[Senate Hearing 108-521]
[From the U.S. Government Publishing Office]



 
                                                        S. Hrg. 108-521

        CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL YEAR 2005

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

                                HEARINGS

                               before the

                        COMMITTEE ON THE BUDGET

                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________


           January 27, 2004--CBO BUDGET AND ECONOMIC OUTLOOK

           February 5, 2004--THE PRESIDENT'S BUDGET PROPOSAL

  February 12, 2004--THE PRESIDENT'S FISCAL YEAR 2005 BUDGET PROPOSAL

  February 13, 2004--THE PRESIDENT'S FISCAL YEAR 2005 BUDGET PROPOSAL

          February 25, 2004--THE PRESIDENT'S HOMELAND SECURITY






           Printed for the use of the Committee on the Budget




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                        COMMITTEE ON THE BUDGET

                    DON NICKLES, Oklahoma, Chairman

PETE V. DOMENICI, New Mexico         KENT CONRAD, North Dakota
CHARLES E. GRASSLEY, Iowa            ERNEST F. HOLLINGS, South Carolina
JUDD GREGG, New Hampshire            PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               PATTY MURRAY, Washington
CONRAD BURNS, Montana                RON WYDEN, Oregon
MICHAEL ENZI, Wyoming                RUSSELL D. FEINGOLD, Wisconsin
JEFF SESSIONS, Alabama               TIM JOHNSON, South Dakota
JIM BUNNING, Kentucky                ROBERT C. BYRD, West Virginia
MIKE CRAPO, Idaho                    BILL NELSON, Florida
JOHN ENSIGN, Neveda                  DEBBIE STABENOW, Michigan
JOHN CORNYN, Texas                   JON S. CORZINE, New Jersey


                Hazen Marshall, Majority Staff Director

                    Mary Ann Naylor, Staff Director

                                  (ii)




                            C O N T E N T S

                               __________

                                HEARINGS

                                                                   Page
January 27, 2004--CBO Budget and Economic Outlook................     1
February 5, 2004--The President's Budget Proposal................    71
February 12, 2004--The President's Fiscal Year 2005 Budget 
  Proposal.......................................................   123
February 13, 2004--The President's Fiscal Year 2005 Budget 
  Proposals......................................................   203
February 25, 2004--The President's Homeland Security.............   263
February 26, 2004--The President's International Affairs Budget..   331

                    STATEMENTS BY COMMITTEE MEMBERS

Chairman Nickles..............................1, 71, 123, 203, 263, 331
Senator Bunning......................................161, 242, 301, 370
Senator Conrad................................2, 71, 124, 207, 264, 332
Senator Domenici.....................................162, 242, 340, 367
Senator Enzi...................................................136, 115
Senator Feingold..........................................167, 113, 299
Senator Johnson..................................................   192

                               WITNESSES

Bolten, Joshua, Director, Office of Management and Budget........    83
Holtz-Eakin, Douglas, Director, Congressional Budget Office......    22
Powell, Hon. Colin L., Secretary, United States Department of 
  State..........................................................   355
Ridge, Tom, Secretary, Department of Homeland Security...........   291
Snow, John, Secretary, United States Department of the Treasury..   211
Thompson, Hon. Tommy G., Secretary, United States Department of 
  Health and Human Services......................................   167

                         QUESTIONS AND ANSWERS

Questions and Answers................................116, 243, 303, 381

               ADDITIONAL MATERIALS AND CHARTS SUBMITTED

Testimony, charts, and graphics submitted........................   371




      THE CONGRESSIONAL BUDGET OFFICE BUDGET AND ECONOMIC OUTLOOK

                              ----------                              


                       TUESDAY, JANUARY 27, 2004

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:07 a.m., in 
room SD-608, Dirksen Senate Office Building, Hon. Don Nickles 
(chairman of the committee) presiding.
    Present: Senators Nickles, Domenici, Gregg, Allard, Enzi, 
Sessions, Bunning, Crapo, Ensign, Conrad, Hollings, Sarbanes, 
Wyden, Nelson, and Stabenow.
    Staff present: Hazen Marshall, majority staff director; and 
Cheri Reidy, senior analyst for budget review/revenues.
    For the minority: Mary Ann Naylor, staff director; and Jim 
Horney, deputy staff director.

             OPENING STATEMENT OF CHAIRMAN NICKLES

    Chairman Nickles. Good morning. This morning, we will hear 
testimony on CBO's budget and economic outlook for the years 
2005-2014. We are delighted that Dr. Holtz-Eakin is with us 
again. We look forward to his presentation before the 
committee.
    For the information of our members, we have scheduled 
several hearings in a rather aggressive schedule, trying to 
comply with our statutory deadline of completing the budget 
resolution conference agreement by April 15th. The House is 
going to be in recess for 2 weeks prior to that. We are going 
to be in recess 1 week prior to that. So we are going to have a 
fairly aggressive schedule, about a week faster than we did 
last year, to complete our work by the deadline. We actually 
have to be--for the Senate, we have to complete by April the 
9th because we are in recess on April the 12th. So we are going 
to have a fairly aggressive schedule.
    Next week, we will have OMB testify on Tuesday. Then we 
also have a hearing scheduled a week from tomorrow with 
Secretary Snow. And then following that, we have a hearing 
scheduled with Secretary Thompson, Secretary Colin Powell, and 
we also hope to have Defense and Homeland Security hearings 
scheduled.
    So we are going to have a fairly busy couple of months to 
have this completed really by the end of March, and I want to 
thank my colleagues for their cooperation in that. I also want 
to thank colleagues for the tenor and the tone of the hearings 
that we had last year as well as the markup in committee and 
debate on the floor. I think we were able to proceed 
senatorially, and I thank my colleagues, especially my 
colleague from North Dakota. And I will call upon him for his 
opening remarks as well, and then I might make a few remarks 
afterwards.
    Senator Conrad.

              OPENING STATEMENT OF SENATOR CONRAD

    Senator Conrad. Thank you, Mr. Chairman, and thank you for 
the many courtesies that you and your staff have extended to 
our side of the aisle. I do think we can have differences, very 
serious policy differences, but do it in a way that is in the 
spirit of cooperation, and I think we have done that, and that 
is much to your credit.
    I would also like to welcome the Director here today. As a 
native of Syracuse, I am not surprised you were able to make 
it. It is amazing what happens in this town with a little bit 
of snow. All of a sudden, everything shuts down. But I am glad 
to see that you are here.
    Mr. Director, I very much appreciate the analysis that you 
have put before us because I think it is important to the work 
of this committee and important to the work of the Congress.
    This was the headline this morning in the Washington Post: 
CBO says the deficit will reach $477 billion this year. Pretty 
stunning. That is $100 billion more than the biggest deficit we 
have ever had in this country. And the sub-headline says, 
``Extending Tax Cuts Could Double Debt.'' The President is fond 
of saying it is the people's money, we ought to give it back to 
the people. It is also the people's debt. And, in effect, what 
the President is doing is borrowing money from the people in 
order to give it back to some people and dramatically increased 
the debt. And I think we have to question very carefully 
whether this set of policies that is exploding the deficit and 
debt, not just in the short term--I want to make clear, I am 
much less concerned about the short term than I am the long 
term. I think it is the long-term implications of deficits and 
debt that is growing geometrically that we have to worry about.

[GRAPHIC] [TIFF OMITTED] 94065.003


    Let's go to the next.
    In the last year of the Clinton administration, we enjoyed 
a $236 billion surplus. Now, in the third year of President 
Bush's term, we have a $477 billion deficit, by far the largest 
in dollar terms we have ever had. But it is not just in dollar 
terms that we see a large deficit. Some have said, well, the 
deficit is relatively small as a percentage of GDP. I think 
when fairly judged, one does not see that. One sees, in fact, 
that the deficit as a percentage of gross domestic product, 
excluding Social Security, looking at it on an operating basis, 
is extremely high by that measure as well--5.5 percent of GDP, 
a level that has only been exceeded once since World War II, 
and that was in 1983.

[GRAPHIC] [TIFF OMITTED] 94065.004


    But it is not just the short-term deficits that alarm me. 
The thing that is of much greater concern is that we face an 
unending flood of red ink, massive budget deficits for as far 
as the eye can see. This result comes from building on your CBO 
baseline, making permanent the tax cuts that the President 
advocates, and fixing the alternative minimum tax, just making 
those two changes, no other changes--making the tax cuts 
permanent, which the President advocates, and fixing the 
alternative minimum tax, which will apply to over 40 million 
taxpayers by the end of this decade if we do not take action. 
And what you can see is deficits that are massive throughout 
the 10-year period.
    Let's go to the next chart.
    Some have said, well, it is because of spending, it is a 
spending explosion that has created the problem. First of all, 
I think all of us have to acknowledge spending has gone up. 
But, most of the spending increase has been for defense and 
homeland security. That is where the big increases have 
occurred.
    But if you look, the red line is total outlays of the 
Federal Government since 1980. The trend on spending as a share 
of gross domestic product has actually been sharply downward. 
Yes, there has been a substantial uptick as a result of 
September 11th, the increased expenditures for defense and 
homeland security being the primary culprits. But you can see, 
even with those increases, we are well below the levels of the 
1980's and 1990's.
    Let's go to the next chart that shows where the increase 
has occurred. The increase in spending, 92 percent of it has 
been in just these categories: defense, of course, by far the 
biggest, which all of us supported as a response to September 
11th and the other events that have transpired. The next 
biggest increase is homeland security. The third category is 
rebuilding New York, the airline bailout, and increased 
international spending. That is where the increases have been.

[GRAPHIC] [TIFF OMITTED] 94065.008


    Let's go to the next chart. The President is now focused on 
domestic spending, which is a very small part of Federal 
spending. He says he is going to restrain the growth of 
domestic non-homeland security spending. The fact is there has 
been very little growth in domestic spending. Not discretionary 
spending. Many of us talk about discretionary spending that 
would include all four of these categories. But you see that 
domestic spending has been almost flat in real terms--in real 
terms there has been very little growth. In real terms, the 
growth has been in defense, international, and homeland 
security.

[GRAPHIC] [TIFF OMITTED] 94065.009


    Let's go to the next chart.
    It is the revenue side of the equation where we have really 
seen things fall out. As a share of GDP, we now anticipate, 
with CBO's numbers, that revenue as a share of gross domestic 
product will reach its lowest level since 1950. So we have 
clearly got a serious revenue problem.
[GRAPHIC] [TIFF OMITTED] 94065.010


    The President tells us not to worry, that he will cut the 
deficit in half. But if we look back on what he has told us 
every year, it turned out to be wrong. He told us in 2001, ``We 
can proceed with tax relief without fear of budget deficits.'' 
That was wrong. In 2002, he told us, ``Our budget will run a 
deficit that will be small and short term.'' He was wrong 
again. Last year, he told us, ``Our current deficit is not 
large by historical standards.'' He was wrong again.
[GRAPHIC] [TIFF OMITTED] 94065.011


    Now he tells us, ``The deficit will be cut in half over the 
next 5 years.'' Will he be wrong again? Well, I don't know. But 
I think it really misses the point because the larger truth is, 
whatever happens in the near term is dwarfed by the long-term 
implications of his budget policies.
    We can see the dollar has declined precipitously against 
the euro, which confirms a warning that has just been made. 
Let's go to the next chart, and I am going to conclude on this. 
This was in the Washington Post of yesterday. ``Currency 
traders, fretting over that dependency''--referring to our need 
to borrow money--``have been selling dollars fast and buying 
euros furiously. The fear is that foreigners will tire of 
financing America's appetites. Foreign investors will dump U.S. 
assets, especially stocks and bonds, sending financial markets 
plummeting. Interest rates will shoot up to entice them back. 
Heavily indebted Americans will not be able to keep up with 
rising interest payments. Inflation, bankruptcies, and economic 
malaise will follow.''
[GRAPHIC] [TIFF OMITTED] 94065.013


    Now, none of us know when that line is crossed, when these 
twin deficits, the budget and trade deficits, will lead to the 
kind of results that were being discussed by economists 
yesterday in the Washington Post. But goodness knows we have 
lots of warnings: the Comptroller General of the United States, 
warning us of the growth of deficits and debt; the 
International Monetary Fund, saying the growth of deficits and 
debt in this country threaten not only our own economic 
security but global economic security.
    Mr. Chairman, these are serious questions and really 
require serious responses by this committee, the Congress, and 
the administration.
    Chairman Nickles. Senator Conrad, thank you very much.
    Would you mind repeating for Senator Ensign and others the 
growth rate on non-defense? It might help us on our side.
    I pointed out to some of our colleagues, my good friend 
Senator Conrad used real growth, which is adjusted for 
inflation--correct me if I am wrong--and it showed not too much 
real growth in non-defense, non-homeland security spending for 
last year, and that is correct. I just wanted that to be known 
because we have heard otherwise, mainly because a lot of 
people, Heritage and others, were using growth in outlays 
rather than growth in budget authority, which, frankly, goes 
back to 2001, 2002, and 2003, things that were in progress, and 
so on.
    Let me just make a couple of comments, and I very much 
appreciate my colleague. One, we did pass a stimulus package 
last year. I supported it. Actually, I think Democrats had a 
stimulus package; we had a stimulus package. We passed a 
stimulus package, and it worked. I have a couple of charts to 
show that.
    The stock market is up by several trillion, from about $11 
trillion to over $15 trillion since February of last year. That 
is a very significant increase. I believe the New York Stock 
Exchange is up about 25 percent and Nasdaq up about 50 percent, 
and combined, a total of about 35 percent. Our tax changes that 
we made where we cut the rates on dividends and capital gains 
worked. It did stimulate the economy.
[GRAPHIC] [TIFF OMITTED] 94065.016


    The gross domestic product, which had its first decline in 
2000 and then went further down in 2001, has shown significant 
appreciation, particularly the last couple quarters. And so the 
economy is starting to move, and that is very positive.
[GRAPHIC] [TIFF OMITTED] 94065.017


    The unemployment rate has declined. It has declined from a 
high of about 6.3 percent to 5.7 percent, so that is positive. 
Total employment has improved, and improved dramatically. If 
you use the household survey, which includes self-employed and 
others, the total employed has risen rather dramatically, 
particularly in the last three quarters. So we are seeing some 
positive signs.
[GRAPHIC] [TIFF OMITTED] 94065.018


[GRAPHIC] [TIFF OMITTED] 94065.019


    I also agree with Senator Conrad; there are two reasons for 
this big deficit. One is that revenues have gone down, and you 
might show that chart. The revenues are in the green. Revenues 
in the year 2000 were over $2 trillion. Now, last year, the 
year completed, 2003, they are at $1.78 trillion. That is about 
a $240 billion reduction, a reduction every year, the first 
time in history that has happened. That did not happen solely 
because of the tax cuts. It happened primarily because the 
economy really did drop--tank--in the year 2000. Nasdaq 
declined by about 50 percent in the year 2000. It is kind of 
interesting reading these articles. When did the recession 
start? Well, if you look at the stock market, the recession 
started in March of 2000 because Nasdaq was about 4,000 and 
Nasdaq was at 2,000 in December. So that has caused a 
precipitous decline in revenue.
[GRAPHIC] [TIFF OMITTED] 94065.020


    And then Senator Conrad is also correct, we have had a lot 
of new spending primarily to fight the war on terrorism. We 
have had a total of $242 billion in supplemental appropriations 
to fight the war on terrorism. Between the aid for New York and 
the Pentagon as a direct result of September 11, that was about 
$40 billion, and then we have had a supplemental last year of 
$87 billion, the year before that I think $91 billion to fight 
the war in Afghanistan and Iraq. So a total of $242 billion.
    Now, there are some other things that were added to that. 
We had about $30 billion in emergency unemployment benefits and 
so on, but a very significant increase in spending, I believe 
one-time spending. Now, correct me if I am wrong, Mr. Director, 
but under your proposal--or under your snapshot, you assume 
that the $87 billion that was in the supplemental last year 
would be ongoing throughout the next 10 years. That is not 
going to happen. We may have some additional supplemental 
spending for our efforts in Iraq and Afghanistan, but I do not 
believe they will be anywhere near the $87 billion. So that is 
inflated in the baseline and will be reduced.
    Also, the assumption that, well, all tax cuts that were 
enacted will be extended is false. I do not believe that is 
intended by this Senator. We had some things that were done 
temporarily to stimulate the economy: the accelerated bonus 
depreciation, which most people supported. It had strong 
bipartisan support, but the policy was for a short period of 
time to encourage investment in the next year or so, to get the 
economy going, to break out of that doldrum, to get some 
economic activity, to create some jobs. And so we did that.
    I think you can paint lots of scenarios that are very bad, 
but I do not think that is going to happen. And will we get the 
deficit down in half? It is very much this Senator's intention 
to do that and more. And so we will see if we cannot work 
together to do it.
    I also want to agree with Senator Conrad, long term there 
are serious problems, and particularly demographically when you 
look at Medicare, and we added to that last year when we passed 
the prescription drug bill. My guess is the cost of that will 
greatly exceed expectations, and I will ask Director Holtz-
Eakin about that in a little bit. But long term, that is a big, 
big, big challenge, and we need to be able to address it.
    But I might mention that was supported by members of both 
parties, and I might mention, too, that there were amendments 
on the floor that would have had a much more expensive proposal 
than what we ended up enacting. I believe 50 percent more was 
supported by a majority of members on the Democrat side.
    So long term, we have big challenges, and we need to work 
together. They will never be solved by one party or another. We 
need to work together to solve those, and I look forward to 
working with any of my colleagues that show an interest in 
trying to do that. And this Senator for one is willing to bite 
off as much as we can bite off this year. I realize it is an 
election year, but I am more than happy to work with my 
colleagues to try and fashion a package. I would love to have a 
bipartisan budget this year, and I would love to see us work 
together to solve some of these problems, both short term and 
long term. So I thank my colleagues.
    Unless colleagues are just dying to make an opening 
statement, I would like to call upon Dr. Holtz-Eakin to make 
his remarks, and then we will alternate back and forth 
according to time of appearance for colleagues to ask 
questions. Is that agreeable?
    Dr. Holtz-Eakin, thank you very much for your appearance 
this morning.
    Senator Sarbanes. Will the chairman appropriately note that 
many of us gave up making opening statements and keep that in 
his ledger book?
    Chairman Nickles. We will always give the Senator from 
Maryland great points for that, and I would ask Dr. Holtz-Eakin 
if he could keep his remarks to 10 or 12 minutes, and then ask 
my colleagues to try to keep their questions to a 5- or 6-
minutes per round.
    Dr. Holtz-Eakin?

   STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL 
                         BUDGET OFFICE

    Mr. Holtz-Eakin. Mr. Chairman, Senator Conrad, members of 
the committee, thank you for the opportunity to appear today. 
You have our report outlining the economic and budget outlook 
for fiscal years 2005-2014. We have also submitted an 
abbreviated version of that report as written testimony for the 
record. I will provide an even more abbreviated version in my 
oral remarks so that we can turn to any questions that might 
remain.
    Let me begin with the numbers. The CBO projects that the 
Federal Government will experience a deficit of $477 billion in 
fiscal year 2004. This will decline over the budget window. In 
2005, we project $362 billion; in 2006, it would be down to 
$269 billion and would steadily diminish thereafter, until the 
budget reaches balance in the years, roughly speaking, after 
2011. In particular, the $477 billion, as noted, is a record 
dollar deficit for the Federal Government. As a fraction of 
GDP, or national income, and a measure of our resources to 
service all commitments, it is 4.2 percent, and the projections 
are that it will diminish first to 3 percent and then down to 
2.1 percent.
[GRAPHIC] [TIFF OMITTED] 94065.021


    Another measure of the fiscal condition is the debt-to-GDP 
ratio, and these projections have a debt-to-GDP ratio that 
rises from about 38 percent, reaches between 40 and 41 percent, 
and plateaus there until after 2011, at which point it begins 
to diminish down to about 35 percent.
    Now, as has been noted, the CBO projections are built on 
several pieces. The first pieces are economic forecasts, which 
I will touch on briefly. They are also built on the baseline 
concept of a neutral benchmark against which further 
legislation can be measured. That neutral benchmark requires us 
to extend current law in the course of the projection period.
    In this particular context, that has implications on both 
sides of the budget. On the receipt side, we assume that the 
tax cuts passed in 2001 and 2003 sunset on schedule, as written 
in law. And on the spending side, we assume not only that 
current mandatory programs will evolve according to the 
demographics and structure of those programs, but that all 
discretionary spending currently on the books, inclusive of the 
$87 billion supplemental, will remain on the books over the 10-
year projection window and that the spending will rise only at 
the rate of inflation. So our assumptions in this baseline show 
discretionary spending rising at 2.5 percent per year, and they 
include the $87 billion supplemental.
    Now, in terms of changes in the budget outlook since we 
last reported in August, there are really two major 
developments. The first is the economy, which has grown even 
faster than we had projected in August. Our August projection 
included a fairly robust cyclical recovery. In the third 
quarter of this year, we saw GDP growth really much stronger 
than we had projected. And, indeed, it may be the case that the 
fourth quarter turns out to be stronger than even this 
projection anticipated. We had something on the order of a 
little below 4 percent built into this projection, and there 
are estimates that range north of that, perhaps nearer 5 
percent, depending on how things play out.
    So one change since August has been the economy. That has 
near-term benefits, not dramatic because we had a fairly strong 
recovery in there to begin with, but it has improved the 
picture from an economic point of view.
    A second major development is legislative. The laws passed 
by Congress since our August update have contributed about $680 
billion to the deficit over the 10-year window. That is in 
contrast to a total of about $300 billion, in round numbers, 
attributed to economic and technical revisions.
    And so those are the two big changes. I think the lesson 
there is that, from the point of view of the path going 
forward, it will be policy choices that largely dictate the 
condition of the budget, as opposed to the economic future, at 
least to the extent it can be anticipated.
    Now, I will go briefly over economic forecasts. This one 
chart is meant to summarize the entire forecast; we do the best 
we can on that. What we see is an economy that is currently 
operating below potential. We have had a recession. Our 
forecast is that the economy will grow rapidly, at 4.8 percent 
this year, 4.2 percent next year. As a result of that, we will 
see unemployment decline from something that averages around 
5.8 percent this year down to 5.3 percent next year. And that 
cyclical recovery will close the gap between the light-blue 
line at the bottom and the dark-blue line which represents the 
capacity of our economy to produce.
[GRAPHIC] [TIFF OMITTED] 94065.022


    Over the long term, however, it is that capacity which is 
central to the amount of income in the economy. So closing the 
gap more rapidly----being wrong in the fourth quarter or having 
a bit faster growth than we anticipate next quarter----really 
just serves to close more quickly and does not change the long-
run budgetary picture very much. Instead, the large uncertainty 
from an economic point of view, in terms of the long-term 
budget outlook, is how fast that potential will grow, and there 
the major issue is how one thinks about the productive capacity 
and particularly the labor productivity growth that we have 
seen recently.
    As is discussed at length in the report, we have 
experienced very rapid productivity growth in this recession 
and recovery, comparable only to that during a brief period in 
the 1950's. And it has raised lots of questions in the minds of 
analysts about the future path of productivity. What we have 
done in our projections is to acknowledge that rapid 
productivity growth by raising our estimate of the productive 
capacity of our economy, moving it up, but not dramatically 
changing our growth rate of that productive capacity. So there 
is some benefit to that, but it is not something we have 
extrapolated beyond the historical increase, largely on the 
grounds that we cannot in our digging through the numbers find 
a solid case that there has really been a change in the trend 
in the economy. But from the economic point of view, that is 
the central piece of the forecast. It is our expectation that 
we will continue to operate in a rapidly growing, low 
inflationary environment. Interest rates will begin to move up, 
but not dramatically so, until a couple years from now.
    Now, built on top of that economic forecast are projections 
for receipts and outlays. Revenues here are shown in the dark-
blue line. Over the 10-year projection period, revenues are 
projected to grow overall at about 7.2 percent per year. That 
is in contrast to the average rate of growth of nominal GDP, 
which is 4.7 percent. So as a consequence, receipts will rise 
as a fraction of GDP from their low in 2004 of 15.8 percent to 
a total of 20.1 percent in 2014.
[GRAPHIC] [TIFF OMITTED] 94065.023


    Shown in a dotted line at the bottom is the average 
receipts collected out of our national income of about 18 
percent over the period since 1962. We will start below that 
and rise above. The increase in receipts in our baseline is 
largely due to the action of the individual income tax. The 
remainder of the tax bases, with the exception of the 
expiration of the partial expensing at the end of this year, do 
not show a great deal of action.
    The rise in the individual income tax comes from two 
sources. First is the sunsets of the tax cuts in 2001 and 2003, 
which are shown in our baseline. Of the 4.3-percentage-point 
rise in revenues as a fraction of GDP, about 2.3 percent comes 
from that source. However, the remainder, the remaining 2 
percentage points of increase in receipts, comes from a variety 
of other sources.
    The first is the fact that with a growing economy, people 
will become better off in real terms, and they will move into 
higher tax brackets and pay more in income taxes.
    The second is that we anticipate a resumption in the 
realization and taxation of capital gains closer to historic 
norms. We have seen a large drop-off in the capital gains 
component. We anticipate that to rise in our projection period.
    The third is the beginning of the retirement of the baby-
boom population that carries with it the taxation of tax-
deferred savings accounts, IRAs, 401(k)'s. Some of those 
revenues will appear in the Federal budget.
    And, finally, included in our projections is a rise in the 
importance of the alternative minimum tax. The alternative 
minimum tax is not indexed for inflation, and even given the 
low inflation outlook that we have in our projections, we will 
see an increasing number of taxpayers become subject to the 
alternative minimum tax. At present, about 3 million taxpayers 
are subject to the AMT. Over the period to 2014, that could 
rise to as high as 30 million taxpayers.
    So those are all sources of increase in receipts in this 
baseline under current law.
    On the outlay side, we have built this to be inclusive of 
the legislation just passed by the Congress, signed by the 
President. So we have the omnibus built into our baseline, and 
it correctly captures all the appropriations therein. As I 
mentioned earlier, it includes the $87 billion supplemental 
appropriation and essentially puts that in for every year and 
raises it with the rate of inflation. Ten times 87 gives you 
$870 billion to begin with. With debt service, that contributes 
about $1.1 trillion to the 10-year deficit number in our 
projections.
    On the mandatory side, we have mandatory spending rising at 
an average rate of 5.5 percent per year. That is driven largely 
by the entitlement programs--Social Security, Medicare, and 
Medicaid. And, indeed, in those programs, the rate of growth 
will rise over the course of the projection period. By 2014, 
those programs are rising at 6.5 percent per year, and that is 
the beginning of what one would anticipate to be a large 
increase in the demand for budgetary resources by those 
programs. The combination of an aging population, the 
retirement of the baby-boom generation, and rising health care 
costs in particular place those entitlement programs on track 
to demand ever larger fractions of our national income.
    The last point that I will note before turning to the 
closing slide is that there has been a great deal of discussion 
in the preparation of this report and even in the opening 
remarks by the Chairman and Senator Conrad about the growth 
rate of different discretionary spending categories. I will 
simply note--and we can return to this in questions--that there 
is a large divergence between growth measured as outlays versus 
growth measured in budgetary resources, particularly on a 
program-by-program basis. And that is built into our baseline 
as well.
    Finally, in an effort to give the Congress some sense of 
the degree to which the budget outlook depends on choices made 
by Congress and the administration, we outlined a series of 
variations from the statutory baseline and their implications 
for the long-run budget outlook. These are intended to give you 
orders of magnitude and stylized notions of the kinds of 
budgetary resources that are at stake.
    The top panel shows those that would reduce any surplus 
that might emerge or increase the deficit. There the first 
policy alternative that is shown is to extend all expiring tax 
provisions. There are really three classes of expiring tax 
provisions, which we have tried to lay out in a table in 
Chapter 4 of the report. One type is the tax cuts in 2001 and 
2003, EGTRRA and JEGTRRA. The second is the partial expensing, 
which has been scheduled to end at the end of 2004. And the 
third is a variety of smaller individual items that 
collectively contribute to this estimate. But if one were to 
make all those tax provisions permanent and not allow them to 
sunset, the total impact on the budget would be $2.2 trillion 
over the 10-year window.
    A second tax item that has gotten attention, as I mentioned 
earlier, is the alternative minimum tax. To give you a sense of 
the magnitude involved, we included a reform of the alternative 
minimum tax, which is very simple. It is a plain-vanilla reform 
in which the AMT is indexed for inflation so that no one moves 
from the individual income tax to the AMT strictly due to 
inflation alone. Instead, to have the AMT apply, you have to 
really be richer, have your income rise in real terms. That 
reform of the AMT would cost about $470 billion over the 10-
year window. I would point out there are many different 
possibilities for changes in the AMT, and the particular cost 
would depend on the proposal itself.
    Then, finally, you can see that, instead of assuming a 
fairly stringent policy baseline of 2.5 percent growth in 
discretionary spending a year, we could have spending 
essentially remain constant as a share of GDP, in which case it 
would rise about 4.7 percent per year; that would cost $1.6 
trillion in increased outlays over the 10-year window. And then 
the final alternative is increasing spending at the rate that 
has occurred in the past 5 years, which is 6.9 percent; 
spending increases over the 10-year window at that rate would 
add $3.2 trillion.
    The bottom panel goes the other direction. You could 
exclude the supplemental. As I mentioned, that is worth about 
$1.1 trillion. One might imagine a freeze in total 
discretionary spending, so declining in real terms. That would 
raise the budget surplus or reduce the deficit by $1.3 
trillion.
    And I think the hope is that that will provide Congress 
with some information about the kinds of things that would be 
on the table in terms of policy options. And given the CBO 
forecast of a solid cyclical recovery and an economy that is 
reaching its productive capacity and then growing at a healthy 
rate thereafter, such figures suggest that in terms of 
budgetary outcomes, it will be policy decisions made by the 
Congress and the administration much more than the anticipated 
path of the economy at this point which will be central.
    So, with that, I will close, and I would be happy to answer 
your questions.
    [The prepared statement of Dr. Hotltz-Eakin follows:]

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    Chairman Nickles. Thank you very much. I have just one 
comment.
    CBO and OMB and all the economists missed the revenue 
projections greatly in 2000, or I guess when testimony was made 
in 2001. They greatly overestimated revenues. Senator Conrad 
and I have wrestled around--well, President Clinton gave us a 
$5.6 trillion surplus. That was the projection in 2001, but way 
off the mark, greatly underestimating what the decline in the 
stock market bubble did to revenues. Just look at NASDAQ in 
2000--now it has started to come up, but the revenues really 
dropped as a result of that, and not just that year, but 
frankly for a couple of years, because you had capital losses.
    Now we have had just in this year alone an enormous 
increase in stock market values. Just as an editorial comment, 
I hope you are greatly missing it again. I cannot help but 
think if you have $4 trillion of new equity, those capital 
gains, even though we are taxing them at a lower rate, we 
should collect more revenue. Every time we reduce capital gains 
rates and we have had an increase in turnover in sales and so 
on, there has been a lot of new revenue--just an editorial 
comment. It was missed greatly going down, and I hope it is 
missed greatly going up. There is a lot of economic activity 
out there to create that kind of robust increase in market 
value. Thank goodness there is. I am hopeful that you greatly 
underestimate it again. Maybe not. I do not know. That is just 
my hope.
    As a matter of fact, I am disappointed. Because we enacted 
the growth package, and we have had more robust growth than 
most, I was leading the charge saying let us have zero tax on 
dividends, and we ought to have 10,000 Dow Jones index, and we 
have exceeded that at a 15 percent rate. So I am thinking there 
should really be some real positive revenues. Yet you came out 
and said, well, we have done economic assumptions, and between 
our economic assumptions and our technical assumptions, we 
think it is about $350 billion worse over the 10-year period. 
We think inflation is lower and so on. I find that kind of hard 
to deal with. I understand you said that short-term, we get a 
little bump, but long-term, it does not make any difference. 
And then I look at your 10-year projections, and with the two 
of them combined, a $171 billion increase in deficit due to 
economic factors. The economic factors are all positive. And 
then, technical revisions to your baseline are another $134 
billion. I do not know. There may be too much pessimism for me. 
I cannot understand it. If you want to comment on that, you 
can, but let me make just two other points that are very 
critical.
    The legislative changes that were enacted since the August 
baseline, $681 billion over 10 years, all that was on the 
outlay side; is that correct?
    Mr. Holtz-Eakin. Yes, sir.
    Chairman Nickles. And that was primarily the Medicare bill, 
adding prescription drugs and the other Medicare changes, and 
what else?
    Mr. Holtz-Eakin. The Medicare bill is a little under 70 
percent of that, and then there is the increase in 
appropriations above and beyond last year's, the difference in 
the supplementals (between $87 billion and $79 billion), 
carried out over 10 years. And there is some debt service 
attached to that number as well.
    Chairman Nickles. OK. I would appreciate a breakdown of 
that if you could give me a breakdown.
    Mr. Holtz-Eakin. We can get you all those figures.
    Chairman Nickles. And maybe it is in your figures, and I 
have not had a chance to review it.
    The Medicare bill--Senator Conrad and I both alluded to the 
long-term problems that we are going to have in entitlement 
programs, primarily Medicare. Medicare Part D--correct me if I 
am wrong; I am looking at page 13 of our Budget Outlook--it 
says the total cost of Part D, the new Medicare prescription 
benefit, is $771 billion; offsets, some changes, but basically, 
the increase in outlays is $758 billion; receipts from 
beneficiaries, $134 billion; and receipts that we get back from 
the States, $88 billion, for a net of $535 billion. And then, 
we expect savings on Medicaid, since we are assuming Medicaid, 
$138 billion. That is how you get to your net of $395 billion 
over the 10-year period of time.
    But gross outlays, you are talking about $771 billion.
    Mr. Holtz-Eakin. Yes.
    Chairman Nickles. What is your estimate on the cost of the 
program over the next 10 years?
    Mr. Holtz-Eakin. Over the years 2004 to 2013, if you just 
take the bottom line impact, $395 billion. But dropping fiscal 
year 2004, where there are essentially no outlays because the 
program has not started up yet and then adding the last year, 
where it will cost about $80 billion on net, moves the cost 
from $395 billion to something on the order of $475 billion 
over this 10-year budget window.
    Chairman Nickles. OK. What about the next 10 years; have 
you done a guesstimate on that?
    Mr. Holtz-Eakin. In preparation for House testimony last 
year in August, we did take a look at the second 10 years of 
any such program. We did not examine the particulars of this 
bill as passed. It was preliminary at that time. We simply 
extrapolated the final year net cost, something on the order of 
$70 or $80 billion, looking at growth rates and costs of 
prescription drugs. Doing that kind of calculation leads one to 
a second 10 years that is somewhere in the vicinity of $1 to $2 
trillion, depending on the range of uncertainty on the growth 
rate of drug prices.
    Chairman Nickles. So, for the next 20 years, you think the 
cost of the bill would be pretty close to $2 trillion?
    Mr. Holtz-Eakin. If you do 20 years, yes--within the range 
of possibilities.
    Chairman Nickles. Well, I read your comment, and I just 
wanted to clarify it, because it is on a ramp like this, and 
people should be aware of it. A lot of people will say, well, 
over 10 years, if it is $400 billion, that is $40 billion a 
year--that is not what we passed. We passed something that has 
very little cost the first couple years, and then it increases 
rather dramatically in the outyears and continues to escalate. 
I saw your comment where you thought it might be a couple of 
trillion dollars.
    This is not paid for. This is outside the beneficiaries' 
contributions, so it would be paid for out of general revenues. 
I might make mention of that.
    One other comment. I notice your letter to Senator Frist 
dealing with non-interference, or having the Government 
negotiate drug prices--would you care to comment on that? Would 
removing that language in the bill have any significant impact 
on the cost of the program or on drug prices?
    Mr. Holtz-Eakin. Our view of the private prescription drug 
delivery in the bill is that those at-risk private firms will 
have tremendous incentives to drive very good bargains with 
pharmaceutical companies, and as a result, removing the 
language prohibiting the Secretary from negotiating would have 
negligible impact on the overall cost of the bill. There are 
already plenty of incentives for cost control.
    Chairman Nickles. I appreciate your comments.
    Senator Conrad.
    Senator Conrad. Thank you, Mr. Chairman.
    Again, thank you, Dr. Holtz-Eakin, for your testimony.
    Your analysis shows that the debt will increase by how much 
over the next 10 years?
    Mr. Holtz-Eakin. The debt-to-GDP ratio will rise----
    Senator Conrad. No--I am talking now the debt in dollar 
terms. How much will the debt in dollar terms increase over the 
next decade if there are no additional tax changes or spending 
changes?
    Mr. Holtz-Eakin. Between 2005 and 2014, debt held by the 
public will rise from $4.8 trillion to about $6.4 trillion----
so $1.6 trillion.
    Senator Conrad. One-point-six trillion. And debt held by 
the public now is $4.8 trillion?
    Mr. Holtz-Eakin. That's the fiscal year 2005 projection.
    Senator Conrad. OK. How much would it add to the debt if 
the tax cuts were to be made permanent? How much would it add 
to the debt over this period?
    Mr. Holtz-Eakin. I have not done a specific calculation of 
the debt outstanding if the 2001 and 2003 tax cuts alone were 
made permanent, but we could certainly do that calculation and 
would be happy to get it to you.
    Senator Conrad. I notice on your chart, you have 
``Extending the expiring tax provisions.'' How much would that 
add to the debt?
    Mr. Holtz-Eakin. Well, there is a cumulative deficit of 
$2.2 trillion, but because of the variety of financing 
mechanisms, that does not map directly into debt outstanding. 
Again, it is a calculation we would be happy to provide to you.
    Senator Conrad. Can you give us a rough--would it be more 
than the $2.2 trillion or somewhat less than the $2.2 trillion?
    Mr. Holtz-Eakin. It is as good a guess as we have. We do 
not know if there is a particular bias one way or the other on 
the timing.
    Senator Conrad. So roughly, making the tax cuts permanent 
would add another $2 trillion to the debt over the next 10 
years?
    Mr. Holtz-Eakin. Ballpark, yes.
    Senator Conrad. So then, we would have a debt of $8.4 
trillion instead of the $4.8 trillion we expect at the end of 
this year.
    Mr. Holtz-Eakin. Right.
    Senator Conrad. You know, there has been a lot of talk by 
some that deficits do not matter, that this buildup of debt and 
these deficits do not matter. In your judgment, do deficits 
matter?
    Mr. Holtz-Eakin. Yes, I do think deficits matter. On 
balance, deficits shift national resources away from saving 
toward current consumption, and the impact of deficit spending 
as a result differs depending on the state of the economy. In 
those situations where the economy is weak, and there is very 
little spending demand from private sources, that shift from 
saving to consumption will bolster demand, and looking back, we 
have seen that. At times when the economy is already fully 
employed and there is plenty of private-sector demand, that 
shift from saving to consumption has not the same benefits of 
supporting the economy. Instead, it affects the supply side and 
the accumulation of saving and national investment and the 
growth in the capacity of the economy to produce. In both 
cases, deficits matter, and their impacts differ.
    Senator Conrad. Well, you have made a very good point here. 
You have really differentiated the effect of deficits depending 
on the state of the economy. As I hear you saying it, when the 
economy is weak, deficits can give lift to the economy; when 
the economy has recovered, then running deficits will actually 
hurt long-term economic growth. Is that correct?
    Mr. Holtz-Eakin. Running sustained large deficits in the 
face of a full employment economy will have negative economic 
growth consequences.
    Senator Conrad. So as you look at these deficits going 
forward, and you say there is going to be $1.6 trillion of 
added debt if we do nothing, we will approximately double the 
debt if we make the tax cuts permanent and address the 
alternative minimum tax problem that you have described as 
growing geometrically, so you would take that to be negative 
for the economy if we run these deficits going forward and the 
economy is growing as you project it to?
    Mr. Holtz-Eakin. We incorporate into our baseline 
projection, including the economic forecast, the deficit and 
its consequences. In our forecast, that shows up mechanically 
in the degree to which there is capital accumulation in the 
economy, and as a result, the rate at which labor productivity 
grows. Those impacts are not very large in the near term, but 
they build over time.
    Senator Conrad. Actually, you are quoted in The Washington 
Post, and I want to see if that is a correct quote. ``The 
cumulative corrosive impacts of sustained deficits in the face 
of a full employment economy would on balance make the 
extension of the tax cuts a `modestly negative policy choice,' 
Holtz-Eakin said.''

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    Is that a correct----
    Mr. Holtz-Eakin. I will assume that it is a correct quote. 
The context in which the question arose is exactly the question 
you are raising. But in terms of the budget projections over a 
10-year window, the impact of the tax cuts sunsetting in 2011 
in the near term has negative impacts when marginal tax rates 
go up for labor supply and thus GDP growth, and we lay those 
out in the report. The other impacts of either making them 
permanent or letting them sunset take longer, and they go 
outside the budget window. So this sort of trade-off is really 
one that has to be framed carefully in terms of the time period 
over which you want to do the analysis.
    Senator Conrad. OK. Let me ask you this. Spending--spending 
and revenue--that relationship is what leads to deficits. When 
we spend more--and right now, we are spending $900,000 a minute 
more than we are taking in--it is kind of stunning--this year, 
we are spending $900,000 more a minute than we are taking in. 
What is the relationship of spending now as a share of our 
gross domestic product to what spending was in the eighties and 
nineties? Is spending more now or lower now?
    Mr. Holtz-Eakin. In these projections, spending averages 
about 20 percent of GDP, which is close to the post-war 
historical average.
    Senator Conrad. Close to the post-war historical average. 
Let me put up--here is what my chart shows, that spending, 
which has picked up now because of increases in defense and 
homeland security, is still quite a bit below where it was in 
the eighties and nineties. You were talking about post-war. I 
was asking eighties and nineties, spending as a share of GDP. 
This chart shows that spending now is below where it was in the 
eighties and nineties. Is that correct?

[GRAPHIC] [TIFF OMITTED] 94065.005


    Mr. Holtz-Eakin. I will assume it is correct. There have 
been variations over the post-war, certainly.
    Senator Conrad. And in terms of revenue, what do you 
anticipate revenue as a share of GDP being this year in 
relationship to where it has been since World War II?
    Mr. Holtz-Eakin. It is 15.8 percent in 2004 in these 
baseline projections. The average is about 18 percent, as I 
mentioned in my remarks.
    The Chairman also raised the question of the path of 
receipts in these projections. The amount in 2004 is low for 
several reasons, some understood, some not well understood. 
Certainly, policy has lowered receipts in 2004, and some of 
that policy will go away--the partial expensing provision.
    There has also been economic performance which is now 
turning around, and we are seeing faster growth. But in 
contrast to the rapid rise in GDP, production, we have not yet 
seen evidence of a comparable rapid rise in taxable incomes, so 
that economic growth really has not translated as much into the 
tax base as one might have expected.
    We have data at this point only through tax returns filed 
in 2001, so we cannot fully diagnose the relationship between 
what is going on in the economy and what we are seeing in 
taxable incomes as well as we would like to, and some of these 
mysteries will be resolved with time, and some, I think we will 
get a better handle on sooner than that, as we see what happens 
to measured wage compensation, for example, in the economy as 
measured by the BEA over the next year.
    So in terms of the revenue picture, we expect 2004 to be 
transitorily low for a variety of reasons and then to pick up 
thereafter.
    Senator Conrad. And our numbers show the revenue as a share 
of gross domestic product being the lowest since 1950. Do you 
agree with that?
    Mr. Holtz-Eakin. That's right.
    Senator Conrad. I thank the Chairman.
    Chairman Nickles. Senator Conrad, thank you very much.
    Senator Enzi.
    I might note for the interest of our colleagues that 
Senator Crapo was actually here first. He beat me here, and 
then he left, so I might have to put him back in the queue when 
he returns.
    Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman.
    Mr. Holtz-Eakin, I particularly thank you for being here 
and the difficulty of your job. It always occurs to me that 
making these predictions is very difficult--but only when we 
are talking about the future.
    I can see from the material that I have been through why it 
is easy to miss on the projections whether you are the director 
of CBO or the President of the United States or one of the 
Senators, or even somebody from the House or somebody from the 
public. There are just so many interacting things.
    First of all, I would like to ask that my entire statement 
be made a part of the record.
    Chairman Nickles. Certainly.
    [The prepared statement of Senator Enzi follows:]

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    Senator Enzi. I notice that CBO kind of isolated some 
things and said that the economy and technicals put about 40 
percent into the deficit in spending increases, 37 percent, and 
the tax cuts, 23 percent. Is that a figure from----
    Mr. Holtz-Eakin. That is a historical analysis, and we have 
done a variety of----
    Senator Enzi. And 2002 to 2011 was actually the baseline 
that you were doing that on. And I appreciate Senator Conrad's 
chart that shows where the bulk of this spending came from--the 
war and national security, and the bailouts we did to take care 
of the damages that were done as a result of September 11, and 
I think we also had some that we did for all of the States that 
were having some difficulties. I think you said that in your 
projections, you continued about an $87 billion expense through 
each of the years?
    Mr. Holtz-Eakin. That is correct.
    Senator Enzi. There are a lot of things that we cannot do 
anything about. Spending, we can, I think. The average rate of 
increased spending for the last 6 years was 6.9 percent when 
you take all those things into consideration. I think that that 
is unsustainable. We have to continually and fully support the 
troops in Iraq and Afghanistan and all the other places in the 
world. There are certain domestic priorities that we are going 
to have to fund. But we still have to look at the areas of 
spending. And people say, well, that is a pretty small part of 
what there is out there, but that is all that we can work with, 
so that is what we have to work with.
    I am reminded of that old phrase, ``A billion here, a 
billion there, and pretty quickly, it runs into money.'' We are 
not very good at cutting anything. We are not even good at 
slightly reducing things. What we go into--particularly in an 
election year, and this is a Presidential election year, so I 
think it might even be worse--is a phase of trying to outbid 
each other on every program that comes along.
    Now, business out there is not given the same options that 
we are given. They have a revenue that they project, and they 
budget against that, and somehow they have to make it come out. 
I haveten to look at some of those private business budget 
plans, and I am amazed at the minute detail that they go into 
making extremely small cuts but realizing that the extremely 
small cuts add up to something much bigger that actually helps 
them to balance or get close to or to follow their business 
plan. So I am going to encourage everybody to look for 
ineffective programs that we can reduce--I am not going to even 
suggest eliminate, because I know that that is an 
impossibility. There is a huge constituency out there for every 
program that we have developed, and those people are making 
some money out of the program, and they will spend some money 
to make sure that we do not eliminate their program. But we 
should be able to take a look at and at least reduce some of 
those that are out there.
    When we are debating our economic policies, I mentioned 
that from 2002 to 2011, we had the 40 percent drop in the 
economy. Do you think the tax cuts have had a positive side on 
the economy? It appears to be reflected in your numbers.
    Mr. Holtz-Eakin. Well, certainly, looking back, the swing--
both as a matter of policy and the fact that the budget 
response to the economy has supported an economy that has been 
hit with a wide variety of adverse economic shocks, if one goes 
through the list--it has been quite dramatic: between war in 
the Middle East, terrorism events, equity market decline, and a 
large fall-off in business, fixed investment. It has been a 
period of lots of downward economic shocks, and the fiscal 
policy has served to support the economy in that period.
    Senator Enzi. I think you also mentioned that during the 
year, there was a tremendous increase, at least in the third 
quarter. Now, that would not be reflected through all of your 
projections; you are not allowed to do that, are you?
    Mr. Holtz-Eakin. We did in fact include the information 
from the third quarter in our projections for the entire 
period. The fourth quarter data have not yet been released, and 
we had to project that in doing our forecast.
    Senator Enzi. I guess the point that I am trying to make is 
that if we increase the gross domestic product, everything 
looks a lot better; taxes probably come in a little bit higher. 
So I appreciate all the effort that you put into those numbers. 
I recognize the difficulty of predicting, and you have been a 
tremendous help.
    Thank you.
    Chairman Nickles. Thank you, Senator Enzi.
    Next, I call upon Senator Hollings. I might note that both 
Senator Hollings and I are having our last year on this 
Committee. I have only been on it for 24 years, which pales 
compared to Senator Hollings' 30 years on this Committee, and I 
compliment him for that and recognize Senator Hollings.
    Senator Hollings. You are might generous, Mr. Chairman, and 
I appreciate it very much. I particularly appreciate us having 
a Director of the Congressional Budget Office who believes that 
deficits count.
    Otherwise, in all sincerity, we have just heard from the 
distinguished Senator from North Dakota, our ranking member, 
the true state of the Union, and I am going to make a public 
request, and if he will not, I will. I want that printed up 
what Senator Conrad in his opening comment stated. If we can 
get that printed up and mailed to all the Members, you will 
have a true state of the Union message. And thank you--I know 
that Senator Conrad has to go to an Agriculture meeting, but I 
cannot thank him enough, because he covered our true situation.
    Mr. Chairman, you have been very generous. We both work 
together. But I could not help but smile when you were talking 
about how the stimulus worked. I would hope so. I would hope 
the stimulus of tax cuts worked some, for the main and simple 
reason that last year, we ended up with a deficit of $562 
billion--$562 billion--I do not want anybody to question the 
accuracy of that.
    Otherwise, we had approximately a current account deficit 
and balance of trade of around $480 billion. So in the last 
year, we have goosed the economy, we have infused the economy 
one trillion bucks. Tax cuts--come on--that little tax cut was 
just a minor part of it. We have put in 562 plus 480--we have 
put in over $1 trillion into the economy, and it is still 
limping along. They are wanting more tax cuts.
    I do not think they would ever mention more tax cuts if 
they understood the exact situation that we are in, and that is 
why I ask that the comments of the Senator from North Dakota be 
printed up and sent around--because Mr. Chairman, I remember 
you were hearkening the days--you were talking about stimulus--
Senator Sam Ervin of North Carolina and I were trying to 
stimulate the economy about 25 years ago with $5 billion in 
highway spending. It had already been approved at the Highway 
Administration, but we had to go out, and we were trying, and 
it took us 3 days to persuade our colleagues to approve 
borrowing $5 billion to get the economy going and to get jobs 
created.
    Now, here we are stimulating over $1 trillion in a year's 
time, which brings me to my hope and mission this morning, 
which is to get truth in budgeting. And I am not playing games, 
Mr. Director, and I am not trying to be cute, but as between 
the word ``gross'' and the word ``total,'' do you find a 
difference?
    I will be specific with you. I had to just pull out my 
little Webster's Collegiate Dictionary, and ``total'' was 
``gross,'' and ``gross'' was ``total''--in fact, the exact 
definition in Webster's. ``Gross'' is ``an overall total 
exclusive of deductions.''
    Do you find a difference when you use the word ``total'' 
and when you use the word ``gross''?
    Mr. Holtz-Eakin. Off the top of my head, they sound like 
similar concepts. I do not know if there is a technical 
definition involved. I think it is about the context.
    Senator Hollings. The reason I ask that--if you take the 
first page of the--well, let me get to what the people 
understand. Here you go. I had some of this this morning. Total 
is 100 percent. That is the headline, right? That is 100 
percent Total. Now, if Total is 100 percent in the public's 
understanding and your understanding and my understanding, I 
notice on page 1 of the summary, you say ``Total budget deficit 
of $477 billion.'' That is really only 68 percent; that is not 
100 percent, because if you turn to page 19 of the regular 
budget report that you have here, you can see that the debt in 
2003 actual--you use the word ``actual,'' which I like--
``total,'' ``actual,'' ``gross,'' so everybody is singing from 
the same page--the actual debt in 2003 was $6,760,000,000, and 
you project the debt in 2004--in 8 months' time, now--next 
year, it is going up, in 2004, which is the fiscal year--to 
$7,459,000,000. So you have an ``actual'' or ``total'' or 
``gross'' deficit of $699 billion; isn't that correct?
    Mr. Holtz-Eakin. That is not the concept that was on page 
1.
    Senator Hollings. I did not ask about the concept. What is 
the fact?
    Mr. Holtz-Eakin. The fact is that the total borrowing by 
the Federal Government from the economy will be $477 billion in 
2004.
    Senator Hollings. I didn't ask about the borrowing. I asked 
about the deficit. You and I have to not run around with the 
percent of GDP. When I go to pay my bill on the house payment, 
or when I go to pay the car payment, or when I go to pay the 
washing machine bill, they do not ask me what is the percent of 
my GDP. They want the money. They want the money. And we have 
to talk sense, and we have to talk facts and not theory--in 10 
years, in 50 years, what we did 10 years ago and all--because 
we only have 8 months. And that is the duty of this Committee 
is to propound a budget.
    Within that, do you find the budget different than $699 
billion?
    Mr. Holtz-Eakin. I do. If you count the dollars coming in 
and then count the dollars going out, the difference, which is 
what you would have to go to the bank--and in this case, the 
``bank'' is the entire economy--that difference is $477 
billion.
    Senator Hollings. Oh, you are borrowing from Social 
Security, and you know--according to the budget law--in fact, 
Mr. Chairman, we were here in the Budget Committee, and we got 
a vote 20-to-1 to make sure that the Greenspan Commission was 
carried out--namely, that Social Security be put off-budget in 
Section 13.301, signed by George Herbert Walker Bush, Sr., on 
November 5, 1990, by a vote of 98-to-2 in the U.S. Senate. 
President Bush signed that into law, Section 13.301 of the 
Budget Act, not to use Social Security. And here you are trying 
to deduct it, and trying to answer the question what is total 
and what is actual.
    The total deficit or the actual deficit is $699 billion; 
isn't that correct?
    Mr. Holtz-Eakin. With all due respect, Senator, this 
document is meant to provide an accounting of the congressional 
actions. The exchange of payroll taxes and debt and Social 
Security Trust Fund is an intergovernmental transfer and would 
not be reflected in the total budget deficit, which shows the 
borrowing requirements by the Federal Government.
    Senator Hollings. Why do you say on page 19--let us all 
turn to page 19, and you will see down there, ``The gross 
Federal debt''--why did you use that rationale or whatever--
that is where the debt is going up from 6,760 to 7,459--I mean, 
it is going up $699 billion. That is all the dollars in and all 
the dollars out; isn't that the case?
    Mr. Holtz-Eakin. It is certainly our desire to inform the 
Congress of all the budgetary consequences of its actions, and 
certainly as the Federal Treasury issues securities to the 
Social Security Trust Fund----
    Senator Hollings. I am not asking how to issue and borrow. 
That is the whole thing. They are going to have to borrow. If 
they wanted to actually put the Government in the black, they 
would have to actually borrow $699 billion; isn't that correct?
    Mr. Holtz-Eakin. No, that is not correct.
    Senator Hollings. Well, how is it incorrect? If it goes 
from $6,760 trillion to $7,459 trillion--that is where I get 
the arithmetic $699 billion.
    Mr. Holtz-Eakin. The point at which the Social Security 
benefits are paid in the future will be the point at which the 
Federal Government will be required----
    Senator Hollings. You are talking about the future. I am 
talking about your listing on page 19, the gross Federal debt.
    Mr. Holtz-Eakin. That figure includes those securities 
issued not only to the public but also to the Social Security--
the Social Security Trust Fund---- and other such Federal 
entities.
    Senator Hollings. That is right, and it should not include 
Social Security, because under 13.301--I can read 13.301 to 
you; I have it; I have the Greenspan Commission report, I have 
the Budget Act right here, and we can read it to you so you 
will understand 13.301.
    But Mr. Chairman, I am not trying to belabor the good 
witness here. I am trying to get us all to speak the truth in 
budgeting, and by gosh, it says here, as you can read it, that 
Social Security--``exclusion of Social Security from all 
budgets.'' This is the thing you are administering. This is the 
Budget Act, 13.301. ``The congressional budget shall not 
include Social Security.''
    And when I ask you the difference between ``total'' and 
``gross,'' you run around and try to talk about the borrowing 
and borrowing. The actual deficit is $699 billion, not $477 
billion.
    You have only given us on page 1 the 68 percent, not the 
100 percent total, and that is the trouble. We around here are 
talking 10 years, and if we do not have to account for $222 
billion of the deficit, then we can say, oh, well, let us have 
another tax cut.
    If the American people understand that we are going in the 
hole, in the red, according to your projection, $700 billion by 
September 30, within 8 months, this year, I would not want to 
go home; they would run me back up here.
    Chairman Nickles. Senator Hollings, thank you very much. 
You only ran about 12 minutes, and that is all right. You are 
entitled to do that since you have been on this Committee for 
30 years.
    I will ask the rest of my colleagues if they could keep 
their comments or questions limited closer to 5 or 6 minutes so 
we will be able to get to everybody at a decent time.
    Senator Hollings. Thank you very much, Mr. Chairman.
    Chairman Nickles. I also want to say that you have raised 
the distinction between gross debt and debt held by the public 
for the last 20 years that I can remember and have done that 
very consistently. I almost look forward to your speech, 
because I know it is coming.
    Senator Sessions.
    Senator Sessions. Thank you, Mr. Chairman.
    Mr. Holtz-Eakin, this projection includes no dynamic 
scoring--that debate we have had that by reducing taxes, it 
increases the economy--your projections do not have any factor 
in them to show an increase in revenue that might arise from a 
reduction in taxes, do they?
    Mr. Holtz-Eakin. That is not quite right. The baseline 
projections are done with an economic forecast that includes 
the impact of those policies that are currently in place, and 
indeed, one of the difficult issues that any analyst in this 
area faces is that, in particular, on the tax side, with the 
legislated sunsets of the tax cuts in 2001 and 2003, one has to 
make a judgment about how the private sector perceives those 
legislative sunsets.
    If members of the private sector believe, for example, that 
all the tax cuts will be made permanent, they will act 
differently than they will if they believe that they will 
sunset on schedule.
    What we have done in trying to guess what the private 
sector believes is simply to build an economic baseline that is 
consistent with the budgetary baseline, so we have constructed 
our economic forecast under the assumption that the private 
sector believes that these tax cuts will sunset as scheduled.
    So, for example, if you will allow me, if you allow the 
partial expensing to expire at the end of this year, there are 
clear incentives for businesses to try to move their investment 
into 2004 as opposed to waiting until after the tax provision 
expires. We have built that into our forecast. It does not 
drive our forecast for 2004, but it contributes to more rapid 
investment in 2004, and there are myriad examples of that type. 
So the baseline forecast for the budget and the baseline 
forecast for the economy are a consistent pair.
    Senator Sessions. Looking at your statement, the quote that 
you were given, I do not know if Senator Conrad's staff has 
that chart--maybe it is still there--but really, that chart was 
an inaccurate statement of the comment you made in the New York 
Times. As I read it, reading from the New York times article, 
it says: ``Mr. Holtz-Eakin said the initial impact of the Bush 
tax cuts was positive because the cuts lowered marginal tax 
rates and gave people more incentive to work and produce.''
    To the extent that rates remain low, that will continue for 
as long as those rates remain low and incentive to work and 
produce, will they not?
    Mr. Holtz-Eakin. That is absolutely correct.
    Senator Sessions. That incentive remains there constantly.
    Then, you went on to say, to be accurate: ``But to the 
extent that tax cuts lead to higher deficits''--you did not say 
this, because it is not in quotes--but it says, ``But to the 
extent that tax cuts lead to higher deficits and greater 
government borrowing, he warned, they could have `a cumulative 
corrosive effect on capital accumulation, on national saving 
and productivity.'''
    So that was your statement in context.
    Mr. Holtz-Eakin. That is correct.
    Senator Sessions. And then the New York Times went on to 
add in the next paragraph: ``Economists prefer''--economists, 
not politicians--``to look at budget deficits in relation to 
the size of the overall economy rather than to the absolute 
dollar amounts.''
    So it is a legitimate economic consideration to consider 
the deficit we have as a percentage of the overall economy; 
isn't that correct?
    Mr. Holtz-Eakin. Indeed, I think it is appropriate. As I 
have mentioned in other places, if one goes to get a car loan 
or a mortgage, the first thing they ask you is, ``What is your 
income?'' They want to know what is your ability to repay, and 
it is appropriate to look at borrowing as a fraction of that 
ability.
    Senator Sessions. So the President's commitment, which I 
think we can exceed, of reducing the debt as a percentage of 
GDP by one-half is a good step, I believe.
    You noted that if we were to keep discretionary 
appropriations at the rate of inflation after 2004, we would 
save from the 2005-2014 timeframe $1 trillion plus. Is that how 
I interpret that chart that you have given us. ``Policy 
alternative that reduce the deficit or increase surplus''--No. 
1 that you list is ``increase discretionary appropriations, 
excluding supplemental appropriations for 2004, by the rate of 
inflation after 2004.''
    Mr. Holtz-Eakin. That is the impact of excluding the 
supplemental, not the impact of the growth rate that we assume; 
that just moves from a lower starting point.
    Senator Sessions. All right--and keeping it at the rate of 
inflation.
    Mr. Holtz-Eakin. Keeping it at the rate of inflation.
    Senator Sessions. So if we came in under the rate of 
inflation, that would be even more savings. So you are 
considering in your deficit numbers an $81 billion supplemental 
every year?
    Mr. Holtz-Eakin. It is actually an $87 billion, and it goes 
up with the rate of inflation. It is in all 10 years.
    Senator Sessions. And that amounts to over $1 trillion, 
which is half of what you projected the deficit to be; is that 
not correct?
    Mr. Holtz-Eakin. That is correct.
    Senator Sessions. Now, in this economy, it seems to me tax 
revenues seem to be more volatile than the GDP. If the GDP 
remains up, sometimes the tax revenues exceed the GDP growth, 
and if it drops, tax revenues drop below the GDP, faster than 
GDP drops. I think that is because we tax higher-income people 
significantly and because when people sell stocks after the 
stock market has dropped, they are taking losses, but when the 
stock market is up, they have to pay capital gains taxes on 
their profits.
    Aren't those some of the things than make for volatility in 
revenue coming in to the Federal Government?
    Mr. Holtz-Eakin. Those are certainly factors that have 
contributed to it. We tax not just the flow of current income 
that is measured by GDP; we tax asset sales. Capital gains and 
capital losses affect tax receipts. It is also the case that 
not every income flow is even across the entire population, and 
shifts in the income distribution have impacts.
    Senator Sessions. We took the hit with September 11, and 
airlines and hotels are in trouble, and these corporations, 
instead of paying corporate taxes, were having losses and were 
not paying taxes; is that correct?
    Mr. Holtz-Eakin. That is correct.
    Senator Sessions. Some of the executives who make big 
salaries were not getting bonuses, which they pay very large 
income tax on, perhaps, because their companies did not show a 
profit that year. That makes some of the volatility occur, does 
it not?
    Mr. Holtz-Eakin. Those are pieces that are in what we refer 
to as our ``technicals.'' They sound economic, but given the 
way we divide things, those are part of the technical revisions 
we have experienced in the past and going forward.
    Senator Sessions. And I guess my question--and I know the 
Chairman is worried about how optimistic we ought to be--but if 
growth holds in the stock market at a steady, modest rate, and 
if GDP holds at the rates you are projecting, isn't it likely 
that profits will begin to increase, that people will begin to 
sell more assets that now have gained in value, so they are 
beginning to pay more capital gains taxes instead of offsetting 
income by taking capital gains losses to the extent they can, 
and that we might show a more volatile increase in revenue than 
you have projected?
    Mr. Holtz-Eakin. It is certainly the case that we have 
built exactly those phenomena into our baseline forecast--
increasing capital gains taxes, increasing profitability by the 
business sector, and tax receipts to go with that. It is also 
the case that there is a lot of the forecast that is simply 
unknowable, and we have tried to document the degree to which 
that kind of uncertainty can affect budgetary outcomes. It is 
in an appendix to our report, and you can see that as you move 
further out in time, as you go out to 2009, there is a wide 
range of possible impacts on the bottom line budget deficit 
that come from economic and technical uncertainty--exactly the 
factors you have discussed.
    Senator Sessions. Mr. Chairman, I would offer this New York 
Times article and ask that Senator Conrad, to the extent to 
which his chart may be in error, correct that.
    Chairman Nickles. Thank you, Senator Sessions.
    Senator Sessions. There is--is that The Washington Post? 
OK.
    Chairman Nickles. Thank you very much.
    Senator Stabenow.
    Senator Sessions. Mr. Chairman, let me just correct that; 
it is unfair to Senator Conrad. I was looking at the New York 
Times, and he had The Washington Post article, which does 
appear to be--I do not have any information on that, so he may 
be correct on that.
    Chairman Nickles. Well, I am sure The Washington Post is 
always as accurate as the New York Times is.
    Senator Sarbanes. Can we get that in writing?
    Chairman Nickles. No, no. Certainly that is off the record. 
Cut that off the record.
    Senator Sarbanes. Can we print out the record on that 
comment?
    Chairman Nickles. No.
    Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman.
    First, I want to congratulate you on your last year 
chairing the Committee. While we do not always agree on policy 
issues or votes, I have very much appreciated your graciousness 
and fairness with the Committee and look forward to a process 
where we can openly debate all the issues and very critical 
policy differences that are before us.
    When we look at these numbers--I was looking at the total 
that is being projected this year, for 2004, on the deficit, 
and depending on whether $477 billion, or if we exclude Social 
Security, as we all say we want to do, and remove that from the 
numbers, $631 billion, what I find extremely interesting is 
that when we look at domestic spending, non-defense domestic 
spending, we see that if we were to eliminate every penny of 
spending this year for education, innovation, non-Medicare 
health programs, environmental protection, and all the other 
things that are domestic spending including homeland security, 
if we were to eliminate it--$445 billion, according to your 
numbers--we could not wipe out our debt this year.
    I think that is very important, Mr. Chairman, to put in 
context for us. Just as you, Mr. Chairman, and Senator Conrad 
agreed that 92 percent of the increase in spending in the last 
number of years has been defense, homeland security, rebuilding 
New York and the Pentagon, other issues related to 9/11--92 
percent--I think it is very important to put in context that if 
we did nothing in terms of the defense and domestic spending, 
if we did nothing but defense and wiped out every penny of 
everything else the American people have asked us to invest in 
to promote education, innovation and help drive the economy, we 
would not eliminate this year's debt. I think that is pretty 
astounding, actually.
    When I came to the Committee, we were debating 3 years ago 
what to do about the largest surpluses in the history of the 
country. We are now talking about what to do about the largest 
deficits in the history of the country, and we can debate 
whether deficits matter--I believe that deficits matter. I 
believe that anyone looking at this in the public believes that 
deficits matter. And if we go back and look at comments that we 
all have made over the last many years, I believe that at many, 
many different points in debates, we have all acknowledged that 
deficits matter.
    I think that what I would like to do is take my few moments 
and talk about the economy and what is happening in terms of 
jobs. There are lots of things I would love to ask you, and I 
certainly have comments about Medicare, and I will save those, 
Mr. Chairman, for another time in terms of what really happened 
under that bill and what will happen in the future.
    But when I look at it from Michigan's standpoint, even 
though we see many of the numbers going up in terms of the 
stock market and what is happening, positive indicators 
happening, that is not being translated in terms of jobs in 
Michigan and where the rubber meets the road. When we look at 
the fact that we have seen about 1,000 jobs, I believe, created 
in the last month or so, I certainly question the numbers in 
terms of being able to see this economy turn around. But I 
would like to have you speak for just a moment about the 
difference between the macroeconomic statistics and what is 
happening in manufacturing in places like Michigan.
    We have an unemployment rate of 7.2 percent this year. We 
have people who have been employed all their lives and have 
invested in education, have done all the things that we have 
asked them to do, losing their jobs right and left. And 
literally every day, I could show you headlines in the paper 
right now of jobs that are not coming back.
    This gets to a whole range of policy issues that we need to 
address, and I will just mention one situation that occurred in 
the last couple of weeks that has been so shocking to people in 
Michigan--a plant in a small town, Greenville, Michigan. Nine 
thousand people live there, and Electrolux, which builds 
refrigerators, announced 2,700 jobs going to Mexico, not 
because they could not make a profit--they say they make a 
profit in the United States--but they could make a bigger 
profit if they paid people $2.50 an hour and no health care.
    So we have a lot of challenges, and we are not seeing the 
jobs being created even though we are focused on high-tech 
manufacturing and focusing on increasing skills and so on.
    I wonder if you could speak to what you have seen in 
manufacturing versus the larger macroeconomic numbers as it 
relates to employment.
    Mr. Holtz-Eakin. I would be happy to. There are a variety 
of factors that have influenced the manufacturing employment 
picture, and if we back up to the long-term trends, the most 
pronounced feature of the manufacturing sector is that it has 
managed to maintain growth rates and total production that are 
comparable to the economy as a whole. So it is not shrinking 
compared to our economy in production, but it has been 
shrinking in terms of total employment on a steady basis for 
quite a while. The gap is filled by the very rapid productivity 
gains in manufacturing, and it is a reflection of the fact that 
in the face of the ability of manufacturers to innovate and 
produce their goods in a more productive fashion. Even when 
price declines are a result of that, consumers do not choose to 
continue buying as much in manufacturing goods as they used to; 
they tend to shift the mix of their purchases toward services 
and other items.
    So we have seen a migration of employment from the 
manufacturing to the nonmanufacturing sector. It is a long-term 
trend. It has been in the data, and it is augmented by a 
statistical phenomenon, which is that many jobs that used to be 
classified as manufacturing are now essentially outsourced by 
manufacturers. They hire janitorial services, and the employee 
is still in the same facility but employed outside the 
manufacturing sector. That has been a piece of what has gone on 
as well.
    A third has been a recession. No question--manufacturing is 
typically highly cyclical. Recessions hurt manufacturing more 
than some other sectors of the economy, and in this recession, 
it has been quite pronounced. We have seen that happen. And 
even more so than in other recessions, there has been a 
difference in the demand for manufacturing, and it comes from 
the sharp decline of business investment in this recession, 
really much more than a typical recession. That decline in 
business investment has hurt the demand for manufacturing 
goods, and to the extent that turns around, we would expect 
part of the manufacturing problems to be diminished to some 
extent.
    And in the international sector, we have seen a decline in 
not only the demand for traded investment goods, which is a big 
part of our exports, but also manufactured consumer goods.
    So one of the really striking features of the performance 
over this business cycle, the recession and recovery, has been 
that we have imported sort of a typical pattern of manufactured 
goods, but we have exported way below what you would expect at 
this point in a recovery. That has to do with weak foreign 
demand for these products and the status of the dollar. We have 
seen the dollar weaken somewhat, and, other things equal, that 
might help, but certainly weak foreign economic performance has 
been a big part of it. The U.S. has been one of the few engines 
of growth internationally. To the extent that foreign demand 
turns around, that also should contribute.
    Then, finally, there is the mixture of locations of 
production, both domestically and internationally. We have just 
seen a growth in trade, and this has raised the usual issues in 
the impact of dislocations from international trade. On the 
whole, international trade betters all parties, but there are 
particular workers who typically bear the brunt of the 
adjustment, and that becomes an issue for policy concern.
    So it has been a wide array of things that have all 
impinged on manufacturing employment, especially through this 
recession and recovery.
    Senator Stabenow. Mr. Chairman, just in conclusion, I will 
say that manufacturing has been a backbone of the middle class 
in America, and I would agree with you that what we are seeing 
is fewer exports--what we are doing is exporting the jobs. The 
plants are going to China as opposed to the product going to 
China. I believe that there are a number of things, including 
addressing currency manipulation, smarter trade policies, more 
incentives to remain in the United States and create those 
jobs, and that that is very much a part of any sustained, long-
term recovery for us, because of the importance of 
manufacturing to the economy of the country.
    Thank you.
    Chairman Nickles. Senator Stabenow, thank you very much.
    Senator Allard?
    Senator Allard. Thank you, Mr. Chairman.
    I would like to followup a little bit on Senator Hollings' 
question, because I think he muddied the waters, and I would 
like to help clarify those waters and clear them up if I might.
    I guess the best thing to do is think of this in terms of 
as though you were if you were a business. If you have a profit 
and loss statement on a business, you want to take the total 
expenses, you want to take the total revenue coming into the 
business, and you come up with your net, whether it is a loss 
or a gain, and that is what your figure reflects; it is total 
cost and total revenue. Is that correct?
    Mr. Holtz-Eakin. That is right.
    Senator Allard. But if I transfer money from the sales 
department in my business to employee benefits in my business, 
it does not affect the bottom line, but as a manager, I may 
want to know that that is happening, because I want to know 
which areas are producing and which ones are showing a profit--
just like we have here in the Federal Government. As managers, 
I think we need to be very much aware that Social Security 
contributes to that net figure. Whether we want to ignore that 
figure or not, the Social Security is part of the total.
    Now, to take a transfer from Social Security to the general 
fund as managers, it is kind of good policy for us as Members 
of Congress to know that, because eventually, it is going to 
have an impact on the general fund unless we do something about 
it.
    So I appreciate your figures. I think they truly reflect 
what is happening this year as far as the bottom line is 
concerned. I think that is important. I think it is in line 
with what we would expect from a legitimate cost and profit 
statement that you would get from a company, and I do think it 
is 100 percent accurate, and I just want to thank you for 
making that point to the Committee.
    Also, I do not know whether you had an opportunity to look 
at the chart called ``Source of Change in Deficit Surplus 
Outlook Since March 2003.'' It has been put out by the Senate 
Budget Committee.
    If you have not had a chance to look at that, I would like 
to have you look at it and send me a letter or something as to 
whether you agree with the figures that are in that or not, 
because I think it tells a definite story, and I would like to 
get those figures confirmed by your office if we might.
    Mr. Holtz-Eakin. I am happy to do that.
    Senator Allard. Also, looking at non-defense discretionary 
spending, I agree that it is up at record high levels, whether 
we look at it in nominal terms or just as a share of gross 
domestic product. My question is do you believe it is necessary 
to reduce Government consumption in order to attain a balanced 
budget?
    Mr. Holtz-Eakin. In the end, you can balance the budget as 
a matter of the math by either cutting what goes out or raising 
what goes in, and it will be a policy decision about which 
route the Congress will choose to go.
    Senator Allard. But you would agree that from a practical 
matter, it is pretty hard for us to balance the budget without 
holding down spending.
    Mr. Holtz-Eakin. Certainly, if you look at our baseline, by 
historic standards, that is a fairly stringent spending path, 
2.5 percent, and you see a diminishing profile of budget 
deficits over the course of the 10 years.
    Senator Allard. Well, I look at this chart that was 
provided to the Committee, and since March of 2001, the new 
spending is 61 percent, tax cuts are 9 percent. It is hard to 
say that if we are going to get around to balancing the budget, 
we certainly have to show some--we have to be aware of the 
spending that is going on in this budget and the impact that it 
is having on the deficit, and I do not see how we could ignore 
the impact of spending on our deficits.
    Mr. Holtz-Eakin. I think it is certainly the case that the 
threshold decision is the decision to spend money by any 
enterprise, especially the Federal Government, and at that 
point, the issue becomes how it is financed. But having made 
the decision to spend it, it will have to be financed either by 
taxes or borrowing, and the issue of the deficit is a finance 
issue. The first issue is what do the Congress and the 
administration choose to do in the way of programs and for 
public policy purposes, necessarily so.
    Senator Allard. Now I have a question related to marginal 
tax rates. Some have argued that the marginal tax rates should 
be raised to reduce the budget deficit--instead of looking at 
the spending side, they are looking at the revenue side. And I 
want you to look at this as an economist--would raising 
marginal tax rates likely reduce the labor supply?
    Mr. Holtz-Eakin. If one were to increase marginal tax 
rates, there would be clear disincentives to supply labor. And 
more broadly, the economics literature documents the distortion 
to effort, occupational choice, and a wide variety of aspects 
of labor supply.
    Senator Allard. So by doing that, we would have an impact 
on jobs.
    Mr. Holtz-Eakin. You would certainly have an impact on the 
efficiency with which the economy operated, and that would be 
one of the costs of high marginal tax rates. A flexible economy 
like the U.S. economy will in the end find ways in the form of 
lower real wages or some other mechanism to employ people, but 
there is a cost associated with high marginal tax rates that is 
a distortion cost in the economy, not measured well by jobs.
    Senator Allard. Mr. Chairman, I believe my time has 
expired. Thank you.
    Chairman Nickles. Senator Allard, thank you very much.
    Senator Nelson?
    Senator Nelson. Thank you, Mr. Chairman.
    You know, back in 1979 when I went to the House, I had the 
privilege of going on the House Budget Committee, and over two 
decades later, as another freshman member of a legislative body 
on the Budget Committee again, this Committee is where the 
action is, but there is too much ``Gotcha'' politics, Mr. 
Chairman, in this Committee. It seems to be endemic to the 
nature of this Committee, because it was so back in the late 
seventies and the eighties, so that the budget does not become 
an economic document, it becomes a political document. So we 
have all of these various interpretations as to what is going 
to help each side's political interest, and it is hard to get 
focused on what the real truth is.
    Let me just on that note ask a question here. Last year's 
budget, August 2003 forecast, had a 10-year projected surplus 
or deficit, and it came out right at $1.4 trillion. If you take 
those same years, 2004 to 2013, it is $2.4 trillion, so that is 
an increase of $1 trillion in the deficit over that decade.
    Help us understand why we shot up $1 trillion in the 
deficit.
    Mr. Holtz-Eakin. It comes in three pieces. Piece No. 1 is 
about $680 billion as a result of new legislation: Medicare 
prescription drug legislation plus other appropriations.
    The second piece is a combination of economic and technical 
factors, as the Chairman mentioned earlier. Within the 
economics, we have three effects--faster near-term growth and 
impacts of higher productivity that allow us to have greater 
economic prosperity. And then, especially in the out-years, we 
anticipate that higher health and other benefits costs will 
lower the fraction of compensation that shows up in taxable 
wages.
    We also anticipate lower inflation, which has a modestly 
negative effect on the budget.
    So given the good news in the near term and the bad news in 
the long term, the net effect on the economics is negative by, 
with the technicals, a total of about $300 billion. So that is 
where the trillion dollars comes from--legislative, about $700 
billion; economics and technicals, about $300 billion.
    Senator Nelson. OK. Now, when we ask questions for the 
average American on the street, and they are trying to 
understand what is happening to the economy, we see right now 
that the economy is going up, there has been this stimulative 
nature of the cash that has gone into circulation through 
additional spending, through some of the tax cuts and so forth, 
but on the basis of what you just said, with a huge deficit 
increase over the next 10 years by these figures over the 
decade, $2.4 trillion of additional deficit, at some point, 
just from a common sense standpoint, if you have to go out and 
borrow an additional $2.4 trillion over the decade, the demand 
for that additional money is going to cause the cost of that 
money to rise, which is the interest rate, and are we not going 
to see interest rates start to rise?
    Mr. Holtz-Eakin. As I mentioned earlier, we have built into 
our economic forecast the budgetary projections, so these are 
part and parcel of the same forecast. Built into our economic 
projections is a rise in interest rates--for example, short-
term rates will rise over the next 2 years to something like 3 
percent, and we will see the 10-year rates go up as well.
    One would expect that to happen both as part of the 
cyclical recovery and as the Fed perhaps moves its policy 
instruments closer to neutral.
    Senator Nelson. Well, when the interest rates rise, will we 
not see, then, a stalling of the recovery because interest 
rates being higher, particularly if they go much higher, aren't 
we going to see a replay of history, that we suddenly have the 
recovery stalled, and we start slipping back into recession?
    Mr. Holtz-Eakin. We certainly do not anticipate that. As I 
mentioned, we have a robust cyclical recovery; we think the 
other factors that influence in particular business 
investments, which are central to a sustained cyclical 
recovery, might outweigh any movement of real interest rates 
back toward their more historical alignments.
    Senator Nelson. Well, I can just give you some country boy 
common sense predictions, and this country boy has gone out and 
talked to several noted economists in the country as well as 
chief economists of some of the major financial institutions in 
this country, and the near unanimous feeling among these 
economists is that we are going to see the economic stimulus 
through the end of this year, and then watch out when we get 
into 2005--it starts slowly going down, and then it starts 
accelerating toward the end of 2005 as the interest rates go 
higher because the deficit keeps going more and more up, and we 
have to borrow more and more, and suddenly you get into a 
vicious downward spiral that will cause the economy to slip 
into that recession.
    I would like to have the optimistic outlook that you have, 
but when I have had that on the Budget Committee before, it did 
not happen that way.
    So, Mr. Chairman, I wanted to bring you the thoughts of 
this country boy.
    Chairman Nickles. Well, Senator Nelson, thank you very 
much, and I do not know that I would characterize Dr. Holtz-
Eakin's comments as being ``optimistic.'' We have had a great, 
robust last couple of quarters, and yet the reestimate 
calculates an additional $700 billion of spending that Congress 
is responsible for, that most people voted for, and then he 
came up with some pessimism, or reestimates, technical 
adjustments and so on, that cost or added to the deficit 
projections of about $300 billion.
    So I do not know that I would characterize his statement, 
but I will tell you that in talking to our colleagues, knowing 
of your interest in the space program and knowing that we have 
to make some cuts, there have been significant discussions of 
funding the space program adequate to get you to the moon, but 
not enough to get you back.
    Senator Nelson. And that is the one you want to send me on; 
is that right?
    Chairman Nickles. That was the one that you were supposed 
to attend--just kidding.
    Senator Domenici. You were asking about it.
    Senator Nelson. Mr. Chairman, I would just say that the 
witness has said 2.4 trillion additional dollars of deficit 
over the next 10 years, and that is bound to have an effect 
dampening any kind of optimism, any kind of reenergizing of the 
economy.
    Chairman Nickles. Senator Nelson, thank you very much.
    Next is Senator Domenici.
    Senator Domenici. Thank you very much, Mr. Chairman, and 
first let me compliment you on your superb work and wish you 
well. I hope you can get a budget this year. We have not seen 
the President's yet, but I imagine it is going to be as 
difficult as last year or more so.
    But to those who complain about the deficit, it is going to 
be pretty obvious they are going to be given an opportunity to 
put their mouths where their money is also, and also for those 
who look at the President, I have heard candidates running 
around the country saying, ``We are looking at him, that is the 
guy who did it''--well, we are going to check on how many 
things they voted for that would have been more than the 
President. We can start with the proposition that the President 
does not spend any money and then see how much did Congress 
spend and then look at each candidate and see how much would 
you have spent more than the President--and of course, they are 
going to say none--but then we can look at the budget. I think 
we had about eight points of order that many Democrats voted 
for that was $50, $60 billion a year, wasn't it, since you have 
been Chairman?
    Chairman Nickles. A lot; there was a lot.
    Senator Domenici. Yes.
    First of all, let me say to you, Mr. Congressional Budget 
Office Director, that I hope you are enjoying your job.
    Mr. Holtz-Eakin. I am.
    Senator Domenici. Good. It is pretty hard to tell, because 
you have gloomy eyes. Your eyes do not smile.
    Mr. Holtz-Eakin. My wife will be disappointed to learn 
this.
    Senator Domenici. But there is nothing we can do about 
that. You know, mine smile too much.
    In any event, I do want to tell you that you keep trying, 
and people keep wanting it to disappear--not that we love 
deficits, but if we are looking at it from the standpoint of 
how risky it is, we have had a couple times when the debt of 
the Nation was bigger than it is now in proportion to gross 
domestic product. I think I was here, and I do not think I was 
very happy, but I had to produce the budget that met the times.
    Do you recall the years that it was higher? My staff gives 
me a number of 1993. Anyway, we do not have to waste a lot of 
time, but if you could find that--OK, I have it. Do you think 
these are correct if I read them into the record: In 1993, the 
highest ever, the percent of GDP was 49.5 percent; 1994 was 
49.4 percent; and now, we have 2003, which is 36 percent. Is 
that correct?
    Mr. Holtz-Eakin. Those sound to be in the ballpark, but we 
can check them.
    Senator Domenici. Well, when you worry about the U.S. 
Government and the debt's impact upon society, this is a pretty 
relevant fact, the relationship of the debt to the gross 
domestic product. It is not exclusively conclusive, but it is 
pretty important. And I want to repeat what you have said--we 
have had higher ones than this year--again, not that we like to 
run around and have them always, but that is the truth.
    Second, I am impressed and confused about a couple of 
things, and maybe you have some answers, maybe you can tell us 
where to look. First, we have a terrific growth pattern in the 
immediate past. For a year and a half or so, if you look at the 
productivity, it is incredible. We had some growth quarters 
that looked like we were China. I just noticed that last year, 
their composite was 9.1 percent. Sometimes it is 9.8, sometimes 
8.9, but 9.1. Well, we have had productivity growth in the area 
of 6 and 7 percent and GDP growth that exceeded 5, right, 
during this period of time.
    Now, I have a very perplexing question. When you woke up 
yesterday morning, you did not have to ask your people what the 
reality was that there were more people employed in the United 
States that day than ever in history--not in proportion to, but 
just more Americans were at work.
    Now, two things--how come we are not having more employment 
with this fantastic GDP growth and this rather enormous 
productivity growth--maybe the productivity growth has 
something to do with why there are fewer jobs--but nonetheless, 
we have those, and we have the highest number of jobs ever, and 
yet we are running around talking about the fact that we have 
lost jobs.
    First, is it very relevant that we have lost jobs in light 
of what I am talking about? And second, is it very important 
that we have more workers than we have ever had in the past? 
And third, when and how are we going to have a big impact on 
employment, since we keep talking about this being a Hoover-
type situation with no new jobs?
    Before you answer, let me tell you that I now understand, 
just from the practical standpoint, this very, very phenomenal 
thing happening in America, that is, the almost enormous, 
proportionately, productivity growth. It is incredible, and 
people wonder how and why, and I think I know, I think I 
understand. When you look at everybody who uses a computer or a 
new electronic gadget, you ask how many people did it replace, 
and clearly, they are replacing people all over, and you are 
still getting more production.
    Now, you cannot expect to tell Americans not to do that, 
right? I think you would destroy everybody if you said you 
cannot be efficient, you cannot rent a new IBM machine, you 
have to keep 20 people employed.
    So, having listened to me carry on here, talk about jobs in 
the context that I have talked to you here about it.
    Mr. Holtz-Eakin. Thank you.
    Let me begin with productivity and turn to jobs. Certainly, 
long-run productivity growth is central to increasing the 
standards of living in any society, so it is something that is 
a good thing and something that we should pursue as part of our 
economic policies.
    The productivity performance in this recession and recovery 
has been quite remarkable by historical standards, and the most 
recent data are in fact really quite impressive as well.
    The first thing to note is that productivity often shows 
some quite dramatic one-quarter increases coming out of a 
recession. It is a highly volatile series, and for that reason, 
it is important not to take any single quarter at face value as 
an indicator of things to come.
    The second thing to note is that, as a matter of national 
statistics, these are data that are revised often. That is a 
second reason to be cautious in interpreting the most recent 
data and taking them at face value.
    But, nevertheless, as I mentioned earlier, since 1995, 
there has been an increased rate of productivity growth in the 
United States that economists puzzled about and wondered if it 
was permanent, real, and what the durability of this 
acceleration in productivity would be.
    The recession and recovery marked essentially a litmus test 
for that, and it has continued, and that is good news. However, 
we do not fully understand the roots of this. In the report, we 
lay out what are some of the most common hypotheses about this. 
Is it reflective merely of business caution in adding new 
workers, and as a result, you get more stuff going out but not 
more people coming in; and productivity is simply the division 
of those two things. Or is it the fact that in the late 
nineties, businesses purchased a lot of computers and other IT 
goods and really undertook a massive expansion and then just 
slowly adjusted to using those and that we are now seeing the 
productivity gains with a lag--some sort of adjustment period. 
Or, finally, is it the fact that the gains that used to be 
concentrated narrowly in faster chip times and things 
concentrated in computing and then shipped--sort of physically 
embodied in those--is now diffusing into business practice and 
the economy more widely?
    There are lots of tantalizing pieces of evidence on all of 
those. There is no definitive case to be made and certainly in 
our view not enough statistical evidence to start picking a 
dramatically big difference for our productivity future. So we 
have acknowledged the history, raised our productivity level to 
some extent, but we have not really changed our growth rate.
    Our productivity puzzle will be an ongoing area of 
investigation not only for us but for many people.
    If one turns to employment----
    Senator Domenici. Could I ask you, just because you do not 
know its roots, is it fair to say nonetheless it is good?
    Mr. Holtz-Eakin. Productivity growth is very good. If 
productivity growth occurred evenly in all sectors of the 
economy, employment would move evenly in all sectors of the 
economy, and people would buy that stuff. It is the fact that 
we do not have even productivity growth and even purchases of 
the output of that productivity growth, which causes us to have 
to shift the employment mix in the economy. And that is an 
ongoing trend; in this economy, it happens all the time.
    Senator Domenici. But we have had many decades in America 
where we would have loved to have this kind of productivity 
increase; right?
    Mr. Holtz-Eakin. Certainly, beginning in the seventies and 
up to the mid-nineties, the productivity puzzle in that era 
was, ``Where did it go? Why did we not have productivity 
growth?'' Now we have a puzzle in the other direction.
    On the employment front, I can say with I think complete 
honesty that we do not really understand the cyclical pattern 
of employment growth, and the labor market has been a bit 
puzzling. People have pointed to the December payroll 
employment survey: up 1,000 jobs. The same caveats apply. You 
do not want to read too much into any single month's data. 
These are very noisy series. There is some tantalizing evidence 
that the seasonable adjustment to the December survey may have 
influenced it.
    But more generally, there has been relatively slow growth 
in payroll employment in this recovery that we cannot fully 
explain. There has been a mismatch between the household survey 
that the Chairman mentioned and the payroll employment survey.
    We have looked at the different stories that these two 
surveys tell. They often tell different stories. They are never 
as far apart as we are experiencing right now. They are about 
600,000 jobs different since July. We can explain about 100,000 
of that difference through different statistical samples and 
different coverage issues. The rest, we do not fully 
understand. We believe still that the payroll survey, which is 
larger and which we think is probably a better indicator of the 
status of the labor market on average, is one that we will 
continue to look at. But we do know that around turning points, 
it will miss startup businesses and things like that. So there 
is an element of truth to both of the surveys.
    But in terms of when this economy will begin to generate 
100,000, 150,000, 200,000 payroll jobs per month, a capacity 
that it is capable of doing, I do not have a firm answer to 
that, and I will not pretend to.
    Senator Domenici. I just want to make one last observation 
and thank the Chairman for giving me time.
    I was going to bring, Mr. Chairman, and article, and I 
apologize, but with your permission, can I put it in the 
record?
    Chairman Nickles. Certainly.
    Senator Domenici. I was reading a recent article, no longer 
than 2 days old, wherein a gentleman in business said, ``I have 
the answer as to why there are no more people being employed in 
America as we come through this enormous growth period.'' He 
said, ``I am the answer.''
    Somebody said, ``Who are you?''
    He said, ``I am a business, and I have three employees, and 
I do enough business where 15 years ago, I would have had to 
employ 15 people.''
    Then they went on with the questioning. He said, ``Just 
last week, I needed a specialist for something. I did not hire 
him and put him on my payroll. I ran an ad. And there was a 
person more equipped than I could ever afford who said he would 
come and do the job for 1 month, that it would take him 1 month 
to do it. I paid him heavily. He got employed for 1 month, and 
my business is rocking along, and a $50,000-a-year person is 
not on my payroll.'' And he said, ``I think there is a lot of 
that going on in the United States.''
    Now, I do not think that that is bad. I think you have to 
be able to do what the marketplace demands of you. But I might 
just ask you if you have come in contact with that as something 
of significance with some name that is affixed to it.
    Mr. Holtz-Eakin. There are a couple of parts to that story 
that ring true. The first is that if you indeed get output 
growth, if business is rocking along, eventually, you will 
require more labor from some source to continue to do business. 
Will that come internally, adding jobs within the company, or 
will it be temporary help that you hire from outside the 
company either in the form of a temporary help agency--and that 
shows up in the data and is one of the things you look for as 
an indicator of an upturn in the labor market--or in the form 
of this gentleman who may be a consultant, essentially a self-
employed individual, in which case it will not show up 
immediately in the data but subsequently would be caught by the 
payroll employment.
    So those are issues in our trying to understand the labor 
market. I would say that what the CBO anticipates in its 
forecast and what most people would say is that you cannot 
continue to grow at the pace that we did in the third and 
likely did in the fourth and as fast as we expect in the future 
without eventually beginning to create jobs. I quite frankly 
would have thought we would have seen more by now, but we have 
not.
    Senator Domenici. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Nickles. Senator Domenici, thank you very much.
    Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman.
    I want to focus on the issue of health care costs. I think 
it is obvious that there are no costs in America going up like 
medical bills. That is true with respect to both the public and 
private sectors. Last week, the country saw that we are going 
to spend $1.6 trillion on health. If we divide the number of 
Americans into $1.6 trillion, it comes to something like 
$16,000 for a family of four.
    So that obviously, we need the strongest possible set of 
cost containment tools, and I want to talk to you about the 
non-interference provision in the Medicare legislation 
specifically. I voted for the bill--I still have the welts on 
my back to show for it--and one of the reasons that I did is 
that it seemed to me it allowed more choices and more 
alternatives with respect to the delivery of health care in 
America, and that would be a plus for senior citizens. That 
would be an opportunity with more choices and more alternatives 
to serve as a force for cost restraint and competition and a 
tool to hold down the bills.
    But what I want to ask you about is wouldn't the removal of 
the non-interference provision allow for Congress to move 
toward the kind of cost containment program that Members of 
Congress have? Wouldn't the removal of the non-interference 
provision allow the Congress to move to a Federal Employee 
Health Benefits-style approach, which so far seems to have been 
the best cost containment vehicle? And I want to know 
particularly in connection with your letter to the majority 
leader whether you examined that issue in particular.
    Mr. Holtz-Eakin. Well, the letter we wrote to the majority 
leader examined that language in the context of the Medicare 
bill as passed, and in our scoring of the Medicare legislation, 
we certainly looked at lots and lots of pieces of evidence, 
including the limited data that we could get out of the FEHB 
program.
    But on the language in particular, what we looked for in 
the bill was both the ability and the incentive to control 
costs. Private entities who bear cost risk have an incentive to 
cut a good deal with pharmaceutical companies, and if we give 
them the tools to manage their costs and pick formularies and 
choose preferred drugs, they will have the ability. And given 
the incentive and ability, it was our reading of the 
legislation that the ability of the Secretary to negotiate a 
better deal than the private plans that already had lots of 
incentive and lots of ability to negotiate that same deal would 
be negligible, and as a result, removing the language should 
not have big budgetary consequences.
    Senator Wyden. You see, what I think is flawed in that 
argument is that if you believe in private sector cost 
containment--and I do; that was one of the factors in my 
supporting the legislation--the reality is now that Medicare 
faces a statutory bar to cost containment that is not faced in 
the Federal Employee Health Benefits Plan that is available to 
Members of Congress. Any way you slice this, colleagues, that 
is where we are on a key cost containment issue. If you believe 
in the private sector, the fact is Medicare now has a statutory 
bar, a statutory restriction, that is not applicable when you 
are talking about cost containment for Members of Congress and 
their families.
    So what I would like to ask you today is to go back and do 
some more analysis with respect to FEHBP, because I do not 
quarrel with the idea that the private sector is of value--that 
is not at issue here. What is at issue is if you believe in the 
private sector, why should there be any statutory restrictions 
in terms of what you can do in terms of tough, hard-nosed 
bargaining, and any way you slice it now, we have restrictions 
in terms of what Medicare can do that is not faced when you are 
talking about negotiating for Members of Congress and their 
families.
    Is that something that you would be willing to do, to look 
further at the FEHBP-style model and particularly whether 
removing the statutory restriction would allow Congress to move 
more aggressively toward a model that is used to protect our 
families?
    Mr. Holtz-Eakin. I would certainly be happy to go back and 
look at that. I will not pretend to be intimately familiar with 
all the details----
    Senator Wyden. I understand.
    Mr. Holtz-Eakin [continuing]. But my recollection was that 
access to data, hard data, on what happened in FEHBP was one of 
the limitations. We can look into that for you.
    Senator Wyden. I think what has happened in particular is 
that there was such a rush with respect to this legislation on 
the bargaining power issue that not enough time was spent, so 
you had a set of very powerful interests who said, look we will 
just put this in there and say that everything is going to go 
to the private sector, and then it is going to come out hunky-
dory. That seems to me to be overly simplistic.
    I will stipulate to the kind of argument that you are 
making as being of real value. There is no question to me that 
the private sector choices--because we have seen it in my home 
town--can be useful. But it also seems to me that if you 
believe in the private sector, you should not have the 
restraints. And the reality today is that when it comes to 
containing costs for senior citizens under Medicare, there are 
legal prohibitions that do not apply to what is done with 
respect to private sector cost containment for Members of 
Congress, and I do not think that is right. You have always 
been very gracious to me, and when you say you will look at 
something, you are always fair and responsive, and I would like 
to see that as soon as possible, because I think that is going 
to be an issue that we are going to be dealing with on the 
floor of the U.S. Senate probably within a matter of weeks.
    Mr. Chairman, thank you.
    Chairman Nickles. Senator Wyden, thank you very much.
    I touched on this in my opening remarks. Let me just ask a 
related question--and I apologize to Dr. Holtz-Eakin who also 
has to testify in the House, and I was trying to get him out of 
here by 12. But if Congress mandated that the Government 
interfere in the negotiations, do you think there would be any 
savings?
    Mr. Holtz-Eakin. If you put a provision and language into 
the bill as passed which said the Secretary ``should'' or 
``must'' negotiate, we think there is the potential for savings 
on some drugs, presumably the nonpreferred drugs, where the 
pharmaceutical company is really aggressively trying to take 
its preferred drugs, give the best deal on those, and get them 
into the prescription drug plans. On the others, we think there 
might be the potential for some saving. But given bottom lines, 
to the extent that you move down the prices on one drug, you 
probably move up the prices on the preferred drugs, and on 
balance, you could raise costs. Certainly, we would have to 
look at the details of any particular legislation and look at 
any other models of this kind of thing in practice, but in our 
thinking about the language, that is the kind of issue that 
arises.
    Senator Wyden. Mr. Chairman, if I could just very briefly, 
I want it understood that I am not talking about mandating some 
kind of cumbersome interference plan. With respect to the FEHBP 
plan, there is no language on this point. Now it is essentially 
discretionary, and that is what is wrong about the current law. 
We are not giving Medicare the discretion to go to bat for 
seniors the way we are giving our health plan the discretion to 
go to bat for us.
    That is what is wrong, and that is what I am going to try 
to change.
    Chairman Nickles. I understand. We do not need to debate 
this now, but I think your letter stated that if we removed 
that language, you do not think there would be any appreciable 
savings.
    Mr. Holtz-Eakin. That is right.
    Chairman Nickles. I appreciate that.
    Dr. Holtz-Eakin, I am going to have to run.
    Just for the information and for the record, our next 
hearing will be next Tuesday, when we will have the Director of 
OMB. They will present their budget on Monday, and we will have 
their hearing on Tuesday.
    I will leave it to Senator Conrad.
    Thank you very much, Dr. Holtz-Eakin, for your appearance 
before the Committee today.
    Mr. Holtz-Eakin. Thank you.
    Senator Conrad. I will be very brief.
    I just wanted to indicate that our former Chairman was 
talking about deficits as a percentage of gross domestic 
product and was talking about these as being smaller than they 
have been in the past.
    I have a different view, and it is expressed in this chart 
that looks at deficits as a percentage of GDP, if you take out 
Social Security, you get a different picture. The last time we 
had deficits as a percentage of GDP that were anywhere close to 
this was in 1983. There, we had a deficit that was 6 percent of 
GDP, but there was a fundamental difference. There was almost 
no Social Security surplus at that time.
    Now the Social Security surplus is $160 billion, or very 
close to it. And if you take out the Social Security surplus 
and look on an operating basis, our deficits as a percentage of 
GDP are the biggest they have been since World War II with the 
exception of 1983.
[GRAPHIC] [TIFF OMITTED] 94065.005


    So I just want to provide that alternative view.
    One other thing----
    Mr. Holtz-Eakin. If I may, I think you and I concur on 
those facts.
    Senator Conrad. Excuse me?
    Mr. Holtz-Eakin. I think you and I concur on those facts. I 
think Senator Domenici was talking about debt as opposed to 
deficit. We can check.
    Senator Conrad. I have heard many describe deficits as 
relatively small as a percentage of our GDP. I think that 
historically, that is not the case when properly viewed.
    Senator Domenici also mentioned what he thinks is happening 
in the work force, and the front page of the business section 
in today's Washington Post has the story he was just telling of 
the gentleman who says he is running a small business, he has 
only three full-time employees, and when he wants to hire 
somebody--when he needs a computer programmer, or a speech 
writer, or a web designer--he just puts the project out to bid 
on the internet. And Senator Domenici was describing that he 
just had a problem with a computer program he needed done, he 
put it on the internet, and he paid $118 to a gentleman in the 
Ukraine to write his computer program. He said it would have 
cost $1,000 to employ somebody here.
    I think Senator Domenici is onto something in terms of 
productivity growth. You can see it in construction as well. We 
are able to put up a Class A building now in a year. It used to 
take sometimes 3 years. And what is happening with computer-
assisted design, all of the computer ordering--it is a 
productivity gain that is occurring in terms of more 
efficiency.
    Again, thank you, Director, for being here today.
    Mr. Holtz-Eakin. Thank you.
    Senator Conrad. The hearing is adjourned.
    [Whereupon, at 12:17 p.m., the Committee was adjourned.]

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                    THE PRESIDENT'S BUDGET PROPOSAL

                              ----------                              


                       THURSDAY, FEBRUARY 5, 2004

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:02 a.m., in 
room 210, Cannon House Office Building, Hon. Don Nickles 
(chairman of the committee) presiding.
    Present: Senators Nickles, Domenici, Gregg, Allard, Burns, 
Enzi, Sessions, Crapo, Conrad, Murray, Byrd, Nelson, Stabenow, 
and Corzine.
    Staff present: Hazen Marshall, majority staff director; and 
Jim Hearn, senior analyst for government finance and 
management.
    For the minority: Mary Ann Naylor, staff director; and Jim 
Horney, deputy staff director.

              OPENING STATMENT OF CHAIRMAN NICKLES

    Chairman Nickles. Good morning. The Committee on the Budget 
will come to order. First I want to acknowledge our friends 
from the House, Chairman Nussle and the entire Budget Committee 
of the House. They have been very cooperative, very supportive. 
As a matter of fact, when it was announced that the Senate 
office buildings would be closed, Chairman Nussle notified me 
immediately that he would be more than happy to cooperate and 
allow us to use not only the hearing room but also offices and 
space. They have been very generous, very cooperative, and I am 
very grateful that they have accommodated us in our hearing 
this morning.
    For this morning's hearing, we have Director Bolten, 
Director of the Office of Management and Budget, to present 
testimony before the committee. We welcome him to this 
committee. We welcome him to his position that he has now had 
for, I guess, about half a year. He has got one of the most 
challenging jobs in Government to try to manage a budget of now 
$2.4 trillion. It is a job just to develop one and to propose 
it, and we look forward to hearing his testimony as well.
    I welcome my colleagues that are with us this morning, and 
following my tradition, I will call upon the ranking member, my 
friend, Senator Conrad.

              OPENING STATEMENT OF SENATOR CONRAD

    Senator Conrad. Thank you, Mr. Chairman.
    I also want to thank our colleagues on the House Budget 
committee. Certainly the chairman and the ranking member, 
Congressman Spratt, they could not have been more gracious. 
They have opened their space to us. They have allowed us to use 
their equipment. And it has been enormously helpful, and we 
very much appreciate their graciousness.
    Mr. Chairman, I also want to welcome Director Bolten to the 
committee. This is a challenging time, certainly for you, for 
the administration, and for the Congress, as we address what I 
believe are deficits that are far too large and growing 
geometrically. Certainly as we look ahead past the 5-year 
window, I think we have to be most concerned about the 
direction, the fiscal direction of the country.
    When I look at past statements by the administration, I 
remember very well in 2001 they told us we could have massive 
tax cuts and there would be no deficits, even with an economic 
downturn. And that proved to be wrong.
    Then the next year, they told us that the deficits would be 
small and short term. That also proved to be wrong. The 
deficits have been large and long term.
    Then in 2003, they told us that the deficits were small by 
historical standards. That, too, proved to be wrong. These 
deficits are record deficits.
    And now this year, we are being told that they are going to 
cut the deficit in half over the next 5 years. And I think we 
have to ask the question: Will that, too, be wrong?
    Let me go to just a back-of-the-envelope analysis that 
tells me that will be wrong as well.

[GRAPHIC] [TIFF OMITTED] 94065.011


    The President says in the fifth year the deficit will be 
$237 billion, but he is not counting the $259 billion he is 
going to be taking of Social Security surplus funds, every dime 
of which has got to be paid back. He is not counting the $23 
billion from the Medicare Trust Fund. He is not counting the 
$55 billion it would take to deal with the alternative minimum 
tax problem, which he is paying for for 1 year but not beyond. 
And he has no costs for the residual war cost, the war on 
terror, Afghanistan, Iraq, which the Congressional Budget 
Office says in that year will be another $30 billion. That is 
over $600 billion being added to the debt.

[GRAPHIC] [TIFF OMITTED] 94065.055


    Just a reality check. I went to the President's budget 
document and looked at 2009, and what one sees is the President 
himself says he is going to add $633 billion to the debt in 
that year.

[GRAPHIC] [TIFF OMITTED] 94065.056


    So how is it that we have much larger accumulations of debt 
than the deficit picture that the President asserts would 
provide?
    Well, first of all, he is taking all the Social Security 
Trust Fund surpluses over the next decade, $2.4 trillion, and 
not accounting for it--not accounting for it at least with 
respect to deficits.

[GRAPHIC] [TIFF OMITTED] 94065.057


    In addition, the tax cut the President is proposing 
explodes outside the 5-year budget window. He is only looking 
at 5 years, when we all know much of the effect of his 
additional tax cuts occur beyond the 5-year budget window. This 
is the cost of the tax cuts, including the associated interest 
cost.

[GRAPHIC] [TIFF OMITTED] 94065.058


    And the same is true of the alternative minimum tax that 
was the old millionaire's tax that now is going to be a middle-
class tax because we have two or three million people affected 
by it today. It is going to be 40 million people by the end of 
the budget period, 40 million people and it costs $658 billion 
to fix. The President has counted 1 year of that cost, but does 
not have a dime beyond that time.

[GRAPHIC] [TIFF OMITTED] 94065.059


    The same is true of war costs. The Congressional Budget 
Office says in the 10-year period, $280 billion of cost for the 
President's defense policies, war on terror, and yet the 
President has no money provided beyond September 30th of this 
year. They tell us we do not know what the cost will be, but we 
know the right answer is not zero.

[GRAPHIC] [TIFF OMITTED] 94065.060


    The thing that most concerns me is the long-term trajectory 
because what we see is that right now we are in the good times, 
in effect, even though the deficits are at record levels, 
because we have these substantial trust fund surpluses. But 
look what happens when the trust funds--the green bar is Social 
Security, the blue is Medicare--when they go cash negative, at 
that very time the cost of the tax cuts explodes.

[GRAPHIC] [TIFF OMITTED] 94065.061


    And I will just end with this chart that shows the 
President's own analysis of the long-term budget circumstance. 
This shows that the current situation, record deficits, is the 
good times; that when the baby boomers retire and the 
President's tax cuts go fully into effect, these deficits go 
right off the cliff. And so I think we have to alert the 
American people that we are on a course that is simply not 
sustainable, that fundamentally threatens the economic security 
of the country, and the biggest way it does is upward pressure 
on interest rates and the biggest way it does is people 
deciding they don't want to hold dollar-denominated assets.

[GRAPHIC] [TIFF OMITTED] 94065.062


    And I would just conclude with an article that is in the 
Washington Post this morning saying, ``Asian central bank 
consider alternatives to big dollar holdings.'' Already we have 
seen the dollar go down almost 30 percent against the euro in 
the last 18 months. I think we have to get very, very serious 
about the fiscal condition of the country.

[GRAPHIC] [TIFF OMITTED] 94065.121


[GRAPHIC] [TIFF OMITTED] 94065.012


    Thank you.
    Chairman Nickles. Senator Conrad, thank you very much.
    I would just make a couple of comments, and then we will 
recognize Director Bolten. A couple of comments.
    One, we had a big challenge last year to pass last year's 
budget. It was not easy. Last year we were facing still the 
end, I guess, of a very soft economy. The stock market was 
still very, very weak. And we were fighting a war. Our budget 
we passed last year funded both of those. We did pass a growth 
package, and the growth package worked. The stock market is up 
substantially. We did fund the war.
    If you look at the chart, it shows that actually the 
economy started declining in the year 2000. Some people want to 
say, well, it was the Bush recession. But if you actually 
notice, it started declining substantially in the year 2000. 
The Nasdaq declined by 50 percent in the year 2000. And we had 
a very soft economy.
    insert chart
    So we needed to do some things that would change it. The 
stimulus package that we passed--and I might mention that the 
Democrats had a stimulus package and we had a stimulus package, 
and ours was supported by a bipartisan majority. It became law, 
and it did work.
    If you look at the next chart, the stock market has grown 
by over $4 trillion since last February. We did cut the tax on 
dividends in half. Maybe some people want to double the tax on 
dividends again, but we made the tax on dividends 15 percent. 
We made the tax on cap gains at 15 percent, and I think both 
greatly helped our economy, as evidenced by the significant 
appreciation we have seen in the stock market. I think the Dow 
Jones is up 25 percent, Nasdaq up 50 percent. That is a big 
change, and I think in large part because of the changes that 
we made and that we proposed.

[GRAPHIC] [TIFF OMITTED] 94065.143


    If you look at the next chart, there was a significant 
appreciation in jobs. You keep hearing about the jobs. The 
household survey shows that we are at an all-time high in 
employment. There is a difference between the household survey 
and the wage survey, and I do not need to debate that. But it 
shows, at least if you look at this trend, the employment 
situation has improved rather substantially.

[GRAPHIC] [TIFF OMITTED] 94065.019


    But I do not disagree with Senator Conrad. I think the 
challenges are very great before us. We are spending a lot more 
than we are taking in, and the deficits are way too high. And I 
will tell my friend and colleague Senator Conrad, I will work 
with him to get them down. I will work with anybody, Democrat 
or Republican, to reduce these deficits. I think they are way 
too high.
    If you look at the next chart, it kind of shows just the 
history of where we are. The green on the chart shows the 
revenues, and you can revenues have actually declined. That has 
never happened before. We had 3 years in a row really where 
revenues did not grow. Actually, they declined.
    If you look at the history, Senator Byrd, revenues over 
history in the United States almost always had some growth. But 
we actually have had a very significant reduction, not because 
of the tax cut, mostly because of the recession. The tax cut 
had some play in it, but the recession was the biggest reason 
why you had such a significant drop from over $2 trillion to 
about $1.78 trillion. I notice, Senator, from the figures 
estimated by both CBO and OMB, very little revenue growth 
between 2003 and 2004. I hope the 2004 revenues are 
underestimated, and my guess is they are. I will just say that. 
We will find out 10 months from now, but I think they 
underestimated the amount of revenue that we are going to 
receive in 2004. I am not sure about your 2005 number, but we 
will talk about that.
    But you notice in the red line, expenditures have gone up 
every single year. So we had a reduction in revenues, mostly 
because of the recession, somewhat because of the tax cut, but 
we had an increase in the red line that is outlays.

[GRAPHIC] [TIFF OMITTED] 94065.020


    Most of the outlay growth, if you look at the next chart, 
you will see is kind of divided up between all other spending, 
domestic discretionary spending. DOD is the red line, defense. 
You will notice the last couple years, if you add the war, the 
war being the big delta, we had supplementals of $79 and $87 
billion in 2003 and 2004. That is that top delta that shows a 
big increase of spending because we had to fight the war. The 
yellow lines are new spending. That is homeland security. So 
that is where most of the new money went.
    So I just make mention of those facts, and the fact that we 
have a big challenge. We are spending more than we are taking 
in. We have to close that gap. And it will not be easy, and it 
probably will not be done unless we all work together to make 
it happen.
    We have to have a budget. The administration has proposed a 
budget. We will work to pass a budget this year. It was not 
easy last year. It will not be easy this year. But I think it 
would be irresponsible of Congress if we do not pass a budget.
    And so I applaud the administration. They have given us a 
challenge, and they said they think we should reduce the 
deficit by half in 5 years. I believe strongly that we should 
do that. I hope that we can accelerate that. I hope that we can 
cut the deficit in half--did I say balance the budget or cut it 
in half? The administration wants us to cut the deficit in half 
in 5 years. I hope we can meet or exceed that level. I hope we 
can do it 2 or 3 years. I cannot stand the idea of having 
deficits at the $400 and $500 billion level. It bothers me 
daily. And I am very serious about that.
    So I hope we can aggressively try and get our deficit, 
whether you are talking about GDP or you are talking about 
dollar-wise, get it to a much smaller, more sustainable figure, 
at the $200 billion level in the next year or so. And I will 
work aggressively to do that. And that may mean taking on some 
popular programs, like a highway bill that my colleague from 
Oklahoma is in the process of passing, and others. I want that 
highway bill to be paid for, and presently it is not paid for 
satisfactorily, and certainly not entirely.
    I want to thank my friend, Senator Conrad, because he was 
of great assistance in our markup in the Finance Committee on 
that bill on Monday.
    So we have many, many big challenges before us. We look 
forward to the administration presenting their budget to us. 
And just for the information of our colleagues, we were 
scheduled to have Secretary Snow testify yesterday and could 
not because of the loss of the hearing room in Dirksen. We are 
trying to reschedule him for as soon as possible. I was hoping 
that we would be able to get Secretary Snow Tuesday or 
Wednesday. We have not confirmed that yet, but we will notify 
members as soon as we can have Secretary Snow scheduled.
    We have Secretary Thompson scheduled for next Thursday, and 
that will be in the Senate. And then we have a couple of others 
lined up, and we will notify all members as soon as possible on 
that.
    We do expect to work through the entire budget process in 
the next 2 months, and so we have a lot of work to do, and we 
will have hearings basically throughout this month, and then 
the month of March we will begin committee markup, floor 
markup, and conference.
    I told Senator Byrd I wanted to talk to him about it. I do 
want to tell all members I would like to improve the process 
that we consider the budget on the floor. I have been 
embarrassed with our vote marathons, vote-a-thons, whatever you 
want to call them. It is not a good way to legislate, and I 
think we all recognize that. Maybe we can see if we cannot 
together, collectively, bipartisanly, improve the procedure on 
the floor, and, frankly, add more respect and dignity to the 
Senate in consideration of a budget of the magnitude somewhere 
in the range of $2.4 trillion. We need to do a better job in 
managing the floor in that effort. So I am going to work with 
our colleagues and see if we cannot come up with some other 
improvements, and I appreciate very much Senator Conrad's 
willingness to consider some changes that might be an 
improvement, not just this year but, frankly, in future years.
    And, with that, Director Bolten, we will recognize you for 
your comments. Welcome to the Budget Committee.

 STATEMENT OF JOSHUA B. BOLTEN, DIRECTOR, OFFICE OF MANAGEMENT 
                           AND BUDGET

    Mr. Bolten. Thank you, Mr. Chairman, and thank you, Senator 
Conrad and other distinguished members of the committee. It is 
a privilege to have the opportunity to appear before you this 
morning.
    The 2005 budget that was transmitted earlier this week 
continues to support the President's three overriding national 
priorities: winning the war on terror, protecting the homeland, 
and strengthening the economy. The President is committed to 
spending what is necessary to provide for our security and 
restraining spending elsewhere.
    Since September 11, 2001, as you have emphasized, Mr. 
Chairman, more than three-quarters of the increase in the 
Federal Government's discretionary spending has been directly 
related to our response to the attacks, enhanced homeland 
security, and the war on terror. The President's 2005 budget 
continues this spending trend. That means significant increases 
in essential funding for our security programs, combined with a 
dramatic reduction in the growth of discretionary spending 
unrelated to security. With your support in enacting this 
budget into law, we will be well on the path to cutting the 
deficit in half over the next 5 years.
    If I could have the first chart up, please.
    Mr. Chairman, at OMB we have found it useful to try to 
divide the discretionary budget into three categories, similar 
to the chart that you just showed. On the left is defense, 
which is basically the Defense Department. In the center is 
homeland security, which is not congruent with the Department 
of Homeland Security; about two-thirds of that Department 
spending we characterize as homeland security spending. But 
there are a number of other elements from other departments 
that are included within that category, particularly from 
Health and Human Services, the Department of Justice, some from 
the Department of Agriculture, and others. And then on the 
right is everything else, which we label non-defense, non-
homeland spending.
    The President's--yes?
    Chairman Nickles. Excuse me. Does that include all the 
supplementals? That includes all spending?
    Mr. Bolten. No, it does not. We have another chart that 
includes supplementals, but this one is just base discretionary 
spending.
    The yellow bars represent the President's proposals for 
2005. What that reflects is, on the left, an increase in 
defense spending by 7 percent to support our men and women in 
uniform and transform our military; in the center, an increase 
in homeland security spending by nearly 10 percent to 
strengthen our capability to prevent future attacks; and on the 
far right, holding the rest of discretionary spending to half-
of-1-percent growth, well below the rate of inflation, while 
continuing to increase funding for key priorities such as the 
President's No Child Left Behind education reforms.
    The President's budget is built on the sensible premise 
that Government spending should grow no faster than the average 
increase in average American family incomes, which is 
approximately 4 percent. This budget, the 2005 budget, proposes 
to hold the growth in total discretionary spending to 3.9 
percent overall and, again, to reduce the growth in non-
defense, non-homeland security spending to half of 1 percent, 
below the rate of inflation.
    Mr. Chairman, in the last budget year of the previous 
administration, 2001--that is reflected in the green bars on 
this chart--discretionary spending unrelated to defense or 
homeland security soared by 15 percent. With the adoption of 
the President's first budget in 2002, that growth rate was 
reduced to 6 percent, then 5 percent the following year, then 4 
percent for the current fiscal year that we are now in, fiscal 
year 2004; and as I have just emphasized, down below 1 percent 
in the President's proposal for 2005.
    The President's budget builds on the pro-growth economic 
policies that have laid the foundation for the economic 
recovery now under way and for sustained growth and job 
creation in the years ahead.
    The tax cuts that you and the Congress enacted have been 
critical to strengthening the economy and to creating jobs. 
Perhaps the best timed in American history, these tax cuts 
deserve much credit for today's brightening economic picture, 
which includes nine consecutive quarters of positive growth, 
the highest quarterly growth in 20 years in the third quarter 
of last year at 8.2 percent, ongoing extraordinary productivity 
growth, continued strength in housing starts and retail sales, 
and encouraging signs of renewed business investment. These 
indicators suggest that job growth, which typically lags 
recovery, should continue to strengthen in the months ahead.
    Mr. Chairman, the President will not be satisfied, however, 
until every American who wants a job can find a job. So this 
budget supports the President's six-point plan for economic and 
jobs growth, including making permanent the tax relief that has 
fueled our economic recovery.
    The sustained growth that this budget supports will be good 
news for our budget picture as well. As the economy improves, 
Treasury revenues will as well.
    Like America itself, the Federal budget has faced 
extraordinary challenges in recent years: a stock market 
collapse that began in early 2000; a recession that was fully 
under way in early 2001; revelation of corporate scandals, 
years in the making; and, of course, the September 11th attacks 
and the ensuing war on terror.
    With Treasury receipts only beginning to reflect a 
recovering economy and major ongoing expenditures in Iraq, 
Afghanistan, and elsewhere in the war on terror, we still face 
a projected $521 billion deficit for the 2004 fiscal year. That 
size deficit at 4.5 percent of GDP is not historically out of 
range. Deficits have been this large or larger in 6 of the last 
25 years, including a peak of 6 percent in 1983.
    Under the circumstances that created it, today's deficit is 
certainly understandable, but that deficit is also undesirable 
and unwelcome. And with enactment of this budget, we will bring 
it down.
    With continuation of the President's economic growth 
policies and sound spending restraint reflected in the budget I 
have just outlined, our projections show the deficit will be 
cut by more than half over the next 5 years. This dramatic 
reduction begins in the fiscal year of this budget, 2005, for 
which we are projecting a deficit of $364 billion, roughly 3 
percent of GDP. The rapid deficit reductions continue in 
subsequent years, with our projections showing the deficit 
falling to 1.6 percent of GDP by 2009. This is not only well 
below half its current 4.5-percent level; it is also well below 
the 2.2-percent average deficit during the last 40 years. And 
you will see on that chart a black line across the middle of 
the chart. That reflects the 2.2-percent, 40-year historical 
average deficit for the Federal Government. It is also roughly 
a line that reflects cutting our current deficit in half.
    This deficit reduction is the combined effect of economic 
growth and spending restraint. As the economy recovers, tax 
receipts as a percent of GDP will rise to historic levels by 
the end of the budget window, while spending restraint keeps 
outlays flat or slightly declining as a share of GDP.
    The spending restraint reflected in this budget is not 
automatic, so we are also proposing new statutory budget 
enforcement mechanisms, establishing in law limits on both 
discretionary and mandatory spending, and requiring that any 
increases in spending be paid for by spending offsets.
    We plan to transmit legislation to the Congress that has 
three elements: one, reinstate the caps on discretionary 
spending for 5 years through 2009; two, a pay-as-you-go 
requirement limited to new mandatory spending--any proposed 
increase in mandatory spending would have to be offset by a 
reduction in mandatory spending, tax increases could not be 
used as an offset, and PAYGO would not apply to tax 
legislation. Three, measure the long-term unfunded obligations 
of major entitlement programs and include a 60-vote hurdle in 
the Senate for legislation that would expand these obligations.
    I look forward to working with this committee to gain 
enactment of these proposals to restrain spending.
    Finally, the President is keeping this administration 
focused on what the American people care most about: results. 
The measure of the Government's success is not how much we 
spend but, rather, how much we accomplish. This budget includes 
a scorecard that measures the progress agencies are making in 
achieving results so that the Government continues to be 
accountable to the taxpayers.
    Since President Bush took office, our Nation has confronted 
a cascading set of challenges. The President and Congress 
responded on all fronts, with tax relief to get the economy 
going, the largest reorganization of the Federal Government in 
50 years to create a new Department of Homeland Security, and 
the largest increases in the defense budget since the Reagan 
administration.
    The President's 2005 budget builds on this record of 
accomplishment. With renewed economic growth and the Congress' 
cooperation in restraining spending, and focusing it on our 
most critical priorities, we can accomplish the great goals the 
President has set for the country while dramatically improving 
our budget situation.
    Mr. Chairman, I look forward to taking your questions.
    [The prepared statement of Mr. Bolten follows:]

    [GRAPHIC] [TIFF OMITTED] 94065.051
    

    [GRAPHIC] [TIFF OMITTED] 94065.052
    

    [GRAPHIC] [TIFF OMITTED] 94065.053
    

    Chairman Nickles. Director Bolten, thank you very much. I 
have a lot of questions, but I also have a lot of colleagues, 
and I want to recognize them.
    I am going to ask all of our colleagues that they try and 
keep their questions and remarks in the order of 5, 6, 7 
minutes. That would be appreciated, and I think by others.
    I will withhold many of my questions until the second 
round. I think I will still be here. I doubt that others will 
be. I will ask you one question, if you could help explain the 
difference in scoring between CBO and OMB or CMS on the cost of 
the prescription drug benefit. When we passed a budget last 
year, we set up a budget that said we would spent up to $400 
billion over the next 10 years to strengthen, enhance, and 
improve Medicare, including prescription drugs. The bill that 
we passed was scored by CBO to be at $395 billion. Under your 
budget submission, CMS, HHS, OMB, your actuaries have 
determined that it was in excess of $520 billion.
    Could you give us a brief explanation of the differences 
between the scoring between CBO and CMS?
    Mr. Bolten. Mr. Chairman, there is a substantial difference 
between the actuaries. CBO, at the time the bill was being 
considered and enacted, scored the cost at $395 billion. The 
estimate that the HHS actuaries put out, I believe at the end 
of December, was $534 billion. So a substantial difference 
there.
    The reasons for the difference are highly technical. I am 
not sure I am the best person to explain it, but I know that 
Secretary Thompson has had an opportunity to address the issue 
in some detail, and I know that the actuaries are working 
together to try to resolve their differences.
    The CBO and HHS actuaries have had differences for some 
time about fundamental assumptions related to the Medicare 
bill. Those include how quickly the prescription drug costs 
would likely come down because of volume buying. They include 
different assumptions about level of participation rates. They 
include different assumptions about the level of participation 
by private plans in the program. All of this in an area that is 
inherently hard to estimate, but made especially difficult in 
this case because of the novelty of so many of the programs 
involved.
    The important part of this is that I think this is an 
honest disagreement between experts, both of whom in my eyes 
have a great deal of credibility. We in the administration are 
under some constraint to carry the HHS estimate in our budgets, 
which we have done. So we are reflecting and carrying in our 
budget the higher estimate. But I know the actuaries are 
working together to try to figure out how to close their 
differences.
    At the time you adopted the legislation, that you 
considered the legislation, what was relevant, as it always is 
with legislation, was and is the CBO score. My expectation is 
that as we submit our budget, CBO will in the ordinary course 
of things rescore our budget. And I expect that they will 
reflect their original score, because I understand that 
Director Holtz-Eakin as recently as this week has reaffirmed 
their intention to stay with their $395 billion score.
    Chairman Nickles. Thank you very much.
    Senator Conrad.
    Senator Conrad. Director Bolten, when did you know that 
there was a difference, a substantial, dramatic difference, 
between the estimates of the cost of the prescription drug bill 
between CMS and your agency?
    Mr. Bolten. I think all of those who were involved in the 
Medicare discussions were aware that there were differences 
between the assumptions of the CBO and the HHS actuaries. My 
understanding is that that was true all the way through the 
Medicare considerations.
    Senator Conrad. And did you ever feel that you had an 
obligation to tell Members of Congress that you thought the 
bill was going to cost much more?
    Mr. Bolten. I wasn't directly engaged with the Members of 
Congress on the bill, but I know that Secretary Thompson, who 
was, did discuss with members some differences in the 
assumptions. But within the administration, we were also aware 
on this legislation, as in all legislation, that what counts as 
the legislation is being considered is the CBO score.
    Senator Conrad. Well, when you say you were not engaged 
with members, you were engaged with me. You came up here and 
told me that you thought additional steps needed to be taken to 
rein in spending, but you never once said to me that you had a 
belief that the cost was going to be far in excess of what was 
before the Congress.
    Mr. Bolten. Senator, yes, I did. I did engage with you and 
several other members on the long-term outlook here. And you 
will recall that our conversation was about our interest in 
creating a unified trust fund, which I think would most 
accurately reflect the overall cost. But on the details of the 
bill, I was not engaged with the members, but I do not think 
that is what is really relevant here. What is relevant here is 
that at the time that you all were considering the bill, it was 
the CBO score that counted, and that is what everybody was 
operating on.
    Senator Conrad. Yes, but I would say this to you: I think 
you had an obligation, if you believed that the cost was going 
to be far in excess of what CBO was telling us, to say so. I 
will not go further with it. I just tell you I am personally 
disappointed that somebody in the administration did not send 
up a very clear signal that, in their judgment, this bill was 
going to cost a third again as much as what we were told at the 
time.
    You keep saying you are going to cut the deficit in half 5 
years from now. The only way you are going to cut the deficit 
in half 5 years from now is just not to count things.
    Let me ask you this: When you say you are going to cut the 
deficit in half, you say it is going to be $237 billion. Are 
you counting the $259 billion you are going to take from Social 
Security in that year that you have to pay back? Is that in 
that?
    Mr. Bolten. Senator, this administration, as all previous 
administrations, at least in recent decades, and CBO, looks at 
the deficit picture on a unified basis. So what counts for 
deficit purposes is the unified budget deficit or surplus, as 
the case may be----
    Senator Conrad. But isn't this going to add--isn't that 
$259 billion going to add to the debt of the United States? The 
money that is being taken from Social Security in 2009 you have 
to pay back, don't you?
    Mr. Bolten. Sure. It is a Government obligation. But what--
--
    Senator Conrad. And that adds to the debt.
    Mr. Bolten. It does not--it adds to the overall debt of the 
Government, but it does not add to the debt held by the public.
    Senator Conrad. Not the debt held by the public, but it 
adds to the gross debt of the United States, and it has got to 
be paid back.
    Now, let me just say why I am concerned about this, because 
back in the 1980's there was virtually no Social Security 
surplus to be concerned about. In 1983, the last time as a 
percentage of GDP we had a deficit as big as this one, there 
was virtually no Social Security surplus.
    In this year alone, your estimates are the Social Security 
surplus is going to be $259 billion, and you are taking it all. 
You are not taking it all just for that year. You are taking it 
all for the next decade. That is $2.4 trillion--$2.4 trillion--
and you are not letting the American people understand all that 
has got to be paid back.
    But it does not end there. The same thing is true with 
Medicare. The alternative minimum tax, which you are paying for 
for 1 year, has a cost in 2009 of $55 billion. It is nowhere. 
You have, in addition to that, no calculation of residual war 
costs. CBO tells us it is going to be $30 billion that year. 
You add all that up, that is over $600 billion of added debt 
when you are telling the people it is going to be a deficit of 
$237 billion.
    I think that is misleading to people, and all of this right 
before the baby boomers retire.
    Mr. Bolten. If you can hold the chart up for just 1 second?
    Senator Conrad. Yes.
    Mr. Bolten. Senator, we disagree--not about the problem 
with Social Security--I share very much your concern about the 
long-term unfunded liability in Social Security. But in terms 
of correctly describing what our deficit situation is, I think 
the right way to look at it is on a unified basis, because it 
is what the Government needs to borrow today from the private 
sector or tomorrow from the private sector that is relevant in 
the concern you expressed at the end of your remarks, which 
was: Is private capital being crowded out? What is going on 
with interest rates?
    Right now we do not see the deficits we are running today 
putting pressure on interest rates, but I think you are right 
to be concerned about it. But the right way to look at it is 
what does the Government need to borrow today or tomorrow in 
order to meet that obligation.
    Let me move on to the other elements. On the Medicare 
surplus----
    Senator Conrad. Let me just respond to that for a moment. I 
tell you, I think we have a fundamentally different 
circumstance than we faced in the 1980's because the baby 
boomers are about to retire. And the hard reality is debt held 
by the public is a different metric than the gross debt of the 
United States. The gross debt of the United States matters a 
lot more when the baby boomers are about to retire. And it is 
why, if you look back at the 1980's, there was virtually no 
Social Security surplus. Now there are huge Social Security 
revenues coming in, growing dramatically--it produces a $150 
billion Social Security surplus this year. It is going to be 
$250 billion by your calculation in just 5 years. And you are 
not counting it as part of the deficit, when, in fact, it has 
all got to be paid back. It is adding to the debt. And what we 
have here is a gross debt that is spinning totally out of 
control at the worst possible time.
    Mr. Bolten. I do want to emphasize that I completely share 
your concern about the long-term unfunded liability of Social 
Security, which begins to bite within the next 10 or 15 years 
very badly, when Social Security itself will start taking in 
less money than it is putting out. So I do not want to minimize 
concern about Social Security. I do want to say we have a 
disagreement about the right way to characterize deficits 
today.
    Looking at some of the other elements on your chart, I 
think to suggest that there is a Medicare surplus does not tell 
the actual story, that Medicare is divided into two parts, part 
of which has a trust fund, which is in surplus, but the other 
half of Medicare is running a large cash deficit.
    Senator Conrad. That is true, but we have made a decision 
around here, made it long ago, that we are going to fund 
Medicare in different ways. Some of it was by a premium. Some 
was by a general fund transfer. We do have a trust fund and it 
is in surplus, and it is being taken and used for other things. 
And the point is it has got to be paid back.
    That is the fundamental problem I have with telling people 
the deficit is going to be cut in half, because the hard 
reality is that the debt in 2009 is not going to be increased 
by $230 billion. The debt, according to your own calculation, 
if you go to your own budget documents, the debt is going to be 
increased by $633 billion in 2009. I think the American people 
need to know that.
    My time is up.
    Chairman Nickles. Senator Conrad, thank you. I am very 
interested in this subject, and you and I have a little 
difference of philosophy, and maybe we can hash this out.
    Senator Conrad and I have basically decided to do a hearing 
on long-term cost implications of some of the Federal programs, 
which will certainly include Social Security and Medicare, but 
also other pension liabilities and long-term liabilities. And I 
may want to have a portion of that or maybe a separate hearing 
devoted to trust funds and what I would say is the false 
assumption of trust funds, but that would let you know where I 
am coming from. And maybe we could really hash this out. I 
would enjoy doing that. I think it would be a good, 
educational, intellectual exercise. But we will save that for 
another day.
    We go by order of appearance, and I might ask my 
colleagues, Senator Domenici is here. Senator Allard, would you 
mind deferring to the former chairman, since he has only been 
chairman of this committee or ranking member for 25 years or 
something. But we are asking all of our colleagues to try and 
keep their comments to 5, 6, 7 minutes. That would be 
appreciated.
    Senator Domenici? And thank you, Senator Allard.
    Senator Domenici. I will try to be brief.
    There is one item of kind of a parochial nature that 
bothers me, and parochial only in the sense that the 
subcommittee that I chair has to pay for this. That has to do 
with Yucca Mountain, Mr. Director. There is something very 
difficult about what your budget is doing on Yucca Mountain.
    First of all, you propose that there be a Yucca Mountain 
fee. There has always been a fee accumulating for that. We use 
it even when we are not making any headway, but the President 
proposes $749 million as a legislative proposal related to 
Yucca Mountain that would change mandatory receipts related to 
the nuclear waste to discretionary receipts. Is that correct so 
far?
    Mr. Bolten. I believe it is, Senator.
    Senator Domenici. OK. In the budget request, the revenue 
from this change is assumed up front, and it is the means to 
maintain the schedule of 2010 opening of Yucca.
    Now, I do not know that Yucca is going to be opened by 
2010, so I do not want to act like I am agreeing with that 
date. But you all are and everybody else is telling the world 
we are.
    Now, what happens if this legislative proposal is not 
enacted? Will we still stay on a path that assumes a 2010 
opening?
    Mr. Bolten. My expectation, Senator, is that unless we are 
able to find some other way to make sure that the funding for 
this project is adequate that it would cause a delay in the 
2010 date.
    Senator Domenici. Well, it would seem to me that is the 
right answer, but also I would like you to know that very few 
proposals for a user fee of this size gets enacted around here. 
And when you have something as controversial as Yucca, whose 
schedule has been all over, to come along and say, well, now is 
the time to ask for $750 million as a new fee, there are going 
to be a lot of people complaining because they have been 
putting up a fee, Mr. Chairman, for a long time. And you have 
been asking me, ``Where is the fee?'' And I say, ``It is 
sitting out there.'' And then you say to me, ``No, it isn't 
sitting out there. You are using it.'' Right? ``Except you are 
not using it for Yucca.''
    Well, now, I personally want everybody to know that I will 
do what I can on Yucca, but I cannot keep it on schedule with 
$750 million left out that we assume we are going to get when I 
do not know how we are going to get it.
    Mr. Bolten. Senator, one comment. I am advised that the 
fees we are talking about are not new fees. It is a shifting of 
fees from the mandatory over to the discretionary side. I 
realize that that still involves some difficult legislative 
machinations, but----
    Senator Domenici. Yes, sir. But, you see, I already told 
you that, and I thought you were not getting it. But, you know, 
I already made that statement about the discretionary, this 
change. I note your marvelous assistant just whispered it in 
your ear.
    Mr. Bolten. Senator, you are both far more astute about 
this than I am, sir.
    Senator Domenici. You are right. He is pretty good, too. He 
worked for us for 20 years.
    Let me talk about the defense environmental management, if 
I could. The fiscal year 2005 requests $350 million to be made 
available only to the extent that legal uncertainty concerning 
certain reprocessing is satisfactorily resolved pending 
litigation or by new legislation. What does that mean?
    Mr. Bolten. I am not familiar with that, Senator.
    Senator Domenici. Well, it is a bunch of money. I do not 
know that you have to be, but somebody has to be. Do you want 
to ask somebody to tell us--
    Mr. Bolten. Can we give you the answers for the record?
    Senator Domenici. Absolutely. Thank you very much.
    The rest of that is: When do you intend to obligate that 
$350 million? And we will wait for that answer, too.
    Mr. Bolten. We will provide that for the record, Senator.
    Senator Domenici. Thank you very much.
    Corps of Engineers. Everybody around here knows, and 
probably Senator Byrd knows the best, that every year 
Presidents submit budgets on the Corps of Engineers that ask 
for projects and then do not pay for them, or cut the projects 
so much knowing full well that you cannot live with them.
    Now, I do not accuse you of it. You are too new. But you 
are following in the footpaths, it would seem, of those that 
came before you.
    The Corps of Engineers fiscal year 2005 request, if enacted 
as is, underfunds the Corps so much that I question whether it 
could be effectively carried out and that it could do its 
mandated work. The fiscal year 2005 budget documents relating 
to the Corps state a concern about the growing construction 
backlog.
    Can you explain how if we cut the construction budget by 
$300 million we are reducing the current construction backlog 
for 2005? Would you like to answer that for the record, too?
    Mr. Bolten. I might, but I would just say, Senator, that 
when we have gone in and looked at that budget, what we have 
tried to do is focus on the priority projects, those already 
under way. I think the Corps does a pretty good job of trying 
to figure out exactly where the resources ought to be 
allocated. We have tried to continue doing that in this budget.
    Senator Domenici. OK. I have three more Corps questions. I 
will submit them. But let me say to the Senators, there is no 
series of projects that the Senators want more than the Corps 
of Engineers. If anybody served on that subcommittee, it gets 
the biggest list, short of maybe Interior, which you chaired, 
Senator Byrd. We get lists of requests for Corps, and if I look 
at your numbers, it is--you know, you have submitted to us an 
impossibility. We cannot do what you have suggested here 
because the Senate Members and House Members will not let us.
    Now, on a very big issue, I would like you to talk with us 
a minute. It seems to me the American economy is changing or 
something has happened that we have not yet put our finger on. 
The easy attack on this administration is that two million jobs 
have been lost, and I see a candidate saying, ``Wait until I 
get President Bush, I will point right in his forehead and say, 
`That is what you have done, lost two million jobs.'''
    Well, Mr. Bolten, it seems to me that with the fiscal 
facts, everything is right on course for this to be a very 
strong economy. Normally a strong economy means more jobs. Is 
that not right?
    Mr. Bolten. Yes, sir.
    Senator Domenici. What has happened? Why do we have all 
these good acts on the economy? We have a few things that are 
strange, and that is this enormous, enormous increase in 
productivity, consistent and so high that 15 years ago if you 
had told Alan Greenspan we are going to have it that big, you 
know, he would have said it is impossible. A couple other 
things have happened. Do you have your version on behalf of 
this President as to why all the growth and other positive 
things and so few new jobs as they are talking about?
    Mr. Bolten. Well, a couple of points. First of all, I think 
the macroeconomic policy has been very well designed to address 
the recessionary situation that the President encountered when 
he entered office. There has been an accommodative monetary 
policy from the Fed, and on the fiscal side, you all have done 
exactly the right thing in enacting what may be the best timed 
tax cuts in American history.
    CEA estimates that those tax cuts are responsible for two 
million more jobs. The Council of Economic Advisers, the 
professional economists within the White House, estimate that 
between 2001 and 2003, there were two million more jobs in the 
economy as a result of the tax cuts than there otherwise would 
have been.
    Now, job growth has been too slow, and it has been, as you 
know, a great concern of the President. One of the reasons is 
routine, and that is that job growth typically lags recovery, 
and it takes some time, once the recovery is under way, for job 
growth to come back. But a huge factor is the one you 
mentioned, which is that productivity growth has been 
unprecedented, far beyond anything that any of the economists 
projected, which is good news for the economy overall. It means 
we are going to remain competitive. It means that we are going 
to have higher real wage rates. But it also means in the short 
run, when you are coming out of a recovery, that there aren't 
as many jobs created because high productivity means you are 
creating more products with fewer people.
    We expect that the trend of low job growth is now moving to 
sustained job growth. We need to see what the numbers will be 
going forward, but I know that our economists are very 
optimistic that we will see strong job growth in the years 
ahead.
    Chairman Nickles. Senator Domenici, thank you very much.
    I am going to urge our colleagues, we have a tool that we 
did not have in the Senate, and there is a little clock up 
there to give us a little guidance.
    Senator Murray.
    Senator Murray. Mr. Chairman, thank you very much, and I 
appreciate the accommodation of the House in being here. I 
would ask, Mr. Chairman, since many of our offices are not open 
and we are going to have difficulty getting things to you, if 
we could hold the record open of this committee hearing to 
submit our questions once our staffs get back int our office to 
be able to do that.
    Chairman Nickles. Certainly. That is an excellent 
suggestion. Thank you.
    Senator Murray. Thank you, Mr. Chairman.
    I just have to say that I am really concerned about the 
budget that has been presented to us by the President. I go 
home every weekend to Washington State. We have had the first 
or second highest unemployment since September 11th. We are now 
fourth highest, you know, so that feels a little better. But it 
is not good, and what people in my State are really worried 
about is health care, the cost of health care. They are 
concerned about jobs. They are concerned about an investment in 
transportation. They are especially concerned about security. 
And what I see in this budget, which is a statement of 
priorities, is a real lack of investment in those, and I want 
to get to that in just a second.
    But I just got your opening statement this morning and 
listened to you give it, and I was kind of befuddled by what 
you were presenting to us because, as Senator Conrad has 
pointed out, you are telling us all that the deficit will be 
reduced by half, and you are sending over legislation to kind 
of make that happen. You talked about reinstating caps, the 
pay-as-you-go requirements, but you are saying tax increases, 
pay-as-you-go would not apply.
    Well, I do not understand how that works when the tax cuts 
take money out of the budget. And I know what you are going to 
go to is that, well, they will create jobs. But what I think we 
have seen and part of what Senator Domenici was talking about 
is that the jobs are not being created here. Many of the 
corporations who are taking advantage of tax cuts are having 
jobs go overseas, and we are not seeing people here, as you 
predict, create a better revenue forecast in the future by 
increasing taxes because they are not being paid here.
    Now, I am a supporter of trade agreements, but I think we 
have to ask the question: If tax cuts are put in place 
permanently and the jobs are not created here, how are we ever 
going to get to a deficit that is cut in half that is being 
promised by this budget and by the White House?
    Mr. Bolten. Senator, first, the tax cuts that we are 
talking about and the ones we are proposing be made permanent 
in the Code are not corporate tax cuts. These are individual 
taxes that we are talking about.
    Senator Murray. But I would assume that you are saying that 
these people will invest back in this economy. That is not what 
we are seeing.
    Mr. Bolten. They will invest, and in particular with 
respect to the top rates, many of the small businesses of 
America, Subchapter S corporations, pay their taxes through the 
top income tax rates. And these are not people typically who 
are sending their jobs overseas. These are people who are 
investing, buying plant and equipment here in America. They are 
the real engines of job growth.
    Senator Murray. I think we are all very concerned that 
where we are seeing job growth is not here in this country, and 
I do not want to get into an agreement on that. Just an 
observation that we are not going to cut the deficit in half if 
we continue to give tax cuts out. We see no job growth here, 
and it is a dynamic that we are going to have to deal with as a 
country.
    But let me ask you a specific question, because it is one I 
am deeply concerned about. You said one of the priorities of 
this budget was protecting the homeland. I do not think any of 
us disagrees with that. I think all of us realize that this 
last week three Senate office buildings were shut down because 
of a small bit of ricin. I would let all of you know that if 
one container comes into any one of our seaports in this 
country, we now understand the dramatic impact to this economy 
if those seaports were to be shut down and the products that 
could not get to stores in the middle of the country, let alone 
the jobs that are lost immediately on our ports, and, of 
course, the lives that would be involved in that.
    I was really disappointed to see that this administration 
identified $1.7 billion for Coast Guard port, waterway, and 
coastal security activities, including $100 million for the 
implementation of the Maritime Transportation Security Act as a 
port security initiative.
    First of all, Mr. Chairman, I want to point out that the 
Coast Guard commandant testified last September that it would 
take approximately $7.3 billion over 10 years to implement the 
Maritime Transportation Security Act, including $1.5 billion 
for the first year. So this program is woefully underfunded, 
and that $1.7 billion figure represents 90 percent of the 
administration's proposed port security budget, and about half 
of the Coast Guard's discretionary budget for its traditional 
missions of port, waterway, coastal security.
    The Coast Guard is doing an excellent job. Any of us who 
live on coastal States will tell you that. But they are 
stretched to the max. They are working overtime, long hours, 
and I do not think this budget offers any relief.
    I want to know how this administration expects the Coast 
Guard, which is already stretched thin, to accomplish its 
traditional missions, including fisheries enforcement, search 
and rescue, all of those, take on 90 percent of the homeland 
security duties, and implement MTSA with only 7 percent--that 
is $100 million of the $1.5 billion--of what the commandant has 
told us they need.
    Mr. Bolten. Senator, we have the Coast Guard very 
substantially funded. I agree completely. They have taken on a 
great burden. They do a terrific job. The Coast Guard funding 
over the course of this administration has been dramatically 
increased. We are proposing in this budget----
    Senator Murray. At the behest of Congress, I would add, 
not----
    Mr. Bolten. Yes, with the cooperation of Congress. I think 
we agree that that is an area that has needed a great deal of 
strengthening in this country. The overall budget for the Coast 
Guard in our 2005 submission increased by 9 percent in total. 
The port security program you referred to, I think we have 
baked into our figures full over the course of the 10-year 
period. But we need to focus our money where we think we can do 
the most good most quickly.
    Senator Murray. Well, I would just disagree with the 
priorities, and I would say eliminating Operation Safe 
Commerce, which is a project that is ongoing in our largest 
ports right now to determine what is the best way to provide 
port security, eliminating that and underfunding this is going 
to cost us in the future. And it makes it very hard to believe 
that homeland security is one of the primary missions of this 
budget.
    Thank you, Mr. Chairman.
    Chairman Nickles. Senator Murray, thank you very much.
    Senator Allard.
    Senator Allard. Thank you, Mr. Chairman. I would have to 
disagree with my colleague from Washington in that what I am 
seeing now is that we are starting to have some job growth. But 
I would also point out, in visiting with economists, it seems 
as though there has been a loss of manufacturing jobs for 
almost two decades. Whether we have gone through periods of 
recession or unprecedented growth like we did in the 1990's, 
the trend has been a loss of manufacturing jobs in this 
country.
    It has brought up a discussion among a number of colleagues 
that I have been visiting with as to just how significant is 
the household survey as compared to, I guess, we call it the 
payroll survey, where we do the--where most of the figures are 
coming out of, historically I think it has been out of the 
payroll survey. What we have noticed recently, there has been a 
huge increase in household survey that reflects small business 
jobs. And I have talked to a number of individuals, a number of 
economists and people sort of in the various industries. They 
seem to think that with the recession that we had, people were 
given bonuses to leave their jobs voluntarily, and they took 
this money and set up their own businesses. Many of them were 
home businesses, the household. They operated a computer and 
they had a good printer, and they ran a business right out of 
their home.
    Do you have any explanation for the discrepancy in the 
household figures as opposed to the payroll figures?
    Mr. Bolten. Senator, for a truly expert answer, I will ask 
the Chairman of the Council of Economic Advisers to give you 
something for the record. But I think the difference is exactly 
the one you identified, and that is that the payroll survey 
tends to go around and get the big businesses and survey their 
employment. The household survey actually asks individuals who 
is doing what, and that is the one that reflects much more 
accurately small businesses, and as has been typical in many 
recoveries, the real robust growth in the economy, and the real 
job creation comes from the small businesses.
    Senator Sessions. Thank you, Mr. Chairman. I think it is 
critical that we take firm and decisive steps to demonstrate 
our commitment as a Congress to contain the growth in spending. 
The American people expect that. The financial community is 
watching us, and I think the world community is watching us.
    We can sustain the deficits we had this year. I was glad to 
see that it came in, what, $50 billion below one of the 
estimates as late as June because of the growth in the economy, 
and it does appear to me that income to the Government from tax 
revenues is more volatile than the economy itself. It tends to 
go up faster and drop faster than the economy itself. But one 
of the things we have not talked about generally is the 
discretionary and entitlement accounts. We have focused mostly 
on discretionary.
    Mr. Bolten, what percentage of our expenditures in this 
unified budget from which you are drawing the deficit number, 
what percentage of that is discretionary and what percentage is 
entitlement programs?
    Mr. Bolten. It is about a one-third/two-thirds 
relationship, and then the interest is the rest of the budget.
    Senator Sessions. So two-thirds of the expenditures other 
than interest would be entitlement programs, Social Security, 
Medicare and those expenditure items?
    Mr. Bolten. I think it is a little bit less than two-
thirds, yes.
    Senator Sessions. And we do not appropriate that money as 
we have set that system up, but every single American who 
reaches a certain age or has certain income levels become 
entitled automatically to the check or the benefit from the 
Government regardless of the state of the government's budget 
and income; is that correct?
    Mr. Bolten. That is true.
    Senator Sessions. Will the entitlement program growth 
exceed the growth projected by the President for the 
discretionary accounts this year?
    Mr. Bolten. This year actually I think entitlement growth 
has been relatively restrained after a number of years of large 
growth, but it is not a path we can expect to continue in the 
future. But if you look out into the future and if you look out 
farther beyond 10 years into the future, as Senator Conrad did 
with his charts, and I know a number of members are interested 
in, you see in the entitlement growth far outstripping not just 
the growth in the rest of the budget, but the growth in the 
economy which is what makes that situation particularly 
dangerous.
    Senator Sessions. I think it is important. So the answer is 
on Social Security, we know it is time for us in this Congress 
to get serious about it. We do not need to wait till 2018 when 
the thing goes into deficit. We need to be thinking ahead now. 
I think the President has had the courage to discuss that 
openly, and I believe he will move forward, and I hope the 
Congress will meet him halfway instead of politicizing the 
issue.
    Now, one matter we need to deal with--and I am glad the 
Chairman raised it--and that is the prescription drug cost 
estimates that we had. Chairman Nickles, to his credit, told us 
on the floor of the Senate and in Committee and privately, that 
the numbers were probably going to exceed the $400 billion. 
Nobody else particularly was saying that, but Chairman Nickles 
did warn us of it. I told the people of my State that I believe 
we needed a prescription drug plan, I believe and know that 
there are seniors in our State who literally, whose health is 
compromised because they cannot afford prescription drugs. And 
I thought and was certain we could do it for the amount we 
budgeted last year, $400 billion, and I ran for reelection and 
that is what I said. So I have to tell you, I am very disturbed 
and concerned that we now have another Government agency saying 
it is going to be $534 billion which is $134 billion more. That 
is $13 billion a year. I do not know where in this Government 
we can save $13 billion a year. And this is a program going 
from zero to 400 billion and now it is going up to there.
    I will just say a couple of things. Do you know which 
number is correct, and do you have an opinion? Is it 400 or 
534?
    Mr. Bolten. I do not know, Senator. I think even people who 
are expert in this area have legitimate disagreements. I know 
that the CBO actuaries are very professional. The HHS actuaries 
are very professional. And they are working together to try to 
resolve their differences.
    Senator Sessions. I do not think we know either, and I have 
been talking to a number of Senators about this, and others in 
trying to figure out what the truth is, and the truth is we do 
not know. The truth is we passed a bill that we said was a $400 
billion bill and now we have an authoritative agency saying it 
is going to be $134 billion more than that. So I think before 
this thing gets implemented, before we go down this road, Mr. 
Chairman, we need to confront this question. I believe that is 
what the Congress was intending. I know I would not have voted 
for a $534 billion bill, and I know other Senators would not 
have voted that big a bill.
    So my question to you is, would you be willing to support, 
and do you think the administration would support a plan to 
contain the growth of this new entitlement program to the 400 
billion we contemplated from the beginning, and would not that 
be good public policy, so if Congress felt they needed to put 
more money in it to drive it up, they could make that decision, 
but that we ought to have a budget that we enforce and we ought 
to have an expenditure plan that is consistent with what we 
expected when we passed the bill?
    Mr. Bolten. Senator, I cannot give you an administration 
position off the top of my head on that. I can tell you that, 
the administration remains very interested in ensuring that 
costs be contained at the same time that we are providing these 
new and improved benefits through Medicare. So there will 
always be an interest in that.
    And I would just come back to one point, which is that as 
we submit this budget, I expect it will be rescored by CBO, and 
my understanding is that they will stay with their $395 billion 
estimate. So as the budget is in front of you, it will be at 
the same cost for the Medicare program that you voted on.
    Senator Sessions. I think that could be helpful to us, Mr. 
Chairman, as we confront the question of can we contain this 
cost to the amount we intended to. I believe we can do that. We 
do not know what it is going to be. In fact, you have 
indicated, I think, we do not know to the extent it could be 
more than $534 billion, and I just think we have a 
responsibility to see what we can do to make this program come 
in at the level we want it to. The idea that entitlement 
program is just a machine let loose and it runs amuck and can 
never be altered should not be our way of thinking.
    Chairman Nickles. Senator Sessions, thank you. I welcome 
any suggestions that you have. I might say that during the 
conference I tried with others to come up with different 
methods of containing the cost, and we came up with a reporting 
mechanism if spending exceeds a certain amount of GDP or 
something, but it was not anything satisfactory as far as this 
Senator is concerned.
    Senator Sessions. I would just say that of all the 
conferees, you are by far the most committed to maintaining 
integrity in that figure, and perhaps the growing concern over 
the deficit in recent weeks might cause some of our colleagues 
to rethink where we are on this particular question. If we can 
come up with a good sound approach, and I believe we can, we 
need to do it.
    Chairman Nickles. I appreciate your suggestion, and the 
administration has made several recommendations as far as 
budgetary changes. Either they would be made as part of the 
budget resolution or they would be made as a separate bill as 
part of amending the Budget Act. I am certainly willing to 
consider recommendations from any member of the Committee, any 
member of the Senate. So if you have some suggestions you think 
that we should be considering, I am more than willing to work 
with Senator Conrad to see what we can do.
    Senator Sessions. And I do intend to be working on that, 
Mr. Chairman.
    Chairman Nickles. I appreciate that.
    Next, the Senator from Michigan, Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman, Mr. Ranking 
Member, and welcome, Mr. Bolten.
    I am looking forward to a broader discussion on Medicare 
myself. I will not spend a lot of time on it today, but just to 
say what I would really like to talk about is how this is not a 
good benefit for seniors, how it lacks in the highest possible 
prices for people under Medicare, and in over 10 years will 
begin to unravel Medicare as we know it. So I hope we are not 
only talking about the numbers but it is really happening and 
what will be happening under this Medicare bill which I am 
deeply concerned about for the seniors of the country.
    There is a lot in this budget bill. It is difficult to 
spend just a few moments talking about it, so, Mr. Chairman, I 
would like to talk in big picture numbers. As I said in the 
last meeting that we had, last hearing, I think it is very 
important to note that with all this sea of red ink, that if we 
were to eliminate every penny of non-defense discretionary 
domestic spending this year, every penny of $445 billion this 
year, that would not eliminate the deficit for this year of 
$521 billion; is that not correct?
    Mr. Bolten. That is true, Senator.
    Senator Stabenow. This is huge. So we can debate around the 
margins about whether or not we should have a half a percent 
increase in non-defense discretionary spending or a percent or 
2 percent. But you could eliminate every penny and it would not 
equal the deficit for this 1 year. So obviously, there are 
broader issues that we need to address, Mr. Chairman, and I 
hope we will.
    The other thing I think is important to put in perspective 
is of the 65 programs that we are talking about being 
eliminated, and I have some questions about those, they equal 5 
billion which is what we spend a month in Iraq and Afghanistan. 
So we are talking about and trumpeting 65 programs that 
eliminate $5 billion, and we can debate whether they should be 
or not, and I am all for eliminating things that do not work 
and doing new things, but that is what--we are spending $5 
billion a month in Iraq and Afghanistan, and this budget does 
not include the funding at this point for those important 
issues of Iraq and Afghanistan. So this budget is not complete, 
which is one of the big concerns as we look at all of this.
    Is it true, when I look at what you are proposing to 
eliminate, we are looking at eliminating in education $1.412, 
basically a billion dollars in education, as I have it, 
education programs, and I assume these numbers are correct that 
we have received from you, $1.412 billion. And adding back $1 
billion in Title I. So we are looking at overall there would be 
a cut there in terms of dollars to education. That concerns me.
    The other thing, coming from a manufacturing State, right 
now, where our world is very different than the world, with all 
due respect, that you are describing in terms of jobs. We are 
losing jobs and we are losing them permanently, middle class 
family wage jobs, and we are desperately concerned about it. 
Everyone is agreed. The President has said, and Members of 
Congress obviously have said, we need to focus on education and 
innovation. We see programs being cut as it relates to 
technology, regional technology in education programs, as well 
as vocational education, as well as other kinds of tech prep 
education, those kinds of things. Then we see being proposed 
for cuts the Advanced Technology Program, which frankly, has 
been a wonderful partnership in Michigan between the 
universities, the big three auto makers, other manufacturers to 
increase our applied technologies in terms of research and 
being able to raise that level of innovation that we all know 
that we need to compete. So I am very concerned about the 
choices being made here that will undercut our ability to in 
fact invest in education, innovation and jobs.
    I would add just one other thing on jobs, and that is I 
would comment--I do not usually commend a program on 
television--but Lou Dobbs has been doing a wonderful ongoing 
series on exporting of American jobs, ``Exporting of America'' 
I believe is what he calls it, in which he really, I believe 
the other night got into the whole question of how we look at 
productivity now. Part of the reason that productivity numbers 
look as high as they are is because we are taking out of the 
equation the numbers of jobs that are being outsourced overseas 
so that the numbers change, and there is some very interesting 
things that I thought came forward in this program.
    So I am more specking, Mr. Chairman, than I am asking 
questions, except to say I am very concerned about the choices 
being made here in terms of education innovation, the choices 
in terms of keeping us safe and the cuts in first responders 
and bioterrorism. And I would ask simply a question as we look 
at these things. We all understand that Social Security and 
Medicare is being included in the numbers that we see in terms 
of the deficit, correct?
    Mr. Bolten. Correct.
    Senator Stabenow. Unified budget. Would you also agree with 
a chart that our ranking member has showed us in the past 
regarding borrowing, the top 10 countries holding our national 
debt, China, Japan. By the way, China is where our jobs are 
going is one of the places, and then manipulating their 
currency which makes it worse. Japan, China, United Kingdom, 
Hong Kong, Germany, OPEC and so on. Would you agree with the 
fact that we are borrowing, that we are taking Social Security 
and Medicare money, and on top of that we are borrowing from 
other countries in order to take care of this debt at this 
time?
    Mr. Bolten. Oh, it is certainly true that a fair amount of 
the U.S. debt is held overseas, yes, and that is one reason why 
it is especially important that we show ourselves to be 
fiscally responsible today because we need to be assuring not 
only our own markets but international markets as well.
    Senator Stabenow. Absolutely. So when we look at this 
budget and the fact that you could eliminate all education 
funding and homeland security and technology innovation and law 
enforcement and everything, and not equal the deficit this 
year, and you look at the fact that we are taking all of Social 
Security and Medicare and borrowing from China and Japan, Mr. 
Chairman, what I find of great concern is that that money is 
not going back into paying our bills. For the most part, that 
has gone as a conscious choice to give tax cuts that you want 
to extend to people who are doing very, very well in our 
country. So we are taking money from Social Security and 
Medicare, borrowing from China and Japan and other countries, 
giving it to millionaires in our country, and then not being 
able to pay our debt on the war, not being able to invest in 
education innovation.
    These are choices that are being made right now in this 
budget and in the past several budgets, and I disagree with 
those choices. I believe that this budget is about values and 
priorities, and I do not believe that right now this budget 
reflects priorities. Thank you.
    Mr. Bolten. Mr. Chairman, may I take a moment for a comment 
or would you like to move on?
    Chairman Nickles. Yes, go ahead.
    Mr. Bolten. I agree completely with the Senator, that that 
is exactly what these budgets are about, setting priorities. I 
imagine we will have some substantial disagreements about where 
the priorities belong.
    Let me make one point about the tax cuts that you raised 
because I think there is a misconception about the effect of 
those tax cuts. This chart shows basically who pays what in our 
income tax system. Right now, let us take the top 5 percent of 
income earners in this country. That is the second set of bars 
from the left. Without the tax cuts, that group, those people 
making more than $135,000 a year, pay 50 percent of the income 
tax in this country. As a result of the income tax cuts, that 
same group pays 53 percent of the income tax take in this 
country. The result of the tax cuts that you all enacted was to 
make the tax code more progressive rather than less.
    I would also come back to the point that a substantial 
portion of the money that is labeled as going to the rich is 
for the small businesses of America, which are, as Senator 
Allard was pointing out, the job creators in this economy.
    Can I mention a couple more things?
    Chairman Nickles. I have two additional Senators and I am 
trying to get this out pretty close to 12 o'clock.
    Mr. Bolten. All right, sir. I will be glad to engage the 
Senator separately.
    Senator Stabenow. Mr. Chairman, if I can just make one 
response with two points. First of all, income tax is not the 
only thing paid in this country.
    Mr. Bolten. Absolutely.
    Senator Stabenow. Everyone is paying payroll taxes.
    Mr. Bolten. Yes.
    Senator Stabenow. The majority of Americans are paying 
payroll taxes which is Social Security and Medicare that we are 
now using to help pay for these income tax cuts as well as 
other things.
    But second, the majority of this income tax cut went to 
those at the very top of our income. Child credit, terrific; 
eliminating the marriage penalty, I care about that more now, 
the last year, than I did the year before.
    [Laughter.]
    Senator Stabenow. And I certainly appreciate what you are 
saying about small business, but we all know where the majority 
of this went, and in fact, if you would be willing to work with 
us, we could eliminate what happened to those at the very top 
who have not been asked to sacrifice during this time of war, 
and reinvest it back into helping our homeland security first 
responders keep us safe, and I think we could have some common 
ground.
    Chairman Nickles. Senator Stabenow, thank you very much.
    The Senator from Idaho, Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman.
    I want to first add my voice to those who are raising a 
high level of concern about the level of deficits that our 
country is facing now. There is a tremendous debate starting in 
this country about why we are facing these deficits, where the 
responsibility lies, and I am sure that given the fact that it 
is a Presidential election year and there is a battle for 
control of the Senate and the House, that there is going to be 
a tremendous amount of rhetoric about these deficits.
    I want to commend you, Mr. Bolten, and the President for 
submitting a budget that focuses on trying to reduce the level 
of these deficits and get us on to a glide path back toward 
balance. My efforts in this Committee are probably going to be 
to help increase the pace at which we engage in those efforts, 
but I appreciate that this budget recognizes that need.
    Second, and I want to use my time here, I want to commend 
you and the President for recognizing that procedure, as we 
adopt budgets, is critical.
    Mr. Chairman, could you help me on my information here, 
Senator Nickles? Last year when we brought our 2004 budget 
resolution to the Senate floor, did we not consider something 
like 80 or 81 admendments and were not the vast majority of 
those efforts to increase the level of spending assumed by the 
resolution?
    Chairman Nickles. The Senator is correct. 81 amendments, 
most of those were to increase spending. I am trying to 
remember if there was one or two to cut spending, but most all 
those were significant increases, most of which were defeated.
    Senator Crapo. And when you say ``most'' we are talking 
like 95 to 100 percent almost of those 81 votes were votes to 
try to increase the spending level of the budget.
    Chairman Nickles. The Senator is correct.
    Senator Crapo. The reason I say that is--and I appreciate 
you pointing out that we were successful in all but one of them 
in defeating them. The reason we were successful in defeating 
them is we had some budget protection measures in place that 
required 60 votes to increase the budget rather than 50. If we 
had not had those budget protections in place, it is hard to 
imagine what the spending levels we would be dealing with today 
might have been.
    The reason I go into that is because it is my understanding 
that in addition to the proposals for the actual numbers of 
this year's budget, that the administration is recommending a 
number of specific statutory budget process changes to help us 
control spending. I want to just go over a few of those to get 
those clarified.
    The first is, I understand that you are proposing that we 
reinstate caps on discretionary spending for five full years; 
is that correct?
    Mr. Bolten. That is correct, Senator.
    Senator Crapo. Second, I understand that you are proposing 
a pay-as-you-go requirement similar to that that we have used 
in the past for new mandatory spending, and that this proposal 
would require that any increases in mandatory spending would 
have to be offset by reductions in mandatory spending, and that 
tax increases could not be utilized for that offset; is that 
correct?
    Mr. Bolten. Also correct, Senator.
    Senator Crapo. I know that earlier in the hearing there was 
some argument with that notion, namely the notion that tax 
increases should not be allowed. I want to first of all weigh 
in on your side on that and ask you to explain it a little 
more, because it seems to me that there are two, at least two 
major objectives here that we want to achieve. One is we want 
to balance our budget, but the second is--and I think this is 
sort of an age-old battle that we have here in Washington--is 
that we want to try to restrain the growth of the Federal 
budget and the growth of the Federal Government. There are 
those who I think believe that we need to have a large all-
powerful centralized economy controlled by the Federal 
Government. I am not in that group. There are others who 
believe that we ought to have the Federal Government performing 
those limited functions contemplated by the Constitution, and 
that we should try to do all we can while we are trying to 
maintain a balanced budget, to also obtain the second 
objective, which is a restrained growth of the Federal 
Government. I mean you can easily balance a budget. Just pass a 
tax increase. Every time you want to spend more money, tax 
more, keep the budget balanced and just watch the Government 
grow. But we want to control growth as well as achieve balance. 
I assume that that was the principle behind your proposal to 
not allow tax increases to be utilized as the mechanism. Am I 
correct?
    Mr. Bolten. Yes, Senator, I think that is very well stated. 
In fact, it is better stated than I did in my last hearing, so 
I am going to go back to the transcript and borrow from that.
    But there is one other point as well, and that is that the 
economists will tell us that a spending cut and a tax increase 
are not equal in their effect on the economy, that a spending 
cut will reduce deficits basically one for one, maybe even a 
little bit more with the interest expense added in. A tax 
increase poses the prospect of undermining the economy. There 
is at a minimum a small--though some economists believe a very 
large-feedback effect from keeping that money in the economy, 
keeping economic growth robust, which keeps Treasury revenues 
robust. Those are the elements that I think also mitigate very 
strongly in favor of biasing the rules in favor of keeping 
spending down, rather than just focusing on increasing taxes.
    Senator Crapo. Thank you. In fact, I think that analysis is 
very appropriate. I am going to add that to my explanations of 
this issue as we go forward.
    I would also say just quickly with regard to this proposal, 
I wish it was applicable to mandatory and discretionary 
spending and not just increases. But I will leave that to some 
further battles that we have here in the Budget Committee.
    One last quick question. Among a number of other procedural 
proposals you are making, one of them is to reinstitute the 
line-item veto. As we all know that was stricken by the court 
recently when we tried it last time. How are you proposing to 
do it differently now to avoid successful court challenges?
    Mr. Bolten. Senator, I am not able to go into the legal 
detail with you now but I know our lawyers are confident that a 
renewed line item proposal could be crafted that would 
withstand Constitutional attack in the courts. We will be glad 
to give you that detailed legal analysis.
    Senator Crapo. If you could submit some further analysis on 
that I would be very interested in that.
    I see my time is up. Thank you, Mr. Chairman.
    Chairman Nickles. Senator Crapo, thank you very much. Next 
our colleague from Florida, Senator Nelson.
    Senator Nelson. Mr. Chairman, you are a biblical scholar 
and given the fact that Senator Byrd had made note of the 
magnificent biblical name of our witness, Joshua, and the fact 
that--by the way, what great name, Joshua Nehemiah, and I got 
Bill. Yet, it is interesting to note about the great leader 
that Joshua was when he led the people into the promised land 
and had one victory after another until deceit, deception and 
untruth entered the camp, and then he lost his first battle 
when he tried to take the city of Ai. And not until he 
exorcized the untruths did the favorable hand of the Lord turn 
back on him to continue his victories in the promised land.
    Now I want to point out one little subtle change here. 
Would you all put back up that chart that you just had up 
there? This chart would lead us to believe that of the top 1 
percent, 5 percent or 10 percent, they are paying the huge 
share of income taxes. That is what the chart basically says. 
Technically, that is correct. But that does not give the whole 
picture about where the burden is upon the American taxpayer, 
for we know that of the American taxpayer, three-quarters of 
them are paying more in payroll taxes than they are in income 
taxes. Is that not approximately true?
    Mr. Bolten. I do not know the exact numbers but the general 
concept is right. There are a huge number of, especially lower 
and middle-income taxpayers for whom the tax burden is greatest 
through the payroll tax rather than the income tax.
    Senator Nelson. So as we try to craft an economic document, 
and this is not particularly an economic document--it is a 
political document--we need to tell the whole story of where 
the tax burden is and how, if we are going to provide relief, 
who that relief is being provided to.
    I would submit that this is a political document of a 
budget--and I do this respectfully--that would offer an 
additional tax cut for the people at the higher end of the 
income scale paid for by borrowing. And where do we borrow 
from? We borrow from the Social Security Trust Fund, and as 
others have pointed out here we borrow from--you think we 
borrow from individual American citizens but a good part of the 
borrowing comes from countries like China and Japan.
    So we have a document in front of us that is increasing the 
deficits, and what I would like for you to educate me on is, 
with this kind of deficit now in excess of $500 billion dollars 
in 1 year, is it not the law of physics applied to economics 
that as you go out and try to accumulate and borrow more and 
more, and the competition gets greater for the available 
dollars, that the cost of that money goes up, which is the 
interest rate? Are we not going to see with this budget, if 
implemented, later on at the end of this year interest rates 
start to rise, and is that not going to cause the economy to 
stall and ultimately go off the cliff? I would love to have 
your comments on that.
    Mr. Bolten. Senator, we have not seen it so far, that 
interest rates remain at historic low levels, but I think you, 
Senator Conrad and Senator Nickles, are right to be concerned 
about that and that is why we want to have as restrained a 
budget as we possibly can, even in the short run. The number 
that the economists tell us is actually most relevant for what 
you are concerned about, that is putting upward pressure on 
interest rates, is the debt to GDP ratio. That is the total 
corpus of the debt that is being built up in this country.
    You will see in our tables that we show that debt to GDP 
ratio has been rising. I believe with a great deal of 
credibility our budget will put us on the right path. In the 
President's Budget that number peaks in 2004 at around 4.5 
percent of GDP. This is below the average of the last several 
decades. It then will begin to slowly to decline. I think you 
are right to focus on that question because we do need to be 
concerned about putting upward pressure on our interest rates. 
But I think if we pursue strong pro-growth economic policies 
and if we exercise responsible fiscal restraint, we will see 
that path of the debt to GDP ratio coming slowly back down, 
which is where it needs to be.
    We have a disagreement about tax cuts. I think you are 
right to focus exactly there. In putting this chart up, I do 
not suggest that everybody in America's principal tax burden is 
income taxes. In fact you are absolutely right, it is not. But 
if the tax cuts that you all enacted are attacked as having 
made the tax code less progressive, I put this chart up to show 
that in fact the tax cuts have made the tax code more 
progressive. That does not mean we should ignore the burden 
that remains on lower and middle-income people. Those are the 
people we want to support and why it is especially important I 
think that this year you all extend the child credit, the 
marriage benefit relief, and the expansion of the 10 percent 
bracket.
    But I think the actual picture of the tax cuts is well-
reflected in this chart. I am comfortable not having undermined 
the beauty of my namesake's biblical name in that respect.
    Let me make one other comment, and that is that the tax 
cuts as an explanation for how we got into this deficit picture 
I think are greatly exaggerated. I think the Chairman had it 
exactly right in the early charts he put up. The tax cuts have 
reduced somewhat our revenue in these last few years and will 
continue to reduce somewhat our revenue. But by far the reason 
for the big change in our deficit picture over the last few 
years has been flagging economic growth. The tax cuts deserve a 
lot of the credit for restoring that economic growth, and the 
Administration takes a strong view that this would be exactly 
the wrong time to contemplate raising those taxes back up 
again.
    Senator Nelson. Mr. Chairman, I want to take the liberty of 
just adding another sentence or two. I am just a country boy 
from Florida, but I understand basic economics. That if you 
have a deficit that is created because there is more spending 
than there is coming in revenue, that if you are going to get 
that deficit eliminated and instead are going to get it to 
where the budget is in balance you either have to cut spending 
or you have to stop tax cuts before they go into effect, and 
therefore the effect of the revenue is higher, and that brings 
you more into balance.
    Now where I think you have miscalculated, I would grant you 
that the tax cuts and the additional spending that has occurred 
in this past year with regard to the war have generated more 
dollars in the economy and we have seen the economy start to 
rise. Not with the effects of the jobs that we would like to 
see increased. However, I think at some point there comes the 
moment of truth. Not bringing that budget into balance and 
instead, with the huge deficits, more spending than you have 
coming in in revenue, that the chickens come home to roost by 
the interest rate suddenly surging upwards, the economy 
constricting and us starting to go off the economic cliff.
    That is what I am afraid is going to happen starting early 
next year, and only compounded, as has been expressed by 
several Senators here, by the fact that this monstrosity that 
we enacted called a prescription drug benefit is now nowhere 
near the level of $400 billion. Indeed, is only going to go 
higher over time. You add that to the fact of the $5 billion a 
month to take care of the war, which I was one of the ones that 
support the war, and obviously now that we are there, despite 
the fact of the misinformation that we had, we have to be 
successful. You add all of that and the budget deficit is going 
absolutely out of control. That is where I think, respectfully 
I say to you, with a great biblical name, that I think your 
budget document is flawed.
    Thank you, Mr. Chairman.
    Chairman Nickles. Thank you, Senator Nelson.
    Senator Conrad.
    Senator Conrad. Thank you, Mr. Chairman. Thank you again 
for holding this hearing. Thanks again to our House colleagues. 
Thank you, Director Bolten, for being here.
    Let me just say in conclusion, I think you are a good and 
decent person. I think the budget that you have put before us 
is a total fiction. As I look ahead, you just leave out things 
that are critically important for the American people to know.
    This is what I think is a closer approximation to the truth 
because this includes the long-term effect of the President's 
tax cuts that he advocates, this includes dealing with the 
alternative minimum tax problem which is supposed to be a 
millionaires' tax that is about to turn into a middle-class tax 
increase, and this deals with Social Security. When you do that 
and you look ahead what you see is the deficits are not going 
down. The additions to the debt are going up, up and away. And 
these are the good times. These are the good times before the 
full effect of the President's tax cuts take effect and before 
the full impact of the retirement of the baby boom generation 
takes effect.
    So I believe this budget, and frankly your presentation, 
badly understates how serious the fiscal condition of the 
country is. In that way I think it is an enormous disservice to 
the American people. I am sad to say that but I believe that is 
the truth.
    The biggest thing you have left out is you folks after 
promising--in fact we looked at the White House web site and 
the President has this statement on his web site. ``We are 
going to keep the promise of Social Security and keep the 
Government from raiding the Social Security surplus.'' It is 
interesting, it is not prominently displayed on the web site, 
and well it should not be because you are taking every penny of 
Social Security surplus, not just this year, not just next 
year, but every year for the next 10 years. Every penny of 
Social Security surplus, and throwing that into the pot to pay 
for tax cuts and other things. Those chickens are going to come 
home to roost because that money has got to be repaid.
    How is it going to be repaid when the baby boomers start to 
retire, and the full effect of making the tax cuts permanent 
takes hold? We already have record deficits and the President's 
plan has increased the spending and cut the revenue. He is 
restraining the growth of spending in a small part of the 
Federal budget, but most of the budget is increasing. The 
overall budget is increasing. The spending is increasing and we 
have record deficits now and he says, increase the overall 
spending, cut the revenue.
    It does not add up. We are honest. We know it does not add 
up. It does not come close to adding up. He has got us headed 
for the fiscal cliff. That is my belief.
    I thank the Chairman again for his many courtesies, and I 
would say on the question of tax cuts and Social Security, the 
Center on Budget and Policy priorities has told us, you take 
the tax cuts for 75 years and the Social Security shortfall for 
75 years, the tax cuts are three times as big as the Social 
Security shortfall over the 75-year period that the analysts 
examined. So we do need to get serious. Getting serious, I 
believe means, no more tax cuts unless they are paid for, and 
get real tough on the spending side as well. Unless we 
acknowledge the reality of our fiscal condition we will do 
neither and that is a huge mistake, because the faster we get 
on this problem the less draconian the solutions will have to 
be.
    I again thank you, Mr. Director, for being here today.
    Chairman Nickles. Senator Conrad, thank you very much.
    Director Bolten, we do appreciate your appearance before 
the Committee. I would just make a couple of comments.
    My very good friend Senator Conrad mentioned the fact, in 
the budget you are using the Social Security surplus. I alluded 
to the fact I do not think there is a Social Security surplus 
because the difference or the surplus is basically used to pay 
for Medicare. People should note that. I also might note that 
all the Democratic budgets, ones produced by Democratic 
majorities, also used the Social Security surplus. So a little 
something there.
    The AMT fix that is assumed in some of these charts is 
$500-some billion over 10 years. I certainly think we can fix 
the tax code and solve a lot of our AMT problems concurrently 
without that kind of expenditure. And on the assumption that 
all the tax cuts are all going to be extended permanently, I 
hope that is not the case. Some of the tax cuts were temporary, 
designed to stimulate the economy. They will not be extended, 
or at least it is not my intention to extend them.
    Also, future extensions of tax cuts require an act of this 
or a future Congress. If somebody does not want to extend the 
tax cuts they can vote, they can change. And some of those will 
not happen for years, may not happen for years. So they have 
ample opportunity to be able to make that decision.
    Of the current tax cuts, the biggest bulk of them do not 
expire until 2011. I want to underline my belief that certain 
of the tax cuts should be extended: for example, the individual 
marginal tax rates and 15 percent rate on capital gains and 
dividends. I think if you increase those, as some people are 
advocating, you are going to send the stock market and the 
economy down significantly. I also think the same thing on 
individual rates. I hope you do not take the 25 percent rate 
and make it 28 again. I hope you do not take the 35 percent 
rate and make it 39.6 again. That would be a mistake in my 
opinion. But a future Congress is going to have to deal with 
those things.
    And the war cost is not going to be any $87 billion for the 
next 10 years. Some people are making that assumption. CBO had 
to build that into their baseline. I think that over estimates 
baseline spending and deficits to the tune of about $1.1 
trillion over the next 10 years. I hope it is a whole lot less 
than that. I hope that the figures are much, much, much, much 
less that. I cannot imagine spending that kind of money in Iraq 
for the next 10 years.
    So I just make those editorial comments. I do not think 
things are quite as bleak as some. I do think the deficits are 
far too high, and it is very much my intention to work with 
members of the Committee and the Administration to more than 
meet the goal of the Administration to get the deficits in 
half, and I believe a lot quicker than in 5 years. That is my 
intention.
    Director Bolten, thank you very much. I know several of our 
Committee members requested that you would answer questions for 
them, most of whom do not have access to their offices and to 
their staffs, so I appreciate their cooperation in meeting with 
us in the House. Again, I want to thank our colleagues, 
Chairman Nussle and Ranking Member Spratt for their hospitality 
and cooperation with us. They have been a big assistance to us 
and I appreciate that.
    The Committee is adjourned.
    [Whereupon, at 12:18 p.m., the Committee was adjourned.]
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           THE PRESIDENT'S FISCAL YEAR 2005 BUDGET PROPOSALS

                              ----------                              


                      THURSDAY, FEBRUARY 12, 2004

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:03 a.m., in 
room SD-608, Dirksen Senate Office Building, Hon. Don Nickles 
(chairman of the committee) presiding.
    Present: Senators Nickles, Enzi, Ensign, Sessions, Conrad, 
Wyden, Byrd, Nelson, and Stabenow.
    Staff present: Hazen Marshall, majority staff director; and 
Stacey Hughes, deputy staff and policy director, Don Dempsey, 
health policy director.
    For the minority: Mary Ann Naylor, staff director; and Jim 
Esquea, analyst for income security and medicaid.

             OPENING STATEMENT OF CHAIRMAN NICKLES

    Chairman Nickles. Good morning. I want to thank everybody 
for coming, and particularly, Secretary Thompson, we welcome 
you before this committee.
    Everyone, I think, knows Secretary Thompson. Governor 
Thompson, who was Governor of the great State of Wisconsin for 
14 years, has now served 3 years at Secretary of HHS, and he 
will make his budget presentation to us today.
    I notice that your budget is 41 percent of the entire 
Federal budget. You have enormous responsibilities. I have had 
the pleasure of working with you both in your previous capacity 
as Governor and as one of the leading Governors on welfare 
reform. I compliment you for that monumental task and, frankly, 
very good success. Because of your leadership and the 
cooperation of Democrats and Republicans, we passed historic 
welfare reform. That needs to be reauthorized this year, so we 
might hear your comments on that.
    Also, you have been a very active participant in enacting 
the Medicare changes, which include the prescription drug 
proposal. You were very active throughout the conference. I 
appreciate your leadership on that as well.
    We have some big challenges, needless to say. With the 
scope of your Department being as broad, as large, as 
comprehensive, as extensive, and as important as it is, I value 
very much your leadership.
    I might tell my colleagues, I mentioned this when Secretary 
Thompson was testifying before the Finance Committee, but I had 
the pleasure of traveling with Secretary Thompson. He led a 
very large delegation, a very prestigious delegation throughout 
Africa to not only learn more, but also to assist in the 
worldwide battle on AIDS. And I compliment you for your 
leadership in that global fight.
    I will recognize my friend and colleague, Senator Conrad.
    Senator Conrad. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary.
    Secretary Thompson. Thank you, Senator.

                OPENING STATEMENT SENATOR CONRAD

    Senator Conrad. Let me start by talking about the concerns 
I have about where we are headed with Social Security. I have 
similar concerns with respect to Medicare, but let me just put 
up something the President said when he was putting out his 
2002 budget. He said that none of the Social Security surplus 
will be used to fund other spending initiatives or tax relief.

[GRAPHIC] [TIFF OMITTED] 94065.098

    Let's go to the next chart. But that is not what is 
happening. Despite those words, which were the right words, 
instead what we see is the President's taking every penny of 
Social Security surplus to pay for other things, and not just 
for this year but every year for the next 10 years, $2.4 
trillion of Social Security surplus funds. And they are really 
not surplus. They are surplus for the moment. They are needed 
for when the baby-boom generation retires. And the President is 
taking every dime over the next 10 years to pay for other 
things.

[GRAPHIC] [TIFF OMITTED] 94065.099


    The President is also telling us, telling the American 
people that he is going to cut the deficit in half over the 
next 5 years. I wish that were so. But when I examine the 
President's plans, I see the only way he accomplishes cutting 
the deficit in half is he just leaves out things. He leaves out 
the fact that he is going to take in that fifth year $259 
billion of Social Security money, every penny of which he has 
got to pay back, but he is not accounting for that when he 
claims he cuts the deficit in half. He says the deficit will be 
$237 billion in that fifth year. But in addition to that, he is 
taking $259 billion of Social Security money.
    He also leaves out the money that he will be taking from 
the Medicare Trust Fund, $23 billion, also money he has got to 
pay back. He leaves out the $55 billion he would need in that 
fifth year to address the alternative minimum tax problem. He 
funds it in the first year, but the alternative minimum tax 
that was designed to be a millionaire's tax is turning into a 
middle-class tax increase. And 3 million people are affected 
now. By the end of this budget period, 40 million people will 
be affected. And yet the President provides no funding.

[GRAPHIC] [TIFF OMITTED] 94065.100


    In addition, he provides no funding past September 30th for 
the war effort. The Congressional Budget Office says that in 
the fifth year the residual war cost is $30 billion. You add up 
all those things, and you don't have a deficit or an addition 
to the debt of $237 billion. You have an addition to the debt 
of over $600 billion, and right before the baby boomers retire.
    Now, that flows through to this budget as well. And what we 
have, Mr. Secretary, in the budget that the administration has 
submitted for your Department is the magic asterisk, the 
suggestion that there is going to be expansion of health care 
coverage, but there is no funding for it. It says from the 
President's Analytical Perspectives: ``In the case of the 
President's proposed health care credit, the budget includes 
contingent offsets that would cover the estimated increases in 
mandatory spending that would result from this proposal. When 
the Congress moves legislation to implement the President's 
health care credit, the administration will work with the 
Congress to offset this additional spending.''

[GRAPHIC] [TIFF OMITTED] 94065.101


    Now, Mr. Secretary, you were a Governor, a distinguished 
Governor, one with a very good reputation for being responsible 
fiscally. I doubt very much you ever submitted a budget that 
says you are going to do something and then says we will 
somehow come up with the money at the time that we move 
forward. That is not a budget.
    Let me just put up the next one. So what we have is the 
President advocating a $65 billion cost for a refundable health 
care tax credit, and he offsets it with nothing. It is just 
words. And so the real amount provided is zero. That is what is 
wrong with this whole budget. It is just filled with things 
where they are just left out. And so then the President says he 
is cutting the deficit in half. I am surprised he did not make 
the claim he is balancing the budget and just leave out some 
more things.

[GRAPHIC] [TIFF OMITTED] 94065.102


    Let's go to the next one. The thing that really concerns me 
is where we are headed in the long term, because as this chart 
shows, the green parts of these bars are the Social Security 
Trust Fund, the blue is the Medicare Trust Fund, the red is the 
cost of the tax cut proposals by the President. And what we see 
is right now the trust funds are in substantial surplus, and 
they are offsetting much of the effect of the tax cuts. But as 
we go forward, when the trust funds turn cash negative, at that 
very time the tax cuts explode in cost, driving us right over 
the fiscal cliff.

[GRAPHIC] [TIFF OMITTED] 94065.103


    And I would conclude with the next chart. This is from the 
President's own Analytical Perspectives. This is his long-term 
outlook for the deficit if his tax and spending proposals are 
adopted. And what it shows is we are in the good times now with 
the trust funds running substantial cash surpluses. But look 
what happens when the baby boomers retire and the President's 
tax cuts go fully into effect: deficits that are massive, 
unsustainable, and unprecedented. That cannot be the 
trajectory.

[GRAPHIC] [TIFF OMITTED] 94065.104


    Let me just conclude by making one other point. I was very 
disturbed to see this campaign that is being run, some $20 
million of advertising, which is really a propaganda effort. It 
is, I think, clearly a political effort to sell the Medicare 
plan. I voted for that plan, but I think it is totally 
inappropriate for public money to be spent in a propaganda 
campaign. That is not an educational campaign. I have read the 
words of the ads. That is not an educational campaign. It is a 
political campaign.
    And I was even more stunned to learn that the firm who is 
conducting it is the same firm that is handling the President's 
re-election account. Now, that just cannot be.
    If this isn't stopped--and I will ask the Secretary today 
to stop this campaign--I will offer legislation to make it 
illegal for public money to be used in a propaganda campaign 
about legislation. That is a totally inappropriate use of 
taxpayer money.
    With that, Mr. Chairman, thank you.
    Chairman Nickles. Senator Conrad, thank you very much.
    I want to make just a few comments, and then we will turn 
it over to the Secretary.
    I share many of Senator Conrad's concerns about the long-
term sustainability of paying for programs, particularly in 
Social Security and Medicare. Medicare spending is growing, and 
growing substantially, and it is going to grow faster now as a 
result of the legislation we passed last year.
    I will also show a couple of charts, but I do have a 
difference of at least outcome. I am concerned about the long-
term health of both, and I might just show a couple of those. 
That is a chart of Medicare spending. It basically shows that, 
you know, we were spending, Medicare in 1990, $105 billion, and 
today it is $271 billion. So that is 2.7 times as much in a 
period of 14 years. If you look at Medicaid, Medicaid spending, 
we were spending about $40 billion in 1990, and today we are 
spending $180 billion. That is about 4.5 times. An enormous 
increase in Medicaid.
    The unfunded liabilities, if you look at the debt held by 
the public, it is $3.9 trillion; Social Security shortfall--and 
this is estimated over a 75-year period of time--is $4.9 
trillion; and Medicare is $15.8 trillion. So the unfunded 
liabilities that we have projected in Medicare are three times 
as much as they are in Social Security. That is troubling.
    And, incidentally, for our colleagues, we plan on having a 
hearing where we are really going to get into this in depth. We 
are going to look at the long-term fiscal challenges that we 
face in this country and try and figure out if there are some 
things that can be done or should be done.

[GRAPHIC] [TIFF OMITTED] 94065.065

[GRAPHIC] [TIFF OMITTED] 94065.066

    Just a quick chart on the HI trust fund. The Medicaid HI 
trust fund--the trust funds I think are a little bogus, and I 
might talk about that. We are going to have one meeting just on 
trust funds. But it shows that we have big challenges in the 
future years. And the Secretary is one of the trustees of that 
trust fund. So I mention that. Social Security has a chart that 
looks just like it. But I have a difference of my opinion with 
my colleague, Senator Conrad, on are we raiding the Social 
Security Trust Funds. I might mention that almost every budget, 
including the Senator from North Dakota's budget, used Social 
Security Trust Fund. But people ignore the fact that we use 
Social Security Trust Funds to pay--or I will say we use Social 
Security Trust Fund to pay Medicare Part B. General revenue 
funds subsidize Medicare Part B three to one. Three to one. And 
I put together a chart--and I will give this to our colleagues 
so they can see it. All the money coming into Social Security 
and Medicare is paid for by a payroll tax, Senator Byrd, 15.3 
percent of all payroll. And, actually, on Medicare it is 2.9 
percent on all payroll. Of the 15.3, 12.4 is Social Security 
and limited to $87,000, in 2003, of income. And then Medicare 
is unlimited, 2.9 percent on all payroll.

[GRAPHIC] [TIFF OMITTED] 94065.067

[GRAPHIC] [TIFF OMITTED] 94065.068

    So this chart is busy, and I will give it to my collegues--
this is not for people to read. It is complicated, but it shows 
all the money coming in from taxes, including the tax on Social 
Security and Medicare, so the receipts coming into the fund and 
the outlays coming out of the fund to pay Medicare and Social 
Security. And, actually, the Government, if you could say it is 
raiding Social Security, it is raiding Social Security to pay 
Medicare Part B premiums. And it will be raiding Social 
Security to pay Part B, and to pay the prescription drug 
benefits. It actually shows that more money is going out for 
these two programs than coming in. And so we are not raiding 
Social Security to pay for defense or to pay for non-defense. 
It is basically used to pay for Medicare.
    The two combined, if you add all the taxes combined coming 
in--and I will just give you one outlay year for 2004, 
projected, or maybe I could use 2003 because it would be 
actual, but I will use 2004. Total amount of money coming in is 
$753 billion, and the total amount of money going out is $784 
billion, for basically a deficit of $31 billion.
    So I just make that point. I think there is a lot of 
misunderstanding on trust funds, and maybe we have a more 
thorough debate. That is not the purpose of the hearing today. 
Our purpose today is to welcome Secretary Thompson since he has 
control or responsibility over 41 percent of the budget and a 
very significantly growing part of the budget. I believe his 
proposal is for a 5.6-percent increase in his total domain. We 
look forward to hearing him present the budget to us.
    I might mention, Senator Byrd, most all of Secretary 
Thompson's growth is in entitlement programs. Very little is on 
discretionary. Mr. Secretary and Senator Byrd, I would be very 
interested, since we only appropriate about one-third of the 
budget, I would be very interested in seeing if some of these 
programs that are already set on automatic pilot as 
entitlements, maybe they should be considered and scored and 
written as discretionary subject to appropriations. I used to 
be on the Appropriations Committee. I used to be very 
chagrined, feeling that we only had one-third of the budget 
under real control and the other two-thirds growing almost out 
of control.
    This committee can work with the Finance Committee to 
control the two-thirds. But a lot of that control has been 
growing the programs, not controlling them. Maybe we will take 
a little different approach this year in light of the deficit 
challenges that we have. But there are a lot of programs in 
your domain, and maybe some of those should be subject to 
appropriation, instead of set up as entitlement.
    I am happy to consider those, either as part of the budget 
resolution or as changes that we might want to make free-
standing, either through budget and/or the appropriations 
process. We have members on both committees on this committee, 
and maybe with some cooperation we could make some adjustments.
    Mr. Secretary, welcome to the committee.

STATEMENT OF HON. TOMMY G. THOMPSON, SECRETARY, U.S. DEPARTMENT 
                  OF HEALTH AND HUMAN SERVICES

    Secretary Thompson. Thank you, Mr. Chairman. It is an honor 
for me to appear in front of you and, Senator Conrad and the 
other distinguished members of this Budget Committee.
    First, let me thank you, Senator Nickles, for going to 
Africa with me. I think it was one of those life-transforming 
trips. It was for me, and I think for most of the people on the 
trip, and I appreciate your participation.
    I thank all of you for inviting me to discuss the 
President's fiscal year 2005 budget for the Department of 
Health and Human Services. In my first 3 years at the 
Department, we have made, I believe, tremendous progress in 
improving the health, the safety, and the independence of the 
American people. We continue to advance in providing health 
care to seniors and to lower-income Americans and improving the 
well-being of children and strengthening families and 
protecting the homeland. We are building a new public health 
infrastructure to give doctors and hospitals the tools they 
need to be able to respond to any public health emergency.
    We have re-energized the fight against AIDS at home and 
abroad. We increased access to quality health care, especially 
for minorities, the uninsured, and the underinsured. And with 
your help, 2 months ago President Bush signed the most 
comprehensive improvements to Medicare since it was created 
nearly four decades ago.
    To expand on our achievements, the President proposes $580 
billion for HHS for fiscal year 2005, an increase of $32 
billion, or 6 percent over fiscal year 2004. Our discretionary 
budget authority is $67 billion, an increase of $819 million, 
or 1.2 percent over fiscal year 2004, but an increase of 26 
percent since 2001.
    We look forward to working with this committee and 
Governors to improve and modernize Medicaid as well as SCHIP 
and by giving State governments flexibility to use consumer-
directed services and to coordinate with free-market providers.
    We propose promoting home and community-based care as an 
alternative to institutionalization for disabled Americans 
through the President's New Freedom Initiative which my 
Department worked on for several months. I look forward to 
working on a bipartisan basis to get this important legislation 
introduced, passed, and signed into law this year.
    President Bush seeks to build on the success of the 1996 
welfare reform law by reauthorizing the successful TANF program 
to help more welfare recipients achieve independence through 
work and be able to protect children and strengthen families. I 
hope that this Congress will take the next step in welfare 
reform and complete the TANF reauthorization. We can and we 
should accomplish this critical goal this year.
    We are also working to protect our most vulnerable 
children. The Federal Government will spend nearly $5 billion 
this year for foster care. We would fund existing adoption 
bonuses as well as the new bonuses that Congress approved last 
year for older children, with $35 million for 2004 and $32 
million for 2005, and to be able to support our commitment to 
helping families in crisis and to protecting children from 
abuse and neglect, President Bush has requested full funding, 
$505 million, for the promotion of the Safe and Stable Families 
Program.
    Working with Governors, we have made tremendous progress in 
providing millions of children with needed health coverage. I 
am delighted to announce today that about 5.3 million children 
who would not have had health coverage were enrolled in the 
State Children's Health Insurance Program at some point during 
2003, a 9-percent increase from 2002. And over the past 3 
years, we have approved Medicaid waivers and State plan 
amendments to allow the States to expand access to health 
coverage for more than 2.6 million people and to expand the 
range of benefits offered to 6.5 million other Americans.
    And, of course, the new Medicare Modernization Act is a 
significant accomplishment for our Department. Adding these 
benefits and choices and educating seniors about them will be a 
significant challenge. You and your fellow lawmakers were right 
to follow the CBO score in making decisions, and when CBO 
scores the budget we submitted last week, it is going to be and 
we expect and anticipate that their estimate would reflect 
their original score of $395 billion, or close to that number.
    As you know by now, in late December--December 24th, to be 
exact--our actuaries came out with a final score showing they 
believe the Medicare bill will cost $534 billion. I thought it 
might be helpful to break down the differences between the CBO 
projections and the HHS projections to explain why we differ by 
$139 billion. I have instructed our actuaries to make it a top 
priority to fully examine why their estimates differ from those 
set forth by the Congressional Budget Office and then to begin 
to work to reconcile those differences. That project is just 
beginning, but here is what we know so far.
    A hundred billion dollars, all those in blue, are the 
difference for what we call the Title I or Title D of the 
Medicare Modernization Act, Chapter 1 of the Act. The first one 
is the eligibility. We learned from our actuaries because of 
the tremendous benefits for low-income Americans, which the 
total is about 11 million people--and you have talked about 
that in the conference committee, Senator Nickles. We believe 
that more low-income Americans will participate and will use 
the subsidies to a larger degree than what CBO says, and that 
accounts for $47 billion of difference.
    The next one is higher participation, totaling $32 billion. 
This is for those individuals, 100 percent of the universe, all 
those that are eligible to participate in Part D. CBO believes 
that because 9 percent of those individuals do not participate 
in Part B, if they don't participate in Part B, more than 
likely they will not participate in Part D. So that reduces the 
universe down to 91 percent. Then they subtracted an additional 
4 percent and saying only 87 percent, according to their 
calculations, will avail themselves of Part D, the drug 
benefit. Our actuaries----
    Chairman Nickles. You estimate what percent will 
participate?
    Secretary Thompson. They believe 87 percent.
    Chairman Nickles. And you believe?
    Secretary Thompson. We believe 94. Our universe is 100 
percent. We believe that 5 percent are still actively employed 
and will be insured by their employers, and our actuaries 
believe it will be 94. The difference between 94 and 87 percent 
is a difference of $32 billion.
    The next one is what we call the Medicaid savings and 
woodwork effect. We believe that is a difference of $18 
billion. We believe that when people come and hear about the 
Part D, they are going to also find out that they are also 
eligible for additional Medicaid benefits, and they also will 
be using more of that, and, therefore, there is a difference of 
$18 billion.
    The next one is $3 billion. That is in regards to what we 
call the stabilization fund. CBO does not believe it will be 
utilized, our actuaries do, and that's a difference of $3 
billion. That is $100 billion of Part D. The second one is the 
plan. That is Chapter 2 of the Medicare Modernization Act. We 
believe that there will be 33 percent of the Medicare eligibles 
that will participate in the plan, and right now it is 11.8 
percent. CBO believes that is going to go up to 14 percent, and 
only 14 percent. That difference is a huge difference, and that 
makes up $30 billion.
    The other $7 billion is basically all differences in the 
other ten chapters in the Medicare Modernization due to some 
pluses and some minuses, but a total difference of $7 billion. 
That is the total of the $139 billion.
    As you know, Mr. Chairman, seniors can begin enrolling in 
the drug discount card by June of this year. We will add 
transparency to the prescription drug market by making 
available the price of drugs under each card. Competition among 
the cards will drive down drug prices, probably very 
significantly, as people compare the prices that each card 
offers for the drugs they typically take. So a senior citizen, 
let's call her Mrs. Jones, can sit down with all of her 
prescriptions in front of her and call 1-800-Medicare. Our 
representatives will review with Mrs. Jones the discount cards 
in her area and tell her the exact price that she will pay for 
her prescriptions under each card. Mrs. Jones then can choose 
the card that will give her the best deal for the prescriptions 
that she is taking. If Mrs. Jones has a computer, she will be 
able to go to our website and get the exact same information.
    We are also currently reviewing the new benefit proposals 
which were submitted by health plans. It appears that more than 
half of current enrollees that are currently on the health 
plans will see better benefits and that almost one-half will 
see reduced premiums or out-of-pocket savings. The average 
premium may decrease by as much as a third. The bottom line is 
that the extra payments are providing more to beneficiaries, 
just as was intended by the Medicare Modernization Act.
    We look forward to working with Congress, the medical 
community, and all Americans as we implement the new Medicare 
law and carry out the initiatives that President Bush is 
proposing to build a healthier, safer, and stronger America.
    Thank you very much, Mr. Chairman.
    Chairman Nickles. Secretary Thompson, thank you very much. 
I appreciate your going over the differences between CBO and 
CMS on the cost of that. Some people were aware that there was 
a significant difference. Others were not. Some were surprised. 
And so I was going to ask you to do that. I appreciate your 
doing that.
    Let me ask you a couple of quick questions. You mentioned 
the drug card is a new benefit, passed under the bill. That is 
going to begin in June?
    Secretary Thompson. That is correct.
    Chairman Nickles. That is going to be provided for by 
private companies; is that correct?
    Secretary Thompson. That is correct.
    Chairman Nickles. Is there interest from private companies? 
What is this looking like? Is it going to happen?
    Secretary Thompson. We were absolutely amazed. We thought 
there would probably be 40 to 50, possibly 60 applications. 
There are 106 applications. We have them, we are now reviewing 
them, and we will be making recommendations by March 23rd as to 
which ones of those we feel are going to meet the requirements 
set out by the law and also the requirements set out by CMS. 
And we will make those known. We will also start putting the 
information out so we can start enrolling in April and May, and 
we will also put on our website a comparison so that 
individuals across America will be able to really have the most 
up-to-date, accurate information, transparent information, on 
every drug that is being purchased. And this is going to help a 
senior pick the right card, and it should drive down the cost 
of drugs for seniors very much.
    Chairman Nickles. So all seniors will be able to enroll in 
May and June?
    Secretary Thompson. That is correct. We want to kick it off 
on June 1st.
    Chairman Nickles. By June 1st, so they would be able to 
enroll April and May?
    Secretary Thompson. We are going to start enrolling in May.
    Chairman Nickles. OK. And then----
    Secretary Thompson. I am trying to push that up, though. We 
are moving very rapidly, and we are hoping to actually get it 
out sooner. But that is what our intention is right now.
    Chairman Nickles. Then will the various providers determine 
what kind of discount they will receive? And will all seniors 
receive the discount?
    Secretary Thompson. All the companies will be negotiating 
with the pharmaceutical companies and will be putting those 
discounts out to a formulary, and those formularies will be 
made available to every senior in America. We will be putting 
it on our website, and our representatives will have the most 
up-to-date information. And you will be able to compare the 
cards in your area. So if you are taking Lipitor, and if you 
have 15 cards in your area, you will be able to determine which 
individual issuer of that card is going to give you the best 
price for Lipitor. And so as with competition, it is going to 
drive down the market and give the best market to the seniors.
    Chairman Nickles. And then low-income seniors have--the 
card also entitles them to a $600 benefit?
    Secretary Thompson. We are already working on that. We are 
working with Treasury and Social Security. We are meshing 
together the computer systems from Treasury, from the Social 
Security Department, and CMS, plus all the States. All those 
individual States that have individuals on Medicaid, we have to 
take in and go through all of those computer runs to find out 
who is eligible. Every senior that is under 135 percent of 
poverty is going to be able to get a credit of $600.
    Chairman Nickles. OK. Then one final thing. A large part of 
the difference in the estimates between your Department, CMS 
actuaries, and CBO is the value of the low-income drug benefit, 
which I stated unsuccessfully during negotiations, was too 
generous. But would you give just a brief description of that? 
Am I correct in saying the low-income benefit, this would be 
for people with--I want to say 36 percent of Medicare 
beneficiaries, but people less than 150 percent of poverty, and 
for those less than 100 percent of poverty, basically their 
copay is $1 and $3. Is that correct?
    Secretary Thompson. That is the only out-of-pocket expense 
they have to pay. The deductible will be waived. The doughnut 
hole is going to be waived and the copays, except for the $1 
for generics and $3 for brand prescription drugs. That is all 
those under 100 percent of poverty will have to pay. We believe 
that is going to be a subsidy of somewhere in the neighborhood 
of 95 percent to 97 percent of those individuals under 100 
percent.
    Those between 100 and 135 percent of poverty, the copay is 
the only thing they have to pay, and it will be $2 for generic 
drugs and $5 for brand prescription drugs. They will not have 
to pay a deductible, and they do not have the doughnut hole.
    The third one is those between 135 percent and 150 percent 
of poverty will have to pay a $50 deductible, and they will pay 
approximately 85 percent of the balance. And that is going to 
be a subsidy of somewhere around 75 to 80 to 85 percent.
    Chairman Nickles. I am familiar with what you are saying 
when you say there is not a doughnut hole. But basically, for 
an audience----
    Secretary Thompson. All those under 150 percent of poverty, 
there is no doughnut hole, no gap between 2,250 and 3,600 
dollars, where those above 150 percent of poverty will have a 
gap in which they will have to pay 100 percent. All those below 
150 percent of poverty, all that doughnut hole has been filled 
up completely.
    Chairman Nickles. OK. Still, to get out of Washington 
vernacular and Washington discussion, those below 150 percent 
of poverty--and that would be for a couple--would be, what, 
about $20,000, $19,000?
    Secretary Thompson. It is approximately $22,000.
    Chairman Nickles. Wherever that is, that sounds a little 
high. But at that point----
    Secretary Thompson. That is the last--it would be about 
$14,000, 150 percent of poverty.
    Chairman Nickles. I think it is pretty close to $19,000, is 
my guess. I was talking about couples, for two.
    Secretary Thompson. It is $20,000 for a couple. It will be 
$20,000 for a couple in 2006, Senator.
    Chairman Nickles. So in the year 2006, for a couple that 
has less than----
    Secretary Thompson. When it starts.
    Chairman Nickles. Oh, that is correct. I was looking at the 
2003 level. I think you are correct. It would be $22,000 by the 
year 2006 when that is available. So for a couple with less 
income than that, they are on Medicare, they are on Social 
Security, they will basically have a drug program that they 
don't even have to pay monthly premiums. For the most part, 
they would be paying their drug copay of maybe $2, $5, or $1 
and $3. And that is all they pay with no limit.
    Secretary Thompson. That is correct.
    Chairman Nickles. No limit.
    Secretary Thompson. That is correct.
    Chairman Nickles. Not up just to the first $2,000, not up 
just to the first $5,000, but, frankly, no limit whatsoever. 
And that is a very generous benefit. You happen to score it 
higher than CBO does. I happen to guess that you are going to 
be more correct. I think utilization will go up substantially 
when people realize that is a very, very generous proposal.
    Secretary Thompson. It is.
    Chairman Nickles. I am a little concerned maybe it is too 
generous, but I did not prevail. I tried but I did not prevail.
    Senator Conrad.
    Senator Conrad. Mr. Chairman, could we put up this chart 
that you put up?
    Chairman Nickles. Yes. Don't take apart my chart.
    Senator Conrad. Well, I have to take apart your chart a 
little bit.
    The chairman put up this chart, and the issue that I take 
with this chart is what it has done is it has lumped Medicare 
and Social Security together as though they are one program. 
They are not one program. They are two separate programs.
    There is no question, if you look at Social Security alone, 
that Social Security surplus funds every year for the next 10 
years are being taken to pay for other things, $2.4 trillion 
worth, something the President pledged not to do. And it is 
being done. And nobody here can say whether that money is going 
to pay for Medicare or tax cuts or parks or recreation or any 
other part of the Federal budget.
    What we do know absolutely is every penny of Social 
Security Trust Fund surplus--and I want to make sure that 
people understand. When I use the word ``surplus,'' it is not 
because it is more money than you need. It is more money than 
you need right now. But it is money we are going to need when 
the baby boomers retire, and they are going to start retiring 
in 2008. And this is right at the heart of what is wrong with 
the President's budget in my judgment.
    The fact is Medicare has been funded in part by payroll 
taxes. This chart assumes it is all payroll taxes. Medicare has 
also been funded in part by general fund. That has been the way 
Medicare has been funded since its inception.
    So I do not want to leave the impression that somehow 
Social Security money is being taken just to pay for Medicare. 
Nobody can tell you what the Social Security money is being 
used for, except we know it is not being used for paying down 
the debt or prepaying the liability. I think those would have 
been appropriate uses.
    With respect to budgets that I have submitted, after the 
hole that has been dug, there is no way in the short term to 
write a budget that does not continue this practice. But I have 
submitted budgets that would use at least $1.2 trillion less of 
Social Security funds for other purposes, and as much as $1.6 
trillion left, depending on our defense needs.
    So I do not want to leave the impression that Social 
Security money is not being taken for other purposes. It is, 
and it is going to be taken to the tune of $2.4 trillion. I 
think that is a profound mistake.
    Mr. Secretary, I want to turn to this ad campaign because, 
I must say, I find it very troubling. I supported that bill. I 
thought it was the right thing to do. But I do not think it is 
the right thing to do to run an ad campaign extolling its 
virtues using taxpayer money to run, in effect, a political 
campaign. And I was especially disturbed to find out that the 
firm that has been hired is also doing work for the President's 
re-election campaign.
    You know, I do not think taxpayer money should be used to 
promote a political agenda. I do not think taxpayer money ought 
to be used to, in essence, propagandize taxpayers about the 
merits of a program. I mean, I could not use and would not use 
my Senate budget to go out and run a campaign telling people 
about how good my voting record is. That would be illegal. And 
I believe it should be illegal for taxpayer funds to be used to 
sell a position on an issue. I just think that is totally 
inappropriate. I suspect it is illegal.
    And I want to ask the Secretary: Do you intend to continue 
with this campaign? Or would you consider ending this campaign 
in respect to those who believe it is just inappropriate?
    Secretary Thompson. Senator, let me correct some 
impressions that I think are erroneous.
    First off, the Medicare bill requires me to do certain 
things. The conferees expect--and this is direct language out 
of the report. The conferees expect, in carrying out the annual 
dissemination of information requirements, that the Secretary 
will conduct a significant public information campaign to 
educate beneficiaries about the new Medicare drug benefit to 
ensure the broad dissemination of accurate and timely 
information.
    Second, we put out an RFP in 2003 in order to find out--in 
2003, in order to find the best person and the best group to do 
our ad programs for Medicare, in 2003, 2004, and that is what 
we did.
    Senator Conrad. Who is doing the ads?
    Secretary Thompson. Ketchum Public Relations, since 2003, 
is still doing them. The chief executive of Ketchum Public 
Relations is Chuck Dolan, who is part of the team. They are the 
overall contractor, and Mr. Chuck Dolan is a financial 
supporter of John Kerry and is one of his biggest supporters. 
John Kerry. He is the chief--that is the chief person. They put 
together the subcontractors. The subcontractors are Campbell 
Ewald. They did the creative work. They are out of Detroit. 
They have done all of our ads since 2001. And Ketchum Public 
Relations, who won the RFP in 2003, kept them on. They do the 
creative work. National Media, which is the one you are talking 
about, are the subcontractors. They have been purchasing for 
CMS since 2001. Ketchum Public Relations kept National Media 
because they worked together.
    Senator Conrad. Is National Media doing the President's 
campaign or part of the President's campaign?
    Secretary Thompson. I understand that they are, but they 
have been doing work at CMS since 2001, and they were retained 
by Ketchum Public Relations, who won the contract, and I am 
telling you that. And then they----
    Senator Conrad. But do you know how bad that looks, 
honestly? I mean, I am being very direct with you. I have great 
respect for you. I tell you, that really looks bad. And I think 
it more than looks bad. I think it is bad for a campaign to be 
run with taxpayer money to promote a program that has enormous 
political implications and to use as a major part of that 
campaign a firm that is helping to run the President's re-
election campaign.
    Secretary Thompson. If I could just finish. National Media 
is not doing the creative work. All they are doing is 
purchasing it. And they were hired by Ketchum Public Relations, 
and one of the chief individuals happens to be Chuck Dolan, who 
is a Democrat who is supporting John Kerry.
    Senator Conrad. Well, I am for taking the money away from 
both of them. I tell you----
    Secretary Thompson. Some Republicans are saying that, you 
know, we are wrong for having Chuck Dolan do it, I am sure. 
But----
    Senator Conrad. Well, let me join them. I think you are 
wrong doing it at all. I think we ought to stop this. I think 
we ought to stop using public money, taxpayer money, to run 
what has all the earmarks of a political campaign. I have read 
the--and I have it here, the TV ad script. I must say, I saw 
this TV ad. I never knew about this campaign until I saw the 
television ad. And it reads like a political ad. It is just 
inappropriate to use public money to do that. And if you guys 
are not going to stop it, then I am going to introduce 
legislation to make it illegal to do it, because it is not 
right. It would not be right if a Democratic administration 
were doing it, and it is not right with this administration 
doing it.
    Secretary Thompson. Senator, I would like to be able to 
respond. I do not want to argue with you. I understand your 
concerns. I am telling you, the law requires me to put out 
information. In 1996----
    Senator Conrad. Well, wait a minute. The law does not 
require to run----
    Secretary Thompson. Well, let me finish----
    Senator Conrad. No, let me just say, the law does not 
require to run television spots that read like political spots. 
Now, the law does not require that.
    Secretary Thompson. In 1996, the Democrat administration 
put out a 30-page bulletin----
    Senator Conrad. Did they run television ads that are 
television spots?
    Secretary Thompson. They did not, but they----
    Senator Conrad. I tell you, I do not argue with putting out 
written material like that. That is fine. This has all the 
earmarks of a political campaign, and it is not right.
    Secretary Thompson. Well, GAO, as I understand it, is going 
to review it, and if they say that it is political, it will be 
pulled immediately. Maybe for the GAO----
    Senator Conrad. I would not wait for somebody else to tell 
me it is political. I can see it is political----
    Secretary Thompson. I do not think it is political.
    Senator Conrad. Well, I do, and I tell you something----
    Secretary Thompson. That is a difference of opinion, 
Senator.
    Senator Conrad [continuing]. If you guys--well, I tell you, 
I have been in a lot of political campaigns, as have you----
    Secretary Thompson. And so have I.
    Senator Conrad. This reads like a political spot.
    Secretary Thompson. Well, I am sorry to tell you, I do not 
believe it is political at all, and that is a difference of 
opinion. I did not put it out. Creative people did on a 
contract basis. It was reviewed by a lot of different people. 
They came back, and we are obligated, I think, under the law to 
do as much information as possible.
    Senator Conrad. Well----
    Secretary Thompson. And I am sorry that you feel that it is 
political. I do not believe it is.
    Senator Conrad. I not only----
    Secretary Thompson. And I do not believe that Chuck Dolan 
would put out a political statement when he is in charge of the 
responsibility of putting out the ad.
    Senator Conrad. Well, he is under contract to do something.
    Look, there is nothing in the law that requires you to run 
what are, in effect--look just like a political spot to me and 
have hired, whether it is a subcontractor or the contractor, 
people who are helping run the President's campaign.
    Now, goodness, if that does not smack of inappropriate use 
of taxpayer money, I do not know what would.
    Secretary Thompson. I am absolutely sorry that you feel 
that way. This was a contract that was put out in 2003, a long 
time before the election ever started, the one that----
    Senator Conrad. Well, but it is for the election period. We 
are in an election period right now, and these ads are running 
now, and these ads are equivalent to political ads in my 
judgment. And now it goes even further. The people who are 
helping do it are involved in the re-election campaign of the 
President. That is wrong. It is inappropriate and it ought to 
stop. And I am going to offer legislation to make it illegal to 
do so under whatever administration. I tell you, it would be 
wrong if a Democratic administration were doing it. It is wrong 
for this administration to be doing it.
    Chairman Nickles. Senator Conrad, thank you very much. The 
statute, just looking at it, doesn't say whether it should be 
TV or not. It just says, ``The Secretary shall provide for 
activities under this subsection to broadly disseminate 
information to discount card eligible individuals and 
prospective individuals regarding enrollment.''
    I mention, one of the reasons why my opening comments on 
the card and the low-income benefit, one, because a lot of 
people are not aware of the fact this card is a benefit that is 
coming in a couple months. And so I want to get that 
information out. I was using the hearing to do it.
    But this is a benefit that is going to be available to 40 
million Americans, and a lot of them are not aware of it. And 
so we have to get it out. This did not say what method, and 
obviously you are certainly entitled to your opinion. You are 
entitled to your right to offer amendments.
    Next we have Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman, for having this 
hearing and, Mr. Secretary, for coming. I have had my curiosity 
piqued a little bit. Are you just using television for the ads 
or are the other media being used as well?
    Secretary Thompson. We are sending out a mailer. We are 
putting out other information. We are putting it out in other 
languages so that we get to other communities that do not have 
English as the first language. And we have set up programs with 
the Aging Commission called SHIPs, and we are doubling the 
number of individuals in SHIPs, which two-thirds of those come 
from the Commission on Aging, which are going out and helping 
individuals in their own homes or in senior centers to pick the 
best card.
    We are forming an organization with 28 different 
associations that have been over to meet with me that are going 
to be using their organizational strength, including AARP who 
was one of those, to get the information out to seniors all 
across America. So we are hitting this with a whole plethora of 
different groups, different ways to contact seniors to tell 
them about the Medicare changes as well as the new drug card 
that is coming.
    Senator Enzi. So I anticipate then that the expenditures 
are approximately in proportion to where people get their 
information, and probably a large amount of seniors get theirs 
from television.
    Secretary Thompson. That is true, and actually we are 
spending more on mailers than we are on television.
    Senator Enzi. Thank you. I appreciate the job that is being 
done on that. I think that it is important for seniors to get 
information about what this program is. I know that there are a 
lot of misconceptions out there; probably many of them came 
from our debate.
    Secretary Thompson. That is true.
    Senator Enzi. And the debates where we argue about the 20 
percent that we are never going to agree on, and there is some 
confusion out there, so I appreciate your taking some efforts 
on that.
    Along those lines, I guess, on the new Medicare 
prescription drug law, there is $1 billion for spending to 
startup the administrative costs. And I was kind of curious. I 
assume--we have already talked a little bit about how those are 
being spent, what those are being spent for, but I am just as 
curious as to why that has been decided to be counted as 
discretionary spending instead of mandatory spending.
    Secretary Thompson. It always has been the tradition that 
administrative costs have been on the discretionary side of the 
budget. The $1 billion is--we had requested more because we 
believe this is going to be a huge, monumental thing.
    Our computers systems, I just would like to point this out. 
Some of our software is older than the technicians that are 
hired to maintain it. We have software that is running some of 
the Medicare program that is over 30 years old, and from your 
vast experience before you became a Senator, you know how 
difficult it is to run a large company--and this is the largest 
insurance company in the world, 42 million subscribers--with 
30-year-old software.
    So we have to upgrade our computers. We also have to 
collaborate with the computers with Treasury, with the State 
Medicaid programs, and with Social Security in order to find 
out the low-income recipients.
    We are also taking over the Medicaid program as far as 
drugs are concerned. It is a huge undertaking. And so we also 
have to get people, contractors and vendors, involved. And it 
is going to be a tremendous undertaking by the Department in 
order to implement all the provisions of the bill and make sure 
that it is up and running on January 1, 2006, for the drug 
portion. But before that, in 2005, we have to set up the 
programs for the free induction physical for those people that 
are coming in, which I think is maybe the most important part 
of the Medicare bill, as far as prevention is concerned and 
managing diseases. And then we have to have the card up and 
running by June 1st of this year.
    A huge undertaking from my Department, and that is where 
the bulk of the $1 billion is going to go, for staffing, for 
computers, for contracting out, for getting all the computers 
to run successfully and be able to intermingle and have 
interoperability.
    Senator Enzi. I appreciate that. Could you provide me with 
a breakdown of----
    Secretary Thompson. Absolutely. But we have not----
    Senator Enzi [continuing]. Anticipated and also the 
additional needs that you mentioned?
    Secretary Thompson. Thank you very much. The computer 
system is really--when I came in, we had over 200 different 
computer systems in the Department. And now we are trying to 
get it down to one computer system.
    Senator Enzi. I appreciate that. It sounds like you are 
doing some good management there.
    Now, one other, what I hope will be a quick question. In 
rural places like Wyoming, the choices in health service 
providers are limited. On Indian reservations, the health 
service selection is even more limited, and they have to 
contract off the reservation sometimes in order to have, 
particularly for emergency purposes, health care for those on 
the reservation. And despite this common use of contract health 
services at both hospitals, IHS does not always adequately or 
evenly supply doctors in those areas. So it is my understanding 
the problem is both fiscal and administrative.
    I am pleased that the HHS budget begins to address this 
fiscal problem, increasing the contract health services by $18 
million. But I am wondering whether or not IHS plans to review 
the management policies of doctors to ensure that the Native 
Americans have equal access to quality care hospitals serving 
large populations.
    Secretary Thompson. We are reviewing all of the Indian 
Health Service programs and projects, and one of the biggest 
problems we have is being able to get enough medical personnel 
to be able to go to areas that are hard to get individuals to 
go into. Indian reservations in some areas of the country have 
a real serious problem of getting the proper medical people 
there, and we are expanding the National Health Service Corps 
so that we can get more people, use the service portion and get 
more doctors and nurses to go to Indian reservations 
throughout.
    This is a high priority of the Indian Health Service, and 
especially a high priority of mine because I travel to a lot of 
Indian reservations, see the tremendous need. I go every year 
to Alaska and tour the Alaskan settlements up there, and I know 
the tremendous problem we have of getting proper medical 
treatment but, more importantly, proper medical personnel to 
these underserved area.
    Senator Enzi. Thank you very much. My time is up.
    Chairman Nickles. Senator Enzi, thank you very much.
    Senator Wyden.
    Senator Wyden. Mr. Chairman, just a clarification. These 
are 10-minute rounds?
    Chairman Nickles. I have asked people to try and limit it 
to 5 or 6 minutes, 7 minutes, but I have not been strict in 
enforcement.
    Senator Wyden. OK. Mr. Secretary, Senator Snowe and I have 
introduced the first bipartisan effort to try to address some 
of the concerns in the prescription drug bill. Our legislation, 
for example, does exactly what AARP has called for. You just 
invoked them. The Snowe-Wyden legislation makes sure that the 
Department has adequate authority to negotiate to try to get 
the best deal on prices for seniors, and addresses the 
reimportation issue.
    I am not going to ask you to address the merits of this 
bill and to announce your position on it, but I would like your 
views on one key point. Given the fact that we have these two 
projections out there with respect to the cost of the bill, the 
CBO appraisal and your actuaries' appraisal, wouldn't it make 
sense to try to work immediately to get the maximum amount of 
cost containment that we can so as to not hit that $530 
billion-plus level or possibly exceed it? In other words, I 
think there was a good case for the Snowe-Wyden bill a month 
ago, but I think there is an even better case today. So I would 
like your views on the question of: Wouldn't it make sense to 
work right now to try to push additional cost containment so as 
to not hit that $534 billion spending level?
    Secretary Thompson. Without a doubt. I think every one of 
us, Democrats, Independents, Republicans, have to take a look 
at how we are going to be able to contain the expenditures. I 
was very impressed by both Senator Conrad's and Senator 
Nickles' charts. I happen to be a trustee of both Social 
Security and Medicare. I am very concerned about that, and I 
will work with you and Senator Snowe.
    I also know that your proposal has something to do with 
discrimination in regards to pricing. I think this is something 
that we should look at, and I will be more than happy to work 
with you, as I have on many different occasions, Senator Wyden, 
in any way I possibly can to further the cost containments.
    I appreciate your offer, and I will reciprocate whatever 
way possible that I can make it work.
    Senator Wyden. Well, that is very constructive, Mr. 
Secretary. I did not want to get you into the specific 
provisions of the bill, but to know that you are on record as 
being interested in trying to get additional cost containment 
so we do not hit that $534 billion level is helpful.
    I would also like, just with respect to the policy aspects 
of it, for you to state your current position on the 
reimportation of medicines that are safe. As you know, there is 
considerable debate with respect to where FDA is on this now. I 
will tell you, as somebody who has tried to specialize in 
health over the years, I am very troubled by the evidence that 
indicates that FDA cannot find cases indicating problems with 
health and safety consequences with respect to reimportation, 
and at the same time we have thousands of cases out there of 
people who have suffered as a result of adverse reactions on 
medicines.
    So could you tell us your current views with respect to 
reimportation? It is part of our legislation, but I am more 
interested in your policy position on it as of today?
    Secretary Thompson. The law requires me to certify that the 
drugs coming in from another country are safe. This is a hurdle 
that I cannot meet because I cannot certify that they are safe, 
because by immediately certifying that drugs from other places 
that are not supervised or regulated by FDA are safe puts the 
Federal Government in complete financial responsibility for 
liability if they are not safe.
    We had two actions that were taken by FDA, Senator Wyden. 
The first was in Miami and New York between July 29th and 31st 
in 2003, and in San Francisco and Carson, California, from 
August 5th to the 7th. During those 3-days, approximately 100 
parcels per day that were suspected of containing drugs were 
pulled, and out of those, about 85 percent were found to be 
mislabeled, were counterfeit, and had other safety problems.
    The second action was conducted in the same manner as the 
first in November in Buffalo, Dallas, Chicago, and Seattle. The 
first one had 1,153 imported products to examine; 1,019, or 88 
percent, were unapproved prescription drugs. The remain 12 
percent represented dietary supplements and other products. The 
drugs were from the following countries: Canada, India, 
Thailand, Philippines, and the remaining from other countries.
    On the second stop, out of the 1,982 parcels, 1,728, or 85 
percent, of unapproved drugs were found. So both of them were 
in the high 80's. Both actions were taken with interdiction of 
drugs coming in which were mislabeled. That doesn't mean that 
they were wrong. They were just mislabeled, mispackaged. 
Several were counterfeit. And, therefore, based upon that 
information, I cannot certify that drugs coming into America 
are safe.
    Senator Wyden. I just hope you will stay at this question, 
Mr. Secretary, because I have been in a number of hearings 
where the FDA literally cannot give any cases that document 
injury, and you juxtapose that by the thousands and thousands 
that have been injured that have been documented. I hope that 
you will stay at it.
    A couple of other areas I do want to get into. As you and I 
have talked about before, the country is headed for a 
demographic tsunami. We have millions of baby boomers retiring, 
and the health care system is completely unprepared for this.
    Secretary Thompson. It is.
    Senator Wyden. We are completely unprepared for what is 
coming in 2010 and 2011. Senator Hatch and I have been able to 
win passage of the Health Care That Works for All Americans 
Act, legislation that would give us a chance to have a plan to 
get those people covered, to get everybody under the tent for 
the basic affordable health care services, and to do it in a 
responsible way, building on the kinds of things that we have 
done in Oregon and that Wisconsin and other States have done.
    What is your position on that? Obviously, we are going to 
be trying to get the appropriation this year. Senator Byrd has 
been enormously helpful on this, and I am so glad that he is 
here. I would like to just have you state for the record your 
assessment of this bill that Senator Hatch and I have written 
that has been passed.
    Secretary Thompson. My reaction is that anything we can do 
to move health policy and health insurance to forefront and get 
more people involved is a net plus. Your commission idea is a 
positive one. It is going to allow for a commission. The only 
question I had is all of the commissioners have to become 
employees of the Senate, and I am one of those that are 
designated. And it is going to be funded by the Senate 
Appropriations. I don't know. So I think there has got to be 
some interpretations done in order for me to qualify to be on 
the commission.
    I think it is a giant step forward. I think that there are 
other ways that we can approach it. But anything we can do to 
get more people involved in talking about how we solve the 
health insurance problems in America, I am all for it.
    Senator Wyden. We will work with you on that. It is a per 
diem arrangement, Mr. Secretary, and, of course, we very much 
want your involvement in it. It just seems to me that we have 
tried the same thing now, literally going back to Harry Truman 
in 1941, in terms of trying to get everybody covered. You write 
these bills in Washington, D.C. The American people find them 
incomprehensible. The interest groups attack it, and it all 
falls apart. What Senator Hatch and I have done is essentially 
say let's go 180 degrees the other way. Let's get the American 
people involved early on in terms of some of the difficult 
kinds of choices and then force congressional action.
    So we will work with you to make sure that it is clear on 
that point that you appropriately raise, that this is per diem 
for these kind of people, and it is not all----
    Secretary Thompson. The idea, the concept is great. I think 
just the mechanics have to be worked out a little bit.
    Senator Wyden. I appreciate that. One last question, if I 
might, Mr. Secretary. As you know, Senator Smith and I have 
been very concerned about Oregon's TANF waiver, the Temporary 
Assistance to Needy Families, and we have a situation where 
States like ours are performing particularly well, and you 
have--and we have talked about it--often been a champion of 
this question of making sure that the States have the 
flexibility so that what you do in Oregon is not necessarily 
what you do in Tallahassee or what you do in the Bronx. And we 
would just like to--and I ask this on behalf of Senator Smith 
and myself, because we have both been very interested in it, 
what you can do to help us nail down that waiver and get the 
Oregon program protected.
    Secretary Thompson. Let me respond, because we have worked 
very closely with Oregon, as you know. When the TANF bill 
expired, it took away my authority to grant any waivers in this 
area whatsoever. So my waiver authority expired with the 
termination of the TANF law. So I have no authority to do that.
    Second, we have examined--we have worked with Oregon, in 
fact, I think we worked with them this past week.
    Third, we have examined Oregon's law. We think you have a 
good law. We want it to continue. We want it to have as much 
flexibility as possible. We are under the impression, in 
looking at it through our professionals, Senator Wyden, that 
Oregon has nothing to fear whatsoever, that Oregon's all-family 
participation rate, if the finance bill was passed, would be 
over 60 percent and would qualify, more than quality for all of 
the requirements under it, and TANF in Oregon, Oregon-style, 
would be able to continue, with or without the waiver.
    Senator Wyden. We will work with you on that, Mr. 
Secretary, and you will also be getting an effort from the 
State to deal with the Oregon Health Plan. As you know, because 
of our difficult economy, we are trying to figure out how to 
make the best use of those resources, and given the State 
budget situation, they are going to have to turn this around in 
sort of land-speed record time. And if Senator Smith and I 
could work with you on both the TANF waiver and the Oregon 
Health Plan----
    Secretary Thompson. The door is always open for you, 
Senator Wyden.
    Senator Wyden. Next time we have a chance to visit and I 
have given you more time to prepare, we will talk more about 
the specifics of the Snowe-Wyden legislation on prescription 
drugs.
    Secretary Thompson. Thank you.
    Senator Wyden. But both of the principles embodied in 
this--and we are two, as you know, who voted for the 
legislation--would allow you to keep in place the basic 
configuration of the legislation. Both policies have been 
endorsed by AARP. I am hopeful that we can win additional 
support for it in the administration, and given these 
projections that you lay out--we are going to need every cost 
containment tool that we can use. As of now, the fact is the 
Medicare program faces a statutory bar to going to bat for the 
beneficiaries that the Federal Employee Plan doesn't face when 
you are going to bat for Members of Congress. Just having come 
off the town hall meeting circuit at home, that just doesn't 
pass the smell test. And I want to work with you on that.
    Secretary Thompson. Thank you.
    Senator Wyden. Thank you for your cooperation.
    Secretary Thompson. Thank you very much, Senator Wyden.
    Senator Conrad [presiding]. Mr. Secretary, we have a vote 
on, just a few minutes left, so I am going to have to leave 
momentarily. We are trying to make it so that Senator Nickles 
can be back in time so the hearing can continue.
    Secretary Thompson. Good.
    Senator Conrad. Let me just go back to what I was asking 
you about before. I have now been told that some 70 members of 
the House and Senate have written to you to ask that you 
suspend this Medicare campaign until the GAO determines whether 
or not it is an illegal use of taxpayer money. Would you be 
willing to suspend the campaign until GAO determines whether it 
is illegal?
    Secretary Thompson. I will consider it, but I am not going 
to make a commitment at this point in time. I just heard about 
the individuals that have written to me. I would like to see 
what they have to say. I know your concerns. I differ with you, 
Senator Conrad, but as you know, I try to be bipartisan, I try 
to reach across. I will take your complaints, and I will go 
back to the office and review it again, and I will get back to 
you with a definite answer.
    Senator Conrad. I would appreciate that. And I say to you, 
I think it would be wrong if the other party were doing it. If 
my party were doing it, I think it would be wrong. I just think 
it is wrong. I think this way lies a lot of grief if we start 
going down this trail.
    Let me turn to another issue, and that is in CBO's letter 
to us, Chairman Nickles and the Committee, with respect to the 
differences in the estimates, one of the major differences, $32 
billion, is that CMS assumes higher participation in Medicare 
Advantage, 32 percent versus 9 percent in the CBO estimate in 
low density, low cost areas where payments to these plans would 
be much higher than the cost of traditional Medicare. The whole 
idea of Medicare Advantage is that it is going to save money. 
How can it be that your actuaries are telling us that these 
plans cost more than traditional Medicare?
    Secretary Thompson. Because our actuaries and the proposal 
that we had advanced limited, Senator Conrad, the bids to the 
lowest three bidders.
    Senator Conrad. Say that again for me. You would have?
    Secretary Thompson. We requested that the Medicare 
Advantage, the bidders, would be limited to the three lowest 
bids.
    Senator Conrad. OK.
    Secretary Thompson. The conferees said no, and they said if 
we are going to go this way, it has to be expanded to anybody 
that wants to bid. By having the three lowest bids, you would 
force the marketplace to come in with the lowest bids. Our 
actuaries at that time projected they would be at 98 percent, 
but if you took----
    Senator Conrad. 98 percent?
    Secretary Thompson. Of fee for service.
    Senator Conrad. So the cost of Medicare Advantage would be 
98 percent of traditional fee for service?
    Secretary Thompson. That is correct.
    Senator Conrad. OK.
    Secretary Thompson. But when they took off the cap, our 
actuaries projected that that would go to 105 percent as an 
average.
    Senator Conrad. And the reason for that is, because, 
frankly, I think given the fact we have now had this dramatic 
change in the estimate from $400 billion of cost to $530 
billion in just a few months, that we have to go back in and 
figure out how we can save some money here. Maybe this is one 
place we could save some money.
    You had taken the position before that we ought to restrict 
access to the three lowest bidders. Is that the basic concept?
    Secretary Thompson. That is correct.
    Senator Conrad. Does the lowest bidder always win or not?
    Secretary Thompson. The three lowest bidders would always 
win.
    Senator Conrad. Under that scenario the three lowest 
bidders would win. And under this scenario somebody that is not 
among the three lowest bidders could win?
    Secretary Thompson. Everybody will be eligible, anybody 
that bids.
    Senator Conrad. Anybody that bids can be in even if they 
are much higher than the three lowest bidders?
    Secretary Thompson. That is correct, and that is why our 
actuaries say if anybody can be in, there is no reason to 
sharpen your pencil and be below.
    Senator Conrad. That is really--why did they do that?
    Secretary Thompson. Well, that was an argument we made in 
the--I made the argument, so I lost, I lost----
    Senator Conrad. Can you tell us what the argument was on 
the other side for doing it the other way? I find it hard to 
understand what their rationale was.
    Secretary Thompson. Senator Nickles I think was the only 
person in that conference----
    Senator Conrad. That agreed with you.
    Secretary Thompson. That agreed with me.
    Senator Conrad. Do you think we should at least reopen the 
bill for the purpose of revisiting at least that item? Frankly, 
I think we have to revisit other items too. We went from $400 
billion to $530 billion in 3 months.
    Secretary Thompson. We want to get the bill up and running. 
We are fearful that opening it up is just going to delay the 
implementation of it. I understand your arguments, and I think 
they are sound, Senator Conrad. The argument on the other side, 
you asked what it was. They said that this is a competitive 
model. Let us allow competition to work. So let us let anybody 
that wants to bid, bid.
    Senator Conrad. But your actuaries say by not restricting 
it to the lowest bidders, just saying open sesame, everybody 
can participate, the marketplace will give us higher cost than 
traditional Medicare. That makes absolutely no sense.
    Secretary Thompson. That is not the motive to keep the 
prices down.
    Senator Conrad. Certainly. Let me ask you on another issue 
if I can. This $65 billion that is in the President's budget, I 
know you were Governor of a State for a long time, Governor of 
Wisconsin. You had a very distinguished record there. You led 
reform of welfare. You were more fiscally responsible as a 
Governor. You are close to being a neighbor, so I have followed 
what you did there. I find it very troubling that the 
President's budget says we are going to have $65 billion for 
health care credit, but then provides no money for it. I do not 
think you budgeted that way when you were Governor.
    Secretary Thompson. There are a lot of things, Senator, 
that I have found different in the Federal budgeting process 
than what we were able to do. I still find it somewhat hard to 
believe that you do not have amortization accounts, you do not 
have capital accounts.
    Senator Conrad. I will tell you, you know I come from a 
financial background, and I must say, when I first came here, 
and to this day, the way the Federal Government accounts for 
things makes no earthly sense, and I think it fundamentally 
misleads people.
    Secretary Thompson. It does.
    Senator Conrad. And I think it even misleads our 
colleagues. That is why I think the Social Security reference I 
was making earlier is so important. We talk about surplus. 
There are no surpluses. We need that money when the baby-
boomers retire. I think the misuse of language confuses people.
    I am going to go vote.
    Chairman Nickles [presiding]. Senator Conrad, thank you 
very much for chairing. They are holding the vote for you, and 
I am sure they will.
    Senator Murray.
    Senator Murray. Mr. Chairman, thank you very much.
    And thank you, Mr. Secretary, for being here today to talk 
about the HHS budget for this year. You oversee an agency that 
impacts all of us, and I know it has a tremendous impact on a 
lot of people across this country, so I appreciate the job you 
do.
    I am concerned about a number of issues in the budget, some 
of the proposed cuts in CDC and the Community Access Program, 
which I think is really critical. I am concerned about the FDA, 
particularly in light of the mad cow disease that surfaced in 
my home State, and I want to ask you about that, and a number 
of things.
    But before I do that, I do want to ask you, since you are 
here today, about a story that is out today that I find 
extremely troubling, and that is the announced efforts by 
Attorney General Ashcroft and the Department of Justice to 
subpoena private medical records of doctors and hospitals who 
are currently challenging the Federal Partial Birth Abortion 
Ban. It is reported in the New York Times today and a number of 
outlets that the Department of Justice is demanding that at 
least six hospitals in New York City, Philadelphia and 
elsewhere turn over hundreds of patient medical records on 
certain abortions that are performed there, and it does not 
appear that the Department of Justice has made any distinction 
between different procedures. They are simply demanding private 
medical records of women who have no idea that their identities 
would be turned over to Attorney General Ashcroft.
    Mr. Secretary, I find this kind of intimidation very, very 
troubling, and I also believe that it is a clear violation of 
the intent of HIPAA, which you oversee in your division. I know 
there are some exceptions in HIPAA, but clearly, releasing 
private medical information to the Department of Justice about 
any reproductive health procedure just is not acceptable.
    Has the Department of Justice asked for any opinion of your 
office since HHS was the lead agency on implementing and 
enforcing HIPAA standards, on this action?
    Secretary Thompson. To the best of my knowledge, no. I was 
not contacted. This is the first time I have heard about it, 
Senator Murray.
    Senator Murray. I find that troubling as well since it is 
your office that oversees the Health Information Privacy Act.
    Secretary Thompson. That is correct.
    Senator Murray. It would seem to me that it would be 
extremely important that they get an opinion from you. Since 
they have not, then I would ask you to give this Committee an 
opinion, and simply ask you the question: are women who seek 
abortions or reproductive health care denied protections under 
HIPAA, and can doctors be compelled to release this kind of 
information at the request of the administration?
    Secretary Thompson. Why don't you send me these questions 
and I will get back to you. The Department of Justice could 
have contacted our General Counsel or could have contacted some 
of our legal staff. I do not know, but this is the first time 
this issue has come to my attention, Senator.
    Senator Murray. I will give that to you in writing, but I 
think it is extremely critical that we get an answer from your 
agency as quickly as possible since you do oversee HIPAA. I, 
like many women, are very, very troubled that someone can go to 
a doctor and completely, unbeknownst to them, have their 
records subpoenaed by the Department of Justice over an action 
they have nothing to do with, and clearly, prying through 
medical records or second guessing doctors' advice to their 
patients is the kind of Government intrusion that many 
Americans are very, very troubled by. Since you oversee HIPAA, 
I would really request that you do it and do it expeditiously 
because I think the question needs to be answered.
    If it is that the DOJ can go on a fishing expedition to 
hospitals and doctors and seek medical records, I think we have 
an obligation to make sure that the privacy acts that we have 
worked so hard on protect their rights. I certainly think any 
woman or anybody who has a daughter or anybody who may have 
sought health care protections or decisions that are very, very 
private and part of their own family and their own religious 
decisions, should not be worried that this Department of 
Justice can ask for their records. So I would ask that you 
expeditiously get a response back and tell us what HIPAA will 
allow under that.
    I would hope, really, that DOJ take a quick second thought 
here and realizes they should have sought your opinion before 
going on this expedition as well.
    Secretary Thompson. Thank you.
    Senator Murray. Thank you. I will ask you also a question 
about the prescription drug bill, but I hope you can get that 
back to us because I am deeply troubled. I think many, many 
people are by that.
    On the prescription drug bill, you are going to be tasked 
with determining different regions of the country, and as you 
know, under that bill, the country's going to be divided up 
into as many as 50 regions. PPOs will be offered within these 
regions, HMOs within the entire State, and the products that 
these PPOs and HMOs offer will really determine the kind of 
access that seniors will have to qualify affordable 
prescription drug coverage.
    As we experienced in my home State and others with the 
Medicare Plus Choice program, senior can be facing a new 
Medicare program every year, and many seniors within a State do 
not have access to those choices. That was the experience we 
had under Medicare Plus Choice. In fact, in Washington State we 
had two very different Medicare options for seniors, and every 
year there were changes to the plan. Some increased premiums, 
reduced coverage, limited coverage, or even closed for new 
enrollees.
    So I am really concerned as we move forward on this that my 
State could be divided up into more than on region or even two 
regions with a fall-back region. That would mean that access to 
coverage would depend on where you lived for the first time in 
the history of Medicare and could force health care providers 
to compete for preferred provider status.
    I would like to know from you what efforts you are going to 
undertake to ensure that stability within a State and with 
States will be there, and whether you know States like 
Washington, that are large and diverse, will see a number of 
different regions that could mean different choices for 
different seniors who live within the same State?
    Secretary Thompson. As you can well imagine, we have not 
been able to get to that particular portion of the law because 
our attention had to go to the drug card first and to get that 
up and running. We are looking at all of the provisions.
    I would like to point out that there is a tremendous, 
enthusiasm for the new Medicare Modernization Act. There are 
people that were on Medicare Plus Choice and are now coming 
back into it. You are going to see a lot more plans coming to 
the forefront. You are going to see a reduction in copays. You 
are going to see enhanced benefits, and you are going to see a 
lot more people in the market.
    In regards to the State of Washington, I cannot imagine any 
scenario, just listening to you, Senator Murray, in which you 
would divide the State of Washington up into more than one 
region. I suppose it is possible, but I do not know any reason 
why you would do that. The law says we have to have a minimum 
of 10 regions up to a maximum of 50. We are looking at the 
potential of around 15, but in all of the regions that we have 
even speculated on, States are held together, and every State 
is held together in a region. I cannot imagine any way in which 
we would divide it up at this particular point in time unless 
it might be a huge city that would be overlapping into another 
region. But I cannot imagine that would take place in the State 
of Washington.
    Senator Murray. As you know, we have regions like Portland, 
Oregon that is right across the border from a----
    Secretary Thompson. Yes, but I would think that Washington 
and Oregon would probably be in the same region.
    Senator Murray. We will be following this very carefully 
because----
    Secretary Thompson. Listen, before we make final 
decisions--this is going to be a very controversial as to how 
the States are placed in the regions. I will be working with 
everybody on a bipartisan basis as long as I am Secretary.
    Senator Murray. All right. Let me ask you quickly then 
about mad cow because I know you are working with FDA to 
address a lot of the issues of the gaps in safety, and FDA has 
moved forward on a number of initiatives to deal with this.
    Secretary Thompson. Yes, we have.
    Senator Murray. As a member of this Committee and the 
Health Committee, I am really concerned that FDA may need some 
kind of legislative authority to continue to move forward, and 
I wanted to ask you if you felt that that would be necessary, 
or is there anything more we should be doing to providing you 
the authority you need to provide the protections that are 
citizens are looking for?
    Secretary Thompson. As you know, we have expanded our rules 
as it relates to the composition of feed. That is a big area 
that we have complete control over. We have strengthened the 
oversight. We are going to increase the number of inspections 
by a great deal, and we are also prohibiting the use of downer 
and dead cattle into human consumption products. So we are 
doing a lot.
    We are continuing to address this. Les Crawford is the 
individual I have tasked to do this. He negotiated this week 
with the Canadians, and we are negotiating with the Japanese as 
far as opening up the market, and we are looking at scientific 
things. We want to base our decisions upon science. At this 
point in time we have not found a place where we cannot go 
statutorily, but if we do, I will be more than happy to sit 
down with you.
    Senator Murray. You know that there are many of us who 
stand ready to work with you in case you do need that 
authority.
    Secretary Thompson. This is very much a concern of mine 
being a beef grower myself.
    Senator Murray. Mr. Secretary, I appreciate that. Let me 
just say, Mr. Secretary, we will get the question to you on 
whether or not women who seek reproductive health care 
protections are denied privacy under HIPAA. We will get that to 
you today. Can I ask you how long it will take your decision to 
come back to us?
    Secretary Thompson. I would hope that my attorneys would be 
able to turn it around the beginning of next week.
    Senator Murray. OK.
    Chairman Nickles. Senator Murray, Thank you very much.
    Senator Sessions.
    Senator Sessions. Thank you, Mr. Chairman. You know, on the 
medical issue that Senator Murray raised, as a prosecutor, I 
have been amazed in recent years the shock people have that 
they think you cannot subpoena library records. You can 
subpoena bank records. You can subpoena medical records. You 
can subpoena library records. There is no privilege for those 
things under certain circumstances.
    Now, if somebody objects, they can file a motion to quash a 
subpoena, but Congress did vote to eliminate the practice of 
partial birth abortion, and I think we meant that. It was an 
overwhelming vote. The investigations surely are focused on the 
physicians who may be performing those procedures if they are 
ongoing. So I think you have at some point, any investigation 
to determine whether or not a physician is performing partial 
birth abortion contrary to the overwhelming vote of this 
Congress should be investigated and you will have to get some 
records. if there is an objection, they can be objected to 
through the court system.
    Senator Murray. Mr. Chairman, let me just say that women 
were not party to the suit, to the----
    Senator Sessions. But it is the records. You say they are 
taking their records, but it is really the doctors', 
physicians' files to determine whether or not he is performing 
that procedure, and he would have her history of whether or not 
that procedure was performed on her.
    Your chart here showing your higher estimate on the 
prescription drug bill is more than troubling to me. I respect 
you though. We knew, and many of us were worried it may be 
higher than the $400 billion that was estimated. I know 
Chairman Nickles raised that concern. I am glad you brought it 
out. I am glad we have your estimate here. I think it is true 
that nobody knows exactly how much is this going to cost. Would 
you agree?
    Secretary Thompson. That is true.
    Senator Sessions. Could be more or less than the 534 you 
have estimated. I believe that Congress wanted to make a 
sizable historic step toward meeting the needs of those seniors 
who cannot afford drugs, and we authorized, this Budget 
Committee did, $400 billion for that purpose. I am just very 
distressed that we passed a bill that it pretty clearly appears 
now is going to go well above that. I think it is important for 
us, if we care about financial responsibility and sanity, that 
we come back and look at this bill, and perhaps as part of this 
budget procedure, to say that we want only that much money 
spent, and that if we have to have some higher copays instead 
of the 3 percent copays that are being paid now, maybe that 
could help keep it within the amount.
    So I am frustrated that the numbers came out higher and 
disturbed by that, but I thank you for doing it because we need 
to know the truth and act on the best information that we can 
have.
    Secretary Thompson. Senator, could I just clarify?
    Senator Sessions. Yes.
    Secretary Thompson. CBO still swears by the fact that it is 
only going to be $395 billion in its projections. CBO has 
experts that are projecting on drugs that we do not have as 
actuaries. So I do not think you can truthfully say that our 
figures are correct and CBO is wrong because they are not. 
These are our estimates.
    For instance, on the first one--and this is something 
Senator Nickles argued quite strongly against--is the fact that 
the low income, where everybody wanted to help, is really wide 
open. It is a huge subsidized benefit for low income, those 
under 150 percent of poverty. That makes a difference of $47 
billion. We cannot say for sure if it is going to be $47 
billion more or $47 billion less.
    For instance, the Balanced Budget Act of 1997, which is not 
nearly as complex as this law, our actuaries were $50 billion 
off from CBO and both of them were wrong. Both of them were 
wrong, in fact it came in at a different amount. And the second 
one, the higher participation, the next big tranche of $32 
billion, this is the difference between 87 percent--CBO 
believes only 87 percent of the people that are eligible will 
participate. Our actuaries think it is going to be higher, they 
think it is going to be 94 percent. But you have to remember 
that in Part B only 91 percent participate, and that is what 
CBO is counting on. CBO is saying if you did not participate in 
Part B, why would you ever then participate in Part D? And so 
they have a solid argument for saying it is going to be less 
than 91 percent.
    So it is just projection and expertise.
    Senator Sessions. My simple view about it is you have 
raised--your official estimates raise the possibility that it 
would be higher. Hopefully it will not, but I think as a 
prudent Congress and as a Committee that is concerned about 
maintaining the integrity of the budget process, we ought to be 
thrilled that we were able to find and appropriate $400 
billion, but I think we have every right to tell the 
administrators or the Finance Committee or others to keep the 
figure at $400 billion, and I think even if your numbers are 
correct, we are going to have the most historic increase in 
drugs for seniors ever. We have four people in my State whose 
drug bill exceeds their Social Security bill in thousands. My 
mother's drug bill does. I see that. It is $400 plus every 
month. It will be a help for people. There is no doubt about 
it, but we need to be responsible.
    Mr. Secretary, you have a reputation for being a good 
manager and cutting waste and abuse. I have information that on 
the Children's Hospitals Graduate Medical Education program--
thank you also for supporting full funding for that and not 
cutting that program. Level funding is what you propose. But 
there was a 5 percent increase, I believe, last year, and we 
now find that all but 267,000 of that 5 million went to 
administrative overhead. It is not getting out to the 
hospitals. I do not know if you are aware of that or not, but 
that is the information I have. I do not know if that is a one-
time cost or just a rise in administrative cost. I would ask 
that if you are not familiar with it, I would understand it----
    Secretary Thompson. Senator Sessions, it better not be that 
way. If it is, some heads are going to roll.
    Senator Sessions. I appreciate your approach to it. That 
has been my impression of your approach to management.
    Secretary Thompson. That is absolutely ridiculous.
    Senator Sessions. I was disturbed to hear those numbers. 
Perhaps they are not correct, but I think they come from a good 
source.
    Secretary Thompson. I will look into it before the end of 
the day.
    Senator Sessions. Mr. Secretary, I appreciate your interest 
and work in dealing with AIDS, particularly internationally. 
And working with you and the Department we confronted this 
question of whether or not, or at least how large an impact 
unsafe health care has in the spread of AIDS in Africa in 
particular. Some studies came out and showed rather shocking 
numbers there based on studies that were in existence. So we 
asked your Department to review that and come up with a figure 
which they believe was accurate. You have contracted with 
somebody. We have preliminary numbers on that, and I was 
unhappy, frankly, that they did not come forward with a figure, 
they simply repeated really the language that WHO has been 
using which is: the reusing of needles is not a major part of 
the problem. I think even WHO estimates 2-1/2 percent of AIDS 
infections in Africa comes from reusing needles, and 7 percent 
of more comes from unsafe blood transfusions.
    The good news is, Mr. Tobias and the money we funded is 
immediately going out, some money earmarked to focus on this 
unsafe health care, but I still believe it is important for us 
to have good numbers. What I do not understand from this study 
is that they are saying that the studies relied on by Dr. 
Gisselquist and others to say the figure is much higher were 
not good studies. Therefore, they conclude that they are not 
accurate and that is it not a major cause, needle reuse. But I 
think you could take that other way too. If the study is not 
good it does not say anything. Maybe we need more studies to 
get an accurate number. We need a number here, and I have been 
frustrated by the stiff-arming of WHO, and even some in your 
bureaucracy on this question because I think it is a big one. 
Would you comment on that?
    Secretary Thompson. Absolutely. Before I comment on that, I 
just wanted to point out that the Medicare Modernization Act 
has some real cost containments for the first time. Part B 
premiums, those with incomes over $80,000, are going to pay 
more, it is going to be indexed, and also the Part B deductible 
is going to be indexed for the first time, and there is a 
trigger for 45 percent. When Medicare gets to 45 percent of the 
general purpose revenue dollars going in to fund Medicare, 
there is a trigger indicating that we have to come back with 
reports to the President as members of the Trustees, which I am 
one, and to Congress, making suggestions on how we might be 
able to improve.
    Senator Sessions. That is true, and Senator Nickles fought 
to get that in there. I would just say that overall Medicare is 
going to be difficult to deal with. We have not started this 
prescription drug program. We ought not to let it get out of 
control before it starts.
    Secretary Thompson. I happen to agree with you, Senator 
Sessions. I also agree with Senator Nickles and Senator Conrad 
on the questioning, and I think we should continue to observe 
this and find ways in which we can enhance cost containment.
    In regards to your issue, you have talked to me about it. I 
happen to agree with you. I think it is a higher percentage, 
and I think we do need an accurate figure. I was somewhat 
nonplussed by the fact that it came back with--after we 
contracted out. I think we do need further studies.
    I happen to be very much involved, as you know, as Chairman 
of the World Global AIDS Fund, trying to make sure that our 
programs and our funding goes the right direction. And we also 
have just received a grant from the $15 billion special 
appropriation to ensure the safety of blood. This is going to 
be done by my Department. We have been awarded the contract to 
ensure the safety of blood. Needles are an absolutely integral 
part of that, so we are addressing this, and I would be more 
than happy to sit down with you and give you more information 
as we go along and set up our program on good reliable blood 
for Africa. But I also agree with you. I cannot disagree with 
you on the report as far as the percentage of people that are 
getting HIV positive transmitted by dirty needles.
    Senator Sessions. We can take the transfusion infection 
rate to zero virtually. I think about 60 percent of the 
transfusions of Africa are checked now. 40 percent are not. And 
according to WHO's numbers, that represents maybe 7 percent of 
all infections in Africa. So we could take that to zero like we 
have done in the United States.
    Chairman Nickles. Senator Sessions, thank you.
    Senator Sessions. My time is up. The Chairman is correct to 
call my hand. Thank you for your interest in that, and I look 
forward to working with you.
    Secretary Thompson. Thank you, Senator Sessions. Appreciate 
it.
    Chairman Nickles. Senator Sessions, thank you very much.
    Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary. I have many questions I would like 
to pursue, but I will ask only two different subjects, and one 
I know that was pursued earlier, but I want to revisit it 
because I was so shocked, frankly, by it, and that is the $20 
million ad blitz that has been started with taxpayers money, 
touting the new Medicare law, when in fact, other than the 
discount cards, no one will have the opportunity to sign up for 
it until 2006.
    I have to say, when I saw the first television ad, and just 
watched it as it went through, I expected a tag line of ``paid 
for by the National Republican Committee,'' and was very 
surprised to see that taxpayers were paying for it, given the 
fact that it went beyond what I believe are accurate 
statements. I have joined with others in requesting the GAO 
investigation that they are doing, which we appreciate, and 
have joined in writing you a letter asking that you stop the 
advertising until we know from the GAO whether or not this is 
legal. So I would ask, first of all, if that is something that 
you would do?
    Secretary Thompson. I answered the same question from 
Senator Conrad. I told him I would go back and review all the 
things. I also wanted to correct some things, that I do not 
believe it is political. I think it is informational, and I am 
responsibe under the Act. I read the Medicare Conference Report 
language which says that I have to get out information on this 
new Medicare law and the money has been appropriated to do so. 
The best ways to do that is through TV, but we are also doing 
it through literature. We are also doing it through expanding 
the SHIPs program, voluntary programs in the community, through 
the Aging Commissions. We are also putting information out in 
more than one language so that especially Hispanics are able to 
understand the new law. GAO is going to review it. I am 
confident that they are going to come back and say that it is 
not political, but if they do, it certainly is going to be 
stopped immediately.
    Senator Conrad had a subsequent, if I would go back and 
review the ad again, and I will this afternoon, and take a look 
at it, and that is as far as I am willing to go at this point 
in time.
    Senator Stabenow. I appreciate your comments. I would like 
to share with you from my perspective in looking at this. There 
is no question that we need to educate people. Frankly, this is 
very complicated.
    Secretary Thompson. Very complicated.
    Senator Stabenow. What is going to happen for people in 
2006 is very complicated because if they have at least one 
private insurance company and one HMO in their area, they would 
not be able to go through the traditional Medicare mechanism. 
Would you agree that they will be choosing between a private 
insurance company and an HMO if those are available in their 
area, is that not correct?
    Secretary Thompson. No. They will also be able to maintain 
their current fee for service.
    Senator Stabenow. They will be choosing. If they have at 
least one private insurance company and one HMO in their area 
for prescription drug coverage, they will go through one of 
those two and only have Medicare as a fall-back.
    Secretary Thompson. That is correct.
    Senator Stabenow. So it is a complicated system. There is 
no question about it.
    Secretary Thompson. Very complicated.
    Senator Stabenow. That people are going to have to know 
they are going to get a lot more information, a lot more 
paperwork. What others have called choices I would call a lot 
of paperwork, and I am not hearing from people, from seniors, 
that they want a lot more paperwork. They just want help with 
their prescription drugs. But we will have that. But I would 
like just a couple of comments----
    Secretary Thompson. Could I just respond quickly to that? I 
would like to point out that the enthusiasm and the interest in 
the Medicare Modernization Act been overwhelming. At the 1-800-
Medicare line. We have 106 companies and individuals and 
entities who want to put out the card. We have had a lot of 
companies that were in Medicare Plus Choice and want to come 
back, they want to expand and increase benefits and reduce 
premiums. So there is a great deal of enthusiasm. We want to 
get the right information out. I do not want to be political on 
this, and I pointed out that the head individual that won the 
request for advertising happens to be an individual that is a 
Democrat.
    Senator Stabenow. But, Mr. Secretary, if I might, I 
understand the enthusiasm. Certainly from the pharmaceutical 
industry that is projected to gain $139 billion from this bill, 
and I understand the enthusiasm from those who will now be 
subsidized in the insurance industry and the HMOs so that they 
have a more favorable position in which to compete against 
Medicare. I understand their enthusiasm. We know that because 
of that enthusiasm and those subsidies, that down the road in 
2010 we will begin to see, because of the change, fundamental 
change in Medicare, that will be experimented with at that 
time, CBO says we will see a 25 percent increase in cost for 
average Medicare, for those who stay in Medicare. So I 
understand the enthusiasm of those who will make money off of 
this bill.
    I would just share with you I do not see the same 
enthusiasm among those who will be paying the bill and of those 
who want prescription drug coverage in my State. We have been 
overwhelmed with seniors and with families who are outraged by 
what has been done. And my concern--and I will move on to one 
other topic--my concern is that when we talk about advertising, 
we have a full page ad in Roll Call, and my staff reads that 
every day, not one of them is even close to being able to 
qualify for Medicare. I do not know why we run ads in Roll Call 
when we are trying to educate seniors around the country. This 
is a propaganda item, but it certainly is not educating folks, 
and I think any lobbyist or senior official reading Roll Call 
certainly has other opportunities to find out information about 
how this works. I would finally just say that----
    Secretary Thompson. I did not know that it was in Roll 
Call.
    Senator Stabenow. It is Roll Call. It has been in Roll 
Call, and that is certainly not where my constituents are 
reading about Medicare, so that is a concern of mine.
    Then finally, I would simply say that in looking at the 
television and the print, when we say, ``So, how is Medicare 
changing? Same Medicare, more benefits.'' I would strongly 
object to that statement. Same Medicare? For those on Medicaid 
who are now going on Medicare, if they want a brand name drug 
they are going to pay more. Their formularies may be different 
and they may have fewer choices on prescription drugs. For the 
people in my State that are on private retiree insurance today, 
the anticipation is that one out of four of them will lose 
their coverage. This is not accurate. And so I would strongly 
support efforts to accurately educate people about the 
complexities and about the choices, and for those that will 
benefit, we certainly want them to know about it. For those who 
will pay more, we certainly want them to know that as well. I 
just have great concern.
    Secretary Thompson. Senator, I would just like to quickly 
respond if I might. I do not want to argue with you. Your 
interpretation is different than mine. I think that the ads 
that we are doing are very informative. I think the 
information--I wish you could listen in to the seniors that are 
calling in at 1-800-Medicare, they are overwhelmingly enthused 
about this opportunity. It is the same. You can stay in the 
same Medicare program like you always have, and you can get 
added benefits. That is the truth of the law.
    Now, you and I differ on that, but that happens to be our 
interpretation of the law.
    Senator Stabenow. Mr. Secretary, in 2010 in the six 
demonstration areas around the country, will Medicare remain 
the same?
    Secretary Thompson. In 2010----
    Senator Stabenow. 2010 with the demonstration projects, 
will Medicare remain the same?
    Secretary Thompson. I do not think anybody around this 
table can say whether or not it will. It probably will not. In 
2010 there is going to be two more Presidential elections, 
there is going to be three congressional elections----
    Senator Stabenow. That is not what I am asking. I am asking 
if the law----
    Secretary Thompson. I am just telling you, I do not know, I 
do not know, I do not know.
    Senator Stabenow [continuing]. That we passed, Mr. 
Secretary----
    Secretary Thompson. And I do not think you do either. I do 
not think it will be.
    Senator Stabenow. Mr. Secretary, I do know under the law we 
passed that in the six demonstration areas around this country, 
starting in 2010 Medicare is not the same. It essentially moves 
from a defined benefit to a defined contribution, and it has 
been touted by Mr. Scully, by others, as a positive change, and 
I am not asking us to debate whether or not it is positive or 
not. I would argue it is not, but there are those that believe 
it is.
    But my question is: is it a change? Is it different? In 
2010 if you are in one of the areas with the six demonstration 
projects under Medicare, will it be different?
    Secretary Thompson. In those six different areas in 2010, 
unless Congress changes it, there will be competition, yes.
    Senator Stabenow. So it is different. So when we say ``same 
Medicare, more benefits,'' this is not accurate, and if you 
change it so that it is accurate, that is fine. But it is not 
accurate to say it is the same because for many people it will 
not be the same.
    Secretary Thompson. Yes, it will be, Senator, because 
seniors will still be able to get fee for service if they so 
desire.
    Senator Stabenow. And it will cost more, up to 25 percent 
more under CBO.
    Secretary Thompson. But the seniors will still be able to 
get their system if they want to.
    Senator Stabenow. It would be great if it said that in 
here, that, ``by the way, it will cost you more.''
    One other quick point--and I realize, Mr. Chairman, I know 
I am pressing.
    Chairman Nickles. We do need to run.
    Senator Stabenow. Actually, I will wait. Thank you very 
much. You have been patient, and I will wait and do the 
additional question in writing. Thank you so very much.
    Chairman Nickles. I appreciate that so much because I am 
trying to get the Secretary out by 12 o'clock, and I have an 
additional question I want to ask him. But first we are joined 
by former Chairman and the most senior person on the Committee, 
Senator Domenici.
    Senator Domenici. Can you hear me?
    Secretary Thompson. Yes, I can, Senator. How are you?
    Senator Domenici. Fine. Nice to see you. You got a haircut, 
huh?
    Secretary Thompson. I hope so.
    Senator Domenici. Looks good. I have to go get mine cut. 
Nickles does not have to cut his very often because----
    [Laughter.]
    Chairman Nickles. I am well aware of that.
    [Laughter.]
    Senator Domenici. His is disappearing.
    Chairman Nickles. Mine does not cost as much as yours or it 
should not.
    Senator Domenici. You get half price.
    Mr. Secretary, I have about five or six questions that I am 
going to submit, and I would greatly appreciate it if you would 
answer them.
    Secretary Thompson. Absolutely.
    Senator Domenici. They are very important, and I just got 
through with a hearing where we had a Secretary who was 
letting, because of OMB or some reason was letting mail from 
Senators go very much unattended, and I do not want to get in 
that position with reference to you. You have a great staff and 
they ought to consider a Senator's question as being something 
important enough to be answered.
    Secretary Thompson. If they do not, they will not be with 
me.
    Senator Domenici. That is what I suggested to her, that 
they should not be.
    In any event, let me ad lib for a minute, and then get to 
some written ones. First, Mr. Secretary, last year our 
President made a little trip to New Mexico. It was probably one 
of the most exciting trips that he has ever taken to our part 
of the country, and he came to meet with a group of doctors and 
health professionals on the subject of insurance parity for the 
mentally ill.
    Now, Mr. Secretary, I think that you know what parity is, 
and I think you probably know that this had resulted in a 
discrimination of coverage for families with a member who has 
one of the serious mental illnesses. I am not talking about 
need for counseling. I am talking about schizophrenia and 
bipolar and the like. It is growing more and more obvious that 
millions of families have no insurance, but do cover all the 
other things, cover heart conditions, cover tuberculosis, cover 
diabetes, but not somebody who is egregiously ill with 
depression.
    As a result, the facilities that should be built and the 
excitement of the careers in research are not what they are in 
the other fields. Just think with me what has happened to 
heart. The heart has always been covered since they wrote 
insurance policies. Just think if they would have exempted 
hearts, said, we are not going to do anything under insurance 
policies for the heart. I would think we would have invented 
none of the great techniques.
    So here we sit, and the President of the United States 
said, ``I do not have to be convinced that the big mental 
illnesses are diseases.'' He said he had a personal experience 
with a friend on severe depression. You might know about that.
    Now, let me ask you, because we are about to get a bill 
reported out of Health Committee, you support the President's 
position on this, do you not?
    Secretary Thompson. Without a doubt. It is the right thing 
to do. I supported it when I was Governor of the State of 
Wisconsin. My family is very much involved in this thing. I 
compliment you for your leadership for years. It is time for us 
to get something done.
    I also talked to Congressman Ramstad yesterday, the day 
before. He tells me that you have reworked a bill and it is 
able to come out.
    Senator Domenici. Yes, sir.
    Secretary Thompson. I said I would like to read it, but the 
concept I fully endorse.
    Senator Domenici. Mr. Secretary, there is going to be a 
meeting of everybody, including your Departments and others, so 
that when it gets beyond our Committee, which is going to 
report it out, all of that work will have been done.
    Secretary Thompson. Good. I would like to be included in 
that meeting.
    Senator Domenici. You will be, and the only reason I raise 
it with you strongly today, I do not want staffers going there 
assuming that they have to go through the whole business of 
whether you are for it or not. I would assume administration--
--
    Secretary Thompson. You do not have to go through. I have 
stated it publicly before, Senator.
    Senator Domenici. OK. And I am for arranging it any way 
that we can be helpful to Senator Nickles on his budget, and I 
am also for limiting the amount, Senator, the percent, the 
cost, et cetera. Now, that is about all my big questions, but I 
have one with reference to New Mexico.
    As it currently exists, the Medicare reimbursement system 
for health care provides and contains some inequities. We all 
know that. Some are intentional because you could not do it any 
other way. Some we are finding out about. But the reimbursement 
for health care providers nationwide vary greatly from region 
to region and from State to State. My home State, New Mexico, 
we are reimbursed less by Medicare for services provided than 
other States. Some of this started way back when we first did 
HMOs and the like, and you are aware of that. Although certain 
costs of providing care are more expensive in some areas than 
others, and that accounted to some extent in the disparity 
between reimbursement.
    But it is my theory that New Mexico is being punished for 
its own efficiency. New Mexico was foresighted enough to allow 
health maintenance organizations to penetrate our market, while 
most States remained involved with fee for service providers, 
and you know better than I, were squabbling and arguing and 
litigating about issues. However, because New Mexico was 
efficient, they are now rewarded with artificially low Medicare 
reimbursement rates. What would you recommend be done to 
address geographic payment inequities that currently exist in 
the system, and what if anything is HHS doing to address the 
geographic payment inequities that currently exist in the 
system?
    Secretary Thompson. Mr. Chairman and members, we are doing 
a lot. The new Medicare law is making changes, and wage 
disparities, for instance, have gone down from 72 percent to 62 
percent in the law, something that I think is badly needed. It 
is going to benefit the State of New Mexico, the State of 
Wisconsin, the State of Oklahoma and the State of North Dakota. 
There is $26 billion of new programs for rural areas which is 
going to benefit the States of New Mexico, all the four States 
that are here. We have been discriminated against for a long 
time, Senator Domenici, and I would have to say that the 
Medicare law is a giant step forward in creating some equity as 
far as reimbursement, and it is going to benefit a great deal 
for the States that are up there, as well as my home State of 
Wisconsin, something that I have been for for a long time, and 
I thank you for bringing it to my attention.
    Senator Domenici. Well, Mr. Secretary--incidentally, you 
called me Mr. Chairman a minute ago, and that is OK if you were 
in another Committee, but in this Committee you should call me 
``used to be Chairman.''
    [Laughter.]
    Secretary Thompson. You have been Chairman of this 
Committee for so long, you are a Chairman----
    Senator Domenici. Emeritus.
    Secretary Thompson. --Emeritus, and I think you should wear 
that as a badge of honor.
    Senator Domenici. Now, Mr. Secretary, I want to tell you, 
my friends here on this Committee that worked on another 
Committee that produced Medicare, have just informed me that 
the fix for the rural disparities versus the other more 
occupied States, that is the biggest fix we have ever had.
    Secretary Thompson. It is.
    Senator Domenici. I am looking forward to seeing the 
numbers because, Senators, I want to tell you--you probably 
know--but when you have a State as poor as ours, and you have 
doctors and neurologists and neurosurgeons leaving, when you do 
not have enough to begin with, and they say, ``Well, we are 
going over here to Texas because we get paid, reimbursed 
differently under the same law,'' you know, pretty soon you 
have riot sounding meetings with people wondering what the hell 
is the Federal Government doing? They know with Chuck Grassley 
and some of them, we have made some fixes, but we did not fix 
it enough. Now we might have.
    Secretary Thompson. I think you are going to be very 
appreciative. This has been an issue for Senator Conrad and 
myself for a long time. He and I have been fighting it. Senator 
Grassley, Senator Nickles, I mean anybody that represents rural 
areas, this Medicare bill, that portion of the law was enough 
to vote for it.
    Senator Domenici. Thank you very much.

    [GRAPHIC] [TIFF OMITTED] 94065.072
    

    Senator Nickles, I will submit my own questions, and I 
assume he will answer them under your rules.
    Chairman Nickles. Senator Domenici, thank you very much.
    And Secretary Thompson, it was almost enough to get some 
people to vote for it.
    [Laughter.]
    Secretary Thompson. I stand corrected, Mr. Chairman.
    Chairman Nickles. But I do stand by your statement, and I 
told Senator Domenici the improvements that we made in the 
resolving or trying to fix some of the rural inequities was the 
most significant step since I have been working on it for many 
years.
    I know you need to leave. I want to raise one other issue 
very quickly. Do you have four or 5 minutes?
    Secretary Thompson. Sure.
    Chairman Nickles. Four minutes. Medicaid spending, we have 
not touched on Medicaid. It is an enormous program under your 
watch. It is $180 billion program. The last 4 years it has 
grown at 9.7 percent, 13.9 percent, 9.1 percent, and estimated 
to grow 10.3 percent this year. There is some abuse in the 
system.
    Secretary Thompson. That is right.
    Chairman Nickles. Part of the abuse is what many of us call 
improper intergovernmental transfers. I have been concerned 
about it. Sometimes in the past we have called it upper payment 
limits, but some States, a lot of State actually, have 
developed what I would call a scheme to greatly enhance the 
reimbursements on Medicaid to where basically the Federal 
Government pays not their stated share, 60/40 or 50/50 or 
something like that, but in many cases it becomes a case where 
the Federal Government pays all of it, or pays a much greater 
share than frankly what it is supposed to do. Would you care to 
comment on it, maybe explain it, or give us 1 minute? I know 
you are pressed for time, and so I will not pursue it too long.
    Secretary Thompson. Thank you for asking me the question. 
This has been something that needs to be corrected. The law 
allows for local participation with the State in order to get 
matching funds. Usually it is a 50/50 match. Some States are 
different. Mine is 57/43. I do not know what North Dakota and 
Oklahoma is, but it is probably somewhere around 57/43. But so 
many States have taken advantage of the failure to supervise, 
the failure to actually audit some of these accounts.
    Let me just go through some examples of what we're finding. 
This State made upper payment limit, quarterly payments were 
being electronically transferred to the nursing home bank 
account. The State then immediately withdrew the amount of the 
payment from the provider's account less a $2,500 participation 
fee. The approximate amount of Federal Medicaid payment, what 
should have gone to the local, that went back to the State, was 
$191 million. That was one State.
    Another State made supplemental----
    Chairman Nickles. Say that again. I am trying to get these 
figures.
    Secretary Thompson. We found $191 million in this 
particular----
    Chairman Nickles. One State?
    Secretary Thompson. One State.
    Chairman Nickles. So basically overpayment to one State of 
191 million?
    Secretary Thompson. It was a wrong payment because it was 
sent to the State. Then the State has got to send it down to a 
county hospital. But the State, instead of leaving the money to 
the county hospital, gave the county hospital $2,500 and took 
the money back to the State and used it for general purpose 
revenue.
    Second example. Made supplemental payments to nursing 
facilities. Upon receipt of the payments, the nursing 
facilities, which are eligible for the funds, are required to 
return 99.5 percent of the payments to the State.
    Chairman Nickles. Wow.
    Secretary Thompson. That was $938 million.
    Chairman Nickles. Just one State or is that nationally?
    Secretary Thompson. One State.
    Chairman Nickles. One State.
    Senator Conrad. Can you tell us what State that is?
    Secretary Thompson. I cannot at this point in time. In 
private, I will be more than happy to, but I do not want to--we 
are auditing these. This is what we are finding.
    Third example. State makes payments to county nursing 
facilities. As a condition of receiving those payments, nursing 
homes must sign a participation agreement in which the nursing 
home agrees to return all but $10,000 of the payment. Those 
nursing homes are allowed to keep the $10,000 as a 
participation fee. The rest of the money goes back to the State 
to be used for whatever, and that accounted for $181 million.
    The next one makes a payment to county home nursing 
facilities. Upon receipt of those payments, the nursing homes 
are required by State law to return the majority of the 
payments back to the State. This is accomplished by an 
electronic transfer of fund. That example is $18 million.
    The next one makes a pro-share to county owned nursing 
facilities. Upon receipt of those payments, the nursing 
facilities are required by contract to return the majority, 
over 90 percent of the payments back to the State within three 
working days of the receipt. They traditionally remit portions 
of the payments to the State. That was 40 million.
    The next one is $1.5 billion. So this one----
    Chairman Nickles. Can you explain that $1.5 billion?
    Secretary Thompson. Yes. Make supplemental payments--this 
is a larger State--to large county nursing facilities. In order 
to receive the payments the county facilities borrow a total of 
$1.5 billion. Within 1 day these funds are transferred into the 
county nursing home bank accounts; from there to the State bank 
account; and then back into the county nursing home bank 
accounts as a Medicaid payment. The counties then repay the 
loan to the bank. At the close of the banking, the State claims 
the borrowed funds as an expenditure for nursing facility 
services of $1.5 billion and draws down $859 million in Federal 
Medicaid matching funds.
    Chairman Nickles. That 1.5 is that----
    Secretary Thompson. Turns into a match from us of $859 
million.
    Chairman Nickles. That really should not be allowed?
    Secretary Thompson. Absolutely not.
    Chairman Nickles. We may want to have a hearing just on 
this issue, and I apologize maybe for bringing it up late. I 
knew there was a lot of interest on the card, on prescription 
drugs, the cost and so on, and I thought that was maybe 
primary, but I am outraged at this, and I think it needs to be 
stopped. I want to stop it. Frankly, when we are running these 
kind of deficits and when I look at these double digit 
compounding growths of Medicaid, it just has to be stopped. We 
cannot afford this. I know that you have a proposal.
    Secretary Thompson. We do.
    Chairman Nickles. That will require legislation to go 
through the Finance Committee, so Senator Conrad and I are both 
interested in that, but I wish to learn more about it. I want 
to fully understand it. I have heard about county hospitals and 
so on.
    Secretary Thompson. Can we put up the chart? You have just 
a second?
    Chairman Nickles. Sure, I do. I know that you have to be--
you have a commitment at 12:15 so I am trying to be quick.
    Secretary Thompson. Dennis, you want to come up? Quickly go 
through it, Dennis.
    Chairman Nickles. Dennis, welcome back to the Committee.
    Mr. Smith. Thank you, Mr. Chairman. Through an 
intergovernmental transfer, this illustrates the process for 
which the county shares part of the match rate with the State 
which is permissible. But under this example--and this would 
have been allowed through upper payment limits--that the county 
provided $10 as a match to the State, the county provider. Any 
time you have a public entity, you have a potential for an 
intergovernmental transfer, be it a county hospital, county 
nursing home, but counties are providers for a wide range of 
other services as well.
    Under this, the county provider had a claim for $100. The 
State, however, a claim-back was for $250. This is a State with 
a 50/50 match. The Federal Government, seeing a claim for $250, 
says, ``OK, here is our share, $125.''
    Secretary Thompson. So the Federal Government pays more 
than the total claim.
    Mr. Smith. The reimbursement is made, and then the county 
provider transfers $150 back to the State. So the State has 
made $150.
    Senator Conrad. That is a scam.
    Chairman Nickles. So the Federal Government pays more than 
the original cost, and the State makes money on the procedure.
    Secretary Thompson. Correct.
    Mr. Smith. The true cost was $100, but a claim for $250.
    Chairman Nickles. How prevalent is this?
    Secretary Thompson. We think about 5 percent. We think it 
is going to be--it is growing. There are drummers out there 
selling this service to the States in order to get a 
percentage, and we think it would be about $6 billion.
    Chairman Nickles. $6 billion per what?
    Secretary Thompson. Annually.
    Chairman Nickles. Per year. I am very interested in trying 
to stop this, and I look forward to reviewing your legislative 
proposal, and we will work with you. I would appreciate it if 
you could provide us more example that would help highlight the 
problem and help us get our hands on the reason why this change 
is needed so we can sell it to our colleagues.
    I will tell you, regrettably, most of our colleagues do not 
have a clue about this. I mention intergovernmental transfers, 
and most people do not know what we are talking about, so I 
think we will have to work to educate people first to make the 
legislative change.
    I want to thank you and also I want to thank Jennifer 
Young, because I know that she has helped expose this. You have 
some excellent staff. I want to compliment Dennis, who I guess 
is now acting at CMS, who has done an outstanding job, both for 
the Finance Committee, and also in working in your Department. 
You have a great team, and we appreciate your bringing this to 
our attention.
    Senator Conrad.
    Senator Conrad. Mr. Chairman, I would just add my voice and 
say that is a scam, that is a pure scam on the Federal 
Government and the Treasury. That is tapping into the Federal 
Treasury in a way that is totally inappropriate and has got to 
be stopped. I would be very interested in finding out what 
States are involved.
    Can you tell us how many States are engaged in this kind of 
activity?
    Secretary Thompson. 34.
    Senator Conrad. 34 of the States. We have to call a 
screeching halt to this because that is totally beyond the 
pale.
    One final point I wanted to make, Mr. Chairman, is on the 
Medicare Advantage, CBO tells us that the private plans cost 
more than traditional fee for service even outside of this 
bidding question, so I do not know if there is a disagreement 
between CBO and CMS on this.
    Secretary Thompson. There is.
    Senator Conrad. There is apparently.
    Secretary Thompson. There is a disagreement.
    Senator Conrad. CBO says that it costs more----
    Secretary Thompson. CBO still believes that.
    Senator Conrad [continuing]. To do the private plans than 
traditional fee for service Medicare. The whole rationale for 
the private plans was to save money, so obviously that is a 
problem. Hopefully we can get to the bottom of that as we go 
forward.
    I just conclude by saying I hope very much, Mr. Chairman, 
that we go back in and find places where we can save money out 
of this bill that has been passed. When we go to $530 billion 
and it was supposed to be $400 billion, that is what people 
thought they were voting on. We have an obligation to go back 
and try to save money. We have a runaway freight train here in 
terms of the Federal deficits. We have to find ways to save 
money wherever we can, and I hope very much this Committee 
plays a role in that.
    I thank the Chairman for the hearing this morning.
    Chairman Nickles. Senator Conrad, thank you very much.
    I want to make one final comment. Senator Conrad was trying 
to get your attention about some of the ads that were running 
advertising Medicare and Medicare changes. I will tell you that 
I was a participant--attended a football game. This is when 
Scully was still head of CMS. And I saw a blimp that was 
advertising 1-800-Medicare. I was embarrassed. I did not see 
too many people writing the number down. I am not sure. I think 
you do need to look at the ad campaign. I think people do need 
to be educated, and it probably will take TV, radio and print 
to get it out. I do not know about a blimp at a football game. 
Maybe I am missing the--I know in sales you have to consider a 
lot of different venues, but I was kind of surprised about that 
and did not think it was the best use of taxpayer money.
    Secretary Thompson. I agree with you.
    [The prepared statement of Secretary Thompson follows:]

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    Chairman Nickles. Thank you very much. I appreciate your 
testimony before the Committee. The Committee is adjourned.
    [Whereupon, at 12:12 p.m., the Committee was adjourned.]

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           THE PRESIDENT'S FISCAL YEAR 2005 BUDGET PROPOSALS

                              ----------                              


                       FRIDAY, FEBRUARY 13, 2004

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room SD-106, Dirksen Senate Office Building, Hon. Don Nickles 
(chairman of the committee) presiding.
    Present: Senators Nickles, Domenici, Allard, Bunning, 
Crapo, Cornyn, Conrad, Byrd, and Stabenow.
    Staff present: Hazen Marshall, majority staff director; and 
Cheri Reidy, senior analyst for budget review/revenues.
    For the minority: Mary Ann Naylor, staff director; and Jim 
Klumpner, chief economist, Steve Bailey, senior analyst for 
revenues.

             OPENING STATEMENT OF CHAIRMAN NICKLES

    Chairman Nickles. The committee will come to order. I want 
to thank Secretary Snow for being with us today and thank all 
of our colleagues. We appreciate their willingness and 
cooperation to change rooms.
    Let me just make a couple comments. I am delighted that 
Secretary Snow is with us today. A year ago, Secretary Snow 
assumed office, and he did so at a very difficult and 
challenging and troubling time. The economy had been in a 
slide, revenues had declined for 3 years in a row, and the 
economy was still very, very slow. I met with Secretary Snow, 
and others did, and he and the President proposed an economic 
package to grow the economy.
    And, Mr. Secretary, but you made a proposal to grow the 
economy and you succeeded. And I want to compliment you for 
that, and I will show a couple of charts to give some evidence 
to that.
    The first chart is gross domestic product, and it shows 
very significant growth in the last year, I think in large part 
because of some of the changes that we have enacted.
[GRAPHIC] [TIFF OMITTED] 94065.140


    Look at the next chart, and it shows the unemployment 
situation has actually improved. Now, this is a chart of the 
household survey figures, and, granted, there is a difference 
between the household survey and the payroll survey. But the 
chart shows all-time record employment, and it is significant 
and it is real.
[GRAPHIC] [TIFF OMITTED] 94065.141


    The next would be the unemployment rate, and that shows, 
again, we have had a significant reduction in the unemployment 
rate, and that is positive. It was, I think, something like 6.3 
percent; now it down to 5.7 percent. So it is certainly moving 
in the right direction.
[GRAPHIC] [TIFF OMITTED] 94065.142


    The stock market has risen, as a result, greatly, I think, 
because of the tax changes that we made, cutting the dividend 
rate about in half and cutting the cap gains rate from 20 to 15 
percent, which we did in last year's bill. It is up from $11 
trillion to over $15 trillion in assets in the market. That is 
a $4 trillion increase, that is about a 40-percent increase. 
That is a very significant increase. So our tax changes made a 
difference.
[GRAPHIC] [TIFF OMITTED] 94065.143


    I would also just show the top marginal rate as a result of 
some of our efforts. It was 28 percent at the end of Ronald 
Reagan's term. It was 31 percent at the end of President Bush 
I's term. It was 39.6 percent at the end of President Clinton's 
term. And we reduced it 35 percent. I might note we did not 
take it all the way down to 31 percent; we took it to 35 
percent. Again, I think as a result of some of those changes, 
we have made significant positive improvement in the economy.

[GRAPHIC] [TIFF OMITTED] 94065.117


    Mr. Secretary, you came in a year ago. You had a 
significant challenge that you presented to us to make changes 
in tax policy to help grow the economy. We did that, in large 
part following the outlines that you gave us a year ago, a big 
challenge. And I think we have had some very good results. So I 
compliment you for that.
    We have big challenges now. The deficits are unacceptable. 
They need to be brought down. The administration says they want 
to reduce them by half in 5 years. I hope that we can beat 
that. I would like to accelerate that goal as much as possible, 
and that will not be easy. So I am going to be asking you some 
tough questions on how we can get the deficit down. The tax 
code that you have charge over has a lot of tax revenue in it, 
but it also has a lot of expenditures in it. And I want to 
examine both. I want to be working with your Department to find 
loopholes. I want to be working to find tax shelters. I want to 
be working to find things that lead to unreported income.
    I happen to think--and Senator Conrad has mentioned it to 
me--there is a lot of income that is not taxed, that is not 
reported, that is underground. We need to find it. We need to 
be aggressive. We need to stop programs that have significant 
expenditures to them that have very large error rates. I am 
talking about the earned income credit program. We need to fix 
it. We need to make sure the money goes to those people who 
deserve it, but not to people who don't deserve it.
    There are billions of dollars at stake, so we have a very 
aggressive challenge. We have to get our fiscal house in order. 
Four or five hundred billion dollar deficits are not 
acceptable. And I plan on doing everything I can in this year, 
in this budget, working with you, maybe in- or outside of a 
reconciliation package, but I want to do as much as we can to 
get our fiscal house restored. I look forward to working with 
you, but, again, I want to compliment you for your first year 
in service. I think you have had a remarkable, successful 
tenure as Secretary of the Treasury, and I compliment you and 
the President for the results that I have just illustrated.
    I call on my colleague and friend, Senator Conrad.

              OPENING STATEMENT OF SENATOR CONRAD

    Senator Conrad. Thank you, Mr. Chairman, and let me just 
start by saying how welcome this discussion has been from you 
this morning with respect to the need to get deficits down. You 
have said this at a number of our meetings, and I agree with 
you entirely. These deficits are too large. They are 
unacceptable and we need to make far more progress than is 
being suggested.
    We have to look on the spending side of the equation, and 
we have to look on the revenue side of the equation. I agree 
with you entirely that one of the areas we need to look at on 
the revenue side of the equation is this tax gap, the 
difference between what is being paid and what is being owed. 
The Revenue Service now says that is over $250 billion a year. 
That is a stunning amount of leakage in the system.
    There is one thing the chairman did not mention, and let me 
just put it up in terms of--and that is the growth of the 
deficit. And it has been dramatic, and it is of record 
proportion. The deficit now in dollar terms is by far the 
biggest it has ever been. Last year was a record, and this year 
surpassed it by more than $100 billion.
    Mr. Secretary, I mentioned to you when I greeted you that I 
wanted to recall some of my favorite Secretary Snow quotes from 
before you were Secretary. This is my all-time favorite: ``A 
balanced Federal budget is the best choice to ensure a bright 
future for the Nation's economy.'' Yesterday you were talking 
in the Finance Committee about how we have to pay attention to 
the economy. That is what creates jobs. And I entirely agree. 
And the question is how threatening the pile-up of deficits and 
debt are to a vibrant economy.
[GRAPHIC] [TIFF OMITTED] 94065.108


    Let's go to the next. I also remember well this ad that 
appeared in major newspapers that you were a signatory to. I 
very much applauded you at the time. The headline was: 
``Without a balanced budget the party's over, no matter which 
party you're in.'' And I agree with that sentiment as well. We 
have to get back to balance as quickly as possible, given 
especially the baby-boom generation which is about to retire.
[GRAPHIC] [TIFF OMITTED] 94065.109


    But when I look at the President's budget proposal and the 
suggestion that he is going to cut the deficit in half, it is 
simply not credible to me and I do not think it is credible to 
anybody that takes a hard look at what the assumptions are, 
because the President has achieved a reduction by largely 
leaving out substantial parts of the budget.
[GRAPHIC] [TIFF OMITTED] 94065.110


    The President is saying that the deficit 5 years from now 
will be cut in half to $237 billion. But in that same year, he 
will be taking under his plan $259 billion from the Social 
Security Trust Fund, every penny of which has to be paid back. 
In addition, he will be taking $23 billion from the Medicare 
Trust Fund. And if we are going to continue to address the 
problem with the alternative minimum tax, which is rapidly 
growing into a crisis. Three million people affected now by 
what is supposed to be a millionaire's tax, there are going to 
be 40 million people affected by the end of this budget period. 
It is becoming a middle-class tax increase. That costs $55 
billion to fix. The President just left it out. And it costs 
$30 billion, according to the CBO, for residual work costs in 
that year. All of these things are left out, and so you have an 
increase in debt in that year not of $237 billion but of over 
$600 billion.
    Let me go to the next, because the President's own budget 
shows in the fifth year that the debt is going to increase not 
by $237 billion, but the debt is going to increase by $633 
billion.
[GRAPHIC] [TIFF OMITTED] 94065.111


    Let's go to the next. Here is the problem that I see. If we 
adjust what the President is saying for the effect of his tax 
cuts beyond the 5 years, the alternative minimum tax problem, 
and his defense policies--not, you know, this idea that defense 
costs will not grow for the war after September 30th, but put 
in what CBO tells us is going to happen. We don't see the 
deficits being reduced for the next 10 years. We see an ocean 
of red ink.
    Let's go to the next one. Here are part of the reasons why. 
One, we are not accounting for the $2.4 trillion of Social 
Security money that is going to be taken--$2.4 trillion during 
this next 10 years, every penny of which has to be paid back. 
The President just shows the effect of the first 5 years of his 
tax cut proposal, and what you can see is this dotted line is 
the fifth year. The cost of the tax cut explodes beyond the 5-
year window. We have to account for that if we are going to be 
accurate with people.
[GRAPHIC] [TIFF OMITTED] 94065.113


[GRAPHIC] [TIFF OMITTED] 94065.114


[GRAPHIC] [TIFF OMITTED] 94065.115


    Let's go to the next one. The alternative minimum tax, the 
same kind of pattern. The President pays for it in the first 
year, but the cost of fixing it, according to the Congressional 
Budget Office, explodes in these outer years.
    And, of course, war costs. The President says no war costs 
past September 30th. The Congressional Budget Office tells us 
$280 billion of costs, none of this accounted for in the 
President's budget.
    The result is we have a debt that is not under control, but 
a debt that is skyrocketing, and at the worst possible time--
right before the baby boomers start to retire.
[GRAPHIC] [TIFF OMITTED] 94065.116


[GRAPHIC] [TIFF OMITTED] 94065.112


    So, Mr. Secretary, I think we have a lot of work to do to 
get serious about the growth of deficits and debt and the risk 
that that growth poses for our economic security.
    Chairman Nickles. Senator Conrad, thank you very much.
    Mr. Secretary, we are delighted to have you with us, and 
please make your presentation, and then we will have a few 
questions.

STATEMENT OF HON. JOHN SNOW, SECRETARY, U.S. DEPARTMENT OF THE 
                            TREASURY

    Secretary Snow. I think I am on here. I am not sure.
    Chairman Nickles. You are.
    Secretary Snow. Thank you very much, Mr. Chairman, Senator 
Conrad, members of the Senate Budget Committee. It is an honor 
to be before you, and I appreciate, Mr. Chairman, your opening 
comments and those of Senator Conrad as well.
    The budget that is before you reflects basically four 
priorities:
    One, winning the war on terror. That has to be at the 
center of everything that we are engaged in today. It has to be 
a national priority of the highest rank, as the President said 
in his State of the Union message, and protecting the homeland 
that goes hand in hand with that. And the budget reflects that 
with some 7-percent increase in defense spending and some 10-
percent increase in the homeland security budget, which isn't 
found just in the Department of Homeland Security but 
throughout many other agencies as well.
    And the budget reflects the President's commitment to 
continuing to keep the economy on a path of creating jobs, 
growing and expanding, because a bigger economy is good to deal 
with the problems of the future, the problems of how we are 
going to pay for the Social Security and the Medicare 
responsibilities of the future, fund those unfunded 
commitments.
    But it also reflects a commitment, Mr. Chairman, in line 
with your suggestion, that we really have to get serious about 
the deficit, and those of Senator Conrad as well. The 
President's budget seeks to cut the deficit in half within 5 
years. If we can do better than that, that is terrific. We 
really ought to be pointing toward a convergence to zero. That 
is where we need to do. We need to get on a path to truly 
balanced budgets. But you can only do it through two ways. 
There aren't a lot of avenues open to us. One is growing the 
economy because that creates more governmental revenues, and, 
of course, back in the late 1990's, when the surpluses 
developed, 2000, we had extraordinarily high governmental 
revenues coming in: receipts from the good stock market, from 
capital gains, from a full-employment economy, and from high 
profitability.
    We had the recession. Government receipts fell down. Now 
they are at quite low levels, but we project them to go back up 
toward the 18-percent average that they have been historically, 
18 percent of GDP as they historically have been, down to 16 
today, 15.7.
    The other thing to do, though, in addition to growing the 
economy, you have to cut spending, and spending cuts have to be 
at the forefront of achieving that objective. That is why the 
highway bill is so important to the President and to many of 
you, because it represents spending levels that, if embraced in 
the actions of the Congress, will make it difficult ever to hit 
those targets, important as and good as much that is in that 
bill is. Actually, I would acknowledge it, but it has to be 
done within restraints of a fiscal balance.
    I appreciated very much your comments on where the economy 
is today. It is really in a tremendously different and better 
posture today than when I appeared before you a year ago. There 
was a lot of talk of a double-dip recession. Then there was 
talk of deflation--deflation that could become destabilizing. 
Even those who were fairly optimistic a year ago about the 
economy acknowledged that it was on a wobbly path; it was an 
anemic pickup. Today, nobody says that. I think today everybody 
acknowledges that the economy is on a strong growth path, with 
the numbers you showed, extraordinary growth--for the year as a 
whole, 4.4 percent; third quarter, over 8 percent, with 
projections for over 4 percent for this year. If we can sustain 
that--and I think we can--we are going to create a lot of jobs 
in this economy, as Chairman Greenspan has said, as the private 
forecasters say, as the administration says.
    I think it is important to recognize where we have come 
from. These deficits are large. They are unwelcome. They are 
unacceptable. And they must be brought in line. They have to be 
reduced.
    But they are understandable, too. They are understandable 
in the context of the President having inherited a recession 
that took a tremendous amount of revenue out of the Government 
receipts, and a recession that was made worse by corporate 
scandals, by the meltdown of the stock market that took $7 
trillion out of the household wealth of the country, by 9/11, 
the war in Afghanistan, the war in Iraq. All of those things 
have had significant effects on the economy.
    When I talk to business people from other parts of the 
world, they are astonished that the American economy has 
sustained itself as well as it has through all this period, and 
that is, I think, a compliment to the resourcefulness of the 
American people and to the adept ability of our institutions, 
including the Congress, which responded with the tax bill last 
year.
    Let me close by saying that without the tax bill last year, 
Mr. Chairman, members of the committee, the economy would not 
be where it is today. Without that tax bill we never would have 
had growth rates of 8.2 percent in the third quarter and 4.4 
for the year.
    I will remind you, we started the year with a growth rate 
of 1.4 percent for the first quarter, a stock market that over 
the course of the year gained something well over 20 percent, 
creating, as you said, nearly $4 trillion of additional value 
from then until now. The reductions you made in dividend taxes 
and the reductions you made in capital gains taxes, the 
lowering of marginal tax rates across the board have had a 
profound effect on this economy and have created a strong 
upward movement in the economy that otherwise simply would not 
have existed.
    We regret the deficits. We are going to go after the 
deficits. They have to be reduced. They do threaten long-term 
prosperity. But working together, I think we can manage our way 
through that problem.
    I thank you very much for the opportunity to appear before 
you.
    [The prepared statement of John Snow follows:]

    [GRAPHIC] [TIFF OMITTED] 94065.135
    

    [GRAPHIC] [TIFF OMITTED] 94065.136
    

    [GRAPHIC] [TIFF OMITTED] 94065.137
    

    [GRAPHIC] [TIFF OMITTED] 94065.138
    

    [GRAPHIC] [TIFF OMITTED] 94065.139
    

    Chairman Nickles. Mr. Secretary, thank you very much for 
your opening remarks.
    I will ask all of my colleagues--we do not have strict time 
limit, but I am going to assume the Secretary needs to get out 
around 12. So if people could try and keep their remarks to 7 
or 8 minutes, we ought to be able to accommodate that, and we 
will have some flexibility if necessary.
    A couple comments. I mentioned to you and Senator Conrad 
that there might be $250 billion of leakage or uncollected 
receipts that might be out there, underground economy, you name 
it. I will just ask you a couple questions. Is that figure 
close to being accurate? Are there some things we could do that 
we are not doing to help close that leakage or to collect taxes 
that are due but not paid?
    Secretary Snow. Mr. Chairman, that number I think is a 
number that goes back some years. There clearly is a tax gap. 
There is an underground economy. There are people who should be 
paying taxes who aren't paying taxes. There are people paying 
taxes who should be paying more taxes. There clearly is a tax 
gap.
    I don't know that the $250 billion number is accurate 
anymore, but it is a large number, whatever it is, and the IRS 
is doing a study with the help of Treasury, the assistance of 
Treasury, to try and get a better handle on it.
    We do know there are some programs that do not work well. 
The one you mentioned, the earned income tax credit, will 
require some improvements because there are both underpayments 
and overpayments there.
    The IRS budget this year, Mr. Chairman, reflects a very 
large increase--I think it some $300 million, roughly--
primarily devoted to greater enforcement. We think we need to 
put more energy into compliance, more effort into compliance 
across the board, for business, small business, large business, 
but taxpayers generally in all income categories. And I hope we 
will see that significant enhancement of the IRS budget for 
enforcement carry the day.
    Chairman Nickles. Mr. Secretary, just a couple comments. 
One, I would appreciate it if you and/or the IRS, which is 
under your domain, would give us a list of, I am going to say, 
loopholes, for lack of a better word. I will just mention a 
couple. I mentioned the earned income credit. In 1999, IRS 
estimated that between 27 and 31.7 percent of claims were in 
error, should not have been made. That was an estimate of $8.5 
to $9.9 billion. That was in 1999, and we were spending $31 
billion on the program. We now are spending almost $35 billion. 
This is a program, keep in mind, that cost about $7.5 billion 
in 1990 and now costs $35 billion. People wonder how spending 
has grown. That program has gone up by a multiple of about 5 
times, 500 percent in the last 14 years.
    But it is not acceptable to have a program that has an 
error rate of 30 percent. Senator Sessions has suggested maybe 
we should make those payments on a monthly basis instead of an 
annual basis and take out some of the incentives for corruption 
and fraud. That is a proposal.
    Anyway, I would solicit from you and from your outstanding 
staff some possible ways to address fraud--some of this is 
going to require legislation. So give us some recommendations, 
if you would, and if you would also give us a list of other 
abuses.
    There is one that I will ask about in my second round--the 
sale-in lease-out transactions that I think your Department has 
identified. But this is a loophole, an abuse of the system that 
is costing billions, maybe as much as $28 or $30 billion over 
10 years. It needs to be stopped. It is growing dramatically, 
Senator Conrad said so.
    I will get on to that one in the second round, but I 
mentioned earned income credit because I think most people are 
more familiar with that. But this is on the spending side. We 
have a lot of spending in the tax code, and we have some abuses 
of the tax code that at least this Senator wants to stop. I am 
not really interested in having the IRS chasing down 
babysitters and lawn mowers to make sure they pay taxes on, you 
know, the $30 they have ten. I am interested in stopping a 
corporation buying a non-taxable entity's assets and then 
getting a lot of tax benefits and leasing them back to the city 
and have it be a shell game.
    Senator Conrad and I yesterday, when we had Secretary 
Thompson up, we found out that a lot of States were doing a 
shell game and costing taxpayers billions and billions of 
dollars. And we hope to close that loophole, and I hope that we 
can close this. And maybe if we can discover some other things 
that are really an abuse of the system, we should shut them 
down earlier rather than later. So if you and/or your staff 
would provide us some abuse list, we will be happy to work with 
you to do what needs to be done legislatively. You may be able 
to do a lot of these things administratively.
    Senator Conrad.
    Senator Conrad. Thank you, Mr. Chairman----
    Senator Domenici. Would you yield for one observation?
    Senator Conrad. Certainly I would yield to the former 
chairman.
    Senator Domenici. Senator Nickles, as I listened to you, if 
I were the Secretary, I would be a little bit confused as to 
what you want. So maybe I could ask you for a minute.
    One thing is loopholes. People have a lot of arguments of 
what loopholes are. One man's loophole is another man's 
necessity. But what you spoke of were abuses and places where 
the laws were being used to cheat. But there also are tax 
expenditures that this committee and the tax committee might 
want to look at and say these used to be pretty good, but they 
aren't any good anymore. And I would assume you want him to 
give you both of those lists.
    Chairman Nickles. Absolutely, and I appreciate your 
clarification.
    Senator Domenici. Thank you.
    Chairman Nickles. Senator Conrad.
    Senator Conrad. I want to again thank the chairman for 
introducing these subjects because I think they are hugely 
important as we go forward.
    Let me just say on the tax gap calculation, your IRS 
Commissioner was just on--I think it was CNN I saw him, and he 
referenced the $250 billion, which, as you correctly point out, 
I think is a result of an analysis that was done in the mid-
1990's.
    Secretary Snow. Yes.
    Senator Conrad. I think we all know that number has done 
nothing but grow. And we have to go after--it is utterly unfair 
to the vast majority of Americans, American taxpayers, American 
corporations that pay what they legitimately owe, to have some 
escape. That is just not fair. And I believe that number is 
much bigger.
    I, frankly, have concluded we need to consider fundamental 
tax reform. I don't think using our current system and just 
increasing audit and enforcement will ever capture perhaps even 
an insignificant part of this tax leakage. So I think we need 
to consider fundamental tax reform in conjunction with 
increased enforcement.
    Let me just go to this question of revenue as a share of 
GDP because it really does jump out at one what has happened 
here. We did have in 2000 revenue as a share of GDP that was at 
a very high level historically. Now we have revenue at a very 
low level historically, the lowest as a percentage of GDP, 
which you referenced, Mr. Secretary, since 1950.
    reuvenue as a share
    When revenue was high as a share of GDP, the President said 
we need tax cuts to rebalance. Now that it is low as a share of 
GDP, he says we need more tax cuts. Frankly, I do not think 
that squares with the reality that we confront.
    I would say that a tax increase should not be the first 
place we look. I think the first place we look ought to be this 
tax gap, because there is an enormous amount of money that 
could be recovered.
    Let's go to the next one. This shows spending as a share of 
GDP, and it is very interesting. This goes back to 1980. We see 
spending got up to 23.5 percent of GDP. It came down steadily 
until 2000 to 18.4 percent of GDP. We have now had a 
substantial uptick, and we see that leveling out.

[GRAPHIC] [TIFF OMITTED] 94065.015


    So we do have a spending problem, but I hasten to point out 
that 92 percent of this increase has been in just three areas: 
defense, homeland security, and response to 9/11. So the 
spending side of the equation is going to be very tough, but it 
simply has to be attended to.
    Let me put up--this is my question. This was in the 
Washington Post on January 26th with an article headlined, 
``Weak dollar helps U.S. firms for now.'' The article said in 
part, ``Currency traders fretting over that dependency''--and 
the dependency they were talking about are these massive 
deficits, both budget and trade--``have been selling dollars 
fast and buying euros furiously. The fear is that foreigners 
will tire of financing Americans' appetites. Foreign investors 
will dump U.S. assets, especially stocks and bonds, sending 
financial markets plummeting. Interest rates will shoot up to 
entice them back. Heavily indebted Americans will not be able 
to keep up with rising interest payments. Inflation, 
bankruptcies, and economic malaise will follow.''

[GRAPHIC] [TIFF OMITTED] 94065.013


    Let me just top it off with this. This is what has happened 
to the value of the dollar against the euro, which you are 
intimately familiar with after meeting with your G-7 partners. 
I am sure they were talking to you about this--what has 
happened to the value of the dollar in the last 18 months.

[GRAPHIC] [TIFF OMITTED] 94065.012


    My question to you is this: Are you concerned about what 
the IMF warned us about, what the Comptroller General of the 
United States has warned us about, what these economists are 
warning us about: that this pile-up of deficits and debt could 
threaten to put upward pressure on interest rates which would 
threaten to reduce economic activity and that an early warning 
sign is what is happening to the value of the dollar?
    Secretary Snow. Well, Senator, clearly the deficits, --
unless dealt with--pose a threat to the long-term well-being of 
this country and they, therefore, must be dealt with and have 
to be dealt with. I think virtually all the economists agree 
that if deficits become embedded in the financial structure of 
a country and financial markets view the deficits as entrenched 
and rising, there will be a perfectly predictable reaction in 
the marketplace. Lenders will demand higher premiums, which 
mean higher interest rates. And that would be extraordinarily 
unfortunate.
    One of the great boons to the American economy today is the 
low interest rates we have. They have helped create a very 
strong housing market, a very strong construction market, 
strong demand for any number of credit-based consumer 
products--automobiles.
    So I share your concern that we must deal with the deficit 
and that the deficit represents national dissavings. And we 
have the Government dissaving through deficits. We have an 
extraordinarily low savings rate on the part of households 
today at 2 percent or so versus 7 or 8 in the past. And we do 
have a large current account deficit, which is really the 
difference between our domestic investment and our domestic 
savings. And since our domestic investments, thanks to the 
strong economy, are high--we have lots of good investment 
opportunities in America. We want to keep that up. But we don't 
have adequate savings to fund it. We need to call on other 
nations of the world. And the current account deficit reflects 
our own national dissavings. I certainly agree with you.
    Senator Conrad. Let me just conclude by saying that the 
problem that I see is that the President's plan does not deal 
with the deficits. Here is what we see happening under the 
President's plan with the growth of the accumulated deficits, 
which is the debt, and the gross debt is just going through the 
roof under this plan.
    So to me the President has not given us a plan that deals 
with the deficits. I would just ask you--I know it is very 
difficult for the President, once he set up his budget, to 
reconsider, but I think as we work through this, we have to be 
much more serious about where this is all headed.
    Secretary Snow. Senator, I cannot see the chart in terms of 
the out years. That goes out to?
    Senator Conrad. 2014.
    Secretary Snow. This would be too long an answer, but I 
think your debt numbers include a good deal of intra-
governmental debt too.
    Senator Conrad. Oh, yes. This is the gross debt. But 
remember, we have a totally different situation than we faced 
before. That different situation is we have the baby-boomers 
that are about to retire, and we have been ramping up Social 
Security dramatically, $160 billion of surplus this year, $260 
billion in the fifth year of Social Security surplus, and under 
the President's plan every dime of it is being taken for other 
things.
    Secretary Snow. As you and I had the exchange yesterday, I 
think we are in agreement that we need to find a way to deal 
with those long-term unfunded commitments represented through 
Social Security and Medicare where--demographics are really 
destiny, as they say, and the demographics are just about to 
hit us. I am in full agreement that we absolutely have to 
confront the issue of our baby-boomers retiring and the 
consequences of the demographics on these very large systems 
which will require us to take actions on a number of fronts, to 
do things like hold down health care costs.
    Senator Conrad. Let me just conclude by saying to you I 
agree with that, but I will tell you, you have to look on the 
revenue side as well. But the 75-year costs of the President's 
tax cuts are three times the shortfall in Social Security. So 
we have to look at both.
    Chairman Nickles. Senator Conrad, thank you very much.
    Next call on the Chairman Emeritus, Senator Domenici.
    Senator Domenici. Thank you very much, Mr. Chairman.
    Mr. Secretary, it is good to be with you.
    Secretary Snow. Thank you, Senator.
    Senator Domenici. My first question will be of great 
interest to the distinguished former Chairman of 
Appropriations, who sits over here on my left. Could I ask you, 
if you know, what percent of this budget is appropriated?
    Secretary Snow. Not offhand, I do not.
    Senator Domenici. I should know it like that, but I do not.
    Senator Byrd. About a third.
    Senator Domenici. About one third?
    Senator Byrd. About a third. When I came to Congress more 
than 51 years ago, the percentage was somewhere in the high 
80's or 90. Today it is less than a third, less than a third.
    And one other thing we need to remember, when we are 
talking about Government spending, we are also talking about 
for the military, spending for the military and for homeland 
security. But to hear these witnesses, you would think it is 
all domestic discretionary. You just think it because they do 
not stop to say that.
    Excuse me, Mr. Chairman.
    Senator Domenici. That is fine. Just so I get my chance to 
do a couple of questions, I am very pleased.
    I wanted to amplify that by saying not too long ago, when 
President Kennedy was President, 59 percent of the entire 
budget of the United States was for the defense of our country, 
and that much was all discretionary, if you can imagine.
    The reason I raise the question, I know our Chairman works 
very, very hard on trying to get the discretionary accounts of 
our Government down, and I commend him for it, but I really 
think every now and then we have to be realistic when we try to 
look at how big that deficit and how we get it down. We have to 
be realistic as to how much of this budget is domestic. I mean 
you cannot take 10, 15 percent of this budget is appropriated. 
You cannot take 10, 15, 20 percent of it each year. The kind of 
money that is needed to get into balance is 10, 15, 20 percent 
of the budget of the United States.
    I really think it is nice to go through this exercise, and 
he will produce a budget that ratchets down this appropriated 
account and we will struggle terribly, and when we are through, 
if we are lucky, if we are lucky, we will save 1 percent or 2. 
So I want to make sure you know that because you are kind of in 
charge of the overall picture, and you must know the overall 
picture is a lot more than the appropriated accounts.
    Having said that, I want to suggest something to you. There 
is an old tax code sitting around your shop that one of your 
men there knows a lot about. It is called the USA tax. You have 
heard of it.
    Secretary Snow. I sure have.
    Senator Domenici. It is the only reform measure that is an 
entire tax code, done by Senator Nunn and I with great help 
from the business community, and USA stands for Unlimited 
Savings Accounts. It was going to change our tax code so that 
you paid money on what--excuse me--taxes on what you spent, not 
on what you saved. But I would tell you there is a separate 
section on corporations, and it might be worthwhile to look at 
it. It very well might work by itself. It completely changes 
corporate taxes. It starts with the premise you are going to 
get as much money as you do now, but believe it or not, if you 
were in business, how do you think it would be for business to 
have no depreciation schedules? Would that not be exciting? 
Everything they purchased is on a cash basis. That is the 
premise of the USA. It is just a phenomenal way to change and 
put some energy into that.
    I do not want any long answer, because I have some things, 
and I want to proceed.
    Secretary Snow. Senator, I am aware of those proposals back 
in the mid 1990's. Former Secretary O'Neill, Leonard Alcoa and 
I and others were engaged----
    Senator Domenici. You all raised the money to put it 
together.
    Secretary Snow. Yes. And it had an extraordinary amount of 
promise and merit to it.
    Senator Domenici. Mr. Secretary, I remember back in the 
day--obviously, I was not here, but I remember reading that 
President Dwight Eisenhower used to say--and lots of people did 
not understand it and did not much care--but he used to say the 
greatest thing for America is to have low inflation. A lot of 
leaders have said that. You remember when we used to struggle 
because inflation would go up and down just like a roller 
coaster? And everybody was trying to figure out why, and some 
people would say, well, labor contracts are all up this year. 
We are going to have inflation.
    The great thing that is happening to America is lack of 
inflation. Is that not correct?
    Secretary Snow. Absolutely.
    Senator Domenici. Second, everybody, including Greenspan, 
for years used to say, Americans will be healthy. There will be 
plenty of jobs if we increase productivity. I just noticed, Mr. 
Secretary, and fellow Senators, that productivity in the third 
quarter of last year was 9.3, second quarter was 7.1, and third 
was 2.2. Then it went along at 5.6 average for 2 years. The 
fastest rate of growth in any 2-year period since 1950.
    Mr. Secretary, I am very perplexed and I do not understand 
any more. How could you have the two most important things for 
a healthy economy, inflation under control and productivity 
humming at the highest rate we have ever had, and somehow 
people are running around saying this is a bad economy, No. 1, 
and second, that we do not have enough people employed?
    Mr. Secretary, either these things are no longer relevant, 
inflation low and productivity high, that is one possibility; 
or we do not know what we are talking about in terms of what 
productivity means any more. I believe it is the second one. I 
do not think we understand productivity. I do not think we know 
how to measure it very well. But I would like you to do two 
things quickly, to comment on what I have said, and then 
second, would you produce for this Committee, if the Chairman 
agrees, an analysis of productivity and what it is, how we 
measure it, who measures it, and how much confidence you have 
in it?
    Secretary Snow. Senator, yes, we will be delighted to do 
the latter, produce that assessment for you.
    Senator Domenici. All right.
    Secretary Snow. On the question of inflation, I agree with 
you. We are blessed with extraordinarily low inflation rates 
today. That is a reflection of high productivity. It is a 
reflection of global competition. It is a reflection of some 
excess capacity that is hanging over from over investment back 
in the late 1990's, and it shows up in the fact that businesses 
do not have any pricing power. Business after business after 
business will tell you they simply cannot raise prices.
    Productivity is also a terrific thing for the economy in 
the aggregate because productivity means you got more output, 
and that means more potentially to share with everybody. Right 
now productivity is probably having a somewhat negative effect 
on job creation because businesses are finding they can produce 
more with less, so a given level of output can be done with 
fewer workers or now a larger level of output can be done with 
the same old level of workers. But productivity will show up as 
higher profits in corporations and businesses and hire-free 
cash-flows. That will get competed away, as it always does, 
marketplace competition. Then the employers will need to expand 
their businesses, they will be led to expand their businesses 
by the profits, and as they do, then the labor share will go 
up.
    I think if we look at our national income statistics, we 
will be in a period here where the share to capital will be 
higher temporarily, and then it sets in place a healthy process 
where the share of the capital shifts and it moves more to 
labor.
    The labor markets are pretty strong, but given this high 
productivity, Senator, there has been a slower pickup in jobs 
than economists would have expected from growth rates as high 
as they are, but of course, as the Chairman said, we have some 
differing interpretations of labor markets given the fact that 
the household survey is showing the creation of quite a few 
jobs, a lot of jobs, and the establishment survey, payroll 
survey, is showing a much, much less fast rebound in jobs. 
There should be a convergence there because they end up 
measuring the same thing, but right now they are showing 
different results.
    Senator Domenici. You would not like to be running for 
President and answer the issue about less jobs having been 
produced by saying we had too high a productivity, would you? 
Would that not be a nice answer out there? Who would understand 
that and would that----
    Secretary Snow. I was trying to explain why the job pickup 
rate in this recovery is a little slower than the economists 
would have predicted.
    Senator Domenici. Yes, I understand. But you think it is 
going to get better in due course?
    Secretary Snow. Oh, absolutely. I think all our forecasts, 
the private sector forecasts, are for a good job pickup over 
this year, over 1904.
    Senator Domenici. Thank you.
    Chairman Nickles. Senator Domenici, thank you very much.
    Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman.
    Welcome Mr. Secretary. We thank you for your service.
    To followup on what I thought were very excellent points of 
my friend and esteemed Senator, Senator Domenici, on two points 
I guess, two points that I was going to ask about. First of 
all, when we look at how we bring this budget back into 
balance--and it is astounding the red ink that we have now. I 
was privileged to be in the U.S. House in 1997 when we balanced 
the budget for the first time in 30 years and were focusing on 
paying down the debt, and it was a time of great economic 
growth for us. But Senator Domenici spoke about the fact that 
to only look at the discretionary spending side would not be to 
look at the largest way in which to bring down the deficit. In 
fact, I have said before the Committee at earlier times this 
year, this year's nondefense domestic budget, discretionary 
budget, everything but defense. Homeland security, education, 
health care, non-Medicare health care, the environment, law 
enforcement, everything, adds up to $445 billion, which is less 
than this year's debt.
    So if you eliminated every penny of everything we did in 
domestic spending and only funded the military, you would not 
eliminate this year's debt. So we can debate whether domestic 
spending, discretionary, should go up, Mr. Chairman, a half a 
percent or a percent or 2 percent, but I share Senator 
Domenici's position that that is really moving around the edges 
when we look at the huge debt that we have. In fact, when we 
look at this as shared GDP, 24 percent of what we are looking 
at in terms of the debt and revenue losses comes from spending 
as shared GDP, 76 percent is revenue losses and about half of 
that is the tax cut, which leads to what I feel is a very 
important debate, and it goes back to what you are talking 
about in terms of productivity and really world view 
economically of how we look at things today.
    We had an economic report released earlier this week that 
said basically if you can get it cheaper in another country, it 
is good business to do that, that on balance outsourcing or 
exporting jobs is a net plus for us. That is a different view, 
and when we look in the context of what we are seeing now, we 
really have a world view that says focus on wealth creation. 
Those who have wealth, hoping it will trickle down, focusing on 
wealth in terms of tax policy and trade policy and so on, 
versus focusing on work and the value of work in America. How 
do we get there? How do we get to the work part?
    When Chairman Greenspan came in yesterday to the Banking 
Committee, talking to us about the fact that it was surprising 
that with the economic growth we have not seen the job 
creation, but one question I would ask is we are beginning to 
hear theories about productivity that look at this larger issue 
of exporting jobs. One theory would say it used to take a 
hundred people, let us say, for a job in the United States. Now 
it takes 80 people in the United States, but 20 in India or 20 
in China and 20 in Mexico, and that we are not looking at 
productivity in a way that would measure that. So that when we 
look--I had asked CRS to look at minimum wage rates around the 
world if they were converted to hourly rates for U.S. dollars. 
In China the minimum wage rate, compared to ours, is 33 cents, 
33 cents in Mexico. So there is a major push, even as you talk 
about more dollars coming; you indicated more productivity, 
higher profits and then reinvestment. The question is, where in 
a world economy are they going to invest? It may not be in this 
country.
    We have Electrolux, which is a plant that makes 
refrigerators in Greenville, Michigan, a community of 9,000 
people, 2,700 jobs. Electrolux makes a profit in the United 
States. They have added a third shift. They admit they make a 
profit, but they could make a bigger profit by paying 2.50 an 
hour and no health benefits in Mexico, and they are closing the 
plant.
    Mr. Secretary, how do we compete with that if we do not go 
right to the heart of smart trade policies, currency 
manipulation with these countries that are taking our jobs, and 
focus on more than wealth accumulation of a few? We need to 
focus on work, the value of work, the value of a middle class, 
and the value of making sure that that household income that 
Chairman Greenspan talked about to us yesterday, that is 
driving this economy, buying those cars which we want to buy in 
Michigan, American made cars, and buying the refrigerators and 
buying the homes, we are not going to be able to do that if we 
are being asked for our workers to receive 2.50 an hour and no 
health benefits, or go to China for 33 cents as an average 
wage. So how do you speak to all of that?
    This vision that I see coming out of the administration is 
one that is working for a few, but I do not see it working for 
the people in my State of Michigan.
    Secretary Snow. Thank you, Senator. The question you raise 
is a large one, and a critical one. It is really the central 
issue of economic policy. How do we make the American citizens 
better off? I think basically the answer is, by allowing the 
dynamics, the dynamism, the creativity, the energy of the 
American system to play out. You know, you go back 100 years 
and think of what the country was. We were an agricultural 
Nation, industrialization was just beginning. We had 40 percent 
of the work force engaged in agriculture. Today, as you know, 
it is less than 2 percent.
    And yet, the standard of living, year after year after year 
after year, as people left agriculture and moved into industry, 
and then left industry and moved into other things like 
computer chips and technology and health care and so on, we 
have had a progression from low value jobs in the United States 
to higher and higher and higher value jobs.
    The reason--and you know this as well as I--the reason 
American workers have high wages is they are productive. Wage 
rates reflect the productivity of the work force. Our work 
force is the best in the world. They have the highest wages in 
the world. They are the most productive in the world. Our job, 
I think, in public policy, is to continue to create the 
conditions where the inherent talent and ability of the 
American work force and our businesses can reflect itself in 
the marketplace.
    Senator Stabenow. Mr. Secretary, with all due respect, 
these are different times now in a global economy. I understand 
going from agriculture economy to manufacturing, and we have 
all been told that now we are moving into high tech, value-
added positions, and we need to focus on education and 
innovation, all of which I support, and I wish it was more 
reflected in this budget, by the way, since we do need to be 
doing that.
    But with all due respect, we are not talking about only 
manufacturing jobs or low-end jobs that are now being lost or 
exported because of the pressures internationally. We are 
talking engineers. We are talking about--in this report, at the 
beginning of the week with the Council of Economic Advisors, it 
was recommended that one of the ways to lower health care cost 
is by exporting health care providers, like radiologists. I 
have friends of mine in Lansing, Michigan, high-end engineers 
who are now in custodial positions because they cannot find 
high-end engineering or computer jobs that are being exported 
to India and other place.
    This is not, at this point in time, just about an evolution 
of economics in a world economy. If we are not smart about 
trade, if we do not address currency manipulation----
    And I would just ask one question, and then, Mr. Chairman, 
I am sure I have used my time, but I just want to ask one 
question on that because if we in fact are saying we are 
productive and can compete with anybody, which I agree 
totally--when manufacturers sit in my office this week from 
Grand Rapids, Michigan and say, ``Just give us a level playing 
field.'' By the way, they were outraged about this report that 
came out the beginning of the week. They are saying, ``What are 
we going to do about a level playing field and currency 
manipulation by China?''
    I would just simply ask, in conclusion, what are we going 
to do about that? Mr. Secretary, we certainly know that 
something is going on, and we would welcome, and we need your 
leadership on that issue.
    Secretary Snow. Thank you very much, Senator. I think we 
are making some good progress with the Chinese on that subject. 
We have engaged them. You know I spoke with Premier Wen, went 
to Beijing and had a long meeting with him and his economic 
policy leaders, the head of the Central Bank, Governor Zho, and 
the finance minister, Minister Jin, and a number of leaders in 
the economy. We are straight with them. We said, ``You know, 
this system does not hold together. It does not work. It is not 
right for the world economy. It is not right for the world 
trading system, and you need to move to a flexible set of 
exchange rates that allows the market to set the value, rather 
have you arbitrarily establish the value.''
    We have an agreement on that with them. They have 
acknowledged the need to move to a flexible exchange rate. They 
rightly point out they cannot do it tomorrow because their 
financial structures are so rudimentary, but they are beginning 
to take steps. There is increasing talk about maybe moving to a 
partial float or a currency basket, but I want you to know we 
are very much engaged on that issue and want to hold their feet 
to the fire on continuing to make forward progress there.
    Chairman Nickles. Secretary Snow, thank you very much.
    Senator Stabenow, thank you.
    Senator Allard.
    Senator Allard. Thank you, Mr. Chairman, and welcome, Mr. 
Snow.
    When the President came into office, I think it has pretty 
well been established that the stock market began to decline 
well before that election. Then when he was sworn into office 
at that time, that is when you started your 3-year downturn and 
went into actually a recessionary period, and the President's 
plan for economic growth was to cut taxes. At that particular 
point in time, I think relatively speaking to the history of 
the country, taxes were pretty high. I agreed with the 
President that when you have that high tax rate, if you begin 
to drop taxes, then you will stimulate the economy.
    We are saying that now. I do not think that anybody can 
deny that the economy is not in recovery, even at the last 
parameter to change which is unemployment rates, and I would 
have real concern for us to raise taxes in any sector of our 
economy at a time when we are looking at recovery that is just 
beginning. I wonder perhaps maybe you might comment on the 
impact that raising taxes would have as we are just starting in 
this growth period.
    Secretary Snow. Senator, I would be very much opposed to 
that. I think it is about the single worst thing we could do. 
It would undermine this recovery, which as you point out is a 
very firm and good recovery. I think it is singularly bad 
economic policy that would jeopardize the recovery and put us 
on the wrong path.
    Senator Allard. I would like to followup a little bit on my 
statement now on the labor market and the unemployment figures. 
The unemployment rate fell to 5.6 percent in January, and it is 
well below the peak of 6.3 percent in June, and the payroll 
employment increased by 112,000 jobs. But I want to go to this 
household survey because the figures I have, they show a gain 
of 500,000 in January. As we move along, it seems like there is 
a greater discrepancy between the payroll employment and the 
household survey, and nobody seems to come up with an answer as 
to why this is occurring.
    I happen to feel that it reflects, and talking to many 
economists, they feel it reflects what is happening in the 
small business are, the self-employed area. I talked with some 
executives in the high-tech companies that say, ``Well, when 
you separate your employees, you cut back, you give them a 
bonus or you give some kind of a separation stipend, and they 
take this cash'' and they say, ``Now is my opportunity to go in 
business for myself,'' so they start their business in their 
home, and that is not really reflected perhaps in that. That 
has kind of been my view and what I have picked up.
    I wonder, perhaps if you have any real things that you can 
add to that discussion that might enlighten us?
    Secretary Snow. Thank you, Senator. You are absolutely 
right, there is a marked discrepancy between the two surveys, 
one showing relatively modest, the 112,000 pickup for January 
versus the five times that pickup in the household survey. I 
must say economists are sort of puzzled on this. I do not think 
anybody has a real good answer for it, but I would credit your 
hypothesis. I think your hypothesis may well explain the 
difference because the establishment survey or payroll survey, 
as it is known, deals with established businesses.
    There is a phenomenon going on that you mentioned that I 
think is very real, and that is more self employment. The large 
companies, in order to shed overhead costs of pensions and of 
rising health care costs, are in effect outsourcing functions 
that used to be done in the business. An H.R. department will 
be outsourced and the people who used to do the pension 
planning, who used to do the benefits planning and so on, are 
now doing it, but they are not doing it as an employee of the 
ABC Corporation. They are doing it as a sole practitioner. The 
household survey does not pick that up the same way. It may 
eventually pick it up, but it does not pick that up the same 
way the establishment does.
    I had a friend come visit me recently to sort of illustrate 
your story. He worked in a big establishment. He had a good job 
in a big establishment. He left, and he founded his own small 
business. He now has 12 employees plus himself. And he is not 
in the household survey. They may get him eventually----
    Senator Allard. I am almost thinking you have that 
backward. Is it not the household survey that picks up those 
people that are doing work at home and so on, and the payroll 
survey does not?
    Secretary Snow. Yes, that is right. I flipped it on you. 
But he is not in the payroll survey. I think there is more of 
that going on, but we cannot quantify it very well. It needs to 
be quantified, I agree. But that is a working hypothesis that a 
lot of people are now trying to test.
    Senator Allard. I would like to approach this manufacturing 
job issue a little bit. I had an opportunity to hear testimony 
yesterday from Alan Greenspan, and he agreed with me that this 
is not a new phenomenon, that we have been seeing a decrease in 
manufacturing jobs since 1979, and he agreed that that was the 
date when we started seeing that phenomenon. But he also 
elaborated on it and said, ``Look, it is not only what is 
happening here in the United States, but that is happening 
worldwide.'' I said, ``Even China?'' He said, ``Yes, because of 
the productivity efficiencies that are being built into the 
system.''
    I had a number of manufacturers come to me 2 years ago and 
say the value of the dollar in comparison to the yet or the 
euro was so high that it was making it difficult for them to 
move their goods and services overseas because they could not 
compete. Now the value of the dollar has dropped down, which is 
a good sign I think for our exports. It means that things that 
we import is going to be more expensive, things that we sell 
overseas is going to be less expensive. I cannot help but think 
that is going to have a positive impact.
    Do you have any way of knowing how much of an impact the 
decrease in the dollar is going to have and whether we are 
going to--I mean is this going to be sort of a sustained thing, 
the drop of the value of the dollar compared to the yet and 
euro, for example, or not?
    Secretary Snow. Senator, that is an important and 
interesting question, but I have made a habit of not trying to 
predict where the dollar is going, or getting into commentaries 
on relative values of currencies for good reasons that you 
know.
    Senator Allard. Sure.
    Secretary Snow. But your opening point of manufacturing, 
there is the secular trend, long-term trend that Chairman 
Greenspan talked about, much more pronounced on jobs than on 
output of manufacturing. We still have a tremendously big, 
vital and important manufacturing sector. In fact, our 
manufacturing sector, if the United States did nothing else but 
carry on manufacturing, nothing else, would be I think the 
fifth largest economy in the world. I think our manufacturing 
sector has an output valued at 1.6 or 1.7 trillion, with the 
Chinese economy at less than a trillion. So it is a huge 
vitally important sector. It is also a extraordinarily 
productive sector, and its productivity rates have been running 
well above the GDP growth rates. So the effect of that is, it 
is becoming a somewhat smaller part of GDP, but more 
importantly, it does not need as many workers. It is staying 
competitive. If we can reduce barriers in the rest of the 
world, which we are intent on doing, which is a tax on our 
manufacturers, we can expand manufacturing.
    But this recession was different in some ways in that on 
top of this long-term secular, we ended up with a cyclical 
downturn which was really harsh and dramatic. Senator Stabenow 
knows that being from a manufacturing area; Michigan, Ohio, 
Pennsylvania, Illinois, and Indiana really were hit very, very 
hard by this and still have not come back from it.
    I remember when it started. It started in the summer of 
2000, because I was then, with my former employer, a 
transportation company that hauls lots of things for the 
manufacturing sector, set up automobiles as a major product 
line. And I got the reports in from the subsidiaries, the barge 
line and the ocean carrier, the container carrier and the 
logistics company and the railroad, and there was all the same 
story. The economy had hit a wall or gone over a cliff, 
whatever metaphor you want to use, and it has not come back to 
that level yet today.
    So it was a dramatic downturn in the manufacturing sector. 
It is beginning to show better results now. Finally, we are 
starting to come out of it. But the jobs have very much lagged.
    Senator Allard. Well, Mr. Secretary, I know that the 
chairman wants to call on other members. To me, I think things 
are--our economy is definitely recovering, and I am pleased to 
see it has moved toward a small business sector. I mean, I see 
that trend. And I think that that is exciting for competition. 
I think that is exciting for our economy because it is the 
small business sector that develops--they are the originators 
of new thoughts and ideas and new jobs. That is where large 
companies come from. And I think it is good for the consumer 
because competition holds down goods and services and gives the 
consumer lots of choices.
    So I cannot help but be positive, bullish on the economy. I 
think it is because of Bush's tax cuts that he put out as part 
of his program.
    Thank you, Mr. Chairman.
    Chairman Nickles. Senator Allard, thank you very much.
    Senator Byrd.
    Senator Byrd. Thank you, Mr. Chairman, and thank you, Mr. 
Secretary.
    My relations with the Secretary have been very good over a 
good many years, and I value his work. I also value my 
association with him.
    Secretary Snow. Thank you.
    Senator Byrd. I think he and I both are supporters of 
Amtrak, which serves many rural areas of this country.
    But on another matter, the Secretary speaks today about the 
commitment to deficit reduction, and my observations lead me to 
believe that the criticism of the administration's commitment 
to deficit reduction is growing. And the price of loyalty--
former Treasury Secretary Paul O'Neill says the administration 
put tax cuts and short-term political gain ahead of the 
Nation's long-term economic well-being. Mr. O'Neill's says his 
warnings about the risk of a fiscal crisis were dismissed.
    The International Monetary Fund, which typically censures 
the budget policies of Third World, debt-heavy countries, 
recently warned that U.S. budget deficits risked destabilizing 
financial markets and stunting global investment and economic 
growth.
    The General Accounting Office issued a similar warning, 
along with Federal Reserve Chairman Alan Greenspan and former 
Treasury Secretary Robert Rubin. Even the conservative Heritage 
Foundation has blasted the administration's reckless fiscal 
policies.
    Secretary Snow, why is the administration having such a 
tough time convincing the American public that it is truly 
committed to deficit reduction?
    Secretary Snow. Senator, let me begin by saying that I 
reciprocate those kind comments you made and have the deepest 
admiration for you, and that goes back a long, long time that 
we have worked together.
    The administration is committed to this objective. We have 
to be committed to this objective. The future well-being of the 
country is what is at stake here. And as I said earlier, this 
is a deeply serious issue. We cannot afford to lose the 
confidence of our financial markets. We cannot allow our 
deficit to become a threat to our future. And I want to tell 
you that I am committed to seeing us bring that deficit down, 
and bringing it down in real terms, and then going on and 
dealing with the longer-term set of issues that Senator Conrad 
and I talked about.
    Senator Byrd. Mr. Secretary, my time is limited. I am 
sorry. But why is the public not responding positively to the 
President's proposal to cut the deficit in half?
    Secretary Snow. Well, Senator, maybe it is our fault in not 
being more persuasive. I guess I need to do a better job of 
getting out there and talking about what we are doing and why 
we are doing and our commitment to doing it. It is a job of 
persuasion.
    Senator Byrd. Well, Mr. Secretary, while the administration 
argues that the deficit will be cut in half over the next 5 
years, your own budget documents show the deficit will be worse 
in 2009 if the President's budget is enacted than if Congress 
took no action at all. The administration's budget is filled 
with holes and magic asterisks by failing to include any 
funding for the war Iraq--this I cannot understand--failing to 
include any funding for the war in Iraq--to which I am 
vehemently opposed, I might say for the record, if there is 
anyone in here who does not already know it--or to address the 
impending crisis in Social Security. I think the administration 
has given the American people little reason to take its deficit 
promises seriously.
    Now, if I might go to a second question, I know there is 
plenty that could be said on both sides here about that 
question I have just asked. But I must go on. Our time is 
limited.
    Tax cuts for the wealthy. On page 131 of its budget and 
economic forecast, the CBO shows that during the Bush 
administration, corporate tax receipts have fallen by $76 
billion; estate and gift tax receipts have fallen by $7 
billion; while social insurance payroll taxes, which fall 
primarily on working-class American families, are at their 
highest levels ever, up $60 billion since 2000.
    So the question is: Why is it that during the Bush 
administration taxes that fall most heavily on middle-class 
working families are rising while the taxes that fall on the 
most affluent are falling?
    Secretary Snow. Senator, the issue of corporate taxes I 
think is explained by the fact that the President inherited a 
weak economy, and with that weak economy, corporate profits 
have fallen significantly, and with lower profits, there is 
less to be taxed, as well as the fact that many companies lost 
money during that period and, as you know, acquired these tax-
loss carry-forwards and so on that they applied against their 
tax returns.
    The numbers I have seen--and I will be pleased to share 
these with you--suggest that actually after the President's tax 
cuts, the share of the burden of the total tax bill rises on 
the highest income and falls on the lower income. That is the 
effect of taking a number of people off the tax rolls, 3 
million in 2003, putting into effect the 10-percent tax 
bracket, the marriage penalty, and the child credits, and a 
variety of things. But the net effect of that is that the 
lower-income groups pay a smaller share of the total tax burden 
today.
    Senator Byrd. Mr. Secretary--do I have time for a short 
statement?
    Chairman Nickles. The Senator does. I will note Senator 
Bunning told me he needed to leave at 11:30. If you don't mind, 
we will call on him, and then I will call on you again.
    Senator Byrd. Well, I would love to do that. I can't do it. 
I have to take my wife to the doctor. I am running short of 
time now. I would love to accommodate to Senator Bunning, and I 
shall. Let him go ahead. I will leave and take care of my wife 
first. She is my first duty.
    Chairman Nickles. You have your priorities----
    Senator Byrd. I have them straight. And I have had them 
straight for almost 67 years.
    Chairman Nickles. My compliments to you.
    Senator Byrd. I have a lot further questions to ask, and 
all this business about increasing taxes, you see, covers up 
the fact that these cuts that have been made are really 
deepening the deficits, and the war in Iraq is deepening the 
deficits. And we have these problems that are confronting us 
now. It is one thing to say that we are raising taxes, but 
nobody says very much about the fact that the war in Iraq is 
costing us--is not included in this year's budget. The 
President is not asking for anything in this year's budget for 
Iraq. But it is going to cost us.
    I will close with this final thing, if I may. In response 
to mounting budget deficit projections, President Ronald Reagan 
signed into law 12 bills to increase taxes, including 
legislation to repeal part of his 1981 tax cut. Similarly, in 
response to alarming deficit projections, in 1990 President 
Bush's father made the courageous decision to break his ``No 
new taxes'' pledge. Although President Bush's father paid a 
high political price, it was the right move at the right time, 
and it started the country's finances on the road to recovery.
    Presidents Reagan and Bush were confronted with the same 
choice that this administration will soon have to make, and 
they concluded that the budget could not be balanced without 
repealing tax cuts. In 1990, the Congress likewise concluded 
that all pieces of the budget--discretionary, mandatory, and 
revenues--would have to yield savings. Until this 
administration acknowledges this seemingly obvious fact, it 
will never bring the budget into balance.
    Again, I want to thank you, Mr. Secretary, and I look 
forward to talking with you further.
    Mr. Chairman, thank you for your patience, and I thank all 
my colleagues for their patience.
    Chairman Nickles. Senator Byrd, thank you, and best wishes 
to you and your wife.
    Senator Byrd. Thank you.
    Chairman Nickles. Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman. Secretary Snow, 
thank you for coming.
    I noticed in the White House budget proposal--and we have 
talked about this prior, and I hope you have been brought up to 
speed because the last time you begged off on it--includes $83 
million for a new regulatory agency in Treasury to oversee 
certain GSEs. I have spoken with your staff in the past about 
regulation of GSEs. Assistant Secretary Abernathy stated before 
the Banking Committee that he believes that the Tennessee 
Valley Authority, TVA, should be under SEC jurisdiction. And I 
have a videotape, if you want to see it, just so that there is 
no misunderstanding.
    Do you think that all GSEs, including non-housing GSEs, 
should be regulated?
    Secretary Snow. Senator, we have proposed that the housing 
GSEs be under, the Federal Home Loan Banks as well as Freddie 
and Fannie. Our proposals at Treasury have not gone beyond 
that.
    Senator Bunning. Well, you are not answering my question. 
My question was: Do you think that all GSEs should be 
regulated?
    Secretary Snow. All Government-sponsored entities----
    Senator Bunning. Should be regulated.
    Secretary Snow. Should be regulated. I am not sure what 
other entities you might have in mind.
    Senator Bunning. Well, there are other GSEs other than 
Freddie, Fannie, and the Federal Home Loan Bank.
    Secretary Snow. Who are not regulated?
    Senator Bunning. Who are not----
    Secretary Snow. To your knowledge----
    Senator Bunning. Who are not being put into the new 
regulator that we are trying to create.
    Secretary Snow. Right. Well, the reason that we are putting 
these in is that they have to do with housing and housing 
finance and present a very significant--play a very significant 
role in the whole issue of housing finance. And in our view, 
these entities have become so large relative to the housing 
finance business and actually to the whole financings of the 
United States that a strong regulator is necessary so we can 
assure the soundness----
    Senator Bunning. I don't argue that fact with you. I agree 
with you 100 percent. I am asking you about those that are 
falling outside of the purview of what you have proposed. We 
have no one regulating TVA right now. No one, except they do 
have $26 billion in debt on the market, which is considered 
guaranteed by the Federal Government. They are not regulated by 
the Securities and Exchange Commission. They are not regulated, 
not by any public service commission in the service areas that 
they serve. And I just think that it is time we got a hold on 
the three commissioners who make all the decisions and have an 
oversight. And this would be a very nice time if we could 
include them in some type of oversight and regulatory 
commission.
    Secretary Snow. Senator, could I take a hard look at that? 
You have asked me this before. The answer I haveten back is 
that they are different.
    Senator Bunning. Yes, they are different, but they are a 
GSE.
    Secretary Snow. Well, the response I haveten--and I will 
probe into it further to make sure I can really talk to this 
with my own knowledge rather than relying on others--is that 
they are not quite like Fannie, Freddie, and the Federal Home 
Loan Banks because they are actually--not just sponsored, they 
are owned by, they are the U.S. Government.
    Senator Bunning. Well, the U.S. Government needs to 
regulate them, and that is the question I am giving you.
    I really feel naked up here because I do not have any 
charts to put up.
    [Laughter.]
    Senator Conrad. Do you want to borrow some?
    Senator Bunning. Yes, I could borrow the chairman's because 
he talked about taxes. You know, already expired at the end of 
2003 were the AMT relief, work opportunity tax credit, above-
line deductions for teachers' classroom expenses, enhanced 
deductions for donations of computers to schools, and medical 
savings accounts. Those are already gone. Those were in the tax 
bills.
    Expiring at the end of this year are R&D tax credit, 
accelerated marriage penalty relief, accelerated child tax 
credit, and the 50-percent bonus depreciation. We are about to 
jettison them at the end of 2004.
    After 2005, small business expensing up to $75,000, it is 
gone, and $3,000 deduction for education and tuition expenses.
    Expiring in 2008, capital gains reduction rate, dividend 
rate reduction, and there are many of them that expire after 
2010.
    My question to you, Mr. Secretary, is: If we do not do 
something soon, most of the good things that we did as far as 
tax reduction are going to disappear. My question is: Do you 
have a priority?
    Secretary Snow. Yes, we do, Senator. A number of the items 
you mentioned are in our budget.
    Senator Bunning. I understand that, but do----
    Secretary Snow. The R&Ds and the child credits and the 
marriage penalty and so on. And I think it is critical that 
Congress act and make them permanent. I would go beyond that 
and say I would like to see the out-year----
    Senator Bunning. The 2008's and 2010's.
    Secretary Snow. Going out to there, exactly, because there 
is an awful lot of good tax policy embraced in what you did 
last year that goes out, and if Congress fails to act on it, it 
means a tax increase, a large tax increase on the American 
people.
    Senator Bunning. That is what my--and in this recovery 
period, in my opinion, and in the opinion of a lot of people 
that are smarter than I am, if we have a tax increase in this 
critical period with a recovering economy, we will send this 
economy the other way rather than allow it to grow as it should 
grow.
    Secretary Snow. I agree with you fully.
    Senator Bunning. OK. There are other questions I have, and 
I am going to submit them to you in writing. As a courtesy to 
the chairman, I will yield back. Thank you.
    Chairman Nickles. Senator Bunning, thank you very much.
    Senator Cornyn.
    Senator Cornyn. Mr. Secretary, it is good to see you. I 
recall a statement that I heard you make shortly after you 
became Secretary of the Treasury, and it struck me as profound, 
but something simple enough that a humble barrister could 
understand, somebody who has not been, like you, very 
successful in business or an economist or someone with that 
sort of professional training. And you said simply this, that 
if you want more of something, you should tax it less. And, 
indeed, I think that has been the policy of the President and 
the policy of this Congress in passing the President's tax 
relief and growth package, and I think we are seeing that come 
to fruition with the economy roaring back. And I am, like 
everyone, grateful for it.
    Obviously, employment is not yet where we want it to be, 
but I am gratified by what you have told us this morning in 
terms of your expectations, and I think that is consistent with 
everything I have heard from everyone who knows or should know 
something about this subject.
    But I, too, share concerns about the deficit, but I think 
we had a fundamental choice to make when we looked at the tax 
relief and growth package, and that is, did we want to try to 
address deficits alone at the risk of killing the economic 
recovery in the cradle, or did we want to take a chance that we 
could get the economy roaring back again and put people back to 
work and then have time in a healthy economy sufficient to deal 
with the deficit, as I understand this budget proposes to do?
    But I also am concerned about when I hear members of this 
body and the others on the other side of the Capitol talk about 
the deficit. Indeed, you have been asked this morning has the 
President--or the statement has been made, The President has 
not given us a plan to deal with the deficit. But, you know, I 
was always under the impression that it was Congress who passed 
a budget. Indeed, that is what we are in the process of doing. 
I always believed that it was Congress that appropriated the 
money to spend it, and the President's role, albeit that of the 
bully pulpit and given the power of the veto, that his role was 
really different, and that it is our responsibility. So I just 
say all that because I do believe that if there is an enemy in 
this process, as Pogo said, ``We have met the enemy and it is 
us.''
    I recall, finally--and I will lead up to a question--that 
as we debated last year both the budget resolution and we 
debated appropriations, that there were amendments proposed on 
the floor of the U.S. Senate totaling $85 billion, or $1.2 
trillion over time, to add to Government spending. And thank 
goodness we had the self-discipline to not agree to those huge 
increases in spending.
    But really what I want to ask you about is this: Yesterday, 
the Senate Judiciary Subcommittee on Immigration had a hearing 
on the President's proposal for a temporary worker program. And 
I must tell you that as complex the subject that you deal with 
every day is, to me the issue of immigration reform rivals that 
in complexity. But one of the things that does make sense to me 
is that if we get people out of the shadows and onto the tax 
rolls, that represents a net benefit for the economy and the 
American people.
    Do you have any comments you would like to share with us 
along that line?
    Secretary Snow. Yes, Senator. I agree with you. There was a 
time when Treasury had more to do with that whole area. The 
Immigration and Naturalization Service had been part of 
Treasury at one point, but, of course, now is not. And I agree 
with you that is one of the more complex areas that we deal 
with.
    But the President's policy of giving an identity to these 
people so that they become part of the recognized--they are 
recognized for tax purposes and so on, will clearly help, as 
you say, bring people out of the shadows and put more revenue 
into the tills of the United States. They are here. We ought to 
recognize the reality that they are here. And we ought to make 
sure that they are not part of an underground economy but 
become part of the regular and visible economy. Yes, I think it 
is a very forward-looking policy.
    Senator Cornyn. And if I have time to ask one other 
question, I would like to ask you a little bit about some of 
the concerns that Senator Stabenow raised about job loss. And I 
appreciate very much your concern and the President's concern 
and the concern we all share when people are out of work and 
they want to work and provide for their families. Yet we all 
understand we are in a very dynamic time with a global economy. 
And the example that you used about the dislocation that 
occurred in agriculture, for example, because of automation and 
now that less than 2 percent are doing what 40 percent of the 
work force used to do at one time. And I guess we could all 
harken back to the day before the computer when it took a lot 
more people to perform functions now that, thanks to 
technology, take less people. But the truth is that consumers 
have benefited at reduced costs, but it does place a burden on 
us, I believe, those of us in positions to help, particularly 
when it comes to education and making sure we have an educated 
work force that is capable of earning the good wages that the 
higher-paying jobs that will inevitably remain in this country 
are capable of paying.
    I know the President talked about that some in his State of 
the Union as it relates to community colleges. Would you 
address that issue?
    Secretary Snow. Yes, Senator, I would be delighted to. The 
President in the State of the Union talked about his jobs for 
the 21st century program, and the linkage between jobs and 
education is just absolutely perfectly clear. And the community 
colleges that he referenced in the jobs for the 21st century 
program provide the pathway to the training that gives you the 
opportunity to participate in the economy.
    It is not just the effects of globalization that we are 
dealing with in this economy. There are really many more jobs 
displaced by domestic competition than from global competition. 
And that is evident by the fact that there are about 40 or 50 
million new jobs every year in this country, but there is also 
40 or 50 million jobs where people are moving on.
    I was at a community college in Florida, in Jacksonville, 
the Jacksonville Community College, earlier this week. And it 
was a moving and inspiring experience to listen to the faculty 
of the school--and they call it the Advanced Technology Center 
at Jacksonville Community College--talk about the effect this 
school is having on the larger Jacksonville community. It is 
supported by the business people who work with the faculty to 
design the courses, indicating what the job skill needs are 
that they see coming along, and they in effect tell the 
students, If you get these skills, you will have a job with us.
    Now, this is not just putting time in to get an associate 
degree. This is actually learning. And the school commits to 
actually conveying the knowledge and hands-on experience in 
large part. And they told some moving stories. I will tell you 
just one that makes the point about how community colleges 
provide the pathway from the present to the jobs of the future.
    A cab driver who had modest earnings as a cab driver, who 
went to the school, night school, and he would get calls, and 
he would have to go, give a ride, and then he would come back. 
And he did this for two or 3 years and finally got the skills 
to get a full-time job at much higher compensation levels. And 
he came back to the school with his first--he had never had a 
check before. He had always depended on these fares. He now had 
a check, and he brought it back to the college, to the faculty, 
and he said, ``I just want you to know what you have done for 
me and my family by giving me the skills that I can get a full-
time job earning $50,000 a year.''
    Now, there are a lot of people who are like that, who are 
looking to get higher-level skills so they can move into 
higher- and better-paying jobs. The community colleges are the 
link between those people and the skills they need to get those 
jobs. And he had not been displaced by global competition. He 
was a fellow who had a job in the United States and wanted a 
better job.
    And that is really how America works, people looking for 
better jobs and acquiring--and we need to make sure we give 
them the ability to acquire the skills to get those jobs.
    Senator Cornyn. Thank you very much.
    Secretary Snow. I appreciate your asking that question.
    Chairman Nickles. Senator Cornyn, thank you very much.
    Mr. Secretary, I thank you for your presentation. I have a 
couple questions, and I think Senator Conrad may, too. Are you 
OK? Is 12 fine?
    Secretary Snow. Yes, 12 o'clock is good, Mr. Chairman.
    Chairman Nickles. One of the issues that we have in the 
Finance Committee deals with international trade, deals with 
compliance with WTO, and that is the FSC/ETI legislation. The 
bill that was reported out of the Finance Committee has a lower 
corporate tax rate for manufacturers than for other 
corporations. It has a tax rate of 32 percent, ultimately--it 
takes a few years to get there--for manufacturers and 35 
percent for other corporations, whether they be financial or 
service.

    I personally think that is a mistake. I think it is a 
complication in the code. I think it is an inefficiency. I 
believe my history tells me that Canada tried a differential 
rate for manufacturing and repealed it. I would hope that the 
administration and your office and yourself would lend some 
advice to Congress before, in my opinion, making a mistake. I 
think we have to pass legislation to be compliant with WTO, and 
I want us to do that. I do not want to see the European Union 
get into a trade war with the U.S. That would be a lose-lose 
situation for both sides.
    But, conversely, I would like to see us fix it in a way 
that I would be willing to sipport. I personally would be very 
troubled by having a differential corporate rate. I think that 
is a serious mistake. Would you care to comment on that?
    Secretary Snow. Well, I agree with you, Mr. Chairman. I 
think what the Canadians found when they had the differential 
rate favoring one class of economic undertaking over another, 
manufacturing, that all of a sudden there was a lot of entry 
into the manufacturing business by people who formerly had not 
been manufacturers, but for purposes of the tax code showed up 
as manufacturers. You create real distortions, I think, with 
that sort of approach. The better approach would be simply if 
we treated everybody the same.
    So I agree with you, and I think we are sending that 
message to both the House and the Senate in terms of what would 
make good tax policy.
    We feel strongly that we need to be in compliance with WTO. 
But we need to do it in a way that does not distort the Tax 
Code and create disincentives for one sector of the economy 
versus another. And we need to do what seems to me in a way 
that moves forward--it cannot get all the way, but moves 
forward in modernizing this 40-year-old set of tax policies 
that I think fundamentally prejudice the interests of American 
manufacturers--American businesses, manufacturers and service 
providers as well. You know, those rules came into effect 
before the United States had emerged as a great trading country 
with 20 percent or so of our GDP tied up in trade, imports and 
exports.
    We need to modernize that whole system and remove the non-
economic limitations on foreign tax credits that do so much 
harm, reform the rules that increase the cost of U.S. companies 
doing business in foreign markets. I would hope at some point 
we could go to the larger issues. Maybe some of them can be 
dealt with in the FSC/ETI. The more that can, the better in the 
FSC/ETI framework. But I see the priority now on just getting 
us into compliance in a way that doesn't prejudice U.S. 
businesses and doesn't create distortions in the Code.
    Chairman Nickles. I mentioned I was displeased with what 
passed out of the Finance Committee. Would you work with us to 
try to help us, one, come up with a proposal that is within the 
revenues available, to be WTO compliant, and give us what I 
would say is a uniform corporate rate? And if there are other 
things on the international tax side that would help make us 
more competitive--and you mentioned one or two, and Senator 
Conrad and I have been around long enough that we know that 
there is a lot of work that needs to be done on the 
international tax code. But we need to move pretty quickly. I 
think we are looking at potential tariffs within 30 days. That 
might be postponed somewhat, but it is important for us to move 
expeditiously.
    And so if you could help assist us in maybe coming up with 
a package that would be WTO compliant in your view and would be 
fair to corporations, we would appreciate your assistance.
    Secretary Snow. We will commit to do that, Mr. Chairman.
    Chairman Nickles. I appreciate that. One other thing from 
my opening comments, and I was reading through it a little bit 
more, and that is the corporations that are engaging in the 
sale-in lease-out or SILO and qualified technological equipment 
transactions. You are familiar with these?
    Secretary Snow. Yes, I am.
    Chairman Nickles. I was asking my staff for an example, and 
they said, well, there are a lot of transit systems that are 
using it. Senator Conrad is familiar with some others, and my 
staff said it has already happened for leasing the Berlin 
subway system. U.S. corporations doing this, getting 
depreciation tax benefits, and it is a shell game. It looks to 
me like it is one of these things that I am alluding to that 
needs to be stopped. It may be legal, but it is an abuse of the 
tax system. I am a person, who doesn't have to tell people 
where I am coming from. I want lower tax rates and I want an 
efficient system, but I find this an abuse, and I want to stop 
it and I plan on working to stop it.
    Would you care to comment?
    Secretary Snow. Yes, I agree fully with your statements on 
that. The SILO transactions, which we have analyzed now, have 
no meaningful economic purpose or utility other than to create 
a transfer mechanism for tax benefits. There is no economic 
utility at all. There is simply a mechanism for a tax transfer. 
I think they need to be stopped. The spread of them is really a 
dangerous thing to the revenues of the U.S. Government. The 
cost of the SILOs is so great that the Treasury Department has 
had to revise its corporate tax baseline, because of so much 
erosion of revenue. It is really, Mr. Chairman, a critical 
issue and I am sympathetic to the States and cities and so on, 
but the revenue they get for that is so small relative to the 
erosion of the revenues of the Federal Government, that it is 
no comparison.
    And now, of course, it is not even our cities and 
municipalities in the States, but it is the cities and 
provinces and so on of the rest of the world, Frankfurt and so 
on, getting the benefit of tax transfers that is paid for by 
subway system, paid for really by the taxpayers of the United 
States. So there is something just fundamentally wrong about 
this, and it needs to be stopped. Let us be real blunt about 
it, this is a real bad deal for the taxpayers of America.
    Chairman Nickles. I appreciate your statement. I told 
Senator Conrad that I think part of our challenge now is that 
most of our colleagues on the Finance Committee and Ways and 
Means Committee probably are not aware of it. Since we are both 
on the Finance Committee, we may ask you or somebody from your 
staff to help us have an additional hearing on it to expose it. 
We are going to send some signals that we are going to try and 
stop it.
    There are a lot of banks, a lot of municipalities that are 
involved in this, but from my preliminary estimates, it looks 
like for every dollar the municipalities are getting out of 
this sham deal, the Federal Government is losing about 10 times 
as much.
    Secretary Snow. A 10 to 1 ratio.
    Chairman Nickles. That is not a very good deal.
    Secretary Snow. If I can help you publicize what a bad deal 
this is for American taxpayers and how abusive this scheme is, 
just call on me.
    Chairman Nickles. What do you estimate the savings to be if 
we close this door?
    Secretary Snow. I do not have a real good number on that, 
but it is in the billions of dollars, 33 billion, I am advised.
    Chairman Nickles. I have heard about the $30 billion 
figure.
    Secretary Snow. 3 billion a year.
    Chairman Nickles. If it is going international as much as 
it evidently is, it is pretty wide open.
    Secretary Snow. It could be much larger than that because 
it is a growing phenomenon. I mean that is why I hesitated to 
put a 3 billion a year. It could be a 4, 5 or 6 unless we stop 
it.
    Chairman Nickles. Thank you.
    Senator Conrad.
    Senator Conrad. Let me just pick up on that point and say 
the Chairman and I have been talking about the need to close 
that particular loophole. What is happening, for those who are 
listening and watching, is municipalities are selling their 
subway systems, they are selling even their sewer and water 
systems to private entities, that then can take the tax 
benefits from the ownership of those facilities, depreciate 
them, for example, over time, and then the municipalities lease 
back these systems. This is truly a scam, and it has to be 
stopped.
    I am advised that companies have gone to meetings of city 
officials, national meetings of cities officials and pitched 
these proposals, and now it is going offshore. The Chairman 
referenced a Berlin subway system. I mean this has got almost 
no limit to its potential for abuse, and it is one area that 
has got to be dealt with.
    I would go back, if I could, to the other conversation you 
were having with respect to FSC. I think we now have to 
consider, in light of the tax gap, in light of our WTO 
challenges, fundamental tax reform in this country. I do not 
think it can be postponed any more. All of us understand it is 
not going to happen this year in an election year. There has 
not been enough time devoted to it.
    I would hope, Mr. Secretary, that we could begin the 
process though, focusing on these challenges, the tax gap, the 
hemorrhage in the current revenue system, our WTO problems, the 
fact that our trading competitors have taxes that are rebatable 
at the border that confers an advantage onto their businesses 
and that we have tried to match this with FSC and all the rest, 
but over and over we are ruled out of compliance with WTO. 
There is a short-term solution, but I think there is a much 
more fundamental need to review our entire tax system.
    Let me ask you this question: what is the deficit; in your 
judgment, how would you define the deficit?
    Secretary Snow. The deficit is, I guess, best thought of as 
the difference between the Government's annual expenditures and 
its annual receipts.
    Senator Conrad. And what is the debt?
    Secretary Snow. The debt is the obligation that the 
Government has to its creditors.
    Senator Conrad. I ask those--I know they are very 
fundamental questions, but I ask them because I find there is 
enormous confusion in the public because the deficit and the 
debt, and of course, Mr. Secretary, you have defined them with 
precision. I find when I am visiting with people there is 
confusion between the deficit and the debt. When the President 
says he is going to cut the deficit in half, a lot of people 
confuse that with the debt.
    Let me show you the thing that very much worries me about 
the President's plan. I know this is very busy. I am not asking 
to try to decipher this, but I want to talk about--this is from 
the President's budget. It shows the increases in the debt at 
the end of the year. It shows the debt right now is $6.76 
trillion. Next year, at the end of this year, 2004, it says the 
debt will be $7.486 trillion, an increase of $726 billion, not 
the $521 billion that the administration has been talking 
about, but $200 billion more. The big part of the difference 
obviously is Social Security, but all of that money is owed. 
They are our creditors. We are borrowing, under the President's 
budget from Social Security.
    The next year the debt goes up by $647 billion. The next 
year by $593 billion, the fourth year by $592 billion. In 2008 
it starts to go up some more, $613 billion, and in the fifth 
year from 2004, the debt is going up $633 billion. I do not see 
this growth of the debt being cut in half anywhere, do you?
    Secretary Snow. Well, the deficit is cut in half under our 
numbers, and pretty much the CBO numbers.
    Senator Conrad. But the deficit, that is where we have this 
confusion. The deficit, you are talking about on a unified 
basis, when you put all the money in the same pot, trust fund 
money and regular money, and the problem with that is, I think 
that fundamentally misleads us as to the magnitude of the 
problem.
    Secretary Snow. Senator, it also----
    Senator Conrad. Do we not owe the money back to Social 
Security?
    Secretary Snow. Senator, it also though, as you and I have 
discussed on prior occasions, calls attention to the things 
that we really have to get focused on. You mentioned Social 
Security and Medicare. That is really what that chart says. We 
have to get focused on these large commitments we have made to 
the future.
    Senator Conrad. Mr. Secretary, the problem I have, when the 
President goes out and tells the American people he is going to 
cut the deficit in half, I think that gives them comfort. I 
think that leads them to conclude that we are getting this 
thing under control. We are not getting it under control. Under 
the President's plan, the debt is going up. In no year is it 
going up less than $600 billion.
    Secretary Snow. Senator, I would hope that that chart and 
what it shows on debt will lead to furtherance of this large 
public discussion on the subject of Social Security and 
Medicare. I think we need to deal with Social Security first, 
in my view. The President has put it on the table with his call 
for the Commission, with his call for the personal accounts, 
tried to engender a broad national dialog. I think we are 
getting more and more attention to it. I commend you for 
bringing the fundamental longer term issue to our attention. It 
needs to be addressed.
    Senator Conrad. The thing that I do not hear you talking 
about is the revenue side of the equation, and here we are, we 
have this addition to the debt every year, massive increases, 
and that is before the baby-boomers retire, that is before the 
full effect of the President's tax cuts which make this 
situation pale by comparison to what is going to happen.
    So I would say this to you, maybe we can make a deal here. 
I am willing to talk about the long-term entitlement 
imbalances, but I would hope you are willing to talk about the 
long-term imbalances on the revenue side, because deficits are 
a product of the difference between spending and revenue, and 
just to talk about spending misses half the equation.
    Secretary Snow. Senator, thank you.
    Chairman Nickles. Senator Conrad, thank you very much.
    Mr. Secretary, so you know, Senator Conrad and I already 
plan, probably after we finish the budget cycle, on having 
hearings on some of the long-term obligations that our country 
is facing, Medicare and Medicaid being the two of the largest. 
Incidentally, the unfunded liabilities that are facing Medicare 
are about three times that of Social Security. But we plan on 
having hearings on those and trying to maybe set the stage on 
what can and could and should be done in the long term to help 
make those programs more affordable. He and I have little 
difference of opinion on whether you should focus on gross debt 
or debt held by the public, but that is a debate for another 
day. Also we will get into--I do not know if it will be at the 
same hearing or another, a discussion about trust funds. So we 
will need your participation on those, maybe both for 
educational purposes.
    I want to compliment you on your hearing performance today. 
You were very educational, very forthright, very helpful to us 
in helping us maybe meet some of these challenges, find some of 
the problems, solve some of the problems, and I would encourage 
Mr. Manciw to listen to your presentation on employment 
statistics. I think that would be helpful. I compliment you and 
your outstanding staff. Thank you very much for your 
participation.
    Secretary Snow. Mr. Chairman, thank you very much.
    Senator Conrad, thank you.
    Chairman Nickles. The meeting is adjourned.
    [Whereupon, at 12:03 p.m., the Committee adjourned.]
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                THE PRESIDENT'S HOMELAND SECURITY BUDGET

                              ----------                              


                      WEDNESDAY, FEBRUARY 25, 2004

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:08 a.m., in 
room SD-106, Dirksen Senate Office Building, Hon. Don Nickles 
(chairman of the committee) presiding.
    Present: Senators Nickles, Gregg, Allard, Burns, Sessions, 
Bunning, Crapo, Conrad, Murray, Wyden, Feingold, Nelson, 
Stabenow, and Corzine.
    Staff present: Hazen Marshall, majority staff director; and 
David Ortega, senior analyst for homeland security, justice and 
community development.
    For the minoriyt: Mary Ann Naylor, staff director; and Mike 
Jones, analyst for justice, homeland security, community and 
regional development, Sarah Kuehl, analyst for social security, 
transportation.

             OPENING STATEMENT OF CHAIRMAN NICKLES

    Chairman Nickles. Mr. Secretary, I would like to welcome 
you to our committee. We are delighted to have the Secretary of 
Homeland Security, Tom Ridge, before us today. I believe this 
is your first appearance before our Budget Committee, so we 
welcome you. I apologize for being a minute or two late. I went 
up to the sixth floor out of habit, but anyway I am delighted 
to have you before us.
    Mr. Secretary, you have enormous responsibility, and I 
compliment the President for selecting you. I compliment your 
willingness to serve our country in this very important task of 
being Secretary of Homeland Security.
    Since the year 2001, the Congress and the President 
increased discretionary appropriations for homeland security 
from basically $10 billion in 2001 to the President's request 
of $30 billion for 2005. We have created a new Department of 
Homeland Security in which you, as Secretary, oversee a total 
budget of over $40 billion, which include mandatory spending 
and fee-funded programs.
    As you know, Mr. Secretary, creating new agencies and new 
appropriations subcommittees can be challenging for budgeteers. 
We like to compare spending levels from year-to-year, and when 
you start moving around the pieces, it can get very confusing. 
I want to make sure, since we have thrown in a lot of new 
money, that we are spending the money wisely. I have seen some 
reports where that is not the case in some areas.
    I am concerned that Congress is creating programs under the 
banner of Homeland Security which, in some cases, some cities, 
some States are using as more or less general revenue sharing. 
I do not think we can afford that. I do not think we can afford 
to, frankly, rehabilitate fire departments throughout the 
country, and I do not think that is the purpose of your 
department.
    So we look forward the your discussion with us today. I 
think it is vitally important for us, as members of this 
committee and Members of Congress, to use adequate and I would 
say good oversight to make sure these funds are well-spent. And 
I intend to do that, and I look forward to working with all 
members of the committee.
    The President requests today a large increase for your 
domain--a 10-percent increase. When we look at most of the 
Federal budget, it is pretty close to a freeze, that is very 
significant. I think you have to compete with all other 
priority programs, and there will be enormous competition. As 
we really try to be more frugal in this era of high deficits, 
you are going to have to justify that $3-billion increase and 
convince me, and I think other members, that it should go to 
your department instead of to other departments.
    And so anyway we are delighted to have you with us today.
    First, I will call upon my friend and colleague, Senator 
Conrad.

              OPENING STATEMENT OF SENATOR CONRAD

    Senator Conrad. Thank you, Mr. Chairman, and welcome, Mr. 
Secretary, to the Budget Committee.
    I want to, first of all, commend the chairman for holding 
this hearing. We discussed a schedule of hearings, and we 
agreed that one of the most important hearings we could have 
would be on homeland security because, as the chairman has 
noted, the spending has increased dramatically, certainly the 
threat has increased dramatically, and much of that spending is 
in response to that threat. We all recognize that, and we 
support as strong a homeland security as we can provide.
    On the other hand, as the chairman mentioned, we have a 
responsibility to make certain that taxpayer funds are used 
wisely, and well, and for the purposes intended. And I must say 
I have been increasingly concerned about reports that I have 
heard from individual departments that spending initiatives 
that were pending previously, that were not approved once they 
were given the label of homeland security, whether or not they 
really fit that description, sailed through.
    And we have an obligation, as do you, to make certain that 
things do not just sail through because a label has been put on 
them, that they really strengthen our homeland security. And I 
know that has got to be an extraordinary challenge to you, 
bringing together all of these different agencies and several 
hundred thousand employees or approaching several hundred 
thousand employees to try to make certain the money is used 
wisely and well.
    Let me just go to put in perspective some of the issues 
that I see with respect to the issue before us.
    First is to kind of put in context where we are. This 
committee, and the administration, and our colleagues in the 
rest of the Congress are faced with deficits that are at record 
levels--$521 billion. I believe at the end of this year it will 
actually be somewhat less than that, but nonetheless, a record 
budget deficit, by far the biggest we have ever had.
    In looking ahead, the President has said he is going to cut 
the deficit in half. I do not see that. I do not see that under 
the President's plan. The only way that is achieved is by 
leaving out things. But when you add back the defense cost, 
when you add back addressing the alternative minimum tax, which 
the President's budget only does for 1 year, when you add back 
the extension of the tax cuts, what I see on an operating basis 
going forward is extremely large deficits, by far the biggest 
we have ever had, and all of it at the worst-possible time, 
right before the baby boomers retire.
    One of the big problems we have is on the revenue side of 
the equation. We have to be tough on the spending side. We also 
have to look at the revenue side of the equation because the 
revenue for this next year, the year we are in, is projected to 
be the lowest as a percentage of gross domestic product since 
1950.
    When I look at the long-term or at least the 5-year trend 
on homeland security, it matches what the chairman indicated--
$9.4 billion in 2001 and going up to $28.1 billion for 2005. So 
we have seen a dramatic ramp-up. All of us understand why.
    In terms of this year, the budget year 2005, the 
administration has called for a 10-percent increase, but I have 
tried to analyze that 10 percent, and what I see leads me to a 
somewhat different conclusion because much of that is Bio 
Shield advance funding for future years--2006 or 2008. When I 
take that out, I see about a 4-percent increase, just to put in 
perspective what I think an appropriate analysis would be.
    And then when I look at the specifics, one thing that 
strikes me are cuts in these areas: State formula grants for 
first responders, the firefighter grants, the urban area 
security. In those areas, $990 million cut in State formula 
grants, almost $250 million in firefighter grants, and then an 
area not under your direct control, over at the Justice 
Department, the COPS program and other law enforcement grants, 
$911 million, for a cut of a $1.4 billion, approaching $1.5 
billion.

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    And then I look at the cost of the Bush tax cut in 2005 for 
those earning over $337,000 a year, and the cost for the tax 
cuts for people earning over $337,000 a year in 2005 is $45 
billion--30 times the amount of the cuts for first responders 
and for cops on the street. I know there are some who do not 
think of cops on the streets as first responders, but I can 
tell you my cops feel that way. And dramatic cuts in the COPS 
program are certainly not well-received in my constituency.
    Finally, on the issue of port security, those grants being 
cut by 63 percent, and those are issues I want to go into in 
some more detail when we get to the questioning phase, Mr. 
Secretary. I hope this information is useful as we go into this 
questioning phase.
    Thank you, Mr. Chairman.
    Chairman Nickles. Mr. Secretary, welcome to the committee. 
You are free to make any opening remarks you wish.

STATEMENT OF HON. TOM RIDGE, SECRETARY, DEPARTMENT OF HOMELAND 
                            SECURITY

    Secretary Ridge. Thank you, Mr. Chairman and Senator 
Conrad. You have been very kind to accommodate a scheduling 
conflict I had later on this morning. So, in order to give the 
membership of the committee the complete opportunity to address 
whatever questions they have, I would like to just ask 
unanimous consent that the statement be included in part of the 
record and get at it.
    Chairman Nickles. Certainly.
    Mr. Secretary, Senator Conrad alluded to the fact, and 
Senator Collins has already written a letter, that dealt with 
the reduction in the program, the State Homeland Security Grant 
program from $1.7 billion to $700 million. Would you care to 
expand upon that?
    Secretary Ridge. Yes, I would.
    First of all, the President's budget reflects the same 
level of commitment in terms of his requests in his budget, the 
budget document of 2004. What you are talking about with regard 
to the State Homeland Security Grant program is a shifting of 
some of those resources, a substantial amount, over $700 
million into the Urban Area Security Initiative, where we feel 
that it is appropriate to take in not only population, but 
population density, threat, critical infrastructure and the 
like.
    So, if you go back and take a look and compare it with the 
2004 numbers, the overall request for the President has been 
sustained, and increases in other parts of the homeland 
security budget have been advanced. It is a shifting of 
resources because there is a shifting of priorities. I think it 
is a strategic decision, while we want to continue to support 
the development infrastructure around the country, continue to 
support States and their development of their own security 
strategies, that we shift some of those dollars where we think 
the greatest threat and the greatest possibility of 
catastrophic loss might be.
    Chairman Nickles. Mr. Secretary, I happen to concur with 
that, but let me also say I do not want to waste money in the 
big cities either.
    Secretary Ridge. I understand.
    Chairman Nickles. And D.C. would be a program that one 
would say that is a high-threat area, probably one of the 
highest, with New York, and maybe Los Angeles and others. The 
District of Columbia funded leather jackets, assessed 
environmental problems on property prime for development. In 
Maryland, the money was buying Prince George's county 
prosecutors an office security system; Virginia, a small 
volunteer fire department spent $350,000 on a custom-made fire 
boat; in State and local Governments in the District, Columbia 
Hospital Association had a formula that guaranteed every city 
hospital a share of an $8-million grant. That meant the 
Psychiatric Institute of Washington, a small private hospital, 
received money to buy security cameras for its wards.
    I could just go on. I am just looking at a lot of money 
that is in a big city that is going to maybe be under the 
discretion--see, D.C., the agency used an additional $300,000, 
this is according to the Washington Post, and maybe they might 
be inaccurate sometime. I do not want to say it is gospel, but 
according to a Washington Post article, let me put it that way, 
and that was debated on November the 23rd, said that $300,000 
was used for a computerized car towing system, which incidently 
I learned, my daughter learned the hard way. There is a lot of 
corruption in the D.C. car towing system--corruption. And I 
will repeat that because I am still mad about it. But I do not 
know that your department or the Federal taxpayers should be 
funding that. And I could go on. There is $100,000 to go to the 
mayor's politically popular Summer Jobs program, but that does 
not make me more secure.
    So my point is I think you are on the right track and 
saying taking away or reducing the amount of money for the 
State grants that is going to every State by a population 
formula, I guess, and moving it into areas that you deem--I am 
guessing with your discretion--in the urban areas that are a 
higher threat, I happen to agree with that. But this is an 
urban area of high threat, and they waste a lot of money. And I 
am going to be just as vigilant on your $700 million under that 
urban grant program as I am on the State program. And when I 
find that we are wasting money, I am not inclined to grant 
increases.
    And I just want you to know I want to be your ally, but I 
can also be your enemy if I find out that these funds are being 
wasted. And a lot of these funds, it looked like we Congress 
rushed to throw money at it, and the cities were all lobbying. 
They are here this week. The League of Cities and the Governors 
are all out saying, give us more money, we want more money, and 
then when you find out they are spending it in ways to buy 
leather jackets and so on, it infuriates me, and I wanted you 
to be aware of that.
    Secretary Ridge. Senator, I do not think we would ever have 
any disagreement about the need to make sure that for every 
dollar that we are investing in security, we should get at 
least a dollar's worth of return in security. Clearly, some of 
the expenditures that you have highlighted are of questionable 
relationship to that outcome.
    I will tell you, this year, for the first year, because we 
have only been in operation for a year as of Monday, we have 
asked the States to submit homeland security plans built from 
the grassroots up. We have also asked, with the Urban Area 
Security Initiative, that we get more complete prior expression 
of where those dollars are going so that as a formal function 
of our Department, we can start, one, limiting where these 
dollars can be expended, as we have a responsibility for 
building that national infrastructure across the country.
    So I am not going to try to explain how relevant some of 
those expenditures are to homeland security because I do not 
think I can. But I can tell you that there is not only a shared 
responsibility for us to oversee where those dollars go, but 
there is also a shared accountability and not just at the 
Federal level, but also at the State and local level to ensure 
that the dollars are being spent as Congress intended. And I 
assure you we will followup on that as rigorously as we 
possibly can.
    This year, for the first year, we will have plans. We are 
already screening the statewide plans. And while we do not want 
to be prescriptive, because one size does not fit all, we do 
want to frame where these dollars can go so we have a much 
better understanding of the integrated nature of the mutual aid 
systems that we are trying to build around the country.
    Chairman Nickles. Well, these funds, correct me if I am 
wrong, these funds really are not supposed to be just a subsidy 
for local police and fire; is that correct?
    Secretary Ridge. That is correct.
    Chairman Nickles. Because I think a lot of cities have 
financial problems or challenges, and they would love to have 
us help them out, whether it is for assets or whether it is for 
other little things that are in the----
    Congress has not abided by the President's request in the 
past. In other words, we funded part of this. I believe you 
wanted most of the first responders' money to go through FEMA 
and your department now. In the past, Congress had $1.6 billion 
of unrequested funding that was in the Department of Justice; 
is that correct? To make sure I am kind of on the right page.
    Secretary Ridge. Well, what we hope to do, Senator, is 
actually take the programs that had been, some of the programs 
that had been at FEMA. The basic source of these dollars were 
the Office of Domestic Preparedness. It used to be in Justice. 
We have it, and we want to combine our Office of Domestic 
Preparedness and our State and local office and then bring the 
relevant grants in from FEMA and from TSA so we can develop a 
one-stop shop for the State and locals, so we can better 
integrate the use of these resources, so we have much more 
rigorous oversight, and so we can evaluate whether or not we 
are getting a security return on those investments.
    Secretary Ridge. For our purposes though, we need to 
combine those funds together to get your budget.
    One other thing, and that deals with the issue of the--
well, maybe I will take it up later. I am going to ask all of 
our colleagues, the Secretary has a meeting, and he needs to 
leave. So I am going to try and be short, and I will ask all of 
our colleagues to try and keep their comments or questions to 
about 7 minutes, and I think we can get there--7 or 8 minutes, 
and we should be fine.
    So, with that, I will turn it over to Senator Conrad.
    Senator Conrad. Thank you, Mr. Chairman.
    Let me just pursue, if I could, some of the items that the 
chairman was mentioning because I think this really does 
deserve scrutiny and your opportunity for response.
    In the article that the chairman was referencing, it 
indicates that ``Two years after Congress approved a massive 
infusion of cash to help gird the Washington area against 
terrorism, much of the $324 million remains unspent or is 
funding projects with questionable connections to homeland 
security.'' That is on the negative side of the ledger.
    On the positive they say, ``Police, firefighters and public 
health have undergone disaster training, are better equipped to 
handle conventional attacks, weapons of mass destruction. They 
have more gear to protect them, more ambulances and fire 
trucks, more heavy equipment to diffuse bombs or locate victims 
buried beneath rubble. Local governments have at their disposal 
new blueprints on how to respond to a terrorist attack.'' All 
of these things are very positive I think we would all agree.
    But they say, on the other hand, ``Some police officers are 
still waiting for basic protective gear. Public health labs, 
swamped by the anthrax attacks of 2001, have no more capacity 
today. Most local Governments have no efficient way to give 
instructions to residents shut off from radio and television, 
and there is no comprehensive plan to unite families separated 
in a disaster.''
    Can we just take that paragraph, Mr. Secretary, and give 
you a chance to respond to that. Obviously, Washington, D.C., 
and you have talked about moving funds around to deal with the 
priority threat areas, and I think all of us would say that 
should be done. But here they are saying Washington, it has 
already been subjected to attack or the area, that some police 
officers are still waiting for basic protective gear. What can 
you tell us about that?
    Secretary Ridge. The only thing I believe I could share 
with you is that among the priorities that the city of 
Washington set was obviously the purchase of some protective 
gear, as well as other emergency equipment during the first 
year of the funding. We are finding that throughout not only 
Washington, D.C., Senator, but around the country, that these 
Governors, and police chiefs, and fire chiefs understand that 
they are not going to be able to build themselves the kind of 
security unit or acquire new uniforms across the board and new 
equipment across the board, and so they are incrementally and 
sequentially making different purchases to buildup over a 
period of years the kind of capacity that they need.
    It reflects a decision by the mayor and the police chief as 
to what their priorities were. So, if they purchased some 
protective gear and other needs, we are not going to quarrel 
with that. We are just going to be mindful of their building up 
an adequate amount of protective gear and equipment over a 
period of time, and they are not going to be able to do this in 
a year.
    Senator Conrad. Do you believe that it is adequate in the 
District?
    Secretary Ridge. Well, again, I think the--I cannot tell 
you specifically the kind of protective gear that any 
particular police department has purchased. I can tell you that 
many of them have initially gone to protective gear and 
communications equipment, but I doubt if any of them have 
purchased the protective gear for everyone in their police 
forces. It is going to take some time, and the question becomes 
whether or not every individual police officer in every single 
police department has to have the same kind of protective gear. 
I do not believe that is necessary.
    Senator Conrad. Let me just, if I could, Mr. Chairman, 
maybe I could ask that I just--I will give you a series of 
questions now, and if you could provide answers in writing, so 
that we not take the full time of the committee.
    My No. 1 question would be do the police in Washington, 
D.C., and surrounding communities have the protective gear that 
they need? No. 1.
    No. 2, do they have a system of communications that allows 
them to communicate an interoperable way? I held a hearing on 
this out in my home State, Mr. Chairman, and that was the No. 1 
issue of first responders is a lack of interoperable 
communications.
    Third question, do the public health labs have sufficient 
capacity to deal with a bio or chemical attack?
    Next question, do local Governments, in the high-target 
areas, have an efficient way to give instructions to residents 
shut off from radio and television, such as a reverse 9/11 
system? And maybe, Mr. Secretary, you could address that one 
right now before the committee.
    To your knowledge, do these local Governments, in these 
high-vulnerability areas, have a way to give instructions to 
residents shut off from radio and television?
    Secretary Ridge. I believe that the National Capital 
Region, which is a specific entity that you created in the 
legislation that created the Homeland Security Department, has 
worked to have that kind of system put in place.
    Senator Conrad. Is it in place?
    Secretary Ridge. Well, they are certainly working on it. I 
believe that Mayor Williams discussed it publicly. Arlington 
County has a similar system. So I think, again, I cannot tell 
you today that it is completely in place across the National 
Capital Region. I can tell you it is a priority of the National 
Capital Region, and they have been working on it vigorously 
since the NCR was created.
    Senator Conrad. Can I just ask that you, for the record, 
let us know what is the status. You know, the one thing that 
really struck me on that fateful day was the lack of 
communications. I mean here in Congress there was no 
communications. I think we saw that there really is a lack of a 
plan. I do not hold you responsible for that. I am just saying 
that is the reality that I saw play out on that day and massive 
confusion in this city. I mean, people were at jobs, did not 
know where their loved ones were. There was no ability to talk 
on a cell phone because the cell phone systems were 
overwhelmed.
    Finally, this article asserts there is no comprehensive 
plan to unite families separated in a disaster. To your 
knowledge, is that still the case that there is no 
comprehensive plan to unite families in the case of a disaster?
    Secretary Ridge. Senator, this raises the question of 
responsibility of Government, and communities and families to 
do some certain things together. There is plenty of information 
out there about the need to have a communication plan and a 
contingency plan. There are individual efforts that have been 
undertaken by the National Capital Region to get families to 
think of how they would contact one another and then reassemble 
in the case of an incident.
    I know the National Capital Region is going to expand 
nearly $5 million that the Congress has appropriated. So they 
have this massive public education effort to alert families 
that they need to develop these individual plans themselves--
very family specific plans.
    I do not think it would be possible for any level of 
Government to design a family specific plan. That is something 
that they need to do themselves, but I do know that the 
National Capital Region is putting quite a bit of energy and 
quite a few dollars that Congress appropriated toward that end.
    Senator Conrad. If you could give us a report on what the 
status of that is.
    Secretary Ridge. Yes, sir.
    Senator Conrad. Thank you, Mr. Chairman.
    Chairman Nickles. Senator Conrad, thank you very much.
    I next call upon Senator Gregg. For the information of our 
colleagues, the vote has started. We will continue throughout. 
We will continue with the hearing.
    Senator Gregg.
    Senator Gregg [presiding]. Thank you, Mr. Chairman. And let 
me join with yourself and with Senator Conrad, and I think the 
questions that Senator Conrad asked and that you asked, Mr. 
Chairman, are very appropriate, and I know the Department will 
want to answer them.
    Actually, to some extent, there is a certain deja vu all 
over again because I have gone through these hearings now, 
since I had jurisdiction of the issue of first responders for a 
number of years in my appropriations committee, and since we 
tried to set up a one-stop-shop attempt. Unfortunately, due to 
the bureaucracy involved, we were never able to put up one-
stop-shop. And I hope now that was the concept of the Homeland 
Security Department, that we would accomplish that. I 
appreciate the Secretary pursuing that course, and I am sure it 
will be accomplished now that we have a central area.
    And the issue of first responders, since basically this was 
a program created by myself and Senator Hollings, was never to 
replace or give the police officers, and fire departments, and 
health people basically replacement parts. It is not a ``blue 
light'' program. It is not supposed to be like the LEA was in 
the seventies. It is supposed to be a threat-based 
organization. It grew out, as I have mentioned before, from the 
original Nunn-Domenici Act, which targeted the top 162 cities 
in the country, and it was supposed to bring those cities up-
to-speed, and we decided to try to take it beyond that.
    I congratulate the Department for going to a threat-based 
system, and I understand that you are reorienting dollars to 
accomplish that. It is the right approach. It is going to make 
a lot of chiefs, fire chiefs, police chiefs, and Governors and 
mayors unhappy, but they have to understand that if they have a 
region that is not a high-priority threat, then they are just 
not going to get as much money as regions that do.
    Second, the State plan. We had an understanding there would 
be State plans in place before we gave out any of this money, 
and that was a precondition. I know you are now redeveloping 
the State plan, but again that is a little bit of deja vu all 
over again. But those State plans are critical to being sure 
that this money is not ending up buying blue lights, that it is 
going--and so I hope you will oversight those aggressively.
    I want to congratulate the Department for some things that 
it has done. One of the reasons I wanted the Department created 
was because, again, I had oversight over Immigration, but I did 
not have oversight over Customs, and I had oversight over 
Border Patrol, but I did not have oversight over Coast Guard, 
and I found that it was just chaos trying to get these 
departments to communicate with each other.
    I have spent a lot of time since the Department has been up 
and running talking to the line folks, the Customs agents, the 
Immigration folks and asked them, ``Well, how is it working? 
Are you guys talking to each other yet?'' And initially there 
was a lot of resistance. There was a sense of, ``I do not want 
to learn that guy's job, and he is never going to do my job as 
well as I can do it.''
    That has changed. That whole atmosphere has changed out 
there. There is a real positive atmosphere from the 
Immigration, the Customs people, the Border Patrol people. I 
sense a real dedication to trying to learn each other's job, 
making this integrated. It is anecdotal to me, but it is good 
news, and I congratulate the Department for the effort there.
    What I want to ask is this Bio Shield issue. As Senator 
Conrad pointed out, most of this money is going to prefund Bio 
Shield, most of the new money. I am very concerned we are not 
making progress on this, that we are open to a biological and 
chemical attack. We have not been able to pass the Bio Shield 
bill out of the Senate. I got it out of our committee a long 
time ago. It should have been through the Senate. It should 
have been passed. It should have been down to you.
    How much do you need the Bio Shield authorization to do 
this right, and even though you have not gotten the 
authorization, are you able to use the dollars to get us 
oriented for the purposes of first detecting and then handling 
biological and chemical attacks, which is clearly our biggest 
threat?
    Secretary Ridge. Senator, as one who spent 12 years on 
authorization committees but never managed to get to an 
appropriation committee, I do not want to say that not having 
the appropriation would impair our ability to restrict our 
ability to use those dollars. I will let the Congress work that 
out.
    We are comfortable that the $2 billion-plus that you have 
provided us can be used under the circumstances designed by the 
legislation. That is, if we see that there is a specific 
threat, a biological threat, for which we do not have an 
antidote or a vaccine, and we know very clearly that there is 
not going to be a commercial market for this product, you have 
given us the resources to go in immediately and engage the 
private sector in researching the antidote or the vaccine.
    So, again, we will let the Congress work their will on 
whether or not we are going to get an authorization bill, but 
we believe that the appropriation gives us the opportunity to 
use those funds immediately when we do.
    Senator Gregg. On another issue, I was a little concerned 
about the Department's request in the area of TOPOFF. It seems 
to me that TOPOFF has been an extremely constructive 
experience. It has now really gotten very mature.
    Senator Conrad. Could the Senator explain what that is.
    Senator Gregg. TOPOFF is basically exercises of attacks, 
going through what is basically a military exercise. We stage a 
simulated attack on a city. It is biological, chemical or 
conventional or maybe even nuclear, and then it is a full 
scale, engage everybody in the community in a time line, very 
complicated, but very professionally done, much the way the 
Strategic Air Command used to stage their exercises relative to 
war.
    But I am a little concerned that the funding does not 
appear to be as aggressive as it needs to be in this area in 
order to stand up the next round of TOPOFF exercises.
    Secretary Ridge. Senator, we think you have given us the 
resources to do that. I am actually going to have a briefing 
here in the next couple of days as we prepare for TOPOFF 3. 
Senator Conrad, the last TOPOFF 2 exercise included 
simultaneous events. One was a radiological event in Seattle, 
the other was a biological event in Chicago. When you bring to 
bear the Federal, State and local resources and all of the 
prime time players, we actually even had a, we call it VNN, a 
Virtual News Network, so we could work on crisis communication 
during this period. You learn a lot. You learn what you are 
doing right. You find gaps in the system, and you learn where 
you need to strengthen.
    Senator Gregg. What we learned was that the mayor of 
Seattle was a lot more efficient than the Federal Government in 
responding.
    Secretary Ridge. They did a good job, Senator. They did a 
good job.
    [Laughter.]
    Secretary Ridge. So there are a lot of lessons to learn, 
both good and bad, and I think the Congress has been very 
generous with funding in that regard. Plus, not only the broad 
national exercises, but we literally run hundreds of both 
formal, on-the-ground, boots-on-the-ground exercises or table-
top exercises. That is one of the primary responsibilities of 
the Office of Domestic Preparedness, and one of the eligible 
costs associated with the dollars that Congress appropriates to 
our department.
    Senator Gregg. Senator Corzine?
    Senator Corzine. Welcome Governor, and let me start with a 
compliment based on my reading of how the Department is working 
with the folks in my home State, and I feel like there is good 
dialog and coordination. That is the good news. Let me ask 
some----
    Senator Gregg. Senator Corzine, could I note that I am 
going to have to leave to go vote. Could you recess the meeting 
after you finish and the other folks will be coming back?
    Senator Corzine [presiding]. Sure. Absolutely. I would be 
happy to recess.
    I am going to ask a couple of questions: one about chemical 
plant security, one about screening issues at airports, and 
then a little bit about port security and do that relatively 
quickly.
    Chemical plant security is a major issue in my State. We 
have a number of plants that have more than a million folks 
that are in the fall-out zone of a potential explosion, and it 
is an issue that you have actually spoke very, I thought, 
eloquently about, talking about voluntary efforts that alone 
are not sufficient in a letter that you sent to the Washington 
Post, October 6, 2002.
    Do you feel the legislation that is working its way through 
Congress, which does not bring about mandatory review of 
security plans and review of technological elements of chemical 
plants is adequate to meet a standard of certainty for the 
communities that surround these plants?
    Secretary Ridge. Senator, first of all, I would hope that, 
while there may not be mandatory review, we certainly are 
empowered to--the Department of Homeland Security is empowered 
with its discretion to go out and review the security plans at 
any chemical site. We have worked very hard over the past year 
visiting some of the potentially more problematic sites. Some 
of them have been in New Jersey.
    We have produced a document dealing with the common 
vulnerabilities of chemical facilities and potential indicators 
of terrorist activity. We have established a protection, 
training, and planning program. We are trying to develop a 
baseline for chemical facilities. So whatever the legislation 
might be, I do think it is very, very important that the 
Department of Homeland Security, particularly the 
Infrastructure Protection Unit, have the ability to go out and 
review the security plans.
    And likewise, I think one of the most important allies to 
determine whether or not that chemical site has met the local 
needs is that we get some, that the local first responders were 
included in that assessment. Because actually they are going to 
be the ones that are going to have to deal with the incident if 
it occurs.
    So mandate--I think it is imperative that we have the 
ability to go out and review the security plans.
    Senator Corzine. I would hope that you would have some kind 
of accountability for the plans. I think that the idea that you 
could go out is a good thing, but whether we are actually 
following through, I believe, based on at least my own 
anecdotal spot checks and others and broad bases, not all of 
what is being said is going to be done is being done, and I 
find it quite threatening in a community where there are 
multiple millions in a number of the incidents in New Jersey, 
but it is true across the country.
    Secretary Ridge. Senator, we would be prepared to work with 
you on the language. What we have done, tried to do within 
these chemical facilities, is take a look at again the toxicity 
of the contents, proximity to population, and we have begun to 
set some priorities. And I think that clearly we will never 
have enough manpower to get out and visit and work with every 
chemical site around the country. We are going to have to rely 
on our first responders and the local law enforcement community 
to do that, but there are some that would offer great potential 
catastrophic consequences, and I would like to work with you on 
the language and make sure we get out and review those.
    Senator Corzine. As you have I think appropriately 
identified threat-based elements with how you are designating 
your priorities in the Department, I think that is true here, 
and we need a prioritization basis on how you look at these.
    I think some of the things that I see coming through 
Congress not necessarily meeting the themes or the standards 
that I think I hear, and I have heard from you as you have 
commented on this, and I recognize that you recognize it is an 
important element. I see it working on the ground through our 
State efforts, but I would encourage you and the administration 
to do whatever you can to get a bill through with some 
meaningful bite with regard to prioritization and then mandates 
at least with regard to some of those issues, and I look 
forward to working with you.
    Let me ask about the state of screening by a TSA at 
airports. I am quite obviously being parochial in one sense in 
that Newark airport is one of the seven airports that did not 
meet the baggage screening deadline at the 1st of the year. I 
think there were seven.
    A lot of this is attributed, at least from the interviews 
that I have been able to put together with the folks on the 
ground, this is a heavy turnover in TSA and among screeners. I 
think average is 14 percent. I think it is 17 percent in 
Newark, and it goes up to 35 or 36 percent. By any managerial 
metric, those are high turnover rates and do not lead to the 
best of professionalism and efforts in carrying through.
    Is this a problem that is being recognized? Are there plans 
to address it? And particularly how soon do we think that these 
seven airports--I happen to have a special interest in Newark--
that we can get this into a position that we can begin to give 
the public assurance that the safety of the airways is intact?
    Secretary Ridge. Senator, I would like permission to get 
back to you specifically with a request to our anticipated 
deadline for the Newark airport and for those seven. I do not 
have that information with me, but I would be pleased to work 
back to you.
    Yes, we have experienced similar problems at some of the 
other airports, Senator. A lot of it has to do with 
convenience, transportation, getting to the airports, the cost 
of either the inconvenience associated with taking public 
transportation--many of them have to--the cost of parking their 
vehicles. There are certain themes that we are seeing in some 
of our major airports around the country that we are going to 
try to address financially with different kinds of incentives 
to keep people working.
    We invest a great deal in them to train, but if we have 
this constant turnover, it is not, to your point, it does not 
provide the stability and the continuity we need. So we are 
aware of the challenge. A lot of it has to do I think with 
access, transportation, and we are reviewing a system of 
financial incentives to help alleviate some of the problems 
that these people are running into in order to get out there to 
serve the public.
    Senator Corzine. I think there are real issues here I the 
overall structure, and any time you start a new program as 
broad as this is, that it can be the kinds of issues you cite. 
It does not happen to be the case at Newark because there is 
great public transportation there. It is a huge turnover.
    I would love to work with you on the specifics in that 
particular situation, but I think it is a national problem. And 
I will just ask for the record, since I need to go vote, on 
port security, I am curious what current percentage of 
containers that we are actually screening, if that is something 
that is available for the public view, and is there a metric of 
resources expended to increase the number, and is there a goal 
where we think we can, since you probably can't screen every 
single container that ever comes to the shores, how can we get 
ourselves into a position to have the greatest confidence on 
our screening abilities? What is the percentage? Where do we 
stand with regard to our budget requirements to get to that?
    And since I have to go vote, I will take that on----
    Secretary Ridge. I would be pleased to, Senator. Just to 
assure you that we are layering in our review, our inspection 
of these container ships, beginning with a very precise 
targeting of these containers before they are unloaded in 
Singapore, and Hong Kong and the like. It is a rule-based 
system. We do it at the National Targeting Center here, and 
right now I think we are at 98 or 99 percent of the containers 
initially go through that process before they are even put on 
the ship. It is a very important and very complex application 
of the information we have acquired from the Coast Guard and 
the Customs over the years, and I would be very pleased to lay 
out in detail to you the different layers of defense as it 
relates to cargo container security.
    Sorry to keep you, Senator. Thank you.
    Chairman Nickles [presiding]. Senator Corzine, thank you 
very much. That was an excellent question.
    Senator Burns.
    Senator Burns. Thank you very much.
    I have just a couple of points. You might want to write 
these down, and you may have to respond to them, Mr. Secretary, 
in private or whatever.
    I notice you have in here an increase of about $892 million 
or a 20-percent increase in improving aviation security. Could 
you tell me is that employees? Is that a capital investment? 
Where is that money going? Because every time I go down there, 
I have never seen so damn many people in my life. They are all 
over the place, and I am not real sure we need it.
    Secretary Ridge. Senator, that additional $800 million is 
basically personnel costs. The 2004 budget, as we ramped up 
pursuant to the mandates from Congress, we did not need, 
because we were not fully ramped up--let me put it another way. 
We had an FTE requirement that was not fully met in 2004, and 
we needed additional dollars to meet it in 2005. So those are 
personnel costs, to your point, paying for labor, and paying 
for the baggage and passenger screeners.
    You should also know simultaneously we are now going back, 
having met the mandate of Congress, getting the technology 
deployed, hiring the screeners, on an airport-by-airport basis 
to see if the present configuration of people and technology is 
appropriate at each and every airport. So there will be some 
adjustments in the future. Some airports may have fewer, some 
airports may have more screeners. But we really need now to 
take a look an airport-by-airport basis to determine whether or 
not we have the right number of people there. And the more 
technology we can deploy, in the long term, probably the fewer 
people we will need.
    Senator Burns. Passenger IDs, any of these people on people 
who have a record of being frequent flyers, are they going to 
identify those people in some way or another, facilitate moving 
some of those people through these airports a lot quicker?
    Secretary Ridge. Senator, as you know, we are working on 
two initiatives right now within the Department. One is the 
computer-assisted passenger prescreening program. It is a pilot 
program that we hope, with the approval of Congress and 
basically we need the stamp of approval from GAO, that we can 
run that program. It would help us prescreen and probably 
eliminate a substantial of the secondary screening.
    There is another initiative that we are looking at called a 
Trusted Traveler Program, where people are prepared to give us, 
in advance, basic information about themselves, and so we can 
confirm their identity, verify who they are, and they do what 
they claim they do, to expedite their movement through the 
airport as well.
    So those two initiatives we are undertaking this year.
    Senator Burns. In another area. Up in our State, when those 
grants come down to help first responders, fire departments, 
this type thing, there was a, if your EMTs or your first 
responders was not a part of the fire department, they did not 
get any funds. Is that a rule in your shop or is that a local 
State regulation?
    Secretary Ridge. I think that is a restriction--I would 
have to double check, Senator--but I believe that is a 
restriction imposed by legislation. If it is the Assistant to 
Firefighters Grant program, I think it limits access to those 
dollars to firefighters.
    Clearly, the emergency management personnel that you are 
talking about, if they are part of a State or local scheme, can 
qualify for any money. But for the Assistance to the 
Firefighters Grant, I believe Congress limited that just to 
fire departments.
    Senator Burns. You have different situations, like in the 
State of Montana, we have such small towns, you know, sometimes 
they are not together, and most times they are volunteer 
systems in that respect.
    One other question. In the area of bio defense, we have 
spent a lot of money in the procurement of vaccines and drugs 
that would be needed in case of a bio attack. Do those drugs 
have shelf lives, and what is our cost of replenishing those or 
turning those over from time to time?
    Secretary Ridge. The drugs do have a shelf life. Health and 
Human Services, one of their responsibilities over the 
strategic national stockpile is to monitor and replace them if 
they have exceeded their shelf life. I cannot give you the 
specific annual figure to replace the vaccines or the other 
pharmaceuticals, but I will get it for you.
    Senator Burns. And border, I understand we are going to 
restock a whole little town in Montana about people coming to 
Montana or that is going to work that border. I do have a 
complaint, though, and I hear this more than anything else.
    As you know, bureaucracies have habits of building 
fiefdoms, and we are getting a lot of complaints on just out 
and out harassment at these borders. And I know most, I should 
probably take that up with department heads, and I plan to do 
that, but I did want to bring it up during this hearing because 
I am concerned about that.
    The free flow, Mr. Secretary, is this. We have people who 
farm both sides of that border up there. They have farms in 
Canada, they have farms in the United States, and now all at 
once we are just--really, it is just a hassle to traverse that 
border now, where it has always been open before, and these are 
people that are everyday people, and most of them live in the 
area. But they say these people are just getting out of hand, 
and they are outrageous, and they are discourteous, and if you 
make them mad, they will leave your equipment sitting there. 
They might hold you for a half a day. I heard of farmer had to 
hold his equipment half a day because he made the guy mad, and 
I fail to understand this.
    Secretary Ridge. Well, Senator, I would like to work with 
you on that. We have had some challenges along the borders 
because of that.
    Senator Burns. I will bet you have.
    Secretary Ridge. And our job obviously is to, No. 1 
priority is security, but there is a commercial activity at the 
border. Some of it is visible with trucks, and cargos, and 
others. It is just good farmers who happen to have a parcel of 
land on both sides. So we would certainly like to work with you 
on that, and I am fairly confident we can come up with a 
satisfactory solution. You identify the problem, Senator, and 
we will correct it.
    Senator Burns. Thank you.
    Chairman Nickles. Senator Burns, thank you very much.
    Mr. Secretary, I told you earlier I would try to get you 
out--11:30 is when you--do you have a little flexibility there?
    Secretary Ridge. A quarter of.
    Chairman Nickles. We will be OK.
    Senator Wyden? Thank you.
    Senator Wyden. Thank you, Mr. Chairman.
    Mr. Secretary, as you and I have talked about before, I 
feel very strongly that it is possible to fight terrorism 
without gutting civil liberties. Yesterday, the associated 
press ran a story that indicated that some of the remnants of 
Admiral Poindexter's program are still continuing. I want to 
start with a couple of questions about that.
    My first question is can you make clear to us that none of 
those Poindexter programs are used to spy on law-abiding 
Americans on American soil? That is what the law requires.
    Secretary Ridge. Senator, I am going to respectfully refer 
that inquiry to DOD, where Admiral Poindexter was engaged in 
that enterprise. I can assure you that nothing that we are 
doing in the Department of Homeland Security has been designed 
to collect information or to spy on American citizens. Frankly, 
every initiative that we consider, from the outset, there is 
both concern and consideration about the impact on civil 
liberties and privacy.
    The Congress very appropriately created within the 
Department a Privacy Office and an Office of Civil Liberties, 
and those couple of really talented lawyers and very good 
staffs are engaged at the very outset not only internally 
within the Department, but frankly with the groups and 
organizations around the country that legitimately are 
concerned about the universal protection of privacy and 
freedom.
    Senator Wyden. Is your office involved, in any way, with 
data mining on the part of Government agencies? Because it 
seems to me that the Congress is just in the dark with respect 
to data mining. And we are paying for it, and my guess is you 
all are involved with other agencies in data mining today. And 
I would like to know, A, if that is the case; B, how many 
programs are going on involving data mining; and, C, how much 
money is being spent on data mining; and, D, whether there are 
any privacy rules with respect to how this data mining is going 
forward?
    What can you tell us about your office and data mining this 
morning?
    Secretary Ridge. Well, Senator, I would like a little 
clarification from you, and I would be happy to have a private 
conversation with you, even a public exchange, if we framed the 
issue.
    We target containers coming into the United States. We 
buildup a data base that includes information about companies, 
and shippers, and we do refer to that. I do not know whether 
you consider that to be part of a data-mining process, but we 
do refer to information that we have compiled in Customs and 
the Coast Guard about companies and shippers.
    We do, as part of a program to move commerce through the 
borders, insist on going in to check the backgrounds of truck 
drivers coming across our borders from Canada to Mexico in 
order to get them access, quicker access to and from the 
States.
    We are contemplating a computer-assisted passenger 
screening program. This is probably perhaps where the greatest 
concern might be, where we would take the name, the address, 
the phone number, and the date of birth and other passenger 
name records that would be associated with that passenger. And, 
again, the Congress has set some thresholds and asked the GAO 
to examine the CAPPS program to ensure that the privacy 
protections that Congress is concerned about are met. We are 
still working and developing that pilot program, which we 
cannot implement without the GAO's imprimatur.
    So I would be happy to take up any of these or any related 
questions with you at any time. But we are getting access to 
personal information, and occasionally some proprietary 
information, but the most expansive reach would be the CAPPS 
program where we are trying to enhance security, reduce 
inconvenience, and frankly get access to some commercial 
information that commercial vendors might.
    Senator Wyden. Why don't you furnish to me, for the record, 
what programs involving data mining your agency is involved 
with because I think it is very clear that everything from 
airline ticket purchases, to visas, to driver's licenses, a 
whole host of information is being examined by Government 
agencies every single day, and the Government, and certainly 
the Congress, is in the dark with respect to what is going on 
in data mining. There are no privacy rules. It seems to me the 
public has a right to know exactly what is going on here.
    Two other questions, very briefly. Section 313 of the 
legislastion creating the homeland security department calls 
for the creation of the Centralized Technology Clearinghouse. 
This is something I was very involved with. And the point of 
the clearinghouse was to make sure that our entrepreneurs and 
our small businesses would not have to traipse all over 
Washington, D.C., in order to get their technologies reviewed. 
We are not clear what the status is of the clearinghouse that 
is mandated by Section 313. Could you give us some sense of 
where that is because there are a lot of entrepreneurs and 
small businesses with ideas out there, and they wanted a one 
stop kind of process. What is the status of the clearinghouse?
    Secretary Ridge. We understand and recognize it is a 
priority for the Congress. It is not as complete as I think you 
want it to be. With regard to getting access to information 
concerning procurement, we are in the process of streamlining 
that. In terms of it getting access to our Science and 
Technology Unit, to review the technology to see if it has 
application either within the Federal Government or elsewhere. 
Those are two features of that, as I read Section 313, that you 
wanted us to do. We are not completely done with either one 
yet; one, procuring information; two, assessing whether or not 
the technology is as good as it says it is and will perform as 
advertised.
    Senator Wyden. I hope that you all can move quickly on that 
because it seems to me that this is something we hear again and 
again from small business people, that they traipse all over 
Washington, D.C., trying to get answers.
    One last question, if I might. Section 224 of the law was 
something that I was particularly interested in because it 
established something called NetGuard, which was essentially 
volunteers in science and technology. We saw after 9/11, for 
example, a lot of companies literally went to New York City in 
an effort to try to help them get their communications link-ups 
back and going, and they simply could not get in.
    What is the status of section 224? This is something, like 
the clearinghouse, it is a very low-cost operation. NetGuard is 
volunteers. This is not something with Government employees. 
What is the status?
    Secretary Ridge. Senator, I will have to get back to you on 
that one.
    Senator Wyden. Fair enough.
    Thank you, Mr. Chairman.
    Chairman Nickles. Senator Wyden, thank you very much.
    Next, is Senator Sessions.
    Senator Sessions. Thank you, Mr. Chairman.
    Mr. Secretary, it is great to have you with us. You have 
had one of the greatest challenges anybody could have to try to 
assimilate all of these agencies and departments into one 
cohesive branch. I think you are doing a good job, and I salute 
you for it, but it is not easy. Anybody that has worked in the 
Federal Government, as I did, and worked with a lot of 
agencies, a United States attorney, and you know they are all 
quite different, have institutional prerogatives. When they 
decide to work together, they sign what amounts to treaties, 
you know, Memoranda of Understanding and things, that really I 
think indicate just how difficult it is to get people to work 
together.
    In that regard, I strongly believe, based on my experience 
at that level, partnerships between law enforcement at the 
local level, partnerships between State and local and Federal 
works. I have heard some concern in the field that there is not 
enough really partnering with the Federal Government in 
cooperative work.
    It is something, in my experience, you have to push 
constantly from the top, and it will eventually filter down, 
but without sustained leadership and pushing, it may not 
happen. I know you have indicated your desire to see this 
happen, but I wonder if you are satisfied at the level of 
cooperation and, if not, will you continue to push for that?
    Secretary Ridge. Senator, I am very satisfied with the 
level of cooperation We have literally seven hundred thousand-
plus volunteers in State and local law enforcement that want to 
be part of the Homeland Security team, and if given actionable 
information will take action to help us.
    Our challenge within the Department is to build an 
information network so that we can give them timely 
information. Just yesterday, we announced an initiative. Our 
goal is to complete it by the end of the year, and that is 
basically to design an Internet-based information-sharing 
system that once completed will go through all 50 States and 
initially to the 50 largest urban areas. But, clearly, trunk 
lines can be spun off of that, so we can pass on down to the 
States and local law enforcement sensitive, but unclassified, 
information, and then as we complete our classification system, 
where needed, and when appropriate, even pass down secret 
information. It will be an Internet-based system.
    As I said before, our goal is to get it up and operational, 
and it is also not only going to connect us vertically, but the 
Operations Center in Washington, D.C., then can compare notes 
with the Operation Center in New York City. So there will be 
points of comparison, where they may pick up bits and pieces of 
information that need to be shared. They may find some trends 
with regard to surveillance activity and share those. So, 
again, it is an Internet-based system. It is one of many that 
we are going to do in addition to secure phones, and video 
conferencing and the like, but our goal is to have that 
completely operational by the end of this year.
    Senator Sessions. I think that would be an historic step 
and would be very important. At the same time, I think you also 
need to push your local officials in areas to have regular 
meetings with the local law enforcement. Make sure they feel 
that they know how to access this and feel that partnership 
effort.
    Secretary Ridge. If I might, Senator, one of the things I 
failed to note, and for everyone's benefit, this was a system 
actually designed by State and local police, and shortly after 
9/11 we became familiar with it. And it just seemed to be the 
easiest way to transmit information.
    During the holiday season, we actually used this system to 
connect with New York City and Los Angeles, California. So 
you'd get virtual real-time information exchanged. We saw a 
couple of States using it. New York and California get a lot of 
credit. We said this should be one of the main poles in the 
informational tent, and it was really brought to us by State 
and local law enforcement. As you point out, if we give them 
information, they can act on it.
    Senator Sessions. Mr. Secretary, we have a substantial 
problem with securing our borders with regard to immigration. 
We have large numbers of people here illegally. I understand 
that this bill calls for I believe $23 million for enhanced 
worksite----
    Secretary Ridge. Enforcement.
    Senator Sessions [continuing]. Enforcement.
    Secretary Ridge. Yes, sir.
    Senator Sessions. Are you satisfied that can make a 
significant difference in that problem?
    Secretary Ridge. Well, Senator, I think it is a doubling of 
the personnel and teams that we have within the Department. We 
will give you a status report here in maybe 6 months to tell 
you whether or not, after we get those dollars, and see if we 
need additional support.
    But I think, as a precursor to dealing with the President's 
initiative concerning immigration, we will know that none of 
these laws are going to be effective unless we have the 
resources to enforce them. So we do have a doubling of those 
dollars to assist us in 2005, and we think it is adequate to 
meet our laws under the existing laws because we are doing so 
many other things in addition to that at the borders to reduce 
the illegal flow of immigrants.
    Senator Sessions. Well, we are making some progress.
    Secretary Ridge. Yes, sir, I think we are.
    Senator Sessions. There is no doubt about that. I have been 
a critic of, as you know, the legal system and its 
effectiveness in some of the things we have done. I think we 
probably need more than that in that account.
    And, second, you have a $100-million increase for purposes 
of dealing with detention and removal of illegals. As I 
remember the numbers, I think there are 400,000 absconders, 
people who have been arrested for violations of immigration 
law, were released on bail, and they just never return. There 
are 400,000 out there. They also are not getting into the 
National Crime Information Center.
    I am sure this $100 million will help, but I hope that you 
will give high priority to guaranteeing, before we have any 
reform of the law, that our legal system is capable of dealing 
effectively with these problems.
    Would you make any comments about that expenditure and what 
you hope to achieve with it.
    Secretary Ridge. Senator, you highlighted a challenge that 
we have with regard to the enforcement of the law, and that is 
dealing with those who fail to show up for that final 
determination hearing or there is a hearing, but we have no 
place to detain them. So the $100 million will significantly 
increase the capacity--not completely--but it is a significant 
increase in our detention capability, so once detained we can 
make arrangements to deport them.
    Senator Sessions. When people are convicted of felonies, 
they really should not be released. They are required by law to 
be deported, and I understand that has not been happening on a 
regular basis, and we need to make progress there.
    Thank you, Mr. Chairman.
    Chairman Nickles. Senator Sessions, thank you very much, 
spoken as a Senator and also a former U.S. attorney.
    Senator Stabenow.
    Senator Stabenow. Thank you, and welcome, Secretary Ridge, 
it is good to see you again.
    Secretary Ridge. Hello, Senator. It is good to see you.
    Senator Stabenow. I first want to thank you for coming to 
Michigan and for the progress we have made at the border. It 
has been my pleasure to be a part of hosting you and a 
bipartisan delegation and have you come and see not only the 
challenge in Detroit, which is the largest Northern border 
crossing, as you know, but also in Port Huron, a smaller 
community where there are multiple risks and threats, and we 
look forward to continuing to work with you to meet those 
multiple needs, both for small communities as well as larger 
communities.
    I also understand you will be in Detroit on Friday to the 
Economic Club, so we welcome you again.
    Secretary Ridge. Thank you.
    Senator Stabenow. There is no doubt in my mind that this is 
one of the most serious issues, if not the most serious issue, 
that we face as it relates to the budget, and this is not a 
partisan issue. We all care about safety and want to make sure 
we are safe, but we have different choices, and that is really 
what the budget process is all about.
    And one of my deep concerns is that after having 11 
different meetings around Michigan with first responders, I can 
say emphatically that if I were to answer Senator Conrad's 
questions about do we have protective gear, do we have 
interoperability on communications, do we have what we need in 
my State, the answer would be no, no, no. And that is of deep 
concern to me.
    And so when I look at choices in the budget, and I would 
ask, first, you to respond with your former Governor hat on, as 
being a distinguished Governor and having to work under Federal 
laws and budgets in the past, when we look at the fact that the 
President's budget cuts the COPS program by $712 million, and 
the fire grant program by $250 million, and then provides some 
other increases, but when we look at the fact that, in totality 
for a Governor or a local community, you do not 
compartmentalize everything. You do not say to this police 
officer, you will only answer the call if we know it is 
terrorism, and you will answer the call if we know that it is a 
domestic problem.
    The practical reality is that law enforcement has to 
address a wide variety of issues. They get a call on a 
suspicious package, they do not know whether or not that is 
terrorism or whether that is something else, and yet they have 
to respond.
    So the local police chief, the mayor, the Governor looks at 
it in totality of what they need to be ready for threats no 
matter where they come from, which is one of my concerns about 
our attempts to divide this up in some way. Where the rubber 
meets the road, and you are dialing 911, that is just now how 
they look at it, in a practical sense.
    So I am concerned, I mean, as a former Governor, if you 
were receiving a $5-million increase in homeland security, but 
then a $5-million cut in other areas, would you feel you were 
really moving ahead?
    Secretary Ridge. Well, Senator, even the new math wouldn't 
get me to that conclusion if you took $5 million out of this 
pot they used to give me and gave me $5 million in that pot, so 
I can understand that. But I want to share with you that I 
think it is, at least from Homeland Security's point of view, 
the President has sustained his commitment, which was a 
considerable increase in 2004. What we are talking about, 
Senator, is the difference between--and again you did say it 
was a matter of priorities--but the President's request, by and 
large, for first responders this year is at 2004 request level.
    In the budget process and in the legislative process, the 
Congress shifted some resources and took the dollar amounts for 
the State homeland security grants a little bit higher, took 
the assistance to the firefighters' grants higher. But I think 
we have to be very clear. The President has basically sustained 
his request from 2004 to 2005, and the priorities were shifted 
a little bit by Congress.
    And I think the President has come up in 2005, and here we 
have shifted--it is the same amount--but we have shifted the 
resources to where we think strategically there would be, at 
least for this time, it would be a better investment.
    Senator Stabenow. And I appreciate that. My concern, which 
is a larger concern, really addressed--that we are responsible 
for as well--is whether or not we are meeting 2004 levels and 
whether it is the same as 2005. Those levels were underfunding 
of what our communities needed.
    And the broader issue, and I have more of a statement, is 
that when we look at what former Republican Senator Warren 
Rudman and the commission, a distinguished group of people, 
looked at in terms of the broad needs that we have on first 
responders, they indicated that it would take $15 billion more 
a year to truly make sure the equipment was there, the 
communications was there, the bioterrorism training was there, 
the staff was there.
    This is more just a comment from the perspective of our 
Budget Committee, but when we look at this next year--and I am 
borrowing Senator Conrad's chart--and we look at the fact that 
it is a matter of choices. For people who are earning over 
$337,000 a year, this next year they get $45 billion back in 
their pockets in terms of a tax cut. If we just gave them two-
thirds of that, if we said we, as Americans, need to sacrifice 
together, and we are all going to be better off if we are able 
to fund everything that is needed in homeland security, and we 
just said you can have two-thirds of that, but we are keeping a 
third of it to fund first responders, I believe that would be a 
better choice to keep us safe.
    One other question, Mr. Secretary, and I will not ask you 
to respond to that. That is an issue for us to debate in terms 
of priorities.
    Secretary Ridge. I understand.
    Senator Stabenow. On the local front in Michigan, when you 
were in Michigan last, we talked about a specific issue to 
Michigan which is the fact that Toronto closed all of their 
landfills and is now trucking all of their trash literally into 
Michigan. We have a, we showed you through a helicopter, the 
trucks coming across the bridge.
    Secretary Ridge. Right.
    Senator Stabenow. Over 180 trucks a day. Even though we 
have better equipment at the border, and I was pleased to 
sponsor the amendment to create that and to work with folks at 
the border who have done an excellent job, we still cannot see 
inside of every truck. Every truck is not completely inspected.
    Your Department has initiated an effort to look at these 
trash trucks from a security standpoint. I wonder if you can 
share, at this point in time, any update on what you are 
finding or when you will be able to give us some feedback on 
that. This is a critical issue in Michigan for us and a real 
issue of national security because we do not know what is 
inside those trucks, and we are very concerned about our 
ability to keep people safe.
    Secretary Ridge. Well, Senator, No. 1, thank you for your 
hospitality during that visit. I did learn quite a bit. The 
visit to Port Huron specifically was very eye-opening in 
relationship to a community with massive infrastructure and not 
very good access to any of the dollars that are out there, 
except through the State's share, and I look forward to working 
with you and your colleagues to see if we can remedy that as we 
work with the regulations around the Urban Area Security 
Initiative.
    I did raise the issue with my counterpart in Canada, after 
our meeting, and clearly it was just the raising of the issue, 
but no resolution. It was raised again when I returned, based 
on my conversation with you, with Customs and Border Patrol. 
But what, if anything, they have done since that time we 
visited, I do not know, and I would be pleased to get back to 
you and report. All right?
    Senator Stabenow. Thank you.
    Chairman Nickles. Senator Stabenow, thank you very much.
    Before I call on Senator Allard, Mr. Secretary, I need to 
excuse myself. Senator Crapo will conclude chairing the 
hearing. I just want to thank you for your presentation before 
our committee today, and also I look forward to working with 
you. You have taken on a big challenge reorganizing a whole lot 
of the Federal Government. I think doing a good job, making our 
country safer, it is almost an impossible task, and I just 
compliment you and your team for the work that you are doing 
and look forward to working with you in the future.
    I apologize that I need to step out, but I think we just 
have three or four more Senators, so you should be done 
shortly.
    Chairman Nickles. Senator Allard.
    Secretary Ridge. Thank you, Senator.
    Senator Allard. Thank you, Mr. Chairman.
    Mr. Secretary, welcome.
    Secretary Ridge. Senator.
    Senator Allard. I always enjoy what you have to say.
    The administration, I want to move right into one, a 
question here that has to do with the local nature and local 
problems that we are having in Colorado and several other 
States first, and then I have some other questions I want to 
talk to you a little bit about--the Information Analysis and 
Infrastructure Protection program that you have in place.
    The administration suggested a significant funding decrease 
for chemical demilitarization in the budget for the Department 
of Defense. We have a facility in Pueblo, Colorado, that will 
be profoundly affected, and understanding that you are not here 
today representing the Department of Defense, I would just ask 
simply does a delay in the disposal of chemical weapons and 
byproducts, essentially warehousing these hazardous materials, 
post a risk to homeland security?
    Secretary Ridge. Senator, I would, without knowing the 
specific details of the change reflected in the DOD's budget, I 
would say to you that the delay, in and of itself, I do not 
necessarily think would create a higher level of risk as long 
as there is no diminution of security around the facility. I do 
think that one organization that has been very good over the 
years at protecting their forest structure and everything 
associated with him has been the Department of Defense. But 
delay in final disposal, no, assuming that the security 
measures have been sustained.
    Senator Allard. And I think that is the big ``if,'' because 
I know around the facility we have in Colorado, I am not, at 
least the locals are not convinced, we have much in the way of 
security measures, and it seems that the sooner we can get 
this----
    Secretary Ridge. Is it through a private contractor?
    Senator Allard. They are in the process--yes, a local 
contractor has been let out, but security is minimal, and I 
think you always have to worry any time you have an 
accumulation of chemicals in one location whether it could ever 
become a target, whether it is a homegrown terrorist or foreign 
terrorist or whatever, and it seems to me that there could be 
some risk there.
    Secretary Ridge. Yes. I am sorry I cannot be more specific, 
Senator, since I am not familiar with the particular venue or 
the contents at the facility.
    Senator Allard. Well, thanks for your interest in it at 
least.
    In January, the President, in 2003, in the State of the 
Union address, he had instructed the leaders of the FBI, and 
the CIA, the Homeland Security, and then the Department of 
Defense to develop a Terrorist Threat Integration Center to 
emerge and analyze all threat information in a single location.
    And there is a section there in the Homeland Security Act 
that provided that your Office of Information Analysis and 
Infrastructure Protection is to assess, receive and analyze law 
enforcement information, intelligence information and other 
information from agencies of the Federal Government, State and 
local Government agencies and private sector entities to 
integrate such information.
    Who is in charge of detecting and warning of these threats 
to the homeland? Is it you or is it the Terrorist Threat 
Information Center?
    Secretary Ridge. The warning responsibility is given to our 
Department. The analytical responsibility is shared. We have 
analysts in the Threat Integration Center. While we do not 
collect information, because we are considered a full partner 
in the intelligence community, we can go back to the Threat 
Integration Center and ask whatever agency responsible for 
generating the information to answer questions that we might 
have from our analytical point of view about that particular 
piece of information.
    So, again, it is a collaborative exercise. We have analysts 
in it from the CIA, FBI, Homeland Security and others that 
paint a strategic threat picture. It is a real value added to 
our own independent analysis, and on a daily basis we do 
analytical work together. We, from time to time, go back and 
ask for additional information if, as part of their strategic 
analysis, there is something that catches our eye as it relates 
to our responsibility to secure critical infrastructure.
    Senator Allard. This has been spread through the various 
agencies and whatnot. I would think that you would have some 
concern about duplication of effort. How do you limit your 
duplication of effort?
    Secretary Ridge. Well, Senator, I think having a couple of 
different groups or organizations bringing their various 
experiences to the analytical side of combatting terrorism is a 
good thing. Some people call it duplication, others call it 
competitive analysis. But I do think it actually is a better 
situation to have analysts in different departments may have a 
slightly different point of view on a particular piece of 
threat reporting, and it will be really forced, because of that 
competitive analysis, if there is a difference of opinion, for 
them to look deeper and more critically at that reporting 
stream.
    I think, by and large, there has been, in my experience so 
far with Homeland Security and the Threat Integration Center, 
there has been harmony in terms of the relationship, and 
frankly not too many differences of opinion as to what it all 
means. But when there is a difference of opinion, it just 
sharpens the clarity, and focus and gets a very robust 
discussion going on, and I think that is healthy.
    Senator Allard. I am just curious, we just stood up the 
Northern Command in the Department of Defense. It seems to me 
that there ought to be some communication between Northern 
Command and Homeland Security. Is there some avenues of 
communication that have been set up between individuals in 
those two departments?
    Secretary Ridge. Well, we can communicate with the Northern 
Command, but as an old soldier, there is a chain of command 
that we use in order to do it. But we----
    Senator Allard. So you feel comfortable with anything that 
they may be doing, anything that you might be doing and that is 
being coordinated.
    Secretary Ridge. Yes. Well, you know, they just had a very, 
very significant multi-day, multi-incident exercise, and we 
were very much involved in the planning process and 
participating in that exercise. I am confident, in the months 
and years head, we will get locked up even closer.
    Senator Allard. There is a computer system being set up. It 
is called the Homeland Security Information Network. You are 
familiar with that.
    Secretary Ridge. Right.
    Senator Allard. It is supposed to provide critical 
information to all 50 States and major urban areas. Can you 
update the committee on the program requirements and estimated 
costs on that.
    Secretary Ridge. Senator, the cost, frankly, is minimal. I 
do not have a specific dollar amount, but since it is Internet-
based, you have the infrastructure there. The costs will be 
associated with developing a classification system and some 
firewalls so that we can share, when appropriate, some 
classified, secret information. But it is actually a system 
that was developed by New York and California, by the State and 
local law enforcement community and a little assistance from I 
think the Defense Intelligence Agency, and it is the way that 
they have been communicating between their State and local 
officials.
    In one of our travels, some of our folks took a look at it 
and said, You have the backbone here. Let us see if we can 
devise what they used to call what they used to call was a 
Joint Regional Information Exchange System, JRIES. Let us take 
it nationwide. Let us draft it and tie it into, at first, to 
the 50 largest urban areas in America so that we have virtual 
contact with the States and the large urban communities.
    We used it during the holidays, when we raised, elevated 
the threat level, with New York City--our Operations Center was 
hooked up with the New York City Police Department and the Los 
Angeles Police Department by virtue of the Internet, and they 
are constantly information on a minute-by-minute basis. So it 
is a good system. It will take us about an entire year to get 
it up and running, but at the end of the day, it will give us 
the capacity to share information to just about every State and 
local law enforcement official in our major urban areas, and we 
think that is a good thing.
    Senator Allard. Thank you.
    I see my time has expired, Mr. Chairman.
    Senator Crapo [presiding]. Thank you, Senator Allard.
    Next is Senator Feingold.
    Senator Feingold. Mr. Chairman, Mr. Secretary, thank you 
for being here and for your work on behalf of our country.
    Let me ask you, first, about something that I have heard 
from emergency management officials in my State. They are 
concerned about a proposal in the President's budget to cut 
funding for the Emergency Management Performance Grants. They 
are much more concerned about the proposal to cut the 
percentage of grant money that they can use for personnel costs 
from 50 percent to 25 percent.
    I am told that this will have a tremendous impact on 
emergency management officials, especially those in small 
cities and counties, because salaries are often almost 100 
percent of the cost of local and State emergency management 
programs. And a number of people told me in meetings back home 
and hearings that many local Governments will simply not be 
able to afford to have an emergency management official. The 
Emergency Management Performance Grant program is a respected 
program that our State and local officials have come to depend 
on.
    Why has the administration proposed reducing the personnel 
spending cap for the EMPG grants and potentially undermining 
State and local emergency management capacity?
    Secretary Ridge. Senator, I think it is a decision based 
upon a shared responsibility for personnel costs and a primary 
responsibility for the Federal Government to send dollars out 
for training and exercise programs; that we would reduce the 
level that we would contribute to defray the salaries and use 
our portion of the funds so that once these men and women were 
in place they would have additional dollars to conduct a 
training and exercise program.
    So it was based on a notion that we have a shared 
responsibility to pay for the salaries. We have a primary 
responsibility to help provide funding for training and 
exercises.
    Senator Feingold. Well, I understand that. I would just 
indicate that I think this is going to have such a 
disproportionate impact on some of our smaller counties and 
communities, and I hope we can work together to possibly 
reverse this before the budget is complete.
    I would like you to address EMS funding in your budget. 
Wisconsin EMS officials tell me that they feel sort of 
overlooked when it comes to first-responder funding. As you 
know, there has been no dedicated funding source for EMS 
funding, and the President's budget proposal does not change 
that.
    I am told you will be submitting a report to the 
Appropriations Committee next week discussing the amount of 
funding EMS teams are receiving through DHS grants and the 
barriers facing EMS teams as they try to get these grants.
    Could you say a little bit about your findings and how the 
Department is working to make sure that our EMS services are 
not overlooked.
    Secretary Ridge. Senator, I cannot tell you today what 
proportion of dollars that we have distributed to the State and 
local Governments have found their way down to the EMS 
personnel. Clearly, they are an invaluable part of our first 
responder community. We relied upon them heavily in 
Pennsylvania, as does just about every other State. So I cannot 
give that specific figure.
    It is certainly supporting EMS, not so much the personnel 
costs, but supporting their equipment acquisitions and their 
involvement in training exercises is clearly an eligible cost 
for the homeland security grants and if they are associated 
with the Urban Security Area Grant money and eligible costs 
there.
    I will be able to tell you, in a short period of time, to 
you and to Congress, as we read the State and territorial plans 
that they have submitted to us, we should be able to get a read 
as to where they view the EMS infrastructure as a priority for 
the distribution of the billions and billions of dollars that 
we have available to them. I just cannot give you the specific 
figures on that.
    As a former Governor, I assure you I think EMS is an 
integral part of the first responder community, and they would 
be eligible for distribution of these dollars, whether or not 
other Governors or mayors, as they have developed their own 
individual plans, have decided that, for this distribution, 
they ought to get some of this money. I do not know yet. We 
just got the plans.
    Senator Feingold. Thank you. I was pleased to hear that DHS 
is working to gather and disseminate first responder best 
practices information. The first responders from Wisconsin who 
I have talked to are excited about having a central Best 
Practices Center. The Council on Foreign Relations Independent 
Task Force, chaired by Senator Rudman, also found a real need 
for such a center, saying that having one would ``allow all 
emergency responders to learn from past experiences and improve 
the quality of their efforts, thereby assuring taxpayers the 
maximum return on their investment in homeland security.''
    How are you involving the local first responder community 
in your efforts to gather and disseminate best practices? And I 
would like to inform Wisconsin first responders about your 
initiatives and when they will be in place. When can they 
realistically expect these programs to be online and available 
for their use?
    Secretary Ridge. First of all, Senator, we have as part of 
the Homeland Security Advisory Council, a group of men and 
women specifically out of the first-responder community from 
around the country. And we were asked by the States, in 
anticipation of our request for statewide plans, to give them a 
template. And so we put together the first responder group, as 
well as a State and local group, and they were the ones that 
developed the template.
    That is why I am hopeful that I can report back to you that 
as the States took a look at the template that the Advisory 
Committee gave them that was, in part, authorized by the first 
responders and EMS folks, that there will be an EMS provision 
there.
    We are consolidating the State and local Government and the 
Office of Domestic Preparedness. We sent a letter to Congress 
here a couple of weeks ago so it can be a one-stop shop. This 
will be the driving force behind the initiative to get the best 
practices out. We will probably use many means of communicating 
back to your first responders in Wisconsin, not the least of 
which will be the Internet. I cannot give you a specific 
timeframe, but I will task my people to provide that 
information because if the first responders of Wisconsin are 
interested in it, first responders everywhere will be 
interested. I just cannot give it to you today.
    Senator Feingold. Thank you for that.
    Other Senators are waiting to ask you questions before you 
have to leave, so let me just associate myself with the 
comments of Senator Wyden with regard to data mining, his 
questions, his emphasis on this. He and I have worked together 
on this, and we will continue to work with you and others to 
assure the American people that certain data-mining practices 
are not used in a way that goes beyond the challenge that you 
face, which is the terrorist threat. And this is a matter of 
the highest priority to me, as it is to Senator Wyden, and we 
look forward to closely watching this with you.
    I thank you, Mr. Chairman.
    Secretary Ridge. Senator, if I might, I would really like 
to take you up on that offer. I served with Senator Wyden some 
time ago. I know that is a passionate interest of his, and 
obviously it is yours as well.
    I do think the most immediate pilot program that we would 
like to initiate I think goes to the heart of everyone's 
concern about individual privacy and liberty, and that is the 
CAPPS program. We think we have designed a program that is 
respectful of individual privacy rights. We know we need GAO's 
approval; i.e., Congress's approval. So particularly with that 
initiative I would welcome the opportunity to work with you to 
address any concerns that you and Senator Wyden or, for that 
matter, any other Members of Congress might have.
    Senator Feingold. I look forward to that.
    Secretary Ridge. Yes, sir. Thank you.
    Senator Feingold. Thank you, Mr. Chairman.
    Senator Crapo. Thank you very much.
    Secretary Ridge, we realize that your time is limited. We 
have three Senators who have not questioned you yet, and I 
believe Senator Conrad would like to have another round of 
questions as well.
    Secretary Ridge. Sure.
    Senator Crapo. I am the last one on our side, and I will 
just hold off until we finish up over there. And so we will 
next go to Senator Nelson.
    Senator Nelson. If Senator Murray was here before me, I 
would certainly defer to her.
    Senator Murray. No, thank you.
    Senator Nelson. Well, thank you. Thank you, Senator. Mr. 
Chairman, Mr. Secretary.
    Secretary Ridge. Senator.
    Senator Nelson. Mr. Secretary, Interpol has testified to 
Congress last summer about the enormous amount of money that is 
being made in the knock-off goods trade. We know, for example, 
in the drug trade, that is a source of funding for terrorist 
organizations. But the profit on knock-off goods is enormously 
higher than the profit on the trafficking in drugs.
    And I just visited with your folks in the Jacksonville 
office, where they had just seized an enormous load, in this 
particular case it was at a flea market, of these goods. And 
interestingly they import the handbags without the labels. So 
it is legal to import them or the shoes or the pieces of the 
watches, and then once they are here, they assemble them and 
then put the Fendi or Ralph Lauren labels on them, which then 
it becomes illegal because it is deception, and that is against 
the law.
    And apparently billions of dollars are being made in this 
kind of trade all over the world. A lot of these items are 
being manufactured in China, where they can be manufactured 
very cheaply. So naturally my concern is, particularly with 
Florida being a place of 14 deep-water ports, where a lot of 
commerce is coming into this country and where we just had this 
seizure over the weekend.
    I would want to know, from you, what we can do to help you, 
perhaps first with legislation, increasing the penalties. 
Because, interestingly, if you get caught dealing in drugs, 
that is one kind of harsh penalty, but if you get caught 
dealing in these knock-off items, it is a much lesser penalty. 
And if we ultimately get the proof that profits from these 
criminal organizations are going into terrorism, then we better 
be concerned.
    The second item that I would wonder would it be helpful for 
us, as the legislators and the appropriators, to do is to 
create some kind of public education fund for you so that, when 
people go and buy these goods--and they know they are getting 
knock-off goods. It is not illegal for them to buy them. It is 
illegal for the guys to sell them--so that they see the 
potential link there with supporting terrorism, and thus a 
campaign of public service announcements.
    What do you think, Mr. Secretary?
    Secretary Ridge. Well, first of all, Senator, I think my 
colleague, Secretary Hutchinson, testified that, from our point 
of view in border and transportation security, as we inherited 
the old Customs Department, that this is probably one of the 
fastest-growing areas of criminal activity not just in this 
country, but around the world. And the potential for it to be 
linked up, in time, because we have no contemporary evidence 
that suggests it is tied to terrorist organizations, but 
certainly the possibility always exists.
    So as it comes to enhancing the penalties or some form of 
public information campaign vis-a-vis the potential consumer, a 
couple of issues we would certainly look to work with you on. I 
would defer to Mike Garcia, of Immigration and Customs 
Enforcement, as to whether or not he thinks, in his experience, 
the penalties have been adequate, whether they have been a 
sufficient deterrent and would like to review, get the benefit 
of his analysis and then get back to you with a more complete 
opinion.
    Senator Nelson. OK. I will talk with Mr. Garcia then, and I 
have put this in a letter to you right after I met with your 
folks on Monday, after this big bust.
    Secretary Ridge. Good.
    Senator Nelson. And that is there in your office. So if you 
would get your folks to direct it to Mr. Garcia.
    Secretary Ridge. I will. Thank you.
    Senator Nelson. Mr. Secretary, of course, port security is 
of enormous importance to us in Florida, with us having so many 
deep-water ports. And I am concerned, a year ago the President 
had no money for the Port Security Grants. The Congress put in 
$125 million. This time the President has put in $43 million 
for a different kind of other than direct grants.
    This Senator is going to be working to increase that at 
least to the level of the $125 million for the grants, but 
beyond that, if you talk to the Nation Ports Council, as well 
as our own Florida Ports Council, they think, nationally, that 
from a security standpoint, that they are lacking about $5 
billion. I am going to shoot, over the course of time, for a 
target of enhancing it by $2 billion. I would like to have your 
reflection on that, and perhaps this is something we can work 
together.
    I know you have $1.9 billion in the budget, but that 
includes the Coast Guard, and the Coast Guard has got a bunch 
of other things to do, particularly in the waters off of 
Florida. Let us hope they do not have to start interdicting an 
exodus out of Haiti, but you know what we have to deal with 
down there.
    Secretary Ridge. Yes, sir.
    Senator Nelson. Not only that, but the drug runners as 
well.
    Secretary Ridge. Yes, sir.
    Senator Nelson. Give me your ideas.
    Secretary Ridge. Well, Senator, I could not help but think, 
with Senator Murray, after you talked about port security, this 
is a conversation that the Senator and I have had before with 
regard to her perspective and yours as the inadequacy of the 
port funding. And I think it is worthy of the kind of public 
discussion, in a civil way, because it is of a civic interest 
to all of us.
    I just, as a former Governor, as someone who expended and 
saw expended both Federal, State and local resources in my 
ports in Pennsylvania, oftentimes they are publicly owned, you 
have public employees there, I more or less view them as part 
of the private sector's distribution chain. It is part of their 
infrastructure. And while I think we have to make the business 
case that it is important for any major corporation to 
protection its own supply chain, I think that we need to have 
that conversation or debate here in the Congress.
    From my point of view, the Congress has appropriated 
hundreds of millions of dollars not only for grants, but you 
support the Coast Guard. The Coast Guard provides enormous port 
security. They are helping them with their security and 
vulnerability assessments. The Coast Guard puts captains of 
each port to coordinate the activity between the public and 
private sector.
    We get to a point I think, given the people and the 
resources we commit to all of these ports, but I think we ought 
to take a look at the private sector to enhance security at 
these ports. So, again, they are for-profit entities. It is 
part of their supply chain, and I think it is reasonable for 
the taxpayer to expect a major corporation that is importing 
goods to sell to our citizens that they invest in their supply 
chain.
    Senator Nelson. Well, I am going to help Senator Murray 
help you, even though you will not say that you need the help, 
we are going to try to help you to up that port security money.
    Thank you.
    Secretary Ridge. Thank you, Senator.
    Senator Crapo. Thank you very much.
    Senator Murray?
    Senator Murray. Well, thank you very much, Mr. Chairman.
    Obviously, from Florida to Washington State, we are deeply 
concerned about the administration's proposal on airport 
security, and I again am very concerned, listening to what you 
have to say, and I do think we need to have a dialog, but we 
need to do it immediately I think.
    As a Senator from a State that depends on seaports for its 
livelihood, we have to have a cohesive port security plan that 
protects our communities and our economy from potential 
threats. I know we both agree that the agencies that are 
involved in securing our ports are doing an admirable job. They 
are working through a very difficult problem, but if they are 
not given the proper tools, and resources and guidance to knit 
together a coordinated approach, all of us are left vulnerable.
    You talk about the supply chain, but that is only part of 
what port security is. Our ports are where a container or 
something can come in and enter this country in a way that puts 
everybody's security at risk.
    I am deeply concerned about putting our security in the 
hands of the private sector when I know how much they are 
struggling today with costs of their own. And if they do not do 
it, we have left a real weak link in the chain at whatever port 
just simply does not have the money to do it.
    But there is another issue as well, and I have listened to 
you. You answered my question before when I asked you about 
this, by saying that the private sectors for goods moving in 
and out, similar to what you just said, and they should be 
responsible for picking up. I noticed that on I think it was 
News Hour with Jim Lehrer you said that the administration 
should engage the private sector and that it should be their 
dollars to provide security.
    Let me tell you what my problem with that is. We are at a 
real competitive disadvantage if we start requiring our ports 
in this country to pay for security. We already have a problem 
in Tacoma and Seattle with, if our prices are higher, 
containers are diverted to Vancouver. I know that is the same 
case in California. I do not know if that occurs in Florida. I 
assume it would. If the costs of bringing containers into our 
ports increases, if our private sector has to put that money in 
there, those containers will not come into this country. Now, 
that means a tremendous loss of jobs. That means killing jobs 
right here in the United States.
    My State is deeply concerned about this. If there is a 
Federal mandate that we have port security, and there is a 
reason that we should have that, it will have to be paid for. 
If our costs go up, those containers will be diverted. Now, 
that is an economic factor. It is a security factor as well, 
and it is a job killer in the State.
    So I wanted to engage you in that conversation today. I am 
glad that the Senator from Florida brought it up. He is 
correct. It is completely underfunded in this. If we are 
relying on the private sector to do it, I think we need to know 
how much you anticipate our port security efforts will cost the 
private sector.
    Secretary Ridge. Senator, first of all, let me just, at the 
outset, say that we have a continuing responsibility that, 
again, as part of the Federal share, to continue to deploy our 
Customs and Border Patrol people there. We are going to make, 
through congressional appropriations, additional purchases of 
the nonintrusive technology, gamma ray and X-ray machines. So 
that is an ongoing contribution to enhancing port security.
    But when it comes to some of the other features of port 
security, again----
    Senator Murray. Other features meaning?
    Secretary Ridge. Well, surveillance cameras, fencing, 
infrastructure that accommodates the intermodal nature of 
securing the infrastructure that accommodates the railroads or 
the trucking companies that come in. I mean, there are security 
profiles and things that I think can be done at relatively low 
cost. We are in the process of----
    Senator Murray. Well, the commandant told us that the cost 
would be $7 billion.
    Secretary Ridge. Seven billion dollars spread over a period 
of years? If that is the case, and I do not----
    Senator Murray. I do know that the requests last year to 
your department for port security were over a billion dollars, 
and I have worked with a number of these ports. I mean, we had 
a wake-up call on September 11th, and many of these ports had 
absolutely no security in them. They are a huge weak link in 
our security chain, and they know that. They have been trying 
to step up to it. Congress told them to put together their 
plans. They have. I am aware that some of it is fencing and 
security cameras, but if we just say, private companies, you go 
do that, I know it will not happen.
    Secretary Ridge. Well, first of all, Senator, I need to 
reiterate, in addition to my preference that the private sector 
pick up more of the additional expense with security because 
the taxpayer is already paying for a substantial part of the 
security, I think the taxpayer owns a lot of the land, has 
provided some of the initial security, but remember we began 
the security protocol before the container is even put on the 
ship.
    Senator Murray. Well, I heard your answer to Senator 
Corzine----
    Secretary Ridge. I guess it becomes a question of what is 
the additional security that you are most concerned with for 
purposes of our discussion? Is it continued scrutiny of the 
contents of the containers?
    Senator Murray. Well, I heard your answer to Senator 
Corzine, and I think he asked you what percentage of containers 
were screened, and you said 98 percent.
    Secretary Ridge. Right.
    Senator Murray. I am assuming that you are talking about 
the 24-hour-rule for screening manifests.
    Secretary Ridge. Correct.
    Senator Murray. That does not look at what is in 
containers. How many containers are screened before they ever 
enter our ports?
    Secretary Ridge. Actual physical screening, there is no 
quota, but I think now it is about 5.4 percent.
    Senator Murray. That is----
    Secretary Ridge. But I would say to the Senator, we could 
physically screen every container----
    Senator Murray. We do not want to do that. I think there 
are really good programs in place to not do that.
    Secretary Ridge. You could do it, but the economic costs 
associated with the physical screening of every container 
coming across by railroad car, coming across by truck, coming 
across by the shipping container, would be a far, far greater 
impact on the overall national economy than modest improvements 
at several hundred ports around the country.
    Senator Murray. And I do not think anybody believes that we 
need to do the actual physical.
    Secretary Ridge. Right.
    Senator Murray. But I do think there are ways to provide 
security at ports where the containers are loaded before they 
ever get there and track them here, which is what Operation 
Safe Commerce was put in place to do. But----
    Secretary Ridge. What we may decide to use, Senator, 
depending on those lessons, there may or may not be a Federal 
role. I am not prejudging that one way or the other.
    Senator Murray. And actually some of that money still has 
not gotten out to them, so we are way behind the curve on where 
we need to be in order to learn that.
    But let me go back to the basic question here because it is 
a critical one for our economy. If that $7 billion that the 
commandant himself told us was going to be necessary, and the 
vast majority of that is going to be required to be paid for by 
private companies, they will increase the costs to them at 
their containers. How do we deal with the competition? That 
means we will lose jobs in Washington State, I am assuming 
California, Florida, other ports on the East. I know we will in 
Washington State. I know our containers will be diverted. It is 
an economic challenge they face every single day.
    Secretary Ridge. Senator, the assessment of the commandant 
of the Coast Guard was based on their review I think of most of 
our major ports, if not all of our major ports. I believe it 
was the optimum costs associated with the security plans to be 
dealt with over a period of time. As we buildup security 
infrastructure, be it at a port, be it at a local community, we 
are not going to ramp it up all at once, No. 1.
    No. 2, we have to be in the business of managing the risk, 
and when it comes to managing the risk around shipping 
containers, if that is the concern we have about enhanced 
security at domestic ports, we begin that process before the 
container is boarded on the ship.
    There is a very sophisticated rulemaking device, based on 
information we have from intelligence, from data that we have 
accumulated over the years, so we have a pretty good way of 
targeting potentially troublesome containers, for a variety of 
reasons: criminal information we have, threat information we 
might have, coupled with the information we have secured by 
Customs and the Coast Guard over the years. That process begins 
before these are ever loaded.
    Senator Murray. Are you confident, as Secretary of Homeland 
Security, that our ports are secure today and that we are safe 
from having a container come into any one of our major ports?
    Secretary Ridge. Senator, if you are asking me to guarantee 
you the safety of 20,000 containers coming into the port every 
day, I will not do that. It can physically be done, but if we 
are going to talk about the impact on the economy, Senator, I 
think we need to understand that in an international economy, a 
domestic economy that is in the trillions of dollars, and so 
much of it relies on container security, we have to manage the 
risk, and you manage that risk----
    Senator Murray. I understand that. But what I am asking is 
you are saying that, under the plans that our ports have put in 
place, that the vast majority of that is going to have to come 
up with the private companies to pay for, are you confident 
that they will do that, that the plans will be put in place and 
that we can tell our citizens who live within blocks of a major 
port, work in our major ports, that they are secure? And even 
beyond that, if a container comes in, and the ports are shut 
down, and stores in Senator Conrad's State no longer have 
anything on the shelves because we do not have any imports, are 
you confident that that will occur?
    Secretary Ridge. Senator, I believe that the business of 
securing America is not exclusively the business of the 
American taxpayer. I believe the business of securing America, 
securing ports, securing chemical sites, securing nuclear 
sites, there is a shared responsibility. It is both in terms of 
leadership and financial responsibility.
    Now, what the division of costs associated with port 
security is between the public and the private sector, that 
remains for a very good public discussion, as we are having 
right now. But if every time we look to a particular sector 
within our economy and say that we cannot guarantee a fail-safe 
system, which we can never do any how, but insist that the 
taxpayer pay the entire measure for securing the private 
sector, that is just a philosophical difference as to how we go 
about integrating the resources and accepting the shared 
responsibility of securing the country.
    What balance is in there, Senator, remains to be seen. We 
certainly are going to have a continuing responsibility to buy 
nonintrusive technology, to continue to ramp up, and we have 
asked you for additional money for the Targeting Center. There 
will be other very significant Federal funds invested in 
securing these containers.
    You continue to give more money to the Coast Guard, I mean, 
there is a long list of things that the taxpayer is providing 
for to provide security, but I do think it will be helpful for 
us, once we get these vulnerability assessments completed and 
we take a look at the precise nature of these security plans, 
to see what is appropriate Federal costs and what should be 
borne by the private sector.
    Senator Murray. What do you expect the time line to be able 
to tell our private companies what their costs are going to be 
on this?
    Secretary Ridge. First of all, Senator, I do not think they 
are operating in isolation because the captains of each and 
every port, more often than not, obviously, a member of the 
Coast Guard--you know, they sit down, and they have worked with 
these men and women in these companies for quite some time. And 
the level of security around these ports, not all, but most of 
them, was pretty good around some of them, nonexistent around 
others, but every day I think around the country, particularly 
at the major ports, they are doing more to integrate their 
security efforts, Federal and public.
    And it just remains, I cannot tell you today what those 
costs will be, but I think in time we will have a pretty good 
idea. And then we have to decide, as a country--both public and 
private sector--at what level do we take security at any of 
these venues?
    Senator Murray. I understand all of that. I know my time 
is----
    Secretary Ridge. How high is the fence? How many cameras?
    Senator Murray. I just have to tell you, where I get really 
nervous with your argument is that if we rely on the private 
sector to do it, and they either do not have a money or there 
is a competitive disadvantage that they do not or for whatever 
reason, they are operating in thin margins that they do not, 
who will end up paying for a tragedy is all of us.
    Secretary Ridge. But, Senator, I am still trying to 
understand, I am still trying to understand is your concern 
with regard to the security of the port from domestic 
infiltration across into the port or is your concern the 
potential vulnerability around the container? I mean, there are 
different kinds of security concerns around a port, and I think 
that is where, very appropriately, the discussion would be who 
has what responsibility for what security concerns.
    Senator Murray. Well, I think both, but I do think the 
potential for something coming in a container on a ship into 
one of our ports, and you are the Secretary, and you know the 
information better than I do, is out there. It has always been 
part of what we need to understand, and accept and do something 
about, and that is a huge concern for me.
    Secretary Ridge. Again, Senator, I thing the approach we 
are taking, laying in the targeting, the physical inspection of 
some of these containers before they get on the ship, we do 
board some of these high-interest vessels before----
    Senator Murray. The 5 percent that you said are looked at 
before they----
    Secretary Ridge. The 5.4, that's right. There is no quota. 
Whenever we find a high-interest container, we run it through 
the machine, and if there is something that reveals itself when 
it is run through the technology, we go in and open up the 
container. And it is about managing the risk.
    Senator Murray. Well, I agree with the Senator from 
Florida. I think we need to make sure we have the funds 
available and put in place a strong security system, and I look 
forward to working with you.
    Thank you, Mr. Secretary.
    Secretary Ridge. Senator, I do too. Thank you.
    Senator Crapo. Thank you.
    Mr. Secretary, the Department of Homeland Security has an 
important role in defending our homeland against bioterrorist 
attacks, including those involving anthrax, and smallpox and 
other toxins. And I note in your testimony that you have 
allocated some of the time and attention of your remarks here 
today to that.
    Could you please expand a little bit on that and tell this 
committee first how the fiscal year 2004 Department of Homeland 
Security funding is being allocated to meet those threats and 
then, second, how you will utilize any funding in fiscal year 
2005 that we may appropriate for deterring or responding to 
such bioterrorism threats.
    Secretary Ridge. First of all, Senator, our responsibility 
with regard to bioterrorism is joint with the Department of 
Health and Human Services. I think, as you recall, when we 
first sought to create a Department of Homeland Security, the 
legislation we initially sent to the Hill, we had requested the 
entire portfolio of bioterrorism defense responsibility, but I 
think Congress said that you have Health and Human Services, 
you have the NIH, you have the Centers for Disease Control, 
they will have primary responsibility, but there are roles that 
you play.
    One of the roles we play is to direct some of the research 
and development on technology that would help us sense a bio 
attack, bio sensors and chemical sensors, and so a considerable 
portion of the research and development dollars you have given 
to S&T is going out to the bio sensors.
    We have also built on the Bio Watch program we have located 
around the country. EPA has air quality monitoring stations at 
various sites around the country. Last year, we expanded those 
sites to include some modest technology that enables us to pick 
up potentially some bio or chemical agents, but it is still a 
very labor-intensive process, and so some of the dollars that 
you have given us are going into technology that will actually 
capture whatever that agent is in the air, analyze it right at 
that point so we do not have to manually take the filter out 
and take it to a lab to get done. So we have that 
responsibility.
    We have a shared responsibility when it comes to Bio 
Shield. That is the program where both the Secretary of Health 
and Human Services and Homeland Security, based on threat, can 
access the dollars that Congress provided. If the threat 
indicates a biological threat, we view it as credible. We look 
at our stockpile of vaccines and antidotes, make a 
determination that we do not have anything in this country to 
combat that threat. Congress has appropriated $2.5 billion for 
us to access that.
    So, again, there are a variety of different ways. We 
interact both with Health and Human Services or act 
independently on our own to deal with a bioterrorist incident.
    Senator Crapo. All right. Thank you. I have several other 
questions, but I think I am going to submit them to you in 
writing because I have just been informed that you are really 
over time.
    Secretary Ridge. I appreciate it. I have to be with your 
colleagues on the other side of the Hill.
    Senator Crapo. Senator Conrad.
    Senator Conrad. Yes, I would just be very brief.
    Again, it has been good to have you here, Mr. Secretary.
    Let me tell you my honest assessment is that with all of 
the work that has been done, the resources that have been 
devoted, we are still ill prepared to deal especially with a 
chemical and biological--chemical or biological attack on this 
Nation's urban centers. I have tried to evaluate, based on my 
staff's analysis, the feedback we have ten from these 
experiments, if you will, in major cities. We look at the 
experience in Denver, and what we saw was really chaos; that 
the health providers basically left their hospitals. Everybody 
headed for the hills.
    I worry very much what would happen if there were a 
chemical and biological attack on the Nation's capital, if 
there were a chemical, biological attack on New York City, if 
there were a chemical or biological attack on our Nation's 
stadiums. I worry very much about that. I can imagine if they 
flew over a small plane with a chemical and biological agent 
and sprayed the crowd, the chaos and panic that would ensue. 
And I do not think we are yet as prepared as we need to be for 
those threats and that eventually.
    I noted that there are places where the money is being 
spent that just make no sense. We talked about the thousands of 
dollars for leather jackets, and $500,000 for a digital camera 
for mug shots, and Dale Carnegie courses for sanitation 
supervisors. This is not money that you authorized. This is 
money that went to local units of Government, but this is what 
they did: Maryland cutting State spending for local health care 
outreach centers and then using Federal funds to fill in, 
basically substituting Federal funds for State funds, an 
$800,000 mobile command bus that they said would be the talk of 
the East Coast.
    You know, these are things that do not make lot of sense to 
me. And the conclusion that I want to leave you with is that 
more money will be frittered away without a clear national plan 
spelling out what first responders need to be able to do in an 
emergency and more stringent guidelines on how the money should 
be spent. That is not my conclusion. That is the conclusion 
from this detailed article that was in the Washington Post that 
I know you paid careful attention to.
    Can you just tell us what it is you are doing to make sure 
that this money does get spent wisely and effectively and what 
you are doing to lay out a clear national plan, spelling out 
what these first responders need to be able to do.
    Secretary Ridge. Senator, during the past several months, 
in addition to worrying and directing congressionally 
appropriated dollars out to first responders, we have been 
working and created a national response plan and a national 
incident management system that has been accepted and will be 
used as the framework within which we can set guidelines and 
standards for our first responders. There are certain protocols 
that we will expect to be done in the event of a chemical 
incident, a biological incident and the like. So we have the 
framework of how we are going to train and exercise our first 
responders that show up to save lives in an incident.
    In addition to that, this is the first year that we are 
going to have the statewide plans, which hopefully were built 
on the template that the Department sent out to the Governors. 
We asked the Governors to take the lead.
    I think you are going to find, from 2005 forward, that we 
are going to be far more prescriptive in where these dollars 
would go so that we can monitor, on an annual basis, that we 
are able to say that that infrastructure that we all believe we 
need to buildup, sometimes it is a complete infrastructure in a 
major urban area, sometimes it is a mutual aid infrastructure 
around a wider, less-populated area. So we know that we have 
the training exercises and the equipment, consistent with the 
protocols that we have developed in the incident management 
system, to respond to a terrorist attack.
    So, again, I do think that we are far better prepared than 
we were a year ago. I do think we have a long way to go to get 
where we want to be, and our goal every single day, Senator, is 
to make sure we rise to a new level of readiness and 
preparation. I think we reached that goal, but we will now be 
in a position, having developed these statewide plans, and we 
have already alerted the Governors and the mayors to be a 
little bit more--we will be more prescriptive as to the menu 
that you can call on to spend Federal money.
    Senator Conrad. Well, I think that is just very important. 
Again, I would say to you the one place that I think we are 
still deficient is the preparation for a chemical or biological 
attack in one of our major urban areas or one of our stadiums. 
I hope there is just an intense focus on preparation, and I 
think the need to exercise, to train in a way that is a 
realistic replication of what might occur is critically 
important.
    Secretary Ridge. Thank you, Senator.
    Senator Crapo. Mr. Secretary, we thank you for your time 
and apologize that we have kept you over. This is very 
important information, and we will submit to you some 
additional questions that we did not get to ask. But, again, 
thank you very much for your time, and you can get on your way.
    Secretary Ridge. Thank you very much.
    [The prepared statement of Secretary Ridge follows:]
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    Senator Conrad. Thank you, Mr. Secretary.
    Secretary Ridge. Thank you, Senator.
    Senator Crapo. This hearing is adjourned.
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          THE PRESIDENT'S BUDGET REQUEST FOR FISCAL YEAR 2005

                              ----------                              


                      THURSDAY, FEBRUARY 26, 2004

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room SD-106, Dirksen Senate Office Building, Hon. Don Nickles 
(chairman of the committee) presiding.
    Present: Senators Nickles, Domenici, Gregg, Enzi, Bunning, 
Crapo, Ensign, Conrad, Nelson, Stabenow, and Corzine.
    Staff present: Hazen Marshall, majority staff director; and 
Roy Phillips, senior policy analyst for defense and 
international affairs.
    For the minority: Mary Ann Naylor, staff director; and Rock 
Cheung, junior analyst for science and international affairs, 
webmaster.

             OPENING STATEMENT OF CHAIRMAN NICKLES

    Chairman Nickles. Mr. Secretary, we are delighted to have 
you come before the Senate Budget Committee again. We 
appreciate your appearances both last year and this year. You 
have done an outstanding job. I compliment you on your 
leadership. As Secretary of State through a very challenging 
time in a lot of areas in the world, you have been an 
outstanding leader representing this government, this 
administration, and I compliment you for it.
    You are here today to present the administration's budget 
on international affairs. This budget at this particular time, 
is a very big challenge. We have enormous deficits. We are 
calling almost for a freeze. The administration has proposed 
almost a freeze in all spending other than defense and homeland 
security, and international affairs. Your increases consume 
almost all the growth revenue in non-defense. It is a big 
increase. And so we look forward to your defending that 
increase.
    There are big increases for the Millennium Challenge and 
also for the very big battle of combating AIDS. I happen to be 
a supporter of the Millennium Challenge, but I am also trying 
to put a budget together, and I realize how difficult and 
challenging that can be.
    I welcome you before the committee. I appreciate your 
willingness to cooperate with us. Before I call on you for 
opening comments, I will ask my colleague and friend, Senator 
Conrad, for opening remarks.

              OPENING STATEMENT OF SENATOR CONRAD

    Senator Conrad. Thank you, Mr. Chairman, and again, thank 
you for convening this hearing.
    Thank you, Mr. Secretary, for once again coming up to 
testify on the budget proposal that is before us.
    I think it may be most appropriate to start with the 
headline from this morning's paper, which should sober us all 
with respect to where this is all heading, that is, these 
massive deficits that now Chairman Greenspan has said will 
require cuts in Social Security in order to, in part, respond 
to where this is all headed.
    Yesterday, Chairman Greenspan called for those cuts in 
Social Security. This is something I have been concerned about 
and have been warning about for 3 years, that the budget 
policies of the President are inevitably and inexorably taking 
us in this direction.

[GRAPHIC] [TIFF OMITTED] 94065.122


    We have record budget deficits now, and the President 
proposes further cutting the revenue base and adding to 
spending. That can only make the deficits worse, more serious, 
and put more pressure on recommendations like the one the 
Chairman made yesterday to cut Social Security benefits.
    When I look at the President's budget proposal for this 
year and compare it to previous years in International, what I 
see is a disturbing pattern that the budget proposed by the 
President is not the real budget--not the real budget for 
international affairs, not the real budget in other areas as 
well, because time after time the President has come back to us 
and asked us for significant increases in what he proposed in 
his initial budget. That is certainly true in international 
affairs where he came back and asked for $1.3 billion more 
after he submitted in budget in 2002, asked for $8 billion more 
in 2003, and then last year came back and asked for $21.6 
billion more than his initial budget request.
    Now, Mr. Secretary, I would very much like to hear from you 
whether we can expect another large supplemental for 
international affairs in 2005.
    In the President's budget proposal for 2005, international 
affairs is receiving the largest percentage increase of any 
area, a 16-percent increase in budget authority. In comparison, 
the President proposes to increase homeland security by 5 
percent, defense by 4 percent, and cut all other domestic 
spending by 4 percent when measured against CBO's baseline.
    As you know, Mr. Secretary, and every member of this 
committee knows, our budget deficit is skyrocketing. We have a 
deficit that is forecast at $521 billion this year. I 
personally believe it will not be that high, but, nonetheless, 
it will clearly be a record, much higher than any previous 
deficit, at least $100 billion more than any that we have seen 
before.
    And the President has told us, well, don't worry, the 
deficits are going to be cut in half over the next 5 years. I 
don't believe that. I don't think that is an accurate report to 
the American people on our fiscal condition. I don't think it 
comes close. The President says we are going to have a deficit 
of $237 billion in the fifth year. But the only way he gets 
there is he just leaves out things. He leaves out any defense 
expenditure, additional defense expenditure for the war on 
terror past September 30th. He leaves out dealing with the 
alternative minimum tax. And, most significantly, he leaves out 
the money he is going to have to pay back to Social Security 
and Medicare that he is taking from the trust funds.
    So I believe we have to tackle this in a very aggressive 
way, and we have to go after the spending side of the equation. 
We also have to look to the revenue side of the equation 
because the revenue side of the equation is where the biggest 
gap has opened. This year, CBO is telling us that revenue will 
fall to 15.7 percent of GDP, the lowest since 1950.
    Mr. Secretary, I would like to bring you back to something 
you said 2 years ago when testifying before this committee. I 
asked you then how the Nation could afford the President's 
proposed increase in the international affairs budget, and I 
asked you if we should cut spending in other areas or raise 
revenues to pay for it. And this was your answer: ``I think 
where we are right now is that for the foreseeable future, for 
the next several years, we may well have to increase the debt, 
as your chart shows, in order to deal with these priorities.''

[GRAPHIC] [TIFF OMITTED] 94065.266


    I think in light of what Chairman Greenspan said yesterday 
that it is appropriate to ask you: Is that still the right 
answer? Can we afford to continue on this course of borrowing 
and borrowing and borrowing, borrowing from Social Security, 
borrowing from the Medicare Trust Fund, borrowing from the 
Japanese and the Chinese and the South Koreans, borrowing from 
the so-called Caribbean banking centers, hundreds of billions 
of dollars to float this boat, whether that can possibly 
continue?
    Mr. Secretary, I noted in a recent Newsweek column from 
Fareed Zakaria, a foreign affairs commentator who has often 
been a supporter of the President's international policies--and 
I will conclude on this note: ``The greatest threat to 
America's primacy in the world comes not from its overseas 
commitments, explains Niall Ferguson. It is the result of 
America's chronically unbalanced domestic finances. The 
mounting Federal budget deficits that now stretch out as far as 
the eye can see will mean, if history is any guide, sharp 
cutbacks in American military and foreign affairs spending. We 
will see a forced retreat of America's foreign policy similar 
to the years after the Vietnam War, only the cuts are likely to 
be much, much deeper and the resulting chaos far greater.''

[GRAPHIC] [TIFF OMITTED] 94065.267


    Now, my first question to you will be: Is that going to be 
the legacy of this administration? And how can that outcome be 
avoided?
    I thank you again, Mr. Secretary, for being here.
    Chairman Nickles. Secretary Powell, we welcome you to the 
committee. Please give any opening remarks you wish.

 STATEMENT OF HON. COLIN L. POWELL, SECRETARY, U.S. DEPARTMENT 
                            OF STATE

    Secretary Powell. Thank you very much, Mr. Chairman. I do 
have a prepared statement which I offer for the record.
    Chairman Nickles. Thank you.
    Secretary Powell. I will summarize that statement and then 
be ready for your questions.
    Before I begin, Mr. Chairman, let me say that we started 
today on a very sad note with the news that President Boris 
Trajkovski of Macedonia was in a plane crash which may have 
taken his life and others aboard the plane. He was a great 
friend of the United States. I have spoken to the new Acting 
President and expressed the sympathy and condolences on behalf 
of the President and all of the American people. When I became 
Secretary of State in January of 2001, one of the first issues 
I had to deal with was a crisis in Macedonia. The place was 
coming apart, with a new President who was in great difficulty 
and anguish as to how to deal with the problems he was facing, 
and that was Boris Trajkovski. And I became a very good friend 
of his over the years and he a good friend of mine. And we 
worked through the problems in Macedonia to the point now where 
Macedonia is on a stable footing, the European Union is going 
to be replacing NATO with respect to providing additional 
support. We have much to be proud of as to what we have 
accomplished in Macedonia with our European friends and with 
the Macedonian people and the Macedonia leaders, especially 
with President Trajkovski. So he will be greatly missed, and we 
wish the Macedonian people all the best in this time of 
tragedy.
    Mr. Chairman, let me also take this opportunity to say to 
you how much I have deeply appreciated your support in the 
years that you have been in the Senate and as a member of this 
committee and chairman of this committee. You have been a good 
friend to the Department. We have done many things together 
over many years, Senator, and I just wanted to take this 
opportunity to thank you on behalf of all the men and women of 
the State Department for the support that you have provided to 
us.
    And I would like to say to the entire committee how much I 
have appreciated the support you have given to the Department 
in the 3 years of my stewardship. I made certain promises to 
the committee when I came in about what we would do to fix 
management and similar sorts of issues, leadership issues, 
infrastructure issues within the Department and you have 
supported our efforts, and I think you can see the payoff in 
what we are doing with respect to our Diplomatic Readiness 
Initiative, how more and more people are coming into the 
Department. We fixed the problems of the previous 10 years when 
people were not being recruited. Information technology has 
been improved. Morale has improved. And it could not have been 
done without the support of this committee and the entire 
Congress, and I express my appreciation for that as well.
    Mr. Chairman and members of the committee, I want to thank 
you for the opportunity to testify on the State Department's 
portion of the President's budget request for fiscal year 2005. 
The 2005 international affairs budget request for the 
Department of State, USAID, and other foreign affairs agencies, 
as was noted by Senator Conrad, totals $31.5 billion, broken 
down as follows: foreign operations, $21.3 billion; State ops, 
$8.4 billion; P.L. 480 food aid, $1.2 billion; international 
broadcasting, $569 million; and the U.S. Institute for Peace, 
$22 million.
    President Bush's top foreign policy priority remains 
winning the war on terrorism. And winning on the battlefield 
with our superb military forces is just one step in this 
process and one part of this campaign. To eradicate terrorism 
altogether, the United States must help create stable 
governments and nations that once supported terrorism, like 
Iraq and Afghanistan. And we must go after terrorist support 
mechanisms as well as the terrorists themselves. We must help 
alleviate conditions in the world that enable terrorists to 
bring in new recruits.
    To these ends, in fiscal year 2005 our foreign affairs 
agencies will continue to focus on the reconstruction of Iraq 
and Afghanistan. We will continue to support our coalition 
partners to further our counterterrorism, law enforcement, and 
intelligence operations and cooperation. And we will continue 
to expand democracy and help generate prosperity, especially in 
the Middle East.
    Mr. Chairman, 48 percent of the President's budget for 
foreign affairs supports the war on terrorism. For example, 
$1.2 billion supports Afghanistan reconstruction, security and 
democracy building. More than $5.7 billion provides assistance 
to countries around the world that have joined us in the war on 
terrorism; $3.5 billion indirectly supports the war on 
terrorism by strengthening our ability to respond to 
emergencies and conflict situations. And, finally, $190 million 
is aimed at expanding democracy in the greater Middle East, 
crucial if we are to attack successfully the motivation to 
terrorism, the roots of terrorism.
    Two of the greatest challenges confronting us today are the 
reconstruction of Iraq and the reconstruction of Afghanistan, 
so let me first turn to Iraq.
    The Coalition Provisional Authority, under the leadership 
of Ambassador Bremer, and the Iraqi Governing Council have made 
great strides in the areas of security, economic stability and 
growth, and democratization. Iraqi security forces now comprise 
more than half of the total security forces in the country, and 
over time that percentage will grow. In addition, the CPA has 
established, working with the Governing Council, a new Iraqi 
Army, issued a new currency, which is quite stable, and 
refurbished and equipped schools and hospitals and town centers 
and all of the other institutions and infrastructure one needs 
for a democratic society. And as you know, the CPA is taking 
steps to return sovereignty to the Iraqi people this summer. We 
are still committed to a turnover of sovereignty on the 30th of 
June.
    Much work remains to be done. Working with our coalition 
partners, we will continue to train Iraqi police, border 
guards, Civil Defense Corps, and the Army in order to ensure 
the country's security as we effect a timely transition to 
democratic self-governance and a stable future.
    At the same time, we are helping to build critical 
infrastructure for the people--clean water, electricity, 
reliable telecommunications, all the systems needed for the 
basic needs of the people. All of this work goes on. It is 
going on with greater and greater effect and efficiency over 
time. It tends not to get the headlines, but the cellular 
telephone system is coming up, the land-line system is coming 
up. More and more people are gaining access to clean water. The 
electricity system is improving, and by the end of the year 
will be far ahead of anything that existed in the time of 
Saddam Hussein. Thousands of brave Americans, in uniform and in 
mufti, are in Iraq now working tirelessly to help the Iraqis 
succeed in this historic effort. Along side their military 
colleagues, USAID, State Department, and the Departments of 
Commerce and Treasury are working to implement infrastructure, 
democracy building, education, health, and economic development 
programs. These efforts are producing real progress in Iraq.
    The United Nations Secretary General's Special Advisor, 
Lakhdar Brahimi, a very distinguished individual, returned from 
Iraq recently and gave his report to the Secretary General. The 
Secretary General released the report on Monday of this week, 
and we have had the report since it went to the Security 
Council, and we have been studying it. By any measure, the task 
we are facing is going to be difficult and complicated, but it 
is achievable. We are going to be moving toward elections as 
fast as we can in Iraq, but before we can get to elections that 
are done openly and fairly and allow all people in the society 
to participate, we want to go to an interim authority, an 
interim sovereign, until we can get full sovereignty on the 
basis of a constitution and the election of a legislature, and 
from that process new leaders who enjoy the full support of the 
Iraqi people.
    Creating a democratic government in Iraq will be an 
enormous challenge, but Ambassador Bremer, working with the 
Iraqi Governing Council and now with the United Nations as 
their full partners, is committed to success. And I think we 
will be successful. And the State Department is working hard to 
be prepared to assume a leadership role on the 1st of July, 
when the CPA will go out of existence and we will have a large 
embassy requiring new resources to stand up. It will be the 
largest diplomatic presence we have anywhere in the world.
    Afghanistan is another high priority for the 
administration. The United States is committed to helping build 
a stable and democratic Afghanistan that is free from terror 
and no longer harbors threats to our security. After we and our 
coalition partners defeated the Taliban government, we faced 
the daunting task of helping the Afghan people rebuild their 
country. I remember those first few days when President Karzai 
went in, no telephones--one telephone for the entire 
government. No money, no accounts, no nothing. No desks, no 
computers, no nothing. And in a short period of time in the 
sweep of history, in just a couple of years, we now have a 
functioning government that is increasingly reaching out to 
take greater control over the outlying provinces, to bring 
order throughout the country, a currency that is relatively 
stable. We are giving more and more technical assistance to 
Afghanistan so that they can get higher up on the food ladder 
and on the economic ladder and on the democracy ladder, women 
are being integrated into the society in every way possible. 
The lives of women and girls have improved so much over the 
past 2 years and will continue to in the years to come.
    Since 2001, the United States has rehabilitated 205 
schools, 140 health clinics, and trained 13 battalions of the 
Afghan National Army. It is still a dangerous situation. We saw 
five aid workers were killed yesterday by those remnants of the 
Taliban and other terrorists in Afghanistan, particularly in 
the southeast part of the country, that we know our work is not 
yet completed. And we are working, as you may have noted in the 
press recently, with our Pakistani friends to do more with 
respect to bringing that part of the country under control, 
also working with our NATO allies to increase NATO presence in 
the country, increase the number of provincial reconstruction 
teams working in the country so that the countryside can be 
made safe for democracy and for development efforts.
    We are also pleased that we completed the project to pave 
the road from Kabul to Kandahar, and that was successfully 
done. The 30-hour journey is now down to just 5 or 6 hours. It 
is not just a road and the journey. We are connecting the 
country once again so it is viable.
    While the Afghanistan of today is very different from that 
of September 2001, there is much left to be done, and we will 
be participating in a conference in the not-too-distance future 
with our friends and allies to see what else we need to be 
doing to help the Afghan people and President Karzai.
    The challenges we face in Iraq and Afghanistan are complex, 
daunting, and dangerous. We must not lose sight of the simple 
fact that two despotic, awful, terrible, miserable, disgraceful 
regimes are no longer in power, either in Kabul or in Baghdad. 
And both the people of Iraq and the people of Afghanistan have 
a brighter future to look forward to. Lives have been spent in 
this cause, the brave lives of coalition soldiers and the brave 
lives of civilians who gave their lives as well. And we mourn 
for them, but we will never, ever let their families think that 
they were lost in vain. They were not. It is a noble cause that 
they have been involved in, in both Afghanistan and Iraq, and 
it is up to us now to keep that work moving forward and not to 
shrink from the challenges ahead and to recognize all that we 
have achieved so far.
    It is expensive work. As I said 2 years ago, Senator, we 
were facing new challenges, and it might require additional 
debt to get ourselves through this period of challenge. That 
challenge is still with us. We have had to come in for 
significant supplemental increases for reconstruction efforts, 
for our defense efforts, and for our international affairs 
efforts. And the President is committed to doing everything he 
can in accordance with the plan that he has submitted to the 
Congress to bring the deficit under control, cutting it in half 
within the timeframe that he indicated. And I can assure you 
that he recognizes that this is an important task for the 
administration. And so we all have been told to make our 
requests as reasonable as we can, to seek no increases that are 
not necessary, to find savings within our budgets, and I think 
that is what we have tried to do in the State Department 
submission for 2005.
    As I mentioned earlier, the 2005 budget for international 
affairs provides more than $5.7 billion for assistance to 
countries around the world that have joined us in the war on 
terrorism, including Turkey, Jordan, Afghanistan, Colombia, 
Pakistan, Indonesia, and the Philippines.
    While progress has been made attacking terrorist 
organizations both globally and regionally, much more remains 
to be done, and the President's budget supports that effort. A 
few highlights: $700 million for Pakistan to help advance 
security and economic cooperation and opportunity for 
Pakistan's citizens, including a multi-year educational support 
program; $461 million for Jordan; $577 million for Colombia to 
support President Uribe's unified campaign against drugs and 
terrorism.
    In September 2003, at the United Nations, President Bush 
said, ``All governments that support terror are complicit in a 
war against civilization. No government should ignore the 
threat of terror, because to look the other way gives 
terrorists the chance to regroup and recruit and prepare. And 
all nations that fight terror, as if the lives of their own 
people depend on it, will earn the favorable judgment of 
history.'' We are helping countries to that judgment.
    Two weeks ago, the President spoke at the National Defense 
University and spoke about another threat that we are facing--
the threat of proliferation of weapons of mass destruction 
technology. The President described how we have worked for 
years to uncover one particular nefarious network, that of Dr. 
A.Q. Khan.
    Men and women of our own and other intelligence services, 
especially the United Kingdom, were able to understand that 
network and provide information about A.Q. Khan to other 
nations. And we now know that he was providing nuclear 
technology and information to Libya, Iran, and North Korea.
    At the NDU speech that the President gave, he proposed 
specific measures to take to strengthen the world's efforts 
against networks such as A.Q. Khan's and others who would 
proliferate weapons of mass destruction knowledge and 
technologies around the world. We are hard at work on that. We 
have seen results.
    We can be very proud, Mr. Chairman and members of the 
committee, of the fact that as a result of U.S. and U.K. 
efforts, Libya came to a conclusion, as they looked around the 
world, they saw that the United States and coalition partners 
were ready to take action against nations such as Iraq. But I 
think Libya did more than that. They looked and said: ``We have 
spent millions and millions of dollars to acquire the 
wherewithal to perhaps someday acquire a nuclear weapon. We 
have spent millions and millions of dollars to produce chemical 
weapons. We have looked into biological weapons technology. 
What has it gotten us? It has made us a pariah on the face of 
the Earth. Nobody will deal with us. Nobody will invest in us. 
Nobody will come here. What we have seen is nothing but 
supporters of terrorism and procurers of weapons of mass 
destruction. What has it done for us? Has it made us safer? No. 
Made us more secure? No. Fixed our health care system? No. Made 
us more able to participate in the 21st century economy? No.''
    And so Colonel Qaddafi decided this was the wrong way to 
go, and he got in touch with us and our friends from the United 
Kingdom. An arrangement was worked out, and you know the rest. 
He is cooperating fully in giving up these programs. Much of 
the material that he acquired is being sent back out of the 
country. We have possession of quite a bit of it, and we 
learned a great deal about A.Q. Khan and the other 
proliferators in the world. And we hope that this will be a 
signal to other countries around the world that it is fool's 
gold, it is ridiculous to invest in these kinds of 
technologies, because you will not scare the United States of 
America, you will not scare our coalition partners. All you are 
doing is denying yourselves the opportunity for a better 
relationship with the United States and with the rest of the 
civilized world.
    Mr. Chairman, moving on, on Monday of this week, Ambassador 
Tobias, Randy Tobias, who now heads up our global AIDS effort, 
Secretary Thompson, USAID Administrator Andrew Natsios, and I 
rolled out the strategy for the President's emergency plan for 
HIV/AIDS relief: $350 million in contracts to some of the NGO's 
and private organizations who will be carrying out the fight at 
the grass-roots level. Making that announcement on Monday was a 
thrilling moment for me and the result of a lot of hard work on 
the part of Secretary Thompson and Administrator Natsios and 
Ambassador Tobias and all of my colleagues in the State 
Department, and so many others.
    With this program, the President has once again indicated 
his commitment to go after one of the great, great threats to 
civilization, and that is HIV/AIDS. Eight thousand people are 
dying every day as a result of HIV/AIDS, and we are going to do 
something about. It is a $15 billion program. It is dedicated 
to go after the source of this disease. It is also intended to 
educate people on how to protect themselves from the disease, 
and for those who have acquired the disease, to provide them 
with the wherewithal to live a life that is still of a quality 
nature. It is going to help those who have been made orphans by 
the disease. It is going to do everything we can to try to get 
this disease under control and educate the world about the 
nature of this disease.
    But it takes money, and we are very proud of the program 
that we have put forward to the Congress. We are very proud 
that the Congress has seen fit to support the first year of 
this program, and I hope that it will support the program in 
the years to come.
    Another part of the President's agenda for the world has to 
do with the Millennium Challenge Account, an account where we 
will take American taxpayer dollars and make those dollars 
available to developing nations, but in this instance, only 
those developing nations that are committed to democracy, 
committed to the rule of law, committed to ending corruption, 
committed to market reforms and market economic policies. And 
we are standing up that corporation, and I am Chairman of the 
Board of Directors, and Mr. Paul Applegarth has just been 
nominated by the President to lead the corporation. We had our 
first board meeting not too long ago, at the beginning of this 
month, and we are ready to go to work. And we appreciate the 
Congress for the $1 billion it made available in this first 
year.
    Mr. Applegarth and Ambassador Tobias were over at my home 
the other evening for a little supper. They are both sort of 
road-running, as we say in the military. They are working here. 
Their families are still at home in another part of the 
country. And we just sat and talked. The longer the three of us 
talked, the more I could see the synergy that will exist 
between what each of them is doing, because they go together. 
Developing countries are doomed if they don't do something 
about HIV/AIDS. And people who are suffering from HIV/AIDS are 
doomed if their countries are not doing something about poverty 
alleviation and getting into the 21st century world with the 
rule of law and with the right kind of development policies.
    And so these two programs will reinforce one another and 
are essential parts of the President's strategy for moving 
forward. They take money, but it is money well spent. And it 
shows America's commitment to the developing world, especially 
the developing world in Sub-Saharan Africa.
    There are so many programs like that in the budget that we 
are asking you to support. It does reflect an increase. It is 
one of the most significant increases, as Senator Conrad noted, 
in the discretionary part of the budget. But, you know, we 
really are in the front lines of foreign policy with our 
programs. USAID, the diplomats that are doing such a great job 
around the world, they are in the front line of foreign policy. 
They are the ones that are carrying our value system out to the 
rest of the world. They subject themselves to the kinds of 
dangers that their military colleagues do. Whether it is 
Ambassador Jim Foley in Haiti today, who is facing a difficult 
situation or the other Ambassadors that have passed through my 
office recently. Our Ambassador to Georgia helped the Georgian 
people through a crisis last November when the a President 
stepped down. He helped create circumstances, working the new 
leadership of Georgia, so that a new democratically elected 
President could take office. And that President with President 
Bush the other day. Or our Ambassador in Liberia, who was faced 
with a very difficult situation last year as people were firing 
at his embassy, as dead bodies were being placed before the 
embassy.
    But we worked with the Liberians. We worked our way through 
that. And now Liberia is on a path hopefully to peace and 
stability. We had a donors' conference at the U.N. a few weeks 
ago and we raised $500 million for Liberia. It was American 
political activity, a little bit of American military strength, 
American support for regional solutions, American support for a 
political compromise that showed us the way forward.
    I could go to country after country around the world where 
our wonderful diplomats, working alongside so many other great 
Americans from all of the agencies of government work hard to 
serve the interests of the American people. And so when you 
support our budget, you are supporting that kind of effort, and 
you are bringing reconciliation and peace to places like Libya, 
Iraq, Georgia, Liberia. We are working hard in Haiti today to 
try to find a solution to that difficult problem.
    Our diplomats are hard at work in Beijing today with the 
North Koreans, the Chinese, and the South Koreans, the 
Japanese, and the Russians, and the results of the first 2 days 
of meetings are positive. There is a positive attitude. There 
is a promising attitude that is emerging from those meetings, 
and hopefully we can move in the right direction there.
    Diplomacy tends not to be something that happens overnight. 
You don't see your successes right away. You see day after day 
after day after day failure, and then suddenly you get a 
breakthrough. And that kind of dogged, determined work is what 
the Department is all about. Because of what you did for us 
over the last several years, we have tens of thousands of 
American youngsters wanting to be a part of this Department. 
Thirty thousand people are year now are signing up to join the 
Foreign Service. They want to be a part of America's team on 
the front line of foreign policy. And it is because you have 
said we are going to invest in information technology, we are 
going to invest in the benefits that you deserve for going out 
and serving your Nation. Well, they are responding, and they 
are serving their Nation.
    So, in conclusion, Mr. Chairman, members of the committee, 
let me just say keep supporting us because I think you are 
getting a hell of a return on the investment that the American 
people place in our international affairs accounts. And I 
promise you that as long as I am there with my team--Deputy 
Secretary Armitage and Under Secretary Grant Green and all the 
others, and Administrator Natsios--we will be good stewards of 
the people's treasure. I am not spending my money. I am 
spending American taxpayer money. And I know that we also have 
to go in debt to finance some of our activities right now. We 
are all sensitive to that. We are all doing what we can to give 
you the best return on your investment, and we are all working 
with the President to get the deficit down and to put the 
Nation on the kind of balanced financial footing that Senator 
Conrad spoke to earlier.
    Mr. Chairman, I will just stop at this point and be 
available for your questions.
    Chairman Nickles. Mr. Chairman, thank you for your opening 
statement. We have several colleagues. Let me make sure that 
all of our colleagues are aware of the fact that we plan on 
marking up the budget next Wednesday and Thursday. It is my 
intention to submit a budget document to markup on Wednesday 
and I expect to mark it up on Thursday. So you might expect--if 
we maintain our tradition, Thursday could be a rather long day. 
Maybe it won't be. Maybe it will be very short. But I wanted to 
make sure that everybody is aware of that and notified of that.
    Mr. Secretary, two or three very quick little comments. And 
I am going to ask all of our colleagues, the Secretary needs to 
be out by noon, and if we can all keep our comments close to 7 
or 8 minutes, I think we can accommodate that request.
    You mentioned the President of Macedonia unfortunately was 
killed. I happened to know him as well. I haven't heard. Was 
that an accident?
    Secretary Powell. It appears to have been an accident, 
flying in mountainous terrain in bad weather.
    Chairman Nickles. That is very difficult terrain. I hate to 
see that happen because he was really leading that country in 
the right direction.
    Just a couple of other comments. You mentioned now that the 
U.N. is cooperating with us much more in Iraq. I am concerned. 
When there was an unfortunate bombing incident right outside 
their headquarters, the next thing we know, the U.N. was 
pulling out. We have shown great leadership, and I compliment 
you, I compliment the President, I compliment Ambassador Bremer 
and others. I have a staff member that is working over there. A 
lot of us have--all of us have constituents that are serving 
over there. But I am always questioning sometimes the UN's 
resolve, and maybe that is just an editorial comment and I am 
not asking you to respond to it. But I am concerned.
    You mentioned it was a noble cause. It is that and more. I 
look at what this administration has done in Afghanistan and in 
Iraq, and I look at it as a liberation. As you mentioned, the 
women in Iraq now have freedoms that they did not enjoy before, 
their country was liberated.
    I object to the term ``occupation.'' We are planning on 
leaving. Correct me if I am wrong.
    Secretary Powell. Absolutely.
    Chairman Nickles. And so we are in the process of trying to 
expedite turning over total government control to the Iraqi 
people in a systematic way as soon as possible. It is a 
liberation. I would encourage your people maybe to use that 
word.
    One other comment. You mentioned Mr. Khan and the fact that 
he had distributed nuclear secrets. I don't see him being 
punished, and I am concerned. This individual evidently was 
spreading nuclear secrets throughout the world to, as you 
mentioned, North Korea and Iran and Libya. It looks like he is 
getting off scot-free, and I am interested in your comment on 
that.
    Secretary Powell. Very quickly, with respect to the United 
Nations, after the bombing last year that killed Sergio de 
Mello and so many others, the Secretary General had to take 
stock of the security situation. They are not soldiers. They 
don't have a green zone. They have to be out where they can do 
their work. And they had to withdraw in order to assess 
security and figure out how they could do their work.
    I think we have demonstrated to the U.N. that the situation 
is improving, and we want to work closely with them on making 
sure that they can do their work in relatively safe conditions. 
You can never guarantee safety. Casualties are occurring every 
day.
    The U.N. has started to come back. Mr. Ross Mountain, a New 
Zealander, is in charge of humanitarian efforts of the U.N. For 
the most part, they are trying to headquarter these efforts 
from nearby countries, thereby reducing their vulnerability. 
But I expect their efforts to grow in the weeks and months 
ahead.
    We were able to arrange security for Mr. Lakhdar Brahimi, 
when he went in. And we are in constant touch with the 
Secretary General because after 1 July, we expect an even 
greater U.N. presence getting ready for the elections at the 
end of the year or some time next year, whenever they occur.
    And so we are working closely with the U.N. They have to 
have some level of confidence in security before they can put 
their people into dangerous situations. But they are anxious to 
play the vital role that the President has anticipated they 
would play.
    With respect to A.Q. Khan, as you know, Senator, he was 
seen as a national hero in Pakistan, and he occupies a special 
place in the life of the Pakistani people. President Musharraf 
is well aware of what Mr. Khan has been doing. I have had many 
conversations with President Musharraf about this. I think he 
took a bold step, the right step to uncover it all and not hide 
from the reality of what A.Q. Khan had done. And he got from 
Mr. Khan full acknowledgment of what he had done and a lot of 
information. And then President Musharraf felt it was in the 
best interest of his country and of his government and of the 
process of uncovering everything we could about this network 
for him to give a conditional amnesty to Mr. Khan.
    Chairman Nickles. Did he cooperate?
    Secretary Powell. He was cooperating.
    Chairman Nickles. Did Khan cooperate with Musharraf as far 
as saying here is what I did, here is where the information was 
going?
    Secretary Powell. Yes. Dr. Khan cooperated with President 
Musharraf and with the Pakistani investigators who were pulling 
all of this up, with assistance from us because we had quite a 
bit of information we could provide to them. So we are getting 
a lot of information out of Dr. Khan's openness, and I expect 
we will get a lot more as well. And it is important to note 
that the amnesty he was given is a conditional one, meaning he 
has to meet the conditions of the amnesty, which means full and 
open disclosure. And we are learning a lot from that.
    Chairman Nickles. Thank you. One other comment. You 
mentioned about 48 percent of your budget is directed toward 
fighting terrorism for international security and so on. You 
also mentioned the terrorist attacks. Some people have said 
that your speech before the U.N. was hyped, that our going into 
Iraq was hyped or inflated or misled. I have heard some people 
say that we are misled into going into Iraq--or lied to, some 
people use that term.
    I looked at a speech that President Clinton gave in 1998, I 
think it was made to the Pentagon, and he said something like, 
``Now, let's imagine the future. What if he fails to comply?'' 
And he is talking about Saddam Hussein. ``If we fail to act or 
we take some ambiguous third route, which gives him more 
opportunities to develop programs of weapons of mass 
destruction, and he continued to press for release of 
sanctions, continuing to ignore the solemn commitments he has 
made. Well, then he will conclude the international community 
has lost its will, he will conclude that he can go right on and 
do more to rebuild an arsenal of devastating destruction, and 
someday, some way, I guarantee you he will use the arsenal.''
    That was President Clinton. That was made in 1998. That was 
made in February 1998.
    I might mention we had two embassies that were bombed later 
that summer in Africa, killed a couple hundred people, all 
employees of the United States, some U.S. citizens.
    I am offended when people use words like ``deliberately 
misled.'' I happen to know you well, and you are my friend. And 
President Bush is my friend. And this is serious. When people 
make allegations of being lied to or misled leading up to this 
war, I am offended by it.
    You have been brought into it because of your excellent 
speech, I might say, before the United Nations a year ago--was 
that a year ago?
    Secretary Powell. 5 February last year.
    Chairman Nickles. It was about a year ago. Anyway, any 
comment on that?
    Secretary Powell. Yes. Let me say, Mr. Chairman, that 
President Clinton's statements and his actions during his 
Presidency, to include Operation Desert Fox, which involved the 
bombing of weapons of mass destruction facilities in Iraq in 
1998, was based on the best intelligence that he had at that 
time. And it was a consistent picture that the intelligence 
community was giving us over time through his administration 
and into President Bush's administration which was that Saddam 
Hussein had never lost the intent to have such weapons, that he 
kept in place the infrastructure for such weapons. There was no 
doubt that if he was ever relieved of the pressure of 
sanctions, he would explode his capability and show it to the 
world again. He had used them before; he had used them against 
his own people; he had used them against his neighbors. And we 
believed, as President Clinton did, we believed that there was 
a stockpile of these weapons.
    When I went before the United Nations last 5 February, I 
knew very well that I was representing the views of the 
American Government to the entire world. And I wasn't going to 
go hype anything or overstate anything. I wasn't going to 
short-sell anything either. And I spent 4 days and nights out 
at the CIA with Director Tenet and with Deputy Director 
McLaughlin and with all their experts going over that 
presentation. And there wasn't a word in that presentation that 
wasn't the considered judgment of the intelligence community. 
Not everybody agreed with every single fact or finding, but it 
was the considered judgment of the intelligence community, and 
it represented the judgment of the Director of Central 
Intelligence. And it was based on the evidence that was 
available to us, not cooked. The analysts were in the room with 
us when we made those judgments and wrote that speech.
    And so if you look at it in retrospect, it did reflect the 
considered judgment not only of our intelligence services, but 
of the United Kingdom and most intelligence services that had 
looked at it. Any prudent person receiving the intelligence 
that I did or the President did, Prime Minister Blair, Prime 
Minister Aznar, Prime Minister Berlusconi, Prime Minister 
Howard, and so many others did, would have come to the same 
conclusion. This is a regime that had not given up these 
programs, had the intent, had the capability, was working on 
the delivery means, had done it before, was desperately trying 
to hide it, was desperately trying to get out of the sanctions 
that had kept it somewhat constrained. And you could reach the 
conclusion based on what the intelligence community had that 
there were stockpiles of such weapons.
    Now, the stockpiles are the only thing in my mind that is 
an issue. Dr. Kay, when he went in to start looking for this 
last year, thought there were stockpiles. He has now come to 
the conclusion that stockpiles are not there.
    Mr. Dulfer, who has gone in to replace him, will continue 
the work, look at additional sites, look at the documentation, 
interrogate people to see if more can be found out. But it 
seems to me that is the area that is in judgment. But nobody 
made up the information last year. It reflected the best 
judgment of the best people we have who were going about this 
trying to find the truth, not to hide the truth or to cook the 
books.
    And so I stand behind what the intelligence community gave 
us as Director Tenet stands behind what he gave us. As new 
information comes forward which puts into question old 
information, let's examine it. If mistakes were made, let's 
find out what those mistakes were and fix our process going 
forward.
    Chairman Nickles. Mr. Secretary, thank you very much.
    Looking at the number of colleagues, again, I am going to 
ask all my colleagues to try and keep it pretty close to 7 or 8 
minutes. Senator Conrad.
    Senator Conrad. Thank you, Mr. Chairman.
    Mr. Secretary, you are a forceful advocate of important 
work that needs to be done in the war on terrorism and the 
global fight on AIDS. You are asking here for a 16-percent 
increase. The question for this committee is how to pay for it. 
How to pay for it.
    Are these increases so important that they should be paid 
for by cutting spending in other areas or by raising taxes? 
Because I think the answer of just borrowing more money is 
really no longer an option. We have record deficits now, and we 
are not going to have the deficit cut in half, as the President 
has said. That I think is utterly outside the question when one 
looks at the hard reality of where this is all headed.
    So I would ask you: Are these priorities so important that 
you would advocate cutting spending in other areas--and if so, 
where?--or raising taxes to pay for them?
    Secretary Powell. I believe these are important priorities. 
As the President put his budget together, all of us had to 
compete our programs. In recognition of the finite resources 
available to the Nation, the President was strict in his 
guidance to us. OMB was strict in their application of that 
guidance, and so our programs competed with other discretionary 
spending and with the Defense Department's needs.
    My figures suggest that we are 7.1 percent above 2004, 
including the supplemental, 2004 actual to 2005, 7.1 percent. I 
think it is a reasonable amount for the kinds of challenges we 
are facing on the war on terrorism, standing up new facilities 
in Iraq, and all that we are being asked to do on the war 
against HIV/AIDS and the Millennium Challenge Account.
    Now, it is always a question as to am I taking spending 
from someone else or am I just asking for the debt ceiling to 
be raised or am I asking for new taxes? I think that is a 
judgment that the President has to make in consultation with 
the Congress, and the Congress ultimately answers that question 
in the manner in which they act on the President's budget. But 
what we try to do is put forward only those priorities that we 
felt were essential and were deserving of additional spending 
in 2005, Senator.
    Senator Conrad. Let me put up this Newsweek article that I 
quoted from earlier. ``The greatest threat to America's primacy 
in the world comes not from its overseas commitments, explains 
historian Niall Ferguson. It is the result of America's 
chronically unbalanced domestic finances. The mounting Federal 
budget deficits that now stretch out as far as the eye can see 
will mean, if history is any guide, sharp cutbacks in American 
military and foreign affairs spending. We will see a forced 
retreat of America's foreign policy similar to the years after 
the Vietnam War, only the cuts are likely to be much, much 
deeper and the resulting chaos far greater.''

[GRAPHIC] [TIFF OMITTED] 94065.267


    Secretary Powell. Well, I don't know that I can agree with 
either Professor Ferguson or my good friend who I admire, 
Fareed Zakaria. America's primacy in the world is unchallenged 
today, and it will be unchallenged in the future. I think 
people recognize that America does have some budget 
difficulties, but they also have confidence in the American 
political system and the American economic system to deal with 
this over a period of time--maybe not in a year or two. And it 
is unfortunate we have gone from a surplus to a deficit 
situation, but we had emergencies thrust upon us. And we have 
to work our way through this. And the President made judgments 
with respect to tax cuts, with respect to his economic plan, 
with respect to how much deficit we could sustain right now and 
how to get out of that deficit position. And I don't think it 
is undercutting our position in the world, and right now we 
have demonstrated to the world that we will not shrink back 
from our responsibilities to go after terrorists and we will 
not shrink back from our obligations in Iraq and Afghanistan.
    I don't see anybody coming to my office saying we are 
worried about you guys losing your primacy in the world. We 
will remain the primary actor in the world, the sole 
superpower--not a superpower that imposes but a superpower that 
looks for allies and partnerships.
    So I don't quite come to the same conclusion that Niall did 
or Fareed did.
    Senator Conrad. Let me just say to you, I have not come to 
your office, but I will tell you, I have looked at the long-
term projections the President has made, not just the next 5 
years but his long-term projections of what happens with his 
proposed tax cuts and the increased cost as a result of the 
retirement of the baby-boom generation. We saw yesterday the 
Chairman of the Federal Reserve tell us those imbalances are so 
great that we have to cut Social Security.
    Now, you know, the explanation that somehow it is all just 
going to work out is becoming an increasingly hollow 
explanation. I don't think it squares with the facts that we 
see before us, either in the immediate term or in the term 
beyond the 5-year budget window. And that is why people like 
Mr. Zakaria, who is, I think, in many ways an ally of yours on 
many issues, and a noted historian are warning us--are warning 
us--where this all leads. And it leads to incredibly serious 
choices in the years ahead. It will be very hard to see how 
international affairs will be exempt from substantial cuts, and 
even defense.
    I would be happy to have you respond to that if you would 
care to.
    Secretary Powell. Well, I think I have, Senator. I am not 
competent to judge what needs to be done or not done with 
respect to Social Security. I do know that the country has 
vital needs now with respect to international affairs and 
defense expenditures. I do know that the challenges we are now 
facing were thrust upon us at the beginning of 2001, and we are 
responding to it. And it has put a great deal of pressure on 
our Federal budget, causing the deficit.
    And I know that there is debate about the President's tax 
cuts, but he is confident that the tax cuts will lead to 
economic growth which will benefit the American people, and he 
has a plan. And you may disagree with the plan and believe that 
it is unachievable, but, nevertheless, it is the plan that he 
was submitted to the Congress that he believes will halve the 
budget in the period of years that you indicated earlier. And 
that is a debate that the Congress, of course, will have in the 
course of the year with the President.
    Senator Conrad. Let me just say in conclusion, I think the 
notion that the President has floated that this is going to cut 
the deficit in half is entirely a fiction--entirely a fiction. 
I mean, I am surprised he didn't say it was going to eliminate 
the deficit, just leave our some more things. But when you 
leave out the costs of the war past the end of September, when 
you leave out the crisis with the alternative minimum tax, when 
you leave out the $2.4 trillion he is borrowing from the Social 
Security Trust Fund, every penny of which he has got to pay 
back--he has no plan to do so--it leads people like the 
Chairman of the Federal Reserve to conclude that you are going 
to have to cut Social Security, and much else as well.
    So I would say to you I have enormous respect for you. But 
the policy of just continuing to increase expenditures and 
borrow the money I don't think stands up. And we are going to 
have to do much better.
    Chairman Nickles. Senator Conrad, thank you very much. I 
hope to have a budget next week that will cut the deficit in 
half, and it will be real.
    Senator Gregg?
    Senator Gregg. Thank you, Mr. Chairman, and I will be happy 
to debate Senator Conrad on his points in the future because I 
disagree with them. But today we are here with the Secretary of 
State, who has been a leader in what is one of the--what is the 
true issue that faces our country, which is that we are at war, 
and that whether we like it or not, there is a culture out 
there whose purpose it is to destroy our culture. And they have 
already shown that they are willing to kill innocent men and 
women to do it. And if they get their hands on a weapon of mass 
destruction, they will use it against us, whether it is 
biological or chemical, and they will kill thousands more 
Americans. And our purpose must be to defeat them, to find 
them, to chase them around the globe.
    And I admire the fact that this President has been myopic 
in his efforts to pursue that course, and I admire the fact 
that he has surrounded himself with people who understand the 
threat and who are also equally committed to defeating them.
    I think if we look at the track record of this 
administration, it is really rather extraordinary in this 
fight. If you look at what we have done in Afghanistan, in 
Iraq, if you look at what is happening in Libya, North Korea is 
starting to move, it appears, Iran has opened itself up to 
review of its nuclear programs--these are extraordinary steps 
in the right direction, and they are steps which are a function 
of the fact that we have shown strength and commitment.
    I can see scenarios where we would have still been debating 
with the Taliban as to whether or not we would have gone in 
there under other administrations, and we didn't take that 
course. So I congratulate the administration and the Secretary 
of State for their aggressiveness in this fight, because that 
is what it takes.
    It also takes a strong State Department, and I appreciate 
the Secretary making the point that we as a Congress have stood 
by the efforts with the DRI program, with the IT program, with 
the embassy security program, with the visa/passport program, 
so hopefully the subcommittee that funds them is not a national 
security risk. But there are some specific concerns I have 
which are tangential to the larger issues, but which I would 
like to raise with the Secretary because our time is limited.
    The first is Charles Taylor. Not many people focus on 
Charles Taylor. I have been focusing on him for a long time, 
ever since his horrific actions and the genocide he created in 
Sierra Leone.
    The tribunal in Sierra Leone has indicted him as their 
first act. It was a courageous act when the indicted him. It 
was led by an American prosecutor. I think his name is Thomas, 
although I am not sure. And now that they have indicted him and 
Taylor has been forced out of his country, it appears that we 
cannot get him before the court. And he should come to Sierra 
Leone and be tried. He should be brought there and tried.
    This Congress has put a bounty on the effort to try to get 
him to Sierra Leone and try him, because if we don't try him in 
Sierra Leone, no future tribunal that is structured on the 
issue of genocide, whether it is Rwanda or what is happening in 
the Congo, is going to have legitimacy. This man cannot be 
allowed to live under the aegis of a foreign country and be 
given that protection.
    I am just wondering what the State Department's position is 
on getting him to Sierra Leone to be tried.
    Secretary Powell. We believe he should be tried. We believe 
that ultimately he will be brought to justice before the 
tribunal.
    We had a challenge last year. We had a rapidly 
deteriorating situation in Liberia. The people were suffering 
badly--starvation, we had mobs running around. We had different 
resistance groups terrorizing the people. And we had to find a 
solution to all of that that would bring the situation under 
control and get rid of the leadership that was there, namely, 
President Charles Taylor.
    And after working with our friends in ECOWAS, the Economic 
Community of Western African States, we came up with a solution 
that would get Charles Taylor out of power, out of the country, 
but the only way we could arrange that to happen was to put him 
in a country where he would not be immediately subject to the 
tribunal and he would not be moved from that country to the 
tribunal.
    It wasn't a perfect arrangement. We would have preferred 
another arrangement. But we had to deal with a real emergency 
at that time. And so it was an arrangement that was entered 
into by ECOWAS and we supported it. And as a result, Charles 
Taylor is no longer in power. He is no longer protected by his 
goons, and the Liberian people are heading toward a better 
future. He went to Nigeria, the country that was willing to 
host him as long as we didn't put pressure on Nigeria to 
immediately turn him over to a court. We made it clear that we 
believe he is still subject to that tribunal. We made it clear 
that we believe this is still a matter between him and that 
tribunal. And we hope and we work for a set of circumstances to 
come about where it will be possible to turn him over to the 
court and put him before the court.
    Senator Gregg. Well, as you know, the----
    Secretary Powell. But for the moment, I am obliged to 
respect the political arrangement that was entered into which 
got him out of the place, out of Monrovia in the first place.
    Senator Gregg. I would hope that we have been generous 
enough to Mr. Taylor. It is time for him to be brought before 
the court. I think we should not be standing in the way of 
that, but I think we are.
    On another issue, which is really tangential, and which I 
suspect you have not focused on, and that is the security of 
the families of our--I know you have focused on the security of 
our families abroad. This has also been a priority of mine, but 
I now learn that the State Department has taken a position that 
if you go to an American school which is not receiving grants 
from the State Department, that that school will not be able to 
access the security funds which we put in the budget last year, 
and which you were kind enough to actually suggest an increase 
in. Whether you are in an America school that gets grants from 
the State Department or not get grants from the State 
Department, if a school is called an American school, it is a 
target unfortunately, and the whole purpose of these funds were 
to protect all Americans, especially families of State 
Department personnel overseas.
    I am wondering why this policy was put in place. It seems 
to be counter to what the intent--I know it is counter to my 
intent when I put the money in. It seems to be counter to the 
logic of the purpose of protecting these families.
    Secretary Powell. I feel a very heavy obligation to protect 
not only my embassy compounds, but places where families live, 
where they go for recreation, and especially where they send 
their children to school. I need to give you an answer for the 
record.
    Senator Gregg. What I would really like you to do is change 
the policy. It makes no sense on its face.
    Secretary Powell. Sir, I will look at it----
    Senator Gregg. After you have looked at it.
    Secretary Powell. Let me look at it before I----
    Senator Gregg. I agree.

    Secretary Powell [continuing]. Change it, to find a reason 
for it first.

    Senator Gregg. But please review. Thank you. I congratulate 
you for the job doing. I think it is extraordinary the progress 
that has been made, as I mentioned earlier, in these core areas 
of our national security, especially obviously, Afghanistan and 
Iraq. North Korea now appears to be moving, and Iran, and 
Libya, of course, and that is only a function of the fact that 
you and the President have shown a very strong hand and been 
willing to play it. Thank you.
    Secretary Powell. Thank you, Senator.
    Chairman Nickles. Mr. Gregg, thank you very much.
    Information from our colleagues: we have roll call that is 
now ongoing I think for about 5 minutes, just FYI.
    Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary.
    Secretary Powell. Thank you, Senator.
    Senator Stabenow. First I would thank you for your service, 
and also say that I think it is good news that we have men and 
women wanting to be involved in foreign service, and coming to 
the Department of State we need the best and the brightest 
serving in very difficult circumstances.
    Two areas of question. First, because we are talking about 
the budget, I want to focus on the budget and what our 
priorities and choices are. When we look at this budget right 
now it is not complete. When we look at it in total we see a 
hole because there is not one penny for ongoing military or 
reconstruction efforts in Iraq, and I might just mention that 
the emergency supplemental we passed last year provided $18 
billion to rebuild Iraq, and as a side note, after yesterday's 
discussion on homeland security, that is four time more than 
what the President's budget is for first responders, which is 
of deep concern to me in terms of relative risk to us and what 
is happening to us in terms of a national threat.
    But I am concerned that we are hearing rumors that there 
will be a supplemental after the election. We are also hearing 
from many military leaders that this will not serve in terms of 
the time limit; they need dollars ahead of time. If we are 
planning to be in Iraq for many years, you have indicated it 
will be very expensive, certainly very difficult. Why does the 
budget not include some type of estimates for our operations 
and rebuilding in Iraq so we can budget intelligently for the 
future? We may not know exactly what the number is, Mr. 
Secretary, we know it is not zero.
    Secretary Powell. Senator, the judgment was made that in 
the course of regular 2004 funding and in the supplemental, we 
received enough money to carry us through the end of 2004 and 
well into 2005, so that the best way to handle it was wait 
until we reached 2005, and then there will be a supplemental 
request in 2005. But there was not enough known about what that 
need would be to include it in the 2005 budget submission, and 
we have more than adequate funding to take us into at least 
first quarter, in my case, of 2005.
    Senator Stabenow. Mr. Secretary, I realize that is the 
position. I would just say that from our perspective on the 
committee, I do not believe that is responsible budgeting when 
we know that our first quarter into the next year we will be 
asked to come back with a supplemental. We are already 
borrowing to spend in Iraq, and rebuilding as well as the 
military, and for us to know that we are going to be going even 
farther into debt, it seems to me we at least ought to have a 
placeholder of an amount of money, and that is certainly 
something I think this committee should be discussing.
    Secretary Powell. In my budget there are some moneys in 
2005 for things we really know about to a finite degree now, 
what it is going to cost us to run our embassy operations in 
Iraq. Those kinds of things we have put in the 2005 submission.
    Senator Stabenow. But you are agreeing that there will be 
additional dollars needed in 2005?
    Secretary Powell. I am quite sure there will be a need for 
a supplemental in 2005.
    Senator Stabenow. Let me turn to another issue, an 
extremely serious issue that you have talked about, which is 
HIV/AIDS. There is no question in my mind that this is one of 
the, if not the, largest crisis that we have in the world 
community. When you say 8,000 people are dying every day, 
including today as we sit here, I cannot imagine a bigger 
threat to humanity than HIV/AIDS. The President's request to 
combat HIV/AIDS increased substantially this year to 2.8 
billion, and I appreciate that, but I am concerned that the 
request lags behind the 3 billion that we authorized in 
legislation last year, which the President signed, and I am 
wondering if you can explain why we are not meeting the 
commitment that we made to the world community last year.
    Secretary Powell. We are really still gearing up our 
programs. The HIV/AIDS Office is now just starting to issue 
contracts, enter into compacts with delivering agencies for the 
new moneys coming from the 2004 appropriations. So I think you 
will see that in the months ahead the rate of commitment of 
money will increase significantly and the funds will really 
start to flow out in a very, very rapid and responsible way.
    Senator Stabenow. Would you not agree that this is an 
emergency?
    Secretary Powell. Ma'am, it is.
    Senator Stabenow. And there has to be the utmost sense of 
urgency.
    Secretary Powell. It has the utmost sense of urgency. It is 
an emergency. It is a priority, and we are working as hard as 
we can, but we have to do it in a responsible way and make sure 
we are sending money out to programs that are prepared to 
receive the money, and we are not wasting the money, and that 
has taken us time to buildup the capacity to handle the 
additional moneys and to make sure we are doing it in a good 
way so that when I come up here next year, I am not criticized 
for having run bad programs.
    Senator Stabenow. Mr. Secretary, I have heard from a number 
of people and had a number of conversations with members of 
NGO's that indicate that as fast as we can get them the 
resources they have the capacity to address this, and I am 
hopeful that we will do this as quickly as possible.
    Finally, this year's request for the Millennium Challenge 
Account is 2.5 billion, nearly 1 billion short of the 
commitment outlined by the administration at the onset of the 
MCAs. I understand it is a new program also. I understand it 
takes time to ramp up, but we need assurance from the 
administration that we will meet the $5 billion annual funding 
goal in year 3 that was promised, and I am very concerned again 
that things just are not moving as fast as they should be.
    Secretary Powell. The President remains committed to 
reaching that $5 billion goal, and it is a brand new 
corporation. The first board of directors meeting I held on the 
2nd of February. So inevitably it takes time to create 
programs, to get the criteria in place. Working with our 
Ambassadors, we now have their ideas in hand. We are evaluating 
the countries now. The evaluation system is being put in place, 
and you will see this program ramp up quickly. It just takes 
time, frankly, to put in place a system to spend these large 
amounts of money in a responsible way. But we will be ramping 
up quickly. I think we will be able to use what we have been 
given this year, and we will be able to use the $2-1/2 billion 
for 2005, and the President is still committed to hit the $5 
billion a year target that he indicated when he created the 
program.
    Senator Stabenow. Finally, one of the things I noticed in 
reading former Secretary O'Neill's book--and there were many 
interesting things in that book--but one of the things that I 
was appreciative of was his passion about HIV/AIDS after his 
trips to Africa and his suggestions about water projects, and 
the fact that only, as an example, half the people in Ghana 
have water, and what a difference it would make just providing 
the basics of water to everyone and how this could be done from 
his analysis, looking at the major reports and some of the 
contractors that have come in from the U.S. that have been 
suggesting huge projects of billions of dollars. His assessment 
was that things could be done for much, much less and much more 
quickly if we just talked about the basics and about wells and 
getting water to people in these countries. I am wondering if 
you have had conversations with him about his proposals? And I 
should also say I am hopeful he will continue to work on those, 
because I think he has the right idea.
    Secretary Powell. Paul had a real passion for that, HIV/
AIDS and clean water, and he and I spent many hours talking 
about both subjects. He had an idea about drilling wells 
rapidly, but we really do have a rather expansive program for 
wells and for other means of providing water, and we made 
another substantial commitment when I went to the World Summit 
on Sustainable Development in South Africa a year, year and a 
half ago. So we are I think as passionate and as committed as 
Paul O'Neill was for providing clean water because it goes 
along with development and it goes along with health, it goes 
along with combatting HIV/AIDS and other infectious diseases, 
so it is all part of the package. We may have had disagreements 
as to how best to provide clean water. It is not just a matter 
of digging a hole in the ground and up comes the water. You 
need other parts of that system. You need to be able to 
maintain and sustain that system over time.
    So we were looking at it in a more comprehensive way than 
Paul was looking at it. I hope he will continue to have an 
interest in this in private life, continue to work on both HIV/
AIDS programs and clean water programs.
    Senator Stabenow. Mr. Secretary, I just cannot find the 
words strong enough to urge you to continue to focus on this as 
well as all of us needing to do that, because there cannot be a 
larger crisis right now in the world, and while we focus on 
military action, which is certainly an important component to 
leadership, focusing on hearts and minds and the leadership 
that we can provide as the greatest country in the world on 
humanitarian efforts, certainly sends an important message 
about our values as much as other actions.
    Secretary Powell. I could not agree with you more, Senator. 
Thank you.
    Senator Domenici [presiding]. Thank you, Senator.
    Mr. Secretary, I am not sure that I can finish in the 3-
minutes that remains on the vote, so if I come back, please do 
not consider that I am trying to abuse my time. It is just that 
I am not going to get 8 minutes in, I do not believe.
    First I want to tell you that I have a statement prepared 
that I want to put in the record. It is a statement of 
accolades, accolades for you, for our President, for America, 
with reference to the world, and principally with reference to 
what it means to be free.
    [The prepared statement of Senator Domenici follows:]

    [GRAPHIC] [TIFF OMITTED] 94065.189
    

    [GRAPHIC] [TIFF OMITTED] 94065.190
    

    [GRAPHIC] [TIFF OMITTED] 94065.191
    

    Senator Domenici. But I have an issue that I am quite sure 
you agree is important, and I think it is so important that it 
requires more than people like you being interested. It 
requires the utmost action. Let me try to explain it to you in 
terms of what is happening today.
    We are engaged in a war against Iraq on the basis that they 
have historically been leaders in the use of weapons in mass 
destruction. Whether they were there on a given day or not will 
probably not be answered until history is beyond us. But we 
worried enough about it that we went to war.
    Now, Mr. Secretary, the problem I address is the 
proliferation of weapons of mass destruction and its components 
and its scientists around the world. When I first got involved 
in this issue, Mr. Secretary, it was Russia and America, and 
believe it or not, from that interest and the interest of some 
very expert people, the first laws were passed with reference 
to proliferation. Believe it or not, one afternoon in a 15-
minute period, the appropriators here started two new 
nonprofileration programs. We did not take a month or 6 months. 
One was $200 million to jump start the program to create a 
plutonium disposition program. I am tempted to stop and go to 
the other issue in a moment, but let me not do that and create 
a little further synergy about the issue. On that very same day 
that that happened, our Appropriations Committee, in 
conference, approved over 50 million for the United States of 
America to buy highly enriched uranium from the Soviet Union. 
That uranium acquisition has worked somewhat. We turned it over 
to an American corporation that was created by selling a 
Government corporation. You are aware of that company. Its 
record has been spotted at best.
    But programs like plutonium disposition, you know, they are 
a kind of a duck on water, and waiting around to drown, and you 
know how hard it is to drown a duck. That is how hard it ought 
to be to dispose of a program like plutonium disposition, but 
we are letting the problem languish to where it may disappear 
if we do not solve a little disagreement with Russia regarding 
what we in America would call indemnification. Maybe somebody 
would describe it as who is going to be liable for what in the 
event things do not work out.
    Let me just say, Mr. Secretary, I have talked to you 
briefly and I do not expect you to know a lot about this just 
because I called you on the phone, but I sent you a letter. I 
have tried my best to speak to the President, and I think a 
result of both the speech and a letter that had something to do 
with the President's announcement. People do not know it, but 
the announcement on nonproliferation, it may go down in history 
as one of the most significant speeches given if it works.
    Mr. Secretary, I want to ask you and urge you, with all the 
things you are carrying around on your shoulders, to really 
consider pursuing with vigor the establishment of international 
institutions to control the spread of weapons of mass 
destruction, and, Mr. Secretary, I have, since our 
conversation, talked to the smartest people I could find. The 
other day you asked me who and I told you, remember, Sig 
Hecker? Since then I have spoken to Steve Younger, who is going 
to be a fellow after having been one of America's--leading 
nuclear bomb makers, and he is going to be a fellow and 
research physicist. I asked him about this. He said we have to 
get somebody to get on with it and get this international thing 
going.
    Now, Mr. Secretary, do you think this is a big problem, 
proliferation?
    Secretary Powell. I absolutely do, Senator, and that is why 
the President spoke to the issue at the National Defense 
University, a speech I think is an historic one, and one in 
which he laid out a number of things we have to be working on 
to include improving the ability of the major international 
organization that deals with nuclear activities and that is the 
IAEA. And he talked about passing resolutions before the U.N. 
He talked about passing the additional protocols to the 
Nonproliferation Treaty and a number of other areas that he is 
working on.
    With respect to the specific issue of liability and 
indemnification with the Russian Federation, it is a subject of 
considerable discussion. I have discussed it with my Russian 
colleagues recently when I was in Moscow, and in subsequent 
conversations with Foreign Minister Ivanov. And we have engaged 
the interagency process in recent weeks in a much more 
aggressive way to find a solution to these continuing, nagging 
indemnification and liability problems that are holding up not 
just the particular program you made reference to, but other 
programs that came out of the G-8.
    Senator Domenici. Mr. Secretary, I am thrilled to know that 
you are involved. I can tell you without mentioning names that 
I believe that people who have been working in your behalf--and 
I would not mention their names--I do not think they are 
competent to get this kind of treaty with the Russians. That is 
my view, not yours. To get that resolved needs your absolute 
mandate to the State Department that they put the kind of 
people in that can resolve it. I tell you, it is not that 
tough, but it has got to have some big people.
    I want to wrap this meeting up so that everybody that is 
here and the media that is here have to understand. We just had 
a national position, and our ranking member took a big swipe at 
the fact that America has gotten heavily in debt, and that the 
Fed Chairman just mentioned Social Security. Well, Mr. 
Chairman, and fellow Senators, I was chairman for so long in 
this committee, and I am so thrilled that this very, very 
competent man, Senator Nickles, is Chairman.
    But do you know, 18 years ago in the U.S. Senate we had a 
vote. Do you remember former Senator Pete Wilson? We wheeled 
Pete Wilson in in a wheelchair because he had had appendicitis. 
His was the deciding vote on a proposal by Domenici and Nunn to 
restrain the COLAs on Social Security, 18 years ago. Why? We 
knew just what is happening was going to happen. We never did 
this again because some people think 8 or 10 people lost 
elections the next time, but from my standpoint I do not think 
it does a lot of good to talk about this unless somebody is 
ready to do something about it. But I can tell you, you have 
some of the greatest programs mankind has ever seen, the 
greatest humanitarian program was this President's effort of 
commitment of $2.8 billion for AIDS. Who would have thought it? 
There are still some people who think Republicans do not care 
and George Bush is a conservative from Texas, who cannot 
believe that he is the one who said we will spend 2.8 billion 
to address the world's aids crisis.
    I tell you, I am not here to criticize how slow it has been 
because I understand with that much money, if you turn it 
loose, it will be gone in a year and then they will be back 
here saying, you forgot this one, this one, the other one, or 
you put too much here and too much there, and that is a bear of 
a job. I hope you get it done and I hope you get it done in 
your typical, methodical and terrific way. The man you put in 
the directorship is already under criticism because he is not a 
health man. We do not need a health man. We need a big-time 
manager, right?
    Secretary Powell. Absolutely, and that is what we have with 
Ambassador Tobias.
    Senator Domenici. That is right, terrific. If you put 
anybody in charge that is going to look at 3, 4, 5 billion and 
spend it right, you are probably on the right track.
    My time is up and I am going to go vote, and I am not sure 
that I can come back. I have about 8, 9 questions. I will 
submit them to you.
    I do want to close by saying, as strange as it may seem, 
with this President having 1 year left, and hopefully he will 
have some more, it is very important that you, where you have 
the lead in some of these programs, that you really put 
Secretary Colin Powell behind them. Nobody will move them like 
you, and you ought to do it. The ones I mentioned are terrific. 
Weapons of mass destruction are moving around the world today 
like nothing we could have believed. We have a guy in Pakistan 
that 10 years ago if you would have found him selling that 
stuff, you would have hung him in the marketplace. The worst 
proliferator ever is that fellow from Pakistan. Is that his 
name, Khan?
    Secretary Powell. Kahn, sir, Dr. Khan.
    Senator Domenici. Can you imagine admitting that he put 
weapons of mass destruction in five countries, and we are still 
running around saying, well, we do not know what to do about 
him?
    Thank you very much.
    Secretary Powell. Thank you, Senator.
    Senator Bunning [presiding]. Since I guess I was the first 
one back, I will be the first one to be able to followup on 
Senator Domenici. I would like to comment on an earlier 
statement by my good friend, the ranking member, about what 
Chairman Greenspan said and what he did not say. I have his 
statement before me. He stressed that he preferred cutting 
Government spending as much as possible before increasing 
taxes. He also endorsed in the statement the tax cuts that we 
implemented in the economic reform program, and then he 
suggested that we might consider cutting promised Social 
Security, and the exact words, ``consider cutting promised 
Social Security benefits to future retirees.'' He did not say 
to cut them. He did not say that that was an option. He said 
``you might consider it.''
    Well, I have news for Alan Greenspan, and I have had it 
before at every hearing--I know I am getting off the track, but 
I have to say these things. Chairman Greenspan has made so many 
wrongheaded statements over the period of the last 15 years 
that I have taken him to task at almost every meeting that he 
has attended. Knowing full well that nobody in this Congress of 
the United States of America is ever going to suggest that we 
cut Social Security benefits for those who have earned and paid 
for them.
    The fact of the matter is, as Chairman of the Social 
Security Subcommittee on the Ways and Means Committee, it was 
never brought up. The only thing that was ever suggested that 
if we did nothing, nothing to correct the problem, that by 2036 
we would have to lower benefits to future beneficiaries after 
that time by 25 percent. I wanted to clear that up because I 
think it is very important.
    Now to get to some of the things that concern me on your 
budget. 9 percent increase for the U.N. and affiliated 
agencies. I bring that only to the point that does that 
consider any of the military money that we are spending in 
Bosnia or Kosovo with our troops, or is that excluding the 
dollars being spent by the DOD on our involvement in Bosnia and 
Kosovo?
    Secretary Powell. It excludes it. Those are strictly within 
the military accounts. If it is a peacekeeping mission 
somewhere under U.N. auspices, then we pay our fair share, 27 
percent of that peacekeeping mission, and that would be 
included in that account.
    Senator Bunning. But we are continuing to pay the 100 
percent of our troops, our troop presence----
    Secretary Powell. In Bosnia and Kosovo.
    Senator Bunning [continuing]. In Bosnia for the last 8 
years and Kosovo for the last 5 years. So that is not in this 
budget?
    Secretary Powell. No.
    Senator Bunning. I have a problem with the State Department 
only to the point that we created a law in the U.S. Congress, 
and it passed and the President signed it on arming cargo 
pilots to operate on international flights. It is called the 
Flight Deck Officers Law.
    In an op-ed piece--and I do not recommend this for reading, 
op-ed piece in Roll Call, because it is not one of my favorite 
periodicals--none are being allowed to do this because our 
State Department has not negotiated any agreements with any 
other nations to allow these armed pilots, whether it be on 
commercial aircraft or cargo planes to carry these. Can you 
bring me up to speed as far as where the State Department is in 
any kind of negotiations with other countries on this specific 
law that we passed?
    Secretary Powell. No. I would rather provide the answer for 
the record, Senator. The only thing that I could say is that 
many of our friends and allies around the world do not have the 
same view of that approach to security, and therefore if we fly 
into those countries, there is probably a debate that will take 
place before we can get in place the necessary policies for our 
pilots to come in armed. But I would rather get a more precise 
answer for you for the record.
    Senator Bunning. I appreciate that, because some of our 
intelligence, as you well know, indicates that that might be a 
source of national security as far as returning to the United 
States on cargo planes and on other planes that have been 
obviously canceled.
    Secretary Powell. I do understand.
    Senator Bunning. I thank you very much for your time, your 
patience, and my God, the responsibility that you hold as 
Secretary of State in this trying time with all of the things 
that are on your plate, our expansion, our problems in Iraq, 
our problems in Afghanistan, and many other areas, and the 
progress that we are making in those areas, and if at all 
possible, I will support almost everything in this budget, and 
we will figure out a way to pay for it.
    Secretary Powell. Thank you, Senator.
    Senator Bunning. Thank you.
    Chairman Nickles [presiding]. Senator Bunning, thank you 
very much.
    Senator Corzine?
    Senator Corzine. Thank you, Mr. Chairman.
    Welcome, Secretary. It is always great to welcome you, and 
I want to as well commend you for your service and particularly 
those who work with you as well in the State Department. The 
agenda is broad and long, and I feel like we are in strong 
hands under your leadership there.
    I also believe that the reinvesting in the people that you 
have made such a centerpiece is one of the most important 
things in the long run for our ability to be able to carry out 
our foreign policy, both current administration and future, and 
support it completely. That is the good news.
    I have a real problem. It is a little bit along the lines 
of sometimes a lack of complete information ends up undermining 
credibility. When we look at the budget this year with regard 
to what you are speaking to us about today, we are talking 
about 31.5 billion. And we all know that there is a plug there 
for reconstruction for additional aid that will accompany both 
our efforts in Afghanistan and Iraq. It has been there for 2 
years, $18 billion last year and two odd years before. I do not 
understand how we cannot make some estimate, understanding that 
rational views know that is coming. And you put that into 
conjunction with other issues about the alternative minimum 
tax, which is left out or only put in for 1 year or the 
elements with regard to the cost of some of the programs that 
were proposed in the state of the union message, like health 
insurance. It gives people an unease about full disclosure. I 
think actually the debate the Chairman talked about is less 
about misleading and lying and more about whether there was 
full presentation of the various interpretations of 
intelligence that came as we preceded the war. So I am very 
troubled about those issues and this is a particularly 
egregious example, that we will end up almost certainly having 
a substantial expenditure that is not included in our 
projections, and it leaves the American people with a false 
sense of, I think, what we are doing with regard to our 
budgetary policies, and then some way undermines credibility of 
people who I think are doing a terrific job and putting 
themselves at risk and all the other things that are associated 
with it.
    I guess that is my statement. I would ask you to comment on 
that, but more importantly, would like to hear some of your 
early interpretations of the writing of your report or the 
fact-finding report. I think the end of this week, if I am not 
mistaken, there is supposed to be an implementation of the 
fundamental law or at least an announcement. Do we think we are 
going to meet that deadline? There are certainly discussions 
with regard to whether June 30th is an appropriate timeframe 
for proper electoral process. I heard some movement away from 
maybe an election, although I do not want to put words in your 
mouth. It was left uncertain. I think nothing is more important 
with regard to our budgetary indications of whether we are 
going to have the resources to actually help build an electoral 
process that is going to have the credibility should the United 
Nations be presenting this. I really think that an exposition 
with regard to some of this fact finding--and a very credible 
person, Ambassador Brahimi, has certainly led the effort in 
Afghanistan in a way that I think almost everyone would argue 
has been remarkable.
    Secretary Powell. Thank you. Senator. With respect to the 
2005 submission we do have dollars in there for things that we 
really can scope down and know what the requirement is going to 
be. There is $46 million requested for State operations in 
Iraq, including $17 million support cost and $29 million to 
staffing. That is known now. We can budget for that and we can 
put it in the budget, which we did. But with respect to other 
demands that might be placed on the Department, and frankly the 
larger demands that will be placed upon the Defense Department, 
it was felt that as a result of the supplemental efforts and 
the fact that there are other sources of money that will be 
coming online, revenues for oil sales in Iraq, the donors 
conference that came up with a lot of money in Madrid a few 
months ago, that money will start to kick in and help with 
reconstruction and budget support for the new Iraqi Government.
    For those reasons, it was felt that the 2004 regular 
appropriations, plus the supplemental appropriation, will take 
us through the early part of 2005. And we will have a better 
sense then of what additional moneys will be required with 
another year of experience under our belt. It was felt it was 
better to wait for that 2005 supplemental to deal with that 
which we cannot see clearly now. That was the judgment that was 
made. So we put in, in the Department, that which we could see 
clearly had a finite way to scope it, and we did not make 
estimates, nor did others make estimates for expenditures they 
could not accurately make estimates for now.
    Senator Corzine. Is there no contingency planning though of 
ranges that are actually thought through with regard to 
associated planning processes?
    Secretary Powell. I do not know what the Pentagon might 
have done, but most of the $21 billion was for reconstruction 
activities and it is not yet clear what that will look like for 
the latter part of 2005, but we have enough to carry us into 
2005 for our operations, both military, State Department and 
other operations, and that is why the judgment was made to wait 
until 2005 to see what kind of supplemental would be required 
for 2005.
    With respect to Mr. Brahimi, he is a man of enormous 
ability, and I haveten to know him very well as a result of 
what he did in Afghanistan, and he did a terrific job in Iraq. 
He visited with the parties and he reaffirmed the judgment we 
had come to that we could not really have the right kind of 
election between now and say the end of June, and there were 
certain deficiencies in the caucus process that we were looking 
at, and he recommended that we look at additional options for 
the purpose of selecting an interim government for Iraq. We are 
still driving toward a 30 June date. We think it is achievable. 
Ambassador Bremer is hard at work on the administrative law 
now. 28 February was our deadline. It is getting close. I have 
not talked to Jerry in the last 24 hours to see whether he 
thinks he will make it or not, but I think we are getting very 
close. There are some issues having to do with Kurdish 
authorities and the regional government of Kurdistan and some 
other issues that have to be dealt with. They are not easy, but 
I think we are getting close to conclusion of the work on the 
administrative law.
    The next real piece of work to be done--and we are looking 
forward to seeing what Ambassador Brahimi and the Secretary 
General might have to say about this--is what kind of interim 
government will you put in place? Will it be the governing 
council, an expanded governing council? Will it be Asura coming 
up with another group of individuals to take sovereignty? A 
variety of alternatives are being looked at, not only by us, of 
course, by the United Nations, but more importantly, by the 
Iraqis themselves as to how they want to go about it. And that 
will be the major activity of our governance group in the weeks 
ahead, what kind of sovereign government should we be 
supporting for hand over on the 30th of June?
    Senator Corzine. The deadline appears though, you still 
very certain can be met in some format, just a different 
format?
    Secretary Powell. Yes, 30 June still is achievable and we 
are all working toward that 30 June turnover.
    Senator Corzine. I am sure you have read the Brahimi or the 
interim report or the fact-finding report.
    Secretary Powell. Yes.
    Senator Corzine. One of those things that sticks out very 
really, very prominently in that report is that security 
constraints are still a serious issue on the ground, and to 
some extent did not seem to jive with I thought your opening 
statement. There is some acknowledgement that security is 
getting better. They were not allowed to travel outside 
Baghdad. I am just reading from the report. They were not 
actually allowed to travel seriously in Baghdad, according to 
the report. How do you assess the security situation on the 
ground?
    Secretary Powell. The security situation on the ground is 
improving but it is still dangerous. We are still losing 
people. There are still old regime elements and terrorists in 
Iraq who are doing everything they can to thwart our efforts. 
The Iraqi security forces are being built up and are being 
targeted because they are being built up. People understand, 
the bad guys understand that they want to go after Iraqi 
security forces, perhaps even more than they want to go after 
coalition military forces because they are trying to keep this 
from happening. So we still have a difficult situation. Our 
commanders I think know what they have to do, and we are 
putting a lot of effort and energy into building up the Iraqi 
police force, the civil defense corps, the army, the border 
police, and all the other security institutions that Iraq will 
need when it becomes a sovereign nation. Over 200,000 people, 
close to that number now, are now involved in Iraqi security 
operations, Iraqis involved in Iraqi security operations. So I 
think things will improve, but it is dangerous.
    Now, the team you are making reference to, they were not 
able to get as much access as they wanted, or they may have 
chosen not to go where they wanted because they were not 
comfortable with the security arrangements. But they got their 
work done, and we hope that by the time 1 July comes around, 
when we think there is an even more comprehensive role for the 
U.N. to play getting ready for elections, we will have put in 
place security arrangements, working with the United Nations, 
that will allow them to move more freely. But it is still a 
dangerous area.
    Senator Corzine. One last followup question. You just 
implied in your response that it is insurgency, I take it 
primarily as the fomenter of the violence and lack of security, 
seem to have a debate going on among different elements of both 
our intelligence and/or defense establishment about whether 
what we are primarily seeing on the ground being outside 
influenced elements who are causing the security problems or 
insurgents?
    Secretary Powell. We are seeing both. I do not think there 
is a debate. I think we are seeing both. On any day of the week 
you can get two opinions as to whether we are seeing more of 
one and less of the other or what the trends are for each. I 
think the Intelligence Community generally believes that we are 
seeing additional terrorists coming into the country and that 
the former regime elements are coming more under control, but 
we are seeing both. We are also seeing criminality, just plain 
criminality, people who want to blow up pipelines, want to 
steal from the pipelines, people who for one reason or another 
that has nothing to do with being a former regime element or a 
terrorist who just came into the country, want to cause 
trouble. So anyone who says it is all this or all that, that is 
not a correct assessment in my judgment. It is still a 
combination.
    Chairman Nickles. Senator Corzine, thank you very much.
    A quick question. You have mentioned 200,000 people are 
being trained. Is that 200,000 Iraqis?
    Secretary Powell. 200,000 Iraqis are performing some kind 
of security function, whether in the police, in the civil 
defense groups, border patrol, pipeline security, or the army 
itself.
    Chairman Nickles. Senator Nelson.
    Senator Nelson. Thank you, Mr. Chairman.
    Mr. Secretary, thank you again for being so resolute as we 
continue to look for Captain Scott Spiker. There is a team over 
there that is looking for him, and although this is outside of 
your bailiwick, with your credentials of your past life, if you 
would just keep the pressure up, and I will give this to your 
staff. It is a letter from the family, which as you know, live 
in Jacksonville. I just want to urge you, as you are in the 
inner sanctum, talking about it, keep him on the forefront. 
They have been. I have been over there. There is a major who 
was set to rotate back. He is now a lieutenant colonel. He 
extended to keep up the search. From time to time we get some 
promising information, but we do not have any results yet. So I 
am going to give that to your staff.
    Secretary Powell. I will stay on it, Senator. He was lost 
on my watch.
    Senator Nelson. Thank you. You know I want to talk to you 
about Haiti. When you were with us in our Senate Foreign 
Relations Committee 2 weeks ago I asked you the question, is it 
the policy of the Government for regime change? You said, No, 
it is the policy of the Government that it is not for regime 
change. I want to suggest to you that what appears to be the 
hands-off policy of the U.S. Government with regard to Haiti is 
in effect going to bring about regime change. Now, we might 
agree at the end of the day that Aristide is a bad character 
who has been corrupt and very ineffective, but in effect, when 
the U.S. Government lays hands off and allows the violence and 
the bloodshed to increase, that is going to bring about the 
regime change, and Aristide is going to go. And I know you have 
probably been overruled by the White House on this to keep a 
hands-off policy. I would like any of your comment on that, and 
then I want to encourage you, although you all have not taken 
my recommendation of putting an international police force in 
there with the other nations of the western hemisphere, that 
when he abdicates, it is clearly time for us to get in there 
and try to settle that thing down, because as you can see, just 
look at the news, you can see the rickety boats that they are 
building. They are turning up on Jamaica, they are turning up 
on the Turks and Caicos. 20 of them turned up on a freighter 5 
miles off the Florida coast. This exodus is coming if we do not 
get in there and stabilize it.
    Secretary Powell. Senator, I have not been overruled by the 
White House. There is no basis for it because the President and 
I have discussed this issue almost every day, and we have a 
common mind. We were together on it 7 o'clock last night in the 
Oval Office, and he and I discussed it again on the phone at 7 
o'clock this morning.
    We have been trying to find a political solution to this 
crisis. I have been in daily contact with the CARICOM leaders, 
with France, with Canada, with the United Nations. I have been 
in relatively constant contact over the last week with the 
authorities in Haiti. I have been in contact with the 
opposition leaders of the DP. I have talked to them in groups. 
I have sent Ambassador Noriega down there to talk to them. We 
have tried to find a political solution. It has not been a 
successful effort at this point, and we continue to try to see 
if there is not a way forward.
    The issue of sending in a security force, be it a police 
force or a military force, has come up time and again. In fact, 
it came up again within the last 24 to 48 hours. What we have 
said and what my French colleague Dominique de Villepin said 
yesterday, and it has been somewhat misinterpreted was that the 
international community stands ready to help put together an 
international security force, whether it is police of some 
component gendarmerie or military or whatever. The 
international community stands ready to put that force 
together, as my French colleague said yesterday, as part of 
stabilizing some political resolution to this problem.
    What the international community--and there may be some 
members of the community who feel a little differently--but 
most of the members of the international community with the 
capacity to send forces in there have said is that Haiti really 
needs to find a political resolution to this problem. We do not 
want to get into an inter-positional situation between opposing 
forces at this time and coming down on one side or the other.
    I spent a great deal of time yesterday on the phone with 
Foreign Minister de Villepin, spoke to him again this morning, 
and he made his statement clear yesterday that France is 
willing to participate in such an effort. So is the United 
States. So is CARICOM. So is Canada. There may be African 
nations of the francophone community that are willing to 
participate in that, but we need to see some kind of political 
resolution.
    We have not succeeded in getting the political opposition, 
the DP as it is known, to agree to enter into this current 
proposal with President Aristide. The reasoning is well known. 
They have stated it clearly. They believe they have been misled 
in previous discussions with him. At the same time, we are 
concerned about the humanitarian situation. We are doing 
everything we can to make sure that food stocks are protected. 
There are some distribution problems in Haiti, but for the most 
part there is adequate food, medicine and other necessary 
stocks.
    I am very sensitive to the plight of the Haitian people, 
and we spent time this morning talking about a spurt in the 
number of people coming out onto our cutters, and there is a 
meeting taking place in the interagency community right now I 
think on how we should respond to that challenge.
    President Aristide is aware of all that we have been trying 
to do. He understands that we have not been able to reach an 
accommodation with the DP. I know that he is taking a look at 
the situation. I do not know what judgments he may come to. But 
we are in a difficult moment in the life of Haiti, the life of 
Haitian people. It is a great disappointment to me to find 
ourselves in this position.
    I went down 10 years ago with Senator Nunn and with 
President Carter and talked the generals out in order for 
President Aristide to come back in, and I regret that over 
those 10 years we have not seen the kind of progress that we 
had hoped for. President Clinton invested a couple of years of 
military presence. The international community spent tons of 
money trying to put in place a professional police force, and 
it did not work, and the political process, the democratic 
political process in Haiti has essentially collapsed, and the 
international community is ready to get engaged, willing to get 
engaged. There are debates and discussions taking place in the 
U.N. today, but anybody who looks at this says, what is it we 
are getting into? And we have gotten into something that looks 
like it is a political solution, and that has not yet emerged.
    Senator Nelson. Mr. Secretary, I pray that you are 
successful, and then once the country is stabilized, then I 
think we have to have fresh thinking about how we help them 
stay stabilized in the future. I say this in a bipartisan way 
because I think at the end of the immediate past administration 
that they started to let Haiti slip out of their sights, as has 
this administration up to this point. So I pray that you are 
successful, and then let us get our heads together of how it is 
going to be stabilized for the long run, and the kind of 
economic assistance that will give it some hope so that people 
will not constantly want to flee.
    Secretary Powell. As you know, Senator, we have provided 
over $800 million from 1995 to the present to Haiti. We are 
still providing funding to Haiti, $75 million this past year. 
There is a request in our budget for more. The international 
financial community and the institutions of the international 
financial community are willing to help more, but they have 
become frustrated that the money does not seem to produce the 
kind of results intended. And so there is a reluctance, until 
the political situation stabilizes itself and there is a 
legislature and there is a functioning executive branch with 
some security in the country, and there are institutions that 
are functioning, there is a reluctance from the international 
community to just pour money into the place. But we are doing 
our part with respect to meeting the immediate needs of the 
Haitian people through NGO and private organizations, and we 
will continue to do so.
    Chairman Nickles. Senator Nelson, thank you very much.
    Mr. Secretary, you have 5 more minutes?
    Secretary Powell. Yes, sir, certainly.
    Chairman Nickles. Just a couple of other issues Senator 
Conrad and I wanted to bring up. One is on the issue of foreign 
adoptions. Right now foreign adoptions are basically regulated 
by the Citizens and Immigration Services and the State 
Department. I have introduced legislation with Senator Landrieu 
and a bipartisan group of Senators called the Inter-Country 
Adoption Reform Act, basically put it under the Department of 
State, try and consolidate it, get it to where it will work 
much more efficiently.
    Would you review that and give us your thoughts? It would 
be put in under your shop. I think it would make it work a lot 
better, simplify the process. I would appreciate your getting 
back to us on your thoughts and comments.
    Secretary Powell. I will look at it, Senator, right away.
    Chairman Nickles. Also I want to just touch on a couple of 
other things. The big increases in your budget are for AIDS and 
for the Millennium Account.
    Secretary Powell. Right.
    Chairman Nickles. Last November, December, I went with 
Ambassador Tobias and Secretary Thompson on an AIDS African 
trip. Our work over there is meeting a need that is enormous, 
enormous, and I compliment you and the President. Ambassador 
Tobias is just an outstanding representative, taking on a 
challenge. I look at the job that you have, the job that we 
have, we all have big jobs around here. That is an enormous 
challenge as well, and I think we have the right person in 
there.
    The Global Fund assistance that Congress appropriated last 
year was $546 million. The amount that is in your budget is 
$200 million. The administration requested a total of $2.8 
billion, and last year we appropriated a total of 2.4 billion. 
So I have not looked at all the differences, but I do know that 
Congress put in a lot of money in the Global Fund that was not 
requested, and you are requesting more money in other places. 
Is the 2.8 consistent on this, meeting that commitment of $15 
billion?
    Secretary Powell. Yes, sir.
    Chairman Nickles. I appreciate that. Also I want to just 
touch on one other thing. The other big piece of that--and you 
mentioned they are combined, and I would echo that--the 
Millennium Challenge coupled with the Global AIDS Fund. One or 
two of the African countries I saw were so poor, and I am 
thinking there are such enormous resources here, if they had a 
legal system, if they had private property ownership. Uganda is 
one--and there are others--the most fertile country I have ever 
seen, and yet we are sending food aid. They could grow enough 
to feed not only Ugandans but many other countries, but in many 
cases they do not have the rule of law and they do not have 
private property, and so I compliment you on both.
    Now, on the financial side of it, last year you talked me 
into a billion dollars for a new program. This year you are 
asking that program to grow to $2-1/2 billion. You have not 
obligated as of yet the billion dollars. Do you really need 
that $2-1/2 billion in 2005? Can we not slip some of that into 
2006 and 2007. The increase we have on all nondefense programs 
is $2 billion, and you are asking a billion and a half of it 
for the Millennium Challenge Fund. You are not really quite 
ready to spend $3-1/2 billion or even obligate $3-1/2 billion, 
are you?
    Secretary Powell. I recommend you really not slip it into 
the out years, Senator. We need that money in our accounts now 
in order to start planning how we are going to ramp up this 
program as fast as we can. There are countries that are 
desperately in need.
    Let me just touch on another effect that the program is 
having already. I am already hearing from a number of 
countries--you were concerned that they are not going to meet 
all the standards required for eligibility. They are asking: 
``Can we send a delegation to see you right away?'' ``What do 
we have to do?'' ``What do we have to do on the rule of law?'' 
``What more do we have to do on corruption?'' ``What is our 
grade?'' ``What is the threshold for passing?'' They want to be 
a part of this program. I think the way in which it is 
structured right now, with one now and two plus next year shows 
determination, shows the commitment of the President, of the 
American people and the Congress. So I would you not slip the 
two, and we will be ramping this up as far as we can.
    Chairman Nickles. I appreciate it. With the concept I am 
with you 100 percent and I compliment you.
    One other compliment I want to make and that is in the 
Office of International Religious Freedom. Senator Lieberman 
and I sponsored that bill years ago. We found then that there 
was a lot of countries where people were persecuted and in some 
cases killed because of their religious beliefs. We find it 
with friends and allies even, in countries like Pakistan, Saudi 
Arabia or countries like China and others. The purpose of that 
bill was to highlight some of the problems and give us a lot of 
tools to help fix those problems, and I would just say I just 
have been looking at the report that was released just last 
December by the Commission, and it was an outstanding report. I 
would urge more attention I guess from all of us, Members of 
Congress and others. I find when we raise some of these issues 
with some of our countries, that our allies, our friends in the 
war on terrorism and so on, that they want to be cooperative. 
So I compliment the Ambassador-at-Large, Mr. Hanford, but also 
the work that that Commission is doing.
    I am amazed at how significant religious persecution is 
today in lots of places in the world. In Pakistan somebody 
walked into a church and just machine gunned people, and that 
happened recently, and so I think this Commission helped 
highlight some of the problems and also has good suggestions 
for some of the solutions.
    Secretary Powell. Thank you, Senator. I fully support 
Ambassador Hanford and his work. It is a good report. 
Yesterday, I issued the Human Rights Report, and then we also 
have the Trafficking in Persons Report. All of these go to the 
human condition and what we believe God intended for all of 
mankind to enjoy, and we will continue to press these reports 
that frankly are the products of Congress. You wanted us to do 
this, and we take them all very, very seriously, and we go 
after these issues aggressively.
    Chairman Nickles. Thank you very much. I think maybe in 
many cases we in Congress have not done enough to followup on 
them, but we can do that with our individual contacts with some 
of the embassies and on some of our trips, and hope that the 
State Department people would as well.
    Senator Conrad.
    Senator Conrad. Thank you again, Mr. Chairman.
    Mr. Secretary, one of our colleagues suggested that somehow 
I had misled on the Greenspan testimony yesterday. I did not. I 
was quoting directly from the Washington Post Dispatch on what 
occurred there, and I just put it up. That is what I quoted 
from. ``Fed Chief urges Cut in Social Security.'' That is the 
headline. ``Future benefits must be curtailed, Greenspan 
warns.'' And I would be happy to go through the story, set the 
record straight here on what was said and what I alluded to. 
``Federal Reserve Chairman Alan Greenspan warned Congress 
yesterday the Federal Government has promised more retirement 
benefits than it can pay for and must consider scaling back 
those commitments soon to avoid damaging the economy in the 
future.''
    ``I am just basically saying we are over committed at this 
stage,'' Greenspan told members of the House Budget Committee. 
Greenspan, who supported President Bush's 2001 tax cuts again 
endorsed Bush proposal to make the tax cuts permanent. However, 
he said in response to questions that raising taxes would 
inevitably be part of any successful effort to reduce the 
growing Federal budget deficit. he stressed her prefers cutting 
spending as much as possible before increasing taxes. He said, 
``You don't have the resources to do it all.'' To curtail 
future spending Greenspan urges Congress, as he has in the 
past, to consider cutting promised Social Security benefits to 
future retirees. ``Otherwise,'' he said, ``the growing burdens 
would create long term budget deficits that would drive up 
interest rates, depress economic growth, make it even harder 
for the Government to pay its bills.''

    That is what he said. That is about as clear as it can be. 
It is very interesting if one looks at what the President is 
proposing. He is proposing in his budget to borrow $2.4 
trillion from Social Security that is funded by payroll taxes, 
and have tax cuts of $2.4 trillion over that same period that 
are largely going to income tax payers. That is the greatest 
shift of benefits from the many to the few in the history of 
this country. When one talks about class warfare, that is class 
warfare writ large.
    Let me just ask you this.
    Chairman Nickles. Senator Conrad, you and I will need to 
debate that another day. The Secretary is being very generous 
with his time.
    Senator Conrad. I just want to ask you this on the 
supplemental. Will you be asking for a supplemental as you have 
the least 3 years?
    Secretary Powell. In 2005?
    Senator Conrad. Yes.
    Secretary Powell. I would expect that there would be a 
supplemental in 2005, sir.
    Senator Conrad. Can you give us any sense of how big it 
might be? Last year's reconstruction supplemental was $21 
billion. Can you give us any sense----
    Secretary Powell. No, I cannot, sir. Really, I do not have 
any way of putting a number to it. If we could put a number to 
it clearly, then it would more likely be in the 2005 budget. It 
is up to the President ultimately to decide whether there will 
be a supplemental, what the amount is. But I think our planning 
assumption is that there will be a need for a 2005 
supplemental.
    Senator Bunning is not here, but since you mention it--I 
could not quite read the article, but I did hear you say the 
word ``consider'' reductions. I think the point the Senator was 
making earlier was that Mr. Greenspan had said ``consider,'' 
whereas the headline suggests that he was advocating cuts.
    Senator Conrad. I do not think there is any question he is 
advocating cuts. He is saying to us to consider. It is his 
recommendation. I think that is very clear, and that is not 
only clear based on what he said yesterday, it is clear on what 
he said 2 weeks ago. It got almost no press attention. So I 
think it is very clear, he is saying to us we are over 
committed, none of this adds up, and it does not add up, and 
that is the problem we have.
    When you send up a budget and you tell us here you are 
going to ask for a supplemental but you do not provide a 
number, the thing we know is the right answer is not zero. But 
what you have in this budget, or more accurately, the President 
has, is zero. We know that is not what it is going to be.
    Chairman Nickles. Mr. Secretary, I want to thank you. I 
might mention that last year when we did the very large, $20 
billion supplemental, actually I think it is $21 billion, we 
were told that that would basically be it, and not to expect a 
2005 supplemental. That is still my expectation. I could be 
corrected, but I would like to be corrected if that is the 
case. We were told that other countries were going to be 
participating more. That was a large, large, large amount of 
money, and I look at the amount of money that is compared to 
what we have done in the past, and we were basically assured 
last year, when Ambassador Bremer and the administration 
requested that $21 billion and a lot of us were swallowing 
hard, that we would not be seeing another supplemental for 
infrastructure for Iraq.
    Secretary Powell. I think we made it clear that there would 
not be another 2004 supplemental, and I do not know what 
Ambassador Bremer believes the needs in 2005 will be. But I 
cannot tell you today that neither the Defense Department, 
State Department, or other agencies of Government will not have 
need for a 2005 supplemental. It will be up to the President to 
decide whether or not a supplemental is forthcoming. It cannot 
be decided now what an amount might be in such a supplemental.
    Chairman Nickles. Mr. Secretary, thank you. My staff 
informs me that the commitment was that we would not see 
another supplemental in 2004.
    Secretary Powell. Right, Senator.
    [The prepared statement of Secretary Powell follows:]
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    Chairman Nickles. I appreciate the clarification both from 
you and my very knowledgeable staff.
    With that, Mr. Secretary, thank you very much for your 
appearance before the committee.
    The committee is adjourned.
    [Whereupon, at 12:15 p.m., the committee was adjourned.]
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