Full text of Debt Ceiling Limit Issue : Hearing Before the Committee on Banking and Financial Services, House of Representatives, One Hundred Fourth Congress, Second Session, February 8, 1996

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DEBT CEILING LIMIT ISSUE

HEARING
BEFORE THE

COMMITTEE ON BANKING AND
FINANCIAL SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTH CONGRESS
SECOND

SESSION

FEBRUARY 8, 1996

Printed for the use of the Committee on Banking and Financial Services

Serial No. 104-42

U.S. GOVERNMENT PRINTING OFFICE
22-450 CC

WASHINGTON : 1996

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0 - 1 6 - 0 5 3 6 0 3 - 0




HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES
JAMES A. LEACH, Iowa, Chairman
BILL McCOLLUM, Florida, Vice Chairman
HENRY B. GONZALEZ, Texas
MARGE ROUKEMA, New Jersey
JOHN J. LAFALCE, New York
DOUG BEREUTER, Nebraska
BRUCE F. VENTO, Minnesota
TOBY ROTH, Wisconsin
CHARLES E. SCHUMER, New York
RICHARD H. BAKER, Louisiana
BARNEY FRANK, Massachusetts
RICK LAZIO, New York
PAUL E. KANJORSKI, Pennsylvania
SPENCER BACHUS, Alabama
JOSEPH P. KENNEDY II, Massachusetts
MICHAEL CASTLE, Delaware
FLOYD H. FLAKE, New York
PETER KING, New York
MAXINE WATERS, California
TOM CAMPBELL, California
BILL ORTON, Utah
EDWARD ROYCE, California
CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma
LUIS V. GUTIERREZ, Illinois
JERRY WELLER, Illinois
LUCILLE ROYBAL-ALLARD, California
J.D. HAYWORTH, Arizona
THOMAS M. BARRETT, Wisconsin
JACK METCALF, Washington
NYDIA M. VELAZQUEZ, New York
SONNY BONO, California
ALBERT R. WYNN, Maryland
ROBERT NEY, Ohio
CLEO FIELDS, Louisiana
ROBERT L. EHRLICH, Maryland
MELVIN WATT, North Carolina
BOB BARR, Georgia
MAURICE HINCHEY, New York
DICK CHRYSLER, Michigan
GARY ACKERMAN, New York
FRANK CREMEANS, Ohio
KEN BENTSEN, Texas
JON FOX, Pennsylvania
JESSE
JACKSON, JR, Illinois
FREDERICK HEINEMAN, North Carolina
CYNTHIA
McKINNEY, Georgia
STEVE STOCKMAN, Texas
FRANK LoBIONDO, New Jersey
BERNARD SANDERS, Vermont
J.C. WATTS, Oklahoma
SUE W. KELLY, New York




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CONTENTS
Page

Hearing held on:
February 8, 1996
Appendix:

1

February 8, 1996

105
WITNESSES
THURSDAY, FEBRUARY 8 , 1 9 9 6

Kaqjorski, Hon. Paul E., a Representative in Congress from the State of
Pennsylvania
Kennedy, Hon. Joseph P., a Representative in Congress from the State of
Massachusetts
Mica, Hon. John L., a Representative in Congress from the State of Florida ....
Saxton, Hon. Jim, a Representative in Congress from the State of New
Jersey
Levy, Mickey D., Chief Economist, NationsBanc Capital Markets, Inc
Penner, Rudolph G., Managing Director, Barents Group, KPMG Peat
Marwick
Poole, William, Herbert H. Goldberger Professor of Economics, Brown University
Rubin, Hon. Robert E., Secretary of the Treasury, U.S. Department of the
Treasury
APPENDIX

22
28
25
19
84
82
87
42

Prepared statements:
Leach, Hon. James A
Kaqjoroki, Hon. Paul E
Kennedy, Hon. Joseph P., II
LaFalce, Hon. John J
Mica, Hon. John L
Saxton, Hon. Jim
Levy, Mickey D
Penner, Rudolph G
Poole, William
Rubin, Hon. Robert E

106
114
128
131
175
133
194
183
188
178

Closing statement:
Leach, Hon. James A

112

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bachus, Hon. Spencer, written response from Department of the Treasury
to questions submitted
Kaiyorski, Hon. Paul E., signed letter dated January 31, 1996, to Hon. Newt
Gingrich, Speaker of the House requesting a vote on a "clean" debt extension (signed by 200 Members)
Mehle, Hon. Roger W., Executive Director, Federal Retirement Thrift Investment Board:
Prepared statement with letter of transmittal dated February 14, 1996 ....
Letter dated January 24, 1996, to Hon. Newt Gingrich re preserving
the existing statutory "make-whole" protection for the Government Securities Investment (G) Fund of the TSP
Letter dated November 8, 1995, to Hon. John L. Mica re H J». 2586




(III)

226
117
212
217
219

IV
Page

Mehle, Hon. Roger W., Executive Director, Federal Retirement Thrift Investment Board—Continued
Letter dated December 11, 1995, to Hon. Bill Archer re H.R. 2621
Saxton, Hon. Jim:
Joint Economic Committee, Dear Republican Colleague letter dated December 6, 1995 enclosing an article entitled "Humbled prophet" from
The Economist, November 18, 1995
Joint Economic Committee, Economic Update, Update on JEC Investigation of Treasury Debt Limit Documents," January 1996
Pre88 Release, Joint Economic Committee, January 19, 1996, "Saxton
Report Calls For Full Disclosure of Administration Debt Limit Documents"
Letter dated November 17, 1995, signed by Hons. Armey and Saxton
to Hon. Robert E. Rubin requesting documents related to the use
of retirement funds
Letter dated January 17, 1996, from Hon. Jim Saxton to Hon. Robert
E. Rubin following up on Nov. 17, 1995 letter
Press Release, Joint Economic Committee, Internal Treasury Documents
Reveal Administration Debt Limit Charade," Februaiy 1, 1996 (with
attachments)
Department of the Treasury memo dated June 27, 1995 to Secretary
Rubin from Darcy Bradbury, Deputy Assistant Secretary re "Debt
Limit"
Department of the Treasury memo dated November 8, 1995 to Secretaiy
Rubin from Darcy Bradbury, re "Debt Limit Contingency Plans*
Weidenbaum, Murray, prepared statement
Gonzalez, Hon. Henry B., letter dated Februaiy 1, 1996 from Senator Bob
Dole, Hon. Newt Gingrich, and Hon. Richard Armey, to President William
J. Clinton re debt limit




224

144
146
147
148
149
152
156
166
205
225

DEBT CEILING LIMIT ISSUE
THURSDAY, FEBRUARY 8, 1996
HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND FINANCIAL SERVICES,

Washington, DC.
The committee met, pursuant to notice, at 9:40 a.m., in room
2128, Rayburn House Office Building, Hon. James A. Leach [chairman of the committee] presiding.
Present: Chairman Leach, Representatives McCollum, Roth,
Bachus, Bono, Ehrlich, Cremeans, Watts of Oklahoma, Gonzalez,
Vento, Schumer, Frank, Kanjorski, Kennedy, Orton, Maloney,
Bentsen, and Jackson.
Also present: Representatives Mica and Saxton.
Chairman LEACH. The committee will come to order.
This hearing is called to discuss the debt ceiling issue and receive recommendations on appropriate courses of congressional action in the wake of the current budget impasse.
Let me begin by making it clear that while the committee can
expect to hear today contentious concerns from various sides about
actions taken or not taken over the past few months of budget negotiations, Congress is committed to the principle that there will be
no default, not for 1 minute.
At issue this month is the establishment of the most appropriate
methodology for lifting the debt ceiling, not whether the ceiling will
be breached. Default is not on the table.
The effects of stock market, as well as bond market, turmoil that
will be triggered by a Federal default cannot be underestimated.
Markets depend on confidence, and confidence is rooted in the notion of a stable government. Given the difficulties in reaching political accommodations in an increasingly diverse and polarizeapolitical system, the political parties ana first and second estates of
government must understand that on certain issues, consensus has
to be reached. Default is such an issue.
Nevertheless, while Congress has never in its history allowed default, few modern day legislators have pristinely supportive voting
records on raising the debt ceiling, and no legislator who has been
in Congress over the past few decades can say he or she supported
only so-called clean debt ceiling approaches. Directly or indirectly,
debt ceiling increases have generally been tied to budgetary
precepts.
Over the last 10 years, for instance, the debt ceiling has been increased 17 times by Congress. Only seven times has this been accomplished through a clean bill and most of these have been shortterm measures tied loosely to resolution of imyor budget issues.




(l)

2

The majority of times debt ceiling increases have explicitly been
tied to budget legislation.
A decade ago the tradeoff demanded by a liberal Congress voting
to increase the debt ceiling was acquiesced by the Reagan Administration in Congress' principal priority: greater percentage increases
in domestic spending than in the defense budget. Indeed, the reason the national debt is such a problem today, is that Reagan era
deficits were surprisingly driven more by increases in spending
than decreases in taxes. Federal spending as a percentage of GNP
increased from 21.5 to 23.5 percent during the Reagan Administration, while tax revenues basically remained level at 19.25 to 19.5
percent.
Hence, Republicans believe that if the country is to reach a balanced budget without tax increases, we must reduce the size of
government in relationship to the whole economy, the GNP,
although not necessarily in relation to current governmental
expenditures.
The background of today's circumstance is that the new majority
in Congress has attempted to couple the debt ceiling issue witn
constraints on the growth of government and institute an inflationadjusted freeze on spending. The old majority is crying foul. Like
in the 1980's, it insists on debt ceiling increases to accommodate
Federal spending growth well above the inflation rate.
There is, of course, a shared responsibility between the executive
and legislative branches on the issues of the budget and debt ceiling. But in today's context, each branch has a different perspective.
The executive argues that Congress has not offered an approach it
can support and that Congress has used strong-arm tactics which
included bringing parts of the government to a standstill. The
President in his State of the Union address even lectured those assembled, "never, never" to again press the executive to this extent.
The Congress, on the other hand, points out that last fall it
passed and sent a balanced budget approach, including the lifting
of the debt ceiling on the executive, which the President vetoed.
Subsequently, the President put the honor of the Presidency on
the line by affirming publicly and signing a bill obligating himself
to the development of a balanced budget approach using common
economic assumptions, that is CBO estimates, by the end of last
Jrear. Only when it became clear that the word of the President, at
east with regard to the budget negotiations, was not being kept,
did Republicans put pressure, perhaps mistakenly, on Federal Government operations.
But it should be clear that just as the view of the executive is
never, never should government be shut down for lack of timely appropriations, it is the view of the majority in Congress that always,
always, should the President uphold the law and keep his word to
the American people. When the President commits to a balanced
budget approach by a time certain, it is not unreasonable for Congress to believe this commitment should and would be kept.
In this regard, subsequent reviews of documents and inside
strategizing would appear to indicate that the White House had developed a strategy well in advance of a debt limit crisis to prolong
confrontation with Congress. This strategy has had the effect of




3

putting an element of instability into the economy and precipitated
more than a little social splintering.
Here let me point out some of the nuances involved in the politicizing of economics. Medicare is the foremost.
In 1993, the First Lady testified before Congress that the Administration favored capping annual Medicare spending increases at 6
to 7 percent. The Vice President in 1993 pointed out on national
television that the Administration favored a 5.5 to 6 percent annual Medicare cap. In the background, Leon Panetta, in one of his
last acts as House Budget Committee Chairman, proposed a 5.5
percent annual cap.
The Republican balanced budget, vetoed last fall bv the President, capped Medicare increases at 6.4 percent. Based on revised
CBO estimates, the Republicans subsequently proposed a 7.2 percent annual Medicare increase approach.
Any neutral observer might ponder the fairness of Democrats
charging Medicare was being gutted, when the Republicans offered
higher Medicare spending levels than the President, the Vice President, and the President's chief of staff earlier proposed. Any neu-%
tral observer might also wonder where Treasury has been in advising the President and Congress on Medicare in recent months,
when it must have had an early glimpse that the Medicare trust
fund was in worse shape than was publicly known until revelations
of last week.
The surprise deficit incurred by the Medicare fund last year underscores the need for reform to ensure Medicare solvency, not politics to advance the fortune of any politician or his or her party.
Here it might be noted, I know of no economist, conservative or
liberal, who has not suggested in recent years that the budget can
never be controlled unless the entitlement system is reformed. If
one is serious about controlling Federal spending, at the same time
leaving adequate room for discretionary spending programs such as
education, entitlements must be disciplined.
In conclusion, let me stress there will be more than a little truth
to the perspectives presented by both sides this morning, but the
big picture is the public has been ill-served by the political games
that have been played. The big picture is that the Republicans
have a compelling case for budgetary restraint and endless entitlement reforms. Likewise, Democrats have a credible case to insist
that priorities in certain areas like education should be reconsidered by the new majority.
The tragedy is that accommodation could and should have been
achieved, witn the discipline of the need to lift the debt ceiling supplying an effective time constraint. Since that circumstance has not
materialized, both parties now find themselves less able to compromise and more likely to delay critical budget issues until after
the next election.
The debt ceiling will soon be lifted and default averted, but the
real story will not relate to this event which will occur later this
month, probably on February 29, Leap Year Day, but to the opportunity that has been lost. What has been at issue is the thinness
of the line between contemplating default and using the debt ceiling issue as a constructive opportunity to reach consensus on what
realistically should be done in the legislative process.




4

The combination of Treasury tactics and an avalanche of partisan mischief and political apprehension in both parties, of Congressional miscalculation of the power of the President, and executive branch misunderstanding tnat taxing and spending decisions
are constitutionally the principal province of Congress, has produced a stalemate, making orderly long-term budget and debt management approaches unlikely to be adopted this year.
It is not a high moment for democratic governance.
Before turning to our distinguished panel, I would like to recognize my esteemed ranking Member, Mr. Gonzalez, for his opening
statement.
Mr. GONZALEZ. Thank you very much, Mr. Chairman. I appreciate that. It is very difficult to treat this hearing as a serious matter, because, after all, this committee does not have jurisdiction to
act on the debt ceiling. Also, the Republican leadership has vowed
not to permit default. But we are told there will be some kind of
political conditions to be met in order to avoid default.
On the other hand, they have not decided what the conditions
will be. In any case, those demands are being formulated not in
this committee, but somewhere else. So this would seem to me to
be the wrong forum for a hearing, since the policy decisions will not
be made here.
One purpose of the hearing might be to allow those who are so
inclined to attack the Secretary for protecting the Nation's credit
to do so. But surely no rational person would seriously argue that
the Secretary should have done anything else. It makes little sense
to have a hearing to try to explain to the Secretary why a lighted
stick of dynamite is actually a nandy bat to beat the President into
submission.
Another purpose might be to trot out the latest political message,
to see if it works better than the old train wreck scenario. After
all, when the train wreck seemed to be a great idea, the Secretary
was blamed for crying wolf, and then accused of doing too much to
keep the wolf away. Now he is being criticized for not doing enough
to prevent default because there really was a wolf at the door.
But what I hope is this hearing will be an opportunity for us to
hear some serious discussions about the debt limit and why default
is a bad idea. Every family gets bills every month, and every bill
carries with it a warning tnat there will be a penalty for late payment. Therefore, every family knows that if you don't pay your bills
on time and in full, you eitner do not get credit, or you pay more
for it.
The same thing is true of the Federal Government. If Congress
does not permit the Treasury to pay bills on time, or if Congress
gives anyone serious cause to believe that the bills will not be paid
on time, the U.S. Government, and that means every one of us, will
pay a penalty. Default, or even serious threats of default, will cost
us real money, that is plain and simple, and there would be no one
to blame but the U.S. Congress, which alone can enact the laws
needed to allow those bills to be paid, bills that the Congress authorized anyway.
Specifically the actions needed to ensure that the bills get paid
must originate here in the House, so if there is a default or if the
credit of the U.S. Government is in any way impaired, the people




5

of this country will know who is at fault: The U.S. House of Representatives, and, more particularly, its leaders.
As I recall it, the Secretary spent all of last summer and fall asking respectfully that Congress act to protect our credit. When Congress failed to act, the Secretary took steps to give us more time
to think this through. At first the Republican reaction was to say
that default would not matter, which is to me a crazed notion to
anyone who has even seen a creditor's bill.
Then the Republicans threatened to impeach the Secretary,
whose sin apparently was to pull them back from the edge of the
cliff. Lately the message has been "default doesn't really matter,
but we will never let it happen anyway."
My colleagues, Congress nas the sole responsibility here. We authorized the spending, and we must now pay the bills or see the
taxpayers subjected to immense and undeserved penalties for late
payment.
Secretary Rubin has done all he legally and prudently can to protect us from ourselves. After all the threats and bluster and bullying, it is now time for the Congress to act as responsible adults
should.
If my friends on the other side can think of some way we can
protect our credit without paying our bills on time and in full, I
certainly want to hear it. But I think the Secretary has already
taken every legal and prudent action possible, and now it is the
turn of Congress to act prudently and responsibly.
Chairman LEACH. Thank you, Mr. Gonzalez.
Before turning to other Members, I would like to notice that we
have a new member of the committee that has joined us today , and
we welcome you, Mr. Jesse Jackson, Jr. Your participation will be
most appreciated.
Mr. JACKSON. Thank you, Mr. Chairman.
Chairman LEACH. Mr. McCollum.
Mr. MCCOLLUM. Thank you very much. I don't think there is any
member of this panel of either party that thinks defaulting on the
Federal debt and obligations of our government is a good idea, but
I think the extremes of the two options have been grossly exaggerated. There would be, of course, some consequences that are not desirable to defaulting, but there would not be the ceiling falling that
some have painted, at least I don't think so, from all the judgments
that I have looked at on this. On the other hand, there would be
some consequences to it.
What I think we have actually, though, is a very clear path that
is being shown to us about some politics that were being played in
another way that was perhaps far more dangerous to the long run
of our economy than simply a question of brinksmanship that often
has been played over the debt ceiling by Democrats as well as Republicans, the Democrats particularly, since they controlled this
House for 40 years, and, as the chairman pointed out, on numerous
occasions attached things to the debt ceiling, including a bill in the
Carter era when the President wound up vetoing it, and so forth,
involving oil embargoes.
But what I see happening, having listened to the President the
last few weeks, the State of the Union message and so forth, is that
somewhere along the way he said in his own mind and now to the




6

American public some things that don't quite jibe with the way the
actions actually turned out.
He sounded awfully conservative in that State of the Union address. I could have given some of that myself. He said he thinks
big government is at an end. I certainly hope so, but I don't see
the signs to follow through on that. He says we are only a few dollars apart with regard to balancing the budget, and all he wants
to do is to protect Medicare and Medicaid and welfare from those
extreme things the Republicans want to do to them, and makes
him sound like he is such a reasonable fellow about all this.
But it took 11 months and four budget submissions to this Congress before he submitted a budget that was in balance according
to the Congressional Budget Office, and that only came about after
there was brinksmanship, the shutting down of the government by
this Congress and the President. Really, I think he shut it down
because he vetoed the bills that would have kept it open. Whatever
the case, he played that rather craftily from a political standpoint
to get the most mileage out of it. Yet, getting a balanced budget
up here sounds like the end-all-be-all wnen you listen to what ne
has to say.
That was never the end game. Republicans never wanted to get
the President to simply present a balanced budget. How you balance it is equally important. We thought that would be the beginning of serious negotiations, once we could agree of the bottom line
figures of something in balance, with figures that matched the Congressional Budget Office's reasonable assumptions about the future
of the economy.
We wanted to reduce the size and scope of the Federal Government. We want to get at entitlements. We think it is required, twothirds of the Federal budget are entitlements, and substantive
changes in the way entitlements work has to be in place to get any
credible budget in balance in 7 years or any number of years.
We are very chagrined by the fact that during the budget negotiations that went on at the White House with Congressional leaders at the end of December and the first of January, the President
submitted a program for Medicaid reform that haa been endorsed
by 68 House Democrats, and he rejected it. He said, "I won't have
anything to do with the balanced budget proposal in these discussions." fie was given a Medicare proposal that was endorsed by 47
House Democrats, hardly something that was strictly a partisan
proposal, and he rejected that. And he was given the Senate-passed
version of the welfare reform bill that only nine Democrats voted
against over there, and he rejected that.
I don't think Republicans nave been unreasonable at all. I think
this President has been playing politics with this, and I think the
debt ceiling question we are on today is a part of that question. We
should not be playing those kinds of politics, and least of all the
President should not be, telling the American public and having
Secretaiy Rubin, I am sure, in convulsions together with the President say the sky is going to fall if this or that doesn't happen, and
then going out and using powers that are very dubious and have
been highly criticized by well-respected authorities to circumvent
the rule that Congress has the right to raise the debt ceiling and




7

to be the one who determines these matters under the Constitution, not the executive branch of government.
So I think today's hearing is fruitful. It is important for us to put
this in perspective, and I look forward to hearing what some of our
colleagues have to say about this subject, but, most importantly,
what Secretary Rubin has to say today about what appears to have
been a pattern and practice going on in this Administration of trying to play as much politics to set Republicans up for the next election as possible, and lacking the seriousness that I think most of
us expect of getting to a real balanced budget and actually accomplishing negotiations of compromise, which the rhetoric says they
want to do, but the actions certainly don't conform to.
Thank you.
Chairman LEACH. Thank you, Mr. McCollum. Mr. Vento.
Mr. VENTO. Thank you, Mr. Chairman.
The government has been in some form of shutdown for almost
a quarter of the current fiscal year. Congress has yet to successfully complete action on spending bills. Key programs are either
unaertun ded or unfunded as Congress, through continuing resolutions, does a patchwork job of funding through March 15.
Today, the ultimate government shutdown is threatened by the
Republicans. Did the Speaker push to enact a clean debt ceiling
last week, or even a compromise debt ceiling bill? No. Instead we
passed a politically-motivated debt extension whose literal intent is
to prevent Social Security checks from bouncing March 1. It leaves
a shadow over all the other credit plans.
In an effort to gloss over the possibility of hard work and explain
away the risk of default, we no doubt will hear that this measure
stays the guillotine of default until March 15 or 21.
This partial measure was a step backwards, and in truth signals
that the Republican majority are at best mixed and at worst disingenuous in the matter of preventing U.S. default. After all, we
are dealing with the real credit life of our Nation, not some cabbages in this self-made GOP guillotine crisis.
At this time of crisis, the House and Senate majority party leadership has postponed consideration of the necessary legislation
until the 11th hour, and offered a convoluted Social Security measure as cover to protect their political hides. The Republican majority is playing a high stakes game with one of the fundamental
benchmarks of the U.S. economy. This is not the type of leadership
behavior that the market or the American people expect, but rather
the threats and actions of those who are politically motivated.
The 104th Congress continues to fiddle while the good U.S. credit
rating burns. U.S. default would be a crisis. Even the threat of it
could tip our U.S. economy into recession. And at the very least it
will mean higher mortgage rates, student loan increases, higher
rates for pensions, for auto loans, consumer credit loans, which are
linked to Treasury paper. The government will see higher costs of
borrowing and the resulting increase in our debt as we pay those
costs.
What thought process grips this Republican leadership and majority in the 104th Congress one can only speculate. Apparently,
the true believers of supply-side tax cuts and dismantling the Federal Government believe their own rhetoric. But even if they are




8

correct about their untested, questionable, inequitable policy proposals, doesn't the majority of Republicans understand that the
economic shock wave of default and tarnished credit rating will
eclipse any assumed benefit from the GOP Federal budget
schemes?
In lieu of responsible action, of course, the Secretary of Treasury
has had to take necessary and legal steps to avoid U.S. Government default. He told us he will run out of viable options on February 29 or March 1. Secretary Rubin supposedly will have the
ability now to hold on until mia-March. The thanks he will probably receive again are threats of impeachment for such action.
U.S. default is simply unthinkable, but some of the Republican
leadership have proudly held up this default as a trump card for
the past year, in spite of the serious and certain negative ramifications. They have used the threat of government default for budget
negotiation posturing and to blackmail the country into accepting
their budget prescription to choke the economy.
This is outside the reasonable conduct assumptions of the Constitution that anticipate cooperation with the public interests for
the American people, not confrontation for the political interests of
candidates.
I must again commend Secretary Rubin for taking the legal and
prudent steps. I commend you, Chairman Leach, for having the
courage and willingness to air what has been a charged issue this
past month.
But this hearing will tell us what we all should know: Pass a
clean extension of the debt ceiling and pay your bills, and save the
political posturing and threats for the campaign.
I look forward to the testimony today, Mr. Chairman, and hopefully a conclusion to this sorry story.
Chairman LEACH. I thank the gentleman. Mr. Roth.
Mr. ROTH. Mr. Chairman, I think this is absolutely the right
time, the right committee, the Committee on Banking and Financial Services, to review this debt ceiling. After all, we are raising
this debt ceiling or being asked to raise it from $4.9 trillion to $5.5
trillion. That means that the average American is going to have
much more debt, that means that the average American out there
is going to have higher interest rates, and that means the average
American out there is going to have a harder time finding and
keeping a good paying job.
To prepare f o r this hearing, I called a number of citizens in my
district, small business owners, bankers, retirees. The real taxpayers. I asked them what their attitude is toward the national
debt and toward the plan to borrow more money.
Everyone I talked to had the same reaction. They simply do not
understand why the government cannot cut spending and balance
the budget. Not in 7 years, but this year. One banker said if the
Federal Government was his customer, he would cut off anymore
credit until the government started paying down the existing debt.
In other words, he would put the government on a work out plan,
a business plan.
A very successful entrepreneur told me the government should be
treated like eveiyone else. No more credit, unless the budget is balanced and you start paying off what you already borrowed. A re-




9

tiree said, "Would you take money from your children and give it
to someone who has borrowed an immense amount of money from
?rou before who has not even tried to pay back anything? Would you
oan such a debtor more money?"
The point is, people in the Midwest think that the government
spending is totally out of control.
Now, this Congress is not going to default. We know that. But
we have an obligation to start asking some questions when we are
again asked to increase the debt ceiling from $4.9 to $5.5 trillion.
I noticed that under the President's budget, spending keeps going
up year by year. After 7 years, we spend much more than we do
today under this plan. Under the President's budget, revenues are
raised, no cuts in spending, and as a result, you nave piled on another $755 billion in debt. It is right here, on page 19, it comes out
to $755 billion in additional debt over the next 7 years. Another
three-quarters of a trillion dollars.
This budget that is before us, I think this would make Marion
Barry proud. No cuts, more spending, more taxes, and more debt.
If the President took this budget out to my district, the constituents would laugh out loud. The people I represent seem to understand better than most that you do not balance the budget by raising taxes. If you don't cut spending, you will never get there. But,
here is the President's budget: More spending every year as far as
the eye can see. So I am forced to conclude that President Clinton
believes in the Marion Barry School of Economics, throw up your
hands, do nothing, and just keep spending.
Well, Mr. Chairman and members of this committee, we owe the
American people a sense of trust. They have put their confidence
in us. So before we raise this national debt ceiling on them again
and their children, from $4.9 trillion to $5.5 trillion, I think it behooves us to ask some tough questions.
Thank you, Mr. Chairman.
Chairman LEACH. Does anyone else on this side—Mr. Schumer.
Mr. SCHUMER. Thank you, Mr. Chairman. I want to thank you
for holding these hearings.
Last week you stated that nothing would be more irrational than
to have any question of default of the government at any time. Not
just don't default, don't have a question of default. Those are my
words.
Back to you, Mr. Chairman. Whatever the status of the budget
talks, this or any year, Congress has no choice but to ensure that
default never occurs.
Well, I couldn't have stated it better myself. I applauded you
then, I do so again today for your clear, forthright assertion of one
of our Nation's most vital interests.
Unfortunately, as our hearing will sadly show today and has already been shown by some statements from the other side, there
are Members of your party who continue to question that wisdom.
They continue to insist, as Bill Archer, Republican Chairman of the
Committee on Ways and Means, did on the same day you spoke
out, that there should be no debt ceiling extension unless it is attached to Republican proposals on budget, taxes, and entitlements.
My good friend Toby Roth from Wisconsin, I doubt his constituents don't understand this, unless he explained it to them wrong.




10

One of them said the government should be treated the same as
everyone else.
Well, go ask that small business owner, Mr. Roth, after he has
incurred a debt, is he allowed not to pay it? Not cut down your
spending in the future, but you went and incurred a debt last year
or the year before. The small business man in Sheboygan is not
foing to get the opportunity to say, no, I am not going to pay. But
Ir. Roth and some of the other colleagues think that Uncle Sam
should have that right, even though every American, once they
incur debt, should have to pay.
So it is incredible that this abstinence persists despite the shocking announcement by Moody's investment service tnat it may be
forced to downgrade U.S. Treasury bonds for the first time in our
Nation's history. Yes, the Congress passed a 2-week stay of execution last week, but we are still on the road to default unless we
act decisively and quickly to pass a clean extension of the debt
ceiling.
Why are we in this fix? One word: politics. We are not bankrupt,
we can pay our debts. As Moody's warned, nonpartisan Moody's,
the positions being taken in the current debate over the budget and
the debt ceiling nave significantly increased the risk of default.
Simply put, the extremists in Congress are playing with fire. And
if they are not very careful, we will all get burned. They say all
they wanted is to reduce the government deficit. That is a worthy
§oal. And first they said President Clinton had to come out for a
alanced budget. He did. They did not like that. So then they said
he had to come out for a balanced budget in 7 years. He did. They
didn't know what to do then. Then they said, well, it has to be a
balanced budget in 7 years with CBO numbers. He said yes again.
Ladies and gentlemen, we know what the story is here. The 80
or 1,800 extremists in the Republican Caucus, they don't want a
balanced budget. They wanted deep tax cuts. That is the only way
they want a balanced budget.
Clinton's way, 7 years, CBO numbers, but not as deep tax cuts
and not as deep government cuts, balances the budget every bit as
well as the bill applauded by the extremists that passed this
House.
So we know what is going on here. And when everyone else says
we wanted to reduce the deficit, no, they are saying only reduce the
deficit, some of these extremists, my way, $270 billion in tax cuts,
which many Americans say is not the way to go.
But you know what? That is what politics is all about, to decide
which way to balance the budget now that both sides have agreed
on all the parameters of how much years, what numbers, and
whether there should be a balanced budget.
That should be debated in Congress. That is a fair debate. But
holding the debt ceiling hostage?
Now, many people watching today just cannot believe that a
small number of those not very well schooled in how finance works,
even though the business manager in Sheboygan would know it in
a minute, say, oh, no, this Congress would not be brass even
enough to default.
Well, let me tell you something. That is what they said about
clogs closing down the government. It was substantively wrong, it




11

was politically stupid, and yet, this Republican Congress did it not
once, but twice. So I am worried they may be wrong now.
If you think it is iust 80 freshmen Republicans, well, I will not
use an expression, but look at the heaa. Look at the top, Newt
Gingrich. Where do you think these guys got this goofy idea? It did
not come to themselves. Here is what he said: 'The President will
veto a number of things, and we will then put them all on the debt
ceiling, and then he will decide how big a crisis he wants." That
was quoted not by some publication of the liberal establishment,
but by none other than the most accurate, quote unquote, newspaper in Washington, DC., according to some, the Washington
Times.
Now, I am having a good time, Mr. Chairman.
Chairman LEACH. YOU are, sir.
Mr. SCHUMER. Let me just do one other thing, one other thing.
I will read one other quote from the Speaker. Skipping my paraphrasing, here is what he said. "I don't care what the price is. I
don't care if we have no executive offices and no bonds for 30
days—not at this time."
Who is to blame that we have not resolved this debt ceiling crisis? Who is to blame that we don't have a clean debt bill while we
debate the politics of how to balance the budget? I would blame the
Speaker.
Mr. ROTH. Would the gentleman yield?
Mr. SCHUMER. I woulayield with the Chairman's permission.
Chairman LEACH. The gentleman's time has expired. Maybe if
we go in regular order, someone else will yield to you briefly.
Mr. Bachus.
Mr. BACHUS. Mr. Chairman, I think it was 1 week ago that many
of us signed the civility pledge. I think we ought to pause for a
minute of silence.
Mr. SCHUMER. When you have nothing to say, you may as well
be silent.
Mr. BACHUS. In the memory of the rest-in-peace civility pledge,
I guess.
Because of that civility pledge, my remarks are going to be somewhat thinner, because I think that pledge was a major step toward
reforming the reputation of this body. When Bruce Vento earlier,
Representative Vento, accused Republicans of being disingenuous,
I didn't realize at the time it might be the kindest thing tnat was
said about us today. So I will accept that as a compliment.
I will say this: For some time the Clinton Administration has
been calling on Congress to adopt a clean debt ceiling increase.
Two months ago, Secretary Rubin appeared before this same committee, this very committee, and argued that there was no relationship between the debt ceiling and spending.
I want to beg to disagree with that statement. I think the people
of this country recognize and they are becoming united in their
view that there is a clear linkage between deficit spending and the
national debt. They are clearly interrelated. The more you spend,
the greater the debt.
Because of that, there is nothing clean about continued deficit
spending. There is no such thing as a clean debt ceiling increase.
That is a contradiction.




12

So when we consider raising the debt ceiling, it is not a clean
thing that we do. It is dumping more and more debt on to pur children. The children of this country are already coming into this
world with a debt of $187,000 in taxes over their lifetime iust to
pay the interest on the national debt. That is why those of us in
Congress on just about every opportunity that we get, we talk
about that it is not wise to increase the debt ceiling, that when we
do that, we are passing the buck to our children.
We are going to continue to be dragged, kicking and screaming,
into increasing the national debt.
Now, the Clinton Administration once again has requested that
Congress increase the debt ceiling. I will say this: It is up to Congress and Congress has the responsibility, and Congress alone, to
make this difficult decision whether or not we are going to raise
the debt ceiling and to permit an increase in the borrowing authority.
I will say this: I recall that just last week we passed a bill, I
think January 29, to increase the debt ceiling temporarily. So there
is no question that we have done that. We did it last week, and
actually I guess it was last week, and the President, it is my understanding, signed it this morning. So we have acted; the debt
ceiling has been increased this morning.
But now is the time for us to get on with the important work.
I want to quote from Secretary Rubin's speech that he has passed
out to us today. It says, "Now Congress and the President must
agree on legislation that addresses the debt limit problem on a
long-term basis, legislation that addresses the debt limit problem
on a long-term basis."
That is a balanced budget. That is what the legislation is that
addresses the debt limit problem on a long-term basis, a balanced
budget. Until we do that, we are going to continue to have these
dirty little debt ceiling increases, where we pass the buck to our
children and grandchildren. I hope we will not again consider or
talk about these as "clean" legislation.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you for those thoughtful observations.
Mr. Frank.
Mr. FRANK. Thank you, Mr. Chairman.
The first thing we ought to remind people is if we had signed
into law the Republican budget plan, I think the deficit would have
had—the debt limit would have had to be increased because the
Republican 7-year budget plan calls for $700 or $800 billion, maybe
closer to $1 trillion, in additional debt.
We are in a fantasy world here. I apologize if the word "fantasy"
strikes you as uncivil. My colleague was accused of incivility for
quoting the Speaker.
Chairman LEACH. If the gentleman would yield, the Chair would
rule that "fantasy" is an appropriate term of reference.
Mr. FRANK. I thank the Uhair. I will submit any fantasies to him
for further ruling.
Chairman LEACH. The Chair would rule that would be inappropriate.
Mr. FRANK. Well, I lost the opportunity.




13

The gentleman from New York quoted the expert and was accused of incivility. I can understand why that would be embarrassing, why it would be inconvenient, but I do not believe it was uncivil. Let's remember only a few weeks ago, and I think this is very
important to note, members of the Republican leadership were outrageously suggesting that the Secretary of the Treasury ought to
be impeachedfor doing his job. They have forgotten that. We have
gone from impeachment to civility. I am sure at some point Attila
went from war to tea parties. We have had that kind of spectrum
change.
Let's not talk outrageously, inappropriately, unfairly about impeaching a hard-working, respectable hard-working public official
with great integrity, and then a few weeks later say you quoted the
Speaker unfairly.
Let's go to the debt limit. The Republican 7-year plan adds hundreds and hundreds and hundreds of billions of dollars to the debt.
To get your own plan into effect, you have to increase the debt
limit. l*he suggestion that there is somehow something wrong
about increasing the debt limit is nonsensical, because the Republican plan says in the year 2001, let's have a deficit, a national debt
that is hundreds of billions of dollars more than this one.
Here is what happened. The Republicans didn't like the Constitution of the United States, because the Constitution said if you want
to make very drastic changes in basic law, you have to have twothirds of boui Houses of Congress or get a Presidential signature.
They didn't have a Presidential signature on the plans to gut Medicare, make severe reductions in what Medicare would be otherwise
spending, to prevent tax cuts we didn't like, to undo the Earned Income Tax Credit. So they didn't have two-thirds to override the
President, they didn't have the President's signature, so they
thought, as the gentleman from New York indicated and others,
they could bludgeon the President into, in effect, suspending his
veto by threatening government chaos. And the President would
not give in.
The Speaker was quoted in the Washington Post as saying he
was surprised the President wouldn't give in. Some of us weren't
surprised, but that is a fact. So the Republicans threatened these
things. At one point, they, of course, accused the Secretary of the
Treasury of exaggerating the effect of shutting down the government through not raising the debt limit. They said he was crying
wolf. Then they criticized him because he took steps to avoid it.
Now they are back to criticizing him because he is again saying it
might happen.
There is a total inconsistency here because this argument is
based on such matters.
I find it particularly odd the Republicans on the one hand are
threatening to shut down the government by not raising the debt
limits to try and get leverage over the President, but then they object when we say that they were doing that. Now they say of course
no one was going to shut down the government. Of course no one
here was going to refuse to raise the new debt ceiling.
Well, I guess we have to ask your forgiveness for taking seriously
what you said. Republican leaders kept saying, Republican Members kept saying, we will not vote for it unless the President gives




14

in. We knew the President was not going to acquiesce in the de
facto suspension of his veto power. He wasn't going to allow you
to change Medicaid and other things so drastically. We have had
this total inconsistency. You attack the Secretary of the Treasury
for saying we should not shut down the government, and then for
keeping the government from being shut down.
I have no idea what this hearing is about. I guess if I could sing
better I would sing for spite the old song "First you say you do, and
then you don't; you say you will, and then you won't."
What are you going to do? You are requesting to have a hearing
that wastes everybody's time. Why don't we simply vote out an increase in the debt limit? I will make a deal with you. I will vote
for one that will only accommodate the amount of aebt you plan to
add to the Federal Government's debt between now and 2002. Let's
settle about 8 or 9 huge billion. Let's get your debt accommodated,
the one you are going to add, and then we will work on other
things.
Chairman LEACH. Mr. Watts.
Mr. WATTS OF OKLAHOMA. Thank you, Mr. Chairman.
It is interesting to see the minority party complaining and moaning about the effort of the Congress to balance the budget. I have
some interesting quotes here from some of the minority Members
from back in 1990 when President Bush was the President of the
United States. Mr. Obey from Wisconsin stated, "For the Congressional budget process to work, the President has to be involved
from the beginning with real budgets, real numbers, and real deficit reduction."
Mr. Panetta said in October of 1990, 'The fact is, we are a Nation at risk. We are a Nation at risk economically, facing a slow
but steady erosion of our economy, frustrating our ability to
confront difficult issues that face us and the rising likelihood of
recession."
Mr. Gephardt said in October of 1990, "With all my heart, the
country is at stake. These deficits cannot go on."
Mr. Fazio said, "We have to reject this effort to clean the hands
of the President from this fiasco. We need to grow up. We need to
stop being carping critics, recriminating from one end of Pennsylvania Avenue to the other."
This was concerning the government shutdown and the deficits
and the things that were going on when George Bush was the
President of the United States. So it seems to me that some Members seem to have amnesia and are not remembering what was
happening back in 1990.
I would like to thank the chairman for holding this hearing on
a most timely and pertinent topic, our Nation's debt management.
I would like to welcome and thank our panelists for being here
today and look forward to hearing their testimony.
Article I, section 8 of the Constitution clearly states that it is the
Congress who has the power to borrow money on the credit of the
United States, not the President or the executive branch. The problem that continues to trigger increases in the debt limit is the failure to balance the Federalbudget. Balancing the budget is the first
step in paying off the ever-mounting debts that have accumulated
for future generations.




15

Passing the Balanced Budget Act of 1995 could be the best gift
we ever give our children, but this cannot be done without the
President s help. We offered the President a balanced budget which
included a raised debt ceiling, but the President vetoed it.
I am baffled that we are continuing to be called extremists because we wanted our children not to be strapped with a debt and
a deficit that will require them to pay 80 percent of their income
in the form of some government tax. We are called extremists because we want to give our kids and grandkids a chance to achieve
the American dream.
Instead of negotiating a balanced budget plan, the President permitted the Treasury to raid two Federal trust funds. I recall in the
State of the Union address the President stated that the Congress
should not allow private employers to raid trust funds or pension
funds of employees. But it is interesting to me that the President
is not raising a hand, not saying a thing, when we find our Treasury Secretary taking a total of about $61.3 billion from the Civil
Service Retirement and Disability Fund and the Federal Employees' Thrift Savings Fund.
By shifting these funds, the President bought more time to allow
the government to skirt the debt limit and avoid a default. While
no one wants a default, disinvesting retirement funds to free up
room under the debt ceiling circumvents the debt limit as well as
Congress' role in authorizing Federal borrowing. Moreover, it allows the Administration to avoid having to change its spending
habits, a change which the American people have demanded.
The Administration says that those funds will be repaid with interest, but that interest is going to have to come from somewhere.
Every dollar the Administration removes from the trust funds can
then be spent by issuing new debt to the public. Again, we are left
with another government bill with more interest payments at taxpayers' and our children's expense.
I would appreciate it if the Secretary and other panelists could
incorporate into their statements where the money for these interest payments comes from and the accounting metnods used in performing such transactions.
Living within one's means is the financial reality that individual
Americans confront every day. We cannot continue to call the bank
or a financial institution and ask them to continue to raise our
limit on spending and not worry about how our borrowing is going
to be paid back.
In closing, a case in point are the figures from the Treasury Department's annual report for fiscal year 1995. The total amount of
money the U.S. Government Treasury Department received was
$1,350,600,000,000 (1 trillion, 350 billion, 600 million dollars). The
amount of money paid out by the U.S. Government's Treasury Department was $1,514,400,000,000 (1 trillion, 514 billion, 400 hundred million dollars), resulting in a deficit of $163.9 billion. If this
continues, there will be no funds left in any of the government's
trust accounts to pay any Social Security checks, any veterans
checks, or any pension funds.
We must stop accumulating this debt and deficit and stop amassing an insurmountable burden on the youth, the children, the
grandchildren, and the great-grandchildren of America.




16

Thank you, Mr. Chairman.
Chairman LEACH. Thank you for that economics lecture.
The gentleman from Utah.
Mr. ORTON. Thank you, Mr. Chairman. I would ask unanimous
consent to submit my full statement into the record and just make
a couple of brief comments at this time.
Chairman LEACH. Before doing that, let me say the unanimous
consent request is accepted. I would also ask unanimous consent
that all the opening statements of Members be allowed to be revised and extended and all of the Congressional panelists as well.
Without objection, so ordered.
[The prepared statement of Hon. John J. LaFalce can be found
on page 131 in the appendix.]
Mr. ORTON. Thank you, Mr. Chairman. The subject matter of
this particular hearing is the extension of the debt ceiling, extending tne limit of the amount of borrowing that our Treasury Department can engage in, in order to keep our government operating and
functional.
As the chairman has stated and quoted in the news in the past,
it should never be a question as to whether or not our country will
default on its liabilities, on its debts. The full faith and credit of
the United States is far too serious an issue to use as a political
bargaining chip, regardless of what the final goal is to be attained.
It is wrong for either political party to politicize this issue, now
or in the past. The most irresponsible act I can imagine as a legislator or as an administrator would be to attempt to put our country
into default. I can plan nothing more irresponsible.
It has been suggested that the debt limit, the debt ceiling, is a
way, and perhaps the only way, to limit our country's continued
spending and thereby to force a balanced budget. I take a back seat
to no one in an effort to balance the budget. But I disagree that
the debt ceiling ought to be a bargaining chip in that balanced
budget effort. In fact, I would like to quote from the nonpartisan
Congressional Budget Office's economic and budget outlook from
August 1995, wherein it stated: "Limiting the Treasury's borrowing
authority is not a productive method of achieving deficit reduction.
Significant deficit reduction can only be accomplished by legislative
decisions that reduce outlays or increase revenues."
Those are the tough decisions. Where are we going to cut spending? Where are we going to raise revenue? Those are the two
choices in balancing the budget.
Everyone in both political parties, in the Congress and in the Administration, should be totally embarrassed by the way we have
handled ourselves in the last year. Our failure to listen to one another, our failure to negotiate in good faith, our failure to find compromise, common sense solutions to solve the problems and move
forward, we should be embarrassed by that. We should be embarrassed by the way this has been handled. We should be embarrassed by statements that each political party has made.
In November of 1995, we hit the debt ceiling. Our country is prohibited by statute from borrowing any more money. At that point
in time, the Secretary of Treasury had two options: Default on the
debt or attempt to use money management techniques that previous Administrations have used in shifting short-term and long-




17

term debt instruments among funds within the government in
order to stave off default. The Secretary of Treasury took, I believe,
the responsible action to avoid default. He was criticized and there
were calls for impeachment.
Congress on several occasions attempted to pass legislation
which would have forced immediate default. Those are irresponsible acts. We need to drop the partisanship; we need to listen to
one another; we need to find a commonsense solution.
I would suggest to you that it is not too late to balance the budget. In fact, last week I and over a dozen of my colleagues on the
Democratic side and a dozen of my colleagues on the Republican
side of the aisle submitted to the Speaker, the President, the Majority Leaders of both Houses, a letter suggesting that there is consensus in the middle of both parties, that we should in fact separate the issues of balancing the budget and tax cuts, have separate
votes, but we should be moving forward to finding solutions. I am
hopeful we can do that.
I hope that this committee in our hearing today and deliberations will, indeed, as my friend from Alabama said, adopt the civility pledge, simply listening to the witnesses. I commend them for
attending and look forward to the information we will receive.
Chairman LEACH. Thank you, Mr. Orton. Mr. Ehrlich.
Mr. EHRLICH. Mr. Chairman, I haven't been here for a while, and
I really wasn't sure where I was. I walked in the room here and
sat down, and within 2 minutes I was called an extremist, and
then I knew I was back in Washington, DC.
I want to hear what our colleagues have to say, but I hope that
we can get something done today and not just the name calling.
Thank you.
Chairman LEACH. Thank you, Mr. Ehrlich. Mr. Jackson.
Mr. JACKSON. Thank you, Mr. Chairman, for the opportunity to
address this issue of paramount importance to our Nation's economic future.
Before I begin, I would like to first say how honored I am to be
representing ikie people of the Second Congressional District of Illinois in this esteemed body and how pleased I am to have received
an appointment to the Committee on Banking and Financial Service. I look forward with great anticipation to joining all of you and
those members of the committee who are not present today as we
engage in a very productive legislative calendar for the remainder
of this Congress.
Mr. Chairman, I encourage all Members to look at this issue
with an open mind as we face a very serious predicament, for as
we know the full faith and credit of the United States is at stake.
As we go through this process, we must remember what is important: Our children, and our seniors upon whom our personal character and our infrastructure as a Nation was built. We must not
forget our working people, the backbone of this Nation. In the instance of our country, let us work together to build upon the broad
support for passing a clean debt limit bill.
Mr. Chairman, I thank you.
Chairman LEACH. Thank you, Mr. Jackson. Mr. Bono.
Mr. BONO. Thank you, Mr. Chairman.




18

First of all, I would like to say to my colleague, Barney Frank,
if he is ever going to go on the road as a singer, OK, I will go with
you, but after hearing you sing, you have to take the harmony.
Mr. FRANK. Will the gentleman yield?
Mr. BONO. The gentleman will yield.
Mr. FRANK. I think someone once said that to you, too.
Mr. BONO. YOU always got to get in the last word; don't you?
OK On this issue that we are talking about, you know, I get a
little disgusted when we continue with this name calling and everybody is outraged that we are now dealing with the Nation's debt
ceiling and we are dealing with the CRs and we have taken it this
far.
I come from the street, and if I ever get into an issue and into
a confrontation, of course I would love to resolve that confrontation.
But if someone, if the opposition continues with the confrontation,
the notion that I am just going to go, OK, you are continuing with
this confrontation, I will leave and forget everything I have done—
please understand that we came here a year ago with a vision of
balancing the budget, and we have come this far to getting to that
point. Now it is hard ball. Unfortunately, it is hard ball, but that
is where it is at now.
So the notion that how dare we play hard ball when we have two
different philosophical positions and not capitulate to the President
and just walk away from this thing because it is serious, well, of
course it is going to be serious. This is 40 years of opposing philosophy coming to a head. Why that is not recognizable, I don't know.
But that is where we are.
So for me to come here and just drop it at this point, the reason
I wanted this job was to try to achieve what we are trying to
achieve as a conference, as a Republican conference. So we are at
the rough portion of it, but we have to hang in there now. So if
it gets to a debt ceiling, if it gets to a CR, if it gets to these rough
issues, unfortunately, they are very rough. But the point is, we are
serious. We wanted a balanced budget and the Nation wants a balanced budget.
So I don't believe in quitting, and we don't believe in quitting.
So wherever it goes, it is going to go, but we are not going to give
up.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Bono.
We will now turn to our panel, and let me say you are all welcome to summarize your statements. They will be in the record.
Our four panelists are the Honorable Jim Saxton, John Mica,
Paul Kanjorski and Joe Kennedy. Mr. Kanjorski and Mr. Kennedy
are members of this committee. Mr. Saxton is a former member
and is the distinguished cochairman of the Joint Economic Committee, and Mr. Mica is the distinguished chairman of a relevant subcommittee of the Government Operations Committee.
I thought what I would do is begin with Mr. Saxton and then alternate and go to Mr. Kanjorski and Mr. Mica and then Mr. Kennedy, if that is all right.
Mr. Saxton.




19
STATEMENT O F HON* J I M SAXTON, A REPRESENTATIVE I N
C O N G R E S S FROM T H E STATE OF NEW J E R S E Y

Mr. SAXTON. Thank you, Mr. Chairman. I appreciate the opportunity to be here.
The purpose of my appearance here today, Mr. Chairman and
Members, is to summarize the interim results of a Joint Economic
Committee investigation of the Treasury Department as it relates
to the debt limit increase, and particularly as it relates to the
events surrounding the November 15 deadline. Let me say, Mr.
Chairman, as you said in your statement, the public has been illserved by the political games that have been played with this issue.
I would just like to make three very general points this morning
in my testimony. The first is that our investigation shows that
there was a deliberate effort on the part of Treasury officials, including Secretary Rubin, to mislead tne country relative to the November default, a default that has become known as the default
hoax; second, that the White House and the Office of Management
and Budget were partners in the default hoax; and, finally, that
Treasury subsequently went to great lengths to conceal information
relative to the planning that preceded the default hoax.
Our inquiry into the disinvestment of the debt limit and the debt
limit issues was initiated on November 17 by a letter to Secretary
Rubin signed by myself and by Majority Leader Armey. Our letter
requested, and I quote, "copies of all of the documents related to
this decisionmaking process."
Though the Administration has still not provided all the documents covered by our request, we do have enough information to
draw several conclusions, which I have iust outlined. In fact, Treasury and other administrative officials nave gone out of their way
to keep information from us, which has been very discouraging.
I will get to that shortly, but now let me just get to the crux of
the issue, which is the American people and the Congress were
misled on the matter of a Federal Government default. Of course,
we are hearing much of the same language again today relative to
a drop-dead date of March 1, and someone mentioned today a
March 15 deadline.
First of all, available documents show that early last summer,
June 27 to be exact, the Administration had identified trust funds
as a source of financing during a protracted debt limit impasse.
These documents reflect a very detailed plan to disinvest or borrow
from the Civil Service Retirement Trust Fund as well as a number
of other funds. The internal Treasury documents show that inaction by Congress when the debt limit was reached in November,
1995 would not trigger a default; and, again, I remind you, this
was on June 27. Those in possession of the information contained
in these documents knew that disinvestment or borrowing from the
trust funds, not default, would be the consequence of a debt
impasse.
It is now an indisputable fact, in my view, that disinvestment of
the trust funds was listed in the Treasury memo as early as June
27 as a way of managing the debt limit. Nonetheless, a number of
high-ranking Clinton Administration officials created the misleading impression that inaction on the debt limit could lead to default
and catastrophic economic consequences.




20

For example, on September 13 of last year, the Los Angeles
Times reported, and please let me quote, "Treasury Secretary
Rubin has warned that fiscal disaster could occur unless the debt
ceiling is raised by November 15." The Treasure memos clearly
show that anyone with access to this information had to know that
inaction on the debt limit would lead to disinvestment, not default.
So while high-ranking Clinton officials in the Treasury Department and elsewhere were publicly raising a misleading impression
of default risk, privately Clinton officials had been preparing for
disinvestment plans all summer.
One high Treasury official was asked at a press conference if he
had been crying wolf about default. He explained that legal clearance for the disinvestment had only just occurred shortly before the
decision was announced on November 15—or perhaps it was the
14th. However, the Treasury documents show that legal analysis of
these issues began early in the summer. So they misled the press,
they misled the American people, and they created nervous markets in this country as well as around the world.
On to point number two. The default hoax was not confined to
the Treasury Department, but it was partnered by the White
House and the Office of Management and Budget. The evidence
shows that the default hoax was part of a larger Administration
political strategy. Like the Treasury officials, other Administration
officials also knew that default last November was not going to
happen but that disinvestment would.
The political origins of the default hoax may not have originated
in the Treasury Department at all but perhaps in the White House.
White House officials participated in perpetuating the default hoax
in a series of inflammatory statements.
For example, Leon Panetta said, of the Republicans, "they will
send a budget to the President of the United States, including a
debt ceiling; and if he doesn't sign it, they will let the country go
to hell and basically default on the debt."
But when Panetta said this, we now know the Administration
had already been planning to use trust funds for 4 full months.
An Administration spokesman has confirmed in a recent press
account—as a matter of fact, it was on February 2 of this year in
the Washington Times. That article states: "An Administration
Spokesman confirmed that top Administration officials in the White
ouse and other offices outside the Treasury were involved in the
debt limit decisions and that these decisions were related to
politics."
The White House official also added, "Obviously, the debt limit
got all wrapped up in the budget debate which was political. The
President is very concerned about dealing with this and other
budget issues at the same time."
The default ruse was used in concert by a variety of Clinton Administration officials in a way that suggests some degree of coordination as called for in the June 27 Treasury memo.
Point number three: The Treasury Department went to great
lengths to conceal information regarding this series of events.
The information that I have laid out thus far was extremely difficult to obtain. It is quite obvious that officials at Treasury didn't
want us to have it. For over 2 months, beginning on November 17,




21

the Treasury Department attempted to withhold information from
Congress by various delaying tactics and extensive censorship of
documents.
For example, a June 27 memo of the kind targeted by our investigation was provided only after more than a month of delay; and
when we finally received it, 90 percent of the memo and its attachments were deleted.
Across the room here on this wall is the memo which we received, beginning on the left; and if you will note, each page, which
has been blown up, has a number down in the bottom right-hand
corner which was placed there by Treasury, so we didn't take pictures of anything they didn't send us. But you can see that this is
a memo which had deletions in order to try to satisfy us, I suppose,
by being able to tell the public we forwarded the document, and
this is what they sent us.
When we finally received this months after our request, of
course, we were extremely disappointed. Of the 10 pages, the text
of 7 pages was entirely deleted when it was provided to us. It is
impossible, in my opinion, to regard this kind of response as anything other than an attempt to conceal information.
Perhaps the Treasury Department will attempt to excuse this inexcusable obstruction of our inquiry by pretending that there was
a misunderstanding about the nature of our request or that we did
not request all of the material related to the decisionmaking process. However, our request originally and on all follow-up occasions
specifically covered all documents and all information.
We received, finally, the uncensored version of this memo of June
27 and several other documents only after the Joint Economic
Committee staff called Treasury's bluff and requested a meeting to
review the uncensored documents in the original. This review of
documents, which included the participation of staff from other
committees, established that there was no justification for the censorship of the Treasury documents. Though we finally received
these documents on January 24, 2Yz months after they were requested, we still have not received all of the documents covered
under our request.
Ironically, yesterday afternoon, Treasury had delivered to us additional documents. These are the documents that we received yesterday afternoon. Volumes of them. It is obvious that they were
withheld until the last minute so as to make it impossible for us
to review and understand them before today's hearings.
Unfortunately, the Treasury has refused to provide other Administration documents on debt-limit planning. We were informed just
a few minutes ago that they are now on the way. So we thank you,
Mr. Chairman, for having this hearing, which has helped us pry
loose these documents.
I would just like to use this opportunity, Mr. Chairman, to call
on Secretary Rubin to immediately release the rest of the documents to the Joint Economic Committee, without delay. Further efforts to withhold relevant information can only reinforce the conclusion that the Treasury Department is intent on keeping all of
this information from Congress, the press and the public as long
as possible.
Thank you, Mr. Chairman.




22

[The prepared statement of Hon. Jim Saxton can be found on
page 133 in the appendix.]
Chairman LEACH. I thank you, Mr. Saxton.
Mr. Kanjorski.
STATEMENT OF HON. P A U L E. KANJORSKI, A REPRESENTATIVE I N C O N G R E S S FROM THE STATE O F PENNSYLVANIA

Mr. KANJORSKI. Mr. Chairman, thank you very much.
Mr. Chairman, you don't very often, as a Member of Congress,
get an opportunity to sit at this table and listen to the committee
give their various positions on an issue like this; and it is most enlightening, to tell you the truth. In a way, I would like to critique
us all.
The American people out there, now I understand why they are
frustrated with Washington and the congressional process. We
sound like a bunch of arguing children over an obvious issue. The
obvious issue is we owe a debt, and we have two choices. We either
fund it and pay it or we default on it.
Then what are the consequences of that default? All the waiting
or tiptoeing—as my good friend, Mr. Saxton, has pointed out, the
hoax, was it going to happen on November 15 or January 1 or February 15? Does it really matter? Is there anybody that doubts that
if we don't refund the debt of the United States we will at some
point in time in the not-too-distant future end up in default, and
then what are the consequences of that default?
Interestingly enough, maybe the best explanation in my critique
here is made by my good mend, Mr. Bono. This is really the culmination of 40 years of political and philosophical differences that
have come together before the American people's eyes in the Congress and in the Government of the United States to resolve some
very fundamental issues, very fundamental issues. But, unfortunately, they are appearing to be superficial in nature.
I was sitting here thinking of an analogy of default. The only
thing I could think of to describe it would De the famous cocktail
in Jonestown. It is the Washington cocktail. If we are so firm in
our belief that this is the only way to accomplish a balanced budget
or some other philosophical trial that we are willing to kill our political and economic system, then we should drink of the glass of
default, because I think it will accomplish just that. And all the believers, indiscriminately—Republicans, Democrats, Independents—
all Americans will die, and that will satisfy I am not sure who, perhaps our enemies somewhere else.
On the other hand, I hear gloom and doom. Every year, the expenditures of the American government goes up. Does that surprise
anybody? Every year, the population of the United States for the
last 208 years nas grown. If you take a per capita cost of running
the U.S. Government per individual, it would be reasonable to assume, if logic prevailed, the cost of government every year would
go up. Now, is that such a shocking revelation that we should
shock the American people and not explain why that occurs?
Should we not explain to the American people why we have the
debt that we have?
Not to get too political, but my friends on the right, 60 percent
or over $3 billion—$3 trillion of this debt that we are about to vote




23

on is debt that was run up during the Administration of those two
great conservatives, Ronald Reagan and George Bush, when they
ran the presidency of the United States. It is this President that
in 1993—and this side of the aisle with 218 votes in the House—
that responsibly voted to bring down the deficit and have accomplished the same so that this coming year we will be able to brag
that for the first time in more than three decades the deficit of the
United States will have decreased 4 years in a row.
But is that something to brag about? Well, not if you are a terribly fiscally conservative person that can't stand debt at all.
But to explain debt from the standpoint that bankers can't stand
debt, my friends on the Republican side, bankers wouldn't be in
business if their customers didn't have debt. That is what they do.
They lend money for people. They lend money for people to buy
homes. They lend money for people to build businesses or to educate their children and make a long-term investment. That is what
America has done.
But, above and beyond that, what we don't tell the American
people is that a good portion of this debt that we are about to refund went to finance the Third World War. It went to finance thetrillions of dollars spent from 1945 to 1990 that did incur more
than $4 trillion in debt as a result—or partially as a result—of
that. But, also, it didn't account for one live new graveyard to be
built in America to house our veterans in a classic confrontation of
the Soviet Union and the United States.
Is that something to brag about? I think it is. We may differ on
that philosophically. We probably could have lessened our population problems both in the United States and throughout the
world. We could have had a different political perspective on the
world if we had gone to that Third World War. We could debate
that all night.
But let us not confuse the American people that somebody came
to Washington and burnt money, purposely thinking that in 1996
we were going to get back at all of those Americans and their future children by destroying the credit of the United States and
have justification for doing the same.
Then we hoist favorite things here. We bring the Secretary of
Treasury, like past Secretaries of the Treasury, and think that if
we ram them hard enough, insult them long enough, they will either resign, be impeached, or leave for some other thought-up reason, as so many in the past have, when in fact they are doing their
job. They are paying the bills of the United States, and they are
raising the revenues of the United States. Neither of those functions are particularly popular, and they are certainly not too popular for us in the Congress, who like to mislead the American people, so that they will continue to return us here.
If we yell that we are fiscally responsible long enough and believe in a balanced budget but don't tell them that the budget is
not going to be balanced for 7 years from now and it is going to
run up more debt, almost $1 trillion, before it gets balanced, we
think we have accomplished something.
There is nobody on my right side here that is voting this year
or at any time that I have been in Congress for a balanced budget




24

this year. It is just an unmitigated misstatement of fact and some
people could say a lie, a political lie, but we go with those lies.
Mr. Bono said it is 40 years of coming together, and I believe he
is right; and I believe, as Mr. Frank said, you have to believe in
the Constitution again. If you don't have two-thirds of both bodies
of the House and the Senate, you cannot prevail. The American
Constitution will not allow you to do that.
How can you prevail? You have a majority of the House and the
Senate, and you elect a President of the United States in November, and you will prevail without that two-thirds approval. What is
it better under our Constitution and our system of government but
to take this issue to the people?
I could be facetious politically and say, if it is a clash, as Mr.
Bono said, is it a clash that the Democratic party is in favor of
Medicare and Social Security and education and the environment
and that the Republican party is not in favor of those things? I
could say that. Those issues that we are fighting over were developed and passed for 60 years under the Democratic parties since
Franklin Roosevelt.
But that would be misleading and political. It isn't that. Some of
my friends on the Republican side have voted for Social Security,
have voted for Medicare, have voted for education and have voted
for environment. Not all.
We have a new element of the majority party. Some of us on our
side and editorialists have referred to them as extremists. Maybe
they are not as extreme as that word implies. But they are certainly of a different philosophical and political bent than the average legislator that has served in the Congress for the last 30 years,
and their exactitude in their way. They want their solution now,
almost in a parliamentary form of government, again forgetting
that we live under the Constitution and live under a different form
of government, that a single election does not provide you the
methodology or means to attain your end without the checks and
balances and the magnificence of the American Constitution.
Mr. Chairman, I hope we do take today to listen to Mr. Rubin
and any other witnesses that may come before us, not with the
idea that we are going to solve and reduce the deficit or that we
are going to solve the debt of the United States or anything else
but just that reason prevails today in America.
I think—I think the election results out there that we are seeing,
both in 1994, 1995 and in the recent elections, the American people
are just fed up. They aren't Republican, they aren't Democrat, they
are American, and they want us just to do the best we can in the
best way we can with the best judgment we can and to stop politicizing issues such as this that are so fundamental to them, to their
children and grandchildren, and that we do them little service if
we balloon and exaggerate, we misstate, and we don't stick to the
truth.
I hope that we give the opportunity to the Secretary of the Treasury to let him tell us why, in fact, he took the actions he took, that
he did, by taking such action, prevent default, and that he hasn't
told us probably as bluntly as he should but let him come up here
and let us say, cut the nonsense, stop playing politics with us, stop
playing philosophy, let's get on. And that can either be handled in




25

the second half of the 104th Congress or, ultimately, in November
of 1996.
[The prepared statement of Hon. Paul E. Kanjorski can be found
on page 114 in the appendix.]
Chairman LEACH. Thank you, Mr. Kanjorski.
Mr. Mica.
STATEMENT OF HON. J O H N L. MICA, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF FLORIDA

Mr. MICA. Thank you, Mr. Chairman.
I welcome your committee's efforts today to examine recent actions taken by the Clinton Administration in dealing with our Federal indebtedness. Quite frankly, I believe this Administration's
disinvesting the Civil Service Retirement and Disability Trust
Fund and stopping routine reinvesting of Federal employees' contributions to the G-Fund borders on the illegal and is at least a
breach of trust. This Administration has broken faith with Federal
employees and annuitants. This fiscal mismanagement represents
really the ultimate failure of this Nation and our Congress to bring
its finances and its indebtedness into order.
Treasury Secretary Rubin really has stretched, in my opinion,
the language of Title 5 beyond the breaking point to rationalize
this Administration's unprecedented raid on the Civil Service Retirement and Disability Fund. Section 8348(k)(2) clearly prohibits
the Secretary from disinvesting more than is necessary to make authorized payments from the fund during, and I quote from the law,
"a debt issuance suspension period."
The purpose of that language is quite clear: Congress wanted to
protect the retirement funds on which our Federal employees and
annuitants depend. As then-Senator from Tennessee Al Gore stated, the statute was intended to, and let me quote from him, "preserve the sanctity of those contributions that these employees have
made toward their retirement by making them," ana I will continue the quote, "usable only for the payment of civil service retirement and disability benefits."
To achieve Senator Gore's objective. Congress enacted strict limits on the Secretary's authority to disinvest that fund. Secretary
Rubin has broken faith with that objective by arbitrarily setting
the length of the "debt issuance suspension period." First, he set
it at 1 vear. Later, he extended it to 14 months. The longer the period, of course, the more he can rob from the fund and the longer
the Clinton Administration can avoid getting its runaway Federal
spending program under control. Until we get spending under control, we will really continue to have this recurring crisis in managingthe growth of our Federal debt before us.
The bitter irony of all of this, Mr. Chairman, is that, even after
all of this skullduggery, Secretary Rubin had the gall recently to
say without a higher debt ceiling he wouldn't be able to pay civil
service retirement benefits in March. Let me repeat, Mr. Chairman. The law says Secretary Rubin can only disinvest the Civil
Service Retirement and Disability Fund to pay retirement benefits.
The Secretary disinvested, but he still says he won't have the
money to pay civil service retirement benefits. Where did all that
money go? Down the Federal spending rathole, that's where.




26

When I assumed responsibility over the Federal retirement system as chairman of our subcommittee, I was absolutely shocked to
discover the civil service retirement trust funds carried an unfunded liability. This is the report issued by this Administration
September 30, 1994. This is one fund. This one fund is $540 billion.
I hope the staff will pass this page out so you can see the shape
this fund is in.
The General Accounting Office is completing right now a review
of more than 50 Federal retirement systems. This is just one of
them. That review should be a wake-up call that a huge, incredible
unfunded obligation exists in nearly every single one of our Federal
retirement funds.
Not only are there multibillion dollar unfunded liabilities, but
the so-called "assets" of Federal employee retirement trust funds
have been replaced with nonmarketable government securities. So,
Mr. Chairman, these funds have been depleted of real assets and
replaced by an accumulation of IOUs. So you have an unfunded liability here, over half a trillion dollars; and then in this one fund
they nave stolen and replaced with IOUs somewhere in the neighborhood right now of $360 billion. That should be in the assets
right now. Not there. Again, it's been replaced by these IOUs.
As a result of these past practices, taxpayers will shell out billions of dollars in annual retirement costs and last year paid $24
billion in interest on trust funds' IOUs. You know, just last year,
because there is no money in that fund, just the IOUs, out of the
general Treasury we paid $24 billion. So we have created incredible
unfunded liabilities, we have stolen trust funds, we pay huge
amounts of interest on missing trust fund money, ana now we
robbed the final pickings of the retirement fund carcass. That is
how bad this has gotten.
Our true national debt actually is understated by more than $1
trillion because of the unfunded liabilities, really in just two of
these funds, our civil service and military system retirement funds,
which are kept off of the books.
Now comes the ultimate insult, which is the President's strategy
to divert public attention from the debt issue by telling? senior citizens and our retirees, our Federal retirees, that he will be forced
to stop Social Security payments and retirement payments. Unfortunately, this Administration believes it can legislate, appropriate,
and extend the indebtedness of our Nation in spite of the Constitution and in spite of the Congress. This fiscal irresponsibility in
managing the future obligations of the American taxpayer must
end.
By obscuring the real costs of retirement and misusing these
funds, we understate the full cost to the taxpayer of every Federal
employee on the payroll by about, grab this, 30 percent. These real
costs are concealed from today's taxpayers in a fiscal footnote to the
Office of Personnel Management accounts.
In 1986, the Federal Employees Retirement System was created.
Well, they—Congress—knew in 1986 the whole thing was going to
collapse, so they created a new system to fix the growing retirement fund problems. They created FERS, the Federal Employee
Retirement System. In that, they created a Thrift Savings Plan,
keeping employees' contributions outside the budget. By taking




27

these contributions out of the budget, not merely calling them offbudget, Congress intended to safeguard at least a portion of these
retirement funds.
Now, that fluid is the fund that the Secretary has been taking
from. This safeguard was intended to prevent the very manipulations that we have witnessed over the past few months. Now, as
we look into the status of the G-Fund and the Thrift Savings Plan,
we find that old, bad habits still prevail. The Gr-Fund has become
merely another bundle of cash for an insatiable Federal appetite
for spending.
Secretary of the Treasury Rubin really, in my opinion, has
bastardized reinvestment of this fund to the tune of $21.8 billion.
Altogether, the civil service retirement funds have provided a slush
fund to the tune of $61 billion, which you heard earlier. The Secretary of the Treasury has, again in my opinion, illegitimately used
these funds to evade the debt ceiling that the Congress has imposed by law. I ask, how much lower can the executive branch of
our government stoop to avoid fiscal responsibility?
The ultimate insult really to taxpayers and retirees is the shameless robbing of the very last shreds of cash flow from the Federal
retirement system.
This whole exercise pursued by the Administration in the name
of managing fiscal resources is really hidden debt. The Secretary
of the Treasury may be moving numbers on ledgers, erasing interest-bearing debt and replacing it with IOUs, but our obligations to
Federal employees and retirees cannot evaporate with the computer keystroke.
We will have to, first of all, restore every cent that has been stolen. We will have to pay interest on every dime that has been hidden through fiscal gimmickry. We will have to redeem every dollar
of our obligations to the people who worked long and hard in public
service.
Unfortunately, this Administration's legacy will be more debt,
more red ink and more robbing Peter to pay Paul.
During his State of the Union address, President Clinton asserted, and these are his words, "We should also protect existing
pension plans. Two years ago, with bipartisan support, we protected the pension plans of 8 million working people and stabilized
the pensions of 32 million more. Congress should not let companies
endanger workers' pension funds." That is what the President said.
Meanwhile, back at the Federal ranch, Trail Boss Rubin was
raiding the last cash at the Federal retirement corral. Unfortunately, only private citizens can go to jail if they abuse or misuse
employee pensions' funds in this fashion.
When private sector employers attempt to invest surplus funds
in their pension accounts, the Secretary of Labor, another Cabinet
official, tells them, "Hands off." If they try to use the funds, even
to create new jobs, he threatens criminal prosecution.
One employer that the Secretary of Labor should speak to real
soon is the Secretary of the Treasury. He needs to hear the message loud and clear: "Hands off Federal employees' pension funds."
Payroll deductions from Federal employees should never again be
used to finance this Administration's deficit spending.




28

Since the Secretary of Labor is not likely to deliver that message,
it is especially important that this Congress send the signal in the
clearest possible terms. We should be providing more protection to
our underfunded government system than private employers are
required to provide for their overfunded systems. Instead, we are
providing less.
I applaud the Chairman of the Ways and Means Committee for
proposing that we fence off Federal employee pension funds from
these financial shenanigans, and I support his initiative and will
support any other positive action to protect Federal employees' pension funds.
Finally, I recommend that Congress act now to move these funds
into real assets and investments. At the very least, we can require
that the Thrift Savings Plan Board start moving into marketable
securities rather than nonmarketable bookkeeping entries. Federal
employees deserve something more tangible than a bookkeeping
entry when they are ready to retire. We must not allow this mismanagement of our debt to continue in this irresponsible manner.
I thank you.
[The prepared statement of Hon. John L. Mica can be found on
page 175 in the appendix.]
Chairman LEACH. I thank you, Mr. Mica.
Mr. Kennedy.
STATEMENT OF HON. J O S E P H P . KENNEDY, II, A REPRESENTATIVE I N CONGRESS FROM THE STATE O F MASSACHUSETTS

Mr. KENNEDY. Thank you very much, Mr. Chairman.
First of all, I want to thank you, Mr. Chairman and other members of the committee, for hosting this hearing this morning. I
think it is important that we have a complete airing of what the
implications of defaulting on the national debt might oe.
We had a hearing last week where we heard from a number of
experts on Wall Street as to exactly what the implications of a debt
default could perhaps take, not only in the United States but
throughout the world. It was an eye-opener. The estimates were
that interest rates overnight would rise by a minimum of 1 percent.
That would create an overnight increase in the amount of debt that
we will pay in this country over the course of the next 7 years by
over $175 billion.
We could see an average home mortgage rate rise by over $1,200.
We would see the potential default on not only the national debt
of the country but the ability of people to get everything from Social Security checks to veterans checks. So it seems to me that,
whether you are a Democrat or whether you are a Republican, everybody can agree that a default scenario is a bad scenario. None
of us want this country to default on our debt.
So then I am trying to understand, if that is the case, what Mr.
Saxton and Mr. Mica are really objecting to. Are they objecting to
the fact that we were facing a default scenario where Mr. Archer,
the Chairman of the Ways and Means Committee, had proposed a
bill on the House floor that would have actually forced us to go into
a default in early December by not allowing the Secretary of the
Treasury to have any flexibility in terms of paying off our debts?
So what they seem to be complaining about and calling it gross




29

mismanagement and fiscal irresponsibility and all of these words
are really the attempt by the Secretary of the Treasury to avoid the
very default that is, by some legislative tool, being issued as a
threat against the agenda which tne Republicans somehow view as
the Democratic agenda.
So what is the underlying concern that has brought us to a point
where we are even discussing default? I am trying to understand.
What is the issue that the Republicans care so much about that
they would issue the kind of threat that Speaker Gingrich talked
about when he said that he wanted to use the default mechanism
as a way of ramming through his program?
Now, I am a supporter of the balanced budget, so I figure, well,
maybe it is because of the balanced budget. But then, President
Clinton agreed to a balanced budget. So then it wasn't that it was
a balanced budget, it was that it wasn't a balanced budget within
7 years. So President Clinton agreed to a balanced budget within
7 years.
Then there was a whole discussion about whether it was a balanced budget within 7 years using CBO numbers, and then President Clinton agreed to a balanced budget in 7 years, CBO numbers. So then it was balanced budget, 7 years, CBO numbers, with
a tax cut. President Clinton agreed to 7 years, CBO numbers, with
a tax cut.
So I guess what we are really talking about is the size of the tax
cut. Because I would think that anybody on the Republican side
would recognize that if you take a look at the total number of dollars that you will send the country into debt over the course of the
next 7 years is roughly equivalent to the total number of dollars
that the Democrats will send the country in debt over the next 7
years.
Nobody should think that just because we get to zero in 7 years
that that means we haven't run up the deficit between now and 7
years from now. The truth is, we do; and both of our numbers are
roughly the same.
So the real issue here is not whether or not we run up debt. You
agree that we are going to run up debt. The budget that you have
proposed, that most of you have voted for, runs up the debt. So it
is not the fact that you are running up the debt. That issue isn't
what you are concerned about. It is not the fact that we are going
to get to a balanced budget. It is now we get to a balanced budget.
Now, if we are down to the level of the cuts that we are going
to make in Medicare and Medicaid in order to achieve a tax cut of
$245 billion, isn't that something we ought to be able to talk about
and work out? I mean, do we really have to issue a threat on defaulting on the national debt to be able to get to a point where we
can negotiate that out?
This is guerilla tactics. It is zealotry. It is the tactics of a party
that cannot get their legislative mandate through, through the constitutional means that nave been laid out and have been adhered
to for over 208 years or 215 years of United States history.
What we have is a situation where, if you want to get our budget
passed on the House floor, you need 218 votes. You can get several
different versions of a balanced budget passed with 218 votes. All
of us know that. The Blue Dog budget would pass with 250 votes.

22-450 9 6 - 2


30

There are a whole stack of budgets. There is probably some I would
vote for and every member of this committee would vote for.
But that is not good enough. What you have to do is you have
to get every single Republican to sign off on your version of a balanced budget before you will ask for one Democratic vote, and that
is all it comes down to. It would be as though Barney Frank and
I drew up our version of a Democratic budget and said we will not
allow a single Republican to vote until we get every Democrat to
vote for it. We couldn't get our version of a balanced budget
through, but you can't get all of your right-wingers to come to flie
middle and come up with a compromise, and that is all this takes.
You start to cut off those individuals that are insistent upon not
just a tax cut but a huge tax cut that goes to the richest Americans, you cut them off and come to grips with a reasonable balanced budget within 7 years that, yes, cuts back on Medicare, yes,
cuts back on Medicaid and, yes, deals with welfare reform. We can
Set this done. But if all you do is insist upon this right-wing agena, then you are going to get into this very tough rhetoric and
name-calling; and it comes not because, in my opinion, of an aggressive Democratic agenda—we don't have one—it comes in response to an overly aggressive Republican agenda.
So if we are really interested in doing what is best for this country, if we are interested in not defaulting on the debt, then the purpose of this hearing or getting together here in Washington today
should be to work out the budget.
This notion that we are going to spend days or the next few
hours grilling Bob Rubin over the fact that he had some staffers
come to grips with what we should do in the Treasury Department
to avoid going into default, what would you expect him to do? I
mean, think of your Secretaries of the Treasury. Do you think that
if we were trying to jam our agenda down their throat and said
that we were going to issue a default mechanism if they didn't do
it, don't you think that our past Secretaries of the Treasury would
be in asking their people to try to come up with some ways to avoid
default? It is a reasonable expectation that anybody running a Federal agency is going to come to grips with with their staff.
So let's try to figure out why we are coming to grips with this
default mechanism. If we answer that today, then these hearings
will have proved fruitful. If all we do is use this to try to throw
some spears at the Secretary of the Treasury or his staff because
they tried to avoid the default of this country, this will be a continued. sham and a continued sense of people just name-calling rather
than dealing with the underlying crisis that this country faces.
Thank you, Mr. Chairman.
[The prepared statement of Hon. Joseph P. Kennedy can be
found on page 128 in the appendix.]
Chairman LEACH. I thank the gentleman.
The Secretary of the Treasury has been kept waiting a little bit
longer than we predicted, so I don't expect a lot of questions, but
Members are certainly entitled to ask any questions.
I would like to make a 15-second observation. Some of what Mr.
Kennedy says I think is valid. But I think it also valid to point out
the last two major budget resolutions, in 1990 and 1993, were tied
to msgor debt ceiling resolutions, two budget agreements; and so




31

that is commonplace, not unusual; and that the real distinction between the parties today is that the Republicans are favoring an inflation-adjusted freeze in spending; the Democrats would like a
somewhat greater level of spending, whatever that might be.
I would also say that, just in terms of compromise, when the
President finally submitted in January a CBO-scored balanced
budget, within a few days the Republicans offered a compromise
which included many of the numbers of the conservatives in the
Democratic party, wnich was immediately rejected. I only lay that
on the table because that was the last proposal of the Republican
party, which did envelop many of the compromises that were certainly of a different ilk than some more conservative Republicans
felt comfortable with.
So I just think in terms of the historical record that should be
understood.
Mr. KENNEDY. May I respond, Mr. Chairman?
Chairman LEACH. Yes.

Mr. KENNEDY. I would only make the point that if, in fact, President Clinton's offer of just taking the agreed-upon numbers on how
to reduce the deficit over the course of the next 7 years in every
major account of the government were to be accepted, the same
proposals that the Republicans and Democrats had both agreed
upon, without a tax cut, you get and arrive at a balanced budget
within 7 years. President Clinton has made that offer to the Republicans, and the Republicans have rejected that.
Mr. Chairman, I believe there is, in fact, enough common ground
to achieve a balanced budget, but I think that if all we do is just
sit here and play Ping-Pong with whose fault it is, it isn't going to
work. I think that if you try to make certain that this hearing
doesn't evolve into another Ping-Pong game, then you would serve
the American people well.
Chairman LEACH. Well, I will tell you, I think this hearing is intended to mete out perspectives from both sides. There is going to
be truth in virtually all of the perspectives. There is also going to
be some misleadingness in virtually all of the perspectives, and it
is up to the public to take that into consideration.
Does anyone else want to ask the panel a question?
Let me turn first to Mr. Vento.
Mr. VENTO. Mr. Chairman, I have an observation; and the observation would be that the debt ceiling really, I think, you can't
argue it on the merits. What is happening here is we are confounding it with what the process is, who gave us what papers, what
your innermost thoughts were in terms of the Department of
Treasury with regard to this.
I mean, I don't understand, you know—the whole argument is
going to be on who is right on the budget, when we all know that
there is a difference of agreement on the budget, OK? So we set
that aside.
But the issue is, is there going to be default or not? I mean, it
seems to me that my colleagues come and suggest you shouldn't
have done this. You were planning on doing this earlier. You
shouldn't have done it. I mean, that would mean that we would
then be in default right now.




32

So if it is the intention not to have default, then why haven't we
dealt with it? Apparently, you have been unable to convince anyone
to come up with a clean solution. I mean, obviously, we can all say
we want our agenda to anneal to whatever is going in terms of the
debt ceiling. Habeas corpus, I recall, was one of the suggestions to
be put on there at one point.
So I just think that issue is—we know we disagree on this, but
what we shouldn't disagree on is we shouldn't risk the credit and
the default of the Unitea States on its obligations. It is not—it does
not presuppose a certain outcome in terms of budget, because we
honor the obligations that we have.
I think you could put together a debt ceiling for whatever period
of time to avoid default that would not preconceive what the outcome was going to be in terms of the policy decisions. That really
is what the issues are. There is no advantage.
But the point is that that hasn't been the case. The debt ceiling
is attempting to be used for the purposes of achieving a goal that
you can't sell or haven't been able to sell to date on its merits. It
is clear and simple.
So you can talk about, well, what you did was, you know, improper or illegal, although I see no court cases coming up on that,
so I am unimpressed with an argument that comes from a certain
view or persuasion. Or you can argue about we didn't get the papers back, and you are not sharing everything with us, and that
you had actually planned that. I guess that is good for pointing out
what the utmost political thoughts of the Secretary of the Treasury
is or somebody is in the end, if, in fact, that is the case. But it
doesn't really address what the issue is: Are we going to avoid default or not? So we take your words, we take your actions and look
at them, and they suggest that that is where you are going.
Thank you, Mr. Chairman.
Mr. ROTH. Mr. Chairman, I just have a short statement.
I want to compliment our panel this morning, our four colleagues, for their excellent statements.
Mr. Kennedy, I was interested in your analysis. You had mentioned the words right-wing extremists. There are people, of course,
who are veiy much dedicated to balancing the budget. Then you
had mentioned that you and your colleague from Massachusetts, if
you came up with a budget—! am just interested in this right, center, left. Where would you and your colleague from Massachusetts
come down on the budget?
Mr. KENNEDY. Well, Mr. Roth, I had proposed a balanced budget
and written one up. It would not have a $7 billion increase in national defense spending, which your party insisted upon. It would
not contain a $245 billion tax break. It would go after a lot of the
corporate welfare that exists in this country that provides enormous support to everything from the oil and gas industry to the
mining interests to the lumber interests in this country, at the expense of keeping the Medicare system sufficiently funded, at the
expense of looking out after the education system in this country
and looking out after our environment.
I don't expect that those are your priorities, but I do expect that
we can find ways of compromising on the positions that I might




33

have in order to try to get a budget that looks out after the overall
interests of this country.
Mr. ROTH. I understand what your budget does, and I compliment you for taking the initiative. But my question remains unanswered. If the people over here who want to balance the budget
are right-wing extremists, where do you come down?
Mr. KENNEDY. I had voted once for the Blue Dog budget, if that
is what you are asking me, Mr. Roth. I think that goes a long way
toward achieving the kind of level of compromise that I think
would pass on the floor of the House. If that budget were put forward by Speaker Gingrich this afternoon on the floor of the House,
I think it would get over 250 votes. Don't you, Mr. Roth? Do you
agree with that?
Mr. ROTH. It might. It might. I don't know.
Mr. KENNEDY. NO, but I am asking your opinion now, Mr. Roth.
Don't you think if the Blue Dog budget were put on the House floor
that it would pass?
Mr. ROTH. My opinion is there is a lot of folderol going on when
you see the budget go from an increase in the next 7 years in
spending and the taxes increase, when we are being asked to increase the Nation's debt ceiling from $4.9 trillion to $5.5 trillion,
that in no way is helping the youngsters, the seniors, or anyone in
this country.
Mr. KENNEDY. Toby, doesn't your budget increase the deficit by
about $1 trillion in the next 7 years? Doesn't it do that?
Mr. ROTH. Our budget balances in 7 years.
Mr. KENNEDY. SO does ours. But I am just saying, over the
course of the next 7 years, doesn't your budget, in fact, increase the
national debt by somewhere between $800 billion and $1 trillion?
Mr. ROTH. NO. We balance it. We start paying off. But I see
Mr. KENNEDY. Wait a second, Toby. Just be reasonable. Don't
mislead people.
Chairman LEACH. There will be regular order. It is the gentleman from Wisconsin's time.
Mr. ROTH. Thank you, Mr. Chairman.
Chairman LEACH. Are there further questions?
Mr. FRANK. Yes, Mr. Chairman.

Chairman LEACH. Mr. Frank.
Mr. FRANK. Mr. Chairman, first I want to sympathize with the
entleman from New Jersey. I am sorry that your enlarger broke,
ecause apparently we got that redacted memo up there. He has
had the full version of it for 2 weeks, and apparently he didn't have
a new enlarger so he had to have the old one up there. He could
have, of course, had the full memo up there; and I hope he can buy
a new enlarger. But people should understand, if they are watching
this on television, for 2 weeks now he has had the full thing.
Maybe they are copying it by hand, and we are going to get an illuminated manuscript for the next hearing.
But I wanted to ask him, it seemed to me that there was a great
contradiction. The gentleman from New Jersey was criticizing the
Secretary of the Treasury for claiming there would be a crisis when
we all along had the ability to do certain things. Then we heard
the gentleman from Florida, apparently not having been here when




34

we discussed the civility pledge, say that it was stolen, it was
bastardized, it was a hoax, and all of these very uncivil words.
So I would ask the gentleman from New Jersey, do you agree
with the gentleman from Florida that all of those things that were
done, that the Secretary of the Treasury stole from the trust fund
and bastardized it? Because, if he did, then all of the things he was
planning to do he shouldn't have done. So I am not sure how you
come out of that. But would you agree with the characterization
that the things that the Secretary did were as dastardly as the
gentleman from Florida suggests?
Mr. SAXTON. My purpose for being here this morning, I would
say to the gentleman from Massachusetts, is to simply say that if
we are going to move down a road toward a balanced budget together, which seems to me most of us now agree on, that we have
to tell each other the truth, the whole truth and nothing but the
truth, and not perpetuate what I characterize as a hoax.
Mr. FRANK. Good. Well, that is what I am trying to elicit from
you is the truth. This notion that you came only to do this, I didn't
understand that we couldn't ask you about other topics.
You have said that it was a hoax because the Secretary of the
Treasury knew very well he could do certain things to avoid a default. But the gentleman from Florida has said that those very
things that you said he could do were terrible, dastardly acts of
theft, that he stole things. I need to know, because is it your opinion that the things that the Secretary of the Treasury was planning
to do were such terrible things? In that case, maybe it wasn't such
a hoax. So I really am interested in your opinion. Do you agree
with the characterization of those steps that the Secretary of the
Treasury took?
Mr. SAXTON. It is not my purpose to agree to or disagree.
Mr. FRANK. Are we allowed to ask you only your purposes?
Mr. SAXTON. Let me just respond to your question by saying that
the gentleman from Florida is the chairman of a subcommittee, and
he has taken it upon himself as his subcommittee's task to deal
with that issue. I have spent untold hours dealing with a separate
issue: whether or not the Secretary told the American people the
truth, and I have characterized what he told the American people
as a hoax.
Mr. FRANK. Thank you for failing to answer, because I think it
shows the intellectual inconsistency here. On one hand we have a
Republican who says the Secretary of the Treasury claimed there
was a crisis and there wasn't one, because he could have done all
of these things and he knew it. Then once he does them, the gentleman from Florida says, look at all of these terrible things the
Secretary of the Treasury is doing.
It is clear that the Republican party has formed the old psychological question, who do you like better, your mother or father, to
which there is no right answer. Because if, in fact, he had allowed
things to default, tnen he could have been criticized; and if he
avoids it, he is criticized.
The gentleman from New Jersey said, how dare he forget that
there is a crisis? He had all of these things to avoid, but apparently
they are dastardly acts. He stole from the trust funds. No one




35

thinks he stole from the trust funds. No one thinks they were going
to be diminished. Stole is an entirely inappropriate word.
But the fact is there is this fundamental conflict in the Republican approach. Should the Secretary of the Treasury have done
that or shouldn't he?
Let me ask the gentleman from Florida, should he have allowed
there to be a default? Given that we had not increased the debt
limit to accommodate—the $600 billion the gentleman talked about
came from the Republican reconciliation plan. That is where the
$600 billion came from that he said wasn't nelping.
But let me ask the gentleman from Florida, do you think the Secretary of the Treasury, A, should have done what he did; B, allowed us to default; or, C, done something else, and what would
that be?
Mr. MICA. If I could respond, Mr. Chairman, first of all, I think
Mr. Saxton outlined how the Administration planned the robbery
and executed the robbery; and I detailed the effects of the robbery
on the people of this Nation. You can make light of this, but I am
telling you
Mr. FRANK. Would you answer the question?
Mr. MICA. I don't want to be interrupted, Mr. Chairman.
Mr. FRANK. I know that.
Mr. MICA. I am trying to answer the question.
Mr. FRANK. Will you answer the question? My time is running
out, Mr. Chairman. It is my time, as you instructed Mr. Kennedy
to defer to Mr. Roth.
Mr. MICA. Could I have the courtesy of responding?
Chairman LEACH. Let the Chair say, there will be regular order.
It is the gentleman from Massachusetts' time, but it is the tradition of the committee that witnesses should have the right to answer in their own way.
Mr. FRANK. Mr. Chairman, it is my time. You did tell Mr. Kennedy to defer to Mr. Roth.
I asked a specific question which the gentleman doesn't want to
answer: Should the Secretary of the Treasury have done what he
did or should he have allowea default or should he have done something else? And, apparently, he doesn't intend to answer that.
Mr. MICA. Mr. Chairman, if I may, I would like to respond.
Again, I think that Mr. Saxton investigated the planning and execution of this, and I consider it stealing from these funds. I think
I also cited the current Vice President, who was a Senator, who
spoke about how these funds—and again you have to look at what
tney took—the last vestige of any cash was picked from the
Gr-Fund. We have already stolen $540 billion in unfunded liability.
There are reckless IOUs left in what should be a trust account. So
now we are down to the very last pickings. I say it borders on the
illegal. It described in fact what led up to this. But I am telling
members of this panel, this is only one example.
Mr. FRANK. This has nothing to do with my question. I would
like to reclaim my time.
Mr. MICA. The fund has been robbed, and how low this Congress
and Administration has stooped in stealing funds to extend the indebtedness and spending of this country, and we should in fact act
in a responsible fiscal manner. Thank you.




36

Chairman LEACH. The time of the gentleman has expired.
Mr. FRANK The last sentence, to point out, he did not answer the
question; he repeated the statement. We haven't gotten from either
of the gentlemen what they think the Secretary of the Treasury
should have done. The gentleman from Florida has explicitly refused to answer the question, which I understand from the position
he has taken.
Chairman LEACH. Mr. Bachus.
Mr. BACHUS. I hope we can reach consensus on one thing, Mr.
Chairman, and that is when we ask the Secretary of the Treasury
what potential actions are you considering, here is his answer.
Hold up the document. That is what he supplies to Congress. When
we ask the Secretary of the Treasury what options are you considering? Hold that answer up.
Mr. FRANK. Will the gentleman yield?
Mr. BACHUS. NO, I wfll not yield.
When we ask the Secretary of Treasury, share your legal opinions with us and your legal analysis, these are the answers we get.
I want to applaud Mr. Saxton for doing some heavy lifting and
simply, and I don't think what he said is all that irrational, he is
simply saying, please, provide us with answers, please provide us
with the documentation. I hope that all of us can agree that when
we ask for a legal analysis, does the Treasury have any legal analysis, and we are given this, I hope that all of us would say that is
not an answer. If we are going to make decisions, can we make
those decisions based on those answers? I don't think that we can.
We have asked the Secretary of Treasury for all his information,
legal opinions, legal analysis, options, in confronting the debt ceiling, and he has supplied to this Congress less information than I
supply to the IRS when I file my income tax. We have gotten less
documentation than I have to supply to the IRS. He may say 5,000
pages of information. But look at some of those pages. Can we not
agree that this doesn't lead to bipartisan cooperation? That this
doesn't lead to us making rational, reasonable decisions?
I could take that information there, I could probably buy a $1 lottery ticket based on that information. But I don't think—I certainly
wouldn't make a decision involving billions of dollars.
Let me say this. I am going to give two more illustrations. We
have been not only asking for this legal opinion and this legal analysis since early last fall, and Mr. Frank, the gentleman from Massachusetts, says 2 weeks ago we finally got a complete document.
It is sort of like a guy in a jail cell that has been kept in the dark
without food or drink for 6 months. Finally somebody hands him
a glass of water through the jail cell.
I don't know whether we are supposed to be grateful or still annoyed about all this, Mr. Saxton. Maybe we just ought to accept,
after 6 months, 2 weeks, and after a lot of these actions are already
taken, they finally give us the document.
I do have some good news and I want to compliment the Secretary of Treasury, that not only did we get that document, the
gentleman from New Jersey, but late yesterday afternoon we got
another August 16, 1995, legal analysis that we have been asking
for since at least November, and we have been told it did not exist,
it might exist, it is being prepared. And then we get it, and it is




37

dated August 16, and we got it late yesterday afternoon. You probably don't even have it. I don't know that you have ever seen this.
Mr. SAXTON. I have not seen that document. I would like to point
out to the gentleman also we strongly believe there are still a lot
of documents we have not received from the White House or OMB.
Mr. BACHUS. Here is one of them. I don't know whether they
found this in a closet on the third floor or where.
Let me say this. I think that everyone in America can understand this. I wrote a letter on December 15 as chairman of the Subcommittee on Oversight and simply asked for the names of those
persons attending the meeting between Treasury and representatives of the Wall Street security firms, which was reported in the
Washington Post on December 15. I was promised these answers
for 2 weeks. I will tell the Representative from New Jersey, I received them finally a month and a week later.
And get your pen out, I want to tell you who these people were
at the meeting. Question that I asked: "Please provide the names
and positions
of all Treasury officials involved in the meeting." Answer: 4<We will be providing you the names." That is the answer.
Mr. ROTH. Will the gentleman yield?
Mr. BACHUS. I will yield for a second.
Mr. ROTH. All of those documents are in the living quarters of
the White House. You can go down and check there.
Mr. BACHUS. The second question: "Please identify the security
firms and their representatives attending the meeting." Answer:
"We will be providing you with the names."
The third one is: ^Please supply a copy of all documents that relate to the meeting." Answer: "We are searching for copies of all
documents." At least it did not say we are shredding all documents.
Mr. KENNEDY. Will the gentleman yield?
Chairman LEACH. The gentleman's time has expired.
Mr. KENNEDY. Let him rattle on and then you are not going to
let him answer?
Mr. BACHUS. If he can ask me a question, I would like to ask him
a question.
Mr. KENNEDY. I am trying to answer.
Chairman LEACH. The time is up of the gentleman from Alabama. The witnesses have not been asked questions.
Mr. KANJORSKI. If the gentleman is the captain of the civility
team, I think his team lost.
Chairman LEACH. Are there further questions? I hope Members
will bear in mind, we do want to get to the Secretary. I think he
would like to come as well.
Mr. SCHUMER. I understand that. I would just make two points.
One, I would ask all members of the press to check with the gentleman from New Jersey, my good friend's staff. They got all these
documents 2 weeks ago. Yet since they—just ask them, did they get
them 2 weeks ago. They did.
Second, look at them. The whole reason people are worried about
redacted documents is there is something bad or nefarious in them.
There is nothing there. It is all bureaucratic gobbledygook. I would
ask all those documents be made public, and before any allegation
of some kind of impropriety is brought up, they are looked at.




38

Finally, I would just repeat Mr. Frank's question to the gentleman from Florida, because we have heard no answers here. We
have heard a lot of ranting and raving and no answers, and using
the word "stealing" and things like that that are pretty gross in my
judgment and don't fit Mr. Bachus's civility model.
In any case, I would ask him a simple question and ask him to
please answer i t If you were Secretary Rubin, on the dates when
the government would have been unable to pay its already accumulated debts, you have said what you wouldn't do. You wouldn't have
borrowed from some of these trust funds. What would you have
done? What would you have done to prevent default, or do you not
care about default?
Please answer the question as opposed to more unfounded rhetoric that really demeans not really the Secretary of Treasury,
whose integrity is second to none, but demeans people that use the
language such as stealing.
Mr. MICA. First of all, I think I tried to paraphrase the intent
that Senator Gore had laid out when they set up again these last
funds and set them aside and hopefully wouldn't be taken in this
fashion. I may term it stealing or robbing or bastardization. And
I think that is an adequate characterization.
More fundamentally, if I were the Secretary of Treasury and saw
what was going on, to see the indebtedness of this country, to see
how we have stooped to robbing from our retired Federal employees
and our senior citizens, we have basically robbed every fund, folks.
The cookie jars are all done. I would have encouraged the President
to sit down, make some adjustments to the spending and this outof-control indebtedness, and get this Nation's finances in order,
working with the Republicans and the Democrats and all reasonable people.
Mr. SCHUMER. Reclaiming my time, you have not answered the
question. Because they were sitting down at that time. They could
not come to an agreement. We all know that. The Secretary of
Treasury could have whispered to the President until the cows
came home, "come to an agreement." He might have even said, "go
along with the Republican plan." But that did not happen. You
knew it was not going to happen.
You are faced with a fiscal choice, not the policy on the budget,
but whether to take the money from the trust funds, borrow;
whether to allow the country to default; or some third fiscal mechanism. If you do not have a third fiscal mechanism, then by logic
you would say let the country default.
I am waiting for your third fiscal mechanism that would have
been available to the Secretary of Treasury.
Mr. MICA. I serve also on the task force that the Speaker has on
the debt limit, and there are a variety of other choices, all of them
are pretty grim.
Mr. SCHUMER. Name one.
Mr. MICA. Stealing from the gold reserve. He lists them in his
memo from the 22nd, some of the other options.
I think, again, we have stooped to a new low in this country
when we choose to rob the trust funds of the employees of this Nation. It is a low point, and it should be a low point for Congress,
it should be a low point for this Administration, and again, if I




39

were the Secretary of Treasury, I would have brought this to the
public's attention rather than using it as a scare tactic.
Mr. SCHUMER. Reclaiming my time, it is obvious the gentleman
has no solution. This is rhetorical ranting. He has not pointed to
a single action that the Treasury Secretary could undertake, other
than default, except for "some pretty horrible actions."
We rest our case.
Mr. FRANK. I thank the gentleman for asking the question. Now
I don't take it personally that he refused to answer. It is clear they
wanted to make accusations and not try to deal responsibly with
what the alternatives were.
Chairman LEACH. The time of the gentleman has expired.
Mr. MICA. He laid out the alternatives in his memo.
Chairman LEACH. I hope there will not be too many questions.
Mr. Orton.
Mr. ORTON. Thank you, Mr. Chairman. I do want to hear the
Secretary, so I will be very brief.
In the interests of accuracy of the record, Mr. Kanjorski and Mr.
Kennedy have raised the issue of the need for additional debt limit
extension regardless of which balanced budget proposal would be
enacted. Let me cite from the Congressional Budget Office: The Republican conference bill would result, this is the Balanced Budget
Act passed by the House and Senate, the conference report, according to CBO, would result in deficits in 1995, $164 billion; 1996,
$151 billion; 1997, $159 billion; 1998, $127 billion; 1999, $97 billion; 2000, $73 billion; 2001, $34 billion; 2002, a surplus of $3 billion. The net increase in deficit, therefore the required addition to
the Federal debt limit under the Republican conference report over
the next 7 years, $638 billion.
Under their final offer, according to the Senate Committee on the
Budget, the final Republican offer would result in the following
deficits: 1995, $164 billion; 1996, $159 billion; 1997, $165 billionnote that 2 years from now the deficit would actually be higher
than it is in this fiscal year—1998 would be $148 billion; 1999,
$125 billion; 2000, $102 billion; 2001, $60 billion; 2002, a surolus
of $1 billion, for a net required increase in the debt limit of $758
billion.
Under either Republican scenario, you would have to increase
the debt limit over the next 7 years from $638 to $758 billion.
The coalition budget, of which I was the principal sponsor in the
House, would raise the debt limit, would be required to raise the
debt limit as a result of deficits over the same 7-year period by
$517 billion. Period. Regardless of which approach we take to balancing the budget, we must increase the debt limit.
I will end with two other additional quotes from CBO. This is
CBO, page 48 of the Economic and Budget Outlook: "Voting separately on the debt is ineffective as a means of controlling deficits
because the decisions that necessitate borrowing are made elsewhere. By the time the debt ceiling comes up for a vote, it is too
late to balk at paying the government's bills without incurring
drastic consequences."
Finally, from page 54 of the same report: "Failing to raise the
debt limit in a timely manner, though perhaps bringing a difficult
vote on legislation to a head, only serves to make the Treasury's




40

job of paying the government's bills more difficult, and an extended
delay could have a significant effect on the government's credibility
and the interest rates that it must pay on future borrowing." That
is the nonpartisan CBO.
I would also like to hear an answer to the question what the Secretary of Treasuiy should do when faced with ultimate default.
There are numerous occasions which I will not go into since the
1950's, in the Eisenhower Administration, the Reagan Administration, the Bush Administration, where similar kinds of efforts by the
Secretary of Treasury to avoid default have been conducted, and I
look forward to the Secretary's comments.
Mr. VENTO. If the gentleman will yield, I think it is of really fundamental importance in terms of the major prerogatives of the Congress in terms of control over financing that is really being raised
here with regard to the actions of the Secretary of the Treasury.
We have, obviously, various laws in terms of the antideficiency
law and others that safeguard that particular prerogative, Mr.
Chairman. So I think we began to make allegations; I think they
have to be backed up. I would think and hope that if in fact there
is a conclusion, that in fact this is the case, that the Speaker and
the Majority Leader of the Senate would take such action.
One of the fears I have, quite frankly, Mr. Chairman, the way
the conduct of this has gone on, is that I think there really is a
question here whether or not Congress will be in the end losing
some of the responsibility or power it has because of the precipitous
type of action. So I think when you look over this, we have had,
after all, Mr. Zoellick and others here that were instrumental in
writing the laws and legislation in 1986 and 1987 with regard to
the authority to in fact borrow from these funds.
But if there is such a great misunderstanding or I am misunderstanding what is being alleged here, then I think the full legal exploration and extinguishing of those particular questions ought to
nave gone immediately in terms of one of our basic powers. So I
iust find the absence of that suggests to me that this is more a political rhetoric than it is in fact substantive legal questions that are
being raised.
Chairman LEACH. I thank the gentleman for his constructive observation. Mr. Bentsen. I believe this will be the last question.
Mr. BENTSEN. Mr. Chairman, I apologize for not being here earlier. Let me say as a new Member, tnis hearing underscores my understanding as to why Congress has such a low positive rating from
the American public.
Let me ask a couple of questions. I appreciate Mr. Orton for talking about the Blue Dog budget. I supported that budget. I am not
a Blue dog, I am a beige dog, I think. But I did support the budget.
He does underscore the fact that all of these plans add to the debt.
So my colleague was incorrect when he said the Republican budget
would not aad to the debt. I think the American public needs to
understand that.
Mr. Mica, let me ask you a question. Presumably, you are an expert as the chairman of the subcommittee that oversees the government pension plan. I would imagine you are an expert, you have
read all the things. Doesn't the law provide that the Secretary of
Treasury will restore all the funds, plus accrued interest, to those




41

pension funds? Doesn't the law require that? Just a "yes" or "no"
is sufficient.
Mr. MICA. The law does require that. However, looking at the
projections of replacing some of these funds, for example, you
weren't here when I pointed out the obligations.
Mr. BENTSEN. I am going to get to that. I would appreciate a
"yes" or "no."
Mr. MICA. Some of the projections of the funds that must come
out of the general treasury, for example, I said out of the current
trust account, the obligation which you as a Congressman must
make to meet that deficit, is now $24 billion a year, the money we
took out of that. By the year 2002, it goes to $53 billion. Within
3 decades, that goes to an amount the size of the current deficit.
Mr. BENTSEN. Answer my question first. The answer was "yes,
they are restored." Just a second, I need to follow up.
You also said in your testimony that nonmarketable securities
are put in there, and inferred I believe that somehow those securities' values were less than a marketable security.
For purposes of the government—for the government's accounting purposes, isn't it true that those securities also bear interest
and pay interest, and therefore would have the same value to the
bottom line? So isn't it incorrect to infer otherwise?
Mr. MICA. Well, again, this is part of the interest that we are
paying out of the general treasury, which I just spoke to, which is
currently $24 billion. If those assets were in fact maintained separately and fenced off, you would have some real assets.
Mr. BENTSEN. The question is, your statement infers someone is
stealing from pension plans. That is what you infer in your testimony. But isn't it true, doesn't the nonmarketable security which
is put in there, doesn't that pay interest, and therefore on the ledgers for the purposes of the pension fund, they accrue interest, and
therefore the full faith and credit of the U.S. Government backs the
payment of those pension funds? Is that not true as the chairman
of the subcommittee that oversees that?
Mr. MICA. Again, you are not talking about what we are talking
about here.
Mr. BENTSEN. I am talking about accounting and how the government keeps its books.
Mr. MICA. We are talking about taking G-Funds which are not
part of that fund. G-Funds are what we are talking about,
G^Funds that were set aside separately. He has chosen not to reinvest those Gr-Funds.
Mr. BENTSEN. But he put nonmarketable securities that do pay
interest.
Mr. MICA. I am not talking about the $360 billion he robbed from
the trust funds; I am talking about the G-Funds, which is a separate amount.
Mr. BENTSEN. Let me ask you a question: You said that the Secretary stole from the pension trust funds in your testimony. Would
you then assume that Jimmy Baker, who was Treasury Secretary
until 1985 and 1986, that he stole?
Mr. KANJORSKI. May I answer that? I am a member of the same
committee Mr. Mica is on.




42

I have sat here today, particularly in light of the caveat Mr.
Bachus said in civility, to use the words "robbery, stolen and theft,"
in association with tne Secretary of Treasury and what he did to
defend the full faith and credit of the United States is a malignant
growth on this institution.
I think. Mr. Mica, you ought to apologize, as you cited on the
floor of uie House for referring to the President of the United
States incorrectly, this is wrong, uncivil, and absolutely incorrect.
The fact of the matter, what the Secretary of the Treasury did
was perfectly allowed by law, had previously been done, and no action has been taken by any American, including Mr. Mica, who
could have brought a cause of action if he really felt it was any illegality or impropriety there. It hasn't been done and will not be
aone. This is misstatement and hyperbole for the purposes of political advantage and it should leave today, now.
We ought to allow the Secretary of the Treasury to come here,
tell us wnat he did, why he did it, and tell us what we can do as
a responsible Congress.
Mr. BENTSEN. 1 think the facts are fairly clear and I thank the
chairman.
Chairman LEACH. I would like to thank the panel. It has been
a long morning.
Our next witness is the Honorable Robert E. Rubin, Secretary of
the Treasury.
Let me just say to my colleagues, it is the position of our party
at this time that not only is default not on the table, neither are
constitutional remedies on the table.
Mr. Rubin, why don't we wait just a minute. The committee will
recess for 1 minute.
[Brief recess.]
Chairman LEACH. The committee will reconvene.
The committee will now hear from the Honorable Robert Rubin,
Secretary of the Treasury.
Please proceed formally or informally, whatever is your preference, Mr. Rubin.
STATEMENT OF HON. ROBERT E. RUBIN, SECRETARY OF T H E
TREASURY, U.S. DEPARTMENT OF THE TREASURY

Secretary RUBIN. Thank you, Mr. Chairman. I appreciate once
again being before your committee to discuss an issue of enormous
national importance, the debt ceiling, and an extension and increase in the debt ceiling.
In the past week, Mr. Chairman, the debt limit discussion has
reached a new stage and has proceeded in a welcome spirit of bipartisan cooperation. On February 1. Majority Leader Dole, Speaker Gingrich, and Majority Leader Armey wrote to the President
and committed to enact a debt ceiling increase acceptable to both
the President and to Congress by February 29 in order to ensure
that the United States continues to meet its obligations.
That same day, Congress passed the Archer legislation, legislation authorizing Treasury to borrow $29 billion outside the debt
limit. This bill, H.R. 2924, will enable us to deal with the March
1 crunch date of benefit payments. It was adopted with the full
support of the Congressional minority, which has urged action on




43

the debt limit throughout this process. President Clinton signed
that bill in the Oval Office this morning.
Now we need to move on and put in place legislation that addresses the debt limit problem on a long-term basis. By ensuring
that this country can meet its obligations, we protect the holders
of public securities, Social Security recipients, and other beneficiaries from any additional risk. It is clearly time to get this job
done now.
Since my last appearance before this committee, Mr. Chairman,
much has changed. We have reached a common understanding of
how important it is to protect the creditworthiness of the United
States, a vital national interest that must never be tarnished by
anyone for any purpose. It is now time that comity replace conflict
and that the debate over the debt limit be drawn to a close.
Last December I testified before this committee about the actions
I had taken and anticipated taking to protect America's creditworthiness absent adoption of a clean debt limit. I will only briefly
review that history today and then turn to more current issues.
In July 1995, our Administration began asking Congress to adopt
a clean debt limit bill. Our communications on this matter were
consistent and clear. I said first, default is unthinkable; second, the
United States will not default because, in the final analysis, Congress will fulfill its responsibilities and pass acceptable debt limit
legislation; third, if Congress did not adopt such legislation, Treasury would be forced to use extraordinary means subject to resolving
legal and practical problems to avoid default; fourth, that I would
notify Congress before taking any extraordinary actions to ensure
that the U.S. Government fulfilled its obligations; fifth, passage of
a clean bill would permit the debate to proceed on its own terms,
the debate on the budget, unencumbered by risks to the Nation's
credit.
Because the debt limit was not increased last fall, it was necessary for me to take the actions that I did take in order to assure
that we had cash and debt limit capacity so the Nation could meet
its obligations. I will not recite the list of those actions, Mr. Chairman, but they are in my submitted testimony. I will comment only
on one, and that was the final and critical action on November 15.
On November 15, I was forced to invoke statutory authority in
the Civil Service Retirement Fund and Disability Fund provided
the Treasury Secretary by a Republican Senate and Democratic
House and signed into law by President Reagan.
November 15 was the date when we would have been out of debt
limit room and out of cash and unable to meet the financial obligations of the United States of America. We were on the eve of
default.
Counsel, both in Treasury and the Office of Legal Counsel at the
Justice Department, had consistently advised me that this decision
with respect to the Civil Service Fund and the application of that
statute could only be made in the context of the facts that existed
on the eve of default.
It was only at that time that I was able to determine that we
could make the judgments necessary to replace approximately $40
billion in securities from the Civil Service Retirement and Disabil-




44

ity Fund and $21.4 billion in securities from the so-called G-Fund
with non-interest-bearing cash credits.
As I said to this committee in December, workers and retirees
are fully protected by the statutes that authorized those actions.
The asset value of those funds was reduced by not one nickel, and
the statutes provide for full and automatic restoration of unpaid interest. Both of those statutes explicitly refer to the use of those
statutes for debt limit management purposes.
Finally, on December 29 I took an additional $14 billion step,
and, as I told the committee last year, that measure has enabled
us to continue meeting the financial obligations of this country
through January and will continue to enable us to meet those obligations through February, to February 15; that is to say, through
February 14.
Each action I mentioned was necessary because a debt limit increase had not been put in place. Each action fit my criteria of only
employing those means that were within my legal authority, were
practical, and prudent. Every one of them was driven by my responsibility as Secretary of the Treasury to protect the full faith
and credit of the United States of America—only, only, by that concern.
As we entered the new year, Treasury continued to examine
other options. As I promised this committee when last I appeared
before you, we would report our findings to Congress and the
American people.
On January 22,1 announced that by February 29 or March 1, absent enactment of a debt limit increase, we would not be able to
meet the Nation's obligations. I reported that there were only three
remaining options available consistent with what was legal, prudent, and practical, that could be exercised by February 15 in order
to pay obligations due on that date.
These actions, approved by our Department's Office of General
Counsel and the Justice Department's Office of Legal Counsel, include: One, suspending the reinvestment of approximately $3.9 billion of dollar-denominated assets in the Exchange Stabilization
Fund, an action that has been taken by several prior Secretaries
of the Treasury; two, amending my November 15 termination on
the length of the debt issuance suspension period under the Civil
Service Fund to 14 months, thus permitting the redemption of approximately $6.4 billion.
However, let me point out that the final decision on the Civil
Service redemption cannot be made, once again, until we are on the
eve of what would otherwise be a failure to meet our obligations,
just as was the case on November 15.
Finally, exchanging approximately $9 billion of assets in the
portfolio of the Federal Financing Bank for an equivalent amount
of Treasury securities held by certain government trust funds; this
action is authorized by statute.
There are no additional legal and prudent measures that I can
take to meet our obligations. We reached that conclusion after considering and rejecting other actions because they failed to meet the
criteria that I have already discussed. I will not delay mailing tax
refunds owed the American people. I will not sell the Nation's gold.



45

I cannot legally go beyond the $9 billion in exchange assets—in
asset exchanges with the Federal Financing Bank.
Delaying tax refunds would hurt more than 70 million Americans
and woula still provide only a short-term deferral, not a long-term
solution, to the problem.
Secretary Baker dismissed selling gold in 1985 and said, "It
would undercut confidence here ana abroad based on the widespread belief that the gold reserve is the foundation of our financial
system and because Congress clearly has the power to prevent a
default by assuming its responsibility with respect to the debt
limit." That was Secretary Jim Baker in 1985. Exactly the same arguments prevail today.
I do not have legal authority to divest any of the other 189 government trust funds for debt management purposes. Only the
G—Fund and the Civil Service Fund where authority is explicitly
provided.
In addition, the President took Social Security off the table,
though, as I said a moment ago, I also did not have the legal authority to disinvest Social Security for debt management purposes.
As to the balance of the Federal Financing Bank assets, I have
been advised by counsel that the Federal Financing Bank assets we
have identified are the only such assets that can be sold within my
legal authority.
Let me also say, Mr. Chairman, that all of these measures and
the measures that I have taken—though in the case of the ones I
have taken, their use was absolutely necessary to avoid default—
are no way for a great nation to manage its financial affairs.
For all of these reasons, the commitment of the leadership to
move debt limit legislation acceptable to the President and to the
Congress by February 29, and the enactment of the Archer legislation which allows for orderly financing and relieves anxieties with
respect to the beneficiary payments due on March 1 and shortly
thereafter, are items of enormous importance with respect to the
debt limit and meeting the obligations of the U.S. Government.
The conclusive and correct answer is right before us. The Congress should pass a debt limit increase for at least 1 year to separate this issue from the budget debate and to get this issue out beyond the election. That would end the risk both for our credit and
for Federal beneficiaries. I think it is important, I think it is critical, that we do exactly that, and do it now.
This debate began last year when some people said that default
was an acceptable price for getting the version of the budget law
they preferred enacted into law. That kind of comment is not being
heard anymore. I believe that is because people now have a better
understanding of the enormous stakes involved in making sure
that this country meets its financial obligations.
In that sense, much has been accomplished during this difficult
period. A nation's financial reputation is an invaluable asset. Its
creditworthiness is a sacred trust. Our reputation has enormous
practical importance for this country. It should not be called into
question; it ought not be subject to uncertainty for any purpose.
We must honor interest and principal obligations, and we need
to protect Social Security recipients, veterans, indigent children,
military personnel, civilian employees, contractors with the Federal




46

Government—indeed, anyone who counts on the full faith and credit of the United States of America.
National leaders, regardless of party, have always acted to protect our creditworthiness. In my December testimony, I read affirmations of this principle from Alan Greenspan, Paul Volcker, two
Republican and four Democratic former Treasury Secretaries, and
comments from the major international rating agencies.
Protecting the Nation's credit is a bipartisan—indeed, a nonpartisan—tradition. More than a decade ago, President Reagan
urged Congress to adopt an increase in the debt limit. In a letter
he wrote to then Majority Leader Howard Baker, he gave voice to
sentiments I share today. He said, 'This country now possesses the
strongest credit in the world. The full consequences of default or
even the prospect of default by the United States are impossible to
predict and awesome to contemplate."
I continue to quote: "Denigration of the full faith and credit of
the United States would have substantial effects on the domestic
financial markets and on the value of the dollar in exchange markets. The Nation can ill afford to allow such a result."
Throughout this process, it has been my view that the Secretary
of the Treasury must act as so many prior secretaries have actea,
doing what is clearly legal and within the bounds of prudence to
protect the creditworthiness of the United States. We did what we
needed to do to avoid default, to make sure the country met all of
its financial obligations, and everything we did was done only for
that purpose.
We communicated our intentions to Congress clearly and well in
advance. Upon reaching the end of our options, we reported that
to Congress as well. We have now reached a new, and, I hope, concluding chapter in the debt limit impasse. Congress has taken
steps to protect this absolutely fundamental underpinning of our
economy, our Nation's creditworthiness.
I look forward, Mr. Chairman, to working with all of you and
with all Members of Congress so that we can make good on the
leaders' commitment to pass and sign debt limit legislation acceptable to the President and to Congress and then to return to the
hard but critical work of balancing the budget and raising the living standards of our people.
Thank you.
[The prepared statement of Hon. Robert E. Rubin can be found
on page 178 in the appendix.]
Chairman LEACH. Thank you, Mr. Secretary.
Let me just say, the Congressional leadership is, as you cited,
committed to resolving this issue on a timely basis. Indeed, no Congress has ever defaulted, and I am confident this Congress would
not have.
One of the key things to know is, though, in a legislative sense,
what are the time constraints of these decisions? And that has
been revealed, as of the end of this month now, mid-March.
But it has been my personal view that this time constraint issue
has been, unfortunately, not taken advantage of this year in ways
that it could otherwise. That is, prolongation of this whole debt
ceiling issue has clearly made compromise on the budget resolution
less likely and, quite frankly, has led to greater social splintering.




47

Here, as you know, and as we have talked about before, I think
it is symbolized in the Medicare issue. You have heard some concerns on some from my side of the aisle about documents that people believe were not provided on a timely basis where they were
requested.
I would express some concern about information that wasn't provided that was not requested. That is, it appears that we have nad
a change in the basic status of the Medicare Trust Fund. Instead
of earning $4.7 billion last year, it lost $35 million. That is a
change. It is an issue that is under review in the whole budget
circumstance.
The Republicans' balanced budget approach, which included lifting the debt ceiling, was vetoed in partial measure because Republicans were alleged to be gutting Medicare. So one of the questions
I would have is, "where was Treasury on this issue of the change
in status of the Medicare Trust Fund?' Why did you not advise the
Congress? Did you advise the executive branch and other parts?
And where has Treasury been?
Secretary RUBIN. Mr. Chairman, let me respond, if I may, to your
questions in a little different order than you presented them.
In terms of the Medicare Trust Fund, there was about a $36 million shortfall in 1995. On October 27 of 1995, this document from
the Treasury and the OMB was sent to every Member of Congress,
50 copies of it were sent to each of the budget committees, and it
fully discloses the $36 million shortfall you are referring to.
So as of October 27 of 1995, which is when the official document
was prepared, these numbers were fully available, not only available to Members of Congress, they were sent to each Congressional
office; 50 copies of each were sent to each of the budget offices.
I think the central point that this document makes though, Mr.
Chairman, is that it is absolutely critical, as the President has said
consistently from the health care debate of 1994 on, to deal with
Medicare. There is no question that the exhaustion date is approaching. It is currently estimated to be 2002.
Our best estimate is that this shortfall will not change that. If
it does, it will change it by a few months or perhaps get it into
2001. But with the shortfall approaching, what is necessary to put
in place are reductions in the rate of growth of Medicare, but in
such a way as to maintain an effective program.
That is precisely what the President has advocated. If his Medicare proposal were enacted, that would extend the exhaustion date
out to 2011. It is possible with this shortfall that you get down to
2010.
So I would say the primary import of the change in the Medicare
numbers which were fully disclosed to Members of Congress on October 27, 1995, would be to say we ought to get on with the Medicare changes that the two parties, roughly speaking, can agree on,
and that is the President's program, both in magnitude and underlying policy.
The other policy areas which we disagree on, on Medicare, are
the kinds of things that need to be debated out and, if necessary,
taken to the electorate in November.
On the question of prolongation, Mr. Chairman, the only reason
we had a prolongation of the budget process was because the two




48

parties, the congressional majority and the President, could not
agree.
The only objective that we ever had with respect to the debt ceiling increase was to meet the obligations of the United States of
America. That was the only animation with respect to any of the
actions we took. That issue, the debt ceiling and meeting our oblifations, could readily have been taken off the table by passing a
ebt ceiling increase. In fact, we consistently advocated the debt
ceiling be separated from the budget process, and let the budget
process proceed on its own two feet.
In terms of documents, Mr. Chairman, I have here a list of the
documents that were provided and the dates they were provided.
I think it was a very full provision of documentation with respect
to the request. The opinions on our November 15 actions were provided, if I read this correctly, on November 22, which was 7 days
after the actions were taken. From then until now, something like
4,300 pages of documents have been produced. We believe we are
in full compliance with the requests made.
If there are shortfalls in that compliance, Mr. Bachus, I can assure you, we would be fully prepared to share everything that we
have with you.
In terms of redaction, I gather that 2 weeks ago there was another production of documents which cured most of those
redactions. There were additional documents provided yesterday.
We continue to be ready to participate and cooperate with you in
any sort of production that is consistent with the requests that you
have made.
I think, Mr. Chairman, that responds to the three items you have
mentioned.
C h a i r m a n LEACH. Mr. Gonzalez.
Mr. GONZALEZ. T h a n k you.

Mr. Secretary, to follow-up, the Republican leaders of the House
and Senate sent a letter to the President on February 1, 1996,
which expressly commits the Congressional Republicans to pass a
mutually agreeable debt limit by February 29.
Mr. Cnairman, I would like unanimous consent to place that letter into the record at this point.
[The letter referred to can be found on page 225 in the appendix.]
Mr. Secretary, what progress has been made toward such an end,
and are you confident that the Republican leadership will fulfill its
commitment?
Also, would you consider an attempt by the Republicans to load
up the bill with controversial and unacceptable measures to be a
breach of that commitment?
Secretary RUBIN. Mr. Gonzalez, I think that that letter was a
very constructive step, because it was precisely what you just said
it was.
On its terms, what it said was that the congressional leadership
would provide an increase in the debt ceiling that was acceptable
to both Congress and the President. I think that is precisely the
kind of increase in the debt ceiling that we have been calling for
from the very beginning of this debate.
We have not since then had meaningful work with respect to fulfilling that commitment. But I don't take that as anything other




49

than the fact that the people simply have not gotten to the point
of working on this. But I would assume that everybody will act in
an appropriate fashion, and I take that commitment as being a
very, very positive development.
In terms of the last piece of your question, I think the letter,
upon its terms, says that the debt ceiling increase will be what it
should be, which is not loaded up—not used as a measure to try
to pressure anybody, either Congress or the President, into doing
things that they are not otherwise willing to do. but rather will
only have attached to it mutually acceptable otner measures, if
any.
Mr. GONZALEZ. All right, sir. Thank you very much.
Chairman LEACH. Mr. McCollum.
Mr. MCCOLLUM. Thank you very much.
Mr. Secretary, back in November a lot of us remember and a lot
of the public remembers that you were letting us know in no uncertain terms there was a great concern in your mind that we might
default and have a debt crisis. In fact, today you have pointed to
the November 15 date as a pretty important date in terms of those
things which you had to make decisions on.
I realize that you have a track record of being very meticulous
about how you have gone about things. You have always done that,
and that I do respect. There is a saying in the law, when it comes
to judging, the appearance of impropriety at times is just as bad
in many ways as taking the step across the breach.
There are those who are saying right now that you screamed so
loudly about the potential debt crisis that we had, and yet at the
same time you knew that you had the powers that you have outlined to us today, that in feet while you may not have technically
made the decision to use those powers, that you indeed were certainly, in your own mind, not going to let the default occur at that
point. Yet you created a great impression out there with a lot of
people in the general public that the Nation was on the brink of
default in November.
I would ask you, how do you respond to the critics who say, with
some appearance of justification, that instead of the Republicans
creating the debt crisis that we were accused of creating back in
that period of time, that indeed you yourself, by making those
shrill statements and not letting us know in a public and open way
you were not that concerned about what was going to happen in
the immediate future, you yourself created that debt crisis at that
moment?
Secretary RUBIN. I think the best answer is simply to recite what
actually happened. Every time that I referred to the impending
debt ceiling problem, which actually was October 31, and the potential for default problem, which was November 15, I, having
spent 26 years on Wall Street running trading operations and
being exceedingly aware of the importance of not undermining confidence in the market, always saia this Nation will not default because Congress will fulfill its responsibility, and, if not, Treasury
will take measures, subject to the caveat, if they were legal and
practical, which indeed they were.
Second, the decision that we made 2 or 3 days before November
15 was not technically made on that date, Mr. McCollum. We met




50

for several hours—I believe it was on a Sunday night—in the main
conference room of the Treasury to look at the facts as they then
existed and at the statute.
We got the Office of Legal Counsel attorneys on the phone at the
Justice Department, and we went through the application of the
statute to the facts.
Having spent many, many years, as I have, making very complex
legal decisions, I can absolutely assure you that tnat was not a
5-minute technicality, that was a many-houred discussion of the
application of that statute to those facts.
Up until that time, there could not have been a certainty that
we in fact could have obtained the resources necessary to get
through the November 15 and December 1 dates. Those were tne
two dates which, you may remember correctly, required about $60
billion if we were going to avoid a default.
In terms of "shrillness of tone," which is a phrase you used, I
would like to go back to that, if I may, for one moment too. I am
repeating myself to some extent, but it is very important to say.
All through this period, given, as I said a moment ago, the experience I had with respect to markets, I was exceedingly conscious
of the importance of not creating a problem with the markets. I
think the best evidence of the success in that respect is the fact
that the markets in fact took the problems that we had with the
calmness that I think was very, very important to this country.
Mr. MCCOLLUM. Mr. Secretary, with all due respect to the decisionmaking that you just outlined, and I don't doubt you went
through some deliberations on that, the memorandum tnat is redacted up there but which we now have had an opportunity to see,
which you produced to us, shows that long ago, before November,
gou had legal analysis showing you what indeed your path could
Now, I know there was debate, I am sure there was, and you described it rather succinctly to us today. But it seems to me that you
would have served the Nation far better had you then, on television, on the Brinkley show or elsewhere, outlined, these are the
Fowers that I see I have got; I have got this analysis yet to do, but
anticipate analyzing this in this way; and that while I don't like
the idea of being put in this position—whatever—the Nation is not
going to go into default because of these reasons.
Instead, it is my impression—correct me if I am wrong—that
maybe it was by error of simple misspelling that you actually said
on the Brinkley show in that timeframe that the auctions that
were going to be taking place the following day were canceled,
when in fact they weren't.
How do you respond to that? It is very difficult for me, even
though I know the technical niceties here, to understand why you
went about creating this. A lot of people think this was all part
of—and I can see why they might think that—an Administration
effort to bring pressure on the Republicans and this whole budget
discussion, instead of the other way around.
A very strange political maneuver that you obviously don't agree
with, but nonetheless, it has a ring of appearance of truth.
Secretary RUBIN. Mr. McCollum, I think the facts are in variance
with that interpretation. On October 17, I think that date is cor-




51

rect, you can check your files, but on October 17 we sent a letter
to the Speaker and the Majority Leader, saying that there were
measures that we could take subject to legal and practical uncertainties.
On October 31, we sent another letter, I believe, in response to
a question from the leadership outlining the conditions that were
requisite with respect to the Civil Service Fund.
I think on October 24, but I won't swear to the absolute date, our
staffs briefed the staffs of the, certain of the congressional staffs at
least with respect to the Civil Service Fund, and I believe it was
on a subsequent Brinkley show that I think was sometime a little
later, sometime in November, that I, in fact, did say that we would
be using the Civil Service Fund.
The point is that we were always very clear that there were
measures we could take, but we also were very clear, and I think
had to be very clear, because it was the case, that these were measures that we could not be absolutely certain we could use until we
got to the point that we could in fact make the decision about applying the statute.
Mr. MCCOLLUM. But didn't you actually say on the Brinkley
show, mistaken or otherwise, tnat the auctions were going to be
canceled on the next day when they were in fact not? That upset
a lot of folks.
Secretary RUBIN. They were postponed and the reason they were
postponed, Mr. McCollum, is because October 31 would have been
the settlement date. Had we proceeded with the auctions on a regular basis, then we would have had settlements on that date that
would have put us $3 billion or $4 billion over the debt limit. So
we had to do two things. One, we had to postpone the auctions; and
two, to remain under the debt limit.
Mr. MCCOLLUM. My time is up, but my problem was maybe your
linguistics that day in terms of your using "canceled" instead of
"postponed."
Secretary RUBIN. Well, if I could respond, I don't think there is
any question, Mr. McCollum, that we had to treat those auctions—
we had to cancel, we had to change the security, the amounts of
the securities that were bein^ issued, and we had to conduct the
securities in an unusual fashion, because of the fact that we had
a debt limit date on October 31. So I don't think there is any difference in import of what I said and what we in fact did.
Mr. MCCOLLUM. The impression you left, though, was one of
S e a t deal more crisis in doing that than you otherwise would have
[t. That is what I am concerned with. That is the whole point of
this.
Chairman LEACH. The gentleman's time has expired. Mr. Vento.
Mr. VENTO. I remember them being canceled, as a matter of fact.
I don't know what you said, but they were in fact canceled.
The question, though, is let's get back to this in terms of, you
know, has the President, to your knowledge, Mr. Rubin, or have
you advised him not to sign a debt ceiling extension at any time
that was not clean?
Secretary RUBIN. Mr. Vento, the President has been consistent
from the very beginning. Number one, he wanted to have a clean
increase in the debt ceiling so that we could get the creditworthy




52

ness issue off the table and separated from the budget; and, number two, I think that he has been the foremost person in the.country in decades, in decades, with respect to fiscal responsibility, because of the deficit reduction program that he put in place in 1993
and obviously now the balanced budget.
Mr. VENTO. I mean, I understand that the debt ceiling at times
has been attached to other measures that have received a majority
of votes and have received the signature of the President. So the
fact is that there is this issue about clean or not. But the issue is
that you obviously do that in the tenor of where you have agreement, where you have compromise, and of course that is what is
absent here.
The issue of course is that if this is going to be a tactic to in fact
accomplish what your goal is, I would suggest to my colleagues
that then I think it would be appropriate for the President, I mean
if this is going to be the tactic, if the debt ceiling is one of the tools
in the arsenal of tiying to accomplish what you want to do, then
to refuse to sign it unless they have my Medicare program on
there, unless they have my health care program on there. Of
course, Mr. Secretary, you would not advise that particular conduct
if it was the President who wanted to achieve that goal and/or
Members of Congress; is that correct?
Secretary RUBIN. Mr. Vento, I can assure you that the only objective we ever had was to protect the creditworthiness of the country
by getting in place a clean debt ceiling increase. It was never even
contemplated that we would attempt to use the debt ceiling increase in any other way and for any advantage of our own.
Mr. VENTO. I see no demonstration of that. In fact, it is quite to
the contrary. Here we are, we are almost 3 months without an extension of the debt ceiling. In other words, we are within 3 months.
Do you know, Mr. Secretary, what the longest period of time was
prior to this where a debt ceiling was not extended?
Secretary RUBIN. What happened—there has never been a period
even remotely like the one that we have gone through just now. In
the past what has happened when there have been disputes around
budgets or on other matters at a time that a debt ceiling was pending, you would have a series of temporary debt ceiling increases.
Mr. VENTO. YOU are saying this is unprecedented.
Secretary RUBIN. Unprecedented, by a vast multitude of whatever the previous time period was.
Mr. VENTO. SO I mean the concerns about default and the concerns about credit rating in terms of your expressions have to be
considered in the context that this is unprecedented. My understanding is that the longest period of time was maybe 3 or 4 days.
Secretory RUBIN. My impression, Mr. Vento, is that that is probably right. There was also never, at least we have not been able
to find in the record any evidence that in the past people have
talked about default, default as an instrument in attempting to accomplish another legislative purpose.
Mr. VENTO. SO we are operating really in a twilight zone in
terms of what is going on in terms of how we might conduct ourselves.
The fact is that when you talk about debt ceiling, the debt ceiling
has not been increased, and so you have been doing activities ana




53

actions under the context, under the ceiling of the debt ceiling
within the context of the normal revenue and spending flow and
borrowing of the Federal Government; is that correct?
Secretary RUBIN. And within the context of our clear legislative
authority.
Mr. VENTO. NOW, one of the concerns that has been expressed
and will be expressed by a later witness, and I apologize to him,
but I wanted to get the issue out, because I think you can probably
give some better feedback than most of us could to this particular
issue, and that is that if the market looks at this and suggests that
this is not a fundamental economic, underlying economic problem
in terms of default or a problem in terms of default, but recognizes
it as a political source, that it will discount that and that it will
have little impact or little meaning.
Secretary RUBIN. I think just the opposite, Mr. Vento. I think
that the notion that the United States of America would default,
not out of financial necessity but as a matter of political will, is actually in some ways more pernicious in terms of how we are perceived in the years and decades going forward. Clearly, this Nation
has the political ability to meet its obligations. But if a perception
develops in the financial markets that, as a matter of political will,
we are prepared not to meet our obligations for political purposes,
I think that that is exceedingly dangerous. Fortunately, we now
have a bipartisan coalescence around dealing with the debt limit,
increasing the debt limit, doing it in a noncoercive fashion and getting on with our business.
Mr. VENTO. I don't want to do anything to upset that particular
tenor, Mr. Secretary, but I would say that, you know, after all, I
suppose that since we have the workings of what was going on in
terms of your thought process here that I would like to have those
of the Speaker ana others that have made statements to the contrary in terms of how the debt ceiling would be in fact delayed, how
it would be—how a default would not be that big of a problem, and
so I think that, you know, it would be good to have I think on both
sides of this the full expansion of that.
Mr. Secretary, one further question, and that is, have you been
in any way legally challenged by any of the actions taken to date,
to your knowledge, in any shape or form or manner?
Secretary RUBIN. Mr. Vento, I think there is absolutely zero
question about our statutory authority with respect to everything
we have done and we have not had anybody—we have had nobody
challenge us in court and nobody has suggested challenging us in
court and we have not been notified by anybody saying that they
would consider challenging us in court.
Mr. VENTO. I know that these new changes that the Republicans
were going to be putting in place were effective; I didn't realize
that they were quite this effective. So I would suggest again, as I
said earlier, Mr. Chairman, I am sort of jealous really, I suppose
all of us are, of the prerogatives of Congress with regard to our
spending authority, and I think that seriously, if we have concerns
about that, I don't care for what purpose it is, that I think that
that is the constitutional prerogative that we ought to uphold. So
it doesn't give great comfort to the Secretary and his staff, but I




54

think that since none has been forthcoming, that is an indication
of the lack of merit in terms of the
Chairman LEACH. I thought you wanted to lead the challenge.
Mr. VENTO. Well, I very well may do it if I see the need for it,
Mr. Chairman.
Chairman LEACH. Mr. Roth.
Mr. ROTH. Thank you, Mr. Chairman.
Secretary Rubin, I have had a chance to look at your testimony
and I also heard your statement before our committee, and I have
to agree with you, Congress is not going to default, so I would have
to conclude that, you know, this issue of default is really a red herring and it is somewhat disingenuous to bring it up.
I think the basic issue here is that the debt ceiling goes up and
up and up, and now you are again coming before Congress and asking us to increase the debt ceiling from $4.9 to $5.5 trillion.
Now, you mentioned before that you have been on Wall Street for
26 years. You know, people always accuse Congress of not living in
the real world. So I asked a couple of our people back home, and
called people back home and asked, what would you ask the Secretary when he appears before the committee? One woman said, I
would ask him, would he take money from his children and give
it to someone who has borrowed an immense amount of money
from him before who hasn't even tried to pay anything back, would
he loan such a debtor more money? What would he tell such a borrower? I was just interested in what you would tell her.
Secretary RUBIN. Mr. Roth, the $5.5 trillion increase, which is,
I do believe, what Congress should do, was the number that appeared in the Republican budget resolution of last year, and that
is where we got that from. The reason it was in the Republican
budget resolution was in recognition that in order to meet the obligations that will exist under either of our budgets going forward,
the debt ceiling simply has to increase.
I might add as another comment that the debt of the Federal
Government quadrupled from 1980 to 1992, a period during
which
Mr. ROTH. Mr. Secretary, if I may be so bold, but I have taken
a look at your budget that you submitted to Congress the day before yesterday and in 7 years, there is nothing but spending increases; the next 7 years, nothing but tax increases. And how is
that going to fulfill the President's primary concern, which your
testimony indicates is to raise the standard of living for average
Americans? That doesn't seem to iibe, that doesn't seem to fit.
Secretary RUBIN. Mr. Roth, I believe that the deficit reduction
program that we put in place in 1993 was the first serious attack
on the deficit in a long, long time. It has brought the deficit down
by roughly 30 percent, and if I just may finish, has been the primary, not the only, but the primary factor with respect to the recovery we have had for the last 3 years.
The budget that we introduced this past Monday with our estimates of CBO scoring would bring us to balance in 7 years, just
as would the congressional majority, and would continue on that
track toward, of fiscal discipline toward balance, and I think it is
a continuation of exactly the policies that have brought us to this
point during the past 3 years.




55

Mr. ROTH. Unless my eyes are deceiving me, here are the total
outlays: Increased spending every single year, revenue increases
every single year, and I see a big minus sign in front of 755, which
tells me there is going to be an increase of over three-quarters of
a trillion dollars in spending.
Secretary RUBIN. Mr. Roth, in a growing economy you will find
that revenues increase under our budget; they increase under the
congressional majority's budget. That is because tax revenues increase with the increase in the economy.
As you know, both our budget and the congressional majority's
budget have a tax cut, although they are veiy different in magnitude, I agree with you on that, and they are different in the purposes and the direction of those who would be the beneficiaries.
Mr. ROTH. YOU know, in all due deference, Mr. Secretary
Secretary RUBIN. And second, both budgets have increased expenditures. The question is, can we go to balance, and I think the
answer is clearly yes.
The President put forth a budget that had been developed, actually by Senator Daschle, that the Congressional Budget Office
scored as reaching balance in 7 years, wnich is exactly what the
congressional majority is doing, and then he put forth another
budget on Monday that had the same purpose.
Mr. ROTH. YOU know, Mr. Secretary, we hear that same scenario
year after year and it keeps climbing year after year after year.
I have only so much time, but I nave to make one statement
here. I wonder if you are putting the right spin on this letter. Because as I read this letter, it says that, committed to act by this
date in a manner acceptable to both you and the Congress.
Boy, that is a big loophole. By the way you interpret it, everything is done. But the way I interpret it, wow, you could drive
semis through that thing.
Secretary RUBIN. Well, if you think that the majority leadership
signed a letter that was designed to have a big loophole, then I
think that suggests that you should discuss it with them. I took it
at face value. It said that it committed to increase the debt limit
in a manner acceptable to the Congress, which is themselves, and
to the President. I don't have it in front of me.
Mr. ROTH. All I am saying is that
Secretary RUBIN. I woula not have imputed to them that I put
a loophole in that letter.
Mr. ROTH. Well, neither would I. Neither would I. But it still is
a matter of interpretation and I think you are misinterpreting that
letter. Is that possible?
Secretary RUBIN. I really just take it at its face, Mr. Roth, at face
value.
Mr. ROTH. Well, so do I.

Mr. SCHUMER. I am glad we have agreement, Mr. Chairman.
Chairman LEACH. I thank the gentleman. I think the Chair
ought to make it clear that I am confident the words of the letter
were sincerely presented.
Mr. Schumer.
Mr. SCHUMER. Well, thank you, and I thank you, Mr. Secretary,
for having to endure this. I want to thank you for coming here to




56

be criticized for saving us from default. I will bet you never thought
you would experience that in all of your days.
The bottom line to me is when some—my friend from Florida
said, well, this is the Democrats' crisis for default, it is sort of like
putting the hostage on trial for the crimes of the kidnappers. It is
just unbelievable, the doublespeak here is appalling to me, and it
is almost embarrassing. I will again, lest we think that this issue
of default was brought about by the Secretary in some memo that
no one has paid any attention to, I am going to read again the
quotes from Speaker Gingrich. Quote, last April: 'The President
will veto a number of things and then will put them all on the debt
ceiling, and then he will decide how big a crisis he wants."
Later, Speaker Gingrich said about the budget debate: "I don't
care what the price is; I don't care if we have no executive offices,
no bonds for 30 days."
The bottom line is a simple one, Mr. Secretary. You know it, I
know it, everyone in this room who is not totally partisan and biased knows it, and that is that just as at one point some in the
majority thought shutting the government down would be a good
strategy and would bring the President to his knees, there was a
smaller, but very vocal group in the majority who thought going to
default would be the same type of strategy. And now that they realize it is not such a good strategy, they are trying to figure out
how to work their way out of the box.
So we have my good colleague from Wisconsin first saying, we
will never default, and then saying, all the people are saying you
shouldn't raise the debt ceiling. Well, you can't have it both ways.
Nor can they say to you, or they are saying to you, oh, you came
up with these mechanisms and yet you were still worried about default. How could you know that there might be other ways to borrow and yet still be worried about default, and what they don't
mention is that at the very same time they were putting legislation
on the floor of the House of Representatives to prevent you from
using those mechanisms. I remember, I remember personally talking to the Secretary about it and people in Treasury as well and
how worried they were that if that legislation had passed, then we
could have indeed defaulted.
So there is no contradiction in saying, yes, we know that there
may be some other mechanisms untried, uncertain how they would
work until you did them, but at the same time worrying that
if they didn't work or if legislation passed that the Congress,
majority-inspired legislation, that it wouldn't happen.
So I guess I would like you to address that point. How did the
awareness of the fact that the majority might cut off your ability
to borrow from these other trust funds play into your worries about
default?
Secretary RUBIN. Mr. Schumer, I think that the thing that was
unique about this situation, having now looked at a couple of decades at least of past circumstances around budgets and debt limits
and the like, is that this is the only time that we have been able
to determine in which there was serious talk by people in positions
of responsibility, of using default or the threat of default as a measure in an attempt to pressure or coerce in a budget negotiation,




57

and that was part of the context. That really was the context within which this discussion began.
Our entire objective during this entire period, and we conducted
ourselves in that context that I just mentioned, was to do everything possible to make sure that, number one, we met all of our
obligations; and, two—and I am sorry Mr. McCollum isn't still
here, because I think this is a very important point. Number two,
on the one hand, urge Congress to pass a debt ceiling increase, because that was absolutely essential, and at the same time not to
create anxiety in the markets. And I think the best evidence that
we succeeded, in pursuing those dual paths was the fact that the
markets did not in fact react adversely to the circumstances and
we managed our way through a very difficult period to the point
now where there seems to be a real coalescence around doing what
needs to be done without having adverse market reactions.
Mr. SCHUMER. Mr. Chairman, I yield back my time.
Chairman LEACH. Thank you.
Mr. Bachus.
Mr. BACHUS. Thank you. I appreciate you being here, Mr. Secretary. I do want to tell you this. I think I have told you this privately, but I want to say it publicly, that this talk about impeachment, that sort of talk, 1 have told you that I felt that was inappropriate, and that it was nonconstructive.
Secretary RUBIN. I tend to have the same view, Mr. Bachus.
Mr. BACHUS. This is—you know, when I hear Members attribute
that as the view of some of the Republicans, it is troubling to me,
and I want to make that clear to you.
I also want to—you mentioned today sort of an assurance to give
us disclosure of information, and I will tell you that for the August
16 document that we finally got late yesterday, when you read that
document, it actually at least supported and justified some of your
actions, at least I would think it was favorable to the actions you
have taken. It at least showed a carefully thought-out legal opinion
that much of what you did, you know, I may disagree with the policy, but at least legally you had grounds for that. So when we finally got the documents, there is nothing in there that—it certainly
did not imply that there was something in there that indicated you
had done anything improper. So it just sort of puzzles me sometimes.
I would like to say in that regard two things, one I have mentioned to your staff. In information you supply to us, they had mentioned that sometimes this information could be used by the financial markets, and I would say to you, I don't want that information.
I would say simply, slap on there something that this disclosure—
something to indicate tnat. I would rather not have the burden of
having that information and having it get out, but at least as opposed to iust a blank sheet of paper, give us some indication of
that. And then if we want to pursue it, which I don't think we
would, let us know.
Second, we have a problem sometimes, and I will give you an example, the February 7 letter to Jim Saxton where you mentioned
that there were materials which were pertinent, but which had
been supplied by other third agencies, or other agencies other than
Treasury that was in your files. Third-agency material and Treas


58

ury files. Sometimes it is hard for us, if we don't know what that
information is, we can't request it from someone else. I am not sure
that some of that information we shouldn't have. I would like to
work a little closer on that.
Secretary RUBIN. Mr. Bachus, let me say that there is absolutely
nothing in any of our files with respect to the debt limit that isn't
totally consistent with everything that we have been doing. I can't
speak to the August 16 document, because I just don't know why
you got it so late. The fact that it is consistent with what we have
done is on the one hand I suppose a positive; on the other hand
I can't tell you why it came up as late in the production as it did.
But I can tell you that we have made a full-faith effort to comply
with the request that we received. I think we already turned over
something like 4,300 pages. But if there are things that we haven't
turned over that you need, we will continue to work with you until
you have what you need.
Mr. BACHUS. I would just say let's sort of build on some cooperation and try to do—I think a lot of the confusion is simply we didn't
get it, and when we did, we wondered why we hadn't before.
Now, let me move on and ask you about a different subject, one
that concerns me, and I know at the Summit for the Americas
laundering of drug money came up. I think that is an important
issue. You are here on something else, but would you like to comment on what steps have been taken since the Summit for the
Americas? I think you went to Argentina.
Secretary RUBIN. Yes.

Mr. BACHUS. If I am putting you on the spot, I
Secretary RUBIN. NO, no, that is all right, Mr. Bachus. I think
that is an exceedingly important issue and one that I suspect is
going to be receiving a lot more attention in the years ahead.
As you know, because you wouldn't have otherwise asked the
question, money laundering is absolutely essential to organized
crime and drug trafficking, because it is only through that that
they can take the illegally gotten gains and turn them into usable
gains. One of the prime objectives of this Administration has been
to try to cut that cord.
Eight years ago, Treasury set up a separate organization within
its law enforcement capabilities to focus on precisely these kinds of
issues, but most specifically money laundering.
About—some months ago, I forget exactly when, I went down to
Argentina, as you said, and chaired a money laundering conference
of which we had all of the nations of the Summit of the Americas.
Our objective is to get the other nations of the Americas to join
with us in this focused effort with respect to money laundering.
I think it was actually quite a successful conference and we have
had some good results in this fairly short period since the conference. But I think that you have correctly identified what will be
a prime focus of law enforcement, not only in this Administration,
but I suspect in Administrations to come.
Mr. BACHUS. I would just like to encourage you to continue with
your initiatives and let us know in that regard. Obviously, that is
something that affects us every day and we need to spend more
time on it.




59

Secretary RUBIN. We would be delighted to do that. We would be
delighted, if you would like, to come by your office at some point
and discuss what is going on, because I think it is a very important
subject.
Chairman LEACH. The gentleman's time has expired. Let me also
mention to the committee, we will be holding a hearing on February 28 on this and related subjects.
Mr. Frank.
Mr. FRANK. Mr. Chairman, I would just say I believe that the
gentleman from Alabama repudiated that impeachment talk that
others had said. I refer to it, and I imputed it to some members
of the Republican leadership, because it came from the Chairman
of the Rules Committee ana it came from I believe the gentleman
from California, who is the head of the Republican Policy Committee, but I am glad to have it repudiated.
I am also glad that we have had repudiated by silence the wholly
intemperate and unfair attack on you, Mr. Secretary, from the gentleman from Florida, Mr. Mica. Mr. Mica, in your absence, made
these outrageous accusations appropriately characterized by Mr.
Kanjorski, and I am delighted to see that not one Member of the
majority has picked them up or carried them forward, and I think
it oug[ht to be very clear that this is disassociation by silence that
is entirety appropriate.
What I am curious about here is this theory. Apparently, I was
surprised to hear you accused of having come up with this whole
strategy of default. Now, I had been under the impression that this
was something the Republicans were talking about, but I guess
they have said it isn't true. So I find myself somewhat in the position of Groucho Marx's interlocutor, what Groucho said "Who are
you going to believe, me or your own eyes?" I guess I will believe
them for a while.
I want to congratulate you, because it seems to me this
strategizing that you have been credited with doing is even greater
in its brilliance than has been said, because apparently you somehow provoked them into raising this default issue. That was the
"rope-a-dope" strategy of all time. There you were, going about your
business, dropping your guard, sticking your chin out, and suggesting that they deal with default, because it did seem to me, looking
at it, that they threatened to default and thought that would force
you, you being the Administration, to give in, and then you found
a way to avoid that, using the trust funds. Half of them decided
to accuse you of stealing the trust funds; the others accused you
of doing something that was so routine, we don't know why it was
a crisis, but all of it seems to be your fault. How you managed to
plant that idea in Speaker Gingrich's head I do not know.
Mr. Schumer read those quotes from Speaker Gingrich, and your
cleverness in leading Speaker Gingrich into threatening default
certainly sets new heights. I don't think Andrew Mellon or Alexander Hamilton combined could have approached that degree of cleverness. I guess I would have to congratulate you for it.
The only other thing, though, I would like to say is the criticism
that you got for some of your department staff of not sending your
material in. Don't let the warriors overdo this. This stuff got redacted because somebody gave some overly legalistic interpretation.




60

Listen to the wires, but understand there is a broader political context, and people have a right to complain that the stuff didn't come
in cordially. Although I must say the tactic of putting up blank
sheets of paper when you have in fact had for 2 weeks what is really on the paper seems to me to be fairly tawdry. But you let yourself into it. So the next time you are brilliantly strategizing and
leading them into this briar patch for you of the default, don't ruin
it with that.
Finally, let me just ask you, if you would, because I think it is
fair for you to comment. Mr. Mica said that you had stolen funds
from the retirement system, that it was robbery, that it was the
lowest thing ever. As I said, several of us on this side have expressed our extreme distaste for that kind of language and the
Members on the other side have made clear by not talking about
it how little they think of it. But it does seem to me, you having
been accused of this stuff, you ought to have a chance to respond,
so I would ask you to do that.
Secretary RUBIN. I think, Mr. Frank, that I would commend to
Mr. Mica the statute, which I think is the best response to the
Mr. FRANK. Well, he might need some help with interpreting it.
Secretary RUBIN. Well, we have legal counsel that can do that.
In fact, we have opinions from both our counsel and the office of
Legal Counsel of the Justice Department, but the statute clearly on
its face says that the actions that we have taken can—or rather,
let me put it differently, that once you make the requisite findings,
then you can use the resources of the fund to the extent that you
make the findings.
Mr. FRANK. Let me just ask, the notion that this was all so carefully preplanned, you just made a clear point there about making
the findings. You could not have in fact made the specific factual
findings until very close to the moment. Is that correct?
Secretary RUBIN. That is exactly right, because what you needed
to do was to make a finding with respect to a debt issue and how
long a period of time might it be during which you might not be
able to issue debt in the normal fashion.
Obviously you can't know the answer to that until you get right
up against a true default and see what the facts are, and that will
enable you to make a determination as to what in fact is the period
during which you might not be able to issue debt in the usual
fashion.
Mr. FRANK. One quick question. Are any of the retirees, present
or future, of the Federal Government in any financial jeopardy as
a result of anything you have done?
Secretary RUBIN. The answer to the question, Mr. Frank, is absolutely not. As I said in my statement, what happened was that
nonmarketable government securities, which are offered to the
fund on special terms—they actually do better than they would in
the market—are redeemed, but in their stead are put credits on the
books of the U.S. Government backed by the full faith and credit
of the United States, with statutory requirements that the interest
be made good once the debt issuance period is passed and there be
full restoration of interest.
Mr. FRANK. I thank you for that.




61

Of course private companies are not comparable to the full faith
and credit.
The last point is, I would like your assurance that the whole
business of the trust funds leading to Mr. Mica's denunciation of
you for robbing and theft, I would like your assurance that this
was not a clever plot of yours that you led poor Mr. Mica into making these accusations and he is going to have to repudiate a couple
of months from now.
Secretary RUBIN. That is all much too clever for me, Mr. Frank.
All I tried to do was to protect the creditworthiness of the United
States of America, make sure we can meet our obligations and utilize our statutory authority toward those ends.
Chairman LEACH. Mr. Baker.
Mr. BAKER. Thank you, Mr. Chairman.
Good morning, Mr. Secretary.
Secretary RUBIN. Good morning, Mr. Baker.
Mr. BAKER. I am trying to go back and look at what has actually
happened over the course of the last 4 or 5 months and make sure
I am understanding properly the flow of events.
You were just looking at the statute, I take it, that authorizes
the actions from the G-Fund and the CSR Fund that clearly establishes legal precedent for you to take whatever actions, in your determination, are warranted on the eve of a principle of default, and
you make that assessment.
On that basis, there was some $21.5 billion from the G-Fund,
$39.8 billion from the CSR Fund, something in excess of $61 billion
transferred via that mechanism, not only to forestall the immediate
default, first question, but for residual operations for the remainder
of the year; is that correct?
Secretary RUBIN. Well, the two periods that we actually were
looking at, at the time we made the decision, were the November
15 date, which would have been a default date, and then the December 1 date, when there were additional substantial obligations,
and it was really those two periods we looked at together, although
we did it on the eve of what otherwise would have been a default
date.
Mr. BAKER. SO you really had two funding principles. One was
the defaulting trigger which you acted on just prior to November
14, but you also contemplated a later cataclysm on December 1
which you funded at the same time.
Secretary RUBIN. Yes, although let me make a point that I perhaps wasn t clear enough about. Those are the two dates we looked
at, that is correct, but the determination under the civil service
statute was not driven by the amounts of money we needed. It
could only be driven by the period with respect to which we felt we
might not be able—there was a reasonable chance that we would
not be able to issue, or we could not be sure that we could issue
debt in the usual fashion, and that gave you an amount of money.
That amount of money
Mr. BAKER. That is my point, I guess, is that it was not a distinct, clearly identifiable debt that we are going to resolve. There
was part A, which was a debt and then some future commitments,
possibly operations, future debt resolution, that was at some foreseeable time in the future, two or three later, perhaps.


22-450 9 6 - 3


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Secretary RUBIN. Well, no; if I could just put it slightly differently, if I may. The Gr-Fund is the amount that doesn't roll over
if you are at the debt limit, and then you can use that for 'debt
management purposes on its own term.
Mr. BAKER. YOU have to take it when you can get it.
Secretary RUBIN. The Gr-Fund, what you have to do is to make
a judgment about the debt issuance suspension period. That was
the judgment we made—that gave us an amount of money—that
we made on own merits.
But if you take those two amounts together, what it did do was
get us through November 15, what otherwise would have been the
default period, and also get us through the December 1 period.
Mr. BAKER. What are the residual assets in the CSR Fund today?
Secretary RUBIN. YOU mean the total amount?
Mr. BAKER. About $300 billion?
Secretary RUBIN. I think they are more like—well, if you count,
which I think you should count, the credits on the books that were
established to replace what was redeemed, I think it is closer to
$350 billion.
Mr. BAKER. My point is that you now have the ability, under the
statute you referenced, to make the judgments about events that
may take place, not tomorrow morning, but at some date certain
in the future, based on the availability of the CSR fund assets to
you to manage, with a fund that now has $350 billion in its pockets. What are the reasons for the stated consequential default if all
of those facts are in your favor?
Secretary RUBIN. No, because—that is why I made the point, I
made the distinction I made. I am glad you raised that question.
It is our judgment that you don't go at it that way. You don't look
at the monies in the fund and then look at the—you look at the
problem, the needs going forward—no, you don't look at the problem and say how much do you need. It is a rather curiously drafted
statute.
Mr. BAKER. I think so. If you don't look at the money or the problem, what are you looking at?
Secretary RUBIN. What you look at is, you look at how long a period you can reasonably judge you might not be able to issue debt
in the usual and normal fashion. That gives you a number of
months. You take that number of months, and you multiply it
times the amount of benefits paid per month. That will give you
an aggregate amount of money, and that is what you can take out.
That actually is unrelated to
Mr. BAKER. And this all happens in a few minutes.
Secretary RUBIN. Well, we spent a few hours doing it.
Mr. BAKER. When did you first start thinking about debt resolution processes? Did you do it in early November? Late September?
Secretary RUBIN. NO. We began thinking about contingency planning sometime in June of
Mr. BAKER. June 27, perhaps?
Secretary RUBIN. On June 27. I think we actually began a little
before that.
We looked at all kinds of ideas, almost all of which turned out
to be not available to us legally.




63

Mr. BAKER. SO that from your extensive work from June probably until the time or the day before the default, the only mechanism you could determine that was available was only this statute
authorizing you to take this action, based upon whatever might be
available in that fund on that date certain for events that may or
may not take place the next day?
Secretary RUBIN. Well, let me put this slightly differently, if I
may. When we started—we started with a wide range of ideas,
some of which I at least thought were reasonably promising.
As we went through the period, not only up to November 15 but
beyond November 15, almost all of the ideas we had ultimately determined not within our authority by our counsel or the counsel at
OLC, November 1 5 —
Mr. BAKER. I hate to interrupt. I am out of time.
Secretary RUBIN. Wait a minute. The November 15 we could not
have gotten through without the Civil Service Fund.
Mr. BAKER. Thank you. I appreciate your courtesy.
My last point—and this is meant with true respect for your abilities as a Wall Street participant, with some measured degree of
success, I might add—you were viewed as a fairly knowledgeable
participant in that process.
During the course of this projection from September to whenever,
today, with the repeated comment of default being imminent and
the crises that would result as a consequence thereof, the stock
markets went up 500 points. Why aren't your friends on Wall
Street listening to what you are saying?
Secretary RUBIN. I think they have listened to what I said. I
think you may not have come in at the time, Mr. Baker
Mr. BAKER. My timing is always bad, but go ahead.
Secretary RUBIN. That is all right. You didn't miss all that much.
But let me just on that particular point make a comment, if I may.
I really tried to accomplish two things at the same time, and I
was exceedingly conscious of that need, having spent as much time
as I have with markets.
On the one hand, we had to urge Congress to put in a clean debt
ceiling increase, because it was only by so doing that we could find
a long-term solution to this problem. At the same time, I was exceedingly conscious of not doing anything that would create uncertainty in the markets.
Mr. BAKER. Well, that was clear.
Secretary RUBIN. Let me say, I think that we managed to accomplish both purposes at the same time, and we did it, or I did it,
I suppose, predominantly by saying, on the one hand, we must do
this, and, on the other hand, I do not believe—and if you look back
at my statement, I always said this—I do not believe we will default, because Congress will fulfill its responsibility.
Mr. BAKER. I would agree with that, but I would come to a
slightly different conclusion, because there were published accounts
in the media saying, here are the statutory authorities, the funds,
the assets; friends, it ain't happening; this Secretary can do what
he needs to do in order to get this problem resolved; and the political consequences were a different matter.




64

But the point is, there were different tools at your disposal to
avoid default, and that was evident to the markets because they
knew at no time would there likely be a default.
Secretary RUBIN. Mr. Baker, let me tell you, having lived in markets, whether markets think—it is a very complicated question.
Mr. BAKER. They buy the rumor and sell the fact, I know.
Secretary RUBIN. Well, if it was that simple—well, let me tell you
what actually happened. What actually happened is precisely what
I said, which is that early in the process we identified a relatively
wide range of possibilities; almost all of them got knocked out as
we did our legal analysis.
The civil service one was one that was clearly available to us on
its face. It was equally clearly the case that we could not make that
decision, and therefore nobody could be certain whether we could
get enough money out of that to get through November 15 until the
eve of default, and that is when we had a several-hour meeting at
Treasury, during which we analyzed the application of that statute
to the facts that existed.
Mr. BAKER. Are you certain of that now, or has the CSR Fund
been fully exploited? There is no room to move now?
Secretary RUBIN. It is our judgment that we cannot take anything out of the Civil Service Fund in addition to the 12 months
that we have taken, plus the two that we may be able to take.
Mr. BAKER. I mean the funds that have been replenished that
were taken out.
Secretary RUBIN. It has nothing to do with that. It has to do with
respect to the debt issuance suspension period. It is a very technical standard that has to be met. In our judgment, if we do the
full 14 months, that will be the most that we can do.
Chairman LEACH. Thank you, Mr. Baker.
Mr. Kanjorski.
Mr. KANJORSKI. Thank you very much, Mr. Chairman.
Mr. Secretary, I am not sure why we are here, but since we are
here and we have to occupy this time, we might as well.
Is it not correct that under your leadership and President Clinton's leadership, this is the first time in decades that the deficit of
the United States will decrease 4 years in a row?
Secretary RUBIN. Mr. Kanjorski, I think that it is the first time—
I know it is the first time since Mr. Truman was President that
that has occurred. In fact, it is the first time since Mr. Truman was
President that the deficit has decreased 3 years in a row. Four
years might take you back even further.
Mr. KANJORSKI. Isn't it correct that in inflation-adjusted dollars
the deficits during the Clinton Administration are smaller than
those of either the Bush or the Reagan Administration?
Secretary RUBIN. On an inflation-adjusted basis, the deficits are
lower, but even on a non-inflation-adjusted basis, I believe they are
lower, and they are certainly lower. In fact, the last deficit proJ'ected by the outgoing Bush Administration was in the neighborlood of $300 billion. Tne deficit of the last year of the Bush Administration was, I think, $290-some-odd billion. You had better check
my number; I am not sure.
This year's deficit is about—the year just passed—$164 billion.
The deficit as a percentage of total economy, which may in some




65

ways be the most useful measure, has fallen by more than 50 percent. We now have the lowest deficit as a percentage of our total
economy among the G-7 nations.
I really and truly believe that the last 3 years with respect to fiscal responsibility have been the most important 3 years probably
in decades with respect to establishing the fiscal responsibility of
this country.
Mr. KANJORSKI. In reality, Mr. Secretary, if you took the period
of time, 1945 when the United States ended the Second World War,
you took the gross domestic product of the United States and the
gross debt of the United States at that time, and you compared
them, and you compared the gross domestic product today and the
gross debt today, it is actually, percentage-wise, less today than it
was when we ended the war in 1945?
Secretary RUBIN. When we ended the war, yes, that is correct.
You mean debt as a percentage of the total economy?
Mr. KANJORSKI. Right.

Secretary RUBIN. Yes, that is correct.
Mr. KANJORSKI. And the reality was that from 1945 until 1980,
when we had a new theory put in of supply side economics, the real
debt of the United States under that 25 years of Democratic control
of the Congress, the real debt of the United States decreased by almost 60 percent. Isn't that correct?
Secretary RUBIN. That number I truly don't know, but I do know,
Mr. Kanjorski, that it decreased very substantially, and then it
quadrupled from 1980 to 1992.
Mr. KANJORSKI. Over 60 percent of what we are trying to refinance today was debt run up under supply side economics that said
you could cut taxes significantly, you could increase spending on
defense significantly, and you could get to a balanced budget by, I
think, 1984, or I won't run for reelection. Wasn't that the promise
i n 1980?

Secretary RUBIN. I truly don't remember.
Mr. KANJORSKI. We couldn't recall that anyway, probably, the
people that were engaged in making that commitment.
Is there any reason in the world—I mean actually you are being
watched by probably 50, 60 million Americans—is there any reason
in the world why we should be terribly pessimistic as to the economic future of the United States, where we are going, what we
can attain, and what this whole land is about today, or do you view
the future of America as I do, as probably one of the most pessimistic times, and the world indeed is perhaps almost a revisit to the
Renaissance period of centuries ago, that we are about to explode
in intellectual pursuits, in science and technology like we have
never before, and that maybe the correct perception of the whole
country is that our institutions of governmentr—or maybe that
means the world—is one of our bigger problems?
Secretary RUBIN. AS Secretary of the Treasury, I spend a reasonable amount of time with the nnance ministers of other countries,
and we meet, the G-7 finance ministers—the seven big industrial
countries meet on a roughly quarterly basis.
It is very interesting at those meetings, Mr. Kanjorski, because
what you do is, you reflect on the strengths and weaknesses of respective countries.




66

I think this country is remarkably positioned for the future, but
I think it is veiy important, if we are going to realize our potential,
that we have in place the right public policies, and, on the one
hand, I think that that requires that we continue with the fiscal
discipline that the President started in 1993 and go toward a balanced budget.
But I think, similarly, it requires that we have appropriate public investment in education and training, technology, and the environment, and the other areas that, in the Presidents judgment and
I think it is absolutely right, are essential if we are going to be
competitive and productive 5, 10, 15, 20 years from now.
Mr. KANJORSKI. Thank you very much, Mr. Secretary.
Chairman LEACH. Thank you, Mr. Kanjorski.
Mr. Ehrlich.
Mr. EHRUCH. NO questions.
Chairman LEACH. Mr. Cremeans.
Mr. CREMEANS. Thank you, Mr. Chairman.
Thank you, Mr. Rubin, for being here this morning, or this afternoon, ana offering testimony. I only have at least one question, a
statement, and then I will yield back the balance of my time.
You know, I have heard testimony from you this morning saying
that the $4.9 trillion debt limit really needs to be raised to $5.5
trillion in order to avoid default on our government obligation. You
alluded earlier, Mr. Rubin, to, or perhaps referenced, a remark to
the effect that maybe a congressional committee or some other oranization in which you led me to believe that you, yourself, may
e puzzled about the $5.5 trillion.
For the record, do you agree that the $5.5 trillion figure is, in
your opinion, the best estimate as to where we should raise this?
Secretary RUBIN. Well, the $5.5 trillion was the debt ceiling increase contained in the Republican budget resolution of last year,
and it seemed when we analyzed the Republican budget resolution
that their analysis was correct and that was a number that would
protect us with respect to meeting our obligations for quite some
period into the future, so we adopted their number.
Mr. CREMEANS. But you would agree, yes, that that is a figure
that you would support?
Secretary RUBIN. I would support that number, yes.
Mr. CREMEANS. O K You know, Mr. Rubin, let me, in all honesty—and let me be honest with you. You know, I like the idea of
attaching budget constraints and entitlement reforms to debt ceiling legislation. The President, Members of the minority, and yourself are all favoring a so-called clean debt limit bill. Not only is
there historical precedent for a loaded debt bill, but the most notable of which is the last one, which contained the largest tax increase in American history and played a role in getting me here
today.
The budget constraints and entitlement reforms actually that the
majority intends to add to this debt ceiling, I hope, will make future debt limit increases unnecessaiy, and that is my comment. Do
you have a response to that?
Secretary RUBIN. Well, I guess the best response is that whether
you put in place the President's balanced budget proposal—and it
is actually two now, one that—well, one was scored by CBO. That




67

was the one developed by Senator Daschle, but the President said
he would sign it. Or you take the one that he proposed last Monday, which we have estimated by CBO procedures, although obviously it hasn't been submitted yet.
In either case, you are going to need an amount of additional
debt ceiling room that is roughly the equivalent of that that you
are going to need with the congressional majority's budget. That is
why I say, it seemed to us a sensible thing to take the congressional majority's $5.5 trillion estimate in tneir budget resolution
and endorse that.
As far as historical precedence is concerned, in 1993 there was
no use of the debt ceiling, there was no need to—well, no need to.
There was no use of the debt ceiling; there was no talk of default.
What you had was a budget that I think clearly made an enormous impact on fiscal responsibility and the fiscal position of this
country adopted well before the debt ceiling would otherwise have
been hit.
Furthermore, if you go back in time, I think that you will find
that there has never been a period until now when there has been
serious talk about using default as a method for attempting to accomplish a budgetary purpose, and I think that the leadership
should be commended, and I really think they have been extremely
constructive in the letter that they provided to the President on
Februaiy 1 saying that they are committed to providing an increase in the debt ceiling without taking any measures that are not
acceptable to the President and the Congress.
Mr. CREMEANS. Thank you, Mr. Rubin.
I yield back, Mr. Chairman, the balance of my time.
Chairman LEACH. Mr. Kennedy.
Mr. KENNEDY. Thank you, Mr. Chairman.
I want to just follow up on the point you just made, Mr. Secretary. You know, I thought at an earlier point in the hearing, Mr.
Chairman, you mentioned the fact that there would be no question
that the debt ceiling would, in fact, be raised and that we would
not default on the debt of the country. That is the kind of language
that I think people are looking for, and that is the kind of message
that I think would avoid a lot of the angst and concern that people
have had over this issue.
The trouble is, as you know, that while some responsible members of your party have voiced those sentiments, at the same time
there have been these sort of fits and starts where other members
come out, such as I saw a couple of weeks ago, Dick Armey saying
that perhaps this wasn't going to be able to move forward, ana
then Mr. Archer also sent a letter indicating that he had certain
measures he wanted to attach to the debt ceiling that perhaps
would not have—in fact would certainly not have gotten past President Clinton.
So the question is really fundamentally whether or not you believe there is a real commitment by the Kepublican leadership and
the members of the Republican Party to allow this issue to get behind us and your sense of whether or not this is an issue that, if
we have differences, we are going to be able to work out, and that
we are not going to try to attach this to a very controversial set
of issues.




68

As Secretary Rubin iust pointed out, in the past there has been
no question that the debt ceiling has been attached to various issues. The difference was that those issues always had the support
of a majority of the Members of the House and Senate. That is not
true with some of the provisions that have been floated to attach
this debt ceiling to.
So I wonder, Mr. Chairman, if you might want to comment on
it first and then see what the Secretary has to say.
Chairman LEACH. Well, first, let me just say I am confident in
the sincerity of the leadership position and that there will be a
debt limit extension that will be acceptable to the executive branch.
Now, in terms of history, I think one has to be very careful. The
only modest correction I would make to the gentleman is that there
already has been an approach that was acceptable to the majority
of both bodies, and we had a balanced budget that included a debt
ceiling limit that was vetoed by the President.
So what is needed is either an approach acceptable to the majority of the body and the President or an approach that has twothirds support of the body, and so that a veto can be overridden.
Clearly, in my judgment, my party has underestimated the constitutional power of the Presidency, and, in underestimating that
constitutional power of the Presidency, there has been a belief that
more might be achieved with a debt ceiling issue than perhaps has
been the case.
But it has also been historical that debt ceilings have been tied
to budget issues. The gentleman has voted on several, as have
other members of the committee.
But it appears to me a certitude that accommodation will be
reached in the debt ceiling later this month, possibly in the first
few days of March, but perhaps the last days of this month. What
is not 100 percent clear to date and what will take some negotiations over the next several weeks will be exactly the framework.
But I don't think the Administration will be tested on that.
I would also say, just speaking personally, and it is my—if there
is any view that this gentleman has, it is that the prolongation of
this debate has unfortunately lessened the likelihood of a budget
resolution and, I think, contributed to increased societal splintering, and that the final measure of the political system has been
tested and found a bit wanting.
But that is just a personal view and may not be shared by other
Members.
Mr. KENNEDY. Well, Mr. Chairman, in response, I would just like
to say that there have been several times over the course of the
last several years when I have mentioned to you that I thought
that you stand up for what you think is right for the country. You
have done it, I think, again in the remarks that you have just
made, and I think it is a testament to your leadership that you can
come out and deal with an issue that is this divisive in the
straightforward manner that you just did, and I appreciate it.
I don't know, Mr. Secretary, if you want to add anything.
Secretary RUBIN. If I could just add one comment, Mr. Kennedy,
it has certainly been true that the past debt ceiling increases have
been associated with the budgets, but it is my impression, Mr.
Chairman, having talked to former chairmen of budget committees




69

as well as others that have been involved, that there has never
been an effort to use default or the debt ceiling as a means for
pressuring the President into signing a budget that he did not
otherwise agree with, that instead what you nad were a series of
temporary increases rather than an attempt to use the threat of
default as a mechanism for achieving a political, or a legislative,
purpose.
Chairman LEACH. Let me respond briefly to the distinguished
Secretary. I think, very explicitly, there are one or two instances
where that did occur. I think the 1990 or 1991 timeframe was one.
But putting that aside, there is always the implicit understanding that debt ceilings had to come with the budget priorities of the
Congress.
But in the 1980's it was very well understood, and this is one of
the reasons, for example, that Republicans would largely have
voted against debt ceilings in the 1980's, Democrats would largely
have supported, was the understanding that the debt ceiling was
designed to accommodate a magnitude of spending. Implicit here is
coercion of Congress vis-a-vis the executive branch or the constitutional role of Congress vis-a-vis the executive branch.
But as all of us will recall, President Reagan articulated—more
than any American President—discomfort with the social programming agenda. And yet he had to swallow that, as President of the
United States, because of a majority in Congress that was a little
bit of a different view, and he wanted also to pass somewhat increased defense spending.
So the combination for an increase in defense was an even greater increase on the social side, and then all of that was implicitly
involved in the debt ceiling debate. And what the debt ceiling has
provided, in my judgment, over time has been the discipline of
some timing decisions that, unfortunately, have not taken place in
precisely the right way, or precisely in an orderly way at this time.
Secretary RUBIN. I agree with part of what you said. I will just
give you a slightly different impression.
I think what you said is correct, but at least my understanding
of what happened in the past, you first had the budget debate; as
you said, President Reagan had to accept certain things he didn't
want; then the debt ceiling got attached to the budget bill. But I
don't think there was ever a time when it was turned around the
other way and a President was told, if you don't accept our version
of the budget, then we will countenance possibly a default. And
that is why, in 1990 I think it was, it was something like six shortterm temporaries while the Administration and the Congress tried
to work out I guess it was the budget and, I think, GrammRudman at the same time.
Chairman LEACH. Well, there are cart-and-horse issues here, and
maybe there has been a little different emphasis. But I would be
very careful.
I mean, you know, it is always fair for a political critic to quote
someone, and I have always found, in my life, the worst things are
when they quote you accurately.
So it is true that you have some accurate quotes about the
Speaker of the House. On the other hand, it is also true that the
Congress, in the final measure, did not precipitate default and that



70

the Congress, in the final measure, has kept trying to negotiate
with the executive branch. So you have differences of judgment.
Mr. KENNEDY. Mr. Chairman.

Chairman LEACH. It is the gentleman's time, and I will allow
him several additional minutes oecause the gentleman has entered
into a debate that I have taken from that time.
Mr. KENNEDY. That is fine, Mr. Chairman. I appreciate that.
The only point I would make is that when you say that the Congress has not precipitated a default, the truth of the matter is that
the only reason why it has avoided the default was because of the
actions taken by the Secretary, which he has been so terribly criticized for, and I think very personally attacked even in this committee today, and I think that it is—he is attacked for the tactics that
he employed to avoid the default, and yet he would have been even
more attacked if he had allowed the country to go into default.
So while I appreciate the sentiment that you are trying to get
across, which is one of some kind of conciliation here, I also think
that it would be wrong to suggest that somehow this has been a
complicity strategy of tne Congress to go along with the Secretary
in allowing the country to avoid default.
I would say that the Secretary has jumped through about 87 different hoops in order to make certain that the country avoided default, and now, as you point out, Mr. Chairman, when it has come
to the reality—the Congress has come to the reality that this strategy of trying to jam the President is not going to work, there is an
accommodation that I think in the last few days is starting to develop, and that I think is a very positive development and one that
I think I certainly welcome, and it sounds like the Secretary welcomes as well.
Chairman LEACH. If the gentleman will yield for a second, his
time, I am sorry to say, has basically expired.
Let me say, at the risk of being trite, this is kind of an analogy.
I look at the debt ceiling and time constraints much the way you
look at a college term paper. Often you don't do your work until
the end. When they keep getting prolonged, the key thing is to
have certitude. Once you have certitude of timing, the history of
this Congress and the country has always been that they abided by
that timing deadline.
We have certitude the Congress is going to abide. I personally
wish we would have had a certitude at an earlier time period.
I cannot challenge and have never challenged the legality of the
Secretary's steps.
Mr. Orton.
Mr. OHTON. Thank you, Mr. Chairman; and, Mr. Secretary, welcome. I appreciate your coming before the committee today.
I am somewhat surprised by the suggestion from some of my colleagues that there was perhaps some impropriety on the part of the
Treasury Department in as early as June, considering alternatives
to default. It would seem to me that it would be malfeasance in office not to consider alternatives to default.
Following the suggestion that it was not the Congress that
precipitated the default, it is the Congress which sets the statutory
limits, and it is the Congress' obligation to enact an extension of
that limit in a timely manner or result in default, I would like to




71

ask, is it your opinion, if in October of 1995 you had not postponed
the auction and subsequently reduced the amount of securities auctioned in that auction, would it not have been the result that we
would have exceeded the statutory debt limit and thereby been in
statutory default?
Secretary RUBIN. There is no question. That is a factual matter,
Mr. Orton. The answer is absolutely yes.
Mr. ORTON. Also in November, by November 15 you told this
body that in fact we had hit the statutory limit and tnat if you did
not exercise your obligations under the statute to conduct cash
management transactions using civil service retirement funds, that
in fact we would go into default.
If you had not replaced those securities within the Civil Service
Fund with the long-term obligations and used those to avoid default, is it not your opinion that the country would have then defaulted at that point in time?
Secretary RUBIN. Yes, sir. Once again, this is not a matter of
opinion. There was roughly a $25 billion interest payment due that
date. Had we not taken the actions we took, we could not have the
met that interest payment, and that would have constituted
default.
Mr. ORTON. IS it not also correct that on at least two or three
occasions in late November and early December, that Congress, the
House of Representatives—specifically, the majority—attempted to
enact legislation which would specifically limit and prohibit the
types of cash management transactions that you were conducting
to avoid default, ana if in fact they had been successful in prohibiting those cash management transactions, that the country would
have also gone into default at that point in time?
Mr. RUBIN. YOU are talking about the legislation introduced
about a day before November 15?
Mr. ORTON. Yes.

Secretary RUBIN. Yes. Had that legislation been passed, I believe
my recollection is, we would have Been in immediate default on
November 15.
Mr. ORTON. IS it not also correct that in 1986 there was specific
statutory authority, to which you have referred, giving the Secretary of the Treasury the flexibility to disinvest specific trust
funds to avoid default?
Secretary RUBIN. That is correct.
Mr. ORTON. And is it not true that previous Administrations
have used similar types, not exactly the same cash management
techniques, but suspension of reinvestment in trust funds and so
on? In November of 1957 the Eisenhower Administration; in March
of 1979 and June of 1980, the Carter Administration; in September
of 1984, September of 1985, October of 1986, the Reagan Administration; in August of 1989, November of 1989 and November of
1990, the Bush Administration, the Secretaries of Treasury in each
of those Administrations on those occasions have also used similar
cash management techniques to avoid default?
Secretary RUBIN. Mr. Orton. other secretaries have used the various means to avoid default for a short period of time. As one of
your colleagues pointed out earlier, the period of time during which
this has had to have been done this time is unprecedented.




72

But it is true that other secretaries have had brief periods during
which they have had to manage similar kinds of situations and
take extraordinary measures to ao so.
Mr. ORTON. Thank you, Mr. Secretary.
I would just commend you for your integrity and your actions in
office to an individual default. I think it is the most irresponsible
action that a Congress could even consider, to put at risk and jeopardy the full faith and credit of the United States Treasury Department to be used as a political chit in a negotiation.
That is irresponsible, we all should Be embarrassed by it, it
shouldn't happen again, and I would commend you for the job that
you did in finding ways to avoid default.
I would hope that in fact we will do as the leadership has now
stated we will do and pass an extension of the debt limit. I hope
you will not be called upon again to find those legal mechanisms
to avoid default. But I commend you for keeping us out of default.
It would have been absolutely different, have been absolute disaster in this countiy and the world and worldwide, if the United
States had defaulted.
And it was through no fault of the Congress that we did not default. It was your specific actions, your positive actions, taken to
avoid default, and I commend you for it.
Secretary RUBIN. Thank you, Mr. Orton.
Chairman LEACH. Mr. Bentsen.
Mr. BENTSEN. Thank you, Mr. Chairman.
One of the advantages or disadvantages of being a junior Member is, you get to sit around and hear every other Member on the
panel talk. Unfortunately, you don't get to engage in the same hitand-run tactics as some of the other Members like to do.
Mr. Secretary, I was shocked to hear you say that the Republican
budget that passed both Houses would actually add, I think,
around $600 billion to the national debt. This is the same budget
that my colleague from Wisconsin, my Republican colleague from
Wisconsin, voted for and was talking about how they didn't want
to add any more to the national debt. Did you say their budget
would add $600 billion to the national debt?
Secretary RUBIN. It would add at least that, Mr. Bentsen. I think
actually the aggregate deficit may be somewhat higher than that.
But in order to make allowances for the debt that would be generated by the Congressional majority budget, in their budget resolution they proposed an increase in the debt limit to $5.5 trillion.
Mr. BENTSEN. $ 6 0 0 to $ 7 0 0 billion in real money?
Secretary RUBIN. YOU are right about the $600 billion and the
$5.5 trillion. I don't know if that would absorb all of the deficits.
They need at least that much.
Mr. BENTSEN. I think it is important we make the record very
clear.
Secretary RUBIN. I believe—if I may, I believe that was actually
a number that was only supposed to—no, that number wouldn t
even begin to absorb the full magnitude needed for a 7-year period.
Remember, you have to absorb your debt limit, not only your
deficits, but also incoming investments to the trust funds. I believe
that $600 billion would only be sufficient for about 2 years.




73

Mr. BENTSEN. SO the Republican budget actually added in excess
of $600 billion to the national debt.
Secretary RUBIN. Substantially in excess.
Mr. BENTSEN. We hear all this talk about how they don't want
to add any more to the debt. We now find out that is not entirely
accurate.
Secretary RUBIN. One thing one needs to remember, Mr. Bentsen—and you know this, I know—if we had a zero deficit, zero, we
would still be adding to the national debt because of the need to
invest incoming proceeds to the trust funds.
Mr. BENTSEN. Let me ask you very quickly, while it is not good
to add to our children's and grandchildren's debt that they have to
incur, would it equally not be as good to leave them with bad debt,
debt that you had defaulted on?
Secretary RUBIN. I think that, as Chairman Greenspan has said
and others have said, if we default once, we would create a question in international markets about our integrity with respect to
our obligations that would affect this Nation for decades. I believe
it would affect our creditworthiness, how it is perceived, the interest rates we pay, and it would be really a profoundly mistaken action to have taken with respect to the future of this country.
Mr. BENTSEN. About 2 weeks ago the long Treasury market lost
almost a point, maybe in excess of a point, in 1 day. It was the
same day, I think, that there was some discussion as to whether
or not there would be an auction if a debt limit could be achieved.
The New York Times Business Section—which, regardless of
what you think of their editorial position, the Business Section is
generally well regarded in Wall Street and the markets throughout
the world—alluded to the fact that that was because of the uncertainty over the projected auctions.
In addition, Treasury has said that your needs for this quarter
are about $55 billion in needed auctions of medium and long-term
debt.
The Congress, before it left for an extended recess a week or so
ago—and I have a follow-up question for that—passed a convoluted
measure which would allow you $29 billion of refinancing in order
that you can send out March 16 Social Security checks.
My question to you is, in between the cash that you receive and
of the $29 billion that you can refinance or raise, do you have an
estimate as to how long before you have to have more money?
I presume you are going to have March 15—if I recall correctly,
Treasuries pay only the 1st and 15th. You are going to have some
needs coming up. Do you know what those are and when you will
need them?
Secretary RUBIN. Well, we do, Mr. Bentsen, and we are still analyzing the full effects of both the legislation that was passed and
the projected revenues and outlays of the Federal Government.
But as you know, the legislation, on its own terms, is such that
the debt obviously is valid and remains outstanding on the 15th,
but the debt limit remains at $4.9 trillion. So we will then have—
and the debt comes back into the calculation for debt limit
purposes.
So on the 15th, the debt outstanding will be substantially in excess of the debt limit. It will still be valid but substantially in ex-




74

cess of the debt limit. That will obviously substantially impede our
ability to raise additional funds. So some time shortly thereafter,
we will cease having adequate resources to meet the obligations of
the United States. But I cannot give you an exact projection right
now, though it is a matter we have been looking at very carefully.
Mr. BENTSEN. If the chairman will indulge me, I know it is late
and I have stood up my wife and children for lunch, but I do have
a couple more questions.
Are you aware, from your experience in working with businesses,
American businesses here, of any business that would be facing a
note payment or a debt payment in short order where the board
of that business would decide to go on vacation or to take a leave
or go to Hawaii, as opposed to calling a meeting and figuring out
where they might be able to come up with $40 or $50 billion that
they might need to make their note payment? Any business that
is still in business today?
Secretary RUBIN. Well, let me say this, Mr. Bentsen. I do think
it is absolutely imperative—I think I said this in my statement—
that we put in place a long-term debt increase and that we could
do it very, very quickly.
I think the steps that the Congress took at the end of last week,
the Archer bill, the letter from leadership, were very constructive
and very important steps.
But I agree with you, it is imperative that we get on with our
work and get this thing done and get it done as quickly as possible.
Mr. BENTSEN. The Congress ought to be in session working on
this, and unfortunately it is not.
I will close by lust asking this question. I know you had a long
discussion with the chairman about the attachment of legislation
to the debt limit.
As I recall, the Gramm-Rudman-Hollings bill was attached to the
debt limit in the Senate in 1985, and it was actually forced upon
the House and the Administration by then the junior Senator from
Texas, now the senior Senator, Senator Gramm. So it has been
used by both sides in a partisan measure.
I think it is a mistake to use this partisan politics. Certainly
Democrats are not here using this in partisan politics. If we wanted to be partisan about the debt limit, we would stand aside and
let the Republicans force you into default, because we would then
probably be in the majority for the next 100 years as a result of
that.
But let me ask you this question, because there has been a lot
of
Secretaiy RUBIN. Mr. Bentsen, it is my understanding—and we
can look into this and get back to you—that in 1985 President
Reagan actually wanted Gramm-Ruaman. So it was not forced
upon him, I believe. We can check it out.
Mr. BENTSEN. Let me ask then, because there has been a lot of
discussion with respect to the 1993 OBRA Act, the 1993 Budget
Act. Are you aware of any measure that has been introduced in
this Congress in your capacity as Treasury Secretary in the 104th
Congress or any measure that has been put forth by the Republican leadership of this Congress which would repeal any portion
of the 1993 Budget Act, other than the one portion which funded




75

direct funds from the Social Security Tax Fund to Medicare, Part
A, the Hospital Insurance Trust Fund?
Other than that, are you aware of any efforts by the Republican
leadership to repeal the increase in the marginal tax rate, the 4
percent gas tax, or any of that? If not, why?
Secretary RUBIN. Mr. Bentsen, I can't answer the why question,
but I don't believe there was anything in OBRA 1993 that was repealed in the ultimate reconciliation bill that went to the President. I think that is correct.
Mr. BENTSEN. SO you are saying that the new leadership of this
Congress, the Republican leadership, none of which voted for the
1993 bill, all of whom said that the bill would drive the country
into a recession, none of them had put forth legislation to repeal
all those things that they are against.
Do you think that is because they are using that to predicate
their budget that they are putting forth now, that without the
OBRA 1993 and the deficit reduction that occurred as a result of
that, that their budget would not be in balance in 7 years, as they
are advocating?
Secretary RUBIN. I can answer the factual question. I do not believe anything in the reconciliation bill repeals anything contained
until OBRA 1993, which I think was an extraordinarily constructive piece of legislation. I can't speculate on motivation.
Mr. BENTSEN. Thank you.

Thank you for your indulgence, Mr. Chairman.
Chairman LEACH. Mrs. Maloney.
Mrs. MALONEY. Thank you, Mr. Chairman.
Secretary Rubin, do you need a debt limit increase? Do we need
to increase our debt limit?
Secretary RUBIN. I think the Nation needs one, yes.
Mrs. MALONEY. Have you been able to achieve it?
Secretary RUBIN. Not to date.
Mrs. MALONEY. Why not?

Secretary RUBIN. Well, a debt limit increase can only be put in
place by Congress. The Congress has thus far chosen not to adopt
a clean or straightforward debt ceiling increase.
Mrs. MALONEY. IS it fair to say that it is because the Republican
majority has tried to attach to the debt limit increase reductions
in Medicare, in Medicaid, the environment, education, student
loans, that we have not been able to come forward with a clean
debt limit increase limit? They have tried to attach policies and
programs to what should just be a clean debt limit bill? Is that not
a fair statement?
Secretary RUBIN. It is absolutely correct that the Congress has
not passed a clean or straightforward debt ceiling increase and that
the reconciliation bill which was sent to the President was one that
he felt was wrong for the future of this country, and he consequently vetoed it.
Mrs. MALONEY. And then they used the same tactics with the
reconciliation bill. They attached many things to the reconciliation
bill that the President didn't agree with—again, cutbacks in Medicare, Medicaid, education, the environment—and they took the extreme step of closing down the government for 21 days.




76

Secretary Rubin, you and I are from the same area of New York.
I wonder if your office received as many phone calls as I did from
people who couldn't get passports, business loans, people out of
work who could not send their children back to school because they
were out of work because of the government shutdown.
In fact, maybe you are aware of the conference in New York on
economic development in Hungary, only no one could get a visa to
come into our country. It was an international disgrace and a national disgrace.
So I think it is fair to say that the tactic of "My way or no way,"
'Winner take all," didn't work, and they did open up the government.
What has changed since then? Could you comment on the Gingrich letter and the Archer bill? Are those the two changes that
have taken place?
Secretary RUBIN. Both of those events occurred Thursday of last
week. As I said in my opening statement, I believe they were both
very constructive, and I believe what we now need to do is put in
f>lace a long-term debt ceiling increase, one that would last for at
east a year.
But I think we have entered a new and, I think, constructive and
bipartisan phase of the debt limit debate which hopefully will lead
to a conclusion to this debate in very short order.
Mrs. MALONEY. SO possibly it is fair to say that maybe they got
the message that default, coercion, blackmail didn't work, and that
it is more responsible to work together in a bipartisan way to come
up with some solutions.
We are both from the great State of New York, and, as you know,
we have a very strong two-party system there. On all of our budget
fights, there are disagreements, but there has never been a shutdown or a default or a threat or blackmail.
In our State, both parties sit down and they reach a conclusion,
and I think this model should be followed on the Federal level,
wouldn't you say?
Secretary RUBIN. Well, I think clearly the budget can only be resolved by the Administration and the Congress working together.
The President, as I said from the very beginning, is very much
committed to achieving a balanced budget and has been ready,
willing, and able to work. I think no President in history has been
so personally involving himself toward that end.
Mrs. MALONEY. It reminds me of Stairmaster politics. First, the
Republicans wanted a 7-year balanced budget. The President came
forward with one. Then they demanded one with CBO numbers.
The President came forward with one. But the minute he meets
one of their demands, they raise the step and come up with another demand that impacts on the policies and his fundamental
values.
Mr. Secretary, I would like to ask you, are there any examples
from other countries who have defaulted on their debt that would
Sive us some idea of what we could expect if the United States ever
efaulted?
Secretary RUBIN. I believe, in this century at least, that the only
countries that have defaulted on debt that is denominated in their
own currency are countries that were either less developed coun-




77

tries or transitional—basically less developed countries, countries
that are not in the same category as the United States would be
as a major industrial nation.
I can tell you from having worked with a lot of countries as they
faced the prospect of having to deal with default that it is an action
that they all do everything possible to avoid, and it is precisely because of the consequences of default.
One reason why it would be so tragic if this country defaulted
as a matter of political will, is because that would set an example
to other nations in the world.
I think one of the real problems—we are not going to default, period; I am confident of that. But were we to default, we would be
setting an example for the international marketplace which I think
would have an effect on how other nations deal with the same situation, nations that unfortunately do not have the same resources
that we do and therefore have to take measures that are extremely
difficult to take in order to avoid default.
Mrs. MALONEY. DO you think if we defaulted the consequences
would be lasting or temporary, would have a lasting effect on our
credit rating?
Secretary RUBIN. I think any default, were it to occur—and it
will not occur, I am confident of that—but were it to occur, would
affect us for years and in fact decades to come.
Mrs. MALONEY. Well, I would like to thank you for everything
you are doing and have done to avoid default.
Secretary RUBIN. Thank you.
Chairman LEACH. Mr. Jackson.
Mr. JACKSON. Let me take this opportunity first and foremost,
Mr. Secretary, to thank you for the very prudent and very responsible way in which you have clearly handled this very difficult
situation.
I do want to take exception to one thing that the gentleman from
Texas, Mr. Bentsen, indicated earlier when he said that one of the
most troubling aspects of being one of the minority Members and
new members on this committee is that you are not able to really
take the potshots and hit-and-runs at panelists.
I might add that, being the most minority Member on this committee, the problem from my perspective is that most questions
that you would have asked earlier have been asked and answered.
So I want to just ask one question for you, Mr. Secretary, and
I also want to take this opportunity to thank the majority tor the
assurances that they have given us that default is no longer a
threat.
But, Mr. Secretary, my question to you is one that really is explanative for the American people, and that is if you could help us
understand what the drastic impact of such an occurrence such as
a default would be without a clean debt limit being passed, and,
more specifically, attempts by this Congress to limit your ability in
the future to use such legal devices as those that you did use to
help the Nation avoid a default?
Secretary RUBIN. I think, Mr. Jackson, that default by our country would have at least three consequences of some very real
significance.




78

One, I think once you create the question mark about your integrity with respect to meeting obligations, that affects how you are
viewed in credit markets, not for years to come, but for decades to
come. It creates an uncertainty, and when you have uncertainties^
then markets will ask for premium interest rates, some premium.
I think that is a particularly serious problem when the country
has difficult circumstances and when your reputation in credit
markets are most important.
Finally—and all of which, by the way, would affect not only the
interest rates of the Federal Government but the private sector as
well. I think it pertains to the way the public sector handles debt
would affect how you handle all American debt was perceived.
Finally is the consequence I mentioned before. If the largest
economy in the world went into default as a matter of political will,
I think that would affect creditworthiness around the world, as
other, much less fortunate countries face excruciatingly difficult decisions that are involved in their staying out of default.
But, fortunately, I think that, though a very important issue to
focus on, this will turn out to be academic. There is no question in
my mind that we are not going to default.
Mr. JACKSON. Mr. Secretary, your response to attempts by this
Congress to limit your ability to use such legal devices as you were
required to do?
Secretary RUBIN. I think the statutory authority created by a Republican Senate and a Democratic House of Representatives and
signed by President Reagan was very wise at the time.
What it did was, it provided an escape valve so that if we were
at what would otherwise be a default time and the political circumstances were such that it looked like that couldn't be resolved,
there was a mechanism to let some of the steam out of the system
until things settled down and Congress and the Administration
could function in a more orderly fashion and deal with the Nation's
problems.
So I think that it is very important that those tools be kept in
place for any future President, any future Secretary of the Treasury, whoever they may be and whatever party they may be, just
as President Reagan felt when he signed them into law.
Mr. VENTO. If the gentleman will yield, I think that one reason
this temporary measure that was passed, obviously the President
signed it—did you draft that particular measure with regards to
the Social Security check protection?
Secretary RUBIN. Did I draft it?
Mr. VENTO. Or were you involved in it? Was that the ideal piece
of legislation, 15 days of avoiding default, or whatever the days
were?
Secretary RUBIN. Well, I think, Mr. Vento, it was very useful, because I think what it will do is, it will give us time to do orderly
financing instead of being crunched into a very short period of
time.
Mr. VENTO. I don't have much time here, and I want to make
certain, but I find that since you didn't draft it, there is some confusion about it, to say the least.
As I read the descriptive material on it, it suggested that it only
covered Social Security checks. Obviously, money is fungible, I un-




79

derstand that. I am lust suggesting that some of the same critics
and others may be delivering to you the same sort of criticism.
In other words, it raises the debt ceiling or pays the checks, it
doesn't raise the debt ceiling, and then it springs back in 15 days
to the original. So this is obviously not ideal or very good. It helps
in terms of relief, I appreciate that, but I just want to point out,
it is hardly the ideal thing.
Secretary RUBIN. This is a very short-term deferral. It doesn't in
any way change what needs to be done, which is to put in place
an acceptable aebt ceiling increase and do it very, very quickly. But
I do think it was constructive, for the reasons I said before.
But you are right, it does not change the situation. It doesn't
change what needs to be done. It just defers it for a very short period of time.
Mr. VENTO. I would just point out, Mr. Chairman, that the explanation that we had in one of our insight sheets that we get, a nonpartisan source of information, explained it completely different.
This is an example. It had the intention of doing something. Intentions don't count. We are dealing here with real ceilings.
Furthermore, I think this opens up the avenue that if you wanted to say that something is being duplicitous, as you read that, the
literal reading of it suggests that Social Security, obviously, the explanation on the floor and the legislative history is clear that you
can take the money, do a variety of things.
I don't want to in any way limit you, but I am suggesting that
this is less than an appropriate way. It is helpful, but there is obviously, I think, a lot of misunderstanding. That is why I referred to
it as sort of a convoluted way of doing vmat we need to do in terms
of getting a true debt ceiling raised over a longer period of time.
I hope we can do that.
I thank the gentleman from Illinois, Mr. Jackson, for yielding me
time.
Mr. JACKSON. Thank you, Mr. Vento.
I yield back the balance of my time, Mr. Chairman.
Chairman LEACH. Mr. Bachus.
Mr. BACHUS. I have got three technical questions, and if you
want to answer them later in writing, that would be fine.
Chairman LEACH. I think maybe that is appropriate.
Mr. BACHUS. That would be fine. Let me tell you what they deal
with. One deals with the Airport Fund. I just didn't know why the
Airport Fund had been involved.
Secretary RUBIN. The Airport Fund?
Mr. BACHUS. Aren't we involved with
Secretary RUBIN. I am sorry, the sale of the assets.
Mr. BACHUS. TO the Airport Fund.
Secretary RUBIN. The statutory authority with respect to the assets we are selling, we would be happy to get back to you with an
explanation.
Mr. BACHUS. The other one is when we transfer assets from
Treasury specials, those Treasury specials have different maturity
rates and interest rates. Does that create technical problems for
you?
Secretary RUBIN. YOU are talking about when we replenish the
Civil Service Fund?




80
Mr. BACHUS. Yes.

Secretary RUBIN. Yes. We will have to replenish the Civil Service
Fund under the statute to exactly the same condition it would have
been if we had not taken the action. Technically, that is a very difficult task, but it is one we can accomplish.
Mr. BACHUS. The third one was the ESF. You are only getting
the cash assets and not the other assets of the ESF?
Secretary RUBIN. Yes.

Mr. BACHUS. I am going to ask you a question about that in
writing.
Secretaiy RUBIN. OK, we would be glad to respond.
[The information referred to can be found on page 226 in the
appendix.]
Chairman LEACH. Mr. Gonzalez.
Mr. GONZALEZ. Thank you, Mr. Chairman.
First I want to thank and commend Secretary Rubin for his
forthright and very patient efforts to avert default.
The Secretary has acted prudently and clearly within the law,
and his efforts nave in fact saved the Congress from its own folly.
What is left is for the majority, having now been through any number of rationalizations, to get on with the iob of authorizing the
debt limit increase necessary to protect the Nation's credit.
I want to also apologize to the Secretary for the behavior of those
who have accused him falsely. I heard one claim that the whole
debt limit crisis was a hoax and another say that the Secretary
robbed the trust funds to prevent default.
These accusations and similar others I have heard today are untrue, unfounded, irresponsible, and, to me, embarrassing personally. I apologize to the Secretary for those accusations, which ought
never to have been made in the first place and which I know my
chairman does not support or condone.
Finally, Mr. Secretaiy, it is plain that we must pay our bills on
time or suffer the consequences of impaired credit. It is incumbent
upon us to act so that we can protect, and you can protect, our
credit. It is time for responsible, adult action by the Congress.
If default occurs, the blame will lie with the Congress alone,
which authorizes spending that the debt must finance. Today's
hearings hopefully lay to rest the last of the fantasy notions that
we need not act.
Again, I commend you, Mr. Secretaiy, for your patient and courageous actions in the face of unprecedented irresponsibility by the
congressional majority. To be accused, as you have been, of improper acts is scandalous to me. But considering the source of the
insults, I think you will see them as a badge of honor.
I thank you again.
Secretary RUBIN. Thank you, Mr. Gonzalez.
Chairman LEACH. Let me first remind the committee we have a
very distinguished panel of private sector people coming to particularly put some of these issues in a long-term economic perspective,
which is critical for our consideration.
But in concluding your appearance, Mr. Secretary, I would just
like to note, we have heard a lot of voices at times raised this
morning. I would like to underline a few points, some of which may
reflect consensus of the Members.




81

First, there is a bipartisan agreement that default is off the
table. The United States will not default on its obligations.
Second, the underlying problem facing the country which is symbolized in the debt ceiling debate is a continuing accumulation of
debt as a result of budgets that have been out of balance.
Third, while it appears from the comments of my colleagues on
both sides of the aisle this morning that there is a growing commitment in Congress to balance the budget in 7 years, strong differences remain on how to reach this balance.
We began last year with the executive branch advocating an approach that woula have precipitated over $800 billion in more debt
than the Republican alternative during this time period. But we
begin this year with the President proposing a budgetary approach
closer to the majority in Congress but one which involves a somewhat higher tax environment.
We are structurally, in other words, closer together than the
rhetoric of both sides would indicate.
Fourth, as reflected in the views expressed this morning, there
has been an unfortunate breakdown in the trust between the executive and legislative branches, which I believe imperils the capacity
of government to function effectively.
Fifth, there remain questions about the Department of Treasury's commitment to make full disclosure, at least on a timely
basis, of its contemplated actions on the debt ceiling and about the
Administration's strategy of politicizing the Medicare issue, despite
the unanticipated negative cash flow from the Medicare Trust
Fund in 1995.
Sixth, the Congress needs to take another look at debt ceiling
legislation to ensure that the options available to the Secretary of
the Treasury are not a matter of dispute but are clear to all
parties.
Seventh, it must be understood that, just as no Congress has
ever precipitated default of the debt ceiling, the issue provides not
only a philosophical framework for budgetary decisions in Congress
but time constraints in which decisions should on an orderly basis
be made.
The prolongation of discourse on the debt ceiling has had the unfortunate effect of delaying and making less likely a budget compromise and accelerated difficulties accordingly. It is my hope that
the airing of conflicting views this morning will, in the final measure, help to serve to advance resolution of these issues.
Let me just say with regard to your comments, I think they have
been forward, very helpful, very straightforward, and very
constructive to the process at this time. We thank you for your
testimony.
Secretary RUBIN. Mr. Chairman, thank you.
Chairman LEACH. The committee will now recess for 2 minutes
as our next group of witnesses are empaneled.
[Recess.]
Chairman LEACH. The committee will reconvene. Let me apologize to the panelists for keeping them a little bit later than they
might have expected. Let me also say to the committee that this
is an extraordinarily estimable group here. I have read the testimony in advance, and it is very important testimony.




82

In introducing the panel, let me say the first witness will be Mr.
Rudolph Penner. Mr. Penner is managing director of the Barents
Group of Peat Marwick in Washington. Prior to joining .Peat
Marwick, Mr. Penner was a senior fellow at the Urban Institute.
He was director of the Congressional Budget Office.
Our second panelist is Dr. Mickey Levy. Dr. Levy currently holds
the position of chief economist of the NationsBanc Capital Markets,
Inc. Previous positions include chief economist at CRT Government
Securities, Ltd.; research associate with the American Enterprise
Institute; and economist with the Congressional Budget Office.
Our third panelist is Dr. William Poole. Dr. Poole is the Herbert
H. Goldberger Professor of Economics at Brown University and
serves on advisory panels for the Federal Reserve Bank in New
York and the Federal Reserve Bank in Boston and the Congressional Budget Office.
Dr. Poole formerly served as a member of President Reagan's
Council of Economic Advisors.
Why don't we begin with Dr. Penner.
STATEMENT OF R U D O L P H G. P E N N E R MANAGING DIRECTOR,
B A R E N T S GROUP, KPMG P E A T MARWICK

Mr. PENNER. Thank you, Mr. Chairman, for this opportunity to
testify.
I believe an increase in the debt limit should be enacted as
quickly and as cleanly as possible. There is absolutely nothing to
be gained from threatening the creditworthiness of the United
States, while there is a great deal that could be lost.
An increase in interest rates and falling bond prices stemming
from the failure to pay interest in a timely fashion, would cause a
concomitant fall in the stock market at a very bad time in the history of the current business cycle. Economic recovery is becoming
more and more fragile. It will not take much to tip the economy
into recession.
No one knows what increase in interest rates would follow a
delay in paying interest due on the public debt, but it is worth
pointing out that each 1 percentage point increase in the rate
would cost American taxpayers well over $200 billion cumulated
over the following 7 years. That is about as much as the tax cut
contained in the Balanced Budget Act. Even a small threat of default undoubtedly adds a significant amount to our interest bill.
Some see debt limit legislation as the only horse that can carry
some needed deficit reduction. I am as strongly in favor of deficit
reduction as anyone, but I think that it has to lie passed on its own
merits. The only way that it will be sustainable is if it is understood and accepted by a majority of the American people, and befuddling the debate by simultaneously talking about the threat of
defaulting is not the way to enhance understanding of the merits
of balancing the budget.
In the longer run, I would like to see us get rid of debt limit legislation altogether. It is completely illogical to enact tax and spending legislation that implies a certain deficit and a certain amount
of oorrowing by the U.S. Treasury and at the same time to have
a piece of legislation on the books that prohibits that borrowing
from taking place.




83

Tax and spending laws are the only appropriate mechanisms for
controlling the size of the national debt. Debt limit legislation does
not provide any independent source of fiscal discipline, yet debates
over it are often time-consuming.
Historically, the debt limit has served largely as the vehicle for
attaching extraneous legislation that would have difficulty being
enacted on its own merits.
It is, in my view, very important to focus all our energies on the
substance of the budget debate. Our country will face a fiscal crisis
when baby boomers start to retire after 2010. Even if we succeed
in balancing the budget in 2002, it will be difficult to keep it balanced for very long after that.
That is another way of saying that the fiscal measures debated
during 1995 and early 1996, though extremely helpful, provide only
a down payment on what will be required eventually to contend
with this demographic problem.
The Bipartisan Commission on Entitlement and Tax Reform reported in 1994 that, given the policies and the economic and demographic assumptions in effect at that time, the budget deficit would
exceed 10 percent of the GDP by 2020 and almost 20 percent of the
GDP by 2030.
Such numbers are not thinkable. If the deficit rises toward those
levels, and is combined with the net withdrawals from pension
funds that are likely during the same time period, it is likely that
U.S. net saving will become negative.
A country cannot grow at a decent pace without saving, and the
economy is likely to go into a cumulative, accelerating decline. That
makes the deficit problem much worse than the Commission's projections which assume continued growth.
At some point countries typically stop borrowing. They default on
their debt in one of two ways: Either they default explicitly, or they
begin to finance government by printing money. The latter is much
more likely, ana the resulting hyperinflation makes the debt
worthless.
It is also not thinkable to avoid the situation solely by raising
taxes in the 2020's. The Federal tax burden would almost have to
double, and that would have a negative impact on economic growth
as well. The bulk of the correction has to come on the spending side
of the budget.
My testimony goes on to point out that the major problems come
from Medicare and Medicaid. Social Security is a smaller burden
but still a significant one when the demographics deteriorate.
I think, tnough, a really important point to end with this: The
sooner we confront the fiscal implications of the demographic problem, the easier it will be. Every reduction in the deficit has a
compounding beneficial impact.
For example, if the spending path of an entitlement program can
be lowered by $1 for 7 years, the public debt will be reduced by
more than $7 at the end of the period. Not only do we have to debt
finance a cumulative $7 less in program spending, but we save on
the interest bill and on the interest on the interest and so forth.
Given current interest rates, every reduction of $1 in a program
expenditure payment saves roughly another 40 cents in interest at
the end of 7 years.




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As I noted above, the deficit cuts once contemplated by the Balanced Budget Act for fiscal years 1996 through 2002 represent only
a down payment on the serious budget problem that lies ahead. It
is highly disappointing to see the probability of that down payment
fall so far. Perhaps the probability could rise again if we could
focus public attention on the severity of the long-term budget outlook. A prolonged and confusing debate over the debt limit would
only distract from that effort.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Rudolph G. Penner can be found
on page 183 in the appendix.]
Chairman LEACH. Dr. Levy.
STATEMENT OF MICKEY D . LEVY, CHIEF ECONOMIST,
NATIONSBANC CAPITAL MARKETS, INC.

Mr. LEVY. Mr. Chairman and members of the committee, I appreciate the opportunity to present my views today.
Achieving fiscal responsibility and credibility, which should be
your objectives, must not be lost in the political maneuvering that
nas entangled the Federal debt ceiling and budget policy issues.
I recognize that a meaningful compromise on fiscal policy is difficult precisely because it involves programmatic changes to key
spending programs and not lust artificial deficit targets. As a result, prompt programmatic change is crucial. The costs are rising.
Not just today but over the last 10 years, I think Washington has
gotten too caught up in deficit bean-counting and the debt, while
these are residuals that are determined by spending and tax
structures.
I would like to make several key points today. First, the Federal
debt ceiling has not been and will not be an effective economic
mechanism for achieving fiscal responsibility, and is not a substitute for addressing the flawed structures of the spending programs that are the sources of the deficit spending and rising debt.
The diminishing clout of the debt ceiling in constraining deficits
should not come as a surprise to any of us in light of the sharp increase in the share of Federal spending that is for entitlements.
Let us think about it: There is a blatant, logical inconsistency between open-ended entitlement programs in which legislation entitles qualified recipients to benefits, whether they are financed
through taxation, borrowing, or debt monetization, and the legal
debt ceiling.
Moreover, the government's debt counted toward the legal debt
ceiling is an inadequate measure of the government's total financial
obligations, particularly because it fails to recognize the government's unfunded liabilities generated by Social Security and the
public pensions. These irreconcilable differences between the social
contract implied by the open-ended entitlements and the legal debt
ceiling result in the type of squabbles we have seen today.
Second, my assessment is that a default resulting from the failure to raise the debt ceiling would have a relatively minor and temporary disruptive impact on financial markets. This contrasts with
many previous speakers today. It is because domestic and international financial participants fully recognize that default would
stem from political game-playing and not economic fundamentals.




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If the probability of default were taken seriously, heightened risk
premium would already have pushed down the dollar and the stock
market, and would have pushed up interest rates. This has not
occurred.
Since the debt ceiling issue arose and the budget negotiations
started to falter, interest rates have continued down, the stock
market up, and the dollar has been firm.
Third, Washington policymakers tend to grossly overstate and
misunderstand the impact of budget deficits on interest rates. The
dramatic decline in interest rates in the last year has reflected primarily the significant slowdown in real economic growth and the
subsequent subsiding inflationary expectations, while the prospect
of deficit-cutting legislation has contributed only marginally to the
rate reduction.
Deficits, more importantly, taxes and spending, do affect financial markets. However, I think it is key to point out that, looking
forward, continued sluggish economic activity and improving inflation will push down interest rates further.
Hypothetically, if in fact the government were to temporarily default and rates shot up dramatically, like some people have said,
it would provide a grand opportunity for a lot of savvy traders to
make a tremendous amount of money, and rates could fall again.
My fourth point is that the unprecedented deficit spending in recent decades has been a result of rising outlays for entitlement programs, while taxes remained fairly constant as a percent of GDP.
Insofar as the mix of Federal spending has been increasingly toward entitlement programs, fewer resources have been allocated toward investment-oriented activity. In fact, the higher tax burdens
and rising debt in recent decades have effectively financed a declining share of government purchases of goods and services and a rising share of transfer payments that are simply redistributed
through the budget from taxpayers to beneficiaries.
In terms of the public's perception as well as economic performance, this increasingly distributional role of the Federal Government is as important as is the magnitude of the deficit spending.
This trend will continue.
My fifth point is that the maior economic problem facing the
United States is not the budget deficit, per se, but rather the mix
of deficit spending and the structure of the tax burden that combine to generate a misallocation of resources that suppresses national saving, discourages work and investment, and constrains
economic growth and long-run standards of living.
Simply put, if you read through the annual report of a corporation and get to the end of the 100 page report and all it talked
about was the deficit and the debt, wouldn't you ask the crucial
question, What are they doing with the capital?
That is what needs to be discussed, rather than game playing
about the debt ceiling. Again, the way in which you cut the deficit
is crucially important, perhaps as important as the magnitude by
which you cut it.
As an example, one of the primary reasons for the 1993 deficitcutting package was to reduce the current account deficit. There is
no question but that the 1993 deficit package did reduce the deficit,
but it didn't achieve any of its objectives.




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Consider the following: The lower deficit reduced the government's dissaving, but insofar as it was largely offset by higher
taxes, which reduced private sector saving, it simply redistributed
wealth and did not close the gap between national saving and national investment. Therefore, the current account deficit is higher
than ever and we are borrowing more and more from abroad.
Once again, we have to consider very carefully how we are reducing the deficit and get away from the deficit bean counting game.
My sixth point is achieving fiscal responsibility and credibility
necessarily requires slowing spending growth in non-means-tested
entitlements which represent the bulk of entitlement spending.
The deficit targets in the budget debate, even for the separate
categories like Medicare and Medicaid ana food stamps, are less
important than how we change the structure of those programs to
put in place incentives to reduce existing disincentives. Once you
change these structures, the saving will unfold.
So the deficit targets you are so concerned about merely provide
a framework for changing the structural legislation.
Having said that, my seventh point is, once you achieve this fiscal responsibility, the political crutch provided by a legal debt ceiling has not contributed to fiscal reform and serves no economic
purpose, causes probably more harm than good, and should be
abolished.
Now, I am a fiscal conservative and would like for the government to restructure public policy and fiscal policy. But relying on
the debt ceiling is ineffective.
My eighth point is, a credible deficit-cutting package based on
slowing the growth of non-means-tested entitlements would not
hurt the economy in the short run and would unambiguously be
positive for long-run growth.
A cut in transfer payments, unlike a reduction in government
purchases, only redistributes wealth. So its largest impact would be
to change the mix of economic output; that is, reduce consumption,
reduce demand and provision of medical services, and increase the
Nation's output for investment, and reduce the trade and current
account deficits. The long run impact of such reduced deficit spending is unambiguously positive.
My ninth point is tax reform should focus on the tax bias against
saving that contributes to the long-run problem of the Natioivs low
rate of national saving, and avoid temporary tax cuts that only fuel
consumption.
Republican and Democratic proposals do not represent tax reform. They shouldn't delay tax reform.
My tenth point is, the failure to include Social Security in the fiscal debate is a glaring omission. It only raises future costs and distortions to the program. It increases the magnitude of the corrective actions that will eventually be needed and exerts high costs on
other spending programs as we attempt to achieve deficit targets.
In addition, with regard to Social Security, we all know that putting in place a fair change in Social Security takes at least a decade to implement. So the sooner the better.
My eleventh point is, an obvious component of a fiscally responsible deficit-cutting package is adjusting the COLAs on entitlements to reflect CPI's overstatement of inflation.




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In fiscal 1995, about $450 billion of Federal outlays were indexed
for inflation. Economists on both sides of the political aisle recognize that the CPI overstates inflation and, I might note, accentuates a lot of the undesirable and unintended wealth redistributions inherent in the programs.
Adjusting the COLAs by half a percent below the CPI would save
over $100 billion over a 7-year projection period, and that half a
percent is well within the estimates of the CPI's bias estimate.
My final point is the Federal Reserve's monetary policy cannot
offset the economic effects of irresponsible fiscal policy. Monetary
and fiscal policy are very different political tools with different economic effects. They are not substitutable. Therefore, I encourage
Congress to pursue meaningful fiscal reform, and with the goal not
just of achieving fiscal responsibility and credibility, but to create
an environment conducive to long economic growth, job creation,
and raising standards of living. That requires care in achieving deficit reduction. I simply note that the Congress' efforts must be conducted independently of the Federal Reserve's monetary policy.
Thank you.
Chairman LEACH. Well, thank you very much, Dr. Levy.
[The prepared statement of Mr. Mickey D. Levy can be found on
page 194 in the appendix.]
Dr. Poole.
STATEMENT OF WILLIAM POOLE, H E R B E R T H. GOLDBERGER
PROFESSOR OF ECONOMICS, BROWN UNIVERSITY

Mr. POOLE. Thank you, Mr. Chairman.
I am pleased to be here to contribute to this debate, to put in
my 2 cents worth. My statement begins with some debt-limit issues, turns to related budget issues, and then goes back to the debt
issues.
As a matter of accounting, as Mr. Penner has emphasized, the
difference between government spending and government revenue
must be financed by issuing debt to the general public or printing
money, or some combination. Fortunately, no one has suggested
that current budget issues could be resolved by printing money, so
the government has, in fact, been issuing new debt to the public
equal to the difference between spending and revenue. This fact is
obscured by the intergovernmental transfers.
A number of government trust accounts hold securities issued by
the Treasury. But these intergovernmental accounts, useful for a
number of purposes, have no bearing whatsoever on this accounting identity that for the Federal Government as a whole, the difference between total spending and total revenue is financed by
selling additional bonds to the public. So the thousands upon thousands of hours of time put in by the Congress and the Treasury
and others on this issue in recent months has not affected by $1
the amount of debt in the hands of the public.
If the debt held by the public is not permitted to rise, and if revenue is determined by existing tax law, then enough spending must
be cut to live within the existing revenues, short of printing money.
If Congress and the Administration cannot agree on what spending
to cut, then the Treasury must somehow decide which bills not to




88

pay, or to defer paying. Treasury cannot write checks on an empty
checking account.
The battle over the debt ceiling is not just a part of the overall
budget battle, but is the same thing as the budget battle, given this
accounting identity. It may seem politically convenient to argue
over the debt ceiling rather than over revenue or spending, but I
doubt that anyone's views on budget issues are much affected by
putting the debate this way.
Now, on the surface it might appear that the Federal Government would be OK if it were to stop paying interest on its debt.
Excluding interest, spending is now below revenue, and therefore,
if we doivt pay the current interest, there is enough current revenue to cover tne current outlays for non-interest purposes. But, of
course, this would decrease dramatically the value of the existing
debt where the interest was not being paid.
Many financial institutions would be quickly insolvent if the
value of their government debt declined dramatically, which means
that the Federal Government would be immediately faced with
huge demands to make good on deposit insurance. Of course, just
starting to spin out a scenario like this shows how silly the whole
exercise is. The Federal Government will not walk away from its
debt, because the voters would demand that the government live
up to its obligations.
Some people have talked about a temporaiy default, for, say, 2
weeks. That would resolve nothing. At the ena of 2 weeks, the government would still have to sell bonds to finance the difference between its spending, including interest, and revenue. One way or
another, Congress and the Administration must decide this year's
spending and revenue and finance the difference, if any, with new
debt.
Now, let me turn to the budget debate for just a moment. This
debate started in earnest during the Reagan years. President
Reagan spoke often and eloquently of the need for our society to
trim government. And the budget deficit that arose in the early
1980's drew attention to the budget issues. President Reagan was
successful in constraining growth in total spending, but he was not
successful in rolling back spending in any significant way. More
importantly, he was not successful in addressing the need for major
structural reforms in Social Security and Medicare.
President Reagan was unsuccessful because the Congress in
those days, including most Democrats and most Republicans, and
the American voting public, were not prepared in the 1980's to face
the reality of our budget situation. It is instructive to look closely
at the Reagan budget for fiscal year 1986, which was perhaps the
most complete and serious effort during those years to introduce
fundamental reforms in spending programs.
This budget proposed spending reductions in numerous politically sensitive areas, including many affecting traditionally Republican constituencies. Reagan proposed reductions in subsidies to
business, to upper-income groups, to agriculture, to Amtrak and to
many others. He proposed reductions in Medicare and certain veterans' benefits, in retirement programs for military and civilian
government employees; and there are a lot of political hotspots in
all of the spending areas I have just mentioned.




89

I brought with me a photocopy of the Washington Post article on
how that budget was received. It says, "President's Budget Meets
Opposition on Capitol Hill. Democrats Attack Middle Class Cuts,"
ana of course the budget went nowhere. But it is still true, I think,
that this budget effort during that period was very worthwhile, because many of the ideas that we are talking about now were first
raised during that period. And there are new proposals on the table
reflecting equal political courage. This battle is a battle over budget
priorities and the role of government in our society.
Our Nation will survive if fewer wasteful programs are cut than
I would prefer. But the really big issue is Social Security and Medicare. Our society will truly be shaken to its foundations if we do
not face this issue soon, before the great retirement begins.
At present, there are about 3.3 workers for each Social Security
beneficiary. Just 5 years from now, that ratio will begin a rapid decline, reaching only 2.0 workers per beneficiary by 2030, according
to the mid-range population estimates.
Financing existing Social Security and Medicare benefit schedules might require an addition to the payroll tax of 10 percent of
the covered wage base as more and more and more retired workers
will have to be supported by each member of the labor force. If we
do not act to introduce structural, fundamental reforms on the
spending side of those programs, within 25 years we face a
S e n e r a t i o n a l conflict between retirees and workers totally unpreceented in our history.
We need to adjust the Social Security and Medicare programs to
encourage later retirement and more efficient use of medical resources. This adjustment would have been easier if we had started
10 years ago, and easier yet if we had started 20 years ago, and
all of those numbers were on the table back then.
The problem was known and it was discussed, but not addressed.
The longer we wait, the more difficult this adjustment will be, and
the greater the chance of very serious generational conflict.
The current budget debate includes proposals for revisions to
Medicare that Congress would do more and the Administration
would do less. Neither the Congress nor the Administration would
address Social Security at this time.
Some future Congress and Administration will address Social Security, because the demographic facts cannot be brushed away.
Much of the acrimony over the debt limit reflects the political pain
of retirement policy issues.
I am very sympathetic to those who ask this question: If we cannot begin now by introducing what are really relatively minor reforms to Medicare, how will we ever be able to begin again before
it is too late to tackle the even more difficult issues that surround
Social Security?
Now let me get back to the debt limit. I understand the frustration of those in the Congress who want to begin to set our fiscal
affairs on a sustainable, long-run path and are willing to hold up
an increase in the debt limit until the Administration negotiates a
satisfactory budget deal.
Nevertheless, 1 believe that the debt limit is the wrong place to
force this confrontation. Despite our divisions, Americans share a
strong bond on certain policy fundamentals, and fortunately so, for




90

otherwise our government would be totally, completely chaotic,
rather than just a little chaotic. The unwritten rules of political engagement do not include risking the credit of the U.S. Government.
Some argue that the market has reacted benignly whenever a
threat of default was raised in recent months, and others attribute
interest-rate increases—the little ones that we have seen from time
to time—to the threat of default. But both of these views misread
the evidence.
In fact, the evidence is absolutely clear, in my view, that the
market has never assigned any significant probability to default. If
default talk had changed views in the market, in the bond market,
we would have seen a dramatic narrowing of the spread between
high-quality corporate securities, not subject to default, and the
Treasury securities, and we haven't seen any such thing. I have
three examples in my statement which are there for the record and
you can look at them if you are curious.
The debt-ceiling battle has certainly from time to time created
some uncertainty in the markets, but the uncertainty has been
about the general course of fiscal policy and how this debate over
policy was going to come out, and not over default per se. The market simply does not believe that default can occur.
We should really be comforted by this finding, for it demonstrates that our Nation's finances are truly strong. Default is unthinkable, and the market believes that the political process will
find a way somehow or other to service the debt. Neither political
party will jump over that cliff.
I believe that the Congress should recognize that the public sentiment for honoring Federal Government obligations is overwhelming, and I think that it is clear that Congress does recognize that.
The issue of default should be put behind us by a routine action
to increase the debt limit whenever required for the government to
pay its bills without interruption. No constructive purpose is served
by forcing the Treasury to engage in strange financial gymnastics.
The debate over the debt limit has served the useful purpose of
emphasizing just how important our budget issues are. Our disputes are over spending and taxes, though, and not over servicing
the debt. It is time to put this phase of the political debate behind
us.
Congress should pass and the President should sign a simple extension of the debt limit. But the larger budget issue must not be
allowed to die. We must make some choices, and the sooner we
make them, the better off we will be.
I offer this guarantee: If we do not begin to address these issues
this year, we will have to face them next year and they will be
more difficult. We are going to face budget issues indeed for the indefinite future, but the longer we wait, the more difficult the job
is going to be.
Thank you.
[The prepared statement of Mr. William Poole can be found on
page 188 in the appendix.]
Chairman LEACH. Well, thank you very much.
I think your last sentence capsulizes the problem we have heard.




91

Let me just ask a couple of questions. First, there are two parameters of statistics that really stick out from the testimony, beginning with you, Mr. Penner.
On page 2, you cite the Bipartisan Commission on Entitlements
and Tax Reform, and you point out, and this is just a stunning
thought: That within a generation, the budget deficit, unless we do
something about it to cnange its current path, will exceed 10 percent of the gross domestic product. And a decade later, 30 percent.
And you also point out: Just because these figures have so—they
are so large, they are so abstract, what are the consequences of
that?
And you say that: U.S. savings will become on a net basis negative, and what that means is, the country, instead of growing at a
decent pace, will actually go into an economic decline.
Those are extraordinary conclusions. And it sets one really in a
position of saying, there are certain things you duck at one's peril
as a public official. So I just would like you to flush out those
thoughts, if you will?
And let me say, I mean from my perspective, it strikes me that
if we look at the history of this country, particularly this century,
we have won the great philosophical battles on market economies
versus closed and structured economies. We have provided the
great sacrifice in terms of political and strategic effort and we have
defeated all of these "isms" of hate. But what this statistic says is
that we have lost self-discipline internally, and the question then
is can we leave the next century like we did the last? Are we going
to be capable of that if this comes to pass?
Mr. PENNER. Well, there may be some who disagree with the details of the scenario I lay out, out I don't think anyone can disagree
with the enormous deterioration we face in our fiscal status as the
baby-boom retires. Economists aren't good at predicting things, but
you don't have to predict much to know the severity of that crisis.
The people who will cause it have already been born; some of
them are sitting right behind you on the lectern there. We know
that we are going to face a very, very dire situation, and it isn't
that far away, as you point out.
I am enormously frustrated that this situation does not get more
attention in the current debate, does not get more attention in the
press and so on. Because it would cast, I think, a whole different
tone to the current debate.
As I said in my testimony, the debate this year has been about
rather trivial changes in the path of spending and taxes relative to
what will eventually be required. And as Bill Poole suggested, if we
can't even get those minor changes in Medicare that have been debated this year, how are we going to contend with the situation
that I lay out, which implies that Medicare and Medicaid, even if
we find a way of controlling costs, will be taking 4 more percentage
points of the GDP out there. Four percentage points, that is about
25 percent of our current tax burden. There is no way that we are
going to solve it by raising taxes that much.
So it is indeed frustrating, Mr. Chairman, that these things that
we know will happen if we do nothing are not getting more
attention.




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Chairman LEACH. Let me just turn quickly to Mr. Poole, or Dr.
Poole.
The other statistic that we sometimes reference in political
speeches, but I don't know if we really comprehend the magnitude
of it. You point out that we have 3.3 working Americans for every
retiree today, and that soon we will start a trend toward 2.0 to be
reached, I think, in 2030, in 35 years. Can you, you know, indicate
the magnitude of that, the economic consequence of that circumstance? Will we have interest—can we deal with that if interest
on the national debt is greater than Medicare expenditures?
Mr. POOLE. The issue is not so much the national debt. We would
have a problem even with no national debt, because the working
people are providing the goods and services, the labor that produces the goods and services, the food, the housing, that the whole
society is consuming. And if you don't have very many working people for the number of retired people, the working people are supporting a very large burden, and that is independent of whether
you have a large inherited national debt at that time.
What has to be done is to reduce the demands of the retired people on the working people, and the only way that can be done is
by having the retired people bear more of those costs themselves
and retire later.
We should remember that the retirement age of 65 that we have
become accustomed to was determined at a time when not very
many people lived beyond 65. We have had these enormous medical
advances and we have lots of good examples of veiy productive people well past age 65, including in this body, obviously, and there
is no reason why the society as a whole shouldn't expect the normal working life to extend longer, and that is what we are going
to have to have independent of whether we have got an inherited
budget deficit or an inherited large debt at that time.
A large debt makes the problem more difficult because you have
to raise taxes to service the debt, to pay the interest on the debt,
and the higher and higher that tax rate, the greater and the greater is the disincentive tor people to work and to provide capital, and
the more difficult it is to deal with the issue.
So it is not just a deficit issue, it is not just a financial issue,
but it is a matter of the number of people in the society at work
supporting those at leisure.
Chairman LEACH. My time has expired.
Let me turn to Mr. Gonzalez.
Before doing that, though, I would like to ask unanimous consent
to put a statement in the record by Professor Murray Weidenbaum
who is, as most people know, a former CEA chairman.
[The prepared statement of Professor Murray Weidenbaum can
be found on page 205 in the appendix.]
Mr. Gonzalez.
Mr. GONZALEZ. Thank you, Mr. Chairman.
I have just a sort of a theoretical question.
If the debt progresses on the geometric progressive basis and the
other on an arithmetic, as obviously your statements indicate, what
eventually is the solution or the method of meeting the future
obligations?



93

Mr. POOLE. I guess, if you are addressing that to me, Iguess I
don't understand. What is growing at an arithmetic basis? The debt
grows geometrically, and tne interest compounds. What is it that
is growing at an arithmetic basis?
Mr. GONZALEZ. Well, I guess you would say the ability to finance
that debt. I guess that is the best way to put it.
Mr. POOLE. Well, the debt service comes out of the taxes that are
levied on the economy, and the economy is growing, and that is
why economic growth is critical to not resolving, but reducing the
magnitude of tne problem. If we not only end up with a large inherited debt and with this high dependency ratio because of all of
the retired people, but in addition, we end up with a low growth
or declining economy, which is the great danger of a very high tax
burden that destroys incentives for people to work and to produce,
then we are on a downward slide very quickly. In that case, what
will happen is, there will be a default all right, not so much necessarily on the debt, but there will be a default on the Social Security obligations. Because what will happen is that the working people will simply say, we are not going to pay those taxes, we are
going to—there is still more of us than there are of you, retired
people, I will be one of those retired people and my kids will say,
we are not going to support you anymore, we are cutting taxes
and cutting your benefits. And if you don't like it, too bad."
Mr. PENNER. They may, too, as I pointed out in my testimony,
they may say, asure, we will give you the benefits, but we can't borrow any more to do it, so we will print up money to do it." And
that is what you see going on in many of the newly independent
states.
Having recently worked in the Ukraine, it is just interesting to
note what can happen under those circumstances. There was a
time when the ruble was declared to be equal to the dollar. Now,
1,000 rubles in the Ukraine is equal to about half a cent. So you
can see what 4,000 percent inflation a year can do to you.
I think that the threat of hyperinflation is the ultimate danger
of a debt that continues to grow geometrically in excess of our
income.
Mr. LEVY. Let me add a point; the situation that you have described is being approached now by Italy, Canada, and Belgium. All
of them have total national debt outstanding greater than GDP. It
is not surprising that Italy and Canada have major social and political turmoil, and that Canada has the highest inflation-adjusted interest rates among G-7 nations.
Once you get to that point, closing the deficit gap is not an arithmetic exercise, it is an economic exercise, because raising taxes can
create disincentives. As an example, the 1993 tax increases can
simply redistribute wealth from the private sector to the public
sector.
I would like to embellish Rudy Penner's statement. It is not just
the persistent deficit spending increases that are adding to the
debt; it is the fact that the deficit spending is for transfer payments
that primarily fuel consumption and not add to the Nation s longterm capacity to grow. Thereby, we are increasing the national debt
and not increasing productive capacity. And from the debt counted
toward the debt ceiling, unfunded liabilities of Social Security and


22-450 96 - 4


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other pensions already measure in the trillions of dollars for people
who are already born.
Mr. GONZALEZ. Thank you very much. Very good.
Chairman LEACH. Mr. Vento.
Mr. VENTO. Thanks, Mr. Chairman.
Mr. Levy, I had raised this question, you notice, with the Secretary, from your material. I didn't know if you were glad that I
read your material ahead or displeased that I actually took away
some of your splash. But I thought we would both benefit from
hearing tne Secretary's response. But you know, your suggestion is
of course that the market can differentiate between a true economic phenomena and a political one, and the suggestion that really because we would be different than, let's say, Argentina.
Mr. LEVY. Yes.

Mr. VENTO. That is your contention anyway. But of course we
don't know. I mean, obviously, this is somewhat speculative, is it
not?
Mr. LEVY. The fact that interest rates have come down, the dollar has firmed and the stock market has gone up since November,
suggests that the market is not placing a high probability on default. It is, as Mr. Poole said, very rational. But yes, financial market participants are, are
Mr. VENTO. Excuse me. I only have 5 minutes. But you really go
beyond that and say, well, even if default did occur, it would be discounted, or did I misunderstand your—am I misstating your statement?
Mr. LEVY. NO. My point is, if the government were to delay some
interest payments, everybody, not just in the United States, but
worldwide who looks the same data and all of the same speeches,
would recognize exactly that it is due to political game-playing
Mr. VENTO. I would hope they would realize that.
Mr. LEVY. And if interest rates were to spike up dramatically,
like some people today have mentioned. I know a lot of traders who
buy everything in sight and rates woula come right back down.
Mr. VENTO. Let me just say, I think that all of the constituent
parts for a healthy economy exist in Argentina too, but if they don't
nave their stuff together, you know, that is sort of they can't get
their act together politically, then unfortunately, I think that it has
an effect on the economy. I mean, I don't know, what is Moody's
doing then? Is Moody's wrong about this, or are they premature,
or are they overreacting?
Mr. LEVY. I don't have a clue what Moody's is doing or why they
did what they did.
Mr. VENTO. Well, I talked to some of my corporate constituents
and they felt the same way when Moody's gave them a bad rating.
Mr. LEVY. Well, simply put, there is no question that the costs
of default outweigh any benefits.
Mr. VENTO. I just don't want to see anyone get any comfort from
your statement, Dr. Levy, or any of the statements. I think that
this should be off the table as our former CBO Director, Mr.
Penner, has said, and I guess Mr. Poole, and I just want to make
it clear, you know in my own mind's eye.
I just think that this is not the area to negotiate. Frankly, I
mean I think very quickly what has happened here, I know with




95

yours and Dr. Poole's statement, Dr. Levy, is that you evolved into
a broader discussion with the budget, entitlements and so forth,
and so on. Frankly, I am a little—I mean I understand—one of the
suggestions—let me Just move into in terms of one of the points
you point out is the COLA. I agree.
I remember Gene McCarthy, my predecessor, saying we can't
have, you know, this government or the economy on automatic
pilot, that we need to reserve these judgments. Unfortunately, the
models of the economists and all of the things that we do are inadequate that we ought to reclaim that. But isn't it true that as much
as we have Social Security or some of the other programs on automatic pilot, don't we also have the, for instance, the changes in the
tax rates on automatic pilot in terms of the adjustments that are
made?
Wasn't that one of the phenomena that occurred during the
1980's that has, in fact, whatever your belief is, has in fact required us, in other words, things happen without us making any
decisions on them. Unfortunately, this isn't as fine-a-tuned watch
as some might like to believe.
Mr. LEVY. I think if it were a temporary default, everybody
would recognize it as such. It would not drive up interest rates. If
you look back to the last time Congress entangled the debt ceiling
with the budget debate, in Fall 1993, rates were coming down
Mr. VENTO. Well, Mr. Levy, I pointed out in the statement that
I made that this has been like—this has been 90 days versus 3
days, or 3 or 4 days then.
Mr. LEVY. GO back to the late summer and fall of 1990, and it
lasted nearly 2 months, with seven temporary extensions, and
there was threat of default, and rates came down the whole time.
But I did put in the statement that I think the debt ceiling is
a crutch and should be abolished, and default, even if it doesn't affect interest rates, has other costs that may not show up in interest
rates.
Mr. VENTO. Mr. Penner, did you have any comment on my automatic pilot discussion?
Mr. PENNER. Well, I think you're exactly right, sir. When we indexed Social Security way back in the early 1970's, ironically many,
including me, thought it was a money-saving measure. And I think
it has turned out to be anything but.
Mr. VENTO. Gene McCarthy probably voted for it, too, Mr.
Penner.
Mr. PENNER. YOU are right that—well, let me put it the other
way. I do believe that the indexing of the whole system was a mistake, in part because the indices are so inaccurate, and that the
Congress should make these kinds of changes in a discretionary
fashion.
Mr. VENTO. There are, of course, Mr. Chairman and Members,
automatic increases that go into effect, like interest on the debt,
which of course are—you know, that greatly conflict with the debt
ceiling itself. I mean, even if we did—I mean, if we didn't have it,
we wouldn't—so I mean, there are these—I fail to see—I don't
know whether in economics whether you treat transfer payments
versus entitlement payments versus other types of dollars different




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in terms of how they affect us in terms of tax expenditures different than they how affect the bottom line.
My assumption was that we are actually, as we compared ourselves to Italy—incidentally, Italy has had a rather politically unstable environment for some 40 or 50 years, Dr. Levy. It isn't just
the last couple of years. In fact, I think they are probably—they
may be a little more volatile, but I think they have had some prol>
lems for some time.
But my observation would be that we actually, as a percentage
of a gross national product have a smaller amount. Now we have
a bigger gross national product, there is no model that we can follow that is exactly reflective, I would say, of our economy. So it is
not any excuse.
It is certainly not my goal to—and I say most of us say we want
to balance the budget, but how we do it m terms of where we are
going? I have seen expressions here about what has happened and
what hasn't happened in terms of spending. But I would just say
this to each of you. I would say that fiscal deficit is a problem. So
is a human deficit. So is not investing in people.
You talked about why we have so many people that are relying
on the system on disability, and so forth, today, and I would point
to education and training where people no longer can be brought
back into the world of work and so they take the least common denominator and go toward that. They nave to survive. And so our
goal has to be, of course, to invest in people.
In fact, you would have a hard time pointing out whether there
is a shortage of capital expenditures in this country. In terms of
research, we need to do it. But the one thing that is lacking, and
there is a lot of other withdrawal from the business cycle, and others are not making the investment today, and that is in people, investing in people. And fundamentally, that is one of our concerns
in terms of what we are tiying to do here.
And I think that if we did and were able to meet that challenge,
we are going to be able to go a lone way. That doesn't mean that
eveiy government expenditure in those areas is appropriate, but
certainly as I look at the needs in my district and across the Nation, I think that we could balance the budget here and end up
with far worse problems in terms of the Nation if we do not have
the type of human investment that we need. I see it lacking in your
statements. I don't see it reflected, and I think it should be
reflected.
Thank you, Mr. Chairman.
Chairman LEACH. Mr. Bentsen.
Mr. BENTSEN. Thank you, Mr. Chairman.
Mr. Levy. I am familiar with your firm. In my former life, my
firm actually did business with your firm, and you all were wellknown, particularly in the Treasury market and your abilities
there.
You have raised the issue, if I understand you correctly, that if
there was a short-term default or nonpayment, that would be a political default, not an economic default. But if you have a train
wreck, it may be because the conductor wasn't paying attention, or
it may be because a car was on the track, but in the end you still
have a wreck, and you have cars spread all over the place.




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Wouldn't it be true, even in a temporary default that was for political reasons, that vou would have escrows backing securities or
$290 billion worth of municipal bonds, which are backed bv Treasury escrows, that would at least technically be in default. Some
would have payment problems if they held securities that actually
were due to be paid and weren't paying.
Wouldn't you have problems with pension funds so that your clients, which have a prudence requirement, that they would have to
divest of defaulted securities, that their indentures would not allow
them to hold the faulted securities, and wouldn't you have a situation where you probably would have a lack of a secondary market
or you would have an artificial secondary market?
Certainly, the price of Treasuries rignt now has gone up and it
has gone up for economic reasons. But wouldn't we have a technical situation that would drive the price down in the lack of a secondary market?
Mr. LEVY. The answer is, nobody knows. My assessment is, it
would only have a minor effect. It would be an absolute nightmare
in terms of back-office operations. It could change spreads and affect the market. At pension funds, investment policy committees
would have a difficult choice. But I don't think they would have
any choice but to continue investing in U.S. Treasuries. It is the
most liquid market in the world.
I am just making the simple point: There is no question that the
United States is by far the wealthiest nation in the world and the
strongest, so I think the impact would be temporary.
Mr. BENTSEN. But that there would be a payments problem that
would occur, and certainly the investment committees of these
funds or any other type of fund, they would have to go to their lawyers to get an interpretation. They would have to look at the bankruptcy code, they would have to look at a number of things, and
in many cases, don't you think some would punt?
Mr. LEVY. It would be an extraordinarily inefficient and costly
process to go through. But would it drive up interest rates? Not
that much, and I think only temporarily.
Mr. BENTSEN. Let me ask you this: The request question of
Moody's was raised, and I would give you two things to think about
with that. One, I think Moody's does have to look at political risk,
certainlv in the municipal market they look at political risk, and
political risk should be associated with Treasuries at this point in
time.
In fact, if you look at their statements for the last 40 years or
50 years versus what they said 2 or 3 weeks ago, they went from
saying that they would invest in Treasuries to obtain a Triple A
rating, because there would never be a question of default. Three
weeks ago they said, that question, the specter of a default has now
been raised. So I think it is probably appropriate for Moody's to
look at it.
Let me back that up by saying, my experience with Moody's, and
Standard & Poor's as well, is while they are always looked at, at
Treasury obligations as a full-faith and credit obligation, a general
obligation of the U.S. Government backed by the taxing power of
the U.S. Government, that they have not viewed debt of the U.S.
Government subject to annual appropriation in the same manner,




98

for the simple reason that it depends on one Congress to the next
Congress on an annual basis as to whether or not they will follow
through.
If you have looked at various lease obligations of the U.S. Government where the rating agencies have looked at them, they have
been uncomfortable to assign that same triple A rating. Wouldn't
you think possibly that Moody's is looking at this and possibly
Standard and Poor's, and Fitch, and they are saying, perhaps now
we are getting to a period where because the debt ceiling has become political" that it may now fall under that same category as
annual appropriations?
Mr. LEVY. My answer is maybe, but maybe Moody's has reacted
simply because they have been asked a lot of questions about it
and feel like they nave to say something, so they said the logical
thing. It provided no value added to anybody's understanding of
the issue.
Mr. BENTSEN. Mr. Chairman, if I might very quickly, I would ask
Mr. Penner and anyone else, this is somewhat related.
We know over the last year there has been a major debate over
the budget in Congress and there has been a major debate about
Medicare and Medicaid, and there has been a war of semantics
going on as to whether or not Medicare and Medicaid are being cut
or whether or not food stamps are being cut.
The three of you all are trained economists; my question to you
would be, and some say it is not a cut, it is a reduction in the rate
of growth. I would argue that it is both.
isn't it fair to say that if you are reducing the rate of growth in
a program, whether it is Medicare or defense, below what the real
rate of inflation would be as determined by their cost, that program's cost of goods and services and its customer base and the increase or decrease of its customer base, would that not be a cut?
Wouldn't that be a real cut? There might be a nominal increase,
but if that increase is below the real rate of inflation for that program, is that not a cut under the laws of economics?
Mr. PENNER. Well, I don't find that particular semantic debate
very useful in understanding what is going on. I think it is much
more important to look at what the programmatic changes are and
what the distribution of harm or benefits from those cnanges are.
To the degree that you reduce the value of the entitlement, it
may be called a cut even though you have to spend more money
to provide the same or reduced entitlements. There are different
components of the changes that are being proposed. There is the
increase in the premium; there is the reduction in the amount you
pay providers. Now, the beneficiaries would not see the latter as
a cut, obviously. The providers might see it as a cut.
But all of that I think pales, or should pale, in favor of actually
studying the kind of programmatic changes that you are making,
asking what their long-run effects are, and I think also asking
whether they are sustainable. I think some of the problems I have
with the Balanced Budget Act is that I wonder if some of the components are truly sustainable.
Mr. BENTSEN. Well, I don't disagree with your contention, and I
have voted for cuts or reductions in growth, or whatever, myself.
I guess I am just searching for the truth more, and I agree we need




99

to look at these things in a long-term context. But we have been
in this intense debate and it is the political side, not the economic
or accounting side, which we tend to spend more time on the political side.
But I am really looking for an answer so that when I talk to my
constituents, half of them think they are cuts, half of them think
they are reductions in growth; and I just want to give them at least
a reasonably honest academic answer. I am willing to say I voted
for the Orton-Stenholm budget which gets us to a balanced budget
in 7 years, and naturally, that is less debt to the Nation than the
other budgets, and it cuts, in my opinion, Medicare and Medicaid,
albeit less than the Republican budget. So that is where I am trying to get.
I agree with you on the question of sustainability, the question
of what the impact is on beneficiaries and looking at the long-term
view. But wouldn't you agree that if you only provide a nominal increase rather than a real increase to match the real rate of inflation, that that is a cut?
Mr. PENNER. Well, I would call it a real cut as opposed to a nominal cut. Yes, I think you would just have to be more careful with
the language. But I wish the debate would turn to the actual programmatic changes that are being proposed here. I wish you could
explain to your constituents just exactly what is going to happen
to them, and then they could judge themselves how much pain or
benefit that is going to cause.
Mr. BENTSEN. Well, few Americans have a complete understanding of the Federal budget process that you do as former CBO chief,
but we do try and do that. And it is, it is complicated. But I just
have a problem where some have on the one side used nominal figures, particularly on the Medicare/Medicaid side, but then they use
real figures when they inflate their baseline, to inflate the level of
the cuts they say they are achieving in their budget. It is kind of
like past tense and present tense.
Our English teachers always told us you had to write in one
tense and not more than one tense, and I think when you are discussing budgets, you need to either talk in terms of real or nominal, but not Doth, because that is sort of burning the candle at both
ends.
Mr. PENNER. I will say that with regard to the baseline, I do believe that it is much more useful to have a baseline that looks at
what is necessary to sustain programs in real terms and what is
necessary to finance the entitlements that are on the books. I think
it is very confusing to look at baselines that are constant in nominal terms.
Chairman LEACH. Dr. Poole wanted to respond.
Mr. POOLE. A quick comment on that.
I think the baseline idea is very sound, but it does depend, when
you actually look at the numbers, depends importantly on how you
convert nominal dollars to real; that is, the price indexes. I know
that Congress has been addressing the issue about biases in the
CPI and whether there is over-indexing in Social Security, and so
forth. This problem is particularly acute in the medical area, medical services, because of the measurement biases, the problems of
constructing price indexes. So whereas economists might say that




100

for the overall CPI, that maybe there is the bias of a percentage
point or one-and-a-half, you know, you get different estimates, a
naif, depending; but when you are talking about the medical area
where it is so terribly difficult to define what you mean by real
service in the first place, much less try to figure out what it really
costs, the concept of what it is that you get in a hospital or a doctor's visit is just very, very difficult.
So that is why it seems to me in the arguments over Medicare
particularly, relying on conventional definition of a real baseline is
likely to be quite misleading, because the price deflators in the
medical area are almost meaningless, almost meaningless.
Mr. BENTSEN. Well, I know my time is up, but both in terms of
the indices as it relates to COLAs for some of these programs, but
the medical care rate of inflation, or whatever the index is labeled,
people have said they possibly overstate a point, or have a point,
or something. What I nave always wondered is that up or down,
or is it up or down?
I mean, do we know? A lot of times it seems that it is just that
they are overstating, but are they potentially understating as well?
Mr. POOLE. There is always a possibility for understatement, but
that possibility arises primarily in economies where you have a lot
of control intervention that causes the product to be degraded by
the producer. But in our economy where most markets are pretty
open and free and not subject to price controls, there is a tremendous amount of quality improvement going on all the time, and you
see it every day, you know, in car batteries and tires, and this, that
and the other thing, computers, medical services, the knowledge of
the medical profession. And so what you get for a day in the nospital, which is the kind of thing that goes into the price index, a
day in the hospital is a dramatically different service than what
you got for a day in the hospital 10 years ago or 20 years ago, and
now you make those adjustments, nobody knows.
Mr. BENTSEN. It is ironic, as you have more inference in the marketplace and apparently more competition in health care and greater innovation, technological innovation, prices go up rather than go
down.
Mr. POOLE. NO, but you see what is priced as a day in the hospital—let me give you a very specific example; cataract surgery. It
used to be that for cataract surgery a person would spend a week
in the hospital and that was very long and uncomfortable, and you
would come out and you would wear these real thick glasses,
maybe, remember those days? Or you may remember seeing people
in that situation. So the total cost of treating the cataract problem
involved all of those days in the hospital.
Now what is done is that a cataract can be handled on an outpatient basis, with an implanted lens, and it is entirely different.
The cost of the half-day in the outpatient clinic, or wherever it was
done, per hour, is far higher than per hour in the hospital the way
this was done 25 years ago. But the cost of the cataract treatment
itself is probably a lot lower, particularly if you take account of the
difference in lost working time and so forth.
But there is no effort to put into the price index in the medical
area the total cost of treating a particular disease or a particular
problem. So the price indices are almost meaningless in this area.




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Mr. BENTSEN. Thank you, Mr. Chairman.
Chairman LEACH. Mr. Vento.
Mr. VENTO. I wish all of the medical practices were as the cataract example. Unfortunately, I think the proliferation of what can
be done to us to keep us going is running far ahead of what limitations or what is not necessary.
One of the questions that ran through Dr. Poole and Dr. Levy's
comments were the savings rate and reduction in taxes, reduction
in government expenditures, at least in a certain, in a quantitative
way, I don't know about the qualitative differences that you have
between what you are referring to. I wonder if they really exist in
the economic world. But let me just say, there has been a lot of
controversy over what the savings would be, that there are other
factors that are external to what the tax rate is or treatment that
there would be, for instance, within the context of tax policy transfers to avoid transfer, so it would not accumulate to a greater savings rate. So is this really something that is cultural and wound
up with the type of economic security and well-being that we have
here, as well as it is with tax policy?
All I am trying to suggest is, I don't want to get into a debate
with you about it, but aren't there a lot of other factors that are
involved than simply the simple rate of taxation and some of the
factors that you are raising here, Dr. Poole?
There is a debate, at the very least, whether or not—I know that
you are probably not in a position, but isn't there a debate concerning that particular rate of savings?
Mr. POOLE. I would say that there is no consensus on why the
saving rate has declined in the last 10, 20 years.
Mr. VENTO. O K
Mr. POOLE. There

are many, many more hypotheses than there
are data points.
Mr. V E N T O . My point is, if you want to accomplish something,
what you really do is hire the best guys that you can with Gucci
shoes and go over to the Ways and Means Committee and sell their
particular story. I think we ought to understand that probably isn't
the area that we ought to—I think it ends up having a lot of other
vectors that come out of there than sort of the single direction that
has come out of this. Dr. Levy may have a different view.
Dr. Levy, did you want to go first or are you looking at Mr.
Penner for the last word?
Mr. LEVY. NO, there may be a whole host of issues, societal and
demographic issues that affect the rate of national saving. But I do
think taxes and the mix of deficit spending contribute significantly
to our lower rate of saving. It is empirically very difficult to control
for all of the variable demographic issues. But there is no question
but that fiscal policy, and not just the deficit per se, but how we
spend and the burden of taxes, has a decidedly negative impact on
national saving, and that is why we have a wide gap between national saving and investment in the current account deficit.
Mr. VENTO. Well, it is a factor.
Dr. Penner, you have been through this particular discussion I
imagine many times in your former role.




102

Mr. PENNER. Well, I agree that there are thousands of variables
that affect the saving rate, but I do think a large portion of those
variables involve public policy in one way or another.
I don't think you can generalize and simply say a tax cut would
cause an increase in private savings; both economic theory and the
empirical research are ambiguous on that matter. But there are
things that could be done where economic theory is less ambiguous
and—for example, a revenue-neutral tax reform, whatever you
think of the flat tax, for example, if it were truly neutral, and that
wouldn't be at a 17 percent rate, it would be like at a 21 percent
rate, or something like that—there is very little doubt in my mind
that it would increase saving quite substantially, and economic theory would suggest the same. In that case, the conclusion would not
be ambiguous.
Mr. VENTO. Well, I don't know. I mean there are some cultural
factors. If there is no taxation on interest or dividends, I don't
know what that means—but I would just point out, Mr. Chairman,
the same sort of thing holds true for interest rates and the demand
for credit and how far interest rates would drop.
Also, I would suggest that since I have been here for 20 years,
we have been cutting Social Security benefits, believe it or not.
There are some efforts to expand them. That is, the Social Security
retirement benefit and other types of benefits, we have not been expanding them.
There have been expansions of SSI, there have been changes in
terms of Medicaid policy. But by and large, we have not done it.
So every year you look, you will find that there are, in my recollection, is that we have modified many of the formulas and some of
the changes that reduce benefits, such as the notch group or
whatever.
It was right to do it, I don't mean to imply that what we did was
wrong, I think it was the right thing to do. But I would iust suggest that it isn't as though we are not responsive and nave not
been responsive.
In fact, Mr. Chairman, the last 1993 budget package that we
passed cut the deficit over $500 billion. The package that we have
before us put forth by the majority in this session over the next 5
years would cut the deficit about half that. About half that. So I
would look at it not as a down payment, Mr. Chairman, but as an
installment on what needs to be done. And I might say that this
isn't the first group that has come to town that has suggested that
therefore a balanced budget or that they want to—and I don't
doubt their good intentions, I just question the way that we get
there.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Vento.
Let me bring this to a conclusion.
Mr. Vento had mentioned earlier to several of the panelists the
problems with some other countries, including Italy. In my first
meeting that I attended as part of this committee, a colorful former
colleague of ours, Mr. Annunzio, railed against Arthur Burns for
redlining. And as it worked out, he was complaining about redlining Italy.




103

It struck me that if you pull together all of the comments of this
panel, that what you are suggesting is if we don't get a little greater fiscal discipline, we could, in effect, cause a redlining of the
United States, at least in terms of making this country a place
where internal investment and external lending might become substantially less attractive. And so it is a very serious long-term
issue.
In any event, I want to thank all three panelists for very interesting perspectives, all of which provide what I think is probably
the most important thing, and that is a context in the longer term
of some of the shorter-term decisions that this body might be
making.
Thank you very much.
The committee is adjourned.
[Whereupon, at 4:43 p.m., the hearing was adjourned.]










A P P E N D I X

February 8, 1996

106

Committee oo Banking and Financial Service*
U.S. House of Representative!
104th Congress

James A. Leech, Chairman

Opening Statement
By James A. Leach
Chairman, House Banking and Financial Services Committee
Hearing on Debt Ceiling
Feb. 8, 1996
The Committee will come to order.
This hearing is called to discuss the debt ceiling issue and
receive recommendations on appropriate courses of Congressional
action in the wake of the current budget impasse.
Let me begin by making it clear that while the committee can
expect to hear today contentious concerns from various sides
about actions taken or not taken over the past few months in
budget negotiations, Congress is committed to the principle that
there will be no default, not for one minute.
At issue this month is the establishment of the most
appropriate methodology for lifting the debt ceiling, not whether
the ceiling will be breached.
Default is not on the table.
As everyone is well aware, the United States has never
defaulted on its debt. At the time of the formation of the
United States, the debts from the Revolutionary War, from the
states and from the government under the Articles of
Confederation were assumed by a new nation. Nothing would be
more irrational than to raise the specter of default by the
government at any time.
Whatever the status of budget talks, this or any year,
Congress has no choice but to ensure that default never occurs.
Not only would default be costly to Americans through higher
interest rates, but default would symbolize a government that
cannot maintain its commitments, a government that cannot
credibly govern.




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Psychologically, there is a great distinction between
defining the problem as a question of the appropriateness of
raising the debt ceiling, about which many Americans may have
doubts because it implies countenancing increased deficit
financing, and the idea of defaulting on our country's
obligations, which few Americans support because it means going
back on our country's word. But what policy makers must
recognize is that the two issues are synonymous and there is good
reason no government can credibly countenance default.
It is simply not in the public interest to have the cost of
government go up because of an escalation in cost of Treasury
bills. Nor is it in the public interest to have the cost of
certain private sector obligations such as adjustable rate
mortgages which in many instances are tied to the Treasury bill
interest rates go up in tandem with Treasury bonds.
The effects on stock as well as bond market turmoil that
would be triggered by a federal default, cannot be
underestimated. Markets depend on confidence and confidence is
rooted in the notion of a stable government. Given the
difficulties in reaching political accommodations in an
increasingly diverse and polarized political system, the
political parties and First and Second estates of government must
understand that on certain issues consensus must be reached.
Default is such an issue.
Nevertheless, while Congress has never in its history
allowed default, few modern day legislators have pristinely
supportive voting records on raising the debt ceiling, and no
legislator who has been in Congress over the past few decades can
say he or she supported only so-called "clean" debt ceiling
approaches. Directly or indirectly, debt ceiling increases have
generally been tied to budgetary precepts.
Over the last 10 years, for instance, the debt ceiling has
been increased 17 times by Congress. Only seven times has this
been accomplished through a "clean" bill and most of these have
been short-term measures tied loosely to resolution of major
budget issues. The majority of times debt ceiling increases have
explicitly been tied to budget legislation.
A decade ago the trade-off demanded by a liberal Congress
for voting to increase the debt ceiling demanded by a liberal
Congress was acquiescence by the Reagan Administration in
Congress' principal priority: greater percentage increases in
domestic spending than in the defense budget. Indeed, the reason
the national debt is such a problem today is that Reagan era
deficits were, surprisingly, driven more by increases in spending
than decreases in taxes. Federal spending as a percentage of GNP
increased from 21.5 percent to 23.5 percent during the Reagan
Administration while tax revenues basically remained level at




2

108
19.25 to 19.5 percent. Hence, Republicans believe that if the
country is to reach a balanced budget without tax increases, we
must reduce the size of government in relation to the whole
economy, although not necessarily in relation to current
governmental expenditures.
The background of today's circumstance is that the new
majority in Congress has attempted to couple the debt ceiling
issue with constraints on the growth of government and institute
an inflation-adjusted freeze on spending. The old majority is
crying foul. Like in the 1980s it insists on debt ceiling
increases to accommodate federal spending growth well above the
inflation rate.
One of the anecdotal vignettes that has more consequence to
the Republican side than has been reflected in the press was the
news conference held last November by the Vice President a week
after President Clinton signed a bill committing the Executive
Branch to forthright negotiation on a balanced budget scored by
the Congressional Budget Office (CBO) by year's end.
A member of the press asked the Vice President whether the
Administration would submit a balanced budget under CBO numbers.
His startling reply was that it hadn't been decided. Later that
day, President Clinton held an impromptu press conference to
clarify the Administration intended to follow the law which the
Vice President had hinted it might not. But the President went
on in an attention-diverting way to charge that the real problem
was the radical Republican freshmen.
The point is that instead of reaffirming the
Administration's commitment to a position it had accepted or
point out that the Vice President had simply erred in his press
conference statements, the President chose to defend by
attacking. The message wasn't lost on Capitol Hill: nor was the
fact that the President refused to submit a balanced budget to
Congress by year's end as envisioned by law.
There is, of course, a shared responsibility between the
Executive and Legislative branches on the issues on the budget
and debt ceiling, but in today's context, each branch has a
different perspective.
The Executive argues that Congress has not offered an
approach it can support and that Congress has used strong-arm
tactics which included bringing parts of the government to a
standstill. The President in his State of the Union Address even
lectured those assembled "never, never" again to press the
Executive to this extent.
The Congress, on the other hand, points out that last fall
it passed and sent a balanced budget approach, including the




3

109
lifting of the debt ceiling, to the Executive, which the
President vetoed.
Subsequently, the President put the honor of the presidency
on the line by affirming publicly and signing a bill obligating
himself to the development of a balanced budget approach using
common economic assumptions, i.e., CBO estimates, by the end of
last year.
Only when it became clear that the word of the President, at
least with regard to the budget negotiations, was not being kept
did Republicans put pressure, perhaps mistakenly, on federal
government operations. But it should be clear that just as the
view of the Executive is that "never, never" should the
government be shut down for lack of timely appropriations, it is
the view of the majority in Congress that "always, always" should
the President uphold the law and keep his word to the American
people.
When the President commits to a balanced budget approach by
a time certain it is not unreasonable for Congress to believe
this commitment should and would be kept.
In this regard, subsequent reviews of documents and inside
strategizing would appear to indicate that the White House had
developed a strategy well in advance of a debt limit crisis to
prolong confrontation with Congress. This strategy has had the
effect of putting an element of instability into the economy and
precipitated more than a little social splintering.
Here, let me point out some of the nuances involved in the
politicizing of economics. Medicare is the foremost.
In 1993, the First Lady testified before Congress that the
Administration favored capping annual Medicare spending increases
at 6 to 7 percent? the Vice President in 1993 pointed out on
national television that the Administration favored a 5.5 to 6
percent annual Medicare cap? and, in the background, Leon
Panetta, in one of his last acts as House Budget Committee
Chairman, proposed a 5.5 percent annual cap.
The Republican balanced budget vetoed last fall by the
President capped Medicare annual increases at 6.4 percent. Based
on revised CBO estimates, the Republicans subsequently proposed a
7.2 percent Medicare annual increase approach. Any neutral
observer might ponder the fairness of Democrats charging that
Medicare was being "gutted" when the Republicans offered higher
Medicare spending levels than the First Lady, the Vice President
and the President's Chief of Staff had earlier proposed.
Any neutral observer might also wonder where Treasury has
been in advising the President and Congress on Medicare in recent




4

110

months when it must have had an early glimpse that the Medicare
Trust Fund was in worse shape than was publicly known until the
revelations of last week. The surprise deficit incurred by the
Medicare fund last year underscores the need for reform to ensure
Medicare solvency, not politics to advance the fortunes of any
politician or his or her party.
Here, it might be noted, I know of no economist —
conservative or liberal — who has not suggested in recent years
that the budget can never be controlled unless the entitlements
system is reformed. If one is serious about controlling federal
spending, and at the same time leaving adequate room for
discretionary spending programs, such as education, entitlements
must be disciplined.
In conclusion, let me stress that there will be more than a
little truth to perspectives presented by both sides this
morning, but the big picture is that the public has been illserved by the political games that have been played.
The big picture is that the Republicans have a compelling
case for budgetary restraint and modest entitlements reform.
Likewise, Democrats have a credible case to insist that
priorities in certain areas such as education should be
reconsidered by the new majority.
The tragedy is that accommodation could and should have been
achieved, with the discipline of the need to lift the debt
ceiling supplying an effective time constraint.
Since that circumstance has not materialized, both parties
now find themselves less able to compromise and more likely to
delay critical budget issues until after the next election.
The debt ceiling will soon be lifted and default averted,
but the real story will not relate to this event which will occur
later this month, probably on February 29, Leap Year Day, but to
the opportunity that has been lost.
What has been at issue is the thinness of the line between
contemplating default and using the debt ceiling issue as a
constructive opportunity to reach consensus on what realistically
should be done in the legislative process.
The combination of Treasury tactics and an avalanche of
partisan mischief and political apprehension in both parties, of
Congressional miscalculation of the power of the Presidency and
Executive branch misunderstanding that taxing and spending
decisions are Constitutionally the principal province of
Congress, has produced a stalemate making orderly long-term
budget and debt management approaches unlikely to be adopted this
year.




5

Ill

It is not a high moment for democratic governance.
Before turning our distinguished panel of members, I
recognize the distinguished ranking member, Mr. Gonzalez, for his
opening statement.
*****************

Contact:




David Runkel
202-226-0471

6

112

News from the
Committee on Becking t o d Floeodel Services
U.S. House of Representatives
104th Coogrtu

James A. Uach, Chairman

Closing Statement
By James A. Leach
Chairman, House Banking and Financial Services Committee
Hearing on Debt Ceiling
Feb. 8, 1996
We have heard a lot of voices, at times raised, during today's
hearing and we have put on the record a variety of views.
In concluding this hearing, I would like to underline a few
points.
First, there is bipartisan agreement that default is off the
table. The United States will not default on its obligations.
Second, the underlying problem facing the county which is
symbolized in the debt ceiling debate is the continued accumulation
of debt as a result of budgets that are out of balance.
Third, while it appears, from the comments by my colleagues on
both sides of the aisle, that there is a commitment in Congress to
balance the budget in seven years, strong differences remain on how
to reach balance.
Fourth, there has been an unfortunate breakdown in trust
between the Executive and Legislative branches of government which
imperils the capacity of government to function credibly.
Fifth, there remain questions about the Department of the
Treasury's commitment to make full disclosure on a timely basis to
the people of the United States of its contemplated actions on the
debt
ceiling
and
about
the Administration's
strategy
of
politicizing the Medicare issue despite the unanticipated negative
cash flow in the Medicare Trust Fund in 1995.
Sixth, the Congress needs to take another look at debt ceiling
legislation to ensure that the options available to the Secretary
of the Treasury are not a matter of dispute, but are clear to all
parties.
more




113
Page 2

Leach Closing Statement, Feb. 8, 1996

Seventh, it must be understood that just as no Congress has
ever precipitated default, the debt ceiling issue provides not only
a philosophical framework for budgetary decisions of Congress but
time constraints in which decisions should on an orderly basis be
made. The prolongation of discourse on the debt ceiling has had
the unfortunate effect of delaying and making less likely a budget
compromise and accelerating societal splintering.
The political
system has been tested and found wanting.
It is my hope that the airing of conflicting views during this
hearing will serve to advance resolution of these issues.
The hearing is adjourned.

Contact:




David Runkel
202-226-0471

114

Statement of

Representative Paul E. Kanjorski
Committee on Banking and Financial Services
February 8, 1996

Mr. Chairman, Members of the Committee, there are f e w more difficult jobs in
Washington than the j o b o f Secretary o f the Treasury. N o one likes a bill collector, and no one
enjoys paying their bills. It is his job to do both. He holds the office everyone loves to hate.
We are fortunate in the United States to have an individual o f Bob Rubin's quality and
character in this important job.
Over the past several months Secretary Rubin has been the subject to a series of savage,
unjustified, and politically-motivated attacks for fulfilling his obligation to faithfully execute the
laws of the United States by paying its bills. Republican leaders in the House have even been so
irresponsible as to suggest he should be impeached for carrying out the duties of his office. They
conveniently ignore fact that the actions he has taken to protect the credit of the United States
were based on a more solid legal foundation than the actions of his Republican predecessors,
including Ronald Reagan's Treasury Secretary, Jim Baker.
Before w e "kill the messenger," we should remind ourselves that the bills Secretary
Rubin is paying this year are primarily the result of legal obligations incurred by previous
administrations and previous Congresses. We must remember that:
• Under the leadership of President Clinton. Secretary Rubin and his predecessor
Secretary Bentsen, the federal deficit will decline for four years in a row, the first
time that has happened in decades.
• In real, inflation-adjusted, dollars, the deficits of the Clinton administration are
dramatically smaller than those o f either the Bush or Reagan administrations.
• As a percentage o f GNP, the U.S. deficit is also smaller than the deficits of our
major trading partners.
• Without the massive defense build-up and the excessive tax cuts for the rich of
the 1980's, the budget would be balanced today.
In short, Secretary Rubin is being pilloried for paying debts incurred by others.




115

A hearing held by Banking Committee Democrats last week under the leadership o f our
c o l l e a g u e Charles Schumer gave dramatic evidence o f the consequences for our government, our
e c o n o m y and our people if the United States defaults on its financial obligations for the first time
in history.
At the Democratic hearing w e were told:
•
by Treasury Deputy Secretary' Larry Summers that the United States w o u l d
j o i n Myanmar, Angola, Argentina, Venezuela. Brazil, Vietnam and Russia on the
short list o f nations that have defaulted on their o w n debt over the past quarter
century.
• that default would endanger the delivery o f Social Security and Medicare
benefits to 43 million senior citizens; V A compensation and pensions to more
than 3 million veterans, their w i d o w s and dependents; and could adversely and
permanently affect the value o f pensions to tens o f millions more.
• that e v e n a o n e minute default would significantly raise the cost o f borrowing
for U.S. taxpayers, state and local governments, businesses, homeowners,
students, and everyone w h o buys a car. The cost o f an adjustable rate mortgage
o n an average home, could increase by $ 6 0 0 to $ 1 , 2 0 0 a year. Our relatively
healthy e c o n o m y could end up in a tailspin. The credit o f the United States is the
standard against which all o t h e r credit is measured. When the government's
credit costs increase, so do e v e r y o n e else's credit costs.
• that the head o f a major Wall Street investment house k n o w s "no one on Wall
Street, sane or completely off their rocker, who thinks that defaulting on the debt
is a good

idea.'''' (James Lebenthal, Chairman, Lebenthal & Co., January 30, 1996)

• that Ronald Reagan believes that, "the full consequences
of a default - or even
the serious prospect
of default - by the United States are impossible to predict
and awesome
to contemplate.
Denigration
of the full faith and credit of the
United States would have substantial
effects on the domestic financial
markets
and on the value of the dollar in exchange markets.
The Nation can ill afford
such a result(letter

to Senator Howard Baker, November 16, 1983)

• that Federal Reserve Chairman Alan Greenspan, former Chairman Paul Volker
and six former Treasury Secretaries from both parties believe that default w o u l d
have serious, adverse, long-term consequences and should be avoided at all costs.
(Chairman Greenspan's letter to Chairman D'Amato, November 8, 1995; Chairman Volker's
letter to President Clinton, October 26, 1995; former Treasury' Secretaries' letter to Speaker
Gingrich, November 9, 1995)




116
• that M o o d y ' s and the European Credit Rating Agency IBCA are reviewing the
U.S. government's A A A credit rating, and that even the mere prospect of a
default, even if it never occurs, might increase our borrowing costs. (Moody's
statement, January 24, 1996; IBCA statement, January 25, 1996).

• that the cost to our government, and our economy, of a one-minute default,
would undo a]l the good that either the Republican or Democratic seven-year
balanced budget plans would achieve.
Mr. Chairman, in the words of our distinguished colleagues Marge Roukema and A m o
Houghton, "The full faith and credit of the United States must not be jeopardized."
As
Republican columnist William Safire, no allie of the Clinton administration, has written, default
is "a foolish and wrongheaded
method of pressure.
You don't play a game of chicken with the
American dollar. ...anyone prepared
to carry out the first national default is as crazy as
Nero...."
This is why, Mr. Chairman and Mr. Secretary, I am pleased to report that 200 Democratic
House Members and Delegates, including every Democrat on the Banking Committee, have
signed my letter to Speaker Gingrich asking him to schedule action on a clean debt ceiling
increase as quickly as possible. The full text of our letter is attached to my testimony. In
addition, approximately a dozen of our Republican colleagues including Chairman Leach,
Chairman Roukema, Mr. Castle, Mr. Campbell and Mr. Fox, have signed similar letters to the
Speaker.
Despite the scorn and ridicule heaped upon Members of Congress by the media, it is clear
that a majority of the House of Representatives wants to do that which is right and honorable.
W e want to act responsibly by paying our debts. We support Secretary Rubin in his legal and
moral obligation to avoid default. We should not allow extremist politicians to jeopardize the
credit, the economy and the future of our nation.




117
WASHINGTON OFFICE:

PAUL E. KANJORSKI
1 1TH DISTRICT. PENNSYLVANIA

MAIN DISTRICT OFFICE:
10 E SOOTH STREET BUILDING

Congress of the Hmtcd Stares
Washington, B £ 20515-5811

DEMOCRATIC WHIP AT LARGE

18001 222-2346

January 31, 1996

The Honorable Newt Gingrich
Speaker
U.S. House of Representatives
Washington, DC 20515
Dear Mr. Speaker:
Over the course of more than two centuries the United States government has never once
defaulted on its debt.
Both in times of unified government when one party controlled the entire government, and in
times of divided government when different parties controlled the Executive and Legislative branches,
default has been unthinkable because the long-term and short-term consequences for our credit rating
and our economy are devastating.
If we do not act promptly on the debt ceiling we will put at risk Social Security and Medicare
benefits. Veterans* compensation and pensions, and many other pension and benefit programs which
tens of millions of Americans depend upon every day to make ends meet.
In order to calm the fears of the American people and the financial markets, as well as to
protect the reputation, credit rating, and economy of the United States, we respectfully urge you to
schedule consideration of a clean debt ceiling increase at the earliest possible moment.
Sincerely.




THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS

118

The Honorable Newt Gingrich
January 31, 1996

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126

127
Signed Rep. Kanjorski's letter to Speaker Gingrich
requesting a vote on a "clean" debt extension (200 Members)
Neil Abercrombie (HI)
Gary L. Ackerman (NY)
Robert E. Andrews (NJ)
Scotty Baesler (KY)
John Elias Baldacci (ME)
James A. Barcia (Ml)
Thomas M. Barrett (Wl)
Xavier Becerra (CA)
Anthony C. Beilenson (CA)
Ken Bentsen (TX)
Howard L. Berman (CA)
Tom Bevill (AL)
Sanford D. Bishop, Jr. (GA)
David E. Bonior (Ml)
Robert A. Borski (PA)
Rick Boucher (VA)
Bill K. Brewster (OK)
Glen Browder (AL)
Conine Brown (FL)
Sherrod Brown (OH)
George E. Brown, Jr. (CA)
John Bryant (TX)
Benjamin L. Cardin (MD)
Jim Chapman (TX)
William (Bill) Clay (MO)
Eva M. Clayton (NC)
Bob Clement (TN)
James E. Clyburn (SC)
Ronald D. Coleman (TX)
Cardiss Collins (IL)
Barbara-Rose Collins (Ml)
Gary A. Condit (CA)
John Conyers, Jr. (Ml)
Jerry F. Costello (IL)
William J. Coyne (PA)
Robert E. (Bud) Cramer, Jr. (AL)
Pat Danner (MO)
E de la Garza (TX)
Peter A. DeFazio (OR)
Rosa L. DeLauro (CT)
Ronald V. Dellums (CA)
Peter Deutsch (FL)
Norman D. Dicks (WA)
John D. Dingell (Ml)
Julian C. Dixon (CA)
Lloyd Doggett (TX)
Calvin M. Dooley (CA)
Michael F. Doyle (PA)
Richard J. Durbin (IL)
Chet Edwards (TX)
Eliot L. Engel (NY)
Anna G. Eshoo (CA)
Lane Evans (IL)
Eni F.H. Faleomavaega (AS)
Sam Farr (CA)
Chaka Fattah (PA)
Vic Fazio (CA)
Cleo Fields (LA)
Bob Filner (CA)
Floyd H. Flake (NY)
Thomas M. Foglietta (PA)
Harold E. Ford (TN)
Barney Frank (MA)
Victor O. Frazer (VI)
Martin Frost (TX)
Elizabeth Furse (OR)
Sam Gejdenson (CT)




Richard A. Gephardt (MO)
Pete Geren (TX)
Sam Gibbons (FL)
Henry B. Gonzalez (TX)
Bart Gordon (TN)
Gene Green (TX)
Luis V. Gutierrez (IL)
Tony P. Hall (OH)
Lee H. Hamilton (IN)
Jane Harman (CA)
Alcee L. Hastings (FL)
W.G. (Bill) Hefner (NC)
Earl F. Hilliard (AL)
Maurice D. Hinchey (NY)
Tim Holden (PA)
Steny H. Hoyer (MD)
Sheila Jackson Lee (TX)
Jesse Jackson, Jr. (IL)
Andrew Jacobs, Jr. (IN)
William J. Jefferson (LA)
Tim Johnson (SD)
Eddie Bernice Johnson (TX)
Harry Johnston (FL)
Paul E. Kanjorski (PA)
Marcy Kaptur (OH)
Patrick J. Kennedy (Rl)
Joseph P. Kennedy II (MA)
Barbara B. Kennelly (CT)
Dale E. Kildee (Ml)
Gerald D. Kleczka (Wl)
Ron Klink (PA)
John J. LaFalce (NY)
Tom Lantos (CA)
Sander M. Levin (Ml)
John Lewis (GA)
Blanche Lambert Lincoln (AR)
William O. Lipinski (IL)
Zoe Lofgren (CA)
Nita M. Lowey (NY)
William P. Luther (MN)
Carolyn B. Maloney (NY)
Thomas J. Manton (NY)
Edward J. Markey (MA)
Matthew G. Martinez (CA)
Frank Mascara (PA)
Robert T. Matsui (CA)
Karen McCarthy (MO)
Jim McDermott (WA)
Paul McHale (PA)
Cynthia A. McKinney (GA)
Michael R. McNulty (NY)
Martin T. Meehan (MA)
Carrie P. Meek (FL)
Robert Menendez (NJ)
Kweisi Mfume (MD)
George Miller (CA)
David Minge (MN)
Patsy T. Mink (HI)
John Joseph Moakley (MA)
Alan B. Mollohan (WV)
G.V. (Sonny) Montgomery (MS)
James P. Moran (VA)
John P. Murtha (PA)
Jerrold Nadler (NY)
Richard E. Neal (MA)
Eleanor Holmes Norton (DC)
James L. Oberstar (MN)

David R. Obey (Wl)
John W. Olver (MA)
Solomon P. Ortiz (TX)
Bill Orton (UT)
Major R. Owens (NY)
Frank Pallone, Jr. (NJ)
Ed Pastor (AZ)
Donald M. Payne (NJ)
L.F. Payne (VA)
Nancy Pelosi (CA)
Douglas "Pete" Peterson (FL)
Collin C. Peterson (MN)
Owen B. Pickett (VA)
Earl Pomeroy (ND)
Glenn Poshard (IL)
Nick J. Rahall, II (WV)
Charles B. Rangel (NY)
Jack Reed (Rl)
Bill Richardson (NM)
Lynn N. Rivers (Ml)
Tim Roemer (IN)
Carlos A. Romero-Barce!6 (PR)
Lucille Roybal-Allard (CA)
Bobby L. Rush (IL)
Martin Olav Sabo (MN)
Bernard Sanders (VT)
Thomas C. Sawyer (OH)
Patricia Schroeder (CO)
Charles E. Schumer (NY)
Robert C. Scott (VA)
Jos6 E. Serrano (NY)
Norman Sisisky (VA)
David E. Skaggs (CO)
Ike Skelton (MO)
Louise Mcintosh Slaughter (NY)
John M. Spratt, Jr. (SC)
Fortney Pete Stark (CA)
Charles W. Stenholm (TX)
Louis Stokes (OH)
Gerry E. Studds (MA)
Bart Stupak (Ml)
John S. Tanner (TN)
Frank Tejeda (TX)
Bennie G. Thompson (MS)
Ray Thorntbn (AR)
Karen L. Thurman (FL)
Esteban Edward Torres (CA)
Robert G. Torricelli (NJ)
Edolphus Towns (NY)
James A. Traficant, Jr. (OH)
Robert A. Underwood (GU)
Nydia M. Vel&zquez (NY)
Bruce F. Vento (MN)
Peter J. Visclosky (IN)
Harold L. Volkmer (MO)
Mike Ward (KY)
Maxine Waters (CA)
Melvin L. Watt (NC)
Henry A. Waxman (CA)
Pat Williams (MT)
Charles Wilson (TX)
Robert E. Wise, Jr. (WV)
Lynn C. Woolsey (CA)
Ron Wyden (OR)
Albert Russell Wynn (MD)
Sidney R. Yates (IL)

128

Statement o f U.S. Representative Joe Kennedy
before the
House Committee on Banking and Financial Services
Thursday, February 8, 1996
2128 Rayburn House Office Building

Mr. Chairman:
Thank you for the opportunity to testify this morning on the need to pass a debt limit ceiling
extension to keep the government from defaulting on its financial obligations. I appreciate
your willingness to hear testimony on this subject.
Last September, I introduced legislation to increase the debt limit ceiling from its current rate
of $5 trillion to $5.5 trillion, without any additional riders, to keep the federal government
from defaulting on its financial obligations.
After the so-called "train wreck" experience o f September and October, 1995, where the
courageous and creative actions o f Treasury Secretary Rubin kept the government from
default, and while the House Republican leadership had continued to avoid this issue, I then
introduced a House resolution calling for the consideration o f my legislation.
Then, two weeks ago I filed a discharge petition — Number 8 — to bring a clean debt ceiling
bill to the House floor for a vote. The petition gathered 173 signatures in five legislative
days, what some long-time observers o f Congress consider to be a near record.
I wish the discharge petition were not necessary, but it became the sole remaining option for
those Members like myself committed to balancing the federal budget, but at the same time
maintaining the financial integrity o f the Nation.
In my view, and the v i e w o f many others, the House Republican leadership's unwillingness to
address and resolve this matter honestly and forthrightly is a crass and cynical political
maneuver that is simply shameful and irresponsible.
It seems this is a game o f "stick it to the President."
First they claimed he didn't support a balanced budget.
The President did.
Then they said a balanced budget in 7 years. First the President said 10, then he agreed to 7
years.




129

Then they said balanced budget in 7 years using CBO numbers. President Clinton agreed to a
balanced budget in 7 years using CBO numbers, and he submitted a budget that according to
CBO balances in 7 years.
N o w , they say, "we won't extend the debt ceiling unless w e include our special interest
agenda items."
That is wrong. That is political gamesmanship. You simply do not play politics with the
financial integrity and reputation o f the United States. Period.
Those seeking to play political games with the debt ceiling have stolen a page from Thelma
and Louise ~ they'll drive the economy and the American public over the edge of a cliff just
to avoid a difficult situation.
But at whose expense?
Our children, who won't be able to afford a college loan.
Working people, w h o won't be able to get a mortgage to buy a home, or a loan to buy a car.
Senior citizens on fixed incomes, who won't be able to live their retired years in dignity.
Investors here at home and throughout the world who will forever remain unwilling to invest
in the financial instruments of the United States.
This kind of mismanagement and "government by crisis," where continuing resolutions and
temporary debt extensions replace the legislative process of compromise and consensus is
creating real chaos and havoc in my State of Massachusetts and in the local Boston area.
For example, in countless communities across the Nation, including in my own backyard,
local school boards are sitting down and negotiating contracts with elementary, junior high
and high school teachers. They are making important hiring decisions that will effect every
student in a classroom, and an important influence on those decisions is the amount of federal
resources for Chapter I programs, including science and math programs.
Because of the uncertainty of this fiscal year's Education funding ~ the most recent
Continuing Resolution funding the government until March 15, 1996 makes a 25 percent cut
in federal aid to education — my school boards are making these decisions in the complete
dark.
The Boston metropolitan area is a leading community in the area o f school reform, from
offering parents the option of public school choice, magnet schools, and the School-to-Work
program. But the Congress has yet to finish consideration o f the Labor-HHS Appropriations
funding measure, which includes federal aid to education, to fund programs for the year
which began on October, 1, 1995.




130

Left to depending on the uncertainty o f the Continuing Resolution, local schbol districts are
left in the lurch, with no direction from Washington. In short, when Congress delays, dithers
and dallies, students suffer the consequences.
The collective impact o f neglect and indifference from the Congress" inability to make final
decisions o n education funding will likely have a drastic and serious effect.
W e must stop this games playing, pass a balanced budget, and end the senseless nonsense o f
threatening to default on the national debt.
A debt default after the March 15th deadline would jam millions o f ordinary Americans,
through:
**

holding up the issue o f April Social Security checks,

**

holding up the issue o f veterans benefits checks,

**

holding up the issue o f paychecks to active military personnel, including the
pay to our troops serving in Bosnia,

**

raising interest rates immediately by at least 1 percentage point on all consumer
debt, bank loans and home mortgages with variable interest rates. For millions
o f homeowners, default would mean an immediate increase in a monthly
mortgage o f $1200 per year - this would more than offset the tax cut the
Republicans are talking about.
For every 1 percent increase in interest rates, this would cause additional
borrowing o f 150 billion dollars by the federal government over seven years —
more than the federal government spends on aid to education!

This is not rhetoric — it is reality. Moody's and Standard & Poor do not think this is some
cruel joke. These internationally recognized financial grading services know the reality and
realize the consequences o f a default.
Those w h o choose to play political games with the debt ceiling should come back through the
looking glass where the rational world lives.
To borrow a line from that infomercial on late night television: "Stop the insanity." Pass a
clean debt limit bill.




131
OPENING STATEMENT
REP. JOHN J. LaPALCE
Banking Committee Hearing On Debt Limit
February 8, 1996
The commitment of the United States of America to honor its
debt obligations is the linchpin of our economic being as a nation.
Indeed, the commitment of our nation to pay its debts is
fundamental to our reputation and integrity on the world stage.
Perhaps that is why most analysts and observers around the world
have refused to take the threat of default seriously.
It simply
couldn't happen, was their reasoning. Let's hope they are right.
A default would be felt first by those expecting to receive
Social Security and Medicare payments, veterans benefits and
military pay.
But beyond this, a default would seriously impact
the vast majority of Americans. With the government unable to pay
its debt obligations, all holders of Treasury securities, including
pension funds and money market funds, would no longer receive the
principal and interest payments they are owed. The asset value of
these funds would decline, threatening the economic security of
millions of middle-class Americans who own Treasury securities
indirectly through pension funds and money market funds.
The government's inability to make payments on Treasury
securities would have a domino effect across the economy when
payments are not received, with potentially dangerous results.
Because the pricing of many loans and other debt securities is
closely linked to the price of Treasuries, a default would cause
interest rates on mortgages and many types of consumer loans to
increase. Likewise a default would cause an increase in the rates
that state and local governments would be required to pay on their
debt securities, as well as an increase in the rates that private
corporations would have to pay on their debt instruments.
A default would cause investors to demand higher interest
rates on Treasury securities, increasing interest payments on the
government's debt.
Instability in foreign currency and stock
markets caused by a default could seriously impact economic growth
in this country. Finally, a default would cause the U.S. to join
the ranks of Vietnam, Angola, Brazil, Venezuela, and Russia -countries that have defaulted on debt issued in their own
currencies.
There has been extensive criticism of Secretary Rubin by my
Republican colleagues for allegedly not been truthful in telling
Congress that he had legal options for avoiding a default.
There
can be no question that Secretary Rubin made absolutely clear that
the Administration was strongly in favor of a clean debt limit
increase and would have much preferred not to have to take
extraordinary actions to avoid default.
Any suggestion that




132

Secretary Rubin preferred taking these extraordinary measures to
having a clean debt ceiling increase, or considered taking such
measures as "business of usual," is absurd and the record makes
that quite clear. However, when there was doubt that a clean debt
ceiling bill would not be forthcoming from Congress, the Secretary
of the Treasury had an obligation to make contingency plans and had
clear legal authority to take the actions he took ultimately to
avoid a default.
Indeed, if the Secretary had not taken such
actions to avoid default, his judgement would have been questioned.
Some Republicans are now advancing the alternative argument
that Secretary Rubin doesn't need a debt ceiling increase at all -he can just continue to find ways to avoid a default. So, is this
a Republican proposal? What actions would the Republicans suggest?
Do Republicans advocate that retirement funds continue to be
disinvested or that gold reserves be sold, or that tax refund
checks be delayed as an alternative to raising the debt ceiling?
The Treasury Secretary has rejected further options for financing
the government after those he announced to the Speaker on January
22. He is calling on Congress yet again to fulfill its obligation
and pass a clean debt ceiling increase. The Republicans seem to be
engaging in politically convenient double speak, designed only to
confuse the electorate and obfuscate the real issues.
It should be clear to all concerned that the Republicans'
tactic of using the debt ceiling issue as political leverage to
resolve the budget debate has been resoundingly unsuccessful. The
budget debate is of vital importance to the American people.
It
reflects the different approaches and priorities of the two parties
and deserves to be fully debated on its merits.
But the credit
rating of our government, the financial security of our people, and
the integrity of the United States around the world simply cannot
b e held hostage in a budget debate.
The cost of default to our
nation and its citizens would completely overwhelm any benefits the
Republicans may claim would result from getting their way on a
particular budget issue.
The valid debate on budget issues gets drowned out in the
crisis atmosphere surrounding the debt ceiling.
The blackmail
tactics of certain Republicans trying to link these two issues only
serves to demean and undermine those more reasonable members of
their party who are trying to conduct an honest debate on the
budget.
I hope that more reasonable voices will prevail in the
future.




2

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STATEMENT OF REPRESENTATIVE JIM SAXTON
VICE-CHAIRMAN
JOINT ECONOMIC COMMITTEE
BEFORE THE HOUSE BANKING COMMITTEE
FEBRUARY 8, 1996

CHAIRMAN LEACH A N D MEMBERS OF THE B A N K I N G COMMITTEE,
T H A N K Y O U FOR THE OPPORTUNITY TO APPEAR BEFORE Y O U THIS MORNING.

THE PURPOSE OF M Y APPEARANCE T O D A Y IS TO SUMMARIZE THE
INTERIM RESULTS OF A JOINT ECONOMIC COMMITTEE (JEC) INVESTIGATION OF
THE T R E A S U R Y DEPARTMENT.

THIS JEC INVESTIGATION FOCUSES ON

T R E A S U R Y D O C U M E N T S REGARDING THE DISINVESTMENT OF FEDERAL TRUST
F U N D S TO CIRCUMVENT THE D E B T LIMIT.

OUR INQUIRY INTO THE DISINVESTMENT A N D DEBT LIMIT ISSUES W A S
INITIATED O N N O V E M B E R 17, 1995 B Y A LETTER TO SECRETARY RUBIN COSIGNED B Y MAJORITY L E A D E R ARMEY A N D MYSELF.

OUR LETTER

REQUESTED, A N D I QUOTE, "COPIES OF ALL THE D O C U M E N T S RELATED TO
THIS DECISION-MAKING PROCESS." THOUGH THE ADMINISTRATION H A S STILL
N O T PROVIDED A L L THE D O C U M E N T S COVERED B Y OUR REQUEST, WE D O
H A V E E N O U G H INFORMATION TO D R A W SEVERAL CONCLUSIONS.

IN FACT, T R E A S U R Y A N D OTHER ADMINISTRATION OFFICIALS H A V E




1

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G O N E O U T OF THEIR W A Y TO KEEP INFORMATION FROM US. I WILL GET TO
T H A T SHORTLY, B U T N O W LET ME GET RIGHT TO THE C R U X OF THE ISSUE.
THE AMERICAN PEOPLE A N D THE CONGRESS WERE MISLED O N THE MATTER
OF A N O V E M B E R DEFAULT.

1. THE DEFAULT HOAX: MISLEADING THE AMERICAN PEOPLE AND
CONGRESS

FIRST, A V A I L A B L E D O C U M E N T S SHOW T H A T B Y JUNE 27, 1995, THE
ADMINISTRATION H A D IDENTIFIED T R U S T F U N D S A S A SOURCE OF FINANCING
D U R I N G A PROTRACTED D E B T LIMIT IMPASSE.

THESE D O C U M E N T S REFLECT A

V E R Y DETAILED P L A N TO DISINVEST THE CIVIL SERVICE RETIREMENT T R U S T
F U N D A S WELL A S A N U M B E R OF OTHER F U N D S , SOME OF WHICH H A V E SINCE
BEEN ANNOUNCED.

THE INTERNAL T R E A S U R Y D O C U M E N T S SHOW T H A T INACTION B Y
CONGRESS W H E N THE D E B T LIMIT W A S REACHED IN N O V E M B E R 1995 W O U L D
N O T TRIGGER DEFAULT. THOSE IN POSSESSION OF THE INFORMATION
C O N T A I N E D IN THESE D O C U M E N T S K N E W T H A T DISINVESTMENT OF T R U S T
F U N D S , N O T DEFAULT, W O U L D B E THE C O N S E Q U E N C E OF A D E B T LIMIT
IMPASSE.

IT IS A N INDISPUTABLE FACT T H A T DISINVESTMENT OF THE T R U S T

F U N D S W A S LISTED IN A T R E A S U R Y M E M O A S E A R L Y A S JUNE 27 A S A W A Y




2

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OF M A N A G I N G THE D E B T LIMIT.

N O N E T H E L E S S , A N U M B E R OF HIGH RANKING CLINTON
ADMINISTRATION OFFICIALS CREATED THE MISLEADING IMPRESSION THAT
INACTION O N THE D E B T LIMIT C O U L D L E A D TO D E F A U L T A N D CATASTROPHIC
ECONOMIC CONSEQUENCES.
L.A.TIMES

FOR EXAMPLE, O N SEPTEMBER 13, 1995 THE

REPORTED, A N D I QUOTE, "TREASURY SECRETARY R U B I N H A S

W A R N E D THAT A FISCAL DISASTER COULD OCCUR U N L E S S THE D E B T CEILING
IS RAISED B Y N O V E M B E R 15." HOWEVER, THE T R E A S U R Y M E M O S CLEARLY
SHOW THAT A N Y O N E WITH ACCESS TO THIS INFORMATION H A D TO K N O W
THAT INACTION O N THE D E B T LIMIT W O U L D L E A D TO DISINVESTMENT, N O T
DEFAULT.

A N D SO, WHILE HIGH RANKING CLINTON OFFICIALS IN THE T R E A S U R Y
DEPARTMENT A N D ELSEWHERE WERE PUBLICLY RAISING A MISLEADING
IMPRESSION OF D E F A U L T RISK, PRIVATELY CLINTON OFFICIALS H A D BEEN
PREPARING DETAILED DISINVESTMENT PLANS.

IN FACT, SEVERAL OF THESE

MEMOS WERE DIRECTED TO SECRETARY RUBIN A N D U N D E R SECRETARY
HAWKE, SO THERE IS SIMPLY N O CREDIBLE W A Y FOR THEM TO CLAIM THEY
WERE U N A W A R E OF THE DISINVESTMENT PLANNING.




3

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O N E HIGH T R E A S U R Y OFFICIAL W A S A S K E D A T A PRESS CONFERENCE IF
HE H A D B E E N CRYING WOLF A B O U T DEFAULT.




4

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HE E X P L A I N E D THAT LEGAL CLEARANCE FOR THE D I S I N V E S T M E N T H A D
O N L Y JUST OCCURRED SHORTLY BEFORE THE DECISION W A S A N N O U N C E D .
HOWEVER, THE T R E A S U R Y D O C U M E N T S SHOW THAT LEGAL A N A L Y S I S OF
THE ISSUES I N V O L V E D B E G A N L A S T SUMMER.

THE NOTION THAT A 3 OR 4

MONTH LEGAL RESOLUTION OF THESE ISSUES OCCURRED O N L Y JUST BEFORE
THE DISINVESTMENT A N N O U N C E M E N T IS SIMPLY N O T CREDIBLE.

MOREOVER, THIS D E F A U L T H O A X W A S WIELDED A S A SHARP PARTISAN
W E A P O N A G A I N S T ADMINISTRATION OPPONENTS.

LEADING ADMINISTRATION

OFFICIALS EITHER FOSTERED OR STOOD B Y A N D TOLERATED THE POLITICAL
DISINFORMATION CAMPAIGN B A S E D ON THE D E F A U L T HOAX.

THEY MISLED

THE PRESS, A N D THE AMERICAN PEOPLE, A N D CREATED N E R V O U S MARKETS
IN THIS C O U N T R Y A S WELL A S A R O U N D THE WORLD.

2. DEFAULT HOAX NOT CONFINED TO TREASURY DEPARTMENT
OFFICIALS

SECOND, THE EVIDENCE SUGGESTS THAT THE D E F A U L T H O A X W A S
PART OF A LARGER ADMINISTRATION POLITICAL STRATEGY.

LIKE T R E A S U R Y

OFFICIALS, OTHER ADMINISTRATION OFFICIALS A L S O K N E W THAT D E F A U L T
L A S T N O V E M B E R W A S N O T GOING TO HAPPEN.
WITH N O REAL S U B S T A N T I V E POSSIBILITY OF DEFAULT, THE




5

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DOCUMENTS SUGGEST THAT THE REAL PURPOSE OF THE DEFAULT SCARE
WAS PARTISAN POLITICS.

I WOULD ADD IN FAIRNESS TO SECRETARY RUBIN THAT WHILE HE IS
RESPONSIBLE FOR HIS PART IN THE DEFAULT HOAX AND ASSOCIATED
CENSORSHIP OF DOCUMENTS, WHICH I WILL GET TO IN A MOMENT, IT IS
CLEAR THAT OTHERS IN THE ADMINISTRATION PLAYED A MAJOR ROLE. THE
JUNE 27 MEMO MAKES CLEAR THAT THE ACTIVITIES ASSOCIATED WITH THE
DEBT LIMIT STRATEGY WERE TO BE CLOSELY COORDINATED WITH OTHER
ADMINISTRATION OFFICIALS.

THE POLITICAL ORIGINS OF THE DEFAULT HOAX MAY NOT HAVE
ORIGINATED IN THE TREASURY DEPARTMENT, BUT IN THE WHITE HOUSE.
WHITE HOUSE OFFICIALS PARTICIPATED IN PERPETUATING THE DEFAULT
HOAX IN A SERIES OF INFLAMMATORY STATEMENTS. FOR EXAMPLE, LEON
PANETTA SAID OF REPUBLICANS, THEY ..."WILL SEND A BUDGET TO THE
PRESIDENT OF THE UNITED STATES, INCLUDING A DEBT CEILING, AND THAT IF
HE DOESN'T SIGN THAT, THEY'LL LET THE COUNTRY GO TO HELL AND
BASICALLY DEFAULT ON ITS DEBT." BUT WHEN PANETTA SAID THIS THE
ADMINISTRATION HAD ALREADY BEEN PLANNING TO USE THE TRUST FUNDS
FOR 4 MONTHS.




6

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IT IS INCONCEIVABLE THAT THE TOP OFFICIALS I N V O L V E D IN THE
B U D G E T A N D D E B T LIMIT ISSUES WERE KEPT IN THE D A R K A B O U T THE
T R E A S U R Y ' S DISINVESTMENT PLANS. THUS THE D I S I N G E N U O U S ATTEMPTS TO
HYPE THE D E F A U L T H O A X DESPITE THE DISINVESTMENT P L A N S REACHED
INTO HIGH LEVELS OF THE WHITE HOUSE, N O T JUST THE T R E A S U R Y
DEPARTMENT.

A N ADMINISTRATION SPOKESMAN H A S CONFIRMED IN A RECENT PRESS
A C C O U N T (2/2/96 W A S H I N G T O N TIMES) THAT TOP ADMINISTRATION OFFICIALS
IN THE WHITE H O U S E A N D OTHER OFFICES OUTSIDE OF THE T R E A S U R Y WERE
I N V O L V E D IN THE D E B T LIMIT DECISIONS, A N D THAT THESE DECISIONS WERE
RELATED TO POLITICS. HE A L S O A D D E D , "OBVIOUSLY THE D E B T LIMIT GOT
WRAPPED UP IN THE B U D G E T DEBATE, WHICH W A S POLITICAL.

THE

PRESIDENT IS V E R Y CONCERNED A B O U T DEALING WITH THIS A N D OTHER
B U D G E T ISSUES A T THE S A M E TIME." THE D E F A U L T R U S E W A S U S E D IN
CONCERT B Y A VARIETY OF CLINTON ADMINISTRATION OFFICIALS IN A W A Y
THAT SUGGESTS SOME DEGREE OF COORDINATION, A S CALLED FOR IN THE
JUNE 27 T R E A S U R Y MEMO.

3. TREASURY EFFORT TO CONCEAL INFORMATION

THE INFORMATION THAT I H A V E LAID O U T THIS FAR W A S EXTREMELY




7

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DIFFICULT TO OBTAIN.

IT IS QUITE O B V I O U S THAT OFFICIALS A T T R E A S U R Y

D I D N O T W A N T U S TO H A V E IT.

FOR O V E R T W O MONTHS, THE T R E A S U R Y D E P A R T M E N T A T T E M P T E D TO
WITHHOLD INFORMATION FROM CONGRESS B Y V A R I O U S D E L A Y I N G TACTICS
A N D E X T E N S I V E CENSORSHIP OF D O C U M E N T S .

FOR EXAMPLE, A JUNE 27, 1995

MEMO OF THE KIND TARGETED B Y O U R INVESTIGATION W A S PROVIDED O N L Y
AFTER MORE T H A N A M O N T H OF D E L A Y .

A N D , WHEN W E FINALLY RECEIVED

IT, 90 PERCENT OF THE MEMO A N D ITS A T T A C H M E N T S WERE DELETED,
INCLUDING THE TEXT OF ENTIRE PAGES. OF 10 PAGES, THE TEXT OF 7 WERE
ENTIRELY DELETED BEFORE PROVIDING THEM TO THE JEC.

IT IS IMPOSSIBLE

TO R E G A R D THIS KIND OF A RESPONSE A S A N Y T H I N G OTHER T H A N A N
ATTEMPT TO CONCEAL INFORMATION.

PERHAPS THE T R E A S U R Y D E P A R T M E N T WILL ATTEMPT TO E X C U S E THIS
I N E X C U S A B L E OBSTRUCTION OF O U R INQUIRY B Y PRETENDING T H A T THERE
W A S A M I S U N D E R S T A N D I N G A B O U T THE N A T U R E OF O U R REQUEST, OR T H A T
WE D I D N O T REQUEST ALL MATERIAL RELATED TO THE DECISION-MAKING
PROCESS.

HOWEVER, O U R REQUEST SPECIFICALLY C O V E R E D "ALL"

DOCUMENTS.

FOR EXAMPLE, THERE IS N O DISPUTE B E T W E E N THE JEC A N D T R E A S U R Y




8

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THAT THE JUNE 27 M E M O W A S C O V E R E D B Y O U R REQUEST.

HOWEVER, IN

PROVIDING THIS D O C U M E N T , THE T R E A S U R Y C E N S O R E D WELL O V E R 90
PERCENT OF ITS CONTENTS.

HOW C O U L D A N Y O N E A R G U E WITH A STRAIGHT FACE T H A T THIS IS A
LEGITIMATE RESPONSE TO O U R REQUEST? IT IS V E R Y DISTURBING T H A T THE
U.S. T R E A S U R Y W O U L D RESORT TO SUCH TACTICS IN D E A L I N G WITH A N
INFORMATION REQUEST.

PERHAPS THE T R E A S U R Y D E P A R T M E N T D O E S N ' T

THINK THE AMERICAN PEOPLE H A V E A RIGHT TO K N O W HOW THEIR AFFAIRS
ARE BEING C O N D U C T E D IN WASHINGTON.

WE RECEIVED THE U N C E N S O R E D VERSION OF THE JUNE 27 M E M O A N D
SEVERAL OTHER D O C U M E N T S O N L Y AFTER JEC STAFF C A L L E D T R E A S U R Y ' S
BLUFF A N D REQUESTED A MEETING TO REVIEW THE U N C E N S O R E D
D O C U M E N T S IN THE ORIGINAL. THIS REVIEW OF D O C U M E N T S , WHICH
I N C L U D E D THE PARTICIPATION OF STAFF FROM OTHER COMMITTEES,
ESTABLISHED T H A T THERE W A S N O JUSTIFICATION FOR THE CENSORSHIP OF
THE T R E A S U R Y DOCUMENTS.

THOUGH W E FINALLY RECEIVED THESE

D O C U M E N T S O N J A N U A R Y 24, WE STILL H A V E N O T RECEIVED ALL THE
D O C U M E N T S C O V E R E D U N D E R O U R REQUEST.

IRONICALLY, Y E S T E R D A Y AFTERNOON T R E A S U R Y H A D DELIVERED TO U S




9

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ADDITIONAL D O C U M E N T S - VOLUMES OF THEM. IT IS OBVIOUS THAT THEY
WERE WITHHELD UNTIL THE LAST MINUTE SO A S TO M A K E IT IMPOSSIBLE FOR
U S TO REVIEW A N D U N D E R S T A N D THEM BEFORE T O D A Y ' S HEARING.

IN ADDITION, I W O U L D LIKE TO A C K N O W L E D G E THE IMPORTANT
A S S I S T A N C E OF SUBCOMMITTEE CHAIRMAN SPENCER B A C H U S , WHO S E N T
A N O T H E R D O C U M E N T REQUEST TO SECRETARY RUBIN, HELD SEVERAL
MEETINGS WITH T R E A S U R Y OFFICIALS, A N D THUS HELPED PRY THESE
D O C U M E N T S LOOSE.

U N F O R T U N A T E L Y , THE T R E A S U R Y H A S R E F U S E D TO PROVIDE OTHER
ADMINISTRATION D O C U M E N T S O N D E B T LIMIT PLANNING C O N T A I N E D IN THE
T R E A S U R Y FILES, B U T ORIGINATING OUTSIDE THE T R E A S U R Y DEPARTMENT.
IN REFUSING TO PROVIDE THESE DOCUMENTS, THE T R E A S U R Y D E P A R T M E N T
B U T PROMISED TO PROVIDE U S NOTICE OF A N Y SUCH D O C U M E N T S FOR
REFERENCE TO THE WHITE H O U S E OR OTHER ORIGINAL SOURCES IN THE
ADMINISTRATION, SUCH A S OMB.

IN N E A R L Y THREE MONTHS OF WAITING,

W E H A V E RECEIVED N O T O N E SUCH NOTICE.

I W O U L D LIKE TO U S E THIS OPPORTUNITY TO CALL O N SECRETARY
R U B I N TO IMMEDIATELY RELEASE THESE D O C U M E N T S TO THE JEC WITHOUT
FURTHER D E L A Y .




FURTHER EFFORTS TO WITHHOLD R E L E V A N T

10

143

INFORMATION C A N O N L Y REINFORCE THE C O N C L U S I O N T H A T THE T R E A S U R Y
D E P A R T M E N T IS INTENT O N KEEPING A L L OF THIS INFORMATION FROM
CONGRESS, THE PRESS, A N D THE PUBLIC A S LONG A S POSSIBLE.

THANK. YOU.




11

144

JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
fade Qulm, New Yorfc
Donald A. Manzullo. lUinoU
Mark Saafotd, South Carolina
Mac Thornberry, Texa*

1537 Umgwotth Bulldiag
Wartlagto*, DC 20515
rhoM 302-226-3234
fax 202-224-3990

December 6, 1995
Dear Republican Colleague:
I would like to bring to your attention an article in the November 18 issue of The
Economist that illustrates Treasury Secretary Robert Rubin's attempt to scare the American
public into believing that the U.S. government would default. As the article points out, the
Administration's default argument was misleading from the start.
The House Republican Members of the Joint Economic Committee recently issued two
reports entitled "The Clinton Administration's Debt Limit Charade" (Parts One and Two). These
reports highlight the recent events surrounding the debt limit, and the Administration's attempt to
exploit this issue for partisan political advantage. To obtain copies of these reports, please
contact the JEC at x6-0603




Sincerely,

f

I L f

Jim Saxton
Vice-Chairman

145

The Economist

November IS, 1995

•»
TIM OCDI calling

TKA

cash to make a $25 billion interest payment
on the government's debts, and to cover its
other debt operationsforthe tot ofthe year.
After that. Mr Rubin claims, a genuine cash
crunch will occur. But since the CSR fund is
still sitting on another SMObillion in assets.

Humbled prophet
P|OOMSDAY is a fraveevent. One does
1^/not simply reschedule it. therefore,
without a food explanation. On November uith-the supposed day
of reckoningforAmerica's
debt—Robert Rubin. America's treasury secretary, laboured mightily to provide
one. He was being; sincere all
along, you see. when he talked
of a possible calamitous defalk
on thefederalgovernment's debts,
when he implored Republicans in Congress toraisethe $4.9 trillion debt ceiling by
that date, or else. It was only by a minor miracle. Mr Rubin explained, that his Treasury
Department had been able, temporarily, to
avert disaster. And if Congress did not relent, the dread day would still come, probably sometime in early Januaiy.
Financial markets reacted to the icvised
timing just as they had to the original one.
They ignored it. Most bond tradets know
what Mr Rubin and his Republican tormentors have known all along: that the
Treasuiy is sitting on a pile of tnist-fund assets that could enable it. if necessary, to hold
out right through to the 1996 elect ions.
The federal government administers
about 160 trust funds, with well over $1 trillion in assets, including the fundsforSocial
Security and Medicare. Most of these are.
strictly, off limits. The two exceptions are a
pair of retirement fundsforfederalemployees. In normal times, these two funds (like
all the others)hold their assets in theformof
special government bonds which, though




Even if Congress continues to play
games with the debt ceiling, a default will
occur only if someone succeasfriKy challenged Mr Rubin's authority over the retirement funds. This is unlikely. For a start, few
parties have an interest in doing battle. Republicans would take the blame if they sueceeded in triggering a default. And federal
employees would be unaffected by the Treasury's shenanigans: by law, all their assets
must be replaced, with interest, once the
CMh crunch has pawed.
In any event, a legal challenge would be
on shaky ground. In 1986, after a similar

they cannot be sold to the public, count officially asfederaldebt. By replacing these
bonds with unofficial tout, the Treasury
Department can magicallyfreesome room
beneath the debt ceiling, allowing it to borrow more moneyfrom
o markets.
hi bond
On November 15th, Mr Rubin did exactly that. First, he drained ad I I I J billion
from the so-called c-Fund, a voluntary pension planforfederal employees. He then authorised ihe Treasury to tap the Civil Service
Retirement (csa) fund,fora further $)9J
billion. These two actionsfreedup enough

, nds to the treasury
secretaiytohelp him pay off debts. And althoutfiMr Rubin would havetoissue a series of bizarre technical rulings to continue
tapping the est fund, there does not appear
to be any legal obstacle tohis doing so.
So Americans need nof wony that their
government will deftuh, or that it will be
preventedfromborrowing more. They do,
however,freeafetethat may be almost as
horrible: someday, the mountain of debt
might actually have to be repaid.

146

JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
Jla Sam*, New Jeraejr
Tkaaat Ewtog, B M
Jack Qotoa, New Yarfc

ECONOMIC

UPDATE

Mark Saatbrd, So«tfe CareBaa
Mac Tikora berry, Tczat
1537 Longworth House Office Building, Washington, DC 20515 Phone: 202-226-3234
January 1996

Update on JEC Investigation of Treasury Debt Limit Documents
•

The JEC investigation has succeeded in obtaining a number of documents from the Treasury Department
regarding Administration plans to circumvent the debt limit. Unfortunately, these documents were only
provided in a heavily redacted (censored) form. The Treasury Department was informed that this
massive redaction of documents was unacceptable, and a meeting was sought to review the redacted
material in an unrcdartcd form. This meeting occurred January 19, with JEC staff accompanied by other
committee staff.

•

This review of the documents confirms our initial view that a Treasury plan to circumvent the debt limit
was made last June. Several conclusions can be drawn from the material in our possession. (For a 20
page packet containing these documents, please contact the JEC at 226-3234.)

•

Administration statements raising default as an outcome of inaction on the debt limit were falsa.
Treasury officials had methodically assembled a detailed plan to evade the debt limit, and render it moot
at I n s t in the short run. Although we believe the legality of at least some of these options was dubious,
in the view of the Treasury, they had sufficient means of circumventing the debt limit

•

The Administration was planning for a budget deadlock starting last June. This suggests that the
Administration was not bargaining in good faith during the budget negotiations, and was maneuvering for
gridlock, not closure.

•

Among die options considered for use during the budget standoff were the following trust funds: social
security, Medicare, disability, military retirement, and most of the other major trust funds.

•

To avoid making the above information public, die Treasury Department engaged in an effort to censor
documents and withhold information from Congress without any justification.

•

The JEC investigation focuses on Treasury planning leading up to the November vetoes by President
Clinton. It is our view that the issue of default as it was used last fall was a political fabrication. This
investigation has no bearing on current or future policy decisions since up-to-date information is not
available.




This material was presented at a Joint Economic
Committee Briefing on Wednesday, January 24,1996.

147

JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES

House Republican Members
PRESS RELEASE
104th Congress

FOR IMMEDIATE RELEASE

January 19,1996

SAXTON REPORT CALLS FOR FULL DISCLOSURE
OF ADMINISTRATION DEBT LIMIT DOCUMENTS
Jim Saxton, New Jersey
Viee-Quimun
Thomas Ewing, Qlinoia
Jack Quiaa, New York
Donald Manzullo, Illinois
Made Sanford, South Carolina
Mac Thomberry, Texas

Today Joint Economic Committee Vice-Chairman Jim Saxtonreleased• JEC report oo a
JEC investigation of Treasury Secretary Robert Rubin's circumvention of tbe debt limit using federal
retirement trust funds. This study, entitled The CBntom Mt Link and Budgtt Charade-Part 111,
revealsforthefirsttime the existence of extensive U.S. Treasury plans to evade tbe debt limit using
these trust funds that were carefully prepared by June 27,1995, more than four months before
President Clinton's vetoes of the CR and debt limit increase on November 13. Tbe JECreportis
based on tbe results of a November 17,1995 document request co-signed by Majority Leader Dick
Axmey and Vice-Chairman Saxtoa
The Administration plans in these documents laid the groundwork for tbe prolonged budget
the Social Security trust fund were considered to find the evasion of the debt limit.
"This JECreportrevealsfor thefirsttime the careM planning undertaken by tbe Clinton
Administration for budget gridlock." said JEC Vkx-Cbairaun Jim Saxton. "While making loud and
disingenuous warnings of imminent default, the Admaristraticn had already made carefiil plans faraiding the trustftmdsin the event tbe debt limit was not increased," he continued. "The default isnie
considering tapping into Social Security tofinanceits budget standoff," Saxton concluded.
According to tbe JECreport,internal memos to Treasury Secretary Robert Rubin and other

Cnntart-

Gary Gallant

entire page* were deleted completely. Theses
information is being concealed, and continues an AihiimiatiaSiiwi pattern of failing to provide
According to Saxton. "Treasury Secretary Robert Rubinrisksappearing as someone wfaa
has wmrthing to hide " As an article in The Economist, as well as a JECreport,poioled out last
November, Secretary Rubin knew all along that no default would occur. Tbe default scare was a

inytwy»»i*HjOA
WmUMMDC WU
Fax

MM1MHB




"I call oo Secretary Rubin toreleaseall d
the pubbc," Saxton said. "There can be oo legitim
press and the public." he concluded.

meredbya

A complete copy of (he repeat is sttarhwi (S pafes).

148

CongreM of tfie ®ntteb &tate*
$ou*e of l&epretfentattoe*
Ohftyngton, S C 2 0 5 1 5

November 17,1995
The Honorable Robert E. Rubin
The Secretary of the Treasury
Department of the Treasury
1500 Pennsylvania Avenue NW
Washington, D.C. 20220
Dear Mr. Secretary:
The recent use of thrift plan and civil service retirement funds to finance federal
government activities raises a number of important issues. Since this action essentially
circumvents the debt limit as well as the constitutional role of Congress to authorize federal
borrowing, members of Congress have an interest in knowing how this decision was made. We
would appreciate your cooperation in answering several questions we have about this matter.
When during the last 12 months did the Treasury staff first examine the options available
to avoid the debt limit? After Treasury staff had completed examining the available options,
when were its conclusions first shared with the White House or OMB staff? We would also like
to request copies of all the documents related to this decision-making process so that the
Congress can have a better understanding of how these decisions were made.
Thank you for your cooperation. If your staff has any questions about this request, please
contact Christopher Frenze of the Joint Economic Committee staff at 225-3923. A response to
this letter by November 22,1995 would be appreciated.




149

JOINT ECONOMIC COMMITTEE
PmtaiM,N«w J«M]r
VktOuiimM
T W « W. Iwia* DIM*
Jack Qmtmm. H*w Y«A
P—d4 A. MMWJU OM—to
M«ktMM,k«diCa#u
Mac TWmb«rry, T«xa»

CONGRESS OF THE UNITED STATES

H——
Hwtw
iS»T tMgww* NMb«
WMWi^M, DC MSU
RIMM
W - O M N
r«JO M M 1 M M

January 17,1996
The Honorable Robert E. Rubin
Secretary of the Treasury
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220
Dear Mr. Secretary:
Majority Leader Dick Armey and I wrote to you on November 17, 1995 asking for all
documents relating to the decision making process that led to your decision to disinvest $61J
billion dollarsfromthe Civil Service Retirement Trust Fund and the Thrift Savings Fund. We
initiated this investigation because we were concerned these actions would essentially
circumvent the debt limit as well as the constitutional role of Congress to authorize federal
borrowing.
Since then, the Treasury's response has raised our cooceras. In addition to the long
delay in receiving materials, there are a number of problems with the response to the November
17, 1995 letter of inquiry. Of the records disclosed so far, most of the relevant documents are
heavily redacted. Your letters have stated that redactions would solely be for the purpose of
deleting irrelevant material, but theredactionsare particularly heavy in areas that discuss the
decision making process, which was expressly the focus of our inquiry.
Furthermore, while many documents appear to be redacted, only some of the affected
documents have been marked as "redacted." This is disturbing, as it makes it difficult or
impossible to know what documents have been altered and therefore are missing textfromthe
original document Redacting usually entails striking out words with a marker, to indicate where
words have been deleted, but your office has blanked out sentences, paragraphs, and even entire
pages of text Byredactingphrases and even whole pages of text in documents clearlyrelatedto
the debt limit, documents and information clearly covered by ourrequesthave been rendered
meaningless.
The third issue of concern is the decision not to comply with ourrequestwith respect to
all documentsfromthird parties, even if theyrelateto our request, but to refer them to the
original party with a so-called notice of referral to my staff After nearly two months, we have
not received any notices, and since there are references to third party correspondence, we know
that such documents exist All three of these problems together make k very difficult to view
your response as a good faith effort to respond to our inquiry.




150

As you recti I, we specifically requested all documents related to the decision making
process leading up to the disinvestment of the two trust funds on November 15, 1995. The
Treasury's first response was woefully inadequate: two memos dated a few days before the
disinvestment decision. In the face of such an obviously non-responsive document production,
we instructed our staff to meet with your staff and explain that this response was less than
forthcoming.
In the meeting between Treasury department officials and my staff, the Treasury
representatives claimed that there really were very few documents and assured us that any such
documents could be easily rounded up and the request complied with as promptly as possible.
Your staff then asked for examples of what we were interested in so as to help them respond to
the request. For instance, my staff specifically requested all background or decision memos that
you as Treasury Secretary relied on in your decision making process. My staff clearly and
repeatedly explained that we wanted all of the documents relevant to the decision making
process, which should be fairly easy to understand, but also enumerated a list of examples —
while making it very clear that the example* were by way of example and the request for all
documents should not be limited in any way to just those examples.
These examples in do way should be interpreted as a reason to limit your response, as we
have made it clear that we want all information regarding the decision making process leading to
the November 15, 1995 decision in favor of the trust fund divestment option. Please
communicate to those providing documents and those reviewing documents that all of the
relevant documents must be provided for a full and proper review.
The second response after the meeting failed to produce almost all of the examples that
were requested. By way of example only, these include the prior Treasury legal opinions
regarding options for Treasury to avoid default; preliminary determinations regarding the current
situation which you publicly referred to before November 10, 1995; all communications
regarding the debt limit with the White House, other Administration offices, and the Federal
Reserve; any determination that some options to avoid default would not or should not be
chosen; and, background or decision memos used in the decision making process. The Treasury
has yet to respond fully to any of these requests, and we find it hard to believe why after almost
two months your office has not properly responded to our request
The third delivery, over a month after our request, was so full of redactions that any
reasonable, neutral party would have to conclude that Treasury staff appears to have redacted
information that was clearly relevant to the issue of the debt limit For instance a number of
documents were redacted immediately following the words "debt limit" and were redacted not
by striking out the words, but by deleting them entirely. In most cases, thb redaction of text
from official documents was not even accompanied by any signal or indication that information
had been deleted.
I am seriously concerned about these redactions, and would ask that you make available
for my staff s review all of the documents during a meeting at your premises at 10:00 a.m. on
January 19, 1996. It is necessary to review all of the documents to detenaise which doca meats
were redacted without u y iadkatioa of sach redactions and to determine whether the
redacted iaforaatioa is tndy sot relevant to oar iaqairy. At this time my staff could also
meet with those responsible for redacting the documents so we can discuss with them the criteria
they used in determining what material to redact If any more relevant information is discovered




151

in th« redacted documents, we will make copies at that time. One document in particular, a June
27 memo from Darcy Bradbury, is clearly relevant to our request, so I would ask that you nuke •
complete copy of all versions of that memo available at the January 19, 1996 meeting.
At the meeting we would also 13m to discuss your request to keep the relevant
documents confidential. These documents appear to be official and public records (not
containing any information regarding Rational security or confidential information), and we are
not convinced that your request is a reasonable one. We woukl be glad to offer the opportunity
to further explain your request at the January 19 meeting.




Sincerely,

Vice-Chairman
Joint Economic Committee

152

JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES

House Republican Members
PRHSS KII I- ASIFOR IMMEDIATE RELEASE

Jim Saxton, New Jersey
Vke-Ouinnan
Thomas Ewiag, Illinois
Jack QaJna, New Yock
•Uo.Dl
South
«y,Te»

Febnivy 1,1996

INTERNAL TREASURY DOCUMENTS REVEAL
ADMINISTRATION DEBT LIMIT CHARADE
Today Vice-Chairman Jim Saxton of the Joint Economic Committer released newly
available documents raising more contradictions about Administration plans to evade the
debt limit last November. Two memos to Treasay General Counsel Ed Knight reveal tha
legal planning for the rationale used to disinvest the trust funds began last summer. The
extended period between summer and November 15 provided at least 10 weeks to review the
legal status of various Administration options. This contradicts the impression left at
Secretary Rubin's November IS press coufcrcnce that the legal judgements regarding trust
fund disinvestment were made at the last moment, and that his previous default warnings
should be viewed in that context
"These internal Treasury documents show that the legal work on trust find

Chief Eceaamist

Mr. Saxton observed. "It is obvious from these and other documents made available, that
extensive legal research justifying the Secretary's actions was prepared weO in advance," he
contimitd "This provi<ks farther tt»fmnation of othg
planning to circumvent the debt limit, even as Secretary Rubin nod Lean Panetta were crying
wolf for public consumption about default TT»eae documents reveal the breadth and depth
of the Administration's disinformation campaign on the default issue last fall, when they
knew there would be no default," he concluded
A third memo also diaciooes the fact that die Treasury's Debt Limit Task Force was
not limited to debt management issues. It was also used, according to the memo to Treasvy
General Counsel Ed Knight, to develop "political itialegies during the debt hnwt impasse."

Guy Gall—I

tltfMaak

h H.O.B.
Waafciagtoa, DC 20515
Phaw 2n«U2M
Fas W2-2*-»50




"This memo confirms the Cact that the Administration's default hoax was part of a
political strategy," Saxton noted. "As I have said publicly before, the default issue was a
phony from the start These docimcnto show the political nature of what they were
attempting to do," he said, h i s not known whether career civil service penoond had any
role in these activities.
Saxton's release of the Treasury documents marics a new phase of an ongoing JEC
investigation sparked by a letter of inquiry co-signed with M^ority Leader Dick Armey. The
Treasury documents were withheld for weeks, and when fmally provided were in a heavily
censored form, with entire pages deleted without justification. Despite a Treasury
commitment to notify the JEC of any relevant documents from the White House and other
agencies, no such notifications have occurred
"Once again I call upon the Administration to release all documents covered by oar
request to the press and the public. The continued effort to withhold Adiimnisli stioo
documents from Congress is amply unacceptable, and r
Attached art dm dure newly rekased documents (dure total pages).

153

DEPARTMENT OF THE TREASURY
W A S H I N G T O N , O.C. 2 0 2 2 0

August 25, 1995

FOR LIMITED DISTRIBUTION AMD MOT FOR DISTRIBUTION
OUTSIDE THE LEGAL DIVISION
flfrORMATION

MEMORANDUM FOR EDWARD S. KNIGHT
FROM:

SUBJECT:

•*•

Weekly Report — Office of the Assistant General
Counsel for Banking and Finance, August 21,
through August 25, 1995

BtteULiliS: Researched iftuts regarding vhtthtr language
aoditied in the Smith legislation would violate tha takings
clause of the Constitution. (Bowman, Hclnerney, Rut ledge.
Could). Attended your nee ting with attorneys froe the
Justice Department Office of Legal Counsel (OLC); scheduled
« seeting (Monday, August 2S, at 11:00 a.a.) for OLC
attorneys to M e t with Treasury technical staff to learn the
nechanics of investing and disinvesting trust fund receipts.
(Sieger)




154

DEPARTMENT OF THE TREASURY
WASHINGTON, O.C. 2 0 2 2 0

September

1,

1995

FOR LIMITED DISTRIBUTION AMD MOT FOR DISTRIBOTIOM
OUTSIDE THE LEGAL DIVISION
TWPORMATIQN

MEMORANDUM FOR EDWARD S. KNIGHT

SUBJECT:

Weekly Report — Office of the Assistant General
Counsel for Banking and Finance, August 28,
through September 1, 1995

Debt Limit: Continued research on various options raised by
the Deputy Assistant Secretary (Federal Finance) for raising
cash during a debt limit impasse. (Bieger, King)
Researched and are preparing a memorandum on whether
language modified in the Seith legislation would violate the
takings clause of the Constitution. (Bowman, Rutledge,
Gould) Met with attorneys from the Department of Justice for
briefing on various operational issues related to the
investaent/d is investment of the various governmental trust
funds. (Bieger, King)




155

DEPARTMENT OF THE TREASURY
W A S H I N G T O N . O.C. 2 0 2 2 0

October 20, 1995
FOR LIMITED DISTRIBUTION AMD MOT FOR DI8TRIBUTIOM
OUTSIDE THE LEGAL DIVISION
IffFQEMftTIQN
MEMORANDUM FOR EDWARD S. KNIGHT
GENERAL COUNS
FROM:

JOHN E. BOWMAN
ASSISTANT GENERAL COUNSEL
(BANKING AND FRANCE)

SUBJECT:

Weekly Report — Office of the Assistant General
Counsel for Banking and Finance, October 16
through October 20, 1995

•—

Debt Limit: Attended your meeting with representatives of
the Justice Department's Office of Legal Counsel to update
OLC on the latest political developments relating to the
debt limit and to discuss uses of various trust funds during
a debt limit impasse; continued to attend the daily meetings
of Treasury's Debt Limit Task Force for developing
Treasury's cash management and political strategies during a
debt limit impasse; continued to review and offer comments
on revisions to the memorandum being prepared by the
Assistant General Counsel (International Affairs) for the
Secretary on uses of the ESF during a debt limit impasse.
(Bowman, Bieger)




156
DEPARTMENT OF T H E TREASURY
WASHINGTON, O.C. 2Q220
June 27, 1995
MEMORANDUM FOR SECRETARY RUBIN
DEPUTY SECRETARY NEWMAN
THROUGH:
FROM:

Darcy Bradburyj££^>
Deputy Assistant Secretary (Federal Finance)

SUBJECTi
Debt Limit
SUMMARY:
The current $4.9 trillion debt limit will only be sufficient
until early this fall. We are currently developing a strategy to
request an increase and to manage the U.S. Government's finances
if an increase is not passed promptly.
DISCUSSION:
•

There are a number of actions that have been taken in the
past to manage cash balances, outstanding debt, and trust
fund investments in nonmarketable Treasuries when there is
not prompt action to increase the debt* limit. If it seems
appropriate, the following steps could be taken in 1995.

•

We will approach current $4.9 trillion debt limit in
September. We should be able to avoid the limit by
disrupting usual auction schedules and carrying lower cash
balances.

•

By October we may need to leave some monies uninvested in
certain trust funds. This will decrease nonmarketable debt
outstanding, so we can sell debt to public to raise cash.
The first choice would be a fund that has overnight
investments and has existing statutory restoration of lost
interest when the debt limit is raised.

•

By late October/early November, it will be difficult to fund
Social Security benefits unless some funds in the Social
Security trust Cund are left uninvested.

•

While similar- actions have been taken by previous
Secretaries, the legal and policy issues are not crystal
clear.

•

Treasury cash forecasts are not precise this far in advance.

Attachment:




Outline of Debt Limit Strategy

157

Outline of Debt Limit Strategy
I.

Phase I;
A.

Notification of Congress of need and issues
1.

B.

C.
II *

Setting the Stage

Letter from Secretary

Background briefings for Congressional Staff
1.

By Treasury staff

2.

By bipartisan former Treasury staff

Background briefings for media

Phase XX: Hearing the Limit
A.

Notification of Congress of impending actions
1.

B.

C.

Letter from Secretary

Public comments to market participants and media
1.

Amending auction announcements

2.

August quarterly refunding press conference

Notifications to trust funds of potential actions

XXX. Phase XXX < Managing a t the Llnlt
A.
Interruptions of regular auction schedules (Sept)
B.
Not inventing incremental trust fund receipts (Oct)
C.
Reducing investments in certain funds to create
capacity to issue debt to public so as to raise cash
(Oct)
D.
Reducing investments in certain trust funds to make
payments related to those trust funds (Nov)
XV.

Close project management throughout phases
A.

Ongoing briefings and centralized message

B.

ITo Administration officials
2.
To Congressional members and staff
3.
To m e d i a
4.
To market participants
Close monitoring of
flows

C

Ongoing a n a l y s e s of


http://fraser.stlouisfed.org/
22-450 96 — 6
Federal Reserve Bank of St. Louis

legal

issues

158

DRAFTINTERNAL USE ONLY
Scenario!
Week of September 18

-Begin reducing bill auctions
-Memo to Secretary requesting approval to disinvest ESP

October 16

-Issue 10-day cash management bill

October 17

-Notice to banks of possible call on compensating balances

October 23

-Waning to Congress of possible suspension of sale of
Savings Bonds, SLGs and foreign add-ons

October 27

-Notice to Congress of upcoming inability to reinvest GFund
-Notice to Congress of possible inability to invest trust fund
receipts
-Notice to Executive Director of Federal Employees
Retirement System of upcoming inability to reinvest G-Fund
-Notice to public trustees of Social Security and other trust
funds of possible inability to invest receipts

October 31

-Call in compensating balances
-Begin not reinvesting G-Fund

Noveofcer i

-Suspend sale of Savings Bonds, SLGs and foreign add-ons

November 3

-Issue $18.0 billion 27-day cash management bills

November 9

-Notice to Congress of upeoming redemption from CSRF

November 13

-Redeem $36.0 billion securities from CSRF (amount equal
to 12 months* benefits payments)

November 15

-Issue $20.0 billion 36 -day cash management bills

November 30

-Redeem $18.0 billion cash management bills




159

DRAFTINTERNAL USE ONLY
December 1

-Repo out $15.0 billion FFB assets
-Issue $15.0 billion 20-day cash management bills

December 21

-Redeem S35.0 billion cash management bins

December 28

-Reduce auction of weekly bills by $10.0 billion

December 29

-Do notreinvest$14.5 bQfioo interest payment to CSRF







Scenario II

10/26
10/27
1<V30
10/31
11/1
11/2
11/3
1115'
11/7
11/8
11/9
11/10
11/13
11/14
11/15
11/16
11/17
11/20
11/21
11/22
11/23
11/24
11/27
11/26
11/29
11/30

Caah*
14.7
14.6
15.5
20.6
12.9
18.5
0.6
(1.8)
(4.7)
(6.4)
(2.5)
(2.7)
(2.9)
(02)
(26.6)
(16.6)
(19.0)
(16.7)
(16.9)
(20.5)
(20.5)
(16.2)
(15.0)
(H.9)
(14.4)
(44)

'Forecastasof 9/29/95

Debt*
4,697.6
4,699.1
4,696.0
4,912.8
4,907.1
4.912.0
4,900.1
4,900.8
4,903.0
4.901.4
4.902.0
4.902.1
4.904.4
4.906.9
4,912.1
4,916.6
4,915.1
4,915.7
4.916.4
4,917.9
4,917.9
4,922.2
4,921.1
4,923.6
4,926.1
4,942.2

Atjfmtmente

call Incomp. balances; don't invest GFnd

Cash Effect Dahtafact

2.3

(21.0)

don't allow foreign addons in auction
cash mot bill

(0.3)
1S.0

(0.3)
18.0

don't allow foreign add-ons fn auction

(0.3)

(0.3)

dtetovest 12 months CSRF

(36.0)

cash mgt bin; no foreign add-ons
donl allow foreign add-ons in auction

18,8
(0.3)

16.8
(0.3)

dont allow foreign addons In auction

(0.3)

(0.3)

(19.3)

(19.3)

(21)

(2.1)

cash mgt bNt matures; no foreign add-ons
Effect of suspension of Savings Bonds
and SLGe for month

&U a e h Arij d * *
4,897.6
14.7
14.6
4,899.1
16.5
4.898.0
22.9
4.691.8
16.2
4.886.1
20.6
4,890.7
4,89816
208
1*2
4,897.5
15.3
4,899.7
4,898.1
13.6
4,898.4
17.2
4,898.6
17.0
16.8
4,864*
19.5
4,8663
11.7
4,891.3
4,694.5
19.6
4,894.0
19.2
4,894.6
19.5
4,895.3
19.3
17.7
4,696.8
4,696.8
17.7
4,900.8
21.7
22.9
4,699.7
4,902.4
23.0
4,904.7
23.5
14.2
4,901.5
12.1

4,899.4

10/04/95DLSTRAT2.WK4




Scenario II

12/1
12/4
12/5
12/6
12/7
12/8
12/11
12/12
12/13
12/14
12/15
12/18
12/19
12/20
12/21
12/22
12/25
12/26
12/27
12/28
12/29

Cash*
(31.5)
(33.2)
(38.8)
(38.5)
(36.5)
(36.9)
(357)
(35.1)
(35.0)
(31.1)
(23.7)
4.0
7.4
8.5
11.5
11.8
11.8
14.2
16.6
19.6
21.4

'Forecast as of 9/29/95

Qfib£
4,926.7
4,927.2
4,928.3
4,924.3
4,920.7
4,923.0
4,923.6
4,925.7
4,927.2
4,929.9
4,926.9
4,928.5
4,929.5
4,930.8
4,933.7
4,935.2
4,935.2
4,936.7
4,939.9
4,942.5
4,987.7

Adjustments
cash mgt bill; FF8 asset sale

don't allow foreign add-ons in auction

dont allow foreign add-ons in auction

cash mgt bill matures; no foreign add-ons

reduce bill auction; no foreign add-ons
don't Invest CSRF interest payment
Effect of suspension of Savings Bonds
and SLGs for month

Cash Effecj Debt Effect AH) Cffitft Aij. debt
30.0
15.0
15.0
4,898.9
13.3
4,899.4
9.7
4,900.5
8.0
4,896.5
(0.3)
(0.3)
9.7
4,892.6
9.3
4,894.9
10.5
4,895.5
4,897.6
11.1
11.2
4,899.1
(0.3)
(0.3)
14.8
4,901.5
4,900.5
22.2
49.9
4,900.1
53.3
4,901.1
54.4
4,902.4
(35.3)
22.1
(35.3)
4,870.0
22.4
4,871.5
22.4
4,871.5
24.8
4,873.0
27.2
4,876.2
(10.3)
(10.3)
19.9
4,868.5
(14.6)
21.7
4,699.2
(2.2)

(2.2)

19.5

4,897.0

10/04/95DLSTRAT2.WK4

162
DRAFT-

INTERNAL USE ONLY

Scenario n
-Beginreducingbfll atMkws

Week of September 18

-Memo to Secretaiy requesting approval to disinvest ESF

October 16

-Issue KKday eaih management bfll

October 17

-Notice to banks of possible call GO compensating balances

October 23

-Warning to Congress of possible suspension of sale of
Savings Bonds, SLGs and foreign add-ons

October 27

-Notice to Congress of possible inability to invest trust fund
receipts
-Notice to public trustees of Social Security and other trust
ftmds of possible inability to invest receipts

October 30

-Notice to Congress of upcomingredemptionfromCSRF

October 31

-Call in compensating balances
-Redeem $36.0 billion securities from CSRF (amount equal
to 12 months* benefits payments)

November 1

-Suspend sale of Savings Bonds, SLGs and foreign add-ons

November 3

-Issue $15 bftlioa 48-day cash management bill

November 13

-Notice to Congress of upcoming inability to reinvest GFund
-Notice to Executive Director of Federal Employees
Retirement System of upooming inability to reinvest G-Fund

November IS

-Issue $18.0 billion 15-day cash management bill
-Begin notreinvestingG-Fund

November 30




-Redeem $18.0 billion cash management bills

163
DRAFTINTERNAL USE ONLY
December 1

-Rcpo out $15.0 billion FFB assets
-Issue $15.0 billion 20-day cash management bill

December 21

-Redeem $30.0 billion cash management bills

December 28

-Reduce aucdon of weekly bills by $10.0 billion

December 29

-Do not reinvest $14.5 billion interest payment to CSRF







Scenario II
Cash*

10/26
10/27
10/30
1CV31
11/1
11/2
11/3
11/6
11/7
11/8
11/9
11/10
11/13
11/14
11/10
11/16
11/17
11/20
11/21
11/22
11/23
11/24
11/27
11/28
11/29
11/30

147
14.6
15.5
20.6
12.9
16.5
0.8
(1.8)
(4.7)
(6.4)
(2.5)
(2.7)
(2.9)
<0.2)
(26.8)
(16.6)
(19.0)
(16.7)
(18.9)
(20.5)
(20.5)
(16.2)
(15.0)
(14.9)
(14.4)
(4.4)

•Forecast as of 9/29/95

Debt*

4,897.6
4,899.1
4,898.0
4,912.8
4,907.1
4,912.0
4,900.1
4,900.8
4.903.0
4,901.4
4,902.0
4,902.1
4,904.4
4,905.9
4,912.1
4,915.6
4,915.1
4,915.7
4,916.4
4,917.9
4,917.9
4,922.2
4,921.1
4,923.8
4,926.1
4,942.2

A^uttmento

Cash Effect Qabt Effect Adjcash

A ^ defat

2.3

(36.0)

dont allow foreign add-ons In auction
eashmot bill

(0.3)
15.0

(0.3)
15.0

don't allow foreign add-ons in auction

(03)

(0.3)

eaah mgt bMidonrtmvatOFd; no add-on
dOrit allow foreign add-ons In auction

16.8
(0.3)

(4.2)
(0.3)

dont allow foreign add-ons In auction

(0.3)

(0.3)

cash mgt bin matures; no add-ons
Effect of suspension of Savings Bonds
and SLGs for month

(19.3)

(19.3)

9J2

4,697.6
4,699.1
4,698.0
4,876.8
4,871.1
4,876.7
4,678.6
4,879.5
4,661.7
4,880.1
4,880.4
4,880.5
4,882.8
4,8843
4,886.3
4,889.5
4,689.0
4,889.6
4,800.3
4,891.8
4,891.8
4,895.8
4,894.7
4,897.4
4,899.7
4,896.5

(2.1)

(2.1)

7.1

4^894.4

cad in oompi bines; dsnvst 12 mos CSRF

14.7
14.6
15.5
22.9
15.2
20.5
17*
15.2
12J3
iae
14.2
140
13.8
16.5
14.6
14.2
14.5
14.3
12.7
12.7
16.7
17.9
1&0
16.5

1Q/04/950LSTRAT2.WK4




Scenario II

12/1
12/4
12/5
12/6
12/7
12/8
12/11
12/12
12/13
12/14
12/15
12/18
12/19
12/20
12/21
12/22
12/25
12/26
-12/27
12/28
12/29

Cash*
(31.5)
(33.2)
(36.8)
(38.5)
(36.5)
(38.9)
(35.7)
(35.1)
(35.0)
(31.1)
(23.7)
4.0
7.4
8.5
11.5
11.8
11.8
14.2
16.6
19.6
21.4

'Forecast as of 9/29/95

Debt*
4,926.7
4,927.2
4,928.3
4,924.3
4,920.7
4,923.0
4,923.6
4,925.7
4,927.2
4,929.9
4,928.9
4,928.5
4.929.5
4,930.8
4,933.7
4,935.2
4,935.2
4.936.7
4,939.9
4,942.5
4,987.7

Adjustments
cash mgl bill; FFB asset sale

don't allow foreign add-ons tn auction

don't allow foreign add-ons in auction

cash mgt bill matures; no add-ons

reduce weekly bill auction; no add-ons
don't invest CSRF interest payment
Effect of suspension of Savings Bonds
and SLGs for month

Cash Effect Debt Effect A^ pfflfr Adj. debt
30.0
4,893.9
15.0
10.0
8.3
4,894.4
4.7
4,896.5
3.0
4,891.5
(03)
(0.3)
4.7
4,887.6
4.3
4,889.9
5.5
4,890.5
6.1
4,892.6
4,894.1
6.2
(0.3)
9.8
4,896.5
(0.3)
4,895.5
17J2
44.9
4,895.1
48.3
4,896.1
49.4
4,897.4
(30.3)
22.1
4,870.0
(30.3)
22.4
4,871.5
22.4
4,871.5
24.8
4,873.0
272
4,876.2
(10.3)
19.9
(10.3)
4,868.5
(14.5)
21.7
4,899.2
(2.2)

(2.2)

19.5

4,897.0

10/04/95DLSTRAT2.WK4

166

D E P A R T M E N T O F T H E TREASURY

MEMORANDUM FOR SECRETARY RUBIN
FRGMx

Darcy B
Roger AndersoiJgJ^

SUBJECT:

Debt Limit Contingency Plans

SUMMARY:
Attached is a brief summary of the measures for consideration and
an update of a possible scenario. Tomorrow Jerry Hawke, Ed
Knight and we are prepared to meet with you to discuss themeasures in detail. Other staff with particular expertise in
specific measures will join us as appropriate. At this time we
have not prepared final, written analyses of the legal and policy
issues for cach item. Sylvia Mathews suggested w e send this
summary to you in anticipation of tomorrow 's discussion.
ATTACHMENTS

CC: Jerry Kawke
Ed Knight
Sylvia Mathews




167

Measures for Consideration

Amount

Comment

Not reinvest assets of G-Fund

$21.5 billion

Not reinvest other overnight rollovers
BIF
SAIF
Postal Service

$1.4 billion
$1.3 bilfipn
$1.5 bQEon

Disinvest Civil Service Retirement and
Disability Fund
-in amount equal to X months' benefits
-December 3 i interest payment
-in tolo

$3 billion per month
$14.5 billion
$350 billion

Not investnew receipts of trust funds

$3-10 billion a day

Variable

Se&FFB assets
-to trust funds
-to public
ETC
Agriculture
Other

$13 billion
$27 billion
$44.3 billion

Varying quality

Disinvest Exchange Stabilization Fund
Dollar portion
Yen portion
Mark portion
Peso swap equivalent

S3 billion
$10 billion
$6.9 billion
$12.2 billion




Variable

May be attractive
to Fed

168
Disinvcst other tiust fluids
-to pay benefits
-for general purposes
MjforRmfc' Holding
Soda! Security
Medicare
MHitaiy Retirement
Unemployment
Disabifity
Highway
Railroad
Airports
Supplementary medical
Other
Sell gold
-to trust funds
Ho Fed
-topublic

Office of Federal Finance
Novembers. 1995




$44S bilfioa
$130 bilfioa
$113 bflfion
$47 bilfioa
$35 bilfioa
$18.5 Union
$14.4 bQGon
$14 bilfioa
$11 billion
$3$ bilfioa
$11.1 bfflion,
market

Awlcward
dbutiptive

169

DRAFT-November
1995INTERNAL USE ONLY
Scenario m
(Assumes no temporary)
October 17

-Announce cut in 10/23 bill auction to $6.0 billion
•Suspend sale of foreign add-ons
-Suspend sale of SLGS

November 1

-Announce quarterly refolding

November 2-8

-Call in compensating balances

November 3

-Issue $14.0 billion cash management bills
-$$.0 billion maturing 1/25
-$6.0 billion maturing 12/21

November 6

-Postpone auctions of 3- and 10- year notes

November 8

-Postpone auction of 52-wcck bills

November 13

-Statutory notice to Congress of upcoming inability to invest
G-Fund fuOy
-Notice to Executive Director of Federal Employees
Retirement System of upcoming inability to reinvest G-Fund
-Statutory notice to Congress of upcoming inability to invest
CSRFfuHy
-Announce $25.0 billion cash management bills

November 14

-Auction $25.0 b3Con cash management bills

November 15

-Begin not reinvesting G-Fund fully




-Redeem S36.0 billion securities from CSRF (amount equal to
12 months' benefits payments)
-Suspend sale of Savings Bonds

170

DRAFT-Neveaber 8, 1995INTERNAL. USE ONLY
-Issue S25.0 billion 36-day cash msiwgcmwrt bills (12/21
maturity)
November 29

-Announce $5.0 bOfion cash management bifit

November 30

-Notice to Congress of sale of FFB assets
-Auction $5.0 billion cash management biQs

December I

-Sell $1X0 ba&on FFB assets
-Issue $5.0 billion 27-day cash management bills (12/28
maturity)

December 15

-New $12.0 billion FFB loan

December 2!

-Redeem $31.0 billion cash management bBs

December 28

•Redeem $5.0 billion cash management bifls
-Notice to Congress of upeoming nonmvestmant of CSRF
interest payment
-Announce $8.0 billion cash management biO

December 29

-Do not reinvest $14.5 bffion interest payment to CSRF
-Auction $8.0 billion cash management bifl
-Antounce $5.0 UQOQ cash management bfQ

January 2

-Issue $8.0 billion 16-day carfi management bfll (1/18 maturity)
•Auction $5.0 billion cash management bifl
-Begin not investing trust fond receipts fuDy

January 3

-Issue $5.0 billion 22-day cash management bill (1/25
maturity)

January 16

-Announce cut in 1/22 auction of $15.0 bUfion




171
DRAFT-N ovem ber 8, 1995INTERNAL USE ONLY
January 18

1

-Redeem $8.0 bilGon cash management bills

January 22

-Reduce aucdon of weekly bills by $1S.0 billion

January 25

•Redeem $13.0 bQGon cash management bills







Scenario III**

11 n
11/8
11/9
11/10
11/13
11/14
11/15
11/18
11/17
11/20
11/21
11/22
11/23
11/24
11/27
11/28
11/29
11/30

5.0
2.7
5.2
4.5
5.4
6.7
(20.4)
(12.9)
(13.0)
(12.7)
(13.3)
(15.3)
(15.3)
(105)
(9.7)
(9.0)
(8.4)
(3.2)

11/08/95

Cash Effect Dett Effect Adj. caah Amdahl £A. Marglln
Adjustments
2.6
5.0
4,807.4
4,897.4
4,895.7
4.3
1.7
4.4
4,895.7 cal in comp balances
4.6
6.9
4,89&6
4,895.5
4.6
4,895.4
6.2
4,895.4
7.1
4,807.9
2.1
4,897.9
4,89&3
8.4
0.7
4.899.3
<
M
M
»
26.5
4,872.6
(31.9)
6.6
4,904.6 cash mgt bill; dainvst G-Fund; redeem CSRF
4.B76L3
14.3
4,907.2
«M
4,874.8
14.2
4,908.7
***
14.6
4,876.3
4.907.2
4,876*
13.9
4,907.8
4,877.4
11.9
4,909.3
•m
4,877.4
11.9
4,909.3
4,8822
16.7
4,914.1
17.6
4,881.1
4,913.0
MM
4,883.6
18.2
4,915.5
•M
4,885.8
18.8
4,917.7
M*
4,900.9
24.0
4.932.8
Effect of suspension of Savings Bonds
***
4,898.8
21.9
(2.1)
(2.1)
and SLGi for month

•11/08/96 forecast

"Reflects all actions announced

•"TrustfUndatobe Invested to Srrtt




III**

Scenario

12/1
12/4
12/5
12/6
12/7
12/8
12/11
12/12
12/13
12/14
12/15
12/18
12/19
12/20
12/21
12/22
12/25
12/26
12/27
12/28
12/29

Cash*
(31.3)
(32.7)
(35.9)
(37.5)
(34.5)
(35.1)
(33.8)
(33.4)
(33.4)
(27.8)
(20.4)
5.2
8.8
9.1
12.5
12.5
12.5
15.1
18.0
21.1
22.6

Datrt*
4,918.9
4,919.4
4.920.5
4.917.2
4.915.4
4,917.7
4.918.3
4.920.5
4.921.9
4.926.1
4.925.1
4,924.7
4,925.8
4,927.1
4,930.3
4,931.8
4,931.8
4,933.4
4,936.6
4,939.5
4,980.8

•11/08/96 forecast

Aflugtrrmita
cash mgt b«s; FFB asset safe

no foreign add-ons

no foralgn add-ons
new FFB loan

cash mgt bQs mature; no add-ons

cash mgt Ml matures; no add-ons
dont invest CSRF interest payment
Effect of suspension of Savings Bonds
and SLGs for month

11/08/95

Cash Effect Debt Effect M . fiftih A*fl.rfabt
10.8
4,880.9
17.0
5.0
4,890.4
9.4
4,891.6
6.2
4,888.2
4.6
4,886.1
(0.3)
7.3
(0.3)
4,866.4
6.7
4,888.0
6.0
4,891.2
8.4
4,892.6
6.4
4,896.3
(0.5)
13.5
(0.5)
4.895.^
(12.0)
8.9
4,894.9
34.5
4,886.0
3&.1
4,897.3
38.4
10.5
4,869.2
(31.3)
(31.3)
4,870.7
10.5
4,870.7
10.5
4,872.3
13.1
16.0
4,875.5
13.8
4,873.1
(5.3)
(5.3)
4,899.9
(14.5)
15.3
(2.2)

"Reflects all actions announced

(2.2)

13.1

4,897.7

•"Trust fUndatobe Invested to Srrtt




Scenario III**

1/1
1/2
1/3
1/4
1/5
1/8
1/9
1/10
1/11
1/12
1/15
1/16
1/17
1/18
1/19
1/22
'/23
1/2 4
1/25
1/26
1/29
1/30
1/31

Cash*
22.6
21.9
10.7
8.4
8.0
8.9
8.9
9.0
11.2
10.3
10.3
12.4
20.1
23.5
28.6
34.7
38.8
39.1
50.6
49.8
51.t
51.6
52.2

Debt*
4,980.8
4,985.2
4,978.6
4,978.2
4,979.0
4,975.6
4,973.1
4,974.9
4,977.1
4,977.0
4,977.0
4,971.7
4,974.5
4,977.5
4,979.6
4,981.6
4,984.3
4,985.8
4,997.4
4,998.7
5,001.0
5,000.2
5,009.5

•11/08/96 forecast

Adjustments
cmb; don't invest receipts; no add-ons
cash mgt bNI
no foreign add-ons

11/08/95

Cash Effect Debt Effect
6.8
5.0
(0.4)

reinvest some receipts

(3.2)
5.0
(0.4)
3.0

no foreign add-ons

(0.8)

(0.8)

cmb matures; no add-ons

(8.4)

(8.4)

(28.4)

(28.4)

(1.2)

(1.2)

(2.2)

(2.2)

cmbs mature; reduce bill auction; no add-ons

no add-ons
Effect of suspension of Savings Bonds
and SLGs for month

"Reflects all actions announced

A c a s h Ad} debt PL Margin
**•
13.1
4,897.7
—
19.2
4,898.9
***
13.0
4,897.3
M*
10.3
4,896.5
«««
9.9
4,897.3
10.8
4,696.9
10.8
4,694.4
10.9
4,896.2
M*
12.3
4,897.6
4,897.5
11.4
«**
11.4
4,897$
«««
13.5
4,602.2
*«*
21.2
4,895.0
MM
4,889.6
16.2
21.3
4,891.7
4.893.7
27.4
31.5
4,898.4
+*»
31.8
4,897.9
4,881.1
14.9
*••
14.1
4,882.4
4HM
16.4
4,884.7
—
15.9
4,883.9
15.3
4,892.0
13.1

4,889.8

m

•"TrustfUndato beInvestedto Srrtt

175

ONE HUNOREO FOURTH CONGRESS

C o n g r e * * of rfie ® m t e b

&tatt*

feottte of ftepresentattoe*
COMMITTEE O N G O V E R N M E N T R E F O R M AND OVERSIGHT

2157 RAVBURN HOUSE OFFICE BCHUXNQ
WASHINGTON. DC 20515-6143

Statement of the Honorable John L. Mica
Chairman, Civil Service Subcommittee
Committees on Government Reform and Oversight
Hearing of the Committee on Banking and Financial Services
February 8,1996
Thank you, Mr. Chairman. I welcome your Committee's efforts to examine the Clinton
Administration's management of the federal debt I believe the administration's actions in
disinvesting the Civil Service Retirement and Disability Trust Fund and stopping routine
reinvesting of federal employees' contributions to the G-Fund borders on the illegal and, at least,
is a breach of trust. This administration broke faith with federal employees and annuitants. This
fiscal mismanagement represents the ultimate Mure of this nation to bring its finances and its
indebtedness in order.
Treasury Secretary Rubin has stretched language in Title 5 beyond the breaking point
to rationalize this Administration's unprecedented raid on the Civil Service Retirement and
Disability Fund. Section 8348(kX2) clearly prohibits the Secretary from disinvesting more
than is necessary to make authorized paymentsfromthe Fund during a "debt issuance
suspension period."
The purpose of that language is clear: Congress wanted to protect the retirement funds
on which our federal employees and annuitants depend. As then-Senator from Tennessee A1
Gore stated, the statute was intended to "preserve the sanctity of those contributions that these
employees have made toward their retirement" by making them "usable only for the payment
of civil service retirement and disability benefits."
To achieve Senator Gore's objective, Congress enacted strict limits on the Secretary's
authority to disinvest that Fund. Secretary Rubin has broken faith with that objective by
arbitrarily setting the length of die "debt issuance suspension period." First, he set it at one
year. Later, he extended it tofourteenmonths. The longer the period, of course, the more he
can rob from the Fund, and die longer the Clinton Administration can avoid getting runaway
federal spending under control. Until we get spending under control, we will face recurring
crises in managing the growth of our federal debt.
The bitter irony of all this, Mr. Chairman, is that even after all of this skullduggery,
Secretary Rubin had the gall recently to say that without a higher debt ceiling he wouldn't be
able to pay civil service retirement benefits in March. Let me repeat, Mr. Chairman. The law
says Secretary Rubin can only disinvest the Civil Service Retirement and Disability Fund to pay
retirement benefits. The Secretary disinvested. But he still says he won't have the money to pay




176

civil service retirement benefits! Where did all that money go? Down the federal spending
rathole, that's where!
When I assumed responsibility over the federal retirement system, I was shocked to
discover that the Civil Service retirement trust funds carried an unfunded liability of $540 billion.
The General Accounting Office is completing a review of more than 50 federal retirement
systems. That review should be a wake up call that huge unfunded obligations exist in nearly
every retirement program.
Not only are there multibillion dollar underfunded liabilities, but the so-called "assets" of
federal employees' retirement "trust funds" have been replaced with "nonmarketable government
securities." So, Mr. Chairman, these funds have been depleted of real assets and replaced by an
accumulation of IOUs.
As a result of these past practices, taxpayers shell out billions of dollars in annual
retirement costs, and last year paid $24 billion in interest on trust funds' IOUs. So we created
incredible unfunded liabilities, stole trust funds, pay huge amounts of interest on missing trust
money, and now rob the final pickings of the retirement fund carcass. This is a national disgrace.
Our true national debt is understated by more than one trillion dollars because the
unfunded liabilities in our civil service, military, and other retirement systems are kept off the
books. Now comes the ultimate insult, which is the President's strategy to divert public attention
from the debt issue by telling senior citizens that he would be forced to stop Social Security
payments. Unfortunately, this Administration believes it can legislate, appropriate, and extend
the indebtedness of the nation in spite of the Constitution and the Congress. This fiscal
irresponsibility in managing the future obligations of American taxpayers must end.
By obscuring the real costs of retirement and misusing these funds, we understate the full
costs to the taxpayers of every federal employee on the payroll by about thirty percent. These
real costs are concealed from today's taxpayers in a fiscal footnote to the Office of Personnel
Management's accounts. In 1986, the Federal Employees Retirement System (FERS) was
created to fix growing retirement fund problems. FERS established a Thrift Savings Plan (TSP)
keeping employees' contributions outside of the budget. By taking these contributions out of the
budget ~ not merely calling them off-budget - Congress intended to safeguard at least a portion
of these retirement funds.
This safeguard was intended to prevent the very manipulations that we have witnessed
over the past few months. Now, as we look into the status of the G Fund in the Thrift Savings
Plan, we find that old bad habits still prevail. The G Fund has become merely another bundle of
cash for an insatiable federal spending appetite.
Secretary of the Treasury Rubin has bastardized reinvestment of this fund to the tune of
$21.8 billion. Altogether, the civil service retirement funds have provided a slush fund to the
tune of 61 billion dollars. The Secretary of the Treasury has illegitimately used these funds to
evade the debt ceiling that the Congress has imposed, by law. How much lower can the
Executive Branch of our government stoop to avoid fiscal responsibility?
The ultimate insult to taxpayers and retirees is the shameless robbing of the last shreds of
cash flow from the federal retirement system.
This whole exercise pursued by the Administration in the name of managing fiscal
resources is really hidden debt. The Secretary of the Treasury may be moving numbers on




2

177

ledgers, erasing interest-bearing debt, and replacing it with IOUs, but our obligations to federal
employees and retirees cannot be evaporated with computer keystrokes.
We will have to restore every cent he has stolen.
We will have to pay interest on every dime that he has hidden through fiscal gimmickry.
We will have to redeem every dollar of our obligations to the people who worked long
and hard in the public service.
Unfortunately, this Administration's legacy will be more debt, more red ink, and more
robbing Peter to pay Paul.
During his State of the Union address, President Clinton asserted, "We should also
protect existing pension plans. Two years ago, with bipartisan support, we protected the
pensions of eight million working people and stabilized the pensions of 32 million more.
Congress should not let companies endanger their workers' pension funds." President Clinton
condemned private sector misuse of pension funds and meanwhile, back at the federal ranch.
Trail Boss Rubin was raiding the last cash at the federal retirement corral. Unfortunately, only
private citizens can go to jail if they abuse or misuse employee pension funds.
When private employers attempt to invest surpluses in their pension accounts, the
Secretary of Labor, tells them, "Hands off." If they try to use the funds, even to create new jobs,
he threatens criminal prosecution.
One employer that the Secretary of Labor should speak to real soon is the Secretary of the
Treasury. He needs to hear the message, loud and clear: "Hands off federal employees' pensions.
Payroll deductions from federal employees should never again be used to finance this
administration's deficit spending."
Since the Secretary of Labor is not likely to deliver that message, it is especially
important that this Congress send the signal in the clearest possible terms.
We should be providing more protection for our underfunded government system than
private employers are required to provide for their overfunded systems. Instead, we are
providing less.
I applaud the Chairman of the Ways and Means Committee for proposing that we fence
off federal employees' pensions from these financial shenanigans. I supported his initiative, and
will support any other positive action to protect federal employees' pension funds.
Finally, I recommend that Congress act now to move these funds into real assets and
investments. At the very least, we can require that the Thrift Savings Board to start moving into
marketable securities rather than nonmarketable bookkeeping entries. Federal employees
deserve something more tangible than a bookkeeping entry when they are ready to retire.




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E M B A R G O E D FOR RELEASE A T 9:30 A.M. E.D.T.
F E B R U A R Y 8, 1996

Statement of Secretaiy Robert E. Rubin
United States Department of the Treasuiy
before the House Committee on Banking and Financial Services
February 8 , 1 9 9 6
Mr. Chairman, I appreciate this opportunity to testify before you and the
other distinguished Members of your Committee.
In the last week, the debt limit discussion has proceeded in a welcomed
spirit of bipartisan cooperation. On February 1, Majority Leader Dole, Speaker
Gingrich and Majority Leader Armey wrote the President. They committed to
passing mutually acceptable legislation, by February 29th, to increase the debt
limit to ensure the United States continues to meet its obligations. The same day,
Congress passed legislation to authorize Treasury temporarily to borrow $29
billion outside the debt limit. This bill, H.R. 2924, will enable us to deal with the
March 1st crunch date of benefit payments. It was adopted with the support of
the Congressional Minority, which has urged action on the debt limit throughout
this process. President Clinton signed that bill into law this morning.
Now Congress and the President must agree on legislation that addresses
the debt limit problem on a long-term basis. By ensuring that America can meet
its obligations, we will protect the holders of government securities, Social
Security recipients, and other federal beneficiaries from any additional risk. It*s
clearly time to get this job done.
Since my last appearance before the Committee, much has changed. We
have reached, in my view, a common understanding of how important it is to
protect the creditworthiness of the United States, a vital national asset that must
never be tarnished by anyone for any reason. It is now time that comity replace
conflict, and the debate over the debt limit be drawn to a close.
Last December, I testified before this Committee about actions I had taken
and anticipated taking to protect America's creditworthiness absent adoption of a
clean debt limit increase. I will only briefly review that history today, and then
turn to more current issues.
In July, 1995, our Administration began asking Congress to adopt a clean
debt limit bill. Our communications on this matter were consistent and clear. I
said,
First, default is unthinkable.




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Second, the United States will not default because, in the final analysis,
Congress will fulfill its responsibilities and pass acceptable debt limit legislation.
Third, if Congress did not adopt such legislation, Treasury would b e forced
to use extraordinary means ~ subject to resolving legal and practical problems to avoid, default, although I cautioned there were costs attached to all such
actions.
Fourth, that I would notify Congress before taking any extraordinary
actions to ensure the United States government remained under the debt limit
and was able to finance its operations.
Fifth, passage of a clean bill will permit the debate on the budget to
proceed o n its own terms, unencumbered by risks to the nation's credit.
Because the debt limit was not increased last Fall, it was necessary for m e
to take actions to ensure we had cash and credit to meet obligations. In October,
we cut the size of a Treasury auction and, in November, we delayed others. O n
October 18th, w e stopped issuing what are called "SLGS" ~ securities that state
and local governments use to lower their debt service burdens. Early in
November, Treasury called in nearly $2.5 billion in "compensating balances" from
a number of large financial institutions.
Then, on November 15th, I was forced to invoke statutory authority
provided to Treasury Secretaries by Congress during the Reagan Administration.
November 15th was the date when w e would have b e e n out of debt limit room
and out of cash, and unable to meet all of our financial obligations. W e were on
the eve of default.
Counsel always advised m e that this decision with respect to the
application of the statute could only be made in the context of the facts which
existed o n the eve of default. It was only at that time that I was able to
determine that w e could replace $39.8 billion in securities from the Civil Service
Retirement and Disability Fund and $21.4 billion in securities from the so-called
"G-Fund" with non-interest bearing cash credits.
A s I said to the Committee in December, workers and retirees are fully
protected by the statutes that authorized those actions. The asset value of the
funds has not b e e n diminished by one nickel, and the statutes provide for full and
automatic restoration of unpaid interest
Finally, o n December 29th, despite all the previous actions, Treasury did
not have sufficient debt ceiling room to issue securities to the Civil Service
Retirement and Disability Fund to allow the fund to invest its $14 billion semiannual interest payment. As I told the Committee last year, the suspension of




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the investment, as authorized by statute, made it possible to continue
operations through January and until the middle of February 1996.

financing

Each action I mentioned was necessary because a debt limit increase was
not at hand. Each action fit my criteria of only employing those means that were
legal, practical and prudent.
Every one of them was driven by my responsibility as Treasury Secretary to
protect the full faith and credit of the United States, and only by that concern.
A n d as I said, in the case of the Civil Service Retirement and Disability
Fund action on November 15th, counsel advised that decision could only be made
in the context of the facts that existed on the eve of default.
A s w e entered the New Year, Treasury continued to examine other
options, if needed, that would permit regular government financing to go forward.
A s I promised this Committee, once we determined whether further legal, prudent
and practical options were available to us, we would report our findings to
Congress and the American people.
O n January 2 2 , 1 made good on that commitment. I announced that by
February 29th or March 1st, absent enactment of a straightforward debt limit
increase, w e would not be able to meet obligations. I further said that there were
only three remaining options available - consistent with what was legal, prudent
and practical - that could be exercised by February 15th in order to pay
obligations due on that date. These actions, approved by our Department's
Office of General Counsel and the Justice Department's Office of Legal
Counsel, include:
Suspending the reinvestment of the approximately $3.9 billion of dollar
denominated Treasury securities held by the Exchange Stabilization Fund,
an action that several prior Treasury Secretaries have taken.
Amending my November 15 determination on the length of the debt
issuance suspension period to fourteen months, thus permitting the
redemption of approximately $6.4 billion in additional Treasury debt held
by the Civil Service Retirement and Disability Fund, and its replacement
with a cash credit. And, I must point out, I must base the final decision on
an application of the statute to the facts which exist at the time of the
determination.
And, finally, exchanging approximately $9.0 billion of assets in the portfolio
of the Federal Financing Bank for an equivalent amount of Treasury
securities held by certain government trust funds. A swap between the
Treasury and the F F B will then let us cancel those Treasury securities.
This action is authorized by statute.




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Following these steps, and without legislation by Congress, there are no
additional legal and prudent measures I can take to meet obligations. W e
reached that conclusion after considering and rejecting other actions because they
failed to meet our criteria of doing what was right to avoid default
I will not delay mailing tax refunds owed the American people. I will not
sell the nation's gold. I cannot go beyond the $9.0 billion in asset exchanges
with the Federal Financing Bank. There are legal, practical and prudential
arguments supporting each of these decisions.
Delaying tax refunds would hurt more than 70 million Americans who
depend o n those refunds. It still would provide only a short-term deferral of the
problem, because we could not and would not hold their money forever.
Secretary Baker considered and dismissed selling gold in 1985 and said:
"It would undercut confidence here and abroad based on the widespread belief
that the gold reserve is the foundation of our financial system, and because
Congress clearly has the power to prevent a default by assuming its responsibility
with respect to the debt limit." Similar arguments prevail today.
I do not have legal authority to divest any of the other 189 government
trust funds for debt management purposes, only the G-Fund and the Civil Service
Fund. In addition, the President took Social Security off the table. A s to the
balance of the FFB assets, I have b e e n advised by counsel that the F F B assets we
have identified are the only F F B assets that can b e legally sold to the trust funds
in a manner that reduces the amount of debt outstanding that is subject to the
debt limit.
In any case, resorting to any of these measures is no way for a great nation
to manage its financial affairs. That is why the commitment of the Leadership to
move acceptable debt limit legislation, by February 29th, and the enactment of the
Archer bill, which allows for orderly financing and relieves anxieties about
government's ability to make payments, is so important
The conclusive answer is right before us. The Congress should pass a debt
limit increase for at least one year to separate this issue from the budget debate
and get it out beyond the election. That would end the risk both for our credit
and for federal beneficiaries, and I think it is important that w e do exactly t h a t
This debate began last year when some said that default was an acceptable
price for getting the version of the budget they preferred enacted into law. That
kind of comment isn't being heard any more. That is because, I believe, people
have a better understanding of what is at stake. In that sense, much has been
accomplished during this difficult period.




182

A nation's financial reputation is an invaluable asset; its creditworthiness
is a sacred trust. Our reputation has enormous practical importance for our
country; it should not be called into question, it ought not be subject to
uncertainty for any purpose. W e must honor interest and principal obligations,
and we need to protect the trust of Social Security recipients, veterans, indigent
children, active duty military personnel, civilian employees and government
contractors -- indeed, everyone who counts on the full faith and credit of the
United States.
National leaders regardless of party have always acted to protect our
creditworthiness.
In my December testimony, I read affirmations of this principle from Alan
Greenspan, Paul Volcker, two Republican and four Democratic former Treasury
Secretaries, and comments from the major international rating agencies. These
quotes are in the record, and I shall not repeat them. Protecting the nation's
credit is a bipartisan, indeed, a non-partisan, tradition.
More than a decade ago, President Reagan urged Congress to adopt an
increase in the debt limit. In a letter he wrote to then Majority Leader Howard
Baker, he gave voice to sentiments I share today.
H e said, "This country now possesses the strongest credit in the world.
The full consequences of default - or even the prospect of default ~ by the
United States are impossible to predict and awesome to contemplate.
Denigration of the full faith and credit of the United States would have
substantial effects on the domestic financial markets and on the value of the
dollar in exchange markets. The nation can ill afford to allow such a result."
Throughout this process, it has been my view that the Secretary of the
Treasury must act — doing what is clearly legal and within the bounds of prudence
~ to protect the creditworthiness of the United States. We did what we needed to
do to avoid default. W e communicated our intentions to Congress clearly and
well in advance. U p o n reaching the end of our options, we reported that to
Congress as well.
W e have now reached a new and, I hope, concluding chapter in the debt
limit debate. Congress has taken steps to protect this very important symbol of
our economy, our nation's creditworthiness. I look forward to working with you,
all of you, so that we may make good on the Leaders' commitment, to pass and
sign debt limit legislation acceptable to the President and Congress, and then
return to the hard but important work of balancing the budget and raising the
living standards of our people.




####

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ON RAISING THE DEBT LIMIT

STATEMENT OF
RUDOLPH G. PENNER
MANAGING DIRECTOR
BARENTS GROUP
KPMG PEAT MARWICK

BEFORE THE
COMMITTEE ON BANKING AND FINANCIAL SERVICES
U. S. HOUSE OF REPRESENTATIVES
FEBRUARY 8,1996

The views expressed in this testimony are those of the author and do not necessarily reflect the views of the
management or employees of the Barents Group or KPMG Peat Marwick.




184

Mr. Chairman, members of the committee, thank you for the opportunity to testify. 1

I believe that an increase in the debt limit should be enacted as quickly and as cleanly as
possible.

There is absolutely nothing to be gained from threatening the creditworthiness of the

government of the United States while there is a great deal that could be lost.

An increase in

interest rates and fall in bond prices stemming from a failure to pay interest in a timely fashion
would cause a concomitant fall in the stock market at a very bad time in the history of the current
business cycle. The economic recovery is becoming more and more fragile. It will not take much
to tip it into recession.

N o one knows what increase in interest rates would follow a delay in paying interest due on
the public debt, but it is worth pointing out that each one percentage point increase in the rate would
cost American taxpayers well over $200 billion cumulated over the following seven years. That is
about as much as the tax cut contained in the Balanced Budget Act. Even a small threat of default
undoubtedly adds a significant amount to our interest bill.

Some see debt limit legislation as the only horse that can carry some needed deficit
reduction. I am as strongly in favor of deficit reduction as anyone, but I think that it has to be
passed on its own merits. The only way that it will be sustainable is if it is understood and accepted
by a majority of the American people, and befuddling the debate by simultaneously talking about
the threat of defaulting is not the way to enhance understanding of the merits of balancing the
budget.

In the longer run, I would like to see us get rid of debt limit legislation altogether. It is
completely illogical to enact tax and spending legislation that implies a certain deficit and a certain
amount of borrowing by the U.S. Treasury, and at the same time, to have a piece of legislation on

1
The views expressed in this testimony are those of die author and do not necessarily reflect the views of die officers or
employees of the Barents Group or KPMG Peat Marwick.
1




185

the books that prohibits that borrowing from taking place. Tax and spending laws are the only
appropriate mechanisms for controlling the size of the national debt. Debt limit legislation does not
provide any independent source of fiscal discipline. Yet, debates over it are often time-consuming.
Historically, the debt limit has served largely as a vehicle for attaching extraneous legislation that
would have difficulty being enacted on its own merits.

It is, in my view, very important to focus all our energies on the substance of the budget
debate. Our country faces a fiscal crisis when baby boomers start to retire after 2010. Even if we
succeed in balancing the budget in 2002, it will be difficult to keep it balanced for very long after
that. That is another way of saying that the fiscal measures debated during 1995 and early 19%,
although extremely helpful, provide only a down payment on what will be required eventually to
contend with this demographic problem.

The Bipartisan Commission on Entitlement and Tax Reform, reported in 1994, that given
the policies and economic and demographic assumptions in effect at that time, the budget deficit
would exceed 10 percent of the GDP by 2020 and would be almost 20 percent of the GDP by
2030. 2 Such numbers are not thinkable. If the deficit rises toward those levels and is combined
with the net withdrawals from pension funds that are likely during the same time period, it is likely
that U.S. net saving will become negative. A country cannot grow at a decent pace without saving
and the economy is likely to go into a cumulative, accelerating decline. That makes the deficit
problem much worse than in the Commission projections which assume continued growth.

At

some point countries typically stop borrowing. They default on their debt one of two ways. Either
they default explicitly or they begin to finance government by printing money. The latter is much
more likely and the resulting hyperinflation makes the debt worthless.

2

That compares to a deficit equal to 2.3 percent in fiscal 1995.
2




186

It is also not thinkable to avoid the situation solely by raising taxes in the 2020s.

The

Federal tax burden would almost have to double and that would also have a negative impact on
economic growth. 3 The bulk of the correction has to come on the spending side of the budget.

On the spending side, the main problem involves the two largest health programs in the
budget, namely, Medicare and Medicaid. The Entitlement Commission sees these two programs
absorbing almost four percentage points more of the GDP between 1993 and 2030, even if cost
growth for each group of beneficiaries of a certain age is lowered to the rate of growth of GDP. In
other words, the increase in the burden is due largely to the aging of the population. If per capita
costs rise as they did in the early 1990s, almost eight additional points of the GDP will be absorbed
by these two programs over the same period. The state of the Hospital Insurance trust fund is not,
for a variety of reasons, a very good indicator of the financial health of the program, but it is,
nevertheless, disheartening to see it go into a surprising deficit in fiscal 1995 long before we have
to confront any demographic problem.

By comparison, social security imposes a smaller relative burden, but it is still substantial.
Its share of GDP will probably go up almost 2 percentage points by 2030.

The sooner we confront the fiscal implications of the demographic problem, the easier it
will be. Every reduction of the deficit has a compounding beneficial impact. For example, if the
spending path of an entitlement program can be lowered by one dollar for seven years, the public
debt will be reduced more than seven dollars at the end of the period. Not only do we have to debt
finance a cumulative seven dollars less in program spending, but we save on the interest bill and on
the interest on the interest. Given current interest rates, every reduction of a dollar in a program
expenditure path saves roughly another 40 cents in interest at the end of seven years.

3
The necessary tax increase would be much less if it came sooner, because the interest bill is responsible for about half
tiie deficit problem in 2030. If earlier deficits could be lowered, it would have a compounding beneficial impact on the
interest bill and die required tax increase. Nevertheless, such a tax increase would still be too large to be contemplated
if American attitudes toward tax increases remain as they are today.
3




187

As I noted above, the deficit cuts, once contemplated by the Balanced Budget Act for fiscal
years 1996 through 2002, represented only a down payment on the serious budget problem that lies
ahead. It is highly disappointing to see the probability of that down payment fall so far. Perhaps,
the probability could rise again if we could focus public attention on the severity of the long-term
budget outlook. A prolonged and confusing debate over the debt limit would only distract from
that effort.




4




188

STATEMENT
William Poole
Herbert H. Goldberger Professor of Economics
Brown University
Before the
Committee on Banking and Financial Services
of the
United States House of Representatives
8 February 1996

189

STATEMENT
Mr. Chairman, I am pleased to be here today to discuss the issue of raising the debt
ceiling on borrowing by the U.S. Treasury. My statement begins with debt-limit issues, turns to
related budget issues, and then returns to the debt limit issue once again.

Debt and the Debt Limit
As a matter of accounting, the difference between government spending and government
revenue must be financed by some combination of issuing new debt to the general public and
printing money. Fortunately, no one has suggested that current budget issues could be resolved
by printing money beyond normal Federal Reserve practice, and so the government has in fact
been issuing new debt to the public equal to the difference between spending and revenue. This
fact is obscured by intergovernmental transfers; a number of government trust accounts hold
securities issued by the Treasury. However, these intergovernmental accounts, though useful for
a number of purposes, have no bearing on the accounting identity that for the federal government
as a whole the difference between total spending and total revenue is financed by selling
additional bonds to the public. The thousands upon thousands of hours of time devoted by
Congress, the Treasury, and others to the debt limit issue have not affected by one dollar the
amount of debt the government has sold to the general public.
If the debt held by the public is not permitted to rise, and if revenue is determined by
existing tax law, then enough spending must be cut to live within existing revenue, short of
printing money to pay bills. If the Congress and Administration cannot agree on what spending
to cut, then the Treasury must somehow decide what bills not to pay, or to defer paying. The
Treasury cannot write checks on an empty checking account.
The battle over the debt ceiling is not just a part of the overall budget battle, but is the
same thing as the budget battle, given the accounting identity linking debt issuance to the
difference between spending and revenue. It may seem politically convenient to argue over the
debt ceiling rather than over revenue and spending, but I doubt that anyone's views on budget
issues are much affected by putting the debate this way.
On the surface, it might appear that the federal government would be O.K. if it were to
stop paying interest on its debt. Excluding interest, spending is below revenue at this time. But,
of course, many financial institutions would be insolvent if the value o f government debt went to

22-450 9 6 - 7


190

zero, which means that the federal government would immediately be faced with huge demands
to make good on deposit insurance. Just starting to spin out a scenario such as this shows how
silly the exercise is. The federal government won't walk away from its debt because the voters
would demand that the government live up to its obligations.
What about a temporary default for, say, two weeks? A temporary default would resolve
nothing. At the end of the two weeks, the government would still have to sell bonds to finance
the difference between spending — including interest if the default were not to continue — and
revenue. One way or another, Congress and the Administration must decide this year's spending
and revenue, and finance the difference (if any) with new debt.

The Budget Debate
The U.S. budget debate started in earnest during the Reagan years. President Reagan
spoke often and eloquently of the need for our society to trim government, and the budget deficit
that arose in the early 1980s drew much additional attention to budget issues. President Reagan
was successful in constraining growth in total spending, but he was not successful in rolling back
spending in any significant way. More importantly, he was not successful in addressing the need
for major structural reforms in Social Security and Medicare.
President Reagan was unsuccessful because Congress — including most Democrats and
most Republicans — and the American voting public were not prepared in the 1980s to face the
reality of our budget situation. It is instructive to look closely at the Reagan budget for Fiscal
Year 1986, which was perhaps the most complete and serious effort during the Reagan years to
introduce fundamental reforms in spending programs. This budget proposed spending reductions
in numerous politically sensitive areas, including many affecting traditionally Republican
constituencies. Reagan proposed reductions in subsidies to business, to upper-income groups, to
agriculture, to Amtrak, and to others. He proposed reductions in Medicare, in certain veterans'
programs, in retirement programs for military and civilian government employees, and on and on.
The FY1986 budget was a courageous one, but it went nowhere at the time. Nevertheless,
many of the budget issues raised during the Reagan years are now attracting serious attention,
and new proposals reflecting equal political courage are on the table. The current budget battle is
a battle over priorities and the role of government in our society.




191

Our nation will survive if fewer wasteful programs are cut than I would prefer. But the
really big issue is Social Security and Medicare; our society will be shaken to its foundations if
w e do not face this issue soon, before the Great Retirement begins. At present, there are about
3.3 workers for each Social Security beneficiary. Just five years from now that ratio will begin a
rapid decline, reaching only 2.0 workers per beneficiary by 2030, according to intermediate
population estimates. Financing existing Social Security and Medicare benefit schedules might
require an addition to the payroll tax of 10 percent o f the covered wage base as more and more
retired workers will have to be supported by each member o f the labor force. 1 If w e do not act,
within 25 years w e face a generational conflict between retirees and workers totally
unprecedented in our history.
W e need to adjust the Social Security and Medicare programs to encourage later
retirement and more efficient use o f medical resources. The adjustment would have been easier if
w e had started 10 years ago, and easier yet if w e had started 2 0 years ago. The longer w e wait,
the more difficult the adjustment will be, and the greater the chance o f serious generational
conflict.
The current budget debate includes proposals for revisions to Medicare; the Congress
would do more, and the Administration would do less. Neither Congress nor Administration
would address Social Security at this time. Some future Congress and Administration will
address Social Security, because the demographic facts cannot be brushed away. Much of the
acrimony over the debt limit reflects the political pain of retirement policy issues. I am very
sympathetic to those w h o ask this question: "If w e cannot begin now by introducing reforms to
Medicare, how will w e ever be able to begin again, before it is too late, to tackle the even more
difficult issues that surround Social Security?"

1

This estimate is from the 1995Annual Report of the Board of Trustees of the Federal

Old-Age and Survivors Insurance and Disability Insurance Trust Funds. Table ID. CI shows a
combined Social Security and Medicare surplus of 0.29 percent of GDP in 1995. Under
intermediate projections, in 2030 the combined surplus has become a deficit of 3.63 percent of
GDP; die swing from surplus to deficit amounts to 3.89 percent of GDP (0.29 percent plus
3.63 percent). In Table HI.C2, under the intermediate projection, the taxable payroll will be
0,389 of GDP in 2030. Thus, we can express the swing from surplus to deficit in Social
Security and Medicare combined as either 3.89 percent of GDP or 10 percent of the payroll
taxable under these programs.




192

The Debt Limit Once Again
I understand the frustrations of those in the Congress who want to begin to set our fiscal
affairs on a sustainable long-run path, and who are willing to hold up an increase in the debt limit
until the Administration negotiates a satisfactory budget deal. Nevertheless, I believe that the
debt limit is the wrong place to force a confrontation. Despite our divisions, Americans share a
strong bond on certain policy fundamentals, and fortunately so for otherwise government would
be totally chaotic. The unwritten rules of political engagement do not include risking the credit of
the United States Government.
Some argue that the market has reacted benignly whenever threat of default was raised in
recent months; others attribute increases in interest rates to the threat of default. Both misread
the evidence. In fact, the evidence is clear that the market has never assigned any significant
probability to default. If default talk had changed views in the bond market, w e would have seen
a dramatic narrowing of the spread between high-quality corporate securities and Treasury
securities. W e haven't seen any such thing.
Consider three examples. 2

•

On Monday, 25 September 1995, The Wall Street Journal carried this headline:
"Gingrich's Threat Spooks Bond Investors." The Journal article said that the threat
was unveiled the previous Thursday. On Wednesday, the 30-year Treasury bond
closed at 6.46 percent, and on Thursday rose to 6.56 percent. At the same time the
long Treasury bond yield was rising by 10 basis points, Aaa corporate bonds were
rising by 8 basis points; the spread between the two narrowed by 2 basis points, which
is a trivial amount. Changes in the spread of this amount are common, and mean
nothing.

•

On 10 November 1995 The Wall Street Journal quoted White House spokesman Mike
McCurry as saying the previous day that, "default is becoming increasingly likely."

2

Kevin Jewell and Chris Tachiki dug out these examples for me; I appreciate their help.




193

The day of McCurry's statement the 30-year bond yield rose by four basis points, and
the spread with Aaa bonds narrowed by a mere one basis point.

•

On Friday, 5 January 1996, The Wall Street Journal ran a headline saying, "GOP's
Threat Against Rubin Roils Markets." The stock market fell and the 30-year bond
yield rose from 5.96 percent to 6.03 percent. However, the spread with Aaa corporates
stayed constant at 75 basis points.

Clearly, the debt-ceiling battle has from time to time created uncertainty in the markets,
but the uncertainty has been about the general course of the fiscal policy debate and not over
default per se. The market simply does not believe that default can occur. We should be
comforted by this finding, for it demonstrates that our nation's finances are truly strong. Default
is unthinkable, and the market believes that the political process will find a way, somehow or
other, to service the debt. Neither political party will in fact jump over that cliff. I believe that
Congress should recognize that public sentiment for honoring our federal government
obligations is overwhelming, and that the issue of default should be put behind us by routine
action to increase the debt limit whenever required for the government to pay its bills without
interruption. N o constructive purpose is served by forcing the Treasury to engage in strange
financial gymnastics.

Concluding Remarks
The debate over the debt limit has served the useful purpose of emphasizing just how
important our budget issues are. But our disputes are over spending and taxes, and not over
servicing the debt. It is time to put this phase of the political debate behind us; Congress should
pass and the President should sign a simple extension of the debt limit.
The larger budget issue must not be allowed to die. W e must make some choices and the
sooner w e make them the better off w e will be. I offer this guarantee: if w e do not begin to
address these issues this year, w e will have to face them next year. Indeed, w e will face budget
issues for the indefinite future, but the longer we wait to act, the more difficult the job will be.




194

PERSPECTIVES ON THE FEDERAL DEBT CEILING AND BUDGET POLICY




by
Mickey D. Levy
Chief Economist
NattonsBanc Capital Markets, Inc.

Prepared for
Committee on Banking and Financial Services
l .S. Hoase of Representatives

Febraary 8,1996

195

PERSPECTIVES ON THE FEDERAL DEBT CEILING AND BUDGET POLICY
by
Mickey D. Le\y
NationsBanc Capital Markets. Inc.
Prepared for
Committee on Banking and Financial Services
U S House of Representatives
February 8. 1996

Mr. Chairman and members of the committee. I appreciate the opportunity to present
my views on the debt ceiling and budgetary policy. Achieving fiscal responsibility and
establishing credibility-the primary objectives of fiscal policymakers—must not be lost in the
political maneuvering that has entangled the federal debt ceiling and budget policy issues. Nor
should the fiscal debate be overwhelmed by the urge to balance the budget by whatever means
possible: in terms of creating an environment conducive to sustained economic expansion, job
creation, and rising standards of living, the way in which deficit spending is reduced is more
important than the magnitude of the deficit reduction I recognize that reaching a compromise
that constitutes meaningful fiscal reform is difficult precisely because it must involve
programmatic changes to key spending programs and not just the establishment of artificial
deficit targets. The economics and arithmetic of the federal budget clearly suggest that any
meaningful fiscal reform must address the structural flaws in key entitlement programs that
have been the source of rapid government spending growth and high deficits, and a wide array
of economic distortions and arbitrary wealth redistributions. In light of demographic trends,
the size and fiscal burdens of these programs will accelerate in coming decades. As a result,
programmatic change is crucial: the costs of delay and the magnitude of the necessary
corrective action are only mounting. Reform can be achieved by slowing the growth in federal
outlays, still allowing for increases in inflation-adjusted terms. Political grandstanding on the
debt ceiling and threat of default is unnecessary, diverts attention from the underlying sources
of the fiscal problems, and reduces the policymakers' credibility.

The \ tews expressed in this testimony art those ofthe author and do not necessarily reflect the vims of the
management or employees of NationsBank or NationsBanc Capital Markets. Inc.




196

1.

The federal debt celling is not an effective economic mechanism for achieving
fiscal responsibility and Is not a substitute for addressing the flawed strictures of
the spending programs that are the sources of deficit spending and rising debt. In
recent years, the legal debt ceiling has been raised as necessary to reflect deficit
spending and the need to borrow to finance the rising debt, but it has not been
sufficient to inhibit the growth in federal spending, budget deficits, or government
debt. The diminishing clout of the debt ceiling in constraining deficit spending should
not come as a surprise, in light of the sharp increase in the share of federal spending fewentitlements and the shrinking share of spending for appropriations. Entitlement
spending has risen from less than 30 percent of total federal spending and 6 percent of
GDP in the mid-1960s to 55 percent of federal outlays and over 12 percent of GDP in
1995. There is a logical inconsistency between open-ended entitlement programs in
which legislation entitles qualified recipients to benefits, whether financed through
taxation, borrowing, or debt monetization, and the legal debt ceiling. Moreover, the
government's debt counted toward the legal debt ceiling is an inadequate measure of
the government's financial obligations, particularly because it fails to reflect the
government's unfunded liabilities generated by social security and other public
pensions. The irreconcilable differences between the social contracts embodied in the
ever-growing entitlements and the iegal debt ceiling have resulted in periodic and
predictable games of political "chicken" that have failed to force a resolution of the
fiscal dilemma and have only eroded the policymakers' credibility.

2.

My assessment Is that a "default" resulting from failure to raise the debt celling
would have a relatively minor and temporary disruptive Impact on financial
markets, Insofar as domestic and International market participants recognize that
the default would stem from political maneuvering and not economic
fundamentals; nevertheless, playing political games with the full faith and credit
of the U.S. government Is unnecessary and Irresponsible. If the probability of
economic default were taken seriously, heightened risk-premia would have pushed
down the U.S. dollar and stock market and pushed up interest rates. That has not
occurred: since the budget negotiations began to stumble in December 1995, the U.S.
dollar has appreciated, the stock market has continued to rise and interest rates have
receded further. Financial market participants at home and abroad clearly distinguish
between a default based on deteriorating economic fundamentals or misguided
inflationary policies, tike in Mexico, and the possibility of a politically-driven,
temporary delay in U.S. government debt service.




2

197

Even if the expected disruption is minor and temporary, it makes little sense to
threaten default. Nobody really knows precisely the full cost of a "default." even if
such an event did not push up interest rates. The temporary disruptions in government
activities (including debt issuance) have reduced the efficient provision of certain
government services, creating an unhealthy environment of uncertainty. Since
December 1995. these impacts have unnecessarily dampened economic performance.
Political maneuvering involving the debt ceiling is an inconsistent and ineffective
approach to achieving fiscal responsibility. The resulting loss of credibility reduces the
flexibility of fiscal policymakers. Remember, the U.S. remains the world's largest
debtor, and it does not pay to unnecessarily upset its current and future creditors.

3.

Washington policymakers tend to overstate and misunderstand the Impact of
budget deficits on Interest rates; the dramatic decline in Interest rates In the last
year has reflected primarily the sharp slowdown In economic growth and
* subsiding Inflation expectations, while the prospects of a deficit-cutting package
have contrtbatedonly marginally to rate reduction. The level and term structure of
interest rates is determined primarily by real economic performance and inflationary
expectations and the market's associated assessment of the Federal Reserve's monetary
policy. Historically, the empirical link between deficits and interest rates has been
significantly smaller than commonly perceived: nevertheless, deficits are the natural
"whipping boy" of financial markets when interest rates are rising. Fiscal policy
affects financial asset prices through its impact on real economic performance and
expected rates of return on investment. Therefore, the mix of federal spending and the
allocative effects of the tax structure do have a significant impact on interest rates, the
stock market, and the U.S. dollar. Certainly, meaningful movement toward fiscal
responsibility would reduce risk premia in interest rates. However, the magnitude of
that effect would be small relative to cyclical trends in economic performance and the
outlook for inflation.
The recent financial market impact of the stalled budget negotiations and threat
of default would have been far different in an environment of strong economic growth
that pushed up real interest rates and inflation expectations. But that has not been the
case. Looking forward, continued sluggish economic growth and the favorable trend
in inflation will generate further interest rate declines. The U.S. dollar is expected to
continue to strengthen, reflecting the favorable fundamentals in the U.S. and the




3

198

recognition by Japanese and German policymakers of the need for weaker currencies.
The stock market will remain strong as long as business efficiencies and economic
expansion generate acceptable gains in corporate profits. However, a continued rise in
financial asset prices is no excuse for ignoring the need for fiscal reform.
4.

The unprecedented deficit spending In recent decades has been a result of rising
outlays for entitlement programs, while taxes have remained fairly constant as a
percent of GDP. As the mix of federal spending has shifted toward a rising share for
entitlements, a declining share of spending has been allocated for investment-oriented
activity. This trend highlights the changing role of the government's budget in
allocating national resources. The higher tax burdens and rising debt in recent decades
effectively have financed a gradually declining amount of real government purchases.
Thus, the government's direct absorption of national resources is shrinking. At the
same time, a sharply rising amount of real transfer payments distributed primarily
through entitlement programs is directly financing consumption by their beneficiaries.
In terms of public perception as well us economic performance, this increasingly
distributional role of the federal budget is as important as the magnitude of deficit
spending; witness the many households that are not direct beneficiaries of transfer
payments who claim they are paying higher taxes and getting less (directly) in return.

5.

The major economic problem fadng the I'.S. fc not the budget deficit per se, but
rather the mix of deficit spending and the structure of the tax burden that
combine to generate a misallocatlon of national resources that suppresses national
saving, discourages work and Investment, and constrains economic growth and
long-run standards of living. The tax bias against saving and the deficit spending for
consumption-oriented entitlements generates the lowest rate of saving among major
industrialized nations. The wide gap between national saving and investment causes
the huge current account deficit which must be financed by international capital flows.
Contrary to common perception, simply reducing the budget deficit does not
necessarily reduce the current account imbalance: the outcome depends on how the
deficit reduction impacts national saving and investment Witness the Clinton
Administration's 1993 deficit cutting package: because it relied so much on tax
increases, it failed to achieve one of its primary objectives of shrinking the current
account deficit because the reduced government dissaving was largely offset by lower
private sector saving, leaving national saving virtually unchanged. The result was
simply a wealth redistribution from the private to the public sector. Attempts to reduce




4

199

the trade and current account imbalances through trade negotiations, without shrinking
the gap between national saving and investment, are similarly fruitless. Lowering the
current account (and trade) deficit requires a credible reduction (or reallocation) of
government spending and or tax reform that raises net national sav ing. A reduction in
the current account (and trade) deficit may or may not raise the U.S. dollar: the
outcome depends on whether or not these changes enhance expected rates of return on
dollar-denominated assets.
The change in the mix of deficit spending toward consumption-oriented
entitlements at the expense of investment-oriented activities generates a wide array of
distortions and disincentives: the structure of many transfer payment programs
discourages work, a fact well understood in the current Congress, while Medicare.
Medicaid, and associated tax incentives have raised the demand and provision of
medical services. The list goes on. Suppressing saving and allocating national
resources aw ay from investment lowers long-run economic growth and standards of
living. Some argue that the U.S. federal tax burden is lower, than in other industrialized
nations, and its social welfare subsidies less. They are. But the economic burdens of
following misguided policy benchmarks are enormous: witness the dismal economic
performance and double-digit unemployment rates throughout Europe.

6.

Achieving fiscal responsibility and credibility necessarily reqilres stowing the
spending growth far nonmeans-tested entitlements by changing the structire of
key programs consistent wtth announced deficit targets. The deficit targets are of
secondary importance to enacting the required programmatic changes. Because
open-ended entitlements comprise such a large and rising portion of outlays, their
growth must be slowed through changes in their structures. Medicare reform must
involve incentives that reduce the demand for unnecessary medical services and
improve the efficiency of their provision, and not rely on government-determined
spending caps and price controls. Medicaid must rely more on competition among
providers while meeting the reasonable needs of patients: this likely involves
tiansfonning the program from a federally managed, open-ended entitlement to a
decentralized program funded by flexible block grants from the federal government.
Welfare reform must include financial incentives to work
Deficit targets without programmatic changes are bound to fail and only
reduce credibility. Insofar as outlays for entitlement programs are affected by




5

200

demographic trends, economic performance, inflation, and other factors, actual
spending may deviate from projections. Therefore, it is the legislated reforms
designed to achieve savings, eliminate structural flaws, and introduce economic
incentives and efficiencies into these programs, rather than deficit targets, that are
crucially important to fiscal responsibility; The rough deficit targets provide only a
framework for evaluating the types of programmatic changes.
7.

The political crutch provided by the legal debt celling has uot contributed to fiscal
reform, serves no economic purpose, perhaps causes more harm than good, and
should be abolished. Since the legal federal debt ceiling is only a reflection of deficit
spending and the rise in debt, a successful restructuring of the programs that generate
the deficit spending obviate the need for the debt ceiling. The budget process requires
Congress to vote on the size of the deficit The impetus for fiscal responsibility must
come from Congress; I doubt that the debt ceiling induces much fiscal responsibility .
In fact cynically speaking, the debt ceiling may even be a platform for mischievous
fiscal policy and misguided political compromise.

8.

A credible deficit-cutting package based primarily on slowing spending growth in
nonmeans-tested entitlements would not significantly depress cyclical economic
activity in the short ran, contrary to standard demand-driven macroeconomic
models, and would be positive for long-run growth. The positive impact on longrun economic growth is widely recognized; although estimates are uncertain, the
cumulative rise in standards of living is substantial. The debate about the shon-run
effect of deficit reduction is biased by standard macromodels that incorrectly rely
nearly exclusively on deficits to measure fiscal thrust—and assume that all deficit
reduction reduces national wealth and is restrictive—while largely ignoring the mix of
deficit reduction and the potential positive impact of enhanced credibility.
A cut in transfer payments, unlike a reduction in government purchases, only
redistributes wealth. so its largest impact would be to change the mix of economic
output, rather than dampen the aggregate leveL Temporarily, consumption and
medical services output would be reduced, as the disposable incomes of beneficiaries
are reduced by the slower growth in transfers. However, the change in the allocation of
national resources and lower interest rates would raise national wealth, generating
stronger growth in investment, healthier housing activity, and a reduction in the net




6

201
export deficit. Reduction of current economic disincentives and heightened credibility
would limit short-run disruptions.
9.

Tax reform should focus on the tax bias against saving that contributes to the
long-run problem of the low rate of national saving, and avoid temporary tax cuts
that only fuel consumption. The tax cut proposals included in Congress's and the
Administration's budget plans are not tax reform. Pro\iding tax credits for child
education effectively subsidizes investment in human capital, a desirable objective,
while adjusting capital gains taxation for inflation is also desirable. However.
Congress must avoid politically motivated, temporary' tax cuts. They dilute the deficit
impact of proposed spending cuts, tend to accentuate the current fiscal policy bias in
favor of consumption, and do little to raise long-run standards of living. Optimally, tax
reform should seek to simplify the current system and adopt a stable, predictable tax
code that eliminates undesirable distortions, including the biases against work, saving
and investment Incremental changes must nor divert attention from the need for true
reform. A cash-flow, consumption-based tax with a graduated, progressive rate
structure and appropriate exclusions for low-income households holds the most
promise.

10.

Failure to include sodal security In the fiscal debate Is a glaring omission: ft only
raises the eventual costs and distortions of the program, increases the magnitude
of the corrective actions that eventually wfl] be required to ensure financial
stability of the program, and exerts a high cost on all other spending programs.
Outlays for social security continue to rise rapidly and will remain a major factor
contributing to the increase in future federal spending Its benefits and taxing
structures discourage work and generate significant distortions in labor markets. It
generates arbitrary and undesirable redistributions of wealth. And despite its size,
social security fails to address the financial needs of certain pockets of elderly, while
being overly generous to others. It is widely recognized that corrective action is
necessary to ensure social security's long-run financial stability , and that changes must
be implemented with long leads to be fair and allow older workers time to plan for
retirement. Excluding social security from the fiscal bargaining table only raises the
eventual costs of reform and forces policymakers to extract larger savings from the
remaining programs.




7

202
An obvious component of t fiscally responsible deficit-cutting package Is
adjusting the cost of living adjustments (COLAs) on entitlement programs to
reflect the CPI's overstatement of Inflation. There is widespread agreement that the
CPI overstates inflation, but some uncertainty about the magnitude. It has been
estimated that the overindexation of social security alone has cumulatively raised
federal debt S200 billion. In fiscal year 1995. spending on government programs
indexed for inflation constituted over $450 billion, nearly one-third of total
government outlays. Not surprisingly, these programs have been some of the fastest
growing, and their spending shares of federal outlays and GDP are projected to
continue to rise. Not only is the inflation measurement bias extremely costly, and
threatening the long-run financial stability of social security and other public
retirement programs, it also generates unintended, arbitrary wealth redistributions. It
increases the real purchasing power of beneficiaries while taxpayers may be incurring
declining real wages, and accentuates the redistribution of wealth from future
generations to current retirees.

Adjusting the COLAs on retirement programs by 0.5 percentage points below
CPI inflation would save over S100 billion over the seven year projection period (the
savings would be cumulative). This adjustment would be well within estimates of the
CPI's inflation bias and would be efficient and fair. Again, delaying this adjustment
only raises the magnitude of future reform required and reduces the flexibility to
compromise.

The Federal Reserve's monetary policy cannot offset the economic effects of
irresponsible fiscal policy: they are very different instruments with Afferent
economic effects, and are not substltutaMe. Fiscal policy determines the allocation
of national resources bet ween the public and private sectors and influences long-run
potential output by altering incentives to consume, save and invest. Fiscal policy is not
capable of generating a permanent shift in aggregate demand Accommodative
monetary policy is incapable of enhancing long-run productivity or output, and only
generates higher inflation that interrupts economic expansion. Attempts to change the
policy mix to achiev e a desired level of economic output require that the magnitude
and timing of the economic responses to fiscal and monetary policies be well
understood: they are not. I encourage Congress to pursue fiscal reform in an attempt to
create an environment conducive to sustained economic growth, job creation, and




*

203

rising standards of living, and simply note that its efforts necessarily must be conducted
independently of the Fed's monetary policy.




9

204

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205

THE CASE FOR RAPID DEFICIT REDUCTION
by Murray Weidenbaum
A Statement Prepared for the
Committee on Banking
U.S. House of Representatives
Washington, DC, February 8, 1996

This statement is designed to make the case for large and rapid reductions in
federal government deficit spending and also to show that the planned degree of fiscal
austerity will not be an excessive depressant on the American economy.
Because of adverse historical experience, we must acknowledge that many
observers find it hard to take the concern very seriously — that the deficit will be cut
too much or too quickly. I am referring to the phenomenon of 14 consecutive federal
budget deficits of triple digit magnitude, measured in billions of dollars. And those
awful fiscal results have occurred despite several versions of the Gramm-RudmanHoliings law as well as the more recent budget "summits."

The Need for Deficit Reduction
But let us make the optimistic assumption that the current attempt to balance the
budget will be more successful. In that light, it is useful to begin with an analytical
justification for a major new effort to eliminate the annual amount of federal deficit
financing. At the outset, let me commit fiscal heresy. To this economist, deficit
financing per se is not sinful. Like private enterprises, governments can borrow to
make useful investments with an attractive future payoff.

Murray Weidenbaum is chairman of the Center for the Study of American Business and
Mallinckrodt Distinguished University Professor at Washington University in St.
Louis.




206

On occasion, the federal government actually does so. Many in my generation
benefited from the post-World War IIGI Bill. The government's outlays for our
education helped us to achieve careers in which our added incomes generated tax
payments that more than repaid the government's original investment.
Alas, such examples of effective federal investment outlays are very rare. Most
public works projects barely show a favorable benefit-cost ratio even when an
unrealistically low cost of capital-is used in the estimation process. In fact, virtually
the entire increase in federal outlays since 1980 has been in the form of consumptiontype spending — aside from interest on the national debt. Thus, the budget deficit has

become a powerful mechanism for converting private saving into publicly supported
consumption.
For a nation with our abysmally low saving and investment rates, those deficits
are a serious economic concern. For the skeptical, I note the strong and positive
correlation between investment and economic growth. It is not a transient or
ephemeral relationship. It held over the 30 year period 1962-1991 and for the large
group of member nations of the Organization for Economic Cooperation and
Development, which comprises the major industrialized economies. The data clearly
reveal that, over this long period, the United States was low on both scores —
investment and economic growth.
Under these circumstances, large reductions in the budget deficit would seem to

be beneficial. Moving to a lower deficit fosters economic growth by making more funds
available for private investment and doing so at the expense of consumption. The
Congressional Budget Office makes the same point in somewhat more restrained prose:
"The progressive elimination of the federal government's competition for funds in




207

private capital markets would lower interest rates and slightly increase the potential
growth of the economy over the next decade."

The Specifics of Deficit Reduction
Let us turn to specifics. The Republican leadership of Congress wants to
eliminate the deficit in the fiscal year 2002 by reducing federal spending by the
cumulative amount of $1,247 billion. That is a substantial sum. The cynic would
assume that the small cuts would be made now and the large cuts later. Surprise of
surprises, that is one aspect of the fiscal plan that both Democrats and Republicans can
quickly agree upon.
Federal outlays are planned to be reduced by $41 billion from the baseline
budget of the Congressional Budget Office for fiscal year 1996 and by $79 billion in
1997. Nobody believes that our $7 trillion economy is so frail that cuts of these
modest proportions (one percent of GDP or less) will bring it crashing down. In later
years, the budget cuts become much more substantial, reaching $278 billion in fiscal
2001 and $348 billion in 2002. As shown in Table 1, those reductions are equivalent
to 2.9% and 3.5% of projected gross domestic product, respectively.
We have to understand the nature of federal fiscal arithmetic. Like the stage
magician's trick, those cuts are bigger on the inside than on the outside. This is, in the
face of reductions totaling $1,247 billion over the period 1996-2002, total federal
spending is expected to rise — from $1,518 billion in fiscal 1995 to $1,876 billion in
the year 2002. That increase more than offsets expected inflation. To cite authority,
Ronald Reagan was fond of saying, we're really not cutting federal spending;

only trying to slow down the growth rate.




we're

208

Table 1
Deficit Reduction and the U.S. Economy, 1996-2002
(dollars in billions)
1996

1997

1998

1999

2000

2001

2002

$7,385

$7,764

$8,165

$8,587

$9,052

$9,497

$9,986

Deficit reduction

$41

$79

$117

$167

$218

$278

$348

Percent

.006

.010

.014

.019

.024

.029

.035

$1,417

$1,475

$1,546

$1,618

$1,697

$1,789

$1,883

Category
GDP

Total federal
spending

Source: Congressional Budget Office

Table 2
Planned Congressional Reductions in Federal Spending, 1996-2002
(in billions of dollars)
Category
Discretionary Programs:
Freeze
Additional saving
Subtotal
Entitlements, etc.:
Medicare
Medicaid
Other
Subtotal
Interest
Total

1996

1997

1998

1999

2000

2001

9
2Q
29

12
22
39

35

55
20
75

75

96

25

24

2S

99

121

18
8
45

26
16
22
67

87

50
33
22
112

59
43
20
132

71
54
26
161

1

5

11

20

31

47

66

41

79

117

167

218

278

348

8

ID
18

8
4
10
22

Source: Congressional Budget Office




IS

60

37
24

26

2002

209

The great bulk of the identified budget cuts occurs in transfer payments which
are virtually pure consumption (see Table 2). The rest of the reductions are not
identified and are likely to be widely distributed across the various spending programs.
But it is easy to see where most of the cuts will occur — consumption outlays, which
dominate the budget. In 1992, the civilian investment outlays of the federal
government were estimated at only $83 billion out of a total of $1,381 billion.
By focusing o n cutting federal consumption, the proposed reductions in deficit
financing clearly respond to the widespread concern about inadequate saving and
investment.

Economic Impacts of Deficit Reduction

If historical experience is any guide, the result of lower deficits should be an
increase in private investment and hence in long-term economic growth. If that is a
hanging offense in the eyes of the defenders of big government, so be it.
As in the case of any major change, attention needs to be given to the transition.
The increased pace of fiscal restraint (the increase in the size of the budget cuts) rises
to $50-70 billion a year around the turn of the century. At most, that is the equivalent
of a bad, but not disastrous, year in housing or automobile sales. Those are
magnitudes that should be readily handled in what will then likely be a $9-10 trillion
dollar economy.
In any event, the Federal Reserve System will not be idle. There is an
advantage

of the planned

reductions:

The Fed can anticipate

them.

especial

Surely, our central

bank possesses a substantial arsenal of monetary policy instruments to help stabilize the
economy during the transition.




210

Political Economy Aspects
A word of warning on taking long-term projections at face value, whether they
are prepared in the government or in the private sector. Multi-year government
policies are rarely carried out without substantial modification. The task of economic
stabilization in the next seven years may be less than it appears to be because the
schedule of cuts is backloaded — and for good reason. The further out in time we go,
the more flexibility is available to policy makers because the fiscal reach of past
commitments becomes less important.
Nevertheless, a cynic might apply a substantial discount to the further out
budget reductions. As progress is achieved in deficit reduction, the urgency to
complete the task may be diminished. Pressure groups pushing for larger government
programs may reassert their political power, especially as public attention is shifted
from balancing the budget to some newer priority. The political attractiveness of
government spending is almost always very high. After all, every dollar the

government spends winds up as a dollar of income to somebody. That is precisely why
an ambitious effort to curb federal spending becomes so difficult when you go from the
general to the specific.
There may be another, less generous reason for making light of the argument
for restraining the efforts to restrain the growth of federal spending. Many of the same
people who express their great concern about the economic viability of the proposed
budget cuts are offended by the proposed increases in military outlays. In fact, they
have advocated very sharp declines in military spending and have assured us that the
economy can adjust to that eventuality quite readily. That juxtaposition of positions is




211

strange because a substantial scholarly literature demonstrates the fact that military
purchases have a more substantial impact (a higher "multiplier") than the transfer
payments they replace.
Perhaps, then, the real hostility to the budget plans does not relate to their
macroeconomic effects at all. Rather, that opposition arises from a different set of
priorities, motivated by a different set of value judgments — specifically by the belief
that the national welfare will be enhanced if a larger share of our resources is devoted
to the civilian programs of government and less to national security.
Although some of us may disagree with that alternate set of priorities, it is
altogether proper to advocate them. We must wonder whether the shyness in doing so
directly stems from the awareness that this alternate set of budget priorities runs
counter to the expressed will of the majority of voters.
As I tell my students, a cynical explanation carries you a long way in
Washington and in public policymaking generally.




212

FEDERAL RETIREMENT THRIFT INVESTMENT BOARD
1250 H Street. N W Washington, DC 20005

SAVINGS
PI AN

February 14, 1996

The Honorable James A. Leach
Chairman
Committee on Banking and Financial Services
U . S . House of Representatives
2129 Rayburn House Office Building
Washington, D.C. 20515-6050

fiX HAND

Dear Mr. Chairman:
I am writing to respond to erroneous statements made to the
House Committee on Banking and Financial Services during a public
hearing on February 8, 1996, regarding the Government Securities
Investment (G) Fund administered by the Federal Retirement Thrift
Investment Board. As the managing fiduciary of the Board, I am
obliged to address these misstatements lest they cause confusion
or alarm to the two million Thrift Savings Plan participants with
investments in the G Fund.
I have been advised that your Committee rules allow for the
addition of material to the hearing record by unanimous consent
and that requests should be filed with both the Chairman and the
Ranking Member. Enclosed is material that I ask be included in
the record. Your consideration of this request is appreciated.
A similar letter is being sent to the Ranking Member of the
Committee.
Sincerely

Roger W. Mehle
Executive Director

Enclosures




213
STATEMENT OF THE HONORABLE ROGER W. MEHLE
EXECUTIVE DIRECTOR
FEDERAL RETIREMENT THRIFT INVESTMENT BOARD
SUBMITTED FOR THE HEARING RECORD
OF THE
HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES
FEBRUARY 14, 1996
My name is Roger Mehle. I am the Executive Director of the
Federal Retirement Thrift Investment Board, and, as such, the
managing fiduciary of the Thrift Savings Plan for Federal employees (TSP). On behalf of myself and the other statutory fiduciaries who serve as members of the Board, I appreciate the opportunity to provide this statement for the record.
The TSP is a retirement savings and investment plan similar
to 401(k) plans available to private sector workers. It was enacted into law with bipartisan congressional cooperation and
support as part of the Federal Employees' Retirement System Act
of 1986.
The Nature of G Fund Securities; Original Vulnerability of
G Fund Balances to Non-Investment Because of the Debt Limit.
The TSP offers its participants three investment choices,
including the Government Securities Investment Fund, known as the
G Fund. G Fund investments, by law, consist only of special
Treasury securities issued directly to the G Fund, 5 U.S.C. §§
8438(b)(1)(A), (e). These securities are similar to those issued
to the Social Security trust funds and other Federal trust funds.
See, e.g.. 42 U.S.C. § 401(d) (Social Security trust funds); 5
U.S.C. § 8348(d) (Civil Service trust fund). Through individual
participants' accounts, however, G Fund securities are owned, in
effect, by the more than two million individuals who have chosen
this investment.
Like all Treasury securities, those issued .to the G Fund are
subject to the limitations on Federal, indebtedness periodically
enacted by Congress. Thus, if purchases of additional Treasury
securities were scheduled toy the G Fund (with its daily contributions) when the debt limit ceiling had been reached, the purchases could not be made and those contributions would necesarily
remain uninvested. Any funds uninvested would not earn interest;
the greater the amount uninvested, the greater would be the earnings foregone. (At present, the G Fund balance of 22 billion
dollars earns about 3.5 million dollars per day for participants
invested in it.)
Congress Resolved the Possibility of Lost G Fund Earnings.
In May 1987, soon after creation of the TSP, a Democratic
Congress and a Republican President recognized this anomaly and
remedied it by enacting the Thrift Savings Fund Investment Act of


22-450 96 — 8


214

Indeed, the reason the Treasury issues securities (other
than to refinance maturing securities) is because the amount of
expenditures authorized by Congress is greater than the amount of
taxes collected, i.e.. there is a deficit, and the money to pay
the difference must accordingly be borrowed. Mr. Mica's statement that Federal employees' payroll deductions (for 6 Fund
contributions) should N never again be used to finance . . .
deficit spending" is especially confusing in this context; as
noted, this is exactly what the Treasury is expected to use the
proceeds from sale of its securities for.*)
Thus it can properly be said — and it should come as no
surprise — that the Treasury spends the money that it receives
from the sales of its securities to fulfill the purposes of
government, pursuant to appropriations made by Congress. This is
no different from what happens to the proceeds of any debt
securities sales, whether the issuer is an individual, a corporation, a municipal entity, or, through the Treasury, the United
States of America. No TSP contributions made to the 6 Fund have
been "stolen" or "robbed" by the Treasury; no contributions are
"missing", nor have any contributions to the G Fund been used as
a "slush fund". But, by the same token, the contributions have
not gone into a physical vault or strongbox somewhere; they have
financed spending authorized by Congress.
Treasury Has Always Repaid 6 Fund Securities When Due with
Interest; Its Periodic Inability to Invest 6 Fund Balances
on Account With It Was Resolved bv Congress and is Harmless.
The essential bargain of any borrower, the repayment of the
borrowed funds when due with interest, has always been met by the
Treasury to the G Fund (and to every other security holder of the
United States throughout its history). Even when, four times in
the past, the Treasury has been prohibited by the debt limit from
issuing its securities to the G Fund, it has recognized the legal
requirement to make whole the interest on the uninvested G Fund
balances still on account with it, and, when permitted by a debt
ceiling increase, has promptly paid it. It will do so again when
the current debt limit is increased.
Moreover, due to the statutorily guaranteed "make-whole" of
the interest otherwise foregone, the G Fund continues to accrue
interest in the identical amounts as if the prescribed securities
had indeed been issued to the G Fund. Thus individual participants' G Fund balances are (and will continue to be) exactly
If there were a budget surplus, i.e.. the amount of taxes
collected were greater than the amount of Federal expenditures,
proceeds from the required sale of special Treasury obligations
to the G Fund (and to other trust funds) would be used to pay off
maturing marketable debt.




- 3 -

215

the same from day to day as if the G Fund were fully invested in
Treasury securities. TSP loan and withdrawal disbursements are
completely unaffected with regard to their timing and amounts.
The Special Treasury Securities Purchased by the G Fund May
be Tailored in Amounts and Maturities to the Exact Needs
of the G Fund; That They May Not be Bought or Sold in the
Qpen M a r k e t p l a c e i s a M a t t e r Qt Pc P r a c t i c a l I m p o r t a n c e t
The Treasury securities held by the G Fund are not "marketable", i.e.. they are not negotiable or transferable (except to
the Treasury itself). 31 C.F.R. § 356.2. In this characteristic, they are like obligations held by the Social Security trust
funds and other Federal trust funds, and they are also like U.S.
Savings Bonds. These special instruments, despite Mr. Mica's
notion that they are not "real assets", are every bit as much
full faith and credit obligations of the United States as are
Treasury marketable securities.
(No one would reasonably contend
that the 182 billion dollars of U.S. Savings Bonds outstanding
are not "real assets" because they can not be sold to others, but
must be redeemed by the Treasury.)
Furthermore, the ability of the G Fund to deal with the
Treasury directly is of great benefit to TSP participants; rather
than being required to pay dealer mark-ups and commissions, along
with the skewed prices associated with transacting billions of
dollars in purchases and sales in the market, the TSP can meet
volume and maturity requirements of the G Fund frictionlessly and
instantly by direct dealing with the Treasury. Moreover, should
a sale of G Fund holdings before their maturity be indicated, the
Treasury will buy them back at a market price.
(The G Fund is
currently invested entirely in daily maturities.) Requiring the
G Fund to buy and sell its enormous holdings of Treasury securities only in the open market would be exceedingly costly to G
Fund participants and would gain them nothing of value in return.
A l l T r e a s u r y MarKetafrle S e c u r i t i e s Are I s s u e d i n P p p K - e n t r y Fprn»t
The Treasury securities Congress authorized for purchase by
the G Fund are book-entry securities, i.e.. there is no "definitive" piece of paper or engraved certificate furnished to evidence their ownership, a practice now largely outmoded in securities markets worldwide. Mr. Mica stated, however, that "Federal
employees deserve something more tangible than a book-keeping
entry", while advocating an (undesirable) requirement that the G
Fund be allowed to buy only Treasury marketable securities.
These concepts are incompatible, since all Treasury marketable
securities have been issued only in book-entry form for many
years. See 31 C.F.R. § 356.5. Book-entry marketable securities,
like the book-entry nonmarketable securities of the G Fund, are,
however, no less full faith and credit obligations of the United
States because of the method of their registration.




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216

Repeal of the 6 Fund "Make-Whole" Provision Would Undo the
Curative Legislation Congress Passed in 1987, And Subject 6
Fund Participants to Genuine Losses During Debt Linit Impasses.
The House of Representatives has recently passed two legislative proposals — H.R. 2586 and H.R. 2621 — that would unnecessarily repeal the essential "make-whole" protection of G Fund
earnings. The confusing statements made about the G Fund at this
Committee's recent hearing only underscore the continuing need to
preserve the "make-whole" protection and to insulate the G Fund
from debt limit politics.
At every opportunity, I have advised the Congress that, with
the "make-whole" protection, G Fund investments are safe. In
that regard, I am attaching copies of ay recent letters to Mr.
Mica (as Chairman of the House Civil Service Subcommittee), to
the Chairman of the House Committee on Ways and Means, and to
Speaker Gingrich. I ask that they too be included in the record
of this Committee's hearing.
I urge this Committee, on behalf of two million G Fund
investors, to take every possible action to affirm the essential
"make-whole" protection in current law, so that Federal employees' retirement savings will not be jeopardized during any future
debt limit impasses.




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217

FEDERAL RETIREMENT THRIFT INVESTMENT BOARD
1250 H Street, NW Washington, DC 20005

January 24, 1996

The Honorable Newt Gingrich
Speaker of the House
of Representatives
Washington, D.C. 20515-6501

BY HAND

Dear Mr. Speaker:
I am the Executive Director of the Federal Retirement
Thrift Investment Board, the Federal agency charged with
administration of the Thrift Savings Plan (TSP) for Federal
employees. On behalf of the Board, I am writing to urge that
the House of Representatives preserve the existing statutory
"make-whole" protection for the Government Securities Investment (G) Fund of the TSP during periods when Treasury securities cannot be issued due to the statutory debt limit.
If new legislation to increase the debt limit ceiling
needlessly seeks to remove that protection, as did previous
bills -- H.R. 2586 and H.R. 2621 -- passed by the House (but
not enacted into law), the Board will strongly oppose it.
I hope I can prevail upon you to appreciate the seriousness of the threat to the integrity of Federal employees'
retirement investments that a repeal of the "make-whole"
provision would create. For example, in the absence of the
provision, the current debt limit impasse would have cost
Federal employees collectively S130 million of retirement funds
in foregone interest to date. Notwithstanding that the previous bills required the Secretary of the Treasury to issue
securities to the G Fund if his not doing so were to conserve
debt issuance authority, the "make-whole" provision will still
be required for those inevitable times when the Secretary is
simply unable to issue securities to the G Fund because the
debt ceiling has otherwise been reached.
Should a repeal of the "make-whole" provision be enacted,
I will have a fiduciary duty to advise 2 million TSP participants that they should reconsider their G Fund investments -now standing at $22 billion - - i n light of Congress' refusal to
ensure the continued earnings ability of their retirement
savings during completely unrelated political conflicts over
the debt limit. As you might imagine, this would not be a
welcome message to Federal employees.




218
I wrote detailed letters to the appropriate committee
leaders (see enclosures) when the previous legislation was
being considered in the House, and I am sending letters similar
to this one to other leaders of the House and Senate today.
Sincerely,

Roger W. Mehle
Executive Director
Enclosures




219

FEDERAL RETIREMENT THRIFT INVESTMENT BOARD
1250 H Street. NW Washington, DC 20005

PLAN

November 8, 1995

The Honorable John L. Mica
Chairman, Subcommittee on
Civil Service
U.S. House of Representatives
Washington, DC 20515

fiX

HAND

Dear Mr. Chairman:
I have reviewed H.R. 2586 which provides for a temporary
extension of the Federal debt limit. The proposed legislation
provides for the repeal, jj&SE alia, of 5 U.S.C. S 8438(g),
which was enacted on May 22, 1987, to prevent harming Federal
employees with investments in the Thrift Savings Plan's G Fund.
It was foreseen at that time that, during periods of constraint
on the issuance of Treasury securities brought about by the
debt limit, the moneys of Federal employees in the G Fund would
irretrievably lose interest (since they could not be invested)
but for this carefully drafted, bipartisan "make-whole" provision. (The enclosed letter from former Executive Director
Francis Cavanaugh forwarded the proposed legislation (not included) to Congress in April 1987, and it was quickly enacted.)
A repeal of this provision at this time would cost Federal
employees invested in the G Fund more than S3.5 million per
dav of debt limit constraint, am amount that, once lost, will
never be recaptured. That Federal employees' retirement funds
might be thus diminished is a matter of great concern to me and
my fellow fiduciaries, as I am sure it is to you.
All of the provisions of the proposed legislation can be
enacted without harm to Federal employees' retirement funds
except for the repeal of § 8438(g) (and its administrative
concomitant, § 8438(h)). That is, the purpose of the proposed
draft legislation can be fully met, as set forth in its accompanying two-page explanation, with the deletion of the words
", and subsections (g) and (h) of section 8438 of such title"
on page 6, lines 7 and 8. (The other provisions to be repealed
pertain to the Civil Service trust fund; because that fund is
not owned by employees directly, their ultimate benefit levels
as derived therefrom are unaffected.)




220

If the bill were passed in its present form, the fiduciaries of ths Thrift Savings Plan would be obligated to point out
the needless and costly removal by Congress of a protection for
Federal employees intended to prevent debt limit politics from
impairing the integrity of their retirement funds. (The "makewhole** provision of § 8438(g) has been employed on four separate occasions in the past to restore interest otherwise lost
to Federal employees from debt limit hiatuses.)
I have sent a similar letter to Senator Ted Stevens, who
chairs the Senate committee with jurisdiction over the Thrift
Savings Plan. I am asking your and his cooperation in preventing any repeal of S 8438(g) in order to safeguard Federal
employees' retirement moneys and ensure their confidence in the
6 Fund, which, at $21.5 billion currently, comprises approximately 2/3 of total Thrift Savings Plan investments.
Sincerely,

Soger W. Mehle
Executive Director

Enclosure




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221
FEDERAL RETIREMENT
THRIFT INVESTMENT BOARD
Benjamin Franklin Station. P.O. Box 511
Washington. DC 20044
April 3 0 ,

1987

Dear Mr. Speaker:
The Federal Retirement Thrift Investment Board respectfully submits the
enclosed draft bill to prevent the loss of interest earnings to federal
enployees in the Thrift Savings Plan (Plan) which would otherwise result
from a temporary suspension of the authority of the Secretary of the
Treasury to issue public debt obligations to the Plan.
The Federal Bnployees' Retirement System Act of 1986 (5 U.S.C. 8401-8479)
established a tax-deferred Thrift savings Plan for federal employees.
Effective April 1, 1987, all government and enployee contributions to the
Plan must be invested in Treasury securities issued to the Government
Securities Investment Fund (GSIF) of the Plan. Since such securities,
like other Treasury debt issues, are subject to the statutory limit on
the amount of public debt outstanding, the Secretary will be unable to
issue such securities to the GSIF after May 15 unless Congress acts on
debt limit legislation by that date.
The present temporary public debt limit of $2*3 trillion is due to expire
on Hay 15, 1987, on which date the debt limit will revert to the permanent
statutory ceiling of $2.1 trillion.
We understand that the Treasury Department advised Congress today, in
testimony before the House Ways and Means Ccoinittee that the Department
expects to have sufficient cash on May 15 so that an increase in the debt
ceiling would not be necessary until May 28. Nevertheless, beginning
May 16 the Treasury will be unable to issue any securities subject to the
debt limit, including securities issued to the GSIF. Thus, if Congress
does not act on debt limit legislation prior to May 16, the GSIF will
lose interest? there is no authority for the Treasury to pay such interest
at a later date to make up for such losses.
The proposed legislation would provide the same treatment to the Thrift
Savings Plan as is now provided by law (P.L. 99-509) to the Civil Service
Retirement Fund. This treatment requires the Treasury to make up any
loss of earnings to the Fund created by a suspension of Treasury borrowing
authority.
Although the bill seeks parity of treatment with the Civil Service
Retirement Fund, it is important to note that the Thrift Savings Plan
is different from the Civil Service Retirement System (CSRS) in that the
Thrift Savings Plan is a wholly voluntary, defined contribution plan;
whereas CSRS is a mandatory, defined benefit plan. CSRS plan benefits do
not depend directly on the amount of the Fund's interest earnings. The
employer-employee contributions to the Thrift Savings Plan, although held




222

in the custody of the Treasury Department, actually belong to the individual
employees. Accordingly, Congress intended that the Thrift Investment
Board be a financially independent agency and exempted the Board from the
appropriations process, the budget, and the controls of the Executive
Office of the President which apply to other federal agencies. Yet, perhaps
inadvertently, Congress did not insulate the Board or the Plan fran the
constraints of the public debt limit.
The Board believes that obligations issued to the GSIP should clearly be
exempt fran the public debt limit constraints. Yet, in view of the urgent
need for timely legislative action before May 15, we are requesting only
that the Plan be accorded the same treatment as the Civil Service Retirement
Fund.
Federal employees have been urged to deposit their funds in the Thrift
Savings Plan upon the representation that such funds will be safely
invested in government securities with a guaranteed rate of return based
on a prescribed statutory interest rate formula. The Board has an
obligation to federal employees to make every effort to see that this
commitment is honored. Now, at the very beginning of the Plan, it is
especially important that there be no question as to the integrity of the
government's representation as to such investments. In order to prevent
unnecessary fear and confusion on this point, we urge Congress to act on
the enclosed bill as soon as possible and before any suspension of Treasury
borrowing authority occurs.
m are sending a similar letter to the President of the Senate. Copies
have been sent to the Director of the Office of Management and Budget.

Sincerely,

Trancis X* Cavanaugh
Executive Director

The Honorable Jim Wright
Speaker of the House of
Representatives
Washington, D.C. 20515
enclosure




223

Summary of the Bill

The purpose of the bill is to ensure that the federal employees' Thrift
Savings Plan (Plan) does not suffer a loss of earnings in its Government
Securities Investment Fund in the event of a temporary suspension of borrowing
authority of the United States Treasury Department, due to the statutory
public debt limit.

The bill provides that, in the event the Secretary of the Treasury suspends
additional issuance of Treasury securities to the Government Securities
Investment Fund because such issuance would exceed the debt limit, immediately
upon lifting of the borrowing suspension, the Secretary of the Treasury
shall issue securities to the Plan at interest rates and maturities which
will replicate the obligations that would have been held by the Plan
if the suspension had not occurred. This "make-whole" relief will include
the payment of any interest the Plan loses as a result of the suspension.
Both the obligations and the interest will be determined in accordance with
the daily investment decisions made by the Federal Retirement Thrift
Investment Board during the suspension period which would have been
effective were it not for the suspension.
The treatment accorded to the Plan by the bill is similar to chat accorded
to Che Civil Service Retirement and Disability Fund in Section 6002 of the
Omnibus Budget Reconciliation Act of 1986, except that the bill recognizes
Che statutory responsibility of the Executive Director (5 U.S.C. 8438
( f ) ( 2 ) ( A ) ) , rather than the Secretary of the Treasury, to determine the
amounts and maturities of the Investments in the Government Securities
Investment Fund.




224

FEDERAL RETIREMENT THRIFT INVESTMENT BOARD
1250 H Stract. NW Washington. DC 20005

December 11, '1995

The Honorable Bill Archer
Chairman
Committee on Ways and Means
U.S. House of Representatives
Washington, D.C. 20515

BY HAND

Dear Chairman Archer:
I have recently reviewed a copy of H.R. 2621, entitled "A
Bill to Enforce the Public Debt Limit and to Protect the Social
Security Trust Funds and Other Federal Trust Funds and Accounts
Invested in Public Debt Obligations. ** On behalf of the Federal
Retirement Thrift Investment Board, I must object to section 2
of the bill to the extent of its proposed repeal of the Thrift
Savings Plan's G Fund "make-whole" provision, 5 U.S.C. §
8438(g). I understand that the bill is scheduled for House
floor action on Tuesday, December 12 f i.e.. tomorrow).
In pertinent part, H.R. 2621 is identical to H.R. 2586,
about which I wrote to Chairman Mica on November 8, 1995. (A
copy of my November 8 letter is enclosed.) As such, H.R. 2621
is equally objectionable to the Federal Retirement Thrift
Investment Board, inasmuch as it too threatens the integrity of
Federal employees' investments in the Thrift Savings Plan's
G Fund by repealing the G Fund "make-whole" provision.
Notwithstanding the mandate to the Treasury of section
1(a) (1) (B) of H.R. 2621 not to "refrain from the investment in
public debt obligations of amounts in (the G Fund]", the "makewhole" provision will still be required for those times when
the Treasury is simply unable to issue securities to the G Fund
because the debt limit ceiling has otherwise been reached.
(Please see my November 8 letter for further details of the
Board's objections to the repeal of S 8438(g).)
I have sent a similar letter to Congressman Gibbons, the
Ranking Member of your committee.

Roger W. Mehle
Executive Director
Enclosure
cc:

The Honorable John L. Mica (w/o enclosure)
The Honorable James P. Moran, Jr. (v/o enclosure)




225

Congrof tfje tHmteb £>tateg
Washington, B C 2 0 5 1 5

February 1, 1996

The Honorable William J. Clinton
The White House
Washington, D C 2 0 5 0 0
Dear Mr. President,
A s you know, the long-term fiscal security of the United States is a primary concern to the
Republican congressional majority. That is why w e worked to produce a balanced budget and
why w e recognize the need to act on legislation on the debt ceiling. In your State o f the Union
address, you emphasized that authority to raise the debt limit is needed by the beginning o f
March.
Your administration has communicated to us that action must be taken by February 29 to ensure
there is no default and no aelay in Social Security payments. Congressional Republicans are
committed to act by this date, in a manner acceptable to both you and the Congress, in order to
guarantee the government does not default on its obligations.

Sincerely,

Bob Dole
Senate Majority Lend . :




/

Newt Gingrich
Speaker of the House

Richard Armey
House Majority Leader

226

DEPARTMENT OF THE TREASURY
WASHINGTON

February 26, 1996
ASSISTANT

SECRETARY

The Honorable Spencer T. Bachus, m
Chairman
Subcommittee on General Oversight and Investigations
Committee on Banking and Financial Services
U.S. House of Representatives
Washington, D.C. 20S15
Dear Mr. Chairman:
Secretary Rubin has asked me to respond to your February 13th letter. In order to make
our responses as clear as possible, I have set forth your questions and our responses together.
Question:
1.
In actions proposed for February 15, 1996, involving the Federal Financing
Bank, you propose to sell TV A and Postal Service assets to the Civil Service Retirement and
Disability Fund and the Airport and Airways Fund.
a.

Why Is it necessary to involve the Airport Fund?

Response:
We have not used the Airport and Airways Fund in any action we have taken to avoid
exceeding the debt limit. We considered using it, as was reflected in the draft legal opinion
reviewed by your staff, but ultimately decided that it was not necessary to do so.
Question:
b.
Are there any documents relating to this decision that you have not
provided us? If so, please provide them.
Response:
We will be providing under separate cover copies of any documents related to the decision
making process involving the exchange of Federal Financing Bank (FFB) assets.
Question:
2.
You propose to exchange TV A and Postal Service securities held by the FFB
for Treasury Specials held by the Civil Service Retirement Fund and the Airport Fund.




227
a.
Please explain the mechanics Involved in ensuring that neither the FFB
nor the trust funds will be damaged in such an exchange?
Response:
Treasury used a valuation model to ensure the equivalence in value of the FFB assets
transferred to the Civil Service Retirement and Disability Fund (CSRDF) and the Treasury
securities transferred by CSRDF to the FFB. An independent financial advisory firm, Public
Resources Advisory Group (PRAG), was retained to review the model and economic conclusions
on behalf of CSRDF. PRAG certified to CSRDF the reasonableness of the model and concluded
that the assets CSRDF received were equivalent in value to those transferred to the FFB.
The process, our model, our conclusions and PRAG's certificate are among the documents
we are providing to you under separate cover.
Question:
b.
Are there any documents relating to this exchange that you have not
provided us? If so, please provide them.
Response:
We will be providing under separate cover copies of any documents related to the decision
making process involving the exchange of FFB assets with CSRDF.
Question:
3.
You propose to discontinue investing the cash assets held by the Exchange
Stabilization Fund in securities.
a.

What are the current assets of the ESF?

Response:
Enclosed is a copy of a summary of the balance sheet of the Exchange Stabilization Fund
(ESF), as of December 31, 1995. Since then, the dollar assets of the ESF have increased to
approximately $3.9 billion.
Question:
b.
Why have you ruled out using any remaining assets for debt
management purposes?




2

228
Response:
The action the Secretary authorized on February 15 is the suspension of the investment of
the dollar-denominated assets of the ESF in Treasury securities. Any further action would have
involved swapping the ESF's holdings of yen and marks into dollars, which then would not have
been invested. Such a swap would have involved additional procedural complications and the
participation of third parties. We were not sure we could accomplish that, and we were also
concerned about impairing our ability to defend the dollar.
Question:
c.
Please explain whether the decision not to use other ESF assets was
based upon "legal" or "prudential" concerns?
Response:
The answer to the previous question explains our concerns.
Question:
d.
Are there any documents relating to this decision that you have not
provided us? If so, please provide them.
Response:
We will be providing tinder separate cover oopies of any documents related to the decision
making process involved in suspending the investment of the Treasury securities held by the ESF.
Question:
4.
You propose to use the Federal Financing Bank as a means of managing the
public debt.
a.

What is the total amount of FFB debt obligations held by the Treasury?

Response:
After the transactions consummated last week, Treasury now holds approximately $54
billion of FFB debt.




3

229

Question:
b.
Is there any explicit statutory prohibition restricting Treasury from
directly exchanging the FFB debt obligations held by Treasury for Treasury Specials held
by the Trust fuods?
Response:
There is no explicit statutory prohibition restricting Treasury from the exchange described
above. There is also no clear legal authority for such an exchange.
Question:
c.
Why should the $15 billion limit contained in Section 9(a) be seen as a
limit on the transfer of FFB debt rather than as simply a limitation upon the amount of FFB
debt that can be Issued irrespective of agency debt purchases by the FFB under Section 9(b)?
Response:
The Treasury does not believe that Section 9(a) of the FFB Act limits the ability of the
Treasury to sell outstanding FFB debt held by Treasury. The FFB has utilized its authority to
borrow from the Secretary of the Treasury under Section 9(b) of the FFB Act solely to fund the
FFB's purchase of agency debt and agency guaranteed debt. The FFB has not borrowed under
its Section 9(b) authority for any other purpose.
Question:
d.
Why should Section 9(d) of the FFB act not be construed as specifically
permitting such transfers from Treasury to the trust funds as it is contained la a wholly
separate provision?
Response:
Section 9(d) of the FFB Act provides:
(d) Obligations of the Bank [FFB] issued pursuant to this section shall be
lawful investments, and may be accepted as security for all fiduciary, trust, and
public funds, the investment or deposit of which shall be under the authority or
control of the United States, the District of Columbia, the Commonwealth of
Puerto Rico, or any territory or possession of the United States, or any agency or
instrumentality of any of the foregoing, or any officer or officers thereof.




4

230

As stated, Section 9(d) makes FFB obligations issued under Section 9 eligible for purchase
by a variety of funds under the control of a variety of governmental entities. It does not by its
terms authorize any particular type of transaction.

Question:
e.
Is it necessary that the organic statute creating a particular agency to
provide specific authority before the debt of such agency can be held by Trust funds? If so,
why? Have there been any instances in the past when agency debt has been held by federal
Trust Funds without having specific authority in the statute creating the agency?

Response:
No. Government trust funds have a range of authority as to the type of agency debt
they can purchase. We are not aware of any instance when agency debt has been held by federal
trust funds without having any specific authority in the statute creating the agency.

Question:
5.
In a January 25, 15)96, Washington Post story, a "senior" Treasury official
indicated that the first effects of the debt ceiling would be felt on March 1, 1996, when $30
billion of Social Security and other benefit payments would come due. (This was prior to
the recent action taken by Congress to accommodate for the March 1 benefit payments.) In
1985, under Secretary James Baker, the Treasury was faced with a similar debt ceiling
limitation and conflicting legal duties requiring it both to invest payroll receipts held by the
trust funds in Treasury securities and the requirement that beneficiaries receive payments
on a timely basis. Recognizing that the Treasury was forced to choose between harming the
trust funds or harming beneficiaries, Secretary Baker chose to ensure that beneficiaries
would receive their checks on a timely basis. The GAO determined that this was not an
unreasonable choice in light of the circumstances.
a.

Why did the Treasury reject this option relating to the March 1 , 1 9 9 6

b.
Please explain.

Was this decision based upon legal" concerns or "prudential" ones?

payments?

c.
Have there been any Intervening legal changes since 1985 that would
make this impracticable?




5

231
Response:
The Administration's position with regard to Social Security and the debt limit has been
stated on a number of occasions. Most recently, Congresswoman Marge Roukema raised a similar
question of Secretary Rubin in the December 13 hearing of the House Banking Committee.
Attached for your information is the letter in response to that question from Under Secretary John
D. Hawke, Jr.
The letter makes a number of points:
Both the President and the Secretary of the Treasury have stated that the Secretary
has no authority to redeem securities from the Social Security fund for any purpose
other than to assure the payment of benefits.
-

The Treasury Department agrees with Congress's understanding of existing law on
this subject, as described in the synopsis of S. 1470 placed in the December 15,
Congressional Record by Chairman Roth, which states in relevant part, "... the
Secretary of the Treasury and other Federal officials are not authorized to use
Social Security and Medicare funds for debt management purposes."

Further:
Disinvestment of assets of the Social Security funds in amounts equal to the benefit
payments due in a particular month, followed by the issuance of new marketable
debt for cash, would not assure that all benefit checks would be paid on the dates
they were presented for payment if the debt ceiling were reached and default were
imminent. Under current procedures, the Federal Reserve, as Treasury's fiscal
agent, will not pay any checks presented for payment on a given day unless
Treasury's account contains funds sufficient to pay all checks presented for
payment the same day. In the absence of sufficient cash to assure the payment of
all such obligations, it is possible that payment of beneficiaries' checks would be
delayed.
Question:
6.
It appears that previous Treasury Departments rejected certain options that
could have freed up room under the debt ceiling because the options would have made a
"mockery" of the debt celling state and, therefore, Congress' Constitutional authority over
the debt.
a.
Did the Treasury Department reject any options during 1995 or 1996
on the grounds that they would make a "mockery" of the debt celling or otherwise infringe
on Congress' Constitutional authority?




6

232

Response:
The Treasury has been at ail times mindful and observant of Congress's authority and its
obligations as they relate to the debt ceiling. As is expressed in the five legal opinions provided
the Congress addressing the actions taken by the Treasury, Treasury believes that none of those
actions infringes upon the authority of Congress. We refer you to those opinions for a more
detailed response.
Question:
b.
Has the Treasury Department taken any steps or proposed to take any
steps that were rejected by previous Treasury Departments because those Administrations
concluded such actions would infringe on Congress' Constitutional authority?
Response:
No.
Question:
c.
Neither the Treasury General Counsel opinion nor the OLC opinion
relating to the November 15, 1995, actions mention any concerns relating to preservation of
Congressional authority over the public debt in construing the ambiguous statutory language
discussed in those opinions. Were such concerns ever discussed by Treasury or Justice legal
staff? If they were, why were they not reflected in the legal opinions?
Response:
The November 15, 199S actions were taken pursuant to explicit statutory authority
provided the Secretary of the Treasury by the Congress in 1986 and 1987. We have reviewed the
legislative history from 1986 and 1987, as is reflected in the opinions. In fact, the opinions rely
on such legislative history in coming to their conclusions that the Secretary's actions have been
clearly legal.
Question:
d.
Are there any documents reflecting legal analysis that reflect such
Constitutional concerns relating to the statutes construed in these opinions? If these have
not previously been provided, please do so.




7

233
Response:
We have provided or will be providing under separate cover copies of all legal analyses
of the Secretary's November 15, December 29 and February IS actions.
Question:
7.
It is my understanding that employee unions or other groups were notified of
the Treasury decision to Up the Civil Service Retirement and Disability Fund and the GFund.
When were such employee groups first notified, informally or otherwise, by
the Administration that Treasury was considering tapping either the Civil Service Retirement
and Disability Fund or the Thrift Savings Fund?
Response:
The Treasury first informed employee unions and other groups that the Secretary was
considering using the CSRDF and the G-Fund for debt limit purposes in late October, after
Treasury began briefing members of Congress. These groups were notified of the Secretary's
decision actually to take such actions on November 15th--shortly after the decision was made.
Following is the sequence of events:
On October 27, 1995, Treasury representatives called union representatives and other
groups to discuss possible use of the Secretary of the Treasury's statutory powers to stop investing
the CSRDF and the G-Fund to avoid exceeding the debt limit.
On November 3, 1995, Treasury representatives and others met with federal employees
groups to explain the debt limit problem and to discuss various options, including the potential use
of the CSRDF and the G-Fund, to avoid default.
On November 9, 1995, Treasury faxed to employee union representatives a copy of
Secretary Rubin's October 31,1995 letter to the Congressional leadership indicating that he might
need to take actions, including using the CSRDF and the G-Fund.
On November 15, Treasury officials contacted employee union representatives and other
groups via conference call to notify them of the Secretary's determination of a debt issuance
suspension period and his decision to use the CSRDF and the G-Fund.
Question:
8.
Finally, some have questioned whether it was simple coincidence that the first
parties predicted to feel the effects of reaching the debt ceiling were Social Security and




8

234
other similar beneficiaries when it was announced in January that the Treasury had
exhausted all "legal" and "prudent" options to manage the debt.
a.
Did you possess any discretion in determining the time at which you
would reach exhaustion of all "legal" and "prudent" options?
Response:
Once we had determined what options were both legal and prudent, we knew
approximately how much debt limit room those options would create. It was simply a matter of
looking at our cash and debt projections to determine approximately how long such debt limit
room would last.
In fact, in his January 22 letter to Congress, the Secretary wrote that "either February 29
or March 1 is the date on which Treasury will ho longer be able to fulfill all of its financial
obligations without legislation increasing the statutory debt limit." Absent the passage of Pub. L.
No. 104-103, Treasury might have defaulted on outstanding debt on February 29. In that case,
debtholders, not trust fund beneficiaries, would have been the first parties to suffer.
Because of statutory benefit payment dates, a large percentage of the payments that
Treasury must make each month are made at the beginning of the month. We make approximately
$55 billion in payments during the first five business days of each month. Therefore, Treasury
needs cash at the beginning of every month, which is normally satisfied through the issuance of
debt. As a result, at a time when debt limit headroom is tight, it is quite likely that the debt limit
might be reached at the beginning of the month.

Question:
b.
Did any "political" considerations play any role in the determination of
the time in which you would reach exhaustion of all such options?
Response:
Once we had determined what options were both legal and prudent, we knew
approximately how much debt limit room those options would create. It was simply a matter of
looking at our cash and debt projections to determine ppproximately how long such debt limit
room would last.




9

235

Question:
c.
When determining the time at which you would reach "exhaustion" of
your "legal" and "prudent" options, did you confer with any other Administration officials
in regard to such timing?
Response:
Once we had determined what options were both legal and prudent, we knew
approximately how much debt limit room those options would create. It was simply a matter of
looking at our cash and debt projections to determine approximately how long such debt limit
room would last.
The President is, of course, very concerned about the country's credit standing, and it is
only natural for the Secretary to keep him and his staff informed of the Secretary's deliberations.
In fact, it is very much the normal course. For example, the letter that Secretary Baker sent to
Congress on October 22, 1985 explicitly mentioned President Reagan's concurrence in Secretary
Baker's decision not to sell the nation's gold.
Question:
d.
Was the timing of the "exhaustion" of such options ever changed (either
delayed or expedited) due to a request from other Administration officials?
Response:
No.




10

236

With respect to the third agency documents mentioned in your letter, because those
documents are not Treasury documents, Treasury cannot produce them. We have provided copies
of those documents to the other agencies and asked them to provide the responsive documents
directly to the Joint Economic Committee.
We appreciate this opportunity to work with you to ensure full understanding of Treasury's
debt limit actions.




Sincerely,

Linda L. Robertson
Assistant Secretary
(Legislative Affairs and
Public Liaison)

11

237

Balance Sheet of the Exchange Stabilization Fund -

December 3 1 , 1 9 9 5

ASSETS
Special Drawing Rights
Doilars
German marks
Japanese yen
Mexican Pesos

$11,114,512,880.22
$2,950,709,059.03
$6,895,860,459.59
$10,077,607,127.36
$11,393,046,106.54

Total Assets

$42,431,735,632.74

LIABILITIES
Special Drawing Rights Certificates
Special Drawing Rights Allocations
Accrued Charges Payable on SDR Allocations
Total Liabilities

$10,168,000,000.00
$7,283,077,261.54
$51,883,561.95
$17,502,960,823.49

CAPITAL
Remaining Appropriated Capital
Retained Earnings
Total Capital
Total Liabilities and Capital




$200,000,000.00
$24,728,774,809.25
$24,928,774,809.25
$42,431,735,632.74

238

D E P A R T M E N T OF THE TREASURY
WASHINGTON

January
UNOCR

31.

1996

SCCRCTARV

The Honorable Marge R o u k e m a
U. S. House of R e p r e s e n t a t i v e s
Washington, D.C.
20515
Dear Marge:
Secretary Rubin h a s asked m e to respond to a q u e s t i o n t h a t you
raised during the D e c e m b e r 13, 1995 H o u s e Banking C o m m i t t e e
hearing on the debt limit.
You asked t h e Secretary t o p r o v i d e
you with the D e p a r t m e n t ' s o p i n i o n concerning the a u t h o r i t y of the
Secretary to use Social S e c u r i t y trust funds to m a n a g e the debt
limit impasse.
As the Secretary indicated at the hearing, the longstanding
position of the T r e a s u r y Department has been that t h e Secretary
may disinvest funds invested in the Social Security trust funds
only to assure the payment of benefits to b e n e f i c i a r i e s of the
funds.
The Treasury D e p a r t m e n t agrees with C o n g r e s s '
understanding of existing law on this subject, as d e s c r i b e d in
the synopsis of S. 1470 p l a c e d in the December 15, 1995
Congressional Record by C h a i r m a n Roth, which states in relevant
part, "... the Secretary of the Treasury and other F e d e r a l
officials are not authorized to use Social Security and Medicare
funds for debt m a n a g e m e n t p u r p o s e s . "
I have enclosed the p o r t i o n of the Record that c o n t a i n s this
language.
As you will o b s e r v e , the Record also c o n t a i n s a letter
from me to C h a i r m a n Roth that reiterates the position of the
Department on this subject.
In addition, I have e n c l o s e d a copy
o f another letter, dated D e c e m b e r 20, 1995, from me t o Chairman
Roth that also r e s t a t e s the Department's position.
We appreciate the o p p o r t u n i t y to restate our position w i t h
respect to this m a t t e r .
If you require further i n f o r m a t i o n
us, please let me k n o w .

from

Sincerely yours<

Jol
wke, Jr.
Under Secretary of the T r e a s u r y
for Domestic Finance
Enclosures




239

December 15, 1995

CONGRESSIONAL RECORD—SENATE

S18733

Proposed Change
to treatment requirement will apply on or
A revolving fond is established in the So- quired not to delay or otherwise u
after the first continuing disability review
cial Security Disability Insurance (88DI) incoming receipts to the Social Security and
occurring after enactment.
3. Entitlement of stepchildren to Social SecurityTrust Fund as a source of non-appropriated Medican trust fonds. They a n also required
administrative fonds to finance 8oclal Secu- not to sell, redeem or otherwise disinvest sedependent benefits
rity CDRs. At the start of each fiscal year, curities. obligations or other assets of th»se
Present Law
the revolving fond will be credited with an
fonds except when necessary to provide
Generally a child. Including a stepchild, amount equal to the estimated present value trust
for the payment of benefits and administraunder age 18 (or under age 19 in the case of of savings to the 88DI and Medicare trust tive expenses of the cash benefit programs.
an individual attending elementary or sec- fonds achieved as a result of CDRs of bene- The Committee intends that these requireondary school full-time) may be entitled to ficiaries conducted In the prior fiscal year- ments be carried out to the maximum extent
receive Social Security benefits as the de- except for the first year, during which S900 possible under the statutory debt limit. The
pendent child of a worker when the worker million will be credited. These amounts will legislation applies to the following trust
retires, becomes disabled, or dies.
be calculated by the Social Security Admin- fonds:
A stepchild is deemed dependent on a step- istration's Chief Aotuary, with appropriate
1. Federal Old-Age and Survivors Insurance
parent if he/she lives with the stepparent or adjustments made annually In subsequent (OASI) Trust Fund;
receives one-half of his/her support from the yean. Amounts credited to the revolving
2. Federal Disability Insurance (DI) Trust
stepparent. Social Security dependent bene- fond a n available for all expenditures relat- Fund;
fits continue to be paid to a stepchild after ed to conducting CDRs by the Social SecuS. Federal Hospital Insurance (HI) Trust
the child's natural parent and the stepparent rity Administration and appropriate State Fund; and
divorce. Continuation of those benefits after agendas.
4. Federal Supplementary Medical Insurdivorce may reduce the amount available for
In addition, the position of Chief Actuary ance (8MI) Trust Fund.
payment to other children entitled to re- in the Social Security Administration Is es- Effective Date
ceive Social Security Dependent benefits tablished in law.
The proposal is effective upon date of enbased on the worker's record.
Effective Date
Reason for Change
The revolving fond is effective for fiscal
Under current law children who are enti- yean
beginning
after
September
30.1M6.
and
According to preliminary estimates of the
tled on a worker's record may be unnecesCongressional Budget office, the legislation
sarily penalised by the entitlement of a step- sunsets September 30,2006.
child who has other means of support. This 5. Protection of Social Security and Medicarewill reduce mandatory spending by S900 million over seven yean (FY 1908-3002) and by
trust fundt
change would result in the payment of bene<2.7 billion over ten yean (FY 1906-1006).
fits only to stepchildren who a n truly deThe various authorising statutes of the
and only as long as the natural parent and major Federal trust fonds require that any
Attached Is a letter from John D. Hawke,
stepparent a n married.
program income not needed to meet current Jr., Under Secretary of the Treasury for Doexpenditures be Invested in interest-bearing mestic Finanoe, providing oomments on the
Proposed Change
proposal
to protect the Social Security and
obligations
of
the
United
Statee
or
in
obligaSocial Security dependents' benefits a n
payable to a stepchild only when the step- tions guaranteed as to both principal and in- Medicare trust funds as originally introparent provides at least SO percent of the terest by the United States. The vast major- duced. The legislation reported by the Comincludes a modification of this prostepchild's support upon application for ben- ity of these securities a n "special issue" mittee
efits. A stepchild is eligible for survlvon' non-marketable obligations of the United posal to siloi II— these oonoerus.
DEPARTMENT OP THE TREASURY,
benefits upon the death of a stepparent if the States. Virtually the entire amount of secuWashington, DC. December IS. IMS.
rities
held
by
the
Federal
trust
fonds
is
constepparent provided at least 60 percent of the
sidered Federal debt subject to the statutory H o n . WILLIAM v . ROTH. J R .
Chairman,
Senate Finance Committee
debt limit.
US.
Senate.
Washington. DC.
Reason for Change
In addition, a stepchild's Social Security
DEAR MR. CHAIRMAN: Our oomments have
81nce late October, the total amount of the
benefits based on the work record of his/her
requested with respect to the provisions
stepparent a n terminated the month follow- public debt obligations has been very cloee been
Section 6 of 8. 1«I0. the "Senior Citissns'
ing the divorce of the child's natural pannt to the public debt limit. This has given rise of
Freedom to Work Act of 1906." This section
and stepparent. The stepparent must also no- to concerns that the Social Security and of
bill is intended to provide protections
tify the Social Security Administration of Medican Trust Funds might be under in- to the
the Social Security and Medican trust
fonds at times when the public debt limit
tration is required to notify annually thoee purposes. While the Administration has stat- might
otherwise cause certain advene conpotentially affected by this provision.
ed that it would not take such action, the sequences with respect to thoee fonds.
Committee concluded that it was desirable
The Administration shares the objective of
The proposal is generally effective three to make clear in law that these fonds oould protecting the beneficiaries of these fonds.
months after date of enactment for new enti- not be used for debt management purpoees. As you know, both the President and the
clarifying this, the Committee does not Secretary of the Treasury have stated that
tlement of stepchildren to benefits and for In
intend that the legislation authorise conduct the Secretary has no authority to redeem sedivorces finalised after that period.
in contravention of any other applicable pro- curities from the Social Security fond for
4. SSDl revolving fund for continuing disabilityvision
of law. such as the public debt limit. any purpose other than to assure the payThe Committee seeks to assure that, to the ment of benefits. The same principle would
Present Law
maximum extent possible under the statu- apply as well to the other 170 trust fonds
The administrative costs of conducting tory debt limit, the Secretary of the Treas- that a n not subject to the Secretary's excontinuing disability nviews (CDRs) of indi- ury and other Federal officials shall invest
viduals receiving Social Security disability and disinvest Social Security and Medican
Section 6 would do the following:
benefits are provided through an appropria- trust fonds solely for the purpoees of acwould require that all revenues received
tion of trust fond monies, and a n considered counting for the income and disbursements orItheld
by these fonds be invested in public
discretionary spending subject to the domes- of these programs. The Committee further debt
obligations, "notwithstanding any
tic discretionary spending cap of the Budget intends that the investments of the trust other provision
of law." Thus, it would effecEnforcement Act.
fonds a n made timely, in accordance with tively create an exception to the debt limit
the normal investment practices of the to permit the investment of incoming reReason for Change
Limited administrative resources have pre- Treasury, and a n not drawn down pre- ceipts of these fonds.
vented the Social Security Administration maturely for the purposes of avoiding limitaIt would forbid the "disinvestment"—that
(torn keeping up with CDRs. which estimates tions on the public debt or to make room is, the redemption prior to maturity—of sethat for every $1 spent conducting CDRs, 96 under the statutory debt limit for the Sec- curities held by the fonds if a purpose therea n saved in benefits that would otherwise be retary of the Treasury to issue new debt ob- of were "to reduce the amount of outstandpaid to individuals who are no longer dis- ligations in order to cover other expendi- ing public debt obligations."
abled. The Social Security Administration tures of the Government.
It would allow Treasury to disinvest the
Proposed Change
estimates that the failure to perform timely
fonds and to issue corresponding new public
CDRs between 1900 and 1906 will cost the
The legislation codifies Congress' under- debt, "notwithstanding the public debt
8SDI Trust Fund 92.3 billion by 1990. The standing of present law that the Secretary of limit," to the extent necessary to raise cash
proposed revolving fond would be a source of the Treasury and other Federal officials a n to pay benefits to fond beneficiaries.
non-appropriated administrative resources not authorised to use 8oclal Security and
The provision of Section 6 would, however,
to finance CDRs. enabling SSA to perform Medican fonds for debt management pur- have serious adverse consequences, and
this essential program-integrity work.
poses. Specifically, the Secretary of the would present certain practical problems




240
S18734

CONGRESSIONAL RECORD—-SENATE

that oould frustrate or Impede the realisation of Its objectives:
First, the continued Investment of new
fund receipts, notwithstanding the debt
limit, would cause outstanding Treasury
debt to exceed the debt limit In an ever Increasing amount. This would prohibit Treasury from Issuing any other new Treasury
debt. Even the rollover of maturing debt
would be precluded so long as outstanding
debt remained over the debt limit. As a consequence we would faoe Imminent default on
all other outstanding obligations.
Because no other new debt oould be Issued,
the bill would also remove Treasury's ability
to raise cash to pay benefits from other trust
fands, even after a disinvestment of securities held by such funds.
Second, while the bill Intends to protect
the ability to make payments to fund beneficiaries at times when the debt limit would
otherwise preclude suob payments, as a practical matter It cannot be assured that the
protected payments could actually be made,
given the current methods of paying government obligations.
The Federal Reserve's current procedure,
when government ohecks are presented for
payment, is to give immediate credit to the
presenting bank. Incoming checks are not
actually sorted for several days after presentment. There is not presently in place
any operational capability that would permit a distinction to be made between protected benefit checks and all other checks
being presented for payment.
While the bill would require the Secretary
to Institute procedures to assure that the
protected benefits are paid when due, we estimate that it would take a minimum of
three months, and perhaps longer, to Institute the changes in the payments system
necessary to provide this assurance.
Finally, the protected payment procedures
prescribed by this legislation would only be
triggered when we were in, or on the brink
of, default.
Since the country has never in its history
experienced a default, it is impossible to determine whether or to what extent it would
be possible for Treasury to sell new debt to
the public to make the protected payments.
In such a situation, all other payment obligations of the United 8tatee would either be
in default or would be "queued up" for payment as cash became available.
We would be pleased to work with the
Committee to try to develop legislative language that would carry out the objectives
that we share, while avoiding the advene
consequences we sse flowing from the language in the current bill.
We continue to believe, however, that the
most effective and certain means for assuring that the interests of beneficiaries of Social Security and Medicare—as well as all
other trust funds—are fully protected, is
promptly to enact a clean permanent increase In the debt limit.
Sincerely,
JOHN D. HAWKK, J r . ,

Under Secretary of the Treasury
for Domestic Finance.

THE LAUTENBERO AMENDMENT
Mr. SIMPSON. Mr. President, earlier
today, Senator Lautznbkrq responded
to a statement I made yesterday regarding the so-called Lautenberg
amendment.
In defending this abused program,
which has made a farce of the Refugee
Act, my friend and colleague claimed
t h a t the beneficiaries "have to prove a
credible fear" of persecution before
they qualify.
Yet, in fact, these people do not have
to prove a credible fear of persecution;
rather all they have to do is assert a
fear of discrimination. Discrimination,
Mr. President, Is not persecution; and
asserting a fear is not proving it. All
other refugees in the world who are
coming to this country are required to
prove a "well-founded fear of persecution."
Senator , Lautenbcrg responded to
the reports of criminals using this program to enter the United States by
saying i t wasn't designed to "allow
criminals to enter." He said i t is the
responsibility of the INS and the State
Department to prevent criminals from
using the program.
I would remind my good friend t h a t
when the INS tried its level best to effectively screen these people, representatives of " t h e groups" went directly to Moscow to insist upon lower
standards. Do not blame the Justice
and the State Departments alone for
this fiasco. "The groups" and their
skilled lobbyists created this one from
whole cloth.
Senator Lautknbkro said he was surprised to hear me refer to Russia as our
"best friend." Perhaps best friend was
a bit of an overstatement, but they are
certainly among our friends, and certainly this administration and this
President as well as the previous administration have gone out of their
way to cultivate friendly relations
with t h a t country. Whether i t is a best
friend or a good friend, there is certainly no Justification whatever—at
this present day—for some blanket
"presumption" of "refugeeneee" for
any of their citizens who happen to belong to one of several religious groups,
some of whose members have been subject t o discrimination or even persecution in the past.
However, the most astounding thing
the Senator from New Jersey said was
t h a t the program ought to be extended
for another year. Even if we cut this ofT
today, there are 100,000 of these beneficiaries of the Lautenberg amendment
already "in the pipeline." That means
t h a t even without an extension we will
have 36,000 entering every year for the
next 3 years.
I can only reply to my friend t h a t he
should read again the article I placed

THE BAD DEBT BOX SCORE
Mr. HELMS. Mr. President, as of the
close of business yesterday, December
14, the Federal debt stood
at
$4,969,708,383,241.14, a little more than
$10 billion shy of the $6 trillion mark, i n t o t h e C o n g r e s s i o n a l R b c o r d y e s t e r which the Federal debt will exceed In a day, and I respectfully recommend t h a t
he should talk to the Immigration
On a per capita basis, every man. Service about the current traffic from
woman, and child in America owes Moscow regarding this program.
$18,941.08 as his or her share of t h a t
How can any of us support a program
where only one-half of 1 percent of
debt.




December 15, 1995

those applying now could qualify as a
"refugee" under the American and the
international law definition of "refugee"? We make a mockery of the law if
we do so.
Why should the American taxpayer
provide our severely limited refugee
aid for these persons, who are actually
regular "immigrants." not "refugees."
These "asserters" are not even required to prove a well-founded fear of
persecution, so we have absolutely no
assurance t h a t they are, in fact, refugees. And more importantly please recall t h a t when they do receive permission to enter the United States, they
take months, even sometimes more
than a year, to decide whether or not
they really want to come here.
About 40,000 of them who are authorised to come here are lingering in the
former Soviet Union, weighing their
options. They are clearly In no hurry.
That is what an immigrant ordinarily
does—16 calmly, and without urging,
weigh all the pluses and minuses of
staying or going to the United States.
A true refugee does not have any possible luxury of such a lengthy, deliberative process. After all they are required to be "fleeing" or have a "well
founded fear" of persecution.
Again, I urge the conferees on the
State Department reauthorization bill
to insist upon the Senate provisions
and not continue this misused program
any longer.
RETIREMENT OF LEE M. NACKMAN
Mr. SIMPSON. Mr. President. I appreciate the opportunity to take a few
brief moments of the Senate's time to
acknowledge the impending retirement
of Mr. Lee M. Nackman from Federal
service.
For nearly 10 years, Mr. Nackman
has served as the Director of the Los
-Angeles VA Outpatient Clinic. During
his tenure, he has taken his clinic from
substandard basement quarters to a $40
million, state-of-the-art, ambulatory
oare center in the heart of downtown
Los Angeles.
The constituency served by the clinic
brings to i t a myriad of medical and
psychosocial problems. Many of the
veterans care for are homeless, living
on the streets literally within sight of
Los Angeles' City Hall. In large measure because of his leadership, each of
the veterans cared by the clinic is
treated with the dignity and respect
they have earned through service to
their country. This is a difficult patient population, yet Lee Nackman has
assured t h a t i t is one t h a t is well
served by the Department of Veterans
AfTalrs health care system.
Mr. President, on January 3,1996, Mr.
Nackman is ending a distinguished 35year career of service to America's veterans. He began as a pharmacy intern
a t the Manhattan VA Medical Center
upon completion of his B.S. degree
from Columbia University. While working as a pharmacy resident a t what is
now the West Los Angeles VA Medical

241

DEPARTMENT OF THE TREASURY
W A S H I N G T O N . O.C.

December 20. 1995

Hon William V. Roth. Jr.
Chairman
Senate Finance Committee
United States Senate
Washington. D.C. 20510
Dear Mr. Chairman:
We are pleated to have had the opportunity to work with you and the staff of
the Finance Comminee with regard to the provisions of section 6 of S.1470. relating
to the protecuon of the Social Security and Medicare trust funds.
With the changes described in my earlier letter to you. and with the synopsis
that you placed in the C o n d i t i o n a l Record making clear that section 6 does not
require any investments relating to these funds in excess of the statutory debt limit, we
fuli) support enactment of these provisions in their present form. The Administration
welcomes the codification of iu position that the Treasury may not use the Social
Secunry and Medicare trust funds for any purpose other than to assure the payment of
benefits
As we made dear during our discussions with the staff, we would not support
secuon 6 if it were broadened to include other trust funds. In light of Secretary
Rubin*! recent testimony before the House Banking Committee, in which he stated
that the trust funds can on)) be disinested for the purpose of paying benefits, we do
not think any broadening of accDo* 6 a warranted.
We would also strongly oppou any effort, in the consideration of S.1470 or
otherwise, to repeal the pmdem and reasonable debt management tools that were given
to the Secretary of the T i u i u r ) &a I H 6 and 1987 in the laws governing the Civil
Service Retirement and Disability Tr*%i
and the Government Securities
Investment Fund. This euthonry not
provides the Secretary with an essential
means of avoiding a default. »hak fwtty protecting the interests of these two funds.




242

but it also protects Treasury's ability to continue investing receipts of the Social
Security and Medicare funds at times when there would otherwise be inadequate debt
limit leeway.




ijncercly.

-Q

JLL

bhn D. Hawke. Jr.
Jnder Secretary of the treasury
for Domestic Finance
O