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After all, they were taking a stand for fiscal responsibility, or so they tell the voters. In reality, they passed the buck. And the Federal Government could pass it right back to the States by eliminating Federal aid to the States, more than $80 billion this year, or two-andone-half times the deficit. So-called fiscal responsibility would then require these brave legislators to raise State or local taxes to provide the necessary services.

The goal of a balanced budget at the Federal level would have been met, but the price would be escalating taxes on the State and local level. Is that really the goal of the sponsors, to shift the tax burden from the Federal Government to these jurisdictions with their notoriously regressive tax structures?

Perhaps this is why, just when the constitutional convention drive was in full swing, and its backers predicting certain success, that State legislatures began to take a second look. There never was broad popular support for such a move. It was manufactured out of pieces of paper, memorial resolutions, at least 16 of which were passed without the benefit of public hearings.

Mr. Chairman, there are many economic reasons which make balancing the budget for all times regardless of economic, social, or military needs a bad idea.

For example, the current jump in the inflation rate is not due to an increase in the budget deficit. Quite the contrary, the deficit has decreased from $49 billion in 1978 to $30 billion in 1979. Meanwhile, the rate of inflation has increased from 7.8 percent in August 1978 to 12 percent in August 1979. The major inflationary sectors of the Consumer Price Index have been energy, up 33.8 percent; shelter, up 14.8 percent; food, up 9.8 percent; and medical care, up 9.6 percent.

The 1979 budget deficit of $30 billion, which amounts to 1 percent of the gross national product, was not responsible for these specific price rises. Instead, specific dislocations in each of these sectors have been the moving forces behind the current inflation.

When the administration presented its fiscal 1979 budget in January of 1978, it was based on prediction of an annual real GNP growth rate of 4.8 percent, with inflation of 6.1 percent. Current figures indicate that GNP will increase approximately 1.7 percent while consumer prices will rise by 10.6 percent. The deficit anticipated in framing the fiscal 1979 budget was $60.6 billion, exactly double the $30.3 billion deficit currently expected.

The largest deficits are the results of fighting wars or related to recessions, and are not the actions of spendthrift Congresses. During recessions, the cost of government increases automatically at a time. when revenue declines.

The recent deficits are not correlated with escalating inflation. The sharpest price increases in recent years took place during periods when the deficits were being rapidly reduced. From 1971 to 1974, the deficit dropped from $23 billion to $4.7 billion, but prices jumped from a 3.4 percent rate of increase to 12.2 percent, a similar experience to the 1979 figures noted earlier.

Under the 1974 Budget Act, the Congress has a working mechanism for determining the limits of the Federal budget, spending, revenue and deficit levels. This budget process permits matching the state of the economy with the urgency of national needs. The Full Employment and Balanced Growth Act of 1978 also provides a process

for determining national priorities in conformance with economic objectives.

The Federal budget begins with the administration submitting its budget 20 months in advance of the end of the fiscal year it is to cover. And, although the levels of receipts, expenditures and the surplus or deficit reflect policy determinations, they are also based on forecasts of the economy's performance.

If the economy departs from its forecasted course, as it invariably does, Congress would be forced to continually revise tax laws and programs in order to fulfill a constitutionally-mandated balanced budget.

To make a balanced budget amendment work, forecasting techniques and accounting procedures would have to be spelled out in precise constitutional language, a mindboggling prospect, to say the least. Even if they were spelled out, there are no guarantees the economy would behave as forecast.

Three major, new considerations confront congressional budget makers this year, each substantially changed from the date the budget was first submitted:

First, the depth of the recession and the response necessary to reverse the downturn;

Second, the need for additional strategic defense spending that is required to make SALT II work, so that we could at long last proceed to the pursuit of real disarmament;

Three, the impact of inflation of OPEC price increases.

The Council of Economic Advisers, with the benefit of hindsight, studied the consequences a balanced-budget requirement would have had on the 1974-75 recession. As Charles Schultze told the House Judiciary Committee in March of this year, real GNP in 1975 would have been 12 percent below prerecession levels, rather than 2.5 percent; and unemployment would have been almost 50 percent higher. In short, a balanced budget would have caused a full-scale depression.

Finally, Mr. Chairman, I would like to deal with the simplistic notion that debt is un-American. It is as American as apple pie.

The most dramatic growth in debt has not been at the Federal level. Indeed, the Federal Government is fiscally conservative when compared with business, families, State, and local government. As table 2 shows, corporate debt rose 9.6 percent annually over the past 20 years while household debt increased 9.9 percent yearly. State and local government debt rose 8.2 percent per year. The Federal debt, however, has risen at an annual rate of only 5.1 percent.

Properly managed debt is part of the economic system of this Nation. Without it, the future would be bleak. Debt buys homes, college educations, new factories, new firehouses, new roads.

We believe the Congress should retain the power to properly manage the debt. If Congress did as many State and local governments do, by separating operating and capital budgets, the Federal deficit would be a different matter.

The facts demonstrate that the Federal debt is not getting out of hand. Rather, it is shrinking dramatically when measured against the size of the economy and the Nation's income. In the past 20 years the Federal debt has decreased from 51.2 percent of the gross national product to 29.9 percent.

Mr. Chairman, there are compelling constitutional and economic reasons why each and every one of these proposed amendments should be rejected by this committee. There is also a moral reason. The greatness of this Nation must never be calculated on an accountant's ledger. It must continue to be measured by the fact that we, as a people, refuse to place a price tag on human life and liberty. If a balanced-budget amendment were adopted, this Nation would be saying to the unemployed, the poor and the downtrodden, "The value of your life has been determined, and it is not worth spending one dime more than we have."

We believe that the Congress should not arbitrarily limit its ability to enhance and protect the lives of the American people. Thank you, Senator BAYH. I apologize, Mr. Kirkland. I had an emergency call I had to take. I have already had the good fortune of reading your statement. I appreciate the comments that you made.

You seem to emphasize the fact that if an amendment like this is passed, that the delicate balance of power, particularly the role that Congress has played in the shaping of economic policies, would be significantly changed. Would that change a decrease of power in Congress? Is that additional power then concentrated totally in the Federal Reserve or did you have other bodies of government positions that would pick up that additional role?

Mr. KIRKLAND. Well, clearly it would result in increased reliance on monetary policies which means enhancement of the power and the role of the Federal Reserve System, which we view with very limited enthusiasm even under current conditions.

The role of the judiciary would be enhanced because they would be the enforcers of a balanced budget and one can well imagine the kind of questions that might have to be constantly, and continually resolved by the courts on this issue.

But, probably worst of all, the future of the country, insofar as it is affected by fiscal policy, national economic policy, would be left at chance, random chance. It is a fundamental fact that as the economy drops, dips as the economic activity slows down, incomes fall off, unemployment increases, Federal revenues reflect that consequence very directly.

I think there is an estimate floating around as 1 million in unemployed cost the Federal Government from $16 to $20 billion, the range of estimates that I have seen. If the revenues drop, under the mandate of a balanced budget, you have to then restack it at the worst possible time, which further accelerates the drop, and you are on an endless spiral down.

Senator BAYH. Let me interrupt you. Let's start today, although that might not be fair, because the amendment hasn't been enacted, but if it was, the provisions would be implemented. Suppose either the circumstances of today exist now or 5 years from now, and this amendment is functioning and, after a rather significant and steady decrease in unemployment, we now find we are over the hill the other way, and unemployment is going up and there is a significant body of thought that we are either in or about to be in a recession. What figures would you put on that $16 to $12, what's the closest?

As you point out, when you have an increase in unemployment, the deficit tendencies increase. First the workers that are not employed don't pay taxes, and the revenue falls off. Second, the unemployment

compensation and the welfare roles increase and that's where you get into the figures.

Mr. OSWALD. The most recent figure used by the Congressional Budget Office was $18 billion.

Senator BAYH. So let us assume that we have had that falloff. After having had the process get to the place where we balanced the budget, we get into a recession, and have an $18 billion deficit. Then, according to most of the amendments I have studied, we would either have to increase taxes or decrease expenditures by $18 billion and zap, that's it. That's the purpose, and either that's what we do, or we shouldn't fool around with the amendment.

What would be the impact then, in your judgment, on the next budget on the general goal of trying to balance the budget if we took those steps, say, right now.

Mr. KIRKLAND. You are constantly chasing the consequences of what you have done, if you put this into effect.

This becomes a mandated requirement. It's going to have the drastic impact on the country and on the economy and you are continually doing things through a reaction of that which create other consequences. All problems are created by solutions. This particular solution that seems so glib and simplistic is going to create enormous problems. All of which cannot be forseen.

You take the matter of the increasing reliance on monetary policy, well, I think, in my view, there is excessive reliance on it now. Interest rates have gone through the roof, and monetary policy of that kind is not without its impact on the Federal deficit. The increase in the cost of servicing the national debt as a consequence of this drastic exercise of the powers of the Federal Reserve System are profound and heavy. And, that in itself then creates another problem that is reflected in the budgetary revenue and the expenditure of problems. faced by the Government.

These expenses are not altogether discretionary for the most part. I just don't know how you would grapple with it.

Senator BAYH. I think there has been general agreement among the administrations of the two Republican parties and three Democratic parties, it's been my good fortune to serve under, that fiscal policy does have a role to play in trying to ease out the peaks and the valleys of the economy.

There have been differing opinions as to how big a club you ought to use, to deal with a given set of circumstances, and when it should be used. Perhaps I should say a dose of medicine, instead of a club.

Are you saying in essence that the philosophy that has been pretty well accepted as to the ability of the congressional branch working with the President, and we would both, it seems to me, be impotent, as you describe it here. It wouldn't be just the Congress, but the President's ability to propose. If we have a downturn like I described, and we find ourselves with an $18 billion deficit and Congress feels, to keep 7-percent unemployment from getting to 9 or 10, that we need to initiate a countercyclical revenue-sharing program. We would need to have a public service jobs program, increased retraining program, something designed to deal with the immediate problems of unemployed workers and their families Even an extension of the unemployment compensation benefits-these are all the tools that have been used.

Are you saying we wouldn't have the capacity to use those because those cost money and, thus, would be prohibited by the provisions of the amendment?

Mr. KIRKLAND. Well, that seems clear to me, sir.

Senator BAYH. And, thus, the situation would get worse instead of having the ability to ease the depth and the duration of the recession, it would tend to exacerbate it?

Mr. KIRKLAND. Yes, in our view. I would like to make it clear that we do not oppose the balanced budget per se. The balanced budget is a very nice thing if it rests on a healthy economy, if it rests on an economy of full employment. In fact, we believe that the only way to really achieve and sustain a balanced budget is through full employ


Senator BAYH. I appreciate having your thoughts for our record. I must say, we have been striving mightily for tools that could help us reach the goal of a balanced budget. The concept makes a great deal of sense to me. The concern I have is if you use a tool it's going to make it more difficult instead of easier to reach the goal

Mr. KIRKLAND. There is another side of the coin as well. If a balanced budget, per se, is your primary goal or the mandated goal, in an inflationary period, the effect of the progressive tax system produces rapid increase in revenues. Then theoretically, you will run a surplus, but to reduce the national debt, you have to cut taxes, which is more inflationary.

Senator BAYH. I hadn't thought about that. Senator Hatch?
Senator HATCH. Thank you, Senator Bayh.

First of all, Mr. Kirkland, I think you make an excellent point with respect to the discrepancy between the supermajority vote required to waive the balanced-budget requirements in most of the bills that have been introduced, and the fact that a simple majority is required under the Constitution to declare war. I think it's a valid point. I will personally strive to insure that any resolution being considered by this subcommittee contained alternative waiver provisions allowing a simple majority, in the event of a declared state of war, to waive the balanced budget requirement and a specified supermajority in the event of other circumstances. We have had the waiver percentages range from as high as three quarters down to as low as 55 percent. I think that what some people feel is critical is that we need something to prod Members of Congress into balancing the budget. For instance, you brought up the fact that we may only incur a $30 billion deficit this year. I not only will be absolutely shocked if that's the case, but suggest further that this figure does not include $12 billion in "off-budget" items.

So, you can put it at $42 billion right now, even if your $30 billion figure is correct. And in fact it is probably going to be closer to the $48 billion incurred last year. So people are concerned; the Carter administration in his 4 years will have incurred the 3 out of 4 highest deficits in the country's history. Now, had Ford been reelected, however, I suspect that he would not have done much better, in all fairness. Although he had proposed a balanced budget by the end of his term. I suspect with the Congress that we have, no President could easily balance the budget. So I don't blame the President necessarily. I think it is we in Congress who are to blame. I think most people know that that is true.

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