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since the time of Hoover has been prepared to follow that kind of disastrous budget-balancing practice. Many Presidents have tried to produce balanced budgets in prosperous years. But in the case of a recession or an incipient recession, every President from Franklin Roosevelt to Gerald Ford has at least on one occasion had to face this problem and has come off foursquare in favor of providing expenditure increases or tax relief to head off the recession rather than in favor of the balanced budget formula.
I can quote General Eisenhower or President Nixon, but the most recent and the most dramatic example is President Gerald Ford. You will recall in late 1974 there was a degree of inflation, largely caused by the OPEC price increases. The President misinterpreted that as being a problem of too much demand in the American economy, and in the fall of 1974 he proposed a substantial tax increase to curb inflation. Before Congress even had time to act on that proposal the economy weakened. It became increasingly clear that demand Was sagging in the economy, much of it eaten up by the OPEC countries. Unemployment was growing, and the country was on the verge of major recession. President Ford in January 1975 went before the American people. He faced up to the fact that within a period of 3 or 4 months he was reversing his policy, and for a simple reason: The economy had reversed itself.
Here is what he said in explaining this to the American people: What we most urgently need today is more spending money in your pockets rather than in the Treasury of Washington. Let's face it: the tax cut to bolster the economy will mean a bigger Federal deficit temporarily, and I have fought against deficits all my public life, but unless our economy revives rapidly Federal tax revenues will shrink so much that future deficits will be even larger.
Now the tax cut was enacted. It came perhaps too late and too little to avert a recession, but at least it was there underpinning demand in the economy. We did not move back to a Great Depression, 1930's style, but in fact have been able to recover largely from that recession today.
We should be able to learn from history like this. But a few decades later we have as many as 30 States that have mindlessly proposed an amendment to the Constitution which, in some versions, would guarantee a reenactment of the kinds of policies that were so disastrous for the United States in the early 1930's.
The previous witness, Ms. Rivlin, made some economic forecasts and points which I would like to add on to.
I am not just talking about liberal economists like Walter Heller. Walter Heller has said this amendment would be "highly dangerous dangerous to the jobs of American workers and dangerous to the strength of the American economy." I am talking about the conservatives as well--the Herbert Steins and the Milton Friedmans.
Alan Greenspan is perhaps the most conservative man who ever served as chairman of the President's Council of Economic Advisers. I don't know where he stands today. But he was asked about this amendment earlier this year and he said very simply:
I must sympathize with the goal of such an amendment. But I must conclude that balancing the budget-year in, year out—is technically infeasible. I do not really know any responsible economist who would see it otherwise.
Particular theories of how our economy should be managed should not be frozen into the Constitution. As Justice Holmes said many decades ago, "Constitutions are intended to preserve practical and substantial rights. A constitution is not intended to embody a particular economic theory.” To that we can only add that the last economic theory that should be embodied is the theory that the Federal budget should be balanced every year. That would be to invite economic and political disaster. The Federal Constitution is a document which has to serve us year in and year out. It cannot be a vehicle for putting our national economy in a straightjacket of the sort that was so harmful in the 1920's and early 1930's.
Thank you very much.
Senator Bayh. Thank you very much, Mr. Gerber. I appreciate the thoughtfulness of your statement.
I would like, if I might, to submit some questions for your consideration, to put them in our record, so as to not take too much of your time. I know we have some schedule problems this morning.
Just to summarize it, I assume from what you said the idea of the balanced budget makes sense to you, but your concern is the vehicle we use might make it more difficult rather than less difficult to achieve.
Mr. GERBER. That is true. We don't object to the prospect of a balanced budget. Under certain circumstances it is very desirable. It isn't the purpose, it is the method of achieving that is objectionable, and that is the constitutional amendment.
Senator Bayh. Mr. Stein, Mr. Friedman, and Mr. Greenspan are all concerned about this as well.
Mr. GERBER. I would say we are on opposite ends of the pole insofar as political philosophies or economic philosophies; in terms of permitting a constitutional amendment we are in accord.
Senator Bayh. Thank you, very much. I appreciate the effort you have made to be here. My special thanks to Mr. Fraser who has made that possible. We will submit questions for your consideration if that is all right.
Mr. GERBER. Thank you very much.
(Questions from Sen. Thurmond, and responses, Mr. Gerber's statement and additional material follow :)
RESPONSES TO SENATOR THURMOND
PROPOSED BALANCED BUDGET AMENDMENT TO THE U.S. CONSTITUTION Question 1. While you define the problem as whether or not we want to take away the power of the federal government to manipulate the economy, I would phrase the issue differently-Can we continue to allow the federal government to add to the national debt by its continuous deficit spending? What would you have us do about our enormous national debt which is rapidly approaching $1 trillion?
Reply. First of all, the true national debt, while large, is not "rapidly approaching $1 trillion." The total of U.S. Treasury gross public debt outstanding was at $804.9 billion by the end of June, 1979. This figure, however, includes $287.8 billion that was owed by the Treasury to other agencies of the Federal government, most notably the Federal Reserve System ($109.2 billion), and U.S. agencies and trust funds like the Social Security system ($178.6 billion). The true national debt in an economic sense, then, is the $517.1 billion owed to "the public"—that is, to private investors and institutions, to state and local governments, and to foreigners.
To understand that figure better, it is useful to look at its origins. About $38.6 billion, or 7.5 percent of the total, was accumulated by the end of 1939. Another $188.8 billion, or 36.5 percent was accumulated by the end of 1945 and generally reflects the deficits incurred during the mobilization for World War II. The debt increased nominally, by only 0.2 percent of its present total, between the end of 1945 and the end of 1968-covering the remainder of the Administration of Harry Truman and the Administrations of Dwight Eisenhower, John Kennedy, and
Lyndon Johnson. The debt did not increase during the first year or so of the Nixon Administration, but a total of $180.9 billion--or 35 percent of the present total—was added over the full 8 years under Nixon and Ford. This was almost entirely a response to the two major recessions of that period—the ones that began in 1970 and in 1974. Tax revenues fell below projected levels and budget outlays had to be increased as those recessions set in. The record annual increase in the Federal debt owed to the public—$73.2 billion, or a full 14 percent of the present totalcame in the Fiscal Year 1976. Deficits have been reduced since that time as the economy has strengthened, but another $107.7 billion-or 20.8 percent of the total—was added during the first 2 years of the Carter Administration.
In short, wars and recessions are what have largely accounted for the present national debt. We think it could invite disaster-military and economic-to tie the hands of the Congress and the President by preventing them from using the full budgetary powers of the U.S. Government to fight wars and recessions.
The "enormous” figures for the national debt must also be seen in comparison with the rest of the economy—which is now producing well over two trillion dollars in goods and services. In 1945, the Federal debt held by the public equalled 107 percent of the gross national product. In 1978, that debt—while much larger in dollar terms-equalled only 24 percent of the GNP.
In addition, we should recall that all other institutions in our society regularly go into debt to finance capital improvements. By the end of 1978, state and local governments had piled up debts of $292 billion, non-financial corporations $836 billion, and households an impressive $1,163 billion-most of it in mortgage debt. Only the Federal government keeps no formal account of the capital assets it accumulates as it goes along—the hundreds of billions of dollars in post offices and other Federal buildings, military equipment, hospitals, and the “human capital” in which it has invested so successfully. When state governments borrow to finance such projects, it is considered sound management, but when the Federal government borrows while making such investments it is all too often rediculed as imprudent and undisciplined.
Question 2. The UAW represents a large member of workers in this country, yet you say the UAW opposes a balanced budget amendment. What portion of the UAW membership do you think is reflected in the 80 percent of the people in this country who want this type of amendemnt?
Reply. There are some public opinion polls which ask:"Do you think the Federal government should be required to balance its budget every year?” and this proves to be an attractive way of stating the question. I do not doubt that there are polls in which 80 percent of the respondents answered “Yes” to such a question, and I do not doubt that UAW members are well represented among those 80 percent.
Let me propose, however, that we ask the same question à litile differently. Suppose we ask: When a recession hits the American economy, unemployment often increases sharply, do you favor taking away the ability of the U.S. Government to cut taxes and to increase spending in order to create more jobs and cut unemployment?” When the question is asked that way--in the concrete, rather than in the abstract-we typically find a very negative reaction to the idea of s mandatory balanced budget. I have no doubt that—when the question is poeed concretely—the vast majority of UAW members, as well as the vast majority of the voters of South Carolina, would support the position that the UAW's loternational Executive Board has taken in opposition to the balanced budget amendment.
Question 3. While you express your concern over how you think a balanced budget might worsen a recession, you say very little about how deficit spending has been fueling the double digit inflation we now suffer. How would you soke this problem which is eating into the finances of every person in this country!
Reply: In my testimony, I say "very little about how deficit spending has been fueling the double-digit inflation” because deficit spending has not been playing this role. The national income and product accounts for 1978 show that the Federal government deficit was adding a net of $29.4 billion to the economy's expenditure stream-while state and local governments were removing a net oi $27.8 billion. Looked at this way, the overall "deficit” of governments at all levels was only $1.5 billion-or less than one-tenth of 1 percent of GNP. The Federal deficit, then, can be seen as a mere counterbalance to the substantial surpluses being run by the states and localities.
When we seek to understand double-digit inflation, we must look to the particular sectors where it has been occurring. Energy is the most obvious, where the exorbitant crude oil price hikes of the OPEC Cartel have been followed by even greater hikes by the domestic oil companies in the prices of petroleum products.
We in the UAW find it hard to blame this on Federal government deficits of less than 1.4 percent of GNP.
The bulk of the remainder of our inflation is accounted for by the "cost-plus" environment for skyrocketing medical costs, the speculative binge in housing, the record high interest rates imposed by the Federal Reserve Board, and the particular problems of supply and demand in the food sector. Government policy toward inflation should be aiming at these particular structural problems--not rising massive unemployment by abruptly eliminating the Federal deficit—whether this be done through sharp reductions in Federal expenditures or sharp increases in Federal taxes.
PREPARED STATEMENT OF MARTIN GERBER We in the UAW are strongly opposed to all proposals to draft a balanced 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 these: What expenditures are within-and 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 have been unbalanced? Enactment of this kind of amendment could 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 & 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 manipu
lated in order to serve as a balance wheel for the total economy. When private Se demand is too weak, that budget can be used to stimulate the economy. The delle 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 bep total demand in the economy.
Now we can differ among ourselves as to whether we today have the ideal level He of total demand in the economy. Some would say that it's too high and is creating inflationary pressures. Others would
the economy se 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 expenditure-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 El examples.
Assume something goes wrong in the economy. Maybe business decides it has too many inventories on hand. It decides to cut back-just 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 balanced 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's 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 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 proposedin 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 already weak economy and to increase the level of unemployment to the point whereby the time Hoover left office--it had reached 25 percent of the work force. Many of the workers ended up on the streets, because they couldn't make their mortgage payments, and they lost their homes. 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.
Here is what he said in explaining this to the American people:
“What we most urgently need today is more spending money in your pockets rather than in the Treasury of Washington. Let's face it: the tax cut to bolster the economy will mean a bigger federal deficit temporarily, and I have fought against deficits all my public life, but unless our economy revives rapidly Federal tax revenues will shrink so much that future deficits will be even larger.”
Now the tax cut was enacted. It came perhaps too late and too little to avert a recession, but at least it was there underpinning demand in the economy. We did not move back to a Great Depression, 1930s style, but in fact have been able to recover largelv from that recession today.
We should be able to learn from history like this. But a few decades later we have as many as 30 states that have mindlessly proposed an amendment to the Constitution which, in some versions, would guarantee a reenactment of the kinds of policies that were so disastrous for the United States in the early 1930s.
Let's look at the economics profession. There is an old story that if every economist in the country were laid end to end, they would still disagree. But, in fact, Mr. Chairman, it's an interesting fact that on the issue of the balancedbudget amendment they do not disagree. There are almost no reputable economists in this country who have supported this proposal. I'm talking not just about liberal economists like Walter Heller. Walter Heller has said this amendment would be “highly dangerous-dangerous to the jobs of American workers and dangerous to the strength of the American economy.” I'm talking about the conservatives as well-the Herbert Steins and the Milton Friedmans.
Alan Greenspan is perhaps the most conservative man who ever served as Chairman of the President's Council of Economic Advisers. I don't know where he stands todav. But he was asked about this amendment earlier this year and he said very simply, “I must sympathize with the goal of such an amendment. But I must conclude that balancing the budret-vear in, year out-is technically infeasible. I do not really know any responsible economist who would see it otherwise."
Particular theories of how our economy should he managed should not he frozen into the Constitution. As Justice IIolmes said many decades ago, "Constitutions are intended to preserve practical and substantial rights. A constitution is not intended to embody a particular economic theory." To that we can only add that the last economic theory that should be embodied is the theory that the Federal budget should he halanced every year. That would be to invite economic and political disaster. The Federal Constitution is a document which has to serve