Transcript
M. Armacost: --policy makers here this morning is Jack Lew, the director of the Office of Management and Budget in the Clinton White House. I was just saying to Jack that it seems appropriate that he speak to the subject of his remarks this morning at Brookings, because the earliest work of this institution was devoted to creating a Budget Bureau and helping get a Budget Bureau established.
For many years we did a great deal of work illuminating for the public and for representatives in the Congress the choices that are embedded in the huge budgetary documents that are sent up to the Hill. Mr. Lew has been director of OMB for nearly a year. And before that time, he served as a deputy for three years. During that time with a couple of Brookings stalwarts, including Alice Rivlin and, of course, Bob Litan, who's currently director of our economic studies.
Prior to moving to OMB, Mr. Lew began his Washington career on the Hill, where, among other assignments, he served as the principal domestic policy adviser to the White House Speaker Tip O'Neill. He's also spent eight years on the House Democratic Steering and Policy Committee as assistant director and then executive director. He served as the executive director of the Center for Middle East Research and was issues director for the Democratic National Committee's Campaign '88. He is a graduate of Harvard, also the Georgetown University Law School. And his talk this morning is titled "Fiscal Policy at the Crossroads: Budget Choices, Fiscal Discipline and the Outlook for the 2000 Budget and Beyond." We're delighted to have you back. Mr. Lew will take questions after his remarks.
[Applause]
J. Lew: I want to thank Mike Armacost and Brookings for making this opportunity available to offer a few remarks. And talking about the founding of Brookings and the origins of budget studies at Brookings, I think it's particularly appropriate to be probably the first budget director in my lifetime to come here and speak about the unique challenges of dealing with a balanced budget and making plans for the future, where the options should be very good and the choice is really one that we will make about how to extend the good fortunes that we have today.
Four months ago, in his State of the Union, President Clinton put forward a framework to save Social Security first, and seize the historic opportunity of the first surplus in a generation to strengthen our nation's future.
The decisions that we make today about fiscal policy are defining issues not just for this year, but for many years to come. With four months to go until the start of the 2000 fiscal year and a season of difficult political decisions ahead, I'd like to address the choices before us.
Our prosperous economy has produced a surplus that's likely to exceed $100 billion this year. But prosperity is not some happy accident of fortune. It is a product of hard work and unremitting fiscal discipline that has marked our budget policy from the start. And looking back at recent history helps us frame the importance of the decisions that we face today.
In the 1980s, fiscal responsibility and the concept of discipline were largely absent from our political culture. Despite the knowledge that deficits and debts were drags on the economy and threats to our nation's economic future, attempts at serious fiscal discipline always fell short of their mark. Fiscal responsibility was a word often invoked but rarely applied.
Individual members of Congress undertook efforts to make whatever progress they could. But between administrations and Congress there was no systematic or effective effort to put the ideological differences aside, to compromise between different visions of government and to achieve the goal of a government that pays its bills while investing in our people.
The numbers tell the story. In 1981, a budget deficit of $79 billion accounted for 2.6 percent of gross domestic product. Debt held by the public was equal to 25.8 percent of the GDP, and a tax cut $747 billion over five years had just become law. In 1985, the year that Gramm-Rudman-Hollings was enacted, the budget deficit reached $212 billion--more than double the 1981 level. Public debt was up to 36 percent of GDP.
By 1990, the year the Budget Enforcement Act was enacted, any benefit from Gramm-Rudman-Hollings had been proven short-lived. The deficit exceeded its 1985 level of $221 billion and public debt rose to 42.4 percent of GDP. The 1990 bipartisan budget agreement did provide real deficit reductions and important improvements in the budget process. But unfortunately, a recession was underway and unexpectedly rapid growth of health care costs sent budget deficits to new heights.
In 1992, the budget deficit was $290 billion and was projected to reach $400 billion by the current fiscal year. Public debt had risen to nearly half--48.8 percent of GDP. Not too far down the road, we could see the massive Baby Boom generation less than 20 years from retirement.
If the deficit continued to explode and to burden the nation with debts, there would be no way for Social Security to honor its commitments when the Baby Boom came to claim benefits. Our ability to redeem securities in the Trust Fund would have been overwhelmed by a nation awash in a growing sea of debt.
But 1993 marked a new era in Washington. President Clinton made fiscal discipline the cornerstone of his economic and budget policy. He proposed a plan to slow the growth of entitlements, to limit federal discretionary spending, and raise taxes incrementally on the most well-off. This program passed Congress in 1993 without bipartisan support, and jump-started the deficit reduction of the past six and a half years.
Critics predicted a recession or worse. But the opposite happened. The bipartisan Balanced Budget Act of 1997 provided the final push to reach a balanced budget, achieving the goal four years ahead of schedule. We have outperformed our projections every year since 1993, and this is no accident. We have used cautious economic forecasts and pursued prudent fiscal policies.
Since 1993, cumulative budget deficits were reduced by $1.2 trillion compared to earlier projections. The nation's debt has fallen from 50 percent of our GDP to 44 percent, reversing a self-sustaining vicious cycle of deficits and debts. And in 1998, for the first time in 29 years, the United States actually paid back part of its debt. In fact, on Friday, the president announced that we expect in this quarter alone to pay down $116 billion of privately held marketable federal debt--the largest sum ever in a single quarter.
Federal spending as a percentage of GDP has declined in each year during the Clinton administration. At the same time, federal receipts have increased because of a strong economy, with rising wages, strong financial markets and rapidly growing corporate profits.
Some argued during consideration of the president's 1993 economic program that it would choke the economy, and that revenues would go down, not up. Now some of those same critics argue that the budget has gone into surplus only because the economic program increased taxes too much. I would argue they can't have it both ways. The fact is that the president's economic program has so invigorated the economy that revenues are strong and taxpayers are better off.
Our economic strength is self-evident. Real average hourly earnings in 1993 were almost 14 percent less than they had been 20 years before. From 1993 through 1998, real wages grew by about 5 percent. And in the last two years, real wages have accelerated. In fact, they've grown more than twice as fast as inflation.
In 1992, before the president took office, the Dow Jones Industrial Average was running about 3,300. Today the Dow is hovering around 11,000. While this trend clearly benefits those who began with considerable wealth, it also improved the lot of tens of millions of American workers through their pension funds, and even those with modest investments have seen their wealth grow. With lower inflation, savings and fixed income securities have maintained their purchasing power.
Whether before or after taxes, there really is no doubt that the vast bulk of the American people are far better off under a policy of fiscal responsibility in Washington. Unemployment and inflation are at 30-year lows, interest rates remain well below the levels of the preceding decade, despite continued growth. Economic growth has in fact exceeded expectations and inflation adjusted business equipment investment remains strong.
All told, we have a strong foundation for further non- inflationary sustainable economic expansion. But good news should not lead us to take for granted how much we have achieved or put at risk our hard-won prosperity.
Our prosperity is the result of our fiscal discipline, and it would be a mistake to turn back. We face both long-term choices about maintaining fiscal responsibility and short-term choices in the form of our 2000 budget. I would like to first focus on the long-term in defining choices for our future.
The president announced in the State of the Union a plan that reduces debt held by the public and increases our ability to meet existing commitments to Medicare and Social Security. The president proposes to devote 52 percent of the budget surpluses over the next 15 years to safeguarding the solvency of Social Security, and another 15 percent to Medicare.
Simply put, the president wants to meet our current commitments before we undertake new ones. The president's framework would lock in debt reduction and target a tax cut to promote savings in Universal Savings Accounts, rather than encouraging more consumption through across-the-board tax cuts.
Others have proposed that the surplus be used for massive tax cuts. The short-term satisfaction of a massive tax cut would be soon forgotten if even a brief economic decline were to bring deficits which we only recently made a relic of the past back. Yet, that is precisely the gamble made by the Republican budget which bets the ranch--committing the entire non-Social Security surplus to a tax cut, starving Medicare and debt reduction and calling for unrealistic and unachievable savings in discretionary spending.
We know that the Baby Boom will begin to retire in 2008, when those born in 1946 turn 62. We are enjoying a surplus we sacrificed much to achieve. We face the certainty of growing demographic pressures in the decades ahead. This would be precisely the wrong time to return to failed policies of the past.
But the fact of the matter is that Congress is considering a budget that severely underfunds critical programs. We have been down this road before, and we know where it leads. The Congressional budget severely underfunds discretionary spending in each of the five years covered. Last week this was proven unworkable when the House of Representatives allocated discretionary resources to its appropriations subcommittees.
In the words of Republican Representative John Porter, who heads the Labor, Health and Education subcommittee, "we are headed for another debacle." He's right. The appropriations committees are now implementing an untenable budget resolution which is a blueprint for chaos.
The Labor HS Education funding bill in the House faces cuts of 18 percent below fiscal '99 spending levels. This means a reduction in Head Start funding of $500 million below current funding levels, actually removing from the rolls 50,000 children who now participate in Head Start. This would mean sacrificing our new initiative to reduce class size by hiring 100,000 new teachers. More than one billion dollars will be cut from this year's spending on Title I education for the disadvantaged--roughly two million children who now take part in the program to improve their educational skills, most of them in our inner cities, would be denied this help.
The budget for the Centers for Disease Control would be cut below this year's funding by some $380 million, cutting childhood immunizations, reducing HIV prevention and breast and cervical cancer screening.
These are not examples of cuts from the president's budget which points us in the direction the country should move--in many cases, to higher funding levels. These are deep cuts from current levels of funding and steps backwards into the past instead of forward into the future.
House allocations call for similarly extreme cuts in the environment, in veterans' programs, law enforcement, farm policy and more, reducing by 12 percent funding to the Departments of Commerce, Justice and State with severe cuts to the FBI, the Drug Enforcement Administration, and other law enforcement programs. These allocations call for cuts of 19 percent in the Interior Department and 23 percent in foreign operations--below current spending levels.
Again, these double-digit cuts are not just below proposed increases in the administration's budget. Cuts of this magnitude would make it impossible for us to protect our borders, keep our citizens safe, or conduct foreign policy at a crucial time in a dangerous world.
Consider for a moment the effect of these across-the-board cuts on certain programs, like the National Institutes of Health or Veterans Affairs. If the cuts required by the allocations were applied, it would reduce the NIH budget by over a billion dollars. And the 16 percent across-the-board cut in Veterans Affairs would seriously hinder the delivery of vital medical care to our nation's veterans.
Surely you're thinking that it's politically preposterous, Congress will never do such a thing. But if these programs are protected, appropriators will be called on to make even deeper cuts in other programs, leaving the CDC and other health programs, job training or housing for the needy even more vulnerable than they already are.
A few select bills are headed for quick action. It appears that the leadership plans to proceed with funding for the activities of Congress, Defense, and military construction, creating untenable choices for the rest of the appropriations bills. The appropriations committees appear to see no immediate alternative but to allow more than half of the funding bills to languish, leaving the programs they fund in limbo, or to provide funding levels that are clearly unacceptable to the American people and quite possibly to a majority in Congress.
Parents whose kids will not get Head Start, Americans serving abroad in embassies whose security will be cut, citizens who count on a fully funded FBI will not view these as acceptable policies. I have described cuts in the House allocations which were released last week. Just yesterday, the Senate released similarly troubling allocations as well.
These funding levels are a direct result of a budget which creates a false choice between chaos in the form of irresponsible appropriations, or abandonment of fiscal discipline. These allocations will almost inevitably delay many of the appropriations bills until the very end of the fiscal year, and leave Congress with no apparent alternative but to break the budget cap and spend the surplus. This is a risky way to govern. It is a dangerous and risky matter to abandon the discipline that brought us success just at the moment we have turned a historic corner, only to return to bad habits that were the source of our problems to begin with.
To start spending the surplus without a broader plan to address Social Security and Medicare or to promote long-term fiscal discipline is simply a mistake. But these draconian cuts are not necessary. There is another way to govern: by exercising responsibility, looking to the future and making tough choices.
The president's FY2000 budget offers tough choices that advance good policy. Congress can address Social Security and Medicare and then proceed to allocate the surplus in a systematic and prudent manner. This would balance the desire for immediate tax cuts with our need to save for the future and reduce our national debt.
The Congress can also choose to implement the politically tough but fiscally responsible offsets in the president's budget. Our tobacco policy is the clearest example. It is central to our 2000 budget, because we are fully committed to the view that one of our greatest public health challenges is to curb teen smoking. Three thousand young people become regular smokers every day, and 1,000 will have their lives cut short as a result.
The federal government spends $8 billion a year on veterans, military and Indian health programs to treat tobacco-related illness. Building on increases already legislated by Congress, we can reach our target to reduce underage smoking with a legislative increase of half the dollar-ten-per pack amount, effectively transferring $8 billion from tobacco revenues to programs that will save lives, reduce medical costs, and make Americans healthier.
It is good public policy. It is good fiscal policy. Interests opposed to our anti-tobacco policy have blocked it at every turn. It is not a difficult choice to be in favor of reducing teen smoking. But it is in fact a tough decision to take on the industries that profit greatly by selling tobacco products.
Our 2000 budget also includes user fees, which place the cost of certain government services where they belong--on private sector companies that benefit directly, rather than on taxpayers at large.
For example, our 2000 budget contains harbor fees which require that shippers rather than taxpayers bear the costs of maintaining the harbors they use. Likewise, we believe the cost of food safety inspection should fall not on the taxpayer but to the company whose products go to the market, certified to be safe.
Again, these are examples of policies that benefit the American people but require courage for Congress to make tough choices. And there are many other examples. We propose reducing unwarranted taxpayer funded subsidies of student loan guarantee institutions. Congress has allowed these agencies to receive large fees, even though the federal government is the actual guarantor of those loans, and most students would be adversely affected by lower subsidies.
The administration has also advocated a new round of military base closure legislation. Our military leaders planning for post- Cold War needs would close underutilized facilities and invest in the force, structure and facilities needed for the future. In the absence of Congressional approval, the nation will waste defense dollars that could be better used.
The president's budget also includes important tax cuts which are paid for and do not violate the principle of saving Social Security first. These tax cuts are targeted to help families with long-term care needs and child-care challenges. They will help our communities by investing in public schools, environmental clean- ups, and by opening new markets. They will help smooth the transition from welfare to work.
These tax cuts are fully paid for through important savings in obsolete or inefficient tax benefits enjoyed by businesses. These include 16 separate proposals aimed at corporate tax shelters, and many others related to methods of business accounting that overstate expenses or understate receipts in an attempt to reduce taxes due. But all of these policies--tobacco, user fees, student loans, base closings and paid-for tax cuts--require the courage to make tough choices.
In the next several weeks and months, we will face numerous choices about our fiscal future which will shape both the years and the decades to come. With regard to our most immediate choices, will we as a nation accept policies that decimate the basic functions of government and deny us the ability to invest in new initiatives for the future?
Or should we instead enact policies that advance public health, put the costs of the private sector services where they belong and even if they are politically tough choices to make, make these choices? Are we as a nation better off with a massive permanent tax cut, even though the surplus that provides the funds has no guarantee? Are we better off adhering to the successful policy of fiscal discipline, or turning our back on policies that are producing outstanding economic results?
In my view, it comes down to a choice between gambling with our future or planning prudently for our prosperity. And for the sake of our children and our children's children, I would argue that there really isn't any choice at all. The Congressional budget does nothing to extend Trust Fund solvency for either Social Security or Medicare, using the entire non-Social Security surplus for a tax cut without committing to address either Social Security or Medicare solvency first.
Add to this the unrealistic and unachievable discretionary spending levels for 2000 and beyond, and the Congressional budget charts a path to the failed policies of the past.
The president's budget offers a choice which only looks better as the alternative becomes clear. I hope that Congress will join us in working together to address these important policy concerns, and as the president has said many times, "Fix the roof while the sun is still shining." Together we must seize this historic opportunity. Thank you very much. I'd be delighted to take questions from the audience.
Participant: If Congress refuses to pass most, if not all of these--?
J. Lew: Well, I think you're getting several steps ahead of the process. I think, as I outlined in my remarks, the funding levels that are called for by the allocations just don't work. I think Congress is going to have to go back to the drawing board and do some more work in order to reach funding levels that are tenable and that don't call for draconian cuts.
We've outlined a path that gets us there through policies that we are very much in favor of and think are good public policy. The burden is now on the Congress not just to present the choice between cuts that don't work and a fiscal policy that doesn't work, but to come up with an alternative that does work.
Participant: [Off mic]
J. Lew: Well, as I think you know, the president has indicated he will be sending a more detailed Medicare proposal forward in the next few weeks. We're working--hard at work on that. We are hopefully very close to completing recommendations to send forward to the president. And the commitment we've made is that we want our proposals before Congress in the timeframe the Congress will be working on legislation which is approaching.
Participant: --on drug prices? Can you tell us anything about that? Is that on or off the table?
J. Lew: Well, rather than address the specifics of the Medicare proposal, which we're working on and will have a great deal more to say about very soon, I think I'd rather not address it at this time.
Obviously the problem of prescription drug costs and the lack of prescription drug coverage is one of the most serious structural problems facing Medicare today. There are too many senior citizens who have access to doctors and hospitals that can't afford the medicines that are prescribed to treat the illnesses that they have and to prevent the onset of more serious diseases and treatments later on.
Clearly one of our concerns as we go forward, as the president indicated in the State of the Union, is to address the prescription drug problem.
Participant: --surplus without a broader plan to reform Social Security and Medicare. Does that mean that if we get to the fall and there has been no agreement on revamping Social Security and Medicare that you will refuse to entertain the possibility of using the surplus to increase discretionary spending?
J. Lew: I think that the argument that I made in my formal remarks bears repetition. It would be wrong to start dipping into the surplus now to solve either the discretionary funding problem or whatever the next problem on the horizon was. The challenge that we undertook in the president's budget and that the president articulated in the State of the Union and his budget was to look at the surplus and the opportunities of decades of surplus in a comprehensive way.
Saying that we need to fix Social Security first never meant that we need to spend all of the surplus on Social Security. But it means that we can't just start drawing down the surplus and then expect five years or 10 years from now to have the same kind of fiscal forecasts that we're looking at and enjoying today.
We've asked Congress to take the kind of comprehensive view that we've taken. We've put our plan forward. We think that there is a need to get back to work. Recently the president's had conversations with Republicans and Democrats in Congress, where he's encouraged them to go back to work on this. There have been some signs of interest in going back to work in the regular order to tray and take these ideas seriously.
That's the challenge that we see for today. And I think it's premature to answer hypothetical questions about where we'll be in October, assuming that we don't take the right course, and the Congress doesn't take the right course.
Participant: So you don't rule out using the surplus for Medicare reform for discretionary spending, do you?
J. Lew: I'm saying very clearly it would be the wrong way for Congress to proceed, and I hope they don't go that way.
Participant: --that was just announced, will they require further emergency spending? And also, do you have a contingency plan? A decision will have to be made very soon about the possible use of ground troops. Do you have a contingency plan for an emergency request that would be required for that, and if so, what's your estimate of a ballpark figure about what that might cost?
J. Lew: Well, as you know, there are substantial discussions underway about preparing for a peacekeeping force. And at the moment, the design of the force and the U.S. participation in it are still matters that have to be worked out. The numbers you've read in the newspaper ought not to mislead. When you read numbers like 40 to 50,000, those are numbers of an entire peacekeeping force, of which U.S. participation would be a smaller percentage. We've in the past said about 15 percent.
Now, there obviously are costs associated with that. But we can't know exactly what the costs are until the plan is worked through. We have substantial assets in the area. As you know, in addition to the air assets, between the Apaches and the ground resources that support them, there are substantial resources in the region now.
We're working with the Pentagon to understand fully what the additional demands would be, and it's just premature to put any kind of a number on what the total costs would be, or whether there would be a need for additional resources.
Participant: [Off mic]
J. Lew: Yeah.
Participant: [Off mic]
J. Lew: I'm just saying it's premature. I mean, right now, we are proceeding--we have all the resources, as you know, Congress just passed and the president signed into law a supplemental appropriation with very substantial resources that permit us to proceed with the air campaign without any interference with any other activities around the world.
And as part of that funding, we obviously are also funding all the ancillary activities in the region, including the helicopters and the forces surrounding them. The question that you're asking me about the additional increment, is one that I don't know the magnitude of yet--until the final force is constituted and agreement is reached on what the U.S. share is and what the nature of the U.S. share would be.
There are very different kinds of assignments that can be taken in a peacekeeping operation. And until we know the exact parameters of it, we can't do a budget estimate.
Participant: --the appropriations debate to a considerable extent. How would you characterize the difference between the administration and the Republicans on overall defense spending in the coming years?
J. Lew: Well, you know, it's interesting. When the president put his budget forward, there was a very substantial increase in defense funding. We from the end of the last fiscal year through the winter--September through December--were seeing troubling signs that there were needs that needed to be addressed that were different from what we had seen in previous years. Problems with retention, problems with the demands on forces.
And the president's budget we put forward was by any measure was a very substantial increase in defense resources, and focused in particular on the problems that we saw: retention, you know, through pay and retirement proposals, spare parts and the like.
Obviously there is a debate now that will try and drive that number up in Congress. I think that it's probably misleading to focus just on the marginal issues as the difference. There is a shared commitment to adequate defense funding.
On the margin, we will disagree about the last increases, perhaps. But at the core, there's a shared commitment to a need for increased defense funding, and we accommodated that in the president's budget, and believe it's very necessary. At the margin, the choices are tough--they're always tough--between the last dollar that goes into defense versus the last dollar that goes into other priorities.
It makes it all the more clear that if the total amount of resources is as inadequate as it is in the Congressional budget, that it will lead to unacceptable choices. It only exacerbates those differences.
Participant: Are you going to sign them, or are you going to hold off because of the prospect of, you know, the backlog with the Labor and the other bills later?
J. Lew: Well, it's difficult to answer hypothetically what we will do with bills that are still being worked on. It--
Participant: --the caps. You're not going to make any effort to adjust the caps with some mix of revenues?
J. Lew: I think that you can very properly take from this that we think it would be wrong to just go into the surplus and increase the caps right now at this point in the process, without dealing with Social Security and Medicare, without dealing with the long-term economic policy.
The question of--what they're doing with the bills, as I addressed in my remarks and as you know, is that they're concentrating the resources in a few bills so that they can move those more quickly so that the others will back up behind.
It's difficult to address what we're going to do with bills if I don't know whether they're acceptable on their face or not. And we will take these bills one at a time, and obviously look at them and try and perfect them. We share our views freely with Congress and tell them what we think they need to do to make the bill more acceptable.
I don't see how they avoid, given the current limitations, hitting a road block on the major bills. They're looking at levels of funding that I don't know that they can mark up in committee, much less pass on the floor. And at a minimum, we're going to see a backlog of a very considerable magnitude, I would think.
Participant: You seem to be taking a position that you're not going to step forward yourself, either.
J. Lew: Well, we have offered our view. I think Congress should take another look at the proposals in the president's budget. When the choice is a choice between enormous draconian reductions in education programs, enormous reductions in programs that protect public safety and the environment, or a tobacco policy which we deeply believe is good policy, we hope Congress takes another choice at it. There is an alternative here without going back to a fiscal policy that we think is wrong.
Now, will they do that? I don't know. Obviously, they're not on that course now. And one of the things we hope is they will take another look and go back, and take some of these proposals very seriously as an alternative to the kind of gridlock that I would think they would want to avoid. And it's an alternative to the draconian cuts being pitted against a fiscal policy which in their hearts of hearts I think they even know is wrong.
Participant: --to wait for a bipartisan consensus. In the last couple of weeks, that group of Senators have consolidated their plan--a bipartisan group of Senators--and Mr. Archer went up to the White House last week to discuss his plan with the president, and they seem to have a certain number of similarities.
Is the president ready to engage Congress on legislation to do something about Social Security, or is this dead for the year?
J. Lew: The president has continued to prod members on both sides of the aisle to keep the discussions on Social Security and Medicare going. He did meet with Chairman Archer, he also met with the Democrats on the Ways and Means Committee. And he delivered the same message to both, that they should proceed with the regular order, bring this through the committees, do the work it takes to pass legislation.
There are undoubtedly large differences. But the only way to work through large differences is to get to work and to put proposals on the table, and to go back and forth.
I think that you've seen, for the last two years, a concerted effort on the president's part, on behalf of the entire administration, an effort to keep a civil debate going in an area in which it is very difficult to do that. It's very easy to politicize Social Security and Medicare. That's not what we're doing here. What we're saying is go to work and solve the problem.
Now does that mean we'll agree on everything? No. Does it mean we have very serious questions? Yes, we do. But the only way to work through that is to get to work. And I think in the interests of the country, we should roll up our sleeves and get to work. But it has to be through the regular order and a bipartisan process in an attempt to work through these kinds of differences. It's happened before and it can happen again, but it's very hard.
Participant: --provisions as a way to ease some of the screaming. And if so, are any of those things acceptable to you, or are you just going to reject that across the board?
J. Lew: There certainly have been a lot of questions raised by health care institutions that are affected by the savings and the Balanced Budget Act. I must say that many of the concerns I've heard are much like patients who go to the doctor and say "Doctor, it hurts." Anything that's wrong in terms of their economics is being attributed to the Balanced Budget Act. And I think in many cases the problems that we're seeing are problems that relate to uncompensated care, they're problems that relate to heavy competition in the health care industry and low reimbursement rates. It's not all a result of policies in the Balanced Budget Act.
We have indicated an openness to hearing concerns and frankly to understand whether there are effects of the Balanced Budget Act that need consideration. But I must say one has to be very careful when you go back and take a look at reopening policies that have done a great deal to establish fiscal discipline, both in Medicare and in the budget.
The goal of these policies was not to cause the kinds of harm that are being suggested. I don't believe in most cases that the connection is as straightforward or as clear as it's made out to be. But they certainly deserve our careful attention and we need to understand and separate out which problems relate to which causes.
Participant: --But what about a smaller scale package of targeted tax relief, which is a combination of what the administration wants and what the Republicans might want, such as marriage penalty relief?
J. Lew: Well, I think you have to go back to the distinction that we made in the president's budget where the president put forward a fairly robust set of tax reduction proposals that were paid for. We think that those targeted tax reductions are a very good policy and to aim for them is the right way to proceed, with or without action on Social Security and Medicare.
I think you're in a very different policy debate if the question is what do you do without offsets, without savings to pay for the tax cuts. And we view that as being a question of putting first things first. It would be wrong to use the surplus to pay for a tax cut before we deal with Social Security and Medicare first.
The president put forward in his framework Universal Savings Accounts, which are a tax cut, and a very substantial tax cut. We think that that's the right way to approach tax relief in the context of a comprehensive plan to use a surplus to deal with first things first. We think it's preferable to have targeted provisions that would be to the benefit of specific parts of the population that--families with disabilities, for example, or in the case of Universal Savings Account, to encourage savings which, as a matter of economic policy, would be a good thing for the country.
So we have policy concerns about across-the-board tax cuts compared to other tax options. But the threshold question is: Do we undertake an unpaid-for tax cut before we deal with Social Security and Medicare first? And we think that would be wrong.
Participant: --about as much as it could, there's no waste, there's no duplication, the programs are running as efficiently as possible. I see you talk about cuts to Title I, but the president has recommended massive changes, I believe, and has said in the State of the Union that some of those programs that aren't working should be stopped. So where's the discussion here of elimination of--be it minor in the budget scheme of things--waste, fraud, abuse, error, duplication?
J. Lew: I think it's a question of scale. We are proceeding, as we have for six and a half years, to take a very critical look at many programs. Your example of the amendments to the Elementary and Secondary Education Act are a perfect case.
In some instances, the right answer is to fix the program so that it works better, and not to reduce the funds. In other cases, the funds aren't needed. I think when you get to reductions of the magnitude that the Congressional budget calls for you're just in a different scale. You can't get savings on the order of 10, 12, 15 percent through the kinds of waste, fraud and abuse measures that you're talking about. You get to the bone very quickly.
And we've had reductions over the last six years that are serious. We've been working in an environment that's been constrained. It's been a good thing. We're doing a lot of things better and we have a fiscal policy that's very good for the economy.
But we shouldn't kid ourselves. We can't go back and ratchet down federal spending, discretionary spending by 10, 15, 20 percent without there being consequences. And the kinds of examples that I gave--obviously, one could come up with a different list of examples. You can choose what to protect and what to expose. But the more you protect, the more you have to reduce in other areas. And I think the magnitude of these reductions just don't work.
So we could talk about going back and trimming programs, and indeed we should continue to talk about trimming programs and eliminating programs if they don't work. But that's not an answer to the spending levels that are in the Republican budget, the Congressional budget resolution, which under the most stringent reductions don't leave enough resources to run government as we know it today, you know, programs that needs to be continued. And it certainly doesn't leave you with the resources for new initiatives, be they 100,000 teachers or any of the other proposals that the president has in his budget and that we pay for.
Participant: --super-majority in Congress to make more difficult spending as emergency?
J. Lew: We've had extended debates over emergency spending in the last year, and we believe quite strongly that there's a need to preserve a workable emergency authority. When the country faces military conflict, natural disasters, there's a need to be able to respond quickly, without doing a lot of damage to other priorities, in order to meet those needs.
Unfortunately, the use of the emergency authority is one that it's easily to lose control of. We're very aware of that. We are committed to using it prudently. We raised a lot of concerns when Congress increased the emergency funding levels in the most recent emergency package, and we succeeded in eliminating some of the worst offenses. But it was still too large.
I think the answer is to use the kind of prudence and discipline that it warrants, not to put procedural hurdles in the way. Because even with the current system, the president's budget went up in the first week of February, and just this last Friday, we signed into law the emergency assistance for Central America. If this were two weeks or three weeks longer, we would have missed the planting season in Central America. So any hurdles that delay the process cause us some concern.
On the other hand, we need to take very seriously the importance of exercising control, self-control, with the use of the emergency authority. The fact that it requires the president and the Congress to agree on an emergency designation has in the past worked to discipline the process. And I think we need to redouble our commitment to making it work in the future.
Participant: Do you see any difference this year over last year in the flow of revenues that will be significant in determining the actual dimensions of the surplus?
J. Lew: We are in the process of going through our spring and summer review, and will very shortly be issuing our mid-session review of the budget. But we'll answer that question. So it's a little premature for me to suggest the exact--
Clearly there's been some positive news on the revenue side, and frankly there's been some positive news on the spending side. Spending has been a little bit down and revenues have been a little bit up. The exact magnitude of it is something that we're working on right now, and hopefully in just a very few weeks we'll be able to release our mid-session review that answers that question.
I think that in terms of looking ahead, we need to be circumspect about planning on a never-ending series of good news reports. We've been very lucky that the economy has broken the right way consistently, and budget indicators have broken the right way, both for economic and technical reasons. And we don't think it's completely an accident, because we've used very, very prudent economic assumptions.
But we shoul