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Washington, D.C. The subcommittee met, pursuant to notice, at 2 p.m., in room 6226 Dirksen Senate Office Building, Hon. Birch Bayh (chairman of the subcommittee) presiding.

Present: Senators Bayh and Simpson.

Also present: Kevin O. Faley, chief counsel and executive director; Mary K. Jolly, staff director and counsel; Linda Rogers-Kingsbury, chief clerk and deputy staff director; Christie F. Johnson, assistant clerk; Arthur Briskman, counsel for Senator Heflin; Stephen Markman, minority counsel; Charles Wood, counsel for Senator Simpson;.. Dennis Shedd, counsel for Senator Thurmond; and Jim Lockemy, counsel for Senator Thurmond.



Senator Bay. Today the Subcommittee on the Constitution resumes its series of hearings on the various proposals introduced in the Senate that seek to amend the Constitution to require a balanced Federal budget.

The issues of excess Federal spending and waste are of increasing concern to me as well as many of our citizens. Over the past years we have seen our spending increase and our debt grow at a steady and at times, alarming rate. We have endured a seemingly endless rise in inflation, a cruel and harsh phenomenon which can eat away the fruits of a lifetime of work and turn the simple practice of saving money into apparent economic foolishness.

At times it seems that our problems are beyond solution, while Americans continue to be concerned with inflation, we now also face the prospect in the coming months of a recession-a recession caused primarily by a staggering increase in overseas oil pricing.

I believe, however, that by working together, rather than by seeking to blame, by planning carefully rather than reacting in haste and by forging real solutions to meet our needs, we can succeed in overcoming the challenges which confront us.

I believe that we can move to gain greater control over Federal spending.

We can and must move to approach budgetary decisions in a responsible manner.

We must realize that simply because a program may be good or desirable it is not always achievable in an era of tight budgets and limited resources.

The purpose of these hearings have been and will be to determine if the best way of assuring greater control over Government spending is a balanced budget amendment to the Constitution.

In approaching this goal, however, we must be aware of the tremendous complexities surrounding these issues. The budget of the United States now reaches some $500 billion and touches the lives of every American. It provides spelling books for grade school students and nuclear aircraft carriers for national defense. Federal spending affects, for good or ill, our mortgage rates, transportation, energy, health, environment and learning. It influences our food prices in the supermarket as well as the stock prices on Wall Street. A small increase or decrease can determine whether thousands of Americans will be employed or unemployed.

It has been said that every large problem has a solution that is quick, easy, and wrong. We should not delude ourselves into thinking that problems concerning fiscal restraint and the economic well-being of this country can be solved by the quick fix and the easy cure.

Those who say that we can end inflation by simply reducing Federal deficits are either misleading us, or are misled themselves.

Those who would have us believe that achieving a balanced budget will not require hard, and at times painful choices, are not leveling with the American people.

There are no panaceas, no magic solutions to these difficult problems.

Although the problems are complex, I believe we must begin to seek the answers. We must explore questions such as the economic and social impact of a balanced budget, the constitutional enforcement problems surrounding such an amendment, whether recent statutory measures adopted by the Congress in the budgetary process would reduce the need for drastic constitutional action, and whether such an amendment can provide the fiscal discipline it seeks at the same time it allows for the budgetary flexibility necessary to meet recessions.

We must determine whether the rapidly changing nature of our current economy, would accommodate a Government fiscal policy which would not be amiable to rapid adjustment.

In closing, I would like to again stress one final point. We must remember that it is the Constitution that we are talking about in this process. That amazing document and its values have been passed down from generation to generation until today it survives, and thrives, as the oldest embodiment of existing constitutional government in the world.

Part of the reason for this is that Congress and the States have traditionally exercised very great restraint in amending the Constitution. Thus, the original document, which was only some 4 pages in length, has been amended only 26 times and deals almost exclusively with institutional arrangements, political processes, and the most fundamental procedural safeguards. The only real digression in this long history was the 18th amendment concerning prohibition which was eventually repealed by the 21st amendment.

The American tradition is that the Constitution should be amended only for good reason and only after careful study. When we are considering the supreme law of the land, caution is preferable to error. To disregard this tradition would be to head down a road which will quickly lead to a very different kind of Constitution. As Henry Clay stated in a speech on the floor of the Senate almost 130 years ago:

The Constitution of the United States was made not merely for the generation that then existed, but for posterity—unlimited, undefined, endless, perpetual posterity.

I believe that most Americans cherish the timeless character of this document and I believe that most Americans would agree that we should not race precipitously into a thicket of economic and constitutional confusion. We will approach this question with responsibility and deliberation.

We are fortunate this afternoon to have two of our distinguished colleagues testifying before our subcommittee.

Senator Stone, I understand you have some conflicting obligations, so why don't you start and we will follow with Senator Heinz.



Senator STONE. Thank you very much. Senator Heinz and I are very happy that this committee has been able to arrange this hearing. We appreciate it.

Mr. Chairman, I ask that my complete prepared statement be admitted into the record and I will abstract a few things from it, and add a few things.

Mr. Chairman, what should the Congress do, in view of the fact that at least 30 State legislatures have petitioned under the Constitution for a Constitutional Convention for action about Federal spending?

This committee is facing that situation, and the leadership in both Houses, and the leadership of this committee ́unquestionably understands that as we get to the full 34 legislatures, we will either take action or action will be taken for the Congress by other constitutional bodies.

Of all of the amendments proposed to address this problem of inflation-caused by increasing deficits of the Federal spending budgetthe one that the Heinz-Stone amendment represents seems not only to us, but to a number of thoughtful observers, as the most flexible, as the most reasonable, and the most sound from the point of view of fundamental economics and logic.

It allows for an inflation rate of 3 percent, the exact target of the Humphrey-Hawkins bill, which is now our national economic policy by law. It prevents the increase of Federal spending above true increases in the gross national product; and when the inflation exceeds it by more than 3 percent, there is an added reduction required of 9 percent of such increase.

It allows flexibility to State and local government programs without penalizing them out of spite or out of the desire to escape reasonable ceilings.

It has been carefully drafted and put together by a board of busipess, civic, and economic leaders, one of whom is seated behind me,

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Prof. Craig Stubblebine of Claremont College. It is really flexible enough to take care of both the needs and demands of the country.

Mr. Chairman, why should Federal spending be tied to national production? Because, since we have left the gold standard and any other standard, the only underpinning of the value of our dollar is the value of our national production, and when we spend more than it increases, we cheapen the value of the dollar. By tying the increase in our Federal spending to the increase in our national production, we restore confidence, investibility, and sound growth to the economy.

It is easy to scapegoat OPEC oil price increases as the culprit in the last few years, but if one carefully analyzes the inflated price increases for oil and gas as compared with the impact on inflation of the Federal spending growth curve, one will find strange as it seems to us when we have to wait in gas lines from time to time—that the Federal deficit is far more the culprit of inflation even than the OPEC price squeeze on us.

A member of the press asked me just before I made these remarks—what would happen under this amendment if we have a negative gross national product, like we seem to have this quarter-next year--and this chairman and the committee will note that a 1-year provision is inserted and provided for by a two-thirds vote, a 1-year exceeding of the limitation can be permitted.

What happens if, on the other hand, instead of a short-term gross national product problem, such as we now have in this phase of the business cycle, we lose all ability to import natural oil and it is then perceived that we would have to substitute synthetics entirely or almost entirely at tremendous Federal spending demands?

Then by a three-fourths vote we could address that problem and change the formula if we had a long-term problem which then faced the Federal Government and the country.

In short, I want to leave the balance of the provisions and other reasons to my distinguished colleague from Pennsylvania, Mr. Heinz. Mr. Chairman and members of this committee, this Heinz-Stone amendment, carefully conceived and hammered out by thoughtful and skilled and experienced business, civic leaders and economists, does address the needs that the whole country feels as is reflected in more than 30 State legislatures calling for some action in curbing the Federal spending.

I hope that this committee and the Senate will be ahead of the curb, that we won't wait until the 34 State legislatures act but we will act soon in the light of this kind of approach to show the initiative demanded over the past 1% years by the vast majority of our people who are on fixed incomes or low incomes, and who are truly taxed by inflation, the culprit of which is largely us.

Thank you, Mr. Chairman.

Senator Bayh. Thank you, Senator Stone, we appreciate your comments and we appreciate that you have other responsibilities.

[Senator Stone's prepared statement follows:]

PREPARED STATEMENT OF SENATOR RICHARD (Dick) STONE Mr. Chairman, I am pleased to be here today to testify before the Subcommittee on the Constitution regarding the Amendment I proposed along with Senator Heinz. Even though the principal focus of the American people and the Congress is now directed-as it should be- on energy problems, the continuing problem of inflation poses an equally serious threat to the nation's well-being. Inflation has been so rapid that the price level has doubled in fourteen years and so persistent that at our current thirteen percent annual rate it will double again in five to six years. At the same time most economists tell us we are entering into a recession. It is convenient to look at the price increases in oil and attribute all of our economic problems to them. It is convenient, but such analysis is wrong. The price of oil, when adjusted for inflation, acutally fell from 1968 to the end of 1971, fell again through the third quarter of 1973, and only recently started a constant climb. Although OPEC price increases since 1973 have indeed caused significant economic dislocations and exacerbated inflationary trends, our economic problems cannot be blamed on increases in the price of oil alone. It is fortunate thai the increases in the price of oil are not the principal cause of our economic problems because there is relatively little we can do in the shortrun to change this situation. On the other hand, ever-increasing federal spending, a principal cause of our inflation, can be controlled.

Mr. Chairman, as you may know, the Heinz-Stone Amendment would limit the growth of the federal budget not to exceed the growth of our nation's economy as measured by the gross national product. Furthermore, there is a built-in inflation penalty clause which provides the Congress and the President with auditional incentives to curb inflation. The formula calls for the inflation penalty to become activated when inflation is greater than 3 percent in a given year. The penalty reduces the amount the federal government can spend by one-quarter of the difference between the actual inflation rate and 3 percent.

The Heinz-Stone Amendment is much more flexible than the rigid, balancethe-budget approaches. The Amendment would not have the effect of drastically cutting back on needed social programs. However, our Amendment allows us to restrain the heretofore unbridled growth of the federal budget. Such a responsible way of cutting back the size of the federal budget is a far more desirable approach than drastic cutbacks in areas that would hit hardest those whom these amendments are suppose to help the most.

Projections by such leading economists as Milton Friedman and other distinguished members of the National Tax Limitation Committee, with whom I have worked closely on this Amendment, show that had the Heinz-Stone Amendment been in effect since 1969, it has been estimated that we would have accumulated a surplus of $22 billion dollars instead of increasing the deficit by $271 billion. Also, the national debt would be almost one-half of the over $800 billion it is today. As can be seen, had our Amendment been in effect since 1969, our economy would probably be much healthier than it is today. Furthermore, were this Amendment operational today, given the current projections of the U.S. Treasury revenues, we would be experiencing a surplus in less than 3 fiscal years which could benefit tax payers in the form of either a tax cut, tax rebate or reduction in the national debt.

We are constantly reminded of the impact of inflation upon those who live on fixed incomes. Many of these citizens are living on social security benefits and/or pensions. They have worked hard for many years to secure a comfortable future for themselves. The current inflation-largely caused by excessive government spending-eats away at this future. To these people, the federal government must take steps to restrain the growth of the federal budget which has been shown by many to be one of the prime causes of inflation.

Mr. Chairman, I urge this subcomunittee to conclude hearings on this amendment and report it favorably to the full committee and then on to the Senate floor.

Senator Bayh. Senator Heinz, we are glad to have you here, this afternoon.



Senator Heinz. Thank you, Mr. Chairman. I want to thank you and members of the committee for holding hearings on this important subject.

I wanted to thank you particularly on behalf of Senator Stone and myself, permitting us to testify on Senate Joint Resolution 56 to limit Federal spending.

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