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you admit, do not seem to be solving the problem of the present situation of stagflation. There seems to be no answer to that. I don't think it is a valid argument to keep saying that we can stimulate the economy
a by continuous deficit spending. In the last 5 years, since the Budget Act's inception, we have had basically a growing economy, or at least a nonrecessionary economy. Is that correct?
Ms. Rivlin. We have had good recovery from a very bad recession.
Senator Hatch. It was certainly not the sort of economy with respect to which Keynes anticipated huge annual deficits?
Ms. Rivlin. It depends on where you start. We have had an uneven but long and reasonably good recovery from the depths of a very serious recession. We have also had a very dismal picture in our productivity.
Senator Hatch. Even Keynes said, however, that when you have periods of recovery and productivity, you ought to have a surplus. Did we have surpluses in these periods or have we had increasing deficits?
Ms. Rivlin. We have not had increasing deficits; we have had decreasing deficits.
Senator Hatch. Could you please elaborate on why you believe that the case for a constitutional amendment rests on the contention that the budget process is biased in favor of increased spending and deficits?
Ms. Rivlin. As I said in my statement, I think the evidence is not all in. We started with a new institutional mechanism at the depths of a very bad recession. I think the test of the process is really yet to come, and I also believe that the process needs a basic reform. It is very difficult, in any one year, to cut expenditures, to phase down programs, and to move toward a lower level of government. Expenditure has to be planned over several years. I think that if the Congress is serious about cutting back on the size of government and about balancing the budget, it should move its budgetary process to a multiyear process. That seems to me a more orderly thing to do than to work on an annual balancing of the budget.
Senator Hatch. You indicate in your statement that simulations performed under the econometric_model of Data Resources Inc. (DRI) indicate that balancing the Federal budget in 1975 and 1976 would have raised the jobless rate by more than 3.5 percent—that is well over 3 million people-to 11 percent of the labor force, and would have delayed the recovery a full year. You also admit additional economic slack would have reduced the inflation rate by 2 percentage points in 1976 and 1977.
Ms. Rivlin. I didn't think I was admitting. I thought I was stating.
Senator Hatch. I am sorry. I didn't mean to characterize it that way. It seems to me that you are assuming with regard to a balanced budget that there are no offsetting benefits from such an action.
Ms. Rivlin. Could I ask you to go on to the next sentence, which says that one would have had benefits on the inflation side. That is definitely a benefit. The Congress is caught in this situation —
Senator Hatch. Is it not true that the DRI model assumes static economic conditions? Might not inflation have been reduced by more than 2 percent, assuming the proper dynamic conditions?
Ms. Rivlin. It could be, but the basic point is that when you are sliding into a deep recession—whenever it is and whatever the economic numbers are–Federal revenues fall off and Federal expenditures go up. To balance the budget at that moment is to make the recession worse. It may have some benefits on the inflation side, but it does make the recession worse. I am not sure one wants to give away that tool. You suggest that one wouldn't give it away.
Senator Hatch. You don't necessarily have to "give" it away because we can have a safety valve or waiver provisions, upon agreement by a specified proportion of Senators and Congressmen. But Congress would be made more responsive. That is the reason people want this amendment. There should be a safety valve; I agree with that. But we have to provide some incentives to Congress to get spending under control. I think you have done us a service by listing some of these nonconstitutional means.
A later witness today, Professor Maisel, has indicated in his statement a great concern that a balanced budget amendment would invest
a power in the technocrats, computer specialists, and economists practicing an inexact art, not a science. I wonder if this isn't already the case. For instance, don't these models premise their conclusions on a basic Keynesian economics theory, a theory that an amendment to the Constitution to balance the budget would most explicitly reject? As you know, the DRI econometric models reject most supply-side analysis, for example.
Ms. Rivlin. I am not here to make a pitch for any particular model or policy. I am simply talking about what is the proper procedure for the Congress to get control of the budget.
Senator Hatch. Let me ask you this. I know you have had a difficult time establishing the proper models and solving the problems of economic forecasting. That is no fault of your own, of course. Would you, however, be able to provide this committee with any kind of detailed historical record of the past accuracy of CBO's budgetary predictions?
Ms. Rivlin. Certainly we could do that.
Senator Hatch. How long would it take you to supply that? Would you please send it to my office as well as to the committee?
Ms. Rivlin. I don't know how long it would take us. We certainly would be happy to share it with the committee and with your office. Let me get clear what we are talking about, however. When we make a prediction or a projection, we base it on certain assumptions. The kind of prediction we normally use is called a current policy projection. We assume that the Congress will continue doing what it has been doing and on that basis project how we expect things to turn out. But the Congress may change its policy, and often has. Thus, there isn't a way of really saying: "Was that current policy projection accurate?” Is the Congress has a tax cut, for instance, that wouldn't have been included in current policy, it will change the outcome.
Senator Hatch. I understand. Why don't you just give the projections you have made since the Budget Act was enacted.
Senator Bays. Could we have that for our record, please?
The additional information subsequently submitted for the record by Ms. Rivlin follows:)
TABLE 1.-CBO ECONOMIC PROJECTIONS BASED ON CURRENT POLICY AND ACTUAL ECONOMIC PERFORMANCE, 1976–781
(Actual and projected values of economic variables, in percent terms] ?
13.1 10.1-12.2 9.4-11.5 8.5-11.5 7.0-11.5
3.5-4.5 3.5-4.5 3.6-5. 1
11.9 11.0-13.0 8.0-11.0 11.0-12.5 10.7-12.0 8.0-12.0 9.5 10.5-12.4 11.5-12.8 11.5-14.5 12.6–14.0
6.7 4.7-6.2 6.0-8.0 5.0 3.9-5.7 5.0-6.5 6.5-8.0 6.3-8.7 6.6 6.6-7.2 7.1-7.8 5. 8-6.4 6.4-6.9 6.6-7.5 7.7 6.9-7.3 7.0-7.5 6.9-7.6 7.8-8.2
8.3 6.4-7.4 5.7-6.7 4.5-6.5 4.0-6.0 9.0 6.8-7.8 5.5-6.5 4.5-6.5 3. 8-5.8 5.8 5.5-6.1 6.0-6.5 5.9-6.9 6.6-7.6
GNP: Annual rate of change.
implicit price deflator.
Rates of change for variables are measured using 4th quarter data; unemployment rates are the
2 The projections were based on current policy fiscal assumptions and, therefore, are not directly
with actual outcomes.
Note: The Congressional Budget Office forecasts were made on a current policy basis-that is, they
Senator Bays. If the Senator would yield, I think you will find the record of our CBO is significantly more accurate and consistent than those who are charged with this responsibility and are doing their best in the various departments of the Federal Government.
Senator Hatch. That may or may not be a good commendation for the CBO.
Senator Bayh. I think it is. I intend to say it and the Senator can assess that any way he wants.
Senator Hatch. There have been many projections in the last year alone that have been less than accurate.
Senator Bayh. I am saying that the projections—and this witness is not trying to sell us on what the policy should be; I think she is trying to show us the problems procedurally. Procedurally, the pronouncements she has tried to make and assessments come a lot closer to what actually happens than other people who are putting out official forecasts.
Senator Hatch. That could very well be. I find her statement provocative and informative, but Ms. Rivlin has made clear she thinks there are better procedures.
Ms. Rivlin. There are preferable procedures.
Senator Hatch. You state that there are signs that a balanced budget without an amendment may be imminent. I would like to ask you (a) to what extent is this a direct response to what this committee is considering today; and (6) to what extent is this due simply to increasing revenues, revenues in part increased by the operation of inflation placing people into higher marginal tax brackets?
Ms. Rivlin. On the first question, I think this committee, like the rest of the Congress, is feeling public pressure to balance the budget and mitigate inflation. I don't know how you assess the relative contributions, but the Congress is voting to balance the budget over the next couple of years. It is responsive to the same forces that are a concern in this committee.
Senator Hatch. Senator Thurmond has some questions. We will submit those to you and will submit your answers for the record.
Ms. Rivlin. Certainly.
Senator Hatch. Thank you. I appreciate your testimony today and have enjoyed your statement. I haven't meant to be combative, but simply to attempt to find some ways of resolving the dilemmas you have raised in your questions. You have raised for example a good case why an amendment should contain effective "waiver" provisions. I can't imagine any constitutional amendment emerging without some form of safety valve that would allow maximum flexibility to Congress where necessary.
Thank you for your testimony.
Ms. Rivlin, we may have questions we might want to submit in writing. I appreciate your patience.
I just would like to say for the benefit of the other witnesses, I hate to do this, both my colleague and I are very concerned. We are going to try to find answers to these very complicated questions, but we are going to have to limit our time if we are going to get out of here.
Thank you very much.
RESPONSES TO ADDITIONAL QUESTIONS BY SENATOR THURMOND Question 1. You mentioned that the Senate has adopted a plan for a balanced fiscal year 1981. How much of that balanced budget can be attributed to inflation and our progressive tax rates?
Answer. The Senate Budget Committees' recommended budget plan, which was adopted by the Senate, calls for a balanced budget in fiscal years 1981 and 1982. This balance is achieved, as your question suggests, in part by postponing a tax cut until fiscal year 1982.
Because both outlays and revenues are changing, it is impossible to determine exactly how much of the balance is due to inflation. Using the figures set out in the First Concurrent Resolution for Fiscal Year 1980, it appears that approximately two-thirds of the growth in revenues between fiscal years 1979 and 1981 is caused by inflation. The remainder results from real economic growth and increases in social security taxes, partially offset by previously enacted but continuing tax cuts.
Outlays, of course, are also increased by inflation. For the First Concurrent Resolution for Fiscal Year 1980, CBO estimated that between fiscal years 1979 and 1981 outlays would increase by $38.5 billion due to automatic increases in those programs formally indexed to the inflation rate. An additional $50.6 billion increase would occur from real growth in program levels. If the Congress chose to grant discretionary inflation increases to those programs not formally indexed an additional $16.4 billion would be added over this 2-year period.
The Senate Budget Committee's recommended budgets for fiscal years 1980 and 1981 called for cuts below current law of $10.4 billion. In addition, in these recommended budgets the Senate Budget Committee chose not to grant $13.2 billion in discretionary inflation increases.
Question 2. You stated that you believe that a multi-year approach is necessary for an effective plan to cut Congressional spending. Do you really perceive any trend toward a multi-year plan to limit spending? If so, where do you see that trend expressed?
Answer. The multi-year targeting procedure adopted by the Senate Budget Committee have been utilized to set out plans that if followed, would limit domestic spending over the next several fiscal years.
These multi-year targets, proposed by the Senate Budget Committee and adopted by the Senate, reduce federal budget outlays as a percentage of the Gross National Product by holding domestic outlays slightly below current-law levels. Since real growth in GNP is assumed, such a strategy causes outlays to decline as a percent of GNP over time from 21.9 percent in fiscal year 1980 to 21.4 percent in 1981, 20.6 percent in 1982, 19.8 percent in 1983, and 18.5 percent in fiscal year 1984.
By utilizing a multi-year approach, the Senate Budget Committee has been able to debate and vote on alternatives that, although they have no budgetary effect in the next fiscal year, lead to significant savings in future years.
Question 3. You have raised the possibility of circumventing a balanced budget amendment by using more off-budget expenditures. How could we prevent that? Would a limitation on “expenditures by the federal government” be sufficient to reach these off-budget outlays?
Answer: Only the judicial branch could give an authoritative answer to this question, and obviously the answer would depend on the full text of the amendment, plus the committee reports and legislative debate in connection with submission of the amendment to the states.
But it does seem clear that the Congress would have to change the current definition of "expenditures” if it wanted to be certain to reach off-budget activities. The word is now used, but not defined, in the Congressional Budget Act of 1974. It has been defined by the Comptroller General, pursuant to Title VIII of that act, as follows:
Expenditures—A term generally used interchangeably with outlays. (See OUTLAYS.) (At one time, the term was used to describe one form of outlays, the other being "net lending." This usage is now obsolete.) (See page 13, GAO pamphlet “Terms Used in the Budgetary Process”, July 1977.] "Outlays" are defined in Section 3(a) (1) of the Congressional Budget Act as "expenditures and net lending of funds under budget authority.” Thus, the 1974 statute draws a distinction between "expenditures" and "net lending" which the Comptroller General in 1977 characterized as obsolete. The July 1977 GAO pamphlet at page 22 defines "outlays” as:
The amount of checks issued, interest accrued on most public debt, or other payments; net of refunds and reimbursements. Total budget outlays consist