And on our side, I think that if we are saying the problem is spending, we ought to be willing to do something about it.

I did not get to make an opening statement, Mr. Chairman, so I just took this time to do that.

Chairman CONRAD. I thank the Senator, and I welcome his observations with respect to measures on constraint. I do think that we as a committee have a special obligation now that we are back in deficit to review the whole question of those constraints that are going to end this year. I look forward to working with Members on both sides. I think it is going to be critically important that we get those constraints put back in place.

Senator Corzine.

Senator CORZINE. Thank you, Mr. Chairman, and welcome, Dr. Crippen.

I want to ask a couple of specific questions, and I have a statement for the record. I particularly want to thank you for pointing out that when you look at 2010 and beyond, you run right into that projected Federal spending on Social Security, Medicare, and Medicaid that is going to cause enormous constraints on our ability to make other choices. We are running roughshod into that box, and I think that is one of the reasons why there is so much emphasis on the tax cut. If we invade the Social Security Trust Fund and the Medicare Trust Fund now, we do not have the ability to deal with that.

I have a couple of specific questions. First of all, are your estimates on interest rates averages over the year-they must be. I am presuming when you say short-term 3-month Bill rates are 3.4 in 2001, that must be the average for the year.

Mr. CRIPPEN. The average for each quarter.

Senator CORZINE. Quarterly averages. Because as I recall, interest rates at this time a year ago in the short-term area where roughly 6.5 percent on the Federal funds rate, and I think they have come down 4.75 percent. And the whole debate about longterm interest rates having an impact on the economy and having impact on budget projections and interest costs is the fact that they have not moved, and short rates have declined 4.75 percent in that timeframe. So it is the shape of the curve that I think people are emphasizing as the basis for why long-term rates are looking, at least to some extent, whether it is inflation or the inflationary impact of borrowing in the market. I wonder if you have made an estimate of what the difference-I think you mentioned this; I know that Senator Conrad did-the expected debt at the end of the decade is $2.8 trillion as opposed to estimates last year of $600 billion; is that rightly right?

Mr. CRIPPEN. That's right-for debt held by the public.

Senator CORZINE. I would argue that for those who operate in the financial markets, $1 trillion tends to have some impact on people's expectations about where interest rates will be in the future, and I think that when we are looking at interest rates that have not moved in a year, that is a pretty dramatic statement in and of itself given that we have had a 4.75 percent decline in short rates at the same time. I think that is impacting back into these budget projections, and I think that is worrisome, because it both leaves us with less resources to spend on whatever it is-homeland de

fense, national defense, or a prescription drug benefit--and I think is a potentially serious cost.

If you have any comments on that, I would be curious.

Mr. CRIPPEN. As I mentioned earlier, Senator, there is not convincing, compelling evidence that we have found to link the budget deficits with interest rates. Clearly, there must be a supply demand phenomenon going on here, and if we are demanding more and selling more debt, that could have an impact. But there are lots of other things going on as well, not the least of which is the rest of the tax bill, which could have different offsetting effects.

What we are focused on, and what is part of your question, is what does the implied increase in debt do to interest rates? That is an important question, but not the only one. We do not do dynamic estimates of the tax changes or spending changes in part because there are so many of them. So to focus on just one factor, I would suggest, whether you are right or wrong, whether that is the correct phenomenon, is not the whole picture, anyway.

Senator CORZINE. I would agree that there are other things operating, including the strength of the economy at the time, but $1 trillion is something that generally, people factor in-it affects supply and demand.

Do you have productivity assumptions built in that I have not been able to see? One of the most controversial elements in projections of the budget surpluses a year ago was productivity assumptions that were outside the range of what was seen, at least except in the last 5 years of the 1990's. I did not see them in there.

Mr. CRIPPEN. They may not be in what you got today; they certainly will be in the January 31 publication.

Senator CORZINE. Do you know what those are offhand?

Mr. CRIPPEN. We reduced them again somewhat. I think we took total factor productivity (TFP) 0.2 percentage points.

Senator CORZINE. So it still would be large relative to other periods in the last 20 years.

Mr. CRIPPEN. Relative to the 1970's, certainly, but smaller than the previous five years.

Senator CORZINE. One thing that I think we can all agree onthat fan-shaped analysis that you talked about is a real issue that we need to understand when we sit down and hammer out whether it is tax cuts or spending cuts or however we put the budget together. There is a broad range of probabilities that we need to assign, and one of the chief issues of debate is this productivity assumption, and it makes big swings in where we are. So interest rates and productivity are things that I am certainly concerned about.

I understand that over the break, you did a review of some of the options on economic stimulus and recovery. I would like to know how you thought accelerating the marginal rate cuts that have been proposed would do with regard to short-term stimulus and the economy?

Mr. CRIPPEN. As I recall, we concluded that relative to its costs, it would not do a lot to increase demand in the short run.

Senator CORZINE. And were there particular initiatives that you thought would increase short-term demand?

Mr. CRIPPEN. The things in particular that put money into taxpayers' hands quickly. As I suggested earlier, the form of that can be important, too, whether it occurs in a lump sum, which does not appear to be consumed as quickly, at least, and probably not as much, or if it appears in payroll checks, where it has a higher tendency to be consumed.

Senator CORZINE. So, Senator Domenici's proposal with regard to a payroll tax holiday has a higher incentive?

Mr. CRIPPEN. Yes.

Senator CORZINE. Finally-and this is the hardest of these, and you will probably want to duck it, but I will ask it anyway-do you have a view on the question of whether a tax cut that is not implemented is a tax hike?

Mr. CRIPPEN. Well, I will duck it only a little in that it is kind of an existential question.

Senator CORZINE. But real for some of us with beards.

Mr. CRIPPEN. I understand. We have lots of things like this in the budget world-is a reduction in the increase in spending a cut or an increase and we do a lot of dancing on the heads of pins.

I can say that the rules that govern what we do and how we score things would clearly show a delay or an elimination as a tax increase or revenue increase, because our baseline assumes current law, and current law has the further reductions embodied in it. So for scoring purposes, I can tell you that we would show it as a revenue increase.

Senator CORZINE. Thank you.

[The opening statement of Senator Corzine follows:]

OPENING STATEMENT OF SENATOR JON S. CORZINE

Thank you, Mr. Chairman, and welcome, Director Crippen.

I personally want to thank you and your staff for your cooperation. I particularly appreciate your willingness to present an analysis that presents some bad news rather clearly-that last year's tax cut has put us on a path that will use Social Security funds over the next 10 years, and beyond.

Mr. Chairman, CBO's new report verifies what many of us have been suggesting for some time: the Federal Government's long run fiscal condition is much weaker than we thought last year, when we passed huge new tax cuts.

Now we face the prospect of deficits for several years, with a significant invasion of Social Security and Medicare Trust Funds. And that's before we even consider new funding for national security, homeland security, prescription drugs and other legislative priorities, or an immediate economic recovery program that I believe all of us support.

Mr. Chairman, throughout last year's tax debate, you and many of us sounded the alarm about the questionable assumptions underlying the tax cut. We said that 10-year forecasts were inherently uncertain. We said they failed to account for unforeseen security threats and other inevitable emergencies. We questioned the rosy productivity scenarios. And we pointed out that official baselines hid many other known costs and future liabilities.

Unfortunately, these warnings were ignored or deflected by best case expectations. And now the chickens are coming home to roost, or at least they are standing on our doorstep.

The world is a very different place than when Director Crippen came before us last year. We have a war on terrorism to fund. We need to beef up security here at home. Our economy is in recession. And the health care crisis is only getting

worse.

Mr. Chairman, a changed world means that our fiscal policy should change, as well. It's now clear that we simply cannot afford all of the huge tax breaks for high income individuals in last year's tax bill. If we don t revisit some of them, it is inevitable that we will both raid the Social Security Trust Fund now and into the future,

but we will fail to provide a meaningful prescription drug benefit. We won't have the resources.

Does that mean we should raise taxes in the middle of a recession? Absolutely not.

Does it mean that we should raise one penny of taxes from struggling middle class families? Absolutely not.

But does it mean that people with incomes over, say, $140,000 may have to wait before getting more tax cuts in the future? Yes. Frankly, the choice is between that and raiding Social Security. There's just no way around it.

Mr. Chairman, based on recen headlines, for years, the Enron Corporation used phony accounting to hide the truth. In the past year, unfortunately, we've seen the Enronization of the Federal Government. If we don't confront the truth about our fiscal condition, and change course, the long term consequences could be similarly disastrous.

With that, I look forward to hearing from Director Crippen and working with you and all my colleagues in the year ahead.

Chairman CONRAD. Senator Hagel.

Senator HAGEL. Mr. Chairman, thank you.

Dr. Crippen, thank you. I do not often have the opportunity to listen to existential conversation.

Mr. CRIPPEN. We will get to metaphysical next.

Senator HAGEL. I will have to leave-but thank you for appearing. Your input is, as you know, very important.

One of the points that you made as you presented to this committee projections for outyear spending on Social Security, Medicare, and Medicaid, that Senator Corzine was referring and others have referred to, is something that we have all been mindful of— sobering numbers. If I recall, a point that you made was that it is not just important that you maintain the trust funds, but the real issue is how do you grow the economy. Is that generally a correct paraphrasing of what you said?

Mr. CRIPPEN. Yes.

Senator HAGEL. And with that as kind of our baseline here, I would like to start where you left off with Senator Corzine on scoring tax cuts. It is my understanding that the Joint Committee on Taxation does most of that; they are looking for ways that might make more sense to improve the macroeconomic dynamic of tax cut scoring. I think you take into consideration some of the behavioral patterns that you can track through various sources.

The first question about that is do you think it is important that your committee would eventually get to a dynamic scoring model to include the benefits of tax cuts-if there are any-to the economy? For example, you mentioned growing the economy. Is it important, as you responded to Senator Corzine about productivity, to factor in investment spending? Does that affect productivity? Does that affect economic growth? Does that then affect tax revenue? I am a bit biased because I think it does.

Could you take us through that a little bit and explain what you are doing and what you are not doing? Are we losing something here by a static analysis of tax cuts? I think history is rather complete if you look at the last three rather sizable tax cuts, and in fact it has generated significant new tax revenues. I go back to the Mellon tax cuts from 1921 or 1929, I think, generally in that area. I would be very interested in your thoughts about this. Mr. CRIPPEN. Senator, currently, of course, as you already said, we do not generate the revenue estimates of changes in law; that is the Joint Committee's purview. On the other hand, it is not en

tirely their responsibility to assume fully dynamic estimates, because we would have to change our baseline if there were to be such an incorporation. And we have certainly been talking to them about what they see as compelling evidence one way or the other on certain tax effects.

Having said that, though, we currently include in our harding assumptions what we anticipate the economy will be like over the next 10 years, and that would include any effect of tax revenues, up or down. In that sense, we incorporate legislation as we know it when it comes time to do the baseline.

So there is a macro dynamic included in our baseline, and that is for current law. Now, if you propose further tax changes this year, we would not feed those back into our baseline and would not get a revenue estimate that is dynamic in the way that you are discussing.

We tend to agree that there are some macrofeedbacks. As Senator Corzine was saying, it is possible that there is an increase in long-term interest rates involved here. We do not have compelling evidence for that, and we do not include it in the baseline at this point. And there are other things in the tax bill that would perhaps help economic growth.

So the net of it is, we have a sense of-and the economics profession has some conclusion about-the direction of change with some particular types of taxes that will help or hurt, for example, economic growth or the labor supply or some other aspects; but we do not have any conclusion as a profession about the magnitude. So if we have offsetting effects, as we do in many cases, because it is not just a rate cut bill, and it is not just a rebate bill, it is hard to say on balance where it comes out.

We do try, however, after the fact to qualitatively give you an assessment of what macroeconomics, at least as we currently practice it, would suggest. We did that in August as a qualitative statement about how the tax cut-the tax bill at that time-is likely to help economic growth in the long run, but probably by small amounts, in part because in truth, the annual amounts of the tax reduction are small relative to the size of the economy.

Senator HAGEL. Do you think generally that you can make any fair assessment one way or the other that tax cuts help economic growth or assist the economy in any way?

Mr. CRIPPEN. No. In general, the profession would say that certain kinds of tax cuts like marginal cuts

Senator HAGEL. What we passed last year.

Mr. CRIPPEN. Some of that would, yes. As I said, there is a qualitative assessment that has been very public, that we put in our August update, talking about the various pieces of the tax bill and the kinds of effects they would have on the economy. But again, as you started out with and I concluded with, what we need to keep our eye on in most of these discussions is what effect do those things, whatever they are, have on the growth of the economy. Ultimately, it is the economy that is the trust funds. It is our kids who will be paying us, so the way we can help them is by growing the economy.

Senator HAGEL. One final question, since I think I have a minute left or maybe not.