FULL TEXT: DARMAN'S TESTIMONY AT SENATE AND HOUSE BUDGET COMMITTEE HEARINGS ON OMB MIDSESSION REVIEW OF FISCAL 1993 BUDGET.

INTRODUCTION

Mr. Chairman, and distinguished members of the Committee, thank you for inviting me to discuss the Mid-Session Review. It is a pleasure to have an opportunity to do so.

I believe a fair examination of the document would lead one to conclude that it is considerably more useful than previous versions. As a practical matter, most of the serious legislative action on the budget takes place in the second half of the year, not the first. It should be helpful at mid-session, therefore, to have an updated presentation of the President's budget-related proposals.

At mid-session, budget estimates have routinely been revised to reflect relevant technical changes. Often, however, a more important determinant of economic and budgetary performance is the pattern of Congressional action (or inaction). This determinant has not routinely been assessed. So this year's Mid-Session Review also includes a more comprehensive factual update of relevant Congressional action. This update is conveniently juxtaposed in relation to the President's recommended policies.

My personal editorial commentary on the factual record has been provided independently of the Mid-Session Review document. Some of that editorial commentary is provided here. Of course I recognize, and can well understand, that several of you may not appreciate or agree with my personal perspective on the pattern of Congressional action. But I trust you may at least agree that Congressional action or inaction is a highly relevant variable in the economic and budgetary equation.

THE DEFICIT OUTLOOK

The near-term budget deficit has been REVISED DOWNWARD VERY SUBSTANTIALLY.

This year's deficit is now estimated to be 66 BILLION DOLLARS LOWER than the January estimate. The estimate has been reduced from $399 billion to $333 billion. The estimate for next year (fiscal year 1993) has also been reduced, but by a lesser amount -- $9 billion. Federal borrowing from the public will be reduced correspondingly.

The revision means that the deficit as a percent of Gross Domestic Product will peak at about 5.7%. This is substantially lower than the high that was reached following the previous recession (6.3% of GDP in fiscal year 1983).

The principal reason for the decline in the current deficit estimate involves an irony. The reason is the same as the reason that the deficit is so high to begin with: Congress has failed to act in a timely and responsible manner.

In this particular case, the Congressional failure involves the funding of legislation to cover losses associated with S&L case resolution. Almost the entire change in the near-term deficit estimates is accounted for by a change in deposit insurance estimates. And the largest portion of this change is really just a delay of outlays due to Congressional inaction on RTC funding.

THE LARGER CONGRESSIONAL PATTERN

Although Congressional inaction in this case has had a beneficial effect on the near-term deficit outlook, the general pattern of inaction has had the reverse effect. OVERALL, CONGRESSIONAL INACTION HAS MADE THE DEFICIT VERY MUCH WORSE THAN IT WOULD HAVE BEEN HAD THE PRESIDENT'S PROGRAM BEEN ENACTED.

To help clarify this dimension of the deficit problem, let me recite the facts with respect to selected Presidential substantive initiatives. These are presented in relation to four topics that are the frequent objects (or victims) of visible rhetorical attention:

(1) ECONOMIC GROWTH

o In January, the President proposed a widely popular and potentially effective short-term stimulus measure, the $5000 TAX CREDIT FOR FIRST-TIME HOME-BUYERS. After months and months of lamentation about sluggish growth, the Congress has still failed to advance this initiative.

o In April 1991, the President advanced "America 2000" -- a bold program of EDUCATION REFORM to help America's workforce compete. The Congress has failed to pass the central elements of that reform.

o The President advanced "Job Training 2000" in January of this year. The Congress has failed to pass it.

o The President first proposed to make the RESEARCH AND DEVELOPMENT TAX CREDIT permanent in February 1989. Almost four years later, the Congress has still failed to do so -- and has, indeed, allowed the R&D credit temporarily to lapse.

o In February 1989, the President first proposed to increase JOB-CREATING INVESTMENT by strengthening the incentive for capital gains and creating strong incentives for investment in "Enterprise Zones." Almost four years later, the Congress has still failed to strengthen the capital gains incentive, and has advanced only modest tax incentives for Enterprise Zones -- that have not yet become law.

o As additional elements of a long-term growth strategy, the President advanced a National Energy Strategy (in February 1991), Financial Services Modernization (in March 1991), Product Liability Reform (in October 1991), Civil Justice Reform (in October 1991), and a Youth Apprenticeship Act (in May 1992). None of the associated legislation has yet been passed by the Congress.

(2) "INVESTMENT IN THE FUTURE"

The concept of "investment in the future" has recently become fashionable in some quarters. It so happens that the President first emphasized this almost four years ago -- in his February 1989 budget presentation. He has emphasized this theme in every subsequent Budget. As a result, there has been some modest progress in shifting discretionary spending more toward investment. But the Congress has consistently been unwilling to address the more basic problem: to shift the balance of overall domestic spending away from short-term consumption. And even within the discretionary program areas there are curious anomalies in relation to some people's rhetoric. For example:

o The President proposed "America the Beautiful" to increase investment in parks, wildlife refuges, etc. Yet the most recent appropriations action has reduced the President's proposed initiative by $260 million.

o The president's proposals for AIRPORT INVESTMENT and modernization of AIR TRAFFIC CONTROL have been cut by almost $300 million.

o The President's requests for investment in IMMUNIZATION, HEALTHY START, INFANT MORTALITY REDUCTION, AND HEAD START have all been cut.

o The President's request for HOPE GRANTS -- to increase home- ownership for low-income people -- has been cut from $1 billion down to $361 million.

o The House has voted to cut each of the President's 10 highlighted APPLIED RESEARCH initiatives -- by a total of over half a billion dollars. The Congressional cuts include such areas of recent attention as high performance computing and transportation R&D.

It is understandable that there are differences in priorities between the Congress and the Executive. But differences such as the foregoing are particularly curious in view of recent rhetoric.

(3) HEALTH REFORM

o The President advanced his "Comprehensive Health Reform Program" on February 6, 1992. He followed this with specific legislation on Health Insurance Market Reform, Medical and Health Insurance Information, and Malpractice Reform. The Congress has failed to act on ANY comprehensive health reform plan.

(4) DEFICIT CONTROL

o By failing to act on the President's ECONOMIC GROWTH AGENDA -- or ANY effective growth agenda -- the congress has allowed the deficit to become many tens of billions higher that it would otherwise have been.

o The President has proposed the elimination OF 246 UNNECESSARY OR INEFFICIENT DOMESTIC PROGRAMS -- costing the taxpayers $5 billion per year. To date, the Congress has terminated none of these.

o This year, the President proposed to RESCIND $738 MILLION in spending on unnecessary, unjustified, or uneconomic projects and programs. The Congress approved only $10 million of the proposed cuts.

o In the area of "MANDATORY" SPENDING -- almost two-thirds of the budget, the Congress has shown a consistent lack of interest in controlling the growth of spending:

o In his first Budget, the President proposed $120 billion in (five-year) mandatory savings. The Congress enacted slightly over $1 billion.

o In the '92 Budget, the President proposed cuts of $47 billion. The Congress actually increased mandatory spending growth by over $4 billion.

o In this year's Budget, the President proposed specific mandatory savings of $68.4 billion. To date, these proposals have been ignored.

o In view of this unfortunate Congressional record, the President also proposed a new law to place an ENFORCEABLE CAP ON THE GROWTH OF MANDATORY SPENDING. As the Mid- session Review makes clear, this is necessary to balance the budget within the five-year budget period. To date, the Congress has not passed the recommended (and necessary) cap.

o In February 1989, the President first proposed LINE-ITEM VETO, ENHANCED RESCISSION, and a BALANCED BUDGET CONSTITUTIONAL AMENDMENT. The Congress has passed none of these.

THE ECONOMIC OUTLOOK

The Administration has revised only slightly its January economic projections. In the course of the Bush Presidency, Administration projections have been as close as most private forecasters in anticipating actual developments. But as I have said in every appearance before this Committee, macro-economics remains a highly fallible "science".

The first quarter of this calendar year showed real GDP growth that was substantially stronger than the Administration projected in January. The second quarter's growth has been less strong than the first. Nonetheless, the Administration projects continued modest growth. In this respect, the latest Administration projections of real growth are very close to (in fact, slightly below) the Blue Chip consensus of private forecasters.

                              REAL GDP

In the first 13 quarters of the Bush Administration, real economic growth has averaged 0.8 percent at an annual rate, and 2.5 percent cumulatively. This is not as slow a rate of growth as in the 13-quarter period of the Carter-Reagan recession -- from Q3/'79 to Q4/'82. In that recession period, real growth averaged MINUS 0.4 percent per year, with a cumulative total of MINUS 1.3 percent.

The unacceptably sluggish growth in the Bush period to date has had several causes:

(1) a persistent "CREDIT CRUNCH" that, for a period, may have overcorrected for prior problems in the financial sector;

(2) SADDAM HUSSEIN'S INVASION OF KUWAIT, which drove up oil prices and uncertainty, causing long-term interest rates to remain higher than they might otherwise have been;

(3) FEDERAL RESERVE action that has resulted in monetary growth (M2 and M3) frequently below the Fed's own target range, and that has rarely moved to the middle of the range (even as the range itself has been lowered); and

(4) from February 1989 to the present, the consistent failure of CONGRESS to enact the President's economic growth and spending control proposals (as highlighted above).

Each of the first three causes has now been responsibly addressed to a significant extent. It is the fourth -- legislative enactment of an agenda for spending control and economic growth -- that is left obviously outstanding.

In this regard it is important to make clear that legislative action on the President's comprehensive agenda is required not only to counter the recent recession -- but also to make America more productive, more competitive, more able to promote strong growth and job-creation in the future.

THE PRESIDENT'S PLAN AND THE ARKANSAS PLAN

The President's comprehensive plan for both spending control and economic growth is summarized on pages 27-29 of the MID-SESSION REVIEW. It is discussed in detail in the 400 pages that follow. THE PRESIDENT'S PLAN REMAINS THE ONLY SERIOUS AND COMPREHENSIVE PLAN THAT HAS FORMALLY BEEN INTRODUCED IN THE LEGISLATIVE PROCESS.

There is, however, another approach that has been advanced recently and that is noteworthy in this context.

It is a twenty-two page "plan" advanced by the Governor of Arkansas -- and favorably commented upon by some in the Congress. There is some irony in the reception this "plan" has received: one hates to think how it might have been ridiculed by this Committee if it had been advanced by the Administration!

Be that as it may, it is at least noteworthy that it is a "plan" without details -- that would produce neither economic growth nor spending reduction. It is comprised of three basic elements:

o A RECORD TAX INCREASE -- the largest first-year and the largest four-year tax increase in history, before even counting the substantial implied payroll tax increases -- perhaps the equivalent of over 8.5% of payroll -- necessary to finance its health and training programs;

o ZERO NET SPENDING REDUCTION -- IN FACT A SUBSTANTIAL NET SPENDING INCREASE by its own account, and an even larger increase by the type of accounting normally demanded by this Committee; and

o ZERO NET DEFICIT REDUCTION -- IN FACT, A NET DEFICIT INCREASE, with a phantom middle-class tax cut (not accounted for), a phantom national health insurance plan (not accounted for), and a new record for "magic asterisk" accounts.

On this last point, I would perhaps best cite the analysis attributed to the Democratic Chairman of the House Budget Committee: "The tough choices are still there. . . . [Gov. Clinton] doesn't frankly confront the issue of how we reduce the budget deficit. . . . I don't see how he can . . . pump that into added spending."

CONCLUSION

I am realistic enough to know that in the current partisan environment it is difficult to get fair consideration for the President's Comprehensive Plan, and difficult to get objective analysis of what competing alternatives there may be. That is a regrettable fact; because the country needs responsible action. Yet it is a fact.

But the following also are facts that will have to be attended to:

o There is a need for prompt legislative action on a comprehensive agenda for economic growth and spending control.

o The Budget will not be brought into balance without enactment of BOTH the economic growth and spending control elements of the agenda.

o Spending control cannot be achieved by focusing exclusively on discretionary spending; it must include an effective means to slow the growth of the "mandatory" programs that are currently beyond anyone's effective control, and that (with interest) account for two-thirds of the federal budget.

o If the growth of mandatory programs is not effectively capped, the political system will be forced to seek deficit reduction by eliminating valuable investments in America's future and by increasing taxes -- both of which could prove counter-productive from the standpoint of economic growth.

With these facts in mind, I would again urge enactment of:

o the President's Comprehensive Agenda for Growth;

o the President's proposed cap on the growth of mandatory spending; and

o a Balanced Budget Constitutional Amendment.

Again, I thank you for the opportunity to discuss these issues at Mid-Session, and look forward to trying to respond to your questions.

Thank you very much.