CONTENTS ADMINISTRATION WITNESSES Penner, Dr. Rudolph, Director, Congressional Budget Office PUBLIC WITNESSES AFL-CIO, Arnold Cantor, assistant director, Department of Research Brookings Institution, Dr. Alice Rivlin, director, economic studies program Cantor, Arnold, assistant director, Department of Research AFL-CIO. Carlson, Dr. Jack, executive vice president and chief economist, National 473 Committee for a Responsible Federal Budget, Carol Cox, president Cox, Carol, president, Committee for a Responsible Federal Budget Friedman, Dr. Benjamin M., professor of economics, Harvard University Heritage Foundation, Dr. Stuart Butler, director of domestic policy studies. Hutton, William R., executive director, National Council of Senior Citizens.. Institute for International Economics, Dr. Fred Bergsten, director. Jasinowski, Jerry, executive vice president and chief economist, National Keating, David, executive vice president, National Taxpayers Union........ 497 90 Lehman Brothers Kuhn Loeb, Inc., Dr. Allen Sinai, chief economist Meyer, Dr. Laurence H., president, Laurence H. Meyer & Associates, Ltd. Mortgage Bankers Association, Dr. Mark Riedy, executive vice president. National Association of Home Builders, Harry Pryde, president National Association of Manufacturers, Jerry Jasinowski, executive vice 98 Pryde, Harry, president, National Association of Home Builders Rahn, Dr. Richard, chief economist, U.S. Chamber of Commerce... National Association of Realtors, Dr. Jack Carlson, executive vice president..... Reidy, Dr. Mark, executive vice president, Mortgage Bankers Association. Rivlin, Dr. Alice, director, economic studies program, the Brookings Institu- 212 349 334 377 Sinai, Dr. Allen, chief economist, Lehman Bros., Kuhn Loeb, Inc.. Stein, Dr. Herbert, senior fellow, American Enterprise Institute.. Straszheim, Dr. Donald, vice president, Wharton Econometrics. U.S. Chamber of Commerce, Dr. Richard Rahn, chief economist.. Weidenbaum, Dr. Murray, director, Center for the Study of American Busi- Wharton Econometrics, Dr. Donald Straszheim, vice president. Prepared statement of Carol G. Cox 219 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............... 518 American Association of Retired Persons. 522 Institute for the Study and Encouragement of Common Sense Economics 695 Institute for Research on the Economics of Taxation...... 701 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 re straint. 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 122 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. |