Hearing of the Senate Budget Committee - The President's Fiscal Year 2010 Budget Proposal

CHAIRED BY: SENATOR KENT CONRAD (D-ND)
WITNESSES: PETER R. ORSZAG, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET

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SEN. CONRAD: The hearing will come to order. First of all, I want to thank everybody for having this bit of a hiatus between when we first scheduled the hearing and today, and look forward to the opportunity to hear from the President's budget director.

I think we should remember what President Obama is inheriting; record deficits, the doubling of the national debt in the previous eight years, the worst recession since the Great Depression, financial market and housing crises unparalleled since the 1930s, 3.3 million jobs lost in the last six months and ongoing wars in Iraq and Afghanistan. I've tried to put myself in the shoes of the president and think what he must feel day after day when confronting these various crises. It must truly be daunting.

With that, the Obama budget has a number of, I think, key improvements: more transparency, accounting for war costs previously unaccounted for, some important priorities especially in energy and education and healthcare, and cutting the deficit in half, albeit from these very high levels as a result of the economic downturn.

This next chart shows the path of the deficit over the first five years of the president's budget, and you can see it more than cuts the deficit in half from its peak of this year. The President is also committed to paying for health reform. He said this at the White House Health Summit on March 5th, "We've also set aside in our budget a healthcare reserve fund to finance comprehensive reform. I know that more will be required, but this is a significant down payment that's fully paid for and does not add one penny to the deficit.

Let me go to the next slide if I can with respect to the question of whether this budget has tax increases or tax cuts, because it depends very much what you have as the starting point. The Congressional Budget Office, which we follow, will use as its starting point the budget baseline based on current law. Looking at it from that perspective, they will say that this budget adds more than a $2 trillion tax cut. They will get to that result by looking at the extension of the 2001 and 2003 tax cuts for those earning under $250,000 a year, and they will score that as a $2 trillion tax cut.

Other provisions in the president's budget, including Making Work Pay and other tax incentives for individuals and businesses, will account for another $940 billion of tax reduction. The alternative minimum tax relief contained in the president's proposal will score at roughly $576 billion of tax relief.

On the other side of the ledger will be the cap and trade proposal, costing some $646 billion, various loophole closures and international reforms, raising $353 billion, and then the limitation on the itemized deduction, raising $318 billion. And you net it all out -- CBO would say there is a tax reduction here of over $2 trillion.

One of the issues that we're going to want to discuss today is the question of forecasts and the economics behind the forecast. Looking at OMB's forecasts of the unemployment rate, for example, comparing it to the blue chip for 2009 and 2010, 2009 OMB is forecasting an unemployment rate of 8.1 percent with blue chip forecasters -- 8.6 percent, and for 2010, OMB is forecasting 7.9 percent rate of unemployment, the blue chip forecasters -- 9.1 percent.

There's obviously a question of how much of the stimulus is included in the blue chip forecast. We know it's included in the OMB forecast. Because of the way the blue chip forecasts are made, I don't think we can know for certain, because it's an aggregation of forecasts of individual forecasters. Some no doubt include the stimulus, others perhaps not.

With respect to real gross domestic product growth, or GDP growth, OMB is forecasting a contracting economy of 1.2 percent in 2009, the blue chip somewhat more pessimistic at 2.6 percent. And then in 2010 OMB is forecasting 3.2 percent, and the blue chip -- 1.9 percent.

Next, looking at the gross debt as a percentage of GDP, we can see that gross debt is jumping very dramatically in this period, 2007 -- ending 2007, 2008, 2009, 2010, a very dramatic increase, which you would expect as a result of the steep economic decline, and then a flattening out through 2019 at about 101 percent of GDP. This is the area which is of significant concern to some of us. I give the president pretty high marks on his budget the first five years, especially given these incredibly difficult times. My greatest concern is the second five years, and what can we do to bend this debt curve, because I'm concerned it's an unsustainable level of debt.

Finally, the President has said that same thing. At the Fiscal Responsibility Summit on February 23rd he said, and I quote, "And I want to be very clear. While we are making important progress towards fiscal responsibility this year in this budget, this is just the beginning. In the coming years, we'll be forced to make more tough choices and do much more to address our long-term challenges." I agree entirely with that sentiment, and hopefully we'll hear more from the budget director on what the president intends to do to address those longer-term aspirations.

With that, I want to again welcome Dr. Orszag to the committee as the head of the president's Office of Management and Budget. We worked very well with him in his previous position as director of the Congressional Budget Office. We were sorry to lose him from that position of responsibility, but we're delighted that the president is fortunate to have his good counsel.

Senator Gregg.

SEN. JUDD GREGG (R-NH): Thank you, Mr. Chairman. Glad to see you back. I hope you're feeling well, and it's good to see you've recovered. And it's nice to have Dr. Orszag here.

Obviously, we have some different views on this budget, but we do have some things we agree on. I appreciate the chairman saying that in the second five years of this budget the debt levels are unsustainable, because they are. And the cost of this budget is unsustainable, and the tax burden is unsustainable. The chairman didn't say that. I added the second two categories.

The budget on balance spends too much, taxes too much and borrows too much. It's that simple. We do not argue -- I do not argue at least -- with the fact that we are in a severe economic downturn. We all know that, and people's jobs are at risk, and people are worried about tomorrow, paying the bills for tomorrow, and there's great angst, and rightly so, and many people suffering hard times.

And therefore, the government has had to step up with massive injections, historic injection of liquidity to try to move the markets and move the economy forward, and that has cost money in the short- run, and we accept that.

The problem is that that effort to try to stabilize the economy has been used as a straw dog for the purposes of expanding the size of the government in the out-years exponentially, moving it to the left in a way that has never been projected or seen before, should it be successful. The -- can I have the first slide there? The budget proposes about $1.4 trillion in new taxes over the next ten years, about $725 billion in new discretionary spending, about $1.2 trillion in new mandatory spending, and virtually no savings.

The practical implications of that is that unlike during the years that -- President Clinton's first term in office when he proposed a major tax increase, as this budget does -- and I think it's a bit of "Wizard of Oz" politics to claim there isn't a major tax increase in this bill because there is, and people who are going to pay the national sales tax on their energy bills are going to feel it, and the people who are going to pay a 42 percent effective rate on their income are going to feel it, small business people especially.

But he used those revenues for the most part to reduce the deficit in conjunction with the Republican Congress at the time that pushed it -- the government in that direction. This massive expansion in revenues, however, is going to be used to massively expand the size of the government. Go to the next chart. It doubles the national debt in five years, publicly held debt, this budget, and as the chairman has said, some of that is understandable because of the fact that we've got this severe situation and a lot of debt is being rung up as a result of that.

But remember, much of the debt's that's being run up in the short-term, if it works, if the spending works, for example, the TARP works and some of the other initiatives work -- that's actually going to come back to us because it's invested funds. But the assumption is it isn't going to come back to us to be used to reduce the debt, it's going to come back and be spent, all these funds coming back to us. So the debt triples in ten years.

The practical implications of that are staggering for our children. Can we go to the next chart? We've seen this chart before. All the presidents, including George Bush, since the beginning of our republic, will not have run up as much debt as this budget will run up in the first period of its term.

Can we go to the next chart? The wall of debt, which has been a famous wall around here for a long time, jumps astronomically. (Inaudible) --

SEN. : Do I get any kind of credit for --

(Laughter.)

SEN. GREGG: But the point here is this, that this debt -- can we see the next chart, please? Hopefully it's the right one. I'm not sure. Yes. This increases the deficit as a percent -- do we have the next one, which is the debt? I don't think we have it anyway. But this debt -- in the year 2013 is a really -- creates a ratio of public -- of debt to GDP of about 67 percent. Historically, we've been around 40 percent. When you get up around 67 percent, as many of our witnesses have said in this committee, you're creating a situation which is probably untenable for our children because of the size of that debt.

And the deficit maintains itself at approximately three percent to four percent of GDP for as far as the eye can see under this budget. And there is no factoring in really of what is coming at us in a significant way, which is the retirement of the baby boom generation and the cost of entitlements on top of all of that.

So you essentially have set up a scenario here on this budget where we will pass on to our children in the very near future -- in about the end of four years from now -- a debt to GDP ratio which is unsustainable and a deficit ratio which is unsustainable. And that means our kids are going to have a hard time digging themselves out of this hole. And I guess our debate with this budget goes to that point.

Rather than doing something in the fourth, fifth, sixth year to bring the -- those lines down and bend the debt down as a percent of gross national product and significantly bend down the deficits as a percent of gross national product -- and this idea that -- well, they cut the deficit in half. Well, if you quadruple the size of the deficit and then you cut it in half, what you've done is you've taken four steps back and two steps forward. You're still not going forward, and that's exactly what this does.

Rather than bending these numbers down so that we don't end up passing on to our kids a government that's not only unsustainable and unaffordable, but a debt burden which is going to basically limit their capacity to have a high quality of life, what we're really doing here is giving them a government that's not sustainable or affordable. And you look at the expansion of this government as proposed in the budget, and it's really extraordinary. I mean, they're talking -- the proposal here is to expand in healthcare and put in place $636 billion in new spending, and that's defined as a down payment, a down payment. That's not even conceived to be the full payment.

So let's say it's over a trillion dollars in new healthcare spending. That's in an economy that already uses 17 percent of its gross national product on healthcare, which is about five percent higher than the next closest industrialized nation. It isn't that we don't have enough money in healthcare in this country, in the system, it's that we don't use it effectively.

But what this budget proposes is to expand the amount of money into healthcare geometrically, probably in the anticipation of some sort of nationalization of the system. The same is done in education where the entire education accounts -- in the student loan area is formally nationalized under the proposals.

So you take this government and you basically explode it in size and proportions, both in the tax burden and on the spending side of the ledger while not doing anything -- there's no significant effort in this proposal to address what is the looming fear that I am concerned about, which is the explosion in entitlement costs. No entitlement restraint in here of any significance over the long-run.

And so we end up in the -- with a situation where what we're seeing here is a budget that's not sustainable for our nation, which fulfills maybe the desires and want of this administration in the area of spending, which it expands dramatically, and taxes, which it expands dramatically, but it doesn't address the issue of our kids' concerns because it expands the debt dramatically.

And again, this is all done under fairly rosy scenarios. I would say this is on the Tinkerbell side of rosy scenarios, this budget. Look at these numbers here as reflected by the blue chip estimates. The budget is making some assumptions, which are very much a reach, 8.1 percent unemployment when we're already at potentially 8.2 percent unemployment, growth rates which are much higher than anticipated by the blue chips and tax revenues, which are much higher than anticipated by the blue chips.

So the budget sets up some very significant problems for us as a nation, I believe, as we go forward, and it is appropriate that we address them. Now, there are places where we could cooperate to get some things done around here that would actually bend these numbers in the out-year. And yet, we're not doing that. In the entitlement accounts the majority -- the Republican leader has said on numerous occasions that he is willing to move forward in an aggressive attempt to try to bring under control the cost of Social Security as we head into the out-years, or at least its burden on our children.

The same is true in healthcare. There are other places where there could be cooperation. And I respect the administration putting forward, for example, ideas in the area of agriculture, limiting agriculture subsidies.

But as a practical matter, the fundamental philosophy of this budget is an expansion of the size of government which isn't affordable by its own definition, because it maintains debt at a level which will essentially run our country into a position where our children cannot afford the cost of government.

Thank you, Mr. Chairman.

SEN. CONRAD: Director Orszag, welcome. It's your turn.

MR. ORSZAG: Thank you very much, Mr. Chairman.

SEN. CONRAD: Welcome back.

MR. ORSZAG: Ranking Member Gregg, members of the committee, thank you for having me. I'm going to be brief, but let me try to address some of the things that were discussed in the opening statements.

I think we face a key choice. We can continue a path in which the theory of the case is that the top marginal tax rate drives economic performance above and beyond any other variable, and in which market competition is defined by how many -- how much subsidies you can provide to private firms. Or, we can change course, be honest about the fiscal condition that we are facing, invest in education, energy and healthcare, which, by the way, corporate leaders have long identified as being key to our long-term economic performance, and bring the budget deficit down.

This budget includes $2.7 trillion in costs that have been excluded from previous budgets. For example, previous budgets have tended to assume that there would never again be a hurricane, that the alternative minimum tax would take over the tax code, that physician payments would be reduced by 20 percent, and yet, Medicare beneficiaries would still somehow have access to their doctors. This budget does not play those games. It presents an honest depiction of the fiscal course that we're on and what we can do about it.

Now, there has been controversy about the economic assumptions. Let me speak to that directly. When the assumptions were locked down, they were fully in line with the Congressional Budget Office economic projections once the Recovery Act was included in the analysis. Since that time, incoming data have suggested a more dire economic situation inherited by this administration and was thought even at the time when the projections were locked down.

I don't think it's constructive to be constantly chasing our tail, revising assumptions with each new piece of information, especially when we have not yet let the Recovery Act -- we haven't given it the opportunity to work. The money is just beginning to flow. Let's see what happens.

But as an example, if you take those blue chip numbers that you put up, Mr. Chairman, and undertake the analysis of what that would do to the budget deficit relative to the projections that we use, the answer is that they would raise the budget deficit by under five percent for this year. So while there would be an impact, I think the argument that it dramatically changes the picture, given that we were already assuming substantial slowing of the economy and a substantial contraction this year, is exaggerated.

Second --

SEN. CONRAD: Is that five percent on $1.8 trillion deficit?

MR. ORSZAG: So roughly $50 billion or so, yes. Second, with regard to whether this is a big spending budget, let's look at the actual data. For non-defense discretionary spending, in 2009 as a share of the economy, discretionary spending outside of defense will be 4.1 percent of the economy. Under this budget it averages 3.6 percent, and by the end of the projection window, 3.1 percent, the lowest on record since 1962 and a percent of GDP lower than where we're starting.

With regard to mandatory spending, there is some increase that occurs, but that's almost entirely because of the baseline, that is, because of rising costs associated with an aging population. So, for example, under the baseline between 2012 and 2019, mandatory spending goes from 11.9 percent of the economy to 13.2. Under this budget, it goes to 13.4. And that reflects, in our opinion, needed investments in education and other areas that have been neglected. .02 percent of GDP is not an explosion in government spending, especially when non- defense discretionary spending declines by much more than that.

Third, with regard to entitlement spending, I think I've appeared before this committee over and over again and put out this chart, which actually comes from the Congressional Budget Office. Sorry. And I think just looking at it makes the case that our entitlement problem is disproportionately focused in Medicare and Medicaid.

Tackling healthcare reform is the key thing -- if you think it's almost obvious from this graph -- the key step in addressing our long- term fiscal problem. There are other issues that need to be addressed, Social Security and the rest of the budget. We do face a long-term deficit in Social Security, and that will need to be addressed. But if you look at this chart, I think it's pretty clear that a disproportionate share of the long-term fiscal problem occurs in healthcare. That is why we believe we want healthcare reform done this year in a way that will reduce costs and improve quality.

The $634 billion that we put on the table is not a net expansion in overall healthcare spending. In fact, half of it comes from reductions in Medicare and Medicaid spending under current law, including $177 billion in payments that are made to Medicare Advantage plans above and beyond what they would receive under a competitive process. Medicare Advantage plans, which are private insurance plans that cover beneficiaries under Medicare, are paid $1,000 more per beneficiary than covering the same beneficiary under traditional Medicare. We propose changing the system so that they competitively bid for the business of Medicare beneficiaries. I think that's a very pro-market and pro-competition step. It saves $177 billion.

Mr. Chairman, you had asked what the next steps were coming out of the Fiscal Responsibility Summit, and as the president mentioned at the end of that summit, we were -- and, in fact, I believe this went out earlier this week, or at the end of last week, but my understanding is that the comments that were made at the Responsibility Summit have now been circulated for revision and editing. We will get that back. We're going to then put that entire document out to the public within 30 days, as the president said, and we look forward to working with you on not only the process forward, but also the specific policy steps that could build upon I think what was a terrific summit where different perspectives were brought together, which is exactly what needs to happen.

So in summary, I just want to come back and say I do think we face a key choice. We have neglected for too long investments in education, in energy, and in healthcare. We have played budget gimmicks where we have hidden massive amounts of spending that was likely to occur, reflected in the $2.7 trillion that we are including in this budget that would have been excluded from previous budgets. And in particular, we have neglected for too long reforming our healthcare system and putting it on a sounder track where there are substantial opportunities to improve its efficiency, which will also have major benefits, not only for our long-term budget picture, but for state governments and for workers, because take home pay is already being reduced to a degree that is unnecessarily large and under appreciated.

And with that, I'll turn it back to you, Mr. Chairman, and again, just look forward to working with you and the rest of the committee on these key issues. Thank you.

SEN. CONRAD: Thank you for your excellent testimony, and let's get right to it because as I've said publicly and said here at the beginning of this hearing, I do believe there are important priorities here in energy, reducing our dependence on foreign energy, while oil prices are low now. I think all of us know that's not likely to go on forever. And this is central to the economic and national security of America, that we reduce our dependence on foreign energy. And that is one of the key components of the President's budget.

Number two -- excellence in education. If we're not the best educated people in the world, we cannot long expect to be the most powerful country in the world. And finally, on healthcare, it is the 800-pound gorilla. Anybody that's spent five minutes studying the numbers know that your testimony is correct, that healthcare is where it's at.

With that said, we're at about 17 percent of our gross domestic product on healthcare, and it appears to me that under almost any possibility of a President -- of a proposal from the President that that will increase in the short-term the share of the economy going to healthcare. And then we look at the revenue side of the equation.

Under the President's proposals, we're -- have spending that's about 22 percent of GDP in the out years, revenue roughly 19 percent of GDP for that three percent gap.

What do you see as a mechanism for addressing this long-term imbalance? Before you answer, I want to make clear people listening may have heard me talk about debt to GDP at over 100 percent. That's gross debt. You may have heard Senator Gregg, the ranking member, talk about debt to GDP of some 70 percent. That's publicly held debt. So they're two different measures of debt. I just want to make that clear to people listening. It's not that Senator Gregg and I have different numbers. In fact, our numbers are precisely the same. They're just two different measures of debt.

So my first question to you would be do you believe a debt -- gross debt to GDP of 100 percent is sustainable for this country given the baby boom generation? If not, what mechanism do you believe will be necessary to address it?

MR. ORSZAG: Well, I prefer to focus on the publicly held debt, and the ratio there would be something like 60 percent. I think we have seen -- while, obviously, it would be desirable to reduce it further, we have seen other countries and even the history of the United States bear a debt burden that high. And again, I want to just emphasize -- even if you -- pull -- if you pull up your chart again on the gross federal debt, what you see is a dramatic increase reflecting the condition that we're inheriting and the steps necessary to address it, and then a leveling off.

What we're trying to accomplish over the next five to ten years is a fiscal sustainability path where you are leveling that ratio and then investing in the key steps that will bend the curve on healthcare costs over the long-term, since this graph -- or the graph had shown that is the key to bringing that debt ratio down over the long-term.

And you had mentioned an expansion in national health expenditures. I think if anything, there will only be a modest expansion in the near term, but the more important point is the power of compound interest is so strong that if you can reduce the rate of healthcare cost growth by, say, 100 basis points, one percent a year, the impact after 40 or 50 years is huge. So one percent a year compounded over 50 years saves you almost 20 percent of GDP in healthcare expenses. The entire ballgame is whether we can put in place the structural changes to our healthcare system to reduce that growth rate.

And I believe we are doing everything that the Institute of Medicine, of which I'm a member, Congressional Budget Office, which I used to run, MedPAC, that anyone has put on the table in terms of bending the curve on long-term costs. And if we're not, I'd welcome more suggestions, but I think we're as forward-leaning as you possibly can be in investing in health IT, comparative effectiveness, changing incentives for providers, investing in prevention. And I'd welcome other suggestions because I think that is the whole ballgame.

SEN. CONRAD: Let me just say I agree almost entirely with what you say with one exception, and that is I never hear anybody talk about the revenue base of the country around here. And we have shown repeatedly that we're unwilling as a country to pay for what we want to spend. And so until we address not only healthcare, but the revenue base of the country, I don't think we're going to get to where we need to go.

Let me just say I'm going to end my questioning there on five- minute rounds. We're going to ask five-minute rounds from everybody today because we've just been informed there will be votes starting at 4:00. And given the turnout, I think that's the only fair thing to do.

Senator Gregg?

SEN. GREGG: Thank you, Mr. Chairman. I think you hit the nail on the head. The difference between the revenues and the spending is what creates the problem and it drives the debt up. And unfortunately, under thus budget the Administration is planning to take spending after the spike for the purposes of adjusting the fiscal problems we have up to 23, 22, 23 percent of GDP, as you can see from this chart, which is way above where we've been historically, and it goes on forever.

And that's the problem, that the spending in this bill is huge. And most of that spending is driven by what the director has said very openly, is the desire of the Administration to spend more on education, healthcare, and a variety of other federal areas other than defense in this bill. So it is a spending problem, in my opinion.

But to move to a more specific issue in this bill, which I'm trying to get clarification on -- and that is the cap and trade tax, which you estimate in this bill is going to generate I think about $65 billion, $67 billion annually, or something in that range. I forgot what the number was, but MIT in scoring the same -- the bill that was out there last year, which is the bill of record and which is -- one presumes the mechanism that will be used -- an MIT study scored that -- generating about $300 billion a year annually.

That is a massive new tax. It's a tax on energy, and it will flow directly through to the consumer in the form of a national sales tax on their electric bill, which I know the director agrees with because he said that when he was director of CBO, that that tax will flow to the consumer. And so I guess my question is, is that accurate, that you're putting in place or proposing to put in place a massive new tax which will flow through to the consumer?

Now, I understand you're going to take that and re-date it to some other consumers through your -- one of your tax mechanisms, your tax deduction mechanisms. I've forgotten the name of it. I'm sure you'll explain it to me, but to (keep up ?) to 80 percent. But there's still 20 percent that's floating around as slush money for whatever the spending -- we want to put it on as a Congress.

But more importantly, how do you explain to that electric utility user -- most likely in the Mid-West and the Northeast -- that their energy bill -- their electricity bill is going to spike a little bit, quite a bit, as a result of this new tax?

MR. ORSZAG: Let me comment on various aspects of that. First, the budget includes $15 billion a year in energy efficiency investment. For example, the kind of thing that we need to take wind energy from the Dakotas and connect it to population centers, because we've got lots of wind energy in parts of the country, but we can't get it to where people --

SEN. GREGG: Are you going to get that money from this tax revenue? Is that where you're planning to get that $15 -- is that where the money's going?

MR. ORSZAG: To finance those investments in a fiscally responsible way, we do have a market friendly cap and trade program. You --

SEN. GREGG: Market friendly?

MR. ORSZAG: Like in the sulfur dioxide program, firms will be able to trade permits, and economists across the political spectrum agree that a cap and trade program is an efficient approach to reducing greenhouse gases because it allows firms to be flexible in terms of how they get efficiencies in reducing greenhouse gasses.

SEN. GREGG: Independent of that, would you answer the specific question --

MR. ORSZAG: Yeah.

SEN. GREGG: -- which is, is there a potentially $300 billion new tax using MIT numbers on energy consumers?

MR. ORSZAG: I haven't seen those estimates. I think that sounds remarkably high to me.

SEN. GREGG: That was the number that actually --

MR. ORSZAG: I --

SEN. GREGG: -- the Obama campaign used during the campaign.

MR. ORSZAG: I don't know what the Obama -- as you know, I was at the Congressional Budget Office and didn't pay attention to campaign undertakings while I was there.

But let me just note that what the president has said is that he supports reducing greenhouse gas, carbon dioxide emissions by 14 percent relative to 2005 levels by 2020. There are many different paths to get there.

SEN. GREGG: How much will the tax be?

MR. ORSZAG: Again, I can't answer the question because there are lots of different ways --

SEN. GREGG: All right, how much are you scoring in the budget as raising --

MR. ORSZAG: In the budget we are --

SEN. GREGG: -- annually by this new energy tax on consumers?

MR. ORSZAG: Okay, and I also need to just address the semantics for a second. But I will do that in a moment. We have roughly $640 billion over ten years, $646 billion coming from the sale of permits under --

SEN. GREGG: So that's $64 billion a year annually if you were to average it out every year.

MR. ORSZAG: No. Are you going to allow me to address the semantic issue?

SEN. GREGG: Oh, of course.

MR. ORSZAG: Okay.

SEN. GREGG: Yes, the semantic issue.

MR. ORSZAG: All right. So I think we have a common understanding of a tax as something that is collected through the tax code. On that basis, the budget delivers a tax cut for 95 percent of Americans, and actually, if you adopt the baseline that Mr. Conrad favors, it may be even more than that. There are lots of other effects of the budget; Pell grants that help kids go to college, early education investments, early Head Start. You either have to do the analysis kind of all in on the financial impact on households, or just look at the tax code. So unless we're going to start calling Pell grants a tax cut, I think incorporating the secondary effects of policies that are not run through the tax code and calling that a tax -- well, it's not the semantic approach that I would adopt.

SEN. GREGG: Well, you're going to raise $646 billion over ten years. It's not going to come from Tinkerbell. It's going to come from consumers, and that's -- you know, I mean, the consumer is going to see it as a price on their energy bill. You can call it a tax. You can call it an increased price for energy. But (that's where the bill's going ?).

MR. ORSZAG: I agree there will be increased prices, yes.

SEN. CONRAD: Senator Cardin.

SEN. BENJAMIN L. CARDIN (D-MD): Thank you, Mr. Chairman, and --

SEN. CONRAD: Senator Cardin, if you would just hold just a moment, maybe I could just go down the list as we have it here so people know where they stand. Cardin, Sanders, Murray, Whitehouse, Stabenow, Warner and Merkley. On our side -- on the other side -- Sessions, Alexander and Graham.

SEN. CARDIN: Thank you, Mr. Chairman, and Mr. Director, it's nice to have you before -- here, and I do want to start off by congratulating the Obama administration for presenting an honest budget. It is good to see all of the expenditures that we're going to incur included in the budget so that we can really have, I think, an intelligent discussion in the Budget Committee and can try to be on the same page with the administration as we make policy decisions.

I want to talk a little bit about healthcare because I was interested in how you framed some of the budget scorekeeping here. And we need to get to universal coverage for many reasons. We need to get to universal healthcare. Forty-seven million people without health insurance is extremely expensive to our economy, and your charts point that out very clearly.

Now, when we get to universal coverage, it will have a dramatic impact on the cost of healthcare. We currently spend twice as much as comparable countries spend on healthcare, and we don't have the results to reflect that type of investment. So if we can reduce or eliminate the number of uninsured, we'll reduce the number of people using emergency rooms. We'll have much stronger preventive healthcare, which will save lives and save tax dollars. If we have a more efficient system for delivery of healthcare that will clearly save money. We'll have less people going into bankruptcy. That will also save money for our economy.

All that will have an impact on our future economy and, I would say, on our deficit and on our budget. It's interesting that this committee -- and Mr. Chairman, I want to ask that a copy of this letter be made part of our record -- received --

SEN. CONRAD: Without objection.

SEN. CARDIN: -- a letter from a group of entities suggesting that CBO's current scoring conventions do not recognize many of the savings to be achieved by restructuring of our healthcare system. "We believe, therefore, it would be reasonable to develop an approach for healthcare reform that reflects both the near-term excesses and long- term savings of such extraordinary legislation."

Now, just so people understand who signed this letter, it includes the U.S. Chamber of Commerce. It includes AFL-CIO, the American Hospital Association, the American Medical Association, the National Federation of Independent Businesses. These aren't exactly radical groups when it comes to trying to spend more government funds, but what I think they're trying to do is get an honest assessment of how these budgets are going to come out in the future for our country.

Now, one more point here, and that is you have a placeholder in the budget for what you think it costs, a little over $600 billion. I believe if you use current values for President Clinton's proposal, that was probably closer to $1.1 trillion. I think some of us question whether there's enough room in what you are suggesting, knowing how we do our budget scoring here, to be able to achieve universal coverage, something that we want to get done during -- we want to see major healthcare reform in 2009.

So my question to you is what type of budget do you need coming out of this committee so that our committees working on healthcare reform can get the job done in 2009? I'm concerned that we may not have enough direction from you now as to what is necessary so Congress can, in fact, take up this issue in 2009.

MR. ORSZAG: Thank you for that question. As we noted in the budget document, the reserve fund was intended as a down payment, and as you noted, there are lots of plans out there that would require more resources, and there are lots of ideas that have been put forward to fill in any gap between how much we've already put on the table and how much would be required.

In terms of what would be necessary in the budget resolution, we feel quite strongly that health reform should be deficit-neutral over the next five to ten years, and also help to reduce costs over the long-term. So in a sense, all that is required is a mechanism for ensuring deficit neutrality as part of the health reform effort. We've tried to kickstart that process by putting substantial resources on the table, including significant savings in Medicare and Medicaid, and we look forward to working with you to fill in any additional amounts that might be necessary.

SEN. CARDIN: But do you agree that if we get this done right, that the future benefits to our economy and to the budget we're considering, including the deficits, will be much easier for us to address if we can get a handle on the resources that our economy currently puts out for healthcare?

MR. CARDIN: Without question.

That is why we are trying to get -- that's why we have put such an emphasis on getting health reform done this year, because without it, the path that we are on is unsustainable, and with it, there are other changes that are still necessary in terms of our long-term fiscal picture, but that is the single most important thing we can do. And I'm going to just repeat -- if other people have ideas about what might help bend the curve, I'm all ears. But I believe we have been more forward-leaning than any budget I have ever seen in terms of putting in place health IT, comparative effectiveness, changes in incentives for providers, and prevention and wellness efforts to help bend the curve.

SEN. CONRAD: Thank you.

Senator Alexander.

SEN. LAMAR ALEXANDER (R-TN): Thank you. Dr. Orszag, thank you very much for coming. Just an observation on Senator Gregg's comment about the national sales tax on energy or gasoline. I'm one senator who wants to deal with climate change and have introduced legislation that would put a cap and trade system only on power plants. But as I -- I want to talk with you some time about -- as we look at it from the TVA region where ten percent of the customers in Nashville said they couldn't pay their electric bills in December because of TVA's rates, which are relatively low, we would be asking them to pay more for in effect a carbon tax.

Then under your proposals we've gone from about $5 billion to about $20 billion to $25 billion a year in subsidies to banks and developers and big companies to build wind turbines in another part of the country. And you also now want to spend hundred billions of dollars, some of which we'd have to pay, to build transmission lines from the other part of the country to Chicago and New York to carry that kind of energy. Typically, transmission lines have been paid for by the rate payers who use the electricity, and that's a separate discussion.

But I would like to ask you about two education issues. I appreciated being invited to the Summit on Fiscal Responsibility and thought the President did an excellent job there, and appreciate his focus there, and as Senator Gregg said, the Republican leader has said he's ready to go to work on that starting with Social Security, and then I believe we should do healthcare this year.

But I was surprised to come back and then find as a next step in the budget that you would propose -- the President in his budget would propose making Pell grants mandatory, because if I'm correct, that would take $117 billion and move it over to the automatic pilot spending side of the budget for the next ten years. Why should we be going in the other direction? We've spent all afternoon down there being told by a whole number of people that our big problem was entitlement spending, and you're proposing to add another $117 billion over ten years.

MR. ORSZAG: Three comments. First, we also propose significant savings by reducing and eliminating the subsidies for middlemen on education loans because the evidence suggests that there is a more efficient way.

SEN. ALEXANDER: That's going to my -- I have a question about that next.

MR. ORSZAG: Okay, great. The second is then let's examine the policy rationale for making Pell grant funding more secure. I think one of -- I think the evidence is overwhelming that one of the reasons that current enrollment rates are not as high as they should be, especially for moderate and low-income families, is that in ninth and tenth grade too many kids don't aspire to go to college in the first place in part because the existence of financial assistance is unclear. And if you look at the pattern of funding for Pell grants in the past, it's been a zig-zaw, zig -- you know, up and down kind of thing, and secondly, that the process of applying for it is too complicated.

So the vision -- and the President's talking about this today, or already --

SEN. ALEXANDER: I only have about a minute and a half --

MR. ORSZAG: Okay, I'm sorry. I'll be very brief. You want to inspire kids to aspire --

SEN. ALEXANDER: Right.

MR. ORSZAG: -- to college, and that's what we're trying to do.

SEN. ALEXANDER: But the fact of the matter is you're moving $117 billion over to entitlement spending, which is where we already have the problem. Now, let me -- are you then going to spend it twice by figuring you left $117 billion hole in discretionary spending and spend that too?

MR. ORSZAG: No, in fact, the reductions in non-defense discretionary spending that I already discussed net out Pell grants, and the historical data also --

SEN. ALEXANDER: So you're only spending on the mandatory side, not on the (discretionary ?)?

MR. ORSZAG: Well, there's a downward adjustment on the discretionary side, but I didn't want to conflate the analysis by making that look like a reduction in discretionary spending, so we took Pell grants out of the --

SEN. ALEXANDER: Well, I want to make sure -- are you going to spend it both on the --

MR. ORSZAG: No, no.

SEN. ALEXANDER: -- mandatory side, and then spend $170 billion -- and then see, I've got $117 billion --

MR. ORSZAG: No.

SEN. ALEXANDER: Okay, good.

MR. ORSZAG: Okay.

SEN. ALEXANDER: Now, may I move to the other part of your vision --

MR. ORSZAG: Yes.

SEN. ALEXANDER: -- give you a moment to answer that? I was education secretary when the direct loan program started. I didn't think it was a good idea then, and I don't today. And the reason I didn't was partly because I didn't think it would save any money. And there have been arguments about that on both sides for the last ten years. I still don't.

The second reason I -- was a bigger reason. It was a management issue. We got 6,000 institutions across the country. We've got 15 million new loans to students every year, and you're going to turn that over to the United States Department of Education suddenly to manage -- Arnie Duncan I think may be the President's best appointee with all courtesy to you -- (laughter) -- but I must -- (inaudible) -- distinguished appointee.

MR. ORSZAG: Okay. (Laughs.)

SEN. ALEXANDER: But even he --

MR. ORSZAG: Yeah.

SEN. ALEXANDER: -- I don't think can take over the management of the -- of millions of new loans that instead of being managed by lenders all across the country to -- 12 million or 13 million students would now be managed by the United States Department of Education in Washington where I used to work.

MR. ORSZAG: Senator, first I'll make sure I pass along your warm regards to Secretary Duncan.

SEN. ALEXANDER: I've already told him.

MR. ORSZAG: Okay. A couple comments. First, I think the evidence is actually clear. I don't think there is ambiguity. The direct lending program does save money relative to an alternative in which the federal government guarantees private loans. Second, that private loan market itself has been experiencing significant difficulty, if you just look at what's been happening recently. So the argument that there would be problems in the direct lending program I think doesn't take account of the difficulties that the private lending program is experiencing.

Finally, before putting this forward, we did do significant work to make sure that the program could ramp up adequately so that there would be no disruptions, and I believe that it would be a smooth ramp- up if this proposal were adopted.

SEN. ALEXANDER: Thank you, Mr. Chairman.

SEN. CONRAD: Senator Sanders.

SEN. BERNARD SANDERS (I-VT): Thank you, Mr. Chairman, and welcome, Mr. Orszag. I want to go over three issues quickly; income inequality, Social Security and healthcare. Number one, under President Bush poverty increased, the middle class shrank, and the wealthiest people became much wealthier. But what we have seen is that despite the fact that the top 400 Americans in this country saw a huge increase in their net worth -- in fact, by $640 billion from 2001 to 2007, a huge amount of money for a few people -- actually, today these wealthiest 400 Americans now pay a lower tax rate, lower effective tax rate than most police officers, teachers, nurses and people in the middle class.

What do you think about that, and what are we going to do about it? Do you think that's right, and should we change that?

MR. ORSZAG: One of the reasons that in 2011 and thereafter the president has asked for some rebalancing of the tax code and for more contribution from the very high-end of the income distribution is precisely the trends that you have identified. The top one percent of the population enjoy ten -- or accrued ten percent (of income ?) income in 1980. It's now up to almost 25 percent.

SEN. SANDERS: Okay, thank you. I want to touch on Social -- and I agree with you, I should tell you. Social Security -- I happen to think there is not a Social Security crisis. Social Security will, in fact, be able to pay full benefits to every recipient for at least the next 32 years, and after that it'll be able to pay out 75 percent benefits. During the campaign a candidate -- you may recall his name -- Barack Obama -- this is what he said. Quote, "What we need to do is raise the cap on the payroll tax so that wealthy individuals are paying a little bit more into the system." Okay, end of quote, a longer quote. Is that still the position of the Obama administration in terms of addressing the Social Security crisis?

MR. ORSZAG: I would just say there are lots of options for eliminating the (actuarial ?) imbalance in Social Security. We face -- I mean, benefits are higher than projected revenue, and that needs to be closed.

SEN. SANDERS: Let me go back again -- do you consider it a crisis when we could pay out every benefit owed to every eligible American for the next 32 years, and by lifting the cap, we could essentially solve the problem? And this is what the candidate, Barack Obama, was talking about. Has there been a change in policy?

MR. ORSZAG: I wouldn't say Social Security is in crisis. It does face a long-term deficit that needs to be addressed, and it should be addressed.

SEN. SANDERS: Are you still thinking about raising that cap?

MR. ORSZAG: Again, I'm just going to say there are lots of options on the table.

SEN. SANDERS: All right. The third question -- I want to thank you and the President very much. In the stimulus package there were $2 billion appropriated for community health centers, $300 million for the National Health Service course so that we can begin to get doctors and dentists and nurses out into under-served areas. And all of the studies indicate that if we expand the community health center program, if we get doctors into under-served area, we end up saving money because people don't end up in an emergency room or the hospital.

Now, you guys did I thought a tremendous job in the stimulus package. Will you continue to support in a significant way community health centers so that, in fact, we can have a center in every under served area in our country?

MR. ORSZAG: Yes, and also the other piece of that on the workforce issues -- there's also $300 million -- a few hundred million dollars in this budget --

SEN. SANDERS: Exactly.

MR. ORSZAG: -- to build upon the effort that was in the Recovery Act.

SEN. SANDERS: All right. So is that still a goal of yours?

MR. ORSZAG: Absolutely, yeah.

SEN. SANDERS: Okay.

Thank you very much, Mr. Chairman.

SEN. CONRAD: Thank you. Senator Graham.

SEN. LINDSEY GRAHAM (R-SC): Thank you, Peter. (Laughs.) I think you're a good choice.

MR. ORSZAG: Thank you.

(Laughter.)

SEN. GRAHAM: A suggestion --

MR. ORSZAG: Yes.

SEN. GRAHAM: -- climate change. No matter -- if you're serious about climate change solutions, there's going to be some increased cost. That's just inevitable. But the problem I have with your approach is that you go to 100 percent auction. And I know hedge funds are going to jump into this and drive up the price of the credits, and those industries that use a lot of energy, particularly in some -- you know, out in the Mid-West and other places are going to have a hard time in 100 percent auction world of paying the cost until we get a solution.

And the fact that you use the revenues to go to your Make Work Pay Program, which, quite frankly, is a tax policy that I don't agree with, is going to make it very difficult for you to pass climate change. So my recommendation would be that whatever revenue is generated from a cap and trade system -- that it be less radical in terms of the 100 percent auction, that we understand that China and India are part of this problem, and that if we do too much too quickly, we're going to drive people offshore, and they're already leaving, and that when you take the revenue and put it into a tax program that there's division, that you've probably thrown an issue into the climate change debate -- has not existed, and I think effectively destroyed the ability to solve the problem. That's just my opinion.

MR. ORSZAG: Could I comment on the 100 percent auction for a moment?

SEN. GRAHAM: Yeah, please.

MR. ORSZAG: I think this is important. If one did not auction the permits under a cap and trade program, the result would be in a sense the largest corporate welfare program that the government ever created, because you would be transferring whatever that -- the value of those permits were, whatever it turns out to be. You would be transferring it almost directly into corporations' bottom line. And so the motivation for the cap and trade --

SEN. GRAHAM: I understand, but every other climate change solution in this building has had an allocation system because we don't see compliance. People are going to have to pay more. Industry's going to have to pay more. The people who are in manufacturing that use a lot of energy are going to be hit with this because they're emitting the most carbon.

I understand that.

But if you do too much too quickly, and if you don't recognize that hedge funds and other groups are going to jump into this auction system and drive up cost, well, one, you've lost me. I'll just be honest with you. There are a lot of folks who believe that climate change is real, that CO2 emissions are heating up the planet, and we need to find a solution. But your $646 billion revenue stream I think assumes some things that are too far too fast and using the money to pay for a Make Work Pay Program that is a different issue where there is more division. And I'll just leave it at that. I think you've done a lot to damage, quite frankly, the ability to find common ground on climate change.

Now, when it comes to defense spending, right now 3.6 percent of gross domestic product is spent on defense. In the budget, is it fair to say, that in ten years from now it will three percent of GDP?

MR. ORSZAG: It would be reduced, yes.

SEN. GRAHAM: I just had a hearing with Admiral Blair, who I think is another good choice, and he gave us the assessment, threat assessment our nation faces. And I came away thinking that we're equally at risk, if not more at risk over time. Do you think it's wise given what this country faces in the next ten years in terms of military threats and international crisis to reduce defense spending?

MR. ORSZAG: Well, again, reduced as a share of the economy, but let me actually speak directly to this.

SEN. GRAHAM: Okay.

MR. ORSZAG: Secretary Gates has stated that given the significant run-up in the defense budget, it is time to sort of change course and start applying more discipline. For example, in the procurement part of the budget you have almost $300 billion in cost overruns --

SEN. GRAHAM: Yes.

MR. ORSZAG: -- because there's been very little discipline applied --

SEN. GRAHAM: I agree that --

MR. ORSZAG: Okay.

SEN. GRAHAM: -- procurement and acquisition reform -- you know, no one should get a pass here. The Pentagon can do better, but we're going to increase the Marine Corps and the Army, as we should, but the biggest --

MR. ORSZAG: And the budget does that.

SEN. GRAHAM: Exactly. The biggest costs of the military is personnel cost. So when you increase your personnel cost, something's got to give. And if you're going to reduce the overall pie, that means there's going to be less money for weapons systems that are efficient. And so I would just look long and hard about the glide path you have put us on when it comes to meeting the national defense threats that we face. And I think this is, quite frankly, a reckless move at a time when our nation is very much at threat.

Finally, in 2009 the percentage of federal spending that goes to interest payment on the national debt is 3.53 percent. In 2019, it's 12.06 percent. Where does that take us as a nation? If this continues where that percentage grows over time, what is the outer limits of the United States government's ability to borrow money? When do we hit those outer limits, and what does it mean?

MR. ORSZAG: Well, first, I don't believe that -- actually, net interest is not anywhere close to that in 2019 as the share of the economy. But let me come to the basic point. Because of the economic difficulties that we are inheriting, there is a significant increase in debt that has already occurred and that will occur this year, and then the whole goal of the budget is to stabilize that as a share of the economy while also dealing with healthcare, which is the key to our long-term future.

Net interest will track that change in debt. And I also do -- because I think -- I agree with you. It's --

SEN. GRAHAM: I don't mean to interrupt, but I'm talking about the amount of money spent to service the interest of the federal spending. It's 3.5 percent now. Of the budget, 3.5 percent goes to pay interest on the national debt. In 2019 it's 12.06. Am I wrong?

MR. ORSZAG: I believe so, yes.

SEN. GRAHAM: Okay. If I am, I stand corrected.

MR. ORSZAG: I think it's more like 2.7 percent, so reduced from current levels.

SEN. CONRAD: I think you're talking about share of the budget --

SEN. GRAHAM: Yes, I am. I'm talking --

SEN. CONRAD: -- share of the economy.

SEN. GRAHAM: Exactly. Twelve cents of every dollar the federal government will spend --

MR. ORSZAG: Oh, I --

SEN. GRAHAM: -- in 2019 is to pay the interest.

MR. ORSZAG: We can do --

SEN. GRAHAM: Am I wrong?

MR. ORSZAG: That is approximately correct, yeah, $622 billion over --

SEN. GRAHAM: And if that continues unchecked, how does that affect this nation's ability to borrow money to meet the obligations --

MR. ORSZAG: One of the reasons why we have to reduce the -- you know, address the fiscal path that we're on is if we don't, debt and deficits in net interest explode in costs over time. There's no question about that. This budget relative to doing nothing reduces the deficit by $2 trillion.

And more important than what happens over the next five or ten years -- I want come back again, because I feel very strongly about this. If we don't address the excess cost growth rate, that is, the rate at which healthcare costs are growing relative to income per capita, whatever happens over the next five or ten years is not going to matter. In order to address our long-term fiscal problem, that is the key thing we need to do, and I think we're being as aggressive as -- I mean, again, I'd welcome thoughts. If anyone else has other things that, you know, the Institute of Medicine or others haven't come up with, let me know, and we'll work with you on them. I think we're as forward-leaning on that question as you could possibly be.

I also just want to come back -- and I don't know if Secretary Gates will be testifying before the committee, but I defer --

SEN. CONRAD: We'd like to have the secretary come. He's not expressed a willingness to come. I think that's a significant mistake at a time like this for the secretary or the deputy secretary not to come, but so far they have resisted the invitation of the committee to come.

MR. ORSZAG: Well, I would again just defer to him on the appropriate level of funding for our defense effort, because again, he thinks that what we are doing is in the nation's best interests.

SEN. CONRAD: Senator Murray.

SEN. PAT MURRAY (D-WA): Thank you very much, Mr. Chairman, and I too wanted to say that I'm pleased that we have a budget that addresses some of the realities that have been ignored for some time. We are going to have earthquakes or floods, and we need to budget for that. The cost of the war is a reality, and I appreciate a budget that comes to us that addresses that and at the same time says we've got to get out arms around some very critical issues -- energy, healthcare, education -- in order to make sure that we have a strong economy in the future so that we can deal with the debt. So I thank you for that.

Let me ask you some specifics. In reading through some of the budget highlights in the document, I was glad to see that the Department of Energy's budget -- and I quote -- "continues the nation's efforts to reduce environmental risk and safety management -- safely manage nuclear material," unquote. While that bullet is last on the list of highlights, I trust it's not the least, because this -- I know the Administration shares my dedication to pursuing both the moral and the legal obligation to clean up the environmental management complex.

You and I have had the opportunity to talk about this many times. You know it's a high priority of mine. I've been very concerned about the previous Administration's failure to comply with cleanup agreements with the states in four years of declining budget requests that have put us in jeopardy. Here in Congress we have worked annually every year to backfill, and most recently in the FY '09 omnibus and the Economic Recovery Act.

This is not a fight we should have every year. This is an obligation, and I'm looking for at least $6.5 billion in the FY '10 request when the details are finally announced, and I wanted a chance to ask you today if that is what we're going to see.

MR. ORSZAG: Well, as you know, the Recovery Act provides substantial funding for environmental management. I think it would premature for me to be committing to specifics for the detailed April budget at this point, but I know it's a priority of yours, and --

REP. MURRAY: The Economic Recovery Act put money in to reduce the size of the footprint, overall complex around the country so that we wouldn't continue to have to pay the high maintenance costs. But that does not take away our obligation every year in the annual budget. I assume you understand that.

MR. ORSZAG: I do understand that.

REP. MURRAY: Okay, well, I'll be looking forward to seeing what you put out.

MR. ORSZAG: I know you will be.

REP. MURRAY: I also wanted to ask you about the VA, and we had a hearing this morning in the VA Committee with Secretary Shinseki, and we're hearing rumors that the administration is going to propose allowing the Department of Veterans' Affairs to bill third party insurers for the care of conditions that are related to a veterans' service-connected disability or injury. I'm sure if you're not aware, you will be aware that our offices are hearing from veterans who are understandably very upset about a proposal such as that. Can you tell me if you are planning to include a third party billing proposal in the VA budget?

MR. ORSZAG: Well, there will be more details about the VA budget in April, but let me state very clearly that there won't be increases in out-of-pocket costs or premiums for veterans. And, in fact, the budget adds $25 billion over five years for veterans and covers more than -- covers roughly a half a million more veterans under the VA system.

REP. MURRAY: But is this specific proposal one that you're looking at?

MR. ORSZAG: There are lots of proposals that are being examined. I think it would be premature to be discussing specifics.

REP. MURRAY: Okay. Have you looked at the revenue impact of a proposal like that?

MR. ORSZAG: Again, I'm going to just say it's premature to be discussing specifics. That will be part of the April budget.

REP. MURRAY: Okay, well, in honesty in budgets, that's probably a proposal with the DOA when it gets here, so if we want to be honest, we better be careful what we're requesting.

MR. ORSZAG: Okay.

REP. MURRAY: Let me go back to education really quick in my last minute. (Laughs.) Senator Conrad mentioned it as well. We've got to educate people today for the jobs that are going to be out there, whether they're healthcare or green energy, or whatever it is. And if we don't do that, all is going to go to naught for all the money we're putting out there to try and get our economy back on track.

I chair the Workforce Investment Subcommittee, and we've been trying to reauthorize the Workforce Investment Act, which is really the backbone of our national efforts, and wanted to ask you if the administration was going to work with us to try and get that authorized so we can move forward and give people the skills they need to be able to compete in the jobs that we want them to be in.

MR. ORSZAG: Absolutely, and I believe the President touched upon that topic in his speech today too.

REP. MURRAY: Okay. Thank you very much. Thanks.

SEN. CONRAD: Thank you.

Senator Whitehouse?

SEN. SHELDON WHITEHOUSE (D-RI): Thank you, chairman.

Welcome back. Peter, I saw the more honest picture that this budget presents -- and I applaud its focus on the long-term challenges we face, which are severe in energy, education, and most particularly in healthcare. You know how I feel about the healthcare question, and I'm -- I couldn't be happier that it is here.

If you look at what I've long considered to be the guideposts for this reform, it's information technology infrastructure, it's improvements in quality and in prevention investments in areas that will save cost overall, and it's reform of the payment system so that we're sending a signal with our dollars that matches from a societal point of view that we want Americans to enjoy, which is better healthcare. And I think the budget touches on all those areas in important ways.

My mental image of this is that our current system is like a cruddy old plant that runs and breaks half of the stuff as it makes it and catches on fire every second or third day and wastes enormous amount of oil and energy, and is really bad designed, bad systems design, but we can move to a better, more efficient one that produces a better product with less casualties and less cost and less waste and less aggravation and all of that.

If you were in a factory floor and you were making that transition, you would not only put investment up, which you do, but you would also have somebody responsible for managing that transition. And what I don't see yet is how this transition is going to be managed. I don't think CMS can do it. I don't know that you want to have this managed directly out of the White House on a day-to-day basis. I know that we in Congress can't do it. We can do great, big, simple, blunt moves, but the type of dynamic oversight of a multi- variable, ongoing process on which I think we believe in many respects the fiscal future of the nation depends is going to be quite a challenge.

And that's what I don't see. How is that transition going to be managed? It's one thing to put this down payment down. Bravo for you. It is brilliant. And I'll work with you as hard as I can to make sure you get all the support you need, but how do you manage it?

MR. ORSZAG: Well, there are differing approaches. It will depend on what is done in the legislative process over the next few weeks and months. I'll give you a couple examples. Senator Bachus has proposed a health institute or a health board that would manage a lot of those decisions.

Senator Rockefeller has proposed something similar, basically MedPAC on steroids where a technically competent body would help guide --

SEN. WHITEHOUSE: An authority.

MR. ORSZAG: -- authority would help guide those decisions. Under the Healthy American Act, the role of the exchanges is crucial, as it is in Massachusetts with the connector. So there are lots of different models.

SEN. WHITEHOUSE: I'm relatively familiar with the legislative proposals. What I don't see is an Administration proposal.

MR. ORSZAG: Oh, I'm sorry. And from the Administration perspective, Governor Sebelius will be making visits this week. We would like her to be confirmed as quickly as possible. The White House has named Nancy-Ann De-Parle as a White House coordinator on health reform, and she will be visiting up on the Hill, working with staff and with senators and members of Congress this -- starting this week.

So we're ready to roll up our sleeves, and it's going to -- I mean, the fact of the matter is it will require a team effort on the -- from the Administration along with a team effort from the Congress to get this done.

SEN. WHITEHOUSE: So there's no fixed Administration position at the moment on how this should be managed. You know that it should be --

MR. ORSZAG: Well, we're --

SEN. WHITEHOUSE: -- aware of the ones -- of the different options that are out there, and Governor Sebelius will be coming on board, and then you'll sort through it. Is that -- (inaudible)?

MR. ORSZAG: Well, no, I would -- okay, so there's how you actually manage the system itself versus how you manage the policy process. The policy process naturally will depend on not only -- well, hopefully soon to be Secretary Sebelius, but also Nancy-Ann DeParle, and then clearly, other members of both the economic and other team will be involved, Secretary Geithner, Larry Summers, myself. Healthcare touches upon so many aspects not only of the economy, but of the federal budget and state governments. It's natural that a team effort will be required, and we will be presenting you with --

SEN. WHITEHOUSE: Okay.

MR. ORSZAG: -- a team, and there will be four points of contact.

SEN. WHITEHOUSE: Well, that's interesting. I'm hearing you saying this is going to be actually managed at a very senior executive level --

MR. ORSZAG: Absolutely.

SEN. WHITEHOUSE: -- (inaudible) -- turfed off to an organization -- (inaudible).

MR. ORSZAG: No, this is going to be managed at the highest levels, yes.

SEN. WHITEHOUSE: I think my time has expired. Thank you.

SEN. CONRAD: Senator Warner.

SEN. MARK R. WARNER (D-VA): Thank you, Mr. Chairman, and let me add my voice to those who applaud the honesty in the budget and also some of the policy directions. We may have some differences on how we get there, but I think the directions are headed in the right way.

One concern that I had is that while recognizing -- on this enormous economic challenge, which generated the requirement for the Recovery and Reinvestment Act, and you write out a very bold agenda going forward. An area that may not be quite as sexy, but one that I hope would get requisite attention is how those funds that are being spent are at least spent efficiently and effectively. And I am -- would like to hear some of your comments about both the role of the chief performance officer, the chief technology officer, your chief information officer, how they're going to intersect from personal experience, (not only ?) in Virginia when we had enormous budget shortfalls -- a challenge, but it also allowed us to bring --

MR. ORSZAG: Right.

SEN. WARNER: -- a great number of efficiencies to our system, and resulting -- us being the best managed state in the country. We found a lot of those efficiencies, I would add, not only through programmatic review -- and I know OMB does a programmatic hit list of programs that perhaps need to be reviewed, but I would just encourage you as you look at these roles -- the -- think about not just across government -- and particularly in the HR area, particularly in the technology area, particularly in the procurement area where I think we could see dramatic savings. And I'd love to see more emphasis on that. If you could perhaps --

MR. ORSZAG: Sure. Let me comment on two aspects of that. Last week, the President talked about our reforms that we will be putting in place to procurement and contracting so that the cost overruns that I talked about before will be much less likely to occur. The budget includes significant efforts at program integrity, that is, making sure that the right provider or the right person gets the right benefit at the right time instead of having improper and erroneous payments.

And, in fact, we dialed that up as substantially as possible based on hard evidence. There's $50 billion in savings from reducing erroneous payments based on credible evidence about what works and what doesn't and reducing them embodied in this budget, at HHS in terms of improper payments to Medicare providers, at the Social Security Administration, in the tax code -- and I would -- I think that is exactly what we need to be doing.

In addition, the Recovery Act clearly raises a challenge in terms of spending the money not only quickly, but wisely. We've already post -- you know, we've already put up online -- recovery.gov -- where there will be significant transparency provided. Appointed -- a head of the Oversight Board, Earl Devaney, who is well known for being a very tough inspector general -- and are working actively not only with Cabinet secretaries, but with governors and others to make sure this money is spent wisely and well in addition to quickly.

SEN. WARNER: I would only add, though, that both in terms of ongoing -- going forward -- I've seen estimates in the past of tens of billions of dollars if we simply rationalized the different technology systems we have, not only across agencies, but across secretariats. And if leveraging our purchasing power on the procurement side -- not simply in terms of mispayment, but simply simple business practices. And at moments of crisis, from at least our experience, you might find a federal workforce that might be more willing to make these kind of systemic changes during these challenging times, number one.

Number two, on the Recovery Act, I know you've appointed a very appropriate inspector general. My hope would be it would not just be a look back (office ?), but it would be a forward-looking -- (inaudible) --

MR. ORSZAG: (Forward-looking, absolutely ?).

SEN. WARNER: -- as you're looking at these, particularly areas like healthcare IT, which is this -- Senator Whitehouse, is a terribly important area in healthcare reform, broadband, weatherization from the energy project. Projects that have been under funded in the past -- you're going to ask them to ramp up very, very rapidly, trying to bring -- and putting templates in place on the front end, as well as just common definitions. I mean, I know a lot of this is going to be driven around jobs, but if you've got 50 different states all defining job creation a different way, it could prove to be a problem. These are areas that I would -- (inaudible) -- (conversation ?).

MR. ORSZAG: Well, let me just -- I know we're running out of time. Let me just very briefly point out -- the President appointed the person who used to be the chief information officer for the D.C. government. He now works at OMB as the chief -- (inaudible) --

SEN. WARNER: (And prior ?) Virginia secretary, assistant secretary -- (inaudible).

MR. ORSZAG: Yeah, he's fabulous.

We need to be moving -- we have under invested in IT and IT efficiencies, and we need to be moving much more aggressively so that we are obtaining the benefits that many state governments and city governments have obtained from using information technology more intelligently. We need to do that at the federal level too.

SEN. WARNER: Mr. Chairman, I actually would just -- would love to see perhaps this committee at some future date spend more time on this effort. We may have policy differences. We may have -- I think equally both sides -- we all have concerns about some of the deficits we're looking at, but how we truly look at spending dollars more efficiently I think would be the subject of -- I know from my standpoint a great deal of interest and probably some of the other members. (Inaudible.)

SEN. CONRAD: Thank you, Senator Warner.

Senator Sessions?

SEN. JEFF SESSIONS (R-AL): Thank you, Mr. Chairman, and -- well, Governor Warner, now Senator Warner -- but has -- like most governors, has to deal with efficiencies and productivity, and they work hard at it I think generally because they have to have a balanced budget. We don't. But I was attorney general. We had a financial crisis, and I saved every dime I could save.

I would just say, Senator Warner and Mr. Orszag, you're going to need to personally drive that if you're going to change, because this Congress and no administration since I have been here had the kind of commitment to efficiency and productivity that most governors have. It's such a big government. People just don't think that's important. But a few billion here and a few billion there can add up in the long- run, and I can assure my colleagues based on my experience in government that we could do a lot better, in my personal opinion.

And the example that we set by passing the stimulus package -- $800 billion thrown together in a rush rush manner with very few real amendments and that kind of thing is -- was just stunning, and now we're moving forward with a package with 9,000 earmarks, and you say that's okay. We'll worry about it next year. That's not a very good answer, I think as the Washington Post replied today and the editorial yesterday. We've got to get serious about this spending. The amount of it is just breathtaking.

In my opinion, Senator Gregg was -- is just incontestably correct. This budget is -- more spending, more taxes, and more debt. That's what this budget is. It can't be defined in any other way. And not just a little bit more spending, more taxes and more debt, a lot of it, in all three categories.

And so I just want to tell you I'm prepared to do some things in this economic crisis and willing to work with the Administration, but if, as Senator Gregg alluded, this represents a philosophical commitment by this Administration to alter the historic vision of America as a government of limited governments and lower taxes and free market capitalism, if it's a commitment that results in any significant change in that, count me out.

So let me ask you. Does this budget -- doesn't this budget reflect an alteration of rather significant -- of a rather significant nature in the classical understanding of the size of the United States government?

MR. ORSZAG: No. And, in fact, I think while there -- while it does represent a change in course, let's look at the revenue proposals. The revenue proposals after 2011 that are generating so much discussion would return the marginal tax rates for the top two marginal tax brackets to the levels that existed in 1993. And at that time, just like now, catastrophe was predicted. If you look at the historical records, anything but is what occurred.

I don't think we're turning marginal tax rates to have for the top five percent of the population to what existed in 1993, which then kicked off a decade of strong economic performance and strong stock market performance, represents --

SEN. SESSIONS: Do you think the tax increase kicked off that?

MR. ORSZAG: The policy changes that were put in place in 1993, helped to encourage economic activity by reducing our out-year deficit and encouraging activity; yes.

SEN. SESSIONS: Well, we'll have debate and I don't want to go into it all at this point, but of course the cap and trade tax increase is a huge burden on the entire economy also.

Some of that money will be given back, but if you look at the budget, I don't think it is expected that all of it will. As Senator Gregg indicated, we're going to look at no pay down of the debt.

I saw Reuters apparently today, had an article that suggested that OMB had not directed or said to the Defense Department that they must delay the replacement of the refueling tanker, the Air Force's number one priority, for quite a number of years, actually. What can you tell us about that?

MR. ORSZAG: What I can say is we're going to have a more detailed budget in April, that decisions about the tanker, and not only the tanker but other defense procurement decisions will be left up to the Defense Department and in this case, the Air Force.

So, the suggestion that somehow OMB somehow dictated or directed is incorrect.

SEN. SESSIONS: What OMB has been known to do is they give you two or three alternatives, none of which are acceptable to the Defense Department, and they have to choose between bad choices and in effect, it directs something.

Is that the nature of this?

MR. ORSZAG: I think given cost overruns, it's almost $300 billion in the defense budget; the Defense Department will have lots of options to put itself on a sound --

SEN. SESSIONS: Well, it's pretty clear to me that the stimulus package did a lot of different things; it did zero virtually for the Defense Department and I'm worried about that direction.

Thank you, Mr. Chairman.

SEN. CONRAD: Thank you.

Senator Merkley.

SEN. MERKLEY: Thank you very much, Mr. Chair and welcome; it's good to have you before the committee, Mr. Orszag.

I must say it's a daunting challenge to lay out a road map to address the Bush legacy economic disaster, but nonetheless, you have undertaken that and I think a superb proposal in which to chart that path out of that disaster; your emphasis on education and energy and healthcare, I applaud you and President taking that and your focus on honest accounting as well.

I want to ask you a few detailed questions. One is, in terms of the way you envisioned the option under cap and trade, do you envision as an all commerce auction or as an auction possibly limited to those participants who meet buy to buy credits for their carbon dioxide production?

I ask this question because there was a lot of discussion in the last couple of years of how hedge funds, pension funds and others, affected the market in oil futures and drove up the price of oil. Is that something that we can avoid by how we structure this auction?

MR. ORSZAG: I think a lot of the details of how a cap and trade auction system would work remain to be worked out; is it upstream or downstream, is it restricted or not.

I would note though, that to the extent that there are financial markets that exist, even if you don't auction the permits, financial markets can trade in the secondary market and you would need an appropriate set of regulatory policies to govern the trading because its not really a question of whether -- I know it came up before -- the permits are auctioned or not, its whether there's secondary trading that occurs and there will be secondary trading because that helps to provide liquidity to the permit market.

SEN. MERKLEY: Thank you.

So, it's a discussion yet to be had and details to be worked out.

Also, I wanted to observe that I believe that you use some of the proceeds of the auction to sustain the tax credit for working Americans. When one takes into account that tax credit as weighed against the higher energy costs, does an average family come out with higher costs or lower costs?

MR. ORSZAG: Well, it would depend on exactly how this is put in place, but (all in?) if you look at the benefits in terms of Pell Grants and other benefits provided through the budget, this budget makes a vast majority of Americans better off.

SEN. MERKLEY: Thank you.

Third, I wanted to address high speed rail. (Being?) there's $8 billion in the stimulus package and than $1 billion a year for five years in this budget. That's not a lot of money when it comes to the cost of high speed rail in that I believe the estimate of building a rail line from San Diego to San Francisco is about $40 billion.

What do you envision being accomplished with this seed money?

MR. ORSZAG: Well I'd say first the recovery act money was a historic investment relative to what has been done so far and the budget builds upon that.

The estimates of how much it will cost depend on what one does; so there's significant differences between the levitation and the theory of very high speed rail, more than 200 mph, versus Acela-like speeds of 125 to 150 mph; the cost is very sensitive to what you mean by high speed rail.

SEN. MERKLEY: Thank you.

That's all my questions, Mr. Chair, thank you.

SEN. CONRAD: Thank you.

Senator Wyden.

SEN. WYDEN: Thank you, Mr. Chairman.

Having heard the director this morning in the Finance Committee on Healthcare, I know he's in the middle now of a double-header and I think what I'll do is get into a couple of other areas very briefly, starting with taxes.

I think we all understand the tax code is going to melt down next year; there have been thousands and thousands of changes to the code in recent years. it comes now to three for every working day year in and year out.

The administration has proposed still more changes; particularly in areas of charity and mortgages. I think my question with respect to taxes is how does what you are proposing this year on taxes fit in to the prospect of tax reform next year, when I think there is a real bi-partisan possibility of a tax reform bill that broadens the base, cleans out a lot of these special interest perks and uses that money to hold down rates and keep progressivity?

Tell me if you would, how does the set of tax changes that you're proposing this year fit into the prospects of tax reform next year?

MR. ORSZAG: Well, just as an example, one of the biggest sets of concerns, or loopholes, in the tax code involves international transactions for corporations. The budget includes $210 billion in that area.

One of the biggest issues involves deferral of profits earned abroad; we specifically mention that. There are many other steps that the Treasury Department believes are warranted to clean out that base, as it were, and promote an overall tax reform, which again, I think -- I agree with you -- would be desirable.

SEN. WYDEN: I'd like to start working with you now, Director Orszag, on that, because I think like healthcare, it goes right to the heart of how we're going to grow the economy.

I think we understand that economic growth and fixing healthcare are two sides of the same coin. If you had three sides to a coin, you'd probably put tax reform on it too. So I'm going to start working with you on that.

Senator Gregg has also done some great good work over the years on tax reform as well.

Let me go now to something that's very important to the Pacific Northwest and that's the question of funding these programs to fight fire. What's happened there is the previous administration just pushed the Forest Service constantly, almost to the brink of bankruptcy, by refusing to fund the growing costs of wildfire fighting.

Now, to pick up on the Chairman, I brought a couple of charts. The first shows how since 1991, the fire spending by agency has eaten up a larger and larger share of the agency's budget. By 2009, it came to 48 percent of the agency's budget; that's in the first chart.

The second chart, which Ms. Miranda (ph) has, shows how the Forest Service, when fire spending is removed, has taken the biggest hit of all of the agencies; it comes to a little over 35 percent. So, I would like to pursue with you -- I think what you all did, as with much of the budget, moved in a constructive way because you set up what is, in effect, a contingent reserve account and I think that is a step in the right direction.

We're still going to end up shorting a lot of these accounts like Fish and Wildlife and Forest Management and, frankly, that helps us care for the health of the forests, it helps us reduce the hazardous fuels, its one of the reasons we won't have to spend so much on fighting fire. Can I continue to work with you on the question of shoring up these other accounts and what is an effective contingent reserve account?

MR. ORSZAG: Absolutely; I was scrambling to find the exact numbers, but the budget includes not only -- if my memory's correct -- something like $1.5 billion to reflect the average wildfire suppression costs, but also $300 or $400 million contingent reserve precisely so that other accounts don't need to be robbed in order to address wildfires.

SEN. WYDEN: A group of us in the House and the Senate have actually introduced legislation today that calls for a separate wildfire suppression account because of the sort of backdoor process of robbing these funds.

We want to continue to work with you on it.

Thank you, Mr. Chairman.

SEN. CONRAD: Thank you, Senator Wyden.

Senator Feingold.

SEN. FEINGOLD: Thanks, Mr. Chairman. Director Orszag, thank you for being here.

In several ways, this budget is a huge improvement over what we've seen over the previous eight years, including the fact that you include a number of important costs that the previous administration simply pretended did not exist.

Having said that let me ask you a few questions. The president's includes some policies in his budget baseline as if they were already the law. I believe the annual hold harmless patch for the alternative minimum tax is assumed as is the permanent extension of the 2001 and 2003 tax cuts.

MR. ORSZAG: That is correct.

SEN. FEINGOLD: Rather than including those policy assumptions in the baseline, why didn't the president just include those policies and their cost in his budget request, preferably with other policies that would offset those costs?

MR. ORSZAG: I understand and respect the baseline that has traditionally been used by this committee.

The president feels that that does not conform to a popular understanding of what current policies are and if you look, for example, at what the Congressional Budget Office did in its long term projections when it put forward an alternative fiscal scenario that was intended to capture the thrust of current policy, that's very similar to the baseline that's reflected in the president's budget.

SEN. FEINGOLD: Let me switch to something else.

The president insisted that the nearly $800 billion stimulus bill be free of earmarks and I was pleased to see that Congress respected that request. Clearly, the president can have a real impact on this topic. With that in mind, what other bills will the president insist be free of earmarks?

MR. ORSZAG: The president feels very strongly that the earmarks need to be reduced even further, that they need to be much more transparent.

I think you're going to see we are actively working with the Congressional leadership to come up with an agreement on what to do with regard to earmarks and I think you will see that forthcoming in the very near future.

SEN. FEINGOLD: Well, I hope he goes back to what he did on some occasions with the stimulus bill, saying no earmarks. I would recommend that as a strategy in the future.

If Congress passes legislation giving the president authority to rescind earmark spending along the lines of the line item veto bill that I introduced recently, will the president sign that bill into law?

MR. ORSZAG: The president, during his campaign, spoke about a line item veto that would need to be done in a constitutionally valid way. Enhanced rescission powers are also a possibility.

I would note, even under current law, after passage of a legislation the president can propose a package of rescission and so any piece of legislation that is enacted, including omnibus, can be reviewed by the administration, a package of rescission can be proposed, which has happened in the past.

SEN. FEINGOLD: Would he be inclined to sign a bill that provides for an enhanced rescission line item veto approach that he believes is constitutionally permissible?

MR. ORSZAG: Inclined, yes. Of course, we'd have to look at the specifics.

SEN. FEINGOLD: Fair enough.

I commend the president for committing to use only emergency, off-budget funding for the incremental costs of ongoing overseas operations and not for base or ongoing activities, such as security assistance and enhancements to intelligence surveillance and reconnaissance activities. I don't think we should be increasing the deficit to pay for such foreseeable operations or predictable recurring costs. Those items should be included in the regular budget.

With that in mind, what definition of war costs you'll be using as you prepare the supplemental for oversees operations? Explain for the committee how you will draw the line between procurement that should be funding using emergency spending and that which should not.

MR. ORSZAG: The goal, again, is to -- let me back up.

Too much of the supplementals that have occurred over the past few years have actually reflected base funding and we are trying to move that stream of funding into the base budget, as would be more appropriate.

You will see a supplemental, we will be coming to you with a proposal within the next few weeks which is necessary to fund the war and I think you'll then see at that point the definition that we're adopting. The budget includes the $75 billion supplemental for the remainder of this fiscal year for the war.

SEN. FEINGOLD: Thank you, sir. Thank you, Mr. Chairman.

SEN. CONRAD: Thank you, Senator Feingold. Thank you, Director Orszag.

A couple of quick things I'd like to review with you.

It is our understanding that we'll have sufficient, functional detail from the administration so that we could write a budget during this work period. Is that --

MR. ORSZAG: That is my understanding also, yes.

SEN. CONRAD: Second, with respect to climate change legislation, this is going to be extraordinarily difficult to accomplish.

Tip O'Neal once said all politics is local. I represent a state -- most people don't think of North Dakota this way, but we are an energy state. We're a large oil and gas producer, we're a large coal producer, we generate electricity for nine states from the state of North Dakota. Climate change, frankly, in North Dakota would be quite welcome.

I say that so the press don't run out and say Conrad said climate change would be welcome; that's a joke.

The reality is, I think it unlikely that climate change legislation will pass if it doesn't have some kind allocations reserved for especially hard hit industries. I think that's just a reality.

There's increasing talk -- I certainly hear it -- of the use of reconciliation for the purpose of climate change legislation. I think that has a series of challenges attached to it as well; especially given the Byrd Rule. I hope people are thinking very carefully about how these things intersect.

Number one, the effect of the Byrd Rule in rating substantive legislation here; we've been told by parliamentary experts that if one tried to write comprehensive legislation using reconciliation, the legislation, once the Byrd Rule had been applied, would look Swiss cheese.

Number two, if we were to move into reconciliation, then only a simple majority vote would allow the prevailing side to advance legislation. I think there're an awful lot of Senators who are on the margins on this issue who would be very concerned to see their leverage reduced by that mechanism.

Third, the notion that there are no allocations for especially hard hit industries tells me the prospect of succeeding in legislation would be an even more distant hope.

So, I hope people are open to understanding that everybody has their own view; that to accomplish big things, takes compromise around here. That brings me to the question of this budget, and what is the White House view with respect to the budget and the committees that have responsibility here.

Is there a realness to have a back-and-forth here to try to get a budget that can pass or is it the feeling that we ought to take the budget that's come here and pass it pretty much as is? I say this because I have colleagues coming to me now every day, every time I go to the floor another colleague comes and sits down beside me and says if this is in, don't count on my vote.

I've had enough colleagues now tell me that about enough provisions in this budget to absolutely assure we can't pass a budget.

I gave a speech at noon to our caucus and I told them, please don't be drawing lines in the sand. I've tried not to draw lines in the sand; I hope the administration is not going to draw lines in the sand. What can you say with respect to that?

MR. ORSZAG: Let me say a couple things.

First, we had a policy process and we think that the set of proposals in here reflects our best judgment about the right way of moving forward. I understand that other folks have different ideas and I think and I hope you know I have a reputation for working with you and I look forward to doing that.

I would also note though, the difficulty of wanting to do even more deficit reduction, concerns about some of the revenue proposals, concerns about some of the spending reductions, and how it will all fit together.

So, absolutely I want to work interactively and we want to work interactively with you. I would just come back and say, we went through a policy process, this reflects our best judgment and we look forward to working with you to get to a budget resolution.

SEN. CONRAD: I found interesting reading in the New York Times about reactions to some of our reactions here to the budget.

Let me just make very clear, from my perspective, we've got an obligation to take what the administration has sent us, we have great respect for it; I've tried to say that publically. But we've got a responsibility here too and if we don't get the votes, it's kind of an empty exercise. If anybody thinks it's going to be easy to get the votes on a budget in the conditions that we face, is smoking something.

I just want to add on two things. On the question of the limits on deductibility, I have heard from many members, concerns about that; effect on charities, effect on housing when there's already a housing downturn. That's clearly in the budget proposal that came up; its one hotspot area and no doubt you've heard it as well.

Second, on agriculture; you know I represent an agricultural state. I just spent the last year and a half getting a Farm Bill passed and we paid for the Farm Bill. We paid for the Farm Bill. There's precious little else paid for around here. I was a little taken aback to read that people are suggesting somehow the Farm Bill was not financially responsible, or fiscally responsible, because of all the things that have occurred around here in the last two years, one of the very few that was actually paid for -- and it was done at my insistence -- was the Farm Bill was paid for.

So, we made a lot of tough choices, we raised money, we made spending reductions, so those who suggest that its not fiscally responsible, I don't think they are very aware of the history of how we got a Farm Bill passed here with 81 votes, overcoming two presidential vetoes and reopening that at this moment is probably not a real propitious way to advance this budget.

With that, I call on my colleague.

SEN. GREGG (?): Thank you, Mr. Chairman.

You didn't ask the question, so I'll ask it. Does the administration support the use of reconciliation (law ?) to the carbon tax, also known as a national sales tax on energy?

MR. ORSZAG: What we have said with regard to both healthcare and energy, is that we would prefer not to start there, but we're not taking anything off the table at this point.

SEN. GREGG (?): Well, I would just make the point that reconciliation is a very unique vehicle.

I don't recall in my experience -- and I think that reconciliation has been used most aggressively during a period that I've had the chance to serve in the Congress, so I think I've been here for the big reconciliation events -- it has never been used on an issue that is ad initio of the size of the national sales tax on energy or on an issue this is all encompassing and as complex as healthcare.

It has, obviously, been used aggressively on a lot of authorization bills, a lot of authorization areas. Two years ago, it was used very aggressively in the student loan area, which I would represent as one of the reasons why the private sector is not necessarily doing so well on student loans. It has obviously been used on tax policy but not on rewriting the entire tax laws; that was done in an open field event; the 1996 Act.

So, to initiate a reconciliation effort in the area where you're basically creating a brand new, massive exercise in an attempt to address global warming with a carbon tax, cap and trade and all the different ramifications of that, we'd be, I believe to depart from the purposes of reconciliation and create real consternation if not an outright act of violence against the system here in the Senate, in my opinion of open debate and --

You're probably not going to get to where you want to go if you did that. The only thing you can do on healthcare anyway, because of all the Byrd Rule issues -- I'm not so sure about carbon tax.

So, I think the fact that the administration hasn't taken that off the table, probably undermines the ability to draw in people like Senator Alexander and myself, Senator Graham, have all been sponsors in the past of initiatives in the area of limiting emissions, because we would be concerned that if we step into this exercise, we will be blindsided with reconciliation exercise and there's no point in stepping into the exercise if we're going to be shut down in our ability to influence it.

So, I think that's a concern -- not that you really care.

MR. ORSZAG: I do care, but okay.

SEN. GREGG (?): On the issue of the budget; I'm entertained by the fact that we're not going to get the specifics of the budget until after we pass the budget.

You parried a number of questions from my colleagues on the other side with the statement, well, when we send up the real budget in April, we'll have more specifics on that. By the time you send up the real budget in April, we will have passed the budget.

MR. ORSZAG: As you know, it is normal during a transition year to put forward an over view, like we have done. You have six weeks to put together something that normally takes six months and then to follow up with a more detailed budget thereafter.

That's exactly what's happened during past transitions also.

SEN. GREGG (?): Do you then expect that your serious budget with the serious detail is going to come to this congress after the Senate's voted on its budget and the House has voted on theirs.

MR. ORSZAG: Let's be clear about what you're filling in.

You're filling in below the top lines for each agency the detailed appropriations that --

SEN. GREGG (?): Well you're (putting in enough ?) so that you couldn't answer questions here today that were asked.

There were three questions asked --

MR. ORSZAG: One was on tankers; what the other questions that I couldn't answer?

SEN. GREGG (?): There were three of them and I'd forgotten the specifics on the issues.

You said well, when we get the budget --

MR. ORSZAG: I think they were all with regard to sub-total, discretionary questions, which are decided as part of the appropriations process later in the year.

SEN. GREGG (?): So you expect your --

MR. ORSZAG: We provided the top lines and the functional numbers that you need to write a budget resolution.

SEN. GREGG (?): But the details are not going to come until after the budget resolutions are voted on.

MR. ORSZAG: But the budget resolutions don't govern that sub- detail; so in other words, we're providing the level of detail --

SEN. GREGG (?): -- it goes to the floor of the Senate that there's not a lot of discussion about what the detail of those (close ?) numbers --

MR. ORSZAG: I will defer to this committee's judgment, but I believe this is exactly what always happens during a transition year and we're providing the information you need to write a budget resolution.

SEN. GREGG (?): Well, that may be, but I would think that it would incomplete if you're not going to put the meat on the bone before we have the votes on the issue.

You said you support rescission and you have the authority for rescission, so in the omnibus that you're about to vote on right now, will you be sending up rescissions relative to earmarks?

MR. ORSZAG: The normal process is to have legislation enacted.

The administration then has the ability to propose a set of rescissions so at the appropriate time, we can come back to you if it's appropriate with the package of rescissions.

SEN. GREGG (?): Since we're not the majority, and it has a right to this, it's not allowing many amendments to this package to pass.

They are allowing us to offer them and I greatly appreciate that courtesy and I think it's appropriate if they've got the votes to stop them; so you know what the form of the omnibus is and you've known that for a while, since you helped write it.

Therefore, my question --

MR. ORSZAG: What?

I didn't -- the administration has not been involved in writing the omnibus at all. Period.

In fact, -- I want to emphasize this -- there have been Cabinet secretaries who have wanted to come up to the Hill to ask for this or that as part of the omnibus. The administration has not been involved in writing this omnibus legislation. It was largely done last fall and that is what it is.

SEN. GREGG (?): Well, it wasn't largely done last fall; the add- ons occurred between last fall and now.

They've occurred since you've taken office. Let's accept the fact that you weren't involved in writing those add-ons, but you've had a chance to read it because it's existed for a while. It passed the House, its going to pass the Senate; there's been nothing in this Bill that has passed the House and is going to pass the Senate today, that you can tell us today that you are going to send a rescission up on.

MR. ORSZAG: Again, I want to allow legislation to be enacted, we will then review it as enacted and if it's appropriate, we will be proposing -- as the president is allowed to do -- a package of rescissions.

SEN. GREGG (?): -- opposed to earmarks; there are 9,000 earmarks in this bill.

Can we presume that the president will send a rescission package up covering five of those?

MR. ORSZAG: I don't want to get in this game of presumption, but again, you are correct that the level of earmarks in this legislation is higher than the president would have liked.

SEN. GREGG (?): Thank you, appreciate your time.

MR. ORSZAG: Thank you, sir.

SEN. CONRAD: Thank you.

Thank you, Director Orszag. Thanks for your service. Thanks for your extraordinary hard work coming into an incredibly challenging environment and doing a very professional job. We appreciate it.

We stand adjourned.

END.