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cut. Well, it turns out they cannot be cut, because those are being increased-whether it is Customs or airport programs-things that are not terribly glamorous until you have a crisis but that are the nuts and bolts that serve the American people for the most part quite well.

If the pressure is to assume that it can all be constrained below inflation, I do not think that that goal will be realized, and I do not think that is a partisan issue. I think it is going to be just a reflection of reality. In order to start with an honest, accurate baseline, one has to confront that difficult issue.

Chairman CONRAD. You know, this is going to be an especially challenging time to write a budget, for the reasons that I have set out. Clearly, we have got to increase spending on national defense and homeland security. We are very much united on that question.

I do not think it would be wise to increase taxes at a time of economic downturn, and I will not propose such a thing. But for the longer term, I must say I am very worried about the direction of taking $2 trillion out of the trust funds of Social Security and Medicare to pay for tax cuts and to pay for other Government spending. I think that is a profound mistake. I said that to Mr. Daniels yesterday, and I believe it.

And what kind of choices does that leave us with? They are all difficult ones; they are all very difficult ones. And at this point, there is not much of a consensus on any of the questions before us that I have raised here today. There are differences with respect to a stimulus package. The President still believes that it is critically important to put one in place. Chairman Green said he is conflicted on the question. I have had a number of colleagues come to me in the last several days and say they now think a stimulus package would be counterproductive, that it would dig the hole deeper in terms of deficit and debt and would probably be too late to give lift to the economy.

One of the things that we did as budgeteers was an analysis of past attempts by Congress to stimulate the economy at a time of economic slowdown. Do you know what we found? Every, single time, we have been too late. Every, single time, we have acted too late. It turns out that because on a bipartisan basis, we did push for tax cuts last year because we thought it was important to give lift to the economy, and because of the increased spending resulting from the attack on the country, those things did provide stimulus, in fact, very substantial stimulus last year-more than $100 billion of stimulus in this period.

So the question is do we do more, and if so, what does it include. Let me just say that I very much appreciate the two of you being here to share your views with us. I wish more of our members had been here to have a chance to hear from you, but this is all part of the record, and their staffs are here and have been listening attentively, and I can tell you that your recommendations will be important to us.

Before I end the hearing, let me ask you about the question of debt limit. Last year, we were told that we would not face an increase in the debt limit until 2008 or perhaps 2009. Now the Treasury is calling over here, saying you have got to increase the debt

limit of the country as quickly as possible, and increase the debt limit by $700 or $800 billion.

It is a stunning turnaround. Those who said last year that you could have it all, that you could have massive tax cuts, that you could have aggressive paydown-in fact, you could pay off as much of the debt as was possible to pay off-that you could have a major military buildup, that you could have protection for Social Security and Medicare were just wrong. They were just wrong. They have been proven wrong on every, single count. They are not protecting Social Security and Medicare. They are raiding Social Security and Medicare. They said you could have all of these additional spending items and tax cuts and still have maximum paydown of debt. That is all gone. Instead of paying down $2 trillion of debt, they are now saying that at most, they are going to pay down $500 billion, and the assumptions behind that are very murky and very doubtful.

So the hard reality is that all of these things that we were told last year proved to be wrong. They said that we would not have to increase the debt limit of the country until way off in the future; now they are asking for an immediate and big increase in the debt limit.

What would be your advice? Clearly, the Government of the United States has to meet its obligations. It would be a disaster for the Government to default. But should we have a big increase all in one fell swoop, or should we take repeated reviews of our debt situation?

What would be your advice?

Mr. LEW. The debt limit is one of the more vexing problems, because by the time you get to the debt limit, it is too late to really affect the policy that caused the need for the debt limit to occur. It is kind of a lagging indicator.

I think that in the short term, there is really very little alternative but to, as you say, do what it takes for the Government to pay its bills. Default is not an option.

I think that it is a point of leverage that has been used from time to time. My own personal is that it has been overused; it has made the orderly management of Government more difficult for both Republican and Democrat administrations. Years ago, when I worked in the House when the Democrats controlled the House and the Republicans were in the White House, we came up with an automatic mechanism for a debt bill to pass because we could never get anyone to vote for it, and we had this kind of crisis mentality around the debt limit.

On the other hand, I personally would not have a huge increase, because you need to keep pressure on the system so that future policies can be made with an eye toward what the impact on the debt is. And at the point where you debate the budget resolution, I think it should be very much in front of this committee and the full Senate what the impact will be on the debt, and the decision on the policy ought to be made with an eye toward what it is going to require in terms of the debt limit when it comes up the next time.

Chairman CONRAD. Mr. Bixby, what would you say on the debt

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


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.]




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.


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


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

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