[Senate Hearing 108-521]
[From the U.S. Government Publishing Office]
S. Hrg. 108-521
CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL YEAR 2005
=======================================================================
HEARINGS
before the
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
January 27, 2004--CBO BUDGET AND ECONOMIC OUTLOOK
February 5, 2004--THE PRESIDENT'S BUDGET PROPOSAL
February 12, 2004--THE PRESIDENT'S FISCAL YEAR 2005 BUDGET PROPOSAL
February 13, 2004--THE PRESIDENT'S FISCAL YEAR 2005 BUDGET PROPOSAL
February 25, 2004--THE PRESIDENT'S HOMELAND SECURITY
Printed for the use of the Committee on the Budget
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COMMITTEE ON THE BUDGET
DON NICKLES, Oklahoma, Chairman
PETE V. DOMENICI, New Mexico KENT CONRAD, North Dakota
CHARLES E. GRASSLEY, Iowa ERNEST F. HOLLINGS, South Carolina
JUDD GREGG, New Hampshire PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado PATTY MURRAY, Washington
CONRAD BURNS, Montana RON WYDEN, Oregon
MICHAEL ENZI, Wyoming RUSSELL D. FEINGOLD, Wisconsin
JEFF SESSIONS, Alabama TIM JOHNSON, South Dakota
JIM BUNNING, Kentucky ROBERT C. BYRD, West Virginia
MIKE CRAPO, Idaho BILL NELSON, Florida
JOHN ENSIGN, Neveda DEBBIE STABENOW, Michigan
JOHN CORNYN, Texas JON S. CORZINE, New Jersey
Hazen Marshall, Majority Staff Director
Mary Ann Naylor, Staff Director
(ii)
C O N T E N T S
__________
HEARINGS
Page
January 27, 2004--CBO Budget and Economic Outlook................ 1
February 5, 2004--The President's Budget Proposal................ 71
February 12, 2004--The President's Fiscal Year 2005 Budget
Proposal....................................................... 123
February 13, 2004--The President's Fiscal Year 2005 Budget
Proposals...................................................... 203
February 25, 2004--The President's Homeland Security............. 263
February 26, 2004--The President's International Affairs Budget.. 331
STATEMENTS BY COMMITTEE MEMBERS
Chairman Nickles..............................1, 71, 123, 203, 263, 331
Senator Bunning......................................161, 242, 301, 370
Senator Conrad................................2, 71, 124, 207, 264, 332
Senator Domenici.....................................162, 242, 340, 367
Senator Enzi...................................................136, 115
Senator Feingold..........................................167, 113, 299
Senator Johnson.................................................. 192
WITNESSES
Bolten, Joshua, Director, Office of Management and Budget........ 83
Holtz-Eakin, Douglas, Director, Congressional Budget Office...... 22
Powell, Hon. Colin L., Secretary, United States Department of
State.......................................................... 355
Ridge, Tom, Secretary, Department of Homeland Security........... 291
Snow, John, Secretary, United States Department of the Treasury.. 211
Thompson, Hon. Tommy G., Secretary, United States Department of
Health and Human Services...................................... 167
QUESTIONS AND ANSWERS
Questions and Answers................................116, 243, 303, 381
ADDITIONAL MATERIALS AND CHARTS SUBMITTED
Testimony, charts, and graphics submitted........................ 371
THE CONGRESSIONAL BUDGET OFFICE BUDGET AND ECONOMIC OUTLOOK
----------
TUESDAY, JANUARY 27, 2004
U.S. Senate,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to notice, at 10:07 a.m., in
room SD-608, Dirksen Senate Office Building, Hon. Don Nickles
(chairman of the committee) presiding.
Present: Senators Nickles, Domenici, Gregg, Allard, Enzi,
Sessions, Bunning, Crapo, Ensign, Conrad, Hollings, Sarbanes,
Wyden, Nelson, and Stabenow.
Staff present: Hazen Marshall, majority staff director; and
Cheri Reidy, senior analyst for budget review/revenues.
For the minority: Mary Ann Naylor, staff director; and Jim
Horney, deputy staff director.
OPENING STATEMENT OF CHAIRMAN NICKLES
Chairman Nickles. Good morning. This morning, we will hear
testimony on CBO's budget and economic outlook for the years
2005-2014. We are delighted that Dr. Holtz-Eakin is with us
again. We look forward to his presentation before the
committee.
For the information of our members, we have scheduled
several hearings in a rather aggressive schedule, trying to
comply with our statutory deadline of completing the budget
resolution conference agreement by April 15th. The House is
going to be in recess for 2 weeks prior to that. We are going
to be in recess 1 week prior to that. So we are going to have a
fairly aggressive schedule, about a week faster than we did
last year, to complete our work by the deadline. We actually
have to be--for the Senate, we have to complete by April the
9th because we are in recess on April the 12th. So we are going
to have a fairly aggressive schedule.
Next week, we will have OMB testify on Tuesday. Then we
also have a hearing scheduled a week from tomorrow with
Secretary Snow. And then following that, we have a hearing
scheduled with Secretary Thompson, Secretary Colin Powell, and
we also hope to have Defense and Homeland Security hearings
scheduled.
So we are going to have a fairly busy couple of months to
have this completed really by the end of March, and I want to
thank my colleagues for their cooperation in that. I also want
to thank colleagues for the tenor and the tone of the hearings
that we had last year as well as the markup in committee and
debate on the floor. I think we were able to proceed
senatorially, and I thank my colleagues, especially my
colleague from North Dakota. And I will call upon him for his
opening remarks as well, and then I might make a few remarks
afterwards.
Senator Conrad.
OPENING STATEMENT OF SENATOR CONRAD
Senator Conrad. Thank you, Mr. Chairman, and thank you for
the many courtesies that you and your staff have extended to
our side of the aisle. I do think we can have differences, very
serious policy differences, but do it in a way that is in the
spirit of cooperation, and I think we have done that, and that
is much to your credit.
I would also like to welcome the Director here today. As a
native of Syracuse, I am not surprised you were able to make
it. It is amazing what happens in this town with a little bit
of snow. All of a sudden, everything shuts down. But I am glad
to see that you are here.
Mr. Director, I very much appreciate the analysis that you
have put before us because I think it is important to the work
of this committee and important to the work of the Congress.
This was the headline this morning in the Washington Post:
CBO says the deficit will reach $477 billion this year. Pretty
stunning. That is $100 billion more than the biggest deficit we
have ever had in this country. And the sub-headline says,
``Extending Tax Cuts Could Double Debt.'' The President is fond
of saying it is the people's money, we ought to give it back to
the people. It is also the people's debt. And, in effect, what
the President is doing is borrowing money from the people in
order to give it back to some people and dramatically increased
the debt. And I think we have to question very carefully
whether this set of policies that is exploding the deficit and
debt, not just in the short term--I want to make clear, I am
much less concerned about the short term than I am the long
term. I think it is the long-term implications of deficits and
debt that is growing geometrically that we have to worry about.
[GRAPHIC] [TIFF OMITTED] 94065.003
Let's go to the next.
In the last year of the Clinton administration, we enjoyed
a $236 billion surplus. Now, in the third year of President
Bush's term, we have a $477 billion deficit, by far the largest
in dollar terms we have ever had. But it is not just in dollar
terms that we see a large deficit. Some have said, well, the
deficit is relatively small as a percentage of GDP. I think
when fairly judged, one does not see that. One sees, in fact,
that the deficit as a percentage of gross domestic product,
excluding Social Security, looking at it on an operating basis,
is extremely high by that measure as well--5.5 percent of GDP,
a level that has only been exceeded once since World War II,
and that was in 1983.
[GRAPHIC] [TIFF OMITTED] 94065.004
But it is not just the short-term deficits that alarm me.
The thing that is of much greater concern is that we face an
unending flood of red ink, massive budget deficits for as far
as the eye can see. This result comes from building on your CBO
baseline, making permanent the tax cuts that the President
advocates, and fixing the alternative minimum tax, just making
those two changes, no other changes--making the tax cuts
permanent, which the President advocates, and fixing the
alternative minimum tax, which will apply to over 40 million
taxpayers by the end of this decade if we do not take action.
And what you can see is deficits that are massive throughout
the 10-year period.
Let's go to the next chart.
Some have said, well, it is because of spending, it is a
spending explosion that has created the problem. First of all,
I think all of us have to acknowledge spending has gone up.
But, most of the spending increase has been for defense and
homeland security. That is where the big increases have
occurred.
But if you look, the red line is total outlays of the
Federal Government since 1980. The trend on spending as a share
of gross domestic product has actually been sharply downward.
Yes, there has been a substantial uptick as a result of
September 11th, the increased expenditures for defense and
homeland security being the primary culprits. But you can see,
even with those increases, we are well below the levels of the
1980's and 1990's.
Let's go to the next chart that shows where the increase
has occurred. The increase in spending, 92 percent of it has
been in just these categories: defense, of course, by far the
biggest, which all of us supported as a response to September
11th and the other events that have transpired. The next
biggest increase is homeland security. The third category is
rebuilding New York, the airline bailout, and increased
international spending. That is where the increases have been.
[GRAPHIC] [TIFF OMITTED] 94065.008
Let's go to the next chart. The President is now focused on
domestic spending, which is a very small part of Federal
spending. He says he is going to restrain the growth of
domestic non-homeland security spending. The fact is there has
been very little growth in domestic spending. Not discretionary
spending. Many of us talk about discretionary spending that
would include all four of these categories. But you see that
domestic spending has been almost flat in real terms--in real
terms there has been very little growth. In real terms, the
growth has been in defense, international, and homeland
security.
[GRAPHIC] [TIFF OMITTED] 94065.009
Let's go to the next chart.
It is the revenue side of the equation where we have really
seen things fall out. As a share of GDP, we now anticipate,
with CBO's numbers, that revenue as a share of gross domestic
product will reach its lowest level since 1950. So we have
clearly got a serious revenue problem.
[GRAPHIC] [TIFF OMITTED] 94065.010
The President tells us not to worry, that he will cut the
deficit in half. But if we look back on what he has told us
every year, it turned out to be wrong. He told us in 2001, ``We
can proceed with tax relief without fear of budget deficits.''
That was wrong. In 2002, he told us, ``Our budget will run a
deficit that will be small and short term.'' He was wrong
again. Last year, he told us, ``Our current deficit is not
large by historical standards.'' He was wrong again.
[GRAPHIC] [TIFF OMITTED] 94065.011
Now he tells us, ``The deficit will be cut in half over the
next 5 years.'' Will he be wrong again? Well, I don't know. But
I think it really misses the point because the larger truth is,
whatever happens in the near term is dwarfed by the long-term
implications of his budget policies.
We can see the dollar has declined precipitously against
the euro, which confirms a warning that has just been made.
Let's go to the next chart, and I am going to conclude on this.
This was in the Washington Post of yesterday. ``Currency
traders, fretting over that dependency''--referring to our need
to borrow money--``have been selling dollars fast and buying
euros furiously. The fear is that foreigners will tire of
financing America's appetites. Foreign investors will dump U.S.
assets, especially stocks and bonds, sending financial markets
plummeting. Interest rates will shoot up to entice them back.
Heavily indebted Americans will not be able to keep up with
rising interest payments. Inflation, bankruptcies, and economic
malaise will follow.''
[GRAPHIC] [TIFF OMITTED] 94065.013
Now, none of us know when that line is crossed, when these
twin deficits, the budget and trade deficits, will lead to the
kind of results that were being discussed by economists
yesterday in the Washington Post. But goodness knows we have
lots of warnings: the Comptroller General of the United States,
warning us of the growth of deficits and debt; the
International Monetary Fund, saying the growth of deficits and
debt in this country threaten not only our own economic
security but global economic security.
Mr. Chairman, these are serious questions and really
require serious responses by this committee, the Congress, and
the administration.
Chairman Nickles. Senator Conrad, thank you very much.
Would you mind repeating for Senator Ensign and others the
growth rate on non-defense? It might help us on our side.
I pointed out to some of our colleagues, my good friend
Senator Conrad used real growth, which is adjusted for
inflation--correct me if I am wrong--and it showed not too much
real growth in non-defense, non-homeland security spending for
last year, and that is correct. I just wanted that to be known
because we have heard otherwise, mainly because a lot of
people, Heritage and others, were using growth in outlays
rather than growth in budget authority, which, frankly, goes
back to 2001, 2002, and 2003, things that were in progress, and
so on.
Let me just make a couple of comments, and I very much
appreciate my colleague. One, we did pass a stimulus package
last year. I supported it. Actually, I think Democrats had a
stimulus package; we had a stimulus package. We passed a
stimulus package, and it worked. I have a couple of charts to
show that.
The stock market is up by several trillion, from about $11
trillion to over $15 trillion since February of last year. That
is a very significant increase. I believe the New York Stock
Exchange is up about 25 percent and Nasdaq up about 50 percent,
and combined, a total of about 35 percent. Our tax changes that
we made where we cut the rates on dividends and capital gains
worked. It did stimulate the economy.
[GRAPHIC] [TIFF OMITTED] 94065.016
The gross domestic product, which had its first decline in
2000 and then went further down in 2001, has shown significant
appreciation, particularly the last couple quarters. And so the
economy is starting to move, and that is very positive.
[GRAPHIC] [TIFF OMITTED] 94065.017
The unemployment rate has declined. It has declined from a
high of about 6.3 percent to 5.7 percent, so that is positive.
Total employment has improved, and improved dramatically. If
you use the household survey, which includes self-employed and
others, the total employed has risen rather dramatically,
particularly in the last three quarters. So we are seeing some
positive signs.
[GRAPHIC] [TIFF OMITTED] 94065.018
[GRAPHIC] [TIFF OMITTED] 94065.019
I also agree with Senator Conrad; there are two reasons for
this big deficit. One is that revenues have gone down, and you
might show that chart. The revenues are in the green. Revenues
in the year 2000 were over $2 trillion. Now, last year, the
year completed, 2003, they are at $1.78 trillion. That is about
a $240 billion reduction, a reduction every year, the first
time in history that has happened. That did not happen solely
because of the tax cuts. It happened primarily because the
economy really did drop--tank--in the year 2000. Nasdaq
declined by about 50 percent in the year 2000. It is kind of
interesting reading these articles. When did the recession
start? Well, if you look at the stock market, the recession
started in March of 2000 because Nasdaq was about 4,000 and
Nasdaq was at 2,000 in December. So that has caused a
precipitous decline in revenue.
[GRAPHIC] [TIFF OMITTED] 94065.020
And then Senator Conrad is also correct, we have had a lot
of new spending primarily to fight the war on terrorism. We
have had a total of $242 billion in supplemental appropriations
to fight the war on terrorism. Between the aid for New York and
the Pentagon as a direct result of September 11, that was about
$40 billion, and then we have had a supplemental last year of
$87 billion, the year before that I think $91 billion to fight
the war in Afghanistan and Iraq. So a total of $242 billion.
Now, there are some other things that were added to that.
We had about $30 billion in emergency unemployment benefits and
so on, but a very significant increase in spending, I believe
one-time spending. Now, correct me if I am wrong, Mr. Director,
but under your proposal--or under your snapshot, you assume
that the $87 billion that was in the supplemental last year
would be ongoing throughout the next 10 years. That is not
going to happen. We may have some additional supplemental
spending for our efforts in Iraq and Afghanistan, but I do not
believe they will be anywhere near the $87 billion. So that is
inflated in the baseline and will be reduced.
Also, the assumption that, well, all tax cuts that were
enacted will be extended is false. I do not believe that is
intended by this Senator. We had some things that were done
temporarily to stimulate the economy: the accelerated bonus
depreciation, which most people supported. It had strong
bipartisan support, but the policy was for a short period of
time to encourage investment in the next year or so, to get the
economy going, to break out of that doldrum, to get some
economic activity, to create some jobs. And so we did that.
I think you can paint lots of scenarios that are very bad,
but I do not think that is going to happen. And will we get the
deficit down in half? It is very much this Senator's intention
to do that and more. And so we will see if we cannot work
together to do it.
I also want to agree with Senator Conrad, long term there
are serious problems, and particularly demographically when you
look at Medicare, and we added to that last year when we passed
the prescription drug bill. My guess is the cost of that will
greatly exceed expectations, and I will ask Director Holtz-
Eakin about that in a little bit. But long term, that is a big,
big, big challenge, and we need to be able to address it.
But I might mention that was supported by members of both
parties, and I might mention, too, that there were amendments
on the floor that would have had a much more expensive proposal
than what we ended up enacting. I believe 50 percent more was
supported by a majority of members on the Democrat side.
So long term, we have big challenges, and we need to work
together. They will never be solved by one party or another. We
need to work together to solve those, and I look forward to
working with any of my colleagues that show an interest in
trying to do that. And this Senator for one is willing to bite
off as much as we can bite off this year. I realize it is an
election year, but I am more than happy to work with my
colleagues to try and fashion a package. I would love to have a
bipartisan budget this year, and I would love to see us work
together to solve some of these problems, both short term and
long term. So I thank my colleagues.
Unless colleagues are just dying to make an opening
statement, I would like to call upon Dr. Holtz-Eakin to make
his remarks, and then we will alternate back and forth
according to time of appearance for colleagues to ask
questions. Is that agreeable?
Dr. Holtz-Eakin, thank you very much for your appearance
this morning.
Senator Sarbanes. Will the chairman appropriately note that
many of us gave up making opening statements and keep that in
his ledger book?
Chairman Nickles. We will always give the Senator from
Maryland great points for that, and I would ask Dr. Holtz-Eakin
if he could keep his remarks to 10 or 12 minutes, and then ask
my colleagues to try to keep their questions to a 5- or 6-
minutes per round.
Dr. Holtz-Eakin?
STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL
BUDGET OFFICE
Mr. Holtz-Eakin. Mr. Chairman, Senator Conrad, members of
the committee, thank you for the opportunity to appear today.
You have our report outlining the economic and budget outlook
for fiscal years 2005-2014. We have also submitted an
abbreviated version of that report as written testimony for the
record. I will provide an even more abbreviated version in my
oral remarks so that we can turn to any questions that might
remain.
Let me begin with the numbers. The CBO projects that the
Federal Government will experience a deficit of $477 billion in
fiscal year 2004. This will decline over the budget window. In
2005, we project $362 billion; in 2006, it would be down to
$269 billion and would steadily diminish thereafter, until the
budget reaches balance in the years, roughly speaking, after
2011. In particular, the $477 billion, as noted, is a record
dollar deficit for the Federal Government. As a fraction of
GDP, or national income, and a measure of our resources to
service all commitments, it is 4.2 percent, and the projections
are that it will diminish first to 3 percent and then down to
2.1 percent.
[GRAPHIC] [TIFF OMITTED] 94065.021
Another measure of the fiscal condition is the debt-to-GDP
ratio, and these projections have a debt-to-GDP ratio that
rises from about 38 percent, reaches between 40 and 41 percent,
and plateaus there until after 2011, at which point it begins
to diminish down to about 35 percent.
Now, as has been noted, the CBO projections are built on
several pieces. The first pieces are economic forecasts, which
I will touch on briefly. They are also built on the baseline
concept of a neutral benchmark against which further
legislation can be measured. That neutral benchmark requires us
to extend current law in the course of the projection period.
In this particular context, that has implications on both
sides of the budget. On the receipt side, we assume that the
tax cuts passed in 2001 and 2003 sunset on schedule, as written
in law. And on the spending side, we assume not only that
current mandatory programs will evolve according to the
demographics and structure of those programs, but that all
discretionary spending currently on the books, inclusive of the
$87 billion supplemental, will remain on the books over the 10-
year projection window and that the spending will rise only at
the rate of inflation. So our assumptions in this baseline show
discretionary spending rising at 2.5 percent per year, and they
include the $87 billion supplemental.
Now, in terms of changes in the budget outlook since we
last reported in August, there are really two major
developments. The first is the economy, which has grown even
faster than we had projected in August. Our August projection
included a fairly robust cyclical recovery. In the third
quarter of this year, we saw GDP growth really much stronger
than we had projected. And, indeed, it may be the case that the
fourth quarter turns out to be stronger than even this
projection anticipated. We had something on the order of a
little below 4 percent built into this projection, and there
are estimates that range north of that, perhaps nearer 5
percent, depending on how things play out.
So one change since August has been the economy. That has
near-term benefits, not dramatic because we had a fairly strong
recovery in there to begin with, but it has improved the
picture from an economic point of view.
A second major development is legislative. The laws passed
by Congress since our August update have contributed about $680
billion to the deficit over the 10-year window. That is in
contrast to a total of about $300 billion, in round numbers,
attributed to economic and technical revisions.
And so those are the two big changes. I think the lesson
there is that, from the point of view of the path going
forward, it will be policy choices that largely dictate the
condition of the budget, as opposed to the economic future, at
least to the extent it can be anticipated.
Now, I will go briefly over economic forecasts. This one
chart is meant to summarize the entire forecast; we do the best
we can on that. What we see is an economy that is currently
operating below potential. We have had a recession. Our
forecast is that the economy will grow rapidly, at 4.8 percent
this year, 4.2 percent next year. As a result of that, we will
see unemployment decline from something that averages around
5.8 percent this year down to 5.3 percent next year. And that
cyclical recovery will close the gap between the light-blue
line at the bottom and the dark-blue line which represents the
capacity of our economy to produce.
[GRAPHIC] [TIFF OMITTED] 94065.022
Over the long term, however, it is that capacity which is
central to the amount of income in the economy. So closing the
gap more rapidly----being wrong in the fourth quarter or having
a bit faster growth than we anticipate next quarter----really
just serves to close more quickly and does not change the long-
run budgetary picture very much. Instead, the large uncertainty
from an economic point of view, in terms of the long-term
budget outlook, is how fast that potential will grow, and there
the major issue is how one thinks about the productive capacity
and particularly the labor productivity growth that we have
seen recently.
As is discussed at length in the report, we have
experienced very rapid productivity growth in this recession
and recovery, comparable only to that during a brief period in
the 1950's. And it has raised lots of questions in the minds of
analysts about the future path of productivity. What we have
done in our projections is to acknowledge that rapid
productivity growth by raising our estimate of the productive
capacity of our economy, moving it up, but not dramatically
changing our growth rate of that productive capacity. So there
is some benefit to that, but it is not something we have
extrapolated beyond the historical increase, largely on the
grounds that we cannot in our digging through the numbers find
a solid case that there has really been a change in the trend
in the economy. But from the economic point of view, that is
the central piece of the forecast. It is our expectation that
we will continue to operate in a rapidly growing, low
inflationary environment. Interest rates will begin to move up,
but not dramatically so, until a couple years from now.
Now, built on top of that economic forecast are projections
for receipts and outlays. Revenues here are shown in the dark-
blue line. Over the 10-year projection period, revenues are
projected to grow overall at about 7.2 percent per year. That
is in contrast to the average rate of growth of nominal GDP,
which is 4.7 percent. So as a consequence, receipts will rise
as a fraction of GDP from their low in 2004 of 15.8 percent to
a total of 20.1 percent in 2014.
[GRAPHIC] [TIFF OMITTED] 94065.023
Shown in a dotted line at the bottom is the average
receipts collected out of our national income of about 18
percent over the period since 1962. We will start below that
and rise above. The increase in receipts in our baseline is
largely due to the action of the individual income tax. The
remainder of the tax bases, with the exception of the
expiration of the partial expensing at the end of this year, do
not show a great deal of action.
The rise in the individual income tax comes from two
sources. First is the sunsets of the tax cuts in 2001 and 2003,
which are shown in our baseline. Of the 4.3-percentage-point
rise in revenues as a fraction of GDP, about 2.3 percent comes
from that source. However, the remainder, the remaining 2
percentage points of increase in receipts, comes from a variety
of other sources.
The first is the fact that with a growing economy, people
will become better off in real terms, and they will move into
higher tax brackets and pay more in income taxes.
The second is that we anticipate a resumption in the
realization and taxation of capital gains closer to historic
norms. We have seen a large drop-off in the capital gains
component. We anticipate that to rise in our projection period.
The third is the beginning of the retirement of the baby-
boom population that carries with it the taxation of tax-
deferred savings accounts, IRAs, 401(k)'s. Some of those
revenues will appear in the Federal budget.
And, finally, included in our projections is a rise in the
importance of the alternative minimum tax. The alternative
minimum tax is not indexed for inflation, and even given the
low inflation outlook that we have in our projections, we will
see an increasing number of taxpayers become subject to the
alternative minimum tax. At present, about 3 million taxpayers
are subject to the AMT. Over the period to 2014, that could
rise to as high as 30 million taxpayers.
So those are all sources of increase in receipts in this
baseline under current law.
On the outlay side, we have built this to be inclusive of
the legislation just passed by the Congress, signed by the
President. So we have the omnibus built into our baseline, and
it correctly captures all the appropriations therein. As I
mentioned earlier, it includes the $87 billion supplemental
appropriation and essentially puts that in for every year and
raises it with the rate of inflation. Ten times 87 gives you
$870 billion to begin with. With debt service, that contributes
about $1.1 trillion to the 10-year deficit number in our
projections.
On the mandatory side, we have mandatory spending rising at
an average rate of 5.5 percent per year. That is driven largely
by the entitlement programs--Social Security, Medicare, and
Medicaid. And, indeed, in those programs, the rate of growth
will rise over the course of the projection period. By 2014,
those programs are rising at 6.5 percent per year, and that is
the beginning of what one would anticipate to be a large
increase in the demand for budgetary resources by those
programs. The combination of an aging population, the
retirement of the baby-boom generation, and rising health care
costs in particular place those entitlement programs on track
to demand ever larger fractions of our national income.
The last point that I will note before turning to the
closing slide is that there has been a great deal of discussion
in the preparation of this report and even in the opening
remarks by the Chairman and Senator Conrad about the growth
rate of different discretionary spending categories. I will
simply note--and we can return to this in questions--that there
is a large divergence between growth measured as outlays versus
growth measured in budgetary resources, particularly on a
program-by-program basis. And that is built into our baseline
as well.
Finally, in an effort to give the Congress some sense of
the degree to which the budget outlook depends on choices made
by Congress and the administration, we outlined a series of
variations from the statutory baseline and their implications
for the long-run budget outlook. These are intended to give you
orders of magnitude and stylized notions of the kinds of
budgetary resources that are at stake.
The top panel shows those that would reduce any surplus
that might emerge or increase the deficit. There the first
policy alternative that is shown is to extend all expiring tax
provisions. There are really three classes of expiring tax
provisions, which we have tried to lay out in a table in
Chapter 4 of the report. One type is the tax cuts in 2001 and
2003, EGTRRA and JEGTRRA. The second is the partial expensing,
which has been scheduled to end at the end of 2004. And the
third is a variety of smaller individual items that
collectively contribute to this estimate. But if one were to
make all those tax provisions permanent and not allow them to
sunset, the total impact on the budget would be $2.2 trillion
over the 10-year window.
A second tax item that has gotten attention, as I mentioned
earlier, is the alternative minimum tax. To give you a sense of
the magnitude involved, we included a reform of the alternative
minimum tax, which is very simple. It is a plain-vanilla reform
in which the AMT is indexed for inflation so that no one moves
from the individual income tax to the AMT strictly due to
inflation alone. Instead, to have the AMT apply, you have to
really be richer, have your income rise in real terms. That
reform of the AMT would cost about $470 billion over the 10-
year window. I would point out there are many different
possibilities for changes in the AMT, and the particular cost
would depend on the proposal itself.
Then, finally, you can see that, instead of assuming a
fairly stringent policy baseline of 2.5 percent growth in
discretionary spending a year, we could have spending
essentially remain constant as a share of GDP, in which case it
would rise about 4.7 percent per year; that would cost $1.6
trillion in increased outlays over the 10-year window. And then
the final alternative is increasing spending at the rate that
has occurred in the past 5 years, which is 6.9 percent;
spending increases over the 10-year window at that rate would
add $3.2 trillion.
The bottom panel goes the other direction. You could
exclude the supplemental. As I mentioned, that is worth about
$1.1 trillion. One might imagine a freeze in total
discretionary spending, so declining in real terms. That would
raise the budget surplus or reduce the deficit by $1.3
trillion.
And I think the hope is that that will provide Congress
with some information about the kinds of things that would be
on the table in terms of policy options. And given the CBO
forecast of a solid cyclical recovery and an economy that is
reaching its productive capacity and then growing at a healthy
rate thereafter, such figures suggest that in terms of
budgetary outcomes, it will be policy decisions made by the
Congress and the administration much more than the anticipated
path of the economy at this point which will be central.
So, with that, I will close, and I would be happy to answer
your questions.
[The prepared statement of Dr. Hotltz-Eakin follows:]
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Chairman Nickles. Thank you very much. I have just one
comment.
CBO and OMB and all the economists missed the revenue
projections greatly in 2000, or I guess when testimony was made
in 2001. They greatly overestimated revenues. Senator Conrad
and I have wrestled around--well, President Clinton gave us a
$5.6 trillion surplus. That was the projection in 2001, but way
off the mark, greatly underestimating what the decline in the
stock market bubble did to revenues. Just look at NASDAQ in
2000--now it has started to come up, but the revenues really
dropped as a result of that, and not just that year, but
frankly for a couple of years, because you had capital losses.
Now we have had just in this year alone an enormous
increase in stock market values. Just as an editorial comment,
I hope you are greatly missing it again. I cannot help but
think if you have $4 trillion of new equity, those capital
gains, even though we are taxing them at a lower rate, we
should collect more revenue. Every time we reduce capital gains
rates and we have had an increase in turnover in sales and so
on, there has been a lot of new revenue--just an editorial
comment. It was missed greatly going down, and I hope it is
missed greatly going up. There is a lot of economic activity
out there to create that kind of robust increase in market
value. Thank goodness there is. I am hopeful that you greatly
underestimate it again. Maybe not. I do not know. That is just
my hope.
As a matter of fact, I am disappointed. Because we enacted
the growth package, and we have had more robust growth than
most, I was leading the charge saying let us have zero tax on
dividends, and we ought to have 10,000 Dow Jones index, and we
have exceeded that at a 15 percent rate. So I am thinking there
should really be some real positive revenues. Yet you came out
and said, well, we have done economic assumptions, and between
our economic assumptions and our technical assumptions, we
think it is about $350 billion worse over the 10-year period.
We think inflation is lower and so on. I find that kind of hard
to deal with. I understand you said that short-term, we get a
little bump, but long-term, it does not make any difference.
And then I look at your 10-year projections, and with the two
of them combined, a $171 billion increase in deficit due to
economic factors. The economic factors are all positive. And
then, technical revisions to your baseline are another $134
billion. I do not know. There may be too much pessimism for me.
I cannot understand it. If you want to comment on that, you
can, but let me make just two other points that are very
critical.
The legislative changes that were enacted since the August
baseline, $681 billion over 10 years, all that was on the
outlay side; is that correct?
Mr. Holtz-Eakin. Yes, sir.
Chairman Nickles. And that was primarily the Medicare bill,
adding prescription drugs and the other Medicare changes, and
what else?
Mr. Holtz-Eakin. The Medicare bill is a little under 70
percent of that, and then there is the increase in
appropriations above and beyond last year's, the difference in
the supplementals (between $87 billion and $79 billion),
carried out over 10 years. And there is some debt service
attached to that number as well.
Chairman Nickles. OK. I would appreciate a breakdown of
that if you could give me a breakdown.
Mr. Holtz-Eakin. We can get you all those figures.
Chairman Nickles. And maybe it is in your figures, and I
have not had a chance to review it.
The Medicare bill--Senator Conrad and I both alluded to the
long-term problems that we are going to have in entitlement
programs, primarily Medicare. Medicare Part D--correct me if I
am wrong; I am looking at page 13 of our Budget Outlook--it
says the total cost of Part D, the new Medicare prescription
benefit, is $771 billion; offsets, some changes, but basically,
the increase in outlays is $758 billion; receipts from
beneficiaries, $134 billion; and receipts that we get back from
the States, $88 billion, for a net of $535 billion. And then,
we expect savings on Medicaid, since we are assuming Medicaid,
$138 billion. That is how you get to your net of $395 billion
over the 10-year period of time.
But gross outlays, you are talking about $771 billion.
Mr. Holtz-Eakin. Yes.
Chairman Nickles. What is your estimate on the cost of the
program over the next 10 years?
Mr. Holtz-Eakin. Over the years 2004 to 2013, if you just
take the bottom line impact, $395 billion. But dropping fiscal
year 2004, where there are essentially no outlays because the
program has not started up yet and then adding the last year,
where it will cost about $80 billion on net, moves the cost
from $395 billion to something on the order of $475 billion
over this 10-year budget window.
Chairman Nickles. OK. What about the next 10 years; have
you done a guesstimate on that?
Mr. Holtz-Eakin. In preparation for House testimony last
year in August, we did take a look at the second 10 years of
any such program. We did not examine the particulars of this
bill as passed. It was preliminary at that time. We simply
extrapolated the final year net cost, something on the order of
$70 or $80 billion, looking at growth rates and costs of
prescription drugs. Doing that kind of calculation leads one to
a second 10 years that is somewhere in the vicinity of $1 to $2
trillion, depending on the range of uncertainty on the growth
rate of drug prices.
Chairman Nickles. So, for the next 20 years, you think the
cost of the bill would be pretty close to $2 trillion?
Mr. Holtz-Eakin. If you do 20 years, yes--within the range
of possibilities.
Chairman Nickles. Well, I read your comment, and I just
wanted to clarify it, because it is on a ramp like this, and
people should be aware of it. A lot of people will say, well,
over 10 years, if it is $400 billion, that is $40 billion a
year--that is not what we passed. We passed something that has
very little cost the first couple years, and then it increases
rather dramatically in the outyears and continues to escalate.
I saw your comment where you thought it might be a couple of
trillion dollars.
This is not paid for. This is outside the beneficiaries'
contributions, so it would be paid for out of general revenues.
I might make mention of that.
One other comment. I notice your letter to Senator Frist
dealing with non-interference, or having the Government
negotiate drug prices--would you care to comment on that? Would
removing that language in the bill have any significant impact
on the cost of the program or on drug prices?
Mr. Holtz-Eakin. Our view of the private prescription drug
delivery in the bill is that those at-risk private firms will
have tremendous incentives to drive very good bargains with
pharmaceutical companies, and as a result, removing the
language prohibiting the Secretary from negotiating would have
negligible impact on the overall cost of the bill. There are
already plenty of incentives for cost control.
Chairman Nickles. I appreciate your comments.
Senator Conrad.
Senator Conrad. Thank you, Mr. Chairman.
Again, thank you, Dr. Holtz-Eakin, for your testimony.
Your analysis shows that the debt will increase by how much
over the next 10 years?
Mr. Holtz-Eakin. The debt-to-GDP ratio will rise----
Senator Conrad. No--I am talking now the debt in dollar
terms. How much will the debt in dollar terms increase over the
next decade if there are no additional tax changes or spending
changes?
Mr. Holtz-Eakin. Between 2005 and 2014, debt held by the
public will rise from $4.8 trillion to about $6.4 trillion----
so $1.6 trillion.
Senator Conrad. One-point-six trillion. And debt held by
the public now is $4.8 trillion?
Mr. Holtz-Eakin. That's the fiscal year 2005 projection.
Senator Conrad. OK. How much would it add to the debt if
the tax cuts were to be made permanent? How much would it add
to the debt over this period?
Mr. Holtz-Eakin. I have not done a specific calculation of
the debt outstanding if the 2001 and 2003 tax cuts alone were
made permanent, but we could certainly do that calculation and
would be happy to get it to you.
Senator Conrad. I notice on your chart, you have
``Extending the expiring tax provisions.'' How much would that
add to the debt?
Mr. Holtz-Eakin. Well, there is a cumulative deficit of
$2.2 trillion, but because of the variety of financing
mechanisms, that does not map directly into debt outstanding.
Again, it is a calculation we would be happy to provide to you.
Senator Conrad. Can you give us a rough--would it be more
than the $2.2 trillion or somewhat less than the $2.2 trillion?
Mr. Holtz-Eakin. It is as good a guess as we have. We do
not know if there is a particular bias one way or the other on
the timing.
Senator Conrad. So roughly, making the tax cuts permanent
would add another $2 trillion to the debt over the next 10
years?
Mr. Holtz-Eakin. Ballpark, yes.
Senator Conrad. So then, we would have a debt of $8.4
trillion instead of the $4.8 trillion we expect at the end of
this year.
Mr. Holtz-Eakin. Right.
Senator Conrad. You know, there has been a lot of talk by
some that deficits do not matter, that this buildup of debt and
these deficits do not matter. In your judgment, do deficits
matter?
Mr. Holtz-Eakin. Yes, I do think deficits matter. On
balance, deficits shift national resources away from saving
toward current consumption, and the impact of deficit spending
as a result differs depending on the state of the economy. In
those situations where the economy is weak, and there is very
little spending demand from private sources, that shift from
saving to consumption will bolster demand, and looking back, we
have seen that. At times when the economy is already fully
employed and there is plenty of private-sector demand, that
shift from saving to consumption has not the same benefits of
supporting the economy. Instead, it affects the supply side and
the accumulation of saving and national investment and the
growth in the capacity of the economy to produce. In both
cases, deficits matter, and their impacts differ.
Senator Conrad. Well, you have made a very good point here.
You have really differentiated the effect of deficits depending
on the state of the economy. As I hear you saying it, when the
economy is weak, deficits can give lift to the economy; when
the economy has recovered, then running deficits will actually
hurt long-term economic growth. Is that correct?
Mr. Holtz-Eakin. Running sustained large deficits in the
face of a full employment economy will have negative economic
growth consequences.
Senator Conrad. So as you look at these deficits going
forward, and you say there is going to be $1.6 trillion of
added debt if we do nothing, we will approximately double the
debt if we make the tax cuts permanent and address the
alternative minimum tax problem that you have described as
growing geometrically, so you would take that to be negative
for the economy if we run these deficits going forward and the
economy is growing as you project it to?
Mr. Holtz-Eakin. We incorporate into our baseline
projection, including the economic forecast, the deficit and
its consequences. In our forecast, that shows up mechanically
in the degree to which there is capital accumulation in the
economy, and as a result, the rate at which labor productivity
grows. Those impacts are not very large in the near term, but
they build over time.
Senator Conrad. Actually, you are quoted in The Washington
Post, and I want to see if that is a correct quote. ``The
cumulative corrosive impacts of sustained deficits in the face
of a full employment economy would on balance make the
extension of the tax cuts a `modestly negative policy choice,'
Holtz-Eakin said.''
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Is that a correct----
Mr. Holtz-Eakin. I will assume that it is a correct quote.
The context in which the question arose is exactly the question
you are raising. But in terms of the budget projections over a
10-year window, the impact of the tax cuts sunsetting in 2011
in the near term has negative impacts when marginal tax rates
go up for labor supply and thus GDP growth, and we lay those
out in the report. The other impacts of either making them
permanent or letting them sunset take longer, and they go
outside the budget window. So this sort of trade-off is really
one that has to be framed carefully in terms of the time period
over which you want to do the analysis.
Senator Conrad. OK. Let me ask you this. Spending--spending
and revenue--that relationship is what leads to deficits. When
we spend more--and right now, we are spending $900,000 a minute
more than we are taking in--it is kind of stunning--this year,
we are spending $900,000 more a minute than we are taking in.
What is the relationship of spending now as a share of our
gross domestic product to what spending was in the eighties and
nineties? Is spending more now or lower now?
Mr. Holtz-Eakin. In these projections, spending averages
about 20 percent of GDP, which is close to the post-war
historical average.
Senator Conrad. Close to the post-war historical average.
Let me put up--here is what my chart shows, that spending,
which has picked up now because of increases in defense and
homeland security, is still quite a bit below where it was in
the eighties and nineties. You were talking about post-war. I
was asking eighties and nineties, spending as a share of GDP.
This chart shows that spending now is below where it was in the
eighties and nineties. Is that correct?
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Mr. Holtz-Eakin. I will assume it is correct. There have
been variations over the post-war, certainly.
Senator Conrad. And in terms of revenue, what do you
anticipate revenue as a share of GDP being this year in
relationship to where it has been since World War II?
Mr. Holtz-Eakin. It is 15.8 percent in 2004 in these
baseline projections. The average is about 18 percent, as I
mentioned in my remarks.
The Chairman also raised the question of the path of
receipts in these projections. The amount in 2004 is low for
several reasons, some understood, some not well understood.
Certainly, policy has lowered receipts in 2004, and some of
that policy will go away--the partial expensing provision.
There has also been economic performance which is now
turning around, and we are seeing faster growth. But in
contrast to the rapid rise in GDP, production, we have not yet
seen evidence of a comparable rapid rise in taxable incomes, so
that economic growth really has not translated as much into the
tax base as one might have expected.
We have data at this point only through tax returns filed
in 2001, so we cannot fully diagnose the relationship between
what is going on in the economy and what we are seeing in
taxable incomes as well as we would like to, and some of these
mysteries will be resolved with time, and some, I think we will
get a better handle on sooner than that, as we see what happens
to measured wage compensation, for example, in the economy as
measured by the BEA over the next year.
So in terms of the revenue picture, we expect 2004 to be
transitorily low for a variety of reasons and then to pick up
thereafter.
Senator Conrad. And our numbers show the revenue as a share
of gross domestic product being the lowest since 1950. Do you
agree with that?
Mr. Holtz-Eakin. That's right.
Senator Conrad. I thank the Chairman.
Chairman Nickles. Senator Conrad, thank you very much.
Senator Enzi.
I might note for the interest of our colleagues that
Senator Crapo was actually here first. He beat me here, and
then he left, so I might have to put him back in the queue when
he returns.
Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman.
Mr. Holtz-Eakin, I particularly thank you for being here
and the difficulty of your job. It always occurs to me that
making these predictions is very difficult--but only when we
are talking about the future.
I can see from the material that I have been through why it
is easy to miss on the projections whether you are the director
of CBO or the President of the United States or one of the
Senators, or even somebody from the House or somebody from the
public. There are just so many interacting things.
First of all, I would like to ask that my entire statement
be made a part of the record.
Chairman Nickles. Certainly.
[The prepared statement of Senator Enzi follows:]
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Senator Enzi. I notice that CBO kind of isolated some
things and said that the economy and technicals put about 40
percent into the deficit in spending increases, 37 percent, and
the tax cuts, 23 percent. Is that a figure from----
Mr. Holtz-Eakin. That is a historical analysis, and we have
done a variety of----
Senator Enzi. And 2002 to 2011 was actually the baseline
that you were doing that on. And I appreciate Senator Conrad's
chart that shows where the bulk of this spending came from--the
war and national security, and the bailouts we did to take care
of the damages that were done as a result of September 11, and
I think we also had some that we did for all of the States that
were having some difficulties. I think you said that in your
projections, you continued about an $87 billion expense through
each of the years?
Mr. Holtz-Eakin. That is correct.
Senator Enzi. There are a lot of things that we cannot do
anything about. Spending, we can, I think. The average rate of
increased spending for the last 6 years was 6.9 percent when
you take all those things into consideration. I think that that
is unsustainable. We have to continually and fully support the
troops in Iraq and Afghanistan and all the other places in the
world. There are certain domestic priorities that we are going
to have to fund. But we still have to look at the areas of
spending. And people say, well, that is a pretty small part of
what there is out there, but that is all that we can work with,
so that is what we have to work with.
I am reminded of that old phrase, ``A billion here, a
billion there, and pretty quickly, it runs into money.'' We are
not very good at cutting anything. We are not even good at
slightly reducing things. What we go into--particularly in an
election year, and this is a Presidential election year, so I
think it might even be worse--is a phase of trying to outbid
each other on every program that comes along.
Now, business out there is not given the same options that
we are given. They have a revenue that they project, and they
budget against that, and somehow they have to make it come out.
I haveten to look at some of those private business budget
plans, and I am amazed at the minute detail that they go into
making extremely small cuts but realizing that the extremely
small cuts add up to something much bigger that actually helps
them to balance or get close to or to follow their business
plan. So I am going to encourage everybody to look for
ineffective programs that we can reduce--I am not going to even
suggest eliminate, because I know that that is an
impossibility. There is a huge constituency out there for every
program that we have developed, and those people are making
some money out of the program, and they will spend some money
to make sure that we do not eliminate their program. But we
should be able to take a look at and at least reduce some of
those that are out there.
When we are debating our economic policies, I mentioned
that from 2002 to 2011, we had the 40 percent drop in the
economy. Do you think the tax cuts have had a positive side on
the economy? It appears to be reflected in your numbers.
Mr. Holtz-Eakin. Well, certainly, looking back, the swing--
both as a matter of policy and the fact that the budget
response to the economy has supported an economy that has been
hit with a wide variety of adverse economic shocks, if one goes
through the list--it has been quite dramatic: between war in
the Middle East, terrorism events, equity market decline, and a
large fall-off in business, fixed investment. It has been a
period of lots of downward economic shocks, and the fiscal
policy has served to support the economy in that period.
Senator Enzi. I think you also mentioned that during the
year, there was a tremendous increase, at least in the third
quarter. Now, that would not be reflected through all of your
projections; you are not allowed to do that, are you?
Mr. Holtz-Eakin. We did in fact include the information
from the third quarter in our projections for the entire
period. The fourth quarter data have not yet been released, and
we had to project that in doing our forecast.
Senator Enzi. I guess the point that I am trying to make is
that if we increase the gross domestic product, everything
looks a lot better; taxes probably come in a little bit higher.
So I appreciate all the effort that you put into those numbers.
I recognize the difficulty of predicting, and you have been a
tremendous help.
Thank you.
Chairman Nickles. Thank you, Senator Enzi.
Next, I call upon Senator Hollings. I might note that both
Senator Hollings and I are having our last year on this
Committee. I have only been on it for 24 years, which pales
compared to Senator Hollings' 30 years on this Committee, and I
compliment him for that and recognize Senator Hollings.
Senator Hollings. You are might generous, Mr. Chairman, and
I appreciate it very much. I particularly appreciate us having
a Director of the Congressional Budget Office who believes that
deficits count.
Otherwise, in all sincerity, we have just heard from the
distinguished Senator from North Dakota, our ranking member,
the true state of the Union, and I am going to make a public
request, and if he will not, I will. I want that printed up
what Senator Conrad in his opening comment stated. If we can
get that printed up and mailed to all the Members, you will
have a true state of the Union message. And thank you--I know
that Senator Conrad has to go to an Agriculture meeting, but I
cannot thank him enough, because he covered our true situation.
Mr. Chairman, you have been very generous. We both work
together. But I could not help but smile when you were talking
about how the stimulus worked. I would hope so. I would hope
the stimulus of tax cuts worked some, for the main and simple
reason that last year, we ended up with a deficit of $562
billion--$562 billion--I do not want anybody to question the
accuracy of that.
Otherwise, we had approximately a current account deficit
and balance of trade of around $480 billion. So in the last
year, we have goosed the economy, we have infused the economy
one trillion bucks. Tax cuts--come on--that little tax cut was
just a minor part of it. We have put in 562 plus 480--we have
put in over $1 trillion into the economy, and it is still
limping along. They are wanting more tax cuts.
I do not think they would ever mention more tax cuts if
they understood the exact situation that we are in, and that is
why I ask that the comments of the Senator from North Dakota be
printed up and sent around--because Mr. Chairman, I remember
you were hearkening the days--you were talking about stimulus--
Senator Sam Ervin of North Carolina and I were trying to
stimulate the economy about 25 years ago with $5 billion in
highway spending. It had already been approved at the Highway
Administration, but we had to go out, and we were trying, and
it took us 3 days to persuade our colleagues to approve
borrowing $5 billion to get the economy going and to get jobs
created.
Now, here we are stimulating over $1 trillion in a year's
time, which brings me to my hope and mission this morning,
which is to get truth in budgeting. And I am not playing games,
Mr. Director, and I am not trying to be cute, but as between
the word ``gross'' and the word ``total,'' do you find a
difference?
I will be specific with you. I had to just pull out my
little Webster's Collegiate Dictionary, and ``total'' was
``gross,'' and ``gross'' was ``total''--in fact, the exact
definition in Webster's. ``Gross'' is ``an overall total
exclusive of deductions.''
Do you find a difference when you use the word ``total''
and when you use the word ``gross''?
Mr. Holtz-Eakin. Off the top of my head, they sound like
similar concepts. I do not know if there is a technical
definition involved. I think it is about the context.
Senator Hollings. The reason I ask that--if you take the
first page of the--well, let me get to what the people
understand. Here you go. I had some of this this morning. Total
is 100 percent. That is the headline, right? That is 100
percent Total. Now, if Total is 100 percent in the public's
understanding and your understanding and my understanding, I
notice on page 1 of the summary, you say ``Total budget deficit
of $477 billion.'' That is really only 68 percent; that is not
100 percent, because if you turn to page 19 of the regular
budget report that you have here, you can see that the debt in
2003 actual--you use the word ``actual,'' which I like--
``total,'' ``actual,'' ``gross,'' so everybody is singing from
the same page--the actual debt in 2003 was $6,760,000,000, and
you project the debt in 2004--in 8 months' time, now--next
year, it is going up, in 2004, which is the fiscal year--to
$7,459,000,000. So you have an ``actual'' or ``total'' or
``gross'' deficit of $699 billion; isn't that correct?
Mr. Holtz-Eakin. That is not the concept that was on page
1.
Senator Hollings. I did not ask about the concept. What is
the fact?
Mr. Holtz-Eakin. The fact is that the total borrowing by
the Federal Government from the economy will be $477 billion in
2004.
Senator Hollings. I didn't ask about the borrowing. I asked
about the deficit. You and I have to not run around with the
percent of GDP. When I go to pay my bill on the house payment,
or when I go to pay the car payment, or when I go to pay the
washing machine bill, they do not ask me what is the percent of
my GDP. They want the money. They want the money. And we have
to talk sense, and we have to talk facts and not theory--in 10
years, in 50 years, what we did 10 years ago and all--because
we only have 8 months. And that is the duty of this Committee
is to propound a budget.
Within that, do you find the budget different than $699
billion?
Mr. Holtz-Eakin. I do. If you count the dollars coming in
and then count the dollars going out, the difference, which is
what you would have to go to the bank--and in this case, the
``bank'' is the entire economy--that difference is $477
billion.
Senator Hollings. Oh, you are borrowing from Social
Security, and you know--according to the budget law--in fact,
Mr. Chairman, we were here in the Budget Committee, and we got
a vote 20-to-1 to make sure that the Greenspan Commission was
carried out--namely, that Social Security be put off-budget in
Section 13.301, signed by George Herbert Walker Bush, Sr., on
November 5, 1990, by a vote of 98-to-2 in the U.S. Senate.
President Bush signed that into law, Section 13.301 of the
Budget Act, not to use Social Security. And here you are trying
to deduct it, and trying to answer the question what is total
and what is actual.
The total deficit or the actual deficit is $699 billion;
isn't that correct?
Mr. Holtz-Eakin. With all due respect, Senator, this
document is meant to provide an accounting of the congressional
actions. The exchange of payroll taxes and debt and Social
Security Trust Fund is an intergovernmental transfer and would
not be reflected in the total budget deficit, which shows the
borrowing requirements by the Federal Government.
Senator Hollings. Why do you say on page 19--let us all
turn to page 19, and you will see down there, ``The gross
Federal debt''--why did you use that rationale or whatever--
that is where the debt is going up from 6,760 to 7,459--I mean,
it is going up $699 billion. That is all the dollars in and all
the dollars out; isn't that the case?
Mr. Holtz-Eakin. It is certainly our desire to inform the
Congress of all the budgetary consequences of its actions, and
certainly as the Federal Treasury issues securities to the
Social Security Trust Fund----
Senator Hollings. I am not asking how to issue and borrow.
That is the whole thing. They are going to have to borrow. If
they wanted to actually put the Government in the black, they
would have to actually borrow $699 billion; isn't that correct?
Mr. Holtz-Eakin. No, that is not correct.
Senator Hollings. Well, how is it incorrect? If it goes
from $6,760 trillion to $7,459 trillion--that is where I get
the arithmetic $699 billion.
Mr. Holtz-Eakin. The point at which the Social Security
benefits are paid in the future will be the point at which the
Federal Government will be required----
Senator Hollings. You are talking about the future. I am
talking about your listing on page 19, the gross Federal debt.
Mr. Holtz-Eakin. That figure includes those securities
issued not only to the public but also to the Social Security--
the Social Security Trust Fund---- and other such Federal
entities.
Senator Hollings. That is right, and it should not include
Social Security, because under 13.301--I can read 13.301 to
you; I have it; I have the Greenspan Commission report, I have
the Budget Act right here, and we can read it to you so you
will understand 13.301.
But Mr. Chairman, I am not trying to belabor the good
witness here. I am trying to get us all to speak the truth in
budgeting, and by gosh, it says here, as you can read it, that
Social Security--``exclusion of Social Security from all
budgets.'' This is the thing you are administering. This is the
Budget Act, 13.301. ``The congressional budget shall not
include Social Security.''
And when I ask you the difference between ``total'' and
``gross,'' you run around and try to talk about the borrowing
and borrowing. The actual deficit is $699 billion, not $477
billion.
You have only given us on page 1 the 68 percent, not the
100 percent total, and that is the trouble. We around here are
talking 10 years, and if we do not have to account for $222
billion of the deficit, then we can say, oh, well, let us have
another tax cut.
If the American people understand that we are going in the
hole, in the red, according to your projection, $700 billion by
September 30, within 8 months, this year, I would not want to
go home; they would run me back up here.
Chairman Nickles. Senator Hollings, thank you very much.
You only ran about 12 minutes, and that is all right. You are
entitled to do that since you have been on this Committee for
30 years.
I will ask the rest of my colleagues if they could keep
their comments or questions limited closer to 5 or 6 minutes so
we will be able to get to everybody at a decent time.
Senator Hollings. Thank you very much, Mr. Chairman.
Chairman Nickles. I also want to say that you have raised
the distinction between gross debt and debt held by the public
for the last 20 years that I can remember and have done that
very consistently. I almost look forward to your speech,
because I know it is coming.
Senator Sessions.
Senator Sessions. Thank you, Mr. Chairman.
Mr. Holtz-Eakin, this projection includes no dynamic
scoring--that debate we have had that by reducing taxes, it
increases the economy--your projections do not have any factor
in them to show an increase in revenue that might arise from a
reduction in taxes, do they?
Mr. Holtz-Eakin. That is not quite right. The baseline
projections are done with an economic forecast that includes
the impact of those policies that are currently in place, and
indeed, one of the difficult issues that any analyst in this
area faces is that, in particular, on the tax side, with the
legislated sunsets of the tax cuts in 2001 and 2003, one has to
make a judgment about how the private sector perceives those
legislative sunsets.
If members of the private sector believe, for example, that
all the tax cuts will be made permanent, they will act
differently than they will if they believe that they will
sunset on schedule.
What we have done in trying to guess what the private
sector believes is simply to build an economic baseline that is
consistent with the budgetary baseline, so we have constructed
our economic forecast under the assumption that the private
sector believes that these tax cuts will sunset as scheduled.
So, for example, if you will allow me, if you allow the
partial expensing to expire at the end of this year, there are
clear incentives for businesses to try to move their investment
into 2004 as opposed to waiting until after the tax provision
expires. We have built that into our forecast. It does not
drive our forecast for 2004, but it contributes to more rapid
investment in 2004, and there are myriad examples of that type.
So the baseline forecast for the budget and the baseline
forecast for the economy are a consistent pair.
Senator Sessions. Looking at your statement, the quote that
you were given, I do not know if Senator Conrad's staff has
that chart--maybe it is still there--but really, that chart was
an inaccurate statement of the comment you made in the New York
Times. As I read it, reading from the New York times article,
it says: ``Mr. Holtz-Eakin said the initial impact of the Bush
tax cuts was positive because the cuts lowered marginal tax
rates and gave people more incentive to work and produce.''
To the extent that rates remain low, that will continue for
as long as those rates remain low and incentive to work and
produce, will they not?
Mr. Holtz-Eakin. That is absolutely correct.
Senator Sessions. That incentive remains there constantly.
Then, you went on to say, to be accurate: ``But to the
extent that tax cuts lead to higher deficits''--you did not say
this, because it is not in quotes--but it says, ``But to the
extent that tax cuts lead to higher deficits and greater
government borrowing, he warned, they could have `a cumulative
corrosive effect on capital accumulation, on national saving
and productivity.'''
So that was your statement in context.
Mr. Holtz-Eakin. That is correct.
Senator Sessions. And then the New York Times went on to
add in the next paragraph: ``Economists prefer''--economists,
not politicians--``to look at budget deficits in relation to
the size of the overall economy rather than to the absolute
dollar amounts.''
So it is a legitimate economic consideration to consider
the deficit we have as a percentage of the overall economy;
isn't that correct?
Mr. Holtz-Eakin. Indeed, I think it is appropriate. As I
have mentioned in other places, if one goes to get a car loan
or a mortgage, the first thing they ask you is, ``What is your
income?'' They want to know what is your ability to repay, and
it is appropriate to look at borrowing as a fraction of that
ability.
Senator Sessions. So the President's commitment, which I
think we can exceed, of reducing the debt as a percentage of
GDP by one-half is a good step, I believe.
You noted that if we were to keep discretionary
appropriations at the rate of inflation after 2004, we would
save from the 2005-2014 timeframe $1 trillion plus. Is that how
I interpret that chart that you have given us. ``Policy
alternative that reduce the deficit or increase surplus''--No.
1 that you list is ``increase discretionary appropriations,
excluding supplemental appropriations for 2004, by the rate of
inflation after 2004.''
Mr. Holtz-Eakin. That is the impact of excluding the
supplemental, not the impact of the growth rate that we assume;
that just moves from a lower starting point.
Senator Sessions. All right--and keeping it at the rate of
inflation.
Mr. Holtz-Eakin. Keeping it at the rate of inflation.
Senator Sessions. So if we came in under the rate of
inflation, that would be even more savings. So you are
considering in your deficit numbers an $81 billion supplemental
every year?
Mr. Holtz-Eakin. It is actually an $87 billion, and it goes
up with the rate of inflation. It is in all 10 years.
Senator Sessions. And that amounts to over $1 trillion,
which is half of what you projected the deficit to be; is that
not correct?
Mr. Holtz-Eakin. That is correct.
Senator Sessions. Now, in this economy, it seems to me tax
revenues seem to be more volatile than the GDP. If the GDP
remains up, sometimes the tax revenues exceed the GDP growth,
and if it drops, tax revenues drop below the GDP, faster than
GDP drops. I think that is because we tax higher-income people
significantly and because when people sell stocks after the
stock market has dropped, they are taking losses, but when the
stock market is up, they have to pay capital gains taxes on
their profits.
Aren't those some of the things than make for volatility in
revenue coming in to the Federal Government?
Mr. Holtz-Eakin. Those are certainly factors that have
contributed to it. We tax not just the flow of current income
that is measured by GDP; we tax asset sales. Capital gains and
capital losses affect tax receipts. It is also the case that
not every income flow is even across the entire population, and
shifts in the income distribution have impacts.
Senator Sessions. We took the hit with September 11, and
airlines and hotels are in trouble, and these corporations,
instead of paying corporate taxes, were having losses and were
not paying taxes; is that correct?
Mr. Holtz-Eakin. That is correct.
Senator Sessions. Some of the executives who make big
salaries were not getting bonuses, which they pay very large
income tax on, perhaps, because their companies did not show a
profit that year. That makes some of the volatility occur, does
it not?
Mr. Holtz-Eakin. Those are pieces that are in what we refer
to as our ``technicals.'' They sound economic, but given the
way we divide things, those are part of the technical revisions
we have experienced in the past and going forward.
Senator Sessions. And I guess my question--and I know the
Chairman is worried about how optimistic we ought to be--but if
growth holds in the stock market at a steady, modest rate, and
if GDP holds at the rates you are projecting, isn't it likely
that profits will begin to increase, that people will begin to
sell more assets that now have gained in value, so they are
beginning to pay more capital gains taxes instead of offsetting
income by taking capital gains losses to the extent they can,
and that we might show a more volatile increase in revenue than
you have projected?
Mr. Holtz-Eakin. It is certainly the case that we have
built exactly those phenomena into our baseline forecast--
increasing capital gains taxes, increasing profitability by the
business sector, and tax receipts to go with that. It is also
the case that there is a lot of the forecast that is simply
unknowable, and we have tried to document the degree to which
that kind of uncertainty can affect budgetary outcomes. It is
in an appendix to our report, and you can see that as you move
further out in time, as you go out to 2009, there is a wide
range of possible impacts on the bottom line budget deficit
that come from economic and technical uncertainty--exactly the
factors you have discussed.
Senator Sessions. Mr. Chairman, I would offer this New York
Times article and ask that Senator Conrad, to the extent to
which his chart may be in error, correct that.
Chairman Nickles. Thank you, Senator Sessions.
Senator Sessions. There is--is that The Washington Post?
OK.
Chairman Nickles. Thank you very much.
Senator Stabenow.
Senator Sessions. Mr. Chairman, let me just correct that;
it is unfair to Senator Conrad. I was looking at the New York
Times, and he had The Washington Post article, which does
appear to be--I do not have any information on that, so he may
be correct on that.
Chairman Nickles. Well, I am sure The Washington Post is
always as accurate as the New York Times is.
Senator Sarbanes. Can we get that in writing?
Chairman Nickles. No, no. Certainly that is off the record.
Cut that off the record.
Senator Sarbanes. Can we print out the record on that
comment?
Chairman Nickles. No.
Senator Stabenow.
Senator Stabenow. Thank you, Mr. Chairman.
First, I want to congratulate you on your last year
chairing the Committee. While we do not always agree on policy
issues or votes, I have very much appreciated your graciousness
and fairness with the Committee and look forward to a process
where we can openly debate all the issues and very critical
policy differences that are before us.
When we look at these numbers--I was looking at the total
that is being projected this year, for 2004, on the deficit,
and depending on whether $477 billion, or if we exclude Social
Security, as we all say we want to do, and remove that from the
numbers, $631 billion, what I find extremely interesting is
that when we look at domestic spending, non-defense domestic
spending, we see that if we were to eliminate every penny of
spending this year for education, innovation, non-Medicare
health programs, environmental protection, and all the other
things that are domestic spending including homeland security,
if we were to eliminate it--$445 billion, according to your
numbers--we could not wipe out our debt this year.
I think that is very important, Mr. Chairman, to put in
context for us. Just as you, Mr. Chairman, and Senator Conrad
agreed that 92 percent of the increase in spending in the last
number of years has been defense, homeland security, rebuilding
New York and the Pentagon, other issues related to 9/11--92
percent--I think it is very important to put in context that if
we did nothing in terms of the defense and domestic spending,
if we did nothing but defense and wiped out every penny of
everything else the American people have asked us to invest in
to promote education, innovation and help drive the economy, we
would not eliminate this year's debt. I think that is pretty
astounding, actually.
When I came to the Committee, we were debating 3 years ago
what to do about the largest surpluses in the history of the
country. We are now talking about what to do about the largest
deficits in the history of the country, and we can debate
whether deficits matter--I believe that deficits matter. I
believe that anyone looking at this in the public believes that
deficits matter. And if we go back and look at comments that we
all have made over the last many years, I believe that at many,
many different points in debates, we have all acknowledged that
deficits matter.
I think that what I would like to do is take my few moments
and talk about the economy and what is happening in terms of
jobs. There are lots of things I would love to ask you, and I
certainly have comments about Medicare, and I will save those,
Mr. Chairman, for another time in terms of what really happened
under that bill and what will happen in the future.
But when I look at it from Michigan's standpoint, even
though we see many of the numbers going up in terms of the
stock market and what is happening, positive indicators
happening, that is not being translated in terms of jobs in
Michigan and where the rubber meets the road. When we look at
the fact that we have seen about 1,000 jobs, I believe, created
in the last month or so, I certainly question the numbers in
terms of being able to see this economy turn around. But I
would like to have you speak for just a moment about the
difference between the macroeconomic statistics and what is
happening in manufacturing in places like Michigan.
We have an unemployment rate of 7.2 percent this year. We
have people who have been employed all their lives and have
invested in education, have done all the things that we have
asked them to do, losing their jobs right and left. And
literally every day, I could show you headlines in the paper
right now of jobs that are not coming back.
This gets to a whole range of policy issues that we need to
address, and I will just mention one situation that occurred in
the last couple of weeks that has been so shocking to people in
Michigan--a plant in a small town, Greenville, Michigan. Nine
thousand people live there, and Electrolux, which builds
refrigerators, announced 2,700 jobs going to Mexico, not
because they could not make a profit--they say they make a
profit in the United States--but they could make a bigger
profit if they paid people $2.50 an hour and no health care.
So we have a lot of challenges, and we are not seeing the
jobs being created even though we are focused on high-tech
manufacturing and focusing on increasing skills and so on.
I wonder if you could speak to what you have seen in
manufacturing versus the larger macroeconomic numbers as it
relates to employment.
Mr. Holtz-Eakin. I would be happy to. There are a variety
of factors that have influenced the manufacturing employment
picture, and if we back up to the long-term trends, the most
pronounced feature of the manufacturing sector is that it has
managed to maintain growth rates and total production that are
comparable to the economy as a whole. So it is not shrinking
compared to our economy in production, but it has been
shrinking in terms of total employment on a steady basis for
quite a while. The gap is filled by the very rapid productivity
gains in manufacturing, and it is a reflection of the fact that
in the face of the ability of manufacturers to innovate and
produce their goods in a more productive fashion. Even when
price declines are a result of that, consumers do not choose to
continue buying as much in manufacturing goods as they used to;
they tend to shift the mix of their purchases toward services
and other items.
So we have seen a migration of employment from the
manufacturing to the nonmanufacturing sector. It is a long-term
trend. It has been in the data, and it is augmented by a
statistical phenomenon, which is that many jobs that used to be
classified as manufacturing are now essentially outsourced by
manufacturers. They hire janitorial services, and the employee
is still in the same facility but employed outside the
manufacturing sector. That has been a piece of what has gone on
as well.
A third has been a recession. No question--manufacturing is
typically highly cyclical. Recessions hurt manufacturing more
than some other sectors of the economy, and in this recession,
it has been quite pronounced. We have seen that happen. And
even more so than in other recessions, there has been a
difference in the demand for manufacturing, and it comes from
the sharp decline of business investment in this recession,
really much more than a typical recession. That decline in
business investment has hurt the demand for manufacturing
goods, and to the extent that turns around, we would expect
part of the manufacturing problems to be diminished to some
extent.
And in the international sector, we have seen a decline in
not only the demand for traded investment goods, which is a big
part of our exports, but also manufactured consumer goods.
So one of the really striking features of the performance
over this business cycle, the recession and recovery, has been
that we have imported sort of a typical pattern of manufactured
goods, but we have exported way below what you would expect at
this point in a recovery. That has to do with weak foreign
demand for these products and the status of the dollar. We have
seen the dollar weaken somewhat, and, other things equal, that
might help, but certainly weak foreign economic performance has
been a big part of it. The U.S. has been one of the few engines
of growth internationally. To the extent that foreign demand
turns around, that also should contribute.
Then, finally, there is the mixture of locations of
production, both domestically and internationally. We have just
seen a growth in trade, and this has raised the usual issues in
the impact of dislocations from international trade. On the
whole, international trade betters all parties, but there are
particular workers who typically bear the brunt of the
adjustment, and that becomes an issue for policy concern.
So it has been a wide array of things that have all
impinged on manufacturing employment, especially through this
recession and recovery.
Senator Stabenow. Mr. Chairman, just in conclusion, I will
say that manufacturing has been a backbone of the middle class
in America, and I would agree with you that what we are seeing
is fewer exports--what we are doing is exporting the jobs. The
plants are going to China as opposed to the product going to
China. I believe that there are a number of things, including
addressing currency manipulation, smarter trade policies, more
incentives to remain in the United States and create those
jobs, and that that is very much a part of any sustained, long-
term recovery for us, because of the importance of
manufacturing to the economy of the country.
Thank you.
Chairman Nickles. Senator Stabenow, thank you very much.
Senator Allard?
Senator Allard. Thank you, Mr. Chairman.
I would like to followup a little bit on Senator Hollings'
question, because I think he muddied the waters, and I would
like to help clarify those waters and clear them up if I might.
I guess the best thing to do is think of this in terms of
as though you were if you were a business. If you have a profit
and loss statement on a business, you want to take the total
expenses, you want to take the total revenue coming into the
business, and you come up with your net, whether it is a loss
or a gain, and that is what your figure reflects; it is total
cost and total revenue. Is that correct?
Mr. Holtz-Eakin. That is right.
Senator Allard. But if I transfer money from the sales
department in my business to employee benefits in my business,
it does not affect the bottom line, but as a manager, I may
want to know that that is happening, because I want to know
which areas are producing and which ones are showing a profit--
just like we have here in the Federal Government. As managers,
I think we need to be very much aware that Social Security
contributes to that net figure. Whether we want to ignore that
figure or not, the Social Security is part of the total.
Now, to take a transfer from Social Security to the general
fund as managers, it is kind of good policy for us as Members
of Congress to know that, because eventually, it is going to
have an impact on the general fund unless we do something about
it.
So I appreciate your figures. I think they truly reflect
what is happening this year as far as the bottom line is
concerned. I think that is important. I think it is in line
with what we would expect from a legitimate cost and profit
statement that you would get from a company, and I do think it
is 100 percent accurate, and I just want to thank you for
making that point to the Committee.
Also, I do not know whether you had an opportunity to look
at the chart called ``Source of Change in Deficit Surplus
Outlook Since March 2003.'' It has been put out by the Senate
Budget Committee.
If you have not had a chance to look at that, I would like
to have you look at it and send me a letter or something as to
whether you agree with the figures that are in that or not,
because I think it tells a definite story, and I would like to
get those figures confirmed by your office if we might.
Mr. Holtz-Eakin. I am happy to do that.
Senator Allard. Also, looking at non-defense discretionary
spending, I agree that it is up at record high levels, whether
we look at it in nominal terms or just as a share of gross
domestic product. My question is do you believe it is necessary
to reduce Government consumption in order to attain a balanced
budget?
Mr. Holtz-Eakin. In the end, you can balance the budget as
a matter of the math by either cutting what goes out or raising
what goes in, and it will be a policy decision about which
route the Congress will choose to go.
Senator Allard. But you would agree that from a practical
matter, it is pretty hard for us to balance the budget without
holding down spending.
Mr. Holtz-Eakin. Certainly, if you look at our baseline, by
historic standards, that is a fairly stringent spending path,
2.5 percent, and you see a diminishing profile of budget
deficits over the course of the 10 years.
Senator Allard. Well, I look at this chart that was
provided to the Committee, and since March of 2001, the new
spending is 61 percent, tax cuts are 9 percent. It is hard to
say that if we are going to get around to balancing the budget,
we certainly have to show some--we have to be aware of the
spending that is going on in this budget and the impact that it
is having on the deficit, and I do not see how we could ignore
the impact of spending on our deficits.
Mr. Holtz-Eakin. I think it is certainly the case that the
threshold decision is the decision to spend money by any
enterprise, especially the Federal Government, and at that
point, the issue becomes how it is financed. But having made
the decision to spend it, it will have to be financed either by
taxes or borrowing, and the issue of the deficit is a finance
issue. The first issue is what do the Congress and the
administration choose to do in the way of programs and for
public policy purposes, necessarily so.
Senator Allard. Now I have a question related to marginal
tax rates. Some have argued that the marginal tax rates should
be raised to reduce the budget deficit--instead of looking at
the spending side, they are looking at the revenue side. And I
want you to look at this as an economist--would raising
marginal tax rates likely reduce the labor supply?
Mr. Holtz-Eakin. If one were to increase marginal tax
rates, there would be clear disincentives to supply labor. And
more broadly, the economics literature documents the distortion
to effort, occupational choice, and a wide variety of aspects
of labor supply.
Senator Allard. So by doing that, we would have an impact
on jobs.
Mr. Holtz-Eakin. You would certainly have an impact on the
efficiency with which the economy operated, and that would be
one of the costs of high marginal tax rates. A flexible economy
like the U.S. economy will in the end find ways in the form of
lower real wages or some other mechanism to employ people, but
there is a cost associated with high marginal tax rates that is
a distortion cost in the economy, not measured well by jobs.
Senator Allard. Mr. Chairman, I believe my time has
expired. Thank you.
Chairman Nickles. Senator Allard, thank you very much.
Senator Nelson?
Senator Nelson. Thank you, Mr. Chairman.
You know, back in 1979 when I went to the House, I had the
privilege of going on the House Budget Committee, and over two
decades later, as another freshman member of a legislative body
on the Budget Committee again, this Committee is where the
action is, but there is too much ``Gotcha'' politics, Mr.
Chairman, in this Committee. It seems to be endemic to the
nature of this Committee, because it was so back in the late
seventies and the eighties, so that the budget does not become
an economic document, it becomes a political document. So we
have all of these various interpretations as to what is going
to help each side's political interest, and it is hard to get
focused on what the real truth is.
Let me just on that note ask a question here. Last year's
budget, August 2003 forecast, had a 10-year projected surplus
or deficit, and it came out right at $1.4 trillion. If you take
those same years, 2004 to 2013, it is $2.4 trillion, so that is
an increase of $1 trillion in the deficit over that decade.
Help us understand why we shot up $1 trillion in the
deficit.
Mr. Holtz-Eakin. It comes in three pieces. Piece No. 1 is
about $680 billion as a result of new legislation: Medicare
prescription drug legislation plus other appropriations.
The second piece is a combination of economic and technical
factors, as the Chairman mentioned earlier. Within the
economics, we have three effects--faster near-term growth and
impacts of higher productivity that allow us to have greater
economic prosperity. And then, especially in the out-years, we
anticipate that higher health and other benefits costs will
lower the fraction of compensation that shows up in taxable
wages.
We also anticipate lower inflation, which has a modestly
negative effect on the budget.
So given the good news in the near term and the bad news in
the long term, the net effect on the economics is negative by,
with the technicals, a total of about $300 billion. So that is
where the trillion dollars comes from--legislative, about $700
billion; economics and technicals, about $300 billion.
Senator Nelson. OK. Now, when we ask questions for the
average American on the street, and they are trying to
understand what is happening to the economy, we see right now
that the economy is going up, there has been this stimulative
nature of the cash that has gone into circulation through
additional spending, through some of the tax cuts and so forth,
but on the basis of what you just said, with a huge deficit
increase over the next 10 years by these figures over the
decade, $2.4 trillion of additional deficit, at some point,
just from a common sense standpoint, if you have to go out and
borrow an additional $2.4 trillion over the decade, the demand
for that additional money is going to cause the cost of that
money to rise, which is the interest rate, and are we not going
to see interest rates start to rise?
Mr. Holtz-Eakin. As I mentioned earlier, we have built into
our economic forecast the budgetary projections, so these are
part and parcel of the same forecast. Built into our economic
projections is a rise in interest rates--for example, short-
term rates will rise over the next 2 years to something like 3
percent, and we will see the 10-year rates go up as well.
One would expect that to happen both as part of the
cyclical recovery and as the Fed perhaps moves its policy
instruments closer to neutral.
Senator Nelson. Well, when the interest rates rise, will we
not see, then, a stalling of the recovery because interest
rates being higher, particularly if they go much higher, aren't
we going to see a replay of history, that we suddenly have the
recovery stalled, and we start slipping back into recession?
Mr. Holtz-Eakin. We certainly do not anticipate that. As I
mentioned, we have a robust cyclical recovery; we think the
other factors that influence in particular business
investments, which are central to a sustained cyclical
recovery, might outweigh any movement of real interest rates
back toward their more historical alignments.
Senator Nelson. Well, I can just give you some country boy
common sense predictions, and this country boy has gone out and
talked to several noted economists in the country as well as
chief economists of some of the major financial institutions in
this country, and the near unanimous feeling among these
economists is that we are going to see the economic stimulus
through the end of this year, and then watch out when we get
into 2005--it starts slowly going down, and then it starts
accelerating toward the end of 2005 as the interest rates go
higher because the deficit keeps going more and more up, and we
have to borrow more and more, and suddenly you get into a
vicious downward spiral that will cause the economy to slip
into that recession.
I would like to have the optimistic outlook that you have,
but when I have had that on the Budget Committee before, it did
not happen that way.
So, Mr. Chairman, I wanted to bring you the thoughts of
this country boy.
Chairman Nickles. Well, Senator Nelson, thank you very
much, and I do not know that I would characterize Dr. Holtz-
Eakin's comments as being ``optimistic.'' We have had a great,
robust last couple of quarters, and yet the reestimate
calculates an additional $700 billion of spending that Congress
is responsible for, that most people voted for, and then he
came up with some pessimism, or reestimates, technical
adjustments and so on, that cost or added to the deficit
projections of about $300 billion.
So I do not know that I would characterize his statement,
but I will tell you that in talking to our colleagues, knowing
of your interest in the space program and knowing that we have
to make some cuts, there have been significant discussions of
funding the space program adequate to get you to the moon, but
not enough to get you back.
Senator Nelson. And that is the one you want to send me on;
is that right?
Chairman Nickles. That was the one that you were supposed
to attend--just kidding.
Senator Domenici. You were asking about it.
Senator Nelson. Mr. Chairman, I would just say that the
witness has said 2.4 trillion additional dollars of deficit
over the next 10 years, and that is bound to have an effect
dampening any kind of optimism, any kind of reenergizing of the
economy.
Chairman Nickles. Senator Nelson, thank you very much.
Next is Senator Domenici.
Senator Domenici. Thank you very much, Mr. Chairman, and
first let me compliment you on your superb work and wish you
well. I hope you can get a budget this year. We have not seen
the President's yet, but I imagine it is going to be as
difficult as last year or more so.
But to those who complain about the deficit, it is going to
be pretty obvious they are going to be given an opportunity to
put their mouths where their money is also, and also for those
who look at the President, I have heard candidates running
around the country saying, ``We are looking at him, that is the
guy who did it''--well, we are going to check on how many
things they voted for that would have been more than the
President. We can start with the proposition that the President
does not spend any money and then see how much did Congress
spend and then look at each candidate and see how much would
you have spent more than the President--and of course, they are
going to say none--but then we can look at the budget. I think
we had about eight points of order that many Democrats voted
for that was $50, $60 billion a year, wasn't it, since you have
been Chairman?
Chairman Nickles. A lot; there was a lot.
Senator Domenici. Yes.
First of all, let me say to you, Mr. Congressional Budget
Office Director, that I hope you are enjoying your job.
Mr. Holtz-Eakin. I am.
Senator Domenici. Good. It is pretty hard to tell, because
you have gloomy eyes. Your eyes do not smile.
Mr. Holtz-Eakin. My wife will be disappointed to learn
this.
Senator Domenici. But there is nothing we can do about
that. You know, mine smile too much.
In any event, I do want to tell you that you keep trying,
and people keep wanting it to disappear--not that we love
deficits, but if we are looking at it from the standpoint of
how risky it is, we have had a couple times when the debt of
the Nation was bigger than it is now in proportion to gross
domestic product. I think I was here, and I do not think I was
very happy, but I had to produce the budget that met the times.
Do you recall the years that it was higher? My staff gives
me a number of 1993. Anyway, we do not have to waste a lot of
time, but if you could find that--OK, I have it. Do you think
these are correct if I read them into the record: In 1993, the
highest ever, the percent of GDP was 49.5 percent; 1994 was
49.4 percent; and now, we have 2003, which is 36 percent. Is
that correct?
Mr. Holtz-Eakin. Those sound to be in the ballpark, but we
can check them.
Senator Domenici. Well, when you worry about the U.S.
Government and the debt's impact upon society, this is a pretty
relevant fact, the relationship of the debt to the gross
domestic product. It is not exclusively conclusive, but it is
pretty important. And I want to repeat what you have said--we
have had higher ones than this year--again, not that we like to
run around and have them always, but that is the truth.
Second, I am impressed and confused about a couple of
things, and maybe you have some answers, maybe you can tell us
where to look. First, we have a terrific growth pattern in the
immediate past. For a year and a half or so, if you look at the
productivity, it is incredible. We had some growth quarters
that looked like we were China. I just noticed that last year,
their composite was 9.1 percent. Sometimes it is 9.8, sometimes
8.9, but 9.1. Well, we have had productivity growth in the area
of 6 and 7 percent and GDP growth that exceeded 5, right,
during this period of time.
Now, I have a very perplexing question. When you woke up
yesterday morning, you did not have to ask your people what the
reality was that there were more people employed in the United
States that day than ever in history--not in proportion to, but
just more Americans were at work.
Now, two things--how come we are not having more employment
with this fantastic GDP growth and this rather enormous
productivity growth--maybe the productivity growth has
something to do with why there are fewer jobs--but nonetheless,
we have those, and we have the highest number of jobs ever, and
yet we are running around talking about the fact that we have
lost jobs.
First, is it very relevant that we have lost jobs in light
of what I am talking about? And second, is it very important
that we have more workers than we have ever had in the past?
And third, when and how are we going to have a big impact on
employment, since we keep talking about this being a Hoover-
type situation with no new jobs?
Before you answer, let me tell you that I now understand,
just from the practical standpoint, this very, very phenomenal
thing happening in America, that is, the almost enormous,
proportionately, productivity growth. It is incredible, and
people wonder how and why, and I think I know, I think I
understand. When you look at everybody who uses a computer or a
new electronic gadget, you ask how many people did it replace,
and clearly, they are replacing people all over, and you are
still getting more production.
Now, you cannot expect to tell Americans not to do that,
right? I think you would destroy everybody if you said you
cannot be efficient, you cannot rent a new IBM machine, you
have to keep 20 people employed.
So, having listened to me carry on here, talk about jobs in
the context that I have talked to you here about it.
Mr. Holtz-Eakin. Thank you.
Let me begin with productivity and turn to jobs. Certainly,
long-run productivity growth is central to increasing the
standards of living in any society, so it is something that is
a good thing and something that we should pursue as part of our
economic policies.
The productivity performance in this recession and recovery
has been quite remarkable by historical standards, and the most
recent data are in fact really quite impressive as well.
The first thing to note is that productivity often shows
some quite dramatic one-quarter increases coming out of a
recession. It is a highly volatile series, and for that reason,
it is important not to take any single quarter at face value as
an indicator of things to come.
The second thing to note is that, as a matter of national
statistics, these are data that are revised often. That is a
second reason to be cautious in interpreting the most recent
data and taking them at face value.
But, nevertheless, as I mentioned earlier, since 1995,
there has been an increased rate of productivity growth in the
United States that economists puzzled about and wondered if it
was permanent, real, and what the durability of this
acceleration in productivity would be.
The recession and recovery marked essentially a litmus test
for that, and it has continued, and that is good news. However,
we do not fully understand the roots of this. In the report, we
lay out what are some of the most common hypotheses about this.
Is it reflective merely of business caution in adding new
workers, and as a result, you get more stuff going out but not
more people coming in; and productivity is simply the division
of those two things. Or is it the fact that in the late
nineties, businesses purchased a lot of computers and other IT
goods and really undertook a massive expansion and then just
slowly adjusted to using those and that we are now seeing the
productivity gains with a lag--some sort of adjustment period.
Or, finally, is it the fact that the gains that used to be
concentrated narrowly in faster chip times and things
concentrated in computing and then shipped--sort of physically
embodied in those--is now diffusing into business practice and
the economy more widely?
There are lots of tantalizing pieces of evidence on all of
those. There is no definitive case to be made and certainly in
our view not enough statistical evidence to start picking a
dramatically big difference for our productivity future. So we
have acknowledged the history, raised our productivity level to
some extent, but we have not really changed our growth rate.
Our productivity puzzle will be an ongoing area of
investigation not only for us but for many people.
If one turns to employment----
Senator Domenici. Could I ask you, just because you do not
know its roots, is it fair to say nonetheless it is good?
Mr. Holtz-Eakin. Productivity growth is very good. If
productivity growth occurred evenly in all sectors of the
economy, employment would move evenly in all sectors of the
economy, and people would buy that stuff. It is the fact that
we do not have even productivity growth and even purchases of
the output of that productivity growth, which causes us to have
to shift the employment mix in the economy. And that is an
ongoing trend; in this economy, it happens all the time.
Senator Domenici. But we have had many decades in America
where we would have loved to have this kind of productivity
increase; right?
Mr. Holtz-Eakin. Certainly, beginning in the seventies and
up to the mid-nineties, the productivity puzzle in that era
was, ``Where did it go? Why did we not have productivity
growth?'' Now we have a puzzle in the other direction.
On the employment front, I can say with I think complete
honesty that we do not really understand the cyclical pattern
of employment growth, and the labor market has been a bit
puzzling. People have pointed to the December payroll
employment survey: up 1,000 jobs. The same caveats apply. You
do not want to read too much into any single month's data.
These are very noisy series. There is some tantalizing evidence
that the seasonable adjustment to the December survey may have
influenced it.
But more generally, there has been relatively slow growth
in payroll employment in this recovery that we cannot fully
explain. There has been a mismatch between the household survey
that the Chairman mentioned and the payroll employment survey.
We have looked at the different stories that these two
surveys tell. They often tell different stories. They are never
as far apart as we are experiencing right now. They are about
600,000 jobs different since July. We can explain about 100,000
of that difference through different statistical samples and
different coverage issues. The rest, we do not fully
understand. We believe still that the payroll survey, which is
larger and which we think is probably a better indicator of the
status of the labor market on average, is one that we will
continue to look at. But we do know that around turning points,
it will miss startup businesses and things like that. So there
is an element of truth to both of the surveys.
But in terms of when this economy will begin to generate
100,000, 150,000, 200,000 payroll jobs per month, a capacity
that it is capable of doing, I do not have a firm answer to
that, and I will not pretend to.
Senator Domenici. I just want to make one last observation
and thank the Chairman for giving me time.
I was going to bring, Mr. Chairman, and article, and I
apologize, but with your permission, can I put it in the
record?
Chairman Nickles. Certainly.
Senator Domenici. I was reading a recent article, no longer
than 2 days old, wherein a gentleman in business said, ``I have
the answer as to why there are no more people being employed in
America as we come through this enormous growth period.'' He
said, ``I am the answer.''
Somebody said, ``Who are you?''
He said, ``I am a business, and I have three employees, and
I do enough business where 15 years ago, I would have had to
employ 15 people.''
Then they went on with the questioning. He said, ``Just
last week, I needed a specialist for something. I did not hire
him and put him on my payroll. I ran an ad. And there was a
person more equipped than I could ever afford who said he would
come and do the job for 1 month, that it would take him 1 month
to do it. I paid him heavily. He got employed for 1 month, and
my business is rocking along, and a $50,000-a-year person is
not on my payroll.'' And he said, ``I think there is a lot of
that going on in the United States.''
Now, I do not think that that is bad. I think you have to
be able to do what the marketplace demands of you. But I might
just ask you if you have come in contact with that as something
of significance with some name that is affixed to it.
Mr. Holtz-Eakin. There are a couple of parts to that story
that ring true. The first is that if you indeed get output
growth, if business is rocking along, eventually, you will
require more labor from some source to continue to do business.
Will that come internally, adding jobs within the company, or
will it be temporary help that you hire from outside the
company either in the form of a temporary help agency--and that
shows up in the data and is one of the things you look for as
an indicator of an upturn in the labor market--or in the form
of this gentleman who may be a consultant, essentially a self-
employed individual, in which case it will not show up
immediately in the data but subsequently would be caught by the
payroll employment.
So those are issues in our trying to understand the labor
market. I would say that what the CBO anticipates in its
forecast and what most people would say is that you cannot
continue to grow at the pace that we did in the third and
likely did in the fourth and as fast as we expect in the future
without eventually beginning to create jobs. I quite frankly
would have thought we would have seen more by now, but we have
not.
Senator Domenici. Thank you very much.
Thank you, Mr. Chairman.
Chairman Nickles. Senator Domenici, thank you very much.
Senator Wyden?
Senator Wyden. Thank you, Mr. Chairman.
I want to focus on the issue of health care costs. I think
it is obvious that there are no costs in America going up like
medical bills. That is true with respect to both the public and
private sectors. Last week, the country saw that we are going
to spend $1.6 trillion on health. If we divide the number of
Americans into $1.6 trillion, it comes to something like
$16,000 for a family of four.
So that obviously, we need the strongest possible set of
cost containment tools, and I want to talk to you about the
non-interference provision in the Medicare legislation
specifically. I voted for the bill--I still have the welts on
my back to show for it--and one of the reasons that I did is
that it seemed to me it allowed more choices and more
alternatives with respect to the delivery of health care in
America, and that would be a plus for senior citizens. That
would be an opportunity with more choices and more alternatives
to serve as a force for cost restraint and competition and a
tool to hold down the bills.
But what I want to ask you about is wouldn't the removal of
the non-interference provision allow for Congress to move
toward the kind of cost containment program that Members of
Congress have? Wouldn't the removal of the non-interference
provision allow the Congress to move to a Federal Employee
Health Benefits-style approach, which so far seems to have been
the best cost containment vehicle? And I want to know
particularly in connection with your letter to the majority
leader whether you examined that issue in particular.
Mr. Holtz-Eakin. Well, the letter we wrote to the majority
leader examined that language in the context of the Medicare
bill as passed, and in our scoring of the Medicare legislation,
we certainly looked at lots and lots of pieces of evidence,
including the limited data that we could get out of the FEHB
program.
But on the language in particular, what we looked for in
the bill was both the ability and the incentive to control
costs. Private entities who bear cost risk have an incentive to
cut a good deal with pharmaceutical companies, and if we give
them the tools to manage their costs and pick formularies and
choose preferred drugs, they will have the ability. And given
the incentive and ability, it was our reading of the
legislation that the ability of the Secretary to negotiate a
better deal than the private plans that already had lots of
incentive and lots of ability to negotiate that same deal would
be negligible, and as a result, removing the language should
not have big budgetary consequences.
Senator Wyden. You see, what I think is flawed in that
argument is that if you believe in private sector cost
containment--and I do; that was one of the factors in my
supporting the legislation--the reality is now that Medicare
faces a statutory bar to cost containment that is not faced in
the Federal Employee Health Benefits Plan that is available to
Members of Congress. Any way you slice this, colleagues, that
is where we are on a key cost containment issue. If you believe
in the private sector, the fact is Medicare now has a statutory
bar, a statutory restriction, that is not applicable when you
are talking about cost containment for Members of Congress and
their families.
So what I would like to ask you today is to go back and do
some more analysis with respect to FEHBP, because I do not
quarrel with the idea that the private sector is of value--that
is not at issue here. What is at issue is if you believe in the
private sector, why should there be any statutory restrictions
in terms of what you can do in terms of tough, hard-nosed
bargaining, and any way you slice it now, we have restrictions
in terms of what Medicare can do that is not faced when you are
talking about negotiating for Members of Congress and their
families.
Is that something that you would be willing to do, to look
further at the FEHBP-style model and particularly whether
removing the statutory restriction would allow Congress to move
more aggressively toward a model that is used to protect our
families?
Mr. Holtz-Eakin. I would certainly be happy to go back and
look at that. I will not pretend to be intimately familiar with
all the details----
Senator Wyden. I understand.
Mr. Holtz-Eakin [continuing]. But my recollection was that
access to data, hard data, on what happened in FEHBP was one of
the limitations. We can look into that for you.
Senator Wyden. I think what has happened in particular is
that there was such a rush with respect to this legislation on
the bargaining power issue that not enough time was spent, so
you had a set of very powerful interests who said, look we will
just put this in there and say that everything is going to go
to the private sector, and then it is going to come out hunky-
dory. That seems to me to be overly simplistic.
I will stipulate to the kind of argument that you are
making as being of real value. There is no question to me that
the private sector choices--because we have seen it in my home
town--can be useful. But it also seems to me that if you
believe in the private sector, you should not have the
restraints. And the reality today is that when it comes to
containing costs for senior citizens under Medicare, there are
legal prohibitions that do not apply to what is done with
respect to private sector cost containment for Members of
Congress, and I do not think that is right. You have always
been very gracious to me, and when you say you will look at
something, you are always fair and responsive, and I would like
to see that as soon as possible, because I think that is going
to be an issue that we are going to be dealing with on the
floor of the U.S. Senate probably within a matter of weeks.
Mr. Chairman, thank you.
Chairman Nickles. Senator Wyden, thank you very much.
I touched on this in my opening remarks. Let me just ask a
related question--and I apologize to Dr. Holtz-Eakin who also
has to testify in the House, and I was trying to get him out of
here by 12. But if Congress mandated that the Government
interfere in the negotiations, do you think there would be any
savings?
Mr. Holtz-Eakin. If you put a provision and language into
the bill as passed which said the Secretary ``should'' or
``must'' negotiate, we think there is the potential for savings
on some drugs, presumably the nonpreferred drugs, where the
pharmaceutical company is really aggressively trying to take
its preferred drugs, give the best deal on those, and get them
into the prescription drug plans. On the others, we think there
might be the potential for some saving. But given bottom lines,
to the extent that you move down the prices on one drug, you
probably move up the prices on the preferred drugs, and on
balance, you could raise costs. Certainly, we would have to
look at the details of any particular legislation and look at
any other models of this kind of thing in practice, but in our
thinking about the language, that is the kind of issue that
arises.
Senator Wyden. Mr. Chairman, if I could just very briefly,
I want it understood that I am not talking about mandating some
kind of cumbersome interference plan. With respect to the FEHBP
plan, there is no language on this point. Now it is essentially
discretionary, and that is what is wrong about the current law.
We are not giving Medicare the discretion to go to bat for
seniors the way we are giving our health plan the discretion to
go to bat for us.
That is what is wrong, and that is what I am going to try
to change.
Chairman Nickles. I understand. We do not need to debate
this now, but I think your letter stated that if we removed
that language, you do not think there would be any appreciable
savings.
Mr. Holtz-Eakin. That is right.
Chairman Nickles. I appreciate that.
Dr. Holtz-Eakin, I am going to have to run.
Just for the information and for the record, our next
hearing will be next Tuesday, when we will have the Director of
OMB. They will present their budget on Monday, and we will have
their hearing on Tuesday.
I will leave it to Senator Conrad.
Thank you very much, Dr. Holtz-Eakin, for your appearance
before the Committee today.
Mr. Holtz-Eakin. Thank you.
Senator Conrad. I will be very brief.
I just wanted to indicate that our former Chairman was
talking about deficits as a percentage of gross domestic
product and was talking about these as being smaller than they
have been in the past.
I have a different view, and it is expressed in this chart
that looks at deficits as a percentage of GDP, if you take out
Social Security, you get a different picture. The last time we
had deficits as a percentage of GDP that were anywhere close to
this was in 1983. There, we had a deficit that was 6 percent of
GDP, but there was a fundamental difference. There was almost
no Social Security surplus at that time.
Now the Social Security surplus is $160 billion, or very
close to it. And if you take out the Social Security surplus
and look on an operating basis, our deficits as a percentage of
GDP are the biggest they have been since World War II with the
exception of 1983.
[GRAPHIC] [TIFF OMITTED] 94065.005
So I just want to provide that alternative view.
One other thing----
Mr. Holtz-Eakin. If I may, I think you and I concur on
those facts.
Senator Conrad. Excuse me?
Mr. Holtz-Eakin. I think you and I concur on those facts. I
think Senator Domenici was talking about debt as opposed to
deficit. We can check.
Senator Conrad. I have heard many describe deficits as
relatively small as a percentage of our GDP. I think that
historically, that is not the case when properly viewed.
Senator Domenici also mentioned what he thinks is happening
in the work force, and the front page of the business section
in today's Washington Post has the story he was just telling of
the gentleman who says he is running a small business, he has
only three full-time employees, and when he wants to hire
somebody--when he needs a computer programmer, or a speech
writer, or a web designer--he just puts the project out to bid
on the internet. And Senator Domenici was describing that he
just had a problem with a computer program he needed done, he
put it on the internet, and he paid $118 to a gentleman in the
Ukraine to write his computer program. He said it would have
cost $1,000 to employ somebody here.
I think Senator Domenici is onto something in terms of
productivity growth. You can see it in construction as well. We
are able to put up a Class A building now in a year. It used to
take sometimes 3 years. And what is happening with computer-
assisted design, all of the computer ordering--it is a
productivity gain that is occurring in terms of more
efficiency.
Again, thank you, Director, for being here today.
Mr. Holtz-Eakin. Thank you.
Senator Conrad. The hearing is adjourned.
[Whereupon, at 12:17 p.m., the Committee was adjourned.]
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THE PRESIDENT'S BUDGET PROPOSAL
----------
THURSDAY, FEBRUARY 5, 2004
U.S. Senate,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to notice, at 10:02 a.m., in
room 210, Cannon House Office Building, Hon. Don Nickles
(chairman of the committee) presiding.
Present: Senators Nickles, Domenici, Gregg, Allard, Burns,
Enzi, Sessions, Crapo, Conrad, Murray, Byrd, Nelson, Stabenow,
and Corzine.
Staff present: Hazen Marshall, majority staff director; and
Jim Hearn, senior analyst for government finance and
management.
For the minority: Mary Ann Naylor, staff director; and Jim
Horney, deputy staff director.
OPENING STATMENT OF CHAIRMAN NICKLES
Chairman Nickles. Good morning. The Committee on the Budget
will come to order. First I want to acknowledge our friends
from the House, Chairman Nussle and the entire Budget Committee
of the House. They have been very cooperative, very supportive.
As a matter of fact, when it was announced that the Senate
office buildings would be closed, Chairman Nussle notified me
immediately that he would be more than happy to cooperate and
allow us to use not only the hearing room but also offices and
space. They have been very generous, very cooperative, and I am
very grateful that they have accommodated us in our hearing
this morning.
For this morning's hearing, we have Director Bolten,
Director of the Office of Management and Budget, to present
testimony before the committee. We welcome him to this
committee. We welcome him to his position that he has now had
for, I guess, about half a year. He has got one of the most
challenging jobs in Government to try to manage a budget of now
$2.4 trillion. It is a job just to develop one and to propose
it, and we look forward to hearing his testimony as well.
I welcome my colleagues that are with us this morning, and
following my tradition, I will call upon the ranking member, my
friend, Senator Conrad.
OPENING STATEMENT OF SENATOR CONRAD
Senator Conrad. Thank you, Mr. Chairman.
I also want to thank our colleagues on the House Budget
committee. Certainly the chairman and the ranking member,
Congressman Spratt, they could not have been more gracious.
They have opened their space to us. They have allowed us to use
their equipment. And it has been enormously helpful, and we
very much appreciate their graciousness.
Mr. Chairman, I also want to welcome Director Bolten to the
committee. This is a challenging time, certainly for you, for
the administration, and for the Congress, as we address what I
believe are deficits that are far too large and growing
geometrically. Certainly as we look ahead past the 5-year
window, I think we have to be most concerned about the
direction, the fiscal direction of the country.
When I look at past statements by the administration, I
remember very well in 2001 they told us we could have massive
tax cuts and there would be no deficits, even with an economic
downturn. And that proved to be wrong.
Then the next year, they told us that the deficits would be
small and short term. That also proved to be wrong. The
deficits have been large and long term.
Then in 2003, they told us that the deficits were small by
historical standards. That, too, proved to be wrong. These
deficits are record deficits.
And now this year, we are being told that they are going to
cut the deficit in half over the next 5 years. And I think we
have to ask the question: Will that, too, be wrong?
Let me go to just a back-of-the-envelope analysis that
tells me that will be wrong as well.
[GRAPHIC] [TIFF OMITTED] 94065.011
The President says in the fifth year the deficit will be
$237 billion, but he is not counting the $259 billion he is
going to be taking of Social Security surplus funds, every dime
of which has got to be paid back. He is not counting the $23
billion from the Medicare Trust Fund. He is not counting the
$55 billion it would take to deal with the alternative minimum
tax problem, which he is paying for for 1 year but not beyond.
And he has no costs for the residual war cost, the war on
terror, Afghanistan, Iraq, which the Congressional Budget
Office says in that year will be another $30 billion. That is
over $600 billion being added to the debt.
[GRAPHIC] [TIFF OMITTED] 94065.055
Just a reality check. I went to the President's budget
document and looked at 2009, and what one sees is the President
himself says he is going to add $633 billion to the debt in
that year.
[GRAPHIC] [TIFF OMITTED] 94065.056
So how is it that we have much larger accumulations of debt
than the deficit picture that the President asserts would
provide?
Well, first of all, he is taking all the Social Security
Trust Fund surpluses over the next decade, $2.4 trillion, and
not accounting for it--not accounting for it at least with
respect to deficits.
[GRAPHIC] [TIFF OMITTED] 94065.057
In addition, the tax cut the President is proposing
explodes outside the 5-year budget window. He is only looking
at 5 years, when we all know much of the effect of his
additional tax cuts occur beyond the 5-year budget window. This
is the cost of the tax cuts, including the associated interest
cost.
[GRAPHIC] [TIFF OMITTED] 94065.058
And the same is true of the alternative minimum tax that
was the old millionaire's tax that now is going to be a middle-
class tax because we have two or three million people affected
by it today. It is going to be 40 million people by the end of
the budget period, 40 million people and it costs $658 billion
to fix. The President has counted 1 year of that cost, but does
not have a dime beyond that time.
[GRAPHIC] [TIFF OMITTED] 94065.059
The same is true of war costs. The Congressional Budget
Office says in the 10-year period, $280 billion of cost for the
President's defense policies, war on terror, and yet the
President has no money provided beyond September 30th of this
year. They tell us we do not know what the cost will be, but we
know the right answer is not zero.
[GRAPHIC] [TIFF OMITTED] 94065.060
The thing that most concerns me is the long-term trajectory
because what we see is that right now we are in the good times,
in effect, even though the deficits are at record levels,
because we have these substantial trust fund surpluses. But
look what happens when the trust funds--the green bar is Social
Security, the blue is Medicare--when they go cash negative, at
that very time the cost of the tax cuts explodes.
[GRAPHIC] [TIFF OMITTED] 94065.061
And I will just end with this chart that shows the
President's own analysis of the long-term budget circumstance.
This shows that the current situation, record deficits, is the
good times; that when the baby boomers retire and the
President's tax cuts go fully into effect, these deficits go
right off the cliff. And so I think we have to alert the
American people that we are on a course that is simply not
sustainable, that fundamentally threatens the economic security
of the country, and the biggest way it does is upward pressure
on interest rates and the biggest way it does is people
deciding they don't want to hold dollar-denominated assets.
[GRAPHIC] [TIFF OMITTED] 94065.062
And I would just conclude with an article that is in the
Washington Post this morning saying, ``Asian central bank
consider alternatives to big dollar holdings.'' Already we have
seen the dollar go down almost 30 percent against the euro in
the last 18 months. I think we have to get very, very serious
about the fiscal condition of the country.
[GRAPHIC] [TIFF OMITTED] 94065.121
[GRAPHIC] [TIFF OMITTED] 94065.012
Thank you.
Chairman Nickles. Senator Conrad, thank you very much.
I would just make a couple of comments, and then we will
recognize Director Bolten. A couple of comments.
One, we had a big challenge last year to pass last year's
budget. It was not easy. Last year we were facing still the
end, I guess, of a very soft economy. The stock market was
still very, very weak. And we were fighting a war. Our budget
we passed last year funded both of those. We did pass a growth
package, and the growth package worked. The stock market is up
substantially. We did fund the war.
If you look at the chart, it shows that actually the
economy started declining in the year 2000. Some people want to
say, well, it was the Bush recession. But if you actually
notice, it started declining substantially in the year 2000.
The Nasdaq declined by 50 percent in the year 2000. And we had
a very soft economy.
insert chart
So we needed to do some things that would change it. The
stimulus package that we passed--and I might mention that the
Democrats had a stimulus package and we had a stimulus package,
and ours was supported by a bipartisan majority. It became law,
and it did work.
If you look at the next chart, the stock market has grown
by over $4 trillion since last February. We did cut the tax on
dividends in half. Maybe some people want to double the tax on
dividends again, but we made the tax on dividends 15 percent.
We made the tax on cap gains at 15 percent, and I think both
greatly helped our economy, as evidenced by the significant
appreciation we have seen in the stock market. I think the Dow
Jones is up 25 percent, Nasdaq up 50 percent. That is a big
change, and I think in large part because of the changes that
we made and that we proposed.
[GRAPHIC] [TIFF OMITTED] 94065.143
If you look at the next chart, there was a significant
appreciation in jobs. You keep hearing about the jobs. The
household survey shows that we are at an all-time high in
employment. There is a difference between the household survey
and the wage survey, and I do not need to debate that. But it
shows, at least if you look at this trend, the employment
situation has improved rather substantially.
[GRAPHIC] [TIFF OMITTED] 94065.019
But I do not disagree with Senator Conrad. I think the
challenges are very great before us. We are spending a lot more
than we are taking in, and the deficits are way too high. And I
will tell my friend and colleague Senator Conrad, I will work
with him to get them down. I will work with anybody, Democrat
or Republican, to reduce these deficits. I think they are way
too high.
If you look at the next chart, it kind of shows just the
history of where we are. The green on the chart shows the
revenues, and you can revenues have actually declined. That has
never happened before. We had 3 years in a row really where
revenues did not grow. Actually, they declined.
If you look at the history, Senator Byrd, revenues over
history in the United States almost always had some growth. But
we actually have had a very significant reduction, not because
of the tax cut, mostly because of the recession. The tax cut
had some play in it, but the recession was the biggest reason
why you had such a significant drop from over $2 trillion to
about $1.78 trillion. I notice, Senator, from the figures
estimated by both CBO and OMB, very little revenue growth
between 2003 and 2004. I hope the 2004 revenues are
underestimated, and my guess is they are. I will just say that.
We will find out 10 months from now, but I think they
underestimated the amount of revenue that we are going to
receive in 2004. I am not sure about your 2005 number, but we
will talk about that.
But you notice in the red line, expenditures have gone up
every single year. So we had a reduction in revenues, mostly
because of the recession, somewhat because of the tax cut, but
we had an increase in the red line that is outlays.
[GRAPHIC] [TIFF OMITTED] 94065.020
Most of the outlay growth, if you look at the next chart,
you will see is kind of divided up between all other spending,
domestic discretionary spending. DOD is the red line, defense.
You will notice the last couple years, if you add the war, the
war being the big delta, we had supplementals of $79 and $87
billion in 2003 and 2004. That is that top delta that shows a
big increase of spending because we had to fight the war. The
yellow lines are new spending. That is homeland security. So
that is where most of the new money went.
So I just make mention of those facts, and the fact that we
have a big challenge. We are spending more than we are taking
in. We have to close that gap. And it will not be easy, and it
probably will not be done unless we all work together to make
it happen.
We have to have a budget. The administration has proposed a
budget. We will work to pass a budget this year. It was not
easy last year. It will not be easy this year. But I think it
would be irresponsible of Congress if we do not pass a budget.
And so I applaud the administration. They have given us a
challenge, and they said they think we should reduce the
deficit by half in 5 years. I believe strongly that we should
do that. I hope that we can accelerate that. I hope that we can
cut the deficit in half--did I say balance the budget or cut it
in half? The administration wants us to cut the deficit in half
in 5 years. I hope we can meet or exceed that level. I hope we
can do it 2 or 3 years. I cannot stand the idea of having
deficits at the $400 and $500 billion level. It bothers me
daily. And I am very serious about that.
So I hope we can aggressively try and get our deficit,
whether you are talking about GDP or you are talking about
dollar-wise, get it to a much smaller, more sustainable figure,
at the $200 billion level in the next year or so. And I will
work aggressively to do that. And that may mean taking on some
popular programs, like a highway bill that my colleague from
Oklahoma is in the process of passing, and others. I want that
highway bill to be paid for, and presently it is not paid for
satisfactorily, and certainly not entirely.
I want to thank my friend, Senator Conrad, because he was
of great assistance in our markup in the Finance Committee on
that bill on Monday.
So we have many, many big challenges before us. We look
forward to the administration presenting their budget to us.
And just for the information of our colleagues, we were
scheduled to have Secretary Snow testify yesterday and could
not because of the loss of the hearing room in Dirksen. We are
trying to reschedule him for as soon as possible. I was hoping
that we would be able to get Secretary Snow Tuesday or
Wednesday. We have not confirmed that yet, but we will notify
members as soon as we can have Secretary Snow scheduled.
We have Secretary Thompson scheduled for next Thursday, and
that will be in the Senate. And then we have a couple of others
lined up, and we will notify all members as soon as possible on
that.
We do expect to work through the entire budget process in
the next 2 months, and so we have a lot of work to do, and we
will have hearings basically throughout this month, and then
the month of March we will begin committee markup, floor
markup, and conference.
I told Senator Byrd I wanted to talk to him about it. I do
want to tell all members I would like to improve the process
that we consider the budget on the floor. I have been
embarrassed with our vote marathons, vote-a-thons, whatever you
want to call them. It is not a good way to legislate, and I
think we all recognize that. Maybe we can see if we cannot
together, collectively, bipartisanly, improve the procedure on
the floor, and, frankly, add more respect and dignity to the
Senate in consideration of a budget of the magnitude somewhere
in the range of $2.4 trillion. We need to do a better job in
managing the floor in that effort. So I am going to work with
our colleagues and see if we cannot come up with some other
improvements, and I appreciate very much Senator Conrad's
willingness to consider some changes that might be an
improvement, not just this year but, frankly, in future years.
And, with that, Director Bolten, we will recognize you for
your comments. Welcome to the Budget Committee.
STATEMENT OF JOSHUA B. BOLTEN, DIRECTOR, OFFICE OF MANAGEMENT
AND BUDGET
Mr. Bolten. Thank you, Mr. Chairman, and thank you, Senator
Conrad and other distinguished members of the committee. It is
a privilege to have the opportunity to appear before you this
morning.
The 2005 budget that was transmitted earlier this week
continues to support the President's three overriding national
priorities: winning the war on terror, protecting the homeland,
and strengthening the economy. The President is committed to
spending what is necessary to provide for our security and
restraining spending elsewhere.
Since September 11, 2001, as you have emphasized, Mr.
Chairman, more than three-quarters of the increase in the
Federal Government's discretionary spending has been directly
related to our response to the attacks, enhanced homeland
security, and the war on terror. The President's 2005 budget
continues this spending trend. That means significant increases
in essential funding for our security programs, combined with a
dramatic reduction in the growth of discretionary spending
unrelated to security. With your support in enacting this
budget into law, we will be well on the path to cutting the
deficit in half over the next 5 years.
If I could have the first chart up, please.
Mr. Chairman, at OMB we have found it useful to try to
divide the discretionary budget into three categories, similar
to the chart that you just showed. On the left is defense,
which is basically the Defense Department. In the center is
homeland security, which is not congruent with the Department
of Homeland Security; about two-thirds of that Department
spending we characterize as homeland security spending. But
there are a number of other elements from other departments
that are included within that category, particularly from
Health and Human Services, the Department of Justice, some from
the Department of Agriculture, and others. And then on the
right is everything else, which we label non-defense, non-
homeland spending.
The President's--yes?
Chairman Nickles. Excuse me. Does that include all the
supplementals? That includes all spending?
Mr. Bolten. No, it does not. We have another chart that
includes supplementals, but this one is just base discretionary
spending.
The yellow bars represent the President's proposals for
2005. What that reflects is, on the left, an increase in
defense spending by 7 percent to support our men and women in
uniform and transform our military; in the center, an increase
in homeland security spending by nearly 10 percent to
strengthen our capability to prevent future attacks; and on the
far right, holding the rest of discretionary spending to half-
of-1-percent growth, well below the rate of inflation, while
continuing to increase funding for key priorities such as the
President's No Child Left Behind education reforms.
The President's budget is built on the sensible premise
that Government spending should grow no faster than the average
increase in average American family incomes, which is
approximately 4 percent. This budget, the 2005 budget, proposes
to hold the growth in total discretionary spending to 3.9
percent overall and, again, to reduce the growth in non-
defense, non-homeland security spending to half of 1 percent,
below the rate of inflation.
Mr. Chairman, in the last budget year of the previous
administration, 2001--that is reflected in the green bars on
this chart--discretionary spending unrelated to defense or
homeland security soared by 15 percent. With the adoption of
the President's first budget in 2002, that growth rate was
reduced to 6 percent, then 5 percent the following year, then 4
percent for the current fiscal year that we are now in, fiscal
year 2004; and as I have just emphasized, down below 1 percent
in the President's proposal for 2005.
The President's budget builds on the pro-growth economic
policies that have laid the foundation for the economic
recovery now under way and for sustained growth and job
creation in the years ahead.
The tax cuts that you and the Congress enacted have been
critical to strengthening the economy and to creating jobs.
Perhaps the best timed in American history, these tax cuts
deserve much credit for today's brightening economic picture,
which includes nine consecutive quarters of positive growth,
the highest quarterly growth in 20 years in the third quarter
of last year at 8.2 percent, ongoing extraordinary productivity
growth, continued strength in housing starts and retail sales,
and encouraging signs of renewed business investment. These
indicators suggest that job growth, which typically lags
recovery, should continue to strengthen in the months ahead.
Mr. Chairman, the President will not be satisfied, however,
until every American who wants a job can find a job. So this
budget supports the President's six-point plan for economic and
jobs growth, including making permanent the tax relief that has
fueled our economic recovery.
The sustained growth that this budget supports will be good
news for our budget picture as well. As the economy improves,
Treasury revenues will as well.
Like America itself, the Federal budget has faced
extraordinary challenges in recent years: a stock market
collapse that began in early 2000; a recession that was fully
under way in early 2001; revelation of corporate scandals,
years in the making; and, of course, the September 11th attacks
and the ensuing war on terror.
With Treasury receipts only beginning to reflect a
recovering economy and major ongoing expenditures in Iraq,
Afghanistan, and elsewhere in the war on terror, we still face
a projected $521 billion deficit for the 2004 fiscal year. That
size deficit at 4.5 percent of GDP is not historically out of
range. Deficits have been this large or larger in 6 of the last
25 years, including a peak of 6 percent in 1983.
Under the circumstances that created it, today's deficit is
certainly understandable, but that deficit is also undesirable
and unwelcome. And with enactment of this budget, we will bring
it down.
With continuation of the President's economic growth
policies and sound spending restraint reflected in the budget I
have just outlined, our projections show the deficit will be
cut by more than half over the next 5 years. This dramatic
reduction begins in the fiscal year of this budget, 2005, for
which we are projecting a deficit of $364 billion, roughly 3
percent of GDP. The rapid deficit reductions continue in
subsequent years, with our projections showing the deficit
falling to 1.6 percent of GDP by 2009. This is not only well
below half its current 4.5-percent level; it is also well below
the 2.2-percent average deficit during the last 40 years. And
you will see on that chart a black line across the middle of
the chart. That reflects the 2.2-percent, 40-year historical
average deficit for the Federal Government. It is also roughly
a line that reflects cutting our current deficit in half.
This deficit reduction is the combined effect of economic
growth and spending restraint. As the economy recovers, tax
receipts as a percent of GDP will rise to historic levels by
the end of the budget window, while spending restraint keeps
outlays flat or slightly declining as a share of GDP.
The spending restraint reflected in this budget is not
automatic, so we are also proposing new statutory budget
enforcement mechanisms, establishing in law limits on both
discretionary and mandatory spending, and requiring that any
increases in spending be paid for by spending offsets.
We plan to transmit legislation to the Congress that has
three elements: one, reinstate the caps on discretionary
spending for 5 years through 2009; two, a pay-as-you-go
requirement limited to new mandatory spending--any proposed
increase in mandatory spending would have to be offset by a
reduction in mandatory spending, tax increases could not be
used as an offset, and PAYGO would not apply to tax
legislation. Three, measure the long-term unfunded obligations
of major entitlement programs and include a 60-vote hurdle in
the Senate for legislation that would expand these obligations.
I look forward to working with this committee to gain
enactment of these proposals to restrain spending.
Finally, the President is keeping this administration
focused on what the American people care most about: results.
The measure of the Government's success is not how much we
spend but, rather, how much we accomplish. This budget includes
a scorecard that measures the progress agencies are making in
achieving results so that the Government continues to be
accountable to the taxpayers.
Since President Bush took office, our Nation has confronted
a cascading set of challenges. The President and Congress
responded on all fronts, with tax relief to get the economy
going, the largest reorganization of the Federal Government in
50 years to create a new Department of Homeland Security, and
the largest increases in the defense budget since the Reagan
administration.
The President's 2005 budget builds on this record of
accomplishment. With renewed economic growth and the Congress'
cooperation in restraining spending, and focusing it on our
most critical priorities, we can accomplish the great goals the
President has set for the country while dramatically improving
our budget situation.
Mr. Chairman, I look forward to taking your questions.
[The prepared statement of Mr. Bolten follows:]
[GRAPHIC] [TIFF OMITTED] 94065.051
[GRAPHIC] [TIFF OMITTED] 94065.052
[GRAPHIC] [TIFF OMITTED] 94065.053
Chairman Nickles. Director Bolten, thank you very much. I
have a lot of questions, but I also have a lot of colleagues,
and I want to recognize them.
I am going to ask all of our colleagues that they try and
keep their questions and remarks in the order of 5, 6, 7
minutes. That would be appreciated, and I think by others.
I will withhold many of my questions until the second
round. I think I will still be here. I doubt that others will
be. I will ask you one question, if you could help explain the
difference in scoring between CBO and OMB or CMS on the cost of
the prescription drug benefit. When we passed a budget last
year, we set up a budget that said we would spent up to $400
billion over the next 10 years to strengthen, enhance, and
improve Medicare, including prescription drugs. The bill that
we passed was scored by CBO to be at $395 billion. Under your
budget submission, CMS, HHS, OMB, your actuaries have
determined that it was in excess of $520 billion.
Could you give us a brief explanation of the differences
between the scoring between CBO and CMS?
Mr. Bolten. Mr. Chairman, there is a substantial difference
between the actuaries. CBO, at the time the bill was being
considered and enacted, scored the cost at $395 billion. The
estimate that the HHS actuaries put out, I believe at the end
of December, was $534 billion. So a substantial difference
there.
The reasons for the difference are highly technical. I am
not sure I am the best person to explain it, but I know that
Secretary Thompson has had an opportunity to address the issue
in some detail, and I know that the actuaries are working
together to try to resolve their differences.
The CBO and HHS actuaries have had differences for some
time about fundamental assumptions related to the Medicare
bill. Those include how quickly the prescription drug costs
would likely come down because of volume buying. They include
different assumptions about level of participation rates. They
include different assumptions about the level of participation
by private plans in the program. All of this in an area that is
inherently hard to estimate, but made especially difficult in
this case because of the novelty of so many of the programs
involved.
The important part of this is that I think this is an
honest disagreement between experts, both of whom in my eyes
have a great deal of credibility. We in the administration are
under some constraint to carry the HHS estimate in our budgets,
which we have done. So we are reflecting and carrying in our
budget the higher estimate. But I know the actuaries are
working together to try to figure out how to close their
differences.
At the time you adopted the legislation, that you
considered the legislation, what was relevant, as it always is
with legislation, was and is the CBO score. My expectation is
that as we submit our budget, CBO will in the ordinary course
of things rescore our budget. And I expect that they will
reflect their original score, because I understand that
Director Holtz-Eakin as recently as this week has reaffirmed
their intention to stay with their $395 billion score.
Chairman Nickles. Thank you very much.
Senator Conrad.
Senator Conrad. Director Bolten, when did you know that
there was a difference, a substantial, dramatic difference,
between the estimates of the cost of the prescription drug bill
between CMS and your agency?
Mr. Bolten. I think all of those who were involved in the
Medicare discussions were aware that there were differences
between the assumptions of the CBO and the HHS actuaries. My
understanding is that that was true all the way through the
Medicare considerations.
Senator Conrad. And did you ever feel that you had an
obligation to tell Members of Congress that you thought the
bill was going to cost much more?
Mr. Bolten. I wasn't directly engaged with the Members of
Congress on the bill, but I know that Secretary Thompson, who
was, did discuss with members some differences in the
assumptions. But within the administration, we were also aware
on this legislation, as in all legislation, that what counts as
the legislation is being considered is the CBO score.
Senator Conrad. Well, when you say you were not engaged
with members, you were engaged with me. You came up here and
told me that you thought additional steps needed to be taken to
rein in spending, but you never once said to me that you had a
belief that the cost was going to be far in excess of what was
before the Congress.
Mr. Bolten. Senator, yes, I did. I did engage with you and
several other members on the long-term outlook here. And you
will recall that our conversation was about our interest in
creating a unified trust fund, which I think would most
accurately reflect the overall cost. But on the details of the
bill, I was not engaged with the members, but I do not think
that is what is really relevant here. What is relevant here is
that at the time that you all were considering the bill, it was
the CBO score that counted, and that is what everybody was
operating on.
Senator Conrad. Yes, but I would say this to you: I think
you had an obligation, if you believed that the cost was going
to be far in excess of what CBO was telling us, to say so. I
will not go further with it. I just tell you I am personally
disappointed that somebody in the administration did not send
up a very clear signal that, in their judgment, this bill was
going to cost a third again as much as what we were told at the
time.
You keep saying you are going to cut the deficit in half 5
years from now. The only way you are going to cut the deficit
in half 5 years from now is just not to count things.
Let me ask you this: When you say you are going to cut the
deficit in half, you say it is going to be $237 billion. Are
you counting the $259 billion you are going to take from Social
Security in that year that you have to pay back? Is that in
that?
Mr. Bolten. Senator, this administration, as all previous
administrations, at least in recent decades, and CBO, looks at
the deficit picture on a unified basis. So what counts for
deficit purposes is the unified budget deficit or surplus, as
the case may be----
Senator Conrad. But isn't this going to add--isn't that
$259 billion going to add to the debt of the United States? The
money that is being taken from Social Security in 2009 you have
to pay back, don't you?
Mr. Bolten. Sure. It is a Government obligation. But what--
--
Senator Conrad. And that adds to the debt.
Mr. Bolten. It does not--it adds to the overall debt of the
Government, but it does not add to the debt held by the public.
Senator Conrad. Not the debt held by the public, but it
adds to the gross debt of the United States, and it has got to
be paid back.
Now, let me just say why I am concerned about this, because
back in the 1980's there was virtually no Social Security
surplus to be concerned about. In 1983, the last time as a
percentage of GDP we had a deficit as big as this one, there
was virtually no Social Security surplus.
In this year alone, your estimates are the Social Security
surplus is going to be $259 billion, and you are taking it all.
You are not taking it all just for that year. You are taking it
all for the next decade. That is $2.4 trillion--$2.4 trillion--
and you are not letting the American people understand all that
has got to be paid back.
But it does not end there. The same thing is true with
Medicare. The alternative minimum tax, which you are paying for
for 1 year, has a cost in 2009 of $55 billion. It is nowhere.
You have, in addition to that, no calculation of residual war
costs. CBO tells us it is going to be $30 billion that year.
You add all that up, that is over $600 billion of added debt
when you are telling the people it is going to be a deficit of
$237 billion.
I think that is misleading to people, and all of this right
before the baby boomers retire.
Mr. Bolten. If you can hold the chart up for just 1 second?
Senator Conrad. Yes.
Mr. Bolten. Senator, we disagree--not about the problem
with Social Security--I share very much your concern about the
long-term unfunded liability in Social Security. But in terms
of correctly describing what our deficit situation is, I think
the right way to look at it is on a unified basis, because it
is what the Government needs to borrow today from the private
sector or tomorrow from the private sector that is relevant in
the concern you expressed at the end of your remarks, which
was: Is private capital being crowded out? What is going on
with interest rates?
Right now we do not see the deficits we are running today
putting pressure on interest rates, but I think you are right
to be concerned about it. But the right way to look at it is
what does the Government need to borrow today or tomorrow in
order to meet that obligation.
Let me move on to the other elements. On the Medicare
surplus----
Senator Conrad. Let me just respond to that for a moment. I
tell you, I think we have a fundamentally different
circumstance than we faced in the 1980's because the baby
boomers are about to retire. And the hard reality is debt held
by the public is a different metric than the gross debt of the
United States. The gross debt of the United States matters a
lot more when the baby boomers are about to retire. And it is
why, if you look back at the 1980's, there was virtually no
Social Security surplus. Now there are huge Social Security
revenues coming in, growing dramatically--it produces a $150
billion Social Security surplus this year. It is going to be
$250 billion by your calculation in just 5 years. And you are
not counting it as part of the deficit, when, in fact, it has
all got to be paid back. It is adding to the debt. And what we
have here is a gross debt that is spinning totally out of
control at the worst possible time.
Mr. Bolten. I do want to emphasize that I completely share
your concern about the long-term unfunded liability of Social
Security, which begins to bite within the next 10 or 15 years
very badly, when Social Security itself will start taking in
less money than it is putting out. So I do not want to minimize
concern about Social Security. I do want to say we have a
disagreement about the right way to characterize deficits
today.
Looking at some of the other elements on your chart, I
think to suggest that there is a Medicare surplus does not tell
the actual story, that Medicare is divided into two parts, part
of which has a trust fund, which is in surplus, but the other
half of Medicare is running a large cash deficit.
Senator Conrad. That is true, but we have made a decision
around here, made it long ago, that we are going to fund
Medicare in different ways. Some of it was by a premium. Some
was by a general fund transfer. We do have a trust fund and it
is in surplus, and it is being taken and used for other things.
And the point is it has got to be paid back.
That is the fundamental problem I have with telling people
the deficit is going to be cut in half, because the hard
reality is that the debt in 2009 is not going to be increased
by $230 billion. The debt, according to your own calculation,
if you go to your own budget documents, the debt is going to be
increased by $633 billion in 2009. I think the American people
need to know that.
My time is up.
Chairman Nickles. Senator Conrad, thank you. I am very
interested in this subject, and you and I have a little
difference of philosophy, and maybe we can hash this out.
Senator Conrad and I have basically decided to do a hearing
on long-term cost implications of some of the Federal programs,
which will certainly include Social Security and Medicare, but
also other pension liabilities and long-term liabilities. And I
may want to have a portion of that or maybe a separate hearing
devoted to trust funds and what I would say is the false
assumption of trust funds, but that would let you know where I
am coming from. And maybe we could really hash this out. I
would enjoy doing that. I think it would be a good,
educational, intellectual exercise. But we will save that for
another day.
We go by order of appearance, and I might ask my
colleagues, Senator Domenici is here. Senator Allard, would you
mind deferring to the former chairman, since he has only been
chairman of this committee or ranking member for 25 years or
something. But we are asking all of our colleagues to try and
keep their comments to 5, 6, 7 minutes. That would be
appreciated.
Senator Domenici? And thank you, Senator Allard.
Senator Domenici. I will try to be brief.
There is one item of kind of a parochial nature that
bothers me, and parochial only in the sense that the
subcommittee that I chair has to pay for this. That has to do
with Yucca Mountain, Mr. Director. There is something very
difficult about what your budget is doing on Yucca Mountain.
First of all, you propose that there be a Yucca Mountain
fee. There has always been a fee accumulating for that. We use
it even when we are not making any headway, but the President
proposes $749 million as a legislative proposal related to
Yucca Mountain that would change mandatory receipts related to
the nuclear waste to discretionary receipts. Is that correct so
far?
Mr. Bolten. I believe it is, Senator.
Senator Domenici. OK. In the budget request, the revenue
from this change is assumed up front, and it is the means to
maintain the schedule of 2010 opening of Yucca.
Now, I do not know that Yucca is going to be opened by
2010, so I do not want to act like I am agreeing with that
date. But you all are and everybody else is telling the world
we are.
Now, what happens if this legislative proposal is not
enacted? Will we still stay on a path that assumes a 2010
opening?
Mr. Bolten. My expectation, Senator, is that unless we are
able to find some other way to make sure that the funding for
this project is adequate that it would cause a delay in the
2010 date.
Senator Domenici. Well, it would seem to me that is the
right answer, but also I would like you to know that very few
proposals for a user fee of this size gets enacted around here.
And when you have something as controversial as Yucca, whose
schedule has been all over, to come along and say, well, now is
the time to ask for $750 million as a new fee, there are going
to be a lot of people complaining because they have been
putting up a fee, Mr. Chairman, for a long time. And you have
been asking me, ``Where is the fee?'' And I say, ``It is
sitting out there.'' And then you say to me, ``No, it isn't
sitting out there. You are using it.'' Right? ``Except you are
not using it for Yucca.''
Well, now, I personally want everybody to know that I will
do what I can on Yucca, but I cannot keep it on schedule with
$750 million left out that we assume we are going to get when I
do not know how we are going to get it.
Mr. Bolten. Senator, one comment. I am advised that the
fees we are talking about are not new fees. It is a shifting of
fees from the mandatory over to the discretionary side. I
realize that that still involves some difficult legislative
machinations, but----
Senator Domenici. Yes, sir. But, you see, I already told
you that, and I thought you were not getting it. But, you know,
I already made that statement about the discretionary, this
change. I note your marvelous assistant just whispered it in
your ear.
Mr. Bolten. Senator, you are both far more astute about
this than I am, sir.
Senator Domenici. You are right. He is pretty good, too. He
worked for us for 20 years.
Let me talk about the defense environmental management, if
I could. The fiscal year 2005 requests $350 million to be made
available only to the extent that legal uncertainty concerning
certain reprocessing is satisfactorily resolved pending
litigation or by new legislation. What does that mean?
Mr. Bolten. I am not familiar with that, Senator.
Senator Domenici. Well, it is a bunch of money. I do not
know that you have to be, but somebody has to be. Do you want
to ask somebody to tell us--
Mr. Bolten. Can we give you the answers for the record?
Senator Domenici. Absolutely. Thank you very much.
The rest of that is: When do you intend to obligate that
$350 million? And we will wait for that answer, too.
Mr. Bolten. We will provide that for the record, Senator.
Senator Domenici. Thank you very much.
Corps of Engineers. Everybody around here knows, and
probably Senator Byrd knows the best, that every year
Presidents submit budgets on the Corps of Engineers that ask
for projects and then do not pay for them, or cut the projects
so much knowing full well that you cannot live with them.
Now, I do not accuse you of it. You are too new. But you
are following in the footpaths, it would seem, of those that
came before you.
The Corps of Engineers fiscal year 2005 request, if enacted
as is, underfunds the Corps so much that I question whether it
could be effectively carried out and that it could do its
mandated work. The fiscal year 2005 budget documents relating
to the Corps state a concern about the growing construction
backlog.
Can you explain how if we cut the construction budget by
$300 million we are reducing the current construction backlog
for 2005? Would you like to answer that for the record, too?
Mr. Bolten. I might, but I would just say, Senator, that
when we have gone in and looked at that budget, what we have
tried to do is focus on the priority projects, those already
under way. I think the Corps does a pretty good job of trying
to figure out exactly where the resources ought to be
allocated. We have tried to continue doing that in this budget.
Senator Domenici. OK. I have three more Corps questions. I
will submit them. But let me say to the Senators, there is no
series of projects that the Senators want more than the Corps
of Engineers. If anybody served on that subcommittee, it gets
the biggest list, short of maybe Interior, which you chaired,
Senator Byrd. We get lists of requests for Corps, and if I look
at your numbers, it is--you know, you have submitted to us an
impossibility. We cannot do what you have suggested here
because the Senate Members and House Members will not let us.
Now, on a very big issue, I would like you to talk with us
a minute. It seems to me the American economy is changing or
something has happened that we have not yet put our finger on.
The easy attack on this administration is that two million jobs
have been lost, and I see a candidate saying, ``Wait until I
get President Bush, I will point right in his forehead and say,
`That is what you have done, lost two million jobs.'''
Well, Mr. Bolten, it seems to me that with the fiscal
facts, everything is right on course for this to be a very
strong economy. Normally a strong economy means more jobs. Is
that not right?
Mr. Bolten. Yes, sir.
Senator Domenici. What has happened? Why do we have all
these good acts on the economy? We have a few things that are
strange, and that is this enormous, enormous increase in
productivity, consistent and so high that 15 years ago if you
had told Alan Greenspan we are going to have it that big, you
know, he would have said it is impossible. A couple other
things have happened. Do you have your version on behalf of
this President as to why all the growth and other positive
things and so few new jobs as they are talking about?
Mr. Bolten. Well, a couple of points. First of all, I think
the macroeconomic policy has been very well designed to address
the recessionary situation that the President encountered when
he entered office. There has been an accommodative monetary
policy from the Fed, and on the fiscal side, you all have done
exactly the right thing in enacting what may be the best timed
tax cuts in American history.
CEA estimates that those tax cuts are responsible for two
million more jobs. The Council of Economic Advisers, the
professional economists within the White House, estimate that
between 2001 and 2003, there were two million more jobs in the
economy as a result of the tax cuts than there otherwise would
have been.
Now, job growth has been too slow, and it has been, as you
know, a great concern of the President. One of the reasons is
routine, and that is that job growth typically lags recovery,
and it takes some time, once the recovery is under way, for job
growth to come back. But a huge factor is the one you
mentioned, which is that productivity growth has been
unprecedented, far beyond anything that any of the economists
projected, which is good news for the economy overall. It means
we are going to remain competitive. It means that we are going
to have higher real wage rates. But it also means in the short
run, when you are coming out of a recovery, that there aren't
as many jobs created because high productivity means you are
creating more products with fewer people.
We expect that the trend of low job growth is now moving to
sustained job growth. We need to see what the numbers will be
going forward, but I know that our economists are very
optimistic that we will see strong job growth in the years
ahead.
Chairman Nickles. Senator Domenici, thank you very much.
I am going to urge our colleagues, we have a tool that we
did not have in the Senate, and there is a little clock up
there to give us a little guidance.
Senator Murray.
Senator Murray. Mr. Chairman, thank you very much, and I
appreciate the accommodation of the House in being here. I
would ask, Mr. Chairman, since many of our offices are not open
and we are going to have difficulty getting things to you, if
we could hold the record open of this committee hearing to
submit our questions once our staffs get back int our office to
be able to do that.
Chairman Nickles. Certainly. That is an excellent
suggestion. Thank you.
Senator Murray. Thank you, Mr. Chairman.
I just have to say that I am really concerned about the
budget that has been presented to us by the President. I go
home every weekend to Washington State. We have had the first
or second highest unemployment since September 11th. We are now
fourth highest, you know, so that feels a little better. But it
is not good, and what people in my State are really worried
about is health care, the cost of health care. They are
concerned about jobs. They are concerned about an investment in
transportation. They are especially concerned about security.
And what I see in this budget, which is a statement of
priorities, is a real lack of investment in those, and I want
to get to that in just a second.
But I just got your opening statement this morning and
listened to you give it, and I was kind of befuddled by what
you were presenting to us because, as Senator Conrad has
pointed out, you are telling us all that the deficit will be
reduced by half, and you are sending over legislation to kind
of make that happen. You talked about reinstating caps, the
pay-as-you-go requirements, but you are saying tax increases,
pay-as-you-go would not apply.
Well, I do not understand how that works when the tax cuts
take money out of the budget. And I know what you are going to
go to is that, well, they will create jobs. But what I think we
have seen and part of what Senator Domenici was talking about
is that the jobs are not being created here. Many of the
corporations who are taking advantage of tax cuts are having
jobs go overseas, and we are not seeing people here, as you
predict, create a better revenue forecast in the future by
increasing taxes because they are not being paid here.
Now, I am a supporter of trade agreements, but I think we
have to ask the question: If tax cuts are put in place
permanently and the jobs are not created here, how are we ever
going to get to a deficit that is cut in half that is being
promised by this budget and by the White House?
Mr. Bolten. Senator, first, the tax cuts that we are
talking about and the ones we are proposing be made permanent
in the Code are not corporate tax cuts. These are individual
taxes that we are talking about.
Senator Murray. But I would assume that you are saying that
these people will invest back in this economy. That is not what
we are seeing.
Mr. Bolten. They will invest, and in particular with
respect to the top rates, many of the small businesses of
America, Subchapter S corporations, pay their taxes through the
top income tax rates. And these are not people typically who
are sending their jobs overseas. These are people who are
investing, buying plant and equipment here in America. They are
the real engines of job growth.
Senator Murray. I think we are all very concerned that
where we are seeing job growth is not here in this country, and
I do not want to get into an agreement on that. Just an
observation that we are not going to cut the deficit in half if
we continue to give tax cuts out. We see no job growth here,
and it is a dynamic that we are going to have to deal with as a
country.
But let me ask you a specific question, because it is one I
am deeply concerned about. You said one of the priorities of
this budget was protecting the homeland. I do not think any of
us disagrees with that. I think all of us realize that this
last week three Senate office buildings were shut down because
of a small bit of ricin. I would let all of you know that if
one container comes into any one of our seaports in this
country, we now understand the dramatic impact to this economy
if those seaports were to be shut down and the products that
could not get to stores in the middle of the country, let alone
the jobs that are lost immediately on our ports, and, of
course, the lives that would be involved in that.
I was really disappointed to see that this administration
identified $1.7 billion for Coast Guard port, waterway, and
coastal security activities, including $100 million for the
implementation of the Maritime Transportation Security Act as a
port security initiative.
First of all, Mr. Chairman, I want to point out that the
Coast Guard commandant testified last September that it would
take approximately $7.3 billion over 10 years to implement the
Maritime Transportation Security Act, including $1.5 billion
for the first year. So this program is woefully underfunded,
and that $1.7 billion figure represents 90 percent of the
administration's proposed port security budget, and about half
of the Coast Guard's discretionary budget for its traditional
missions of port, waterway, coastal security.
The Coast Guard is doing an excellent job. Any of us who
live on coastal States will tell you that. But they are
stretched to the max. They are working overtime, long hours,
and I do not think this budget offers any relief.
I want to know how this administration expects the Coast
Guard, which is already stretched thin, to accomplish its
traditional missions, including fisheries enforcement, search
and rescue, all of those, take on 90 percent of the homeland
security duties, and implement MTSA with only 7 percent--that
is $100 million of the $1.5 billion--of what the commandant has
told us they need.
Mr. Bolten. Senator, we have the Coast Guard very
substantially funded. I agree completely. They have taken on a
great burden. They do a terrific job. The Coast Guard funding
over the course of this administration has been dramatically
increased. We are proposing in this budget----
Senator Murray. At the behest of Congress, I would add,
not----
Mr. Bolten. Yes, with the cooperation of Congress. I think
we agree that that is an area that has needed a great deal of
strengthening in this country. The overall budget for the Coast
Guard in our 2005 submission increased by 9 percent in total.
The port security program you referred to, I think we have
baked into our figures full over the course of the 10-year
period. But we need to focus our money where we think we can do
the most good most quickly.
Senator Murray. Well, I would just disagree with the
priorities, and I would say eliminating Operation Safe
Commerce, which is a project that is ongoing in our largest
ports right now to determine what is the best way to provide
port security, eliminating that and underfunding this is going
to cost us in the future. And it makes it very hard to believe
that homeland security is one of the primary missions of this
budget.
Thank you, Mr. Chairman.
Chairman Nickles. Senator Murray, thank you very much.
Senator Allard.
Senator Allard. Thank you, Mr. Chairman. I would have to
disagree with my colleague from Washington in that what I am
seeing now is that we are starting to have some job growth. But
I would also point out, in visiting with economists, it seems
as though there has been a loss of manufacturing jobs for
almost two decades. Whether we have gone through periods of
recession or unprecedented growth like we did in the 1990's,
the trend has been a loss of manufacturing jobs in this
country.
It has brought up a discussion among a number of colleagues
that I have been visiting with as to just how significant is
the household survey as compared to, I guess, we call it the
payroll survey, where we do the--where most of the figures are
coming out of, historically I think it has been out of the
payroll survey. What we have noticed recently, there has been a
huge increase in household survey that reflects small business
jobs. And I have talked to a number of individuals, a number of
economists and people sort of in the various industries. They
seem to think that with the recession that we had, people were
given bonuses to leave their jobs voluntarily, and they took
this money and set up their own businesses. Many of them were
home businesses, the household. They operated a computer and
they had a good printer, and they ran a business right out of
their home.
Do you have any explanation for the discrepancy in the
household figures as opposed to the payroll figures?
Mr. Bolten. Senator, for a truly expert answer, I will ask
the Chairman of the Council of Economic Advisers to give you
something for the record. But I think the difference is exactly
the one you identified, and that is that the payroll survey
tends to go around and get the big businesses and survey their
employment. The household survey actually asks individuals who
is doing what, and that is the one that reflects much more
accurately small businesses, and as has been typical in many
recoveries, the real robust growth in the economy, and the real
job creation comes from the small businesses.
Senator Sessions. Thank you, Mr. Chairman. I think it is
critical that we take firm and decisive steps to demonstrate
our commitment as a Congress to contain the growth in spending.
The American people expect that. The financial community is
watching us, and I think the world community is watching us.
We can sustain the deficits we had this year. I was glad to
see that it came in, what, $50 billion below one of the
estimates as late as June because of the growth in the economy,
and it does appear to me that income to the Government from tax
revenues is more volatile than the economy itself. It tends to
go up faster and drop faster than the economy itself. But one
of the things we have not talked about generally is the
discretionary and entitlement accounts. We have focused mostly
on discretionary.
Mr. Bolten, what percentage of our expenditures in this
unified budget from which you are drawing the deficit number,
what percentage of that is discretionary and what percentage is
entitlement programs?
Mr. Bolten. It is about a one-third/two-thirds
relationship, and then the interest is the rest of the budget.
Senator Sessions. So two-thirds of the expenditures other
than interest would be entitlement programs, Social Security,
Medicare and those expenditure items?
Mr. Bolten. I think it is a little bit less than two-
thirds, yes.
Senator Sessions. And we do not appropriate that money as
we have set that system up, but every single American who
reaches a certain age or has certain income levels become
entitled automatically to the check or the benefit from the
Government regardless of the state of the government's budget
and income; is that correct?
Mr. Bolten. That is true.
Senator Sessions. Will the entitlement program growth
exceed the growth projected by the President for the
discretionary accounts this year?
Mr. Bolten. This year actually I think entitlement growth
has been relatively restrained after a number of years of large
growth, but it is not a path we can expect to continue in the
future. But if you look out into the future and if you look out
farther beyond 10 years into the future, as Senator Conrad did
with his charts, and I know a number of members are interested
in, you see in the entitlement growth far outstripping not just
the growth in the rest of the budget, but the growth in the
economy which is what makes that situation particularly
dangerous.
Senator Sessions. I think it is important. So the answer is
on Social Security, we know it is time for us in this Congress
to get serious about it. We do not need to wait till 2018 when
the thing goes into deficit. We need to be thinking ahead now.
I think the President has had the courage to discuss that
openly, and I believe he will move forward, and I hope the
Congress will meet him halfway instead of politicizing the
issue.
Now, one matter we need to deal with--and I am glad the
Chairman raised it--and that is the prescription drug cost
estimates that we had. Chairman Nickles, to his credit, told us
on the floor of the Senate and in Committee and privately, that
the numbers were probably going to exceed the $400 billion.
Nobody else particularly was saying that, but Chairman Nickles
did warn us of it. I told the people of my State that I believe
we needed a prescription drug plan, I believe and know that
there are seniors in our State who literally, whose health is
compromised because they cannot afford prescription drugs. And
I thought and was certain we could do it for the amount we
budgeted last year, $400 billion, and I ran for reelection and
that is what I said. So I have to tell you, I am very disturbed
and concerned that we now have another Government agency saying
it is going to be $534 billion which is $134 billion more. That
is $13 billion a year. I do not know where in this Government
we can save $13 billion a year. And this is a program going
from zero to 400 billion and now it is going up to there.
I will just say a couple of things. Do you know which
number is correct, and do you have an opinion? Is it 400 or
534?
Mr. Bolten. I do not know, Senator. I think even people who
are expert in this area have legitimate disagreements. I know
that the CBO actuaries are very professional. The HHS actuaries
are very professional. And they are working together to try to
resolve their differences.
Senator Sessions. I do not think we know either, and I have
been talking to a number of Senators about this, and others in
trying to figure out what the truth is, and the truth is we do
not know. The truth is we passed a bill that we said was a $400
billion bill and now we have an authoritative agency saying it
is going to be $134 billion more than that. So I think before
this thing gets implemented, before we go down this road, Mr.
Chairman, we need to confront this question. I believe that is
what the Congress was intending. I know I would not have voted
for a $534 billion bill, and I know other Senators would not
have voted that big a bill.
So my question to you is, would you be willing to support,
and do you think the administration would support a plan to
contain the growth of this new entitlement program to the 400
billion we contemplated from the beginning, and would not that
be good public policy, so if Congress felt they needed to put
more money in it to drive it up, they could make that decision,
but that we ought to have a budget that we enforce and we ought
to have an expenditure plan that is consistent with what we
expected when we passed the bill?
Mr. Bolten. Senator, I cannot give you an administration
position off the top of my head on that. I can tell you that,
the administration remains very interested in ensuring that
costs be contained at the same time that we are providing these
new and improved benefits through Medicare. So there will
always be an interest in that.
And I would just come back to one point, which is that as
we submit this budget, I expect it will be rescored by CBO, and
my understanding is that they will stay with their $395 billion
estimate. So as the budget is in front of you, it will be at
the same cost for the Medicare program that you voted on.
Senator Sessions. I think that could be helpful to us, Mr.
Chairman, as we confront the question of can we contain this
cost to the amount we intended to. I believe we can do that. We
do not know what it is going to be. In fact, you have
indicated, I think, we do not know to the extent it could be
more than $534 billion, and I just think we have a
responsibility to see what we can do to make this program come
in at the level we want it to. The idea that entitlement
program is just a machine let loose and it runs amuck and can
never be altered should not be our way of thinking.
Chairman Nickles. Senator Sessions, thank you. I welcome
any suggestions that you have. I might say that during the
conference I tried with others to come up with different
methods of containing the cost, and we came up with a reporting
mechanism if spending exceeds a certain amount of GDP or
something, but it was not anything satisfactory as far as this
Senator is concerned.
Senator Sessions. I would just say that of all the
conferees, you are by far the most committed to maintaining
integrity in that figure, and perhaps the growing concern over
the deficit in recent weeks might cause some of our colleagues
to rethink where we are on this particular question. If we can
come up with a good sound approach, and I believe we can, we
need to do it.
Chairman Nickles. I appreciate your suggestion, and the
administration has made several recommendations as far as
budgetary changes. Either they would be made as part of the
budget resolution or they would be made as a separate bill as
part of amending the Budget Act. I am certainly willing to
consider recommendations from any member of the Committee, any
member of the Senate. So if you have some suggestions you think
that we should be considering, I am more than willing to work
with Senator Conrad to see what we can do.
Senator Sessions. And I do intend to be working on that,
Mr. Chairman.
Chairman Nickles. I appreciate that.
Next, the Senator from Michigan, Senator Stabenow.
Senator Stabenow. Thank you, Mr. Chairman, Mr. Ranking
Member, and welcome, Mr. Bolten.
I am looking forward to a broader discussion on Medicare
myself. I will not spend a lot of time on it today, but just to
say what I would really like to talk about is how this is not a
good benefit for seniors, how it lacks in the highest possible
prices for people under Medicare, and in over 10 years will
begin to unravel Medicare as we know it. So I hope we are not
only talking about the numbers but it is really happening and
what will be happening under this Medicare bill which I am
deeply concerned about for the seniors of the country.
There is a lot in this budget bill. It is difficult to
spend just a few moments talking about it, so, Mr. Chairman, I
would like to talk in big picture numbers. As I said in the
last meeting that we had, last hearing, I think it is very
important to note that with all this sea of red ink, that if we
were to eliminate every penny of non-defense discretionary
domestic spending this year, every penny of $445 billion this
year, that would not eliminate the deficit for this year of
$521 billion; is that not correct?
Mr. Bolten. That is true, Senator.
Senator Stabenow. This is huge. So we can debate around the
margins about whether or not we should have a half a percent
increase in non-defense discretionary spending or a percent or
2 percent. But you could eliminate every penny and it would not
equal the deficit for this 1 year. So obviously, there are
broader issues that we need to address, Mr. Chairman, and I
hope we will.
The other thing I think is important to put in perspective
is of the 65 programs that we are talking about being
eliminated, and I have some questions about those, they equal 5
billion which is what we spend a month in Iraq and Afghanistan.
So we are talking about and trumpeting 65 programs that
eliminate $5 billion, and we can debate whether they should be
or not, and I am all for eliminating things that do not work
and doing new things, but that is what--we are spending $5
billion a month in Iraq and Afghanistan, and this budget does
not include the funding at this point for those important
issues of Iraq and Afghanistan. So this budget is not complete,
which is one of the big concerns as we look at all of this.
Is it true, when I look at what you are proposing to
eliminate, we are looking at eliminating in education $1.412,
basically a billion dollars in education, as I have it,
education programs, and I assume these numbers are correct that
we have received from you, $1.412 billion. And adding back $1
billion in Title I. So we are looking at overall there would be
a cut there in terms of dollars to education. That concerns me.
The other thing, coming from a manufacturing State, right
now, where our world is very different than the world, with all
due respect, that you are describing in terms of jobs. We are
losing jobs and we are losing them permanently, middle class
family wage jobs, and we are desperately concerned about it.
Everyone is agreed. The President has said, and Members of
Congress obviously have said, we need to focus on education and
innovation. We see programs being cut as it relates to
technology, regional technology in education programs, as well
as vocational education, as well as other kinds of tech prep
education, those kinds of things. Then we see being proposed
for cuts the Advanced Technology Program, which frankly, has
been a wonderful partnership in Michigan between the
universities, the big three auto makers, other manufacturers to
increase our applied technologies in terms of research and
being able to raise that level of innovation that we all know
that we need to compete. So I am very concerned about the
choices being made here that will undercut our ability to in
fact invest in education, innovation and jobs.
I would add just one other thing on jobs, and that is I
would comment--I do not usually commend a program on
television--but Lou Dobbs has been doing a wonderful ongoing
series on exporting of American jobs, ``Exporting of America''
I believe is what he calls it, in which he really, I believe
the other night got into the whole question of how we look at
productivity now. Part of the reason that productivity numbers
look as high as they are is because we are taking out of the
equation the numbers of jobs that are being outsourced overseas
so that the numbers change, and there is some very interesting
things that I thought came forward in this program.
So I am more specking, Mr. Chairman, than I am asking
questions, except to say I am very concerned about the choices
being made here in terms of education innovation, the choices
in terms of keeping us safe and the cuts in first responders
and bioterrorism. And I would ask simply a question as we look
at these things. We all understand that Social Security and
Medicare is being included in the numbers that we see in terms
of the deficit, correct?
Mr. Bolten. Correct.
Senator Stabenow. Unified budget. Would you also agree with
a chart that our ranking member has showed us in the past
regarding borrowing, the top 10 countries holding our national
debt, China, Japan. By the way, China is where our jobs are
going is one of the places, and then manipulating their
currency which makes it worse. Japan, China, United Kingdom,
Hong Kong, Germany, OPEC and so on. Would you agree with the
fact that we are borrowing, that we are taking Social Security
and Medicare money, and on top of that we are borrowing from
other countries in order to take care of this debt at this
time?
Mr. Bolten. Oh, it is certainly true that a fair amount of
the U.S. debt is held overseas, yes, and that is one reason why
it is especially important that we show ourselves to be
fiscally responsible today because we need to be assuring not
only our own markets but international markets as well.
Senator Stabenow. Absolutely. So when we look at this
budget and the fact that you could eliminate all education
funding and homeland security and technology innovation and law
enforcement and everything, and not equal the deficit this
year, and you look at the fact that we are taking all of Social
Security and Medicare and borrowing from China and Japan, Mr.
Chairman, what I find of great concern is that that money is
not going back into paying our bills. For the most part, that
has gone as a conscious choice to give tax cuts that you want
to extend to people who are doing very, very well in our
country. So we are taking money from Social Security and
Medicare, borrowing from China and Japan and other countries,
giving it to millionaires in our country, and then not being
able to pay our debt on the war, not being able to invest in
education innovation.
These are choices that are being made right now in this
budget and in the past several budgets, and I disagree with
those choices. I believe that this budget is about values and
priorities, and I do not believe that right now this budget
reflects priorities. Thank you.
Mr. Bolten. Mr. Chairman, may I take a moment for a comment
or would you like to move on?
Chairman Nickles. Yes, go ahead.
Mr. Bolten. I agree completely with the Senator, that that
is exactly what these budgets are about, setting priorities. I
imagine we will have some substantial disagreements about where
the priorities belong.
Let me make one point about the tax cuts that you raised
because I think there is a misconception about the effect of
those tax cuts. This chart shows basically who pays what in our
income tax system. Right now, let us take the top 5 percent of
income earners in this country. That is the second set of bars
from the left. Without the tax cuts, that group, those people
making more than $135,000 a year, pay 50 percent of the income
tax in this country. As a result of the income tax cuts, that
same group pays 53 percent of the income tax take in this
country. The result of the tax cuts that you all enacted was to
make the tax code more progressive rather than less.
I would also come back to the point that a substantial
portion of the money that is labeled as going to the rich is
for the small businesses of America, which are, as Senator
Allard was pointing out, the job creators in this economy.
Can I mention a couple more things?
Chairman Nickles. I have two additional Senators and I am
trying to get this out pretty close to 12 o'clock.
Mr. Bolten. All right, sir. I will be glad to engage the
Senator separately.
Senator Stabenow. Mr. Chairman, if I can just make one
response with two points. First of all, income tax is not the
only thing paid in this country.
Mr. Bolten. Absolutely.
Senator Stabenow. Everyone is paying payroll taxes.
Mr. Bolten. Yes.
Senator Stabenow. The majority of Americans are paying
payroll taxes which is Social Security and Medicare that we are
now using to help pay for these income tax cuts as well as
other things.
But second, the majority of this income tax cut went to
those at the very top of our income. Child credit, terrific;
eliminating the marriage penalty, I care about that more now,
the last year, than I did the year before.
[Laughter.]
Senator Stabenow. And I certainly appreciate what you are
saying about small business, but we all know where the majority
of this went, and in fact, if you would be willing to work with
us, we could eliminate what happened to those at the very top
who have not been asked to sacrifice during this time of war,
and reinvest it back into helping our homeland security first
responders keep us safe, and I think we could have some common
ground.
Chairman Nickles. Senator Stabenow, thank you very much.
The Senator from Idaho, Senator Crapo.
Senator Crapo. Thank you very much, Mr. Chairman.
I want to first add my voice to those who are raising a
high level of concern about the level of deficits that our
country is facing now. There is a tremendous debate starting in
this country about why we are facing these deficits, where the
responsibility lies, and I am sure that given the fact that it
is a Presidential election year and there is a battle for
control of the Senate and the House, that there is going to be
a tremendous amount of rhetoric about these deficits.
I want to commend you, Mr. Bolten, and the President for
submitting a budget that focuses on trying to reduce the level
of these deficits and get us on to a glide path back toward
balance. My efforts in this Committee are probably going to be
to help increase the pace at which we engage in those efforts,
but I appreciate that this budget recognizes that need.
Second, and I want to use my time here, I want to commend
you and the President for recognizing that procedure, as we
adopt budgets, is critical.
Mr. Chairman, could you help me on my information here,
Senator Nickles? Last year when we brought our 2004 budget
resolution to the Senate floor, did we not consider something
like 80 or 81 admendments and were not the vast majority of
those efforts to increase the level of spending assumed by the
resolution?
Chairman Nickles. The Senator is correct. 81 amendments,
most of those were to increase spending. I am trying to
remember if there was one or two to cut spending, but most all
those were significant increases, most of which were defeated.
Senator Crapo. And when you say ``most'' we are talking
like 95 to 100 percent almost of those 81 votes were votes to
try to increase the spending level of the budget.
Chairman Nickles. The Senator is correct.
Senator Crapo. The reason I say that is--and I appreciate
you pointing out that we were successful in all but one of them
in defeating them. The reason we were successful in defeating
them is we had some budget protection measures in place that
required 60 votes to increase the budget rather than 50. If we
had not had those budget protections in place, it is hard to
imagine what the spending levels we would be dealing with today
might have been.
The reason I go into that is because it is my understanding
that in addition to the proposals for the actual numbers of
this year's budget, that the administration is recommending a
number of specific statutory budget process changes to help us
control spending. I want to just go over a few of those to get
those clarified.
The first is, I understand that you are proposing that we
reinstate caps on discretionary spending for five full years;
is that correct?
Mr. Bolten. That is correct, Senator.
Senator Crapo. Second, I understand that you are proposing
a pay-as-you-go requirement similar to that that we have used
in the past for new mandatory spending, and that this proposal
would require that any increases in mandatory spending would
have to be offset by reductions in mandatory spending, and that
tax increases could not be utilized for that offset; is that
correct?
Mr. Bolten. Also correct, Senator.
Senator Crapo. I know that earlier in the hearing there was
some argument with that notion, namely the notion that tax
increases should not be allowed. I want to first of all weigh
in on your side on that and ask you to explain it a little
more, because it seems to me that there are two, at least two
major objectives here that we want to achieve. One is we want
to balance our budget, but the second is--and I think this is
sort of an age-old battle that we have here in Washington--is
that we want to try to restrain the growth of the Federal
budget and the growth of the Federal Government. There are
those who I think believe that we need to have a large all-
powerful centralized economy controlled by the Federal
Government. I am not in that group. There are others who
believe that we ought to have the Federal Government performing
those limited functions contemplated by the Constitution, and
that we should try to do all we can while we are trying to
maintain a balanced budget, to also obtain the second
objective, which is a restrained growth of the Federal
Government. I mean you can easily balance a budget. Just pass a
tax increase. Every time you want to spend more money, tax
more, keep the budget balanced and just watch the Government
grow. But we want to control growth as well as achieve balance.
I assume that that was the principle behind your proposal to
not allow tax increases to be utilized as the mechanism. Am I
correct?
Mr. Bolten. Yes, Senator, I think that is very well stated.
In fact, it is better stated than I did in my last hearing, so
I am going to go back to the transcript and borrow from that.
But there is one other point as well, and that is that the
economists will tell us that a spending cut and a tax increase
are not equal in their effect on the economy, that a spending
cut will reduce deficits basically one for one, maybe even a
little bit more with the interest expense added in. A tax
increase poses the prospect of undermining the economy. There
is at a minimum a small--though some economists believe a very
large-feedback effect from keeping that money in the economy,
keeping economic growth robust, which keeps Treasury revenues
robust. Those are the elements that I think also mitigate very
strongly in favor of biasing the rules in favor of keeping
spending down, rather than just focusing on increasing taxes.
Senator Crapo. Thank you. In fact, I think that analysis is
very appropriate. I am going to add that to my explanations of
this issue as we go forward.
I would also say just quickly with regard to this proposal,
I wish it was applicable to mandatory and discretionary
spending and not just increases. But I will leave that to some
further battles that we have here in the Budget Committee.
One last quick question. Among a number of other procedural
proposals you are making, one of them is to reinstitute the
line-item veto. As we all know that was stricken by the court
recently when we tried it last time. How are you proposing to
do it differently now to avoid successful court challenges?
Mr. Bolten. Senator, I am not able to go into the legal
detail with you now but I know our lawyers are confident that a
renewed line item proposal could be crafted that would
withstand Constitutional attack in the courts. We will be glad
to give you that detailed legal analysis.
Senator Crapo. If you could submit some further analysis on
that I would be very interested in that.
I see my time is up. Thank you, Mr. Chairman.
Chairman Nickles. Senator Crapo, thank you very much. Next
our colleague from Florida, Senator Nelson.
Senator Nelson. Mr. Chairman, you are a biblical scholar
and given the fact that Senator Byrd had made note of the
magnificent biblical name of our witness, Joshua, and the fact
that--by the way, what great name, Joshua Nehemiah, and I got
Bill. Yet, it is interesting to note about the great leader
that Joshua was when he led the people into the promised land
and had one victory after another until deceit, deception and
untruth entered the camp, and then he lost his first battle
when he tried to take the city of Ai. And not until he
exorcized the untruths did the favorable hand of the Lord turn
back on him to continue his victories in the promised land.
Now I want to point out one little subtle change here.
Would you all put back up that chart that you just had up
there? This chart would lead us to believe that of the top 1
percent, 5 percent or 10 percent, they are paying the huge
share of income taxes. That is what the chart basically says.
Technically, that is correct. But that does not give the whole
picture about where the burden is upon the American taxpayer,
for we know that of the American taxpayer, three-quarters of
them are paying more in payroll taxes than they are in income
taxes. Is that not approximately true?
Mr. Bolten. I do not know the exact numbers but the general
concept is right. There are a huge number of, especially lower
and middle-income taxpayers for whom the tax burden is greatest
through the payroll tax rather than the income tax.
Senator Nelson. So as we try to craft an economic document,
and this is not particularly an economic document--it is a
political document--we need to tell the whole story of where
the tax burden is and how, if we are going to provide relief,
who that relief is being provided to.
I would submit that this is a political document of a
budget--and I do this respectfully--that would offer an
additional tax cut for the people at the higher end of the
income scale paid for by borrowing. And where do we borrow
from? We borrow from the Social Security Trust Fund, and as
others have pointed out here we borrow from--you think we
borrow from individual American citizens but a good part of the
borrowing comes from countries like China and Japan.
So we have a document in front of us that is increasing the
deficits, and what I would like for you to educate me on is,
with this kind of deficit now in excess of $500 billion dollars
in 1 year, is it not the law of physics applied to economics
that as you go out and try to accumulate and borrow more and
more, and the competition gets greater for the available
dollars, that the cost of that money goes up, which is the
interest rate? Are we not going to see with this budget, if
implemented, later on at the end of this year interest rates
start to rise, and is that not going to cause the economy to
stall and ultimately go off the cliff? I would love to have
your comments on that.
Mr. Bolten. Senator, we have not seen it so far, that
interest rates remain at historic low levels, but I think you,
Senator Conrad and Senator Nickles, are right to be concerned
about that and that is why we want to have as restrained a
budget as we possibly can, even in the short run. The number
that the economists tell us is actually most relevant for what
you are concerned about, that is putting upward pressure on
interest rates, is the debt to GDP ratio. That is the total
corpus of the debt that is being built up in this country.
You will see in our tables that we show that debt to GDP
ratio has been rising. I believe with a great deal of
credibility our budget will put us on the right path. In the
President's Budget that number peaks in 2004 at around 4.5
percent of GDP. This is below the average of the last several
decades. It then will begin to slowly to decline. I think you
are right to focus on that question because we do need to be
concerned about putting upward pressure on our interest rates.
But I think if we pursue strong pro-growth economic policies
and if we exercise responsible fiscal restraint, we will see
that path of the debt to GDP ratio coming slowly back down,
which is where it needs to be.
We have a disagreement about tax cuts. I think you are
right to focus exactly there. In putting this chart up, I do
not suggest that everybody in America's principal tax burden is
income taxes. In fact you are absolutely right, it is not. But
if the tax cuts that you all enacted are attacked as having
made the tax code less progressive, I put this chart up to show
that in fact the tax cuts have made the tax code more
progressive. That does not mean we should ignore the burden
that remains on lower and middle-income people. Those are the
people we want to support and why it is especially important I
think that this year you all extend the child credit, the
marriage benefit relief, and the expansion of the 10 percent
bracket.
But I think the actual picture of the tax cuts is well-
reflected in this chart. I am comfortable not having undermined
the beauty of my namesake's biblical name in that respect.
Let me make one other comment, and that is that the tax
cuts as an explanation for how we got into this deficit picture
I think are greatly exaggerated. I think the Chairman had it
exactly right in the early charts he put up. The tax cuts have
reduced somewhat our revenue in these last few years and will
continue to reduce somewhat our revenue. But by far the reason
for the big change in our deficit picture over the last few
years has been flagging economic growth. The tax cuts deserve a
lot of the credit for restoring that economic growth, and the
Administration takes a strong view that this would be exactly
the wrong time to contemplate raising those taxes back up
again.
Senator Nelson. Mr. Chairman, I want to take the liberty of
just adding another sentence or two. I am just a country boy
from Florida, but I understand basic economics. That if you
have a deficit that is created because there is more spending
than there is coming in revenue, that if you are going to get
that deficit eliminated and instead are going to get it to
where the budget is in balance you either have to cut spending
or you have to stop tax cuts before they go into effect, and
therefore the effect of the revenue is higher, and that brings
you more into balance.
Now where I think you have miscalculated, I would grant you
that the tax cuts and the additional spending that has occurred
in this past year with regard to the war have generated more
dollars in the economy and we have seen the economy start to
rise. Not with the effects of the jobs that we would like to
see increased. However, I think at some point there comes the
moment of truth. Not bringing that budget into balance and
instead, with the huge deficits, more spending than you have
coming in in revenue, that the chickens come home to roost by
the interest rate suddenly surging upwards, the economy
constricting and us starting to go off the economic cliff.
That is what I am afraid is going to happen starting early
next year, and only compounded, as has been expressed by
several Senators here, by the fact that this monstrosity that
we enacted called a prescription drug benefit is now nowhere
near the level of $400 billion. Indeed, is only going to go
higher over time. You add that to the fact of the $5 billion a
month to take care of the war, which I was one of the ones that
support the war, and obviously now that we are there, despite
the fact of the misinformation that we had, we have to be
successful. You add all of that and the budget deficit is going
absolutely out of control. That is where I think, respectfully
I say to you, with a great biblical name, that I think your
budget document is flawed.
Thank you, Mr. Chairman.
Chairman Nickles. Thank you, Senator Nelson.
Senator Conrad.
Senator Conrad. Thank you, Mr. Chairman. Thank you again
for holding this hearing. Thanks again to our House colleagues.
Thank you, Director Bolten, for being here.
Let me just say in conclusion, I think you are a good and
decent person. I think the budget that you have put before us
is a total fiction. As I look ahead, you just leave out things
that are critically important for the American people to know.
This is what I think is a closer approximation to the truth
because this includes the long-term effect of the President's
tax cuts that he advocates, this includes dealing with the
alternative minimum tax problem which is supposed to be a
millionaires' tax that is about to turn into a middle-class tax
increase, and this deals with Social Security. When you do that
and you look ahead what you see is the deficits are not going
down. The additions to the debt are going up, up and away. And
these are the good times. These are the good times before the
full effect of the President's tax cuts take effect and before
the full impact of the retirement of the baby boom generation
takes effect.
So I believe this budget, and frankly your presentation,
badly understates how serious the fiscal condition of the
country is. In that way I think it is an enormous disservice to
the American people. I am sad to say that but I believe that is
the truth.
The biggest thing you have left out is you folks after
promising--in fact we looked at the White House web site and
the President has this statement on his web site. ``We are
going to keep the promise of Social Security and keep the
Government from raiding the Social Security surplus.'' It is
interesting, it is not prominently displayed on the web site,
and well it should not be because you are taking every penny of
Social Security surplus, not just this year, not just next
year, but every year for the next 10 years. Every penny of
Social Security surplus, and throwing that into the pot to pay
for tax cuts and other things. Those chickens are going to come
home to roost because that money has got to be repaid.
How is it going to be repaid when the baby boomers start to
retire, and the full effect of making the tax cuts permanent
takes hold? We already have record deficits and the President's
plan has increased the spending and cut the revenue. He is
restraining the growth of spending in a small part of the
Federal budget, but most of the budget is increasing. The
overall budget is increasing. The spending is increasing and we
have record deficits now and he says, increase the overall
spending, cut the revenue.
It does not add up. We are honest. We know it does not add
up. It does not come close to adding up. He has got us headed
for the fiscal cliff. That is my belief.
I thank the Chairman again for his many courtesies, and I
would say on the question of tax cuts and Social Security, the
Center on Budget and Policy priorities has told us, you take
the tax cuts for 75 years and the Social Security shortfall for
75 years, the tax cuts are three times as big as the Social
Security shortfall over the 75-year period that the analysts
examined. So we do need to get serious. Getting serious, I
believe means, no more tax cuts unless they are paid for, and
get real tough on the spending side as well. Unless we
acknowledge the reality of our fiscal condition we will do
neither and that is a huge mistake, because the faster we get
on this problem the less draconian the solutions will have to
be.
I again thank you, Mr. Director, for being here today.
Chairman Nickles. Senator Conrad, thank you very much.
Director Bolten, we do appreciate your appearance before
the Committee. I would just make a couple of comments.
My very good friend Senator Conrad mentioned the fact, in
the budget you are using the Social Security surplus. I alluded
to the fact I do not think there is a Social Security surplus
because the difference or the surplus is basically used to pay
for Medicare. People should note that. I also might note that
all the Democratic budgets, ones produced by Democratic
majorities, also used the Social Security surplus. So a little
something there.
The AMT fix that is assumed in some of these charts is
$500-some billion over 10 years. I certainly think we can fix
the tax code and solve a lot of our AMT problems concurrently
without that kind of expenditure. And on the assumption that
all the tax cuts are all going to be extended permanently, I
hope that is not the case. Some of the tax cuts were temporary,
designed to stimulate the economy. They will not be extended,
or at least it is not my intention to extend them.
Also, future extensions of tax cuts require an act of this
or a future Congress. If somebody does not want to extend the
tax cuts they can vote, they can change. And some of those will
not happen for years, may not happen for years. So they have
ample opportunity to be able to make that decision.
Of the current tax cuts, the biggest bulk of them do not
expire until 2011. I want to underline my belief that certain
of the tax cuts should be extended: for example, the individual
marginal tax rates and 15 percent rate on capital gains and
dividends. I think if you increase those, as some people are
advocating, you are going to send the stock market and the
economy down significantly. I also think the same thing on
individual rates. I hope you do not take the 25 percent rate
and make it 28 again. I hope you do not take the 35 percent
rate and make it 39.6 again. That would be a mistake in my
opinion. But a future Congress is going to have to deal with
those things.
And the war cost is not going to be any $87 billion for the
next 10 years. Some people are making that assumption. CBO had
to build that into their baseline. I think that over estimates
baseline spending and deficits to the tune of about $1.1
trillion over the next 10 years. I hope it is a whole lot less
than that. I hope that the figures are much, much, much, much
less that. I cannot imagine spending that kind of money in Iraq
for the next 10 years.
So I just make those editorial comments. I do not think
things are quite as bleak as some. I do think the deficits are
far too high, and it is very much my intention to work with
members of the Committee and the Administration to more than
meet the goal of the Administration to get the deficits in
half, and I believe a lot quicker than in 5 years. That is my
intention.
Director Bolten, thank you very much. I know several of our
Committee members requested that you would answer questions for
them, most of whom do not have access to their offices and to
their staffs, so I appreciate their cooperation in meeting with
us in the House. Again, I want to thank our colleagues,
Chairman Nussle and Ranking Member Spratt for their hospitality
and cooperation with us. They have been a big assistance to us
and I appreciate that.
The Committee is adjourned.
[Whereupon, at 12:18 p.m., the Committee was adjourned.]
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THE PRESIDENT'S FISCAL YEAR 2005 BUDGET PROPOSALS
----------
THURSDAY, FEBRUARY 12, 2004
U.S. Senate,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to notice, at 10:03 a.m., in
room SD-608, Dirksen Senate Office Building, Hon. Don Nickles
(chairman of the committee) presiding.
Present: Senators Nickles, Enzi, Ensign, Sessions, Conrad,
Wyden, Byrd, Nelson, and Stabenow.
Staff present: Hazen Marshall, majority staff director; and
Stacey Hughes, deputy staff and policy director, Don Dempsey,
health policy director.
For the minority: Mary Ann Naylor, staff director; and Jim
Esquea, analyst for income security and medicaid.
OPENING STATEMENT OF CHAIRMAN NICKLES
Chairman Nickles. Good morning. I want to thank everybody
for coming, and particularly, Secretary Thompson, we welcome
you before this committee.
Everyone, I think, knows Secretary Thompson. Governor
Thompson, who was Governor of the great State of Wisconsin for
14 years, has now served 3 years at Secretary of HHS, and he
will make his budget presentation to us today.
I notice that your budget is 41 percent of the entire
Federal budget. You have enormous responsibilities. I have had
the pleasure of working with you both in your previous capacity
as Governor and as one of the leading Governors on welfare
reform. I compliment you for that monumental task and, frankly,
very good success. Because of your leadership and the
cooperation of Democrats and Republicans, we passed historic
welfare reform. That needs to be reauthorized this year, so we
might hear your comments on that.
Also, you have been a very active participant in enacting
the Medicare changes, which include the prescription drug
proposal. You were very active throughout the conference. I
appreciate your leadership on that as well.
We have some big challenges, needless to say. With the
scope of your Department being as broad, as large, as
comprehensive, as extensive, and as important as it is, I value
very much your leadership.
I might tell my colleagues, I mentioned this when Secretary
Thompson was testifying before the Finance Committee, but I had
the pleasure of traveling with Secretary Thompson. He led a
very large delegation, a very prestigious delegation throughout
Africa to not only learn more, but also to assist in the
worldwide battle on AIDS. And I compliment you for your
leadership in that global fight.
I will recognize my friend and colleague, Senator Conrad.
Senator Conrad. Thank you, Mr. Chairman.
Welcome, Mr. Secretary.
Secretary Thompson. Thank you, Senator.
OPENING STATEMENT SENATOR CONRAD
Senator Conrad. Let me start by talking about the concerns
I have about where we are headed with Social Security. I have
similar concerns with respect to Medicare, but let me just put
up something the President said when he was putting out his
2002 budget. He said that none of the Social Security surplus
will be used to fund other spending initiatives or tax relief.
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Let's go to the next chart. But that is not what is
happening. Despite those words, which were the right words,
instead what we see is the President's taking every penny of
Social Security surplus to pay for other things, and not just
for this year but every year for the next 10 years, $2.4
trillion of Social Security surplus funds. And they are really
not surplus. They are surplus for the moment. They are needed
for when the baby-boom generation retires. And the President is
taking every dime over the next 10 years to pay for other
things.
[GRAPHIC] [TIFF OMITTED] 94065.099
The President is also telling us, telling the American
people that he is going to cut the deficit in half over the
next 5 years. I wish that were so. But when I examine the
President's plans, I see the only way he accomplishes cutting
the deficit in half is he just leaves out things. He leaves out
the fact that he is going to take in that fifth year $259
billion of Social Security money, every penny of which he has
got to pay back, but he is not accounting for that when he
claims he cuts the deficit in half. He says the deficit will be
$237 billion in that fifth year. But in addition to that, he is
taking $259 billion of Social Security money.
He also leaves out the money that he will be taking from
the Medicare Trust Fund, $23 billion, also money he has got to
pay back. He leaves out the $55 billion he would need in that
fifth year to address the alternative minimum tax problem. He
funds it in the first year, but the alternative minimum tax
that was designed to be a millionaire's tax is turning into a
middle-class tax increase. And 3 million people are affected
now. By the end of this budget period, 40 million people will
be affected. And yet the President provides no funding.
[GRAPHIC] [TIFF OMITTED] 94065.100
In addition, he provides no funding past September 30th for
the war effort. The Congressional Budget Office says that in
the fifth year the residual war cost is $30 billion. You add up
all those things, and you don't have a deficit or an addition
to the debt of $237 billion. You have an addition to the debt
of over $600 billion, and right before the baby boomers retire.
Now, that flows through to this budget as well. And what we
have, Mr. Secretary, in the budget that the administration has
submitted for your Department is the magic asterisk, the
suggestion that there is going to be expansion of health care
coverage, but there is no funding for it. It says from the
President's Analytical Perspectives: ``In the case of the
President's proposed health care credit, the budget includes
contingent offsets that would cover the estimated increases in
mandatory spending that would result from this proposal. When
the Congress moves legislation to implement the President's
health care credit, the administration will work with the
Congress to offset this additional spending.''
[GRAPHIC] [TIFF OMITTED] 94065.101
Now, Mr. Secretary, you were a Governor, a distinguished
Governor, one with a very good reputation for being responsible
fiscally. I doubt very much you ever submitted a budget that
says you are going to do something and then says we will
somehow come up with the money at the time that we move
forward. That is not a budget.
Let me just put up the next one. So what we have is the
President advocating a $65 billion cost for a refundable health
care tax credit, and he offsets it with nothing. It is just
words. And so the real amount provided is zero. That is what is
wrong with this whole budget. It is just filled with things
where they are just left out. And so then the President says he
is cutting the deficit in half. I am surprised he did not make
the claim he is balancing the budget and just leave out some
more things.
[GRAPHIC] [TIFF OMITTED] 94065.102
Let's go to the next one. The thing that really concerns me
is where we are headed in the long term, because as this chart
shows, the green parts of these bars are the Social Security
Trust Fund, the blue is the Medicare Trust Fund, the red is the
cost of the tax cut proposals by the President. And what we see
is right now the trust funds are in substantial surplus, and
they are offsetting much of the effect of the tax cuts. But as
we go forward, when the trust funds turn cash negative, at that
very time the tax cuts explode in cost, driving us right over
the fiscal cliff.
[GRAPHIC] [TIFF OMITTED] 94065.103
And I would conclude with the next chart. This is from the
President's own Analytical Perspectives. This is his long-term
outlook for the deficit if his tax and spending proposals are
adopted. And what it shows is we are in the good times now with
the trust funds running substantial cash surpluses. But look
what happens when the baby boomers retire and the President's
tax cuts go fully into effect: deficits that are massive,
unsustainable, and unprecedented. That cannot be the
trajectory.
[GRAPHIC] [TIFF OMITTED] 94065.104
Let me just conclude by making one other point. I was very
disturbed to see this campaign that is being run, some $20
million of advertising, which is really a propaganda effort. It
is, I think, clearly a political effort to sell the Medicare
plan. I voted for that plan, but I think it is totally
inappropriate for public money to be spent in a propaganda
campaign. That is not an educational campaign. I have read the
words of the ads. That is not an educational campaign. It is a
political campaign.
And I was even more stunned to learn that the firm who is
conducting it is the same firm that is handling the President's
re-election account. Now, that just cannot be.
If this isn't stopped--and I will ask the Secretary today
to stop this campaign--I will offer legislation to make it
illegal for public money to be used in a propaganda campaign
about legislation. That is a totally inappropriate use of
taxpayer money.
With that, Mr. Chairman, thank you.
Chairman Nickles. Senator Conrad, thank you very much.
I want to make just a few comments, and then we will turn
it over to the Secretary.
I share many of Senator Conrad's concerns about the long-
term sustainability of paying for programs, particularly in
Social Security and Medicare. Medicare spending is growing, and
growing substantially, and it is going to grow faster now as a
result of the legislation we passed last year.
I will also show a couple of charts, but I do have a
difference of at least outcome. I am concerned about the long-
term health of both, and I might just show a couple of those.
That is a chart of Medicare spending. It basically shows that,
you know, we were spending, Medicare in 1990, $105 billion, and
today it is $271 billion. So that is 2.7 times as much in a
period of 14 years. If you look at Medicaid, Medicaid spending,
we were spending about $40 billion in 1990, and today we are
spending $180 billion. That is about 4.5 times. An enormous
increase in Medicaid.
The unfunded liabilities, if you look at the debt held by
the public, it is $3.9 trillion; Social Security shortfall--and
this is estimated over a 75-year period of time--is $4.9
trillion; and Medicare is $15.8 trillion. So the unfunded
liabilities that we have projected in Medicare are three times
as much as they are in Social Security. That is troubling.
And, incidentally, for our colleagues, we plan on having a
hearing where we are really going to get into this in depth. We
are going to look at the long-term fiscal challenges that we
face in this country and try and figure out if there are some
things that can be done or should be done.
[GRAPHIC] [TIFF OMITTED] 94065.065
[GRAPHIC] [TIFF OMITTED] 94065.066
Just a quick chart on the HI trust fund. The Medicaid HI
trust fund--the trust funds I think are a little bogus, and I
might talk about that. We are going to have one meeting just on
trust funds. But it shows that we have big challenges in the
future years. And the Secretary is one of the trustees of that
trust fund. So I mention that. Social Security has a chart that
looks just like it. But I have a difference of my opinion with
my colleague, Senator Conrad, on are we raiding the Social
Security Trust Funds. I might mention that almost every budget,
including the Senator from North Dakota's budget, used Social
Security Trust Fund. But people ignore the fact that we use
Social Security Trust Funds to pay--or I will say we use Social
Security Trust Fund to pay Medicare Part B. General revenue
funds subsidize Medicare Part B three to one. Three to one. And
I put together a chart--and I will give this to our colleagues
so they can see it. All the money coming into Social Security
and Medicare is paid for by a payroll tax, Senator Byrd, 15.3
percent of all payroll. And, actually, on Medicare it is 2.9
percent on all payroll. Of the 15.3, 12.4 is Social Security
and limited to $87,000, in 2003, of income. And then Medicare
is unlimited, 2.9 percent on all payroll.
[GRAPHIC] [TIFF OMITTED] 94065.067
[GRAPHIC] [TIFF OMITTED] 94065.068
So this chart is busy, and I will give it to my collegues--
this is not for people to read. It is complicated, but it shows
all the money coming in from taxes, including the tax on Social
Security and Medicare, so the receipts coming into the fund and
the outlays coming out of the fund to pay Medicare and Social
Security. And, actually, the Government, if you could say it is
raiding Social Security, it is raiding Social Security to pay
Medicare Part B premiums. And it will be raiding Social
Security to pay Part B, and to pay the prescription drug
benefits. It actually shows that more money is going out for
these two programs than coming in. And so we are not raiding
Social Security to pay for defense or to pay for non-defense.
It is basically used to pay for Medicare.
The two combined, if you add all the taxes combined coming
in--and I will just give you one outlay year for 2004,
projected, or maybe I could use 2003 because it would be
actual, but I will use 2004. Total amount of money coming in is
$753 billion, and the total amount of money going out is $784
billion, for basically a deficit of $31 billion.
So I just make that point. I think there is a lot of
misunderstanding on trust funds, and maybe we have a more
thorough debate. That is not the purpose of the hearing today.
Our purpose today is to welcome Secretary Thompson since he has
control or responsibility over 41 percent of the budget and a
very significantly growing part of the budget. I believe his
proposal is for a 5.6-percent increase in his total domain. We
look forward to hearing him present the budget to us.
I might mention, Senator Byrd, most all of Secretary
Thompson's growth is in entitlement programs. Very little is on
discretionary. Mr. Secretary and Senator Byrd, I would be very
interested, since we only appropriate about one-third of the
budget, I would be very interested in seeing if some of these
programs that are already set on automatic pilot as
entitlements, maybe they should be considered and scored and
written as discretionary subject to appropriations. I used to
be on the Appropriations Committee. I used to be very
chagrined, feeling that we only had one-third of the budget
under real control and the other two-thirds growing almost out
of control.
This committee can work with the Finance Committee to
control the two-thirds. But a lot of that control has been
growing the programs, not controlling them. Maybe we will take
a little different approach this year in light of the deficit
challenges that we have. But there are a lot of programs in
your domain, and maybe some of those should be subject to
appropriation, instead of set up as entitlement.
I am happy to consider those, either as part of the budget
resolution or as changes that we might want to make free-
standing, either through budget and/or the appropriations
process. We have members on both committees on this committee,
and maybe with some cooperation we could make some adjustments.
Mr. Secretary, welcome to the committee.
STATEMENT OF HON. TOMMY G. THOMPSON, SECRETARY, U.S. DEPARTMENT
OF HEALTH AND HUMAN SERVICES
Secretary Thompson. Thank you, Mr. Chairman. It is an honor
for me to appear in front of you and, Senator Conrad and the
other distinguished members of this Budget Committee.
First, let me thank you, Senator Nickles, for going to
Africa with me. I think it was one of those life-transforming
trips. It was for me, and I think for most of the people on the
trip, and I appreciate your participation.
I thank all of you for inviting me to discuss the
President's fiscal year 2005 budget for the Department of
Health and Human Services. In my first 3 years at the
Department, we have made, I believe, tremendous progress in
improving the health, the safety, and the independence of the
American people. We continue to advance in providing health
care to seniors and to lower-income Americans and improving the
well-being of children and strengthening families and
protecting the homeland. We are building a new public health
infrastructure to give doctors and hospitals the tools they
need to be able to respond to any public health emergency.
We have re-energized the fight against AIDS at home and
abroad. We increased access to quality health care, especially
for minorities, the uninsured, and the underinsured. And with
your help, 2 months ago President Bush signed the most
comprehensive improvements to Medicare since it was created
nearly four decades ago.
To expand on our achievements, the President proposes $580
billion for HHS for fiscal year 2005, an increase of $32
billion, or 6 percent over fiscal year 2004. Our discretionary
budget authority is $67 billion, an increase of $819 million,
or 1.2 percent over fiscal year 2004, but an increase of 26
percent since 2001.
We look forward to working with this committee and
Governors to improve and modernize Medicaid as well as SCHIP
and by giving State governments flexibility to use consumer-
directed services and to coordinate with free-market providers.
We propose promoting home and community-based care as an
alternative to institutionalization for disabled Americans
through the President's New Freedom Initiative which my
Department worked on for several months. I look forward to
working on a bipartisan basis to get this important legislation
introduced, passed, and signed into law this year.
President Bush seeks to build on the success of the 1996
welfare reform law by reauthorizing the successful TANF program
to help more welfare recipients achieve independence through
work and be able to protect children and strengthen families. I
hope that this Congress will take the next step in welfare
reform and complete the TANF reauthorization. We can and we
should accomplish this critical goal this year.
We are also working to protect our most vulnerable
children. The Federal Government will spend nearly $5 billion
this year for foster care. We would fund existing adoption
bonuses as well as the new bonuses that Congress approved last
year for older children, with $35 million for 2004 and $32
million for 2005, and to be able to support our commitment to
helping families in crisis and to protecting children from
abuse and neglect, President Bush has requested full funding,
$505 million, for the promotion of the Safe and Stable Families
Program.
Working with Governors, we have made tremendous progress in
providing millions of children with needed health coverage. I
am delighted to announce today that about 5.3 million children
who would not have had health coverage were enrolled in the
State Children's Health Insurance Program at some point during
2003, a 9-percent increase from 2002. And over the past 3
years, we have approved Medicaid waivers and State plan
amendments to allow the States to expand access to health
coverage for more than 2.6 million people and to expand the
range of benefits offered to 6.5 million other Americans.
And, of course, the new Medicare Modernization Act is a
significant accomplishment for our Department. Adding these
benefits and choices and educating seniors about them will be a
significant challenge. You and your fellow lawmakers were right
to follow the CBO score in making decisions, and when CBO
scores the budget we submitted last week, it is going to be and
we expect and anticipate that their estimate would reflect
their original score of $395 billion, or close to that number.
As you know by now, in late December--December 24th, to be
exact--our actuaries came out with a final score showing they
believe the Medicare bill will cost $534 billion. I thought it
might be helpful to break down the differences between the CBO
projections and the HHS projections to explain why we differ by
$139 billion. I have instructed our actuaries to make it a top
priority to fully examine why their estimates differ from those
set forth by the Congressional Budget Office and then to begin
to work to reconcile those differences. That project is just
beginning, but here is what we know so far.
A hundred billion dollars, all those in blue, are the
difference for what we call the Title I or Title D of the
Medicare Modernization Act, Chapter 1 of the Act. The first one
is the eligibility. We learned from our actuaries because of
the tremendous benefits for low-income Americans, which the
total is about 11 million people--and you have talked about
that in the conference committee, Senator Nickles. We believe
that more low-income Americans will participate and will use
the subsidies to a larger degree than what CBO says, and that
accounts for $47 billion of difference.
The next one is higher participation, totaling $32 billion.
This is for those individuals, 100 percent of the universe, all
those that are eligible to participate in Part D. CBO believes
that because 9 percent of those individuals do not participate
in Part B, if they don't participate in Part B, more than
likely they will not participate in Part D. So that reduces the
universe down to 91 percent. Then they subtracted an additional
4 percent and saying only 87 percent, according to their
calculations, will avail themselves of Part D, the drug
benefit. Our actuaries----
Chairman Nickles. You estimate what percent will
participate?
Secretary Thompson. They believe 87 percent.
Chairman Nickles. And you believe?
Secretary Thompson. We believe 94. Our universe is 100
percent. We believe that 5 percent are still actively employed
and will be insured by their employers, and our actuaries
believe it will be 94. The difference between 94 and 87 percent
is a difference of $32 billion.
The next one is what we call the Medicaid savings and
woodwork effect. We believe that is a difference of $18
billion. We believe that when people come and hear about the
Part D, they are going to also find out that they are also
eligible for additional Medicaid benefits, and they also will
be using more of that, and, therefore, there is a difference of
$18 billion.
The next one is $3 billion. That is in regards to what we
call the stabilization fund. CBO does not believe it will be
utilized, our actuaries do, and that's a difference of $3
billion. That is $100 billion of Part D. The second one is the
plan. That is Chapter 2 of the Medicare Modernization Act. We
believe that there will be 33 percent of the Medicare eligibles
that will participate in the plan, and right now it is 11.8
percent. CBO believes that is going to go up to 14 percent, and
only 14 percent. That difference is a huge difference, and that
makes up $30 billion.
The other $7 billion is basically all differences in the
other ten chapters in the Medicare Modernization due to some
pluses and some minuses, but a total difference of $7 billion.
That is the total of the $139 billion.
As you know, Mr. Chairman, seniors can begin enrolling in
the drug discount card by June of this year. We will add
transparency to the prescription drug market by making
available the price of drugs under each card. Competition among
the cards will drive down drug prices, probably very
significantly, as people compare the prices that each card
offers for the drugs they typically take. So a senior citizen,
let's call her Mrs. Jones, can sit down with all of her
prescriptions in front of her and call 1-800-Medicare. Our
representatives will review with Mrs. Jones the discount cards
in her area and tell her the exact price that she will pay for
her prescriptions under each card. Mrs. Jones then can choose
the card that will give her the best deal for the prescriptions
that she is taking. If Mrs. Jones has a computer, she will be
able to go to our website and get the exact same information.
We are also currently reviewing the new benefit proposals
which were submitted by health plans. It appears that more than
half of current enrollees that are currently on the health
plans will see better benefits and that almost one-half will
see reduced premiums or out-of-pocket savings. The average
premium may decrease by as much as a third. The bottom line is
that the extra payments are providing more to beneficiaries,
just as was intended by the Medicare Modernization Act.
We look forward to working with Congress, the medical
community, and all Americans as we implement the new Medicare
law and carry out the initiatives that President Bush is
proposing to build a healthier, safer, and stronger America.
Thank you very much, Mr. Chairman.
Chairman Nickles. Secretary Thompson, thank you very much.
I appreciate your going over the differences between CBO and
CMS on the cost of that. Some people were aware that there was
a significant difference. Others were not. Some were surprised.
And so I was going to ask you to do that. I appreciate your
doing that.
Let me ask you a couple of quick questions. You mentioned
the drug card is a new benefit, passed under the bill. That is
going to begin in June?
Secretary Thompson. That is correct.
Chairman Nickles. That is going to be provided for by
private companies; is that correct?
Secretary Thompson. That is correct.
Chairman Nickles. Is there interest from private companies?
What is this looking like? Is it going to happen?
Secretary Thompson. We were absolutely amazed. We thought
there would probably be 40 to 50, possibly 60 applications.
There are 106 applications. We have them, we are now reviewing
them, and we will be making recommendations by March 23rd as to
which ones of those we feel are going to meet the requirements
set out by the law and also the requirements set out by CMS.
And we will make those known. We will also start putting the
information out so we can start enrolling in April and May, and
we will also put on our website a comparison so that
individuals across America will be able to really have the most
up-to-date, accurate information, transparent information, on
every drug that is being purchased. And this is going to help a
senior pick the right card, and it should drive down the cost
of drugs for seniors very much.
Chairman Nickles. So all seniors will be able to enroll in
May and June?
Secretary Thompson. That is correct. We want to kick it off
on June 1st.
Chairman Nickles. By June 1st, so they would be able to
enroll April and May?
Secretary Thompson. We are going to start enrolling in May.
Chairman Nickles. OK. And then----
Secretary Thompson. I am trying to push that up, though. We
are moving very rapidly, and we are hoping to actually get it
out sooner. But that is what our intention is right now.
Chairman Nickles. Then will the various providers determine
what kind of discount they will receive? And will all seniors
receive the discount?
Secretary Thompson. All the companies will be negotiating
with the pharmaceutical companies and will be putting those
discounts out to a formulary, and those formularies will be
made available to every senior in America. We will be putting
it on our website, and our representatives will have the most
up-to-date information. And you will be able to compare the
cards in your area. So if you are taking Lipitor, and if you
have 15 cards in your area, you will be able to determine which
individual issuer of that card is going to give you the best
price for Lipitor. And so as with competition, it is going to
drive down the market and give the best market to the seniors.
Chairman Nickles. And then low-income seniors have--the
card also entitles them to a $600 benefit?
Secretary Thompson. We are already working on that. We are
working with Treasury and Social Security. We are meshing
together the computer systems from Treasury, from the Social
Security Department, and CMS, plus all the States. All those
individual States that have individuals on Medicaid, we have to
take in and go through all of those computer runs to find out
who is eligible. Every senior that is under 135 percent of
poverty is going to be able to get a credit of $600.
Chairman Nickles. OK. Then one final thing. A large part of
the difference in the estimates between your Department, CMS
actuaries, and CBO is the value of the low-income drug benefit,
which I stated unsuccessfully during negotiations, was too
generous. But would you give just a brief description of that?
Am I correct in saying the low-income benefit, this would be
for people with--I want to say 36 percent of Medicare
beneficiaries, but people less than 150 percent of poverty, and
for those less than 100 percent of poverty, basically their
copay is $1 and $3. Is that correct?
Secretary Thompson. That is the only out-of-pocket expense
they have to pay. The deductible will be waived. The doughnut
hole is going to be waived and the copays, except for the $1
for generics and $3 for brand prescription drugs. That is all
those under 100 percent of poverty will have to pay. We believe
that is going to be a subsidy of somewhere in the neighborhood
of 95 percent to 97 percent of those individuals under 100
percent.
Those between 100 and 135 percent of poverty, the copay is
the only thing they have to pay, and it will be $2 for generic
drugs and $5 for brand prescription drugs. They will not have
to pay a deductible, and they do not have the doughnut hole.
The third one is those between 135 percent and 150 percent
of poverty will have to pay a $50 deductible, and they will pay
approximately 85 percent of the balance. And that is going to
be a subsidy of somewhere around 75 to 80 to 85 percent.
Chairman Nickles. I am familiar with what you are saying
when you say there is not a doughnut hole. But basically, for
an audience----
Secretary Thompson. All those under 150 percent of poverty,
there is no doughnut hole, no gap between 2,250 and 3,600
dollars, where those above 150 percent of poverty will have a
gap in which they will have to pay 100 percent. All those below
150 percent of poverty, all that doughnut hole has been filled
up completely.
Chairman Nickles. OK. Still, to get out of Washington
vernacular and Washington discussion, those below 150 percent
of poverty--and that would be for a couple--would be, what,
about $20,000, $19,000?
Secretary Thompson. It is approximately $22,000.
Chairman Nickles. Wherever that is, that sounds a little
high. But at that point----
Secretary Thompson. That is the last--it would be about
$14,000, 150 percent of poverty.
Chairman Nickles. I think it is pretty close to $19,000, is
my guess. I was talking about couples, for two.
Secretary Thompson. It is $20,000 for a couple. It will be
$20,000 for a couple in 2006, Senator.
Chairman Nickles. So in the year 2006, for a couple that
has less than----
Secretary Thompson. When it starts.
Chairman Nickles. Oh, that is correct. I was looking at the
2003 level. I think you are correct. It would be $22,000 by the
year 2006 when that is available. So for a couple with less
income than that, they are on Medicare, they are on Social
Security, they will basically have a drug program that they
don't even have to pay monthly premiums. For the most part,
they would be paying their drug copay of maybe $2, $5, or $1
and $3. And that is all they pay with no limit.
Secretary Thompson. That is correct.
Chairman Nickles. No limit.
Secretary Thompson. That is correct.
Chairman Nickles. Not up just to the first $2,000, not up
just to the first $5,000, but, frankly, no limit whatsoever.
And that is a very generous benefit. You happen to score it
higher than CBO does. I happen to guess that you are going to
be more correct. I think utilization will go up substantially
when people realize that is a very, very generous proposal.
Secretary Thompson. It is.
Chairman Nickles. I am a little concerned maybe it is too
generous, but I did not prevail. I tried but I did not prevail.
Senator Conrad.
Senator Conrad. Mr. Chairman, could we put up this chart
that you put up?
Chairman Nickles. Yes. Don't take apart my chart.
Senator Conrad. Well, I have to take apart your chart a
little bit.
The chairman put up this chart, and the issue that I take
with this chart is what it has done is it has lumped Medicare
and Social Security together as though they are one program.
They are not one program. They are two separate programs.
There is no question, if you look at Social Security alone,
that Social Security surplus funds every year for the next 10
years are being taken to pay for other things, $2.4 trillion
worth, something the President pledged not to do. And it is
being done. And nobody here can say whether that money is going
to pay for Medicare or tax cuts or parks or recreation or any
other part of the Federal budget.
What we do know absolutely is every penny of Social
Security Trust Fund surplus--and I want to make sure that
people understand. When I use the word ``surplus,'' it is not
because it is more money than you need. It is more money than
you need right now. But it is money we are going to need when
the baby boomers retire, and they are going to start retiring
in 2008. And this is right at the heart of what is wrong with
the President's budget in my judgment.
The fact is Medicare has been funded in part by payroll
taxes. This chart assumes it is all payroll taxes. Medicare has
also been funded in part by general fund. That has been the way
Medicare has been funded since its inception.
So I do not want to leave the impression that somehow
Social Security money is being taken just to pay for Medicare.
Nobody can tell you what the Social Security money is being
used for, except we know it is not being used for paying down
the debt or prepaying the liability. I think those would have
been appropriate uses.
With respect to budgets that I have submitted, after the
hole that has been dug, there is no way in the short term to
write a budget that does not continue this practice. But I have
submitted budgets that would use at least $1.2 trillion less of
Social Security funds for other purposes, and as much as $1.6
trillion left, depending on our defense needs.
So I do not want to leave the impression that Social
Security money is not being taken for other purposes. It is,
and it is going to be taken to the tune of $2.4 trillion. I
think that is a profound mistake.
Mr. Secretary, I want to turn to this ad campaign because,
I must say, I find it very troubling. I supported that bill. I
thought it was the right thing to do. But I do not think it is
the right thing to do to run an ad campaign extolling its
virtues using taxpayer money to run, in effect, a political
campaign. And I was especially disturbed to find out that the
firm that has been hired is also doing work for the President's
re-election campaign.
You know, I do not think taxpayer money should be used to
promote a political agenda. I do not think taxpayer money ought
to be used to, in essence, propagandize taxpayers about the
merits of a program. I mean, I could not use and would not use
my Senate budget to go out and run a campaign telling people
about how good my voting record is. That would be illegal. And
I believe it should be illegal for taxpayer funds to be used to
sell a position on an issue. I just think that is totally
inappropriate. I suspect it is illegal.
And I want to ask the Secretary: Do you intend to continue
with this campaign? Or would you consider ending this campaign
in respect to those who believe it is just inappropriate?
Secretary Thompson. Senator, let me correct some
impressions that I think are erroneous.
First off, the Medicare bill requires me to do certain
things. The conferees expect--and this is direct language out
of the report. The conferees expect, in carrying out the annual
dissemination of information requirements, that the Secretary
will conduct a significant public information campaign to
educate beneficiaries about the new Medicare drug benefit to
ensure the broad dissemination of accurate and timely
information.
Second, we put out an RFP in 2003 in order to find out--in
2003, in order to find the best person and the best group to do
our ad programs for Medicare, in 2003, 2004, and that is what
we did.
Senator Conrad. Who is doing the ads?
Secretary Thompson. Ketchum Public Relations, since 2003,
is still doing them. The chief executive of Ketchum Public
Relations is Chuck Dolan, who is part of the team. They are the
overall contractor, and Mr. Chuck Dolan is a financial
supporter of John Kerry and is one of his biggest supporters.
John Kerry. He is the chief--that is the chief person. They put
together the subcontractors. The subcontractors are Campbell
Ewald. They did the creative work. They are out of Detroit.
They have done all of our ads since 2001. And Ketchum Public
Relations, who won the RFP in 2003, kept them on. They do the
creative work. National Media, which is the one you are talking
about, are the subcontractors. They have been purchasing for
CMS since 2001. Ketchum Public Relations kept National Media
because they worked together.
Senator Conrad. Is National Media doing the President's
campaign or part of the President's campaign?
Secretary Thompson. I understand that they are, but they
have been doing work at CMS since 2001, and they were retained
by Ketchum Public Relations, who won the contract, and I am
telling you that. And then they----
Senator Conrad. But do you know how bad that looks,
honestly? I mean, I am being very direct with you. I have great
respect for you. I tell you, that really looks bad. And I think
it more than looks bad. I think it is bad for a campaign to be
run with taxpayer money to promote a program that has enormous
political implications and to use as a major part of that
campaign a firm that is helping to run the President's re-
election campaign.
Secretary Thompson. If I could just finish. National Media
is not doing the creative work. All they are doing is
purchasing it. And they were hired by Ketchum Public Relations,
and one of the chief individuals happens to be Chuck Dolan, who
is a Democrat who is supporting John Kerry.
Senator Conrad. Well, I am for taking the money away from
both of them. I tell you----
Secretary Thompson. Some Republicans are saying that, you
know, we are wrong for having Chuck Dolan do it, I am sure.
But----
Senator Conrad. Well, let me join them. I think you are
wrong doing it at all. I think we ought to stop this. I think
we ought to stop using public money, taxpayer money, to run
what has all the earmarks of a political campaign. I have read
the--and I have it here, the TV ad script. I must say, I saw
this TV ad. I never knew about this campaign until I saw the
television ad. And it reads like a political ad. It is just
inappropriate to use public money to do that. And if you guys
are not going to stop it, then I am going to introduce
legislation to make it illegal to do it, because it is not
right. It would not be right if a Democratic administration
were doing it, and it is not right with this administration
doing it.
Secretary Thompson. Senator, I would like to be able to
respond. I do not want to argue with you. I understand your
concerns. I am telling you, the law requires me to put out
information. In 1996----
Senator Conrad. Well, wait a minute. The law does not
require to run----
Secretary Thompson. Well, let me finish----
Senator Conrad. No, let me just say, the law does not
require to run television spots that read like political spots.
Now, the law does not require that.
Secretary Thompson. In 1996, the Democrat administration
put out a 30-page bulletin----
Senator Conrad. Did they run television ads that are
television spots?
Secretary Thompson. They did not, but they----
Senator Conrad. I tell you, I do not argue with putting out
written material like that. That is fine. This has all the
earmarks of a political campaign, and it is not right.
Secretary Thompson. Well, GAO, as I understand it, is going
to review it, and if they say that it is political, it will be
pulled immediately. Maybe for the GAO----
Senator Conrad. I would not wait for somebody else to tell
me it is political. I can see it is political----
Secretary Thompson. I do not think it is political.
Senator Conrad. Well, I do, and I tell you something----
Secretary Thompson. That is a difference of opinion,
Senator.
Senator Conrad [continuing]. If you guys--well, I tell you,
I have been in a lot of political campaigns, as have you----
Secretary Thompson. And so have I.
Senator Conrad. This reads like a political spot.
Secretary Thompson. Well, I am sorry to tell you, I do not
believe it is political at all, and that is a difference of
opinion. I did not put it out. Creative people did on a
contract basis. It was reviewed by a lot of different people.
They came back, and we are obligated, I think, under the law to
do as much information as possible.
Senator Conrad. Well----
Secretary Thompson. And I am sorry that you feel that it is
political. I do not believe it is.
Senator Conrad. I not only----
Secretary Thompson. And I do not believe that Chuck Dolan
would put out a political statement when he is in charge of the
responsibility of putting out the ad.
Senator Conrad. Well, he is under contract to do something.
Look, there is nothing in the law that requires you to run
what are, in effect--look just like a political spot to me and
have hired, whether it is a subcontractor or the contractor,
people who are helping run the President's campaign.
Now, goodness, if that does not smack of inappropriate use
of taxpayer money, I do not know what would.
Secretary Thompson. I am absolutely sorry that you feel
that way. This was a contract that was put out in 2003, a long
time before the election ever started, the one that----
Senator Conrad. Well, but it is for the election period. We
are in an election period right now, and these ads are running
now, and these ads are equivalent to political ads in my
judgment. And now it goes even further. The people who are
helping do it are involved in the re-election campaign of the
President. That is wrong. It is inappropriate and it ought to
stop. And I am going to offer legislation to make it illegal to
do so under whatever administration. I tell you, it would be
wrong if a Democratic administration were doing it. It is wrong
for this administration to be doing it.
Chairman Nickles. Senator Conrad, thank you very much. The
statute, just looking at it, doesn't say whether it should be
TV or not. It just says, ``The Secretary shall provide for
activities under this subsection to broadly disseminate
information to discount card eligible individuals and
prospective individuals regarding enrollment.''
I mention, one of the reasons why my opening comments on
the card and the low-income benefit, one, because a lot of
people are not aware of the fact this card is a benefit that is
coming in a couple months. And so I want to get that
information out. I was using the hearing to do it.
But this is a benefit that is going to be available to 40
million Americans, and a lot of them are not aware of it. And
so we have to get it out. This did not say what method, and
obviously you are certainly entitled to your opinion. You are
entitled to your right to offer amendments.
Next we have Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman, for having this
hearing and, Mr. Secretary, for coming. I have had my curiosity
piqued a little bit. Are you just using television for the ads
or are the other media being used as well?
Secretary Thompson. We are sending out a mailer. We are
putting out other information. We are putting it out in other
languages so that we get to other communities that do not have
English as the first language. And we have set up programs with
the Aging Commission called SHIPs, and we are doubling the
number of individuals in SHIPs, which two-thirds of those come
from the Commission on Aging, which are going out and helping
individuals in their own homes or in senior centers to pick the
best card.
We are forming an organization with 28 different
associations that have been over to meet with me that are going
to be using their organizational strength, including AARP who
was one of those, to get the information out to seniors all
across America. So we are hitting this with a whole plethora of
different groups, different ways to contact seniors to tell
them about the Medicare changes as well as the new drug card
that is coming.
Senator Enzi. So I anticipate then that the expenditures
are approximately in proportion to where people get their
information, and probably a large amount of seniors get theirs
from television.
Secretary Thompson. That is true, and actually we are
spending more on mailers than we are on television.
Senator Enzi. Thank you. I appreciate the job that is being
done on that. I think that it is important for seniors to get
information about what this program is. I know that there are a
lot of misconceptions out there; probably many of them came
from our debate.
Secretary Thompson. That is true.
Senator Enzi. And the debates where we argue about the 20
percent that we are never going to agree on, and there is some
confusion out there, so I appreciate your taking some efforts
on that.
Along those lines, I guess, on the new Medicare
prescription drug law, there is $1 billion for spending to
startup the administrative costs. And I was kind of curious. I
assume--we have already talked a little bit about how those are
being spent, what those are being spent for, but I am just as
curious as to why that has been decided to be counted as
discretionary spending instead of mandatory spending.
Secretary Thompson. It always has been the tradition that
administrative costs have been on the discretionary side of the
budget. The $1 billion is--we had requested more because we
believe this is going to be a huge, monumental thing.
Our computers systems, I just would like to point this out.
Some of our software is older than the technicians that are
hired to maintain it. We have software that is running some of
the Medicare program that is over 30 years old, and from your
vast experience before you became a Senator, you know how
difficult it is to run a large company--and this is the largest
insurance company in the world, 42 million subscribers--with
30-year-old software.
So we have to upgrade our computers. We also have to
collaborate with the computers with Treasury, with the State
Medicaid programs, and with Social Security in order to find
out the low-income recipients.
We are also taking over the Medicaid program as far as
drugs are concerned. It is a huge undertaking. And so we also
have to get people, contractors and vendors, involved. And it
is going to be a tremendous undertaking by the Department in
order to implement all the provisions of the bill and make sure
that it is up and running on January 1, 2006, for the drug
portion. But before that, in 2005, we have to set up the
programs for the free induction physical for those people that
are coming in, which I think is maybe the most important part
of the Medicare bill, as far as prevention is concerned and
managing diseases. And then we have to have the card up and
running by June 1st of this year.
A huge undertaking from my Department, and that is where
the bulk of the $1 billion is going to go, for staffing, for
computers, for contracting out, for getting all the computers
to run successfully and be able to intermingle and have
interoperability.
Senator Enzi. I appreciate that. Could you provide me with
a breakdown of----
Secretary Thompson. Absolutely. But we have not----
Senator Enzi [continuing]. Anticipated and also the
additional needs that you mentioned?
Secretary Thompson. Thank you very much. The computer
system is really--when I came in, we had over 200 different
computer systems in the Department. And now we are trying to
get it down to one computer system.
Senator Enzi. I appreciate that. It sounds like you are
doing some good management there.
Now, one other, what I hope will be a quick question. In
rural places like Wyoming, the choices in health service
providers are limited. On Indian reservations, the health
service selection is even more limited, and they have to
contract off the reservation sometimes in order to have,
particularly for emergency purposes, health care for those on
the reservation. And despite this common use of contract health
services at both hospitals, IHS does not always adequately or
evenly supply doctors in those areas. So it is my understanding
the problem is both fiscal and administrative.
I am pleased that the HHS budget begins to address this
fiscal problem, increasing the contract health services by $18
million. But I am wondering whether or not IHS plans to review
the management policies of doctors to ensure that the Native
Americans have equal access to quality care hospitals serving
large populations.
Secretary Thompson. We are reviewing all of the Indian
Health Service programs and projects, and one of the biggest
problems we have is being able to get enough medical personnel
to be able to go to areas that are hard to get individuals to
go into. Indian reservations in some areas of the country have
a real serious problem of getting the proper medical people
there, and we are expanding the National Health Service Corps
so that we can get more people, use the service portion and get
more doctors and nurses to go to Indian reservations
throughout.
This is a high priority of the Indian Health Service, and
especially a high priority of mine because I travel to a lot of
Indian reservations, see the tremendous need. I go every year
to Alaska and tour the Alaskan settlements up there, and I know
the tremendous problem we have of getting proper medical
treatment but, more importantly, proper medical personnel to
these underserved area.
Senator Enzi. Thank you very much. My time is up.
Chairman Nickles. Senator Enzi, thank you very much.
Senator Wyden.
Senator Wyden. Mr. Chairman, just a clarification. These
are 10-minute rounds?
Chairman Nickles. I have asked people to try and limit it
to 5 or 6 minutes, 7 minutes, but I have not been strict in
enforcement.
Senator Wyden. OK. Mr. Secretary, Senator Snowe and I have
introduced the first bipartisan effort to try to address some
of the concerns in the prescription drug bill. Our legislation,
for example, does exactly what AARP has called for. You just
invoked them. The Snowe-Wyden legislation makes sure that the
Department has adequate authority to negotiate to try to get
the best deal on prices for seniors, and addresses the
reimportation issue.
I am not going to ask you to address the merits of this
bill and to announce your position on it, but I would like your
views on one key point. Given the fact that we have these two
projections out there with respect to the cost of the bill, the
CBO appraisal and your actuaries' appraisal, wouldn't it make
sense to try to work immediately to get the maximum amount of
cost containment that we can so as to not hit that $530
billion-plus level or possibly exceed it? In other words, I
think there was a good case for the Snowe-Wyden bill a month
ago, but I think there is an even better case today. So I would
like your views on the question of: Wouldn't it make sense to
work right now to try to push additional cost containment so as
to not hit that $534 billion spending level?
Secretary Thompson. Without a doubt. I think every one of
us, Democrats, Independents, Republicans, have to take a look
at how we are going to be able to contain the expenditures. I
was very impressed by both Senator Conrad's and Senator
Nickles' charts. I happen to be a trustee of both Social
Security and Medicare. I am very concerned about that, and I
will work with you and Senator Snowe.
I also know that your proposal has something to do with
discrimination in regards to pricing. I think this is something
that we should look at, and I will be more than happy to work
with you, as I have on many different occasions, Senator Wyden,
in any way I possibly can to further the cost containments.
I appreciate your offer, and I will reciprocate whatever
way possible that I can make it work.
Senator Wyden. Well, that is very constructive, Mr.
Secretary. I did not want to get you into the specific
provisions of the bill, but to know that you are on record as
being interested in trying to get additional cost containment
so we do not hit that $534 billion level is helpful.
I would also like, just with respect to the policy aspects
of it, for you to state your current position on the
reimportation of medicines that are safe. As you know, there is
considerable debate with respect to where FDA is on this now. I
will tell you, as somebody who has tried to specialize in
health over the years, I am very troubled by the evidence that
indicates that FDA cannot find cases indicating problems with
health and safety consequences with respect to reimportation,
and at the same time we have thousands of cases out there of
people who have suffered as a result of adverse reactions on
medicines.
So could you tell us your current views with respect to
reimportation? It is part of our legislation, but I am more
interested in your policy position on it as of today?
Secretary Thompson. The law requires me to certify that the
drugs coming in from another country are safe. This is a hurdle
that I cannot meet because I cannot certify that they are safe,
because by immediately certifying that drugs from other places
that are not supervised or regulated by FDA are safe puts the
Federal Government in complete financial responsibility for
liability if they are not safe.
We had two actions that were taken by FDA, Senator Wyden.
The first was in Miami and New York between July 29th and 31st
in 2003, and in San Francisco and Carson, California, from
August 5th to the 7th. During those 3-days, approximately 100
parcels per day that were suspected of containing drugs were
pulled, and out of those, about 85 percent were found to be
mislabeled, were counterfeit, and had other safety problems.
The second action was conducted in the same manner as the
first in November in Buffalo, Dallas, Chicago, and Seattle. The
first one had 1,153 imported products to examine; 1,019, or 88
percent, were unapproved prescription drugs. The remain 12
percent represented dietary supplements and other products. The
drugs were from the following countries: Canada, India,
Thailand, Philippines, and the remaining from other countries.
On the second stop, out of the 1,982 parcels, 1,728, or 85
percent, of unapproved drugs were found. So both of them were
in the high 80's. Both actions were taken with interdiction of
drugs coming in which were mislabeled. That doesn't mean that
they were wrong. They were just mislabeled, mispackaged.
Several were counterfeit. And, therefore, based upon that
information, I cannot certify that drugs coming into America
are safe.
Senator Wyden. I just hope you will stay at this question,
Mr. Secretary, because I have been in a number of hearings
where the FDA literally cannot give any cases that document
injury, and you juxtapose that by the thousands and thousands
that have been injured that have been documented. I hope that
you will stay at it.
A couple of other areas I do want to get into. As you and I
have talked about before, the country is headed for a
demographic tsunami. We have millions of baby boomers retiring,
and the health care system is completely unprepared for this.
Secretary Thompson. It is.
Senator Wyden. We are completely unprepared for what is
coming in 2010 and 2011. Senator Hatch and I have been able to
win passage of the Health Care That Works for All Americans
Act, legislation that would give us a chance to have a plan to
get those people covered, to get everybody under the tent for
the basic affordable health care services, and to do it in a
responsible way, building on the kinds of things that we have
done in Oregon and that Wisconsin and other States have done.
What is your position on that? Obviously, we are going to
be trying to get the appropriation this year. Senator Byrd has
been enormously helpful on this, and I am so glad that he is
here. I would like to just have you state for the record your
assessment of this bill that Senator Hatch and I have written
that has been passed.
Secretary Thompson. My reaction is that anything we can do
to move health policy and health insurance to forefront and get
more people involved is a net plus. Your commission idea is a
positive one. It is going to allow for a commission. The only
question I had is all of the commissioners have to become
employees of the Senate, and I am one of those that are
designated. And it is going to be funded by the Senate
Appropriations. I don't know. So I think there has got to be
some interpretations done in order for me to qualify to be on
the commission.
I think it is a giant step forward. I think that there are
other ways that we can approach it. But anything we can do to
get more people involved in talking about how we solve the
health insurance problems in America, I am all for it.
Senator Wyden. We will work with you on that. It is a per
diem arrangement, Mr. Secretary, and, of course, we very much
want your involvement in it. It just seems to me that we have
tried the same thing now, literally going back to Harry Truman
in 1941, in terms of trying to get everybody covered. You write
these bills in Washington, D.C. The American people find them
incomprehensible. The interest groups attack it, and it all
falls apart. What Senator Hatch and I have done is essentially
say let's go 180 degrees the other way. Let's get the American
people involved early on in terms of some of the difficult
kinds of choices and then force congressional action.
So we will work with you to make sure that it is clear on
that point that you appropriately raise, that this is per diem
for these kind of people, and it is not all----
Secretary Thompson. The idea, the concept is great. I think
just the mechanics have to be worked out a little bit.
Senator Wyden. I appreciate that. One last question, if I
might, Mr. Secretary. As you know, Senator Smith and I have
been very concerned about Oregon's TANF waiver, the Temporary
Assistance to Needy Families, and we have a situation where
States like ours are performing particularly well, and you
have--and we have talked about it--often been a champion of
this question of making sure that the States have the
flexibility so that what you do in Oregon is not necessarily
what you do in Tallahassee or what you do in the Bronx. And we
would just like to--and I ask this on behalf of Senator Smith
and myself, because we have both been very interested in it,
what you can do to help us nail down that waiver and get the
Oregon program protected.
Secretary Thompson. Let me respond, because we have worked
very closely with Oregon, as you know. When the TANF bill
expired, it took away my authority to grant any waivers in this
area whatsoever. So my waiver authority expired with the
termination of the TANF law. So I have no authority to do that.
Second, we have examined--we have worked with Oregon, in
fact, I think we worked with them this past week.
Third, we have examined Oregon's law. We think you have a
good law. We want it to continue. We want it to have as much
flexibility as possible. We are under the impression, in
looking at it through our professionals, Senator Wyden, that
Oregon has nothing to fear whatsoever, that Oregon's all-family
participation rate, if the finance bill was passed, would be
over 60 percent and would qualify, more than quality for all of
the requirements under it, and TANF in Oregon, Oregon-style,
would be able to continue, with or without the waiver.
Senator Wyden. We will work with you on that, Mr.
Secretary, and you will also be getting an effort from the
State to deal with the Oregon Health Plan. As you know, because
of our difficult economy, we are trying to figure out how to
make the best use of those resources, and given the State
budget situation, they are going to have to turn this around in
sort of land-speed record time. And if Senator Smith and I
could work with you on both the TANF waiver and the Oregon
Health Plan----
Secretary Thompson. The door is always open for you,
Senator Wyden.
Senator Wyden. Next time we have a chance to visit and I
have given you more time to prepare, we will talk more about
the specifics of the Snowe-Wyden legislation on prescription
drugs.
Secretary Thompson. Thank you.
Senator Wyden. But both of the principles embodied in
this--and we are two, as you know, who voted for the
legislation--would allow you to keep in place the basic
configuration of the legislation. Both policies have been
endorsed by AARP. I am hopeful that we can win additional
support for it in the administration, and given these
projections that you lay out--we are going to need every cost
containment tool that we can use. As of now, the fact is the
Medicare program faces a statutory bar to going to bat for the
beneficiaries that the Federal Employee Plan doesn't face when
you are going to bat for Members of Congress. Just having come
off the town hall meeting circuit at home, that just doesn't
pass the smell test. And I want to work with you on that.
Secretary Thompson. Thank you.
Senator Wyden. Thank you for your cooperation.
Secretary Thompson. Thank you very much, Senator Wyden.
Senator Conrad [presiding]. Mr. Secretary, we have a vote
on, just a few minutes left, so I am going to have to leave
momentarily. We are trying to make it so that Senator Nickles
can be back in time so the hearing can continue.
Secretary Thompson. Good.
Senator Conrad. Let me just go back to what I was asking
you about before. I have now been told that some 70 members of
the House and Senate have written to you to ask that you
suspend this Medicare campaign until the GAO determines whether
or not it is an illegal use of taxpayer money. Would you be
willing to suspend the campaign until GAO determines whether it
is illegal?
Secretary Thompson. I will consider it, but I am not going
to make a commitment at this point in time. I just heard about
the individuals that have written to me. I would like to see
what they have to say. I know your concerns. I differ with you,
Senator Conrad, but as you know, I try to be bipartisan, I try
to reach across. I will take your complaints, and I will go
back to the office and review it again, and I will get back to
you with a definite answer.
Senator Conrad. I would appreciate that. And I say to you,
I think it would be wrong if the other party were doing it. If
my party were doing it, I think it would be wrong. I just think
it is wrong. I think this way lies a lot of grief if we start
going down this trail.
Let me turn to another issue, and that is in CBO's letter
to us, Chairman Nickles and the Committee, with respect to the
differences in the estimates, one of the major differences, $32
billion, is that CMS assumes higher participation in Medicare
Advantage, 32 percent versus 9 percent in the CBO estimate in
low density, low cost areas where payments to these plans would
be much higher than the cost of traditional Medicare. The whole
idea of Medicare Advantage is that it is going to save money.
How can it be that your actuaries are telling us that these
plans cost more than traditional Medicare?
Secretary Thompson. Because our actuaries and the proposal
that we had advanced limited, Senator Conrad, the bids to the
lowest three bidders.
Senator Conrad. Say that again for me. You would have?
Secretary Thompson. We requested that the Medicare
Advantage, the bidders, would be limited to the three lowest
bids.
Senator Conrad. OK.
Secretary Thompson. The conferees said no, and they said if
we are going to go this way, it has to be expanded to anybody
that wants to bid. By having the three lowest bids, you would
force the marketplace to come in with the lowest bids. Our
actuaries at that time projected they would be at 98 percent,
but if you took----
Senator Conrad. 98 percent?
Secretary Thompson. Of fee for service.
Senator Conrad. So the cost of Medicare Advantage would be
98 percent of traditional fee for service?
Secretary Thompson. That is correct.
Senator Conrad. OK.
Secretary Thompson. But when they took off the cap, our
actuaries projected that that would go to 105 percent as an
average.
Senator Conrad. And the reason for that is, because,
frankly, I think given the fact we have now had this dramatic
change in the estimate from $400 billion of cost to $530
billion in just a few months, that we have to go back in and
figure out how we can save some money here. Maybe this is one
place we could save some money.
You had taken the position before that we ought to restrict
access to the three lowest bidders. Is that the basic concept?
Secretary Thompson. That is correct.
Senator Conrad. Does the lowest bidder always win or not?
Secretary Thompson. The three lowest bidders would always
win.
Senator Conrad. Under that scenario the three lowest
bidders would win. And under this scenario somebody that is not
among the three lowest bidders could win?
Secretary Thompson. Everybody will be eligible, anybody
that bids.
Senator Conrad. Anybody that bids can be in even if they
are much higher than the three lowest bidders?
Secretary Thompson. That is correct, and that is why our
actuaries say if anybody can be in, there is no reason to
sharpen your pencil and be below.
Senator Conrad. That is really--why did they do that?
Secretary Thompson. Well, that was an argument we made in
the--I made the argument, so I lost, I lost----
Senator Conrad. Can you tell us what the argument was on
the other side for doing it the other way? I find it hard to
understand what their rationale was.
Secretary Thompson. Senator Nickles I think was the only
person in that conference----
Senator Conrad. That agreed with you.
Secretary Thompson. That agreed with me.
Senator Conrad. Do you think we should at least reopen the
bill for the purpose of revisiting at least that item? Frankly,
I think we have to revisit other items too. We went from $400
billion to $530 billion in 3 months.
Secretary Thompson. We want to get the bill up and running.
We are fearful that opening it up is just going to delay the
implementation of it. I understand your arguments, and I think
they are sound, Senator Conrad. The argument on the other side,
you asked what it was. They said that this is a competitive
model. Let us allow competition to work. So let us let anybody
that wants to bid, bid.
Senator Conrad. But your actuaries say by not restricting
it to the lowest bidders, just saying open sesame, everybody
can participate, the marketplace will give us higher cost than
traditional Medicare. That makes absolutely no sense.
Secretary Thompson. That is not the motive to keep the
prices down.
Senator Conrad. Certainly. Let me ask you on another issue
if I can. This $65 billion that is in the President's budget, I
know you were Governor of a State for a long time, Governor of
Wisconsin. You had a very distinguished record there. You led
reform of welfare. You were more fiscally responsible as a
Governor. You are close to being a neighbor, so I have followed
what you did there. I find it very troubling that the
President's budget says we are going to have $65 billion for
health care credit, but then provides no money for it. I do not
think you budgeted that way when you were Governor.
Secretary Thompson. There are a lot of things, Senator,
that I have found different in the Federal budgeting process
than what we were able to do. I still find it somewhat hard to
believe that you do not have amortization accounts, you do not
have capital accounts.
Senator Conrad. I will tell you, you know I come from a
financial background, and I must say, when I first came here,
and to this day, the way the Federal Government accounts for
things makes no earthly sense, and I think it fundamentally
misleads people.
Secretary Thompson. It does.
Senator Conrad. And I think it even misleads our
colleagues. That is why I think the Social Security reference I
was making earlier is so important. We talk about surplus.
There are no surpluses. We need that money when the baby-
boomers retire. I think the misuse of language confuses people.
I am going to go vote.
Chairman Nickles [presiding]. Senator Conrad, thank you
very much for chairing. They are holding the vote for you, and
I am sure they will.
Senator Murray.
Senator Murray. Mr. Chairman, thank you very much.
And thank you, Mr. Secretary, for being here today to talk
about the HHS budget for this year. You oversee an agency that
impacts all of us, and I know it has a tremendous impact on a
lot of people across this country, so I appreciate the job you
do.
I am concerned about a number of issues in the budget, some
of the proposed cuts in CDC and the Community Access Program,
which I think is really critical. I am concerned about the FDA,
particularly in light of the mad cow disease that surfaced in
my home State, and I want to ask you about that, and a number
of things.
But before I do that, I do want to ask you, since you are
here today, about a story that is out today that I find
extremely troubling, and that is the announced efforts by
Attorney General Ashcroft and the Department of Justice to
subpoena private medical records of doctors and hospitals who
are currently challenging the Federal Partial Birth Abortion
Ban. It is reported in the New York Times today and a number of
outlets that the Department of Justice is demanding that at
least six hospitals in New York City, Philadelphia and
elsewhere turn over hundreds of patient medical records on
certain abortions that are performed there, and it does not
appear that the Department of Justice has made any distinction
between different procedures. They are simply demanding private
medical records of women who have no idea that their identities
would be turned over to Attorney General Ashcroft.
Mr. Secretary, I find this kind of intimidation very, very
troubling, and I also believe that it is a clear violation of
the intent of HIPAA, which you oversee in your division. I know
there are some exceptions in HIPAA, but clearly, releasing
private medical information to the Department of Justice about
any reproductive health procedure just is not acceptable.
Has the Department of Justice asked for any opinion of your
office since HHS was the lead agency on implementing and
enforcing HIPAA standards, on this action?
Secretary Thompson. To the best of my knowledge, no. I was
not contacted. This is the first time I have heard about it,
Senator Murray.
Senator Murray. I find that troubling as well since it is
your office that oversees the Health Information Privacy Act.
Secretary Thompson. That is correct.
Senator Murray. It would seem to me that it would be
extremely important that they get an opinion from you. Since
they have not, then I would ask you to give this Committee an
opinion, and simply ask you the question: are women who seek
abortions or reproductive health care denied protections under
HIPAA, and can doctors be compelled to release this kind of
information at the request of the administration?
Secretary Thompson. Why don't you send me these questions
and I will get back to you. The Department of Justice could
have contacted our General Counsel or could have contacted some
of our legal staff. I do not know, but this is the first time
this issue has come to my attention, Senator.
Senator Murray. I will give that to you in writing, but I
think it is extremely critical that we get an answer from your
agency as quickly as possible since you do oversee HIPAA. I,
like many women, are very, very troubled that someone can go to
a doctor and completely, unbeknownst to them, have their
records subpoenaed by the Department of Justice over an action
they have nothing to do with, and clearly, prying through
medical records or second guessing doctors' advice to their
patients is the kind of Government intrusion that many
Americans are very, very troubled by. Since you oversee HIPAA,
I would really request that you do it and do it expeditiously
because I think the question needs to be answered.
If it is that the DOJ can go on a fishing expedition to
hospitals and doctors and seek medical records, I think we have
an obligation to make sure that the privacy acts that we have
worked so hard on protect their rights. I certainly think any
woman or anybody who has a daughter or anybody who may have
sought health care protections or decisions that are very, very
private and part of their own family and their own religious
decisions, should not be worried that this Department of
Justice can ask for their records. So I would ask that you
expeditiously get a response back and tell us what HIPAA will
allow under that.
I would hope, really, that DOJ take a quick second thought
here and realizes they should have sought your opinion before
going on this expedition as well.
Secretary Thompson. Thank you.
Senator Murray. Thank you. I will ask you also a question
about the prescription drug bill, but I hope you can get that
back to us because I am deeply troubled. I think many, many
people are by that.
On the prescription drug bill, you are going to be tasked
with determining different regions of the country, and as you
know, under that bill, the country's going to be divided up
into as many as 50 regions. PPOs will be offered within these
regions, HMOs within the entire State, and the products that
these PPOs and HMOs offer will really determine the kind of
access that seniors will have to qualify affordable
prescription drug coverage.
As we experienced in my home State and others with the
Medicare Plus Choice program, senior can be facing a new
Medicare program every year, and many seniors within a State do
not have access to those choices. That was the experience we
had under Medicare Plus Choice. In fact, in Washington State we
had two very different Medicare options for seniors, and every
year there were changes to the plan. Some increased premiums,
reduced coverage, limited coverage, or even closed for new
enrollees.
So I am really concerned as we move forward on this that my
State could be divided up into more than on region or even two
regions with a fall-back region. That would mean that access to
coverage would depend on where you lived for the first time in
the history of Medicare and could force health care providers
to compete for preferred provider status.
I would like to know from you what efforts you are going to
undertake to ensure that stability within a State and with
States will be there, and whether you know States like
Washington, that are large and diverse, will see a number of
different regions that could mean different choices for
different seniors who live within the same State?
Secretary Thompson. As you can well imagine, we have not
been able to get to that particular portion of the law because
our attention had to go to the drug card first and to get that
up and running. We are looking at all of the provisions.
I would like to point out that there is a tremendous,
enthusiasm for the new Medicare Modernization Act. There are
people that were on Medicare Plus Choice and are now coming
back into it. You are going to see a lot more plans coming to
the forefront. You are going to see a reduction in copays. You
are going to see enhanced benefits, and you are going to see a
lot more people in the market.
In regards to the State of Washington, I cannot imagine any
scenario, just listening to you, Senator Murray, in which you
would divide the State of Washington up into more than one
region. I suppose it is possible, but I do not know any reason
why you would do that. The law says we have to have a minimum
of 10 regions up to a maximum of 50. We are looking at the
potential of around 15, but in all of the regions that we have
even speculated on, States are held together, and every State
is held together in a region. I cannot imagine any way in which
we would divide it up at this particular point in time unless
it might be a huge city that would be overlapping into another
region. But I cannot imagine that would take place in the State
of Washington.
Senator Murray. As you know, we have regions like Portland,
Oregon that is right across the border from a----
Secretary Thompson. Yes, but I would think that Washington
and Oregon would probably be in the same region.
Senator Murray. We will be following this very carefully
because----
Secretary Thompson. Listen, before we make final
decisions--this is going to be a very controversial as to how
the States are placed in the regions. I will be working with
everybody on a bipartisan basis as long as I am Secretary.
Senator Murray. All right. Let me ask you quickly then
about mad cow because I know you are working with FDA to
address a lot of the issues of the gaps in safety, and FDA has
moved forward on a number of initiatives to deal with this.
Secretary Thompson. Yes, we have.
Senator Murray. As a member of this Committee and the
Health Committee, I am really concerned that FDA may need some
kind of legislative authority to continue to move forward, and
I wanted to ask you if you felt that that would be necessary,
or is there anything more we should be doing to providing you
the authority you need to provide the protections that are
citizens are looking for?
Secretary Thompson. As you know, we have expanded our rules
as it relates to the composition of feed. That is a big area
that we have complete control over. We have strengthened the
oversight. We are going to increase the number of inspections
by a great deal, and we are also prohibiting the use of downer
and dead cattle into human consumption products. So we are
doing a lot.
We are continuing to address this. Les Crawford is the
individual I have tasked to do this. He negotiated this week
with the Canadians, and we are negotiating with the Japanese as
far as opening up the market, and we are looking at scientific
things. We want to base our decisions upon science. At this
point in time we have not found a place where we cannot go
statutorily, but if we do, I will be more than happy to sit
down with you.
Senator Murray. You know that there are many of us who
stand ready to work with you in case you do need that
authority.
Secretary Thompson. This is very much a concern of mine
being a beef grower myself.
Senator Murray. Mr. Secretary, I appreciate that. Let me
just say, Mr. Secretary, we will get the question to you on
whether or not women who seek reproductive health care
protections are denied privacy under HIPAA. We will get that to
you today. Can I ask you how long it will take your decision to
come back to us?
Secretary Thompson. I would hope that my attorneys would be
able to turn it around the beginning of next week.
Senator Murray. OK.
Chairman Nickles. Senator Murray, Thank you very much.
Senator Sessions.
Senator Sessions. Thank you, Mr. Chairman. You know, on the
medical issue that Senator Murray raised, as a prosecutor, I
have been amazed in recent years the shock people have that
they think you cannot subpoena library records. You can
subpoena bank records. You can subpoena medical records. You
can subpoena library records. There is no privilege for those
things under certain circumstances.
Now, if somebody objects, they can file a motion to quash a
subpoena, but Congress did vote to eliminate the practice of
partial birth abortion, and I think we meant that. It was an
overwhelming vote. The investigations surely are focused on the
physicians who may be performing those procedures if they are
ongoing. So I think you have at some point, any investigation
to determine whether or not a physician is performing partial
birth abortion contrary to the overwhelming vote of this
Congress should be investigated and you will have to get some
records. if there is an objection, they can be objected to
through the court system.
Senator Murray. Mr. Chairman, let me just say that women
were not party to the suit, to the----
Senator Sessions. But it is the records. You say they are
taking their records, but it is really the doctors',
physicians' files to determine whether or not he is performing
that procedure, and he would have her history of whether or not
that procedure was performed on her.
Your chart here showing your higher estimate on the
prescription drug bill is more than troubling to me. I respect
you though. We knew, and many of us were worried it may be
higher than the $400 billion that was estimated. I know
Chairman Nickles raised that concern. I am glad you brought it
out. I am glad we have your estimate here. I think it is true
that nobody knows exactly how much is this going to cost. Would
you agree?
Secretary Thompson. That is true.
Senator Sessions. Could be more or less than the 534 you
have estimated. I believe that Congress wanted to make a
sizable historic step toward meeting the needs of those seniors
who cannot afford drugs, and we authorized, this Budget
Committee did, $400 billion for that purpose. I am just very
distressed that we passed a bill that it pretty clearly appears
now is going to go well above that. I think it is important for
us, if we care about financial responsibility and sanity, that
we come back and look at this bill, and perhaps as part of this
budget procedure, to say that we want only that much money
spent, and that if we have to have some higher copays instead
of the 3 percent copays that are being paid now, maybe that
could help keep it within the amount.
So I am frustrated that the numbers came out higher and
disturbed by that, but I thank you for doing it because we need
to know the truth and act on the best information that we can
have.
Secretary Thompson. Senator, could I just clarify?
Senator Sessions. Yes.
Secretary Thompson. CBO still swears by the fact that it is
only going to be $395 billion in its projections. CBO has
experts that are projecting on drugs that we do not have as
actuaries. So I do not think you can truthfully say that our
figures are correct and CBO is wrong because they are not.
These are our estimates.
For instance, on the first one--and this is something
Senator Nickles argued quite strongly against--is the fact that
the low income, where everybody wanted to help, is really wide
open. It is a huge subsidized benefit for low income, those
under 150 percent of poverty. That makes a difference of $47
billion. We cannot say for sure if it is going to be $47
billion more or $47 billion less.
For instance, the Balanced Budget Act of 1997, which is not
nearly as complex as this law, our actuaries were $50 billion
off from CBO and both of them were wrong. Both of them were
wrong, in fact it came in at a different amount. And the second
one, the higher participation, the next big tranche of $32
billion, this is the difference between 87 percent--CBO
believes only 87 percent of the people that are eligible will
participate. Our actuaries think it is going to be higher, they
think it is going to be 94 percent. But you have to remember
that in Part B only 91 percent participate, and that is what
CBO is counting on. CBO is saying if you did not participate in
Part B, why would you ever then participate in Part D? And so
they have a solid argument for saying it is going to be less
than 91 percent.
So it is just projection and expertise.
Senator Sessions. My simple view about it is you have
raised--your official estimates raise the possibility that it
would be higher. Hopefully it will not, but I think as a
prudent Congress and as a Committee that is concerned about
maintaining the integrity of the budget process, we ought to be
thrilled that we were able to find and appropriate $400
billion, but I think we have every right to tell the
administrators or the Finance Committee or others to keep the
figure at $400 billion, and I think even if your numbers are
correct, we are going to have the most historic increase in
drugs for seniors ever. We have four people in my State whose
drug bill exceeds their Social Security bill in thousands. My
mother's drug bill does. I see that. It is $400 plus every
month. It will be a help for people. There is no doubt about
it, but we need to be responsible.
Mr. Secretary, you have a reputation for being a good
manager and cutting waste and abuse. I have information that on
the Children's Hospitals Graduate Medical Education program--
thank you also for supporting full funding for that and not
cutting that program. Level funding is what you propose. But
there was a 5 percent increase, I believe, last year, and we
now find that all but 267,000 of that 5 million went to
administrative overhead. It is not getting out to the
hospitals. I do not know if you are aware of that or not, but
that is the information I have. I do not know if that is a one-
time cost or just a rise in administrative cost. I would ask
that if you are not familiar with it, I would understand it----
Secretary Thompson. Senator Sessions, it better not be that
way. If it is, some heads are going to roll.
Senator Sessions. I appreciate your approach to it. That
has been my impression of your approach to management.
Secretary Thompson. That is absolutely ridiculous.
Senator Sessions. I was disturbed to hear those numbers.
Perhaps they are not correct, but I think they come from a good
source.
Secretary Thompson. I will look into it before the end of
the day.
Senator Sessions. Mr. Secretary, I appreciate your interest
and work in dealing with AIDS, particularly internationally.
And working with you and the Department we confronted this
question of whether or not, or at least how large an impact
unsafe health care has in the spread of AIDS in Africa in
particular. Some studies came out and showed rather shocking
numbers there based on studies that were in existence. So we
asked your Department to review that and come up with a figure
which they believe was accurate. You have contracted with
somebody. We have preliminary numbers on that, and I was
unhappy, frankly, that they did not come forward with a figure,
they simply repeated really the language that WHO has been
using which is: the reusing of needles is not a major part of
the problem. I think even WHO estimates 2-1/2 percent of AIDS
infections in Africa comes from reusing needles, and 7 percent
of more comes from unsafe blood transfusions.
The good news is, Mr. Tobias and the money we funded is
immediately going out, some money earmarked to focus on this
unsafe health care, but I still believe it is important for us
to have good numbers. What I do not understand from this study
is that they are saying that the studies relied on by Dr.
Gisselquist and others to say the figure is much higher were
not good studies. Therefore, they conclude that they are not
accurate and that is it not a major cause, needle reuse. But I
think you could take that other way too. If the study is not
good it does not say anything. Maybe we need more studies to
get an accurate number. We need a number here, and I have been
frustrated by the stiff-arming of WHO, and even some in your
bureaucracy on this question because I think it is a big one.
Would you comment on that?
Secretary Thompson. Absolutely. Before I comment on that, I
just wanted to point out that the Medicare Modernization Act
has some real cost containments for the first time. Part B
premiums, those with incomes over $80,000, are going to pay
more, it is going to be indexed, and also the Part B deductible
is going to be indexed for the first time, and there is a
trigger for 45 percent. When Medicare gets to 45 percent of the
general purpose revenue dollars going in to fund Medicare,
there is a trigger indicating that we have to come back with
reports to the President as members of the Trustees, which I am
one, and to Congress, making suggestions on how we might be
able to improve.
Senator Sessions. That is true, and Senator Nickles fought
to get that in there. I would just say that overall Medicare is
going to be difficult to deal with. We have not started this
prescription drug program. We ought not to let it get out of
control before it starts.
Secretary Thompson. I happen to agree with you, Senator
Sessions. I also agree with Senator Nickles and Senator Conrad
on the questioning, and I think we should continue to observe
this and find ways in which we can enhance cost containment.
In regards to your issue, you have talked to me about it. I
happen to agree with you. I think it is a higher percentage,
and I think we do need an accurate figure. I was somewhat
nonplussed by the fact that it came back with--after we
contracted out. I think we do need further studies.
I happen to be very much involved, as you know, as Chairman
of the World Global AIDS Fund, trying to make sure that our
programs and our funding goes the right direction. And we also
have just received a grant from the $15 billion special
appropriation to ensure the safety of blood. This is going to
be done by my Department. We have been awarded the contract to
ensure the safety of blood. Needles are an absolutely integral
part of that, so we are addressing this, and I would be more
than happy to sit down with you and give you more information
as we go along and set up our program on good reliable blood
for Africa. But I also agree with you. I cannot disagree with
you on the report as far as the percentage of people that are
getting HIV positive transmitted by dirty needles.
Senator Sessions. We can take the transfusion infection
rate to zero virtually. I think about 60 percent of the
transfusions of Africa are checked now. 40 percent are not. And
according to WHO's numbers, that represents maybe 7 percent of
all infections in Africa. So we could take that to zero like we
have done in the United States.
Chairman Nickles. Senator Sessions, thank you.
Senator Sessions. My time is up. The Chairman is correct to
call my hand. Thank you for your interest in that, and I look
forward to working with you.
Secretary Thompson. Thank you, Senator Sessions. Appreciate
it.
Chairman Nickles. Senator Sessions, thank you very much.
Senator Stabenow.
Senator Stabenow. Thank you, Mr. Chairman.
Welcome, Mr. Secretary. I have many questions I would like
to pursue, but I will ask only two different subjects, and one
I know that was pursued earlier, but I want to revisit it
because I was so shocked, frankly, by it, and that is the $20
million ad blitz that has been started with taxpayers money,
touting the new Medicare law, when in fact, other than the
discount cards, no one will have the opportunity to sign up for
it until 2006.
I have to say, when I saw the first television ad, and just
watched it as it went through, I expected a tag line of ``paid
for by the National Republican Committee,'' and was very
surprised to see that taxpayers were paying for it, given the
fact that it went beyond what I believe are accurate
statements. I have joined with others in requesting the GAO
investigation that they are doing, which we appreciate, and
have joined in writing you a letter asking that you stop the
advertising until we know from the GAO whether or not this is
legal. So I would ask, first of all, if that is something that
you would do?
Secretary Thompson. I answered the same question from
Senator Conrad. I told him I would go back and review all the
things. I also wanted to correct some things, that I do not
believe it is political. I think it is informational, and I am
responsibe under the Act. I read the Medicare Conference Report
language which says that I have to get out information on this
new Medicare law and the money has been appropriated to do so.
The best ways to do that is through TV, but we are also doing
it through literature. We are also doing it through expanding
the SHIPs program, voluntary programs in the community, through
the Aging Commissions. We are also putting information out in
more than one language so that especially Hispanics are able to
understand the new law. GAO is going to review it. I am
confident that they are going to come back and say that it is
not political, but if they do, it certainly is going to be
stopped immediately.
Senator Conrad had a subsequent, if I would go back and
review the ad again, and I will this afternoon, and take a look
at it, and that is as far as I am willing to go at this point
in time.
Senator Stabenow. I appreciate your comments. I would like
to share with you from my perspective in looking at this. There
is no question that we need to educate people. Frankly, this is
very complicated.
Secretary Thompson. Very complicated.
Senator Stabenow. What is going to happen for people in
2006 is very complicated because if they have at least one
private insurance company and one HMO in their area, they would
not be able to go through the traditional Medicare mechanism.
Would you agree that they will be choosing between a private
insurance company and an HMO if those are available in their
area, is that not correct?
Secretary Thompson. No. They will also be able to maintain
their current fee for service.
Senator Stabenow. They will be choosing. If they have at
least one private insurance company and one HMO in their area
for prescription drug coverage, they will go through one of
those two and only have Medicare as a fall-back.
Secretary Thompson. That is correct.
Senator Stabenow. So it is a complicated system. There is
no question about it.
Secretary Thompson. Very complicated.
Senator Stabenow. That people are going to have to know
they are going to get a lot more information, a lot more
paperwork. What others have called choices I would call a lot
of paperwork, and I am not hearing from people, from seniors,
that they want a lot more paperwork. They just want help with
their prescription drugs. But we will have that. But I would
like just a couple of comments----
Secretary Thompson. Could I just respond quickly to that? I
would like to point out that the enthusiasm and the interest in
the Medicare Modernization Act been overwhelming. At the 1-800-
Medicare line. We have 106 companies and individuals and
entities who want to put out the card. We have had a lot of
companies that were in Medicare Plus Choice and want to come
back, they want to expand and increase benefits and reduce
premiums. So there is a great deal of enthusiasm. We want to
get the right information out. I do not want to be political on
this, and I pointed out that the head individual that won the
request for advertising happens to be an individual that is a
Democrat.
Senator Stabenow. But, Mr. Secretary, if I might, I
understand the enthusiasm. Certainly from the pharmaceutical
industry that is projected to gain $139 billion from this bill,
and I understand the enthusiasm from those who will now be
subsidized in the insurance industry and the HMOs so that they
have a more favorable position in which to compete against
Medicare. I understand their enthusiasm. We know that because
of that enthusiasm and those subsidies, that down the road in
2010 we will begin to see, because of the change, fundamental
change in Medicare, that will be experimented with at that
time, CBO says we will see a 25 percent increase in cost for
average Medicare, for those who stay in Medicare. So I
understand the enthusiasm of those who will make money off of
this bill.
I would just share with you I do not see the same
enthusiasm among those who will be paying the bill and of those
who want prescription drug coverage in my State. We have been
overwhelmed with seniors and with families who are outraged by
what has been done. And my concern--and I will move on to one
other topic--my concern is that when we talk about advertising,
we have a full page ad in Roll Call, and my staff reads that
every day, not one of them is even close to being able to
qualify for Medicare. I do not know why we run ads in Roll Call
when we are trying to educate seniors around the country. This
is a propaganda item, but it certainly is not educating folks,
and I think any lobbyist or senior official reading Roll Call
certainly has other opportunities to find out information about
how this works. I would finally just say that----
Secretary Thompson. I did not know that it was in Roll
Call.
Senator Stabenow. It is Roll Call. It has been in Roll
Call, and that is certainly not where my constituents are
reading about Medicare, so that is a concern of mine.
Then finally, I would simply say that in looking at the
television and the print, when we say, ``So, how is Medicare
changing? Same Medicare, more benefits.'' I would strongly
object to that statement. Same Medicare? For those on Medicaid
who are now going on Medicare, if they want a brand name drug
they are going to pay more. Their formularies may be different
and they may have fewer choices on prescription drugs. For the
people in my State that are on private retiree insurance today,
the anticipation is that one out of four of them will lose
their coverage. This is not accurate. And so I would strongly
support efforts to accurately educate people about the
complexities and about the choices, and for those that will
benefit, we certainly want them to know about it. For those who
will pay more, we certainly want them to know that as well. I
just have great concern.
Secretary Thompson. Senator, I would just like to quickly
respond if I might. I do not want to argue with you. Your
interpretation is different than mine. I think that the ads
that we are doing are very informative. I think the
information--I wish you could listen in to the seniors that are
calling in at 1-800-Medicare, they are overwhelmingly enthused
about this opportunity. It is the same. You can stay in the
same Medicare program like you always have, and you can get
added benefits. That is the truth of the law.
Now, you and I differ on that, but that happens to be our
interpretation of the law.
Senator Stabenow. Mr. Secretary, in 2010 in the six
demonstration areas around the country, will Medicare remain
the same?
Secretary Thompson. In 2010----
Senator Stabenow. 2010 with the demonstration projects,
will Medicare remain the same?
Secretary Thompson. I do not think anybody around this
table can say whether or not it will. It probably will not. In
2010 there is going to be two more Presidential elections,
there is going to be three congressional elections----
Senator Stabenow. That is not what I am asking. I am asking
if the law----
Secretary Thompson. I am just telling you, I do not know, I
do not know, I do not know.
Senator Stabenow [continuing]. That we passed, Mr.
Secretary----
Secretary Thompson. And I do not think you do either. I do
not think it will be.
Senator Stabenow. Mr. Secretary, I do know under the law we
passed that in the six demonstration areas around this country,
starting in 2010 Medicare is not the same. It essentially moves
from a defined benefit to a defined contribution, and it has
been touted by Mr. Scully, by others, as a positive change, and
I am not asking us to debate whether or not it is positive or
not. I would argue it is not, but there are those that believe
it is.
But my question is: is it a change? Is it different? In
2010 if you are in one of the areas with the six demonstration
projects under Medicare, will it be different?
Secretary Thompson. In those six different areas in 2010,
unless Congress changes it, there will be competition, yes.
Senator Stabenow. So it is different. So when we say ``same
Medicare, more benefits,'' this is not accurate, and if you
change it so that it is accurate, that is fine. But it is not
accurate to say it is the same because for many people it will
not be the same.
Secretary Thompson. Yes, it will be, Senator, because
seniors will still be able to get fee for service if they so
desire.
Senator Stabenow. And it will cost more, up to 25 percent
more under CBO.
Secretary Thompson. But the seniors will still be able to
get their system if they want to.
Senator Stabenow. It would be great if it said that in
here, that, ``by the way, it will cost you more.''
One other quick point--and I realize, Mr. Chairman, I know
I am pressing.
Chairman Nickles. We do need to run.
Senator Stabenow. Actually, I will wait. Thank you very
much. You have been patient, and I will wait and do the
additional question in writing. Thank you so very much.
Chairman Nickles. I appreciate that so much because I am
trying to get the Secretary out by 12 o'clock, and I have an
additional question I want to ask him. But first we are joined
by former Chairman and the most senior person on the Committee,
Senator Domenici.
Senator Domenici. Can you hear me?
Secretary Thompson. Yes, I can, Senator. How are you?
Senator Domenici. Fine. Nice to see you. You got a haircut,
huh?
Secretary Thompson. I hope so.
Senator Domenici. Looks good. I have to go get mine cut.
Nickles does not have to cut his very often because----
[Laughter.]
Chairman Nickles. I am well aware of that.
[Laughter.]
Senator Domenici. His is disappearing.
Chairman Nickles. Mine does not cost as much as yours or it
should not.
Senator Domenici. You get half price.
Mr. Secretary, I have about five or six questions that I am
going to submit, and I would greatly appreciate it if you would
answer them.
Secretary Thompson. Absolutely.
Senator Domenici. They are very important, and I just got
through with a hearing where we had a Secretary who was
letting, because of OMB or some reason was letting mail from
Senators go very much unattended, and I do not want to get in
that position with reference to you. You have a great staff and
they ought to consider a Senator's question as being something
important enough to be answered.
Secretary Thompson. If they do not, they will not be with
me.
Senator Domenici. That is what I suggested to her, that
they should not be.
In any event, let me ad lib for a minute, and then get to
some written ones. First, Mr. Secretary, last year our
President made a little trip to New Mexico. It was probably one
of the most exciting trips that he has ever taken to our part
of the country, and he came to meet with a group of doctors and
health professionals on the subject of insurance parity for the
mentally ill.
Now, Mr. Secretary, I think that you know what parity is,
and I think you probably know that this had resulted in a
discrimination of coverage for families with a member who has
one of the serious mental illnesses. I am not talking about
need for counseling. I am talking about schizophrenia and
bipolar and the like. It is growing more and more obvious that
millions of families have no insurance, but do cover all the
other things, cover heart conditions, cover tuberculosis, cover
diabetes, but not somebody who is egregiously ill with
depression.
As a result, the facilities that should be built and the
excitement of the careers in research are not what they are in
the other fields. Just think with me what has happened to
heart. The heart has always been covered since they wrote
insurance policies. Just think if they would have exempted
hearts, said, we are not going to do anything under insurance
policies for the heart. I would think we would have invented
none of the great techniques.
So here we sit, and the President of the United States
said, ``I do not have to be convinced that the big mental
illnesses are diseases.'' He said he had a personal experience
with a friend on severe depression. You might know about that.
Now, let me ask you, because we are about to get a bill
reported out of Health Committee, you support the President's
position on this, do you not?
Secretary Thompson. Without a doubt. It is the right thing
to do. I supported it when I was Governor of the State of
Wisconsin. My family is very much involved in this thing. I
compliment you for your leadership for years. It is time for us
to get something done.
I also talked to Congressman Ramstad yesterday, the day
before. He tells me that you have reworked a bill and it is
able to come out.
Senator Domenici. Yes, sir.
Secretary Thompson. I said I would like to read it, but the
concept I fully endorse.
Senator Domenici. Mr. Secretary, there is going to be a
meeting of everybody, including your Departments and others, so
that when it gets beyond our Committee, which is going to
report it out, all of that work will have been done.
Secretary Thompson. Good. I would like to be included in
that meeting.
Senator Domenici. You will be, and the only reason I raise
it with you strongly today, I do not want staffers going there
assuming that they have to go through the whole business of
whether you are for it or not. I would assume administration--
--
Secretary Thompson. You do not have to go through. I have
stated it publicly before, Senator.
Senator Domenici. OK. And I am for arranging it any way
that we can be helpful to Senator Nickles on his budget, and I
am also for limiting the amount, Senator, the percent, the
cost, et cetera. Now, that is about all my big questions, but I
have one with reference to New Mexico.
As it currently exists, the Medicare reimbursement system
for health care provides and contains some inequities. We all
know that. Some are intentional because you could not do it any
other way. Some we are finding out about. But the reimbursement
for health care providers nationwide vary greatly from region
to region and from State to State. My home State, New Mexico,
we are reimbursed less by Medicare for services provided than
other States. Some of this started way back when we first did
HMOs and the like, and you are aware of that. Although certain
costs of providing care are more expensive in some areas than
others, and that accounted to some extent in the disparity
between reimbursement.
But it is my theory that New Mexico is being punished for
its own efficiency. New Mexico was foresighted enough to allow
health maintenance organizations to penetrate our market, while
most States remained involved with fee for service providers,
and you know better than I, were squabbling and arguing and
litigating about issues. However, because New Mexico was
efficient, they are now rewarded with artificially low Medicare
reimbursement rates. What would you recommend be done to
address geographic payment inequities that currently exist in
the system, and what if anything is HHS doing to address the
geographic payment inequities that currently exist in the
system?
Secretary Thompson. Mr. Chairman and members, we are doing
a lot. The new Medicare law is making changes, and wage
disparities, for instance, have gone down from 72 percent to 62
percent in the law, something that I think is badly needed. It
is going to benefit the State of New Mexico, the State of
Wisconsin, the State of Oklahoma and the State of North Dakota.
There is $26 billion of new programs for rural areas which is
going to benefit the States of New Mexico, all the four States
that are here. We have been discriminated against for a long
time, Senator Domenici, and I would have to say that the
Medicare law is a giant step forward in creating some equity as
far as reimbursement, and it is going to benefit a great deal
for the States that are up there, as well as my home State of
Wisconsin, something that I have been for for a long time, and
I thank you for bringing it to my attention.
Senator Domenici. Well, Mr. Secretary--incidentally, you
called me Mr. Chairman a minute ago, and that is OK if you were
in another Committee, but in this Committee you should call me
``used to be Chairman.''
[Laughter.]
Secretary Thompson. You have been Chairman of this
Committee for so long, you are a Chairman----
Senator Domenici. Emeritus.
Secretary Thompson. --Emeritus, and I think you should wear
that as a badge of honor.
Senator Domenici. Now, Mr. Secretary, I want to tell you,
my friends here on this Committee that worked on another
Committee that produced Medicare, have just informed me that
the fix for the rural disparities versus the other more
occupied States, that is the biggest fix we have ever had.
Secretary Thompson. It is.
Senator Domenici. I am looking forward to seeing the
numbers because, Senators, I want to tell you--you probably
know--but when you have a State as poor as ours, and you have
doctors and neurologists and neurosurgeons leaving, when you do
not have enough to begin with, and they say, ``Well, we are
going over here to Texas because we get paid, reimbursed
differently under the same law,'' you know, pretty soon you
have riot sounding meetings with people wondering what the hell
is the Federal Government doing? They know with Chuck Grassley
and some of them, we have made some fixes, but we did not fix
it enough. Now we might have.
Secretary Thompson. I think you are going to be very
appreciative. This has been an issue for Senator Conrad and
myself for a long time. He and I have been fighting it. Senator
Grassley, Senator Nickles, I mean anybody that represents rural
areas, this Medicare bill, that portion of the law was enough
to vote for it.
Senator Domenici. Thank you very much.
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Senator Nickles, I will submit my own questions, and I
assume he will answer them under your rules.
Chairman Nickles. Senator Domenici, thank you very much.
And Secretary Thompson, it was almost enough to get some
people to vote for it.
[Laughter.]
Secretary Thompson. I stand corrected, Mr. Chairman.
Chairman Nickles. But I do stand by your statement, and I
told Senator Domenici the improvements that we made in the
resolving or trying to fix some of the rural inequities was the
most significant step since I have been working on it for many
years.
I know you need to leave. I want to raise one other issue
very quickly. Do you have four or 5 minutes?
Secretary Thompson. Sure.
Chairman Nickles. Four minutes. Medicaid spending, we have
not touched on Medicaid. It is an enormous program under your
watch. It is $180 billion program. The last 4 years it has
grown at 9.7 percent, 13.9 percent, 9.1 percent, and estimated
to grow 10.3 percent this year. There is some abuse in the
system.
Secretary Thompson. That is right.
Chairman Nickles. Part of the abuse is what many of us call
improper intergovernmental transfers. I have been concerned
about it. Sometimes in the past we have called it upper payment
limits, but some States, a lot of State actually, have
developed what I would call a scheme to greatly enhance the
reimbursements on Medicaid to where basically the Federal
Government pays not their stated share, 60/40 or 50/50 or
something like that, but in many cases it becomes a case where
the Federal Government pays all of it, or pays a much greater
share than frankly what it is supposed to do. Would you care to
comment on it, maybe explain it, or give us 1 minute? I know
you are pressed for time, and so I will not pursue it too long.
Secretary Thompson. Thank you for asking me the question.
This has been something that needs to be corrected. The law
allows for local participation with the State in order to get
matching funds. Usually it is a 50/50 match. Some States are
different. Mine is 57/43. I do not know what North Dakota and
Oklahoma is, but it is probably somewhere around 57/43. But so
many States have taken advantage of the failure to supervise,
the failure to actually audit some of these accounts.
Let me just go through some examples of what we're finding.
This State made upper payment limit, quarterly payments were
being electronically transferred to the nursing home bank
account. The State then immediately withdrew the amount of the
payment from the provider's account less a $2,500 participation
fee. The approximate amount of Federal Medicaid payment, what
should have gone to the local, that went back to the State, was
$191 million. That was one State.
Another State made supplemental----
Chairman Nickles. Say that again. I am trying to get these
figures.
Secretary Thompson. We found $191 million in this
particular----
Chairman Nickles. One State?
Secretary Thompson. One State.
Chairman Nickles. So basically overpayment to one State of
191 million?
Secretary Thompson. It was a wrong payment because it was
sent to the State. Then the State has got to send it down to a
county hospital. But the State, instead of leaving the money to
the county hospital, gave the county hospital $2,500 and took
the money back to the State and used it for general purpose
revenue.
Second example. Made supplemental payments to nursing
facilities. Upon receipt of the payments, the nursing
facilities, which are eligible for the funds, are required to
return 99.5 percent of the payments to the State.
Chairman Nickles. Wow.
Secretary Thompson. That was $938 million.
Chairman Nickles. Just one State or is that nationally?
Secretary Thompson. One State.
Chairman Nickles. One State.
Senator Conrad. Can you tell us what State that is?
Secretary Thompson. I cannot at this point in time. In
private, I will be more than happy to, but I do not want to--we
are auditing these. This is what we are finding.
Third example. State makes payments to county nursing
facilities. As a condition of receiving those payments, nursing
homes must sign a participation agreement in which the nursing
home agrees to return all but $10,000 of the payment. Those
nursing homes are allowed to keep the $10,000 as a
participation fee. The rest of the money goes back to the State
to be used for whatever, and that accounted for $181 million.
The next one makes a payment to county home nursing
facilities. Upon receipt of those payments, the nursing homes
are required by State law to return the majority of the
payments back to the State. This is accomplished by an
electronic transfer of fund. That example is $18 million.
The next one makes a pro-share to county owned nursing
facilities. Upon receipt of those payments, the nursing
facilities are required by contract to return the majority,
over 90 percent of the payments back to the State within three
working days of the receipt. They traditionally remit portions
of the payments to the State. That was 40 million.
The next one is $1.5 billion. So this one----
Chairman Nickles. Can you explain that $1.5 billion?
Secretary Thompson. Yes. Make supplemental payments--this
is a larger State--to large county nursing facilities. In order
to receive the payments the county facilities borrow a total of
$1.5 billion. Within 1 day these funds are transferred into the
county nursing home bank accounts; from there to the State bank
account; and then back into the county nursing home bank
accounts as a Medicaid payment. The counties then repay the
loan to the bank. At the close of the banking, the State claims
the borrowed funds as an expenditure for nursing facility
services of $1.5 billion and draws down $859 million in Federal
Medicaid matching funds.
Chairman Nickles. That 1.5 is that----
Secretary Thompson. Turns into a match from us of $859
million.
Chairman Nickles. That really should not be allowed?
Secretary Thompson. Absolutely not.
Chairman Nickles. We may want to have a hearing just on
this issue, and I apologize maybe for bringing it up late. I
knew there was a lot of interest on the card, on prescription
drugs, the cost and so on, and I thought that was maybe
primary, but I am outraged at this, and I think it needs to be
stopped. I want to stop it. Frankly, when we are running these
kind of deficits and when I look at these double digit
compounding growths of Medicaid, it just has to be stopped. We
cannot afford this. I know that you have a proposal.
Secretary Thompson. We do.
Chairman Nickles. That will require legislation to go
through the Finance Committee, so Senator Conrad and I are both
interested in that, but I wish to learn more about it. I want
to fully understand it. I have heard about county hospitals and
so on.
Secretary Thompson. Can we put up the chart? You have just
a second?
Chairman Nickles. Sure, I do. I know that you have to be--
you have a commitment at 12:15 so I am trying to be quick.
Secretary Thompson. Dennis, you want to come up? Quickly go
through it, Dennis.
Chairman Nickles. Dennis, welcome back to the Committee.
Mr. Smith. Thank you, Mr. Chairman. Through an
intergovernmental transfer, this illustrates the process for
which the county shares part of the match rate with the State
which is permissible. But under this example--and this would
have been allowed through upper payment limits--that the county
provided $10 as a match to the State, the county provider. Any
time you have a public entity, you have a potential for an
intergovernmental transfer, be it a county hospital, county
nursing home, but counties are providers for a wide range of
other services as well.
Under this, the county provider had a claim for $100. The
State, however, a claim-back was for $250. This is a State with
a 50/50 match. The Federal Government, seeing a claim for $250,
says, ``OK, here is our share, $125.''
Secretary Thompson. So the Federal Government pays more
than the total claim.
Mr. Smith. The reimbursement is made, and then the county
provider transfers $150 back to the State. So the State has
made $150.
Senator Conrad. That is a scam.
Chairman Nickles. So the Federal Government pays more than
the original cost, and the State makes money on the procedure.
Secretary Thompson. Correct.
Mr. Smith. The true cost was $100, but a claim for $250.
Chairman Nickles. How prevalent is this?
Secretary Thompson. We think about 5 percent. We think it
is going to be--it is growing. There are drummers out there
selling this service to the States in order to get a
percentage, and we think it would be about $6 billion.
Chairman Nickles. $6 billion per what?
Secretary Thompson. Annually.
Chairman Nickles. Per year. I am very interested in trying
to stop this, and I look forward to reviewing your legislative
proposal, and we will work with you. I would appreciate it if
you could provide us more example that would help highlight the
problem and help us get our hands on the reason why this change
is needed so we can sell it to our colleagues.
I will tell you, regrettably, most of our colleagues do not
have a clue about this. I mention intergovernmental transfers,
and most people do not know what we are talking about, so I
think we will have to work to educate people first to make the
legislative change.
I want to thank you and also I want to thank Jennifer
Young, because I know that she has helped expose this. You have
some excellent staff. I want to compliment Dennis, who I guess
is now acting at CMS, who has done an outstanding job, both for
the Finance Committee, and also in working in your Department.
You have a great team, and we appreciate your bringing this to
our attention.
Senator Conrad.
Senator Conrad. Mr. Chairman, I would just add my voice and
say that is a scam, that is a pure scam on the Federal
Government and the Treasury. That is tapping into the Federal
Treasury in a way that is totally inappropriate and has got to
be stopped. I would be very interested in finding out what
States are involved.
Can you tell us how many States are engaged in this kind of
activity?
Secretary Thompson. 34.
Senator Conrad. 34 of the States. We have to call a
screeching halt to this because that is totally beyond the
pale.
One final point I wanted to make, Mr. Chairman, is on the
Medicare Advantage, CBO tells us that the private plans cost
more than traditional fee for service even outside of this
bidding question, so I do not know if there is a disagreement
between CBO and CMS on this.
Secretary Thompson. There is.
Senator Conrad. There is apparently.
Secretary Thompson. There is a disagreement.
Senator Conrad. CBO says that it costs more----
Secretary Thompson. CBO still believes that.
Senator Conrad [continuing]. To do the private plans than
traditional fee for service Medicare. The whole rationale for
the private plans was to save money, so obviously that is a
problem. Hopefully we can get to the bottom of that as we go
forward.
I just conclude by saying I hope very much, Mr. Chairman,
that we go back in and find places where we can save money out
of this bill that has been passed. When we go to $530 billion
and it was supposed to be $400 billion, that is what people
thought they were voting on. We have an obligation to go back
and try to save money. We have a runaway freight train here in
terms of the Federal deficits. We have to find ways to save
money wherever we can, and I hope very much this Committee
plays a role in that.
I thank the Chairman for the hearing this morning.
Chairman Nickles. Senator Conrad, thank you very much.
I want to make one final comment. Senator Conrad was trying
to get your attention about some of the ads that were running
advertising Medicare and Medicare changes. I will tell you that
I was a participant--attended a football game. This is when
Scully was still head of CMS. And I saw a blimp that was
advertising 1-800-Medicare. I was embarrassed. I did not see
too many people writing the number down. I am not sure. I think
you do need to look at the ad campaign. I think people do need
to be educated, and it probably will take TV, radio and print
to get it out. I do not know about a blimp at a football game.
Maybe I am missing the--I know in sales you have to consider a
lot of different venues, but I was kind of surprised about that
and did not think it was the best use of taxpayer money.
Secretary Thompson. I agree with you.
[The prepared statement of Secretary Thompson follows:]
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Chairman Nickles. Thank you very much. I appreciate your
testimony before the Committee. The Committee is adjourned.
[Whereupon, at 12:12 p.m., the Committee was adjourned.]
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THE PRESIDENT'S FISCAL YEAR 2005 BUDGET PROPOSALS
----------
FRIDAY, FEBRUARY 13, 2004
U.S. Senate,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to notice, at 10:05 a.m., in
room SD-106, Dirksen Senate Office Building, Hon. Don Nickles
(chairman of the committee) presiding.
Present: Senators Nickles, Domenici, Allard, Bunning,
Crapo, Cornyn, Conrad, Byrd, and Stabenow.
Staff present: Hazen Marshall, majority staff director; and
Cheri Reidy, senior analyst for budget review/revenues.
For the minority: Mary Ann Naylor, staff director; and Jim
Klumpner, chief economist, Steve Bailey, senior analyst for
revenues.
OPENING STATEMENT OF CHAIRMAN NICKLES
Chairman Nickles. The committee will come to order. I want
to thank Secretary Snow for being with us today and thank all
of our colleagues. We appreciate their willingness and
cooperation to change rooms.
Let me just make a couple comments. I am delighted that
Secretary Snow is with us today. A year ago, Secretary Snow
assumed office, and he did so at a very difficult and
challenging and troubling time. The economy had been in a
slide, revenues had declined for 3 years in a row, and the
economy was still very, very slow. I met with Secretary Snow,
and others did, and he and the President proposed an economic
package to grow the economy.
And, Mr. Secretary, but you made a proposal to grow the
economy and you succeeded. And I want to compliment you for
that, and I will show a couple of charts to give some evidence
to that.
The first chart is gross domestic product, and it shows
very significant growth in the last year, I think in large part
because of some of the changes that we have enacted.
[GRAPHIC] [TIFF OMITTED] 94065.140
Look at the next chart, and it shows the unemployment
situation has actually improved. Now, this is a chart of the
household survey figures, and, granted, there is a difference
between the household survey and the payroll survey. But the
chart shows all-time record employment, and it is significant
and it is real.
[GRAPHIC] [TIFF OMITTED] 94065.141
The next would be the unemployment rate, and that shows,
again, we have had a significant reduction in the unemployment
rate, and that is positive. It was, I think, something like 6.3
percent; now it down to 5.7 percent. So it is certainly moving
in the right direction.
[GRAPHIC] [TIFF OMITTED] 94065.142
The stock market has risen, as a result, greatly, I think,
because of the tax changes that we made, cutting the dividend
rate about in half and cutting the cap gains rate from 20 to 15
percent, which we did in last year's bill. It is up from $11
trillion to over $15 trillion in assets in the market. That is
a $4 trillion increase, that is about a 40-percent increase.
That is a very significant increase. So our tax changes made a
difference.
[GRAPHIC] [TIFF OMITTED] 94065.143
I would also just show the top marginal rate as a result of
some of our efforts. It was 28 percent at the end of Ronald
Reagan's term. It was 31 percent at the end of President Bush
I's term. It was 39.6 percent at the end of President Clinton's
term. And we reduced it 35 percent. I might note we did not
take it all the way down to 31 percent; we took it to 35
percent. Again, I think as a result of some of those changes,
we have made significant positive improvement in the economy.
[GRAPHIC] [TIFF OMITTED] 94065.117
Mr. Secretary, you came in a year ago. You had a
significant challenge that you presented to us to make changes
in tax policy to help grow the economy. We did that, in large
part following the outlines that you gave us a year ago, a big
challenge. And I think we have had some very good results. So I
compliment you for that.
We have big challenges now. The deficits are unacceptable.
They need to be brought down. The administration says they want
to reduce them by half in 5 years. I hope that we can beat
that. I would like to accelerate that goal as much as possible,
and that will not be easy. So I am going to be asking you some
tough questions on how we can get the deficit down. The tax
code that you have charge over has a lot of tax revenue in it,
but it also has a lot of expenditures in it. And I want to
examine both. I want to be working with your Department to find
loopholes. I want to be working to find tax shelters. I want to
be working to find things that lead to unreported income.
I happen to think--and Senator Conrad has mentioned it to
me--there is a lot of income that is not taxed, that is not
reported, that is underground. We need to find it. We need to
be aggressive. We need to stop programs that have significant
expenditures to them that have very large error rates. I am
talking about the earned income credit program. We need to fix
it. We need to make sure the money goes to those people who
deserve it, but not to people who don't deserve it.
There are billions of dollars at stake, so we have a very
aggressive challenge. We have to get our fiscal house in order.
Four or five hundred billion dollar deficits are not
acceptable. And I plan on doing everything I can in this year,
in this budget, working with you, maybe in- or outside of a
reconciliation package, but I want to do as much as we can to
get our fiscal house restored. I look forward to working with
you, but, again, I want to compliment you for your first year
in service. I think you have had a remarkable, successful
tenure as Secretary of the Treasury, and I compliment you and
the President for the results that I have just illustrated.
I call on my colleague and friend, Senator Conrad.
OPENING STATEMENT OF SENATOR CONRAD
Senator Conrad. Thank you, Mr. Chairman, and let me just
start by saying how welcome this discussion has been from you
this morning with respect to the need to get deficits down. You
have said this at a number of our meetings, and I agree with
you entirely. These deficits are too large. They are
unacceptable and we need to make far more progress than is
being suggested.
We have to look on the spending side of the equation, and
we have to look on the revenue side of the equation. I agree
with you entirely that one of the areas we need to look at on
the revenue side of the equation is this tax gap, the
difference between what is being paid and what is being owed.
The Revenue Service now says that is over $250 billion a year.
That is a stunning amount of leakage in the system.
There is one thing the chairman did not mention, and let me
just put it up in terms of--and that is the growth of the
deficit. And it has been dramatic, and it is of record
proportion. The deficit now in dollar terms is by far the
biggest it has ever been. Last year was a record, and this year
surpassed it by more than $100 billion.
Mr. Secretary, I mentioned to you when I greeted you that I
wanted to recall some of my favorite Secretary Snow quotes from
before you were Secretary. This is my all-time favorite: ``A
balanced Federal budget is the best choice to ensure a bright
future for the Nation's economy.'' Yesterday you were talking
in the Finance Committee about how we have to pay attention to
the economy. That is what creates jobs. And I entirely agree.
And the question is how threatening the pile-up of deficits and
debt are to a vibrant economy.
[GRAPHIC] [TIFF OMITTED] 94065.108
Let's go to the next. I also remember well this ad that
appeared in major newspapers that you were a signatory to. I
very much applauded you at the time. The headline was:
``Without a balanced budget the party's over, no matter which
party you're in.'' And I agree with that sentiment as well. We
have to get back to balance as quickly as possible, given
especially the baby-boom generation which is about to retire.
[GRAPHIC] [TIFF OMITTED] 94065.109
But when I look at the President's budget proposal and the
suggestion that he is going to cut the deficit in half, it is
simply not credible to me and I do not think it is credible to
anybody that takes a hard look at what the assumptions are,
because the President has achieved a reduction by largely
leaving out substantial parts of the budget.
[GRAPHIC] [TIFF OMITTED] 94065.110
The President is saying that the deficit 5 years from now
will be cut in half to $237 billion. But in that same year, he
will be taking under his plan $259 billion from the Social
Security Trust Fund, every penny of which has to be paid back.
In addition, he will be taking $23 billion from the Medicare
Trust Fund. And if we are going to continue to address the
problem with the alternative minimum tax, which is rapidly
growing into a crisis. Three million people affected now by
what is supposed to be a millionaire's tax, there are going to
be 40 million people affected by the end of this budget period.
It is becoming a middle-class tax increase. That costs $55
billion to fix. The President just left it out. And it costs
$30 billion, according to the CBO, for residual work costs in
that year. All of these things are left out, and so you have an
increase in debt in that year not of $237 billion but of over
$600 billion.
Let me go to the next, because the President's own budget
shows in the fifth year that the debt is going to increase not
by $237 billion, but the debt is going to increase by $633
billion.
[GRAPHIC] [TIFF OMITTED] 94065.111
Let's go to the next. Here is the problem that I see. If we
adjust what the President is saying for the effect of his tax
cuts beyond the 5 years, the alternative minimum tax problem,
and his defense policies--not, you know, this idea that defense
costs will not grow for the war after September 30th, but put
in what CBO tells us is going to happen. We don't see the
deficits being reduced for the next 10 years. We see an ocean
of red ink.
Let's go to the next one. Here are part of the reasons why.
One, we are not accounting for the $2.4 trillion of Social
Security money that is going to be taken--$2.4 trillion during
this next 10 years, every penny of which has to be paid back.
The President just shows the effect of the first 5 years of his
tax cut proposal, and what you can see is this dotted line is
the fifth year. The cost of the tax cut explodes beyond the 5-
year window. We have to account for that if we are going to be
accurate with people.
[GRAPHIC] [TIFF OMITTED] 94065.113
[GRAPHIC] [TIFF OMITTED] 94065.114
[GRAPHIC] [TIFF OMITTED] 94065.115
Let's go to the next one. The alternative minimum tax, the
same kind of pattern. The President pays for it in the first
year, but the cost of fixing it, according to the Congressional
Budget Office, explodes in these outer years.
And, of course, war costs. The President says no war costs
past September 30th. The Congressional Budget Office tells us
$280 billion of costs, none of this accounted for in the
President's budget.
The result is we have a debt that is not under control, but
a debt that is skyrocketing, and at the worst possible time--
right before the baby boomers start to retire.
[GRAPHIC] [TIFF OMITTED] 94065.116
[GRAPHIC] [TIFF OMITTED] 94065.112
So, Mr. Secretary, I think we have a lot of work to do to
get serious about the growth of deficits and debt and the risk
that that growth poses for our economic security.
Chairman Nickles. Senator Conrad, thank you very much.
Mr. Secretary, we are delighted to have you with us, and
please make your presentation, and then we will have a few
questions.
STATEMENT OF HON. JOHN SNOW, SECRETARY, U.S. DEPARTMENT OF THE
TREASURY
Secretary Snow. I think I am on here. I am not sure.
Chairman Nickles. You are.
Secretary Snow. Thank you very much, Mr. Chairman, Senator
Conrad, members of the Senate Budget Committee. It is an honor
to be before you, and I appreciate, Mr. Chairman, your opening
comments and those of Senator Conrad as well.
The budget that is before you reflects basically four
priorities:
One, winning the war on terror. That has to be at the
center of everything that we are engaged in today. It has to be
a national priority of the highest rank, as the President said
in his State of the Union message, and protecting the homeland
that goes hand in hand with that. And the budget reflects that
with some 7-percent increase in defense spending and some 10-
percent increase in the homeland security budget, which isn't
found just in the Department of Homeland Security but
throughout many other agencies as well.
And the budget reflects the President's commitment to
continuing to keep the economy on a path of creating jobs,
growing and expanding, because a bigger economy is good to deal
with the problems of the future, the problems of how we are
going to pay for the Social Security and the Medicare
responsibilities of the future, fund those unfunded
commitments.
But it also reflects a commitment, Mr. Chairman, in line
with your suggestion, that we really have to get serious about
the deficit, and those of Senator Conrad as well. The
President's budget seeks to cut the deficit in half within 5
years. If we can do better than that, that is terrific. We
really ought to be pointing toward a convergence to zero. That
is where we need to do. We need to get on a path to truly
balanced budgets. But you can only do it through two ways.
There aren't a lot of avenues open to us. One is growing the
economy because that creates more governmental revenues, and,
of course, back in the late 1990's, when the surpluses
developed, 2000, we had extraordinarily high governmental
revenues coming in: receipts from the good stock market, from
capital gains, from a full-employment economy, and from high
profitability.
We had the recession. Government receipts fell down. Now
they are at quite low levels, but we project them to go back up
toward the 18-percent average that they have been historically,
18 percent of GDP as they historically have been, down to 16
today, 15.7.
The other thing to do, though, in addition to growing the
economy, you have to cut spending, and spending cuts have to be
at the forefront of achieving that objective. That is why the
highway bill is so important to the President and to many of
you, because it represents spending levels that, if embraced in
the actions of the Congress, will make it difficult ever to hit
those targets, important as and good as much that is in that
bill is. Actually, I would acknowledge it, but it has to be
done within restraints of a fiscal balance.
I appreciated very much your comments on where the economy
is today. It is really in a tremendously different and better
posture today than when I appeared before you a year ago. There
was a lot of talk of a double-dip recession. Then there was
talk of deflation--deflation that could become destabilizing.
Even those who were fairly optimistic a year ago about the
economy acknowledged that it was on a wobbly path; it was an
anemic pickup. Today, nobody says that. I think today everybody
acknowledges that the economy is on a strong growth path, with
the numbers you showed, extraordinary growth--for the year as a
whole, 4.4 percent; third quarter, over 8 percent, with
projections for over 4 percent for this year. If we can sustain
that--and I think we can--we are going to create a lot of jobs
in this economy, as Chairman Greenspan has said, as the private
forecasters say, as the administration says.
I think it is important to recognize where we have come
from. These deficits are large. They are unwelcome. They are
unacceptable. And they must be brought in line. They have to be
reduced.
But they are understandable, too. They are understandable
in the context of the President having inherited a recession
that took a tremendous amount of revenue out of the Government
receipts, and a recession that was made worse by corporate
scandals, by the meltdown of the stock market that took $7
trillion out of the household wealth of the country, by 9/11,
the war in Afghanistan, the war in Iraq. All of those things
have had significant effects on the economy.
When I talk to business people from other parts of the
world, they are astonished that the American economy has
sustained itself as well as it has through all this period, and
that is, I think, a compliment to the resourcefulness of the
American people and to the adept ability of our institutions,
including the Congress, which responded with the tax bill last
year.
Let me close by saying that without the tax bill last year,
Mr. Chairman, members of the committee, the economy would not
be where it is today. Without that tax bill we never would have
had growth rates of 8.2 percent in the third quarter and 4.4
for the year.
I will remind you, we started the year with a growth rate
of 1.4 percent for the first quarter, a stock market that over
the course of the year gained something well over 20 percent,
creating, as you said, nearly $4 trillion of additional value
from then until now. The reductions you made in dividend taxes
and the reductions you made in capital gains taxes, the
lowering of marginal tax rates across the board have had a
profound effect on this economy and have created a strong
upward movement in the economy that otherwise simply would not
have existed.
We regret the deficits. We are going to go after the
deficits. They have to be reduced. They do threaten long-term
prosperity. But working together, I think we can manage our way
through that problem.
I thank you very much for the opportunity to appear before
you.
[The prepared statement of John Snow follows:]
[GRAPHIC] [TIFF OMITTED] 94065.135
[GRAPHIC] [TIFF OMITTED] 94065.136
[GRAPHIC] [TIFF OMITTED] 94065.137
[GRAPHIC] [TIFF OMITTED] 94065.138
[GRAPHIC] [TIFF OMITTED] 94065.139
Chairman Nickles. Mr. Secretary, thank you very much for
your opening remarks.
I will ask all of my colleagues--we do not have strict time
limit, but I am going to assume the Secretary needs to get out
around 12. So if people could try and keep their remarks to 7
or 8 minutes, we ought to be able to accommodate that, and we
will have some flexibility if necessary.
A couple comments. I mentioned to you and Senator Conrad
that there might be $250 billion of leakage or uncollected
receipts that might be out there, underground economy, you name
it. I will just ask you a couple questions. Is that figure
close to being accurate? Are there some things we could do that
we are not doing to help close that leakage or to collect taxes
that are due but not paid?
Secretary Snow. Mr. Chairman, that number I think is a
number that goes back some years. There clearly is a tax gap.
There is an underground economy. There are people who should be
paying taxes who aren't paying taxes. There are people paying
taxes who should be paying more taxes. There clearly is a tax
gap.
I don't know that the $250 billion number is accurate
anymore, but it is a large number, whatever it is, and the IRS
is doing a study with the help of Treasury, the assistance of
Treasury, to try and get a better handle on it.
We do know there are some programs that do not work well.
The one you mentioned, the earned income tax credit, will
require some improvements because there are both underpayments
and overpayments there.
The IRS budget this year, Mr. Chairman, reflects a very
large increase--I think it some $300 million, roughly--
primarily devoted to greater enforcement. We think we need to
put more energy into compliance, more effort into compliance
across the board, for business, small business, large business,
but taxpayers generally in all income categories. And I hope we
will see that significant enhancement of the IRS budget for
enforcement carry the day.
Chairman Nickles. Mr. Secretary, just a couple comments.
One, I would appreciate it if you and/or the IRS, which is
under your domain, would give us a list of, I am going to say,
loopholes, for lack of a better word. I will just mention a
couple. I mentioned the earned income credit. In 1999, IRS
estimated that between 27 and 31.7 percent of claims were in
error, should not have been made. That was an estimate of $8.5
to $9.9 billion. That was in 1999, and we were spending $31
billion on the program. We now are spending almost $35 billion.
This is a program, keep in mind, that cost about $7.5 billion
in 1990 and now costs $35 billion. People wonder how spending
has grown. That program has gone up by a multiple of about 5
times, 500 percent in the last 14 years.
But it is not acceptable to have a program that has an
error rate of 30 percent. Senator Sessions has suggested maybe
we should make those payments on a monthly basis instead of an
annual basis and take out some of the incentives for corruption
and fraud. That is a proposal.
Anyway, I would solicit from you and from your outstanding
staff some possible ways to address fraud--some of this is
going to require legislation. So give us some recommendations,
if you would, and if you would also give us a list of other
abuses.
There is one that I will ask about in my second round--the
sale-in lease-out transactions that I think your Department has
identified. But this is a loophole, an abuse of the system that
is costing billions, maybe as much as $28 or $30 billion over
10 years. It needs to be stopped. It is growing dramatically,
Senator Conrad said so.
I will get on to that one in the second round, but I
mentioned earned income credit because I think most people are
more familiar with that. But this is on the spending side. We
have a lot of spending in the tax code, and we have some abuses
of the tax code that at least this Senator wants to stop. I am
not really interested in having the IRS chasing down
babysitters and lawn mowers to make sure they pay taxes on, you
know, the $30 they have ten. I am interested in stopping a
corporation buying a non-taxable entity's assets and then
getting a lot of tax benefits and leasing them back to the city
and have it be a shell game.
Senator Conrad and I yesterday, when we had Secretary
Thompson up, we found out that a lot of States were doing a
shell game and costing taxpayers billions and billions of
dollars. And we hope to close that loophole, and I hope that we
can close this. And maybe if we can discover some other things
that are really an abuse of the system, we should shut them
down earlier rather than later. So if you and/or your staff
would provide us some abuse list, we will be happy to work with
you to do what needs to be done legislatively. You may be able
to do a lot of these things administratively.
Senator Conrad.
Senator Conrad. Thank you, Mr. Chairman----
Senator Domenici. Would you yield for one observation?
Senator Conrad. Certainly I would yield to the former
chairman.
Senator Domenici. Senator Nickles, as I listened to you, if
I were the Secretary, I would be a little bit confused as to
what you want. So maybe I could ask you for a minute.
One thing is loopholes. People have a lot of arguments of
what loopholes are. One man's loophole is another man's
necessity. But what you spoke of were abuses and places where
the laws were being used to cheat. But there also are tax
expenditures that this committee and the tax committee might
want to look at and say these used to be pretty good, but they
aren't any good anymore. And I would assume you want him to
give you both of those lists.
Chairman Nickles. Absolutely, and I appreciate your
clarification.
Senator Domenici. Thank you.
Chairman Nickles. Senator Conrad.
Senator Conrad. I want to again thank the chairman for
introducing these subjects because I think they are hugely
important as we go forward.
Let me just say on the tax gap calculation, your IRS
Commissioner was just on--I think it was CNN I saw him, and he
referenced the $250 billion, which, as you correctly point out,
I think is a result of an analysis that was done in the mid-
1990's.
Secretary Snow. Yes.
Senator Conrad. I think we all know that number has done
nothing but grow. And we have to go after--it is utterly unfair
to the vast majority of Americans, American taxpayers, American
corporations that pay what they legitimately owe, to have some
escape. That is just not fair. And I believe that number is
much bigger.
I, frankly, have concluded we need to consider fundamental
tax reform. I don't think using our current system and just
increasing audit and enforcement will ever capture perhaps even
an insignificant part of this tax leakage. So I think we need
to consider fundamental tax reform in conjunction with
increased enforcement.
Let me just go to this question of revenue as a share of
GDP because it really does jump out at one what has happened
here. We did have in 2000 revenue as a share of GDP that was at
a very high level historically. Now we have revenue at a very
low level historically, the lowest as a percentage of GDP,
which you referenced, Mr. Secretary, since 1950.
reuvenue as a share
When revenue was high as a share of GDP, the President said
we need tax cuts to rebalance. Now that it is low as a share of
GDP, he says we need more tax cuts. Frankly, I do not think
that squares with the reality that we confront.
I would say that a tax increase should not be the first
place we look. I think the first place we look ought to be this
tax gap, because there is an enormous amount of money that
could be recovered.
Let's go to the next one. This shows spending as a share of
GDP, and it is very interesting. This goes back to 1980. We see
spending got up to 23.5 percent of GDP. It came down steadily
until 2000 to 18.4 percent of GDP. We have now had a
substantial uptick, and we see that leveling out.
[GRAPHIC] [TIFF OMITTED] 94065.015
So we do have a spending problem, but I hasten to point out
that 92 percent of this increase has been in just three areas:
defense, homeland security, and response to 9/11. So the
spending side of the equation is going to be very tough, but it
simply has to be attended to.
Let me put up--this is my question. This was in the
Washington Post on January 26th with an article headlined,
``Weak dollar helps U.S. firms for now.'' The article said in
part, ``Currency traders fretting over that dependency''--and
the dependency they were talking about are these massive
deficits, both budget and trade--``have been selling dollars
fast and buying euros furiously. The fear is that foreigners
will tire of financing Americans' appetites. Foreign investors
will dump U.S. assets, especially stocks and bonds, sending
financial markets plummeting. Interest rates will shoot up to
entice them back. Heavily indebted Americans will not be able
to keep up with rising interest payments. Inflation,
bankruptcies, and economic malaise will follow.''
[GRAPHIC] [TIFF OMITTED] 94065.013
Let me just top it off with this. This is what has happened
to the value of the dollar against the euro, which you are
intimately familiar with after meeting with your G-7 partners.
I am sure they were talking to you about this--what has
happened to the value of the dollar in the last 18 months.
[GRAPHIC] [TIFF OMITTED] 94065.012
My question to you is this: Are you concerned about what
the IMF warned us about, what the Comptroller General of the
United States has warned us about, what these economists are
warning us about: that this pile-up of deficits and debt could
threaten to put upward pressure on interest rates which would
threaten to reduce economic activity and that an early warning
sign is what is happening to the value of the dollar?
Secretary Snow. Well, Senator, clearly the deficits, --
unless dealt with--pose a threat to the long-term well-being of
this country and they, therefore, must be dealt with and have
to be dealt with. I think virtually all the economists agree
that if deficits become embedded in the financial structure of
a country and financial markets view the deficits as entrenched
and rising, there will be a perfectly predictable reaction in
the marketplace. Lenders will demand higher premiums, which
mean higher interest rates. And that would be extraordinarily
unfortunate.
One of the great boons to the American economy today is the
low interest rates we have. They have helped create a very
strong housing market, a very strong construction market,
strong demand for any number of credit-based consumer
products--automobiles.
So I share your concern that we must deal with the deficit
and that the deficit represents national dissavings. And we
have the Government dissaving through deficits. We have an
extraordinarily low savings rate on the part of households
today at 2 percent or so versus 7 or 8 in the past. And we do
have a large current account deficit, which is really the
difference between our domestic investment and our domestic
savings. And since our domestic investments, thanks to the
strong economy, are high--we have lots of good investment
opportunities in America. We want to keep that up. But we don't
have adequate savings to fund it. We need to call on other
nations of the world. And the current account deficit reflects
our own national dissavings. I certainly agree with you.
Senator Conrad. Let me just conclude by saying that the
problem that I see is that the President's plan does not deal
with the deficits. Here is what we see happening under the
President's plan with the growth of the accumulated deficits,
which is the debt, and the gross debt is just going through the
roof under this plan.
So to me the President has not given us a plan that deals
with the deficits. I would just ask you--I know it is very
difficult for the President, once he set up his budget, to
reconsider, but I think as we work through this, we have to be
much more serious about where this is all headed.
Secretary Snow. Senator, I cannot see the chart in terms of
the out years. That goes out to?
Senator Conrad. 2014.
Secretary Snow. This would be too long an answer, but I
think your debt numbers include a good deal of intra-
governmental debt too.
Senator Conrad. Oh, yes. This is the gross debt. But
remember, we have a totally different situation than we faced
before. That different situation is we have the baby-boomers
that are about to retire, and we have been ramping up Social
Security dramatically, $160 billion of surplus this year, $260
billion in the fifth year of Social Security surplus, and under
the President's plan every dime of it is being taken for other
things.
Secretary Snow. As you and I had the exchange yesterday, I
think we are in agreement that we need to find a way to deal
with those long-term unfunded commitments represented through
Social Security and Medicare where--demographics are really
destiny, as they say, and the demographics are just about to
hit us. I am in full agreement that we absolutely have to
confront the issue of our baby-boomers retiring and the
consequences of the demographics on these very large systems
which will require us to take actions on a number of fronts, to
do things like hold down health care costs.
Senator Conrad. Let me just conclude by saying to you I
agree with that, but I will tell you, you have to look on the
revenue side as well. But the 75-year costs of the President's
tax cuts are three times the shortfall in Social Security. So
we have to look at both.
Chairman Nickles. Senator Conrad, thank you very much.
Next call on the Chairman Emeritus, Senator Domenici.
Senator Domenici. Thank you very much, Mr. Chairman.
Mr. Secretary, it is good to be with you.
Secretary Snow. Thank you, Senator.
Senator Domenici. My first question will be of great
interest to the distinguished former Chairman of
Appropriations, who sits over here on my left. Could I ask you,
if you know, what percent of this budget is appropriated?
Secretary Snow. Not offhand, I do not.
Senator Domenici. I should know it like that, but I do not.
Senator Byrd. About a third.
Senator Domenici. About one third?
Senator Byrd. About a third. When I came to Congress more
than 51 years ago, the percentage was somewhere in the high
80's or 90. Today it is less than a third, less than a third.
And one other thing we need to remember, when we are
talking about Government spending, we are also talking about
for the military, spending for the military and for homeland
security. But to hear these witnesses, you would think it is
all domestic discretionary. You just think it because they do
not stop to say that.
Excuse me, Mr. Chairman.
Senator Domenici. That is fine. Just so I get my chance to
do a couple of questions, I am very pleased.
I wanted to amplify that by saying not too long ago, when
President Kennedy was President, 59 percent of the entire
budget of the United States was for the defense of our country,
and that much was all discretionary, if you can imagine.
The reason I raise the question, I know our Chairman works
very, very hard on trying to get the discretionary accounts of
our Government down, and I commend him for it, but I really
think every now and then we have to be realistic when we try to
look at how big that deficit and how we get it down. We have to
be realistic as to how much of this budget is domestic. I mean
you cannot take 10, 15 percent of this budget is appropriated.
You cannot take 10, 15, 20 percent of it each year. The kind of
money that is needed to get into balance is 10, 15, 20 percent
of the budget of the United States.
I really think it is nice to go through this exercise, and
he will produce a budget that ratchets down this appropriated
account and we will struggle terribly, and when we are through,
if we are lucky, if we are lucky, we will save 1 percent or 2.
So I want to make sure you know that because you are kind of in
charge of the overall picture, and you must know the overall
picture is a lot more than the appropriated accounts.
Having said that, I want to suggest something to you. There
is an old tax code sitting around your shop that one of your
men there knows a lot about. It is called the USA tax. You have
heard of it.
Secretary Snow. I sure have.
Senator Domenici. It is the only reform measure that is an
entire tax code, done by Senator Nunn and I with great help
from the business community, and USA stands for Unlimited
Savings Accounts. It was going to change our tax code so that
you paid money on what--excuse me--taxes on what you spent, not
on what you saved. But I would tell you there is a separate
section on corporations, and it might be worthwhile to look at
it. It very well might work by itself. It completely changes
corporate taxes. It starts with the premise you are going to
get as much money as you do now, but believe it or not, if you
were in business, how do you think it would be for business to
have no depreciation schedules? Would that not be exciting?
Everything they purchased is on a cash basis. That is the
premise of the USA. It is just a phenomenal way to change and
put some energy into that.
I do not want any long answer, because I have some things,
and I want to proceed.
Secretary Snow. Senator, I am aware of those proposals back
in the mid 1990's. Former Secretary O'Neill, Leonard Alcoa and
I and others were engaged----
Senator Domenici. You all raised the money to put it
together.
Secretary Snow. Yes. And it had an extraordinary amount of
promise and merit to it.
Senator Domenici. Mr. Secretary, I remember back in the
day--obviously, I was not here, but I remember reading that
President Dwight Eisenhower used to say--and lots of people did
not understand it and did not much care--but he used to say the
greatest thing for America is to have low inflation. A lot of
leaders have said that. You remember when we used to struggle
because inflation would go up and down just like a roller
coaster? And everybody was trying to figure out why, and some
people would say, well, labor contracts are all up this year.
We are going to have inflation.
The great thing that is happening to America is lack of
inflation. Is that not correct?
Secretary Snow. Absolutely.
Senator Domenici. Second, everybody, including Greenspan,
for years used to say, Americans will be healthy. There will be
plenty of jobs if we increase productivity. I just noticed, Mr.
Secretary, and fellow Senators, that productivity in the third
quarter of last year was 9.3, second quarter was 7.1, and third
was 2.2. Then it went along at 5.6 average for 2 years. The
fastest rate of growth in any 2-year period since 1950.
Mr. Secretary, I am very perplexed and I do not understand
any more. How could you have the two most important things for
a healthy economy, inflation under control and productivity
humming at the highest rate we have ever had, and somehow
people are running around saying this is a bad economy, No. 1,
and second, that we do not have enough people employed?
Mr. Secretary, either these things are no longer relevant,
inflation low and productivity high, that is one possibility;
or we do not know what we are talking about in terms of what
productivity means any more. I believe it is the second one. I
do not think we understand productivity. I do not think we know
how to measure it very well. But I would like you to do two
things quickly, to comment on what I have said, and then
second, would you produce for this Committee, if the Chairman
agrees, an analysis of productivity and what it is, how we
measure it, who measures it, and how much confidence you have
in it?
Secretary Snow. Senator, yes, we will be delighted to do
the latter, produce that assessment for you.
Senator Domenici. All right.
Secretary Snow. On the question of inflation, I agree with
you. We are blessed with extraordinarily low inflation rates
today. That is a reflection of high productivity. It is a
reflection of global competition. It is a reflection of some
excess capacity that is hanging over from over investment back
in the late 1990's, and it shows up in the fact that businesses
do not have any pricing power. Business after business after
business will tell you they simply cannot raise prices.
Productivity is also a terrific thing for the economy in
the aggregate because productivity means you got more output,
and that means more potentially to share with everybody. Right
now productivity is probably having a somewhat negative effect
on job creation because businesses are finding they can produce
more with less, so a given level of output can be done with
fewer workers or now a larger level of output can be done with
the same old level of workers. But productivity will show up as
higher profits in corporations and businesses and hire-free
cash-flows. That will get competed away, as it always does,
marketplace competition. Then the employers will need to expand
their businesses, they will be led to expand their businesses
by the profits, and as they do, then the labor share will go
up.
I think if we look at our national income statistics, we
will be in a period here where the share to capital will be
higher temporarily, and then it sets in place a healthy process
where the share of the capital shifts and it moves more to
labor.
The labor markets are pretty strong, but given this high
productivity, Senator, there has been a slower pickup in jobs
than economists would have expected from growth rates as high
as they are, but of course, as the Chairman said, we have some
differing interpretations of labor markets given the fact that
the household survey is showing the creation of quite a few
jobs, a lot of jobs, and the establishment survey, payroll
survey, is showing a much, much less fast rebound in jobs.
There should be a convergence there because they end up
measuring the same thing, but right now they are showing
different results.
Senator Domenici. You would not like to be running for
President and answer the issue about less jobs having been
produced by saying we had too high a productivity, would you?
Would that not be a nice answer out there? Who would understand
that and would that----
Secretary Snow. I was trying to explain why the job pickup
rate in this recovery is a little slower than the economists
would have predicted.
Senator Domenici. Yes, I understand. But you think it is
going to get better in due course?
Secretary Snow. Oh, absolutely. I think all our forecasts,
the private sector forecasts, are for a good job pickup over
this year, over 1904.
Senator Domenici. Thank you.
Chairman Nickles. Senator Domenici, thank you very much.
Senator Stabenow.
Senator Stabenow. Thank you, Mr. Chairman.
Welcome Mr. Secretary. We thank you for your service.
To followup on what I thought were very excellent points of
my friend and esteemed Senator, Senator Domenici, on two points
I guess, two points that I was going to ask about. First of
all, when we look at how we bring this budget back into
balance--and it is astounding the red ink that we have now. I
was privileged to be in the U.S. House in 1997 when we balanced
the budget for the first time in 30 years and were focusing on
paying down the debt, and it was a time of great economic
growth for us. But Senator Domenici spoke about the fact that
to only look at the discretionary spending side would not be to
look at the largest way in which to bring down the deficit. In
fact, I have said before the Committee at earlier times this
year, this year's nondefense domestic budget, discretionary
budget, everything but defense. Homeland security, education,
health care, non-Medicare health care, the environment, law
enforcement, everything, adds up to $445 billion, which is less
than this year's debt.
So if you eliminated every penny of everything we did in
domestic spending and only funded the military, you would not
eliminate this year's debt. So we can debate whether domestic
spending, discretionary, should go up, Mr. Chairman, a half a
percent or a percent or 2 percent, but I share Senator
Domenici's position that that is really moving around the edges
when we look at the huge debt that we have. In fact, when we
look at this as shared GDP, 24 percent of what we are looking
at in terms of the debt and revenue losses comes from spending
as shared GDP, 76 percent is revenue losses and about half of
that is the tax cut, which leads to what I feel is a very
important debate, and it goes back to what you are talking
about in terms of productivity and really world view
economically of how we look at things today.
We had an economic report released earlier this week that
said basically if you can get it cheaper in another country, it
is good business to do that, that on balance outsourcing or
exporting jobs is a net plus for us. That is a different view,
and when we look in the context of what we are seeing now, we
really have a world view that says focus on wealth creation.
Those who have wealth, hoping it will trickle down, focusing on
wealth in terms of tax policy and trade policy and so on,
versus focusing on work and the value of work in America. How
do we get there? How do we get to the work part?
When Chairman Greenspan came in yesterday to the Banking
Committee, talking to us about the fact that it was surprising
that with the economic growth we have not seen the job
creation, but one question I would ask is we are beginning to
hear theories about productivity that look at this larger issue
of exporting jobs. One theory would say it used to take a
hundred people, let us say, for a job in the United States. Now
it takes 80 people in the United States, but 20 in India or 20
in China and 20 in Mexico, and that we are not looking at
productivity in a way that would measure that. So that when we
look--I had asked CRS to look at minimum wage rates around the
world if they were converted to hourly rates for U.S. dollars.
In China the minimum wage rate, compared to ours, is 33 cents,
33 cents in Mexico. So there is a major push, even as you talk
about more dollars coming; you indicated more productivity,
higher profits and then reinvestment. The question is, where in
a world economy are they going to invest? It may not be in this
country.
We have Electrolux, which is a plant that makes
refrigerators in Greenville, Michigan, a community of 9,000
people, 2,700 jobs. Electrolux makes a profit in the United
States. They have added a third shift. They admit they make a
profit, but they could make a bigger profit by paying 2.50 an
hour and no health benefits in Mexico, and they are closing the
plant.
Mr. Secretary, how do we compete with that if we do not go
right to the heart of smart trade policies, currency
manipulation with these countries that are taking our jobs, and
focus on more than wealth accumulation of a few? We need to
focus on work, the value of work, the value of a middle class,
and the value of making sure that that household income that
Chairman Greenspan talked about to us yesterday, that is
driving this economy, buying those cars which we want to buy in
Michigan, American made cars, and buying the refrigerators and
buying the homes, we are not going to be able to do that if we
are being asked for our workers to receive 2.50 an hour and no
health benefits, or go to China for 33 cents as an average
wage. So how do you speak to all of that?
This vision that I see coming out of the administration is
one that is working for a few, but I do not see it working for
the people in my State of Michigan.
Secretary Snow. Thank you, Senator. The question you raise
is a large one, and a critical one. It is really the central
issue of economic policy. How do we make the American citizens
better off? I think basically the answer is, by allowing the
dynamics, the dynamism, the creativity, the energy of the
American system to play out. You know, you go back 100 years
and think of what the country was. We were an agricultural
Nation, industrialization was just beginning. We had 40 percent
of the work force engaged in agriculture. Today, as you know,
it is less than 2 percent.
And yet, the standard of living, year after year after year
after year, as people left agriculture and moved into industry,
and then left industry and moved into other things like
computer chips and technology and health care and so on, we
have had a progression from low value jobs in the United States
to higher and higher and higher value jobs.
The reason--and you know this as well as I--the reason
American workers have high wages is they are productive. Wage
rates reflect the productivity of the work force. Our work
force is the best in the world. They have the highest wages in
the world. They are the most productive in the world. Our job,
I think, in public policy, is to continue to create the
conditions where the inherent talent and ability of the
American work force and our businesses can reflect itself in
the marketplace.
Senator Stabenow. Mr. Secretary, with all due respect,
these are different times now in a global economy. I understand
going from agriculture economy to manufacturing, and we have
all been told that now we are moving into high tech, value-
added positions, and we need to focus on education and
innovation, all of which I support, and I wish it was more
reflected in this budget, by the way, since we do need to be
doing that.
But with all due respect, we are not talking about only
manufacturing jobs or low-end jobs that are now being lost or
exported because of the pressures internationally. We are
talking engineers. We are talking about--in this report, at the
beginning of the week with the Council of Economic Advisors, it
was recommended that one of the ways to lower health care cost
is by exporting health care providers, like radiologists. I
have friends of mine in Lansing, Michigan, high-end engineers
who are now in custodial positions because they cannot find
high-end engineering or computer jobs that are being exported
to India and other place.
This is not, at this point in time, just about an evolution
of economics in a world economy. If we are not smart about
trade, if we do not address currency manipulation----
And I would just ask one question, and then, Mr. Chairman,
I am sure I have used my time, but I just want to ask one
question on that because if we in fact are saying we are
productive and can compete with anybody, which I agree
totally--when manufacturers sit in my office this week from
Grand Rapids, Michigan and say, ``Just give us a level playing
field.'' By the way, they were outraged about this report that
came out the beginning of the week. They are saying, ``What are
we going to do about a level playing field and currency
manipulation by China?''
I would just simply ask, in conclusion, what are we going
to do about that? Mr. Secretary, we certainly know that
something is going on, and we would welcome, and we need your
leadership on that issue.
Secretary Snow. Thank you very much, Senator. I think we
are making some good progress with the Chinese on that subject.
We have engaged them. You know I spoke with Premier Wen, went
to Beijing and had a long meeting with him and his economic
policy leaders, the head of the Central Bank, Governor Zho, and
the finance minister, Minister Jin, and a number of leaders in
the economy. We are straight with them. We said, ``You know,
this system does not hold together. It does not work. It is not
right for the world economy. It is not right for the world
trading system, and you need to move to a flexible set of
exchange rates that allows the market to set the value, rather
have you arbitrarily establish the value.''
We have an agreement on that with them. They have
acknowledged the need to move to a flexible exchange rate. They
rightly point out they cannot do it tomorrow because their
financial structures are so rudimentary, but they are beginning
to take steps. There is increasing talk about maybe moving to a
partial float or a currency basket, but I want you to know we
are very much engaged on that issue and want to hold their feet
to the fire on continuing to make forward progress there.
Chairman Nickles. Secretary Snow, thank you very much.
Senator Stabenow, thank you.
Senator Allard.
Senator Allard. Thank you, Mr. Chairman, and welcome, Mr.
Snow.
When the President came into office, I think it has pretty
well been established that the stock market began to decline
well before that election. Then when he was sworn into office
at that time, that is when you started your 3-year downturn and
went into actually a recessionary period, and the President's
plan for economic growth was to cut taxes. At that particular
point in time, I think relatively speaking to the history of
the country, taxes were pretty high. I agreed with the
President that when you have that high tax rate, if you begin
to drop taxes, then you will stimulate the economy.
We are saying that now. I do not think that anybody can
deny that the economy is not in recovery, even at the last
parameter to change which is unemployment rates, and I would
have real concern for us to raise taxes in any sector of our
economy at a time when we are looking at recovery that is just
beginning. I wonder perhaps maybe you might comment on the
impact that raising taxes would have as we are just starting in
this growth period.
Secretary Snow. Senator, I would be very much opposed to
that. I think it is about the single worst thing we could do.
It would undermine this recovery, which as you point out is a
very firm and good recovery. I think it is singularly bad
economic policy that would jeopardize the recovery and put us
on the wrong path.
Senator Allard. I would like to followup a little bit on my
statement now on the labor market and the unemployment figures.
The unemployment rate fell to 5.6 percent in January, and it is
well below the peak of 6.3 percent in June, and the payroll
employment increased by 112,000 jobs. But I want to go to this
household survey because the figures I have, they show a gain
of 500,000 in January. As we move along, it seems like there is
a greater discrepancy between the payroll employment and the
household survey, and nobody seems to come up with an answer as
to why this is occurring.
I happen to feel that it reflects, and talking to many
economists, they feel it reflects what is happening in the
small business are, the self-employed area. I talked with some
executives in the high-tech companies that say, ``Well, when
you separate your employees, you cut back, you give them a
bonus or you give some kind of a separation stipend, and they
take this cash'' and they say, ``Now is my opportunity to go in
business for myself,'' so they start their business in their
home, and that is not really reflected perhaps in that. That
has kind of been my view and what I have picked up.
I wonder, perhaps if you have any real things that you can
add to that discussion that might enlighten us?
Secretary Snow. Thank you, Senator. You are absolutely
right, there is a marked discrepancy between the two surveys,
one showing relatively modest, the 112,000 pickup for January
versus the five times that pickup in the household survey. I
must say economists are sort of puzzled on this. I do not think
anybody has a real good answer for it, but I would credit your
hypothesis. I think your hypothesis may well explain the
difference because the establishment survey or payroll survey,
as it is known, deals with established businesses.
There is a phenomenon going on that you mentioned that I
think is very real, and that is more self employment. The large
companies, in order to shed overhead costs of pensions and of
rising health care costs, are in effect outsourcing functions
that used to be done in the business. An H.R. department will
be outsourced and the people who used to do the pension
planning, who used to do the benefits planning and so on, are
now doing it, but they are not doing it as an employee of the
ABC Corporation. They are doing it as a sole practitioner. The
household survey does not pick that up the same way. It may
eventually pick it up, but it does not pick that up the same
way the establishment does.
I had a friend come visit me recently to sort of illustrate
your story. He worked in a big establishment. He had a good job
in a big establishment. He left, and he founded his own small
business. He now has 12 employees plus himself. And he is not
in the household survey. They may get him eventually----
Senator Allard. I am almost thinking you have that
backward. Is it not the household survey that picks up those
people that are doing work at home and so on, and the payroll
survey does not?
Secretary Snow. Yes, that is right. I flipped it on you.
But he is not in the payroll survey. I think there is more of
that going on, but we cannot quantify it very well. It needs to
be quantified, I agree. But that is a working hypothesis that a
lot of people are now trying to test.
Senator Allard. I would like to approach this manufacturing
job issue a little bit. I had an opportunity to hear testimony
yesterday from Alan Greenspan, and he agreed with me that this
is not a new phenomenon, that we have been seeing a decrease in
manufacturing jobs since 1979, and he agreed that that was the
date when we started seeing that phenomenon. But he also
elaborated on it and said, ``Look, it is not only what is
happening here in the United States, but that is happening
worldwide.'' I said, ``Even China?'' He said, ``Yes, because of
the productivity efficiencies that are being built into the
system.''
I had a number of manufacturers come to me 2 years ago and
say the value of the dollar in comparison to the yet or the
euro was so high that it was making it difficult for them to
move their goods and services overseas because they could not
compete. Now the value of the dollar has dropped down, which is
a good sign I think for our exports. It means that things that
we import is going to be more expensive, things that we sell
overseas is going to be less expensive. I cannot help but think
that is going to have a positive impact.
Do you have any way of knowing how much of an impact the
decrease in the dollar is going to have and whether we are
going to--I mean is this going to be sort of a sustained thing,
the drop of the value of the dollar compared to the yet and
euro, for example, or not?
Secretary Snow. Senator, that is an important and
interesting question, but I have made a habit of not trying to
predict where the dollar is going, or getting into commentaries
on relative values of currencies for good reasons that you
know.
Senator Allard. Sure.
Secretary Snow. But your opening point of manufacturing,
there is the secular trend, long-term trend that Chairman
Greenspan talked about, much more pronounced on jobs than on
output of manufacturing. We still have a tremendously big,
vital and important manufacturing sector. In fact, our
manufacturing sector, if the United States did nothing else but
carry on manufacturing, nothing else, would be I think the
fifth largest economy in the world. I think our manufacturing
sector has an output valued at 1.6 or 1.7 trillion, with the
Chinese economy at less than a trillion. So it is a huge
vitally important sector. It is also a extraordinarily
productive sector, and its productivity rates have been running
well above the GDP growth rates. So the effect of that is, it
is becoming a somewhat smaller part of GDP, but more
importantly, it does not need as many workers. It is staying
competitive. If we can reduce barriers in the rest of the
world, which we are intent on doing, which is a tax on our
manufacturers, we can expand manufacturing.
But this recession was different in some ways in that on
top of this long-term secular, we ended up with a cyclical
downturn which was really harsh and dramatic. Senator Stabenow
knows that being from a manufacturing area; Michigan, Ohio,
Pennsylvania, Illinois, and Indiana really were hit very, very
hard by this and still have not come back from it.
I remember when it started. It started in the summer of
2000, because I was then, with my former employer, a
transportation company that hauls lots of things for the
manufacturing sector, set up automobiles as a major product
line. And I got the reports in from the subsidiaries, the barge
line and the ocean carrier, the container carrier and the
logistics company and the railroad, and there was all the same
story. The economy had hit a wall or gone over a cliff,
whatever metaphor you want to use, and it has not come back to
that level yet today.
So it was a dramatic downturn in the manufacturing sector.
It is beginning to show better results now. Finally, we are
starting to come out of it. But the jobs have very much lagged.
Senator Allard. Well, Mr. Secretary, I know that the
chairman wants to call on other members. To me, I think things
are--our economy is definitely recovering, and I am pleased to
see it has moved toward a small business sector. I mean, I see
that trend. And I think that that is exciting for competition.
I think that is exciting for our economy because it is the
small business sector that develops--they are the originators
of new thoughts and ideas and new jobs. That is where large
companies come from. And I think it is good for the consumer
because competition holds down goods and services and gives the
consumer lots of choices.
So I cannot help but be positive, bullish on the economy. I
think it is because of Bush's tax cuts that he put out as part
of his program.
Thank you, Mr. Chairman.
Chairman Nickles. Senator Allard, thank you very much.
Senator Byrd.
Senator Byrd. Thank you, Mr. Chairman, and thank you, Mr.
Secretary.
My relations with the Secretary have been very good over a
good many years, and I value his work. I also value my
association with him.
Secretary Snow. Thank you.
Senator Byrd. I think he and I both are supporters of
Amtrak, which serves many rural areas of this country.
But on another matter, the Secretary speaks today about the
commitment to deficit reduction, and my observations lead me to
believe that the criticism of the administration's commitment
to deficit reduction is growing. And the price of loyalty--
former Treasury Secretary Paul O'Neill says the administration
put tax cuts and short-term political gain ahead of the
Nation's long-term economic well-being. Mr. O'Neill's says his
warnings about the risk of a fiscal crisis were dismissed.
The International Monetary Fund, which typically censures
the budget policies of Third World, debt-heavy countries,
recently warned that U.S. budget deficits risked destabilizing
financial markets and stunting global investment and economic
growth.
The General Accounting Office issued a similar warning,
along with Federal Reserve Chairman Alan Greenspan and former
Treasury Secretary Robert Rubin. Even the conservative Heritage
Foundation has blasted the administration's reckless fiscal
policies.
Secretary Snow, why is the administration having such a
tough time convincing the American public that it is truly
committed to deficit reduction?
Secretary Snow. Senator, let me begin by saying that I
reciprocate those kind comments you made and have the deepest
admiration for you, and that goes back a long, long time that
we have worked together.
The administration is committed to this objective. We have
to be committed to this objective. The future well-being of the
country is what is at stake here. And as I said earlier, this
is a deeply serious issue. We cannot afford to lose the
confidence of our financial markets. We cannot allow our
deficit to become a threat to our future. And I want to tell
you that I am committed to seeing us bring that deficit down,
and bringing it down in real terms, and then going on and
dealing with the longer-term set of issues that Senator Conrad
and I talked about.
Senator Byrd. Mr. Secretary, my time is limited. I am
sorry. But why is the public not responding positively to the
President's proposal to cut the deficit in half?
Secretary Snow. Well, Senator, maybe it is our fault in not
being more persuasive. I guess I need to do a better job of
getting out there and talking about what we are doing and why
we are doing and our commitment to doing it. It is a job of
persuasion.
Senator Byrd. Well, Mr. Secretary, while the administration
argues that the deficit will be cut in half over the next 5
years, your own budget documents show the deficit will be worse
in 2009 if the President's budget is enacted than if Congress
took no action at all. The administration's budget is filled
with holes and magic asterisks by failing to include any
funding for the war Iraq--this I cannot understand--failing to
include any funding for the war in Iraq--to which I am
vehemently opposed, I might say for the record, if there is
anyone in here who does not already know it--or to address the
impending crisis in Social Security. I think the administration
has given the American people little reason to take its deficit
promises seriously.
Now, if I might go to a second question, I know there is
plenty that could be said on both sides here about that
question I have just asked. But I must go on. Our time is
limited.
Tax cuts for the wealthy. On page 131 of its budget and
economic forecast, the CBO shows that during the Bush
administration, corporate tax receipts have fallen by $76
billion; estate and gift tax receipts have fallen by $7
billion; while social insurance payroll taxes, which fall
primarily on working-class American families, are at their
highest levels ever, up $60 billion since 2000.
So the question is: Why is it that during the Bush
administration taxes that fall most heavily on middle-class
working families are rising while the taxes that fall on the
most affluent are falling?
Secretary Snow. Senator, the issue of corporate taxes I
think is explained by the fact that the President inherited a
weak economy, and with that weak economy, corporate profits
have fallen significantly, and with lower profits, there is
less to be taxed, as well as the fact that many companies lost
money during that period and, as you know, acquired these tax-
loss carry-forwards and so on that they applied against their
tax returns.
The numbers I have seen--and I will be pleased to share
these with you--suggest that actually after the President's tax
cuts, the share of the burden of the total tax bill rises on
the highest income and falls on the lower income. That is the
effect of taking a number of people off the tax rolls, 3
million in 2003, putting into effect the 10-percent tax
bracket, the marriage penalty, and the child credits, and a
variety of things. But the net effect of that is that the
lower-income groups pay a smaller share of the total tax burden
today.
Senator Byrd. Mr. Secretary--do I have time for a short
statement?
Chairman Nickles. The Senator does. I will note Senator
Bunning told me he needed to leave at 11:30. If you don't mind,
we will call on him, and then I will call on you again.
Senator Byrd. Well, I would love to do that. I can't do it.
I have to take my wife to the doctor. I am running short of
time now. I would love to accommodate to Senator Bunning, and I
shall. Let him go ahead. I will leave and take care of my wife
first. She is my first duty.
Chairman Nickles. You have your priorities----
Senator Byrd. I have them straight. And I have had them
straight for almost 67 years.
Chairman Nickles. My compliments to you.
Senator Byrd. I have a lot further questions to ask, and
all this business about increasing taxes, you see, covers up
the fact that these cuts that have been made are really
deepening the deficits, and the war in Iraq is deepening the
deficits. And we have these problems that are confronting us
now. It is one thing to say that we are raising taxes, but
nobody says very much about the fact that the war in Iraq is
costing us--is not included in this year's budget. The
President is not asking for anything in this year's budget for
Iraq. But it is going to cost us.
I will close with this final thing, if I may. In response
to mounting budget deficit projections, President Ronald Reagan
signed into law 12 bills to increase taxes, including
legislation to repeal part of his 1981 tax cut. Similarly, in
response to alarming deficit projections, in 1990 President
Bush's father made the courageous decision to break his ``No
new taxes'' pledge. Although President Bush's father paid a
high political price, it was the right move at the right time,
and it started the country's finances on the road to recovery.
Presidents Reagan and Bush were confronted with the same
choice that this administration will soon have to make, and
they concluded that the budget could not be balanced without
repealing tax cuts. In 1990, the Congress likewise concluded
that all pieces of the budget--discretionary, mandatory, and
revenues--would have to yield savings. Until this
administration acknowledges this seemingly obvious fact, it
will never bring the budget into balance.
Again, I want to thank you, Mr. Secretary, and I look
forward to talking with you further.
Mr. Chairman, thank you for your patience, and I thank all
my colleagues for their patience.
Chairman Nickles. Senator Byrd, thank you, and best wishes
to you and your wife.
Senator Byrd. Thank you.
Chairman Nickles. Senator Bunning.
Senator Bunning. Thank you, Mr. Chairman. Secretary Snow,
thank you for coming.
I noticed in the White House budget proposal--and we have
talked about this prior, and I hope you have been brought up to
speed because the last time you begged off on it--includes $83
million for a new regulatory agency in Treasury to oversee
certain GSEs. I have spoken with your staff in the past about
regulation of GSEs. Assistant Secretary Abernathy stated before
the Banking Committee that he believes that the Tennessee
Valley Authority, TVA, should be under SEC jurisdiction. And I
have a videotape, if you want to see it, just so that there is
no misunderstanding.
Do you think that all GSEs, including non-housing GSEs,
should be regulated?
Secretary Snow. Senator, we have proposed that the housing
GSEs be under, the Federal Home Loan Banks as well as Freddie
and Fannie. Our proposals at Treasury have not gone beyond
that.
Senator Bunning. Well, you are not answering my question.
My question was: Do you think that all GSEs should be
regulated?
Secretary Snow. All Government-sponsored entities----
Senator Bunning. Should be regulated.
Secretary Snow. Should be regulated. I am not sure what
other entities you might have in mind.
Senator Bunning. Well, there are other GSEs other than
Freddie, Fannie, and the Federal Home Loan Bank.
Secretary Snow. Who are not regulated?
Senator Bunning. Who are not----
Secretary Snow. To your knowledge----
Senator Bunning. Who are not being put into the new
regulator that we are trying to create.
Secretary Snow. Right. Well, the reason that we are putting
these in is that they have to do with housing and housing
finance and present a very significant--play a very significant
role in the whole issue of housing finance. And in our view,
these entities have become so large relative to the housing
finance business and actually to the whole financings of the
United States that a strong regulator is necessary so we can
assure the soundness----
Senator Bunning. I don't argue that fact with you. I agree
with you 100 percent. I am asking you about those that are
falling outside of the purview of what you have proposed. We
have no one regulating TVA right now. No one, except they do
have $26 billion in debt on the market, which is considered
guaranteed by the Federal Government. They are not regulated by
the Securities and Exchange Commission. They are not regulated,
not by any public service commission in the service areas that
they serve. And I just think that it is time we got a hold on
the three commissioners who make all the decisions and have an
oversight. And this would be a very nice time if we could
include them in some type of oversight and regulatory
commission.
Secretary Snow. Senator, could I take a hard look at that?
You have asked me this before. The answer I haveten back is
that they are different.
Senator Bunning. Yes, they are different, but they are a
GSE.
Secretary Snow. Well, the response I haveten--and I will
probe into it further to make sure I can really talk to this
with my own knowledge rather than relying on others--is that
they are not quite like Fannie, Freddie, and the Federal Home
Loan Banks because they are actually--not just sponsored, they
are owned by, they are the U.S. Government.
Senator Bunning. Well, the U.S. Government needs to
regulate them, and that is the question I am giving you.
I really feel naked up here because I do not have any
charts to put up.
[Laughter.]
Senator Conrad. Do you want to borrow some?
Senator Bunning. Yes, I could borrow the chairman's because
he talked about taxes. You know, already expired at the end of
2003 were the AMT relief, work opportunity tax credit, above-
line deductions for teachers' classroom expenses, enhanced
deductions for donations of computers to schools, and medical
savings accounts. Those are already gone. Those were in the tax
bills.
Expiring at the end of this year are R&D tax credit,
accelerated marriage penalty relief, accelerated child tax
credit, and the 50-percent bonus depreciation. We are about to
jettison them at the end of 2004.
After 2005, small business expensing up to $75,000, it is
gone, and $3,000 deduction for education and tuition expenses.
Expiring in 2008, capital gains reduction rate, dividend
rate reduction, and there are many of them that expire after
2010.
My question to you, Mr. Secretary, is: If we do not do
something soon, most of the good things that we did as far as
tax reduction are going to disappear. My question is: Do you
have a priority?
Secretary Snow. Yes, we do, Senator. A number of the items
you mentioned are in our budget.
Senator Bunning. I understand that, but do----
Secretary Snow. The R&Ds and the child credits and the
marriage penalty and so on. And I think it is critical that
Congress act and make them permanent. I would go beyond that
and say I would like to see the out-year----
Senator Bunning. The 2008's and 2010's.
Secretary Snow. Going out to there, exactly, because there
is an awful lot of good tax policy embraced in what you did
last year that goes out, and if Congress fails to act on it, it
means a tax increase, a large tax increase on the American
people.
Senator Bunning. That is what my--and in this recovery
period, in my opinion, and in the opinion of a lot of people
that are smarter than I am, if we have a tax increase in this
critical period with a recovering economy, we will send this
economy the other way rather than allow it to grow as it should
grow.
Secretary Snow. I agree with you fully.
Senator Bunning. OK. There are other questions I have, and
I am going to submit them to you in writing. As a courtesy to
the chairman, I will yield back. Thank you.
Chairman Nickles. Senator Bunning, thank you very much.
Senator Cornyn.
Senator Cornyn. Mr. Secretary, it is good to see you. I
recall a statement that I heard you make shortly after you
became Secretary of the Treasury, and it struck me as profound,
but something simple enough that a humble barrister could
understand, somebody who has not been, like you, very
successful in business or an economist or someone with that
sort of professional training. And you said simply this, that
if you want more of something, you should tax it less. And,
indeed, I think that has been the policy of the President and
the policy of this Congress in passing the President's tax
relief and growth package, and I think we are seeing that come
to fruition with the economy roaring back. And I am, like
everyone, grateful for it.
Obviously, employment is not yet where we want it to be,
but I am gratified by what you have told us this morning in
terms of your expectations, and I think that is consistent with
everything I have heard from everyone who knows or should know
something about this subject.
But I, too, share concerns about the deficit, but I think
we had a fundamental choice to make when we looked at the tax
relief and growth package, and that is, did we want to try to
address deficits alone at the risk of killing the economic
recovery in the cradle, or did we want to take a chance that we
could get the economy roaring back again and put people back to
work and then have time in a healthy economy sufficient to deal
with the deficit, as I understand this budget proposes to do?
But I also am concerned about when I hear members of this
body and the others on the other side of the Capitol talk about
the deficit. Indeed, you have been asked this morning has the
President--or the statement has been made, The President has
not given us a plan to deal with the deficit. But, you know, I
was always under the impression that it was Congress who passed
a budget. Indeed, that is what we are in the process of doing.
I always believed that it was Congress that appropriated the
money to spend it, and the President's role, albeit that of the
bully pulpit and given the power of the veto, that his role was
really different, and that it is our responsibility. So I just
say all that because I do believe that if there is an enemy in
this process, as Pogo said, ``We have met the enemy and it is
us.''
I recall, finally--and I will lead up to a question--that
as we debated last year both the budget resolution and we
debated appropriations, that there were amendments proposed on
the floor of the U.S. Senate totaling $85 billion, or $1.2
trillion over time, to add to Government spending. And thank
goodness we had the self-discipline to not agree to those huge
increases in spending.
But really what I want to ask you about is this: Yesterday,
the Senate Judiciary Subcommittee on Immigration had a hearing
on the President's proposal for a temporary worker program. And
I must tell you that as complex the subject that you deal with
every day is, to me the issue of immigration reform rivals that
in complexity. But one of the things that does make sense to me
is that if we get people out of the shadows and onto the tax
rolls, that represents a net benefit for the economy and the
American people.
Do you have any comments you would like to share with us
along that line?
Secretary Snow. Yes, Senator. I agree with you. There was a
time when Treasury had more to do with that whole area. The
Immigration and Naturalization Service had been part of
Treasury at one point, but, of course, now is not. And I agree
with you that is one of the more complex areas that we deal
with.
But the President's policy of giving an identity to these
people so that they become part of the recognized--they are
recognized for tax purposes and so on, will clearly help, as
you say, bring people out of the shadows and put more revenue
into the tills of the United States. They are here. We ought to
recognize the reality that they are here. And we ought to make
sure that they are not part of an underground economy but
become part of the regular and visible economy. Yes, I think it
is a very forward-looking policy.
Senator Cornyn. And if I have time to ask one other
question, I would like to ask you a little bit about some of
the concerns that Senator Stabenow raised about job loss. And I
appreciate very much your concern and the President's concern
and the concern we all share when people are out of work and
they want to work and provide for their families. Yet we all
understand we are in a very dynamic time with a global economy.
And the example that you used about the dislocation that
occurred in agriculture, for example, because of automation and
now that less than 2 percent are doing what 40 percent of the
work force used to do at one time. And I guess we could all
harken back to the day before the computer when it took a lot
more people to perform functions now that, thanks to
technology, take less people. But the truth is that consumers
have benefited at reduced costs, but it does place a burden on
us, I believe, those of us in positions to help, particularly
when it comes to education and making sure we have an educated
work force that is capable of earning the good wages that the
higher-paying jobs that will inevitably remain in this country
are capable of paying.
I know the President talked about that some in his State of
the Union as it relates to community colleges. Would you
address that issue?
Secretary Snow. Yes, Senator, I would be delighted to. The
President in the State of the Union talked about his jobs for
the 21st century program, and the linkage between jobs and
education is just absolutely perfectly clear. And the community
colleges that he referenced in the jobs for the 21st century
program provide the pathway to the training that gives you the
opportunity to participate in the economy.
It is not just the effects of globalization that we are
dealing with in this economy. There are really many more jobs
displaced by domestic competition than from global competition.
And that is evident by the fact that there are about 40 or 50
million new jobs every year in this country, but there is also
40 or 50 million jobs where people are moving on.
I was at a community college in Florida, in Jacksonville,
the Jacksonville Community College, earlier this week. And it
was a moving and inspiring experience to listen to the faculty
of the school--and they call it the Advanced Technology Center
at Jacksonville Community College--talk about the effect this
school is having on the larger Jacksonville community. It is
supported by the business people who work with the faculty to
design the courses, indicating what the job skill needs are
that they see coming along, and they in effect tell the
students, If you get these skills, you will have a job with us.
Now, this is not just putting time in to get an associate
degree. This is actually learning. And the school commits to
actually conveying the knowledge and hands-on experience in
large part. And they told some moving stories. I will tell you
just one that makes the point about how community colleges
provide the pathway from the present to the jobs of the future.
A cab driver who had modest earnings as a cab driver, who
went to the school, night school, and he would get calls, and
he would have to go, give a ride, and then he would come back.
And he did this for two or 3 years and finally got the skills
to get a full-time job at much higher compensation levels. And
he came back to the school with his first--he had never had a
check before. He had always depended on these fares. He now had
a check, and he brought it back to the college, to the faculty,
and he said, ``I just want you to know what you have done for
me and my family by giving me the skills that I can get a full-
time job earning $50,000 a year.''
Now, there are a lot of people who are like that, who are
looking to get higher-level skills so they can move into
higher- and better-paying jobs. The community colleges are the
link between those people and the skills they need to get those
jobs. And he had not been displaced by global competition. He
was a fellow who had a job in the United States and wanted a
better job.
And that is really how America works, people looking for
better jobs and acquiring--and we need to make sure we give
them the ability to acquire the skills to get those jobs.
Senator Cornyn. Thank you very much.
Secretary Snow. I appreciate your asking that question.
Chairman Nickles. Senator Cornyn, thank you very much.
Mr. Secretary, I thank you for your presentation. I have a
couple questions, and I think Senator Conrad may, too. Are you
OK? Is 12 fine?
Secretary Snow. Yes, 12 o'clock is good, Mr. Chairman.
Chairman Nickles. One of the issues that we have in the
Finance Committee deals with international trade, deals with
compliance with WTO, and that is the FSC/ETI legislation. The
bill that was reported out of the Finance Committee has a lower
corporate tax rate for manufacturers than for other
corporations. It has a tax rate of 32 percent, ultimately--it
takes a few years to get there--for manufacturers and 35
percent for other corporations, whether they be financial or
service.
I personally think that is a mistake. I think it is a
complication in the code. I think it is an inefficiency. I
believe my history tells me that Canada tried a differential
rate for manufacturing and repealed it. I would hope that the
administration and your office and yourself would lend some
advice to Congress before, in my opinion, making a mistake. I
think we have to pass legislation to be compliant with WTO, and
I want us to do that. I do not want to see the European Union
get into a trade war with the U.S. That would be a lose-lose
situation for both sides.
But, conversely, I would like to see us fix it in a way
that I would be willing to sipport. I personally would be very
troubled by having a differential corporate rate. I think that
is a serious mistake. Would you care to comment on that?
Secretary Snow. Well, I agree with you, Mr. Chairman. I
think what the Canadians found when they had the differential
rate favoring one class of economic undertaking over another,
manufacturing, that all of a sudden there was a lot of entry
into the manufacturing business by people who formerly had not
been manufacturers, but for purposes of the tax code showed up
as manufacturers. You create real distortions, I think, with
that sort of approach. The better approach would be simply if
we treated everybody the same.
So I agree with you, and I think we are sending that
message to both the House and the Senate in terms of what would
make good tax policy.
We feel strongly that we need to be in compliance with WTO.
But we need to do it in a way that does not distort the Tax
Code and create disincentives for one sector of the economy
versus another. And we need to do what seems to me in a way
that moves forward--it cannot get all the way, but moves
forward in modernizing this 40-year-old set of tax policies
that I think fundamentally prejudice the interests of American
manufacturers--American businesses, manufacturers and service
providers as well. You know, those rules came into effect
before the United States had emerged as a great trading country
with 20 percent or so of our GDP tied up in trade, imports and
exports.
We need to modernize that whole system and remove the non-
economic limitations on foreign tax credits that do so much
harm, reform the rules that increase the cost of U.S. companies
doing business in foreign markets. I would hope at some point
we could go to the larger issues. Maybe some of them can be
dealt with in the FSC/ETI. The more that can, the better in the
FSC/ETI framework. But I see the priority now on just getting
us into compliance in a way that doesn't prejudice U.S.
businesses and doesn't create distortions in the Code.
Chairman Nickles. I mentioned I was displeased with what
passed out of the Finance Committee. Would you work with us to
try to help us, one, come up with a proposal that is within the
revenues available, to be WTO compliant, and give us what I
would say is a uniform corporate rate? And if there are other
things on the international tax side that would help make us
more competitive--and you mentioned one or two, and Senator
Conrad and I have been around long enough that we know that
there is a lot of work that needs to be done on the
international tax code. But we need to move pretty quickly. I
think we are looking at potential tariffs within 30 days. That
might be postponed somewhat, but it is important for us to move
expeditiously.
And so if you could help assist us in maybe coming up with
a package that would be WTO compliant in your view and would be
fair to corporations, we would appreciate your assistance.
Secretary Snow. We will commit to do that, Mr. Chairman.
Chairman Nickles. I appreciate that. One other thing from
my opening comments, and I was reading through it a little bit
more, and that is the corporations that are engaging in the
sale-in lease-out or SILO and qualified technological equipment
transactions. You are familiar with these?
Secretary Snow. Yes, I am.
Chairman Nickles. I was asking my staff for an example, and
they said, well, there are a lot of transit systems that are
using it. Senator Conrad is familiar with some others, and my
staff said it has already happened for leasing the Berlin
subway system. U.S. corporations doing this, getting
depreciation tax benefits, and it is a shell game. It looks to
me like it is one of these things that I am alluding to that
needs to be stopped. It may be legal, but it is an abuse of the
tax system. I am a person, who doesn't have to tell people
where I am coming from. I want lower tax rates and I want an
efficient system, but I find this an abuse, and I want to stop
it and I plan on working to stop it.
Would you care to comment?
Secretary Snow. Yes, I agree fully with your statements on
that. The SILO transactions, which we have analyzed now, have
no meaningful economic purpose or utility other than to create
a transfer mechanism for tax benefits. There is no economic
utility at all. There is simply a mechanism for a tax transfer.
I think they need to be stopped. The spread of them is really a
dangerous thing to the revenues of the U.S. Government. The
cost of the SILOs is so great that the Treasury Department has
had to revise its corporate tax baseline, because of so much
erosion of revenue. It is really, Mr. Chairman, a critical
issue and I am sympathetic to the States and cities and so on,
but the revenue they get for that is so small relative to the
erosion of the revenues of the Federal Government, that it is
no comparison.
And now, of course, it is not even our cities and
municipalities in the States, but it is the cities and
provinces and so on of the rest of the world, Frankfurt and so
on, getting the benefit of tax transfers that is paid for by
subway system, paid for really by the taxpayers of the United
States. So there is something just fundamentally wrong about
this, and it needs to be stopped. Let us be real blunt about
it, this is a real bad deal for the taxpayers of America.
Chairman Nickles. I appreciate your statement. I told
Senator Conrad that I think part of our challenge now is that
most of our colleagues on the Finance Committee and Ways and
Means Committee probably are not aware of it. Since we are both
on the Finance Committee, we may ask you or somebody from your
staff to help us have an additional hearing on it to expose it.
We are going to send some signals that we are going to try and
stop it.
There are a lot of banks, a lot of municipalities that are
involved in this, but from my preliminary estimates, it looks
like for every dollar the municipalities are getting out of
this sham deal, the Federal Government is losing about 10 times
as much.
Secretary Snow. A 10 to 1 ratio.
Chairman Nickles. That is not a very good deal.
Secretary Snow. If I can help you publicize what a bad deal
this is for American taxpayers and how abusive this scheme is,
just call on me.
Chairman Nickles. What do you estimate the savings to be if
we close this door?
Secretary Snow. I do not have a real good number on that,
but it is in the billions of dollars, 33 billion, I am advised.
Chairman Nickles. I have heard about the $30 billion
figure.
Secretary Snow. 3 billion a year.
Chairman Nickles. If it is going international as much as
it evidently is, it is pretty wide open.
Secretary Snow. It could be much larger than that because
it is a growing phenomenon. I mean that is why I hesitated to
put a 3 billion a year. It could be a 4, 5 or 6 unless we stop
it.
Chairman Nickles. Thank you.
Senator Conrad.
Senator Conrad. Let me just pick up on that point and say
the Chairman and I have been talking about the need to close
that particular loophole. What is happening, for those who are
listening and watching, is municipalities are selling their
subway systems, they are selling even their sewer and water
systems to private entities, that then can take the tax
benefits from the ownership of those facilities, depreciate
them, for example, over time, and then the municipalities lease
back these systems. This is truly a scam, and it has to be
stopped.
I am advised that companies have gone to meetings of city
officials, national meetings of cities officials and pitched
these proposals, and now it is going offshore. The Chairman
referenced a Berlin subway system. I mean this has got almost
no limit to its potential for abuse, and it is one area that
has got to be dealt with.
I would go back, if I could, to the other conversation you
were having with respect to FSC. I think we now have to
consider, in light of the tax gap, in light of our WTO
challenges, fundamental tax reform in this country. I do not
think it can be postponed any more. All of us understand it is
not going to happen this year in an election year. There has
not been enough time devoted to it.
I would hope, Mr. Secretary, that we could begin the
process though, focusing on these challenges, the tax gap, the
hemorrhage in the current revenue system, our WTO problems, the
fact that our trading competitors have taxes that are rebatable
at the border that confers an advantage onto their businesses
and that we have tried to match this with FSC and all the rest,
but over and over we are ruled out of compliance with WTO.
There is a short-term solution, but I think there is a much
more fundamental need to review our entire tax system.
Let me ask you this question: what is the deficit; in your
judgment, how would you define the deficit?
Secretary Snow. The deficit is, I guess, best thought of as
the difference between the Government's annual expenditures and
its annual receipts.
Senator Conrad. And what is the debt?
Secretary Snow. The debt is the obligation that the
Government has to its creditors.
Senator Conrad. I ask those--I know they are very
fundamental questions, but I ask them because I find there is
enormous confusion in the public because the deficit and the
debt, and of course, Mr. Secretary, you have defined them with
precision. I find when I am visiting with people there is
confusion between the deficit and the debt. When the President
says he is going to cut the deficit in half, a lot of people
confuse that with the debt.
Let me show you the thing that very much worries me about
the President's plan. I know this is very busy. I am not asking
to try to decipher this, but I want to talk about--this is from
the President's budget. It shows the increases in the debt at
the end of the year. It shows the debt right now is $6.76
trillion. Next year, at the end of this year, 2004, it says the
debt will be $7.486 trillion, an increase of $726 billion, not
the $521 billion that the administration has been talking
about, but $200 billion more. The big part of the difference
obviously is Social Security, but all of that money is owed.
They are our creditors. We are borrowing, under the President's
budget from Social Security.
The next year the debt goes up by $647 billion. The next
year by $593 billion, the fourth year by $592 billion. In 2008
it starts to go up some more, $613 billion, and in the fifth
year from 2004, the debt is going up $633 billion. I do not see
this growth of the debt being cut in half anywhere, do you?
Secretary Snow. Well, the deficit is cut in half under our
numbers, and pretty much the CBO numbers.
Senator Conrad. But the deficit, that is where we have this
confusion. The deficit, you are talking about on a unified
basis, when you put all the money in the same pot, trust fund
money and regular money, and the problem with that is, I think
that fundamentally misleads us as to the magnitude of the
problem.
Secretary Snow. Senator, it also----
Senator Conrad. Do we not owe the money back to Social
Security?
Secretary Snow. Senator, it also though, as you and I have
discussed on prior occasions, calls attention to the things
that we really have to get focused on. You mentioned Social
Security and Medicare. That is really what that chart says. We
have to get focused on these large commitments we have made to
the future.
Senator Conrad. Mr. Secretary, the problem I have, when the
President goes out and tells the American people he is going to
cut the deficit in half, I think that gives them comfort. I
think that leads them to conclude that we are getting this
thing under control. We are not getting it under control. Under
the President's plan, the debt is going up. In no year is it
going up less than $600 billion.
Secretary Snow. Senator, I would hope that that chart and
what it shows on debt will lead to furtherance of this large
public discussion on the subject of Social Security and
Medicare. I think we need to deal with Social Security first,
in my view. The President has put it on the table with his call
for the Commission, with his call for the personal accounts,
tried to engender a broad national dialog. I think we are
getting more and more attention to it. I commend you for
bringing the fundamental longer term issue to our attention. It
needs to be addressed.
Senator Conrad. The thing that I do not hear you talking
about is the revenue side of the equation, and here we are, we
have this addition to the debt every year, massive increases,
and that is before the baby-boomers retire, that is before the
full effect of the President's tax cuts which make this
situation pale by comparison to what is going to happen.
So I would say this to you, maybe we can make a deal here.
I am willing to talk about the long-term entitlement
imbalances, but I would hope you are willing to talk about the
long-term imbalances on the revenue side, because deficits are
a product of the difference between spending and revenue, and
just to talk about spending misses half the equation.
Secretary Snow. Senator, thank you.
Chairman Nickles. Senator Conrad, thank you very much.
Mr. Secretary, so you know, Senator Conrad and I already
plan, probably after we finish the budget cycle, on having
hearings on some of the long-term obligations that our country
is facing, Medicare and Medicaid being the two of the largest.
Incidentally, the unfunded liabilities that are facing Medicare
are about three times that of Social Security. But we plan on
having hearings on those and trying to maybe set the stage on
what can and could and should be done in the long term to help
make those programs more affordable. He and I have little
difference of opinion on whether you should focus on gross debt
or debt held by the public, but that is a debate for another
day. Also we will get into--I do not know if it will be at the
same hearing or another, a discussion about trust funds. So we
will need your participation on those, maybe both for
educational purposes.
I want to compliment you on your hearing performance today.
You were very educational, very forthright, very helpful to us
in helping us maybe meet some of these challenges, find some of
the problems, solve some of the problems, and I would encourage
Mr. Manciw to listen to your presentation on employment
statistics. I think that would be helpful. I compliment you and
your outstanding staff. Thank you very much for your
participation.
Secretary Snow. Mr. Chairman, thank you very much.
Senator Conrad, thank you.
Chairman Nickles. The meeting is adjourned.
[Whereupon, at 12:03 p.m., the Committee adjourned.]
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THE PRESIDENT'S HOMELAND SECURITY BUDGET
----------
WEDNESDAY, FEBRUARY 25, 2004
U.S. Senate,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to notice, at 10:08 a.m., in
room SD-106, Dirksen Senate Office Building, Hon. Don Nickles
(chairman of the committee) presiding.
Present: Senators Nickles, Gregg, Allard, Burns, Sessions,
Bunning, Crapo, Conrad, Murray, Wyden, Feingold, Nelson,
Stabenow, and Corzine.
Staff present: Hazen Marshall, majority staff director; and
David Ortega, senior analyst for homeland security, justice and
community development.
For the minoriyt: Mary Ann Naylor, staff director; and Mike
Jones, analyst for justice, homeland security, community and
regional development, Sarah Kuehl, analyst for social security,
transportation.
OPENING STATEMENT OF CHAIRMAN NICKLES
Chairman Nickles. Mr. Secretary, I would like to welcome
you to our committee. We are delighted to have the Secretary of
Homeland Security, Tom Ridge, before us today. I believe this
is your first appearance before our Budget Committee, so we
welcome you. I apologize for being a minute or two late. I went
up to the sixth floor out of habit, but anyway I am delighted
to have you before us.
Mr. Secretary, you have enormous responsibility, and I
compliment the President for selecting you. I compliment your
willingness to serve our country in this very important task of
being Secretary of Homeland Security.
Since the year 2001, the Congress and the President
increased discretionary appropriations for homeland security
from basically $10 billion in 2001 to the President's request
of $30 billion for 2005. We have created a new Department of
Homeland Security in which you, as Secretary, oversee a total
budget of over $40 billion, which include mandatory spending
and fee-funded programs.
As you know, Mr. Secretary, creating new agencies and new
appropriations subcommittees can be challenging for budgeteers.
We like to compare spending levels from year-to-year, and when
you start moving around the pieces, it can get very confusing.
I want to make sure, since we have thrown in a lot of new
money, that we are spending the money wisely. I have seen some
reports where that is not the case in some areas.
I am concerned that Congress is creating programs under the
banner of Homeland Security which, in some cases, some cities,
some States are using as more or less general revenue sharing.
I do not think we can afford that. I do not think we can afford
to, frankly, rehabilitate fire departments throughout the
country, and I do not think that is the purpose of your
department.
So we look forward the your discussion with us today. I
think it is vitally important for us, as members of this
committee and Members of Congress, to use adequate and I would
say good oversight to make sure these funds are well-spent. And
I intend to do that, and I look forward to working with all
members of the committee.
The President requests today a large increase for your
domain--a 10-percent increase. When we look at most of the
Federal budget, it is pretty close to a freeze, that is very
significant. I think you have to compete with all other
priority programs, and there will be enormous competition. As
we really try to be more frugal in this era of high deficits,
you are going to have to justify that $3-billion increase and
convince me, and I think other members, that it should go to
your department instead of to other departments.
And so anyway we are delighted to have you with us today.
First, I will call upon my friend and colleague, Senator
Conrad.
OPENING STATEMENT OF SENATOR CONRAD
Senator Conrad. Thank you, Mr. Chairman, and welcome, Mr.
Secretary, to the Budget Committee.
I want to, first of all, commend the chairman for holding
this hearing. We discussed a schedule of hearings, and we
agreed that one of the most important hearings we could have
would be on homeland security because, as the chairman has
noted, the spending has increased dramatically, certainly the
threat has increased dramatically, and much of that spending is
in response to that threat. We all recognize that, and we
support as strong a homeland security as we can provide.
On the other hand, as the chairman mentioned, we have a
responsibility to make certain that taxpayer funds are used
wisely, and well, and for the purposes intended. And I must say
I have been increasingly concerned about reports that I have
heard from individual departments that spending initiatives
that were pending previously, that were not approved once they
were given the label of homeland security, whether or not they
really fit that description, sailed through.
And we have an obligation, as do you, to make certain that
things do not just sail through because a label has been put on
them, that they really strengthen our homeland security. And I
know that has got to be an extraordinary challenge to you,
bringing together all of these different agencies and several
hundred thousand employees or approaching several hundred
thousand employees to try to make certain the money is used
wisely and well.
Let me just go to put in perspective some of the issues
that I see with respect to the issue before us.
First is to kind of put in context where we are. This
committee, and the administration, and our colleagues in the
rest of the Congress are faced with deficits that are at record
levels--$521 billion. I believe at the end of this year it will
actually be somewhat less than that, but nonetheless, a record
budget deficit, by far the biggest we have ever had.
In looking ahead, the President has said he is going to cut
the deficit in half. I do not see that. I do not see that under
the President's plan. The only way that is achieved is by
leaving out things. But when you add back the defense cost,
when you add back addressing the alternative minimum tax, which
the President's budget only does for 1 year, when you add back
the extension of the tax cuts, what I see on an operating basis
going forward is extremely large deficits, by far the biggest
we have ever had, and all of it at the worst-possible time,
right before the baby boomers retire.
One of the big problems we have is on the revenue side of
the equation. We have to be tough on the spending side. We also
have to look at the revenue side of the equation because the
revenue for this next year, the year we are in, is projected to
be the lowest as a percentage of gross domestic product since
1950.
When I look at the long-term or at least the 5-year trend
on homeland security, it matches what the chairman indicated--
$9.4 billion in 2001 and going up to $28.1 billion for 2005. So
we have seen a dramatic ramp-up. All of us understand why.
In terms of this year, the budget year 2005, the
administration has called for a 10-percent increase, but I have
tried to analyze that 10 percent, and what I see leads me to a
somewhat different conclusion because much of that is Bio
Shield advance funding for future years--2006 or 2008. When I
take that out, I see about a 4-percent increase, just to put in
perspective what I think an appropriate analysis would be.
And then when I look at the specifics, one thing that
strikes me are cuts in these areas: State formula grants for
first responders, the firefighter grants, the urban area
security. In those areas, $990 million cut in State formula
grants, almost $250 million in firefighter grants, and then an
area not under your direct control, over at the Justice
Department, the COPS program and other law enforcement grants,
$911 million, for a cut of a $1.4 billion, approaching $1.5
billion.
[GRAPHIC] [TIFF OMITTED] 94065.163
And then I look at the cost of the Bush tax cut in 2005 for
those earning over $337,000 a year, and the cost for the tax
cuts for people earning over $337,000 a year in 2005 is $45
billion--30 times the amount of the cuts for first responders
and for cops on the street. I know there are some who do not
think of cops on the streets as first responders, but I can
tell you my cops feel that way. And dramatic cuts in the COPS
program are certainly not well-received in my constituency.
Finally, on the issue of port security, those grants being
cut by 63 percent, and those are issues I want to go into in
some more detail when we get to the questioning phase, Mr.
Secretary. I hope this information is useful as we go into this
questioning phase.
Thank you, Mr. Chairman.
Chairman Nickles. Mr. Secretary, welcome to the committee.
You are free to make any opening remarks you wish.
STATEMENT OF HON. TOM RIDGE, SECRETARY, DEPARTMENT OF HOMELAND
SECURITY
Secretary Ridge. Thank you, Mr. Chairman and Senator
Conrad. You have been very kind to accommodate a scheduling
conflict I had later on this morning. So, in order to give the
membership of the committee the complete opportunity to address
whatever questions they have, I would like to just ask
unanimous consent that the statement be included in part of the
record and get at it.
Chairman Nickles. Certainly.
Mr. Secretary, Senator Conrad alluded to the fact, and
Senator Collins has already written a letter, that dealt with
the reduction in the program, the State Homeland Security Grant
program from $1.7 billion to $700 million. Would you care to
expand upon that?
Secretary Ridge. Yes, I would.
First of all, the President's budget reflects the same
level of commitment in terms of his requests in his budget, the
budget document of 2004. What you are talking about with regard
to the State Homeland Security Grant program is a shifting of
some of those resources, a substantial amount, over $700
million into the Urban Area Security Initiative, where we feel
that it is appropriate to take in not only population, but
population density, threat, critical infrastructure and the
like.
So, if you go back and take a look and compare it with the
2004 numbers, the overall request for the President has been
sustained, and increases in other parts of the homeland
security budget have been advanced. It is a shifting of
resources because there is a shifting of priorities. I think it
is a strategic decision, while we want to continue to support
the development infrastructure around the country, continue to
support States and their development of their own security
strategies, that we shift some of those dollars where we think
the greatest threat and the greatest possibility of
catastrophic loss might be.
Chairman Nickles. Mr. Secretary, I happen to concur with
that, but let me also say I do not want to waste money in the
big cities either.
Secretary Ridge. I understand.
Chairman Nickles. And D.C. would be a program that one
would say that is a high-threat area, probably one of the
highest, with New York, and maybe Los Angeles and others. The
District of Columbia funded leather jackets, assessed
environmental problems on property prime for development. In
Maryland, the money was buying Prince George's county
prosecutors an office security system; Virginia, a small
volunteer fire department spent $350,000 on a custom-made fire
boat; in State and local Governments in the District, Columbia
Hospital Association had a formula that guaranteed every city
hospital a share of an $8-million grant. That meant the
Psychiatric Institute of Washington, a small private hospital,
received money to buy security cameras for its wards.
I could just go on. I am just looking at a lot of money
that is in a big city that is going to maybe be under the
discretion--see, D.C., the agency used an additional $300,000,
this is according to the Washington Post, and maybe they might
be inaccurate sometime. I do not want to say it is gospel, but
according to a Washington Post article, let me put it that way,
and that was debated on November the 23rd, said that $300,000
was used for a computerized car towing system, which incidently
I learned, my daughter learned the hard way. There is a lot of
corruption in the D.C. car towing system--corruption. And I
will repeat that because I am still mad about it. But I do not
know that your department or the Federal taxpayers should be
funding that. And I could go on. There is $100,000 to go to the
mayor's politically popular Summer Jobs program, but that does
not make me more secure.
So my point is I think you are on the right track and
saying taking away or reducing the amount of money for the
State grants that is going to every State by a population
formula, I guess, and moving it into areas that you deem--I am
guessing with your discretion--in the urban areas that are a
higher threat, I happen to agree with that. But this is an
urban area of high threat, and they waste a lot of money. And I
am going to be just as vigilant on your $700 million under that
urban grant program as I am on the State program. And when I
find that we are wasting money, I am not inclined to grant
increases.
And I just want you to know I want to be your ally, but I
can also be your enemy if I find out that these funds are being
wasted. And a lot of these funds, it looked like we Congress
rushed to throw money at it, and the cities were all lobbying.
They are here this week. The League of Cities and the Governors
are all out saying, give us more money, we want more money, and
then when you find out they are spending it in ways to buy
leather jackets and so on, it infuriates me, and I wanted you
to be aware of that.
Secretary Ridge. Senator, I do not think we would ever have
any disagreement about the need to make sure that for every
dollar that we are investing in security, we should get at
least a dollar's worth of return in security. Clearly, some of
the expenditures that you have highlighted are of questionable
relationship to that outcome.
I will tell you, this year, for the first year, because we
have only been in operation for a year as of Monday, we have
asked the States to submit homeland security plans built from
the grassroots up. We have also asked, with the Urban Area
Security Initiative, that we get more complete prior expression
of where those dollars are going so that as a formal function
of our Department, we can start, one, limiting where these
dollars can be expended, as we have a responsibility for
building that national infrastructure across the country.
So I am not going to try to explain how relevant some of
those expenditures are to homeland security because I do not
think I can. But I can tell you that there is not only a shared
responsibility for us to oversee where those dollars go, but
there is also a shared accountability and not just at the
Federal level, but also at the State and local level to ensure
that the dollars are being spent as Congress intended. And I
assure you we will followup on that as rigorously as we
possibly can.
This year, for the first year, we will have plans. We are
already screening the statewide plans. And while we do not want
to be prescriptive, because one size does not fit all, we do
want to frame where these dollars can go so we have a much
better understanding of the integrated nature of the mutual aid
systems that we are trying to build around the country.
Chairman Nickles. Well, these funds, correct me if I am
wrong, these funds really are not supposed to be just a subsidy
for local police and fire; is that correct?
Secretary Ridge. That is correct.
Chairman Nickles. Because I think a lot of cities have
financial problems or challenges, and they would love to have
us help them out, whether it is for assets or whether it is for
other little things that are in the----
Congress has not abided by the President's request in the
past. In other words, we funded part of this. I believe you
wanted most of the first responders' money to go through FEMA
and your department now. In the past, Congress had $1.6 billion
of unrequested funding that was in the Department of Justice;
is that correct? To make sure I am kind of on the right page.
Secretary Ridge. Well, what we hope to do, Senator, is
actually take the programs that had been, some of the programs
that had been at FEMA. The basic source of these dollars were
the Office of Domestic Preparedness. It used to be in Justice.
We have it, and we want to combine our Office of Domestic
Preparedness and our State and local office and then bring the
relevant grants in from FEMA and from TSA so we can develop a
one-stop shop for the State and locals, so we can better
integrate the use of these resources, so we have much more
rigorous oversight, and so we can evaluate whether or not we
are getting a security return on those investments.
Secretary Ridge. For our purposes though, we need to
combine those funds together to get your budget.
One other thing, and that deals with the issue of the--
well, maybe I will take it up later. I am going to ask all of
our colleagues, the Secretary has a meeting, and he needs to
leave. So I am going to try and be short, and I will ask all of
our colleagues to try and keep their comments or questions to
about 7 minutes, and I think we can get there--7 or 8 minutes,
and we should be fine.
So, with that, I will turn it over to Senator Conrad.
Senator Conrad. Thank you, Mr. Chairman.
Let me just pursue, if I could, some of the items that the
chairman was mentioning because I think this really does
deserve scrutiny and your opportunity for response.
In the article that the chairman was referencing, it
indicates that ``Two years after Congress approved a massive
infusion of cash to help gird the Washington area against
terrorism, much of the $324 million remains unspent or is
funding projects with questionable connections to homeland
security.'' That is on the negative side of the ledger.
On the positive they say, ``Police, firefighters and public
health have undergone disaster training, are better equipped to
handle conventional attacks, weapons of mass destruction. They
have more gear to protect them, more ambulances and fire
trucks, more heavy equipment to diffuse bombs or locate victims
buried beneath rubble. Local governments have at their disposal
new blueprints on how to respond to a terrorist attack.'' All
of these things are very positive I think we would all agree.
But they say, on the other hand, ``Some police officers are
still waiting for basic protective gear. Public health labs,
swamped by the anthrax attacks of 2001, have no more capacity
today. Most local Governments have no efficient way to give
instructions to residents shut off from radio and television,
and there is no comprehensive plan to unite families separated
in a disaster.''
Can we just take that paragraph, Mr. Secretary, and give
you a chance to respond to that. Obviously, Washington, D.C.,
and you have talked about moving funds around to deal with the
priority threat areas, and I think all of us would say that
should be done. But here they are saying Washington, it has
already been subjected to attack or the area, that some police
officers are still waiting for basic protective gear. What can
you tell us about that?
Secretary Ridge. The only thing I believe I could share
with you is that among the priorities that the city of
Washington set was obviously the purchase of some protective
gear, as well as other emergency equipment during the first
year of the funding. We are finding that throughout not only
Washington, D.C., Senator, but around the country, that these
Governors, and police chiefs, and fire chiefs understand that
they are not going to be able to build themselves the kind of
security unit or acquire new uniforms across the board and new
equipment across the board, and so they are incrementally and
sequentially making different purchases to buildup over a
period of years the kind of capacity that they need.
It reflects a decision by the mayor and the police chief as
to what their priorities were. So, if they purchased some
protective gear and other needs, we are not going to quarrel
with that. We are just going to be mindful of their building up
an adequate amount of protective gear and equipment over a
period of time, and they are not going to be able to do this in
a year.
Senator Conrad. Do you believe that it is adequate in the
District?
Secretary Ridge. Well, again, I think the--I cannot tell
you specifically the kind of protective gear that any
particular police department has purchased. I can tell you that
many of them have initially gone to protective gear and
communications equipment, but I doubt if any of them have
purchased the protective gear for everyone in their police
forces. It is going to take some time, and the question becomes
whether or not every individual police officer in every single
police department has to have the same kind of protective gear.
I do not believe that is necessary.
Senator Conrad. Let me just, if I could, Mr. Chairman,
maybe I could ask that I just--I will give you a series of
questions now, and if you could provide answers in writing, so
that we not take the full time of the committee.
My No. 1 question would be do the police in Washington,
D.C., and surrounding communities have the protective gear that
they need? No. 1.
No. 2, do they have a system of communications that allows
them to communicate an interoperable way? I held a hearing on
this out in my home State, Mr. Chairman, and that was the No. 1
issue of first responders is a lack of interoperable
communications.
Third question, do the public health labs have sufficient
capacity to deal with a bio or chemical attack?
Next question, do local Governments, in the high-target
areas, have an efficient way to give instructions to residents
shut off from radio and television, such as a reverse 9/11
system? And maybe, Mr. Secretary, you could address that one
right now before the committee.
To your knowledge, do these local Governments, in these
high-vulnerability areas, have a way to give instructions to
residents shut off from radio and television?
Secretary Ridge. I believe that the National Capital
Region, which is a specific entity that you created in the
legislation that created the Homeland Security Department, has
worked to have that kind of system put in place.
Senator Conrad. Is it in place?
Secretary Ridge. Well, they are certainly working on it. I
believe that Mayor Williams discussed it publicly. Arlington
County has a similar system. So I think, again, I cannot tell
you today that it is completely in place across the National
Capital Region. I can tell you it is a priority of the National
Capital Region, and they have been working on it vigorously
since the NCR was created.
Senator Conrad. Can I just ask that you, for the record,
let us know what is the status. You know, the one thing that
really struck me on that fateful day was the lack of
communications. I mean here in Congress there was no
communications. I think we saw that there really is a lack of a
plan. I do not hold you responsible for that. I am just saying
that is the reality that I saw play out on that day and massive
confusion in this city. I mean, people were at jobs, did not
know where their loved ones were. There was no ability to talk
on a cell phone because the cell phone systems were
overwhelmed.
Finally, this article asserts there is no comprehensive
plan to unite families separated in a disaster. To your
knowledge, is that still the case that there is no
comprehensive plan to unite families in the case of a disaster?
Secretary Ridge. Senator, this raises the question of
responsibility of Government, and communities and families to
do some certain things together. There is plenty of information
out there about the need to have a communication plan and a
contingency plan. There are individual efforts that have been
undertaken by the National Capital Region to get families to
think of how they would contact one another and then reassemble
in the case of an incident.
I know the National Capital Region is going to expand
nearly $5 million that the Congress has appropriated. So they
have this massive public education effort to alert families
that they need to develop these individual plans themselves--
very family specific plans.
I do not think it would be possible for any level of
Government to design a family specific plan. That is something
that they need to do themselves, but I do know that the
National Capital Region is putting quite a bit of energy and
quite a few dollars that Congress appropriated toward that end.
Senator Conrad. If you could give us a report on what the
status of that is.
Secretary Ridge. Yes, sir.
Senator Conrad. Thank you, Mr. Chairman.
Chairman Nickles. Senator Conrad, thank you very much.
I next call upon Senator Gregg. For the information of our
colleagues, the vote has started. We will continue throughout.
We will continue with the hearing.
Senator Gregg.
Senator Gregg [presiding]. Thank you, Mr. Chairman. And let
me join with yourself and with Senator Conrad, and I think the
questions that Senator Conrad asked and that you asked, Mr.
Chairman, are very appropriate, and I know the Department will
want to answer them.
Actually, to some extent, there is a certain deja vu all
over again because I have gone through these hearings now,
since I had jurisdiction of the issue of first responders for a
number of years in my appropriations committee, and since we
tried to set up a one-stop-shop attempt. Unfortunately, due to
the bureaucracy involved, we were never able to put up one-
stop-shop. And I hope now that was the concept of the Homeland
Security Department, that we would accomplish that. I
appreciate the Secretary pursuing that course, and I am sure it
will be accomplished now that we have a central area.
And the issue of first responders, since basically this was
a program created by myself and Senator Hollings, was never to
replace or give the police officers, and fire departments, and
health people basically replacement parts. It is not a ``blue
light'' program. It is not supposed to be like the LEA was in
the seventies. It is supposed to be a threat-based
organization. It grew out, as I have mentioned before, from the
original Nunn-Domenici Act, which targeted the top 162 cities
in the country, and it was supposed to bring those cities up-
to-speed, and we decided to try to take it beyond that.
I congratulate the Department for going to a threat-based
system, and I understand that you are reorienting dollars to
accomplish that. It is the right approach. It is going to make
a lot of chiefs, fire chiefs, police chiefs, and Governors and
mayors unhappy, but they have to understand that if they have a
region that is not a high-priority threat, then they are just
not going to get as much money as regions that do.
Second, the State plan. We had an understanding there would
be State plans in place before we gave out any of this money,
and that was a precondition. I know you are now redeveloping
the State plan, but again that is a little bit of deja vu all
over again. But those State plans are critical to being sure
that this money is not ending up buying blue lights, that it is
going--and so I hope you will oversight those aggressively.
I want to congratulate the Department for some things that
it has done. One of the reasons I wanted the Department created
was because, again, I had oversight over Immigration, but I did
not have oversight over Customs, and I had oversight over
Border Patrol, but I did not have oversight over Coast Guard,
and I found that it was just chaos trying to get these
departments to communicate with each other.
I have spent a lot of time since the Department has been up
and running talking to the line folks, the Customs agents, the
Immigration folks and asked them, ``Well, how is it working?
Are you guys talking to each other yet?'' And initially there
was a lot of resistance. There was a sense of, ``I do not want
to learn that guy's job, and he is never going to do my job as
well as I can do it.''
That has changed. That whole atmosphere has changed out
there. There is a real positive atmosphere from the
Immigration, the Customs people, the Border Patrol people. I
sense a real dedication to trying to learn each other's job,
making this integrated. It is anecdotal to me, but it is good
news, and I congratulate the Department for the effort there.
What I want to ask is this Bio Shield issue. As Senator
Conrad pointed out, most of this money is going to prefund Bio
Shield, most of the new money. I am very concerned we are not
making progress on this, that we are open to a biological and
chemical attack. We have not been able to pass the Bio Shield
bill out of the Senate. I got it out of our committee a long
time ago. It should have been through the Senate. It should
have been passed. It should have been down to you.
How much do you need the Bio Shield authorization to do
this right, and even though you have not gotten the
authorization, are you able to use the dollars to get us
oriented for the purposes of first detecting and then handling
biological and chemical attacks, which is clearly our biggest
threat?
Secretary Ridge. Senator, as one who spent 12 years on
authorization committees but never managed to get to an
appropriation committee, I do not want to say that not having
the appropriation would impair our ability to restrict our
ability to use those dollars. I will let the Congress work that
out.
We are comfortable that the $2 billion-plus that you have
provided us can be used under the circumstances designed by the
legislation. That is, if we see that there is a specific
threat, a biological threat, for which we do not have an
antidote or a vaccine, and we know very clearly that there is
not going to be a commercial market for this product, you have
given us the resources to go in immediately and engage the
private sector in researching the antidote or the vaccine.
So, again, we will let the Congress work their will on
whether or not we are going to get an authorization bill, but
we believe that the appropriation gives us the opportunity to
use those funds immediately when we do.
Senator Gregg. On another issue, I was a little concerned
about the Department's request in the area of TOPOFF. It seems
to me that TOPOFF has been an extremely constructive
experience. It has now really gotten very mature.
Senator Conrad. Could the Senator explain what that is.
Senator Gregg. TOPOFF is basically exercises of attacks,
going through what is basically a military exercise. We stage a
simulated attack on a city. It is biological, chemical or
conventional or maybe even nuclear, and then it is a full
scale, engage everybody in the community in a time line, very
complicated, but very professionally done, much the way the
Strategic Air Command used to stage their exercises relative to
war.
But I am a little concerned that the funding does not
appear to be as aggressive as it needs to be in this area in
order to stand up the next round of TOPOFF exercises.
Secretary Ridge. Senator, we think you have given us the
resources to do that. I am actually going to have a briefing
here in the next couple of days as we prepare for TOPOFF 3.
Senator Conrad, the last TOPOFF 2 exercise included
simultaneous events. One was a radiological event in Seattle,
the other was a biological event in Chicago. When you bring to
bear the Federal, State and local resources and all of the
prime time players, we actually even had a, we call it VNN, a
Virtual News Network, so we could work on crisis communication
during this period. You learn a lot. You learn what you are
doing right. You find gaps in the system, and you learn where
you need to strengthen.
Senator Gregg. What we learned was that the mayor of
Seattle was a lot more efficient than the Federal Government in
responding.
Secretary Ridge. They did a good job, Senator. They did a
good job.
[Laughter.]
Secretary Ridge. So there are a lot of lessons to learn,
both good and bad, and I think the Congress has been very
generous with funding in that regard. Plus, not only the broad
national exercises, but we literally run hundreds of both
formal, on-the-ground, boots-on-the-ground exercises or table-
top exercises. That is one of the primary responsibilities of
the Office of Domestic Preparedness, and one of the eligible
costs associated with the dollars that Congress appropriates to
our department.
Senator Gregg. Senator Corzine?
Senator Corzine. Welcome Governor, and let me start with a
compliment based on my reading of how the Department is working
with the folks in my home State, and I feel like there is good
dialog and coordination. That is the good news. Let me ask
some----
Senator Gregg. Senator Corzine, could I note that I am
going to have to leave to go vote. Could you recess the meeting
after you finish and the other folks will be coming back?
Senator Corzine [presiding]. Sure. Absolutely. I would be
happy to recess.
I am going to ask a couple of questions: one about chemical
plant security, one about screening issues at airports, and
then a little bit about port security and do that relatively
quickly.
Chemical plant security is a major issue in my State. We
have a number of plants that have more than a million folks
that are in the fall-out zone of a potential explosion, and it
is an issue that you have actually spoke very, I thought,
eloquently about, talking about voluntary efforts that alone
are not sufficient in a letter that you sent to the Washington
Post, October 6, 2002.
Do you feel the legislation that is working its way through
Congress, which does not bring about mandatory review of
security plans and review of technological elements of chemical
plants is adequate to meet a standard of certainty for the
communities that surround these plants?
Secretary Ridge. Senator, first of all, I would hope that,
while there may not be mandatory review, we certainly are
empowered to--the Department of Homeland Security is empowered
with its discretion to go out and review the security plans at
any chemical site. We have worked very hard over the past year
visiting some of the potentially more problematic sites. Some
of them have been in New Jersey.
We have produced a document dealing with the common
vulnerabilities of chemical facilities and potential indicators
of terrorist activity. We have established a protection,
training, and planning program. We are trying to develop a
baseline for chemical facilities. So whatever the legislation
might be, I do think it is very, very important that the
Department of Homeland Security, particularly the
Infrastructure Protection Unit, have the ability to go out and
review the security plans.
And likewise, I think one of the most important allies to
determine whether or not that chemical site has met the local
needs is that we get some, that the local first responders were
included in that assessment. Because actually they are going to
be the ones that are going to have to deal with the incident if
it occurs.
So mandate--I think it is imperative that we have the
ability to go out and review the security plans.
Senator Corzine. I would hope that you would have some kind
of accountability for the plans. I think that the idea that you
could go out is a good thing, but whether we are actually
following through, I believe, based on at least my own
anecdotal spot checks and others and broad bases, not all of
what is being said is going to be done is being done, and I
find it quite threatening in a community where there are
multiple millions in a number of the incidents in New Jersey,
but it is true across the country.
Secretary Ridge. Senator, we would be prepared to work with
you on the language. What we have done, tried to do within
these chemical facilities, is take a look at again the toxicity
of the contents, proximity to population, and we have begun to
set some priorities. And I think that clearly we will never
have enough manpower to get out and visit and work with every
chemical site around the country. We are going to have to rely
on our first responders and the local law enforcement community
to do that, but there are some that would offer great potential
catastrophic consequences, and I would like to work with you on
the language and make sure we get out and review those.
Senator Corzine. As you have I think appropriately
identified threat-based elements with how you are designating
your priorities in the Department, I think that is true here,
and we need a prioritization basis on how you look at these.
I think some of the things that I see coming through
Congress not necessarily meeting the themes or the standards
that I think I hear, and I have heard from you as you have
commented on this, and I recognize that you recognize it is an
important element. I see it working on the ground through our
State efforts, but I would encourage you and the administration
to do whatever you can to get a bill through with some
meaningful bite with regard to prioritization and then mandates
at least with regard to some of those issues, and I look
forward to working with you.
Let me ask about the state of screening by a TSA at
airports. I am quite obviously being parochial in one sense in
that Newark airport is one of the seven airports that did not
meet the baggage screening deadline at the 1st of the year. I
think there were seven.
A lot of this is attributed, at least from the interviews
that I have been able to put together with the folks on the
ground, this is a heavy turnover in TSA and among screeners. I
think average is 14 percent. I think it is 17 percent in
Newark, and it goes up to 35 or 36 percent. By any managerial
metric, those are high turnover rates and do not lead to the
best of professionalism and efforts in carrying through.
Is this a problem that is being recognized? Are there plans
to address it? And particularly how soon do we think that these
seven airports--I happen to have a special interest in Newark--
that we can get this into a position that we can begin to give
the public assurance that the safety of the airways is intact?
Secretary Ridge. Senator, I would like permission to get
back to you specifically with a request to our anticipated
deadline for the Newark airport and for those seven. I do not
have that information with me, but I would be pleased to work
back to you.
Yes, we have experienced similar problems at some of the
other airports, Senator. A lot of it has to do with
convenience, transportation, getting to the airports, the cost
of either the inconvenience associated with taking public
transportation--many of them have to--the cost of parking their
vehicles. There are certain themes that we are seeing in some
of our major airports around the country that we are going to
try to address financially with different kinds of incentives
to keep people working.
We invest a great deal in them to train, but if we have
this constant turnover, it is not, to your point, it does not
provide the stability and the continuity we need. So we are
aware of the challenge. A lot of it has to do I think with
access, transportation, and we are reviewing a system of
financial incentives to help alleviate some of the problems
that these people are running into in order to get out there to
serve the public.
Senator Corzine. I think there are real issues here I the
overall structure, and any time you start a new program as
broad as this is, that it can be the kinds of issues you cite.
It does not happen to be the case at Newark because there is
great public transportation there. It is a huge turnover.
I would love to work with you on the specifics in that
particular situation, but I think it is a national problem. And
I will just ask for the record, since I need to go vote, on
port security, I am curious what current percentage of
containers that we are actually screening, if that is something
that is available for the public view, and is there a metric of
resources expended to increase the number, and is there a goal
where we think we can, since you probably can't screen every
single container that ever comes to the shores, how can we get
ourselves into a position to have the greatest confidence on
our screening abilities? What is the percentage? Where do we
stand with regard to our budget requirements to get to that?
And since I have to go vote, I will take that on----
Secretary Ridge. I would be pleased to, Senator. Just to
assure you that we are layering in our review, our inspection
of these container ships, beginning with a very precise
targeting of these containers before they are unloaded in
Singapore, and Hong Kong and the like. It is a rule-based
system. We do it at the National Targeting Center here, and
right now I think we are at 98 or 99 percent of the containers
initially go through that process before they are even put on
the ship. It is a very important and very complex application
of the information we have acquired from the Coast Guard and
the Customs over the years, and I would be very pleased to lay
out in detail to you the different layers of defense as it
relates to cargo container security.
Sorry to keep you, Senator. Thank you.
Chairman Nickles [presiding]. Senator Corzine, thank you
very much. That was an excellent question.
Senator Burns.
Senator Burns. Thank you very much.
I have just a couple of points. You might want to write
these down, and you may have to respond to them, Mr. Secretary,
in private or whatever.
I notice you have in here an increase of about $892 million
or a 20-percent increase in improving aviation security. Could
you tell me is that employees? Is that a capital investment?
Where is that money going? Because every time I go down there,
I have never seen so damn many people in my life. They are all
over the place, and I am not real sure we need it.
Secretary Ridge. Senator, that additional $800 million is
basically personnel costs. The 2004 budget, as we ramped up
pursuant to the mandates from Congress, we did not need,
because we were not fully ramped up--let me put it another way.
We had an FTE requirement that was not fully met in 2004, and
we needed additional dollars to meet it in 2005. So those are
personnel costs, to your point, paying for labor, and paying
for the baggage and passenger screeners.
You should also know simultaneously we are now going back,
having met the mandate of Congress, getting the technology
deployed, hiring the screeners, on an airport-by-airport basis
to see if the present configuration of people and technology is
appropriate at each and every airport. So there will be some
adjustments in the future. Some airports may have fewer, some
airports may have more screeners. But we really need now to
take a look an airport-by-airport basis to determine whether or
not we have the right number of people there. And the more
technology we can deploy, in the long term, probably the fewer
people we will need.
Senator Burns. Passenger IDs, any of these people on people
who have a record of being frequent flyers, are they going to
identify those people in some way or another, facilitate moving
some of those people through these airports a lot quicker?
Secretary Ridge. Senator, as you know, we are working on
two initiatives right now within the Department. One is the
computer-assisted passenger prescreening program. It is a pilot
program that we hope, with the approval of Congress and
basically we need the stamp of approval from GAO, that we can
run that program. It would help us prescreen and probably
eliminate a substantial of the secondary screening.
There is another initiative that we are looking at called a
Trusted Traveler Program, where people are prepared to give us,
in advance, basic information about themselves, and so we can
confirm their identity, verify who they are, and they do what
they claim they do, to expedite their movement through the
airport as well.
So those two initiatives we are undertaking this year.
Senator Burns. In another area. Up in our State, when those
grants come down to help first responders, fire departments,
this type thing, there was a, if your EMTs or your first
responders was not a part of the fire department, they did not
get any funds. Is that a rule in your shop or is that a local
State regulation?
Secretary Ridge. I think that is a restriction--I would
have to double check, Senator--but I believe that is a
restriction imposed by legislation. If it is the Assistant to
Firefighters Grant program, I think it limits access to those
dollars to firefighters.
Clearly, the emergency management personnel that you are
talking about, if they are part of a State or local scheme, can
qualify for any money. But for the Assistance to the
Firefighters Grant, I believe Congress limited that just to
fire departments.
Senator Burns. You have different situations, like in the
State of Montana, we have such small towns, you know, sometimes
they are not together, and most times they are volunteer
systems in that respect.
One other question. In the area of bio defense, we have
spent a lot of money in the procurement of vaccines and drugs
that would be needed in case of a bio attack. Do those drugs
have shelf lives, and what is our cost of replenishing those or
turning those over from time to time?
Secretary Ridge. The drugs do have a shelf life. Health and
Human Services, one of their responsibilities over the
strategic national stockpile is to monitor and replace them if
they have exceeded their shelf life. I cannot give you the
specific annual figure to replace the vaccines or the other
pharmaceuticals, but I will get it for you.
Senator Burns. And border, I understand we are going to
restock a whole little town in Montana about people coming to
Montana or that is going to work that border. I do have a
complaint, though, and I hear this more than anything else.
As you know, bureaucracies have habits of building
fiefdoms, and we are getting a lot of complaints on just out
and out harassment at these borders. And I know most, I should
probably take that up with department heads, and I plan to do
that, but I did want to bring it up during this hearing because
I am concerned about that.
The free flow, Mr. Secretary, is this. We have people who
farm both sides of that border up there. They have farms in
Canada, they have farms in the United States, and now all at
once we are just--really, it is just a hassle to traverse that
border now, where it has always been open before, and these are
people that are everyday people, and most of them live in the
area. But they say these people are just getting out of hand,
and they are outrageous, and they are discourteous, and if you
make them mad, they will leave your equipment sitting there.
They might hold you for a half a day. I heard of farmer had to
hold his equipment half a day because he made the guy mad, and
I fail to understand this.
Secretary Ridge. Well, Senator, I would like to work with
you on that. We have had some challenges along the borders
because of that.
Senator Burns. I will bet you have.
Secretary Ridge. And our job obviously is to, No. 1
priority is security, but there is a commercial activity at the
border. Some of it is visible with trucks, and cargos, and
others. It is just good farmers who happen to have a parcel of
land on both sides. So we would certainly like to work with you
on that, and I am fairly confident we can come up with a
satisfactory solution. You identify the problem, Senator, and
we will correct it.
Senator Burns. Thank you.
Chairman Nickles. Senator Burns, thank you very much.
Mr. Secretary, I told you earlier I would try to get you
out--11:30 is when you--do you have a little flexibility there?
Secretary Ridge. A quarter of.
Chairman Nickles. We will be OK.
Senator Wyden? Thank you.
Senator Wyden. Thank you, Mr. Chairman.
Mr. Secretary, as you and I have talked about before, I
feel very strongly that it is possible to fight terrorism
without gutting civil liberties. Yesterday, the associated
press ran a story that indicated that some of the remnants of
Admiral Poindexter's program are still continuing. I want to
start with a couple of questions about that.
My first question is can you make clear to us that none of
those Poindexter programs are used to spy on law-abiding
Americans on American soil? That is what the law requires.
Secretary Ridge. Senator, I am going to respectfully refer
that inquiry to DOD, where Admiral Poindexter was engaged in
that enterprise. I can assure you that nothing that we are
doing in the Department of Homeland Security has been designed
to collect information or to spy on American citizens. Frankly,
every initiative that we consider, from the outset, there is
both concern and consideration about the impact on civil
liberties and privacy.
The Congress very appropriately created within the
Department a Privacy Office and an Office of Civil Liberties,
and those couple of really talented lawyers and very good
staffs are engaged at the very outset not only internally
within the Department, but frankly with the groups and
organizations around the country that legitimately are
concerned about the universal protection of privacy and
freedom.
Senator Wyden. Is your office involved, in any way, with
data mining on the part of Government agencies? Because it
seems to me that the Congress is just in the dark with respect
to data mining. And we are paying for it, and my guess is you
all are involved with other agencies in data mining today. And
I would like to know, A, if that is the case; B, how many
programs are going on involving data mining; and, C, how much
money is being spent on data mining; and, D, whether there are
any privacy rules with respect to how this data mining is going
forward?
What can you tell us about your office and data mining this
morning?
Secretary Ridge. Well, Senator, I would like a little
clarification from you, and I would be happy to have a private
conversation with you, even a public exchange, if we framed the
issue.
We target containers coming into the United States. We
buildup a data base that includes information about companies,
and shippers, and we do refer to that. I do not know whether
you consider that to be part of a data-mining process, but we
do refer to information that we have compiled in Customs and
the Coast Guard about companies and shippers.
We do, as part of a program to move commerce through the
borders, insist on going in to check the backgrounds of truck
drivers coming across our borders from Canada to Mexico in
order to get them access, quicker access to and from the
States.
We are contemplating a computer-assisted passenger
screening program. This is probably perhaps where the greatest
concern might be, where we would take the name, the address,
the phone number, and the date of birth and other passenger
name records that would be associated with that passenger. And,
again, the Congress has set some thresholds and asked the GAO
to examine the CAPPS program to ensure that the privacy
protections that Congress is concerned about are met. We are
still working and developing that pilot program, which we
cannot implement without the GAO's imprimatur.
So I would be happy to take up any of these or any related
questions with you at any time. But we are getting access to
personal information, and occasionally some proprietary
information, but the most expansive reach would be the CAPPS
program where we are trying to enhance security, reduce
inconvenience, and frankly get access to some commercial
information that commercial vendors might.
Senator Wyden. Why don't you furnish to me, for the record,
what programs involving data mining your agency is involved
with because I think it is very clear that everything from
airline ticket purchases, to visas, to driver's licenses, a
whole host of information is being examined by Government
agencies every single day, and the Government, and certainly
the Congress, is in the dark with respect to what is going on
in data mining. There are no privacy rules. It seems to me the
public has a right to know exactly what is going on here.
Two other questions, very briefly. Section 313 of the
legislastion creating the homeland security department calls
for the creation of the Centralized Technology Clearinghouse.
This is something I was very involved with. And the point of
the clearinghouse was to make sure that our entrepreneurs and
our small businesses would not have to traipse all over
Washington, D.C., in order to get their technologies reviewed.
We are not clear what the status is of the clearinghouse that
is mandated by Section 313. Could you give us some sense of
where that is because there are a lot of entrepreneurs and
small businesses with ideas out there, and they wanted a one
stop kind of process. What is the status of the clearinghouse?
Secretary Ridge. We understand and recognize it is a
priority for the Congress. It is not as complete as I think you
want it to be. With regard to getting access to information
concerning procurement, we are in the process of streamlining
that. In terms of it getting access to our Science and
Technology Unit, to review the technology to see if it has
application either within the Federal Government or elsewhere.
Those are two features of that, as I read Section 313, that you
wanted us to do. We are not completely done with either one
yet; one, procuring information; two, assessing whether or not
the technology is as good as it says it is and will perform as
advertised.
Senator Wyden. I hope that you all can move quickly on that
because it seems to me that this is something we hear again and
again from small business people, that they traipse all over
Washington, D.C., trying to get answers.
One last question, if I might. Section 224 of the law was
something that I was particularly interested in because it
established something called NetGuard, which was essentially
volunteers in science and technology. We saw after 9/11, for
example, a lot of companies literally went to New York City in
an effort to try to help them get their communications link-ups
back and going, and they simply could not get in.
What is the status of section 224? This is something, like
the clearinghouse, it is a very low-cost operation. NetGuard is
volunteers. This is not something with Government employees.
What is the status?
Secretary Ridge. Senator, I will have to get back to you on
that one.
Senator Wyden. Fair enough.
Thank you, Mr. Chairman.
Chairman Nickles. Senator Wyden, thank you very much.
Next, is Senator Sessions.
Senator Sessions. Thank you, Mr. Chairman.
Mr. Secretary, it is great to have you with us. You have
had one of the greatest challenges anybody could have to try to
assimilate all of these agencies and departments into one
cohesive branch. I think you are doing a good job, and I salute
you for it, but it is not easy. Anybody that has worked in the
Federal Government, as I did, and worked with a lot of
agencies, a United States attorney, and you know they are all
quite different, have institutional prerogatives. When they
decide to work together, they sign what amounts to treaties,
you know, Memoranda of Understanding and things, that really I
think indicate just how difficult it is to get people to work
together.
In that regard, I strongly believe, based on my experience
at that level, partnerships between law enforcement at the
local level, partnerships between State and local and Federal
works. I have heard some concern in the field that there is not
enough really partnering with the Federal Government in
cooperative work.
It is something, in my experience, you have to push
constantly from the top, and it will eventually filter down,
but without sustained leadership and pushing, it may not
happen. I know you have indicated your desire to see this
happen, but I wonder if you are satisfied at the level of
cooperation and, if not, will you continue to push for that?
Secretary Ridge. Senator, I am very satisfied with the
level of cooperation We have literally seven hundred thousand-
plus volunteers in State and local law enforcement that want to
be part of the Homeland Security team, and if given actionable
information will take action to help us.
Our challenge within the Department is to build an
information network so that we can give them timely
information. Just yesterday, we announced an initiative. Our
goal is to complete it by the end of the year, and that is
basically to design an Internet-based information-sharing
system that once completed will go through all 50 States and
initially to the 50 largest urban areas. But, clearly, trunk
lines can be spun off of that, so we can pass on down to the
States and local law enforcement sensitive, but unclassified,
information, and then as we complete our classification system,
where needed, and when appropriate, even pass down secret
information. It will be an Internet-based system.
As I said before, our goal is to get it up and operational,
and it is also not only going to connect us vertically, but the
Operations Center in Washington, D.C., then can compare notes
with the Operation Center in New York City. So there will be
points of comparison, where they may pick up bits and pieces of
information that need to be shared. They may find some trends
with regard to surveillance activity and share those. So,
again, it is an Internet-based system. It is one of many that
we are going to do in addition to secure phones, and video
conferencing and the like, but our goal is to have that
completely operational by the end of this year.
Senator Sessions. I think that would be an historic step
and would be very important. At the same time, I think you also
need to push your local officials in areas to have regular
meetings with the local law enforcement. Make sure they feel
that they know how to access this and feel that partnership
effort.
Secretary Ridge. If I might, Senator, one of the things I
failed to note, and for everyone's benefit, this was a system
actually designed by State and local police, and shortly after
9/11 we became familiar with it. And it just seemed to be the
easiest way to transmit information.
During the holiday season, we actually used this system to
connect with New York City and Los Angeles, California. So
you'd get virtual real-time information exchanged. We saw a
couple of States using it. New York and California get a lot of
credit. We said this should be one of the main poles in the
informational tent, and it was really brought to us by State
and local law enforcement. As you point out, if we give them
information, they can act on it.
Senator Sessions. Mr. Secretary, we have a substantial
problem with securing our borders with regard to immigration.
We have large numbers of people here illegally. I understand
that this bill calls for I believe $23 million for enhanced
worksite----
Secretary Ridge. Enforcement.
Senator Sessions [continuing]. Enforcement.
Secretary Ridge. Yes, sir.
Senator Sessions. Are you satisfied that can make a
significant difference in that problem?
Secretary Ridge. Well, Senator, I think it is a doubling of
the personnel and teams that we have within the Department. We
will give you a status report here in maybe 6 months to tell
you whether or not, after we get those dollars, and see if we
need additional support.
But I think, as a precursor to dealing with the President's
initiative concerning immigration, we will know that none of
these laws are going to be effective unless we have the
resources to enforce them. So we do have a doubling of those
dollars to assist us in 2005, and we think it is adequate to
meet our laws under the existing laws because we are doing so
many other things in addition to that at the borders to reduce
the illegal flow of immigrants.
Senator Sessions. Well, we are making some progress.
Secretary Ridge. Yes, sir, I think we are.
Senator Sessions. There is no doubt about that. I have been
a critic of, as you know, the legal system and its
effectiveness in some of the things we have done. I think we
probably need more than that in that account.
And, second, you have a $100-million increase for purposes
of dealing with detention and removal of illegals. As I
remember the numbers, I think there are 400,000 absconders,
people who have been arrested for violations of immigration
law, were released on bail, and they just never return. There
are 400,000 out there. They also are not getting into the
National Crime Information Center.
I am sure this $100 million will help, but I hope that you
will give high priority to guaranteeing, before we have any
reform of the law, that our legal system is capable of dealing
effectively with these problems.
Would you make any comments about that expenditure and what
you hope to achieve with it.
Secretary Ridge. Senator, you highlighted a challenge that
we have with regard to the enforcement of the law, and that is
dealing with those who fail to show up for that final
determination hearing or there is a hearing, but we have no
place to detain them. So the $100 million will significantly
increase the capacity--not completely--but it is a significant
increase in our detention capability, so once detained we can
make arrangements to deport them.
Senator Sessions. When people are convicted of felonies,
they really should not be released. They are required by law to
be deported, and I understand that has not been happening on a
regular basis, and we need to make progress there.
Thank you, Mr. Chairman.
Chairman Nickles. Senator Sessions, thank you very much,
spoken as a Senator and also a former U.S. attorney.
Senator Stabenow.
Senator Stabenow. Thank you, and welcome, Secretary Ridge,
it is good to see you again.
Secretary Ridge. Hello, Senator. It is good to see you.
Senator Stabenow. I first want to thank you for coming to
Michigan and for the progress we have made at the border. It
has been my pleasure to be a part of hosting you and a
bipartisan delegation and have you come and see not only the
challenge in Detroit, which is the largest Northern border
crossing, as you know, but also in Port Huron, a smaller
community where there are multiple risks and threats, and we
look forward to continuing to work with you to meet those
multiple needs, both for small communities as well as larger
communities.
I also understand you will be in Detroit on Friday to the
Economic Club, so we welcome you again.
Secretary Ridge. Thank you.
Senator Stabenow. There is no doubt in my mind that this is
one of the most serious issues, if not the most serious issue,
that we face as it relates to the budget, and this is not a
partisan issue. We all care about safety and want to make sure
we are safe, but we have different choices, and that is really
what the budget process is all about.
And one of my deep concerns is that after having 11
different meetings around Michigan with first responders, I can
say emphatically that if I were to answer Senator Conrad's
questions about do we have protective gear, do we have
interoperability on communications, do we have what we need in
my State, the answer would be no, no, no. And that is of deep
concern to me.
And so when I look at choices in the budget, and I would
ask, first, you to respond with your former Governor hat on, as
being a distinguished Governor and having to work under Federal
laws and budgets in the past, when we look at the fact that the
President's budget cuts the COPS program by $712 million, and
the fire grant program by $250 million, and then provides some
other increases, but when we look at the fact that, in totality
for a Governor or a local community, you do not
compartmentalize everything. You do not say to this police
officer, you will only answer the call if we know it is
terrorism, and you will answer the call if we know that it is a
domestic problem.
The practical reality is that law enforcement has to
address a wide variety of issues. They get a call on a
suspicious package, they do not know whether or not that is
terrorism or whether that is something else, and yet they have
to respond.
So the local police chief, the mayor, the Governor looks at
it in totality of what they need to be ready for threats no
matter where they come from, which is one of my concerns about
our attempts to divide this up in some way. Where the rubber
meets the road, and you are dialing 911, that is just now how
they look at it, in a practical sense.
So I am concerned, I mean, as a former Governor, if you
were receiving a $5-million increase in homeland security, but
then a $5-million cut in other areas, would you feel you were
really moving ahead?
Secretary Ridge. Well, Senator, even the new math wouldn't
get me to that conclusion if you took $5 million out of this
pot they used to give me and gave me $5 million in that pot, so
I can understand that. But I want to share with you that I
think it is, at least from Homeland Security's point of view,
the President has sustained his commitment, which was a
considerable increase in 2004. What we are talking about,
Senator, is the difference between--and again you did say it
was a matter of priorities--but the President's request, by and
large, for first responders this year is at 2004 request level.
In the budget process and in the legislative process, the
Congress shifted some resources and took the dollar amounts for
the State homeland security grants a little bit higher, took
the assistance to the firefighters' grants higher. But I think
we have to be very clear. The President has basically sustained
his request from 2004 to 2005, and the priorities were shifted
a little bit by Congress.
And I think the President has come up in 2005, and here we
have shifted--it is the same amount--but we have shifted the
resources to where we think strategically there would be, at
least for this time, it would be a better investment.
Senator Stabenow. And I appreciate that. My concern, which
is a larger concern, really addressed--that we are responsible
for as well--is whether or not we are meeting 2004 levels and
whether it is the same as 2005. Those levels were underfunding
of what our communities needed.
And the broader issue, and I have more of a statement, is
that when we look at what former Republican Senator Warren
Rudman and the commission, a distinguished group of people,
looked at in terms of the broad needs that we have on first
responders, they indicated that it would take $15 billion more
a year to truly make sure the equipment was there, the
communications was there, the bioterrorism training was there,
the staff was there.
This is more just a comment from the perspective of our
Budget Committee, but when we look at this next year--and I am
borrowing Senator Conrad's chart--and we look at the fact that
it is a matter of choices. For people who are earning over
$337,000 a year, this next year they get $45 billion back in
their pockets in terms of a tax cut. If we just gave them two-
thirds of that, if we said we, as Americans, need to sacrifice
together, and we are all going to be better off if we are able
to fund everything that is needed in homeland security, and we
just said you can have two-thirds of that, but we are keeping a
third of it to fund first responders, I believe that would be a
better choice to keep us safe.
One other question, Mr. Secretary, and I will not ask you
to respond to that. That is an issue for us to debate in terms
of priorities.
Secretary Ridge. I understand.
Senator Stabenow. On the local front in Michigan, when you
were in Michigan last, we talked about a specific issue to
Michigan which is the fact that Toronto closed all of their
landfills and is now trucking all of their trash literally into
Michigan. We have a, we showed you through a helicopter, the
trucks coming across the bridge.
Secretary Ridge. Right.
Senator Stabenow. Over 180 trucks a day. Even though we
have better equipment at the border, and I was pleased to
sponsor the amendment to create that and to work with folks at
the border who have done an excellent job, we still cannot see
inside of every truck. Every truck is not completely inspected.
Your Department has initiated an effort to look at these
trash trucks from a security standpoint. I wonder if you can
share, at this point in time, any update on what you are
finding or when you will be able to give us some feedback on
that. This is a critical issue in Michigan for us and a real
issue of national security because we do not know what is
inside those trucks, and we are very concerned about our
ability to keep people safe.
Secretary Ridge. Well, Senator, No. 1, thank you for your
hospitality during that visit. I did learn quite a bit. The
visit to Port Huron specifically was very eye-opening in
relationship to a community with massive infrastructure and not
very good access to any of the dollars that are out there,
except through the State's share, and I look forward to working
with you and your colleagues to see if we can remedy that as we
work with the regulations around the Urban Area Security
Initiative.
I did raise the issue with my counterpart in Canada, after
our meeting, and clearly it was just the raising of the issue,
but no resolution. It was raised again when I returned, based
on my conversation with you, with Customs and Border Patrol.
But what, if anything, they have done since that time we
visited, I do not know, and I would be pleased to get back to
you and report. All right?
Senator Stabenow. Thank you.
Chairman Nickles. Senator Stabenow, thank you very much.
Before I call on Senator Allard, Mr. Secretary, I need to
excuse myself. Senator Crapo will conclude chairing the
hearing. I just want to thank you for your presentation before
our committee today, and also I look forward to working with
you. You have taken on a big challenge reorganizing a whole lot
of the Federal Government. I think doing a good job, making our
country safer, it is almost an impossible task, and I just
compliment you and your team for the work that you are doing
and look forward to working with you in the future.
I apologize that I need to step out, but I think we just
have three or four more Senators, so you should be done
shortly.
Chairman Nickles. Senator Allard.
Secretary Ridge. Thank you, Senator.
Senator Allard. Thank you, Mr. Chairman.
Mr. Secretary, welcome.
Secretary Ridge. Senator.
Senator Allard. I always enjoy what you have to say.
The administration, I want to move right into one, a
question here that has to do with the local nature and local
problems that we are having in Colorado and several other
States first, and then I have some other questions I want to
talk to you a little bit about--the Information Analysis and
Infrastructure Protection program that you have in place.
The administration suggested a significant funding decrease
for chemical demilitarization in the budget for the Department
of Defense. We have a facility in Pueblo, Colorado, that will
be profoundly affected, and understanding that you are not here
today representing the Department of Defense, I would just ask
simply does a delay in the disposal of chemical weapons and
byproducts, essentially warehousing these hazardous materials,
post a risk to homeland security?
Secretary Ridge. Senator, I would, without knowing the
specific details of the change reflected in the DOD's budget, I
would say to you that the delay, in and of itself, I do not
necessarily think would create a higher level of risk as long
as there is no diminution of security around the facility. I do
think that one organization that has been very good over the
years at protecting their forest structure and everything
associated with him has been the Department of Defense. But
delay in final disposal, no, assuming that the security
measures have been sustained.
Senator Allard. And I think that is the big ``if,'' because
I know around the facility we have in Colorado, I am not, at
least the locals are not convinced, we have much in the way of
security measures, and it seems that the sooner we can get
this----
Secretary Ridge. Is it through a private contractor?
Senator Allard. They are in the process--yes, a local
contractor has been let out, but security is minimal, and I
think you always have to worry any time you have an
accumulation of chemicals in one location whether it could ever
become a target, whether it is a homegrown terrorist or foreign
terrorist or whatever, and it seems to me that there could be
some risk there.
Secretary Ridge. Yes. I am sorry I cannot be more specific,
Senator, since I am not familiar with the particular venue or
the contents at the facility.
Senator Allard. Well, thanks for your interest in it at
least.
In January, the President, in 2003, in the State of the
Union address, he had instructed the leaders of the FBI, and
the CIA, the Homeland Security, and then the Department of
Defense to develop a Terrorist Threat Integration Center to
emerge and analyze all threat information in a single location.
And there is a section there in the Homeland Security Act
that provided that your Office of Information Analysis and
Infrastructure Protection is to assess, receive and analyze law
enforcement information, intelligence information and other
information from agencies of the Federal Government, State and
local Government agencies and private sector entities to
integrate such information.
Who is in charge of detecting and warning of these threats
to the homeland? Is it you or is it the Terrorist Threat
Information Center?
Secretary Ridge. The warning responsibility is given to our
Department. The analytical responsibility is shared. We have
analysts in the Threat Integration Center. While we do not
collect information, because we are considered a full partner
in the intelligence community, we can go back to the Threat
Integration Center and ask whatever agency responsible for
generating the information to answer questions that we might
have from our analytical point of view about that particular
piece of information.
So, again, it is a collaborative exercise. We have analysts
in it from the CIA, FBI, Homeland Security and others that
paint a strategic threat picture. It is a real value added to
our own independent analysis, and on a daily basis we do
analytical work together. We, from time to time, go back and
ask for additional information if, as part of their strategic
analysis, there is something that catches our eye as it relates
to our responsibility to secure critical infrastructure.
Senator Allard. This has been spread through the various
agencies and whatnot. I would think that you would have some
concern about duplication of effort. How do you limit your
duplication of effort?
Secretary Ridge. Well, Senator, I think having a couple of
different groups or organizations bringing their various
experiences to the analytical side of combatting terrorism is a
good thing. Some people call it duplication, others call it
competitive analysis. But I do think it actually is a better
situation to have analysts in different departments may have a
slightly different point of view on a particular piece of
threat reporting, and it will be really forced, because of that
competitive analysis, if there is a difference of opinion, for
them to look deeper and more critically at that reporting
stream.
I think, by and large, there has been, in my experience so
far with Homeland Security and the Threat Integration Center,
there has been harmony in terms of the relationship, and
frankly not too many differences of opinion as to what it all
means. But when there is a difference of opinion, it just
sharpens the clarity, and focus and gets a very robust
discussion going on, and I think that is healthy.
Senator Allard. I am just curious, we just stood up the
Northern Command in the Department of Defense. It seems to me
that there ought to be some communication between Northern
Command and Homeland Security. Is there some avenues of
communication that have been set up between individuals in
those two departments?
Secretary Ridge. Well, we can communicate with the Northern
Command, but as an old soldier, there is a chain of command
that we use in order to do it. But we----
Senator Allard. So you feel comfortable with anything that
they may be doing, anything that you might be doing and that is
being coordinated.
Secretary Ridge. Yes. Well, you know, they just had a very,
very significant multi-day, multi-incident exercise, and we
were very much involved in the planning process and
participating in that exercise. I am confident, in the months
and years head, we will get locked up even closer.
Senator Allard. There is a computer system being set up. It
is called the Homeland Security Information Network. You are
familiar with that.
Secretary Ridge. Right.
Senator Allard. It is supposed to provide critical
information to all 50 States and major urban areas. Can you
update the committee on the program requirements and estimated
costs on that.
Secretary Ridge. Senator, the cost, frankly, is minimal. I
do not have a specific dollar amount, but since it is Internet-
based, you have the infrastructure there. The costs will be
associated with developing a classification system and some
firewalls so that we can share, when appropriate, some
classified, secret information. But it is actually a system
that was developed by New York and California, by the State and
local law enforcement community and a little assistance from I
think the Defense Intelligence Agency, and it is the way that
they have been communicating between their State and local
officials.
In one of our travels, some of our folks took a look at it
and said, You have the backbone here. Let us see if we can
devise what they used to call what they used to call was a
Joint Regional Information Exchange System, JRIES. Let us take
it nationwide. Let us draft it and tie it into, at first, to
the 50 largest urban areas in America so that we have virtual
contact with the States and the large urban communities.
We used it during the holidays, when we raised, elevated
the threat level, with New York City--our Operations Center was
hooked up with the New York City Police Department and the Los
Angeles Police Department by virtue of the Internet, and they
are constantly information on a minute-by-minute basis. So it
is a good system. It will take us about an entire year to get
it up and running, but at the end of the day, it will give us
the capacity to share information to just about every State and
local law enforcement official in our major urban areas, and we
think that is a good thing.
Senator Allard. Thank you.
I see my time has expired, Mr. Chairman.
Senator Crapo [presiding]. Thank you, Senator Allard.
Next is Senator Feingold.
Senator Feingold. Mr. Chairman, Mr. Secretary, thank you
for being here and for your work on behalf of our country.
Let me ask you, first, about something that I have heard
from emergency management officials in my State. They are
concerned about a proposal in the President's budget to cut
funding for the Emergency Management Performance Grants. They
are much more concerned about the proposal to cut the
percentage of grant money that they can use for personnel costs
from 50 percent to 25 percent.
I am told that this will have a tremendous impact on
emergency management officials, especially those in small
cities and counties, because salaries are often almost 100
percent of the cost of local and State emergency management
programs. And a number of people told me in meetings back home
and hearings that many local Governments will simply not be
able to afford to have an emergency management official. The
Emergency Management Performance Grant program is a respected
program that our State and local officials have come to depend
on.
Why has the administration proposed reducing the personnel
spending cap for the EMPG grants and potentially undermining
State and local emergency management capacity?
Secretary Ridge. Senator, I think it is a decision based
upon a shared responsibility for personnel costs and a primary
responsibility for the Federal Government to send dollars out
for training and exercise programs; that we would reduce the
level that we would contribute to defray the salaries and use
our portion of the funds so that once these men and women were
in place they would have additional dollars to conduct a
training and exercise program.
So it was based on a notion that we have a shared
responsibility to pay for the salaries. We have a primary
responsibility to help provide funding for training and
exercises.
Senator Feingold. Well, I understand that. I would just
indicate that I think this is going to have such a
disproportionate impact on some of our smaller counties and
communities, and I hope we can work together to possibly
reverse this before the budget is complete.
I would like you to address EMS funding in your budget.
Wisconsin EMS officials tell me that they feel sort of
overlooked when it comes to first-responder funding. As you
know, there has been no dedicated funding source for EMS
funding, and the President's budget proposal does not change
that.
I am told you will be submitting a report to the
Appropriations Committee next week discussing the amount of
funding EMS teams are receiving through DHS grants and the
barriers facing EMS teams as they try to get these grants.
Could you say a little bit about your findings and how the
Department is working to make sure that our EMS services are
not overlooked.
Secretary Ridge. Senator, I cannot tell you today what
proportion of dollars that we have distributed to the State and
local Governments have found their way down to the EMS
personnel. Clearly, they are an invaluable part of our first
responder community. We relied upon them heavily in
Pennsylvania, as does just about every other State. So I cannot
give that specific figure.
It is certainly supporting EMS, not so much the personnel
costs, but supporting their equipment acquisitions and their
involvement in training exercises is clearly an eligible cost
for the homeland security grants and if they are associated
with the Urban Security Area Grant money and eligible costs
there.
I will be able to tell you, in a short period of time, to
you and to Congress, as we read the State and territorial plans
that they have submitted to us, we should be able to get a read
as to where they view the EMS infrastructure as a priority for
the distribution of the billions and billions of dollars that
we have available to them. I just cannot give you the specific
figures on that.
As a former Governor, I assure you I think EMS is an
integral part of the first responder community, and they would
be eligible for distribution of these dollars, whether or not
other Governors or mayors, as they have developed their own
individual plans, have decided that, for this distribution,
they ought to get some of this money. I do not know yet. We
just got the plans.
Senator Feingold. Thank you. I was pleased to hear that DHS
is working to gather and disseminate first responder best
practices information. The first responders from Wisconsin who
I have talked to are excited about having a central Best
Practices Center. The Council on Foreign Relations Independent
Task Force, chaired by Senator Rudman, also found a real need
for such a center, saying that having one would ``allow all
emergency responders to learn from past experiences and improve
the quality of their efforts, thereby assuring taxpayers the
maximum return on their investment in homeland security.''
How are you involving the local first responder community
in your efforts to gather and disseminate best practices? And I
would like to inform Wisconsin first responders about your
initiatives and when they will be in place. When can they
realistically expect these programs to be online and available
for their use?
Secretary Ridge. First of all, Senator, we have as part of
the Homeland Security Advisory Council, a group of men and
women specifically out of the first-responder community from
around the country. And we were asked by the States, in
anticipation of our request for statewide plans, to give them a
template. And so we put together the first responder group, as
well as a State and local group, and they were the ones that
developed the template.
That is why I am hopeful that I can report back to you that
as the States took a look at the template that the Advisory
Committee gave them that was, in part, authorized by the first
responders and EMS folks, that there will be an EMS provision
there.
We are consolidating the State and local Government and the
Office of Domestic Preparedness. We sent a letter to Congress
here a couple of weeks ago so it can be a one-stop shop. This
will be the driving force behind the initiative to get the best
practices out. We will probably use many means of communicating
back to your first responders in Wisconsin, not the least of
which will be the Internet. I cannot give you a specific
timeframe, but I will task my people to provide that
information because if the first responders of Wisconsin are
interested in it, first responders everywhere will be
interested. I just cannot give it to you today.
Senator Feingold. Thank you for that.
Other Senators are waiting to ask you questions before you
have to leave, so let me just associate myself with the
comments of Senator Wyden with regard to data mining, his
questions, his emphasis on this. He and I have worked together
on this, and we will continue to work with you and others to
assure the American people that certain data-mining practices
are not used in a way that goes beyond the challenge that you
face, which is the terrorist threat. And this is a matter of
the highest priority to me, as it is to Senator Wyden, and we
look forward to closely watching this with you.
I thank you, Mr. Chairman.
Secretary Ridge. Senator, if I might, I would really like
to take you up on that offer. I served with Senator Wyden some
time ago. I know that is a passionate interest of his, and
obviously it is yours as well.
I do think the most immediate pilot program that we would
like to initiate I think goes to the heart of everyone's
concern about individual privacy and liberty, and that is the
CAPPS program. We think we have designed a program that is
respectful of individual privacy rights. We know we need GAO's
approval; i.e., Congress's approval. So particularly with that
initiative I would welcome the opportunity to work with you to
address any concerns that you and Senator Wyden or, for that
matter, any other Members of Congress might have.
Senator Feingold. I look forward to that.
Secretary Ridge. Yes, sir. Thank you.
Senator Feingold. Thank you, Mr. Chairman.
Senator Crapo. Thank you very much.
Secretary Ridge, we realize that your time is limited. We
have three Senators who have not questioned you yet, and I
believe Senator Conrad would like to have another round of
questions as well.
Secretary Ridge. Sure.
Senator Crapo. I am the last one on our side, and I will
just hold off until we finish up over there. And so we will
next go to Senator Nelson.
Senator Nelson. If Senator Murray was here before me, I
would certainly defer to her.
Senator Murray. No, thank you.
Senator Nelson. Well, thank you. Thank you, Senator. Mr.
Chairman, Mr. Secretary.
Secretary Ridge. Senator.
Senator Nelson. Mr. Secretary, Interpol has testified to
Congress last summer about the enormous amount of money that is
being made in the knock-off goods trade. We know, for example,
in the drug trade, that is a source of funding for terrorist
organizations. But the profit on knock-off goods is enormously
higher than the profit on the trafficking in drugs.
And I just visited with your folks in the Jacksonville
office, where they had just seized an enormous load, in this
particular case it was at a flea market, of these goods. And
interestingly they import the handbags without the labels. So
it is legal to import them or the shoes or the pieces of the
watches, and then once they are here, they assemble them and
then put the Fendi or Ralph Lauren labels on them, which then
it becomes illegal because it is deception, and that is against
the law.
And apparently billions of dollars are being made in this
kind of trade all over the world. A lot of these items are
being manufactured in China, where they can be manufactured
very cheaply. So naturally my concern is, particularly with
Florida being a place of 14 deep-water ports, where a lot of
commerce is coming into this country and where we just had this
seizure over the weekend.
I would want to know, from you, what we can do to help you,
perhaps first with legislation, increasing the penalties.
Because, interestingly, if you get caught dealing in drugs,
that is one kind of harsh penalty, but if you get caught
dealing in these knock-off items, it is a much lesser penalty.
And if we ultimately get the proof that profits from these
criminal organizations are going into terrorism, then we better
be concerned.
The second item that I would wonder would it be helpful for
us, as the legislators and the appropriators, to do is to
create some kind of public education fund for you so that, when
people go and buy these goods--and they know they are getting
knock-off goods. It is not illegal for them to buy them. It is
illegal for the guys to sell them--so that they see the
potential link there with supporting terrorism, and thus a
campaign of public service announcements.
What do you think, Mr. Secretary?
Secretary Ridge. Well, first of all, Senator, I think my
colleague, Secretary Hutchinson, testified that, from our point
of view in border and transportation security, as we inherited
the old Customs Department, that this is probably one of the
fastest-growing areas of criminal activity not just in this
country, but around the world. And the potential for it to be
linked up, in time, because we have no contemporary evidence
that suggests it is tied to terrorist organizations, but
certainly the possibility always exists.
So as it comes to enhancing the penalties or some form of
public information campaign vis-a-vis the potential consumer, a
couple of issues we would certainly look to work with you on. I
would defer to Mike Garcia, of Immigration and Customs
Enforcement, as to whether or not he thinks, in his experience,
the penalties have been adequate, whether they have been a
sufficient deterrent and would like to review, get the benefit
of his analysis and then get back to you with a more complete
opinion.
Senator Nelson. OK. I will talk with Mr. Garcia then, and I
have put this in a letter to you right after I met with your
folks on Monday, after this big bust.
Secretary Ridge. Good.
Senator Nelson. And that is there in your office. So if you
would get your folks to direct it to Mr. Garcia.
Secretary Ridge. I will. Thank you.
Senator Nelson. Mr. Secretary, of course, port security is
of enormous importance to us in Florida, with us having so many
deep-water ports. And I am concerned, a year ago the President
had no money for the Port Security Grants. The Congress put in
$125 million. This time the President has put in $43 million
for a different kind of other than direct grants.
This Senator is going to be working to increase that at
least to the level of the $125 million for the grants, but
beyond that, if you talk to the Nation Ports Council, as well
as our own Florida Ports Council, they think, nationally, that
from a security standpoint, that they are lacking about $5
billion. I am going to shoot, over the course of time, for a
target of enhancing it by $2 billion. I would like to have your
reflection on that, and perhaps this is something we can work
together.
I know you have $1.9 billion in the budget, but that
includes the Coast Guard, and the Coast Guard has got a bunch
of other things to do, particularly in the waters off of
Florida. Let us hope they do not have to start interdicting an
exodus out of Haiti, but you know what we have to deal with
down there.
Secretary Ridge. Yes, sir.
Senator Nelson. Not only that, but the drug runners as
well.
Secretary Ridge. Yes, sir.
Senator Nelson. Give me your ideas.
Secretary Ridge. Well, Senator, I could not help but think,
with Senator Murray, after you talked about port security, this
is a conversation that the Senator and I have had before with
regard to her perspective and yours as the inadequacy of the
port funding. And I think it is worthy of the kind of public
discussion, in a civil way, because it is of a civic interest
to all of us.
I just, as a former Governor, as someone who expended and
saw expended both Federal, State and local resources in my
ports in Pennsylvania, oftentimes they are publicly owned, you
have public employees there, I more or less view them as part
of the private sector's distribution chain. It is part of their
infrastructure. And while I think we have to make the business
case that it is important for any major corporation to
protection its own supply chain, I think that we need to have
that conversation or debate here in the Congress.
From my point of view, the Congress has appropriated
hundreds of millions of dollars not only for grants, but you
support the Coast Guard. The Coast Guard provides enormous port
security. They are helping them with their security and
vulnerability assessments. The Coast Guard puts captains of
each port to coordinate the activity between the public and
private sector.
We get to a point I think, given the people and the
resources we commit to all of these ports, but I think we ought
to take a look at the private sector to enhance security at
these ports. So, again, they are for-profit entities. It is
part of their supply chain, and I think it is reasonable for
the taxpayer to expect a major corporation that is importing
goods to sell to our citizens that they invest in their supply
chain.
Senator Nelson. Well, I am going to help Senator Murray
help you, even though you will not say that you need the help,
we are going to try to help you to up that port security money.
Thank you.
Secretary Ridge. Thank you, Senator.
Senator Crapo. Thank you very much.
Senator Murray?
Senator Murray. Well, thank you very much, Mr. Chairman.
Obviously, from Florida to Washington State, we are deeply
concerned about the administration's proposal on airport
security, and I again am very concerned, listening to what you
have to say, and I do think we need to have a dialog, but we
need to do it immediately I think.
As a Senator from a State that depends on seaports for its
livelihood, we have to have a cohesive port security plan that
protects our communities and our economy from potential
threats. I know we both agree that the agencies that are
involved in securing our ports are doing an admirable job. They
are working through a very difficult problem, but if they are
not given the proper tools, and resources and guidance to knit
together a coordinated approach, all of us are left vulnerable.
You talk about the supply chain, but that is only part of
what port security is. Our ports are where a container or
something can come in and enter this country in a way that puts
everybody's security at risk.
I am deeply concerned about putting our security in the
hands of the private sector when I know how much they are
struggling today with costs of their own. And if they do not do
it, we have left a real weak link in the chain at whatever port
just simply does not have the money to do it.
But there is another issue as well, and I have listened to
you. You answered my question before when I asked you about
this, by saying that the private sectors for goods moving in
and out, similar to what you just said, and they should be
responsible for picking up. I noticed that on I think it was
News Hour with Jim Lehrer you said that the administration
should engage the private sector and that it should be their
dollars to provide security.
Let me tell you what my problem with that is. We are at a
real competitive disadvantage if we start requiring our ports
in this country to pay for security. We already have a problem
in Tacoma and Seattle with, if our prices are higher,
containers are diverted to Vancouver. I know that is the same
case in California. I do not know if that occurs in Florida. I
assume it would. If the costs of bringing containers into our
ports increases, if our private sector has to put that money in
there, those containers will not come into this country. Now,
that means a tremendous loss of jobs. That means killing jobs
right here in the United States.
My State is deeply concerned about this. If there is a
Federal mandate that we have port security, and there is a
reason that we should have that, it will have to be paid for.
If our costs go up, those containers will be diverted. Now,
that is an economic factor. It is a security factor as well,
and it is a job killer in the State.
So I wanted to engage you in that conversation today. I am
glad that the Senator from Florida brought it up. He is
correct. It is completely underfunded in this. If we are
relying on the private sector to do it, I think we need to know
how much you anticipate our port security efforts will cost the
private sector.
Secretary Ridge. Senator, first of all, let me just, at the
outset, say that we have a continuing responsibility that,
again, as part of the Federal share, to continue to deploy our
Customs and Border Patrol people there. We are going to make,
through congressional appropriations, additional purchases of
the nonintrusive technology, gamma ray and X-ray machines. So
that is an ongoing contribution to enhancing port security.
But when it comes to some of the other features of port
security, again----
Senator Murray. Other features meaning?
Secretary Ridge. Well, surveillance cameras, fencing,
infrastructure that accommodates the intermodal nature of
securing the infrastructure that accommodates the railroads or
the trucking companies that come in. I mean, there are security
profiles and things that I think can be done at relatively low
cost. We are in the process of----
Senator Murray. Well, the commandant told us that the cost
would be $7 billion.
Secretary Ridge. Seven billion dollars spread over a period
of years? If that is the case, and I do not----
Senator Murray. I do know that the requests last year to
your department for port security were over a billion dollars,
and I have worked with a number of these ports. I mean, we had
a wake-up call on September 11th, and many of these ports had
absolutely no security in them. They are a huge weak link in
our security chain, and they know that. They have been trying
to step up to it. Congress told them to put together their
plans. They have. I am aware that some of it is fencing and
security cameras, but if we just say, private companies, you go
do that, I know it will not happen.
Secretary Ridge. Well, first of all, Senator, I need to
reiterate, in addition to my preference that the private sector
pick up more of the additional expense with security because
the taxpayer is already paying for a substantial part of the
security, I think the taxpayer owns a lot of the land, has
provided some of the initial security, but remember we began
the security protocol before the container is even put on the
ship.
Senator Murray. Well, I heard your answer to Senator
Corzine----
Secretary Ridge. I guess it becomes a question of what is
the additional security that you are most concerned with for
purposes of our discussion? Is it continued scrutiny of the
contents of the containers?
Senator Murray. Well, I heard your answer to Senator
Corzine, and I think he asked you what percentage of containers
were screened, and you said 98 percent.
Secretary Ridge. Right.
Senator Murray. I am assuming that you are talking about
the 24-hour-rule for screening manifests.
Secretary Ridge. Correct.
Senator Murray. That does not look at what is in
containers. How many containers are screened before they ever
enter our ports?
Secretary Ridge. Actual physical screening, there is no
quota, but I think now it is about 5.4 percent.
Senator Murray. That is----
Secretary Ridge. But I would say to the Senator, we could
physically screen every container----
Senator Murray. We do not want to do that. I think there
are really good programs in place to not do that.
Secretary Ridge. You could do it, but the economic costs
associated with the physical screening of every container
coming across by railroad car, coming across by truck, coming
across by the shipping container, would be a far, far greater
impact on the overall national economy than modest improvements
at several hundred ports around the country.
Senator Murray. And I do not think anybody believes that we
need to do the actual physical.
Secretary Ridge. Right.
Senator Murray. But I do think there are ways to provide
security at ports where the containers are loaded before they
ever get there and track them here, which is what Operation
Safe Commerce was put in place to do. But----
Secretary Ridge. What we may decide to use, Senator,
depending on those lessons, there may or may not be a Federal
role. I am not prejudging that one way or the other.
Senator Murray. And actually some of that money still has
not gotten out to them, so we are way behind the curve on where
we need to be in order to learn that.
But let me go back to the basic question here because it is
a critical one for our economy. If that $7 billion that the
commandant himself told us was going to be necessary, and the
vast majority of that is going to be required to be paid for by
private companies, they will increase the costs to them at
their containers. How do we deal with the competition? That
means we will lose jobs in Washington State, I am assuming
California, Florida, other ports on the East. I know we will in
Washington State. I know our containers will be diverted. It is
an economic challenge they face every single day.
Secretary Ridge. Senator, the assessment of the commandant
of the Coast Guard was based on their review I think of most of
our major ports, if not all of our major ports. I believe it
was the optimum costs associated with the security plans to be
dealt with over a period of time. As we buildup security
infrastructure, be it at a port, be it at a local community, we
are not going to ramp it up all at once, No. 1.
No. 2, we have to be in the business of managing the risk,
and when it comes to managing the risk around shipping
containers, if that is the concern we have about enhanced
security at domestic ports, we begin that process before the
container is boarded on the ship.
There is a very sophisticated rulemaking device, based on
information we have from intelligence, from data that we have
accumulated over the years, so we have a pretty good way of
targeting potentially troublesome containers, for a variety of
reasons: criminal information we have, threat information we
might have, coupled with the information we have secured by
Customs and the Coast Guard over the years. That process begins
before these are ever loaded.
Senator Murray. Are you confident, as Secretary of Homeland
Security, that our ports are secure today and that we are safe
from having a container come into any one of our major ports?
Secretary Ridge. Senator, if you are asking me to guarantee
you the safety of 20,000 containers coming into the port every
day, I will not do that. It can physically be done, but if we
are going to talk about the impact on the economy, Senator, I
think we need to understand that in an international economy, a
domestic economy that is in the trillions of dollars, and so
much of it relies on container security, we have to manage the
risk, and you manage that risk----
Senator Murray. I understand that. But what I am asking is
you are saying that, under the plans that our ports have put in
place, that the vast majority of that is going to have to come
up with the private companies to pay for, are you confident
that they will do that, that the plans will be put in place and
that we can tell our citizens who live within blocks of a major
port, work in our major ports, that they are secure? And even
beyond that, if a container comes in, and the ports are shut
down, and stores in Senator Conrad's State no longer have
anything on the shelves because we do not have any imports, are
you confident that that will occur?
Secretary Ridge. Senator, I believe that the business of
securing America is not exclusively the business of the
American taxpayer. I believe the business of securing America,
securing ports, securing chemical sites, securing nuclear
sites, there is a shared responsibility. It is both in terms of
leadership and financial responsibility.
Now, what the division of costs associated with port
security is between the public and the private sector, that
remains for a very good public discussion, as we are having
right now. But if every time we look to a particular sector
within our economy and say that we cannot guarantee a fail-safe
system, which we can never do any how, but insist that the
taxpayer pay the entire measure for securing the private
sector, that is just a philosophical difference as to how we go
about integrating the resources and accepting the shared
responsibility of securing the country.
What balance is in there, Senator, remains to be seen. We
certainly are going to have a continuing responsibility to buy
nonintrusive technology, to continue to ramp up, and we have
asked you for additional money for the Targeting Center. There
will be other very significant Federal funds invested in
securing these containers.
You continue to give more money to the Coast Guard, I mean,
there is a long list of things that the taxpayer is providing
for to provide security, but I do think it will be helpful for
us, once we get these vulnerability assessments completed and
we take a look at the precise nature of these security plans,
to see what is appropriate Federal costs and what should be
borne by the private sector.
Senator Murray. What do you expect the time line to be able
to tell our private companies what their costs are going to be
on this?
Secretary Ridge. First of all, Senator, I do not think they
are operating in isolation because the captains of each and
every port, more often than not, obviously, a member of the
Coast Guard--you know, they sit down, and they have worked with
these men and women in these companies for quite some time. And
the level of security around these ports, not all, but most of
them, was pretty good around some of them, nonexistent around
others, but every day I think around the country, particularly
at the major ports, they are doing more to integrate their
security efforts, Federal and public.
And it just remains, I cannot tell you today what those
costs will be, but I think in time we will have a pretty good
idea. And then we have to decide, as a country--both public and
private sector--at what level do we take security at any of
these venues?
Senator Murray. I understand all of that. I know my time
is----
Secretary Ridge. How high is the fence? How many cameras?
Senator Murray. I just have to tell you, where I get really
nervous with your argument is that if we rely on the private
sector to do it, and they either do not have a money or there
is a competitive disadvantage that they do not or for whatever
reason, they are operating in thin margins that they do not,
who will end up paying for a tragedy is all of us.
Secretary Ridge. But, Senator, I am still trying to
understand, I am still trying to understand is your concern
with regard to the security of the port from domestic
infiltration across into the port or is your concern the
potential vulnerability around the container? I mean, there are
different kinds of security concerns around a port, and I think
that is where, very appropriately, the discussion would be who
has what responsibility for what security concerns.
Senator Murray. Well, I think both, but I do think the
potential for something coming in a container on a ship into
one of our ports, and you are the Secretary, and you know the
information better than I do, is out there. It has always been
part of what we need to understand, and accept and do something
about, and that is a huge concern for me.
Secretary Ridge. Again, Senator, I thing the approach we
are taking, laying in the targeting, the physical inspection of
some of these containers before they get on the ship, we do
board some of these high-interest vessels before----
Senator Murray. The 5 percent that you said are looked at
before they----
Secretary Ridge. The 5.4, that's right. There is no quota.
Whenever we find a high-interest container, we run it through
the machine, and if there is something that reveals itself when
it is run through the technology, we go in and open up the
container. And it is about managing the risk.
Senator Murray. Well, I agree with the Senator from
Florida. I think we need to make sure we have the funds
available and put in place a strong security system, and I look
forward to working with you.
Thank you, Mr. Secretary.
Secretary Ridge. Senator, I do too. Thank you.
Senator Crapo. Thank you.
Mr. Secretary, the Department of Homeland Security has an
important role in defending our homeland against bioterrorist
attacks, including those involving anthrax, and smallpox and
other toxins. And I note in your testimony that you have
allocated some of the time and attention of your remarks here
today to that.
Could you please expand a little bit on that and tell this
committee first how the fiscal year 2004 Department of Homeland
Security funding is being allocated to meet those threats and
then, second, how you will utilize any funding in fiscal year
2005 that we may appropriate for deterring or responding to
such bioterrorism threats.
Secretary Ridge. First of all, Senator, our responsibility
with regard to bioterrorism is joint with the Department of
Health and Human Services. I think, as you recall, when we
first sought to create a Department of Homeland Security, the
legislation we initially sent to the Hill, we had requested the
entire portfolio of bioterrorism defense responsibility, but I
think Congress said that you have Health and Human Services,
you have the NIH, you have the Centers for Disease Control,
they will have primary responsibility, but there are roles that
you play.
One of the roles we play is to direct some of the research
and development on technology that would help us sense a bio
attack, bio sensors and chemical sensors, and so a considerable
portion of the research and development dollars you have given
to S&T is going out to the bio sensors.
We have also built on the Bio Watch program we have located
around the country. EPA has air quality monitoring stations at
various sites around the country. Last year, we expanded those
sites to include some modest technology that enables us to pick
up potentially some bio or chemical agents, but it is still a
very labor-intensive process, and so some of the dollars that
you have given us are going into technology that will actually
capture whatever that agent is in the air, analyze it right at
that point so we do not have to manually take the filter out
and take it to a lab to get done. So we have that
responsibility.
We have a shared responsibility when it comes to Bio
Shield. That is the program where both the Secretary of Health
and Human Services and Homeland Security, based on threat, can
access the dollars that Congress provided. If the threat
indicates a biological threat, we view it as credible. We look
at our stockpile of vaccines and antidotes, make a
determination that we do not have anything in this country to
combat that threat. Congress has appropriated $2.5 billion for
us to access that.
So, again, there are a variety of different ways. We
interact both with Health and Human Services or act
independently on our own to deal with a bioterrorist incident.
Senator Crapo. All right. Thank you. I have several other
questions, but I think I am going to submit them to you in
writing because I have just been informed that you are really
over time.
Secretary Ridge. I appreciate it. I have to be with your
colleagues on the other side of the Hill.
Senator Crapo. Senator Conrad.
Senator Conrad. Yes, I would just be very brief.
Again, it has been good to have you here, Mr. Secretary.
Let me tell you my honest assessment is that with all of
the work that has been done, the resources that have been
devoted, we are still ill prepared to deal especially with a
chemical and biological--chemical or biological attack on this
Nation's urban centers. I have tried to evaluate, based on my
staff's analysis, the feedback we have ten from these
experiments, if you will, in major cities. We look at the
experience in Denver, and what we saw was really chaos; that
the health providers basically left their hospitals. Everybody
headed for the hills.
I worry very much what would happen if there were a
chemical and biological attack on the Nation's capital, if
there were a chemical, biological attack on New York City, if
there were a chemical or biological attack on our Nation's
stadiums. I worry very much about that. I can imagine if they
flew over a small plane with a chemical and biological agent
and sprayed the crowd, the chaos and panic that would ensue.
And I do not think we are yet as prepared as we need to be for
those threats and that eventually.
I noted that there are places where the money is being
spent that just make no sense. We talked about the thousands of
dollars for leather jackets, and $500,000 for a digital camera
for mug shots, and Dale Carnegie courses for sanitation
supervisors. This is not money that you authorized. This is
money that went to local units of Government, but this is what
they did: Maryland cutting State spending for local health care
outreach centers and then using Federal funds to fill in,
basically substituting Federal funds for State funds, an
$800,000 mobile command bus that they said would be the talk of
the East Coast.
You know, these are things that do not make lot of sense to
me. And the conclusion that I want to leave you with is that
more money will be frittered away without a clear national plan
spelling out what first responders need to be able to do in an
emergency and more stringent guidelines on how the money should
be spent. That is not my conclusion. That is the conclusion
from this detailed article that was in the Washington Post that
I know you paid careful attention to.
Can you just tell us what it is you are doing to make sure
that this money does get spent wisely and effectively and what
you are doing to lay out a clear national plan, spelling out
what these first responders need to be able to do.
Secretary Ridge. Senator, during the past several months,
in addition to worrying and directing congressionally
appropriated dollars out to first responders, we have been
working and created a national response plan and a national
incident management system that has been accepted and will be
used as the framework within which we can set guidelines and
standards for our first responders. There are certain protocols
that we will expect to be done in the event of a chemical
incident, a biological incident and the like. So we have the
framework of how we are going to train and exercise our first
responders that show up to save lives in an incident.
In addition to that, this is the first year that we are
going to have the statewide plans, which hopefully were built
on the template that the Department sent out to the Governors.
We asked the Governors to take the lead.
I think you are going to find, from 2005 forward, that we
are going to be far more prescriptive in where these dollars
would go so that we can monitor, on an annual basis, that we
are able to say that that infrastructure that we all believe we
need to buildup, sometimes it is a complete infrastructure in a
major urban area, sometimes it is a mutual aid infrastructure
around a wider, less-populated area. So we know that we have
the training exercises and the equipment, consistent with the
protocols that we have developed in the incident management
system, to respond to a terrorist attack.
So, again, I do think that we are far better prepared than
we were a year ago. I do think we have a long way to go to get
where we want to be, and our goal every single day, Senator, is
to make sure we rise to a new level of readiness and
preparation. I think we reached that goal, but we will now be
in a position, having developed these statewide plans, and we
have already alerted the Governors and the mayors to be a
little bit more--we will be more prescriptive as to the menu
that you can call on to spend Federal money.
Senator Conrad. Well, I think that is just very important.
Again, I would say to you the one place that I think we are
still deficient is the preparation for a chemical or biological
attack in one of our major urban areas or one of our stadiums.
I hope there is just an intense focus on preparation, and I
think the need to exercise, to train in a way that is a
realistic replication of what might occur is critically
important.
Secretary Ridge. Thank you, Senator.
Senator Crapo. Mr. Secretary, we thank you for your time
and apologize that we have kept you over. This is very
important information, and we will submit to you some
additional questions that we did not get to ask. But, again,
thank you very much for your time, and you can get on your way.
Secretary Ridge. Thank you very much.
[The prepared statement of Secretary Ridge follows:]
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Senator Conrad. Thank you, Mr. Secretary.
Secretary Ridge. Thank you, Senator.
Senator Crapo. This hearing is adjourned.
[Whereupon, at 12:15 p.m., the committee was adjourned.]
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THE PRESIDENT'S BUDGET REQUEST FOR FISCAL YEAR 2005
----------
THURSDAY, FEBRUARY 26, 2004
U.S. Senate,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to notice, at 10:05 a.m., in
room SD-106, Dirksen Senate Office Building, Hon. Don Nickles
(chairman of the committee) presiding.
Present: Senators Nickles, Domenici, Gregg, Enzi, Bunning,
Crapo, Ensign, Conrad, Nelson, Stabenow, and Corzine.
Staff present: Hazen Marshall, majority staff director; and
Roy Phillips, senior policy analyst for defense and
international affairs.
For the minority: Mary Ann Naylor, staff director; and Rock
Cheung, junior analyst for science and international affairs,
webmaster.
OPENING STATEMENT OF CHAIRMAN NICKLES
Chairman Nickles. Mr. Secretary, we are delighted to have
you come before the Senate Budget Committee again. We
appreciate your appearances both last year and this year. You
have done an outstanding job. I compliment you on your
leadership. As Secretary of State through a very challenging
time in a lot of areas in the world, you have been an
outstanding leader representing this government, this
administration, and I compliment you for it.
You are here today to present the administration's budget
on international affairs. This budget at this particular time,
is a very big challenge. We have enormous deficits. We are
calling almost for a freeze. The administration has proposed
almost a freeze in all spending other than defense and homeland
security, and international affairs. Your increases consume
almost all the growth revenue in non-defense. It is a big
increase. And so we look forward to your defending that
increase.
There are big increases for the Millennium Challenge and
also for the very big battle of combating AIDS. I happen to be
a supporter of the Millennium Challenge, but I am also trying
to put a budget together, and I realize how difficult and
challenging that can be.
I welcome you before the committee. I appreciate your
willingness to cooperate with us. Before I call on you for
opening comments, I will ask my colleague and friend, Senator
Conrad, for opening remarks.
OPENING STATEMENT OF SENATOR CONRAD
Senator Conrad. Thank you, Mr. Chairman, and again, thank
you for convening this hearing.
Thank you, Mr. Secretary, for once again coming up to
testify on the budget proposal that is before us.
I think it may be most appropriate to start with the
headline from this morning's paper, which should sober us all
with respect to where this is all heading, that is, these
massive deficits that now Chairman Greenspan has said will
require cuts in Social Security in order to, in part, respond
to where this is all headed.
Yesterday, Chairman Greenspan called for those cuts in
Social Security. This is something I have been concerned about
and have been warning about for 3 years, that the budget
policies of the President are inevitably and inexorably taking
us in this direction.
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We have record budget deficits now, and the President
proposes further cutting the revenue base and adding to
spending. That can only make the deficits worse, more serious,
and put more pressure on recommendations like the one the
Chairman made yesterday to cut Social Security benefits.
When I look at the President's budget proposal for this
year and compare it to previous years in International, what I
see is a disturbing pattern that the budget proposed by the
President is not the real budget--not the real budget for
international affairs, not the real budget in other areas as
well, because time after time the President has come back to us
and asked us for significant increases in what he proposed in
his initial budget. That is certainly true in international
affairs where he came back and asked for $1.3 billion more
after he submitted in budget in 2002, asked for $8 billion more
in 2003, and then last year came back and asked for $21.6
billion more than his initial budget request.
Now, Mr. Secretary, I would very much like to hear from you
whether we can expect another large supplemental for
international affairs in 2005.
In the President's budget proposal for 2005, international
affairs is receiving the largest percentage increase of any
area, a 16-percent increase in budget authority. In comparison,
the President proposes to increase homeland security by 5
percent, defense by 4 percent, and cut all other domestic
spending by 4 percent when measured against CBO's baseline.
As you know, Mr. Secretary, and every member of this
committee knows, our budget deficit is skyrocketing. We have a
deficit that is forecast at $521 billion this year. I
personally believe it will not be that high, but, nonetheless,
it will clearly be a record, much higher than any previous
deficit, at least $100 billion more than any that we have seen
before.
And the President has told us, well, don't worry, the
deficits are going to be cut in half over the next 5 years. I
don't believe that. I don't think that is an accurate report to
the American people on our fiscal condition. I don't think it
comes close. The President says we are going to have a deficit
of $237 billion in the fifth year. But the only way he gets
there is he just leaves out things. He leaves out any defense
expenditure, additional defense expenditure for the war on
terror past September 30th. He leaves out dealing with the
alternative minimum tax. And, most significantly, he leaves out
the money he is going to have to pay back to Social Security
and Medicare that he is taking from the trust funds.
So I believe we have to tackle this in a very aggressive
way, and we have to go after the spending side of the equation.
We also have to look to the revenue side of the equation
because the revenue side of the equation is where the biggest
gap has opened. This year, CBO is telling us that revenue will
fall to 15.7 percent of GDP, the lowest since 1950.
Mr. Secretary, I would like to bring you back to something
you said 2 years ago when testifying before this committee. I
asked you then how the Nation could afford the President's
proposed increase in the international affairs budget, and I
asked you if we should cut spending in other areas or raise
revenues to pay for it. And this was your answer: ``I think
where we are right now is that for the foreseeable future, for
the next several years, we may well have to increase the debt,
as your chart shows, in order to deal with these priorities.''
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I think in light of what Chairman Greenspan said yesterday
that it is appropriate to ask you: Is that still the right
answer? Can we afford to continue on this course of borrowing
and borrowing and borrowing, borrowing from Social Security,
borrowing from the Medicare Trust Fund, borrowing from the
Japanese and the Chinese and the South Koreans, borrowing from
the so-called Caribbean banking centers, hundreds of billions
of dollars to float this boat, whether that can possibly
continue?
Mr. Secretary, I noted in a recent Newsweek column from
Fareed Zakaria, a foreign affairs commentator who has often
been a supporter of the President's international policies--and
I will conclude on this note: ``The greatest threat to
America's primacy in the world comes not from its overseas
commitments, explains Niall Ferguson. It is the result of
America's chronically unbalanced domestic finances. The
mounting Federal budget deficits that now stretch out as far as
the eye can see will mean, if history is any guide, sharp
cutbacks in American military and foreign affairs spending. We
will see a forced retreat of America's foreign policy similar
to the years after the Vietnam War, only the cuts are likely to
be much, much deeper and the resulting chaos far greater.''
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Now, my first question to you will be: Is that going to be
the legacy of this administration? And how can that outcome be
avoided?
I thank you again, Mr. Secretary, for being here.
Chairman Nickles. Secretary Powell, we welcome you to the
committee. Please give any opening remarks you wish.
STATEMENT OF HON. COLIN L. POWELL, SECRETARY, U.S. DEPARTMENT
OF STATE
Secretary Powell. Thank you very much, Mr. Chairman. I do
have a prepared statement which I offer for the record.
Chairman Nickles. Thank you.
Secretary Powell. I will summarize that statement and then
be ready for your questions.
Before I begin, Mr. Chairman, let me say that we started
today on a very sad note with the news that President Boris
Trajkovski of Macedonia was in a plane crash which may have
taken his life and others aboard the plane. He was a great
friend of the United States. I have spoken to the new Acting
President and expressed the sympathy and condolences on behalf
of the President and all of the American people. When I became
Secretary of State in January of 2001, one of the first issues
I had to deal with was a crisis in Macedonia. The place was
coming apart, with a new President who was in great difficulty
and anguish as to how to deal with the problems he was facing,
and that was Boris Trajkovski. And I became a very good friend
of his over the years and he a good friend of mine. And we
worked through the problems in Macedonia to the point now where
Macedonia is on a stable footing, the European Union is going
to be replacing NATO with respect to providing additional
support. We have much to be proud of as to what we have
accomplished in Macedonia with our European friends and with
the Macedonian people and the Macedonia leaders, especially
with President Trajkovski. So he will be greatly missed, and we
wish the Macedonian people all the best in this time of
tragedy.
Mr. Chairman, let me also take this opportunity to say to
you how much I have deeply appreciated your support in the
years that you have been in the Senate and as a member of this
committee and chairman of this committee. You have been a good
friend to the Department. We have done many things together
over many years, Senator, and I just wanted to take this
opportunity to thank you on behalf of all the men and women of
the State Department for the support that you have provided to
us.
And I would like to say to the entire committee how much I
have appreciated the support you have given to the Department
in the 3 years of my stewardship. I made certain promises to
the committee when I came in about what we would do to fix
management and similar sorts of issues, leadership issues,
infrastructure issues within the Department and you have
supported our efforts, and I think you can see the payoff in
what we are doing with respect to our Diplomatic Readiness
Initiative, how more and more people are coming into the
Department. We fixed the problems of the previous 10 years when
people were not being recruited. Information technology has
been improved. Morale has improved. And it could not have been
done without the support of this committee and the entire
Congress, and I express my appreciation for that as well.
Mr. Chairman and members of the committee, I want to thank
you for the opportunity to testify on the State Department's
portion of the President's budget request for fiscal year 2005.
The 2005 international affairs budget request for the
Department of State, USAID, and other foreign affairs agencies,
as was noted by Senator Conrad, totals $31.5 billion, broken
down as follows: foreign operations, $21.3 billion; State ops,
$8.4 billion; P.L. 480 food aid, $1.2 billion; international
broadcasting, $569 million; and the U.S. Institute for Peace,
$22 million.
President Bush's top foreign policy priority remains
winning the war on terrorism. And winning on the battlefield
with our superb military forces is just one step in this
process and one part of this campaign. To eradicate terrorism
altogether, the United States must help create stable
governments and nations that once supported terrorism, like
Iraq and Afghanistan. And we must go after terrorist support
mechanisms as well as the terrorists themselves. We must help
alleviate conditions in the world that enable terrorists to
bring in new recruits.
To these ends, in fiscal year 2005 our foreign affairs
agencies will continue to focus on the reconstruction of Iraq
and Afghanistan. We will continue to support our coalition
partners to further our counterterrorism, law enforcement, and
intelligence operations and cooperation. And we will continue
to expand democracy and help generate prosperity, especially in
the Middle East.
Mr. Chairman, 48 percent of the President's budget for
foreign affairs supports the war on terrorism. For example,
$1.2 billion supports Afghanistan reconstruction, security and
democracy building. More than $5.7 billion provides assistance
to countries around the world that have joined us in the war on
terrorism; $3.5 billion indirectly supports the war on
terrorism by strengthening our ability to respond to
emergencies and conflict situations. And, finally, $190 million
is aimed at expanding democracy in the greater Middle East,
crucial if we are to attack successfully the motivation to
terrorism, the roots of terrorism.
Two of the greatest challenges confronting us today are the
reconstruction of Iraq and the reconstruction of Afghanistan,
so let me first turn to Iraq.
The Coalition Provisional Authority, under the leadership
of Ambassador Bremer, and the Iraqi Governing Council have made
great strides in the areas of security, economic stability and
growth, and democratization. Iraqi security forces now comprise
more than half of the total security forces in the country, and
over time that percentage will grow. In addition, the CPA has
established, working with the Governing Council, a new Iraqi
Army, issued a new currency, which is quite stable, and
refurbished and equipped schools and hospitals and town centers
and all of the other institutions and infrastructure one needs
for a democratic society. And as you know, the CPA is taking
steps to return sovereignty to the Iraqi people this summer. We
are still committed to a turnover of sovereignty on the 30th of
June.
Much work remains to be done. Working with our coalition
partners, we will continue to train Iraqi police, border
guards, Civil Defense Corps, and the Army in order to ensure
the country's security as we effect a timely transition to
democratic self-governance and a stable future.
At the same time, we are helping to build critical
infrastructure for the people--clean water, electricity,
reliable telecommunications, all the systems needed for the
basic needs of the people. All of this work goes on. It is
going on with greater and greater effect and efficiency over
time. It tends not to get the headlines, but the cellular
telephone system is coming up, the land-line system is coming
up. More and more people are gaining access to clean water. The
electricity system is improving, and by the end of the year
will be far ahead of anything that existed in the time of
Saddam Hussein. Thousands of brave Americans, in uniform and in
mufti, are in Iraq now working tirelessly to help the Iraqis
succeed in this historic effort. Along side their military
colleagues, USAID, State Department, and the Departments of
Commerce and Treasury are working to implement infrastructure,
democracy building, education, health, and economic development
programs. These efforts are producing real progress in Iraq.
The United Nations Secretary General's Special Advisor,
Lakhdar Brahimi, a very distinguished individual, returned from
Iraq recently and gave his report to the Secretary General. The
Secretary General released the report on Monday of this week,
and we have had the report since it went to the Security
Council, and we have been studying it. By any measure, the task
we are facing is going to be difficult and complicated, but it
is achievable. We are going to be moving toward elections as
fast as we can in Iraq, but before we can get to elections that
are done openly and fairly and allow all people in the society
to participate, we want to go to an interim authority, an
interim sovereign, until we can get full sovereignty on the
basis of a constitution and the election of a legislature, and
from that process new leaders who enjoy the full support of the
Iraqi people.
Creating a democratic government in Iraq will be an
enormous challenge, but Ambassador Bremer, working with the
Iraqi Governing Council and now with the United Nations as
their full partners, is committed to success. And I think we
will be successful. And the State Department is working hard to
be prepared to assume a leadership role on the 1st of July,
when the CPA will go out of existence and we will have a large
embassy requiring new resources to stand up. It will be the
largest diplomatic presence we have anywhere in the world.
Afghanistan is another high priority for the
administration. The United States is committed to helping build
a stable and democratic Afghanistan that is free from terror
and no longer harbors threats to our security. After we and our
coalition partners defeated the Taliban government, we faced
the daunting task of helping the Afghan people rebuild their
country. I remember those first few days when President Karzai
went in, no telephones--one telephone for the entire
government. No money, no accounts, no nothing. No desks, no
computers, no nothing. And in a short period of time in the
sweep of history, in just a couple of years, we now have a
functioning government that is increasingly reaching out to
take greater control over the outlying provinces, to bring
order throughout the country, a currency that is relatively
stable. We are giving more and more technical assistance to
Afghanistan so that they can get higher up on the food ladder
and on the economic ladder and on the democracy ladder, women
are being integrated into the society in every way possible.
The lives of women and girls have improved so much over the
past 2 years and will continue to in the years to come.
Since 2001, the United States has rehabilitated 205
schools, 140 health clinics, and trained 13 battalions of the
Afghan National Army. It is still a dangerous situation. We saw
five aid workers were killed yesterday by those remnants of the
Taliban and other terrorists in Afghanistan, particularly in
the southeast part of the country, that we know our work is not
yet completed. And we are working, as you may have noted in the
press recently, with our Pakistani friends to do more with
respect to bringing that part of the country under control,
also working with our NATO allies to increase NATO presence in
the country, increase the number of provincial reconstruction
teams working in the country so that the countryside can be
made safe for democracy and for development efforts.
We are also pleased that we completed the project to pave
the road from Kabul to Kandahar, and that was successfully
done. The 30-hour journey is now down to just 5 or 6 hours. It
is not just a road and the journey. We are connecting the
country once again so it is viable.
While the Afghanistan of today is very different from that
of September 2001, there is much left to be done, and we will
be participating in a conference in the not-too-distance future
with our friends and allies to see what else we need to be
doing to help the Afghan people and President Karzai.
The challenges we face in Iraq and Afghanistan are complex,
daunting, and dangerous. We must not lose sight of the simple
fact that two despotic, awful, terrible, miserable, disgraceful
regimes are no longer in power, either in Kabul or in Baghdad.
And both the people of Iraq and the people of Afghanistan have
a brighter future to look forward to. Lives have been spent in
this cause, the brave lives of coalition soldiers and the brave
lives of civilians who gave their lives as well. And we mourn
for them, but we will never, ever let their families think that
they were lost in vain. They were not. It is a noble cause that
they have been involved in, in both Afghanistan and Iraq, and
it is up to us now to keep that work moving forward and not to
shrink from the challenges ahead and to recognize all that we
have achieved so far.
It is expensive work. As I said 2 years ago, Senator, we
were facing new challenges, and it might require additional
debt to get ourselves through this period of challenge. That
challenge is still with us. We have had to come in for
significant supplemental increases for reconstruction efforts,
for our defense efforts, and for our international affairs
efforts. And the President is committed to doing everything he
can in accordance with the plan that he has submitted to the
Congress to bring the deficit under control, cutting it in half
within the timeframe that he indicated. And I can assure you
that he recognizes that this is an important task for the
administration. And so we all have been told to make our
requests as reasonable as we can, to seek no increases that are
not necessary, to find savings within our budgets, and I think
that is what we have tried to do in the State Department
submission for 2005.
As I mentioned earlier, the 2005 budget for international
affairs provides more than $5.7 billion for assistance to
countries around the world that have joined us in the war on
terrorism, including Turkey, Jordan, Afghanistan, Colombia,
Pakistan, Indonesia, and the Philippines.
While progress has been made attacking terrorist
organizations both globally and regionally, much more remains
to be done, and the President's budget supports that effort. A
few highlights: $700 million for Pakistan to help advance
security and economic cooperation and opportunity for
Pakistan's citizens, including a multi-year educational support
program; $461 million for Jordan; $577 million for Colombia to
support President Uribe's unified campaign against drugs and
terrorism.
In September 2003, at the United Nations, President Bush
said, ``All governments that support terror are complicit in a
war against civilization. No government should ignore the
threat of terror, because to look the other way gives
terrorists the chance to regroup and recruit and prepare. And
all nations that fight terror, as if the lives of their own
people depend on it, will earn the favorable judgment of
history.'' We are helping countries to that judgment.
Two weeks ago, the President spoke at the National Defense
University and spoke about another threat that we are facing--
the threat of proliferation of weapons of mass destruction
technology. The President described how we have worked for
years to uncover one particular nefarious network, that of Dr.
A.Q. Khan.
Men and women of our own and other intelligence services,
especially the United Kingdom, were able to understand that
network and provide information about A.Q. Khan to other
nations. And we now know that he was providing nuclear
technology and information to Libya, Iran, and North Korea.
At the NDU speech that the President gave, he proposed
specific measures to take to strengthen the world's efforts
against networks such as A.Q. Khan's and others who would
proliferate weapons of mass destruction knowledge and
technologies around the world. We are hard at work on that. We
have seen results.
We can be very proud, Mr. Chairman and members of the
committee, of the fact that as a result of U.S. and U.K.
efforts, Libya came to a conclusion, as they looked around the
world, they saw that the United States and coalition partners
were ready to take action against nations such as Iraq. But I
think Libya did more than that. They looked and said: ``We have
spent millions and millions of dollars to acquire the
wherewithal to perhaps someday acquire a nuclear weapon. We
have spent millions and millions of dollars to produce chemical
weapons. We have looked into biological weapons technology.
What has it gotten us? It has made us a pariah on the face of
the Earth. Nobody will deal with us. Nobody will invest in us.
Nobody will come here. What we have seen is nothing but
supporters of terrorism and procurers of weapons of mass
destruction. What has it done for us? Has it made us safer? No.
Made us more secure? No. Fixed our health care system? No. Made
us more able to participate in the 21st century economy? No.''
And so Colonel Qaddafi decided this was the wrong way to
go, and he got in touch with us and our friends from the United
Kingdom. An arrangement was worked out, and you know the rest.
He is cooperating fully in giving up these programs. Much of
the material that he acquired is being sent back out of the
country. We have possession of quite a bit of it, and we
learned a great deal about A.Q. Khan and the other
proliferators in the world. And we hope that this will be a
signal to other countries around the world that it is fool's
gold, it is ridiculous to invest in these kinds of
technologies, because you will not scare the United States of
America, you will not scare our coalition partners. All you are
doing is denying yourselves the opportunity for a better
relationship with the United States and with the rest of the
civilized world.
Mr. Chairman, moving on, on Monday of this week, Ambassador
Tobias, Randy Tobias, who now heads up our global AIDS effort,
Secretary Thompson, USAID Administrator Andrew Natsios, and I
rolled out the strategy for the President's emergency plan for
HIV/AIDS relief: $350 million in contracts to some of the NGO's
and private organizations who will be carrying out the fight at
the grass-roots level. Making that announcement on Monday was a
thrilling moment for me and the result of a lot of hard work on
the part of Secretary Thompson and Administrator Natsios and
Ambassador Tobias and all of my colleagues in the State
Department, and so many others.
With this program, the President has once again indicated
his commitment to go after one of the great, great threats to
civilization, and that is HIV/AIDS. Eight thousand people are
dying every day as a result of HIV/AIDS, and we are going to do
something about. It is a $15 billion program. It is dedicated
to go after the source of this disease. It is also intended to
educate people on how to protect themselves from the disease,
and for those who have acquired the disease, to provide them
with the wherewithal to live a life that is still of a quality
nature. It is going to help those who have been made orphans by
the disease. It is going to do everything we can to try to get
this disease under control and educate the world about the
nature of this disease.
But it takes money, and we are very proud of the program
that we have put forward to the Congress. We are very proud
that the Congress has seen fit to support the first year of
this program, and I hope that it will support the program in
the years to come.
Another part of the President's agenda for the world has to
do with the Millennium Challenge Account, an account where we
will take American taxpayer dollars and make those dollars
available to developing nations, but in this instance, only
those developing nations that are committed to democracy,
committed to the rule of law, committed to ending corruption,
committed to market reforms and market economic policies. And
we are standing up that corporation, and I am Chairman of the
Board of Directors, and Mr. Paul Applegarth has just been
nominated by the President to lead the corporation. We had our
first board meeting not too long ago, at the beginning of this
month, and we are ready to go to work. And we appreciate the
Congress for the $1 billion it made available in this first
year.
Mr. Applegarth and Ambassador Tobias were over at my home
the other evening for a little supper. They are both sort of
road-running, as we say in the military. They are working here.
Their families are still at home in another part of the
country. And we just sat and talked. The longer the three of us
talked, the more I could see the synergy that will exist
between what each of them is doing, because they go together.
Developing countries are doomed if they don't do something
about HIV/AIDS. And people who are suffering from HIV/AIDS are
doomed if their countries are not doing something about poverty
alleviation and getting into the 21st century world with the
rule of law and with the right kind of development policies.
And so these two programs will reinforce one another and
are essential parts of the President's strategy for moving
forward. They take money, but it is money well spent. And it
shows America's commitment to the developing world, especially
the developing world in Sub-Saharan Africa.
There are so many programs like that in the budget that we
are asking you to support. It does reflect an increase. It is
one of the most significant increases, as Senator Conrad noted,
in the discretionary part of the budget. But, you know, we
really are in the front lines of foreign policy with our
programs. USAID, the diplomats that are doing such a great job
around the world, they are in the front line of foreign policy.
They are the ones that are carrying our value system out to the
rest of the world. They subject themselves to the kinds of
dangers that their military colleagues do. Whether it is
Ambassador Jim Foley in Haiti today, who is facing a difficult
situation or the other Ambassadors that have passed through my
office recently. Our Ambassador to Georgia helped the Georgian
people through a crisis last November when the a President
stepped down. He helped create circumstances, working the new
leadership of Georgia, so that a new democratically elected
President could take office. And that President with President
Bush the other day. Or our Ambassador in Liberia, who was faced
with a very difficult situation last year as people were firing
at his embassy, as dead bodies were being placed before the
embassy.
But we worked with the Liberians. We worked our way through
that. And now Liberia is on a path hopefully to peace and
stability. We had a donors' conference at the U.N. a few weeks
ago and we raised $500 million for Liberia. It was American
political activity, a little bit of American military strength,
American support for regional solutions, American support for a
political compromise that showed us the way forward.
I could go to country after country around the world where
our wonderful diplomats, working alongside so many other great
Americans from all of the agencies of government work hard to
serve the interests of the American people. And so when you
support our budget, you are supporting that kind of effort, and
you are bringing reconciliation and peace to places like Libya,
Iraq, Georgia, Liberia. We are working hard in Haiti today to
try to find a solution to that difficult problem.
Our diplomats are hard at work in Beijing today with the
North Koreans, the Chinese, and the South Koreans, the
Japanese, and the Russians, and the results of the first 2 days
of meetings are positive. There is a positive attitude. There
is a promising attitude that is emerging from those meetings,
and hopefully we can move in the right direction there.
Diplomacy tends not to be something that happens overnight.
You don't see your successes right away. You see day after day
after day after day failure, and then suddenly you get a
breakthrough. And that kind of dogged, determined work is what
the Department is all about. Because of what you did for us
over the last several years, we have tens of thousands of
American youngsters wanting to be a part of this Department.
Thirty thousand people are year now are signing up to join the
Foreign Service. They want to be a part of America's team on
the front line of foreign policy. And it is because you have
said we are going to invest in information technology, we are
going to invest in the benefits that you deserve for going out
and serving your Nation. Well, they are responding, and they
are serving their Nation.
So, in conclusion, Mr. Chairman, members of the committee,
let me just say keep supporting us because I think you are
getting a hell of a return on the investment that the American
people place in our international affairs accounts. And I
promise you that as long as I am there with my team--Deputy
Secretary Armitage and Under Secretary Grant Green and all the
others, and Administrator Natsios--we will be good stewards of
the people's treasure. I am not spending my money. I am
spending American taxpayer money. And I know that we also have
to go in debt to finance some of our activities right now. We
are all sensitive to that. We are all doing what we can to give
you the best return on your investment, and we are all working
with the President to get the deficit down and to put the
Nation on the kind of balanced financial footing that Senator
Conrad spoke to earlier.
Mr. Chairman, I will just stop at this point and be
available for your questions.
Chairman Nickles. Mr. Chairman, thank you for your opening
statement. We have several colleagues. Let me make sure that
all of our colleagues are aware of the fact that we plan on
marking up the budget next Wednesday and Thursday. It is my
intention to submit a budget document to markup on Wednesday
and I expect to mark it up on Thursday. So you might expect--if
we maintain our tradition, Thursday could be a rather long day.
Maybe it won't be. Maybe it will be very short. But I wanted to
make sure that everybody is aware of that and notified of that.
Mr. Secretary, two or three very quick little comments. And
I am going to ask all of our colleagues, the Secretary needs to
be out by noon, and if we can all keep our comments close to 7
or 8 minutes, I think we can accommodate that request.
You mentioned the President of Macedonia unfortunately was
killed. I happened to know him as well. I haven't heard. Was
that an accident?
Secretary Powell. It appears to have been an accident,
flying in mountainous terrain in bad weather.
Chairman Nickles. That is very difficult terrain. I hate to
see that happen because he was really leading that country in
the right direction.
Just a couple of other comments. You mentioned now that the
U.N. is cooperating with us much more in Iraq. I am concerned.
When there was an unfortunate bombing incident right outside
their headquarters, the next thing we know, the U.N. was
pulling out. We have shown great leadership, and I compliment
you, I compliment the President, I compliment Ambassador Bremer
and others. I have a staff member that is working over there. A
lot of us have--all of us have constituents that are serving
over there. But I am always questioning sometimes the UN's
resolve, and maybe that is just an editorial comment and I am
not asking you to respond to it. But I am concerned.
You mentioned it was a noble cause. It is that and more. I
look at what this administration has done in Afghanistan and in
Iraq, and I look at it as a liberation. As you mentioned, the
women in Iraq now have freedoms that they did not enjoy before,
their country was liberated.
I object to the term ``occupation.'' We are planning on
leaving. Correct me if I am wrong.
Secretary Powell. Absolutely.
Chairman Nickles. And so we are in the process of trying to
expedite turning over total government control to the Iraqi
people in a systematic way as soon as possible. It is a
liberation. I would encourage your people maybe to use that
word.
One other comment. You mentioned Mr. Khan and the fact that
he had distributed nuclear secrets. I don't see him being
punished, and I am concerned. This individual evidently was
spreading nuclear secrets throughout the world to, as you
mentioned, North Korea and Iran and Libya. It looks like he is
getting off scot-free, and I am interested in your comment on
that.
Secretary Powell. Very quickly, with respect to the United
Nations, after the bombing last year that killed Sergio de
Mello and so many others, the Secretary General had to take
stock of the security situation. They are not soldiers. They
don't have a green zone. They have to be out where they can do
their work. And they had to withdraw in order to assess
security and figure out how they could do their work.
I think we have demonstrated to the U.N. that the situation
is improving, and we want to work closely with them on making
sure that they can do their work in relatively safe conditions.
You can never guarantee safety. Casualties are occurring every
day.
The U.N. has started to come back. Mr. Ross Mountain, a New
Zealander, is in charge of humanitarian efforts of the U.N. For
the most part, they are trying to headquarter these efforts
from nearby countries, thereby reducing their vulnerability.
But I expect their efforts to grow in the weeks and months
ahead.
We were able to arrange security for Mr. Lakhdar Brahimi,
when he went in. And we are in constant touch with the
Secretary General because after 1 July, we expect an even
greater U.N. presence getting ready for the elections at the
end of the year or some time next year, whenever they occur.
And so we are working closely with the U.N. They have to
have some level of confidence in security before they can put
their people into dangerous situations. But they are anxious to
play the vital role that the President has anticipated they
would play.
With respect to A.Q. Khan, as you know, Senator, he was
seen as a national hero in Pakistan, and he occupies a special
place in the life of the Pakistani people. President Musharraf
is well aware of what Mr. Khan has been doing. I have had many
conversations with President Musharraf about this. I think he
took a bold step, the right step to uncover it all and not hide
from the reality of what A.Q. Khan had done. And he got from
Mr. Khan full acknowledgment of what he had done and a lot of
information. And then President Musharraf felt it was in the
best interest of his country and of his government and of the
process of uncovering everything we could about this network
for him to give a conditional amnesty to Mr. Khan.
Chairman Nickles. Did he cooperate?
Secretary Powell. He was cooperating.
Chairman Nickles. Did Khan cooperate with Musharraf as far
as saying here is what I did, here is where the information was
going?
Secretary Powell. Yes. Dr. Khan cooperated with President
Musharraf and with the Pakistani investigators who were pulling
all of this up, with assistance from us because we had quite a
bit of information we could provide to them. So we are getting
a lot of information out of Dr. Khan's openness, and I expect
we will get a lot more as well. And it is important to note
that the amnesty he was given is a conditional one, meaning he
has to meet the conditions of the amnesty, which means full and
open disclosure. And we are learning a lot from that.
Chairman Nickles. Thank you. One other comment. You
mentioned about 48 percent of your budget is directed toward
fighting terrorism for international security and so on. You
also mentioned the terrorist attacks. Some people have said
that your speech before the U.N. was hyped, that our going into
Iraq was hyped or inflated or misled. I have heard some people
say that we are misled into going into Iraq--or lied to, some
people use that term.
I looked at a speech that President Clinton gave in 1998, I
think it was made to the Pentagon, and he said something like,
``Now, let's imagine the future. What if he fails to comply?''
And he is talking about Saddam Hussein. ``If we fail to act or
we take some ambiguous third route, which gives him more
opportunities to develop programs of weapons of mass
destruction, and he continued to press for release of
sanctions, continuing to ignore the solemn commitments he has
made. Well, then he will conclude the international community
has lost its will, he will conclude that he can go right on and
do more to rebuild an arsenal of devastating destruction, and
someday, some way, I guarantee you he will use the arsenal.''
That was President Clinton. That was made in 1998. That was
made in February 1998.
I might mention we had two embassies that were bombed later
that summer in Africa, killed a couple hundred people, all
employees of the United States, some U.S. citizens.
I am offended when people use words like ``deliberately
misled.'' I happen to know you well, and you are my friend. And
President Bush is my friend. And this is serious. When people
make allegations of being lied to or misled leading up to this
war, I am offended by it.
You have been brought into it because of your excellent
speech, I might say, before the United Nations a year ago--was
that a year ago?
Secretary Powell. 5 February last year.
Chairman Nickles. It was about a year ago. Anyway, any
comment on that?
Secretary Powell. Yes. Let me say, Mr. Chairman, that
President Clinton's statements and his actions during his
Presidency, to include Operation Desert Fox, which involved the
bombing of weapons of mass destruction facilities in Iraq in
1998, was based on the best intelligence that he had at that
time. And it was a consistent picture that the intelligence
community was giving us over time through his administration
and into President Bush's administration which was that Saddam
Hussein had never lost the intent to have such weapons, that he
kept in place the infrastructure for such weapons. There was no
doubt that if he was ever relieved of the pressure of
sanctions, he would explode his capability and show it to the
world again. He had used them before; he had used them against
his own people; he had used them against his neighbors. And we
believed, as President Clinton did, we believed that there was
a stockpile of these weapons.
When I went before the United Nations last 5 February, I
knew very well that I was representing the views of the
American Government to the entire world. And I wasn't going to
go hype anything or overstate anything. I wasn't going to
short-sell anything either. And I spent 4 days and nights out
at the CIA with Director Tenet and with Deputy Director
McLaughlin and with all their experts going over that
presentation. And there wasn't a word in that presentation that
wasn't the considered judgment of the intelligence community.
Not everybody agreed with every single fact or finding, but it
was the considered judgment of the intelligence community, and
it represented the judgment of the Director of Central
Intelligence. And it was based on the evidence that was
available to us, not cooked. The analysts were in the room with
us when we made those judgments and wrote that speech.
And so if you look at it in retrospect, it did reflect the
considered judgment not only of our intelligence services, but
of the United Kingdom and most intelligence services that had
looked at it. Any prudent person receiving the intelligence
that I did or the President did, Prime Minister Blair, Prime
Minister Aznar, Prime Minister Berlusconi, Prime Minister
Howard, and so many others did, would have come to the same
conclusion. This is a regime that had not given up these
programs, had the intent, had the capability, was working on
the delivery means, had done it before, was desperately trying
to hide it, was desperately trying to get out of the sanctions
that had kept it somewhat constrained. And you could reach the
conclusion based on what the intelligence community had that
there were stockpiles of such weapons.
Now, the stockpiles are the only thing in my mind that is
an issue. Dr. Kay, when he went in to start looking for this
last year, thought there were stockpiles. He has now come to
the conclusion that stockpiles are not there.
Mr. Dulfer, who has gone in to replace him, will continue
the work, look at additional sites, look at the documentation,
interrogate people to see if more can be found out. But it
seems to me that is the area that is in judgment. But nobody
made up the information last year. It reflected the best
judgment of the best people we have who were going about this
trying to find the truth, not to hide the truth or to cook the
books.
And so I stand behind what the intelligence community gave
us as Director Tenet stands behind what he gave us. As new
information comes forward which puts into question old
information, let's examine it. If mistakes were made, let's
find out what those mistakes were and fix our process going
forward.
Chairman Nickles. Mr. Secretary, thank you very much.
Looking at the number of colleagues, again, I am going to
ask all my colleagues to try and keep it pretty close to 7 or 8
minutes. Senator Conrad.
Senator Conrad. Thank you, Mr. Chairman.
Mr. Secretary, you are a forceful advocate of important
work that needs to be done in the war on terrorism and the
global fight on AIDS. You are asking here for a 16-percent
increase. The question for this committee is how to pay for it.
How to pay for it.
Are these increases so important that they should be paid
for by cutting spending in other areas or by raising taxes?
Because I think the answer of just borrowing more money is
really no longer an option. We have record deficits now, and we
are not going to have the deficit cut in half, as the President
has said. That I think is utterly outside the question when one
looks at the hard reality of where this is all headed.
So I would ask you: Are these priorities so important that
you would advocate cutting spending in other areas--and if so,
where?--or raising taxes to pay for them?
Secretary Powell. I believe these are important priorities.
As the President put his budget together, all of us had to
compete our programs. In recognition of the finite resources
available to the Nation, the President was strict in his
guidance to us. OMB was strict in their application of that
guidance, and so our programs competed with other discretionary
spending and with the Defense Department's needs.
My figures suggest that we are 7.1 percent above 2004,
including the supplemental, 2004 actual to 2005, 7.1 percent. I
think it is a reasonable amount for the kinds of challenges we
are facing on the war on terrorism, standing up new facilities
in Iraq, and all that we are being asked to do on the war
against HIV/AIDS and the Millennium Challenge Account.
Now, it is always a question as to am I taking spending
from someone else or am I just asking for the debt ceiling to
be raised or am I asking for new taxes? I think that is a
judgment that the President has to make in consultation with
the Congress, and the Congress ultimately answers that question
in the manner in which they act on the President's budget. But
what we try to do is put forward only those priorities that we
felt were essential and were deserving of additional spending
in 2005, Senator.
Senator Conrad. Let me put up this Newsweek article that I
quoted from earlier. ``The greatest threat to America's primacy
in the world comes not from its overseas commitments, explains
historian Niall Ferguson. It is the result of America's
chronically unbalanced domestic finances. The mounting Federal
budget deficits that now stretch out as far as the eye can see
will mean, if history is any guide, sharp cutbacks in American
military and foreign affairs spending. We will see a forced
retreat of America's foreign policy similar to the years after
the Vietnam War, only the cuts are likely to be much, much
deeper and the resulting chaos far greater.''
[GRAPHIC] [TIFF OMITTED] 94065.267
Secretary Powell. Well, I don't know that I can agree with
either Professor Ferguson or my good friend who I admire,
Fareed Zakaria. America's primacy in the world is unchallenged
today, and it will be unchallenged in the future. I think
people recognize that America does have some budget
difficulties, but they also have confidence in the American
political system and the American economic system to deal with
this over a period of time--maybe not in a year or two. And it
is unfortunate we have gone from a surplus to a deficit
situation, but we had emergencies thrust upon us. And we have
to work our way through this. And the President made judgments
with respect to tax cuts, with respect to his economic plan,
with respect to how much deficit we could sustain right now and
how to get out of that deficit position. And I don't think it
is undercutting our position in the world, and right now we
have demonstrated to the world that we will not shrink back
from our responsibilities to go after terrorists and we will
not shrink back from our obligations in Iraq and Afghanistan.
I don't see anybody coming to my office saying we are
worried about you guys losing your primacy in the world. We
will remain the primary actor in the world, the sole
superpower--not a superpower that imposes but a superpower that
looks for allies and partnerships.
So I don't quite come to the same conclusion that Niall did
or Fareed did.
Senator Conrad. Let me just say to you, I have not come to
your office, but I will tell you, I have looked at the long-
term projections the President has made, not just the next 5
years but his long-term projections of what happens with his
proposed tax cuts and the increased cost as a result of the
retirement of the baby-boom generation. We saw yesterday the
Chairman of the Federal Reserve tell us those imbalances are so
great that we have to cut Social Security.
Now, you know, the explanation that somehow it is all just
going to work out is becoming an increasingly hollow
explanation. I don't think it squares with the facts that we
see before us, either in the immediate term or in the term
beyond the 5-year budget window. And that is why people like
Mr. Zakaria, who is, I think, in many ways an ally of yours on
many issues, and a noted historian are warning us--are warning
us--where this all leads. And it leads to incredibly serious
choices in the years ahead. It will be very hard to see how
international affairs will be exempt from substantial cuts, and
even defense.
I would be happy to have you respond to that if you would
care to.
Secretary Powell. Well, I think I have, Senator. I am not
competent to judge what needs to be done or not done with
respect to Social Security. I do know that the country has
vital needs now with respect to international affairs and
defense expenditures. I do know that the challenges we are now
facing were thrust upon us at the beginning of 2001, and we are
responding to it. And it has put a great deal of pressure on
our Federal budget, causing the deficit.
And I know that there is debate about the President's tax
cuts, but he is confident that the tax cuts will lead to
economic growth which will benefit the American people, and he
has a plan. And you may disagree with the plan and believe that
it is unachievable, but, nevertheless, it is the plan that he
was submitted to the Congress that he believes will halve the
budget in the period of years that you indicated earlier. And
that is a debate that the Congress, of course, will have in the
course of the year with the President.
Senator Conrad. Let me just say in conclusion, I think the
notion that the President has floated that this is going to cut
the deficit in half is entirely a fiction--entirely a fiction.
I mean, I am surprised he didn't say it was going to eliminate
the deficit, just leave our some more things. But when you
leave out the costs of the war past the end of September, when
you leave out the crisis with the alternative minimum tax, when
you leave out the $2.4 trillion he is borrowing from the Social
Security Trust Fund, every penny of which he has got to pay
back--he has no plan to do so--it leads people like the
Chairman of the Federal Reserve to conclude that you are going
to have to cut Social Security, and much else as well.
So I would say to you I have enormous respect for you. But
the policy of just continuing to increase expenditures and
borrow the money I don't think stands up. And we are going to
have to do much better.
Chairman Nickles. Senator Conrad, thank you very much. I
hope to have a budget next week that will cut the deficit in
half, and it will be real.
Senator Gregg?
Senator Gregg. Thank you, Mr. Chairman, and I will be happy
to debate Senator Conrad on his points in the future because I
disagree with them. But today we are here with the Secretary of
State, who has been a leader in what is one of the--what is the
true issue that faces our country, which is that we are at war,
and that whether we like it or not, there is a culture out
there whose purpose it is to destroy our culture. And they have
already shown that they are willing to kill innocent men and
women to do it. And if they get their hands on a weapon of mass
destruction, they will use it against us, whether it is
biological or chemical, and they will kill thousands more
Americans. And our purpose must be to defeat them, to find
them, to chase them around the globe.
And I admire the fact that this President has been myopic
in his efforts to pursue that course, and I admire the fact
that he has surrounded himself with people who understand the
threat and who are also equally committed to defeating them.
I think if we look at the track record of this
administration, it is really rather extraordinary in this
fight. If you look at what we have done in Afghanistan, in
Iraq, if you look at what is happening in Libya, North Korea is
starting to move, it appears, Iran has opened itself up to
review of its nuclear programs--these are extraordinary steps
in the right direction, and they are steps which are a function
of the fact that we have shown strength and commitment.
I can see scenarios where we would have still been debating
with the Taliban as to whether or not we would have gone in
there under other administrations, and we didn't take that
course. So I congratulate the administration and the Secretary
of State for their aggressiveness in this fight, because that
is what it takes.
It also takes a strong State Department, and I appreciate
the Secretary making the point that we as a Congress have stood
by the efforts with the DRI program, with the IT program, with
the embassy security program, with the visa/passport program,
so hopefully the subcommittee that funds them is not a national
security risk. But there are some specific concerns I have
which are tangential to the larger issues, but which I would
like to raise with the Secretary because our time is limited.
The first is Charles Taylor. Not many people focus on
Charles Taylor. I have been focusing on him for a long time,
ever since his horrific actions and the genocide he created in
Sierra Leone.
The tribunal in Sierra Leone has indicted him as their
first act. It was a courageous act when the indicted him. It
was led by an American prosecutor. I think his name is Thomas,
although I am not sure. And now that they have indicted him and
Taylor has been forced out of his country, it appears that we
cannot get him before the court. And he should come to Sierra
Leone and be tried. He should be brought there and tried.
This Congress has put a bounty on the effort to try to get
him to Sierra Leone and try him, because if we don't try him in
Sierra Leone, no future tribunal that is structured on the
issue of genocide, whether it is Rwanda or what is happening in
the Congo, is going to have legitimacy. This man cannot be
allowed to live under the aegis of a foreign country and be
given that protection.
I am just wondering what the State Department's position is
on getting him to Sierra Leone to be tried.
Secretary Powell. We believe he should be tried. We believe
that ultimately he will be brought to justice before the
tribunal.
We had a challenge last year. We had a rapidly
deteriorating situation in Liberia. The people were suffering
badly--starvation, we had mobs running around. We had different
resistance groups terrorizing the people. And we had to find a
solution to all of that that would bring the situation under
control and get rid of the leadership that was there, namely,
President Charles Taylor.
And after working with our friends in ECOWAS, the Economic
Community of Western African States, we came up with a solution
that would get Charles Taylor out of power, out of the country,
but the only way we could arrange that to happen was to put him
in a country where he would not be immediately subject to the
tribunal and he would not be moved from that country to the
tribunal.
It wasn't a perfect arrangement. We would have preferred
another arrangement. But we had to deal with a real emergency
at that time. And so it was an arrangement that was entered
into by ECOWAS and we supported it. And as a result, Charles
Taylor is no longer in power. He is no longer protected by his
goons, and the Liberian people are heading toward a better
future. He went to Nigeria, the country that was willing to
host him as long as we didn't put pressure on Nigeria to
immediately turn him over to a court. We made it clear that we
believe he is still subject to that tribunal. We made it clear
that we believe this is still a matter between him and that
tribunal. And we hope and we work for a set of circumstances to
come about where it will be possible to turn him over to the
court and put him before the court.
Senator Gregg. Well, as you know, the----
Secretary Powell. But for the moment, I am obliged to
respect the political arrangement that was entered into which
got him out of the place, out of Monrovia in the first place.
Senator Gregg. I would hope that we have been generous
enough to Mr. Taylor. It is time for him to be brought before
the court. I think we should not be standing in the way of
that, but I think we are.
On another issue, which is really tangential, and which I
suspect you have not focused on, and that is the security of
the families of our--I know you have focused on the security of
our families abroad. This has also been a priority of mine, but
I now learn that the State Department has taken a position that
if you go to an American school which is not receiving grants
from the State Department, that that school will not be able to
access the security funds which we put in the budget last year,
and which you were kind enough to actually suggest an increase
in. Whether you are in an America school that gets grants from
the State Department or not get grants from the State
Department, if a school is called an American school, it is a
target unfortunately, and the whole purpose of these funds were
to protect all Americans, especially families of State
Department personnel overseas.
I am wondering why this policy was put in place. It seems
to be counter to what the intent--I know it is counter to my
intent when I put the money in. It seems to be counter to the
logic of the purpose of protecting these families.
Secretary Powell. I feel a very heavy obligation to protect
not only my embassy compounds, but places where families live,
where they go for recreation, and especially where they send
their children to school. I need to give you an answer for the
record.
Senator Gregg. What I would really like you to do is change
the policy. It makes no sense on its face.
Secretary Powell. Sir, I will look at it----
Senator Gregg. After you have looked at it.
Secretary Powell. Let me look at it before I----
Senator Gregg. I agree.
Secretary Powell [continuing]. Change it, to find a reason
for it first.
Senator Gregg. But please review. Thank you. I congratulate
you for the job doing. I think it is extraordinary the progress
that has been made, as I mentioned earlier, in these core areas
of our national security, especially obviously, Afghanistan and
Iraq. North Korea now appears to be moving, and Iran, and
Libya, of course, and that is only a function of the fact that
you and the President have shown a very strong hand and been
willing to play it. Thank you.
Secretary Powell. Thank you, Senator.
Chairman Nickles. Mr. Gregg, thank you very much.
Information from our colleagues: we have roll call that is
now ongoing I think for about 5 minutes, just FYI.
Senator Stabenow.
Senator Stabenow. Thank you, Mr. Chairman.
Welcome, Mr. Secretary.
Secretary Powell. Thank you, Senator.
Senator Stabenow. First I would thank you for your service,
and also say that I think it is good news that we have men and
women wanting to be involved in foreign service, and coming to
the Department of State we need the best and the brightest
serving in very difficult circumstances.
Two areas of question. First, because we are talking about
the budget, I want to focus on the budget and what our
priorities and choices are. When we look at this budget right
now it is not complete. When we look at it in total we see a
hole because there is not one penny for ongoing military or
reconstruction efforts in Iraq, and I might just mention that
the emergency supplemental we passed last year provided $18
billion to rebuild Iraq, and as a side note, after yesterday's
discussion on homeland security, that is four time more than
what the President's budget is for first responders, which is
of deep concern to me in terms of relative risk to us and what
is happening to us in terms of a national threat.
But I am concerned that we are hearing rumors that there
will be a supplemental after the election. We are also hearing
from many military leaders that this will not serve in terms of
the time limit; they need dollars ahead of time. If we are
planning to be in Iraq for many years, you have indicated it
will be very expensive, certainly very difficult. Why does the
budget not include some type of estimates for our operations
and rebuilding in Iraq so we can budget intelligently for the
future? We may not know exactly what the number is, Mr.
Secretary, we know it is not zero.
Secretary Powell. Senator, the judgment was made that in
the course of regular 2004 funding and in the supplemental, we
received enough money to carry us through the end of 2004 and
well into 2005, so that the best way to handle it was wait
until we reached 2005, and then there will be a supplemental
request in 2005. But there was not enough known about what that
need would be to include it in the 2005 budget submission, and
we have more than adequate funding to take us into at least
first quarter, in my case, of 2005.
Senator Stabenow. Mr. Secretary, I realize that is the
position. I would just say that from our perspective on the
committee, I do not believe that is responsible budgeting when
we know that our first quarter into the next year we will be
asked to come back with a supplemental. We are already
borrowing to spend in Iraq, and rebuilding as well as the
military, and for us to know that we are going to be going even
farther into debt, it seems to me we at least ought to have a
placeholder of an amount of money, and that is certainly
something I think this committee should be discussing.
Secretary Powell. In my budget there are some moneys in
2005 for things we really know about to a finite degree now,
what it is going to cost us to run our embassy operations in
Iraq. Those kinds of things we have put in the 2005 submission.
Senator Stabenow. But you are agreeing that there will be
additional dollars needed in 2005?
Secretary Powell. I am quite sure there will be a need for
a supplemental in 2005.
Senator Stabenow. Let me turn to another issue, an
extremely serious issue that you have talked about, which is
HIV/AIDS. There is no question in my mind that this is one of
the, if not the, largest crisis that we have in the world
community. When you say 8,000 people are dying every day,
including today as we sit here, I cannot imagine a bigger
threat to humanity than HIV/AIDS. The President's request to
combat HIV/AIDS increased substantially this year to 2.8
billion, and I appreciate that, but I am concerned that the
request lags behind the 3 billion that we authorized in
legislation last year, which the President signed, and I am
wondering if you can explain why we are not meeting the
commitment that we made to the world community last year.
Secretary Powell. We are really still gearing up our
programs. The HIV/AIDS Office is now just starting to issue
contracts, enter into compacts with delivering agencies for the
new moneys coming from the 2004 appropriations. So I think you
will see that in the months ahead the rate of commitment of
money will increase significantly and the funds will really
start to flow out in a very, very rapid and responsible way.
Senator Stabenow. Would you not agree that this is an
emergency?
Secretary Powell. Ma'am, it is.
Senator Stabenow. And there has to be the utmost sense of
urgency.
Secretary Powell. It has the utmost sense of urgency. It is
an emergency. It is a priority, and we are working as hard as
we can, but we have to do it in a responsible way and make sure
we are sending money out to programs that are prepared to
receive the money, and we are not wasting the money, and that
has taken us time to buildup the capacity to handle the
additional moneys and to make sure we are doing it in a good
way so that when I come up here next year, I am not criticized
for having run bad programs.
Senator Stabenow. Mr. Secretary, I have heard from a number
of people and had a number of conversations with members of
NGO's that indicate that as fast as we can get them the
resources they have the capacity to address this, and I am
hopeful that we will do this as quickly as possible.
Finally, this year's request for the Millennium Challenge
Account is 2.5 billion, nearly 1 billion short of the
commitment outlined by the administration at the onset of the
MCAs. I understand it is a new program also. I understand it
takes time to ramp up, but we need assurance from the
administration that we will meet the $5 billion annual funding
goal in year 3 that was promised, and I am very concerned again
that things just are not moving as fast as they should be.
Secretary Powell. The President remains committed to
reaching that $5 billion goal, and it is a brand new
corporation. The first board of directors meeting I held on the
2nd of February. So inevitably it takes time to create
programs, to get the criteria in place. Working with our
Ambassadors, we now have their ideas in hand. We are evaluating
the countries now. The evaluation system is being put in place,
and you will see this program ramp up quickly. It just takes
time, frankly, to put in place a system to spend these large
amounts of money in a responsible way. But we will be ramping
up quickly. I think we will be able to use what we have been
given this year, and we will be able to use the $2-1/2 billion
for 2005, and the President is still committed to hit the $5
billion a year target that he indicated when he created the
program.
Senator Stabenow. Finally, one of the things I noticed in
reading former Secretary O'Neill's book--and there were many
interesting things in that book--but one of the things that I
was appreciative of was his passion about HIV/AIDS after his
trips to Africa and his suggestions about water projects, and
the fact that only, as an example, half the people in Ghana
have water, and what a difference it would make just providing
the basics of water to everyone and how this could be done from
his analysis, looking at the major reports and some of the
contractors that have come in from the U.S. that have been
suggesting huge projects of billions of dollars. His assessment
was that things could be done for much, much less and much more
quickly if we just talked about the basics and about wells and
getting water to people in these countries. I am wondering if
you have had conversations with him about his proposals? And I
should also say I am hopeful he will continue to work on those,
because I think he has the right idea.
Secretary Powell. Paul had a real passion for that, HIV/
AIDS and clean water, and he and I spent many hours talking
about both subjects. He had an idea about drilling wells
rapidly, but we really do have a rather expansive program for
wells and for other means of providing water, and we made
another substantial commitment when I went to the World Summit
on Sustainable Development in South Africa a year, year and a
half ago. So we are I think as passionate and as committed as
Paul O'Neill was for providing clean water because it goes
along with development and it goes along with health, it goes
along with combatting HIV/AIDS and other infectious diseases,
so it is all part of the package. We may have had disagreements
as to how best to provide clean water. It is not just a matter
of digging a hole in the ground and up comes the water. You
need other parts of that system. You need to be able to
maintain and sustain that system over time.
So we were looking at it in a more comprehensive way than
Paul was looking at it. I hope he will continue to have an
interest in this in private life, continue to work on both HIV/
AIDS programs and clean water programs.
Senator Stabenow. Mr. Secretary, I just cannot find the
words strong enough to urge you to continue to focus on this as
well as all of us needing to do that, because there cannot be a
larger crisis right now in the world, and while we focus on
military action, which is certainly an important component to
leadership, focusing on hearts and minds and the leadership
that we can provide as the greatest country in the world on
humanitarian efforts, certainly sends an important message
about our values as much as other actions.
Secretary Powell. I could not agree with you more, Senator.
Thank you.
Senator Domenici [presiding]. Thank you, Senator.
Mr. Secretary, I am not sure that I can finish in the 3-
minutes that remains on the vote, so if I come back, please do
not consider that I am trying to abuse my time. It is just that
I am not going to get 8 minutes in, I do not believe.
First I want to tell you that I have a statement prepared
that I want to put in the record. It is a statement of
accolades, accolades for you, for our President, for America,
with reference to the world, and principally with reference to
what it means to be free.
[The prepared statement of Senator Domenici follows:]
[GRAPHIC] [TIFF OMITTED] 94065.189
[GRAPHIC] [TIFF OMITTED] 94065.190
[GRAPHIC] [TIFF OMITTED] 94065.191
Senator Domenici. But I have an issue that I am quite sure
you agree is important, and I think it is so important that it
requires more than people like you being interested. It
requires the utmost action. Let me try to explain it to you in
terms of what is happening today.
We are engaged in a war against Iraq on the basis that they
have historically been leaders in the use of weapons in mass
destruction. Whether they were there on a given day or not will
probably not be answered until history is beyond us. But we
worried enough about it that we went to war.
Now, Mr. Secretary, the problem I address is the
proliferation of weapons of mass destruction and its components
and its scientists around the world. When I first got involved
in this issue, Mr. Secretary, it was Russia and America, and
believe it or not, from that interest and the interest of some
very expert people, the first laws were passed with reference
to proliferation. Believe it or not, one afternoon in a 15-
minute period, the appropriators here started two new
nonprofileration programs. We did not take a month or 6 months.
One was $200 million to jump start the program to create a
plutonium disposition program. I am tempted to stop and go to
the other issue in a moment, but let me not do that and create
a little further synergy about the issue. On that very same day
that that happened, our Appropriations Committee, in
conference, approved over 50 million for the United States of
America to buy highly enriched uranium from the Soviet Union.
That uranium acquisition has worked somewhat. We turned it over
to an American corporation that was created by selling a
Government corporation. You are aware of that company. Its
record has been spotted at best.
But programs like plutonium disposition, you know, they are
a kind of a duck on water, and waiting around to drown, and you
know how hard it is to drown a duck. That is how hard it ought
to be to dispose of a program like plutonium disposition, but
we are letting the problem languish to where it may disappear
if we do not solve a little disagreement with Russia regarding
what we in America would call indemnification. Maybe somebody
would describe it as who is going to be liable for what in the
event things do not work out.
Let me just say, Mr. Secretary, I have talked to you
briefly and I do not expect you to know a lot about this just
because I called you on the phone, but I sent you a letter. I
have tried my best to speak to the President, and I think a
result of both the speech and a letter that had something to do
with the President's announcement. People do not know it, but
the announcement on nonproliferation, it may go down in history
as one of the most significant speeches given if it works.
Mr. Secretary, I want to ask you and urge you, with all the
things you are carrying around on your shoulders, to really
consider pursuing with vigor the establishment of international
institutions to control the spread of weapons of mass
destruction, and, Mr. Secretary, I have, since our
conversation, talked to the smartest people I could find. The
other day you asked me who and I told you, remember, Sig
Hecker? Since then I have spoken to Steve Younger, who is going
to be a fellow after having been one of America's--leading
nuclear bomb makers, and he is going to be a fellow and
research physicist. I asked him about this. He said we have to
get somebody to get on with it and get this international thing
going.
Now, Mr. Secretary, do you think this is a big problem,
proliferation?
Secretary Powell. I absolutely do, Senator, and that is why
the President spoke to the issue at the National Defense
University, a speech I think is an historic one, and one in
which he laid out a number of things we have to be working on
to include improving the ability of the major international
organization that deals with nuclear activities and that is the
IAEA. And he talked about passing resolutions before the U.N.
He talked about passing the additional protocols to the
Nonproliferation Treaty and a number of other areas that he is
working on.
With respect to the specific issue of liability and
indemnification with the Russian Federation, it is a subject of
considerable discussion. I have discussed it with my Russian
colleagues recently when I was in Moscow, and in subsequent
conversations with Foreign Minister Ivanov. And we have engaged
the interagency process in recent weeks in a much more
aggressive way to find a solution to these continuing, nagging
indemnification and liability problems that are holding up not
just the particular program you made reference to, but other
programs that came out of the G-8.
Senator Domenici. Mr. Secretary, I am thrilled to know that
you are involved. I can tell you without mentioning names that
I believe that people who have been working in your behalf--and
I would not mention their names--I do not think they are
competent to get this kind of treaty with the Russians. That is
my view, not yours. To get that resolved needs your absolute
mandate to the State Department that they put the kind of
people in that can resolve it. I tell you, it is not that
tough, but it has got to have some big people.
I want to wrap this meeting up so that everybody that is
here and the media that is here have to understand. We just had
a national position, and our ranking member took a big swipe at
the fact that America has gotten heavily in debt, and that the
Fed Chairman just mentioned Social Security. Well, Mr.
Chairman, and fellow Senators, I was chairman for so long in
this committee, and I am so thrilled that this very, very
competent man, Senator Nickles, is Chairman.
But do you know, 18 years ago in the U.S. Senate we had a
vote. Do you remember former Senator Pete Wilson? We wheeled
Pete Wilson in in a wheelchair because he had had appendicitis.
His was the deciding vote on a proposal by Domenici and Nunn to
restrain the COLAs on Social Security, 18 years ago. Why? We
knew just what is happening was going to happen. We never did
this again because some people think 8 or 10 people lost
elections the next time, but from my standpoint I do not think
it does a lot of good to talk about this unless somebody is
ready to do something about it. But I can tell you, you have
some of the greatest programs mankind has ever seen, the
greatest humanitarian program was this President's effort of
commitment of $2.8 billion for AIDS. Who would have thought it?
There are still some people who think Republicans do not care
and George Bush is a conservative from Texas, who cannot
believe that he is the one who said we will spend 2.8 billion
to address the world's aids crisis.
I tell you, I am not here to criticize how slow it has been
because I understand with that much money, if you turn it
loose, it will be gone in a year and then they will be back
here saying, you forgot this one, this one, the other one, or
you put too much here and too much there, and that is a bear of
a job. I hope you get it done and I hope you get it done in
your typical, methodical and terrific way. The man you put in
the directorship is already under criticism because he is not a
health man. We do not need a health man. We need a big-time
manager, right?
Secretary Powell. Absolutely, and that is what we have with
Ambassador Tobias.
Senator Domenici. That is right, terrific. If you put
anybody in charge that is going to look at 3, 4, 5 billion and
spend it right, you are probably on the right track.
My time is up and I am going to go vote, and I am not sure
that I can come back. I have about 8, 9 questions. I will
submit them to you.
I do want to close by saying, as strange as it may seem,
with this President having 1 year left, and hopefully he will
have some more, it is very important that you, where you have
the lead in some of these programs, that you really put
Secretary Colin Powell behind them. Nobody will move them like
you, and you ought to do it. The ones I mentioned are terrific.
Weapons of mass destruction are moving around the world today
like nothing we could have believed. We have a guy in Pakistan
that 10 years ago if you would have found him selling that
stuff, you would have hung him in the marketplace. The worst
proliferator ever is that fellow from Pakistan. Is that his
name, Khan?
Secretary Powell. Kahn, sir, Dr. Khan.
Senator Domenici. Can you imagine admitting that he put
weapons of mass destruction in five countries, and we are still
running around saying, well, we do not know what to do about
him?
Thank you very much.
Secretary Powell. Thank you, Senator.
Senator Bunning [presiding]. Since I guess I was the first
one back, I will be the first one to be able to followup on
Senator Domenici. I would like to comment on an earlier
statement by my good friend, the ranking member, about what
Chairman Greenspan said and what he did not say. I have his
statement before me. He stressed that he preferred cutting
Government spending as much as possible before increasing
taxes. He also endorsed in the statement the tax cuts that we
implemented in the economic reform program, and then he
suggested that we might consider cutting promised Social
Security, and the exact words, ``consider cutting promised
Social Security benefits to future retirees.'' He did not say
to cut them. He did not say that that was an option. He said
``you might consider it.''
Well, I have news for Alan Greenspan, and I have had it
before at every hearing--I know I am getting off the track, but
I have to say these things. Chairman Greenspan has made so many
wrongheaded statements over the period of the last 15 years
that I have taken him to task at almost every meeting that he
has attended. Knowing full well that nobody in this Congress of
the United States of America is ever going to suggest that we
cut Social Security benefits for those who have earned and paid
for them.
The fact of the matter is, as Chairman of the Social
Security Subcommittee on the Ways and Means Committee, it was
never brought up. The only thing that was ever suggested that
if we did nothing, nothing to correct the problem, that by 2036
we would have to lower benefits to future beneficiaries after
that time by 25 percent. I wanted to clear that up because I
think it is very important.
Now to get to some of the things that concern me on your
budget. 9 percent increase for the U.N. and affiliated
agencies. I bring that only to the point that does that
consider any of the military money that we are spending in
Bosnia or Kosovo with our troops, or is that excluding the
dollars being spent by the DOD on our involvement in Bosnia and
Kosovo?
Secretary Powell. It excludes it. Those are strictly within
the military accounts. If it is a peacekeeping mission
somewhere under U.N. auspices, then we pay our fair share, 27
percent of that peacekeeping mission, and that would be
included in that account.
Senator Bunning. But we are continuing to pay the 100
percent of our troops, our troop presence----
Secretary Powell. In Bosnia and Kosovo.
Senator Bunning [continuing]. In Bosnia for the last 8
years and Kosovo for the last 5 years. So that is not in this
budget?
Secretary Powell. No.
Senator Bunning. I have a problem with the State Department
only to the point that we created a law in the U.S. Congress,
and it passed and the President signed it on arming cargo
pilots to operate on international flights. It is called the
Flight Deck Officers Law.
In an op-ed piece--and I do not recommend this for reading,
op-ed piece in Roll Call, because it is not one of my favorite
periodicals--none are being allowed to do this because our
State Department has not negotiated any agreements with any
other nations to allow these armed pilots, whether it be on
commercial aircraft or cargo planes to carry these. Can you
bring me up to speed as far as where the State Department is in
any kind of negotiations with other countries on this specific
law that we passed?
Secretary Powell. No. I would rather provide the answer for
the record, Senator. The only thing that I could say is that
many of our friends and allies around the world do not have the
same view of that approach to security, and therefore if we fly
into those countries, there is probably a debate that will take
place before we can get in place the necessary policies for our
pilots to come in armed. But I would rather get a more precise
answer for you for the record.
Senator Bunning. I appreciate that, because some of our
intelligence, as you well know, indicates that that might be a
source of national security as far as returning to the United
States on cargo planes and on other planes that have been
obviously canceled.
Secretary Powell. I do understand.
Senator Bunning. I thank you very much for your time, your
patience, and my God, the responsibility that you hold as
Secretary of State in this trying time with all of the things
that are on your plate, our expansion, our problems in Iraq,
our problems in Afghanistan, and many other areas, and the
progress that we are making in those areas, and if at all
possible, I will support almost everything in this budget, and
we will figure out a way to pay for it.
Secretary Powell. Thank you, Senator.
Senator Bunning. Thank you.
Chairman Nickles [presiding]. Senator Bunning, thank you
very much.
Senator Corzine?
Senator Corzine. Thank you, Mr. Chairman.
Welcome, Secretary. It is always great to welcome you, and
I want to as well commend you for your service and particularly
those who work with you as well in the State Department. The
agenda is broad and long, and I feel like we are in strong
hands under your leadership there.
I also believe that the reinvesting in the people that you
have made such a centerpiece is one of the most important
things in the long run for our ability to be able to carry out
our foreign policy, both current administration and future, and
support it completely. That is the good news.
I have a real problem. It is a little bit along the lines
of sometimes a lack of complete information ends up undermining
credibility. When we look at the budget this year with regard
to what you are speaking to us about today, we are talking
about 31.5 billion. And we all know that there is a plug there
for reconstruction for additional aid that will accompany both
our efforts in Afghanistan and Iraq. It has been there for 2
years, $18 billion last year and two odd years before. I do not
understand how we cannot make some estimate, understanding that
rational views know that is coming. And you put that into
conjunction with other issues about the alternative minimum
tax, which is left out or only put in for 1 year or the
elements with regard to the cost of some of the programs that
were proposed in the state of the union message, like health
insurance. It gives people an unease about full disclosure. I
think actually the debate the Chairman talked about is less
about misleading and lying and more about whether there was
full presentation of the various interpretations of
intelligence that came as we preceded the war. So I am very
troubled about those issues and this is a particularly
egregious example, that we will end up almost certainly having
a substantial expenditure that is not included in our
projections, and it leaves the American people with a false
sense of, I think, what we are doing with regard to our
budgetary policies, and then some way undermines credibility of
people who I think are doing a terrific job and putting
themselves at risk and all the other things that are associated
with it.
I guess that is my statement. I would ask you to comment on
that, but more importantly, would like to hear some of your
early interpretations of the writing of your report or the
fact-finding report. I think the end of this week, if I am not
mistaken, there is supposed to be an implementation of the
fundamental law or at least an announcement. Do we think we are
going to meet that deadline? There are certainly discussions
with regard to whether June 30th is an appropriate timeframe
for proper electoral process. I heard some movement away from
maybe an election, although I do not want to put words in your
mouth. It was left uncertain. I think nothing is more important
with regard to our budgetary indications of whether we are
going to have the resources to actually help build an electoral
process that is going to have the credibility should the United
Nations be presenting this. I really think that an exposition
with regard to some of this fact finding--and a very credible
person, Ambassador Brahimi, has certainly led the effort in
Afghanistan in a way that I think almost everyone would argue
has been remarkable.
Secretary Powell. Thank you. Senator. With respect to the
2005 submission we do have dollars in there for things that we
really can scope down and know what the requirement is going to
be. There is $46 million requested for State operations in
Iraq, including $17 million support cost and $29 million to
staffing. That is known now. We can budget for that and we can
put it in the budget, which we did. But with respect to other
demands that might be placed on the Department, and frankly the
larger demands that will be placed upon the Defense Department,
it was felt that as a result of the supplemental efforts and
the fact that there are other sources of money that will be
coming online, revenues for oil sales in Iraq, the donors
conference that came up with a lot of money in Madrid a few
months ago, that money will start to kick in and help with
reconstruction and budget support for the new Iraqi Government.
For those reasons, it was felt that the 2004 regular
appropriations, plus the supplemental appropriation, will take
us through the early part of 2005. And we will have a better
sense then of what additional moneys will be required with
another year of experience under our belt. It was felt it was
better to wait for that 2005 supplemental to deal with that
which we cannot see clearly now. That was the judgment that was
made. So we put in, in the Department, that which we could see
clearly had a finite way to scope it, and we did not make
estimates, nor did others make estimates for expenditures they
could not accurately make estimates for now.
Senator Corzine. Is there no contingency planning though of
ranges that are actually thought through with regard to
associated planning processes?
Secretary Powell. I do not know what the Pentagon might
have done, but most of the $21 billion was for reconstruction
activities and it is not yet clear what that will look like for
the latter part of 2005, but we have enough to carry us into
2005 for our operations, both military, State Department and
other operations, and that is why the judgment was made to wait
until 2005 to see what kind of supplemental would be required
for 2005.
With respect to Mr. Brahimi, he is a man of enormous
ability, and I haveten to know him very well as a result of
what he did in Afghanistan, and he did a terrific job in Iraq.
He visited with the parties and he reaffirmed the judgment we
had come to that we could not really have the right kind of
election between now and say the end of June, and there were
certain deficiencies in the caucus process that we were looking
at, and he recommended that we look at additional options for
the purpose of selecting an interim government for Iraq. We are
still driving toward a 30 June date. We think it is achievable.
Ambassador Bremer is hard at work on the administrative law
now. 28 February was our deadline. It is getting close. I have
not talked to Jerry in the last 24 hours to see whether he
thinks he will make it or not, but I think we are getting very
close. There are some issues having to do with Kurdish
authorities and the regional government of Kurdistan and some
other issues that have to be dealt with. They are not easy, but
I think we are getting close to conclusion of the work on the
administrative law.
The next real piece of work to be done--and we are looking
forward to seeing what Ambassador Brahimi and the Secretary
General might have to say about this--is what kind of interim
government will you put in place? Will it be the governing
council, an expanded governing council? Will it be Asura coming
up with another group of individuals to take sovereignty? A
variety of alternatives are being looked at, not only by us, of
course, by the United Nations, but more importantly, by the
Iraqis themselves as to how they want to go about it. And that
will be the major activity of our governance group in the weeks
ahead, what kind of sovereign government should we be
supporting for hand over on the 30th of June?
Senator Corzine. The deadline appears though, you still
very certain can be met in some format, just a different
format?
Secretary Powell. Yes, 30 June still is achievable and we
are all working toward that 30 June turnover.
Senator Corzine. I am sure you have read the Brahimi or the
interim report or the fact-finding report.
Secretary Powell. Yes.
Senator Corzine. One of those things that sticks out very
really, very prominently in that report is that security
constraints are still a serious issue on the ground, and to
some extent did not seem to jive with I thought your opening
statement. There is some acknowledgement that security is
getting better. They were not allowed to travel outside
Baghdad. I am just reading from the report. They were not
actually allowed to travel seriously in Baghdad, according to
the report. How do you assess the security situation on the
ground?
Secretary Powell. The security situation on the ground is
improving but it is still dangerous. We are still losing
people. There are still old regime elements and terrorists in
Iraq who are doing everything they can to thwart our efforts.
The Iraqi security forces are being built up and are being
targeted because they are being built up. People understand,
the bad guys understand that they want to go after Iraqi
security forces, perhaps even more than they want to go after
coalition military forces because they are trying to keep this
from happening. So we still have a difficult situation. Our
commanders I think know what they have to do, and we are
putting a lot of effort and energy into building up the Iraqi
police force, the civil defense corps, the army, the border
police, and all the other security institutions that Iraq will
need when it becomes a sovereign nation. Over 200,000 people,
close to that number now, are now involved in Iraqi security
operations, Iraqis involved in Iraqi security operations. So I
think things will improve, but it is dangerous.
Now, the team you are making reference to, they were not
able to get as much access as they wanted, or they may have
chosen not to go where they wanted because they were not
comfortable with the security arrangements. But they got their
work done, and we hope that by the time 1 July comes around,
when we think there is an even more comprehensive role for the
U.N. to play getting ready for elections, we will have put in
place security arrangements, working with the United Nations,
that will allow them to move more freely. But it is still a
dangerous area.
Senator Corzine. One last followup question. You just
implied in your response that it is insurgency, I take it
primarily as the fomenter of the violence and lack of security,
seem to have a debate going on among different elements of both
our intelligence and/or defense establishment about whether
what we are primarily seeing on the ground being outside
influenced elements who are causing the security problems or
insurgents?
Secretary Powell. We are seeing both. I do not think there
is a debate. I think we are seeing both. On any day of the week
you can get two opinions as to whether we are seeing more of
one and less of the other or what the trends are for each. I
think the Intelligence Community generally believes that we are
seeing additional terrorists coming into the country and that
the former regime elements are coming more under control, but
we are seeing both. We are also seeing criminality, just plain
criminality, people who want to blow up pipelines, want to
steal from the pipelines, people who for one reason or another
that has nothing to do with being a former regime element or a
terrorist who just came into the country, want to cause
trouble. So anyone who says it is all this or all that, that is
not a correct assessment in my judgment. It is still a
combination.
Chairman Nickles. Senator Corzine, thank you very much.
A quick question. You have mentioned 200,000 people are
being trained. Is that 200,000 Iraqis?
Secretary Powell. 200,000 Iraqis are performing some kind
of security function, whether in the police, in the civil
defense groups, border patrol, pipeline security, or the army
itself.
Chairman Nickles. Senator Nelson.
Senator Nelson. Thank you, Mr. Chairman.
Mr. Secretary, thank you again for being so resolute as we
continue to look for Captain Scott Spiker. There is a team over
there that is looking for him, and although this is outside of
your bailiwick, with your credentials of your past life, if you
would just keep the pressure up, and I will give this to your
staff. It is a letter from the family, which as you know, live
in Jacksonville. I just want to urge you, as you are in the
inner sanctum, talking about it, keep him on the forefront.
They have been. I have been over there. There is a major who
was set to rotate back. He is now a lieutenant colonel. He
extended to keep up the search. From time to time we get some
promising information, but we do not have any results yet. So I
am going to give that to your staff.
Secretary Powell. I will stay on it, Senator. He was lost
on my watch.
Senator Nelson. Thank you. You know I want to talk to you
about Haiti. When you were with us in our Senate Foreign
Relations Committee 2 weeks ago I asked you the question, is it
the policy of the Government for regime change? You said, No,
it is the policy of the Government that it is not for regime
change. I want to suggest to you that what appears to be the
hands-off policy of the U.S. Government with regard to Haiti is
in effect going to bring about regime change. Now, we might
agree at the end of the day that Aristide is a bad character
who has been corrupt and very ineffective, but in effect, when
the U.S. Government lays hands off and allows the violence and
the bloodshed to increase, that is going to bring about the
regime change, and Aristide is going to go. And I know you have
probably been overruled by the White House on this to keep a
hands-off policy. I would like any of your comment on that, and
then I want to encourage you, although you all have not taken
my recommendation of putting an international police force in
there with the other nations of the western hemisphere, that
when he abdicates, it is clearly time for us to get in there
and try to settle that thing down, because as you can see, just
look at the news, you can see the rickety boats that they are
building. They are turning up on Jamaica, they are turning up
on the Turks and Caicos. 20 of them turned up on a freighter 5
miles off the Florida coast. This exodus is coming if we do not
get in there and stabilize it.
Secretary Powell. Senator, I have not been overruled by the
White House. There is no basis for it because the President and
I have discussed this issue almost every day, and we have a
common mind. We were together on it 7 o'clock last night in the
Oval Office, and he and I discussed it again on the phone at 7
o'clock this morning.
We have been trying to find a political solution to this
crisis. I have been in daily contact with the CARICOM leaders,
with France, with Canada, with the United Nations. I have been
in relatively constant contact over the last week with the
authorities in Haiti. I have been in contact with the
opposition leaders of the DP. I have talked to them in groups.
I have sent Ambassador Noriega down there to talk to them. We
have tried to find a political solution. It has not been a
successful effort at this point, and we continue to try to see
if there is not a way forward.
The issue of sending in a security force, be it a police
force or a military force, has come up time and again. In fact,
it came up again within the last 24 to 48 hours. What we have
said and what my French colleague Dominique de Villepin said
yesterday, and it has been somewhat misinterpreted was that the
international community stands ready to help put together an
international security force, whether it is police of some
component gendarmerie or military or whatever. The
international community stands ready to put that force
together, as my French colleague said yesterday, as part of
stabilizing some political resolution to this problem.
What the international community--and there may be some
members of the community who feel a little differently--but
most of the members of the international community with the
capacity to send forces in there have said is that Haiti really
needs to find a political resolution to this problem. We do not
want to get into an inter-positional situation between opposing
forces at this time and coming down on one side or the other.
I spent a great deal of time yesterday on the phone with
Foreign Minister de Villepin, spoke to him again this morning,
and he made his statement clear yesterday that France is
willing to participate in such an effort. So is the United
States. So is CARICOM. So is Canada. There may be African
nations of the francophone community that are willing to
participate in that, but we need to see some kind of political
resolution.
We have not succeeded in getting the political opposition,
the DP as it is known, to agree to enter into this current
proposal with President Aristide. The reasoning is well known.
They have stated it clearly. They believe they have been misled
in previous discussions with him. At the same time, we are
concerned about the humanitarian situation. We are doing
everything we can to make sure that food stocks are protected.
There are some distribution problems in Haiti, but for the most
part there is adequate food, medicine and other necessary
stocks.
I am very sensitive to the plight of the Haitian people,
and we spent time this morning talking about a spurt in the
number of people coming out onto our cutters, and there is a
meeting taking place in the interagency community right now I
think on how we should respond to that challenge.
President Aristide is aware of all that we have been trying
to do. He understands that we have not been able to reach an
accommodation with the DP. I know that he is taking a look at
the situation. I do not know what judgments he may come to. But
we are in a difficult moment in the life of Haiti, the life of
Haitian people. It is a great disappointment to me to find
ourselves in this position.
I went down 10 years ago with Senator Nunn and with
President Carter and talked the generals out in order for
President Aristide to come back in, and I regret that over
those 10 years we have not seen the kind of progress that we
had hoped for. President Clinton invested a couple of years of
military presence. The international community spent tons of
money trying to put in place a professional police force, and
it did not work, and the political process, the democratic
political process in Haiti has essentially collapsed, and the
international community is ready to get engaged, willing to get
engaged. There are debates and discussions taking place in the
U.N. today, but anybody who looks at this says, what is it we
are getting into? And we have gotten into something that looks
like it is a political solution, and that has not yet emerged.
Senator Nelson. Mr. Secretary, I pray that you are
successful, and then once the country is stabilized, then I
think we have to have fresh thinking about how we help them
stay stabilized in the future. I say this in a bipartisan way
because I think at the end of the immediate past administration
that they started to let Haiti slip out of their sights, as has
this administration up to this point. So I pray that you are
successful, and then let us get our heads together of how it is
going to be stabilized for the long run, and the kind of
economic assistance that will give it some hope so that people
will not constantly want to flee.
Secretary Powell. As you know, Senator, we have provided
over $800 million from 1995 to the present to Haiti. We are
still providing funding to Haiti, $75 million this past year.
There is a request in our budget for more. The international
financial community and the institutions of the international
financial community are willing to help more, but they have
become frustrated that the money does not seem to produce the
kind of results intended. And so there is a reluctance, until
the political situation stabilizes itself and there is a
legislature and there is a functioning executive branch with
some security in the country, and there are institutions that
are functioning, there is a reluctance from the international
community to just pour money into the place. But we are doing
our part with respect to meeting the immediate needs of the
Haitian people through NGO and private organizations, and we
will continue to do so.
Chairman Nickles. Senator Nelson, thank you very much.
Mr. Secretary, you have 5 more minutes?
Secretary Powell. Yes, sir, certainly.
Chairman Nickles. Just a couple of other issues Senator
Conrad and I wanted to bring up. One is on the issue of foreign
adoptions. Right now foreign adoptions are basically regulated
by the Citizens and Immigration Services and the State
Department. I have introduced legislation with Senator Landrieu
and a bipartisan group of Senators called the Inter-Country
Adoption Reform Act, basically put it under the Department of
State, try and consolidate it, get it to where it will work
much more efficiently.
Would you review that and give us your thoughts? It would
be put in under your shop. I think it would make it work a lot
better, simplify the process. I would appreciate your getting
back to us on your thoughts and comments.
Secretary Powell. I will look at it, Senator, right away.
Chairman Nickles. Also I want to just touch on a couple of
other things. The big increases in your budget are for AIDS and
for the Millennium Account.
Secretary Powell. Right.
Chairman Nickles. Last November, December, I went with
Ambassador Tobias and Secretary Thompson on an AIDS African
trip. Our work over there is meeting a need that is enormous,
enormous, and I compliment you and the President. Ambassador
Tobias is just an outstanding representative, taking on a
challenge. I look at the job that you have, the job that we
have, we all have big jobs around here. That is an enormous
challenge as well, and I think we have the right person in
there.
The Global Fund assistance that Congress appropriated last
year was $546 million. The amount that is in your budget is
$200 million. The administration requested a total of $2.8
billion, and last year we appropriated a total of 2.4 billion.
So I have not looked at all the differences, but I do know that
Congress put in a lot of money in the Global Fund that was not
requested, and you are requesting more money in other places.
Is the 2.8 consistent on this, meeting that commitment of $15
billion?
Secretary Powell. Yes, sir.
Chairman Nickles. I appreciate that. Also I want to just
touch on one other thing. The other big piece of that--and you
mentioned they are combined, and I would echo that--the
Millennium Challenge coupled with the Global AIDS Fund. One or
two of the African countries I saw were so poor, and I am
thinking there are such enormous resources here, if they had a
legal system, if they had private property ownership. Uganda is
one--and there are others--the most fertile country I have ever
seen, and yet we are sending food aid. They could grow enough
to feed not only Ugandans but many other countries, but in many
cases they do not have the rule of law and they do not have
private property, and so I compliment you on both.
Now, on the financial side of it, last year you talked me
into a billion dollars for a new program. This year you are
asking that program to grow to $2-1/2 billion. You have not
obligated as of yet the billion dollars. Do you really need
that $2-1/2 billion in 2005? Can we not slip some of that into
2006 and 2007. The increase we have on all nondefense programs
is $2 billion, and you are asking a billion and a half of it
for the Millennium Challenge Fund. You are not really quite
ready to spend $3-1/2 billion or even obligate $3-1/2 billion,
are you?
Secretary Powell. I recommend you really not slip it into
the out years, Senator. We need that money in our accounts now
in order to start planning how we are going to ramp up this
program as fast as we can. There are countries that are
desperately in need.
Let me just touch on another effect that the program is
having already. I am already hearing from a number of
countries--you were concerned that they are not going to meet
all the standards required for eligibility. They are asking:
``Can we send a delegation to see you right away?'' ``What do
we have to do?'' ``What do we have to do on the rule of law?''
``What more do we have to do on corruption?'' ``What is our
grade?'' ``What is the threshold for passing?'' They want to be
a part of this program. I think the way in which it is
structured right now, with one now and two plus next year shows
determination, shows the commitment of the President, of the
American people and the Congress. So I would you not slip the
two, and we will be ramping this up as far as we can.
Chairman Nickles. I appreciate it. With the concept I am
with you 100 percent and I compliment you.
One other compliment I want to make and that is in the
Office of International Religious Freedom. Senator Lieberman
and I sponsored that bill years ago. We found then that there
was a lot of countries where people were persecuted and in some
cases killed because of their religious beliefs. We find it
with friends and allies even, in countries like Pakistan, Saudi
Arabia or countries like China and others. The purpose of that
bill was to highlight some of the problems and give us a lot of
tools to help fix those problems, and I would just say I just
have been looking at the report that was released just last
December by the Commission, and it was an outstanding report. I
would urge more attention I guess from all of us, Members of
Congress and others. I find when we raise some of these issues
with some of our countries, that our allies, our friends in the
war on terrorism and so on, that they want to be cooperative.
So I compliment the Ambassador-at-Large, Mr. Hanford, but also
the work that that Commission is doing.
I am amazed at how significant religious persecution is
today in lots of places in the world. In Pakistan somebody
walked into a church and just machine gunned people, and that
happened recently, and so I think this Commission helped
highlight some of the problems and also has good suggestions
for some of the solutions.
Secretary Powell. Thank you, Senator. I fully support
Ambassador Hanford and his work. It is a good report.
Yesterday, I issued the Human Rights Report, and then we also
have the Trafficking in Persons Report. All of these go to the
human condition and what we believe God intended for all of
mankind to enjoy, and we will continue to press these reports
that frankly are the products of Congress. You wanted us to do
this, and we take them all very, very seriously, and we go
after these issues aggressively.
Chairman Nickles. Thank you very much. I think maybe in
many cases we in Congress have not done enough to followup on
them, but we can do that with our individual contacts with some
of the embassies and on some of our trips, and hope that the
State Department people would as well.
Senator Conrad.
Senator Conrad. Thank you again, Mr. Chairman.
Mr. Secretary, one of our colleagues suggested that somehow
I had misled on the Greenspan testimony yesterday. I did not. I
was quoting directly from the Washington Post Dispatch on what
occurred there, and I just put it up. That is what I quoted
from. ``Fed Chief urges Cut in Social Security.'' That is the
headline. ``Future benefits must be curtailed, Greenspan
warns.'' And I would be happy to go through the story, set the
record straight here on what was said and what I alluded to.
``Federal Reserve Chairman Alan Greenspan warned Congress
yesterday the Federal Government has promised more retirement
benefits than it can pay for and must consider scaling back
those commitments soon to avoid damaging the economy in the
future.''
``I am just basically saying we are over committed at this
stage,'' Greenspan told members of the House Budget Committee.
Greenspan, who supported President Bush's 2001 tax cuts again
endorsed Bush proposal to make the tax cuts permanent. However,
he said in response to questions that raising taxes would
inevitably be part of any successful effort to reduce the
growing Federal budget deficit. he stressed her prefers cutting
spending as much as possible before increasing taxes. He said,
``You don't have the resources to do it all.'' To curtail
future spending Greenspan urges Congress, as he has in the
past, to consider cutting promised Social Security benefits to
future retirees. ``Otherwise,'' he said, ``the growing burdens
would create long term budget deficits that would drive up
interest rates, depress economic growth, make it even harder
for the Government to pay its bills.''
That is what he said. That is about as clear as it can be.
It is very interesting if one looks at what the President is
proposing. He is proposing in his budget to borrow $2.4
trillion from Social Security that is funded by payroll taxes,
and have tax cuts of $2.4 trillion over that same period that
are largely going to income tax payers. That is the greatest
shift of benefits from the many to the few in the history of
this country. When one talks about class warfare, that is class
warfare writ large.
Let me just ask you this.
Chairman Nickles. Senator Conrad, you and I will need to
debate that another day. The Secretary is being very generous
with his time.
Senator Conrad. I just want to ask you this on the
supplemental. Will you be asking for a supplemental as you have
the least 3 years?
Secretary Powell. In 2005?
Senator Conrad. Yes.
Secretary Powell. I would expect that there would be a
supplemental in 2005, sir.
Senator Conrad. Can you give us any sense of how big it
might be? Last year's reconstruction supplemental was $21
billion. Can you give us any sense----
Secretary Powell. No, I cannot, sir. Really, I do not have
any way of putting a number to it. If we could put a number to
it clearly, then it would more likely be in the 2005 budget. It
is up to the President ultimately to decide whether there will
be a supplemental, what the amount is. But I think our planning
assumption is that there will be a need for a 2005
supplemental.
Senator Bunning is not here, but since you mention it--I
could not quite read the article, but I did hear you say the
word ``consider'' reductions. I think the point the Senator was
making earlier was that Mr. Greenspan had said ``consider,''
whereas the headline suggests that he was advocating cuts.
Senator Conrad. I do not think there is any question he is
advocating cuts. He is saying to us to consider. It is his
recommendation. I think that is very clear, and that is not
only clear based on what he said yesterday, it is clear on what
he said 2 weeks ago. It got almost no press attention. So I
think it is very clear, he is saying to us we are over
committed, none of this adds up, and it does not add up, and
that is the problem we have.
When you send up a budget and you tell us here you are
going to ask for a supplemental but you do not provide a
number, the thing we know is the right answer is not zero. But
what you have in this budget, or more accurately, the President
has, is zero. We know that is not what it is going to be.
Chairman Nickles. Mr. Secretary, I want to thank you. I
might mention that last year when we did the very large, $20
billion supplemental, actually I think it is $21 billion, we
were told that that would basically be it, and not to expect a
2005 supplemental. That is still my expectation. I could be
corrected, but I would like to be corrected if that is the
case. We were told that other countries were going to be
participating more. That was a large, large, large amount of
money, and I look at the amount of money that is compared to
what we have done in the past, and we were basically assured
last year, when Ambassador Bremer and the administration
requested that $21 billion and a lot of us were swallowing
hard, that we would not be seeing another supplemental for
infrastructure for Iraq.
Secretary Powell. I think we made it clear that there would
not be another 2004 supplemental, and I do not know what
Ambassador Bremer believes the needs in 2005 will be. But I
cannot tell you today that neither the Defense Department,
State Department, or other agencies of Government will not have
need for a 2005 supplemental. It will be up to the President to
decide whether or not a supplemental is forthcoming. It cannot
be decided now what an amount might be in such a supplemental.
Chairman Nickles. Mr. Secretary, thank you. My staff
informs me that the commitment was that we would not see
another supplemental in 2004.
Secretary Powell. Right, Senator.
[The prepared statement of Secretary Powell follows:]
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Chairman Nickles. I appreciate the clarification both from
you and my very knowledgeable staff.
With that, Mr. Secretary, thank you very much for your
appearance before the committee.
The committee is adjourned.
[Whereupon, at 12:15 p.m., the committee was adjourned.]
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