people, while it is simple to them they have perfectly plausible ideas as to what is causing what in the economy and what you ought to do about it, when, in fact, unfortunately, economics is not like physics, not like mathematics, not like a natural science, where you have clear laws that hold firm and about which we know a great deal. Inflation-the one thing we know is that modern inflation is caused-it can be caused by many factors interacting one with the other.

I will not go into a dissertation on the causes of inflation here, and I certainly don't understand the interaction any better than anybody else. But I know there are several factors.

Food price increases, which may or may not have anything to do with spending by the Congress, are one such factor. Some of them have to do with natural factors—with climate in this country and in the world.

If you have a bad harvest in another part of the world, in China or in the Soviet Union or somewhere else, it drives up food prices all over the world, including here.

OPEC's decisions, although external to anything you do, have an impact. Energy prices-OPEC's prices-increased by 33 percent on a trade weighted basis this year alone, up to now. And I don't think that is necessarily the end. That is inflationary. Very inflationary.

There is not really anything that your spending can do, or our spending can do, to influence that.

The coming together of various regulations for safety, for health, for the environment, which don't have to do with spending by the Congress, by the Government-by the Federal Government-but which have an impact on the spending is required, maybe, in a concentrated period by private industry, can be very inflationary.

I am not questioning the validity of the goals that we are trying to achieve with these rules on safety, health, the environment. They may be perfectly necessary and good goals. I am merely saying, if you do it all at the same time, in a certain period of time, it can be very inflationary. It raises the cost of the product by x.

Then you add Government spending. At certain periods when the economy is tight, as it is now, Government spending is inflationary. That is why the President has been urging and I have been enthusiastically supporting the notion of keeping Government spending down, reducing it, not letting it go up, squeezing it down as much as possible, because in a tight economy, any additional pressure by the Government causes more inflation.

When we have 10 percent unemployed, when we have industrial capacity utilization rate of 70 percent, as compared to 85 percent, it is a different story. Then if you spend, you may put some of these idle resources to work. That is not inflationary. Or it is not as inflationary as it is when the situation is tight, as it is now.

So, with that necessarily not very satisfying and clear answer to your question, I would say at the present time, controls on Government spending, not letting it go up, not going out in the market and borrowing when interest rates are very high any more than we have to, getting that squeezed down, are clearly a key to controlling inflation; not doing so is very inflationary at the present time.

That is why Government spending must be kept under control, un rtunately, for more than 1 year, for a several-year period.

That is the situation at the present. I cannot give you a precise measure of what would happen if you raised it by $10 billion, $20 billion, or lowered it by 10 or 20.

But we do know that it does have an anti-inflationary impact if we keep it down at the present time.

Senator BAYH. You couldn't hazard a guess as to where we would be if we cut your figure, $33.4 billion, out of the present budget or raise taxes?

Secretary BLUMENTHAL. Where would you cut it?

Mr. Chairman, $33.4 billion, if you cut it, bearing in mind that a great portion of the Federal budget is mandated, so-called "uncontrollable," indexed-you then have a decision to make. Do you cut defense?

Senator BAYH. I understand that.

Secretary BLUMENTHAL. In other words, what you are left with if you don't want to cut defense, if you bear in mind that the President has no authority to cut a lot of programs, because they are mandated and indexed-you are left, essentially, with cutting $33 billion outreally changing the social programs and taking it out of social security, taking it out of health, taking it out of areas that are important.

And I don't think the American people would be all that happy to see the cut. And it would be very, very difficult to do. It is a theoretical possibility.

The practicality of cutting $33 billion more out of this budget, in my judgment, raises enormous problems. And, much as I would like to-I am sure the President would like to see it in balance-but when you actually sit down with the books to see: Where do I cut it? If I can't touch the mandated programs or defense, what is left?

Do you want to cut veterans' benefits? I don't really think the enthusiasm amongst your colleagues would be very high for what would really be required.

Senator BAYH. Thank you.

Senator Hatch?

Senator HATCH. I appreciate the work that you have done, Mr. Secretary, in trying to get some restraint on spending in this society. I think you have been very charitable to the Congress here today, because, as you know, we have created 75 percent of the so-called "uncontrollables" that you have been talking about, which you can't do a thing about.

We don't seem to want to do anything about it here, either. I think you have concluded that Government spending is one of the causes of inflation. You said: "It is my view that substantial imbalances in the Federal budget may be a principal cause of inflation." And you have enumerated a number of other items which may be causes of inflation.

I distinctly recall, however, while sitting on the Budget Committee, the testimony of Elmer Staats, the head of the General Accounting Office, and Benjamin Civiletti, Deputy Attorney, observing that there was up to $50 billion in waste on the Federal level. Both emphasized the need to end mismanagement in the Federal Government.

Personally I view the amount of waste much higher. But I realize that cutting back is no easy matter, in fact, it may even be somewhat counterproductive as you may spend almost as much in the attempt as you save initially by the cutbacks.

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So, this is a very difficult problem. But, nontheless, I think what bothers the people in this country is that in the last 46 years, Congress, combining the respective administrations, whether Democrat or Republican, have failed to balance the Federal budget.

Even during the periods of prosperity, when we should have done so and should have had surpluses, we have failed to even follow the Keynesian theory, which is the subterfuge most people hide behind when they start talking about the difficulties.

Given the gain in the annual budget of almost $350 billion and in the national debt of over $400 billion, in just the seventies, and the reluctance on the part of Congress to meaningfully reduce these amounts, it is easy to see why the Founding Fathers provided an alternative method of implementing change in the U.S. Constitution. When the people are forced to deal with either an unresponsive administration or a Congress, especially a Congress who, as you have alluded, avoids responsibility for deficit spending by going around the budget with off-budget items to the tune of $12 billion, they are forced to utilize that alternative means. They say, in effect, "The heck with the Congress. We are going to get 34 States to call for a Constitutional Convention under the alternative approach." They demand the Convention. They get it. And they say: "We are going to balance that budget, no matter whether the President or the Congress desires it or

not."

That may not be the best situation. But that is an alternative. And it is a way for the people to do it.

My question is: Thirty States have now demanded a Constitutional Convention. Though it appears it will be difficult to get the additional four States necessary and we recognize the complexities involved in the differing requests, which I won't bore you with here, is it not better for this committee to come up with a reasonable constitutional amendment beforehand; one which won't be so obstreperous in approach; one permitting the use of an unbalance budget during times of economic distress, recession, depression, or war, or for any other reason we decide; and one that has, during normal times, spending limitations built in so that we at least balance the budget and can't excessively tax? Might it not be even a better situation for this committee, with all of the resources available to it, to come up with a reasonable constitutional amendment that really can give some flexibilities, which the people are not going to give if we have a constitutional convention-some flexibilities, which you think are so essential in order to have good economic policy in this country?

Secretary BLUMENTHAL. Senator, I fully understand the origins of this concern. I share the concerns.

Senator HATCH. Do you see what I am saying? You come in and say we don't want an amendment balancing the budget that is absurd, ridiculous and give as a reason that it wouldn't have the flexibility; that it can exacerbate downturn problems, that there are outside concerns which are not being taken into consideration.

We both agree that just fiscal responsibility would mandate that you don't just automatically mandate a balanced budget.

But wouldn't it be better for us to grab the bit and come up with a reasonable, objective approach that allows for flexibility. At least one that gives the people some consideration here, since during 42

of the last 46 years we have failed to balance the budget. And this thing has gone out of control in the 1970's. You yourself admit it is very, very difficult to control.

I might also add one other thing. You have indicated the President has called for a lean and austere budget, somewhere around $29 billion. Already the econometric models are up somewhere around $37 billion. And that is not counting off-budget items.

We have already got a conference report that has us up to $25 billion and that is not counting off-budget items, which need to be counted in the total which bring the total to $37 billion.

Secretary BLUMENTHAL. If you could find a way, I will stick my neck out here

Senator HATCH. I have stuck mine out.

Secretary BLUMENTHAL. Yes, but I am in a little different position than you. [Laughter.]

That is reasonable, objective, effective, flexible, not amenable to evasion, does not push people off-budget and some of these other techniques of evasion

Senator HATCH. You would like to have the off-budget stuff stopped? Secretary BLUMENTHAL. If it does not lead to bad government of the kind I have indicated if you do so. I think it would be something to talk about.

Senator HATCH. I think we can live with it.

Secretary BLUMENTHAL. I guess this is where we part company. I say by definition you can't do it.

Senator HATCH. I think this committee could design a better amendment balancing the budget than could a Constitutional Convention but should Congress prove unresponsive to the call, as they have been for the short time you have worked with them, and for 42 of the last 46 years while your predecessors worked with them, then I favor a Constitutional Convention.

If you could show me how Congress could become fiscally responsible without an amendment balancing the budget I would be more persuaded by your presentation here today.

Secretary BLUMENTHAL. Let me add a couple of things to that. It seems to me that there is a shift occurring in this country and in the world for the last 4 years or so. We have been substantially motivated by economic policies that concentrated on demand management, how to keep up demand, how to stimulate it, how to give everybody more, direct it fairly. That is essentially what we have done.

More and more with the kind of problems we have run into, with inflation getting worse and worse all the time, people getting tired of all of this Government spending, we are moving toward the need to think about supply, toward increasing production, and not concentrating on demand management so much-I think that is happening in other countries. Perhaps to some extent that is how you can explain changes that have occurred in the United Kingdom and elsewhere. It seems to me that the way to do it is for the voters to elect the kind of President and Members of Congress who will implement those policies, and I say don't insist on a constitutional amendment which I say will not accomplish this; throw out those Members of Congress, if you will pardon the expression, who spend indiscriminately, who vote for foolish wasteful spending

Senator HATCH. You would recommend that?

Secretary BLUMENTHAL. And that is after all the way our democracy functions.

Senator HATCH. We may lose an awful lot of our colleagues then, the vast majority.

Secretary BLUMENTHAL. We may and maybe we should.

Senator HATCH. That would be beneficial.

Secretary BLUMENTHAL. It seems to me what you have a responsibility of doing, and if you will mind my being so bold as to tell you your business, after all you tell me my business all the time

[Laughter.]

Senator BAYH. Mr. Secretary, he is in a little different position than you.

Secretary BLUMENTHAL. Exactly-is to say to your constituents, I agree with you, I will fight for this, but I won't do it foolishly and even though you people think that is the way to go I will have to explain to you, having looked into it, that is so risky, that is so fraught with other side effects that are going to make the patient sicker than he is―

Senator HATCH. But wouldn't you agree that the patient is sick primarily because of our course of action, as regarding fiscal responsibility, has been so wrong and risky and given the present situation we don't appear to be improving any.

We have an upturn now close to $40 billion, and the Congress isn't through yet. We have a second concurrent budget resolution and there may be other difficulties that have to be added in. It seems to me we may well be over $50 billion this year, which is hardly lean and austere. I know you have tried. I am not criticizing you. I commend you and the President for any effort toward fiscal responsibility. But I am saying he has had an overwhelming problem with the Congress and that has been the problem for years and years.

Secretary BLUMENTHAL. I am saying a President will not reduce his problem with the Congress because the ingenuities of the Congress-if the Congress feels free to do so, to get around that stricture are enormous and the bad government that ensues from that circumvention is very dangerous.

Senator HATCH. Let me ask you this, Mr. Secretary. I am working on a constitutional amendment that might solve these problems. I agree they are monumental problems and very difficult to solve and we may not be able to reach an amendment that would be satisfactory to everybody but I think we can reach an amendment that will allow for flexibility and still allow for some of the things you are talking about.

Would you be willing to work with us to the extent that your office permits you, at least reviewing these things and giving us your best input with regard to some of the problems I am talking about?

Secretary BLUMENTHAL. It is our business to work with you and any Member of the Congress on any proposal that you may have. We certainly will do that.

Senator HATCH. I will count on that.

Secretary BLUMENTHAL. We will certainly do that. But please understand that reviewing and commenting does not imply nor am I saying to you that I think you can do it or that we will try to construct it for you.