Mr. BIXBY. I think that having a huge increase in the debt limit at this time would be a mistake, because the fiscal outlook right now is very uncertain, or does not appear good. I would agree that once you get to the point where you are bumping up against the debt limit, it needs to be raised, but I would keep the increase to a fairly small level at this point so it would help keep control over fiscal policy a little bit better and act as a check, so we have to come back and look at it again.

It is one of the ultimate ironies of this year that one of the justifications for the tax cut last year was that we were going to pay off the national debt too fast; and now, we begin this year by debating how soon we have to raise the debt limit. So things change very quickly, and I would keep the increase to a fairly small one.

Chairman CONRAD. All right. I think that is very good advice. Do you have any other last comments or last suggestions to us, things that we should keep in mind as we try to deal with this series of challenges?

Mr. LEW. The one thing I guess I would say as a closing comment is that this is not the first time that a year after a large tax cut, it turned out not to work. In 1981, exactly the same thing happened, and to the credit of President Reagan and his administration, they worked with the Congress in 1983 and in subsequent years to be responsible about what the impact was. It obviously was not enough, and it took the better part of 20 years to really turn things around, but it would have been a lot worse if we had waited 10 years to get started.

I would just hope that the model that is looked to in terms of how to deal with the consequences of policy decisions made is more like that than some other examples that are being used which would suggest that we just barrel ahead regardless of the consequences.

Chairman CONRAD. Dig the hole deeper. I think the most disturbing thing about the budget that I see coming from the President is that it just digs the hole deeper and deeper and deeper. There does not seem to be any plan at all to return to fiscal bal

ance.

Mr. Bixby?

Mr. BIXBY. The problem with getting back into deficits for a legitimate reason, whether it is war, recession, or a combination of both, is that once back into them, people get comfortable with the idea. It is like who cares about all that fiscal discipline stuffyahoo, we are out of the lockbox.

Getting back into that lockbox is going to be tough, and what The Concord Coalition is concerned about is the return to the old habit of let us cut taxes, increase spending, spend the Social Security surplus, and run up the debt. We just cannot afford to do that with the boomers beginning to collect their benefits by the end of this decade.

So our strong plea is that this is a very crucial point for the fiscal and economic future of the country, and maintaining fiscal discipline is going to require some hard work, but it is work worth doing, because we are really doing it in the name of future generations, and we have always said that patriotism includes generational patriotism. We need to look out for the future of the

kids and grandkids that we leave behind, and that now becomes a short-term concern of ours as you prepare your budget for this year.

Chairman CONRAD. Thank you for that.

On that note, we will end the hearing, and I want to thank you both again very much for being advocates for fiscal balance and for paying attention to what really will make a great difference to the long-term fiscal security of the Nation.

Thank you very much.

[Whereupon, at 11:25 a.m., the committee was adjourned.]

THE PRESIDENT'S FISCAL YEAR 2003 BUDGET

PROPOSALS

THURSDAY, FEBRUARY 7, 2002

U.S. SENATE,

COMMITTEE ON THE BUDGET,

Washington, DC.

The committee met, pursuant to notice, at 10 a.m., in room SD608, Dirksen Senate Office Building, Hon. Kent Conrad (chairman of the committee) presiding.

Present: Senators Conrad, Byrd, Nelson, Stabenow, Corzine, Snowe, Smith, and Allard.

Staff present: Mary Ann Naylor, staff director.

For the minority: G. William Hoagland, staff director.

OPENING STATEMENT OF CHAIRMAN CONRAD

Chairman CONRAD. Good morning, and welcome.

It is good to have you here, Mr. Secretary. As I was describing to you, the leadership on both sides had indicated there was going to be a vote at roughly 10:05, so some of our members have gone to the floor in anticipation of that.

They have now put that vote off for some indeterminate period, so I think we will press ahead and try to get through statements, and hopefully, we will be able to do that before the vote actually

occurs.

I want to acknowledge this morning that Senator Gordon Smith of Oregon will be serving as the ranking member in the absence of Senator Domenici, who remains in the hospital for tests. All of us on this Committee again send our best wishes to him. He is an invaluable member of this Committee and of the Senate, and we miss him, and we are hoping that these tests are completed successfully and that he is back with us very soon.

I want to again welcome you, Mr. Secretary, for a return to the committee. We are delighted that you are here. We have been through a year of remarkable changes. I think we all have to acknowledge that and state it clearly.

Last year, we were told that we were going to be blessed with extraordinary surpluses as far as the eye could see. Obviously, that course was altered in the first instance by recession, and war, which for this year and next played the biggest role in reducing those surpluses.

But over the next 10 years, we see the biggest factor in the reduction of surpluses being the tax cut. CBO told us that about 42 percent of the change is as a result of the tax cut over 10 years; 23 percent, the economic downturn; some 18 percent, spending that

came about as a result of the attacks on this country; and 17 percent, technical changes, largely increases in Medicare and Medicaid expenses that were not anticipated.

Last year, you came before the committee, and you were a staunch defender of the tax cut, which is understandable as a representative of the administration. I think that many people might have had a different view if they had known everything that was to come. Certainly if we had applied the President's own formula, which was one in every four surplus dollars for a tax cut, the tax cut would have been dramatically smaller, because we are now down to under, the President's budget, a $600 billion surplus over the 10 years, and one-quarter of $600 billion would be a $150 billion tax cut instead of a $1.6 trillion tax cut.

But people were using what they thought were the best forecasts at the time.

When you appeared before us last March, you used a reference that stuck in my mind ever since, a reference to a well-known fairy tale, and you talked about characterizing the tax cut plan as a "Goldilocks" tax relief plan-not too big, not too small, but just right.

When you explained the math to the committee last year and you outlined it, as in this chart, you indicated that starting with the $5.6 trillion surplus, take away the $2.6 Social Security surpluses and $1.6 trillion for tax relief, and we are left with a $1.4 trillion cushion.

Today, as I have indicated, we face a far different picture, with those surpluses largely disappearing. All of this tells me that a prudent person putting out a budget this year would decide not to dig the hole deeper. In fact, I do not think it would be a bad idea if the administration and Congress kept in mind the observation that you made earlier this week at the Finance Committee. You said that "10-year projections ar a useful discipline, but they are not rock-solid predictions." This is a point that I tried to make last year and certainly alerted people to last year, that any 10-year projection is a crapshoot. I think we do need to remind ourselves of that fact.

But in this context, the President now comes with a budget with another $600 billion of tax cuts, all of which is going to be coming out of Social Security Trust Funds. I personally think that that is a serious mistake in light of the fact that the baby boom generation starts to retire in just 6 years.

In addition, the tax cuts that the President proposes are heavily backloaded. Maybe we could put up that chart. More than 70 percent of the tax cuts being proposed by the administration will take effect in the second 5 years. More than 40 percent of the cuts take place only in 2012, the final year of this budget window. And the cost of these additional tax cuts in the second 10 years is $4 trillion-right at the time when the baby boom generation is retiring and the fiscal condition of the country is dramatically altered by that fact.

Leaving aside the tax policy problems with what the President has proposed, what is especially troubling to me and to many Members of the Senate is the taking of Social Security and Medicare Trust Fund surplus money to use for other purposes.

Remember what you said last year to the Finance Committee on the subject of protecting Social Security-as a member of that committee, I remember it very well. You said: "The Social Security dollars that are going to flow into the government over the next 10 years are safeguarded, lockboxed, fenced off, protected from all evildoers. I do not know if there are more strong ways to say it. Social Security dollars are set aside without any threat of encroachment."

Now, we look back, and we see that that is just not so. If we look at what we are faced with now, if we go back to the bad, old days, 1996 and 1997, we were taking all the Social Security Trust Fund money and using it for other purposes. We were able to reduce that in 1998. We were able to stop the practice completely in 1999 and 2000, when we took none of the Social Security surpluses for other purposes.

But now we have seen a reversal. In 2001, it started in a relatively modest way, but the next 3 years under the President's budget, we are taking all of the Social Security surpluses to be used for other purposes. And over the next decade under the President's plan, $1.7 trillion of Social Security surpluses will be taken to pay for tax cuts and other expenditures of government.

The President's plan has enormous consequences. Last year, you assured us that we would be able to pay down as much of the publicly held debt as was possible to do some $2 trillion. And now, we see that instead of being able to pay down $2 trillion of debt, that is dramatically reduced to $521 billion.

The result is that Federal interest costs go up dramatically. Last year, we were told that over the next decade, we would pay some $600 billion in interest costs. That has now been increased to $1.6 trillion. That is $1 trillion that is going out in interest costs that is not available to strengthen our national defense or improve homeland security or meet the other pressing needs of the country-or to pay down debt.

I believe the truth is there are no surpluses left-none. I think their words mislead us, perhaps. I think they certainly mislead the American people. I believe that to the extent surpluses are from trust funds, that those funds are already fully committed and should not be designated as surpluses.

Before Chairman Greenspan's testimony before this committee, he and I had a very interesting conversation. He said that one of the things that has concerned him is the liabilities that the Federal Government has that are not on the books of the Federal Government, and they are not on the books of the Federal Government because the theory is that the Federal Government could stop the programs of Social Security and Medicare, so those liabilities are considered contingent liabilities.

As Chairman Greenspan said to me, in his judgment, the vast majority of it is not contingent at all. And that is why I liken this to the Enron theory. I am not accusing anybody of corruption here; that is not the point. The point is that as I understand it, the biggest problem with Enron is that they did not face up to their true debt. In effect, they were hiding debt from creditors, from shareholders, and perhaps even from themselves. Perhaps there were executives there who did not fully appreciate the amount of debt that