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rional amendment to balance the budget. So let us examine these proposals and see where they lead us and what the effects might be.
You are currently considering 20 different proposals to amend the Constitution for the purpose of balancing the federal budget, each with its own formula, each with its own cures and each with a different perspective on today's economic needs. I think that there is one point upon which we can all agree, double digit inflation, rising taxes, swollen mortgage rates, trembled fuel costs, and shrunken dollars have crashed down on all of us, radically affecting our lifestyles and our expectations. Our constituents want action, and quick solutions to some very complex problems. So, as in earlier economic crisis, the budget balancers have come along with a cure-all for our economic ills. Sponsors of this legislation assert that by simply inserting a few bars and graphs into our nation's most fundamental law we can stop inflation, reduce taxes and cut government waste all in one fell swoop.
I am not an economist, I do not pretend to be any kind of an expert on economic theory, but I have studied this problem and realize that both the problem and solutions are complex. And the constitutional amendment approach to these serious economic problems seems simplistic. I would have to liken this situation to a saying by H. L. Mencken that, "To every complex problem there is a simple solution, and it is usually wrong.'
In this case I think the balanced budget solution is both simplistic and incomplete.
Fifty years ago this very month an event took place that plummeted our nation into the most severe economic crisis we have ever had. In October of 1929 the stock market crashed, plummeting us into the Great Depression. But like today, the budget balancers had a simplistic answer to these economic ills. If you look back over the Gallup polls in the early 30's you will find that 70 percent of the American public favored a balanced budget as a cure for the economic problems of that time. Before we rewrite our Constitution and lock into it the resurrected depression era economic policies of Herbert Hoover, perhaps we should take a look at some of the historical aspects of the balanced budget debate.
Looking back over this century, it is noteworthy that one of the most dramatic and rapid inflationary periods in our history occurred in 1919–1920. But during this high inflationary period there was no budget deficit at all, rather we had a large surplus. Looking back at the Great Depression we can see some of the pitfalls of a mandated balanced budget. Herbert Hoover proved that in 1931 when he turned a recession into a full scale depression.
The stock market crash of 1929 had set off a recession. With the economy failing and unemployment rising, the federal government began running a deficit. Like today the cry arose that deficit spending was the cause of the economic problems. Hoover heard the cry, and he balanced the budget quite easily, he simply raised taxes. By 1932 along with a balanced budget purchasing power decreased even more and unemployment rose to a staggering 25 percent. Franklin Roosevelt on looking back over the recovery from the depths of depression told the American prople, "In 1933, 1934, or 1935, a balanced budget would have been a crime against the American people It is the deficits of today which are making possible the surplus of tomorrow.” Had Roosevelt not been able to pump money into the economy by incurring a deficit in those bleak years we might never have recovered from the depression at all.
In more recent times deficits persisted in the 1959–1965 period, yet inflation rose by only one percent annually. In 1960 President John Kennedy remarked that, "We should seek a balanced budget over the course of the business cycle, with surpluses during the good times more than off-setting the deficits which may be incurred during the slumps. I submit, he said, that this is not a radical fiscal policy, it is a conservative policy."
If we look at more recent economic history we find that in 1969 we had a $3.2 billion dollar surplus yet inflation was at 6 percent which in 1969 was very high. In 1974, the federal budget was almost in balance, the deficit was only $4'3 billion when the recession set in. But, by 1975, 842 percent of our work force was unemployed. Because of lost tax revenues and increased unemployment our budget deficit had swelled to $66 billion dollars by 1976. Had the federal government been constitutionally required to balance the budget through tax increases or spending cuts, our nation would have slid down a vicious spiral into a depression. Econometric models using the 1974-76 statistics show us that had we balancer the budget unemployment would have reached 12 percent, 11 million people would have been jobless, and from 1973-75 the GNP would have declined by 12 percent.
Again looking back at 1974, we had a $41 billion deficit with 11.8 percent inflation, but in 1976 the deficit jumped to $66.4 billion and inflation dropped to 5 percent. Clearly then the fact that we currently have a large deficit and high inflation does not necessarily mean that one is the cause of the other. However most economists would agree that there is a link between deficits and inflation. But the key point here is that whether or not that link is forged depends on the level of employment. Deficit spending is inflationary only when the government pumps purchasing power into an economy which is already at full employment.
To put it more simply, had a Constitutional amendment for a balanced budget been in effect during the 1974-75 recession, the American economy woull have suffered its first depression since the 1930's.
The use of the federal budget to moderate recessions has played a major role since the end of World War II. The proposed amendment would destroy our most important guarantee against a repetition of the depressions that plagued the prewar era.
I am sure that proponents of the various measures before you will argue that there are escape clauses. That in times of crisis the Congress can get around this amendment. I urge you to keep in mind that this is the fundamental law of our land that we are tinkering with. This is no simple piece of legislation. As a part of an enduring Constitution this amendment would have to define the meanings of expenditures and revenues for time to come. It would become routine for lips constitutionality of various budgetary changes to be challenged in the courts. Many important aspects of budgetary and economic policy making could te transferred from the Congress and the Executive branch to the Judicial branch. I do not think this is what our founding fathers had in mind when they conceived the idea of the separation of powers.
Remember, a constitutional amendment must be as meaningful fifty years from now as it is today. Various statistical measures such as the gross national product or consumer price index may not even be in use in the future. I agree with the economist Paul Samuelson that “economics is so inexact a science and the future is so unpredictable that it is an act of arrogant folly to try to specify constitu. tional formulas for the infinite future.”
I understand your concerns, as elected officials our constituents are demandling relief from the economic problems that plague us all. We as a nation are frightened. The standard of living we once enjoyed seems to have vanished. But before we buy the quick cure all of a balanced budget amendment, before we submit to this radical surgery, let us examine some of the rehabilitative exercises that are available to us in our struggle back to economic health.
We can and must reexamine our spending priorities in the builgetary process We must trim the fat off of our bloated budget, but that trimming must nuclien at the expense of vital but undernourished segments of our society--such as the cities, the poor, the elderly. We can and should root out the waste materiala the programs that are no longer working, the inefficient bureaucratic red tape that often handicaps our own efforts at recovery.
The cures are already available within our system, and we are making progress limiting our deficit spending. I am optimistic that we can deal with our current economic problems without engraving economic policy into our most precions document.
So for these reasons I urge you to preserve our Constitution. Leave out the bars and graphs and let it stand as it is.
QUESTIONS For Thomas O'NEILL (CITIZENS FOR THE CONSTITUTION)
SUBMITTED BY SENATOR THURMOND, WITH RESPONSES Question No. 1. I appreciate your concern for our Constitution and our Constituie tional process. I share many of the thoughts you expressed here today. If we are to change the Constitution, we need a compelling reason. However, I must sur that when over 80 percent of the people in this country, and 30 states in our l'nion feel that we need to balance the federal budget, and when Congress refuses to get responsibly on the issue, we are faced with a compelling reason. You mention "equivalent cases” in our history. When have over 70 percent of the people and 30 states, seeking a Constitutional Convention, called for some action only to be rebuffed repeatedly by Congress?
Answer No. 1. In answer to your first question, I believe that this cosintry should not be governed by pollsters. But if we are to consider the polls, let is look at the total picture. On first glance it would appear that a large majority of the American public favors a balanced budget, that is, if you ask the simple question to you favor a balanced budget. But in those same polls, when pollsters really po wplore that question we find that the American public, while favoring a balanced intliiget, does not agree to cutting spending to achieve that goal. If you break those agires down, you can not find a majority to support cutting the programs which contribute to the budget deficits.
I would also take issue with the notion that the actions in the state legislatures of thirty states truly reflect the sentiment for a Constitutional convention. In slleen of those states were there no full committee hearings on this bill, in fifteen nates there were no committee reports, and in six states there was nó rceorded vote on these resolutions. I am delighted that this committee and the Congress are now holding public hearings and bringing this issue before the American public.
Question No. 2. As you mentioned, this is not simple piece of legislation. We have resorted to a Constitutional amendment because the simple legislative process huss proved to be totally ineffective in the area of controlling federal spending. Do son really hold out any hope of the legislative process miraculously reversing itsuf in this area?
Answer No. 2. I do believe that the Congress as well as the President have acted
sponsibly and are seriously attempting to control federal spending. I think that te size of the cuts in this year's federal budget reflect that concern. I am confident I'll we will have a balanced budget in the near future, however a large factor in as ir l;
nIget consideration is the state of our economy. With the economic slowdown auw projected for 1980 we may be a little slowed in achieving this goal immediately however I am sure we will see a balanced budget within the next few years.
Question No. 3. The national debt is rapidly approaching one trillion dollars. Do you seriously contend that we are making progress on limiting our deficit sneniling?
Answer No. 3. I do not believe that the national debt is growing out of control. Ailmitteilly at first glance the numbers themselves are somewhat frightening. But ipon closer scrutiny the federal debt is hardly alarming. If we view it in Ilative terms as a percentage of the Gross National Product, public debt today is Trghly 35 percent of the GNP as compared with 123 percent of the GNP in 1947. And 22 percent of that debt is actually held by the Federal Government itself. Public holding of the debt has as a percentage of the GNP steadily declined from 62 percent in 1954 to 30 percent today. And how do we stack up against d'her nations? Since 1976, the U.S. deficit as a percentage of the GNP was lower than the deficits as percentages of the GNP's in both Germany and Japan.
So in conclusion I do believe that we are making progress in limiting our deficit spending.
Senator Bayh. Our next witness is Mr. Jim Davidson, the chairman of the National Taxpayers Union, Washington, D.C.
TESTIMONY OF JAMES D. DAVIDSON, CHAIRMAN, NATIONAL TAX
PAYERS UNION, WASHINGTON, D.C., ACCOMPANIED BY ROBERT MARTIN, ECONOMIST
Mr. Davidson. Thank you, Mr. Chairman. I am here today with one of the citizens of whom we hear so much. He is a member of the National Taxpayers Union. His name is Robert Martin. He is an economist and an investment analyst money manager, whose specialty is the study of debt markets, and he will have a few words to say.
I thank you for the opportunity to appear before this subcommittee. The National Taxpayers Union, which I represent, includes 130,000 duespaying members interested in reducing the burdens on the taxpayer. Since 1975, we have been working on behalf of a constitutional amendment to require that the Federal budget be balanced. Largely through our efforts, 30 State legislatures have petitioned Congress to call a limited constitutional convention to propose such an amendment in the event that the Congress cannot. And I may say here that I believe in the event the Congress does not act that the opportunities for four more States to make such a call will be enhanced.
Opinion polls show that an overwhelming majority of citizens from all walks of life, young and old, rich and poor, black and whiteand to answer explicitly a question that was placed to Mr. Kirkland, according to the Gallup poll 88 percent of labor families—all agree that constitutional restraints are necessary to force the Federal Government to follow practices of sound finance.
Since 1961, the budget has been in balance just once. Deficits are now the norm during good years and bad. Further, as the record clearly indicates, the trend toward increased deficits is worsening. I point out that in the fiscal years 1961 through 1965 inclusive, the total budget deficit was only $23 billion. In the 1976 through 1980 fiscal years, the total will be $276 billion or more than 10 times what the budget deficits were less than two decades ago.
The total deficit spending since 1961 is over $450 billion. This has many bad effects which we have heard about often and I won't repeat all of them. I think everyone is aware that one of the major consequences when the Federal budget is out of balance is that there is a tendency for the Federal Reserve to accommodate the deficits by expanding the money supply. This is inflation. Federal deficits in times of economic recovery are also a clear symbol of Federal fiscal irresponsibility and they help encourage an inflationary psychology throughout the economy.
Currently, about 20 percent of the national debt is owned by foreign investors. Interest payments on this debt add significantly to our balance-of-payments deficit and contribute to the decline of the dollar overseas.
In most cases, the Federal Government has been running budget deficits as an expedient way of redistributing earnings from one sector to another by hiding the costs in a way that is difficult to trace. Whether these costs are hidden by the shifting of the tax burden to future taxpayers, by increasing interest payments on the national debt, or by increasing the money supply, it is difficult to weigh these costs versus the benefits of the programs they finance.
Unfortunately, current taxpayers are starting to pay for the deficits of the past 20 years. With inflation increasing and deficits continuing, prudent financial managers must assume that the burden of Government spending will continue to rise. Thus, they turn down high-risk projects with low future, aftertax paybacks. The result is that rates of investment in the United States now trail those in all other industrialized countries.
And here are a few examples of the consequences of fiscal excess, which I think make this not simply a question of economic abstraction, but a question of human need, something which should concern every Member of Congress and indeed every thinking citizen.
Growth in family income has dwindled. Growth in the medium income had been increasing at about 35 percent per decade. But from 1970 to 1977, it had only grown by 4 percent. That took $5,000 out of the income of the average citizen.
During the 1970's, investment in new plant and equipment-
Mr. DAVIDSON. Annually. In other words, if income had grown as fast as it had done in previous decades, today the median income of the average American family would be $5,000 higher than it is now.
Senator BAYH. Well, that is over 10 years.
Senator Bayh. You give the impression, even in response to my question, that was $5,000 this year.
Mr. DAVIDSON. No; we have $5,000 less income than we would have.
Further, private pensions and the well-being of the elderly are being eroded in spite of increases in social security programs. Most pension programs do not increase in value at the time the pensioner retires. A $10,000 pension, if inflation continues at current rates, will be worth $7,569 in spending power within 2 years; within 5 years it will be worth less than $5,000.
But in 10 years it will have a spending power of $2,484. And within 15 years, the $10,000 pension today will be worth $1,238 in purchasing power.
Between 1965 and 1975, the number of taxpayers paying 20 percent of their income to the Federal Government rose from 19 percent of the population to 53 percent. This is what happens while Congress was going through the motions of cutting taxes.
Today 7 of 10 families have less real spending power after taxes than they had in 1967.
The Government has become a giant publishing venture printing dollars by the billions. So much money has been printed without backing that a real dime from 15 years ago is worth more than a paper dollar today. I think that is a sobering consequence of these deficits.
In fact, it is not only our money that is worthless, it is almost everything that we buy. The services that we get have become cheapened just as the money has been cheapened. I point out to you that one candy bar manufacturer has surreptitiously reduced the size of its simple milk chocolate bar 14 times in the last decade by as little as a sixteenth of an ounce on each occasion. Shirts are manufactured typically with one fewer button than they had years ago. Pizza manufacturers slice the sauce on frozen pizza thinner. The doors on new homes are no longer solid wood. Most are plastic or plywood stretched over cardboard.
These are symptoms of the cheapening of our way of life which do not show up in the indices which supposedly tell us about inflation.
Indeed, there is another problem that we have which is, the American dream of homeownership is being placed beyond the reach of most people. I point out to you that in 1960, the monthly interest charge to buy the average home sold in that year was $32.22. As of July it was $715.50 a month, more than 20 times than it was only two decades ago.
Obviously income today is not 20 times higher than it was two decades ago.
We have even reached the situation that a confederate dollar bill backed by a government which has been defunct for more than a century is worth eight times as much as the dollar bill we are printing today down the street.
The fault for these persistent deficits and excessive spending is not the bad intentions of elected politicians. Elected officials do as they should, respond to pressures from their constituents. What is clear is that voters are pleased by tax rate reductions, they are displeased by tax rate increases. Well-organized special interest groups make strong demands for programs that benefit them greatly and personally.