above that for short periods of time, although I do not see this recovery as being a raucous recovery that is going to be filled with bull markets month after month. But I believe that to talk about trying to get the surpluses back where they were without acknowledging that the principal reason we got them to the height they were was that we had a sustained growth economy-we need to get back to that.

I have some indications in my opening remarks with reference to long-term interest rates, where they are going, where they are now, where they were during most of the Clinton time in the White House, and frankly, we are not doing so badly, and from what I can tell, we are doing pretty good.

I do not believe there is anything that we can do in the next year or two that will dramatically alter those long-term interest rates, but I do believe they are going to ameliorate and get better over time, not worse.

With those few words which, instead of me saying them, we ought to be asking you for your opinions, nonetheless I thank you again.

And I want to say to the Chairman that I think I told you and told your staff and did tell the witnesses that I have a hearing in the Energy Committee on Enron, and I happen to be the second in charge on the Republican side, so I guess I had better go there, and if I can find time, I will run back.

So I thank you much, and I will try my best to pass judgment on what you say here today by reading it and reviewing it with one of my trusted staff, so it will be attended to by me as if I were here. Thank you very much, and thank you, Mr. Chairman.

Chairman CONRAD. Thank you very much, Senator Domenici. [The prepared statement of Senator Pete V. Domenici follows:]

STATEMENT OF SENATOR DOMENICI

Thank you, Mr. Chairman, and good morning.

Once again, I'd like to thank everyone involved in the move of the committee out of the Russell Building and back into Dirksen. Specifically, I'd like to thank Lynn Seymour, George Woodall, Sahand Sarshar, Mandy Wimmer, and Tim Nolan. Now, I'd like to welcome all of our witnesses her today-a very accomplisjed group. Dr. Reischaeur, I'd like to welcome you back to Capitol Hill.

I see Dr. Orszag is with us again after testifying three times last year. Mr. Wesbury also testified once last year and in the meantime won an award from the Wall Street Journal as the most accurate economic forecaster in 2001. Unlike most economists, who didn't forecast a recession until 6 months after it started, Mr. Wesbury forecast a recession as far back as January last year. That's impressive, although I think he knows that his is a humbling occupation. My former Chief Economist at the committee won the same top honors twice for her forecasts in 2000 but came in dead last on her predications for 2001.

Today, we are here to examine the relationship between the economy and budget outlook.

Listening to some of my colleagues, one might get the impression that we are moving toward some sort of fiscal collapse and that interest rates are going through the roof.

But as Chairman Greenspan testified last week, "our underlying fiscal situation remains considerable stronger than that of a decade ago."

The new CBO baseline from last week shows the debt as a share of GDP falling to the lowest level since 1917.

And at only 5.1 percent, long-term interest rates are low-not high. In fact, rates are lower now than they were in 90 of the 96 months of the Clinton administration.

This does not mean we are without any fiscal challenges. Social Security and Medicare require long-term attention. Our ability to make these programs work depends heavily on strong economic growth.

I believe the tax cut we enactd last year will enhance economic growth in both the short-term and the long-term, and thereby help address, in part, the future of Social Security and Medicare.

Has our fiscal position changed since last year? Of course it has. We have had a recession and the start of a war. Under these circumstances, a couple years of deficits are, maybe not desirable, but appropriate.

In the near term our fiscal policy must focus on national security, homeland security, and economic security.

It is our responsibility to produce a budget that preserves the security of our citizens on all these fronts. As I have said before, nothing much else can matter at this time.

Having said that, I hope we can work together-in a bipartisan manner-to produce a budget plan that focuses on these three security issues; and I look forward to hearing our witnesses this morning.

Chairman CONRAD. We will begin with Dr. Reischauer. Welcome. Please proceed with your testimony.

My intention is to have the entire panel give their testimony, and then we will open it up for questions.

Thank you.

STATEMENT OF ROBERT D. REISCHAUER, PRESIDENT, THE URBAN INSTITUTE

Dr. REISCHAUER. Thank you, Mr. Chairman.

I appreciate the opportunity to appear before the committee. I will summarize my statement, which reviews the latest baseline budget projections, draws a couple of straightforward lessons from the experience of the last year, argues that fiscal discipline remains an important goal for the Congress and that you should work to extend and revise the procedures that have been used in the past to attain this fiscal discipline, and it makes the case for augmenting the fiscal flexibility that is available to lawmakers in the future.

Last week, CBO reported to this committee a sharp deterioration in the budget outlook from the situation that faced the Congress just a year ago. In the short run, meaning the current year and next year, the major explanation for this deterioration is the weakness in the economy. In the long run, meaning 2009 through 2011, the dominant explanation is the tax legislation that was enacted last June, which accounts for roughly half of the deterioration that occurs during those years.

While the baseline outlook certainly is less robust than it was a year ago, the Nation is not facing the budget difficulties that it faced from the early 1980's through the mid-1990's. During those years, the budget projections showed that deficits would grow unless Congress cut spending below or raised taxes above baseline levels.

CBO's new projections how that the unified budget will return to surplus when the economy recovers if Congress adheres to baseline spending and baseline revenue numbers.

However, as you know better than I do, it will be very difficult to keep spending or taxes at baseline levels over the next decade. If one adds to the baseline the amount necessary to complete the unfinished business that is before Congress now-and by that, I mean the farm bill, some disaster assistance, likely 2002 supple

mental, and extension of the expiring provisions of the Tax Actthe outlook is nowhere near as rosy.

Adding resources for new priorities such as a Medicare prescription drug benefit, increased medical research at NIH, a true fix for the AMT, and other items that are being debated would make the projections even less optimistic.

Looking at that situation, I concluded in my statement that it will be a challenge simply to attain and then maintain balance in the unified budget over the course of the next decade.

This raises the question of what the fiscal goal for the Nation should be. For many years, there was a consensus that we should try to balance the unified budget. Over the last 4 years, however, a broad bipartisan consensus emerged around the notion that we could do better than that, that we should balance the non-Social Security portion of the budget at least in good times and devote Social Security surpluses to paying down debt or to investing in structural reform of those programs.

Considering the challenges facing the Nation when the baby boomers begin to retire and the Nation's low personal savings rate, I think a fiscal goal like this, one that calls for a significant unified budget surplus in good times, is an appropriate goal; but the rough estimates of the realistic budget outlook facing the Nation that are in my testimony suggest that we are not going to be even close to this mark over the course of the next decade. In fact, we are likely to have on-budget deficits in the $100 to $200 billion range as far as the eye can see.

If Congress wants to reserve some of the Social Security surpluses for debt reduction, it will have to take steps now to increase the fiscal flexibility that is available for the Nation in the future. I suggest in my statement that the most straightforward way of doing this would be to modify the provisions of the 2001 Tax Act. Specifically, I suggest making permanent and indexing all of the provisions that have been implemented to date and placing the remaining provisions on hold until we have restored a desirable level of fiscal flexibility. While some might characterize this proposal as a tax increase, it is in fact a tax cut for both 2003 and for all of the years after 2010 relative to current law. It would also represent a tax cut in the intervening years for the majority of families who face either the 10 or the 15 percent marginal tax rate.

This proposal, while not raising taxes above levels that people are currently paying, would restore sufficient fiscal flexibility so that Congress could address not only its unfinished business, but also the needs that will emerge over the course of the next decade. Thank you.

Chairman CONRAD. Thank you very much.

[The prepared statement of Dr. Reischauer follows:]

PREPARED STATEMENT OF ROBERT D. REISCHAUER1

Mr. Chairman and members of the committee, I appreciate this opportunity to discuss with you some of the challenges facing the Congress this year as it makes its decisions about the fiscal 2003 budget. This statement:

President of the Urban Institute. The views expressed in this statement should not be attributed to the Urban Institute, its sponsors, staff, or trustees.

• reviews the latest baseline budget projections and suggests that the baseline may be outside the range of politically attainable paths;

⚫ draws some straightforward lessons from the sharp and unexpected deterioration in the budget outlook over the past 12 months;

• argues that fiscal discipline remains important and that Congress should revise and extend the procedures and mechanisms that facilitated budgetary restraint during the 1990's; and

• makes the case for augmenting the fiscal flexibility available to future lawmakers by modifying the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

WHAT A DIFFERENCE A YEAR CAN MAKE!

When the Congressional Budget Office (CBO) released its baseline budget projections a year ago, they showed growing surpluses over the 2002-11 period in both the unified budget and the on-budget accounts, surpluses that cumulated to $5.611 trillion and $3.122 trillion, respectively, over the 10-years (see Chart 1). For many who had struggled through the dark decades of large and seemingly intractable deficits, CBO's January 2001 projections were like passing through the pearly gates to the promised land of fiscal plenty. Resources appeared to be available to address many of the Nations priorities simultaneously-to reduce tax burdens, strengthen defense, modernize Medicare, expand aid to education, reduce the ranks of uninsured, help farmers, boost national saving and so on. Spirited debates even developed over the maximum feasible pace at which debt held by the public could be retired and the investment dilemma Treasury would face when government ran surpluses after all of the public debt had been retired.

Last week, CBO released its latest baseline projections before this committee. In sharp contrast to those of a year ago, they showed unified budget deficits for 2002 and 2003 and deficits in the on-budget accounts through 2009 (see Charts 2 and 3). The cumulative unified budget surplus for the 2002-11 period had shrunk to $1.601 trillion and the on-budget accounts were projected to have a cumulative deficit of $742 billion over the period (see Chart 1).