Information furnished by the Committee for a Responsible Federal Budget 249 Prepared statement of Dr. Jack Carlson. 260 Kemp, Hon. Jack, a U.S. Representative from New York. Institute for the Study and Encouragement of Common Sense Economics 518 522 548 551 562 564 570 574 584 593 615 635 650 660 673 675 679 688 692 695 701 714 721 743 748 754 765 791 792 794 797 DEFICIT REDUCTION PROPOSALS MONDAY, DECEMBER 12, 1983 U.S. SENATE, COMMITTEE ON FINANCE, The committee met, pursuant to notice, at 2 p.m., in room SD215, Dirksen Senate Office Building, Hon. Robert Dole (chairman) presiding. Present: Senators Dole, Danforth, Durenberger, Grassley, Matsunaga, Baucus, and Mitchell. [The press release announcing the hearing and the prepared statements of Senators Dole, Mitchell, and Grassley follow:] [Press Release No. 83-200] SENATE FINANCE COMMITTEE SETS HEARINGS ON DEFICIT REDUCTION PACKAGE Senator Robert J. Dole (R., Kans.), Chairman of the Senate Finance Committee, announced today that the Committee will hold hearings on December 12, 13, and 14, 1983, on the need for prompt enactment of a major deficit reduction package and on the specific contents of such a package. The hearings will begin at 2:00 p.m. on December 12 in Room SD-215 of the Dirksen Senate Office Building and continue on December 13 and 14 starting at 10:00 a.m. each morning. In announcing the hearings Senator Dole stated, "The Congressional Budget Office currently projects annual Federal budget deficits of approximately $200 billion or more through 1989. These hearings will attempt to answer three fundamental questions about these massive projected deficits: "First, what are the economic consequences if the Administration and Congress do nothing to address the deficit problem? "Second, do we need to act in early 1984 or can we afford to wait to address the deficits until 1985 or thereafter? "Third, what specific legislation would the witnesses recommend that Congress enact to reduce the deficits?" Senator Dole cautioned, "In formulating deficit reduction recommendations, I hope witnesses will present specific practical proposals that recognize the political realities that will necessarily shape any deficit reduction package. For example, the President and Speaker O'Neill have both categorically rejected reductions in Social Security Cost of Living Adjustments (COLA). Thus, suggestions that we freeze or reduce Social Security COLAs will not be very helpful to the Committee as it seeks to develop a bipartisan package." STATEMENT OF SENATOR DOLE The most important domestic problem facing Congress is how to deal with budget deficits. Ironically there is no issue on which there is a greater bipartisan consensus than the need to reduce deficits; yet Congress was unable to pass even the very modest $28 billion budget reconciliation before we adjourned in November. There is a real danger of political stalemate in the coming year over the budget issue. Without strong leadership, neither those who favor budget cuts, nor those who believe in the need for tax increases, will budge. Both the President and the Speaker of the House will have to give some ground, because the fact is that only a (1) balanced package of spending reductions and revenue increases has any chance of becoming law. I voted against the fiscal year 1984 budget resolution last June because it relied almost entirely on tax increases, calling for $73 billion in new taxes but virtually no restraint on domestic spending. But just because the budget resolution was unbalanced, doesn't mean we can ignore the budget problem. The budget resolution was approved by Congress, so it is my responsibility as chairman of the Finance Committee to try to produce an alternative. These hearings, and our efforts to write major deficit-reduction legislation represent an attempt to comply with the reconciliation instructions of the budget resolution. FINANCE COMMITTEE PACKAGE The Finance Committee has been working to produce a balanced package that is big enough to make a noticeable dent in the deficits. The chairman and staff have been instructed by the committee to draft legislation that would reduce deficits by $150 billion over fiscal years 1984-1987, and that is evenly split between tax increases and reduced spending. In effect, we are just trying to balance the tax increases contained in the budget resolution with an equal measure of spending restraint. Further, tax increases in the package will be contingent on the spending cuts being already in place, similar to the conditions laid out for the administration's contingency tax. Reflecting the strong view of the committee that early congressional action is essential, the staff is to report by February 15. We are holding these hearings now in response to that instruction. I hope that these hearings will help maintain the momentum toward deficit reduction that was established before last month's recess. I also hope that these hearings will raise the level of debate about budget deficits. In my view, little is accomplished by pointing fingers about responsibility for deficits. It is obviously true that the deficits would be lower if taxes had been reduced less in 1981. But it is also true that the current level of taxation would be more than adequate if Federal spending, with the help of many of today's harshest critics of the deficit, hadn't exploded during the 1970's. And while it cannot be denied that increased defense spending adds to the deficit, given a certain revenue level, current defense outlays as a percentage of the budget and GNP are well below where they were in 1969 when the budget was in balance. SOLUTION NEEDED We have not called these hearings to assess blame for our current predicament. The American public doesn't care how we got here; they want the problem solved so that they can feel confident about their economic future-not just in 1984, but for the rest of the decade and beyond. Another goal of the hearings is to establish how serious the deficit threat is. There has been much confusion about the economic impacts of deficits. The danger is that many Americans see the current vigorous recovery and forget about the real, long-term dangers of deficits. It is difficult to conceptualize the size of the projected deficits unless it is reduced to a personal level. The public debt now stands at about $6,000 for every man, woman and child in the U.S. If nothing is done to reduce the deficits over the next five years, the debt will grow to over $10,000 per person. At this level, by 1989 it will take about 50 percent of all Americans' personal income tax payments, or $1,100 per person, just to pay the Federal Government's interest bill. Many Americans will find home-buying more difficult with higher deficits. Consider a family purchasing a home at today's current interest rate, averaging about 121⁄2 percent, with a $55,000 mortgage. If the deficits push interest rates up, total interest costs over the 30-year term will be $15,500 more for each one percentage point increase. At the national level, it is my belief that enormous deficits, extended indefinitely into the future, could cause real damage to the American economy. As the recovery matures, Treasury borrowing will compete more with private sector needs, crowding out investment, and leading to slower growth in living standards, productivity, and jobs. The deficit also feeds upon itself, making the next year's budgeting that much harder. Each year of $200 billion deficits adds about $15 billion in interest costs to the following year's spending levels. This amount is nearly the size of the entire medicaid program. It is my hope that these hearings will add to the weight of opinion favoring swift action on the deficit. But we have witnesses representing a wide variety of opinionthe entire political spectrum. Those who expect a unanimous voice will be disappointed. STATEMENT OF SENATOR GEORGE J. MITCHELL Mr. President: It would be ironic, if it were not so serious, that these hearings on the implications of the budget deficit will have the advice of witnesses representing virtually every facet of economic opinion and interest, with the one glaring exception of the Administration itself. We will hear from the non-partisan Congressional Budget Office, from both its current and former director. We will hear from former members of this and earlier Republican administrations. We will hear from the academic community, the business community and from representatives of the elderly, taxpayers and workers. Yet the one group whose concern about the deficits should be most obvious-the Reagan Administration-will not appear. It is hard to avoid the conclusion that this non-appearance is a politically motivated decision to subordinate the hard questions of the deficit to the forthcoming election campaign. It appears that a conscious risk is being taken with the economic future of our nation. It seems to reflect a hope that so long as the Administration can avoid appearing concerned about the deficit, its economic effects can somehow be avoided. But such a hope is both irresponsible and misplaced. The economy will not go on hold until November 1984 for the convenience of anyone. Businessmen will make decisions about investment and inventory. Consumers will make decisions about home purchases based on prevailing mortgage rates. Investors will make decisions based on their best judgment of future developments. All of them will act throughout the year, well before November, 1984. Their actions will be based at least in part on fiscal policy. But taking credit for the good news about unemployment, inflation and economic rebound does not constitute a fiscal policy. Stifling differing opinions within the Administration raises the real fear that no voices of reason will be heard. And having the Secretary of Defense publicly demand a $55 billion spending increase next year reaffirms the impression that this Administration is simply not willing to make any choices whatsoever while the election hangs over it. But the essence of governing and leadership is to make choices. In this instance, a lack of action will be as much a conscious choice as any other. But it is a choice that risks the economic recovery for all Americans, not only those in the Administration. In past years, even when budget deficits elicited howls of rage in political election campaigns, they never approached the relative size they are today. The 1983 deficit approaches 6 percent of GNP. In our postwar history, the highest comparable deficit-of 1976-was 4 percent of GNP. It took the previous Administration four years to rack up deficits of $134 million total-deficits which were then said to threaten our economic survival. In just three years, this Administration has produced deficits totalling $365 billion. And in the face of these figures, the only response we hear from the Administration is that nothing can be done or needs to be done other than to "cut spending". Yet the Defense Secretary demands an additional $55 billion next year. The reiterated claim that "cutting spending" can somehow transform this structural deformity in the budget has been disproven by the numbers from private, Congressional and Administration sources. They all demonstrate that there is no way to cut the deficit without taking action on all fronts. All fronts must include revenues, entitlements, discretionary spending and even discretionary defense spending. So the Administration's adamant position that it will accept no tax increases, that it must have its defense buildup at whatever the cost, and that the cuts have to come from discretionary spending is simply political posturing of the most misleading sort. When the budget deficit steadily climbs to equal the amount of net savings in the economy, we face the prospect of government borrowing needs virtually absorbing most of the net new capital available for business investment. If the Federal Reserve maintains steady growth in the money supply, the credit requirements of an expanding business sector create a virtual certainty of hugely higher interest rates and an end to the recovery. If the Federal Reserve does not maintain a steady monetary course, the inflationary expectations of our investment community will send those rates up in anticipation, even though they are at unprecedently high real levels today. The opinion of virtually all sectors of economic thought is that a slowdown in the economic recovery is inevitable-disagreement exists only over when it will happen, not if. And in a slowdown, our deficit can be expected to balloon to even more dramatic proportions. But the Administration is apparently willing to gamble that the slowdown and possible recession will not occur until after November 1984. It may win its gamble. But at what cost? The corrective actions needed in 1985 will be far more difficult, painful and costly to Americans than the actions we can contemplate today. The economic suffering toward which this gamble is driving us will be very real, whether the gamblers win their political bet or not. The current reality of good economic news is being used to mask the future reality that it will not be sustained. But the future reality will be just as real, when it comes, as today's pleasant news is. The only difference will be then that instead of credit-taking by one side and another, we will be in for another round of fingerpointing as to whose fault it all was. Surely the American people deserve better of their elected officials than this. At the end of the recent session of Congress, the opportunity existed to vote for a deficit reduction package which had the bipartisan backing of the Budget Committee leadership. Unfortunately, it was roundly condemned by the White House, and failed to gain the bipartisan support of a Senate majority. That same unyielding administration opposition helped prevent this Committee developing a package for consideration as well. I hope that the outcome of this series of hearing will, on the contrary, mark the beginning of a realistic effort by all parties involved-the Administration as well as the Congress-to take a serious approach to the deficit problem and join in developing a solution, instead of risking the nation's economic future on a political gamble yet again. The CHAIRMAN. Before we call the first witness, if it is all right with you, Mr. Penner, we will just have brief opening statements. I think Senator Danforth has a statement. Senator DANFORTH. Mr. Chairman, thank you very much. I think that these hearings promise to be very helpful in focusing on the problem of the Federal deficit. So often, we in Washington tend to pay attention to matters of immediate crisis; the difficulties that we are going to be facing over a period of weeks or months. It's my hope that during these hearings we will have the chance to look not only at short-range consequences but particularly at the longrange damage that we are inflicting on the country by these huge, growing deficits in the Federal budget. Mr. Chairman, in 1981 the national debt for the first time exceeded $1 trillion. On the current trend line, by 1986, it will reach $2 trillion; and by 1990, it will reach $3 trillion. It is not only increasing, it is increasing in geometric proportions. The payment on the national debt, which is called for by these large increases of payment of interest on the national debt, is and will continue to be an increasing burden on our country for generations to come. Every year we will have to pay interest on the increase in the national debt, which is caused by this year's deficit. The American people have a right to know what we in Washington are doing to correct this very damaging situation. And the answer is really a one word answer: we are doing absolutely nothing. We tell ourselves that we can't do anything in 1984 because 1984 is an election year. And most people who think about the size of the deficit realize that reducing it by any significant amount requires some steps which are generally thought to be politically unacceptable. Reducing the deficit calls for increases in tax revenue, |