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live year after year beyond their means-never saving, always going deeper and deeper in debt. Such persons frequently end up in serious economic difficulty. The people simply do not believe that the Federal Government can act this way without the same type of harm to the economy as a whole.
The impression that the Federal Government is wholly irresponsible in its constant trend in deficit spending reinforces a feeling that the Federal Government is wasteful, inefficient and that somehow this Government is not subject to the same economic constraints as are upon business and individuals. In a recent New York Times-CBS poll of the American people, 80 percent of those questioned felt that the Federal Government wasted “a lot of tax money.”
With respect to the second problem excessive government—it is commonly believed that spending is too free and easy. There are at the present time insufficient incentives to set priorities and make the tough choices between programs. The result is that Federal programs keep increasing --squeezing the people's pocketbooks through inflation and taxes—and intruding into their lives.
A balanced budget amendment could operate to limit the size of Government to that funded by taxes alone. Since tax increases are not politically feasible in the near future, some check would thereby exist on further growth in Government.
Even if a balanced budget amendment would reduce inflation and limit the size of Government, it would not be an acceptable approach if it caused sufficiently many additional problems or if there were other solutions that would cause fewer problems.
The major criticisms of a balanced budget amendment appear to be: One, it would limit the ability of the Federal Government to respond swiftly and flexibly to changing economic conditions, particularly in periods of recession and high unemployment; two, it could not be adequately enforced.
The answer to the first point is that various attempts by the Federal Government to "fine tune" the economy have not been notably successful. Furthermore, economists are coming increasingly to doubt the claimed "tradeoff” between inflation-through deficit spending-and unemployment. It is also worth noting that the budget has been in deficit in 19 of the last 20 years—through good times as well as bad. Even Keynesian economists state that budget surpluses should be created during periods of inflationary boom. In any event an "escape clause" is built into every such amendment that has been proposed.
The second point--that such an amendment could not be enforcedrefers primarily to the likelihood that Government will seek its objectives through mandatory expenditures by State and local governments or private industry, loan guarantees, or other approaches not requiring Federal funds. Even if this occurred in other words if Congress sought to violate the spirit of the amendment, which is a disturbing possibility—some constraint will nevertheless remain. "Nonfiscal" approaches would not always be possible, nor always be politically acceptable.
Several alternatives have been suggested which are claimed to resolve the problems of inflation and excessive Goverument yet create fewer new problems. These include: One, a statutory approach; and two, a spending limit amendment.
It is clear to me that the statutory approach will not work. Any statutory constraint can be wholly amended by a later statute, just as the Byrd balanced budget amendment of the last session of Congress has been ignored. This approach cannot overcome the basic problem in our political system with respect to spending—and this point is frequently and tellingly made-that the special interest group benefiting from a certain spending program has a great deal to gain from that single program and lobbies hard for it, while those who lose, often the taxpayers, may have little to lose from the one program and therefore do not properly lobby with the diligence of the opposition.
The difficulty with a spending limit is that it may not have the simplicity and popularity of a balanced budget approach. Nevertheless, I believe that the spending limit approach may well yet be acceptable in some form and it is of course not inconsistent with a balanced budget amendment. I will look forward to hearing additional testimony on that issue.
Let me conclude by repeating my view that we should be affirmative here—we should indeed be problem solvers. The people have distinctly and strongly indicated their concerns. We cannot ignore them. Those Senators who do so, may be reminded the hard way—at the ballot box.
While I am not fearful of a Constitutional Convention on this issue, I would prefer that Congress draft the amendment. I believe that Congress has the drafting skill and the procedures in place which would assure the preparation of the best amendment.
OPENING STATEMENT OF HON. HOWELL HEFLIN, A U.S. SENATOR
FROM THE STATE OF ALABAMA
Senator HEFLIN. Mr. Chairman, I would like to make just a few brief remarks at this time. First, I would like to welcome my distinguished colleagues who are here to testify today. I certainly look forward to hearing their comments with regard to this crucial issue.
Mr. Chairman, one of the joint resolutions which has been referred to this committee is the one which I sponsored, but in my judgment none of us can let pride of authorship stand in the way of achieving a .consensus on some measure to bring about a degree of fiscal responsibility and to bring it about within a reasonable period of time. When I introduced my proposed joint resolution, 25 States had taken action to demand that this Congress call a Constitutional Convention in order to amend the Constitution to require the Federal budget to be balanced. I am sure that everyone in this room is aware of the fact that today 30 States have taken a position on this issue. Only four more States need to act and we will then be facing the possibility of a Constitutional Convention, the results of which certainly could be unsettling.
I think that it is important that these hearings focus on concepts rather than specific measures since, in my judgment, what we need to develop is a consensus for an approach that is acceptable to a twothirds majority of Congress and which would be acceptable to threefourths of the States. It will then be the duty of this subcommittee to see that this consensus is translated into proper constitutional language. Thus, I am particularly anxious today to hear what my colleagues have to say and I certainly look forward to additional testimony in the days to come by economists and other persons with expertise in the field of fiscal planning.
În my judgment, Mr. Chairman, we must take the lead and put forth a decisive plan of action or the States will take the matters into their own hands and force a Constitutional Convention upon us. In my judgment, it is our duty to act and I think we should act with dispatch.
Senator HEFLIN. We are pleased to have the Honorable James A. McClure, U.S. Senator, from the State of Idaho with us. Senator McClure, we are delighted to have you. Will you give us a statement on your opinion of this issue of the balanced budget constitutional amendment?
TESTIMONY OF HON. JAMES A. MCCLURE A U.S. SENATOR FROM THE
STATE OF IDAHO
Senator McClure. Thank you very much, Mr. Chairman, I am particularly pleased that you are presiding this morning because I know of your personal interest in this issue.
Mr. Chairman, I am pleased to be here today to offer my testimony in support of Senate Joint Resoultion 9 and Senate Joint Resolution 10, but more importantly I appreciate this opportunity to testify on the pressing need for a constitutional amendment to balance the Federal budget and to reduce Federal spending and taxation.
Recently our constituents have become increasingly alarmed at the bulk and expense of big Government. The public's mood has shifted from a naive assumption that the purpose of Government is to legislate and finance solutions to all of man's problems, to the realization that the near malignant growth of Government is gnawing at the undergirdings of our basic freedoms and threatening to destroy our economic system.
Much of the popular interest in limiting big Government springs from the passage of proposition 13 in California. With this landslide victory people all over the country realized, perhaps for the first time, that an economically oppressive big Government is not an inevitable condition: the giant can be beaten. The popular land-lide in California has provided impetus for similar movements throughout the country. At last count, 30 of the necessary 34 States have memorialized Congress to call a Constitutional Convention for the purpose of proposing an amendment to the Constitution requiring that the Federal budget be balanced each year. Government's corpulent neck is stretched out a little too far; the people have started to swing the ax. At the time of the writing of my statement there were close to 40 sponsors of such an amendment. Congress has begun to react to the public mood.
The time has come for decisive action from Congress; I believe that the pruning back of the Hydra-like Government is the most important task faced by Congress in this decade.
One of the two amendments I am sponsoring, Senate Joint Resolution 10, calls for a balanced budget. Throughout our history, and that of many Western nations, revenue estimates were invariably dealt with before expenditure estimates. It was generally believed that public expenditure should be fit to available public revenues and that
revenues should not be extended to fit expenditures. Moreover, public debt was regarded as undesirable, a thing to be reduced and eliminated if possible. The guiding principle was that Government should aim to be self-supporting: this implies a philosophy and practice of balanced budgets.
By the middle of the 20th century, spending decisions have become increasingly divorced from constraints of revenue. The Government now determines its spending priorities first, and then instructs the Treasury to get, by taxation or borrowing, whatever funds are necessary to cover the outlays. Since Government is reluctant to increase taxes, borrowing has been the chief way to cover shortfalls. The result has been an accumulation of massive debt and rising rates of inflation induced by rapid monetary growth.
The general acceptance of Keynesian countercyclical fiscal policies in the 1930's-deficit spending to curb recession and taxation to curb inflation-gave deficit spending a type of legitimacy. But in heavy deficit spending lawmakers have found a political “free lunch.”' Theoretically, Congress should spend until the benefits of each additional expenditure are equal to the cost of financing that expenditure.
Under a balanced budget arrangement, the public's reluctance to be taxed would act as a natural brake on Government spending. If, for example, the Government attempted to extend spending beyond the point where benefits equaled costs, the public's dissatisfaction with the additional taxes would exceed the benefits of the expenditures. But expenditures beyond this benefit-cost equilibrium, when financed through a deficit, appear costless.
No additional taxes are levied and thus the restraining influence is lost. Congress is permitted to enjoy the political benefits of deficit spending—popularizing themselves by funding every pressure group's fancy—while ignoring the costs, inflation, slow economic growth, and a cripplingly high Federal debt. Although deficit spending has become the norm, the public is becoming aware of its inescapable costs and demanding fiscal reform.
The Federal deficit has reached staggering dimensions. By the end of the current fiscal year, the national debt is expected to reach $839.2 billion. Interest on this debt alone is projected at $57 billion for the 1980 fiscal year, or $260 per capita. Interest payments comprise the third largest item in the Federal budget, consuming 9 cents of every budget dollar.
This is more than will be spent on education, training, employment, social services, transportation and energy combined. We have recently approved a deficit of $29 billion for the 1980 fiscal year: a rather plump-sounding figure already. Yet with off-budget expenses figured in, the Federal debt is expected to increase by as much as $60 billion in the 1980 fiscal year. It is becoming abundantly clear that the American people are getting fed up with such irresponsible fiscal policy.
The seriousness of the Government's deficit-ridden budget is not merely that it flouts the moral imperative that any entity must live within its means, although this should perhaps be sufficient reason to maintain a balanced budget. This country's huge deficit has proven to be destructive of our economy.
One of the main sources of this strain on the economy arises from the method by which the deficit is financed. This can be done in one of two ways: Borrowing from the public or the creation of money. The first option, borrowing, is carried out through the sale of bonds to the public. The persistent deficits and the borrowing needs of the Government crowd out the private sector in the financial market.
Funds which would have been used to finance capital investment are diverted in support of the deficit. The result has been a range of economic ills, including an absence of private investment and a subsequent decline in productivity. Investment in the seventies in new plants and equipment has been well below the postwar trend. The capital stock has grown slowly during a period in which the labor force increased rapidly. If capital per worker had grown in the seventies at the average rate of postwar years, real income would now be as much as 5 or 6 percent higher; that would be an additional $70 to $80 billion more than $350 per capita. A deficit financed by borrowing leaches the private sector of its available investment funds, crippling the entire economy.
The other method of financing a deficit is the creation of money. In this financing alternative, the borrowing operations of the Treasury are repeated, but now the Federal Reserve purchases the Treasury obligations, and, in so doing, monetizes the newly created debt: money is created; this is commonly known as turning to the printing presses.
This is done in such a way that Federal spending increases without a compensating reduction in private spending. This is simply a lot more money in the system competing for the same amount of goods. The outcome of such a series of events is clear: Interest rates rise, prices rise, speculational purchases begin, and the economy heats up. Seen in this way the Federal Government is the main culprit in producing the spiraling inflation that now besets the country. The sure cure for inflation and the inflation-caused recession is simply to slow the rate of growth in the money supply.
This cannot be done without the elimination of high Federal deficits. One further point should be reviewed under the heading of deficitinduced inflation. Inflation makes having money in personal savings unprofitable. As the inflation rate exceeds the interest rate paid on savings the real value of savings actually decreases. The only remedy is to spend the money, convert it into noninflationary assets. This inflation-induced reduction in personal savings portends even greater difficulty for the private sector in obtaining funds: the banks have less to loan out.
Deficit spending, financed in either of these two ways, constitutes a tax. Inflation taxes the people in two ways:
First: when Government produces new money, the value of the money held by everyone else diminishes. Thus, by inflationary policies the Government takes value right out of everyone's bank accounts without any explicitly legislated authorization to do so.
Second, when wage earners receive wage increases just to keep up with inflation, they are pushed into higher tax brackets where & higher percentage of their income is taken in taxes. The effective tax rate, after all the figures are corrected for inflation, increases.
As previously stated, deficits financed through borrowing taxes the entire economy by cramping capital investment. The alarming point is that these taxes are not the direct result of any explicit legislation. Deficit spending, in other words, results in taxation without representation. I wonder if this Government hasn't come the full circle and