Debt Ceiling Limit Issue, 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 0-16-053603-0 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES JAMES A. LEACH, Iowa, Chairman BILL McCOLLUM, Florida, Vice Chairman MARGE ROUKEMA, New Jersey HENRY B. GONZALEZ, Texas DOUG BEREUTER, Nebraska JOHN J. LAFALCE, New York TOBY ROTH, Wisconsin BRUCE F. VENTO, Minnesota RICHARD H. BAKER, Louisiana CHARLES E. SCHUMER, New York RICK LAZIO, New York BARNEY FRANK, Massachusetts SPENCER BACHUS, Alabama PAUL E. KANJORSKI, Pennsylvania MICHAEL CASTLE, Delaware JOSEPH P. KENNEDY II, Massachusetts PETER KING, New York FLOYD H. FLAKE, New York TOM CAMPBELL, California MAXINE WATERS, California EDWARD ROYCE, California BILL ORTON, Utah FRANK D. LUCAS, Oklahoma CAROLYN B. MALONEY, New York JERRY WELLER, Illinois LUIS V. GUTIERREZ, Illinois J.D. HAYWORTH, Arizona LUCILLE ROYBAL-ALLARD, California JACK METCALF, Washington THOMAS M. BARRETT, Wisconsin SONNY BONO, California NYDIA M. VELAZQUEZ, New York ROBERT NEY, Ohio ALBERT R. WYNN, Maryland ROBERT L. EHRLICH, Maryland CLEO FIELDS, Louisiana BOB BARR, Georgia MELVIN WATT, North Carolina DICK CHRYSLER, Michigan MAURICE HINCHEY, New York FRANK CREMEANS, Ohio GARY ACKERMAN, New York JON FOX, Pennsylvania KEN BENTSEN, Texas FREDERICK HEINEMAN, North Carolina JESSE JACKSON, JR, Illinois STEVE STOCKMAN, Texas CYNTHIA McKINNEY, Georgia FRANK LoBIONDO, New Jersey J.C. WATTS, Oklahoma BERNARD SANDERS, Vermont SUE W. KELLY, New York (II) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis CONTENTS Page Hearing held on: February 8, 1996 1 Appendix: February 8, 1996 105 WITNESSES THURSDAY, FEBRUARY 8, 1996 Kaqjorski, Hon. Paul E., a Representative in Congress from the State of Pennsylvania 22 Kennedy, Hon. Joseph P., a Representative in Congress from the State of Massachusetts 28 Mica, Hon. John L., a Representative in Congress from the State of Florida .... 25 Saxton, Hon. Jim, a Representative in Congress from the State of New Jersey 19 Levy, Mickey D., Chief Economist, NationsBanc Capital Markets, Inc 84 Penner, Rudolph G., Managing Director, Barents Group, KPMG Peat Marwick 82 Poole, William, Herbert H. Goldberger Professor of Economics, Brown Univer- sity 87 Rubin, Hon. Robert E., Secretary of the Treasury, U.S. Department of the Treasury 42 APPENDIX Prepared statements: Leach, Hon. James A 106 Kaqjoroki, Hon. Paul E 114 Kennedy, Hon. Joseph P., II 128 LaFalce, Hon. John J 131 Mica, Hon. John L 175 Saxton, Hon. Jim 133 Levy, Mickey D 194 Penner, Rudolph G 183 Poole, William 188 Rubin, Hon. Robert E 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 226 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 exten- sion (signed by 200 Members) 117 Mehle, Hon. Roger W., Executive Director, Federal Retirement Thrift Invest- ment Board: Prepared statement with letter of transmittal dated February 14, 1996 .... 212 Letter dated January 24, 1996, to Hon. Newt Gingrich re preserving the existing statutory "make-whole" protection for the Government Se- curities Investment (G) Fund of the TSP 217 Letter dated November 8, 1995, to Hon. John L. Mica re H J». 2586 219 (III) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis IV Page Mehle, Hon. Roger W., Executive Director, Federal Retirement Thrift Invest- ment Board—Continued Letter dated December 11, 1995, to Hon. Bill Archer re H.R. 2621 224 Saxton, Hon. Jim: Joint Economic Committee, Dear Republican Colleague letter dated De- cember 6, 1995 enclosing an article entitled "Humbled prophet" from The Economist, November 18, 1995 144 Joint Economic Committee, Economic Update, Update on JEC Investiga- tion of Treasury Debt Limit Documents," January 1996 146 Pre88 Release, Joint Economic Committee, January 19, 1996, "Saxton Report Calls For Full Disclosure of Administration Debt Limit Docu- ments" 147 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 148 Letter dated January 17, 1996, from Hon. Jim Saxton to Hon. Robert E. Rubin following up on Nov. 17, 1995 letter 149 Press Release, Joint Economic Committee, Internal Treasury Documents Reveal Administration Debt Limit Charade," Februaiy 1, 1996 (with attachments) 152 Department of the Treasury memo dated June 27, 1995 to Secretary Rubin from Darcy Bradbury, Deputy Assistant Secretary re "Debt Limit" 156 Department of the Treasury memo dated November 8, 1995 to Secretaiy Rubin from Darcy Bradbury, re "Debt Limit Contingency Plans* 166 Weidenbaum, Murray, prepared statement 205 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 225 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 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 [chair- man 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 re- ceive recommendations on appropriate courses of congressional ac- tion 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 ne- gotiations, 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 no- tion of a stable government. Given the difficulties in reaching polit- ical accommodations in an increasingly diverse and polarizeapoliti- cal 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 de- fault, 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 in- creased 17 times by Congress. Only seven times has this been ac- complished through a clean bill and most of these have been short- term measures tied loosely to resolution of imyor budget issues. (l) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 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 Adminis- tration in Congress' principal priority: greater percentage increases in domestic spending than in the defense budget. Indeed, the rea- son 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 Administra- tion, while tax revenues basically remained level at 19.25 to 19.5 percent. Hence, Republicans believe that if the country is to reach a bal- anced 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 inflation- adjusted 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 ceil- ing. 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 as- sembled, "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.