March 8, 1979
Page 4443
HELLER-GREENSPAN TESTIMONY
Mr. MUSKIE. Mr. President, on Monday, March 5, the Budget Committee heard testimony from a distinguished panel of economists regarding statutory and constitutional restraints on Federal spending and budgeting.
Dr. Walter Heller and Dr. Alan Greenspan speak from widely different points of view. While each has served as chairman of the Council of Economic Advisers, Dr. Heller served Presidents Kennedy and Johnson while Dr. Greenspan served Presidents Nixon and Ford.
Despite many differences and conflicting opinions, both men agree that a constitutional amendment to balance the Federal budget would be a very serious mistake. Their testimony is persuasive. Moreover, their additional views on the character of our current economic difficulties and on various approaches toward solving them are also particularly thought-provoking and instructive.
I recommend that their views be given a careful reading by all who are concerned about the need for taking rational and realistic approaches to fiscal policy.
Mr. President, I ask that the statements of Dr. Heller and Dr. Greenspan be printed in the RECORD.
The statements follow:
STATEMENT BY WALTER W. HELLER
I appreciate this opportunity to appear before the Senate Budget Committee on the hotly debated topic of mandatory budget-balancing and spending limits constitutional or otherwise.
The territory that Chairman Muskie has asked us to roam is very wide and deep, comprising budget-balancing, spending-limit, and tax-cutting proposals, both constitutional and legislative. To make this Herculean task more manageable, let me start with the proposal that seems to have caught the popular imagination — a constitutional amendment mandating a balanced budget and is claimed to have the support of 26 to 28 state legislatures.
I am not unaware that leading members of this Committee have forcefully and cogently attacked the proposal to enshrine a rigidly balanced budget in the Constitution. Senator Muskie has called it "unworkable, counterproductive, and even irresponsible." Senator Bellmon has warned Governors not to "go overboard and adopt a mechanistic process that will make it difficult to deal with changing circumstances." And they have been joined by other Congressional leaders like Senator Kennedy (Chairman of the Senate Judiciary Committee), Representative Rodino (Chairman of the House Judiciary Committee), and House Minority Leader John Rhodes (who has expressed "grave reservations" about a balanced budget amendment). So it might appear that an attack on the balanced budget proposal is a bit like flaying a dead or at least dying horse.
But the Gallup Poll, the legislators of some 28 states, and the half dozen members of this Committee who are cosponsors of bills to mandate a balanced budget in one form or another all suggest that the movement is by no means on its last legs.
In an era of dissatisfaction with big government, high taxes, and stubborn inflation, it is not too surprising that the Gallup Poll shows a six-to-one majority favoring a balanced budget amendment. And it must be a strong temptation for an elected official — if he or she wants to be reelected — to vote for such a proposal.
But this is one case where the majority is simply wrong — not in seeking some curbs on government and inflation, for that is their inherent right in a democracy — but in seeking to do so by putting the federal government in a fiscal straitjacket. In other words this is a case where responsible political leadership consists in leading voters out of the valley of error and supporting better and sounder ways to achieve their goals.
Since the major thrust for the balanced budget amendment (and some of its half-siblings) comes from a misinformed public, it may be worth while to examine some of the fallacies that seem to underlie public thinking on this subject.
FALLACY NO. ONE
"Individuals, families, and households have to run a balanced budget — so why shouldn't Uncle Sam?" People fail to realize that typically when they buy a car or a boat, or most obviously, a house, they are doing anything but running a balanced budget. At times, they run deficits — often huge deficits — relative to current income. So they are asking Uncle Sam to adhere to a rigid and austere standard that they don't observe themselves.
Prudent budgeting and balanced budgets simply aren't the same thing. Often, a rigidly balanced budget is pure fiscal imprudence. Unlike the household, the federal government has the specific statutory responsibility to serve as a balance wheel for the economy, using the federal budget not simply as a means of financing government activities but as a means of overcoming unemployment and recessions on one hand and an overheated economy on the other. More often than not, that calls for unbalanced budgets.
FALLACY NO. TWO
Closely related to the first fallacy is the second one that runs something like this: "We consumers (homeowners, corporations) pay back our debts, but Uncle Sam just keeps piling up his debts without end."
The surprising — to some even jolting — truth is that in the period since World War II, the federal debt has been the slowest growing major form of debt. As the following table shows, the federal debt today is less than three times the size it was in 1950, while consumer installment debt is nearly fourteen times, mortgage debt sixteen times, corporate debt eleven times, and state-local debt thirteen times its 1950 level.
Even with the unprecedented run-up of federal debt in the face of two recessions in the 1970's, the doubling of that debt since 1970 is just about equaled by the rise of corporate and state-local debt, while consumers and homeowners have substantially outdistanced Uncle Sam in expanding their debt.
None of this is meant to justify the present levels of federal deficits or debts nor to suggest that the federal debt poses no problems. But the figures do serve to put the federal debt in a perspective that is often misunderstood.
FALLACY NO. THREE
"State and local governments have to live by the balanced budget rule, so why shouldn't Uncle Sam?"
True, states and localities have to balance their budgets annually, except for capital outlays, for which they can borrow. But federal budgetary accounting throws current and capital outlays (as it should) into the same pot. So balancing the federal budget means matching total outlays with current tax revenues, which is quite different from the balanced budget concept for states and localities.
Not only is the state-federal budget analogy off base, but states would be the first, or at least one of the first, to feel the sting of a balanced budget mandate in the Federal Constitution. There is already serious talk in Congress of cutting revenue sharing and other grants to state and local governments as the most natural targets of budget austerity, especially if the states force a year-in-year-out balanced budget on the federal government.
Let me underscore another decisive difference between state and federal budget impacts: a state or local budget can be balanced by tax hikes or spending cuts without jarring the whole U.S. economy. The federal budget cannot. If the national economy starts to slide, joblessness rises, income and profits fall, and the federal budget automatically goes into deficit as revenues shrink and spending rises. Try to balance it by boosting taxes or forcing cuts in spending, and the result will inevitably be to draw that much more purchasing power out of an already soft and sluggish economy.
Trying to balance the budget under these circumstances would send the economy into a deeper tailspin, thereby throwing more people out of work, further cutting tax revenues and boosting unemployment compensation, food stamps, and similar entitlement expenditures, thus throwing the budget even more out of whack. A dog chasing its own tail comes to mind.
FALLACY NO. FOUR
"But unlike private and state-local deficit financing, federal deficits are a major, perhaps even the major, source of inflation." Both analysis and evidence fail to support this proposition.
Except where federal deficits pump more purchasing power into an already prosperous or overheated economy, they simply are not inflationary. When the economy is slack or in a recession, when there are idle workers and idle plants and machinery to be activated by additional demand for goods and services, the deficit will help the economy get back on its feet. In those cases, tax cuts or spending hikes that enlarge the deficit serve to overcome the waste of human and material resources associated with economic slack or recession.
In other words, there are both destructive federal deficits and constructive deficits, depending on the state of the private economy. What we should seek is fiscal discipline — the avoidance of waste, inefficiency, boondoggling, and unnecessary government programs — but not at the cost of strangling the federal government in its attempts to serve as a balance wheel for the national economy and an instrument for avoiding that greatest of wastes, namely, the idling of millions of human beings and machines and factories in recession and slack.
Even a cursory inspection of the data on deficits and inflation shows little relation between the two:
Reaching back to 1919-20, we note that rapid inflation was associated with a large surplus.
Then Milton Friedman also reminds us that "one of the most extreme deflations we had in history — decline in prices — was in the 1931-33 period. In those years, the federal government was running a deficit."
From 1959 to 1965, federal deficits were the order of the day, yet price inflation was little more than 1 percent a year.
In the face of huge deficits in 1974-76, price inflation dropped from over 12 percent to less than 6 percent.
FALLACY NO. FIVE
"Well, even if deficits aren't as bad as we thought the federal budget is out of control, and the only way to get it under control is to slap some kind of a Constitutional lid on it."
Once again, the facts run to the contrary:
As a proportion of the Gross National Product, the budget is being reduced from 22.6% in 1976 to 21.2% in 1980.
As against 12.2% annual increases in soending for 1973-78, the rise from 1979 to 1980 will be only 7.7%.
According to the Congressional Budget Office staff, President Carter's proposed $531 billion budget for 1980 falls $20 billion short of the amount that it would cost simply to maintain current services under current law.
The trend growth in revenues from 1978 to 1980 will be 12%, well ahead of the trend growth of 8½ % in expenditures. (These are the comparative growth rates in an economy that is growing at a steady trend rate.)
Quite apart from the numbers, the popular clamor for "getting the budget under control" seems to ignore two important facts:
For the past four years, the Congress has been operating under a new budget procedure that has brought vastly more discipline and responsibility into the budget process. In other words, the mechanism for getting the budget under control is already in place and is working.
Both the White House and the Congress have heard and heeded the message implicit in Proposition 13, calls for Constitutional budget limits, and the like. Whether one likes it or not, budget austerity is the political order of the day.
FALLACY NO. SIX
"The balanced budget mandate is a simple and workable way to force the White House and Congress at long last to match spending and tax revenues."
The simple truth is that this simplistic approach is beset with simply prohibitive difficulties of definition, administration, evasion, and incentives for bad government practice:
A mandate to balance taxes and expenditures first has to define them. Does spending include outlays of social security and highway trust funds? (It didn't until 1968.) Does it include lending activities? If not, moving things from expenditures into loan programs would be an inviting loophole. Imagine the Founding Fathers two centuries ago trying to draw a dividing line between "on-budget" and "off-budget" expenditures. No less an authority then House Minority Leader Rhodes has noted that "it would be so easy to end-run it."
Administering the mandate would be a nightmare. In January each year, the President submits a budget for a fiscal year that ends eighteen months later. Given the unexpected twists and turns of the economy, revenues may well fall below the forecast path. Imagine the scramble to adjust and readjust the budget as revenues misbehaved or unexpected shifts occurred in the costs of farm programs, Medicare, costs-of-living adjustments in social security benefits, and so on.
It does not take too much imagination to foresee Congress, caught in the balanced budget vice, shoving some expenditures off into the private sector (e.g., by requiring private industry to support laid-off workers); or onto state-local governments by mandating outlays on Medicaid, pollution control, and so on, without picking up the tab, or onto consumers by relying more on higher farm price supports and acreage set-asides and less on federal deficiency payments.
So many exceptions, exclusions, and special emergency provisions would be necessary to make the amendment workable that it would no longer be meaningful. The drafters of the amendment would find that they were writing a prescription for Congressional action, not a Constitutional mandate. A meaningful amendment would not be workable, and a workable amendment would not be meaningful.
Even if some magic formula could be found to hold the government's nose to the balanced budget grindstone, it would be an affront to responsible democratic government to do so. The essence of that government is to adapt economic, social, and other policies to the changing needs of the times and the changing wills of the majority. It is the job of the Constitution to protect basic human rights and define the framework of our self-governance. Taking the very stuff of democratic self-determination out of the hands of legislative bodies and freezing them into the Constitution would not only hobble our ability to govern ourselves but dilute and cheapen the fundamental law of the land.
That consideration applies also to other budget limits that have been proposed. Take for example the proposal by the Committee on National Tax Limitation (and Milton Friedman) to limit federal spending to a percentage of the immediate past Gross National Product, adjusted for inflation. Merely to put the definition of the limit into the Constitution — let alone the provisions for enforcement through the courts — has spawned draft Constitutional language that makes one despair for this Constitution that John Marshall told us was "intended to endure for ages to come."
The Friedman proposal is of the very stuff of which statutory law is made — a cutting of the budget cloth to suit the times — moving one way when an explosion of aspirations, school-age population, and public needs callsfor an expansion of public services as in the 1960's and moving another way when the pendulum swings toward government austerity as in the late 1970's. (One need not even invoke the technical objections that GNP for any given period is subject to frequent and prolonged revisions and that tying spending to GNP would invite political intrusion into the definition and measurement process.)
Suppose we remove the Constitutional constraint and shift the mandate from annual balance to something approximating balance over the business cycle. That is the underlying philosophy of a proposal by Senator Proxmire, cosponsored by several members of this Senate Budget Committee, to enact a law requiring the President to bring to Congress a balanced budget whenever the real rate of economic growth is 3% or more. A statute is better than a Constitutional amendment, and requiring a balanced budget only when the economy is growing at 3% or more is better than a balanced budget requirement through thick and thin. But it is hard to say more than that on behalf of the proposal.
Suppose that the economy is growing at 3%, but is running about 10% below its potential: would one really want a rigid balanced budget requirement under those circumstances? In effect, it would say that fiscal policy should be restrictive whenever the economy is moving up at a rate of 3% or better, no matter how far below par its level of operation might be. Fiscal and monetary policy have to take account not only of the direction of the economy but its level.
And as to Senator Proxmire's call for a proposal that "will at least provide us with a balanced budget over the cycle," I would agree with the statement of the London Economist some 30 years ago. In the 1940's when the proposal to balance the budget over the business cycle (presumed to average five years), was gaining a lot of attention, the Economist noted that "there is no greater sanctity in a quinquennium than in the time it takes the Earth to revolve around the Sun." That statement is no less true today than it was 30 years ago. To define the "business cycle," identify its various phases, and force federal spending into equality with tax revenues over that cycle would provide a bit more flexibility than an annually balanced budget rule but might well put unbearable and perverse pressures on the budgetary process and economic policy as the cycle neared its stated end.
Time and space do not permit assessment of the many other proposals that now dot the budgetary landscape. But I should like to comment quickly on two of them:
One proposal would embed in the Constitution a provision that all "money bills" — that is, all those having to do with budget authorizations, appropriations, outlays, off-budget credits, and so on — would require a two-thirds vote by both Houses of Congress. Even leaving aside the problems of definition (and possible end runs via tax preferences), one wonders how this can be reconciled with the basic principle of majority rule that is so fundamental to American democracy. To give one-third of either House a veto power over all government programs and appropriations is to redefine the whole American concept of the "rule of the people."
Another approach to the budget problem has been suggested by those who would have the federal government set up a capital budget permitting debt financing of capital expenditures. While originally attracted by this idea some thirty years ago, I have long since seen the error of my ways. I agree entirely with the President's Commission on Budget Concepts, which stated in its October 1967 Report (page 33) that there is "little merit in proposals to exclude outlays for capital goods from the total of budget expenditures that is used to compute the budget surplus or deficit." It strongly recommended against such a budget on grounds that it would lead to inappropriate fiscal policy, temptations to stretch the capital budget rules to include current expenditures, and a tilting of Congressional decisions toward debt-financed capital outlays and against tax-financed current outlays. Beyond this, there would be monumental problems of deciding what is a true capital expenditure.
Let me, in closing, come back to the public pressure and clamor to do something to cut back spending, taxes, waste, and inflation. In the face of this irresistible force, the federal budget cannot be an immovable object. Wrong headed as the move for a rigidly balanced budget may be, it reflects a mood that demands a response.
Part of that response has already been forthcoming: both in the Congressional process and in the growing move toward budgetary pruning and restraint, one sees that response. One is even entitled to ask whether it may be pushed too far. But given that the Constitutional approach is unwise, unworkable, and unworthy of democratic self-government, one hopes that Congress will work out a statutory solution that will be responsive to the public will without imposing destructive shackles on itself.
EXCERPTS OF THE TESTIMONY OF ALAN GREENSPAN
It is a pleasure to appear before this Committee to testify on proposals to mandate fiscal restraint, either legislatively, or in its most dramatic form, through a Constitutional amendment.
Most economists, myself included, do not favor such an amendment. However, it would be short sighted of the Congress not to recognize that, while the growing pressures for such an amendment may be mistaken in form, they are a reflection of the increasing concern of the American people that the U.S. Congress cannot come to grips with the problem of chronic federal budget deficits and the inflationary pressures they support. The advocacy for a Constitutional amendment, I believe, is largely symbolic. It is a proxy to do something on the fiscal front.
It would accordingly be inappropriate for the Congress to respond narrowly with a Constitutional amendment mandating a balanced budget. Such an amendment, should it come to pass, would, in fact, not achieve the very purposes which those advocating it desire. It, in itself, will not prevent the growth in government and leaves open and, in fact, creates, the likelihood that budget balancing would be achieved more through increasing taxation, than through curbing expenditures.
Moreover, the Congress cannot readily control the actual budget deficit in the short run — say, a year. Except for relatively small parts of the budget, the levels of expenditures in the short run are determined either by entitlement programs or previously committed funds for which scheduled payments to private contractors are relatively fixed. Hence, the level of outlays in the short run is, to a substantial extent, outside the realm of executive or Congressional discretion.
Similarly, the Congress sets a tax rate structure which means that the level of federal receipts largely becomes a function of the level of taxable incomes generated. Notwithstanding those who believe that the federal government can fine tune the economy, taxable income levels, at least in the short run, remain outside the discretion of government.
Finally, even where considerable discretion does exist, outlays often are unpredictable; the surprising outlay shortfalls in recent years being a clear case in point.
The fact that there are technical difficulties in achieving budget balance or expenditure restraint in the short run makes it all the more imperative that we come to grips with the underlying long term rate of growth in federal outlays. Unrestrained, federal outlay growth will soon run ahead of our tax raising capacity. It is becoming increasingly evident that we must create a far more effective mechanism to restrain outlay expansion than we have constructed to date.
The basic problem is that, while restraint in total outlays is supported by virtually everybody, when it comes to a specific expenditure proposal, the short term benefits to a specific constituency tend to override the long term costs to the nation as a whole. The current services budget estimates for future years invariably indicate that expenditure growth will slow rather markedly.But this is partly illusory, since there is an implicit assumption that the Congress will be on vacation fifty-two weeks a year and will add no new spending to the Budget. We often forget that there is a special type of uncontrollable spending which is built into our political system.
It derives from the fact that the Congress meets for extended periods each year and that most bills on which committees hold hearings have a significant price tab on them. It is rare that a Congressional committee will meet in extended session on an inconsequential budgetary matter unless it has wide political or media interest. One cannot tell in advance which particular bills will pass or which particular expenditures will be authorized. However, we would not be terribly far off if we specified a certain aggregate level of newly authorized outlays per day of Congressional session. This, in a certain sense, is as much an uncontrollable add-on as previously mandated outlays.
It appears, therefore, that the only way in which we can permanently curb a rate of growth in federal outlays which outruns the revenue raising capacity of the economy is to impose some form of restraint on outlays which cannot be by-passed by simple majority votes. This would require a Constitutional amendment. I endorse this with great reluctance. Constitutional amendments should not have to deal with technical problems such as those which now confront us on the budget. However, given our institutional structure, I see little hope of achieving the type of restraint that our economy requires other than through the Constitution.
While the Constitutional amendment proposals which endeavor to limit expenditures, rather than mandate a balanced budget, skirt some of the obvious problems of a balanced budget amendment, they, too, have a significant problem associated with them: namely, the criteria against which budget restraint is measured. Any attempt to employ, for example, the gross national product as a measure to guide expenditure growth confronts the obvious problem that the gross national product is continuously undergoing redefinition with respect to inclusion and coverage.
Moreover, estimates, especially preliminary estimates, are subject to revision of as much as a full percentage point. (For a $500 billion budget tied to GNP, this implies a potential shift in the ceiling of $10 billion.) Remember. a Constitutional amendment must be as meaningful fifty years from now as today. Various statistical measures such as gross national product or the consumer price index are not likely to live in perpetuity in their current form. One may, of course, by-pass this technical problem by merely creating a generic basis for expenditure restraint in the Constitution and have Congressional enabling legislation specify the elements which would guide that restraint.
I find this solution, however, complex and unsatisfactory. We need something simpler. We should probably resolve the outlay growth problem by requiring that all budget authority, appropriation, expenditure and credit guarantee bills be passed by a two-thirds, rather than a simple, majority of both houses. A Presidential veto would merely require that the two-thirds vote be reaffirmed. Such a procedure would avoid many of the problems associated with defining an appropriate Constitutional amendment. It would not, however, resolve the problem of defining what, in fact, constitutes expenditures.
I have no doubt that if we restrain what is covered under the current definition of outlay or expenditure by some legal prohibition, the Congress, in its wisdom, will find alternate means to accomplish what it ordinarily would do on the expenditure side. However, I nonetheless believe that such means are limited and that while we can never expect a Constitutional amendment requiring a two-thirds vote on money bills to be fully effective, it clearly would have a major impact on restraining the growth of the federal sector.
Most of the areas where the Congress is apt to create expenditure bypassing devices are on the tax side, through credits. I do not consider this totally undesirable. We will need periodic cuts in tax rates, and any restraint on expenditure levels will probably exert additional pressure on the Congress to cut taxes in order to avoid excessive budget surpluses.
Pending the passage of a Constitutional amendment requiring a two-thirds vote on money bills, we might wisely amend the Budget Act of 1974 in a similar fashion. While the two-thirds vote requirement could be rescinded by a majority of the Congress (with the acquiescence of the President), individual Congressmen might well be persuaded not to vote for such a rescission since it might stamp them as less than fiscally responsible. So there is a possibility that a legislative two-thirds requirement could indeed hold. I doubt, however, that one could rely on that for an overly extended period. A Constitutional amendment mandating such a requirement appears to be the only viable long term solution.
Restraining budget outlays, however, will not be enough, in itself, if our underlying goal is to defuse inflationary pressures. We must focus not only on on-budget outlays and financing requirements, but on all of the direct and indirect preemptions of private savings embodied in federal policy as well. The inflationary impact of the federal government is only partly related to the on-budget deficit financing requirements and I believe we take far too simplistic a view by employing the deficit as our sole measure of fiscal policy.
Off-budget borrowing has risen sharply in recent years. So have mandated capital investments by business (pollution, safety equipment, etc.) which most be financed; and matching grants, which have induced increased spending and borrowing by state and local governments. These demands have added heavily to capital market pressures, but in total have been small compared with the extraordinary expansion in mortgage credit.
Prior to the 1970's an increase in mortgage credit on one- to four-family homes rarely exceeded $15 billion per year. During the past year, the increase has approached $100 billion. Changes in institutional structures and subsidy programs sponsored by the federal government, from mortgage backed bonds to the newest six-month certificates tied to the Treasury bill rate, have been responsible for this explosion in mortgage credit.
As a result, we have arrived at a point where we no longer have the luxury of employing sophisticated mixes of fiscal and monetary policy. Monetary policy has become increasingly hostage to fiscal policy in recent years. Until we reduce the aggregate drains on the credit markets created by federal policy, direct and indirect, the Federal Reserve will have little leeway to pursue a discretionary monetary policy. We have largely run out of options which enable us to calibrate various degrees of monetary restraint and budgetary stimulus.
Unless we apply strong restraining policies, both on the fiscal and the monetary side, we risk being unable to subdue, and ultimately defuse, the inflationary pressures which undercut the productiveness of the American economy. There is no question that policies of restraint risk the inadvertent triggering of a recession. But we have procrastinated so long in suppressing inflationary pressures that we have run out of low risk policies.