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of the sum of the outlays from appropriations and funds included in the unified budget, less offsetting receipts. The outlays of off-budget federal entities are excluded from the unified budget under provisions of law, even though these outlays are part of total government spending. Federal outlays are recorded on the cash basis of accounting"--with the exception of most interest on the public debt, for which the "accrual basis of accounting” is
used. Question 4. While you view the current budget process with optimism (despite & $225 billion deficit in its five years of operation), how much of the so-called "restraint" which you think you see in Congress is a result of the combination of the movement for a Constitution Convention and the shadow of the approaching elections?
Answer: This is a question of political judgment. The restraint of the current budget process is political. In 1912 President Taft stated "the Constitutional purpose of a budget is to make government responsive to public opinion and responsible for its acts.” The current budget process reflects this approach. The process forces Members of Congress, for the first time, to vote on the size of the deficit or surplus and on the magnitude of total budget outlays. If by doing so the budget process provides additional information to the general public of the positions of their representatives, it is fulfilling its role. If the general public is unhappy with the decisions of their representatives, the approach of an election provides an incentive and a mechanism for the public to influence the actions of the Congress.
PREPARED STATEMENT OF ALICE M. RIVLIN Mr. Chairman, I welcome this opportunity to comment on proposals for amending the Constitution to require balance in the federal budget or to restrict the size of federal spending. I do not question the legitimacy of these objectives— the federal budget has been in deficit far too frequently in recent years and strong arguments can be made for lower levels of federal expenditures. But, I believe it would be a mistake to attempt to reach these objectives by writing a formula into the Constitution.
The Congressional Budget Act of 1974 provides the Congress with its first workable procerlure for debating and deciding the overall size of federal spending and the magnitude of the deficit or surplus. Using this procedure to formulate and cxecute a multiyear budget plan holds more promise of reducing federal spending intelligently than does introducing an inflexible constitutional formula.
Although a balanced or suprlus budget would often be appropriate · policy, requiring balance every year would deprive the government of a useful tool for reducing the length and severity of recessions and would shift the full burden of stabilizing the economy onto the Federal Reserve Board.
A constitutional spending limit or balanced budget requirement would provide incentives for carrying out national objectives through creation of off-budget agencies, allocation of private credit, and increased fecleral regulation. Such developments would probably reduce, rather than enhance, the ability of the public and its elected representatives to monitor and control the activities of the federal government.
CAUSE FOR CONCERN The relative size of the federal sector has grown substantially over the last 30 years as a result of increased benefit payments to individuals (especially Social Security, food stamps, medical payments, public assistance, student aid, and housing subsidies) along with rising federal grants to finance a wide variety of state and local government services. Federal outlays rose from an average of 18.2 percent of Gross National Product (GNP) during the 1950's, to 19.5 percent during the 1960's, to 21.2 percent during the 1970's.
Many believe this growth in federal spending is wasteful or even harmful and should be reduced to leave more room for private spending. Moreover, concern with the growth of federal spending serves as a proxy for more general concern with the growth of government power and the pervasiveness of government regulations.
Rising federal spending has been financed partly by increased federal revenues and partly by persistent federal deficits. In fiscal year 1980, the federal budget will be in deficit for the eleventh straight year, the nineteenth time in the last twenty years, the forty-second time in fifty years. The size of deficits has also increased during the postwar period. As a percent of the GNP, the average federal deficit during the 1970's was about double the average during the previous decade.
To many people, persistent deficits symbolize a lack of discipline that enables the Congress to enact spending programs without simultaneously increasing taxes. Moreover, many people believe that federal deficits cause inflation, either by "crowding out” the private sector investment that would increase the supply of goods and services and the level of productivity or, more directly, by forcing the Federal Reserve to increase the money supply in order to buy up the new federal debt. Recent escalation in inflation-even though it is largely associated with world oil prices and other events outside the control of the federal governmenthas focused attention on the inflation-creating potential of federal deficits.
The case for a constitutional amendment rests on the contention that our present political system is biased in favor of increased spending and deficits. The benefits of a particular federal program tend to be concentrated on a small group each member of which stands to gain substantially from the program, while the costs are spread over a large number of taxpayers (or victims of inflation) each of whom will lose only a little. Hence, elected officials are in a difficult position: if they vote against a program increase or champion a cut, they will encounter the vocal and well-organized opposition of the program's beneficiaries without earning more than a weak nod of approval from those who see their share of total taxes reduced by a small amount. Thus, it is argued, the political pressures on the Congress do not reflect the real desires of the electorate, and a constitutional amendment is neces. sary to redress the balance in favor of reduced spending and budget discipline.
THE NEW BUDGET PROCESS
This allegation of spending bias had much validity as long as spending and tax bills were voted on one at a time and the Congress had no opportunity to debate or vote on the overall size of the budget or the magnitude of the deficit. But since the implementation of the Congressional Budget Act of 1974, the Congress has required itself to consider and adopt overall spending totals and to vote explicitly on the planned deficit or surplus. Under the new procedures, those who would add to spending must visibly add to the total of expenditures and the deficit or must propose compensating cuts.
It is really too early to tell what effect this new process will have on spending and deficits. The process was implemented during the most severe recession since the 1930's. Much of the expenditure growth and deficits of the past four years can be attributed to the effect of the recession on the budget and the planned fiscal policy that the Congress adopted to speed the recovery.
The key test of the new process, therefore, is before us. There are signs that the process will provide the tools for achieving a balanced budget and controlling expenditure growth. This year the Senate adopted a plan that would lead to a balanced budget in fiscal year 1981. So far, that plan has been observed. Just last month, for the first time, the Senate voted to invoke the budget process's reconciliation procedure by requiring six committees to cut outlays by $3.6 billion.
As long as the budget process operates one year at a time, however, it will be difficult to achieve significant cutbacks without causing major hardships, leaving projects unfinished, and creating disappointed expectations. If the Congress is to cut spending in an orderly way, it must plan at least three years ahead and must seriously consider phasing out and restructuring programs and reducing the rate of growth of entitlements. The Long Amendment to the Debt Limit bill earlier this year was a first step in multiyear planning, but the Congress has yet to adopt an organized and coordinated plan for making cuts over several years.
Although a multiyear approach would allow the Congress to plan cuts, a constitutional formula requiring annual balance or restricting overall growth would force last minute, unplanned cuts as changing economic conditions caused federal outlays to rise and revenues to fall. It seems sensible, therefore, that before moving to a constitutional amendment the Congress should give its new process a chance.
IMPACT OF A BALANCED BUDGET RULE ON THE ECONOMY When the economy is close to full employment and the utilization of plant capacity is high, a federal hudget deficit can add to short-run inflationary pressure by increasing aggregate demand for goors and services, and an exacerbi e long run inflationary tendencies by crowdling out private investment neerleri to expand productive capacity. In the late 1960's, for example, unemployment was low and factory operating rates were high. Nevert heless, because of incroisési sreni'ing for the Vietnam War and an unwillingness either to curb other government srending or to raise taxes significantly, the federal deficit rose sharply. Not surprisingly, the inflation rate tripled between 1965 and 1969. Requiring budget balance in this period would have helped to avoid overheating the economy and accelerating inflation.
When the economy is sliding into a severe recession, however, attempting to balance the federal budget will almost certainly make the recession significantly worse. Deficits occur automatically in recession since declining incomes produce luwer federal revenues and spending for unemployment compensation rises. At such a moment, raising taxes or cutting spending in order to balance the budget would reduce aggregate demand further and throw additional people out of work.
In fiscal year 1975, for example, the iederal budget deficit rose sharply as the economy turned downward in response to escalating oil prices and other shocks. The federal deficit offset part of the decline in aggregage demand and helped to reduce the depth of the recession. Simulations on the econometric model of Data Resources Incorporated indicate that balancing the federal budget in both 1975 and 1976 would have raised the jobless rate hy 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. The additional economic slack, however, would have reduced the inflation rate hy perhaps two percentage points in 1976 and 1977.
To require taat the federal budget always be bal incei is to give up a powerful tool for influe icing the economy, especially at the begi ining ot a severe recession, and to sh ft the responsibilty for sta lizing the economy e tirely onto monetary policy. Rather thaä с st asid: suca a pita.lt to 1 for fear that it may sometimes be misured, the Congress should ex lor ways to preserve discretion over fiscal policy while making it less vul arra' le to mis ise. The debate and explicit votes on budget de icits that are part of the new budget process should reduce the frequency of ill-timed budget imbilance.
PERVERSE INCENTIVES OF ConstitUTIONAL LIMITATIONS, Constitutional limitations on federal spending or budget deficits would probably not reduce pressures for new federal activities, but might well change their form. The Congress could avoid the budget limits altogether by using the regulatory power of the federal government to force the private sector or states and localities to hear the cost of new programs. Employers, for example, could be asked to bear the major cost of national health insurance. New off-budget agencies or government-sponsored corporations could be created. Increasing use could be made of federal loan guarantees or other devices to allocate private credit to activities deemed especially desirable by the federal government. A constitutional limit on expenrlitures would also be likely to encourage the use of tax expenditures to provide subsidies to particular activities. Indeed, even without such a limit, subsidies granted through the tax code have been increasing at a faster rate than outlays in recent years—to an estimated $169 billion in fiscal year 1980.
One effect of the new budget process has been to draw Congressional attention to the current magnitude of tax expenditures, off-budget agencies, and credit activities of the federal government and to increase efforts to bring these activities within the purview of the budget process. CBO believes that Congressional control of the full range of federal activities would be enhanced by bringing off-budget spending agencies back on budget, by compiling a credit budget showing various loan and loan-guarantee activities of the government, and by reviewing tax expenditure on the same basis as direct expenditures. Public decisionmaking is improved and accountability is enhanced when the activities of government are as visible as possible and trade-offs among them can be explicitly considered.
From this point of view, a constitutional amendment would be a step backward. It would enrourage the Congress to hide federal activities of off-budget agencies, to control through regulation, and to subsidize through the tax code. The power of the federal bureaucracy might well increase as accountability to the public was reduced.
In sum, I believe that the Congress has made enormous progress since the passage of the Congression:l Budget Act of 1974. I urge those who believe in balancing the budget and holding down federal spending to work to strengthen and improve i he present process, to use it, and to give it a chance before turning to a fixed rule that might set back progress toward accountable government and that could not be changed without the agreement of two-thirds of the House and the Senate and three-fourths of the state's.
Senator Bayn. Our next witness is Mr. Martin Gerber, vice president of the International Union, UAW.
Mr. Gerber, good to have you with us.
TESTIMONY OF MARTIN GERBER, VICE PRESIDENT
INTERNATIONAL UNION, UAW Mr. GERBER. Good to be here, Senator.
My name in Martin Gerber. I am vice president of the UAW, and I would like to present to the committee my comments.
We in the UAW are strongly opposed to all proposals to draft a balance budget amendment to the Constitution of the United States.
You have had extensive testimony on the legal nightmare that would result if any amendment of this sort were adopted. There would be endless wrangles over such issues as: What expenditures are withinand what outside—the budget? Would revenue estimates or actual revenues be the basis for determining that Congress complied? Would the Supreme Court be charged with policing the Congress? If so, could it act before the fiscal year was over, and which taxes would it order raised and which expenditures would it order cut if the budget proved to be unbalanced? Enactment of this kind of amendment would fundamentally alter the balance of powers in our present constitutional system and engulf our vital budgetary processes in years and years of unnecessary litigation.
These legal problems are very important. But I would like to take the remainder of my time to discuss the point that is of special concern to us in the labor movement, and that is the economic impact of such an amendment. I can summarize our objections in a few words: The rigid requirement of a balanced budget every year is the best guarantee that a small economic downturn will be converted into a recession, and the best guarantee that a recession will be converted into a depression.
Let me describe the general way in which a balanced budget requirement would affect the economy and then go on to cite some specific examples.
We have a number of sources of demand in the American economy. Consumers demand goods and services, and this provides jobs for the people who produce those goods and services. The business community, through investments, demands goods and services. The Government demands goods and services. In some cases the foreign sector produces a net demand from foreign countries. Each of these sectors operates according to its own motives and according to its own needs. The Federal budget is the one piece of the picture that can be deliberately manipulated in order to serve as a balance wheel for the total economy. When private demand is too weak, that budget can be used to stimulate the economy. The ability of Congress to adjust the levels of expenditure and taxation in the Federal budget is one of the cleanest and clearest ways we have of regulating the level of total demand in the economy.
Now we can differ among ourselves as to whether we today have the ideal level of total demand in the economy. Some would say that it is too high and is creating inflationary pressures. Others would say it is too low and is dragging the economy into a deep recession. We can differ among ourselves from day-to-day on just where that level of demand should be. But the real issue before this committee is whether we want to take away from the Federal Government the ability to use this very powerful instrument—this budget which is one-fifth of the total economy. This instrument—the difference between taxes and expenditures—is now our major means of taking money out of the economy or putting money into the economy, according to the needs of the day.
Now the Federal budget, if used intelligently, can be a means to avert recession. It may also, if it cannot be used intelligently, be a means to force a recession to spiral downward. Let me describe the mechanics in outline and give some practical examples.
Assume something goes wrong in the economy. Maybe business decides it has too many inventories on hand. It decides to cut backjust the stocks of cars in the lots, the suits in the clothing store, or the raw materials in the factories. That simple cutback on inventory reduces demand and has a small impact on employment and income in the economy as a whole.
The impact of this on the Federal budget is obvious—a given set of tax rates will reduce tax collections. If you have an income tax, and incomes fall, then tax revenues fall off. Now if you have a requirement that you must always balance the budget, the immediate response is to raise taxes or to cut government expenditures in order to bring the budget back into balance. But the impact of increasing taxes is to suck money out of the economy. The impact of reducing expenditures is to reduce the flow of money into the economy. In both cases, the effect of the balance budget response is to aggravate the recession. Of course, once you have aggravated the recession, it comes back to haunt you again. Income is lower, and the given tax rates are again bringing in lower levels of revenue. So you again raise taxes or again cut expenditures and you again reduce incomes and reduce employment and increase unemployment.
Now that is a sure-fire formula for converting a recession into a depression. It has been tried, and it works. The last President of the United States who tried it was Herbert Hoover. We had the beginnings of a very serious recession-even a small depression--stemming from the stock market crash of 1929 and growing worse in 1930. President Hoover went to the Congress in 1931 and he proposed, in the face of a growing budget deficit, to balance the budget. He proposed to raise taxes. He said it was "indispensable to the restoration of confidence" and therefore had to be done. A newly elected Democratic Congress went along with President Hoover and passed the tax increase.
The impact, of course, was to take more money out of an alreadly weak economy and to increase the level of unemployment to the point where by the time Hoover left office it had reached 25 percent of the workforce. Many of the workers ended up on the streets and lost their homes because they couldn't make their mortgage payments. They ended up going to empty lots and building shacks out of scrap pieces of cardboard or wood or tar paper. When enough of these shacks grew up together in one area they were called Hoovervilles. Ironically, that is probably the most important legacy in the national memory that President Hoover left with us.
I hope we all remember that when Hoover took those measures, when he restricted the economy in the name of balancing the budget it was a very popular measure. People thought it should be done. But, fortunately, we have learned from that awful experience, and no President since has ever embraced that philosophy.
I have attached to my testimony a paper that describes the attitude of subsequent Presidents toward this problem. No American President