[Congressional Record Volume 144, Number 19 (Tuesday, March 3, 1998)]
[Senate]
[Pages S1291-S1293]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                    ABRAHAM SPEECH ON BUDGET SURPLUS

 Mr. COVERDELL. Mr. President, I rise to share with my 
colleagues a speech which I believe provides a number of important 
ideas and policy positions we should be discussing as we enter the era 
of budget surpluses.
  Because of strong economic growth, the Office of Management and 
Budget reports that we will begin running a surplus in 2001, and that 
surplus will total $447 billion by 2005.
  In a speech before the Detroit Economic Club on February 17, Senator 
Abraham sought to start a dialogue on how best we as a nation could 
approach the upcoming and unaccustomed circumstance of budget 
surpluses. In my view he offered excellent suggestions on how to save 
Social Security, provide comprehensive tax reform and invest in 
infrastructure and human capital, all within the confines of a limited 
budget surplus.
  His specific proposals, limited private investment accounts within 
the Social Security system, an alternative flat tax and scholarships 
for low income students entering hi-tech fields, all deserve our 
attention. It is my hope that they will help spur fruitful debate 
concerning how we can best approach the new century with continued 
economic growth, expanding opportunity and confidence in our fellow 
citizens.
  I ask that Senator Abraham's speech be printed in the Record 
immediately following my remarks.
  The speech follows.

               Surplus Politics: What Congress Should Do

                       By Senator Spencer Abraham

       Before I begin today, I would like to say a few words about 
     the situation in Iraq. When I last spoke here a year ago, it 
     was under very different circumstances. Today we face an 
     imminent crisis in the Middle East. As you know, it is 
     entirely possible that our troops, including a member of my 
     own staff, may soon find themselves in a combat situation. I 
     know I speak for everyone in this room when I say how proud 
     we are of the young people defending our country, and how 
     much we appreciate all that they have sacrificed already. I 
     also know that I speak for everyone here when I say that I 
     hope and pray that we can settle this crisis through 
     diplomatic means, without putting our troops in harm's way. 
     But if we can't, I know we will all support them in every way 
     possible.


                              The Economy

       But I came here to talk about a more pleasant subject: our 
     economy. And I think this is a pleasant subject for the 
     simple reason that the news continues to be good. Gross 
     Domestic Product is up 3.7 percent over last year, in real 
     terms, that's up 16.3 percent since 1994. Inflation is down 
     to 1.7 percent, down 27 percent since 1994. Unemployment last 
     year averaged just 4.9 percent, down from 6.1 percent in 
     1994. Interest Rates are at 30 year lows, and down 20 percent 
     from 1994. Industrial production is up 5.9 percent over last 
     year and 14 percent since 1994. And we finally have managed 
     to pass a balanced budget--one that includes tax cuts for 
     working Americans.
       The issue we face today, in my view, is ``how can we keep 
     this economic growth going strong into the next century?'' 
     And I think we can see the outlines of a workable program 
     right here in Michigan. If we look back to 1990, we can see 
     the progress we have made here in Michigan, as well as how we 
     have made it.
       In 1990, Michigan had the highest unemployment rate of any 
     industrial state and a $1.8 billion deficit, on a budget of 
     only $8 billion. Now our state is a thriving, fiscally 
     responsible beacon for free enterprise. Since 1990 Michigan 
     has created well over half a million new jobs, brought 
     unemployment down to well under 4 percent, and produced 
     balanced budgets and even a budget surplus.
       How did we get here from there? John Engler became 
     governor, and he cut taxes over 20 times, instituted a 
     program of regulatory reforms lessening the burden of a state 
     government on our job creators, brought spending under 
     control and balanced the state budget.
       But Governor Engler knows that you can never simply rest on 
     your laurels, particularly when the goal is continued 
     prosperity. That is why, if the Governor gets his way, we'll 
     cut taxes and regulations further and expand our pro-growth 
     policies into the next century.
       On the national level we can't rest on our laurels either. 
     The question is, how can we best build on our recent 
     progress? Because of strong economic growth, for the first 
     time in recent memory we face the prospect of budget 
     surpluses. According to the Office of Management and Budget, 
     we will begin running a surplus in 2001, and that surplus 
     will total $447 billion by 2005.


                            surplus options

       Assuming we can maintain the budgetary discipline and 
     economic growth necessary to fully realize it, the question 
     is, what are we going to do with this surplus? Now, just 
     about everyone in Washington, DC has their own answer to this 
     question. They fall into four camps. Some say that we should 
     use it to cut taxes. Others respond that we should use it to 
     pay down the national debt. Still others have called on us to 
     use it to ``save Social Security.'' Finally, a number of 
     people have said that we should use the surplus to invest in 
     social programs, human capital and infrastructure.
       Of course, all of these answers sound good--but how we 
     handle the specifics is very crucial.
       First let's look at those who say simply ``cut taxes.'' 
     That sounds good. I for one believe that one of the reasons 
     Republicans were put on this Earth was to cut taxes. But how? 
     Do we just continue the recent approach of more targeted tax 
     cuts, as the President suggests? Cut a tax here, create a 
     deduction there?
       Last year's tax cut was needed and welcome. But the 
     legislation putting it into effect added or amended over 800 
     sections in an already complicated tax code. I question 
     whether we should just continue down that path.
       Paying down the national debt sounds appealing too. But 
     what does it really mean? Remember, even if we use the entire 
     projected surplus, we would only pay down less than 10 
     percent of the debt. And don't forget, a significant portion 
     of the debt is held by foreign investors. Does it really make 
     sense to use American taxpayers' dollars to make early debt 
     payments, to foreign investors like the central banks of 
     China, Japan and Germany?
       Saving Social Security as the President suggests is a good 
     idea too. But how we might employ a short range surplus to do 
     it is the issue. For example, if we simply dump the budget 
     surplus into the Social Security Trust Fund, it would only 
     extend the life of Social Security for less than 2 years.
       Which brings us to the fourth and final option: investing 
     the surplus in social human capital and infrastructure. 
     Again, the question is, what does this mean? Based on the 
     President's speech and the comments of other such advocates 
     in Washington, it means rebuilding the Great Society, 
     restoring many of the welfare programs we reformed and 
     launching new programs which will be impossible to end or 
     reduce at a later date.
       As my colleague Chuck Grassley says, it appears that ``the 
     era of saying that the era of big government is over, is 
     over.''
       As I have said, in Washington the debate over these choices 
     has begun. And for the most part the attitude is that they 
     are mutually exclusive. Moreover, because too much of the 
     early thinking takes a ``business as usual'' approach as 
     described above, rather than a creative and innovative one, 
     we aren't likely to make much progress on any front. To have 
     impact we must think in terms of new ideas and approaches. 
     And, a set of strong pro-growth policies must underlie any 
     strategy for using the surplus.
       If we are creative in this sense, I believe it is possible 
     for us to attack the burdensome tax code, the looming Social 
     Security crisis, the human capital and infrastructure 
     challenges we confront, and our gargantuan debt, and make 
     great progress on all fronts.

[[Page S1292]]

                         an integrated program

       I see the doubt on your faces. You're thinking we can't do 
     it all. And I confess to having a few doubts of my own. But, 
     for just a moment, suspend your judgment and consider several 
     possible prescriptions. Today I want to share with you some 
     ideas both as to surplus priorities and as to specific policy 
     concepts, with the hope of starting a dialogue on how we 
     should approach the upcoming era of surpluses, in the best 
     interests of Michigan and the nation.
       Let's begin with Social Security. Ladies and gentlemen, if 
     we properly use up to two-thirds of the surplus, we can 
     simultaneously save Social Security and dramatically reduce 
     the federal debt. We do this, not by perpetuating the current 
     system with its paltry 1 to 2 percent return on investment, 
     but by employing the surplus to subsidize the transition to a 
     system that would allow anyone in Social Security who so 
     chooses, to invest up to 2 or 3 percent of their earnings--or 
     \1/3\ to \1/2\ of the employee share of their payroll taxes, 
     in a private investment account.
       As you know, the Social Security system clearly needs 
     saving. As of now the Congressional Budget Office estimates 
     that it goes broke in 2030. If we do not take action, the 
     taxes needed to finance currently projected Social Security 
     benefits in 2030 would be equal to about 8 percent of Gross 
     Domestic Product--equivalent to doubling all personal income 
     tax rates on working Americans. Moreover, as I've said, 
     simply deploying the surplus to the trust fund would only 
     extend this between one and two years.
       How can we prevent such a catastrophe? One way is by using 
     part of the surplus to fund a system of Personal Retirement 
     Accounts modeled on the successful and widely used 401(k) 
     plans. People would have the option of investing \1/3\ to \1/
     2\ of their payroll tax contributions to a Private Retirement 
     Account, rather than to Social Security. The employee would 
     be able to invest the money in stocks, bonds and mutual 
     funds. Even with rules guarding the safety of the 
     investments, the return would be far higher than the current 
     system's 1 to 2 percent. Funds would accumulate tax free 
     until retirement, when the employee could withdraw the 
     balance. These dollars would then be used to partially offset 
     the trust funds' obligations to participating individuals, by 
     a fraction of the private investment account payout.
       Meanwhile, as we give people a payroll tax cut to finance 
     their private investment accounts, we would use an equal 
     amount of surplus dollars to keep the trust fund whole. In 
     this way we would lower the financial pressure on the system 
     over the long term, saving it from insolvency and 
     dramatically reduce if not eliminate the need to raise 
     payroll taxes.
       The economy also would benefit. Where Social Security 
     monies now exist only in theory or in government debt 
     instruments, they now would add to the pool of money 
     available for investment and expansion, thus lowering 
     interest rates and spurring growth. And higher growth would 
     further strengthen the Social Security system. What is more, 
     we could keep our eyes on our money.
       For those at or nearing retirement, including baby boomers, 
     this strategy would ensure that everyone receives their 
     social security. But for American young people in particular, 
     this would produce a substantial tax cut and greater security 
     for their old age. That security is particularly important 
     since one recent pool shows that more people under 30 believe 
     that they will personally see a flying saucer in their 
     lifetimes than believe they will see a Social Security check.
       Under this plan, a married couple with a combined income of 
     $60,000 would get a $1,200 annual tax reduction. By the time 
     this couple retired, after 35 years of consistent investment, 
     even at a relatively low 5.5 percent rate of return, they 
     would have $120,000 in supplemental retirement income.
       Well that's a plan for Social Security. Now remember, we 
     have used at most two thirds of the surplus. The next 25 
     percent we should consider devoting to taxes. But let's not 
     get into another battle over competing tax cuts. Instead, if 
     we are going to employ any of the surplus on taxes, I believe 
     it should be used to finance an overhaul of our antiquated 
     tax system.
       As you know, the President has said in his State of the 
     Union address and since, that whatever we do ``we shouldn't 
     use any of the surplus for tax cuts.'' But I find it hard to 
     take him very seriously when in the same speeches, he himself 
     called for major tax cuts and, more importantly, the 
     launching of $125 billion of new, impossible to restrain, 
     spending programs.
       So in response to the President I would say this: if the 
     taxpayers are sending over $400 billion more to Washington 
     then even the DC politicians asked for or expected, don't 
     they deserve to have a tax system that's right for the 21st 
     century, instead of the broken, intrusive, complicated one we 
     have today?
       Ladies and Gentlemen, we need a tax system that is fairer, 
     simpler, and flatter and an IRS that is under control.
       We need this to restore public confidence in the tax 
     system. A recent USA Today poll found that 60 percent of 
     Americans believe the IRS ``frequently abuses its powers.'' 
     Fully 95 percent believe the tax code itself isn't working 
     and must be changed.
       If we had an Economic Protection Agency to watch over the 
     economy the way the Environmental Protection Agency watches 
     over the environment, the IRS code would be labeled toxic. 
     IRS forms would come with a warning label: The Economist 
     General of the United States has determined that the Internal 
     Revenue Code is hazardous to America's economic health and 
     could cause financial devastation to your family.
       The problem is that we do not have majority support for any 
     one, particular alternative. According to surveys, the most 
     popular alternative is a flat tax, but even that lacks a 
     clear majority. This is true for a number of reasons but, 
     primarily, because many fear that a flat tax might cost them 
     money, due to a loss of deductions and because of concerns 
     about some of the flat tax proposals floating around out 
     there, which would essentially allow many of the most 
     affluent Americans to pay no tax at all.
       So, what do we do? Stick with the current broken system? 
     Impose a flat tax or a sales tax on all Americans whether 
     they like it or not?
       Well, here's a proposition. Why force a new system on the 
     taxpayers, or force them to live under the old one? Why not 
     give taxpayers a choice? Let's strive to achieve some 
     consensus. Why not give taxpayers the option of sticking with 
     the old system or of choosing something new.
       To that end, with a strong plurality of Americans 
     preferring a flat tax, I've been exploring the concept of an 
     Alternative Flat Tax, and I'd like to outline it here today 
     for your consideration.
       Rather than simply impose a new tax structure, we would 
     allow people to opt out of the current system and choose a 
     25% flat tax instead. Applicable to income above a generous--
     family--based exclusion.
       No one would pay more tax under the Alternative Flat Tax 
     than they do under the current system, for the simple reason 
     that no one would be forced to choose the new system.
       In addition to the optional feature, the plan would also, 
     of course, possess the usual appeal of a flat tax:
       It's simple--it could be computed on a post card, and it 
     would not entail the development of the kind of complicated 
     transitional tax rules that would be required if we mandated 
     that everyone change to a whole new system.
       And it's pro growth--driving down the top marginal tax rate 
     on individuals and businesses to 25 percent would give a 
     tremendous boost to incentives to work, save and invest.
       Now, let me talk about how we might invest the rest of the 
     surplus. The final ingredients we need to enjoy growth and 
     prosperity in the 21st century are an upgraded infrastructure 
     combined with a well-trained workforce. And the remainder of 
     the surplus is sufficient to achieve just that.
       I don't think I have to tell anyone here about the problems 
     we have with our infrastructure. Over half our roads and 
     bridges are in poor shape. That means that we must spend more 
     on transportation. It also means we must stop spending the 
     road dollars of Michigan and 20 other states to subsidize 
     other people's freeways. An investment of about $5 billion of 
     the surplus per year; money that is already in the highway 
     transportation trust fund, will make that happen.
       In addition to our transportation infrastructure, we need 
     to look to our human capital. No input is more important to a 
     business than properly skilled workers. And we as a nation 
     are not producing enough highly skilled workers.
       A study conducted for the Information Technology 
     Association of America estimates that there are more than 
     346,000 unfilled positions for highly skilled workers in 
     American companies.
       Bureau of Labor Statistics figures project that our economy 
     will produce 100,000 information technology jobs in each of 
     the next 10 years. Meanwhile, our universities will produce 
     less than a quarter that number of information technology 
     graduates.
       This is serious, for Michigan and for the nation. Here in 
     Michigan, 24 of every 1,000 private sector workers are 
     employed by high-tech firms. For the nation, the Hudson 
     Institute estimates that the unaddressed shortage of skilled 
     workers throughout our economy will result in a 5 percent 
     drop in the growth rate of GDP. That translates into about 
     $200 billion in lost output, nearly $1,000 for every 
     American.
       This problem calls for both a short term and a long term 
     solution.
       For the short term, the only immediate source of talent to 
     fill the gap is immigration. But, by this summer American 
     businesses will reach the limit on the small number of highly 
     skilled temporary workers they can currently bring in from 
     abroad. Last year our employers reached this 65,000 cap for 
     the first time in history, and we did it by the end of 
     August. If no action is taken this year, the cap will be 
     reached by February of 1999 and even earlier the following 
     year. This would be disastrous. If American companies cannot 
     find home grown talent, and if they cannot bring talent to 
     this country, some of them will move their operations 
     overseas, taking American jobs with them.
       And that is why I am going to use my position as Chairman 
     of the Senate Immigration Subcommittee to propose that we 
     increase the number of higher skilled temporary workers we 
     allow into the United States. This will keep American 
     companies in this country, saving American jobs and 
     contributing to the growth of the economy. It would also give 
     us time to formulate a long-term solution.
       In my view, we can produce the talent here in America to 
     meet our skilled labor needs. And that's where the surplus 
     could come in. Through wise investments in human capital we 
     can give kids in this city, and in every

[[Page S1293]]

     other city in America, including kids whose opportunities 
     seem severely limited, the chance to be part of the new high-
     tech economy.
       Our young people have what it takes to be valuable 
     employees in our high-tech age. But our educational system is 
     not giving them the skills they need to succeed. The National 
     Research Council estimates that three quarters of American 
     high school graduates would fail a college freshman math or 
     engineering course. Most don't even try. Only 12 percent of 
     1994 college graduates earned degrees in technical fields.
       This is not acceptable. In a highly advanced economy like 
     ours we cannot continue to function without highly skilled 
     workers. And our workers cannot continue to prosper unless 
     our educational system gives them the skills they need to 
     succeed.
       To begin, I propose we invest $1 billion per year, the 
     balance of the surplus, to annually provide at least 100,000 
     more Americans with scholarships for study in scientific and 
     technical areas. Let's start training unemployed Americans in 
     skills needed in the information technology industry. 
     Combined with approaches to increase parental choice in 
     determining their children's schooling and to move resources 
     out off Washington and back to the school districts, local 
     school boards and parents, I believe that this investment can 
     increase the skill levels of our workers, to everyone's 
     benefit.


                          A Golden Opportunity

       Well, these are some of the ideas I am considering, one 
     possible blueprint for our entry into the age of surplus.
       In closing let me say I believe we have a golden 
     opportunity. As we stand on the edge of a new century, 
     possibilities are opening up for all Americans. We remain the 
     world's richest nation, and we are richer than we have ever 
     been. Now, after decades of overtaxing and overspending, 
     Washington finally has managed to balance the budget and, 
     provided we institute policies that make sense, soon will 
     produce a surplus.
       But this opportunity will not be with us forever. If we do 
     not plan out how we should use the impending surplus it will 
     disappear into more ``Washington-knows-best'' programs that 
     will simply trap more Americans into lives of dependency and 
     desperation.
       But if we are creative we can forge a new path. We can move 
     forward, with optimism, secure in the knowledge that our 
     people want opportunity, not handouts, that our economy can 
     continue to produce prosperity, if only we will let it, and 
     that the entrepreneurial spirit remains alive in America.
       We can move toward growth and prosperity for the next 
     century if we are willing to use the surplus as a tool to 
     increase savings and investment, to get the Social Security 
     system back on a sound footing through individual choice, to 
     overhaul our tax system, giving greater control over their 
     money back to our taxpayers, and to rebuild the 
     infrastructure and human capital so crucial to our economy.
       Responsible, limited government, combined with the spirit 
     of the American people, can lead us into a new century of 
     unprecedented growth and opportunity, in which the American 
     dream can become a reality for everyone fortunate enough to 
     be an American.
       I would welcome your input, here and now or in the future, 
     whether regarding these principles or regarding the reforms I 
     have talked about today. I hope that we will have a chance to 
     discuss these issues, which will be so much a part of public 
     debate in Washington in the coming months, and I thank you 
     for having me speak today.

                          ____________________