for the Nation's economy, more than if we have the deficits that we currently have, and the future will therefore be wealthier and more productive than it otherwise would be.

Given that economic background, which is, I think, the standard viewpoint that the broad range of economists of whatever party agree with, it follows that there isn't any particular right deficit or right surplus. If we reduce the deficit $50 billion, that is good because it is $50 billion lower.

If we reduce it $100 billion, that is better. If we knock $200 billion or $400 billion or $600 billion off the projected 2002 deficit, each would give us that much more future consumption at the price of current consumption, a policy tradeoff. When I talk about $600 billion, I am talking about surpluses in the year 2002 rather than balanced budgets.

Any number along that spectrum is purely an arbitrary target. The right answer is in general-the more, the better and the more the better is a value tradeoff.

However, even here this issue depends in large part on what the private savings rate is. When the private savings rate was much higher than it is now, back in the good old days of the 1960's and the 1950's, the Government could run a deficit and the net national saving rate would still be plenty high, there would be plenty of money for investment, and future productivity growth would be large.

When the private savings rate is as abysmally low as it is now, I think a strong case could be made that the Government should be running surpluses right now, not balanced budgets. If you have a balanced budget target, people say we have hit our target; fine. The target is inherently arbitrary and does not take into account the real fundamental economic question, which is, is the Nation saving enough, too much, or too little. This is a way of getting back to saying that any arbitrary target, any target fixed in some past time and applying to the present, is bound to be wrong because conditions change.

And it is bound to be a value tradeoff of current consumption versus future consumption where different people have legitimate reasons to favor one more than another. I favor future consumption, but it is easy for me to say because I am part of a successful two-earner family and can afford to sacrifice more, and I have kids that I care deeply about. I can see others in another position for whom it is not so easy to say, "Sure, I will sacrifice now for someone's future benefit later."

So as I said, deficit targets, and by analogy caps in general, are bound to be too high or too low in some future time, maybe by a very substantial amount. Also they are bad macroeconomics.

They don't take account of the business cycle, and no Congress, unfortunately, can repeal the business cycle.

Graph 3 at the very end of my testimony shows the effects of the business cycle on the deficit, and it shows that one can have a cyclical deficit or a cyclical surplus that is very substantial as a share of GDP. [See p. 193.] For example, in 1983 we had a cyclical deficit that was 2.5 percent of GDP.

Trying to wipe that out in a $10 trillion economy, as it is projected to be in 2002, means $250 billion of deficit reduction in that year alone. You can't do that in a single year.

If you try to do it, you could turn a recession into a depression. Not only is this a bad idea, it is also unnecessary because the business cycles fluctuate around an underlying trend and it is really the underlying trend that is important, not the day-to-day or yearto-year fluctuations, but where the structural deficit is underneath that.

The problem is that fixed deficit targets, and fixed targets generally, ignore the business cycle. That is equally true of fixed entitlement caps that, for example, don't reflect the effect of the business cycle on caseload. Unemployment insurance is the obvious point.

Unemployment insurance doubles in essence during recessions and moves back down during normal times. A fixed deficit target that didn't account for that could do something like create a waiting list for unemployment insurance that was 6 months long. It would eviscerate the program. It is both not necessary and not useful.

The experience of Gramm-Rudman II, which set fixed deficit targets by statute, was not a good experience. Congress did two things.

First of all, it and the executive branch engaged in institutional lying to say, "Everything is fine," using rosy scenarios to say the targets would be met until they weren't met in actuality. But then it was too late because we had moved on. That institutional lying gave reporters an awful lot to talk about.

They talked about blue smoke and mirrors rather than real budget subjects, and I think helped breed general cynicism about our Government, I think a pretty unfortunate reaction. And of course the Gramm-Rudman didn't really achieve their purpose.

Second, when Congress and the President decided in 1990 that they were not going to lie to such an extent, that they would say that the targets could not be met, then they were amended. They were changed.

They were in fact repealed. I think trying to make something like Gramm-Rudman stronger would just make the evasions greater and the ultimate disaster when it can't be met that much greater. Instead of doing something like the fixed targets in Gramm-Rudman II, I think that the Budget Enforcement Act was more rational in this respect.

The pay-as-you-go rule, for example, says Congress cannot liberalize entitlements without paying for it, and Congress cannot enact tax cuts without paying for it, but if things fluctuate because of the business cycle, fine, so be it.

I might add that the business cycle is not the only economic reality that affects the budget, but so is inflation. Inflation is largely deficit-neutral, as CBO has pointed out.

That is to say, if inflation is noticeably above CBO's projections for ever and ever, we will spend more money. Many of the entitlement programs are indexed to inflation directly and many respond to it indirectly, such as Medicare.

But we will also take in more revenue by the same token, and the two will balance out. So inflation is not a deficit problem.

If, however, one sets fixed entitlement caps that were not responsive to inflation or fixed programmatic caps on individual entitlements, such as a Medicaid cap, that was not responsive to changes in inflation, one would end up cutting the program by, for example, not the 30 percent in real terms that was intended but 50 percent in real terms or perhaps only 10 percent in real terms.

If this Congress judges that it is right to cut benefits per capita by 30 percent in real terms, so be it. Legislate that result, but don't legislate a cap that would mean that it might turn out that you only got 10 or that you got 50. Get what you intended, not some unexpected result.

In this respect, I would point out that entitlement cap bills that do set targets on entitlements and enforce them through sequestration and that have been introduced in this and previous sessions are made in such a way that they are automatically adjustable for changes in caseloads vis-a-vis the projection or changes in inflation vis-a-vis the projection.

Mr. Armey has a bill that does that. Mr. Gramm has a bill that does that, Mr. Stenholm, Mr. Dole, Mr. Domenici. I don't like caps as a matter of principle, but I do think if one is going to have them, the key point is they should not be fixed caps but rather caps that respond to changes in caseload and changes in inflation.

That doesn't mean you have to build in all that and then do a plus. You can build in all of that and do a substantial minus. Just so that minus keeps going up and down as factors change.

There is another argument against aggregate entitlement caps and that is that entitlements are not out of control. If you look at the last page, graph 4, you can see that as a percentage of GDP Medicaid and Medicare are destroying us, but that all the other entitlements are basically unchanged over the period from 1994 through 2005, which CBO is projecting. [See p. 194.]

This includes Social Security and civil service and military retirement and welfare and food stamps and the earned income tax credit. There is not a problem with that group of entitlements. There is a heck of a problem with Medicaid and Medicare.

In this respect, I think it is very wise that the current budget plan has 72 percent of its entitlement savings from Medicaid and Medicare and that the President's alternative plan has 83 percent of his entitlement savings from Medicaid and Medicare. Of course, he only wants to do about a third in total of what Congress wants to do, but the priorities within that I think are well designed.

From my point of view, if you took all savings out of Medicaid and Medicare and left the others alone that might be even better. Mr. Goss. Please wind down your thoughts.

Mr. KOGAN. Then let me go straight to the other point I would like to make, which is that you should also as a matter of process look towards strengthening the majority's ability to govern and strengthen the leadership and avoid things that weaken the majority's ability to govern, that break deals, that allow fragmentation of the process.

Therefore, you should avoid such things as lockboxes, which actually make it harder to get the appropriations bills to conform with

the budget resolution, or the A to Z plan, which allows individual groups which may be composed primarily of people who didn't agree with the budget resolution to change the entitlements that were moving on track with the budget resolution, or the line-item veto, which again takes away from the consensus that put together appropriations consistent with the budget resolution.

Don't give the President a line-item veto because that takes away Congress' main power. The President has the veto; you have the power to package.

If he has the power to unbundle your packages then he can get everything he wants and not what you want.

Don't do an automatic continuing resolution. Any continuing resolution is a package document where you have something, that is to say, what he has. If you have an automatic continuing resolution, he can win the game when he doesn't want cuts by just vetoing the regular appropriations bill from now until the end of the fiscal year and get what he wants.

Do three things that might strengthen the majority. No. 1, take the process of rotating membership that applies to the Budget Committee and apply it to all committees. This will make all committees more responsive to the leadership and to the will of the caucus as a whole. It will keep committees from going off track and representing a little coalition of their individual members.

Second, if there is any particular flaw in which the Congress does not really represent majority will, it is because of the influence of money. I suggest campaign finance reform as the best single budget process change, preferably public financing.

Third, see if you can prevail upon our friends in the Senate to make the Byrd rule apply only to Senate consideration of legislation and not stop the House from doing budget related things that seem relevant to the overall package.

Thank you.

[Mr. Kogan's prepared statement follows:]

PREPARED STATEMENT OF RICHARD KOGAN, SENIOR FELLOW, CENTER ON BUDGET

AND POLICY PRIORITIES

The budget process is a subset of the legislative process. While the Federal budget is important, it is not necessarily more important than other issues the Congress considers. Stated differently, a budget process that functions well may be a reflection of a legislative process that functions well and vice versa. So the basic question before this committee is whether the legislative process, of which the budget process is merely a part, functions well.

I think it does, especially in the House of Representatives. I therefore conclude that this committee should not suggest fundamental changes either to the legislative process as a whole or to the budget process. Perhaps I prefer the House of Representatives to the Senate because I had the honor of serving this body for 17 years on the staff of the House Budget Committee. Whatever the reason, it seems to me that more good can be accomplished by reforming Senate procedure than by reforming House procedure.

And yet a legislative and budget process that has largely worked as intended, and demonstrates daily that it can continue to function well, is now under attack in two fundamental ways. First, a large number of Members are suggesting that budget making be done by establishing multiyear, fixed, unbending, automatically enforced, numerical ceilings. These ceilings may be applied to individual spending programs such as Medicaid, Medicare, and Aid to Families with Dependent Children. They may be applied to broad categories of spending, such as all entitlement programs or all discretionary programs. They may be applied to annual spending totals, or even to the deficit. Such fixed ceilings are bad economics, unwise public policy, and unnecessary toward achieving prudent budgets, 9 times out of 10.

Second, a large number of Members seem eager to abandon majority rule, which is the underpinning of our democratic republic and goes hand in hand with a free citizenry. Specifically, many Members and outsiders are unabashed about suggesting different ways to institute minority rule in the House of Representatives. Socalled supermajority waivers are now being proposed with depressing regularity. Their effect is to give one side in a public policy debate a procedural advantage over the other. This concept means, very simply, that one side of a debate can prevail with less than half the votes while the other side needs more. It means partially or completely disenfranchising some of your fellow citizens-potentially a majority of them.

It is ironic that any Member, owing his election to the voice of the majority, would contemplate subverting majority rule. It is doubly ironic that Members who profess a deep respect for the workings of a free marketplace of goods, services, capital, and labor would attack the free marketplace of ideas.

And in some cases, Members and others propose budget process reforms that combine the worst of these two sins: Fixed multiyear spending or deficit ceilings, combined with rules that would prevent a majority from increasing them. What would justify such a restrictive approach?

I have heard an answer-that the deficit is too big, that it is Congress' fault; that Congress is incapable of solving the deficit problem by majority rule; therefore, let's impose fixed ceilings on the deficit-such as zero-and create rules to hamstring a majority that may think 1 is a better number than 0.

Let's examine these propositions one at a time.

Big Deficits?

Adjectives such as big don't tell us much about the deficit. In fact, the best way to measure any economic factor-and the deficit is an important one-is relative to the size of the Nation's economy. By analogy, when I was fresh out of college and earning a salary of $2,400 per year, it would have been highly imprudent for me to borrow $1,000, even though I had no debts at the time. Twenty-three years later I find myself part of a successful two-income family; as a result, credit card companies are falling all over themselves to extend me $10,000 or $15,000 lines of credit, notwithstanding that I am now in debt-I own a mortgage. A $1,000 debt would have been big then, but a $10,000 debt is small now.

Graph 1, attached to the end of this testimony, includes a thick line depicting the deficit as a percent of the economy for the last 40 years. One striking aspect of this graph is that, as a share of the economy-gross domestic product, or GDP—the deficit is lower today than it has been in almost 14 years.

But is the current deficit, about 2.3 percent of GDP, big? One way to address this question is by comparing the deficit as a percent of GDP to the real growth of GDP, shown by the thinner dotted line. Two important facts are revealed by this Compari

son.

First, particularly in the 1960's, the deficit was often lower than the economy's real growth. This means that the debt grew more slowly than the economy.

Of course, the deficit in any given year is the amount our Government's debt grows in that year. When the thick line-the deficit-is below the thin line-the economy's growth-the debt is growing more slowly than the economy. This means the burden of our debt is shrinking. Stated differently, the debt as a percent of GDP is shrinking. And it generally means that the share of our budget devoted to interest payments is shrinking as well.

True in this situation we still have deficits and the debt still grows, but if the economy grows faster, the debt hurts less. This allows us to attach a possible meaning to the concept of a big deficit: A deficit is big if it causes our Government's debt burden to rise.

This definition of big leads to the second important facto except during the 1980's, our Government has run big deficits only during times of war or recessions. In fact, this generalization appears to be true back to the beginning of this century, and probably back to the beginning of the Republics.

Graph 2 shows that our Government's debt as a share of the economy shrank significantly from 1946 through the 1970's-notwithstanding regular deficits-rose significantly during the 1980's, and has now leveled off. One member of the House Budget Committee told me his rule about holes; he said, "If you're stuck in a hole, first stop digging."

So what is the conclusion? It can be stated in different ways, depending on one's slant. A possibly neutral formulation is that in the early 1980's our Government made the mistake of cutting taxes significantly more than it cut spending. Starting in the mid-1980's we took a number of steps to reverse that mistake and now-another decade older and deeper in debt-we have finally stopped digging.