JIM LEHRER: To two key budget players now. Jack Lew heads President Clinton's Office of Management and Budget. Pete Domenici, Republican of New Mexico chairs the Senate Budget Committee. Senator, in general, what do you think of the president's proposal?
SEN. PETE DOMENICI, Chairman, Budget Committee: Well, first, I want to get a commitment from you. When we get our budget ready, we want to come back and explain ours to you for the American people.
JIM LEHRER: You got it. That's a deal.
SEN. PETE DOMENICI: Okay. It's pretty difficult to be talking about both, although I'll lace my conversations a little bit.
JIM LEHRER: That's a deal, Senator, you got it.
SEN. PETE DOMENICI: Thank you.
JIM LEHRER: Yes, sir.
SEN. PETE DOMENICI: Let me first say, you know, the president and those who helped him put this budget together are very smart. Jack Lew is a wonderful man, besides being smart, but essentially it's almost as if they have gone to the extreme to see to it that we don't cut American taxpayers' taxes but rather that we continue this spiral of little tiny targeted tax cuts and then that we invent some new program for savings accounts where we match money with people when as a matter of fact the president has set the stage for a truly historic battle. Thirty Eight percent of the surplus is not needed for Social Security and he said that because he said 62 percent is needed.
We ought to save that 62 percent and together we ought to figure a way to tie it up where it can't be spent. But to then talk about taking more of that surplus and putting it into some kind of lock box when the president stands before us and has submitted a budget that increases spending all over the place and even recommends giant new entitlement programs, what are they going to be paid out of?
They're going to be paid out of that 38 percent, because if you spent them, they're not available for tax cuts. And I look at this as a typical Democrat versus Republican argument. We think that 38 percent is overpayment by the American people. We'd reduce the debt by using the Social Security funds the way they ought to be, but the 38 percent, we think the average working American and taxpayer should get back what he overpaid.
And that means that they should get across-the-board cuts and it can actually exceed 10 percent over a period of time, which I think would save us from a growing government even though the president said two years ago "we've seen the end of big government." We've kind of seen it reinvented in the president's budget. Now, frankly, it's almost deja vu, it's much like last year's.
All these programs are going to be paid for with increased taxes and with increased user fees, none of which are going to be adopted. And so essentially, I think we're going to have a really nice argument about should the taxpayers get the money back -- or should we play like we're saving it knowing it's going to be spent ultimately we don't give it back to them?
JIM LEHRER: Jack Lew, first of all, do you agree with the senator's definition of what the problem here, what the argument is going to be about, that 38 percent, and whether or not it should be returned to the people as a tax cut or used the way the president and you propose?
JACK LEW, Office of Management and Budget Director: Well, I would have put it a little bit differently, Jim. I think I would agree the first question is do we set aside 62 percent for Social Security and put that money back into the Social Security trust fund? If we've agreed on that, we have a good beginning.
The president's proposal goes beyond that. The next 15 percent would be dedicated to Medicare, and the important thing about Social Security and Medicare is first, it's keeping commitments we've already made, paying obligations we already have.
We think that's the right thing to do been before we make new obligations - whether it's on the spending side or on the tax side. But, more importantly, the payments to Social Security and to Medicare are investing money in the trust funds, which will reduce our need to borrow. Reducing the public debt is the key to the virtual cycle that will keep the deficits from returning, will keep surpluses growing and keep the economy growing.
The senator has described an alternative plan where that 15 percent -- instead of going for Medicare -- would go for a tax cut. And I would suggest respectfully that that would not have the same effect on the economy, it would not have a good effect on the economy. Reducing debt is increasing national savings, as Chairman Greenspan testified last week before Senator Domenici's committee. That's the best thing to do with the surplus for the economy.
JIM LEHRER: But you see that as the alternative, Mr. Lew? It's not necessarily tax cuts or spending -- it's tax cuts or putting the money and reducing the Medicare problem, right?
JACK LEW: Certainly that's the next step. After that, the president does have a tax proposal in his surplus allocation. He's proposed U.S.A. accounts and Senator Domenici suggests the preferable alternative is an across-the-board tax cut. We disagree, but that's a kind of disagreement that really is the basis for a good debate. We think the right way to give tax relief is to encourage savings, to encourage people to prepare for their own retirement, to be able to supplement Social Security and their pensions with their own savings.
JIM LEHRER: All right. Let's get back to the senator on that, just that general point that there are two ways to skin the cat, you want to do it one way, he wants to do it another but it's still skinning the same cat.
SEN. PETE DOMENICI: Let me say to my good friend, Jack Lew, if I had the least bit of confidence that this White House and White Houses to follow would not spend this so-called non-Social Security surplus or that Congress would not spend it, I would be sounding that horn that we can put it on the deficit and that would be a pretty good way to use it. I don't believe that for a minute and - I don't -
JIM LEHRER: Why not? Why don't you believe that, Senator?
SEN. PETE DOMENICI: Because history reveals to the contrary. When you have a surplus around and you have designated it as a surplus, you obviously spend it. And history would reveal we have much more of a propensity to spend than to cut programs. We have much more of a propensity on the tax side to increase taxes here and there, rather than to cut taxes.
JIM LEHRER: Mr. Lew, is he right about that?
JACK LEW: We agree with the history, but we've proposed something that's different from the history. I think that if the money is put into the Social Security trust fund and it's set aside as assets to pay benefits now owed, I would dare almost any future political party from proposing to take it away. That's a very, very strong promise. It's a promise that couldn't be broken.
SEN. PETE DOMENICI: We're not disagreeing. But, look, let's make sure. We're saying reduce the debt by putting what belongs to Social Security. You've come up with some hokey-pokey idea that we're going to put more than that somewhere, and we're going to use it for Medicare and yet reduce the deficit. It's not understandable.
JACK LEW: By the way we figure our overall surplus, we've had a surplus for the last number of years which has gone to tax cuts, it's gone to spending. We've not put any of the surplus into Social Security. Social Security builds up assets and then those assets are repaid in the future. We're saying add to the assets. Put it into Social Security the way you would put it into either spending or tax cut.
SEN. PETE DOMENICI: Let me add something on Medicare because it deserves saying. There's a commission studying; they're going to recommend how to preserve it for a long period of time. We ought to wait for them. They're bipartisan. The president's budget doesn't account for this idea of let's increase the benefits by paying for prescription drugs. It's not even mentioned. And if you spend it there, it's out of the general fund for the first time in American history using general taxpayers' money for that entitlement program, which has not been part of the way we think it should be paid for.
JIM LEHRER: Mr. Lew, let me go back to one of the senator's general points at the beginning, which was that this budget is actually a return to big government, that the president declared the era of big government was over two years ago and this is right back in the old era. How do you respond to that?
JACK LEW: Well, I would respond with several points. First, the government as a percentage of the economy has been reduced every year that President Clinton has been in office, and that would be true with this budget as well. It would decline from last year, as it did from each previous year, as it did from the two previous administrations. Secondly, the number of civilian workers in the federal government has declined by hundreds of thousands. We have a smaller, leaner federal government. There are many challenges that the federal government should undertake and I think there's bipartisan consensus on many of these, certainly in the area of national defense. I think we have the makings of a good bipartisan discussion on what the additional requirements are.
JIM LEHRER: Senator, do you dispute those basic points that the government actually has been shrinking in the last few years?
SEN. PETE DOMENICI: Look, you know, the economy grew so much that if you use percentage of GDP, you get a bigger government, and the percentage doesn't necessarily grow. Most of the personnel cuts, I think 92 percent, have come because we've reduced the military of the United States, not agencies and departments substantially. In fact, some departments have gone up. But the point of it all is why do we need to take the 38 percent that is excess taxes to the United States and say we're trying to spend that for something other than tax cuts and at the same time say we're in some way preserving Social Security when it has nothing to do with Social Security.
JIM LEHRER: Mr. Lew, the basic philosophical difference, is there a basic philosophical difference here that is going to be argued out over the next several weeks, maybe months, that the Republicans as represented by Senator Domenici want to take a portion of that 38 percent, which I think it's 10 percent is what you're proposal is, is it not Senator Domenici?
SEN. PETE DOMENICI: No. But you shouldn't confuse that 10 (percent) with 38 (percent).
JIM LEHRER: Okay. Right, but some part of that.
SEN. PETE DOMENICI: Yes.
JIM LEHRER: And you and the president, Mr. Lew, are not willing to do that. Is that -
JACK LEW: I think there is a philosophical difference. We think keeping our commitments to Medicare does come first and we would put 15 percent there. I think we have to be honest about the needs that are out there in the area of defense and the area of education. We are going to have to find some more resources to meet those needs. And we have proposed a tax cut. The U.S.A. accounts are a tax cut. So we have proposed that 12 percent of the surplus go to a tax cut, and I do think we will have a good principle disagreement on the nature of that tax cut, and we look forward to that.
SEN. PETE DOMENICI: We'll have one other big one. We're going to propose a very large increase in education, kind of a sea change, maybe as much as a 40 percent increase, but we're going to do that not through the Department of Education but direct to the classrooms and school boards across America. We're going to do that by cutting other programs and restraining programs and saying our first priority is a real addition to education.
JIM LEHRER: So there's no disagreement, Senator Domenici, between you and the president -- between Republicans and Democrats over the need to put federal money into education?
SEN. PETE DOMENICI: Well, from my standpoint there may be with some Republicans. But if a different kind of education assistance -- we're going to get a lot of support from senators and I think before we're finished, the people are going to support it because we're not any longer talking about little targeted programs where we interfere and almost tell the schools what to do. We're saying, "you know what's best, you don't have enough money, we're going to give you this for five principle functions within your school and we're going to do it for 10 years and see if we don't improve education." That's a different philosophy on how to help education.
JIM LEHRER: Is that a different philosophy to you, Mr. Lew?
JACK LEW: Well, I haven't seen the proposal and I would certainly want to wait to see it. But I think that if we share the goal of increasing the resources for reducing class sizes, if we share the goal of increasing the resources available for school construction, we may well be able to find some things here that we do agree on. I hope so. The president's goal, our goal is that we have a bipartisan process to deal with the problem of Social Security and then to have a discussion about our priorities so that we use the surplus to pay for first things first. We've put our priorities forward. We hope there's bipartisan consensus that those are the right priorities and we look forward to joining this debate.
JIM LEHRER: All right. And -- Senator Domenici -- we're going to leave it there, but Senator Domenici you have my word, when you have your proposal together, we'll get Mr. Lew back and let him react to yours.
SEN. PETE DOMENICI: Ours will be much simpler.
JACK LEW: I look forward to doing that.
JIM LEHRER: All right. That's a deal, gentlemen, thank you both.