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country. Since 1929, governmental spending has dramatically increased as a percentage of gross national product so that by last year it reached nearly 38 percent of GNP. Obviously, government spending has increased without any relation to increases in the nation's productivity.

Federal spending, of course, accounts for the largest part of total government expenditures. Accordingly, it has played a dominant role in the explosion of overall governmental spending. In absolute terms, Federal outlavs have increased from slightly over $100 billion in 1962 to approximately $400 billion this year, This represents a remarkable 400 percent increase in just 17 years.

NEED TO BREAK THE SPENDING CYCLE Recent history has proven that in a political world it is nearly impossible to get a majority of the legislature to make the hard decisions necessary to reduce Federal spending. It is elemental that each new Federal spending program gives birth to a new constituency that begins to rely on Government support. Today's Federal largesse is tomorrow's inalienable right. The result is that constituencies organize themselves and lobby Congress both to prevent any spending cuts and to increase the funding for their programs.

This is not a criticism of political activity-it is merely a statement of a fact of life. The most recent example of this phenomenon is the banding together of welfare and social security groups to oppose the cuts in their programs proposed by the President's budget. This axiom is equally true for business. They fight just as vehemently as any group to protect their particular Federal benefits.

The only way to break this spending cycle is through a Constitutional balancedbudget amendment. Such an amendment will at last allow Congress to say "no," and it will force Congress to make the necessary hard decisions.

GROWING TAX BURDEN

The explosion of Government spending has resulted in a growing tax burden on the American people. Currently, Federal taxes drain more than 20 percent of our gross national product. In addition, Federal taxes are consuming an ever-increasing percentage of taxpayer's personal income. As the tax system is now structured, inflation propels taxpayers into higher and higher tax brackets, even if their real income remains the same. Many respected economists believe that high taxation is the single greatest impediment to investment and increased productivity.

FEDERAL BUDGET DEFICITS

Despite repeated increases in taxation, Federal spending has persistently outstripped available revenues. Since 1950, the Federal budget has been balanced in only five years. Even more alarming is the fact that the budget has not been balanced at all during this decade. Deficit spending seems to have become the norm for Federal fiscal policy. Thus, deficits are incurred regardless of whether business conditions are poor or whether the economy is booming.

At the same time, Federal budget deficits have been increasing in size. This has brought about a dramatic growth in the already staggering national debt. In 1970, the national debt stood at $383 billion. However, by 1978, the national debt has more than doubled to $780 billion. The Administration is currently seeking authorization to increase the total national deht by another $38 billion to $836 billion just to finance our debt needs through the end of this fiscal year.

ROOT CAUSE OF INFLATION

The President has correctly identified inflation as our most serious domestic problem. Inflation has been called the cruelest tax of all because it hits the poor and elderly the hardest. The Federal Government itself is largely responsible for the problem since substantial and persistent Federal deficit spending is one of the root causes of inflation. When the Government runs a deficit, it pumps more money into the pocketbooks of its citizens than it collects from them in taxes. Since more money is “chasing” the same number of goods, in the long run the price of goods must increase.

Another way to view the inflationary impact of deficit spending is to examine the dilemma faced by the Federal Reserve System. Government borrowing to finance the Federal deficit forces the Federal Reserve either to increase the supply of money or to watch interest rates rise to unreasonable levels. When the '

money supply is increased, this naturally fuels inflation.

This process is exacerbated by the fact that inflation tends to feed on itself. It makes businessmen leery of economic expansion; it tends to depress the stock market; and, it encourages labor to demand extremely high wage settlements.

DISPLACEMENT OF CAPITAL In order to finance its deficit spending, the Federal Government must borrow enormous amounts of additional capital each year. Last year the Government borrowed $72 billion to finance deficits and this year it will borrow another $67 billion. This heavy governmental borrowing bas a significant adverse effect on the money markets by creating an upward pressure on interest rates and by displacing investment that would otherwise be made in the private sector. Thus, Federal deficit spending diverts capital from more productive investment in the private sector, further aggravating the serous shortage of private investment capital.

SENATE JOINT RESOLUTION 5

Mr. Chairman, on January 15th, I introduced Senate Joint Resolution 5, a proposed Constitutional amendment that comprehensively addresses the problems of deficit spending, excessive Federal expenditures and excessive taxation. This proposal pulls together the thoughts of a number of respected economists and fiscal experts.

S. J. Res. 5 would impose three new limitations on the Federal Government. First, Federal spending would be limited to 18 percent of gross national product. It is projected that in the next fiscal year Federal spending will be approximately 22 percent of gross national product. This level is simply too high. S. J. Res. 5 would require that Federal spending be decreased to its historic level of 18 percent within 3 years. In order to maintain some flexibility to deal with unknown contingencies, spending would be permitted to rise above the limitation if the increase is approved by two-thirds of both houses of Congress.

Secondly, S. J. Res. 5 would limit Federal taxation to 18 percent of gross national product. This limit will insure potential tax relief to the overburdened taxpayer. The present level of taxation creates a disincentive to investment and stifies economic growth. Again, there is flexibility built into the limitation on taxation since the limit can be exceeded with the concurrence of two-thirds of both houses of Congress.

Finally, S. J. Res. 5 would require a balanced budget, unless both houses of Congress approve a deficit by a two-thirds vote. This balanced budget provision has two innovative features. First, deficits in the Federal budget can be run only four out of nine years. This will give Congress ample flexibility to manage the economy and to respond to economic emergencies. Second, any deficit must be repaid within four years. This feature should eliminate any additional long-run growth of the national debt.

NO "GIMMICK" The proposed Constitutional amendment is no "gimmick" or "quick-fix” as some crities have charged. Rather, it represents a fundamental philosophical shift toward greater fiscal discipline and towards a smaller and necessarily more efficient Federal Government. By its terms, S. J. Res. 5 would permit a brief transition period to permit compliance with its dictates. The proposal is also drafted to include enough flexibility to permit an effective response to any unforeseen contingencies or to special economic circumstances. The net result is a flexible and workable system that requires reasonable fiscal restraint.

Mr. Chairman, I urge the Committee to give prompt and favorable consideration to S. J. Res. 5. If Congress fails to heed the message now being delivered by the States by moving forward on a reasonable measure such as S. J. Res. 5, the States will have no choice but to impose their own solution through the Constitutional convention procedure.

SENATOR Bob Dole's QUESTIONS AND ANSWERS CONCERNING SENATE JOINT

RESOLUTION 5 Question. Why is a Constitutional amendment to balance the budget necessary?

Answer. The Federal Government as it is now structured has proven incapable of reversing the uncontrolled growth of Federal spending, burdensome taxation, and defirit spending. Various special interest groups dependent of Federal funds block efforts to reduce spending and to pare down the size of government. As a

four years.

result, the Congressional budgetary process alone cannot do the job. The only way to break the cycle of increased spending and deficit financing is by means of fundamental Constitutional change that will compel Congress to make the hard decisions that must be made.

Question. Is this an appropriate subject for a Constitutional action?

Answer. Definitely, The proposed amendment would bring about a fundamental change in the spending, taxing and budgetary powers of the Federal Government. This is hardly a trivial matter. The proposed amendment would be far more significant to the actual functioning of the Federal Government than the Equal Rights Amendment, the D.C. Voting Rights Amendment, or Article XXVI, which permits 18 year olds to vote.

Question. How would the Dole Amendment work?

Answer. The Dole Amendment, S.J. Res. 5, would impose three new limitations on the Federal Government. First, Federal spending would be limited to 18 percent of gross national product. Second, Federal taxation would similarly be limited to 18 percent of gross national product. Both the spending and taxing limitations can be exceeded with the concurrence of two-thirds of both houses of Congress. Third, the amendment would require a balanced budget, unless both houses of Congress approve a budget deficit by two-thirds vote. Nevertheless, the amendment would not permit deficits to be run more than four out of nine years and any deficit would be required to be paid back within four years.

Question. How does the Dole Amendment differ from other Constitutional amendments that have been proposed?

Answer. Like many others, the Dole Amendment requires a balanced Federal budget, but would permit an exception if approved by two-thirds of both houses of Congress. The Dole Amendment, however, would permit unbalanced budgets in only four out of nine years. Further, any deficit would have to be repaid in

The Dole Amendment is also unique in that it would directly limit Federal spending and taxation.

Question. Why is it necessary to have specific spending and taxing limitations if the amendment already requires a balanced budget?

Answer. A balanced budget amendment by itself cannot guarantee that the growth of Federal spending will be held down or that the over-burdened taxpayer will get any long-term relief. Rather than reducing spending to balance the budget, Congress might instead opt for an increase in taxation. At the present time, every State in the Union, except Connecticut and Vermont, is required either by constitutional provision or by statute to have a nannually balanced budget. Neverthe less, State spending has been increasing at least as wildly as Federal spending. Thus, a balanced budget requirement alone will not insure any slowdown in spending. For these reasons, S.J. Res. 5 includes specific spending and taxing limits.

Question. Wouldn't the proposed amendment prevent the Government from effectively combating a recession or responding to some other national emergency?

Answer. Not at all. The amendment was drafted to provide the flexibility needed to respond to such crises. The spending and taxing limitations can be exceeded with a two-thirds vote of both houses of Congress. The balanced budget requirement can also be exceeded every four out of nine years with a two-thirds vote of both houses of Congress.

Senator Bayh. If there are no objections, I might make a few remarks as a personal overview of where I, as chairman of the subcommittee, anticipate we may be going.

First of all, I think it's fair to suggest that the overwhelming number of people in this country are deeply concerned about our Federal spending policy, and it is a direct response to this concern-indeed, it is part of our responsibility as a Congress—to analytically look at the way the Federal spending policy solves problems and at the same time may create problems.

We're going to do the very best we possibly can to find answers to the questions that are raised: What is the best way to deal with deficit spending in a way that we cut the size of the ficit instead of increasing it?

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Now, amending the Constitution is serious business. As the author of more than one amendment, I have had the privilege of sitting in lengthy hearings over the years on constitutional amendments. I have been impressed that our Founding Fathers were wise when they made it difficult to amend the Constitution. In 200 years, we have had only 26 constitutional amendments. There is one now that's before the States.

Amending the Constitution is the most serious of legislative business. So, what this committee wants to look at is explore, from the viewpoint of our colleagues in the Congress as well as from expert witnesses from all walks of life, to see if the best way to balance the budget is to amend the Constitution.

If we come to the conclusion that the best way, perhaps the only way to arrive at a more prudent spending policy at the Federal level is to approach it in the constitutional amendment process, then I would hope that the Members of this body and our colleagues in the House would stand up and face this responsibility.

I must say I am deeply concerned over the possibility of calling a constitutional convention. We have basic constitutional rights that we have come to take for granted, that are fundamental as part of our way of life in this country, and I don't want to see them destroyed by an ill-thought-out convention.

The Members of this Congress, if the people don't like what they're doing, in terms of a constitutional amendment, can be removed and someone else brought in to represent their State or their district, so you have an ongoing overview process.

So, I am hopeful that this Congress, this committee, the Senate will stand up and meet this responsibility of how we solve the problems that confront our country, and not just rush out here and do something that may be temporarily politically expedient but may, in the long run, destroy the very constitutional fabric of our society.

We will be having other hearings in the very near future. We have to take into consideration what may, indeed, be the pending order of business in the Senate this next week or two. Thus we have not set a specific date, but we will advise all of you who are interested, in the very near future.

We will be in recess, pending the call of the Chair.

(Whereupon, at 12 noon, the hearing was adjourned, subject to the call of the Chair.]

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