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Federal deficits in times of economic recovery are also a clear symbol of federal fiscal irresponsibility and help encourage an inflationary psychology.

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 contributes 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 the costs are hidden by shifting of the tax burden to future taxpayers, by increasing interest payments on the national debt, or by increasing the money supply, it's difficult to weigh these costs versus the benefits of the programs financed.

Unfortunately, current taxpayers are starting to pay for the deficits of the past twenty 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, after-tax paybacks. The result is that rates of investment in the U.S. now trail those in all other industrialized countries.

Here are a few examples of the consequences of the fiscal excess by the federal government:

Growth in family income has dwindled. Growth in medium income had been increasing at about 35 percent per decade. But from 1970 to 1977 it had only grown by 4 percent.

During the seventies, investment in new plant and equipment has been well below the postwar trend.

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 all happened while Congress was pretending to cut taxes.

Seven of ten families have less real after-tax spending power in 1975 than they had in 1967.

Government is becoming 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.

In fact, a Confederate one dollar bill, backed by a government which has been defunct for more than a century, is worth 8 times as much as the dollar

bill we are printing today. The fault for these persistent deficits and excessive spending is not bad intentions of elected politicians. Elected officials do, as they should, respond to pressures from their constituencies. 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. On the other hand, the costs of the programs are spread over all taxpayers so that when spending is decided on a program by program basis the pressures for increasing spending are always greater. The result is that the total of government spending is higher, even though the majority of voters would oppose the higher total if given a chance.

The simple arithmetic of the pressures for increased spending over what the tax base can produce, produces permanent and continuing deficits. This tendency could be kept in check by new constitutional fiscal groundrules. These incentives have to be changed. Simply replacing one set of legislators with another will not eliminate these incentives. The evidence is clear that legislators prefer deficits to surpluses and prefer spending increases to spending cuts.

The familiar news stories that the dollar is falling on foreign money markets, that interest rates are rising, that consumer borrowing is rapidly increasing, that there is today an inflationary psychology, all point to the urgent necessity of action now to balance the federal budget. A strongly worded amendment proposed by the Congress now would do more to restore confidence in the U.S. dollar than any other single action. A balanced budget amendment, proposed by Congress, would be a signal to the world that we have finally found the resolve to turn off the printing presses and live within our means.

The question now becomes which of the various proposals for changing the fiscal groundrules should be enacted. To date, over 70 different proposed constitutional amendments have been introduced. These resolutions can be isolated into three distinct categories.

(A) One group of proposals seeks to restrain all deficits and in so doing balance the federal budget.

(B) A second group prescribes formulas to limit the rate of federal spending increases and thereby balance the budget.

(C) A third approach restrains deficit spending and sets rules for tax rate increases and tax rate reductions with the overall goal of keeping the budget

balanced. There are some counterproductive proposals which do not fall into these three groups. For example, we do not support S.J. Res. 2, introduced by Senator DeConcini and S.J. Res. 6, introduced by Senator Stennis. Both provide for automatic surtax increases to produce additional revenues to automatically cover the deficit of the previous year. In our estimation, such proposals would defeat one of the major popular purposes of the balanced budget concept, which is to balance the budget at a lower level of federal expenditure and increase accountability for the costs which Congress imposes upon the public. The budget should not be balanced on the backs of the taxpayer. Accountability would be lost through the formula proposed by Senators Stennis and DeConcini. Since the surtax would operate automatically, it would be unclear as to whom should be blamed for higher taxes because every member of Congress who contributed to the total budget would be in some measure indirectly responsible. Such a proposal would allow Congress to raise tax rates without a recorded vote! It would further bias the fiscal rules in favor of higher spending and higher taxes. The public wants just the opposite.

S.J. Res. 11, authorized by Senator Talmadge requires a balanced federal budget except when both Houses of Congress agree to a concurrent resolution stating that there is a national emergency. In our estimation, such a proposal does nothing. It is meaningless, or worse, because it reaffirms the current fiscal ground rules that have repeatedly resulted in deficit spending.

The first group, containing the largest number of proposals introduced, all directly restrain deficit spending. They differ as to what language best describes the balanced budget concept.

They differ in the supermajority vote required to accept a deficit, ranging from a meaningless majority requirement go 55 percent, two-thirds, or threefourths vote of both Houses of Congress. Some proposals in this category also require systematic repayment of the national debt.

The proposals in the second group impose a mathematical formula for government spending. This restrains spending either by retsricting the amount of federal outlavs to a percentage of the GNP or national income, or by prescribing the maximum permissible rate of increase in iederai spending from year to year. Many of these proposals also incorporate language from the proposals in group one.

The third approach makes it harder to run a spending deficit and raise tax rates, while allowing tax rate reductions notwithstanding the balanced budget requirement.

A few examples of the first group are: S.J. Res. 10, by Senator McClure, and S.J. Res. 13, by Senator Helms, both prohibit total outlays from exceeding total receipts. S.J. Res. 10 requires a two-thirds vote of both Houses of Congress to suspend the rule for one year, while S.J. Res. 13 requires a three-fourths vote.

H.J. Res. 213, introduced by Representative White and the Democratic Research Organization, would require that total outlays not exceed total receipts "for such year to the end that the level of the national debt in the hands of the public is not increased.” It may be suspended for any fiscal year during war declared by Congress or by an affirmative vote of two-thirds of both Houses of Congress. It also provides for the disposition of unanticipated deficits. To date, no similar proposal has been introduced in the Senate.

S.J. Res. 45, by Senator Byrd, is similar to S.J. Res. 10 but also requires systematic repayment of the national debt over a 25 year period.

A few examples of the second group are: S.J. Res. 79, by Senator Byrd, requires a balanced budget and also limits total outlays to 20 percent of the GNP of the previous year. II.J. Res. 43, by Representative Guyer and S.J. Res. 5, by Senator Dole, are similar but H.J. Res. 43 would limit federal tax revenues to 15 percent of the GNP and S.J. Res. 5 would limit spending to 18 percent of the GNP. These provisions could be suspended temporarily by a two-thirds vote of both Houses of Congress.

S.J. Res. 56, by Senators Heinz and Stone, and H.J. Res. 395, by Representatives Jenkins and Conable, provide for a limit on federal expenditures. Total outlays could not increase at a rate faster than the rate of growth of the gross national product. If the inflation rate exceeds three percent, the Congress is penalized such that the rate of growth of the gross national product. If the inflation rate exceeds three percent, the Congress is penalized such that the rate of growth of outlays is slightly less than the rate of GNP growth. Emergency outlays in excess of the limit must be approved by a % vote of both Houses of Congress after the declaration of an emergency by the President. In addition, the limit may be changed by s 34 vote of both Houses of Congress.

S.J. Res. 9, by Senator McClure, would limit total outlays to no more than K the average national income for the three prior calendar years.

S.J. Res. 86, by Senator Hatch, requires a balanced budget and uses the same formula that S.J. Res. 56 uses to restrain the growth of federal spending. It provides for exceptions to the rule by a rollcall vote of 60 percent of all members for each House of Congress.

The Third approach has only one proposal to date. H.J. Res. 278 and S.J. Res. 93, the Rousselot-Armstrong amendment, would require a balanced budget every fiscal year unless %s of both Houses of Congress votes to approve a deficit. It requires Congress to reduce all tax rates to offset the effects of inflation. Tax rate increases would require a % majority vote, but tax rate reductions could still be passed by a simple majority and may be passed without violating the balanced budget rule.

The proposal differs from the first group of proposals primarily because Congress is forced to vote on tax rate increases rather than relying on inflation to raise taxes. It also explicitly assumes that tax rate reductions are more effective than spending increases in promoting economic growth. This amendment assumes deficits which are products of tax rate reductions are more likely to be self financing than deficits caused by spending increases.

When considering other witnesses to speak on the subject, we recommend that the committee invite Professor Allan H. Meltzer, Maurice Falk Professor of Economics and Social Science at the Carnegie-Mellon University, and a leading theorist on this subject. Professor Meltzer has a proposal for a constitutional amendment, part of which may prove useful to the committee when drafting language for such an amendment. In part, his proposal says that for any fiscal year total government outlays shall not exceed the average of total budget receipts in the three most recent fiscal years.

This part of his amendment deals with many of the objections raised about the effects of such an amendment.

Once an amendment takes effect, Congressmen will be under less pressure to spend. When they do come under pressure from spending constituencies, the Congressmen will be constrained by the new fiscal groundrules. The special interests will then find that the rewards for lobbying for income transfers are reduced, so fewer groups will organize.

As Professor Meltzer has said: “The incentives to organize and to press for increased spending are very different now. It is these incentives that have to be changed. A lasting change cannot be made by defeating one group of legislators and replacing them with another.” Only by changing the rules under which spending decisions are made can we expect to obtain the outcome which people desire an end to the inflationary deficits with taxes reduced to a more tolerable level.

We strongly feel that all three approaches represent a significant improvement over the current situation. The question is not one of “either-or". The question is which approach best represents the widest public support for changing constitutional fiscal groundrules expressed by these three approaches.

With this in mind, we recommend that the subcommittee draft the best language for each of the three approaches. Then report three amendments, one from each group, so that the public can voice its opinion to allow everyone to see which approach garners the widest support.


Washington, D.C., December 14, 1979. Hon. BIRCH Bayi, Russell Senate Office Building, Washington, D.C.

DEAR SENATOR Bays: This letter is in response to your request made during my testimony on constitutional federal budget restraints. You asked for a list of areas where budgetary savings can be made. Our staff has been actively investigating this subject, and we look forward to providing you, Members of the Subcommittee and Members of Congress with additional information in the near future.

Savings can be made in the following areas:

Clinch River Breeder Reactor: This $2.6 billion project uselessly duplicates existing technology and should have been discontinued 3 years ago.

Reform Social Security Disability Insurance program. The modest reforms proposed by H.R. 3236 would save $1 billion a year by 1984. The bill would not reduce any benefits to those currently on the program.

Reduce travel of federal employees. Funds for government travel could be cut $500 million per year.

Individuals and businesses owe $140 billion to the United States. In fiscal 1978 Federal accounts and loans receivable increased $22 billion. No one knows how much could be saved here because the Federal Government keeps such messy records. Savings of several billion dollars a year are realistic.

Federal Pay Reform: President Carter's modest pay reform proposal could save $3 billion a year by 1982. In addition, many federal employees are over graded resulting in a net loss of $436 million each year.

Amtrak still wastes money. Fares still collect only a fraction of the actual cost per passenger. Real reform of Amtrak's subsidies could save several billion dollars in the next 5 years.

Congress should have adopted reconciliation instructions in the fiscal year 1980 budget. Fiscal year 1980 outlays would have been cut by $3.6 billion.

Synthetic fuels: President Carter would like to spend $88 billion here. A free market in energy would better solve our energy problems. No money should be spent on this program.

Chrysler Aid: The cost of economic stagnation, of crowding out in the capital markets, and the precedent set by a corporate bail-out will cost taxpayers several billion dollars.

H.R. 2325, Solar Power Satellite Research and Development Act: This bill will cost $25 million in 1980, even though a similar study is already being performed. If this project is continued to completion, it could cost taxpayers several billion dollars.

Stonewall Jackson Lake Project: This project has been "justified" with outdated and invalid data and assumptions. It's not cost effective. It's opposed by local citizens and will waste at least a quarter of a billion dollars.

The Department of Energy should be abolished. It's a mess. It has caused the energy shortages, not solved them. Much of their $9 billion budget could be saved.

I am also enclosing a list, complied by our staff, which illustrates the areas where waste can be reduced.

In conclusion, there is strong evidence that the budget can be balanced by cutting waste, and that there is no need to raise taxes. Sincerely,


Chairman. Enclosures.

Clear up questioned and unresolved grant monies in highway programs. Possible savings: $8.2 million questioned and $68.8 unresolved costs.

Close out inactive projects in Federal-aid Highway Program. Possible savings: $100 million.

Clear up questioned and unresolved grants in the Airport Development Aid Program. Possible savings: $6 million unresolved and $7.7 million questioned.

The Army could buy diesel generators instead of questionable gas turbines. Savings over 20 years: $275 million to $1.6 billion.

Reduce Defense budget by at least $25 million by improving transfer of Army Pacific Support Functions.

Save tens of millions of dollars by improving the Management of Air Force Inventories.

Savings on Department of Defense foreign military sales (reduction in the fiscal year 1978 arms sales ceiling had the correct sales figure been known): $420,000,000.

Savings through reductions in flying hour_programs-flying for training and transportation-of the Army, Navy, and Air Force (accomplished by substituting in-flight simulators in lieu of airtime, etc.): $124 million.

Excess and surplus property acquired by GSA in fiscal year 1977. $1,700,000,000 remaining in inventory after some additional property had been disposed of.

Cost due to government buying commercial products of a higher quality than needed, lack of price competition in the process. This relates specifically to GSA

purchase of common use items of all federal agencies under the multiple schedule award program, under which GSA now operates. Possible savings: $100,000,000 annually.

Require Medicaid and Medicare institutional providers to have a mandatory common audit. Possible savings: $41 million.

Enact the Civil Money Penalty Bill to give Secretary the authority to move against defrauders of Medicaid and Medicare possible savings: $24 million.

Simplify eligibility requirements and automatic State AFDC information systems. Possible savings: $92 million.

Reduce excessive physician costs for hospital based radiologists, anesthesi. ologists, and pathologists. Possible savings: $55 million.

Improve administration of Child Support Enforcement. Possible savings: $35 million.

Statutory reform to prevent excessive payments for laboratory services. Possible savings: $51 million per year.

Competitive selections of Medicare fiscal agents. Savings: $50 million annually.

Cope with SSI/Disability overpayment problem. GAO estimate savings: $54 million.

Clear up questionable research funds for Colleges and Universities. Savings: $3.5 million now $86.5 million and $143.8 million are in question.

Charge interest for misspent federal money to grantees—9 percent rate would recover $25 million.

Eliminate Social Security Students Benefits for Post-secondary Students-save $1.1 billion in 1981. GAO No. HRD-79-108.

Eliminate duplication of National Disaster Loan Program by the Small Business Administration. Possible savings: $2.5 billion.

Savings that could be realized in the Agency for International Development: $245,994,093.

Administrative costs and labor costs incurred by the U.S. Government identified as direct costs of the Davis-Bacon Act: $175 million.

Senator Bayh. Our next witness is Mr. Marshall Beil, an attorney representing the Association of the Bar of the City of New York.



Mr. Beil. Thank you, Mr. Chairman. My name is Marshall Beil. I am a lawyer in private practice in New York City and have the honor today of representing the Committee on Federal Legislation of the Association of the Bar of the City of New York.

On behalf of the association, I would like to thank you for giving us the opportunity to participate in these hearings. In view of the lateness of the hour, I ask that my testimony be submitted as well as the report published earlier this year. At this time I will just summarize our findings.

Senator Bayh. That will be fine.

Mr. Beil. As we are lawyers and not economists, we have taken no position on the economic policy question whether the Federal budget should be balanced or Federal spending limited. We do believe, however, very strongly that even assuming a balanced budget is desirable, a constitutional amendment requiring that result is not. To elevate a balanced budget economic policy to permanent constitutional status is unwise and historically unsound. It would fundamentally alter the principle of majority rule and the existing allocation of powers among the three branches of Government.

In words you expressed earlier today, Mr. Chairman, it would essentially create more problems than it would solve. In our judgment, the economic policy issues raised by the proposed amendments are

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