[Senate Hearing 109-906]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-906
 
                  CONGRESS' ROLE IN FEDERAL FINANCIAL
               MANAGEMENT: IS IT EFFICIENT, ACCOUNTABLE,
                     AND TRANSPARENT IN THE WAY IT
                          APPROPRIATES FUNDS?
=======================================================================



                                HEARING

                               before the

                FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                     INFORMATION, AND INTERNATIONAL
                         SECURITY SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 25, 2006

                               __________

        Available via http://www.access.gpo.gov/congress/senate

       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs




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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia

           Michael D. Bopp, Staff Director and Chief Counsel
             Michael L. Alexander, Minority Staff Director
                  Trina Driessnack Tyrer, Chief Clerk


FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL 
                         SECURITY SUBCOMMITTEE

                     TOM COBURN, Oklahoma, Chairman
TED STEVENS, Alaska                  THOMAS CARPER, Delaware
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
LINCOLN D. CHAFEE, Rhode Island      DANIEL K. AKAKA, Hawaii
ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia             MARK PRYOR, Arkansas

                      Katy French, Staff Director
                 Sheila Murphy, Minority Staff Director
            John Kilvington, Minority Deputy Staff Director
                       Liz Scranton, Chief Clerk
                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Coburn...............................................     1
    Senator Carper...............................................     4
    Senator Levin................................................    21

                               WITNESSES
                         Thursday, May 25, 2006

Hon. David M. Walker, Comptroller General, U.S. Government 
  Accountability Office..........................................     4
Hon. James C. Miller III, former Director, Office of Management 
  and Budget.....................................................     4
Hon. Timothy J. Penny, former Congressman, Senior Fellow, 
  University of Minnesota Humphrey Institute.....................     7
Douglas Holtz-Eakin, former Director, Congressional Budget 
  Office, Director, Maurice R. Greenberg Center for Geoeconomic 
  Studies, Paul A. Volcker Chair in International Economics 
  Council on foreign Relations...................................     9
Chris Edwards, Director of Tax Policy Studies, CATO Institute....    26
Maya C. MacGuineas, President, Committee for a Responsible 
  Federal Budget and Director, Fiscal Policy Program, New America 
  Foundation.....................................................    28

                     Alphabetical List of Witnesses

Edwards, Chris:
    Testimony....................................................    26
    Prepared statement...........................................    70
Holtz-Eakin, Douglas:
    Testimony....................................................     9
    Prepared statement...........................................    59
MacGuineas, Maya C.:
    Testimony....................................................    28
    Prepared statement...........................................    79
Miller, Hon. James C., III:
    Testimony....................................................    41
    Prepared statement...........................................    48
Penny, Hon. Timothy J.:
    Testimony....................................................     7
    Prepared statement...........................................    52
Walker, Hon. David M.:
    Testimony....................................................     4
    Prepared statement...........................................    31

                                APPENDIX

GAO Selected Commissions Summary (5/25/06) chart.................    85
Insert for the record from Wilma W. Broom to Christine E. Bonham.    88
``Social Security, Medicare, and Medicaid Spending as a 
  Percentage of GDP,'' chart submitted by Senator Coburn.........    89
``Supplemental Appropriations as a Percentage of Budget 
  Authority,'' chart submitted by Senator Coburn.................    90
Questions and responses for the Record from Senator Levin from:
    Mr. Walker...................................................    91
    Mr. Holtz-Eakin..............................................    95


   CONGRESS' ROLE IN FEDERAL FINANCIAL MANAGEMENT: IS IT EFFICIENT, 
     ACCOUNTABLE, AND TRANSPARENT IN THE WAY IT APPROPRIATES FUNDS?

                              ----------                              


                         THURSDAY, MAY 25, 2006

                                   U.S. Senate,    
          Subcommittee on Federal Financial Management,    
       Government Information, and International Security  
                            of the Committee on Homeland Security  
                                          and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:30 p.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Tom Coburn, 
Chairman of the Subcommittee, presiding.
    Present: Senators Coburn, Carper, and Levin.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. The Subcommittee on Federal Financial 
Management, Government Information, and International Security 
of the Homeland Security and Governmental Affairs Committee 
will come to order. I will give you all notice that we have six 
stacked votes at some time after 3 p.m., so I am going to put 
my statement into the record, just make a short summary, and I 
am going to ask General Walker to start out.
    I have read each of your testimonies. Senator Carper will 
be here sometime before we adjourn. Six stacked votes means 
about an hour and a half, and I am not about to ask anybody to 
hang around for that. What we will try to do is probably pick 
up our third panel at some point in the future. This is not the 
only hearing. This is a big issue; it is the biggest issue that 
we face.
    We are going to spend $2.7 trillion this year, of which we 
are going to add to the debt between last year and this year $1 
trillion. When you do real accounting and you say what do we 
have left over and what do we owe at the end of the year, last 
year we added $538 billion to the debt. The debt this year is 
probably more likely $450 billion.
    We are on a truly unsustainable course. The question is, 
what do we do now? What do we do in the near and midterm so 
that the consequences of the solution fix the ultimate problem? 
I have two posters that I want to put up to just show one of 
the big problems is supplementals.\1\ Because they are outside 
of the budget guidelines, the rules that we have do not apply 
to them, so consequently you can see what is happening in terms 
of total dollar amount and as well as percentages for as to 
what is happening in terms of supplemental spending, net of 
rescissions, which go completely outside of the budget 
guidelines, completely outside of the authority we give 
ourselves.
---------------------------------------------------------------------------
    \1\ The charts referred to by Senator Coburn appears in the 
Appendix on page 89 and 90 respectively.
---------------------------------------------------------------------------
    The second poster, if you would, is the total amounts. As a 
percentage of the total budget deficit, supplementals in the 
last 3 years account for 23 or almost 24 percent of the total 
deficit. So just having the budget run on supplementals which 
is all sorts of mannerisms to play games, because now we put 
things we know are needed for legitimate things into 
supplemental and spend extra money inside the budget. So now we 
have a process going back and forth where the supplemental is 
now used as a tool to expand within the budget frameworks.
    Because of the Federal financial management of our country, 
there are two things going on. One is process and one is 
people, and we have had a diversity of opinion in your 
statements. One says it is all process and it is not leadership 
related; others say it is leadership related, that you can 
accomplish it within the process. The whole purpose of ours is 
not to debate the leadership question today. The question is 
how do we set a structure to solve the problems and secure that 
future and meet the unending challenges of about $50 trillion 
of unfunded liability.
    [The prepared statement of Senator Coburn follows:]
                  PREPARED STATEMENT OF SENATOR COBURN
    Last year, the Federal Government spent $2.5 trillion (OMB). We're 
on track to spend at least $2.7 trillion this fiscal year. Last year 
our national debt increased a whopping $554 billion and it has already 
increased another $400 billion so far this year. This extra $1 trillion 
dollars that the Federal Government now owes, on top of the more than 
$7 trillion already owed, occurred because Uncle Sam continues to spend 
beyond his means year after year after year.
    Right now, GAO--Congress' watchdog agency--estimates that our total 
debt is nearly 70 percent of the size of our entire economy. By the 
time our grandkids face the unenviable task of paying off this mountain 
of debt, GAO estimates that the debt will be almost four times larger 
than our entire economy. That means that if our grandchildren took 
every dollar of value created by the economy in one year to pay off the 
debt, they would still be left with debt three times larger than the 
economy.
    Clearly, we are on an unsustainable course. Now the question is 
what to do about it, and that means identifying the source of our 
fiscal mess. There's been a lot of finger-pointing. Some claim the 
economy isn't booming enough to bring in sufficient tax revenues. But 
our unemployment rate of 4.7 percent is lower than the average rates 
from each of the past 4 decades. Over the past 32 months of consecutive 
job creation instead of loss, nearly 5.3 million new jobs have been 
created. Inflation remains low. Some blame big corporations for jacking 
up prices and making it harder to get as much out of the dollar. But 
the only thing keeping the equality higher and price of goods and 
services lower in America is less government meddling in private 
markets, not more like we see in Europe.
    Some blame the tax cuts, but most Americans think that their 
government ought to be able to chug along just fine after confiscating 
25-40 percent of their hard-earned income. Some blame the President for 
not vetoing enough spending bills. That's like driving drunk, and then 
blaming the bartender when you wreck your car. The Executive Branch is 
supposed to carry out the spending directions from Congress.
    The problem is us. Congress holds the power of the purse. The 
American people expect elected officials to run the government the same 
way to run a household or business--exercising the discipline to live 
within your means, saving some extra for emergencies and for long-term 
needs like retirement income and healthcare. If you fail to do that, 
and you spend beyond your means, the private market will step in and 
limit the amount you can go into debt by lowering your credit score and 
raising your rates.
    Congress operates under no such limits. It's not because limits 
have never been set. Various budget reforms have passed for decades. 
But Congress has found ways around each and every one. And when the 
Senate's budget rules get in the way, the Senate just ``waives'' them 
by a vote of 60 Senators.
    That's 60 of us saying ``we don't have to live by the rules that 
American families and businesses live by.'' Nobody can take away our 
credit, because we set our own limit. And when we reach that limit, we 
just vote to raise it. The latest episode a few weeks ago raised the 
debt limit to $9 trillion.
    It's clear that the answer is not tweaking the rules at the 
margins. We need radical budget process reforms. But more than that, we 
need to create an environment--a set of conditions--that helps us live 
with our rules. It's easy to break rules when there's no 
accountability. One of the key conditions to creating accountability is 
transparency. Most people--even politicians--aren't crooks by nature. 
But it never hurts to have transparency.
    Transparency helps our better natures play by the rules and reduces 
temptation for our lesser natures to cheat. Americans know that if they 
don't pay their taxes, they might get audited and get caught. With the 
Enron and other corporate scandals, we saw that a lack of transparency 
to shareholders can result in bankruptcy and legal action. Our 
witnesses today will be talking about ways to bring transparency, 
efficiency and accountability to the budget process. I am pleased that 
our panel has several key players in the Federal budget process--both 
current and past--to help us discover weaknesses in the current system, 
and ways we can improve upon it.
    Most Members are still not ready to swallow the idea of having to 
make politically difficult budget decisions on the floor of the U.S. 
Senate. The purpose of this hearing is to get experts past and present 
who know the process well--to be able to identify what is a true budget 
reform versus a sham sound bite intended only to make the 109th 
Congress look like budget hawks. This can begin an ongoing dialogue 
about what changes are really needed to restrain Congressional 
spending. The most effective way to discuss possible reforms to the 
current Congressional budget process is to ask the question: ``Is the 
process efficient, accountable and transparent in the way it 
appropriates funds?''
    Because we'd better figure this our. There's a rumble growing 
outside the Beltway. People are fed up with a Congress acting like 
teenagers who fritter away their allowance and then whine about how 
there isn't enough money to buy the important stuff. The American 
people want us to start playing by the rules they have to play by, 
especially when it's their money we're ``playing'' with. If we don't 
take our responsibility seriously, the rumble may just greet us at the 
ballot box.

    Senator Coburn. And with that, I would like to introduce 
Hon. David Walker. He is Comptroller General of the United 
States since November 1998. He serves as the Nation's Chief 
Accountability Officer and head of the U.S. Government 
Accountability Office. He has extensive executive-level 
experience in both government and private industry. He is a 
certified public accountant, has a degree in accounting, and he 
also has a senior management in government certificate in 
public policy from the John F. Kennedy School of Government. 
Mr. Walker, thank you.
    I also want to introduce--and then we will go in this 
order--the Hon. Jim Miller, extensive experience with the 
Federal budget process. He was Chairman of the Federal Trade 
Commission and Budget Director for President Reagan. He was the 
first Administrator of the Office of Information and Regulatory 
Affairs and the Executive Director of Vice President George 
Bush's task force on regulatory relief. He is a John M. Olin 
Distinguished Fellow at the Citizens for a Sound Economy 
Foundation and at the Center for Public Choice at George Mason 
University. He is also a Senior Fellow at the Hoover 
Institution at Stanford University. He is currently Chairman of 
the Capital Analysis Group and was elected by the U.S. Postal 
Service Board of Governors to be its Chairman in 2005.
    Douglas Holtz-Eakin is the former Director of the 
Congressional Budget Office, Chief Economist of the White House 
Council of Economic Advisers. He is a leading expert in 
economics and economic policy, tax, entitlement, and health and 
budget policy, defense budgets, domestic and international 
finance. He was Chairman and Trustee Professor of Economics at 
Maxwell School, Syracuse University, a visiting professor at 
Princeton University, and a professor at Columbia University. 
His expertise in the realm of congressional budgeting will be 
invaluable to our discussion today.
    Also, I am honored to have the Hon. Tim Penny, former 
Congressman, who co-directs the Humphrey Institute Policy Forum 
at the University of Minnesota. He represented southeastern 
Minnesota's 1st Congressional District from 1982 through 1994. 
While in the U.S. House, Mr. Penny served on the Agriculture 
and Veterans' Affairs Committee and the Select Committee on 
Hunger. While in Congress, he founded and co-chaired the 
Democratic Budget Group and drafted deficit-cutting 
initiatives. He is a board member of the Committee for a 
Responsible Federal Budget, the Concord Coalition, an advisory 
board member for a Clean Campaign Project, the Minnesota 
Compact. He is the co-author of two books, ``Common Sense'' and 
``Payment Due.'' It is a privilege to have an insider on the 
panel today who truly knows that spending in Washington is out 
of control.
    Let me introduce first General Walker, if you would, and I 
will give our Ranking Member, my co-Chair, Senator Carter, an 
opportunity for an opening statement. I put mine in the record. 
There are six votes coming in.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. Let me just say to our Governor, Governor 
Miller, to Congressman Tim Penny, who is one of my dearest 
friends and someone who--we were both elected to the class of 
1982. If you ever look up in the dictionary the term ``fiscal 
hawk'' or ``budget hawk,'' his picture is right there. He was a 
great leader on this front.
    It is always great to be with General Walker, and to our 
former CBO Director, thank you for being here and for the good 
work you have done. I look forward to your testimonies. Thanks 
for joining us.
    Senator Coburn. General Walker.

TESTIMONY OF HON. DAVID M. WALKER,\1\ COMPTROLLER GENERAL, U.S. 
                GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Walker. Mr. Chairman, Senator Carper, I would 
respectfully suggest that the entire statement be included in 
the record, and I am going to give you a quick executive 
summary so you can hear from the others and we can go to Q&A 
before your votes.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Walker appears in the Appendix on 
page 31.
---------------------------------------------------------------------------
    Senator Coburn. All of your statements will be made a part 
of the record.
    Mr. Walker. Thank you. As you know, Mr. Chairman, I have 
been outspoken in saying that our Nation's financial condition 
is worse than advertised, and that we face large and growing 
structural deficits due to known demographic trends, rising 
health care costs, and lower Federal revenues as a percentage 
of the economy than historically has been the case. We are 
running very large structural operating deficits, most of which 
have nothing to do with Iraq, Afghanistan, and incremental 
Homeland Security costs. This must change.
    The process is important, but it is not a panacea. 
Leadership is essential in any event. However, the process can 
help. In my view, we need to reinstitute and strengthen 
controls to deal with both near-term and longer-term deficits, 
and we need to focus on a process that will help the Congress 
to tackle the large and growing long-term fiscal challenges 
facing our Nation. Among other things, that means improving the 
transparency of long-term costs of current proposed tax and 
spending decisions, as well as in all likelihood the formation 
of a credible and a comprehensive tax and entitlement reform 
commission that can make recommendations to the President and 
the Congress.
    Specifically, with regard to reimposed and enhanced budget 
controls; we need to reimpose discretionary spending caps; and 
reimpose pay-as-you-go rules on both the spending and the tax 
side of the ledger. When the bottom line is bleeding, we cannot 
afford to exempt one side of the ledger. Tax expenditures 
represent back-door spending. If we don't have controls on both 
sides of the ledger, we are not going to control the bottom 
line.
    We need mandatory spending triggers and appropriate sunset 
provisions for both direct spending programs and tax 
preferences, potentially with specific default mechanisms that 
would take place. And we need to modify the rules dealing with 
selected items such as earmarks and emergency designations.
    Mr. Chairman, I could go on at some length, but let me just 
say again, the process is no panacea, but the process does 
matter. However, no matter what process is in place, leadership 
is essential. Our long-range imbalance has gone from $20 
trillion in 2000 to $46 trillion at the end of fiscal year 
2005. It will likely hit $50 trillion plus by the end of this 
fiscal year, and it is going up every second, of every minute 
of every day, due to continuing deficits, due to known 
demographics trends, and due to compounding interest costs. The 
time for action is now, Mr. Chairman. Thank you.
    Senator Coburn. Governor Miller.

  TESTIMONY OF HON. JAMES C. MILLER III,\1\ FORMER DIRECTOR, 
                OFFICE OF MANAGEMENT AND BUDGET

    Mr. Miller. Thank you, Mr. Chairman and Senator Carper. 
Thank you for inviting me here today. The budget process is 
clearly dysfunctional. Deadlines are missed; people don't know 
what are in the budgets. Telephone numbers are written in the 
side margins. I remember one time when the President received a 
budget that was so big and so long, it took all the OMB people 
working through the night to try to make sense of it. I told 
him the next morning, ``I still don't know all that is hidden 
in there.'' But he had to sign it because the government would 
have to shut down otherwise.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Miller appears in the Appendix on 
page 48.
---------------------------------------------------------------------------
    I think people are important, leadership is important, but 
the main thing is the process needs to be changed. If you have 
a system, a set of processes that incorporate incentives to do 
bad things, you are going to get a lot of bad things. If you 
have a system that incorporates incentives for people to do the 
right things, you will tend to get the right things. It is sort 
of like the good man theory of regulation. Mr. Holtz-Eakin will 
probably remember this. Back in the 1960s and 1970s, there was 
a lot of debate over what caused the Federal economic 
regulatory agencies, such as the IC&C and the CAB, to do bad 
things, to get bad results. One idea was it was the ``good man 
theory.'' If the President would just appoint good men and 
women to these agencies and the Senate would confirm them, then 
everything would be taken care of.
    And another said, well, no, it is the institutions. It is 
the laws that have them do the regulating and make these bad 
decisions that are at fault. President Ford, President Carter, 
President Reagan, and the Congress during those periods of time 
made changes, and in fact we have had, rather universally 
applauded, more competition and greater efficiency in those 
markets.
    Closer to home, many of us who are very concerned about 
excessive government and reining in the excesses of government 
spending and so forth. If you had a Republican House and a 
Republican Senate, all this would be taken care of. If you had 
a Republican President, it would be nirvana, right? But that is 
not what happened. You did have some changes in the class that 
came in in 1994, that was elected in 1994 and 1995, and so for 
a while you had retraction in the growth of spending. The 
deficit came down to zero. You had stimulated economic growth, 
but then there has been a lot of recidivism. And so an academic 
might legitimately ask the question, are there differences 
between Republicans and Democrats? Are there differences 
between conservatives, budget hawks, and big spenders? It would 
appear, with respect to the budget, that the budget process, 
the incentives that incorporated in being a Congressman and 
responding to constituent needs within the confines and the 
contours of the overall process, yield results irrespective of 
political leaning or ideological leaning. And so it is the 
budget process that really needs to be fixed.
    Since leaving OMB, I have written about some of this. You 
have to applaud the 1974 Budget Act. Its intent was to rein in 
the excesses by having Congress vote on at least the limits, 
the total spending, the total revenues, etc. But the system is 
broken down because the deadlines are not met.
    Gramm-Rudman-Hollings was a great thing and it worked the 
first year, and then Congress got cold feet and redrew the 
numbers. If you have targets and they do not like them, you 
change the targets.
    I have recommendations. You ought to make the budget 
resolution a joint resolution, include the President, make it a 
law, not just a concurrent resolution. I would suggest a new 
Gramm-Rudman-Hollings law or something like that to limit 
spending. You need a line-item veto. Go ahead and approve the 
President's line-item veto. I wrote an op-ed published in 
yesterday's Washington Times, that talked about the President 
can actually ``veto'' most of the pork, the vast majority of 
the earmarks in the budget, because they appear in the report 
language, they don't appear in the legislation themselves. They 
don't meet the Presentment Clause of the Constitution, so the 
President can veto them himself.
    I think you ought to sunset entitlements, not end them 
necessarily, but to force the process of evaluating them every 
few years. You ought to eliminate ``budget speak.'' Only in 
Washington can you talk about a rate of spending this year that 
is less than what you might have liked to have seen and call it 
a cut, when this rate of spending for this year may be 10 
percent more than it was last year. Also, I think you ought to 
institute a regulatory budget.
    I see my time is up. Thank you, sir.
    Senator Coburn. Congressman Penny.

  TESTIMONY OF HON. TIMOTHY J. PENNY,\1\ FORMER CONGRESSMAN, 
   SENIOR FELLOW, UNIVERSITY OF MINNESOTA HUMPHREY INSTITUTE

    Mr. Penny. Thank you, Mr. Chairman and Mr. Carper. It is 
good to be with you today.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Penny appears in the Appendix on 
page 52.
---------------------------------------------------------------------------
    Budgets matter. I think it was former Rules Committee 
Chairman, Richard Bolling, who once said, ``If I give you 
control over policy and you give me control over process, I 
will beat you every time.''
    Senator Coburn. John Dingell told me that.
    Mr. Penny. John Dingell was known to say that as well. 
These are the fundamental truths of Washington budgeting, that 
when we have had a budget process, we have done better. Gramm-
Rudman-Hollings was violated after the first couple of years, 
but nonetheless it put the focus on deficit reduction. It 
forced us to make tougher decisions than we otherwise would 
have made. When we replaced that with the Budget Enforcement 
Act during the 1990s, those spending caps and that PAYGO system 
on entitlement and tax policy held the line on spending to a 
large extent and allowed the growth in the economy and the 
resulting growth in revenue to bring us back to a balanced 
budget for the first time in 30 years. So process matters.
    Good process accomplishes several things. It sets the terms 
for the debate. It helps us to set overarching goals. It helps 
us to set priorities within those goals. It ought to give us 
some increased transparency so people understand what is 
happening and can hold folks accountable for what has 
happened--good, bad, or otherwise. A process also ought to help 
us measure results, because whatever we are spending, we ought 
to be getting value for our dollar. And finally, it ought to 
help us look over the longer term. It ought to help us look 
beyond the horizon into the implications that this might have 
in the next generation. That is what good process can do for 
us.
    We have got a process in place for the past several years, 
and the numbers tell the story. In 2000, spending totaled $1.79 
trillion or 18.4 percent of GDP. In 2006, it is expected to 
reach $2.7 trillion or 20.2 percent of GDP. Going back to 2000, 
revenues totaled $2 trillion or 20.9 percent of GDP, and in 
2005, revenues were expected to be $2.15 trillion or 17.5 
percent of GDP. We have not had a budget process that has 
forced us to look at these two numbers and reconcile them in 
any way. And so without a budget process going forward, I think 
we can only expect more of the same.
    I agree with some of the recommendations that have been 
made by the previous two speakers and will add a few more that 
will probably be repeated and reinforced by other speakers here 
today. Clearly, I think we need a national budget. We never 
have really had one. For many years the President set the terms 
of the budget debate and then the Congressional Budget Act in 
1974 brought Congress into the act, but we have competed 
between OMB and CBO on budgets every year. Congress has it is 
own budget resolution that is a concurrent resolution. We 
really need a joint resolution so that the broad numbers are 
agreed upon at the front end of the process and it becomes a 
binding law that all parties have to abide by.
    I think we need to move toward biennial budgeting. We 
reinvent the wheel every 12 months around here. We sometimes 
are dealing with the next year's budget at the same time that 
we are trying to implement the current year's budget. Too much 
overlap, too much duplication of effort. A biennial process 
would also give us more time for reflection. We have Inspectors 
General reports. We have GAO studies. We have CRS studies. We 
have more information than we know what to do with because we 
are always caught up in this frenzy of annual budgeting. If we 
had a year to take a breather to look at some of these reports 
and recommendations, we could clean up the budget process, find 
savings, find more efficient ways to deliver government 
services.
    We need to restore the Budget Enforcement Act with its 
spending caps on the discretionary side of the budget, as well 
as its PAYGO principles on the tax and entitlement side of the 
budget. Frankly, we are getting so badly out of control between 
revenue and expenditures, much of it driven by automatic 
programs, the mandatory entitlement programs, that we may need 
to take the PAYGO process a step further, put it on steroids, 
and require that any tax increase be accompanied by comparable 
tax cuts. We are so far behind the eight ball right now that 
just holding the line perhaps is no longer enough.
    Next, let me point to a couple of issues that a small in 
the scale of the overall deficit but huge symbolically, and 
significantly important because if we can't deal with these, 
who are we kidding to think that we can tackle these longer-
term entitlement issues. It is pork barrel spending.
    We need something akin to the Byrd rule that denies, unless 
there is a super-majority vote, extraneous matters from being 
included in the reconciliation bill. We need to apply that to 
all spending bills so that these extraneous pork barrel items 
are forced to a separate vote in some fashion before they clear 
the Congress.
    We need to look at what has happened in the last decade or 
more on pork barrel spending. In 1991, there were like 546 pork 
barrel projects in all of the 13 appropriation bills. By 2005, 
that was 13,997. It went from costing us about $3 billion a 
year to now $27 billion a year. It is wildly out of control and 
needs to be brought back into some restraint. And we also need 
to look at the egregious approach to emergency spending in the 
last several years.
    In the decade on the 1990s, we allowed a loophole of 
emergency spending to take us beyond our current year budget. 
But it was always very limited, and the bulk of that spending 
was tied to the immediate emergency at hand, averaging maybe 
$16 billion a year. We are now up to about $160 billion with 
some of our recent emergency spending bills, and they always 
get larded up with pork barrel items.
    So that is the kind of reform that is sort of a 
prerequisite to courage. If you can't gin up the courage to do 
these things, who are we kidding to think we can do the longer-
term things and entitlements? And I would also recommend that 
we authorize the CBO to do an intergenerational impact 
statement on every budget that comes through the Congress.
    Senator Coburn. Thank you, Congressman. Dr. Holtz-Eakin.

     TESTIMONY OF DOUGLAS HOLTZ-EAKIN,\1\ FORMER DIRECTOR, 
  CONGRESSIONAL BUDGET OFFICE, DIRECTOR, MAURICE R. GREENBERG 
   CENTER FOR GEOECONOMIC STUDIES, PAUL A. VOLCKER CHAIR IN 
      INTERNATIONAL ECONOMICS COUNCIL ON FOREIGN RELATIONS

    Mr. Holtz-Eakin. Mr. Chairman, Senator Carper, thank you 
for asking me to be here. As I mentioned in my written 
statement, there is a lost list of perceived failings with the 
current budget process. Let's just stipulate that it is failing 
and move past that.
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    \1\ The prepared statement of Mr. Holtz-Eakin appears in the 
Appendix on page 59.
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    It would be useful to develop a process that will identify 
the actual decisions Congress has to make and help to implement 
those decisions. In doing so, I think it is important to keep 
an eye on the ball and make sure that the process, whatever it 
may be, is comprehensive in scope; that there are no 
opportunities for claiming things are off budget or somehow 
irrelevant when they commit the taxpayer to coming up with 
resources to meet decisions made by the Congress.
    It should identify all the decisions, including the ones 
that currently get passed by on a yearly basis, things which 
should be chopped out of the budget, things which should be 
renewed. It should include enforcement. To have a budget 
process that does not include the enforcement, allows for 
artificial trade-offs, pretend savings in future years for 
current appropriations stand out at the moment. It should be 
focused on the decisions Congress has to make, so it should be 
oriented around spending decisions, tax policy decisions, not 
outcomes. Gramm-Rudman-Hollings focused attention, but you 
can't control the outcomes. You can only control what the 
Congress does. And it should be tied to the financial 
management system. It should integrate smoothly with the actual 
operations of the agencies so that it is transparent, the link 
between what Congress decided and what came out. That will 
improve the accountability in result and help in the oversight 
process.
    I had a fairly long list of potential ways one could go 
forward, ranging from what I think of as small things like 
Band-aids to the rethinking it from scratch. It is important to 
recognize that there is no such thing as the budget process. 
There has to be a process which supports the Congress' policy 
decisions. As has been mentioned, it can't substitute for the 
Congress making policy decisions because a future Congress can 
always reverse it. So it cannot by itself get the right answer, 
but it can help Congress identify decisions, it can support the 
decisions that Congress has made. That is the obligation of a 
good budget process. In redoing a budget process for the 
future, as opposed to the one which we have had so far, I think 
it is important to do at least two things:
    First, to clean up the concepts in the budget. Only in this 
day and age would it be possible to label something an 
offsetting receipt, call it negative spending, when it accounts 
to the same thing as a tax. On the other side of the budget, we 
have lots of tax credits which are just vouchers being handed 
out. They are spending programs done through the Tax Code. You 
can claim they are tax cuts; the economics is the same. It 
really needs to be cleaned up so that there is an actual 
matching between policy objectives and the instruments the 
Congress uses.
    Second, it should be focused around mandatory spending. The 
big issue here is Social Security, Medicare, and Medicaid. That 
is it for the future. Once the decision is made to spend those 
monies, they are going to be paid for one way or another. So I 
think removing the distinction between discretionary and 
mandatory would be a good step. Money is money. The Congress is 
going to commit to spend taxpayers' money and the big money is 
in mandatory. So every year those programs should be looked at.
    Thank you for the opportunity to be here, and I would be 
happy to answer your questions.
    Senator Coburn. Well, let me thank each of you. Let me just 
go through. Do all of four of you agree that a biennial 
budgeting process could work better? Does anybody disagree with 
that?
    Mr. Walker. I think it deserves serious consideration, and 
I would like to think that Congress would spend the extra year 
doing more oversight and analysis, and if, in fact, they did, 
it would be a plus. I have my doubts as to whether or not they 
would.
    Mr. Holtz-Eakin. I am skeptical. At the moment we have 
Appropriations Committees that have to do appropriations every 
year, and authorizing committees which have years to do the 
oversight of the programs they have authorized. It doesn't 
happen. I don't see what more time will do besides give them 
more time to not do the oversight. It may work. I mean, no one 
knows, but it won't work worse.
    Senator Coburn. One of the groups that does oversight is 
the appropriation process. They do oversight hearings besides 
authorizing committees like this Committee. If you had a 2-year 
budget cycle, would there not be more time available for the 
appropriators who tend to do more oversight than the 
authorizing--would there not be more time for the appropriators 
to do it? And could you not make it mandatory--if you had a 
budget process change where you mandated that, as a function of 
this Committee, at a minimum these programs will be looked at 
and oversighted every so many years. Whether you call that 
sunset or not, the fact is this Committee, myself and Senator 
Carper, have had more oversight hearings than any committee in 
Congress.
    Mr. Holtz-Eakin. I think you hit the nail on the head. It 
is not just biennial budgeting. That may, in fact, serve as 
part of a better process. It is what you do along with it to 
make sure that that time is used effectively. Just giving more 
time I don't think will do it.
    Senator Coburn. Congressman Penny, you could probably 
address this more, having had the experience. Can you see a way 
where we could write that obligation into a budget bill that 
says this is a requirement of the committees, both the 
authorizing committee and the appropriating committee?
    Mr. Penny. The underlying Budget Act allows an opportunity 
for every committee of Congress to submit its recommendations 
to the Budget Committee before it develops the budget 
resolution. It seems to me that you could amend the budget law 
to require sort of a review and analysis of any and all reports 
from various agencies as part of the committee's 
responsibilities each year, and they could report that to the 
Budget Committee. The Budget Committee in turn could report 
essentially an off year-reconciliation bill to incorporate 
those changes. I think that there is a way that the budget 
process could anticipate and instruct that to happen.
    Senator Coburn. Governor Miller.
    Mr. Miller. I think biennial budgeting is a good idea. One 
thing you would have to worry about or be concerned about is 
the abuse of the supplemental process, because on the off years 
there would be enormous pressure to do a supplemental 
appropriation which could easily get out of hand. You would 
have to zero sum with the existing budget or something of that 
nature.
    Senator Coburn. Can you imagine a budget process reform 
that said if you have a supplemental bill, you have to have 
rescissions equal to the supplemental?
    Mr. Miller. Every supplemental I sent up or I prepared for 
President Reagan had that in there.
    Senator Coburn. Let me rephrase that question. Do you think 
the American people could see that? Washington, I know doesn't 
see that. But if you were to look at everybody else, how they 
have to run their business or run their family, if they have to 
do a supplemental, they have to rescind somewhere.
    Mr. Miller. Exactly.
    Senator Coburn. And they don't get the privilege of 
printing money to make the difference. So answer it in the 
context: One, is it good policy? Two, given your skepticism 
that I saw in all of your faces when I mentioned it, in light 
of what the American public might decide, should we try to do 
something like that?
    Mr. Holtz-Eakin. I think it is good policy. I think if you 
are going to go this way, the piece you need is a tight 
definition of emergencies, a genuinely tight definition of 
emergencies, and some allowance ex ante, right up front, for 
emergencies. So, budget for the emergencies and stick to it. 
And then anything above the budgeted, you have just got to deal 
with an offset. Otherwise, the temptation in circumstances 
which are genuinely bad to create an emergency and then expand 
the definition is going to overwhelm that process. So that is a 
key part of doing this.
    Senator Coburn. Well, we have a good definition, a pretty 
good definition of ``emergency'' now and it is totally ignored. 
I spent a lot of time on the floor putting that definition out 
during the recent supplemental, and everybody ignored that part 
of the debate because it definitely didn't meet the 
qualifications. So if we don't follow the rules of what we say 
is an emergency, even though you tighten the definition, it 
gets back to the process.
    Mr. Penny. Well, supplementals are typically driven by 
emergency situations, natural disasters, and that can be 
anticipated because we have got decades of history telling us 
roughly how much we spend on that every year.
    Senator Coburn. So we could budget.
    Mr. Penny. You could budget for it ahead of time, and then 
deal with the overages in a pay-as-you-go fashion.
    Mr. Miller. What you could also do is supplementals. You 
have the Budget Act requirement for supermajority for certain 
things. So, with 2-year budgeting and you have supplementals, 
maybe the way to police the supplemental would be to require 
supermajority for not zero budgeting or not rescinding as much 
as you proposed to increase spending. And that would also be a 
measure of emergency. If it is truly an emergency, you would 
easily get a supermajority.
    Senator Coburn. General Walker.
    Mr. Walker. Mr. Chairman, I would say that if you are going 
to pursue biennial budgeting, it would be incredibly important 
to be able to link it as part of a package, to more 
comprehensive reforms, so you are not just going to a biennial 
budgeting process, but you are tightening up on emergencies, 
tightening up on supplementals, and doing something on earmarks 
as well as increasing the likelihood that the time that will be 
freed up from the normal process will be used productively.
    Candidly, just this morning I was on the House side talking 
to the leadership on one side of the aisle, and bringing them a 
copy of our high-risk list, which you are very familiar with, 
and our 21st Century Challenges document, which you have read 
more than one time. That is a lay-up, an absolute lay-up for 
constructive oversight and yet this Subcommittee and the full 
Committee and your counterparts in the House are really the 
only ones that have used them to any great extent. I mean, this 
involves billions and billions of dollars every year.
    Senator Coburn. Congressman Penny, you said that there may 
come a point in time when we look at the process of the 
national budget that tax increases would be accompanied by--you 
said tax cuts, but I think you meant----
    Mr. Penny. I meant spending cuts. The nice thing about 
testifying here is I get a chance to edit those remarks. I 
thought of that after I turned my light off. What I meant is 
this is so far out of whack with the spending lines and the 
revenue lines going in the wrong direction, that simply holding 
the line is not going to get us to a balanced budget anytime 
soon. And so we may need PAYGO on steroids, which is really tax 
increases matched with a comparable dollar's worth of spending 
cuts, so that we really begin to move the budget back toward 
balance. If we don't get this done before the baby boomers 
begin to retire and the cost of Medicare and Social Security 
begin to explode, we are in deep doo-doo.
    Senator Coburn. Before I go to Senator Carper, because I 
want to give him some time, this Subcommittee has had testimony 
that the tax gap is $350 billion. This Subcommittee has already 
found in excess of $200 billion annually in wasted or defrauded 
payments by the Federal Government. That is $550 billion. Now, 
that solves our problem today, but it does not solve our 
entitlement problem.
    How do we get past the point to where when we say we want 
to do a tax increase--which I have always said if we are 
efficient and we need more money, that is our option or we 
decrease benefits and that is the hardest thing to do. How do 
we justify a tax increase when we don't justify the ability to 
make the government run the way it should run?
    Mr. Penny. Well, and that is why I said this is like PAYGO 
on steroids. This way, if you match it with comparable spending 
cuts, measurable, scorable spending cuts, then you are 
guaranteeing that whatever tax revenue you achieve through 
cleaning up the Tax Code, getting rid of some wasteful 
loopholes and deductions, whatever it might be, you guarantee 
that all of those revenues go to the bottom line and help us 
reduce this deficit. But if you don't do that, I can understand 
resistance to do even tax reform for fear that the money will 
just be squandered on higher spending.
    Senator Coburn. Senator Carper.
    Senator Carper. It is a great panel, isn't it?
    Senator Coburn. It is. I was just thinking I am going to 
ask Senator Carper if he would help host a dinner where we 
could sit down and----
    Senator Carper. That is funny. I was thinking the same 
thing.
    I think Dr. Eakin didn't put forth his list, but I suspect 
he had a laundry list there of things that we might do. But 
several of you have and they are actually quite good lists.
    Where do you think you agree, where do you think there is 
consensus just on some of the truly significant steps that we 
ought to consider taking? Where is the consensus among the four 
of you?
    Mr. Walker. Reimpose budget controls. I don't know if we 
are in total agreement as to what that should be, but clearly I 
think all of us are saying that one of the reasons that 
Congress was able to bring back more fiscal discipline was 
because there were meaningful budget controls in place that 
forced the Congress to make tough choices. Right now they have 
all expired. If anything, you need tougher controls than you 
had before, because we are in worse shape over the long term 
today than we were then.
    Senator, I would like to mention two examples of what is 
wrong with the current budget rules. They represent poster 
cases that need to be on the table. First, Medicare Part D, 
with a $8 trillion plus price tag. That number was never 
discussed or debated before the bill was enacted into law. It 
is absolutely critical that Congress consider the discounted 
present value dollar cost of major spending and tax proposals 
before it acts, because we need to understand the long-term 
affordability and sustainability of proposed legistation. 
Second, the recent tax cut extension, the way that was paid for 
is shocking. Short-term, one-time revenue gains through 
conversion of regular IRAs to Roth IRAs, coupled with long-term 
structural revenue losses. The only reason it worked is because 
the budget rules assume the country is going to end in 10 
years. And it is not.
    Senator Carper. If we keep this up, it might.
    Mr. Walker. No, I think we have got longer than that.
    Senator Carper. I hope you are right. Again, I am looking 
for consensus. You have mentioned budget controls, budget 
rules, and we have talked about PAYGO on the spending side as 
well as on the tax side. Let me just ask you, is there a 
consensus on that, that PAYGO should be a two-way street?
    Mr. Miller. I am not all that big a fan of PAYGO because I 
think it did not have as much effect as some people believe it 
did. Tim and I both were saying a joint resolution, make the 
budget resolution a joint resolution.
    Senator Carper. Is there anybody that doesn't agree on 
that?
    Mr. Walker. Having a budget for the United States, would be 
a good thing.
    Mr. Miller. The transparency, I think we would all agree 
making the budget transparent, talking about it in plainer 
language and honestly, with integrity, would be something else 
that we would agree to. But whether it is PAYGO or whether it 
is Gramm-Rudman-Hollings or it is a constitutional amendment 
that limits spending or something like it, or a rule that 
spending cuts have to accompany every tax increase and things 
of this nature, those are very much needed. We could call those 
controls, but those kinds of institutional controls I think all 
four of us would agree are needed.
    Senator Carper. General Walker, go ahead, sir.
    Mr. Walker. I think that other thing that everyone would 
agree on is there has to be an improved conduct of oversight on 
both the tax and the spending side so that the American public 
has confidence in the use of their dollars so that when the 
future comes they don't feel ``gamed,'' and so that they 
believe we are doing the best we can as a government.
    And the second thing I think we would agree on is we will 
have to scale back the spending in Medicare, Medicaid, and 
Social Security. We may have to raise taxes as well given the 
scale of this.
    They are going to have to feel the same way on the tax 
side.
    So the oversight piece of this is both good government and 
a no-brainer. It is also essential to the compact between the 
public and the government.
    Mr. Walker. I think we all also agree that we need to 
tighten what is happening with regard to supplementals, with 
regard to emergencies, and with regard to earmarks. And the 
last thing I would say is, candidly, this country spends over 
$2.5 trillion a year and forgoes between $700 and $800 billion 
a year in revenues because of tax preferences. In a vast 
majority of the cases, we have no idea whether those programs 
and tax preferences are working or not and who is benefiting 
from them. And that is just outrageous. We need to figure out 
what we can do to make sure we are coming up with some outcome-
based metrics that we can use to assess the effectiveness of 
these programs and policies and to reconsider them as part of a 
normal structured process over time, because last year we 
incurred expenses of $1.35 for every $1 in revenue, and it is 
going to get worse if we don't do something.
    Senator Carper. General Walker was up in Delaware with some 
folks from the Concord Coalition. Congressman Mike Castle and I 
hosted a forum. We thank you very much for coming, and you were 
well received and made a whole lot of sense. I mentioned to the 
folks that were gathered that day at the riverfront that when I 
was Governor of Delaware, if I had proposed budgets that were 
hopelessly out of balance and called in the legislature to do 
the tough work of balancing the budget, they would have run me 
out of town. In fact, they would have run me out of the State.
    Congressman Penny and I once had an opportunity to vote on 
a balanced budget amendment to the Constitution that Charlie 
Stenholm, Larry Craig, and I had worked on for a long time. It 
was an amendment that did not mandate a balanced budget every 
year, but what it said is at a date certain, the President has 
to propose a balanced budget, and at a date certain, the 
Congress can unbalance the budget but you need a supermajority, 
three-fifths vote--to unbalance the budget, you need a 
supermajority; you need a three-fifths vote to raise the debt 
ceiling. I think we got 280 votes, we needed 290. We got pretty 
close in the House to passing it.
    We also voted on something called statutory line-item veto 
powers for the President, something that Dick Armey joined me 
in offering. It was a little different than the one that 
actually passed and got signed into law, because our approach 
was sort of a 2-year test drive. There was a lot on unease 
about giving the President that kind of authority and would he 
or she use that to intimidate others to support his or her 
proposals in order to make sure that some things that we were 
interested in didn't get marginalized.
    So we proposed a 2-year test drive on line-item veto 
powers. It said the problem with the President's rescission 
powers is Presidents can offer rescissions forever, but unless 
we vote on them, then it may as well not take the time to 
submit them, and we just basically were ignoring the 
rescissions that were submitted. So we said how about an 
approach where for 2 years we try this: When the President 
submits a rescission, there is an expedited process that brings 
it up for consideration before one body and then the other. 
Either body could literally defeat the rescission with a simple 
majority vote.
    For programs that were authorized, fully authorized, the 
President could rescind as much as 25 percent of those; for 
unauthorized programs the President could propose rescission 
equal to 100 percent of the unauthorized programs. After 2 
years, the authority to do this would sunset unless it were 
extended. And I think we had about a three-quarters vote in the 
House, the majority of both parties who voted for it. It got 
over here to the Senate, and my dear friend, who was then the 
Chairman of the Appropriations Committee, a senior Senator from 
West Virginia, whose name will go unmentioned from these lips, 
but I am told it got slowed down there and ultimately it didn't 
pass.
    I am not sure that it would meet constitutional muster. We 
are going to ask CRS, among others, to give us their opinions 
on that. But that was one of the thoughts we had to--and I 
don't think the line-item veto is the end-all/be-all. I think 
it is a marginally helpful tool but it could be helpful.
    General Walker.
    Mr. Walker. Based on the latest data I have seen, there 
have been no rescissions proposed in a number of years, nor 
have there been any vetoes in a number of years.
    Senator Coburn. The last rescission package was 1996.
    Mr. Walker. It has been a while. Second, I was in 
California yesterday, and they have a large fiscal challenge on 
their own, and while in the short-term they are better off, in 
the long-term they have serious problems. One of the things 
they require is for the governor to submit a balanced budget 
proposal. They are not required to have a balanced budget but 
the Governor is required to submit a balanced budget proposal.
    I think one of the things you ought to think about is 
whether or not the President should be required to submit a 
proposal to move toward balance, or if not to balance, then why 
not and attribute dollars to the gap. For example, today, how 
much money are we spending in Iraq and Afghanistan and how much 
are we going to have in one-time costs associated with 
Hurricane Katrina? One might argue that those are extraordinary 
expenses. On the other hand, we should not be running operating 
deficits in the hundreds of billions dollars a year. Companies 
can't do it. Not-for-profits can't do it. And countries can't 
do it over the long-term either.
    Senator Carper. It is actually funny you should say that 
because, Mr. Chairman, when I concluded after years of trying 
to get the balanced budget amendment up for a vote, I concluded 
that the most important provision was not the three-fifths vote 
to unbalance the budget or the three-fifths vote for raising 
the debt ceiling. I concluded the most important provision of 
our balanced budget amendment was a President, at a date 
certain, would have to propose a balanced budget. And any body 
that I have been a part of, whether governor, legislatures, 
mayors, city councils, county executives, county councils, was 
that the leadership on fiscal issues has to come from the chief 
executive and if it doesn't, it rarely comes from the 
legislative body. Go ahead, Dr. Holtz-Eakin.
    Mr. Holtz-Eakin. Just on the line-item veto, given that the 
courts have ruled that it is going to have to be something of a 
fast-track rescission authority instead of a pure line-item 
veto, I think one of the things to look at in that is making 
sure that you can just treat it as rescissions and not as a 
pretend line-item veto. What I mean by that is, don't rush the 
Administration to, say, in 5 days you have to send this up, in 
10 days you have to send it up. The bills that are currently 
going up, that deserve a lot of scrutiny are a nightmare. We 
have seen them. Some of these supplementals----
    Senator Coburn. They are rushed.
    Mr. Holtz-Eakin. And they are rushed. Give them time to go 
through those bills, find the sensible rescissions, then make 
the decisions, have a fast-track and expedited authority to 
vote up or down. But make sure that the bills get scrubbed. If 
you turn this into a 5-day operation, you haven't accomplished 
anything.
    Mr. Miller. The President has proposed--he calls it a 
``legislative line-item veto,'' which is enhanced rescission. 
And, Senator Carper, let me align myself with the 
recommendations that you just outlined. I thought those were 
all really quite good. On the question of the balanced budget, 
when I was Budget Director we did have budget deficits of a 
couple hundred billion dollars my first year and it came down 
to $150 and was plummeting further, until Congress changed its 
mind on the Gramm-Rudman-Hollings targets.
    But at one point I said, ``OK, I am going to put together a 
balanced budget,'' and people in the West Wing were very 
unhappy about that because it is an easy target. If you put 
together what would be required to balance the budget, the 
President would have a field day.
    Senator Carper. Going back to something the Chairman said 
earlier, if there were the requirement to submit a balanced 
budget, I bet we would do a hell of a lot better job, excuse my 
French, of collecting the revenues that are owed on some of 
these tax debts he was talking about.
    Mr. Miller. You are right.
    Mr. Penny. And that gets to my point about an 
intergenerational impact statement, because when you submit a 
budget but there is no requirement to submit a budget that is 
in the black, then whether it is $250 billion of red ink or 
$300 billion of red ink, it all sort of becomes meaningless. It 
is easy to throw a few extra billion or tens of billions of 
dollars into the mix because there is no bottom line. And yet 
there is a consequence. We have interest costs now, the fourth 
largest item in the Federal budget, and it is because of the 
accumulation of deficits year upon year upon year. And those 
interest costs don't go away.
    An intergenerational impact statement would help us to 
identify those costs as what they really are, a tax on some 
future taxpayer. Without making that a more real and more 
visible cost item, in not only the current budget but 
perpetually in all future budgets, we allow both the White 
House and the Congress to get off the hook by using the deficit 
as sort of an open-ended ATM card. And it isn't open-ended 
because the price comes due someday; it is just that today's 
taxpayers are not the ones that are going to have to pay it.
    Mr. Walker. Two things on that: One, arguably, the biggest 
item of waste in the Federal budget today is interest on the 
Federal debt which is the fourth largest item and growing 
rapidly. Two, we have recommended previously that each budget 
each year that the President submits should have a statement of 
fiscal exposures and commitments, which is along the lines of 
what Mr. Penny is talking about. It should show these 
exposures, unfunded commitments and liabilities, how they are 
growing over time, and what the intergenerational implications 
are.
    This morning I appeared before the Federal Accounting 
Standards Advisory Board, which promulgates accounting and 
reporting standards for the Federal Government, to make a pitch 
for a fiscal sustainability and intergenerational equity 
statement that we need as part of our basil financial 
statements, because we are running up the credit card at record 
rates and that means you are going to pay $1 plus plus plus 
down the road when you hit the day of reckoning. All of these, 
I think, are positive ideas and could help to get us to where 
we need to be.
    Senator Coburn. Let me hit one other point. The rules for 
the CBO in terms of how things are scored often times don't 
reflect reality. The question that I would like to ask is, What 
do we need to do in terms of the direction? We can go to CBO 
right now under the rules and say that we want to show this, 
and with direction we can pretty well a lot of times get what 
we want. How do we change the rules for the CBO to accurately 
reflect future costs, not just in 10 years--it is like the 
debate on the immigration bill right now. The only thing they 
did is because it is after 10 years, they said it would cost 
more than $5 billion. Well, the fact is, if it were looked at, 
we would be astounded at what it is going to cost, but yet 
there is nothing in the rules that says they have to look at 
that.
    So one of my questions is, How do we change the rules to 
accurately reflect the financial condition and environment that 
we are in? We use no dynamic scoring. Every business I know 
looks at inflation-adjusted or net present values to see what 
they are doing. The whole country bases it is finances, outside 
of the government, on what is the net internal rate of return, 
inflation adjusted, what are you really getting for it. So are 
there suggestions in the things we should change in terms of 
direction for the CBO so that what we really get is real 
numbers upon which to make real decisions? Because I think 
oftentimes, because of the direction that has been by law to 
CBO, we don't get what we need to make the real decisions. 
Could you address that?
    Mr. Holtz-Eakin. I think there is no harder problem, quite 
frankly. Obviously you can write any rules you want for the CBO 
and having lots of presentations which show long-term 
implications of current programs and current decisions, I am a 
big fan of. This hearing is about the budget process, which is 
how, in fact, you will make the decision to pull the trigger 
and spend the taxpayers' money. That is much harder because in 
the end, I think it is desirable to tie that process to the 
money you put in the checking account, and that is the annual 
flow of budget authority and some of it is now mandatory. I 
don't think that is a good idea. I think that is Congress' call 
and it should be taken and made discretionary across the board.
    What I am nervous about is anything that would move toward 
actually trying to budget on a present value basis, because I 
believe that will be more damaging than helpful for the 
Congress. There are too many games that could be played. I 
would say right now at this table that under the current law, 
Medicare, Medicaid, Social Security are going to be such large 
burdens on the U.S. economy that ultimately growth will go 
negative. It is absolutely unsustainable in an economic sense.
    So imagine cutting back and scoring a cutback of those 
programs to a sustainable basis. What would be, 50 years from 
now, the growth impact on the U.S. economy? I don't think the 
science is up to answering that question, and directing the 
CBO, or anyone for that matter, to come up with an answer to 
that so that the economy grows better, you get the tax 
revenues, suddenly you have got these games 50 years out 
solving your problem now; terrible place to go.
    Know the problem. The problem is that the promises are up 
here, the money is down here. The gap is forever. But deal with 
what we have now, which is the authority to put money in the 
checking account so that agencies can write checks and focus 
the budget process on providing that authority. Know what you 
are getting into; lots of supplemental presentations. But I 
think the process should be focused on the financial management 
system because that is what these guys are actually going to 
do.
    Senator Coburn. But when you do a budget, as I visited with 
Senator Judd Gregg, how the CBO scores it today determines what 
you can do. And so the games that are played today, under the 
rules that we have today, don't accurately reflect the 
financial condition of this country.
    Mr. Holtz-Eakin. There is no question about that. But when 
you pick the next process, because we agree that this 
particular one is not working very well, you will set up 
incentives to game it as well. If you put in place trade-offs 
and enforcement and people don't want to have to make trade-
offs, they don't want to suffer enforcement, the incentives for 
the game will be there.
    So focus the attention on the big ones, and the big one 
here really is long-term costs of entitlement programs. Senator 
Gregg put in place a point of order for any programs that 
raised spending outside the budget window in any 5- or 10-year 
periods. I thought it was a fabulous idea. Very quickly, every 
piece of legislature this Senate considered sunsetted at the 
end of the 10-year--and that was on the spending side. How you 
get that is the key question.
    Senator Coburn. And the budget point of order has been 
waived every time on it.
    Mr. Holtz-Eakin. Right. So how do you----
    Senator Coburn. So it has not done anything.
    Mr. Holtz-Eakin. I don't know how you beat that. That is 
the key question.
    Mr. Walker. Mr. Chairman, let me clarify something because 
I want to make sure you understand what we have recommended on 
this. We are not recommending accrual budgeting.
    Senator Coburn. No, I know that.
    Mr. Walker. We are, however, recommending that as a 
supplement to reimposing meaningful, substantive budget 
controls that there be disclosures, transparency, that would be 
required on any major spending and tax proposal. Namely, to 
calculate the discounted present value dollar cost that must be 
considered as part of the legislative process, possible 
supermajority rules, whatever else. That is different. That is 
critically important.
    The other thing one might reconsider is whether or not CBO 
ought to be required to assume that discretionary spending is 
going to grow by the rate of inflation over the next 10 years.
    The other thing you might want to reconsider is whether or 
not CBO might have the option or be required that, when 
Administration policy is X, that somehow they have an ability 
to show what the impact would be if that was enacted by the 
Congress. What the Congress looks at and what the CBO is 
currently required to do for the 10 year projection is totally 
unrealistic and not credible.
    Mr. Holtz-Eakin. As an addendum to that, one of the great 
advantages to one of the recommendations that you have heard, a 
joint budget resolution, is that the current practice of the 
Administration's baseline reflecting one set of assumptions, 
the CBO's baseline reflecting a second set of assumptions, the 
incentives for scoring gimmicks on both sides being different 
and present, so that no one in their right mind can figure out 
whether some budgetary objective has been met. It would 
eliminate a lot of that.
    Senator Coburn. So you are going to use the same 
assumptions? You would have to come to the same----
    Mr. Holtz-Eakin. You would be forced to come--under the 
Budget Enforcement Act, where there were rescissions and 
sequestration and the enforcement provisions, there was a head-
to-head with the CBO and the OMB, there was a coming to grips 
with the scoring assumptions. It was an environment in which 
there was more transparency, because both sides had to talk 
about it. That was beneficial.
    Mr. Miller. In the budget deal of 1987, the Budget Accord, 
CBO and OMB had to agree on major assumptions and things of 
this nature. And it was kind of interesting because you do have 
a cadre of very devoted civil servants at OMB that think this 
is the right way to do it, and at CBO it is a different way. 
And you have to get them together and talk to each other and 
get them to agree to a system.
    Could I just point out, just think of what Mr. Holtz-Eakin 
was just saying a while ago about the effects of these 
burgeoning spending demands in 50 years, or whatever, causing 
economic growth to come to a halt, and actually you would have 
contraction in total output. What you are establishing is the 
predicate for enormous intergenerational strife. You have young 
people 50 years from now who are going to be supporting old 
people and going to be really upset, not only with having to 
support old people, but the pie will be shrinking at the same 
time.
    Senator Coburn. Well, the real manifestation of that is a 
lower standard of living for the next two generations. All you 
have to do is look at Germany today with 11-percent 
unemployment and 40 percent of their GDP as an expenditure of 
the take of their government, and growth that is one-fourth of 
what ours is. We see it, and the question is can we handle it. 
And the cost of making those decisions late versus the cost of 
making those decisions now is much less than that now.
    Senator Carper. Mr. Chairman, could I come back with 
another question? I think everybody has said the biggest 
budgetary challenge that we face is Medicare, Medicaid, and 
Social Security. The President suggested in his State of the 
Union Address that creating a sort of true bipartisan 
commission that examines, essentially, those three programs. It 
was one part of the State of the Union Address that I actually 
stood up and kind of saluted, and we haven't heard a whole lot 
about it since.
    I remember when Congressman Penny and I were just elected 
to the House in 1982, with the brother of Carl Levin, Sandy 
Levin, and we got there and one of the first things that I 
learned was that a commission had been created in 1982 on 
Social Security reforms and was chaired by Alan Greenspan, 
Robert Dole was on it, Claude Pepper, a bunch of others, and 
Senator Moynihan was on it.
    And they had worked in 1982 and presented to us in 1983 
sort of a whole range of revenue increases, cost cuts and so 
forth, and this whole package, and they agreed, basically 
agreed unanimously on it, almost unanimously, and said this is 
what we think we ought to do. And they gave it to us, President 
Reagan signed off on it. He had assigned part of the 
Commission--Tip O'Neill--I think Robert Byrd had to sign, 
appointed part of the Commission. They signed off on it, and 
the rest of us kind of drank the Kool-Aid together.
    And when the President said in his budget address or in his 
State of the Union Address that we ought to have a blue-ribbon 
commission to look at Medicare and Social Security--I don't 
know that he mentioned Medicaid--I thought that sounds like a 
winner to me.
    Your thoughts? We haven't really talked specifically on 
what to do to rein in the costs of those programs. My sense is 
that in order to take the politics out of it, you need that 
kind of approach.
    Mr. Walker. I think you need an entitlement and tax reform 
commission. There is a lot of interrelationship between what is 
going to have to be done with regard to entitlement programs 
and with regard to tax policy. I think from a practical 
standpoint, in order to get the kind of people on the 
commission and to make it meaningful, then you are probably 
going to have to have that scope in order to get it done. I 
will be happy to provide for you, and the other Members of the 
Subcommittee, an analysis that we just did at GAO, analyzing 
about a half a dozen policy-oriented commissions over the last 
25 years and what were the key criteria that helped to 
determine success or failure. And you will find that there were 
only two that were really successful in the last 25 years. One 
was the 1982 Social Security Commission, but also keep in mind 
there was a very real action-forcing event back then. It was 
called the checks weren't going to go out on time within a 
matter of time.
    The other one was the 9/11 Commission, where the American 
people were demanding action because of the cataclysmic events 
of September 11, 2001. I do think we need to consider 
something, but broader than what the President suggested.
    [The information follows:]
    Senator Carper. OK. Thank you.
    Senator Coburn. Welcome, Senator Levin.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Mr. Chairman, thank you for holding this 
hearing, again, a very useful hearing, as so many hearings are 
that this Subcommittee under your leadership has had. I think, 
Mr. Chairman, in your opening statement, you made reference to 
what is called a tax gap. I would like to ask our witnesses 
about that issue.
    There is approximately a $350 billion tax gap between the 
amount of taxes which are collected and the amount of taxes 
which would be collected if everybody paid the taxes which were 
intended to be paid by them. So there is a gap in the 
collection of taxes that is huge. It obviously would make a big 
difference.
    I am wondering whether or not--perhaps starting off with 
you Mr. Walker, but also the other witnesses might comment on 
the importance of trying to close that tax gap and any specific 
proposals that you might have. I know there is going to be a 
vote coming shortly, but if we could just get the answer 
perhaps to that question, my other questions I would reserve 
for the record, Mr. Chairman.
    Mr. Walker. Senator Levin, I have testified on this on a 
couple of occasions. It is about $350 billion. If you really 
want to make significant progress in closing that tax gap, you 
are going to have to authorize additional information returns 
and additional withholding. I would be happy to provide more 
information for your and the Subcommittee's consideration, but 
we do have some specific ideas for you.
    Senator Levin. Have you given us your proposals on closing 
the loophole or the tax dodging and avoidance which is created 
through the use of offshore tax havens?
    Mr. Walker. I believe we have done a little work on that 
and we have some other work ongoing right now, but I will 
double check and provide an answer for the record.\1\
---------------------------------------------------------------------------
    \1\ The information supplied for the record appears in the Appendix 
on page 88.
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    Senator Levin. On either of those questions do our other 
witnesses want to comment?
    Mr. Holtz-Eakin. I think there are two dimensions to the 
question. One is the numerical objective of collecting the 
revenue that has been identified in the tax gap. There, I would 
point you to the work of Joel Slemrod at the University of 
Michigan, who is the tax policy expert's tax policy expert, and 
he would argue that number is like the difference between 
reserves and proven reserves for oil companies, that you are 
not going to get all $350 billion, you are going to get 
something less than that and you ought to be sensible in your 
approaches to doing it.
    But I think the bigger part of the question is making a 
sincere and honest effort to clarify the Tax Code and enforce 
it so that can't arise again because we have relied so much on 
voluntary compliance in the past, and what we have done is 
erode the confidence of Americans in our Tax Code, and we are 
undermining the voluntary compliance of it. I think it is 
essential to go after that tax gap, largely because we need 
this Tax Code to function better in the future, not worse. And 
that is really what is at stake.
    Senator Levin. Any comments on tax havens?
    Mr. Holtz-Eakin. Tax havens are a big issue and are part 
and parcel of the way we have tried to run our international 
tax rules for large multinational corporations. The most 
important thing is to simplify this and clarify the objectives, 
and then I think the enforcement will be easier too. At the 
moment there are too many conflicting provisions to allow 
enforcement to proceed with any certainty at all.
    Mr. Walker. We currently need tax reform, Senator Levin, in 
order to streamline and simplify and in order to help voluntary 
compliance. We need to have credible enforcement as well. But 
one other area that I would give you for consideration: The 
U.S. Government does business with contractors, and also gives 
grants to entities that are significantly delinquent in their 
taxes. I think we need to consider establishing a date certain, 
and say that you either get current by the date certain, or we 
don't do business with you.
    Senator Levin. There are a number of provisions which I 
believe are in our defense authorization bill, actually, on 
that issue, and I don't know whether the Chairman has got 
legislation along that line, but I know we do have a provision 
in the bill which is coming to the floor in the Armed Services 
Committee.
    Mr. Penny. I know that one of our Senators, Mr. Coleman 
from Minnesota, had some hearings on this a couple of months 
ago and I assume that it is part and parcel----
    Senator Levin. That is correct.
    Mr. Penny [continuing]. Of the legislation that is now 
moving forward.
    Senator Levin. Thank you for the reminder. It was Senator 
Coleman, the Chair of another Subcommittee.
    Mr. Penny. And it is certainly a good place to begin.
    Senator Levin. He does have a bill on this which I have 
cosponsored, as a matter of fact, in addition to the defense 
authorization.
    Mr. Miller, how are you doing?
    Mr. Miller. I am doing fine, sir. How are you? First let's 
stipulate that you and I have paid the taxes that we have due.
    Senator Levin. I would be happy to stipulate that.
    Mr. Miller. I think it is very important that tax rates be 
low and that taxes be simple, understandable, and that everyone 
pay their fair share of taxes. And I think going after not only 
tax avoidance--excuse me, tax evasion. Tax avoidance is 
perfectly legal--tax evasion, but also people who owe the 
Federal Government money, people who have borrowed on some of 
these programs. When I was OMB Director, we tried to collect 
monies that were owed the Federal Government and actually 
Congress put an estoppel on our efforts to secure this money. I 
think, and Mr. Walker probably has in his own mind--you 
probably know how much is owed. I don't know what the current 
figure is.
    Senator Levin. Well, we talk about tax avoidance and 
complicated rules. The Enron Corporation had 400 shell 
corporations in one Caribbean island, the Caymans. Now there 
are 1,500 other shell corporations apparently that they created 
in other tax havens. But do you have any comment, Mr. Miller, 
on the tax haven issue?
    Mr. Miller. This is just further evidence that the tax 
system is dysfunctional too, and it needs to be reformed 
dramatically and simplified.
    Senator Levin. I have a lot of other questions. If our 
witnesses would be kind enough to answer them for the record, 
although they are not obligated to do so except probably for 
Mr. Walker. He is always willing to do it even if he weren't 
obligated. He does a tremendous job. Thank you all.
    Mr. Penny. Thank you, Senator. Mr. Chairman, if I could 
back up and respond to the question that Senator Carper asked, 
because my take on this is a bit different than General 
Walker's take on this. I think in a perfect world, General 
Walker's response that we need a broad-based entitlement and 
tax commission to deal with all of these issues, Social 
Security, Medicare and tax policy, because there is a lot of 
interrelationship, in a perfect world that is absolutely right 
because there are so many pieces, they all do fit together one 
way or the other and we have to look at the whole picture.
    I think, realistically, if we are going to get a serious 
commission going, it is better to segment this. It needs to be 
bicameral. It needs to be bipartisan. Hopefully it would also 
include some outside experts, as did the Social Security 
Commission back in 1982-83 with Alan Greenspan and others. But 
I think the better construct for a commission today would be a 
retirement security commission. And the reason I say that is 
because we have a broken defined benefit system in America. Too 
many companies are now going bankrupt and turning those 
obligations over to the PBGC, and the PBGC is not financed 
adequately to take care of that.
    Other companies are redefining their defined benefit plans 
in some way; in other words, shortchanging people. After 
decades of telling them they had a certain benefit level, they 
are now redefining those benefits. They haven't invested them 
properly. We have also got problems with (402)k and other 
defined contribution plans in the private sector.
    The most easily addressed aspect of that is just 
enrollment. We have people who are not opting in. If we force 
them to opt out and automatically place them in, we would take 
from about 20 percent to 80 percent the number of participants 
in those programs. It is the kind of program that you really 
ought to be invested in from the very first job you take, from 
the very first paycheck you receive, and until we do that we 
are not going to prepare particularly lower- and middle-income 
Americans for their retirement because they are not benefiting 
from the magic of compound gains.
    And then you tie that together with Social Security because 
in many ways the problems in Social Security mirror the 
problems in these private sector plans. And if you put it all 
together as a package deal, I think you can get both Democrats 
and Republicans to come to the table for that. Democrats 
clearly are reluctant to debate Social Security as a free 
standing issue. But if you make this retirement security and 
show how all these pieces fit together and what the end result 
can be, I think you can get some reform in that area. But I 
think if you load in Medicare and you load in tax reform as a 
part of that, it just gets too heavy to carry.
    Senator Coburn. And you also might get encouragement in 
savings, which is one of the things that we lack.
    Mr. Walker. We had a negative savings rate for the first 
time since 1933, which wasn't a good year. The only concern 
that I have with that--and, of course, I have longstanding 
background in pensions, health care, Social Security and 
Medicare, and there is a need to look at this issue. But the 
problem is health care. That is the problem. I mean, of the $46 
trillion in exposures, commitments and unfunded obligations, 
about $30 trillion is Medicare. And so we need to deal with all 
these issues, but when you are talking about retirement 
security, health care is as important as anything else.
    Senator Coburn. Would health care be the problem if health 
care was 67 percent of the cost it is today?
    Mr. Walker. It wouldn't be as big a problem, but it would 
still be a problem over the longer term.
    Senator Coburn. And the reason I want to put that out is we 
can document that $1 out of every $3 that goes into health care 
isn't going into health care under the systems that we have 
today. It doesn't go to help anybody get well. It doesn't go to 
help prevent the illness. It doesn't help in the treatment. It 
is consumed because of the way we have designed the health care 
system. And the $2.2 trillion that we are going to spend on it, 
only $1.6 to $1.7 trillion actually goes to help treat somebody 
or prevent illness or diagnose it.
    Mr. Penny. There are fundamental problems in the structure 
of our health care system, both the public programs and the 
private sector programs. But it is a much different issue with 
a lot of moving parts in a way that retirement security reform, 
Social Security and these other plans, are much more 
straightforward. I think it is easier to deal with them as 
separate issues. I don't dispute General Walker's comment that 
Medicare is a much more immediate and a much larger problem, 
and for that reason it ought to go first. But very much the way 
I have urged action on pork barrel spending as a way of ginning 
up some courage to deal with the bigger challenges, I think the 
same is true in the entitlement area. If you take on, arguably, 
the easier to fix piece, which is Social Security, you might 
gin up the courage it takes to take the next and larger step to 
deal with Medicare as well.
    Mr. Holtz-Eakin. I really want to echo that because there 
is a big difference between the medical issues and the Social 
Security issues. We can solve Social Security today. 
Analytically there is nothing to it. You can solve it 15 
different ways. It is strictly a political issue. And the key 
with Social Security is it is pure demography, and every year 
that we wait, another generation, the cohort of baby boomers 
gets grandfathered. And if you grandfather the baby-boom 
generation, you have missed the money. And so my bumper sticker 
on Social Security has always been, ``Get Doug Holtz-Eakin.'' I 
am the tailing end of the baby-boom generation. If you don't 
get me, you have missed the problem.
    So that needs to be dealt with and dealt with quickly. And 
I think Mr. Penny is right in that the defined benefit pension 
system--our private sector experiment with that is over. We are 
going to clean up, but it is going to be defined contribution 
savings going future, that is good. Take care of that problem 
because it is the easy one analytically. Health care reform is 
just going to have to be part of a daily routine. There are so 
many things going on in health care in the United States that 
needs to be improved that I think a big fix is the wrong way to 
think about it. We need to make steady progress.
    Senator Coburn. We don't really want to get into health 
care in here, even though it is a big segment in terms of 
Medicare and Medicaid.
    Mr. Holtz-Eakin. I think that is right. It is a health care 
problem. It is not a Medicare and Medicaid problem, where with 
Social Security, it is the structure of the program itself, and 
that is fixable.
    Senator Coburn. All right. Any other comments?
    [No response.]
    Senator Coburn. Well, let me thank you and I am going to 
invite our other witnesses to come up. Senator Carper and I 
would very much like to have an off-the-record individual 
discussion with you all and if possible, we will be offering 
some dates that we might be able to find common with everybody 
so that we can sit down and talk about how do we do it. We both 
have a sincere interest in trying to address this issue, and it 
is my understanding the Majority Leader is going to have some 
time for budget process reform in June on the floor. So we 
would like to maybe be able to do something together to put 
forward some of these ideas.
    Thank you for your testimony. You will be receiving some 
written questions from us. If you would be so kind as to return 
those, I would appreciate it. Thank you very much.
    Our next panel is Chris Edwards. He is Director of the Tax 
Policy Studies at the Cato Institute and a member of the Joint 
Economic Committee. He was a Consultant Manager with 
PricewaterhouseCoopers, examining fiscal issues being 
considered by Congress. He holds an M.A. in Economics from 
George Mason University in Virginia.
    Our next witness is Maya MacGuineas. She is President of 
the Committee for a Responsible Federal Budget and Director of 
Policy Program of the New America Foundation. Her areas of 
expertise include the budget, entitlements, and tax policy. 
Before coming to New America, Ms. MacGuineas worked as a Social 
Security advisor to the McCain Presidential campaign where she 
helped craft the Senator's Social Security reform proposal and 
traveled with the campaign. Prior to that, she worked at The 
Brookings Institute, the Concord Coalition, and on Wall Street. 
She received her master's in public policy from the John F. 
Kennedy School of Government at Harvard University.
    Thank you. I am sorry we are running behind.
    Mr. Edwards, if you would, your complete testimony will be 
made part of the record. I have read it, and I want to thank 
you for it, and you are recognized for 5 minutes.

TESTIMONY OF CHRIS EDWARDS,\1\ DIRECTOR OF TAX POLICY STUDIES, 
                         CATO INSTITUTE

    Mr. Edwards. Thank you very much, Mr. Chairman. Thank you 
for having me testify on financial management today, and thank 
you, of course, for all your great leadership on fiscal issues 
the last couple of years. You have certainly shown that even a 
single Senator who is frugal-minded can have a really big 
impact on the policy debate, and if I had 20 Tom Coburns in the 
Senate, I think we would be moving a long way toward fiscal 
sanity around here.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Edwards appears in the Appendix 
on page 70.
---------------------------------------------------------------------------
    Federal spending, as our previous panel discussed, 
continues to soar. Deficits are running year after year. The 
cost of entitlement programs are going to impose huge unfunded 
liabilities on young Americans. Clearly, current budget 
procedures don't work. We need to do something new. Let's 
experiment and try something new.
    Without tight control of the problem, many members 
essentially just become advocates for narrow special interest 
causes, and broader concerns such as the size of the debt, the 
size of the burdens we put on the next generation are ignored. 
Without tight budget rules, there essentially becomes a budget 
anarchy in Congress.
    As was discussed in the prior panel, the States have much 
tighter budget rules than the Federal Government. Virtually all 
the States have legal requirements to balance their budgets. 
One good idea that I think Senator Carper mentioned and I think 
Maya would agree with is that requiring a President to issue a 
balanced budget every year, even as sort of a planning 
document, I think would be a very good and fairly simple step 
we could take.
    Most State constitutions limit government debt pretty 
strictly. More than half the States have some sort of overall 
budget cap. And also importantly, the States are fiscally 
constrained by the need to make sure that their bond ratings 
don't fall, a constraint that the Federal Government 
essentially doesn't have. So if anything, we need tighter 
constraints at the Federal level than at the State and local 
level.
    There, of course, have been numerous efforts in the past to 
put tighter budget controls in the Federal budget. Some of them 
were mentioned here: Gramm-Rudman-Hollings and the BEA of 1990. 
But I think a more direct and powerful way to control Federal 
spending is to put a cap on overall budget outlays tied to 
growth and some economic indicators such as GDP or personal 
income or inflation. The BEA of 1990 imposed caps on 
discretionary spending. This time around I think we need to put 
a cap on overall spending, both discretionary and entitlement 
spending.
    I think we need to put cap ties to some indicator like 
growth in GDP. The principle is that the government should not 
consume an increasing amount of the economy's resources over 
time. With an overall cap in place, Congress would pass its 
annual budget resolution to insure that spending came in below 
the statutory cap. If needed, reconciliation instructions could 
be included to reduce entitlement spending. The OMB, as under 
GRH, would provide regular updates regarding whether Congress 
was above or below spending caps. If the session of Congress 
ended at the end on the year and OMB determined it was above 
the cap, there would be a sequester mechanism in place. Both 
discretionary and entitlement spending would, and I think 
should, be sequestered.
    There have been numerous bipartisan proposals in the past, 
especially in the early 1990s, regarding the idea of putting a 
cap on overall entitlement spending. More recently the 
Republican study committees, the Family Budget Protection Act, 
would have included both a cap on discretionary and entitlement 
spending. They would protect their cap under their plan by both 
a sequester and a two-third supermajority voting requirement in 
both the House and the Senate.
    The idea of capping the overall budget is inspired by 
budget caps in the States. Most noticeably, Colorado has a 
constitutional limit on overall growth in the State's revenues. 
Any revenue growth above the sum of population plus inflation 
growth is automatically rebated back to taxpayers. Federally, a 
cap on spending makes a lot more sense than a cap on revenues 
for variety of reasons. For one thing, Federal spending 
fluctuates a lot less than revenues and fluctuates a lot less 
than deficits. One of the problems with GRH was that it focused 
on deficits. Deficits fluctuate a lot and can surprise Congress 
with big changes. I think a cap on spending would allow 
Congress time to plan and make the reductions that would be 
needed to fit under the cap.
    It is true that Congress could, of course, rewrite a 
spending cap if it was only statutory and not a constitutional 
cap anytime it wanted if it didn't want to comply with it. But 
I think if you had a simple cap on the overall budget, it would 
be a very high profile symbol of fiscal restraint that I think 
reformist Members of Congress and taxpayer and watchdog groups 
could rally behind and defend. I think if we put a cap in place 
now, before the entitlement cost explosion hits, we would have 
a number of years of experience with it. Taxpayers and citizens 
would start to understand that cap is there and Congress should 
live by it, so that when we get into further trouble down the 
road, I think the cap would be a really solid way to control 
spending.
    So, to conclude, I think we need tougher budget rules to 
ward off a financial crisis in the future as entitlement costs 
soar. A spending cap is not a guarantee that Congress would 
take proactive steps to cut wasteful spending, to follow some 
of the ideas you have expressed earlier, but it would help 
prevent the type of huge spending orgy I think we have seen 
over the last few years. And I think it would be a very good 
solid step forward.
    Thanks a lot for having the hearings and I would love to 
talk with you further about these ideas and work with your 
staff. Thank you.
    Senator Coburn. Thank you. Ms. MacGuineas.

TESTIMONY OF MAYA C. MACGUINEAS,\1\ PRESIDENT, COMMITTEE FOR A 
RESPONSIBLE FEDERAL BUDGET AND DIRECTOR, FISCAL POLICY PROGRAM, 
                     NEW AMERICA FOUNDATION

    Ms. MacGuineas. Thank you. Good afternoon. Thank you for 
holding this hearing and thank you for inviting me to testify. 
Let me begin by saying that even the best budget process cannot 
serve as a replacement for responsible budget decisions and 
proper oversight. If politicians continue to cut taxes and 
increase spending, we will continue to run budget deficits no 
matter what the rules. If politicians continue to both build 
programs into the budget and Tax Code without sufficiently 
scrutinizing their effectiveness, we will continue to have a 
budget that is less efficient than it should be no matter what 
the rules.
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    \1\ The prepared statement of Ms. MacGuineas appears in the 
Appendix on page 79.
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    And if politicians continue to make and expand promises for 
intergenerational programs such as Social Security and 
Medicare, we will continue to be faced with large unfunded 
liabilities and a highly inflexible budget that does not allow 
us to respond to important challenges and opportunities no 
matter what the rules. Ultimately, the most important component 
of responsible budgeting is the people who are involved and the 
decisions they make.
    But while process cannot do the heavy lifting required to 
create responsible budgets, sensible and balanced rules 
certainly are important. I would say that I agree with almost 
everything we have heard this afternoon from Mr. Edwards and 
the previous panel. The fact that we are still not moving 
forward on some of those ideas, so that is it is even difficult 
to move forward on budget process rule reforms as important as 
they are.
    The Committee for a Responsible Federal Budget, which I 
run--the board is made up of many of the past directors of GAO, 
CBO, the Federal Reserve Board, and the Budget Committees. We 
have a number of recommendations which I will just quickly go 
through.
    The first is a joint budget resolution. We do believe that 
having the President and Congress agree on what budget they 
will be working with at the beginning of the process will be 
much more useful. It would also make transparent when Congress 
``busts the budget'' during the year.
    Second, expenditure limits, which Mr. Edwards just 
emphasized. In the past statutory limits have proven to be one 
of the most effective approaches to instilling discipline into 
the budget process. We believe that the budget resolution 
should include enforceable nominal dollar limits for both 
discretionary and direct spending. Let me just say on that 
topic, there is disagreement even amongst my board members 
about whether those caps should apply to direct spending. But I 
think it is certainly clear that as more of our budget is 
mandatory or entitlements, we have to look at how to cap that 
kind of area of the budget or have more oversight or take those 
areas off of automatic pilot.
    Third, pay-as-you-go rules. We believe the pay-as-you-go 
principle is an important one that helped us in the past. It 
should be applied to the budget on both the spending and the 
tax side. If it is not, there is a huge loophole that is left 
to put spending programs through the Tax Code in the form of 
tax expenditures, which you see happening more and more often 
right now. PAYGO is a little bit lopsided; there is some 
disagreement about it because entitlement programs, when they 
are sunsetted, they come back in the budget without being 
subject to PAYGO. But they are also not in the baseline so you 
don't receive savings for that. We might want to find ways to 
even out the treatment of taxes and spending, but PAYGO should 
apply to both.
    Fourth, tracking long-term spending promises. More 
information needs to be made clear and highlighted in budget 
documents about the long-term commitments that we have entered 
into on the costs of these intergenerational programs which are 
coming to dominate the budget.
    Finally, triggers. We don't have an institutional position 
on this as a committee, but I believe that the use of triggers 
is something we should think about seriously bringing more into 
the budget process; where when we hit marks, whether it is a 
trigger that is triggered by spending, taxes, deficits, debt, 
unfunded liabilities, we have something that--a default that 
moves into place, either a soft default where Congress or the 
President has to make a recommendation about how to fix 
whatever problem has triggered the trigger, or a hard trigger, 
something as freezing all indexing on the tax side and the 
spending side until Congress comes up with a solution.
    In addition to those recommendations, we support biennial 
budgeting with the reservations that were voiced before. There 
is some concern that supplementals would certainly be abused, 
and I don't know how Members of Congress are, but a lot of us 
who always wait until the last night to study for the exam 
might under biennial budgeting still not get that much more 
done even when you are given 2 years.
    Senator Coburn. Could supplementals be any worse than what 
they are today?
    Ms. MacGuineas. Sadly, probably. I mean, certainly that is 
one of the big problems we face right now. We need to find a 
way to fix supplementals, which are actually two of the next 
recommendations I would support: A very strict limit on what 
emergency spending is. You are more familiar than almost 
anybody on this topic and how hard it is to get people to stick 
to it. But we need to buy into the notion of an emergency 
requirement, an emergency definition that we stick to. And 
certainly rainy-day funds in the budget, we need to be 
budgeting for emergencies in advance. Something like Hurricane 
Katrina might have cost more than we budgeted for, but we still 
would have been in a better fiscal position to contend with 
that challenge.
    Automatic continuing resolutions, and properly 
distinguishing between spending and tax cuts. As Mr. Holtz-
Eakin pointed out, we have a tremendous problem of mislabeling 
things and putting them on the wrong side of the budget, to the 
point where we are not even sure how big our Federal budget 
actually is. And that is a real problem with transparency and 
trying to do national budgeting.
    So, again, I will point out that process is no substitute 
for courageous choices. We can sit here and talk about the need 
to reform entitlements and the need for commissions, and all of 
those things are very true. But what we really have to do is 
make some tough choices on what taxes we will increase and what 
spending we will cut. And there is no way about getting around 
those choices no matter what. But as soon as we have Congress 
and the President willing to make those changes and those tough 
choices, budget rules will be instrumental in enforcing the 
kinds of agreements that we come up to as a country, helping 
keep us on track once we put ourselves on that track.
    Thank you again for holding the hearing today. If we have 
time for questions, I look forward to that.
    Senator Coburn. Thank you. I am going to include you all in 
our dinner because we have really got some good ideas here. 
This automatic CR is something that takes the pressure off and 
it also controls spending. Nobody has ever done a study to see 
how much money that is saved by not being able to come to an 
agreement on appropriations. I am sure it is billions of 
dollars because we did CRs.
    We will submit some questions to you. I am probably going 
to miss this next vote because everybody else is gone to it. I 
want to thank you. I apologize for the delay, and I want to 
thank you for your prepared testimony as well as your words 
here today, and I look forward to an off-the-record get-
together.
    Ms. MacGuineas. I look forward to the dinner. Thank you.
    Mr. Edwards. Thank you.
    Senator Coburn. We are adjourned.
    [Whereupon, at 4 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

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