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In addition to that, you have in the world, as complicated as it is, contingencies that you cannot account for, which clearly would make observance of the balanced budget requirement very difficult.

And I don't refer only to war's or national emergencies of this kind, because they fortunately are rare and few. And one can provide for these.

But how do you provide for prolonged national strikes, for developments outside the United States-such as substantial changes in the world oil picture through OPEC-which have an impact on the domestic economy, for natural disasters, floods, earthquakes, what have you, to take care of all of those things and still to achieve balance? İt is clearly a very, very difficult thing.

Finally, then, Mr. Chairman, it seems to me that what you are trying to achieve is fiscal responsibility, keeping the budget in balance; except in periods when it is clearly necessary to have it out of balance for a short period of time in order to maintain the stability of economic security for our citizens.

That requires responsible action by the Congress and by the Executive.

I submit to you that you cannot legislate responsibility of this kind. Members of Congress are responsible to their constituents for acting properly and responsibly. And the President equally is. And his appointees equally are held to account.

We have a system, in effect, under which there is an executive and a legislative budget process. That can be made to work more effectively. It is working much more effectively than it used to.

There is, in my judgment, no substitute for, in fact, responsible decisionmaking. No legal framework can provide for all the contingencies and can substitute for that.

So, as I did in my prepared testimony, I would like to end by citing the words of President Kennedy on this subject 17 years ago-it is not a new idea—who said:

"To attain them”—that is: High employment, a steady growth of output, stable prices, and a strong dollar-"we require, not some automatic response, but hard thought."

Mandatory budget balance offers no escape from our responsibility for making better discretionary decisions concerning economic policies, including decisions on spending and taxes.

Thank you very much.
Senator Bayh. Thank you, Mr. Secretary.

I think everyone is aware of your past background prior to coming here as Secretary of the Treasury, where you were chief executive officer of one of America's major corporations, which responsibility, I assume, carried with it the necessity of dealing with balancing the budgets in the business-term frame of reference.

Did I get the impression from your testimony that the general premise from the standpoint of how the Federal budgeteer approaches his business should be on the basis of trying to accomplish a balanced budget, if not annually at least over a cycle?

Secretary BLUMENTHAL. It is my view that substantial imbalances in the Federal budget are a major contributing factor to inflation. But they are not the key to solving inflation.

I wish that were the case. If there was one cause of inflation, namely, imbalance in the Federal budget, it would be so easy for us to deal with inflation. Unfortunately, there are a multiplicity of causes of inflation. And, therefore, you need a multiplicity of approaches.

An unbalanced budget under many circumstances, but not all circumstances, is an important contributing factor.

Therefore, unless there are other reasons, I think-important reasons—we should strive for budget balance as a general principle, not every year but certainly over a period of time. And I think we have not done a good job in the past. We have been too relaxed about this in the past.

I am saying, however, that to require that every year, to require it constitutionally, without flexibility and not to take account of the fact that in recessions we have to act differently than during periods when there is a tightness, pressure on the resources, that in periods of high unemployment, we need to act differently than in periods of low unemployment, and differently when there are external strains than when things are in good shape externally, that is, to not take account of such different situations is to simply ignore reality.

Senator Bayh. I think, to make that very clear, that is your judgment. But to those of us who are concerned about the cycle that may have permeated planning either in the executive branch or in the legislative branch there for a while, where you sort of got accustomed to a $66 billion deficit-or a $42- or a $50-some billion deficit-given where you are now, looking on to the future, over what time frame should we try to balance?

Secretary BLUMENTHAL. I think it would be very difficult to legislate or to amend the Constitution in a way which says: Well, don't balance every year, but you must balance on the average over 3 years or 2 years or 4 years—or what have you.

It seems to me that you have a number of means of testing whether or not Government action is responsible, and whether or not the budget is appropriate to given circumstances.

I think, in that regard, the President has shown the way in emphasizing some of these. The percentage of taxes, the percentage which taxes constitute of personal income or of national income or of GNP-you can see where the taxes get out of line-is an important device.

The percentage of Government spending of total GNP—one of the figures I referred to in my opening comments—is another way of keeping things under control.

It seems to me that the percentage of the national debt compared to total GNP is another such index. In other words, you have a variety of measurements that you can use without trying to say that we must balance over 2 years, 3 years, 5 years, 1 year. It seems to me that that is a better device, because you have some downturns that are relatively brief and shallow. You have others that are prolonged and deeper. Clearly, in each of these circumstances, a different budget policy may be the right way to go.

Therefore, I would shy away-other than agreeing on the principle that we should strive to balance whenever possible-- I would shy away from making it a requirement. And I would rely on the budget com


mittees and on the budget procedure of the executive branch to make that decision each year.

Senator Bayh. Could you give us an idea or give us your projections about your plans to accomplish this goal the way that you would like to accomplish them?

You mentioned a figure of $66 billion in the 1976–77 timeframe.

Can you give us your projection as to what you think the deficit will be for fiscal 1979, 1980, 1981? What can we anticipate, given the tools that you are using and the tools that Congress is using?

Secretary BLUMENTHAL. As you know, the most recent estimates that have been made indicate that the budget deficit for 1979 is likely to be about $33.5 billion, $33 to $34 billion, which is a substantial reduction from the previous year.

I certainly don't believe that it will be any higher when the next estimate is made. It may well turn out that it may be somewhat lower. It really depends on the level of economic activity the rest of the year, and also the level of inflation. But we should be certainly no higher than in the low thirties in 1979.

In fiscal 1980, the President has sent a proposal which, based on the economic assumptions made at the time of that proposal, would result in a deficit of below 30—29, 28.9.

The Congress has not yet finally spoken. You have the first Budget Resolution, which is being acted on these days, which actually would give you a budget deficit somewhat lower than that, somewhere in the twenties, but that, I think, has to do with somewhat different economic assumptions.

I would say, therefore, that in actual fact, unless very unforeseen events occur, events which are not foreseen either by the executive or the legislative, we should have a budget deficit in fiscal 1980 somewhere in the twenties.

I cannot tell you what the deficit will be in 1981. That is a matter which is now being studied by the President's advisers. It will only be in the latter part of the year that the President will make his final determination with regard to the 1981 budget.

I would be exceedingly surprised if the President would not make a very great effort to move that deficit, which for 1980 is somewhere in the twenties, substantially lower and toward balance. I cannot tell you how low it will be or whether he will actually achieve balance. That is again based on decisions he has not yet made and, of course, on the performance of the economy.

But I think that the trend is very clear in the direction of balance; toward balance and possibly even to balance. I really am not in a position to tell you more than that, Mr. Chairman.

Senator Bayh. On the budget bill, the conferees of the Joint Budget Committees, as I recall, they projected somewhere between a $2 and a $5 billion surplus in 1981. Is that unreasonable?

Secretary BLUMENTHAL. I think that it is very difficult to say. I doubt that we will; maybe, but I doubt we will have a surplus. It really depends on whether or not we have a long slowdown or a rather short slow down, and it really depends on whether or not we can bring the rate of inflation under control as we expect.

Unfortunately, the higher the rate of inflation is, the more we take in in tax revenues, which then gets into the question of whether or not,


Mr. Chairman, you have a tax cut. If you don't, inflation pushes some

a people into higher tax brackets. Therefore, the percentage GNP going to tax collections goes up, and the tax burden on Americans is increased.

That is not necessarily the best way to achieve, balance not necessarily the best way to run our economy.

So, there is an important decision to be made. Knowing more about the speed of the economy, the level of economic activity, and the level of inflation, you then have to make a decision about the tax level that you are willing to accept.

That surplus for 1981, I don't believe includes anything with regard to tax cuts. Whether or not there will be a tax cut, I don't know, The President has not yet decided. That would have an important impact on whether or not we would wind up with that kind of number.

Senator Bayh. I think that is accurate, as I recall it. It did not permit any flexibility for tax cuts, which goes to another question.

One of the general premises that is talked about and proposed by those who are supporting a constitutional amendment is that, if we do have a constitutional amendment, it would likely result in a lower tax burden. If we were to implement some of the variety of amendments that are now before us, which you are familiar with, which would require this year and next year that we would have a balanced budget, there would be no deficit.

Would there be room for tax reduction? What would be the prospect?

Secretary BLUMENTHAL. I think what you would get in motion, in all likelihood, is the kind of process that I briefly described in my opening comments. You would try to get as much spending off the budget or transform it to other kinds of forms of spending that don't impact the budget, so that you could live within your means or so that you could seek to lower taxes. But in fact, you would not accomplish anything beneficial. You would be shifting the burden to the States, or you would be shifting it into the price level to the companies, or you would be moving it off-budget, which has to be financed.

When it is off-budget, the Secretary of the Treasury has to go into the credit markets and raise that money, just as well as when it is on-budget.

So, you may achieve balance, and you may say: "Gentlemen, we are doing rather well. We can reflect that in the tax rate."

But by moving it off-budget, the Secretary of the Treasury would have to finance it, financing it and competing in the credit markets against private borrowers. That would drive up interest rates. Higher interest rates would cause more inflation, and you would be in the soup in a different way.

I guess what I am saying, Mr. Chairman, is, there is no place to hide.

The economy is interrelated. Strange things occur when you try through gimmicks to appear to be dealing with inflation if you don't really fundamentally deal with it. It comes back at you in a different way.

Senator Bayh. That is one of the things that concerns me—the gimmickery that could result from this.

I question, though, basically, from what you said I assume that one of the options that would not be available during that period of time would be to lower the tax rate. There would be no room for tax cuts if we were going to have a balanced budget.

Secretary BLUMENTHAL. The only way to have lower taxes is to either substantially cut spending or to have a deficit, to run a deficit.

Cutting spending during periods of an economic downturn may well aggravate, or would aggravate, the seriousness of that downturn. You don't want to cut the resources available to the poor and to the unemployed in a period of downturn. But if you don't cut spending, then you either run a deficit or you increase taxes. You can't have it both ways.

In other words, there just is no place to go.

If you have a downturn, for whatever reason, then the only way to keep your taxes down, or to cut your taxes, is either to really cut the dickens out of spending, so that you don't have to raise that much in taxes, or to run a deficit. If you can't run a deficit, if you are precluded from running the deficit, then the only thing that is left is to substantially cut spending. If you substantially cut spending, you make the downturn worse.

Senator Bayh. What does that do to revenue income?

Secretary BLUMENTHAL. You have less revenue, which means you have unbalance. That is the point I am making.

There is a multiplier effect. You must cut $2 of spending for every $1 reduction of the deficit, between 12 to 2, according to the econometric model.

In order to get a $1 reduction in the deficit, you have to cut your spending by 1 to 2 or raise taxes.

Senator Bayh. Is there a similar formula for determining what that does to the unemployment rate? In other words, for each million reduction of deficit, what does that do to the unemployment rate?

Secretary BLUMENTHAL. I think we can give you that.
It depends on the general level of economic activity.

We can certainly tell you what happens to the unemployment rate under various conditions with each x billion dollar cut in spending.

Senator Bayn. Could you give us that for the record, so we can see it?

Secretary BLUMENTHAL. Yes. A rough estimate is that a permanent annual tax reduction of $10 billion, after eight quarters, will be associated with a decline in the unemployment rate of a little less than one-half of 1 percentage point.

Senator Bays. One last question; then I want to yield, so I can pass this questioning around.

I know my colleagues will have questions.

Could you deal, Mr. Secretary, with the general premise that I think exists throughout the country that inflation, which concerns all of us, is basically because of congressional spending?

You mentioned that that did have a role.

Could you give us your assessment of how important the present spending is compared to the present rate of inflation?

Another way of putting it is: Suppose you had—or suppose we were to cut spending or to raise taxes in a place where we had a zero deficit situation. Suppose we had no deficit. What would the inflation rate then be, compared to what it is now?

Secretary BLUMENTHAL. I cannot give you off the top of my head exactly what would happen to the rate of inflation.

First of all, I would say that the problem with economics is that we know a great deal less than we pretend to know and that lots of

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