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As we move toward our mission, which is to find reforms that could improve how we do our business, budget reform always steps up to the front of the line.

It seems to me that your testimony is far more measured than that. You seem to imply that one could over-rely on budget reform to get other kinds of reforms we are after and that an evaluation of the budget process may be distorted by the structural deficit that looks us in the face every day that we come to this body.

I was interested to see you indicate that the role of budgeting has been marginal adjusting as opposed to the more central role that some in these two bodies have tended to give it.

As a result, of course, of focusing so distinctly on budget, you get outcome-oriented devices like a balanced budget amendment, caps, line item vetoes, and you offer a balanced analysis of the pros and cons of each of these devices.

Your testimony implies that changing the law is no substitute where there is a policy defect. We have finally come—maybe 25 years after it got any attention—to the point where we are going to change the law when it comes to health care. We decided to do that, it appears, only because it has busted the budget. We shouldn't fool ourselves. The middle class didn't like what it was doing to their incomes and to the budget, so we are going to change it.

I would hope that we don't get to that point with respect to other policy initiatives that need to be taken. That is to say, they get into a crisis and then finally we get the policy changed. We need to stop focusing on the budgetary outcomes or devices that might get us to change.

It would be helpful to me to have your views—I am looking at page 12 of your testimony when you talk about caps that are often used to trigger future savings. You say: But such savings cannot be realized without taking policy actions to reduce mandatory spending, and these actions involve changing the laws that govern these programs.

It would be helpful to hear your view on laws involving other programs that might better stimulate change than focusing so centrally on the budget process.

Mr. REISCHAUER. I think you can make a case for restructuring the operations and workings of the Congress, which is what you are all about. But that shouldn't be driven by budget policy. It should be driven by an effort to streamline this institution, to make it more effective, to make the outcomes of your deliberation more to the liking of the membership.

If you do that, I think we will have a more effectively working budget process. It will be a byproduct of that. You shouldn't go about the reforms because the budget is consuming your activity and if you could do something about the way the budget operated within the Congress it would make the rest of congressional life more efficient. I think that would be a mistake.

With respect to comments you made about outcomes, here I really think my statement is fairly clear. I am saying that these are really procedural promises. There is no beef. They are one step away from the beef. They are really saying, “We're going to do something later on. We aren't telling you what it is and don't blame us for the consequences of it.” That really provides very little assurance that whatever it is will be done later on at all, and that it really is not a substitute for taking the real actions.

If you can take the real actions, then you don't need to pass the procedural promise.

Ms. NORTON. Thank you, Mr. Chairman.
Chairman HAMILTON. Senator Cohen?
Senator COHEN. Thank you, Mr. Chairman.

Dr. Reischauer, I was curious about a couple of things you said this morning. I just came in during the middle of your testimony. You said something to the effect that by simplifying the process you might only lead to greater evasion.

I took it from that that the corollary might be that if you make it more complicated you will have more compliance. I hope you weren't saying that. We found just the opposite to be the case in the field of taxation. When you have a more complicated tax system with higher rates and more deductions, exemptions, and credits, you found a good deal of time being spent trying to evade the paying of taxes by taking advantage of the complexities as opposed to when you tried to simplify it by having fewer rates and less deductions when we found we had greater compliance.

Mr. REISCHAUER. I think the analogy there is incorrect. The budget process is really the analog of the compliance and enforcement part of IRS. By devoting more resources to it, by making it more complex in fact compliance and revenues go up.

The complexity of the underlying tax code, I agree, leads to evasion, leads to an ability to shift resources around. But in the analogy I was giving, that would be equivalent to the economic, political, social, institutional framework that brings forth the pressures that lead to a big deficit.

Senator COHEN. We will debate that in a little bit.

Also, in your written testimony—and I take it from your prepared statement here today—you talk about the difficulty in drawing a capital budget versus a consumption budget.

We had this evidenced by Leon Panetta's testimony when he first came for his confirmation hearings as well as Mr. Ross Perot, who testified earlier this week. I asked a series of questions.

Do you feel, for example, spending for education is investment or consumption?

Mr. Panetta would say that is investment. Mr. Perot indicated that was consumption.

Child immunization, the WIC program, roads—Mr. Panetta indicated in each of those categories that those would all be investments, something that would benefit us in the future. In each of those cases, Mr. Perot said that was spending.

Then we come to the issue of defense. Most people would assume that if you spend for defense that is consumption and not investment. Yet some of the testimony we have had—that the success of Boeing and our major airline manufacturing industry has had its success almost directly dependent upon the investment made to the Department of Defense over the years in perfecting the technology and allowing that to filter into the private sector.

But it does point out the difficulty in anybody talking about investment versus spending. I think we have to disabuse ourselves that we can somehow set up a separate capital budget and a separate budget for consumptive spending, as such, and hold to any kind of degree of integrity in that process.

Would you agree with that?

Mr. REISCHAUER. I agree with you completely. It is a continuum from some activities in Government that might be pure private sector type investment all the way to pure consumption type activities. It is not clear where one would draw the line at all.

Senator COHEN. I was also curious about the reaction when Mr. Perot cited the State of the Union message. When President Clinton said that he was going to rely upon the CBO figures in terms of putting together his budget, laughter broke out. And it broke out principally on the side of the Republicans. There was no doubt about that.

Frankly, I was interested in hearing you today. I have heard Senator Domenici praise your efforts in the past, as he did here today. I have had no dealings with you on the various committees on which I serve.

I would agree with what President Clinton said. The numbers that have been historically put forward by CBO have been much more accurate or in line with the reality than those put forth by OMB. That is because the numbers that have gone through the Executive Branch have in fact been manipulated to achieve a political objective. Again, one only has to go back and read David Stockman's book in terms of the triumph of politics to realize that.

But I was curious in terms of when you said that you have never received a single complaint from any Member of Congress about the integrity of your operation, as such. You may have complaints about whether something ought to be scored one way or the other, and yet how do we reconcile that with the reaction the President got during his State of the Union address?

There apparently is a perception—I suspect it may break down more not only on party lines but on House versus Senate lines that the CBO is

Mr. REISCHAUER. I think there might be divisions within parties, too, as you suggest.

Senator COHEN. The perception is, however, that CBO somehow operates only as the arm of the Democratic party in the Congress. I don't believe that to be the case.

Mr. REISCHAUER. I have the scar tissue to prove that it is not the case.

Senator COHEN. Anyway, I am glad that we can resolve that because I think there is a tendency on the part of Republicans, at least, to launch those kinds of things against you.

Mr. REISCHAUER. There has been criticism of my office by certain Members of the Congress that we refuse to engage in what is called dynamic revenue estimating to include the presumed impact of the policy change in revenues. I try to point out to people that we don't, the Joint Committee on Taxation doesn't, and the Treasury Department doesn't, and it didn't under Ronald Reagan and it didn't under George Bush. This is not a partisan issue. It is an issue of what we think is the most responsible way to produce these numbers.

Senator COHEN. I would like to make one final comment.

You indicated in response to Ms. Norton that what we do with the budget process really only has an impact on the margins. The laws have to be changed rather than the budget process itself. I am not sure that you really meant that you would give Congress an A minus for its budget process entirely.

Mr. REISCHAUER. For adhering to the limits that you placed on yourself in 1990.

Senator COHEN. You confine it to 1990?
Mr. REISCHAUER. From 1990 on.

Senator COHEN. The implication is that we have very little control through the budget process in terms of what happens in the economy. I want to clarify that for myself.

What we do, in fact, has quite a bit of impact upon the state of the economy. To give you an example as recently as yesterday, we decided to declare an emergency in the payment of unemployment insurance and not pay for it. We have added that to the deficit. That may have a long-term effect in terms of long-term interest rates if Wall Street and others see that we're not serious about ever coming to grips with the deficit problem. The rates are going to continue to remain higher than they ordinarily would.

If they remain high, that means you may have less investment in the private sector, which means you may have fewer jobs, which means you may have less revenue, which means you will have, in fact, higher budget deficits.

So what we do within the budget process does have an impact upon the economy. It is not just monetary policy.

Mr. REISCHAUER. I would agree with you completely that certainly the policies that you adopt in the aggregate have fiscal policy consequences, and that affects the economy in very substantial ways. But what I am suggesting is that if you adopt a particular policy now, that will affect our economy, but so will what is going on in Europe and Japan, so will the price of oil. All of these forces also affect the economy and your actions might be quite responsible with respect to the economy and other things might derail the economy. You are then blamed for the consequences of the whole package.

Ms. NORTON (assuming Chair]. The chairmen have had to depart and have asked me, Mr. Reischauer, to thank you for your very excellent and helpful testimony. Your office enjoys great respect both inside and outside the Congress. Your testimony here is morning gives every indication why.

You have been very helpful to us and we appreciate it.
Mr. REISCHAUER. Thank you.
[Whereupon, at 1:55 p.m., the committee was adjourned.]

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