Let me remind the subcommittee that my proposal contains an emergency escape clause providing that a deficit may be voted by two-thirds of both Houses of the Congress. This would cover any situations in which genuinely uncontrollable forces pushed spending up unexpectedly; for example, the outbreak of war, or a severe and unpredictable economic reversal.

Thus, as I see it, there is sufficient flexibility in my proposal to allow for deficits when they are truly warranted by disastrous develop

ments.

I shall conclude this brief presentation with one final observation: I am convinced that the Congress now stands at an historic crossroad. Either we put in place a mechanism to achieve fiscal responsibility, or we acquiesce in the continuation of the chronic and demoralizing cycle of inflation and recession which threatens to undermine our whole economic system. The choice is ours.

I was much impressed this morning with President Carter on television speaking to the Knesset in Israel. I want to quote his statement, and then paraphrase it, because I think it applies to our situation here.

In his dramatic statement to the Israeli Knesset this morning, President Carter said this: "The people of both Israel and Egypt are ready now for peace. The people," he emphasized, "are ready now." He put the question squarely to the leaders as to whether the leaders. of those two great countries are ready for peace.

I paraphrase, this morning, President Carter: I say, the people of the United States are ready now for a balanced budget. The people are ready. It remains to be seen whether the leaders are ready.

Now, Mr. Chairman, a most unusual thing has happened in the last several years: 27 or 29, I forget, I don't have the exact figure in my mind, legislatures-27 or 29 different States have petitioned the Federal Government for a Constitutional Convention to mandate a balanced budget through the constitutional process.

I want to commend my long-time friend and constituent, Mr. Don Baldwin of the city of Alexandria. I want to commend Mr. James Davidson, the chairman of the National Taxpayers Union, and I want to commend Senator James Clark, the Democratic president of the Maryland Senate, for their effective work in focusing attention on one of the vital problems facing the United States; namely, the need for a balanced budget.

It was largely their work which brought about these 27 or 29 States acting to request the Congress to call a Convention for the purpose of achieving a constitutional amendment to require a balanced budget.

Personally, I prefer the traditional way. I prefer the way that Senator Bayh handled the constitutional amendment dealing with Vice Presidents, and I prefer the traditional way that we have put into the Constitution-all of our constitutional amendments.

But if the Congress is not willing to act in the traditional way, I for one shall support an endeavor for a Constitutional Convention, if indeed 34 States-and I believe they will-make such a demand. Now I end, Mr. Chairman and gentlemen of the committee, by saying that I think that our country today, in a financial way, is very much like any of us if we should drink too much whisky at night. The next morning, we must do one of two things. We must either take

the discomfort of a hangover, or we must start drinking again, and if we do that consistently, we become an alcoholic.

That's what this country, in a financial way, has been doing for many years now. It has been trying to solve all of its problems by more and more spending. It has become a spendaholic; and we know that if each of us each morning tries to solve our problems for that day by more and more drinking, we become an alcoholic.

Our country, in my judgment, or rather our Federal Government, has become a spendaholic, and I see no other way, no other way, to bring discipline to the Federal Congress than through a constitutional amendment.

I state again, I realize the difficulties involved, and I do not pretend that there is an easy solution.

At this point, Mr. Chairman, may I ask the consent of the committee to insert a few items for the record? One is a rather detailed statement which I have prepared, dealing with the balanced budget proposal. Second is the text of Senate Joint Resolution 45.

Third is an excellent article published in the Washington Post on March 6, prepared and written by James Dale Davidson, president of the National Taxpayers Union.

Fourth, I have prepared a table of the national debt in the 20th century, showing the national debt each year beginning with the year 1900; and also I have prepared a table showing the unified budget receipts, outlays, surplus, and deficit for the fiscal years 1958 through 1980, and the resultant deficit.

I would ask the committee if it would be willing to receive these. Senator BAYH. Without objection, we will place those in the record. Does that conclude your testimony?

Senator BYRD. That concludes my testimony, Mr. Chairman. I again want to express my warm appreciation to you as chairman of the subcommittee, and to the members of the committee for giving me this opportunity to speak this morning.

Senator BAYH. We appreciate your giving us your views on this subject.

I know that you are supposed to be testifying someplace else in about 2 minutes, and Senator Muskie has arrived. I will forgo any questions or further comment.

Senator BYRD. Thank you. I have no objection.

Senator HATCH. Let me just say that, Senator, I appreciate your remarks here today. You brought out a lot of interesting statistics. I agree with you that this country hasn't done a thing to solve the budgetary deficits that we have had for 33 of the last 39 years.

Something has to be done. I think the question is: What is the approach that should be taken?

I also tend to agree with you that I'm not afraid of the Constitutional Convention. That was the way that the Founding Fathers intended to afford the States some relief from a profligate Congress, one unresponsive to what the State and what the citizens in those States really wanted them to do.

I think you have brought up some interesting points. I am interested in your particular amendment, because you have provided for this national emergency escape valve in the case of bona fide national emergencies as determined by the U.S. Congress.

It is a reasonable approach to try and solve these problems. I think that you have certainly put forth an excellent effort in explaining your position, and I have enjoyed listening to you here today. I will forgo questioning.

Senator BYRD. Thank you, Senator Hatch.

Senator BAYH. Senator Simpson?

Senator SIMPSON. Just one item, Senator Bayh.

I very much appreciate your testimony and that of Senator Stennis. In my 2 months here in Washington as a new Senator, every Senator here at least within my hearing, at one time or another, has pronounced the need to cut back, to get responsive to the people, to return to fiscal sanity. But I observe that they can't do it, and they can't cut that particular pork barrel project; they can't deny that particular interest group, they can't deny that certain constituency.

They are absolutely paralyzed. Perhaps I will be, too. The virus is rather common. But I enjoyed your anecdote about the drunken sailor and the spending. At least the drunken sailor is spending his

own money.

Thank you very much.

Senator BAYH. Senator Heflin?

Senator HEFLIN. No questions.

Senator BYRD. Thank you, Senator.

Senator BAYH. Thank you, Senator Byrd.

[The prepared statement of Senator Harry F. Byrd, Jr., and the additional materials referred to follow:]

PREPARED STATEMENT OF SENATOR HARRY F. BYRD, JR.

It is with considerable reluctance that I have become a sponsor of a constitutional amendment to require a balanced federal budget. This is my 14th year in the Senate, but it was not until May 10, 1977-less than two years agothat I first introduced a balanced-budget amendment. Nor did I previously cosponsor any of the balanced-budget resolutions offered by other senators.

One of my chief concerns was that it might prove impossible to draft an amendment with sufficient flexibility to deal with genuine emergency situations. It would not do, obviously, to have the government bound to a balanced budget in time of war or other national emergency.

I believe that the resolution which I have introduced this year, a slightly modified version of the one which I originally introduced in 1977, overcome this potential objection. While it requires a balanced budget, it provides that this requirement may be set aside by a two-thirds vote of both Houses of the Congress declaring a national emergency to exist.

Each time in our history, when a genuine national emergency has arisen, the votes in the Congress to declare that emergency and thus pave the way for necessary legislation and executive action have been overwhelming, approaching uananimity. Therefore I believe that as drafted, Senate Joint Resolution 45-my present proposal-affords adequate flexibility.

I believe that the need for a constitutional amendment to require a balanced budget has, in recent years, risen from the status of being desirable to the status of being urgent. I say this because I see no measure short of such a constitutional amendment which can achieve fiscal responsibility in the federal government. Recent years have shown that there is a total lack of fiscal discipline in Washington. For example, during the last 15 quarters, the economy has been in a period of strong recovery. Yet huge deficits in the federal budget have continued, contrary to the teachings of every school if economic thought of which I am aware, including the writings of Keynes himself.

During the past five years, the government has accumulated $242 billion in deficits, with at least $29 billion-probably more to be added in the forthcoming Fiscal Year. Accumulated deficits have pushed the national debt to close to $800 billion, and Treasury Secretary Blumenthal says it will rise by another $98 billion in the next 18 months.

The interest charges on this debt-just the interest-will cost taxpayers $67 billion next year. That amounts to 22 percent of all individual and corporate income tax payments into the U.S. Treasury.

Moreover, the accumulated deficits of recent years, plus the activities of the government's off-budget agencies, result in a need for the government to borrow over $60 billion in the current Fiscal Year and about the same amount in the next and this is assuming that the highly optimistic economic projections of the administration hold up, which most economists doubt.

As I see it, it is the accelerated spending and accumulated deficits of the government which comprise a major cause-if not the chief cause of the chronic high inflation which is eroding the value of the paycheck of every American working man and woman.

I recognize that many objections have been raised to the adoption of a constitutional amendment requiring balance in the federal budget. Among the arguments which have been advanced in opposition are these:

1. Deficit financing is not a major cause of inflation, so eliminating it will do little if anything to cure inflation.

2. The federal budget is essentially unpredictable and uncontrollable, hence a balanced-budget requirement will not work.

3. If a balanced-budget requirement is instituted, Congress will achieve balance not by cutting spending, but by increasing taxes.

Let us examine these arguments.

First, are continued high deficits a significant cause of inflation?

It seems clear to me that they are.

Of course no single action, even one so fundamental as balancing the federal budget, can be a panacea for all our economic woes. Some cyclical behavior in the economy is probably inevitable. But I am convinced that if we establish a policy of maintaining a balanced budget as a norm, with deficits reserved for emergencies, we shall have taken a giant step toward lowering the inflationary peaks and filling in the recessionary pits.

I say this not because deficit financing violates some semi-religious principles of Puritan thrift, but rather because I see accumulated deficits as a trigger for some of the most powerful inflationary forces in our economy. Among the most significant of these deficit-related forces are excessive growth of the money supply and the fostering of a self-perpetuating inflationary psychology in the economy as a whole.

Consider the monetary growth rate. One of the strongest pressures on the Federal Reserve Board to allow rapid growth of the money stock is the high level of government borrowing. When government demand for lendable funds is high, as it must inevitably be when large federal deficits accumulate, the Federal Reserve must choose between a policy of accommodation and one of strict restraint-in the full knowledge that if the latter course is taken, interest rates are bound to soar. (We have witnessed this very phenomenon in recent months, with the prime interest rate approaching 12 percent while money growth has been restricted.)

All too often, the pressure to accommodate irresponsible fiscal policy becomes overwhelming, and the money stock is allowed to grow rapidly in an effort to make sufficient funds available for both the deficit-stimulated demands of the government and at least the most pressing needs of business for growth. The inflationary consequences of fast growth in the money stock are acknowledged by all economists: overheated demand, soaring consumer credit, weakening of the dollar, rapidly rising import prices-in short, the very conditions which prevailed in late 1978, when the Fed was forced to put on the brakes and prop up the dollar. Were it not for the high demand for funds on the part of the government, more moderate and non-inflationary-adjustments in the money supply could be made, thus permitting steady business growth without shyrocketing prices.

One of the worst effects of accumulated deficits and the consequent high level of government borrowing is the destruction of so much of the flexibility which the Federal Reserve Board needs to adjust to the credit requirements of the private sector without precipitating crises in the economy.

But continued deficit financing has a far broader inflationary impact than can be seen by looking only at monetary policies. So long as the government is in the position of stimulating the economy with big deficits in good times and bad, it will be perceived as unconcerned about inflation. The not unreasonable conclusion on the part of consumers, labor, business, bankers, investors—all participants in the economy is that price increases will continue and probably escalate.

The long-continued deficits and the resultant heavy government borrowing— create an environment inwhich inflationary expectations enter into every economic calculation. A poisonous inflationary psychology premeates the whole nation.

Consumers engage in "advance buying" to beat anticipated price increases. This overheating of consumer demand not only tends to push up prices in the short run, but also paves the way for later recession, for such artificial demand must sooner or later dry up. When it does, demand falls below normal levels.

Unions, foreseeing that the value of paychecks will continue to be eroded, make anticipatory wage demands which inevitably lead to further price increases.

As Treasury borrowing continues at massive rates, it soaks up capital. Funds which otherwise would be available for business growth often are preempted, for as former Treasury Secretary William E. Simon observed, "when the government goes to the money market, it goes to the head of the line." At the same time, the government's borrowing creates upward pressure on interest rates.

The effect of these trends is to discourage capital investment, and in the longer run this means lower productivity and less capacity-both of which are inflationary.

Thus a pervasive inflationary psychology spreads across the entire economy. Consumers, workers, business men, and investors all seek to shield themselves against the consequences of protracted inflation, and in the process usually contribute to its prolongation.

The government, by overdoing fiscal stimulus, continually reinforces inflationary expectations. Surely if a balanced budget were to be established, this would represent a major break in the vicious circle of inflation.

So it seems clear to me that continued deficit financing, with the consequent impact upon monetary policy, is indeed a major cause of inflation, and that a balanced budget would be a major step toward alleviating the chronic inflationary pressures in our economy.

The second objection to a balanced-budget amendment, namely that it won't work because the budget can't be controlled, I think is completely fallacious. Indeed, one is tempted to ask, if the Congress and the President cannot control the federal budget, how do they justify their salaries?

One may note, too, that many of those who claim that the Congress and the Administration cannot forecast revenues or limit spending in the next breath argue that despite these disabilities, the very same Congress and Administration can skillfully apply the tools of fiscal stimulus to ward off an impending recession. As James Dale Davidson, president of the National Taxpayers Union, observed in a recent article in The Washington Post, "That is like saying that someone who is too blind to wield an axe should be trusted as a surgeon."

Furthermore, the argument that a balanced-budget amendment is unworkable completely overlooks the fact that during most of the nearly 200 years of our national existence, the federal government operated with its budget in balance. Until quite recently, the only significant exceptions were years of war and the Great Depression.

While it is all too true that much federal spending has spun out of control, it does not follow that no control can be exerted. Rather, the logical conclusion is that control must be exerted.

That will involve establishing a few good habits here in Washington.

First, we must have conservative estimates of revenues. When framing the budget, to insure staying within a specified target of outlays, those who prepare the President's recommendations and we in the Congress in adopting our budget resolutions must avoid the temptation to overstate probable revenues.

Second, spending estimates must be tight and supplementals must be avoided in all but the most extreme cases of need.

Third, the Congress must maintain close oversight of all programs to guard against waste, fraud and mismanagement.

Fourth, non-essential programs must be scrapped through a "Sunset" process, and new programs must pass a rigorous test of essentiality.

Fifth, benefit levels and eligibility criteria in some programs, such as welfare and food stamps, must be carefully re-examined.

Sixth, we must take a close look at the way we measure the unemployment rate, which triggers so many entitlement programs. In my view the present method of measurement overstates hardship.

Thoughtful observers will be able to add to this list. It is merely an outline of some productive steps which should be taken promptly to get control of spending and enable the government to meet outlay targets geared to realistic estimates of revenues.

It is my conviction that if such reasonable measures are adopted, there is no reason why the budget cannot be balanced when the nation is not in an emergency situation.

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