We might find that the political benefits which occur because of the skewed nature of the way we do our fiscal business could be at least partially remedied. One of the reasons, I might add, why there is a fiscal responsibility in the local school district is because that is precisely what they do.

When they go out and decide they want to increase educational expenditures, they are talking about at the same time how they are going to be financed. You get various elements in the community vying one against the other to make a determination whether you spend that much, spend less, spend not at all, or you cut it back. And if we could create the fiscal attitudes of the local school district in the Congress, I suspect we would not be having to deal with this constitutional amendment question.

Senator HATCH. That is a good point. As you know, the Budget Committee and the Senate always start debate with how much we are going to spend. Then, we figure our revenues. We never talk about revenues, first, and outlays, second.

Some of us have tried to reverse this process.

I know that you have to run, so this will be my last question: yesterday, the conference committee between the House and Senate Budget Committees agreed upon a "lean and austere" Federal deficit of only $29.6 billion. That figure, however, really isn't the total truth, is it? There is at least $12 billion more in "off-budget" items that nobody talks about.

Mr. GREENSPAN. That is correct, Senator.

Senator HATCH. That is what the public needs to know; when their Government says $29 billion, they are really talking $41 billion. Considering loan guarantees and credit allocations, this figure, in fairness, ought to be higher still, shouldn't it?

Mr. GREENSPAN. There is no reason I am aware of which tells me why the elements which appear in the off-budget category under the Federal Financing Bank are there and not right smack in an on-budget agency, except by definition.

Senator HATCH. Congress has chosen to do that, and I think it is deceptive with regard to taxpayers and the public.

You may be interested to know that I received a letter from Senator Muskie this week indicating that he is going to hold hearings on "offbudget" items; this may be an excellent opportunity for outstanding people such as yourself to bring your point of view to their attention. Let us, at least, have an open and honest budget, whether or not it is balanced.

I appreciate your testimony. I have enjoyed listening to you today and appreciate your answering some of these questions.

Senator BAYH. Thank you very much, Dr. Greenspan. Why don't we just suggest since you do have that testimony over in the House, that you feel free to leave or stay as you see fit.

Mr. GREENSPAN. I thank you, very much, Mr. Chairman.

Senator BAYH. It takes great courage to pull yourself away from this enlightened hearing, but we understand.

Dr. Saunders, why don't you proceed now if you would please, then we could develop a little colloquy back and forth.

TESTIMONY OF PHILLIP SAUNDERS, PROFESSOR OF ECONOMICS, INDIANA UNIVERSITY, BLOOMINGTON, IND.

Mr. SAUNDERS. Thank you very much.

Some of the points I want to make are similar to those that have already been made. Rather than read all of my written remarks, which are appended separately, I will just summarize them verbally. My verbal comments, however, will make reference to the three tables included in my written statement.

I think it would be a mistake to amend the Constitution to require an annually-balanced budget for three basic reasons, which I would like to state briefly and then elaborate on this in a little more detail.

The first, and I think the most important reason, is I don't think that either the absolute size of the Federal debt or the existence of a surplus or a deficit in the Federal budget in any given year should be considered the most important goals of economic policy. There are other goals that are often more important for the economic well-being of the American people than these, and I think to elevate the goal of an annually-balanced budget, and/or a systematic reduction of the national debt to a Constitutionally-mandated priority would be a mistake, even if these goals could be attained.

And that brings me to the second point. Not all of our problems, let alone all of our economic problems, are susceptible to constitutional remedies.

I feel the effectiveness of our Constitution, which has served us so well, will be seriously undermined if we begin to load it up with amendments that promise things which we might not be able to deliver. At a time when many people feel the public confidence in our most basic institutions is eroding, it would be unfortunate to drag something as important as the Constitution of the United States into the hurlyburly of the annual budgeting process. Nothing would be gained, and much could be lost, if economic and political realities would cause the Constitution to be treated as we have treated the legislatively-mandated national debt ceilings in recent years.

Third, I think much of the support for the proposed amendments, or at least much of the emotion surrounding the national debt, confuses symbol with substance, may suffer from a lack of perspective, and may be perhaps based on misleading analogies with private debt. There is, unfortunately, no one-to-one cause and effect relationship between the size of a budget deficit and other important economic variables. Contrary to some popular misconceptions, the national debt is not the fastest-growing thing in the U.S. economy, and having warned of misleading analogies, one of the last points that I want to make this morning is that if the Federal Government kept its books in the same way that private businesses do, and used capital budgeting, the budget deficits of recent years, which are the source of so much concern, would not even exist.

So having made these three basic points, I would like to elaborate just briefly. In terms of the goals of economic policy, what really counts in terms of the economic well-being of the American people is how well we are fed, how well we are clothed, how safe we are from

external aggression. It is these fundamental goals of freedom and security, and the full employment of our scarce resources, that I think are most important, and there is no simple relationship between the Federal budget deficit or the size of the national debt, and these things.

Sometimes the attainment of these more important economic goals is compatible with a budgetary surplus. Sometimes it is compatible with a budgetary deficit. But I think given a choice between trying to adjust the economy to fit some sort of arbitrary budget requirement and adjusting the budget to changing economic circumstances, economic reality requires that we try and use the budget and not the economy as the adjustment mechanism.

In any given year, a large part of Federal fiscal flexibility is already locked in, and many of the proposals for the annually-balanced budget amendments recognize that it might not be possible to achieve this goal in any given year. Unfortunately, I think that some of the remedies proposed are more serious than the disease. For example, some of these amendments propose that if we don't have a budget balance that we automatically mandate income tax surcharges, and I think this would be a serious mistake. The Revenue Act of 1932 and 1934 in the depths of the great depression attempted to raise taxes, but the economy was at such a low state that tax receipts fell.

You can't necessarily legislate away a budget deficit with tax

increases.

And so I think the general notion that we could strengthen Congress will with a constitutional amendment misses the basic point that it is not lack of will that has led to so many of our deficits. It is the state of the economy. What happens in the economy affects what happens in the budget. What happens in the budget affects what happens in the economy. I just don't think there is a simple way that we can deal with the complex problems we are facing.

Like some of the previous testimony, I am concerned about many of our current economic problems. But I don't think the inflation we are in right now, for example is one of classic excess demand inflations, and I don't think we can just rely on only one single weapon to fight it. To get out of the mess we are in now is going to take fiscal policy, monetary policy, increasing the productivity of the economy, changing people's expectations, and other things as

well.

There is no simple way out, and I think we would be misleading ourselves if we fell into the trap of thinking that somehow the budget deficit alone could be changed in a way to get us out of our current economic problems.

Turning to the last major point that I would like to make in my oral testimony concerns putting budget deficits and the national debt in some sort of perspective.

We heard testimony this morning that attempted to compare public finance to private finance and I think these analogies can sometimes be very misleading. I would like to refer to two or three tables that I have appended to my written testimony and simply call attention to the first point that when you look at the absolute size of the budget deficit or the absolute size of the national debt in terms of just dollar magnitudes, they are very, very large, but when you put them in the perspective of our ability to handle them,

the national debt and the budget deficits are not the only things. that are growing in the economy. Our ability to handle the debt and the deficits has also been growing. The national debt as a percentage of the Gross National Product has declined steadily in the post-war period, and the interest payments on the national debt. have always been less than 2 percent of GNP.

I am not trying to excuse the debt or to say it is always good. There are times when I think we should retire the debt and run surpluses, but I think in looking at the overall magnitude, we can sometimes elevate this problem to an importance that it doesn't deserve, compared to some of the other important problems that we have in the economy.

Another thing I would like to call your attention to in putting this thing in perspective is the fact that the Government cannot borrow unless somebody lends.

If we look at the ownership of the public debt, who has lent the money to the Government, we get an important insight into what the real economic aspects of the debt are, and we get an insight into how public finance can differ from private finance. Indeed, just to give a personal example of this, all during World War II, I used to take a dime to my homeroom teacher on Friday, and for this she would give me a savings stamp and I would paste this savings stamp in a little book and when the book was full, I would trade it in on a war bond and I felt very patriotic, and I thought I was saving. It was not until later that I realized I was adding to the national debt. If I told you. the national savings were over $800 billion, you probably would feel good. If I tell you the national debt is over $800 billion, most people feel bad, but the point I want to make is they are the same thing, that Government cannot borrow unless somebody has saved and lent. So I would like to call your attention to table 1 at the end of my written testimony, which simply shows who owns the national debt. The thing that surprises most people is the Federal Government itself is the single biggest holder of the public debt.

If you go on down the table, you can see that large portions of the national debt are held by commercial banks, mutual savings and insurance companies, other private corporations and miscellaneous investors.

And so, if we would, as some of these proposals suggest, retire the national debt, these institutions would be faced with a problem of trying to find someplace for their savings that can offer you the absolute guarantee that the U.S. Government securities offer, and of course, there is no such other financial opportunity.

Again, I make this point not to say the debt is not a problem, but to say if we put it in perspective and look at the economic implications of some of the things we are talking about, I think we would have a great deal of trouble trying to raise taxes if people knew those increased taxes were just going to go back to the Government to retire the debt.

I think the economic implications of the national debt are more complex than any simple analogies to private finance. But while I am in the area of private finance, I would like to also call your attention to table 2, which simply shows increases in debt in the U.S. economy both public and private. In table 2, I have used the concept of net debt. In both the public debt and private debt, I have elimi

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nated the money that is so-called "owed to ourselves." The table shows that the analogies that usually begin with the notion that private individuals can't go into debt is misleading. Private individuals and corporations can borrow and, indeed, do borrow. As long as somebody is willing to lend them the money, it is quite possible to borrow, and so you can see that total private borrowing in the United States, since 1946, the end of World War II, has increased by $2,368,100 million. This is an increase of 1,544 percent.

It is clear that private individuals can borrow and can spend in any given year more than they take in. Private corporations use borrowing to finance investment, plants, and equipment that add to the productive capacity of our economy.

So borrowing can be done, borrowing has to be put in context, and if you look at total borrowing in this context, you will see that Federal Government borrowing, both in absolute terms and as a percentage rate of increase, may not be quite as alarming as if you simply look at it in terms of its absolute magnitude.

The final point I would like to make verbally this morning is that, having warned you of the difference in analogies between public debt and private debt, if the Government really did keep the books the same way that private businesses do, what we call budget deficits. really wouldn't show up in the current expense accounts of the U.S. Government. The reason that corporations can borrow and carry the huge amounts of money that are shown in table 2 is simply because they don't charge all of their capital expenditures to current income. If an asset is going to last for a long period of time, and have a useful life, businesses amortize that asset and only charge the depreciation, or the amortized amount, to current accounts.

Many Federal Government expenditures are of the capital type; that is, some assets that are purchased in any given year have a useful life that extends into the future. If we charged only the amortized part of these expenditures to the current expense budget, most of our deficits would disappear. The statistics I give in table 3, which are based on some calculations by Joseph Scherer of the New York Federal Reserve Bank, show that if we separated the Federal budget into a capital account and a current expense account, the way private businesses do, that we have collected enough in tax revenues in recent years to finance all of our current expenditures without a deficit. Indeed, many of our capital expenditures have also been financed by current revenues, with only approximately 50 to 60 percent of capital expenditures financed through borrowing.

I don't want to overdo the analogy, but people who argue that way I think should be aware of the implications of the private-public comparisons. This brings me back to my most important point, that the Constitution of the United States is too important a document to be involved in the annual budget process. If you can meet a constitutional requirement by simply changing budget concepts, I think this is likely to undermine the credibility of our institutions.

To conclude, I am concerned about a lot of our current economic problems. We have heard reference this morning to limiting Federal spending and I am concerned about that, but I don't think a constitu