
There is no more effective way to protect Americans, or, as we now say, 
to provide ``homeland security,'' than to root out terror and stop it 
before it can reach our shores. The President's budget provides $380 
billion for the war on terror and the continued rebuilding of our 
national security capabilities. Spending on domestic homeland security 
is also given top priority, with spending rising at the fastest 
percentage rate of any major category.
    The President's third priority is to reinvigorate an American 
economy that has grown for five consecutive quarters, but at a rate 
that he deems far too slow. To this end the President proposes a major 
growth and jobs plan, the third of his Presidency.
    Below these three transcendent objectives, the President urges 
greater spending on a host of essential activities: veterans' programs, 
the education of our disadvantaged and disabled children, the 
alleviation of Africa's AIDS tragedy, research on a pollution-free 
automobile, and so on.
    The budget has returned to deficit, a phenomenon that pleases no 
one, but which ought not be misunderstood or overstated. Today's 
deficit, while unwelcome, was unavoidable, and is manageable. In fact, 
given a sputtering economy, it reflects appropriate economic policy, as 
the President decided in advocating a bold economic plan.
    The deficit's origins are no mystery. It was the product of a 
triple witching hour in which recession, war, and the collapse of a 
stock market bubble coincided, presenting our country and government 
with a radical change of circumstances.
    Let me pause to dispel a persistent fiction, or, more accurately, 
misrepresentation. Note this fact: If there had never been a 2001 tax 
cut, we would still be experiencing triple digit deficits today. Let me 
repeat: if those who opposed tax relief in 2001 had succeeded, and no 
bill of any size had ever passed, the 2002 budget would have been $117 
billion in deficit, and the 2003 shortfall would have been $170 
billion.
    Even if we had never been attacked, and incurred no costs of war or 
recovery from September 11th, and no tax relief had become law, we 
still would have gone into deficit, as a consequence of the recession 
and the popped revenue bubble. There is no question about what got us 
out of balance; what we should be debating is the right way, and right 
pace, for getting back in.
    Deficits are not always unacceptable. The strongest proponents of 
balanced budgets routinely make exceptions for war, recession, and 
emergency--exactly the conditions we have experienced simultaneously. 
In other words, there are times when it is necessary for the Federal 
Government to borrow in order to address critical national priorities.
    These are such times. In proposing an aggressive economic growth 
plan, the President was consciously opting to accept somewhat greater 
borrowing in order to put more Americans back to work.
    He did so recognizing that today's deficit is moderate, and 
manageable. It is moderate by any historical measure: at 2.7% of GDP, 
the 2004 shortfall will be smaller than in 12 of the past 20 years, and 
less than half the largest deficit in that period. It is manageable, in 
fact highly so, in that the costs of debt service are extraordinarily 
low. Just five years ago, interest payments took up 15 cents of every 
budget dollar; this year, thanks to the lowest interest rates in 40 
years, it will be just 8 cents.
    A balanced federal budget is a very high priority for this 
President. It is not, and cannot be, the highest priority, let alone 
the only one. He does not place it ahead of our national security, the 
safety of Americans from domestic terror, or a growing, full employment 
economy.
    If a balanced budget were all that mattered, it would be no great 
trick to accomplish. By either CBO or OMB estimates, all we would have 
to do is to stop where we are, to hold our spending growth to inflation 
for the next couple years. But that would mean no action to create 
jobs, no new action to defend our homeland, no further strengthening of 
our defenses, and so forth.
    The most important objective in this context is economic growth, 
the wellspring of balanced budgets. No one saw the last surplus coming: 
not five years ahead, or three, or even one. In fact, four months into 
the year of the first surplus, both OMB and CBO were still predicting a 
deficit for that year. A strong economy produced that unpredicted 
surplus, and only a strong economy can bring a surplus back. If we 
balance our priorities, we will balance our budget in due course.
    The costs of a potential conflict in Iraq are not included in this 
submission. We all fervently hope that no such event will prove 
necessary, but if it should, we would present to the Congress 
immediately a request for the funds estimated to be required to enable 
a decisive victory, a secure and compassionate aftermath, and the 
replenishment of stocks and supplies to prewar levels.
    Our projections, which incorporate extraordinarily conservative 
revenue estimates, see deficits peaking this year and heading back down 
thereafter. To hasten our return to balance, the President proposes to 
restore the system of spending controls under the recently-expired 
Budget Enforcement Act. He asks the Congress to pass, along with this 
year's Budget Resolution, a reenacted BEA incorporating two years of 
caps limiting discretionary spending to the 4% path that would match 
government's growth to the growth of American family income. That 
renewed statute should also reinstate the so-called PAYGO system that 
limits the budgetary effect of entitlement spending and revenue 
measures.
    Finally, no discussion of this or any future budget should take 
place without serious examination of the real fiscal danger facing our 
Republic. We will debate the right level of imbalance for this year and 
next, as we should. We will argue over the right amounts to be employed 
in defense reconstruction, or economic growth measures, or fighting the 
scourge of AIDS, as we must. But, from a financial standpoint, these 
are small matters compared to the looming, unfunded liabilities of our 
huge entitlement programs.
    The unfunded promises of Social Security are some $5 trillion, more 
than the entire national debt outstanding. The figure for Medicare is 
even more staggering: its promises exceed its future receipts by more 
than $13 trillion, a figure more than triple the national debt and 40 
times the deficit we will run this year. We cannot conceivably tax our 
way out of this dilemma. Only sustained economic growth, coupled with 
thoughtful reform of these programs, can secure to future generations 
the same degree of protection, or more, that seniors enjoy today.
    This Committee, and its counterpart in the other body, have the 
first and fundamental role in helping the President determine the 
Nation's priorities. You also are the taxpayer's first line of defense 
against excess or misuse of the dollars which the government takes away 
from them. On behalf of the President, thank you for your service here 
and for your leadership in restoring an orderly, effective budget 
process during 2003.

                                 

    Chairman THOMAS. With that, I would recognize the gentleman 
from New York for any questions you may wish to ask within the 
5-minute period.
    Mr. RANGEL. Okay. Well, I need some help with our 
Governors. They really believe that their revenues are going to 
be dramatically reduced as a result of this tax cut program. 
Have you shared--have you got a feedback from the Governors as 
relates to the deficits that they are going to face as a result 
of this, and the fact that they cannot balance their budgets 
the way we do, and that if you move the dividends--taxes from 
dividends, that it would be negative in terms of them raising 
revenues the way they have?
    Mr. DANIELS. Obviously, everyone knows that the States are 
facing serious fiscal problems of their own. A starting point 
that surprised me and may surprise some Members is really to 
note how fast federal transfers to the States have been 
growing. It hasn't been enough, obviously, to head off the 
problems they have got, but over the last 4 years they have 
risen from $285 billion to, in the projection for 2004, $407 
billion. They have been going up at a rate of 9 percent, which 
is a lot faster than State spending has been going up and, 
therefore, must have prevented the situation from becoming any 
worse.
    On the tax proposals, there is, I know, concern. The 
estimates I think the Treasury has made are that the impact on 
State collections would be a few billion dollars, not an 
enormous increase in the problem they are facing. Offset 
against that, of course, is the hope of greater economic 
growth. The one way for States to quickly get back to a 
position of stability is for this economy to grow more and for 
their own taxes systems to start throwing off more revenue.
    Mr. RANGEL. Let me ask, how in God's name can you prepare 
any budget with a war--the war clouds overhead, and in 
listening to the Commander-in-Chief, it looks like the war is 
evident? There has to be fantastic costs estimated and 
associated with the war. Why would that not be included in a 
budget?
    Mr. DANIELS. Congressman, with you, the President hopes 
that there won't be a war. That war is avoidable today, 
tomorrow, any day, by Saddam Hussein who could comply if he 
chose with the demands the world community has been making on 
him to disarm now for 11 years. So, we hope it won't occur at 
all. If it does, we think we would be prepared as soon as the 
President told us the nature--and our military leaders told us 
the nature of the conflict that they expect, to bring the 
Congress a good-faith----
    Mr. RANGEL. So, the answer to my question is in the hands 
of Saddam Hussein?
    Mr. DANIELS. Well, it could be in his hands. He could 
certainly prevent the problem. Otherwise, I suppose the world 
community will take matters into its own hands.
    Mr. RANGEL. So, the fiscal estimate of the costs of this, 
we would not project at this time because Saddam has not given 
us the opportunity to make that decision?
    Mr. DANIELS. More or less, that is correct.
    Mr. RANGEL. It seems like it is a lot more, less than more, 
but I will just hate to believe--well, suppose for a 
hypothetical since you have been at this a long time, that 
Saddam Hussein does not fulfill the wishes of the President and 
all of us and encourages an attack on--in Iraq. Then what would 
you think the costs would be?
    Mr. DANIELS. Well, we don't have any single estimate, sir. 
The----
    Mr. RANGEL. How about a guesstimate? The Pentagon has said 
from 50,000 to 200,000 troops. The Secretary of Defense said it 
may take 4 days, 4 weeks or 4 months. Doesn't this give you 
enough to work with in ballpark figures as to how much it would 
cost for 50,000 or 200,000 troops?
    Mr. DANIELS. Well, those are the right variables, but the 
numbers you use illustrate how huge the ballpark is, and there 
is a very wide range of possibilities. As I said, we have done 
a lot of work on this. At a point at which the President made a 
decision, and we would ask the experts in the military for the 
likely parameters, number of troops, likely duration and so 
forth.
    Mr. RANGEL. It would be premature to ask them now?
    Mr. DANIELS. Well, yes.
    Mr. RANGEL. Saddam hasn't decided, so we can't project it 
ourselves?
    Mr. DANIELS. That is correct. It would be a very wide range 
of conflicts and, therefore, of estimates.
    Mr. RANGEL. Thank you, Mr. Chairman.
    Chairman THOMAS. Mr. Crane.
    Mr. CRANE. Thank you, Mr. Chairman. I welcome you, Mr. 
Daniels, today. I want to congratulate you for having been one 
of the strongest proponents on behalf of fiscal restraint over 
the past several years. We are entering a period right now 
where it looks like we are faced with the prospect in the 
foreseeable future of budget deficits, and that is a concern to 
me.
    The Administration has effectively made the point that the 
President's package will promote growth, economic growth and 
hopefully long-term recovery and increase job creation over 
time. In short, that it will be a decided plus to the economy, 
but in the interim, we are faced with the necessary increase in 
expenditures in areas like defense and homeland security. Any 
time you are faced with these kinds of problems, you must spend 
as much as you have to spend to try and maximize security.
    There is also the request for a 4-percent increase in 
spending in other areas beyond defense and homeland security. 
Why 4 percent? Why not zero?
    Mr. DANIELS. We did approach it much the way you described, 
Congressman. That is to say, the President did assign top 
priority to the life and death issues of national defense, a 
successful war on terror, and what we now call homeland 
defense. He told us that he wanted for all spending to 
decelerate substantially from the rate we have been running. 
That rate was running around 7 percent plus in the years right 
before the President took office. It slowed for the first year 
but then went up to 9 percent last year because of the costs of 
September 11. The President suggested--or chose, I should say, 
from a list of possible benchmarks the amount that the American 
family can expect its--a typical family can expect its own 
income to go up and said the government ought grow no faster. 
We were able by being selective about programs that could grow, 
programs that could stand still and some programs that could 
shrink, to put the whole package together at that 4-percent 
level.
    The rest of government, aside from defense and homeland 
defense, you are quite close, but we measure its growth at 3.8. 
You say why not zero? I think the answer is that----
    Mr. CRANE. Why not freeze it during this crisis period?
    Mr. DANIELS. Obviously, a case could be made. The President 
believes that at least in certain areas--and he laid out many 
in the State of the Union, the rest are in the budget--that it 
was important to keep moving forward.
    Mr. CRANE. Have you any idea what the dollar amount would 
be if we froze it versus that 4-percent figure?
    Mr. DANIELS. It would be something like $10 or $12 billion. 
If you take defense and homeland out, you have a remainder that 
is, I guess, $360-$370 million something like that. So, take a 
little under 4 percent of that.
    Mr. CRANE. The centerpiece of the President's growth 
package has been the elimination of the double taxation on 
dividends, and some have criticized this proposal, saying it 
doesn't do enough to help to boost the economy. Can you explain 
to me the effects that the dividends proposal would have on, 
one, the costs of capital; two, business and the economy--or 
business and investment, rather; and thirdly, the economy?
    Mr. DANIELS. I can report that there was a strong consensus 
of many economists whose views were sought as the President 
looked at all his options last fall, that in addition to the 
correcting an unfairness in the Tax Code, that of double 
taxation, that this particular move would have a very strong 
positive effect on the factors you just mentioned, the cost of 
capital, therefore the investment climate, and it would also 
have a positive effect on individual investors, in the sense 
that strength and confidence in the market itself, we heard 
different estimates of how much and how quickly, but all these 
were positive factors.
    I would describe this particular piece of the package as 
aimed more at the intermediate and long-term sort of balancing 
the package, along with those elements that would have 
immediate effect.
    Mr. CRANE. Well, I thank you very kindly, Mr. Daniels, and 
I look forward to working with you.
    Mr. DANIELS. Yes, sir. Thank you.
    Mr. MCCRERY. [Presiding.] Mr. Stark.
    Mr. STARK. Thank you, Mr. Chairman. Mr. Director, thank 
you. I am interested in your program for Medicare. I am afraid 
that just as you are manufacturing trumped-up danger in Iraq to 
send a lot of young Americans to get killed unnecessarily, you 
are also trumping up a lot of unnecessary alarms in terms of 
Social Security and Medicare, mostly because I am quite sure 
you would like to do away with entitlements. It is obvious that 
is part of the Republican policy and platform.
    It doesn't do the Office of Management and Budget (OMB) 
much good when you keep bouncing around with your estimates. 
Now, in here you suggest--I don't know what you feel for Social 
Security, but you suggest that Medicare is going to exceed its 
future receipts by more than $13 trillion. That is a 75-year 
projection, Mr. Daniels. I am not even--I know I am not going 
to be around to call you on it, and you may not be here, but 
tell me this: If you want to use 75-year projections to scare 
the hell out of old people, which is a terrible thing to do, 
tell me how much the President's proposed tax cuts are going to 
cost us over 75 years.
    Mr. DANIELS. Well, who is us, Congressman? That is money 
you would be taking away from the us----
    Mr. STARK. Just project the cost of the President's tax 
cuts. How much will they cost over 75 years?
    Mr. DANIELS. Well, there is no way for me to tell you that 
answer.
    Mr. STARK. Of course there isn't. Only a hare-brained 
economist who didn't know his butt from his elbow would try an 
estimate like 75 years, but let us do this: How about the 
interest on the debt payments for 75 years, can you do that 
with your shoes and socks on?
    Mr. DANIELS. One could make a good estimate of any one 
point like that. Just as the actuaries, we didn't invent the 
75-year convention. We didn't do the numbers you are talking 
about. The actuaries who worked forever----
    Mr. STARK. It has no relationship to the current deficit or 
the current tax cuts or anything else, does it? It is a figure 
picked out of the air, which, I might add, ignores revenues, 
general revenues, does it not?
    Mr. DANIELS. It does not include them, so----
    Mr. STARK. So, it would only be about half that didn't 
know. It would be about $11 trillion, actually. No, $6\1/2\ 
trillion if you used the continued rate of general revenue.
    So, what I would like to suggest is that when you come 
out--when you are talking about a budget, you are talking about 
a $1.5 trillion tax cut, whatever you are talking about in lost 
revenues or deficits, to come out with this idea that there is 
something so brutally wrong with Medicare, which by the way has 
probably got the best short-run surplus, which you guys are 
spending, that it has had in its history. So, to suggest that 
$13 trillion in the context is terribly disingenuous and 
certainly not worthy of someone who would like us to accept 
these numbers and make any decisions on them, I just think that 
that is unprofessional and is tantamount to cooking the books 
and making up numbers. It would be very nice, and I would ask 
you if you would like to resubmit this testimony with 5-year 
Medicare shortfalls or 10 if that is what you choose to use. 
Let us get this into a realistic ballpark. Is that fair?
    Mr. DANIELS. It is something we can clearly do. The people 
whose professionalism you are demeaning are the actuaries at 
the U.S. Department of Health and Human Services (HHS) who work 
on a nonpartisan basis for every Administration. They do these 
calculations routinely. Seventy-five years is the convention 
they have used. Just as any pension fund is required to do, one 
can make a projection and should over the long term of whether 
the promises made exceed the revenues that are currently coming 
in. In this case they do----
    [The information follows:]

    Medicare is a complex, long-term, intergenerational program. A 
consequence of this is that it can be very misleading to look at a 
single year, or even five or ten year forecasts when assessing the 
program and proposed changes such as a drug benefit or more fundamental 
reforms. We really have no choice but to assess Medicare using long-
term forecasts, the norm being a 75-year forecast done by Medicare 
actuaries. Five or even ten year forecasts are flawed because they 
ignore critical factors about the program that threaten the financial 
health of Medicare for our children and grand children. The impact of 
the aging baby boomers is a good example. Medicare actuaries predict 
that the influx of baby boomers into the Medicare program will almost 
double enrollment by 2030, from 40 million to 77 million. It would be 
irresponsible for us to focus on short term forecasts that ignore the 
implications of swelling Medicare enrollment when assessing the 
program's financial health.

                                 

    Mr. STARK. This $13 trillion is not what the actuaries 
presented. That is a manipulated figure. I just submit to you 
that using 75-year projections when you are mucking around 
badly enough; you are using 10-year tax projections and then 
you are using 5-year spending projections. So, there is a game 
called three-card Molly that you might care to indulge in, but 
it is a shell game. It is too bad, because you are harming 
those people in your budget who rely on Medicare and Social 
Security. To go beyond this is not worthy, and I am very 
disappointed.
    Mr. MCCRERY. Mr. Houghton.
    Mr. HOUGHTON. Yes. Thank you, Mr. Director. It is good to 
see you here. I don't believe you are using a show game. I 
think you are being honest, and I would prefer to consider all 
your statement in that light.
    I have got to ask you, though, that--I have got some 
figures here from 1960 on, and of the 42 years we have had 6 
years of surplus and 36 years of deficit. It took us such a 
long time to get out of the deficit situation. I would just 
like to have your feel about how that is going to come along, 
because there are other issues out there, whether it is the 
cost of the war or whether it is Medicare or Social Security or 
any other things. I am really sort of interested in sort of the 
long-term trends and how you see this?
    Mr. DANIELS. Well, your figures are correct. We have been--
we borrowed on a net basis far more years than we have paid 
down debt, and there is nothing at all unprecedented about the 
levels we see now. Even if the President's entire program is 
passed.
    I should also add that we have the lowest, most pessimistic 
revenue figures around for this year and next year, because we 
have observed what has happened. Let us remember where the 
deficit came from. It is no mystery at all. It is entirely the 
product of the recession that was on in the first quarter of 
2001, the war and the costs of recovery and the popping of the 
stock market bubble which took a lot of federal revenue--which 
inflated federal revenue in the late 1990s and took it away 
just as quickly in the last couple, 3 years. It is very 
important to note that if there had never been tax relief, not 
one dime of tax relief provided to the American people in 2001, 
we would have had a $170 billion deficit this year. So, we 
ought to, A, be accurate with our facts; and B, be talking 
about how to move out, get back to balance.
    The other thing that is very important to note is that if 
there are those for whom balance in the federal budget is the 
overriding dominant federal priority, we can do it. We can hold 
spending to inflation for a couple years. We will project to be 
in balance, but we don't do anything new. The President 
believes that it is--a set of balanced priorities would include 
a growth package to put more people back to work, would include 
further strengthening of defense, would include more homeland 
defense, would include a start on Medicare reform and several 
other things. Honest people can differ about that. Please note 
that even with all his policies involved, we do see deficits 
peaking this coming year and then heading back toward balance.
    Mr. HOUGHTON. I think Common Cause has figured out that we 
may have something like $25 trillion in unfunded liabilities, 
and how serious--I don't know if that number is accurate or 
not, but assuming it is, it is a rather large number. Is that 
going to have an impact on our getting back to a surplus 
condition?
    Mr. DANIELS. Concord Coalition's number is about $25 
trillion, that more or less tracks with what we reported in the 
budget. They believe that is the honest and accurate way to 
account for our future unfunded liabilities, and so do we.
    The answer is that it will have an increasing effect on our 
ability to have annual balance in the budget. If we don't do 
something about the fundamental structure of those programs, 
and we leave the promises at trillions and trillions of dollars 
more than the revenue coming to fulfill the promises, we will 
be stuck either with unthinkable increases in taxation, truly 
unthinkable of the kind that would stop the economy cold, or 
wrenching restructuring of the programs.
    The real tragedy would be that if we blinded ourselves to 
this problem and waited and waited and waited as the political 
process is far too prone to do. The changes--instead of making 
moderate modest changes in the program, we would have to make 
very, very severe ones. So, let us hope we don't procrastinate.
    [The chart follows:]



    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


                           --------


    Mr. HOUGHTON. Thank you very much.
    Mr. MCCRERY. Mr. Matsui.
    Mr. MATSUI. Thank you, thank you very much, Mr. Chairman. 
Welcome, Director Daniels.
    Mr. DANIELS. Thank you.
    Mr. MATSUI. I want to refer you to the third page of your 
written testimony here in the next to the last paragraph where 
you state, the unfunded promises of Social Security are some $5 
trillion.
    From the actuary's point of view, they say it is actually 
over the 75-year period, $3.3 trillion. I gather where you may 
have picked up the additional $1.7 trillion. I think what you 
are probably excluding is the money at this moment anyway in 
the trust fund. We do have a surplus of about $1.2 trillion, 
and you may have added that on to the $3.3 trillion, and then 
you may have also add--maybe rounded it off to get 5 trillion.
    The numbers that the actuary used is $3.3 trillion. The 
only reason I raise this is because it is my understanding if 
you read the President's budget, not you, but we all read the 
President's budget carefully, over the next 5 years, we are 
going to add to the national debt some $1 trillion, perhaps a 
little over $1 trillion, and that means that that entire 
surplus in the trust account, or at least from an accounting 
point of view, will be gone. So, we will have used about $2.6 
trillion worth of Social Security surpluses over the last, 
well, 7 years if you count the last 2 years and then 5 years 
projected down in the future.
    The reason I raise this is not to question you on that, but 
to make reference to the fact that the President has an 
initiative on Social Security. He had a commission come up with 
three proposals. Actually, it was in 2001, December 2001. He 
has spoken over this in the last 6, 7 months, most recently 3 
months ago when he said every American should have a choice 
into where they put their investments and we should partially 
privatize Social Security. I think he used the word ``personal 
accounts,'' and I will use that for his purposes.
    The question I have is, how do we deal with the cost of 
privatizing Social Security, because we have eliminated the 
entire surplus? There is no surplus, so there is no 
opportunity. Even under the President's scenario, the best-case 
scenario, there is no money to finance a bridge loan to pay for 
these privatized accounts for the first 40 or 50 years. As a 
result, would we just have to go further into deficit spending 
to pay for the personal accounts, so long as we still want to 
maintain, as the President insists, disability and survivors' 
benefits and also benefits for every American at or near 
retirement. So, how does he intend to do this? I know he didn't 
spend much time on this in his State of the Union message. So, 
I assume he is not going to bring it up, but if he is not going 
to bring it up, I would like him at least then to explain how 
he will find the $3.2 trillion to pay for the privatized 
accounts that his own commission designed, because we are 
anxious to deal with this.
    I wrote a letter to the President, along with Mr. Rangel, 
Mr. Doggett, Mr. Cardin, Mr. Pomeroy and Mr. Becerra on January 
23, in which we suggested either we take this up now and debate 
it with the President in terms of his personal accounts so we 
can really deal with this. If not that, if he doesn't want to 
present us with a proposal, we should sit down without 
preconditions, without any preconditions and see if we can 
resolve this problem, because I personally, and all Members on 
my side of the aisle, think this is a very serious problem. We 
have to address it soon, but we shouldn't be addressing it with 
gimmicks. We should try to address it in a good-faith serious 
way, as I think all of us try to do when President Reagan was 
President, and he showed leadership on that in 1983. Perhaps 
you can respond to that.
    Mr. DANIELS. Well, I know the President will read your 
letter carefully and will welcome your shared concern about 
this subject.
    Mr. MATSUI. By the way, I have been asking for this for the 
last 2 years.
    Mr. DANIELS. I would respond in this way. First of all, we 
have to be pretty careful about our language. The Social 
Security trust fund is there. Every penny of it is there, and 
there is exactly as much there as if we had a different fiscal 
outcome this year or any other year, it is exactly the same 
size. It has exactly the same assets, namely Treasury bonds, 
that it always has had, and it is paying exactly the same 
benefits. It will next year and in all future years.
    Second, there are different ways of measuring the unfunded 
liabilities, as your question indicated, but all of them 
indicate a problem as large or larger than the whole national 
debt of today.
    So, I think that the President would be eager to work with 
you on it. He did, both because of its size and because of the 
interest and momentum in Congress in recent years in Medicare, 
did decide to try to move forward on Medicare first, and that 
is a decision that most people that we have talked to believe 
is probably just tactically prudent.
    Mr. MATSUI. Mr. Chairman, I know my time has run out and I 
know you want to move along, but----
    Mr. MCCRERY. I would love to hear more, but we have a lot 
of people who want to----
    Mr. MATSUI. I don't think he answered my question. I asked 
him how he was going to deal with the----
    Mr. MCCRERY. He can submit it in writing.
    Mr. MATSUI. Would you ask him to submit it in writing.
    Mr. MCCRERY. Yes, sir. I am sure he will.
    Mr. MATSUI. Perhaps you can look at the exact question and 
submit the exact answer to my question.
    [The information follows:]

    The Administration is committed to strengthening Social Security 
and to giving individuals the option of owning personal accounts. In 
May 2001, the President appointed a bipartisan commission to develop 
recommendations to modernize and restore fiscal soundness to Social 
Security. In December 2001, the President's Commission reported that 
reforming Social Security to include personal retirement accounts would 
lead to better long run outcomes for future beneficiaries, the Social 
Security program, and the economy as a whole.
    It is widely acknowledged that corrective action must be taken to 
place Social Security on a permanently sustainable course. The short-
term costs of any effort to strengthen Social Security must be 
considered in the context of the long-range gains to individuals and 
the federal budget.
    Analysis by the independent Social Security actuaries has verified 
that the revenues required to fund a given level of benefits under a 
personal account framework will be substantially less than the revenues 
required to finance the same level of benefits--for retirees, 
survivors, and the disabled--under the current Social Security 
structure.
    Personal accounts would thus be an important part of strengthening 
the Social Security system and would reduce long-term fiscal pressures 
relative to other available methods of funding Social Security.

                                 

    Mr. MCCRERY. Sure. Yes, sir. Mr. Collins.
    Mr. COLLINS. Thank you, Mr. Chairman. Mr. Daniels, you just 
made a very important statement here about this Social Security 
trust fund, Medicare trust fund, all trust funds, but these two 
particular, are they not entitlements, they are entitlements by 
law, the benefits have to be paid as structured by law?
    Mr. DANIELS. Yes, sir.
    Mr. COLLINS. That means that these benefits will be paid 
prior to anything that is not structured by law or which is 
discretionary?
    Mr. DANIELS. I think as a matter of law and as a matter of 
the commitment that we all feel----
    Mr. COLLINS. They come ahead of any kind of discretionary 
spending?
    Mr. DANIELS. Yes, sir.
    Mr. COLLINS. Discretionary includes defense discretionary 
and nondefense discretionary; is that right? The Social 
Security and Medicare benefits will be paid by law ahead of 
anything else that happens within the Treasury of the United 
States?
    Mr. DANIELS. I think you can feel confident.
    Mr. COLLINS. Very good. Well, I get tired of these people 
trying to scare our seniors at home that these benefits are not 
going to be paid, they are going away. That is absolutely 
asinine, wrong, and they should not be doing that. These 
benefits must and will be paid prior to any type of 
discretionary spending.
    As far as this unfunded liability that is out there, when 
you talk to the seniors at home, $1 trillion, $3 trillion, $5 
trillion, $10 trillion, that number just blowing their mind. 
What they are worried about, concerned about is their check. I 
think it has been pretty well put to the people in this country 
by this President who has really stepped up to the bar and says 
let us deal with this, that we are not going to do anything 
that is going to affect anyone who is in the structure today 
drawing Social Security benefits or covered under the Medicare 
fee-for-service system. Is that not true? Has he not said that?
    Mr. DANIELS. Yes, sir.
    Mr. COLLINS. That leaves two other generations, the 
generation behind the generations receiving benefits, today 
that is those of us who are baby boomers. I don't believe I 
have heard this President say it is going to be mandated that 
anything changes about my Social Security, has he? Have you 
heard him say anything is going to change, the baby boomer's 
generation Social Security, unless they opt to have some 
change? Should we make a change? Yes or no? Simple answer. The 
answer is no. I haven't heard him say it, because it would 
affect me.
    There are another set of generations affected by Social 
Security and Medicare, and that is the generation behind me. 
That is my children and my grandchildren and yours and others 
and all in this room. They are the ones that are going to pay 
the bill. It is a pay-as-you-go system. They are going to pay 
the taxes and benefits of those and me who are receiving today. 
That is what the President is focused on. That is who he is 
focused on. That is who he wants to make sure they have 
something that is viable and real and lasting once they reach 
the age of eligibility. Is that not true?
    Mr. DANIELS. That is certainly true.
    Mr. COLLINS. Well, I like the concept he has put forward. I 
have been talking about it at home for going on 10 years, 8 
years since I have been on this Committee. My seniors 
overwhelmingly support me because I talk to them in simple 
terms that they understand about how it is going to affect 
them, how it is not going to affect them, who it is going to 
affect, who is going to pay the bill and who is going to be 
receiving the benefits, are they going to receive the benefits 
that they have put into the structure for many, many years and 
there is no jeopardizing to their benefits.
    We had a summit in 1995 on Social Security, one that the 
President called. As we were gathered around the big table the 
last day, the closing session, the Commissioner of Social 
Security pretty well pointed out, and I thought he did a really 
good job the day before, and I relayed this message to 
President Clinton at that time, the reason that we have such a 
problem dealing with Social Security or Medicare is that people 
on this Hill do not trust each other. Members of Congress don't 
trust each other to deal with this because it is so political, 
whether it be a Democrat or Republican, the House or the 
Senate, and when it comes to dealing with Administration, there 
is just not enough trust to deal with something this important 
to the way the current atmosphere is in this town. If we don't 
correct that, we are not going to correct this problem. I wish 
the people in this body and on the other end of the hall would 
stop telling people at home that you are not going to get this, 
you are not going to get that, it is going to be cut out, they 
are spending your money on other things, which is absolutely 
not true.
    I thank you for your presentation, your comments, your 
welcome work, and for the President and his focus on how we are 
going to deal with these two very important issues, as well as 
how we are going to deal with terrorism, Iraq and other things 
that have to be dealt with through this budget process. Thank 
you, Mr. Chairman.
    Mr. MCCRERY. Mr. Levin.
    Mr. LEVIN. Thank you. Welcome. I have been looking at your 
testimony while the questioning has been going on. We didn't 
have a chance to hear from you. I think you are the first 
witness I can remember who has made your standing who did not 
have any presentation at the beginning. So, I have been trying 
to catch up. We just received your written testimony an hour 
ago, and it is interesting how you make so many arguments that 
minimize the deficits. We went through this with the Secretary 
of Treasury yesterday, and you talk about the 2.7 percent, it 
is smaller than 12 of the last 20 years. You don't look earlier 
than the 20 years when it was always lower, except 1 or 2 
years. Of course, those were the years in the 1980s of deficits 
with those huge tax cuts that were supposed to grow us, and 
that didn't quite work out. Then you say no one saw the last 
surplus coming.
    It is interesting to read all of your rationale for not 
worrying about the deficit very much, but I happen to be given 
chart 3.4 in your budget, the alternative productivity 
assumptions. Do you remember that chart?
    Mr. DANIELS. Tell me more, Congressman. I am not sure which 
one it is.
    Mr. LEVIN. I have the page, I think. It is on page 43 of 
the budget of the U.S. Government, and it has, as I said, 
alternative productivity assumptions. It shows that except for 
a few years between now and 2050, it is projected that there 
will always be a deficit. Do you remember that chart?
    [The chart follows:]
    [GRAPHIC] [TIFF OMITTED] T86155A.001
    

                                 

    Mr. DANIELS. Well, I think I know the one you mean. What 
question can I answer for you?
    Mr. LEVIN. Well, if you yourself predict deficits except 
for a few years going out to the year 2050 and under 2004 
budget policy extended, it goes down and down--actually, the 
deficit there goes up and up. The line goes down and down. The 
percentage of deficit to gross domestic product (GDP) goes up 
and up. That is your chart. Now, how do you mesh that with 
minimizing the significance of deficits?
    Mr. DANIELS. First of all, Congressman, you can search my 
testimony. You won't find the word ``minimize.'' You won't find 
the words ``don't worry.'' I think that the concern is entirely 
proper.
    Mr. LEVIN. Do you stand by this chart?
    Mr. DANIELS. For what it is. It illustrates, if it is the 
one I am thinking of, the point made earlier about the--it is 
really not a prediction of where deficits can go. We know we 
can't tell, with much precision at all, about the next few 
years. One thing we know with some rough precision is what our 
current entitlement mismatch between revenue and promises is, 
and that is what dominates the chart you are looking at. It 
must be if it is the one that goes to 2050.
    Mr. LEVIN. So, it shows when you look at the unified 
budget, you have this continuing deficit except for a few years 
through 2050. That is even if there is assumed higher 
productivity growth.
    Look, we spent a lot of time with the Secretary of Treasury 
yesterday. I want to just ask you. You have your belief, your 
faith, and we are not going to shake it. Let me ask you about 
education. I think that your budget proposal is in terms of no 
child left behind less than was authorized for 2004. Do you 
remember about how much?
    Mr. DANIELS. By some margin, but that is true of almost 
every appropriation compared to almost every authorization 
bill.
    Mr. LEVIN. I think it is by $9 billion. Is that possible?
    Mr. DANIELS. Yes, it is possible.
    Mr. LEVIN. So, what do we tell my constituents who were 
promised in H.R. 1 a certain level of federal funding, and you 
come forth with a budget that is $9 billion below what was 
stated by this institution and the President of the United 
States?
    Mr. DANIELS. First, you tell them that we doubled federal 
education spending in the last 6 years. You tell them it is 
going up at one of the most rapid rates in the budget this 
year. You tell them that what they were promised in H.R. 1 
first and foremost was accountability. We have been spending 
more and more money per student for 30 years now with worse and 
worse results, and what they were promised most fundamentally 
was better results.
    As the Secretary of Education and the President have 
consistently said, more money, yes, but results first, and so 
there is substantially more money this year as the President 
has provided in each year for education. If and when the system 
begins to perform, then he will certainly support still further 
increases.
    Mr. MCCRERY. Mr. Lewis.
    Mr. LEVIN. Thank you.
    Mr. LEWIS OF KENTUCKY. Thank you, Mr. Chairman. Mr. 
Daniels, a little while ago you stated that if we froze 
spending at current levels, that there would still be a 
significant deficit, that the 4-percent increase in spending--
in discretionary spending would basically increase the deficit 
by $10 to $12 billion; is that correct?
    Mr. DANIELS. Well, it would increase what we call budget 
authority by about that much, and that would roughly be 
reflected in actual money spent.
    Mr. LEWIS OF KENTUCKY. What effect do you think the 
projected deficits will have on our economy?
    Mr. DANIELS. It depends what they are used for or depends 
what their source is. As the budget makes plain, the deficit--
projected deficit is, in substantial part, due to the--would be 
due to a major growth plan, which we hope would be very 
beneficial to the economy, both short term and longer term. If 
you are asking about the level of the deficits, and that is a 
very important question, how much is too much? A look at 
history says that this is a level at which the economy has 
succeeded in many past years and it is an acceptable level. 
Nobody is happy about it, but given its uses, number one, to 
defend the lives of Americans; number two, to try and create 
more jobs, the President believes it is the right balance of 
our priorities.
    Mr. LEWIS OF KENTUCKY. The President's critics have accused 
the 2001 tax cuts as being a big part of the loss of the 
surpluses and now the projected deficits. Is that an accurate 
assessment?
    Mr. DANIELS. It is a fiction. As I mentioned, if there had 
been no act at all in 2001, no tax relief at all--and there 
weren't very many people, as I recall, who favored zero. There 
were many who favored a smaller package of tax relief or 
different combinations, but let us just pretend that there had 
been zero. We would have had triple digit deficits last year 
and this year and next year, and that is because their origins 
lie in circumstance. They lie in the popping of the stock 
market bubble, in the recession, which was not seen at the 
beginning of 2001, although it was starting, and of course the 
events around the war.
    [The chart follows:]
    [GRAPHIC] [TIFF OMITTED] T86155A.002
    

                                 

    Mr. LEWIS OF KENTUCKY. Thank you.
    Mr. DANIELS. Thank you.
    Mr. MCCRERY. Mr. Cardin.
    Mr. CARDIN. Thank you, Mr. Chairman. Welcome. It is a 
pleasure to have you here. I want to just express my great 
concerns about the overall budget direction. I really do think 
we have to be more sensitive about the deficit, particularly as 
it relates to the spending and revenue side, and Mr. Chairman, 
with your permission, I would like to put an editorial from the 
Baltimore Sun Paper--it was in the Baltimore Sun Paper this 
morning--in our records, which I think express at least my view 
on the subject and would be helpful I think in our records.
    Mr. MCCRERY. Without objection.
    [The article follows:]
                           The Baltimore Sun
                            February 5, 2003
                          Reversal of Fortune
    President Bush has hit on one way to try to control federal 
spending: grow the federal budget deficit so rapidly--by shamelessly 
providing so many tax breaks for the wealthy--there won't be that much 
money left to spend down the road. And what a masterful jump he's now 
gotten on this.
    Mr. Bush took office with a projected budget surplus over the 
coming decade of $5.6 trillion--and there was talk of eliminating all 
federal debt by 2008 and maybe salting away some bucks for that fateful 
day, perhaps in 2016, when Social Security revenue will begin to fall 
behind its payments.
    But in just 2 years--with his historic tax cuts, a sagging economy 
and the unforeseen costs of fighting terrorism--that surplus has 
suddenly evaporated, replaced by red ink as far as the eye can see.
    In Mr. Bush's budget released this week, the deficits total a 
record $304 billion in 2003 and $307 billion in 2004. Over the next 5 
years, the cumulative deficit runs to $1.08 trillion. On paper, that's 
a surplus-to-deficit collapse of almost $7 trillion in 2 years, and the 
reality appears to be far worse.
    The Administration's deficit forecast paints a rosier picture by 
looking forward only 5 years, not 10. It doesn't take into account the 
cost of a war in Iraq. It also doesn't include $500 billion for Mr. 
Bush's plan to fix the Alternative Minimum Tax.
    As a result, the liberal Center on Budget and Policy Priorities 
says the 5-year deficit projection is more like $2.3 trillion and the 
10-year deficit likely exceeds $4 trillion. And that doesn't include 
Mr. Bush's latest proposed handout to the rich, his creation of new, 
non-taxable IRA-like accounts--likely to cost hundreds of billions of 
dollars more in lost tax revenue.
    This is a stunning reversal of fortune--one largely driven by the 
Administration's aggressive tax-cut plans. It mortgages the future, 
making doublespeak of the President's promise in his State of the Union 
address last week to not pass along problems to other generations. Mr. 
Bush's radical tax cuts now make it far more likely younger Americans 
will later bear much greater tax burdens to provide Social Security and 
Medicare to aging baby boomers--or these safety nets will have to be 
drastically cut.
    Of course, like President Ronald Reagan, Mr. Bush and his supply 
side economists believe his tax proposals will so grow the economy that 
there will be more than enough for all. This is uncertain at best; Mr. 
Reagan's similar agenda led to big deficits.
    What's certain are big windfalls for the wealthy from his plans for 
tax-free dividends and those new savings accounts--as well as wide-
ranging cuts in federal social programs. His 2003 budget plan 
essentially freezes spending on social and environmental programs, 
doesn't help slumping States and cities, and seeks savings by cracking 
down on recipients of Medicaid, school lunches and earned income tax 
credits. If Mr. Bush's tax cuts become law, you can bet much deeper 
cuts will come.
    Some deficit spending might be justified if it provided immediate 
stimulus for the reluctant economic recovery. But Mr. Bush's proposals 
don't even pretend to do that. They mainly serve the economic interests 
of those with the very highest incomes--for which the vast majority of 
us could be paying for generations.

                                 

    Mr. CARDIN. Mr. Daniels, I was under the impression that 
the Administration generally tries to avoid placing the burden 
of unfunded mandates on our States. Am I correct on that?
    Mr. DANIELS. That would be correct.
    Mr. CARDIN. Well, I am being told that it is likely we are 
going to take up the welfare reform bill directly on the Floor 
of the Congress next year. Our Chairman has indicated that it 
is not his preference. He would prefer the bill to come through 
our Committee, but it is likely that that is not going to 
happen and we are going to have it go directly to the Floor. I 
am also told that it is likely to be very similar to the 
President's proposal and very similar to the bill that we 
considered last year. The CBO estimates that for the States to 
implement that bill, it will cost them somewhere between $8 and 
$11 billion of additional State expenditures over the next 5 
years. That is an unfunded mandate, isn't it?
    Mr. DANIELS. I confess I haven't seen CBO's estimate of 
that.
    Mr. CARDIN. Well, I will make sure you have a copy of this. 
It was in last year's bill that was, as you know, passed in the 
House of Representatives, but did not get through the U.S. 
Senate. We have had broad discussions in this body about the 
fact that we do not want to create unfunded mandates. We have 
letters from the Governors indicating that to implement the new 
work requirements, they are going to need significantly more 
money for child care because of the increased requirement that 
people work at traditional jobs where they will need to have 
more child care, and second, that in order to meet the work 
requirement many States are going to have to institute work 
fare type of opportunities which cost money to create.
    So I think it is beyond question that there is an unfunded 
cost to the States. We may argue whether it is $11 billion or 
$8 billion or $15 billion, but it is going to cost the States 
additional money that we have not appropriated. My 
understanding is that your budget doesn't include any 
additional dollars in welfare funds for our States. Therefore, 
I think these changes to welfare meet the traditional 
definition of unfunded mandates, and I would ask that you look 
at that. If I am correct, I would hope the Administration would 
correct that before we bring it up on the Floor next week.
    Mr. DANIELS. I would be glad to take a look at what they 
found, Congressman. I will simply observe that the President 
has proposed the same amount of money for fewer than half as 
many recipients, welfare reform having been probably the 
greatest social policy success in memory. As you know, 
caseloads are down 54 percent, and yet the funding has not 
reduced proportionately and the President suggests keeping it 
at the same level.
    I know from the last couple years' experience there have 
been unspent so-called TANF money in most States that had 
leftover money, not money they had to make up. So we will sure 
take a look. It would appear that there ought to be enough give 
in the system because of its success to take care of this 
problem.
    Mr. CARDIN. I appreciate your mentioning that. I would also 
hope you would go back and look at the law. The purpose of the 
1996 TANF law was to get individuals off of cash assistance, 
specifically so that States would have less dependency upon 
cash assistance. We have been succeeding in doing that. Our 
States in 1996 spent 75 percent of their TANF funds on cash 
assistance. Today they are spending less than half on cash 
assistance. Exactly what we wanted them to do they are doing. 
They shouldn't be penalized for that. Once again I come back to 
the fact if the States are doing exactly what we anticipated 
they do, we should not now be putting additional burdens on 
them to change course without providing the dollars to do it.
    One more point, since I have a few seconds left. This 
morning I was with the Mayor of Baltimore and our county 
executives on homeland security. Let me put a plug in. They are 
hurting. They are up against incredible cost issues of 
providing security for our ports, providing law enforcement, 
and we need to get that money released and monies provided for 
local governments on the frontline. I would just urge you to do 
everything you can to release the monies that Congress has 
appropriated and to make sure that the dollars are provided to 
our frontline State, county, and city needs in order to meet 
the security and safety of the people in our community.
    Mr. DANIELS. We share that concern 100 percent, 
Congressman. As you know, we are trying to get the omnibus bill 
done so there will be money appropriated. We will release it as 
quickly as it can be. The President asked, as you know, for 
over $3 billion to help States and localities. We are eager to 
move that money.
    Mr. CARDIN. Thank you.
    Mr. MCCRERY. Ms. Dunn.
    Ms. DUNN. Thank you very much, Mr. Chairman. We are happy 
to have you here to talk to us, Mr. Daniels.
    I wanted to be more specific about an issue that is very 
important to the Pacific Northwest, and that is the endangered 
salmon. We have lived under a threatened warning for months and 
then under all the legalities that surround the Endangered 
Species Act with regard to the Chinook salmon. As you know, 
Washington State has worked very hard on salmon recovery 
efforts, on hatchery reform and a number of other issues that 
we believe will help to bring back the wild runs that will 
compensate for the loss of the salmon habitat and will 
replenish the runs, the wild runs.
    I want to thank the Administration for your continued 
support for salmon recovery. This Administration has provided 
much more funding for salmon recovery compared to the previous 
Administration. This year the Administration has shown its 
commitment to salmon recovery by including $90 million in its 
fiscal year 2004 budget for the Pacific Coastal Salmon Recovery 
Program that serves Washington, Oregon, northern California and 
Alaska.
    Another part of the recovery solution, of course, is 
hatchery reform. We have a project currently in its third year 
of funding. This is a process that is driven by science. It is 
reforming our hatcheries and providing for salmon conservation 
and sustainable fisheries in our State of Washington. It 
started in 2000 by our former Senator Slade Gorton and others, 
including Bill Ruckelshaus, who are very involved in the 
replenishment of the run.
    I would like to give you the opportunity to comment on the 
Administration's support for environmental and fish programs 
that affect many of the Western States and most specifically in 
my area of interest, Washington State.
    Mr. DANIELS. There is not much I can add except to admit 
that we didn't think all of this up on our own. We had good 
input and help from certain Members of the Northwestern 
delegation, specifically you. We appreciate you directing our 
attention to these problems and hope that the proposal 
addresses them adequately.
    Ms. DUNN. I will keep my fingers crossed that the Senate is 
able to support your proposal. The House consistently has gone 
in at the higher level, which this year is the same level the 
Administration proposed.
    Let me ask you about a question I have heard come up so far 
in this hearing many times and actually at home when I am in 
the district. There are lots of folks concerned about the 
deficits and particularly how the deficit will impact long-term 
interest rates.
    I wonder if you could comment on how you believe the 
current deficit projections through the year, I understand, 
2008, whether they pose a threat to long-term interest rates?
    Mr. DANIELS. Long-term interest rates are a very important 
economic variable. One of the great strengths of the economy 
right now and in recent years, we are enjoying the lowest rates 
in decades. It is important that they stay under control for 
the long term. We actually hope to see them rise a little bit 
from today's very low levels, because that would presumably 
mean economic growth was strengthening.
    We find no evidence at all that deficits on the order of 
today's have any connection. There is no historical effect we 
can find from these rather typical deficit levels, ``X'' 
percent of the economy, on interest rates.
    I think long-term interest rates have a lot more to do 
probably with inflation or the expectations of inflation, and 
right now that is very low also. Now, our expectation is it 
stays in the neighborhood of 2 percent. That seems to be what 
other observers believe. If that is even close to right, then 
one, I think, should not expect any sharp departure from the 
low interest rate environment that we have seen, other than 
that that would be associated naturally with a growing economy. 
Let's hope that happens.
    Ms. DUNN. I want to thank you, Mr. Daniels, and the 
Administration for working into your budget the permanency of 
the tax relief provisions that the President signed into law a 
couple of years ago. I frankly believe that is terribly 
important for predictability, particularly when it comes to the 
death tax, of course, that will help small businesses know what 
to plan for in the long run. To do a short-term tax relief 
package and then let those taxes come back at a time in the 
future I think is not good tax policy, and I don't think it 
contributes to the economic health of our Nation, which is, 
after all, what all of us are trying to do, whether it is 
through the growth package or in any other way. Thank you.
    Mr. MCCRERY. Mr. McDermott.
    Mr. MCDERMOTT. Thank you, Mr. Chairman. Mr. Daniels, I have 
in front of me three articles, one from the New York Times, one 
from the Wall Street Journal and one from the Christian Science 
Monitor. The titles are, ``Corporate Leaders Say Recovery 
Requires Middle East Resolution,'' ``Bush's Best Economic Plan 
May Be to Resolve the War Issue,'' and ``War Limbo Keeps 
Economy on Hold.''
    Now, when you write a budget, and having written a few when 
I was a State legislator, a balanced one, by the way, we wrote 
five of them, you always make some assumptions about what is 
going to go on.
    Robert Hormat, who is the Vice Chairman of Goldman Sachs, 
sees three possible courses for the crisis. The first one he 
terms the Rumsfeld dream, a quick war with no oil disruptions. 
This is good for confidence, he said; he calls the second one 
the Colin Powell nightmare, a long, nasty war that saps 
confidence and keeps oil prices high; and the third he calls 
the Greenspan insomnia scenario, no war, no peace, high oil 
prices and more hesitation to invest.
    Which of those assumptions did you build this budget on?
    Mr. DANIELS. Well, not consciously any one of those. That 
is a formulation, of course, that appeared after our budget was 
written. I would suppose you would say our budget is closer to 
the last of those. It presupposes an environment more like the 
present. As I indicated, I hope, candidly, we will be prepared 
if the President orders a change in the situation, but we 
didn't write a budget in the expectation of war.
    Mr. MCDERMOTT. So you say no war, but no peace, and oil 
prices going up?
    Mr. DANIELS. Well, I said closest to the last of those. Mr. 
Hormat had not written the article at the time we wrote our 
budget.
    Mr. MCDERMOTT. When did you start writing this budget?
    Mr. DANIELS. The last quarter of last year.
    Mr. MCDERMOTT. Well, we have been talking about war since 
last September. The President has had the authorization in his 
pocket for 3 months. You didn't take that into account when you 
wrote the budget?
    Mr. DANIELS. The budget clearly contemplates a funding of 
the current war on terror, which is a new feature in the last 
year, and we incorporated the cost of that into both the 2003 
and 2004 requests.
    It has been the policy of this Administration, and I hope 
it will remain, not to build into the base of the defense 
budget what may be one-time costs of events or hostilities. 
When I look back at the history of defense spending postwar, I 
see a constant recurrent pattern of mistakes in which we have 
built, maybe overbuilt, the base of defense for conflict, and 
then we have built it down rather sharply. We have wasted money 
usually on the way up and the way down.
    The policy we are trying to follow is to gradually 
strengthen defense, and if there are events like Afghanistan, 
or potentially Iraq, to fund them on a one-time basis so they 
don't have to later on be removed from defense, possibly in a 
mistaken way.
    Mr. MCDERMOTT. Am I taking the assumption from what you say 
that you think the expenditures in Afghanistan are kind of a 
one-time event? I mean, the fact we have Green Berets as the 
protection for Mr. Karzai, that is just--when is that going to 
end? Are we going to hand it off to the North Atlantic Treaty 
Organization? How are we going to get out of that?
    Mr. DANIELS. Well, that is a question I will leave for the 
Secretaries of State and Defense. I will say there were one-
time costs associated with those. We did not put those, embed 
those, in the base of defense. We have made a calculation of 
the ongoing month-on-month cost of the war on terror, which 
does appear to be an indefinite enterprise, and that is in the 
request that is in front of you.
    Mr. MCDERMOTT. You keep making a distinction which I guess 
I am confused about. Do you think the war in Iraq is not a part 
of the war on terror? Do you separate those two?
    Mr. DANIELS. No, it will be very much a part of the war on 
terror. I just don't know yet that there will be a war in Iraq.
    Mr. MCDERMOTT. So you made the assumption that there would 
be no war when you made this budget? This budget is about to be 
broken before it ever gets resolved before the Congress, 
because we are hurdling toward it.
    Mr. DANIELS. There is nothing unusual, sir, about 
supplemental requests for war or emergency, and we made 
supplemental requests after we were attacked to mount the 
large-scale activity in Afghanistan. We might have to again.
    Mr. MCDERMOTT. That was after we were attacked. This is 
planning going forward. This isn't like you are blind about 
what you are about to do, or what your President is talking 
about doing. Mr. Lindsey got let go after he let the cat out of 
the bag and said that $100- to $200 billion was going to be the 
cost over the next 2 years. I can't believe that you put this 
budget together with no concept of planning what might happen 
or what was going to happen in a war.
    Mr. DANIELS. We did contingency planning. I think if we 
brought you a budget that priced out a war on Iraq, I think you 
would have found it unusual, and I think you would have asked 
me why we were declaring war in the budget of the U.S. 
Government instead of in the conventional way.
    Mr. MCDERMOTT. I just wondered if in the office you were 
doing some thinking about it, but it sounds like you haven't 
done any.
    Mr. MCCRERY. The question has been asked and answered. Mr. 
Hulshof.
    Mr. HULSHOF. Thank you, Mr. Chairman. Mr. Daniels, it is 
great to have you here as Director of the Office of Management 
and Budget, not as Chairman of the Joint Chiefs.
    I would like to, first of all, state that I absolutely 
agree with the President that the federal budget should not 
grow by a percentage greater than the typical American family's 
budget, because those working men and women, after all, pay the 
bills around here, and I wish Congresses in the past had taken 
that same very common-sensical approach to our federal budget.
    At a recent civic club lunch back home in Missouri, I posed 
this question to those attendees, and it was as follows: Did 
the national economy grow or shrink during the calendar year 
2002? Not surprisingly, since a lot of people believe that our 
economy goes as the stock market goes, a lot of those attendees 
answered that they believed the economy most assuredly 
contracted.
    As you pointed out through your testimony, however, at 
least on the national level, that we saw almost a 3 percent 
rate of growth, roughly $220 billion more to our GDP this year 
than last. Understandably, too, however, not all sectors have 
done as well, agriculture, manufacturing and a number of 
others, and unemployment continues to be high. As President 
Harry Truman from Missouri once said, it is a recession when 
your neighbor loses his job. It is a depression when you lose 
your own. There are a lot of displaced workers out there.
    What I would like to ask you, sir, there are a lot of 
proposals about the economy. There are some short-term ideas, 
things like a payroll tax holiday and a number of really very 
short-term proposals, and then there are some of the ideas that 
look longer, have a longer view down the road. I guess just a 
general question: Do you believe or does the Administration 
believe that the economy needs a short-term boost or really 
long-term reform?
    Mr. DANIELS. Both. I think this distinguishes the 
President's proposal from some others that have been offered up 
which are, I would say, more or even purely short-term.
    The President did--first of all, the President looked, I am 
confident, at every option, certainly every one I have seen 
anybody else put forward, and selected the package that he has 
now proposed only after a careful review of all his choices.
    When I think about the proposal he has made, I would sort 
of array it this way. At the short end, the immediate impact 
end, I would imagine that the acceleration of the rates would 
have the greatest, the most immediate effect; more money in the 
pockets of taxpayers, but also in small businesses, many 
millions of which pay at those rates. Those are the job 
creators in our economy. So I think that might have the most 
short-term impact, along with the small business expensing and 
the child credit acceleration, which again would deliver 
immediate cash to particularly low- and middle-income 
Americans.
    I think down at the other end comes a proposal like the 
dividend exclusion, which is more geared to the long term.
    Mr. HULSHOF. Certainly I know that the Federal Reserve and 
the monetary policy, I think they have done about all that they 
can do as far as trying to create some exuberance in the 
economy, and so I really do think it now comes to the fiscal 
side, that is policy changes we might make. I know there was a 
lot of hand-wringing back in the spring months of 2001 when we 
were first talking about the President's tax relief measures. 
Now, looking back, most mainstream economists believe those 
$300 and $600 checks that went out over the summer actually did 
mitigate the depth of the recession and got us back on track 
much more quickly.
    Just in the couple of minutes I have remaining, I want to 
echo and associate myself with the remarks of Ms. Dunn from the 
State of Washington. Paul Ryan and I in the last Congress 
introduced the bill that would have made the 2001 tax relief 
measures permanent.
    Can you in the remaining moments I have talk briefly about 
the economic effect of actually making permanent those tax 
relief items of 2001?
    Mr. DANIELS. The President believes for the reasons Ms. 
Dunn gave that it is important to do, for predictability and 
reliability.
    Now, I am moved to say that there has been nothing very 
predictable or reliable, a steady state about our tax system in 
any year I can remember. There have been frequent changes, and 
I think that does sometimes disorient businesses in planning. 
So, simply voting to make these permanent doesn't mean over the 
years ahead there would not be attempts to change them again, 
but it would be a good step.
    Mr. HULSHOF. Well, as a concluding comment, an old Farmer's 
Almanac saying says that if Patrick Henry thought taxation 
without representation was bad, he ought to see it with 
representation. I yield back.
    Mr. MCCRERY. Mr. Neal.
    Mr. NEAL. Thank you very much, Mr. Chairman. Mr. Daniels, 
as you know, I have been pursuing legislation to deal with 
those companies that set up phony headquarters in places like 
Bermuda for the purpose of avoiding corporate income taxes. Are 
you familiar with the expatriation problem?
    Mr. DANIELS. In general, sir.
    Mr. NEAL. Do you agree that these moves are both 
unpatriotic and unhealthy financially for the Treasury?
    Mr. DANIELS. I certainly agree that they could be.
    Mr. NEAL. We could collect $4 billion over the next decade. 
Don't you think that is a reasonable idea in this atmosphere?
    Mr. DANIELS. My impression is there have been abuses here. 
It is a subject well worth exploring.
    Mr. NEAL. There is one company that I would point out that 
I believe is doing some work on the Capitol, and at the same 
time their headquarters has been moved to Bermuda. Do you see 
an inconsistency in doing work on the Capitol and trying to get 
away from the Capitol when it comes to paying their fair share?
    Mr. DANIELS. It seems a logical question.
    Mr. NEAL. We need a logical answer.
    Mr. DANIELS. Well, I don't know the situation in question, 
but I certainly agree that it raises a question of for what 
purpose, whether there is a good economic purpose or even a 
legitimate business purpose for doing this.
    Mr. NEAL. What about alternative minimum tax (AMT)?
    Mr. DANIELS. Your leadership here has been important and 
will remain. This is a problem that will recur every so often. 
It will have to continue being addressed. It is part of the 
President's proposal this time to correct for the AMT, if the 
Congress were to agree to support another measure for growth, 
and it is something we are going to have to keep working 
together on so we don't cancel out the effects of tax relief 
when Congress decides to extend it, or that we don't have more 
and more average Americans drawn into a system that was 
originally designed for a small percentage at the top.
    Mr. NEAL. Thank you, Mr. Daniels. Thank you very much, Mr. 
Chairman.
    Mr. MCCRERY. Mr. Herger.
    Mr. HERGER. Thank you, Mr. Chairman, and thank you, Mr. 
Daniels, for being with us.
    I just would like to begin by making a comment. One of my 
comments was alluding to the fact that perhaps in the TANF, 
Temporary Assistance to Needy Family, our welfare reform 
legislation that passed last year, which is basically the same 
proposal of the Administration, that there were some unfunded 
mandates as far as work requirements were concerned. I would 
like to respond to that by noting that the Congressional Budget 
Office, CBO, issued a report last year which would be, again, 
basically the same, I am sure, for our current proposal, which 
is about the same, that the increased work requirements did not 
constitute an unfunded mandate.
    So, I would like to clarify that. The same argument was 
made back in 1996, and again I might say that not only is that 
not the fact, but we have some $7.4 billion in surplus TANF 
funds that remain unspent by the States.
    My question to you has to do with the President's 
unemployment administration financing reform plan. It calls for 
reducing federal unemployment taxes. If you could provide us 
with the background on the Administration's view of the need to 
reform our Nation's unemployment compensation program and what 
effect you project that reducing these payroll taxes might have 
on businesses and their ability to hire new workers?
    Mr. DANIELS. The President does re-propose this reform. 
This is one I really hope--I know not too many people have paid 
close attention; a couple Members of this Committee have, but 
many have not had the chance. This is one that I would hope 
perhaps we could work on on a bipartisan basis. I don't really 
see anything philosophical about it. We have an antiquated 
system that raises more money than is necessary, collects it at 
the federal level, and it is sort of dribbled out to States for 
the administrative portion of the system that we run.
    It would be much more straightforward and better for all 
parties to let the States set the rate, collect the amount they 
need, and not go through this complex process of passing it 
back and forth. Winners in the process would, first of all, be 
businesses, who would probably, almost certainly, see a 
reduction in this payroll tax, and therefore could hire more 
workers; States, who would have more flexibility, wouldn't have 
to crawl to Washington and ask for these occasional extra 
disbursements that we make; and workers, because I believe 
States would have a more effective administration, employment 
training service at the local level.
    So, I really think this is about simple better practice and 
administration. I can't find really a philosophical argument in 
it. I hope that some folks will pay a little attention to it. 
It might be a matter of really good housekeeping we could get 
done.
    Mr. HERGER. I appreciate your comments, and I have to 
agree. Right now the Federal Government, as you know, is 
collecting almost or about twice as much as we are actually 
spending as far as the administration of these programs. If our 
employers were able to keep that, certainly that would be 
dollars that they could invest in new equipment and hiring new 
employees.
    Another question, a point that has been made by some, is 
that in 2003 OMB is projecting a deficit of $304 billion. If I 
could ask you, Mr. Director, how does this deficit compare as a 
percent of GDP to the deficits of the last 25 years?
    Mr. DANIELS. Well, at 2.8 percent, it is smaller than 11 of 
the last 20. I didn't look back further than that. It is 
interesting, if you take the average deficit, including the 
surplus years, that we had for the last 25, you get about 2.5 
or a little more than that. So it is sort of around the average 
experience that we have had during that timeframe. Again, it 
doesn't mean it is not--that we are happy about it. It doesn't 
mean we ought not work to reduce it. That puts it in some 
context.
    Mr. HERGER. Also, in recognition of the fact we are in a 
war on terrorism, we are in a recession, and a number of other 
factors.
    Mr. DANIELS. The President sees it that way, that there are 
some extraordinary circumstances right now that make this the 
right set of choices.
    Mr. HERGER. Thank you very much.
    Mr. DANIELS. Thank you.
    Mr. MCCRERY. Mr. Becerra.
    Mr. BECERRA. Mr. Daniels, thank you very much for being 
here. I appreciate your testimony.
    I would like to ask a couple of questions with regard to 
the budget and Social Security. In the budget the President 
states today's seniors and near retirees are counting on Social 
Security and Medicare to provide retirement income and health 
insurance. They should never doubt that promises made will be 
promises kept.
    Then on the same page in the budget, if I could have 
someone move to the second chart that we have, where he makes 
another quote in the budget that says Social Security and 
Medicare cannot continue as they are structured today. We must 
make a different kind of promise to the retirees of tomorrow.
    I get the sense that the President is saying that we can 
make a commitment based on current Social Security to today's 
retirees and near-retirees, but we are going to have to make 
some real structural changes, a different promise to tomorrow's 
retirees.
    I was wondering, first, if you could tell me how you 
distinguish between a near-retiree who would get current Social 
Security benefits and tomorrow's retiree. What is the 
difference?
    [The charts follow:]
    [GRAPHIC] [TIFF OMITTED] T86155A.003
    

    [GRAPHIC] [TIFF OMITTED] T86155A.004
    

                                 

    Mr. DANIELS. The first principle that the President has 
consistently set for changing Social Security is that those who 
are now in retirement or very close should see no change 
whatsoever, at least none that they don't personally opt for.
    Mr. BECERRA. What is very close? How close?
    Mr. DANIELS. Typically it has been age 55, but I think that 
is something the President would be glad to work with the 
Congress on and make some difference when we get around to it. 
As I mentioned earlier, one of the ironies of this situation is 
the longer we put it off, the more difficult the choices will 
be. If we act--the sooner we act, the more moderate and gentle 
any change might have to be.
    Mr. BECERRA. This to me, plus what the President said at 
the State of the Union, sounds a lot like the privatization 
plans we hear for Social Security that are sort of crouched in 
the shadows in this whole Social Security reform debate.
    If we are going to have a different kind of promise for 
retirees of tomorrow, and you are saying somewhere from the age 
of 55 and below, does that different promise mean that the 
promise of a guaranteed benefit is no longer there?
    Mr. DANIELS. Oh, not necessarily. I think the promise ought 
to include the possibility of a much better return than Social 
Security now stands to deliver, a very low return, especially 
to retirees of the future; probably the promise of some 
ownership and control, not simply being--just simply being the 
recipient of a check, but some----
    Mr. BECERRA. The private account. A personal private 
account?
    Mr. DANIELS. Some portion at least.
    Mr. BECERRA. Does the different promise guarantee a 
disability benefit? Right now under Social Security, if you are 
disabled, you will receive a disability benefit.
    Mr. DANIELS. Yes. I think the President's objective would, 
of course, be to continue that.
    Mr. BECERRA. Continue it. Would he also continue as a 
promise the guarantee of a survivor's benefit for spouses and 
children?
    Mr. DANIELS. I am sure this would be the goal. Again, all 
these details will have to be worked out by people of goodwill 
across the spectrum, and the President has, I think, advanced 
this argument a long way. It was said over here this whole 
issue has suffered from a lack of trust, people misusing 
sometimes the argument for cheap political gains. I am more 
confident than that. We are starting to move beyond that.
    Mr. BECERRA. I think the problem that folks have, you are 
right, seniors should not be fooled into going a particular 
direction or not knowing where we are going to go. When you say 
we have a goal of providing a survivor's benefit, that is very 
different from what we have right now. Right now it is 
guaranteed. You can't take that from someone. That is in the 
law, you are guaranteed a benefit for your spouse or child 
should you happen to die. It is not a goal. We are not going to 
try to shoot for that. If our budget deficits are massive, 
maybe we could reach that goal. It is not, to use your word, a 
possibility. Right now a disability benefit is not a 
possibility if you should become disabled when you are a worker 
under Social Security. You are guaranteed that.
    So I think seniors are legitimately concerned because they 
are hearing all sorts of messages out there. I think they would 
like to know, if we are going to go to a privatized system of 
Social Security, what are the guarantees and how does it 
differ, how does this new promise, this different kind of 
promise, compare to the promise that they have right now? If 
you are going to talk to those who are 55 and under, today the 
stock market doesn't promise them a whole lot. Today's retiree 
at least knows that he or she will receive a benefit that can 
never be taken away.
    Mr. DANIELS. Yes, and that is completely so with the 
President's position.
    Mr. MCCRERY. Before I recognize Mr. Portman, let me 
acknowledge and ask everyone to help me welcome back to the 
Committee, Clay Shaw. Welcome back, Mr. Shaw. Mr. Portman.
    [Clapping.]
    Mr. PORTMAN. Thank you, Mr. Chairman. Now that Mr. Shaw is 
back, we will get some good straight talk on entitlement 
reform. We are happy to have you back.
    I noticed earlier Mr. Stark addressed the issue by saying 
that somehow his reading of the budget meant that Republicans 
didn't care about entitlements, and Mr. Becerra asked some good 
questions. The fact is, and correct me if I am wrong, Mr. 
Director, the reason the President is eager to look at the 
Medicare program and Social Security program is to save our 
entitlement system. I agree that there are seniors who are 
nervous about various proposals out there. There is also a lot 
of nervousness among policymakers and those in the younger 
generation who are looking at the future of Social Security and 
Medicare, wondering how it is going to be there if we don't 
live up to our responsibilities.
    I thought one of the best parts of the President's State of 
the Union was to say we are not going to leave these challenges 
for future Congresses and future generations. We need to face 
them.
    So, I applaud what you have done on Medicare. I would like 
to see you be even more aggressive on Social Security. I know 
it is difficult to do too much during one Congress or one 
session, but I applaud you for addressing it for exactly the 
opposite reason that Mr. Stark indicated, which is that we need 
to save these programs for the future.
    With regard to the growth package, you have had great 
testimony today. I appreciate your educating the Committee a 
little further about what is in the growth package and why it 
is so important.
    As I look at the package, I think it has a good balance in 
terms of short and long term. I wonder if you could talk a 
little about that, what you see in the economy going forward 
and how this growth package addresses it. We have an economy 
growing. It is sluggish. I think your numbers were 2.8-percent 
growth in 2002, unemployment went up some. The recession, I 
hope is over, but it is still very sluggish.
    What does the economy need, and how does the 
Administration's proposal address those needs?
    Mr. DANIELS. Again, I believe the President feels the 
economy needs help immediately, particularly help that is 
likely to increase the rate of job creation.
    We have had a somewhat anomalous situation of growth, 2.8 
percent, as you said. That in some eras would have been seen as 
reasonably healthy and would have created a significant number 
of net new jobs, but it didn't because of this really 
tremendous rate of productivity improvement that we have been 
seeing and are continuing to see. I think that surprised a lot 
of people, and long term that is a very positive thing for the 
economy.
    It does mean, however, that the economy can grow without 
adding jobs. So, I think the President first emphasized small 
business expensing and particularly the rate reductions, the 
acceleration of rate reductions, which, as I said, yes, have 
some real impact for consumers who might spend a little more. 
Maybe the most important impact for the whole economy could be 
its effect on smaller businesses, a little immediate cash flow.
    Mr. PORTMAN. I missed some of your testimony, I apologize. 
I didn't hear it come up when I was here. Tell me how the rate 
cuts will affect small businesses.
    Mr. DANIELS. Millions of the small businesses pay on the 
individual rates as opposed to the corporate tax.
    Mr. PORTMAN. Do you have any sense of the percentage or the 
numbers of those who would benefit from the rate cuts who are 
subchapter S owners, who are sole proprietors or partners, who 
are business people but pay their taxes through the individual 
income tax system?
    Mr. DANIELS. It is many millions, Congressman. I have seen 
this expressed in different ways. I think if you count every 
last sole proprietorship, it approaches--it is in the high 
teens of millions. It seems to be a reliable number.
    Mr. PORTMAN. I think at the top rate most of the benefit 
goes to business people.
    Mr. DANIELS. Yes, that is correct. So this being the job 
factory of the American economy, that, plus the expensing, I 
think probably has the most immediate-term potential. Also 
bringing forward the child credit would be tantamount to 
immediate cash in the pockets of families who are likely to 
need and spend it.
    Mr. PORTMAN. So there is short-term stimulus as well as 
long-term growth through the double taxation of dividend 
prohibition, through some of the other business investment, 
including the depreciation, increasing expensing for small 
businesses under section 179.
    One final note and question. With regard to the retirement 
security provisions that are in the budget, again, I want to 
commend you for raising the issue, particularly talking about 
simplification and its importance. I think we all share that 
across the board, that if we don't simplify the system, it is 
going to be harder to cover those people that do not currently 
have retirement savings, which is, unfortunately, about half 
the work force.
    With regard to being able to let people save more, raising 
the limit from--we are approaching $5,000 over the next several 
years to $7,500 is also good policy. I do hope that you will 
continue to work with us on this Committee. This Committee has 
taken the lead on that over the last 5 years, and we have 
simplified and increased limits using the existing system and 
are beginning to consolidate, as you propose. I think it is 
entirely consistent with where we have been, and I hope you 
will continue to work with us on that.
    Mr. DANIELS. Absolutely.
    Mr. MCCRERY. At this time I am going to claim my time, 
which actually occurred several people ago, and yield to Mr. 
Shaw.
    Mr. SHAW. Thank you, Mr. Chairman. Mr. Daniels, I want to 
thank you and the President for your commitment to the 
taxpayers and to our seniors by increasing the Social Security 
Administration's administrative budget by 7.5 percent compared 
to the average about 4 percent of all the other agencies.
    On January 30, the General Accounting Office placed the 
Social Security Disability Insurance Program on their high risk 
list. This, of course--the problem is going to be compounded 
with the baby boomers, the aging of the baby boomers and 
generally the graying of America.
    My question is will the President's budget allow SSA to 
address these serious management changes we are seeing with 
also the aging of the work force within the Social Security 
Administration?
    Mr. DANIELS. Congressman, it will, and it better, I would 
say. Those problems are severe, but the current Administrator 
and her team there are working very hard and really should be 
commended, and that very large increase that we propose for 
them is in recognition of the way they are attacking this 
problem. I am sure you have been briefed on it, but many 
Members would be astonished to know how antiquated the system 
for judging and eventually paying those who are entitled their 
benefits has been over there.
    The vast majority of the hundreds of days it takes from the 
filing of the claim to eventual payment, the vast majority of 
that time, nothing is happening. Paper is sitting, or literally 
paper is moving from one place to another. It is a dinosaur 
system, and they are moving very aggressively to bring it into 
even the last century, and quickly this one. We wanted to back 
that up every way we could. People who need these benefits and 
are entitled to them deserve a much better shake than they are 
getting now.
    Mr. SHAW. Yes, they do. We have already shortened the time 
somewhat, but there is a lot of work to be done. I agree, I 
think the Social Security Administration is committed to that, 
and I am pleased to see the support of the President.
    I want to comment just very briefly on something Mr. 
Becerra was talking about a few minutes ago. A government-
insured Social Security pension system is not necessarily and 
does not have to be incompatible with investment and private 
accounts. They can work together, and it still can be a 
government-guaranteed system, as I intend to work for. Thank 
you. I yield back.
    Mr. MCCRERY. Thank you, Mr. Shaw. It is nice to have you 
back. Mr. Doggett.
    Mr. DOGGETT. Thank you, Mr. Chairman. Mr. Daniels, you, of 
course, appear here on a day that a very important presentation 
has been made up at the United Nations to justify military 
action against Iraq, and yet if I understand your answer to Mr. 
Rangel, it is that you and your office are incapable at this 
point of providing a credible estimate of the cost to American 
taxpayers of a war with Iraq; is that correct?
    Mr. DANIELS. I wouldn't use that word, no. I think we are 
capable of providing an estimate, but first we would need to 
know what the President, what the military, has decided, and 
what they therefore expect.
    Mr. DOGGETT. I see. So, I guess if you can't provide an 
answer to Mr. Rangel today, you don't have any basis for 
questioning the accuracy of the estimate that the President's 
top economic adviser Mr. Lindsey gave before he was fired, that 
it could run up to $200 billion?
    Mr. DANIELS. First of all, if Larry was here, he would 
repeat, as he did many times, that wasn't an estimate. He was 
simply remarking that some past conflicts--he gave a quick 
answer based on a percent of GDP, and that is what some past 
conflicts had cost. He did not pretend that he had an ability 
or even tried to estimate this one.
    Mr. DOGGETT. Was that the type of estimate you gave on 
December 30th to the New York Times when you said it would cost 
about $60 billion?
    Mr. DANIELS. Actually, what I told the New York Times was 
that that was what the Gulf War cost.
    Mr. DOGGETT. That is what you thought was a reasonable 
estimate for this one; isn't that what you also told them?
    Mr. DANIELS. I said it was a closer range than the number--
they were asking me to react to the number that had been 
associated with Mr. Lindsey.
    Mr. DOGGETT. Does that figure include the Nation-building 
that the President is committed to after any conflict in Iraq?
    Mr. DANIELS. Any request that we would make would include 
both the estimated cost of the conflict, which with all the 
uncertainty that would be around that----
    Mr. DOGGETT. I am not asking the specific figure that you 
used. It didn't include the Nation-building because we didn't 
have that in the first Gulf War.
    Mr. DANIELS. That is correct. It also, of course, did not 
include the contributions of allies, which brought that figure 
way down.
    Mr. DOGGETT. Yes, sir, which we probably won't have this 
time. Well, how soon after the bombs start dropping, if they 
do, do you think it would be reasonable for you to have an 
estimate of the cost?
    Mr. DANIELS. Immediately.
    Mr. DOGGETT. Okay. So it certainly will be possible to you 
before this dividend tax cut passes the House, if we proceed 
with military action in March, to give us that figure, 
including the Nation-building?
    Mr. DANIELS. If the President made a decision in March, and 
hostilities started, we would owe the Congress and we would 
bring the Congress an estimate based on whatever decision he 
made.
    Mr. DOGGETT. I appreciate that. In January, last month, you 
also told the New York Times that you would expect us not to be 
back in a surplus in this budget for a decade; is that correct?
    Mr. DANIELS. Well, no. I don't have any such expectation. 
In fact, I have every hope that we might be.
    Mr. DOGGETT. This was the January 16 issue. ``Mr. Daniels 
suggested today the budget was not likely to be in surplus in 
the next 10 years.'' Is that not your position?
    Mr. DANIELS. It is my position that I don't know and that 
no one can know. Just as we didn't know the last surplus was 
coming, we didn't know the events that took us back to deficit 
were coming, we cannot know with any confidence even 3 or 4 
years ahead.
    Mr. DOGGETT. You are not retracting those comments?
    Mr. DANIELS. You notice that was not a comment. Somebody 
said I suggested. Maybe they drew an inference I didn't really 
mean to give.
    Mr. DOGGETT. Well, did you suggest it? Did you suggest the 
budget was not likely to be in surplus within the next 10 
years, and, if so, is that your position today?
    Mr. DANIELS. No, it isn't.
    Mr. DOGGETT. Did you suggest that then?
    Mr. DANIELS. No. My position is I don't know.
    Mr. DOGGETT. It is like the war; you don't know what the 
situation is going to be with the surplus?
    Mr. DANIELS. I think we can have some assurance, maybe a 
year, maybe 2 ahead. As experience has taught us, we are 
kidding ourselves if we think we know much further out.
    Mr. DOGGETT. What we can be sure of though is that under 
your plan, you are going to add at least $1 trillion in public 
debt, aren't you, under the projections that you have given us 
that you do feel confident on, just looking over the next 5 
years, with the largest deficit this year in the history of the 
country, in absolute terms?
    Mr. DANIELS. I think the right way to think about it is the 
way our colleagues at the Congressional Budget Office do, and 
they will always--they look back and see an average miss one 
way or another over the last couple, three decades, of over 
$200 billion. Nobody is able to see all the changes that can 
come in circumstances, or just simply economic changes, and, 
therefore, the way to think about 5 years from now is in terms 
of a very broad range that could go from substantial deficits 
into surplus again.
    Mr. DOGGETT. Under the plan you presented to us, don't you 
have $1 trillion? That is all I am asking you, sir. If you 
can't answer it, I understand.
    Mr. MCCRERY. Mr. Johnson. Everybody is adhering to the 5-
minute limit very nicely today.
    Mr. JOHNSON OF TEXAS. Glad to have you here. It is always 
good to deal with you. Thank you for being with us. I am sorry 
you are getting some of the chastisement you are getting.
    Mr. DANIELS. I hadn't noticed.
    Mr. JOHNSON OF TEXAS. It is not warranted, but I know your 
skin is thick. I would like to ask you, I recall when there was 
a Democrat Congress that we had huge deficits, and it seems to 
me that often they exceeded 5 percent of GDP. In the projected 
deficit that you have proposed, is it not much smaller than 
many of them in the last 25 years, even in spite of all the 
extra war and other talk we have got?
    Mr. DANIELS. It is smaller than most of the last 20 years, 
again, before the cost of any war, it is perfectly fair to say, 
and it is less than half as large as the largest of those 
deficits.
    Mr. JOHNSON OF TEXAS. That is great. I think you all have 
done a super job with that. Can you tell me, did you use at all 
or consider using any other cost estimate in determining 
whether or not a tax reduction would improve our position? 
Because, you know, everybody talks about how you are going to 
put us in deep debt. It seems to me that that may decrease the 
debt significantly once they take effect.
    Mr. DANIELS. Right. All the estimates here, of course, are 
on the conventional so-called static approach. That is, they 
assume that the President's full proposal is enacted, and 
absolutely nothing changes. We know that is wrong. We know that 
some substantial amount of the revenue that was left in the 
pockets of taxpayers would come back through greater economic 
activity, but no one is quite sure how to predict that in 
advance.
    Mr. JOHNSON OF TEXAS. Did you try to do any dynamic 
scoring?
    Mr. DANIELS. We did not. Our colleagues at the Council of 
Economic Advisors have estimates as much as 40 percent would be 
recaptured. I have heard other estimates of 30 percent and so 
forth. So, this would amount to a very large reduction in the 
deficit that is forecast here, but we have taken, as I say, 
what is the conventional route and made no such assumption.
    Mr. JOHNSON OF TEXAS. So, if their estimate of 30 percent, 
which is the lower number that you just mentioned, reduction 
were to occur, does that mean the deficit would be 30 percent 
less than what you are estimating?
    Mr. DANIELS. It means it would be less by 30 percent of the 
amount of the growth package. So, if our growth package, the 
President's growth package, is $415 billion over 5 years, you 
could take 30 or 40 percent off of that.
    Mr. JOHNSON OF TEXAS. Which puts the deficit at a 
reasonable number that could turn into a positive number within 
5 years maybe?
    Mr. DANIELS. Yes, that is, again, what CBO's so-called fan 
chart, which I don't have here to show you, but they have 
published often, that just looks back at history, looks at the 
extent of uncertainty around any of these estimates, and shows 
how wide the range of possibilities is. It ranges from deeper 
deficits than we expect all the way into surplus.
    Mr. JOHNSON OF TEXAS. That is good. I think that is the 
positive answer we are looking for. Let me ask you on a 
different subject, U.S. General Accounting Office study that 
just came out indicated that personal account plans in Social 
Security would strengthen the system and increase benefits for 
low-wage and disabled. Do you have a comment on that?
    Mr. DANIELS. I haven't seen this particular report, but 
that would be consistent with many, many others that have been 
done of the concept.
    Mr. JOHNSON OF TEXAS. That is part of the President's 
proposal; is it not?
    Mr. DANIELS. The President hasn't made a specific proposal 
yet, but he certainly indicated his belief that some personal 
account, some degree of personal ownership of people's 
retirement future, ought to be part of the reform we seek. One 
reason for that is it would certainly project to improve the 
return they can expect to get overall.
    Mr. JOHNSON OF TEXAS. Thank you very much. Thank you, Mr. 
Chairman.
    Mr. MCCRERY. Mr. Pomeroy.
    Mr. POMEROY. Thank you, Mr. Chairman. Mr. Daniels, I would 
like to have my questions predominantly address this new 
retirement savings proposal advanced in the budget.
    As I understand it, under the RSAs proposed, retirement 
savings account, an individual will be able to put $7,500 in, 
their spouse would also be able to put $7,500 in, and 
thereafter there would be no tax on any earnings generated in 
those accounts; is that correct?
    Mr. DANIELS. That is part of it, yes, sir.
    Mr. POMEROY. It is part of it. I also understand if the 
kids, for example, had a summer job, they probably would be 
able to get one of these accounts, too, and $7,500 more could 
be invested for RSAs for the kids if they had some 
participation in the work force. Is that your understanding?
    Mr. DANIELS. I believe that is consistent with the concept.
    Mr. POMEROY. Then in addition to that, there are what is 
called lifetime savings accounts (LSAs). These, as I mention, 
are in addition. You would be able to put $7,500 into these for 
each Member of the family, and thereafter there would be no tax 
on any earnings that might accrue in those accounts; is that 
correct?
    Mr. DANIELS. That is correct.
    Mr. POMEROY. Well, just quick and simple math, you have got 
a family of four, let's say. You get $15,000 going in for Mom 
and Dad, and under the LSAs you have $15,000 going in for each 
of the four. You have $45,000 annual investment opportunity 
right there, and no tax thereafter on any of their earnings; is 
that correct?
    Mr. DANIELS. Thereafter.
    Mr. POMEROY. This appears to me to be a very significant 
change in tax policy, a major step toward a policy position of 
the government where we won't tax investment income. Do you see 
it in that light?
    Mr. DANIELS. I do think it represents a very fundamental 
concept, I would agree with you on that, both in terms of the 
treatment of investment income and simplification of the Code 
both.
    Mr. POMEROY. In looking at the long-term budget costs of 
this, it is kind of a--actually while we don't have specifics 
in terms of costs, we do kind of get the picture in terms of 
how this is going to work. If I might have that one chart. The 
proposal is actually projected to generate some revenue in the 
early going. Can we tilt that a little bit so they can see it?
    As revenues flow out of traditional individual retirement 
accounts (IRAs), not the Roth IRAs, but the traditional IRAs, 
and is taxed before it is placed in these accounts, never to 
have earnings taxed again, but the longer out you go, you begin 
to experience revenue loss, because you have these sums that 
presently are taxable no longer taxable because they exist 
within these accounts; is that correct?
    [The chart follows:]
    [GRAPHIC] [TIFF OMITTED] T86155A.005
    

                                 

    Mr. DANIELS. Yes. That is the way the Treasury would look 
at it.
    Mr. POMEROY. Mr. Daniels, my real anxiety, I am concerned, 
of course, about several facets of this plan, but I believe 
that in the next decade to follow you would have even more 
pronounced revenue loss under this plan than is reflected in 
the second 5-year experience. You would have this revenue that 
otherwise would have been taxable, the earnings, now not taxed. 
You would have greater and greater amounts sheltered in that 
way.
    The next decade's fiscal problems involve the retirement of 
the baby boomers. So as you move from tax on investment income 
to an increasing dependence upon tax on wages, you have got to 
look at where your work force is going, and we are going to 
have a work force retiring, which is going to drive up spending 
in the Social Security and Medicare area while generating fewer 
workers per retiree.
    Now, doesn't this put us on a long-term problem in terms of 
making this all work out?
    Mr. DANIELS. I don't think so, Congressman. These are 
important questions. First let me say that I do believe that 
this proposal ought to start a very serious conversation; it 
ought to be seen, as you portrayed it, as an important new 
concept or new way of thinking about future savings policy, and 
we ought to approach it very carefully.
    As your chart indicates, nobody sees it, at the moment at 
least, not Treasury and I guess not the preparer of that chart, 
as much of a fiscal event for quite a long time. These numbers 
are pretty small compared to the other ones we talked about 
today, $14-, $15 billion here and $12 billion there. So it is 
kind of a fiscal nonevent for quite a long time.
    I think the motivator behind the policy is that if you 
fundamentally encourage more savings you may do some wonderful 
things for the economy. It may be very beneficial for interest 
rates in the future investment climate, not to mention the 
retirement security of the people who do save more than they 
otherwise would have. All of those things are going to have to 
be considered, not just look at this through any one dimension 
of what it might or might not do in the second or third decade 
out.
    I think you raise important questions, and I think the 
proposal was meant to stimulate just that kind of discussion.
    Mr. MCCRERY. Mrs. Johnson.
    Mr. POMEROY. I will conclude in 20 seconds.
    Mr. MCCRERY. We have to move on. Mrs. Johnson. Everybody 
else has abided.
    Mrs. JOHNSON OF CONNECTICUT. It is a pleasure to have you 
before our Committee, and I commend you on the many, many 
initiatives in the budget on the area of health care. You are 
really taking on pretty much all of the major problems, and I 
think we do have to think that way. Many of them in regard to 
Medicare, Medicaid and NIH are not before this Committee, but 
there are many that you have talked about before this 
Committee.
    First of all, let me say thank you for the $400 billion 
figure for Medicare. That is a higher figure than any President 
of either party has ever put in the budget to strengthen 
Medicare. It is desperately needed. It isn't just a matter of 
prescription drugs, it is a matter of better integrating care, 
and, indeed, if we provide seniors with prescription drugs 
without some better ability to prevent them from getting drugs 
that interact poorly or that are representing overprescribing, 
we will cause a fair amount of harm as well as a fair amount of 
good.
    So I appreciate your strong proposals in the area of 
strengthening Medicare, including the immediate expenditure of 
$84 million to help with the information technology we so 
desperately need to help the small providers develop, as well 
as to help the government develop.
    There are several other areas that nobody is talking about 
that I think it is important to note, and it not clear to me 
from your summary as to whether you expect these to start in 
the second 5 years of a 10-year period or the first 5 years.
    Your initiative on long-term care is one that the preceding 
Member who questioned, Earl Pomeroy, and I have worked on for 
many years. It has to do with incentivizing the purchase of 
long-term care insurance by allowing a deduction of the 
premium. You do have that in your budget, for a cost of $28 
billion.
    You also have a benefit for families, caregivers, who 
provide family members with long-term care at home. This is 
extremely important as people get older. I appreciate your 
providing that in the budget, although, again, it isn't clear 
to me when you expect to start that.
    Thirdly, you do have $87.6 billion in your budget for 
refundable advanceable credits for the uninsured. At this point 
if we don't do something to begin covering all Americans, it is 
not only not fair to the Americans who don't have access to 
affordable insurance, but it is going to be catastrophic for 
the providers, because no payer anymore is willing to cross-
subsidize other folks, and the uncompensated care issue is 
reaching truly a critical proportion.
    So, I am very pleased that those three initiatives are in 
there. Could you talk a little bit about when you expect them 
to go into effect? Could we do those this year, and would there 
be room to get those initiatives started? All of them will take 
a while to set up.
    Mr. DANIELS. Thanks. First, let me just commend you for 
your leadership in this area for a long time. A lot of these 
ideas came from you, or at least were shaped in conversations 
with you. So I am pleased that we are able to incorporate them, 
too, and I hope it is a good starting point. In most cases you 
mentioned, the budget assumes that we move quickly into these 
areas, such as the tax credit for the uninsured. Now, this is 
the third time the President has proposed it, and so it didn't 
happen in each of the first years, and each year it becomes 
more urgent that we do it.
    The Medicare proposal is phased in and would start in 2004. 
That is the first year after enactment, but it does not become 
what I would call a substantial program until about the third 
year. So in 2006, it rises to $33 billion.
    The general answer to your question is the President would 
like to move on these fronts and move on them as fast as he and 
Congress can agree.
    Mrs. JOHNSON OF CONNECTICUT. Thank you very much. There are 
some very good aspects to your budget that I won't take time to 
go into here, but I would ask you to look back at an 
Environmental Protection Agency/U.S. Department of Housing and 
Urban Development (EPA/HUD) proposal that you have where you 
eliminate HUD's brownfields cleanup money and keep EPA's. The 
HUD's leverage is a lot of private investment. Well, it is $25 
million versus 10, and so I like the higher money. It also does 
function to help communities rehabilitate old industrial 
properties and therefore affects the ability of communities to 
redevelop their economic potential, but also thereby to reduce 
the incentives for sprawl. So that is an issue that I hope we 
will be able to talk about.
    Mr. DANIELS. Well, the brownfield idea has been a major 
theme of the President's for some time. He thinks it is a very 
high-yield environmental initiative, and we will look at where 
it could best be housed.
    Mrs. JOHNSON OF CONNECTICUT. Thank you.
    Mr. MCCRERY. Now I would like to recognize my neighbor from 
east Texas Mr. Sandlin.
    Mr. SANDLIN. Thank you, Mr. Chairman. Thank you, Mr. 
Daniels, for coming today.
    I noted that the President's budget has about $400 billion 
for Medicare, but not much detail. Could you tell us how much 
of that will be spent on a drug plan, particularly as it 
affects America's seniors?
    Mr. DANIELS. First of all, I hope the details will be 
available to you within the next weeks, Congressman. It is 
being worked on very hard and we are trying to produce a plan 
which is really well thought through and also has been--is 
thoughtful from the standpoint of costs and so forth. Most of 
the--I am quite confident that most of the costs of the 
proposal will be taken up in providing prescription drug 
coverage, although it is far from the only thing we need to do 
with Medicare. I think that----
    Mr. SANDLIN. Let me ask you this: When you talk about 
Medicare, will there be a prescription drug plan in Medicare, 
or will this just be another example of the government giving 
money to health maintenance organizations (HMOs)?
    Mr. DANIELS. Yeah. I would not expect HMOs to figure much 
into this.
    Mr. SANDLIN. The seniors would have to leave Medicare to 
enroll in a private plan for drug coverage?
    Mr. DANIELS. Seniors will be in Medicare come what may. The 
President's notion here is to dramatically expand the choices 
available to seniors, including to stay right where they are, 
to make sure they have as wide a choice of doctors as possible.
    Mr. SANDLIN. If they stay right where they are, though, 
will they have a prescription drug plan in Medicare?
    Mr. DANIELS. Well, this is being worked on at the moment.
    Mr. SANDLIN. Do you know how--let me ask you this: How much 
would be provided for provider payments? Do you know that?
    Mr. DANIELS. We haven't reached a final determination.
    Mr. SANDLIN. You haven't?
    Mr. DANIELS. We have not. As we have worked with Members of 
this Committee, the President certainly believes that on the 
physicians' side at this point there is simply an inaccurate 
and unfair level of payment being made, and this is important 
because----
    Mr. SANDLIN. Would his position be the same on the 
reimbursement or provider payments to the hospitals?
    Mr. DANIELS. Well, we are looking carefully at the other 
providers. The one area at this point that the President and 
that our friends at HHS have certainly agreed needs immediate 
attention is physicians. As you know, we are beginning to lose 
some physicians, or patients are beginning to lose access in 
Medicare today.
    Mr. SANDLIN. Could you tell us where the $400 billion 
figure came, if we don't know how much would be toward a drug 
plan and we don't know how much will be provider payments? Did 
the $400 billion just come from the ether, the land of Oz? How 
did you figure that internally?
    Mr. DANIELS. I looked at a Powerball card.
    Mr. SANDLIN. Good. That is a good plan.
    Mr. DANIELS. No. It is a good faith, admittedly, round-
number estimate. We looked at programs similar to the one that 
the President has outlined, and this seems to be certainly in 
the neighborhood, I hope an adequate amount. Again, when we 
look at similar programs, they cost about that, maybe a little 
less.
    Mr. SANDLIN. Let me move on to something else. My good 
friend, our Ranking Member, Mr. Rangel and Mr. Doggett asked 
you about the war, and clearly that hasn't been figured into 
the budget. I am a little confused. In looking at your 
testimony today, your two-page testimony about the budget, you 
indicate the deficit's origins are no mystery. It was the 
product of a triple witching hour in which recession, war and a 
collapse of the stock market bubble coincided. Later you said 
deficits are not always unacceptable. The strongest proponents 
of balanced budgets routinely make exceptions for war.
    It appears to me that you figure in the war and you use the 
war for excuses for the deficit, but then you fail to use the 
numbers to fund the very war that you think is imminent.
    Mr. DANIELS. No, sir. We are at war today, and the defense 
budget for 2003 and again for 2004 was increased specifically 
to take account of the fact that Afghanistan and the defeat of 
the Taliban was not the end of that war. Now, there may be an 
expansion. There may be a new theatre to the war on terror. We 
don't know----
    Mr. SANDLIN. Do you feel like a war with Iraq is imminent?
    Mr. DANIELS. I don't know.
    Mr. SANDLIN. Well, you know we have troops there, don't 
you?
    Mr. DANIELS. I sure do.
    Mr. SANDLIN. You know that the Roosevelt carrier went there 
today to join others, right?
    Mr. DANIELS. Yes, sir.
    Mr. SANDLIN. You say Mr. Blix said we are 5 minutes to 
midnight. I mean, it appears that war is imminent. Assuming 
that threat to be real, it seems inappropriate and misleading 
and negligent not to include budgeting for the war in a budget 
that you submit to the U.S. Congress, doesn't it?
    Mr. DANIELS. We think it would have been inappropriate to 
include it, because the President continues to hope it will not 
be necessary, but we will be ready.
    Mr. SANDLIN. We all hope it won't be necessary, but you 
know local governments, cities, counties, they all budget for 
unanticipated expense, and they budget for unanticipated but 
probable expense, and we have not done that, have we?
    Mr. DANIELS. Well, we will be prepared very quickly if the 
need is there, and we have certainly thought ahead about it, I 
think, in the way you would want us to.
    Mr. SANDLIN. Well, my time is up. As Mr. Gutknecht said, 
this budget is a tough pill to swallow, isn't it?
    Mr. DANIELS. These are tough times.
    Mr. MCCRERY. Mr. English.
    Mr. ENGLISH. Thank you, Mr. Daniels. As someone who 
actually had a career in local government at one point, I want 
to salute you for as many contingencies as you have taken into 
account in this budget, as tight as it is and as challenging as 
it is.
    I have some other questions, and I know my time is limited, 
but let me see if I can take a moment to explore, to my better 
understanding, the scope of your negligence here, and that is 
you have not budgeted for a war in this budget, that may not 
occur, the scope and tactics of which at this point are 
undetermined, the duration of which is impossible to determine, 
and the question of nation-building, which of course is usually 
an enthusiasm on the other side of the aisle, is still to be 
specified. In all of that you are unable to attach at all a 
figure to this potential conflict?
    Mr. DANIELS. We chose not to attach one to a hypothetical 
conflict. If that conflict becomes real, then we will--you have 
just named very, very perceptively the most important 
variables, and we will get guidance and quickly develop a 
request consonant with it.
    Mr. ENGLISH. Well, in that case, sir, I would like to in my 
remaining questions retreat out of the partisan ether and head 
toward something a little more concrete. I am concerned about 
our budget deficit, and some of the functions that you fund, 
not necessarily the largest functions in the Federal 
Government, but nevertheless very important ones, are critical 
to the operation of our trade policy.
    Now that the Customs Service has been transferred to the 
new Department of Homeland Security, what proposed budget 
changes have been made for all of Customs statutory functions 
that have been transmitted in the current budget? Recognizing 
that Congress directed in the homeland security bill that those 
trade functions and staffing to certain trade revenue-
collecting offices not be diminished, does this budget 
faithfully reflect that objective?
    Mr. DANIELS. Yes. I believe it does.
    Mr. ENGLISH. Similarly, the Department of Commerce plays a 
critical role in enforcing our trade laws and in overseeing 
many issues that relate to our markets. Have you provided 
adequate funding for the Department of Commerce for its 
international trade functions?
    Mr. DANIELS. I hope so. Commerce is in for about a 5-
percent increase this year, which I must say is better from 
their standpoint, more than we proposed in previous years, and 
there are certain aspects of their activities which we think 
are very important. We gave--we proposed a significant increase 
with our statistical service, for example, upon which a lot of 
business and governmental decisions rely, and they have been 
doing a good job, and it looks like they could do more with 
more money.
    Mr. ENGLISH. Similarly, the U.S. Trade Representative's 
Office is a small one in terms of the overall size of the 
Federal Government, but absolutely critical in its efforts to 
open up international markets and create opportunity for 
American products and to ensure a level playing field for 
American companies and American workers. This Administration 
has launched an extraordinarily aggressive and broad trade 
agenda, I think far beyond the scope of anything we have seen 
in a prior Administration, with the acquisition of trade 
promotion authority. Does the U.S. Trade Representative's 
Office, in your view, have adequate funding to meet those 
challenges?
    Mr. DANIELS. I think the next time you see the U.S. Trade 
Representative, you will find a very happy person. He and I 
discussed--you are right. It is a very, very small, but also 
very, very important piece of the government. He and I 
discussed his situation directly and in detail, and he went 
away with a very large increase.
    You know, after the passage of Trade Promotion Authority, 
as well pointed out it is only a hunting license, and what 
matters really now is if it is translated into new agreements 
that open up markets to our products and bring down barriers 
and help consumers in both countries. So he needs more people 
to make the potential of trade promotion authority real.
    Mr. ENGLISH. I will see him in about 5 minutes, so I will 
test your theory. Thank you. Thank you for your testimony.
    Mr. MCCRERY. Now the distinct privilege of wrapping up 
today's hearing falls to Mrs. Tubbs Jones.
    Ms. TUBBS JONES. Thank you, Mr. Chairman. Good afternoon.
    Mr. DANIELS. Yes, ma'am.
    Ms. TUBBS JONES. I am the last one up to bat, and let me 
say this, that none of my questions are intended to necessarily 
be partisan. I am here to represent the people of the 11th 
Congressional District of Ohio, and I am required to make 
inquiry as to this particular budget.
    Let me--I am going to ask as short a questions as I can, 
and I hope that you will give me short answers so we can get 
through the process.
    The Senate passed an omnibus bill that provided a provision 
that fixed the physician payment in Medicare as a stopgap 
measure for the balance of this year. Would you support such a 
measure, sir?
    Mr. DANIELS. Well, yes. The President would support any of 
a number of measures that would try to address the problem we 
talked about earlier, which is a real one, physician 
reimbursement.
    Ms. TUBBS JONES. Let me move on to another statement that 
you made in your written statement. You said a balanced, fair 
budget is a very high priority for this President. It is not 
and cannot be the highest priority, let alone the only one. He 
does not place it ahead of our national security, the safety of 
Americans from domestic terror, or a growing full employment 
economy. Does he place it ahead of the need for health care for 
all Americans?
    Mr. DANIELS. No, and that is why his budget includes the 
tax credit. That is not a small matter that Mrs. Johnson asked 
about, why it includes Medicare enhancement, Medicaid and so 
forth. There are----
    Ms. TUBBS JONES. In order to have a health care tax credit, 
you have to have money to buy it, and if we contemplate that 
there are numerous people, such that Medicare costs are as high 
as they are, out of jobs, a tax credit--health care tax credit 
does very little for that population.
    Mr. DANIELS. Well, it is refundable, so it could help 
anybody who----
    Ms. TUBBS JONES. Who has money to pay.
    Mr. DANIELS. Takes advantage of it. Of course, it is only 
one of several proposals in this budget. You----
    Ms. TUBBS JONES. I am specifically asking about the health 
care tax credit. If I don't have money to pay to get refunded, 
it doesn't help me; is that correct, sir?
    Mr. DANIELS. Well, actually it can be structured so that 
the person can be advanced the money ahead of the credit.
    Ms. TUBBS JONES. That is not in the proposal as it 
currently exists. It could be structured.
    Mr. DANIELS. Well, let us work together if you think that 
is----
    Ms. TUBBS JONES. Answer my question, sir. I am short on 
time.
    Mr. DANIELS. Your question was does he place this ahead 
of--a balanced budget ahead of this, and obviously he doesn't, 
or he wouldn't have included these proposals.
    Ms. TUBBS JONES. Does he place it in front of the need or 
the right to every child to have a good education in the United 
States?
    Mr. DANIELS. Oh, obviously not, because once again, 
education is proposed to have a very large increase, and the 
biggest increases, bigger than any President has ever proposed 
before, for Title I and for the Individuals with Disabilities 
Education Act, $1 billion each.
    Ms. TUBBS JONES. If all of that is tied to the performance 
of the school system, and in light of the fact that the 
performance of the school system is not the responsibility of 
any child, it is going to be difficult to say to a child, we 
are going to fund education based on the performance of the 
school.
    Mr. DANIELS. Actually, no. Title I funding is not all tied 
to the performance of the school system.
    Ms. TUBBS JONES. Okay. Let me move on. You keep talking 
about the typical American family. Can you tell me what a 
typical American family is, sir?
    Mr. DANIELS. Well, we meant that the family at the average 
or median income.
    Ms. TUBBS JONES. What is that, sir?
    Mr. DANIELS. Oh, I think it is in the neighborhood of 
$50,000. Again, it depends on what family size you are talking 
about.
    Ms. TUBBS JONES. Well, I am asking you. You keep using the 
term when you describe the typical American family should not--
we should not spend any more in terms of increases than--in 
Federal Government than the typical American family that is 
only getting 4 percent. I want to know what that typical 
American family is, sir.
    Mr. DANIELS. Measured in per capita income, so whether it 
is a single person or a family of four, if you measure on a per 
capita basis, any----
    Ms. TUBBS JONES. What is that per capita income, sir?
    Mr. DANIELS. Well, the point is whatever a family's income 
is now, they can expect about a 4-percent increase; some more, 
some less.
    Ms. TUBBS JONES. Let me move on. Will the typical American 
family benefit from the dividend tax cut based on your 
description of making less than--for four it is $50,000?
    Mr. DANIELS. Well, the President certainly believes so. 
Millions and millions----
    Ms. TUBBS JONES. No. I am not asking what the President 
believes. I am asking you as the head of the Office of 
Management and Budget, can the typical family benefit from a 
dividend tax cut?
    Mr. DANIELS. Sure. Same answer.
    Ms. TUBBS JONES. How?
    Mr. DANIELS. Millions of those families----
    Ms. TUBBS JONES. If they don't even make $7,500 or whatever 
amount it is to invest.
    Mr. DANIELS. Millions of those families, of course, will 
receive dividends in the first instance, and many others would 
benefit from the job creation, the new investment and the 
stronger stock market.
    Ms. TUBBS JONES. I asked about the dividend tax cut. Can 
you tell me how many average American citizens currently have 
dividend income, sir?
    Mr. DANIELS. About 35 million families.
    Ms. TUBBS JONES. No; 35 million families, but those 35 
million families are not included in the typical American 
family that you have discussed, sir, are they?
    Mr. DANIELS. I have trouble following your question, ma'am.
    Ms. TUBBS JONES. That is because you don't want to follow 
my question. The 35 million people that you talk about benefit 
from a dividend tax cut, are they part of--are all 35 million 
of them the typical American family, sir?
    Do you want me to say it again?
    Mr. DANIELS. You can try.
    Ms. TUBBS JONES. That is all right, sir. I understand why 
you are not answering my question, and I hope that I can submit 
it in writing to you and you can respond. You didn't have a 
problem answering the questions on the other side, sir. Thank 
you, Mr. Chairman.
    [The information follows:]

    The President's dividend exclusion proposal will directly benefit 
35 million taxpayers. More than 40 percent of the people who receive 
taxable dividends make under $50,000 per year, and three-fourths make 
less than $100,000 per year. Further, almost half of all savings from 
the dividend exclusion under the President's plan would go to taxpayers 
65 and older. The average tax savings for the 9.8 million seniors 
receiving dividends would be $936.
    According to a variety of outside experts, the dividend proposal 
will also produce an increase in equity values, which means that each 
of these dividend-receiving taxpayers will receive an important and 
near-term second benefit from the proposal. And the proposal will 
reduce the cost of capital to business investment, which means that 
future productivity growth and hence future wages will rise more 
rapidly under the President's proposal.
    As Federal Reserve Board Chairman Alan Greenspan commented, ``In my 
opinion, the elimination of the double taxation of dividends will be 
helpful to everybody. This particular program will be of net benefit to 
virtually everybody in the economy over the long run, and that is one 
of the reasons I strongly support it.''

                                 

    Mr. MCCRERY. Thank you very much. Mr. Daniels, thank you 
very much for your patience today.
    Mr. DANIELS. My pleasure.
    Mr. MCCRERY. I want to thank all the Members of the 
Committee for so--for being so nice and adhering to the 5-
minute rule today. It did enable us to get through every Member 
of the Committee within almost 2 hours, 2 hours and 15 minutes. 
So great job, everybody.
    Thank you for your testimony and your responses, Mr. 
Daniels, sir. We look forward to seeing you again. The hearing 
is adjourned.
    [Whereupon, at 4:19 p.m., the hearing was adjourned.]
    [Questions submitted from Chairman Thomas to Mr. Daniels, 
and his responses follow:]

                                    Office of Management and Budget
                                               Washington, DC 20503
Question: Given that the Customs Service has been transferred to the 
new Department of Homeland Security, what proposed budget changes have 
been made for all of Customs' statutory functions in the current 
budget? Congress directed in the Homeland Security bill that trade 
functions and staffing to certain trade revenue collecting offices not 
be diminished. How does the budget reflect this?

Answer: The budget does not propose to change statutory functions 
related to customs. It does display the Administration's request for 
the Department of Homeland Security, including customs functions, in 
the structure that the President proposes for the Department on a 
going-forward basis. Modifications to organizational units in the 
Border and Transportation Security Directorate were detailed in the 
Reorganization Plan Modification for the Department of Homeland 
Security submitted by the President on January 30, 2003, pursuant to 
section 1502 of the Homeland Security Act of 2002. Consistent with the 
Homeland Security Act, the budget maintains the Department's trade 
functions and staffing for certain trade revenue collecting offices.

Question: In crafting the reorganization legislation, Congress left the 
organic authority for Customs within Treasury, creating a presumption 
that the authority should not be delegated and Treasury would continue 
to perform its role in international trade. Will the Department of 
Treasury retain this authority, and will the Department remain fully 
staffed and funded in order to continue to perform its oversight role? 
What office within the Department of Treasury will be charged with the 
oversight of the revenue collection functions of the Customs Service?

Answer: The Departments of Treasury and Homeland Security will be 
discussing these issues with you in the near future.

                                
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