financed by taxes, with only relatively small amounts financed by borrowing in most years." &

Scherer raised the further question:

"If a federal balanced budget should be mandated some time in the future, will Congress find it expedient to accede to the demand that the government be more businesslike by adopting the dual budget system?"?

This question reinforces my belief that it is a mistake to involve the Constitution in Congressional budget matters. Constitutional issues should not be capable of manipulation by devices such as shifting accounting practices. Another danger of attempting to amend the Constitution on the balanced budget issue that I have not yet mentioned involves the point that, once convened, a Constitutional Convention might not confine itself to only one issue. Who knows what might really happen if a Constitutilnal Convention were convened? The risk in this area far outweighs any potential gains that might result.

In conclusion, you will note that I have so far confined my remarks to the balanced budget amendments pending before this committee. These amendments, however, are analytically and practically very closely related to the proposed amendments that would directly limit federal spending to some figure such as 18 percent of GNP, or 33% percent of the average national income of the prior three calendar years, or some other formula. The size of the public sector as opposed to the private sector of our economy is an important issue. But, again, I think that it is an issue best left to the give-and-take of the legislative process and changing economic, social, and political conditions, and not mandated by a Constitutional amendment. In principle, however, I feel that the level of government spending should be based as far as possible on a careful analysis of the costs and benefits to society of using scarce resources in the private sector compared to their use in the public sector. The relation of government spending to GNP, as such, does not in itself provide such a criterion for evaluating the level of federal expenditures. TABLE 1.-ESTIMATED OWNERSHIP OF PUBLIC DEBT SECURITIES, NOVEMBER 1978

1 Includes savings and loan associations, nonprofit institutions, corporate pension trust funds, dealers and brokers, certain Government deposit accounts and Government-sponsored agencies, and investments of foreign balances and international accounts in the United States.

Source: January 1979 "Economic Report of the President," table B-77, p. 272.

TABLE 2.-GROWTH OF NET PUBLIC AND PRIVATE DEBT, 1929-76 AND 1946-761

1 Net public and private debt is a comprehensive aggregate of the indebtedness of borrowers after eliminating certain types of duplicating Government and corporate debt.

Net Federal Government debt is the outstanding debt held by the public, as defined in "The Budget of the United States Government, Fiscal Year 1979".

Source: January 1978 "Economic Report of the President," table B-69, p. 337

Joseph Scherer, "Is the Federal Budget Balanced?," Challenge: The Magazine of Economic Affairs, September/October, 1979, p. 42:

Ibid.

1 Data derived from the "Special Analysis Budget of the United States Government, Fiscal Year 1980." Source: Joseph Scherer, "Is the Federal Budget Balanced?" Challenge: The Magazine of Economic Affairs September/ October, 1979, p. 42.

TESTIMONY OF RICHARD W. EVERETT, VICE PRESIDENT, CHASE MANHATTAN BANK, NEW YORK, N.Y.

Mr. EVERETT. Thank you, Mr. Chairman.

Let me open by saying that I note that the chairman began the proceedings today by indicating that he listened to all the testimony so far on these subjects, which implies to me a determination to listen. to all the rest of it.

The chairman has my sympathy.

That observation, by the way, was not intended to have any implications for today's testimony.

Let me begin by identifying myself.

I am in charge of domestic economic analysis and forecasting for the Chase Manhattan Bank. Like Alan Greenspan, I am a former president of the National Association of Business Economics. If either of those organizations has an official position on the immediate question, I am not aware of it; today I am testifying solely for myself. I am opposed to any proposal to include in our Constitution a requirement that the Federal budget be balanced, regardless of the qualifications that might be attached to that requirement. The basis for my objection is primarily a matter of economics, but I have other concerns as a citizen.

This position by no means implies an enthusiasm for unbalanced budgets certainly not a devotion comparable to that implicitly expressed by the Government itself.

Including fiscal 1980, we have seen 19 budget deficits out of 20 opportunities. Deficits are sometimes unavoidable. But circumstances of the moment can hardly be held responsible for this record. Through thick and thin, we outspend our income.

We also take the consequences. Compared with what we might have expected with a less profligate fiscal policy, these consequences include worse inflation, higher interest rates, a lower level of private investment and other interrelated afflictions. Of these, inflation is central.

The causes of inflation are numerous, and the means by which it has gained momentum are complex. But I have to believe that budget deficits totaling well over $300 billion in the last 10 years alone are the triggers that set off the destructive process and the fuel that encouraged it on its way.

Now, as a result, we see real incomes of Americans declining. We see a developing recession brought about mainly by inflation and by the attempts to contain it. We hear, and will soon hear more, demands from damaged citizens for redress and probably in forms that are themselves inflationary.

Not surprisingly, we also see a disillusioned public. And we see a variety of suggestions from that public of methods to bring this mischief to an end. Among them, of course, are the proposals that would constitutionally mandate balance in the Federal budget.

It is not clear to me that, in its most simple form, it would be possible to comply with such an amendment. This is the form that says the budget must be balanced-period-except perhaps in time of war. But what happens in the event of recession in the private economy? This is a question that is bound to arise. With only one exceptionduring the Korean war-every balanced Federal budget since World War II has been followed, within little over a year, by an economic recession. As one who favors a more frugal approach to fiscal matters, this fact makes me a bit uneasy. Unfortunately, it is a fact.

As everyone knows, recessions move the budget toward deficit. Tax revenue is reduced as private income falters, and spending increases, mostly through employment insurance and other income maintenance programs.

The size of the increase in the budget gap due to these influences varies, both over time and in relation to the depth of the recession, so I can't put a precise figure on it. But something like $15 billion for an increase in the unemployment rate of one percentage point might be a reasonable estimate today.

This rise in the deficit represents the operation of the "automatic stabilizers" that are widely regarded as a front line of defense against extreme economic fluctuations. The requirement of perpetual budget balance would place this process in direct conflict with the demands of constitutional government.

I have no idea what procedures would be adopted to reestablish balance once it unexpectedly was lost. Presumably they would have to be fairly mechanical in view of the long delays likely before effective decisions to raise taxes or reduce spending could be made. But regardless of the details, the pursuit of balance could prove to be futile the goal unattainable no matter what the Constitution says, with every increase in taxation or cut in spending leading to a deeper recession and another widening of the deficit.

To put it another way, there are probably not many economists who regard reduction in Government spending or increases in taxes as the most appropriate policy response to recession.

The potential destructiveness and possible futility of mandated perpetual balance is sufficiently apparent to have generated some alternative proposals. I will come back to that. But I would like to note that, at least in my limited experience, noneconomists who favor an amendment add no such qualifications. They would regard a balanced budget amendment that did not balance the budget as further and overwhelming evidence of the misgovernment that they already

resent.

Of the alternative proposals, one approach would mandate balance at some specified level of economic activity. In effect, this amounts to specifying a variation on the full employment budget. Perhaps the budget would be balanced when the economy is operating at a set percent of its potential.

This, in my view, would trade one problem for another. Our economic potential grows over time, but at what rate? The Council of Economic Advisers has repeatedly revised its view of this potentialand it always finds other qualified experts prepared to disagree with it. Of course, if you would allow me to be the one who provides the operating estimate of economic potential, my views on this matter might be modified. But perhaps that is precisely the point. To paraphrase someone else, the economy is much too important to be left to the economists. Much as I respect my profession, I do not think it should be constitutionally raised to a level in some ways equal to that of the Congress or the Executive. Those who establish the budget of the United States should have to face the electorate.

There are proposals that would provide for other escape hatchesPresidential proclamation of need, or congressional votes to suspend the requirement if two-thirds, or three-quarters, or some such arbitrary proportion of both Houses agree.

My objections to these proposals have little to do with economics. If the process is too easy-a Presidential declaration or majority vote, for example there would be a probability that this part of the Constitution would become a mockery.

The annual spectacle of the Congress refusing, for a while, to legislate an increase in the debt limit to accommodate expenditures that the Congress itself has already approved comes immediately to mind. And if it is made too difficult, the opportunity for legislative blackmail by a minority with some unrelated objective in mind seems potentially great.

Again, there is a current example in the difficulties in authorizing expenditures at the beginning of the current fiscal year. With the wrong kind of amendment, this could become an annual event.

That brings me to my final point, which begins with a question: What budget is to be balanced? Would it be one that includes offbudget operations and Government agencies? If it did, the problem of achieving-or even defining-budget balance would be an awesome one. If it did not, there is every reason to believe that the proliferation of offbudget activities would put the already-impressive record of growth in that area to shame in no time flat.

Similarly, what are expenditures? Do they include the potential outlays connected with loan guarantees, for example? If not, we might soon be startled to discover the wonderful things that loan guarantees can accomplish.

I submit that the problem of definition would be a nightmare. As it stands, the Constitution is a lovely document. Even if a balancedbudget amendment could be written that would define terms, provide for exceptions, and the like in a form that would remain appropriate in a rapidly changing world, it would be an esthetic monstrosity.

There is something inherently wrong in the concept of a Constitution for all the people that can only be read, understood, and appreciated by those who have advanced degrees in both economics and constitutional law. And even as it stands, the Constitution provides more than enough business for the courts.

As I hope I made clear at the beginning, these comments are in no way intended to minimize the importance of responsible budgeting by our Federal Government. Deficits have been far too big and far too persistent. I think that the dimensions of Government, too, have expanded to a point where sheer size itself is a source of inflation. But, for the reasons I have given, constitutional amendment does not appear to me to offer a solution.

Let me close by referring to some earlier testimony in which the disposition of the Congress to live on deficits was compared with the condition of an alcoholic. It is suggested the cure for this was to swear off the sauce and make that stick. I thought the analogy was appropri ate, but not perhaps for the reasons it was originally advanced.

We once tried to make the United States give up alcoholism and we did it by a constitutional amendment. The result was not a reduction in the rate of alcoholism; it was an increase in the rate of chicanery. Senator BAYH. Interesting comparison. Thank you very much, Mr. Everett.

Both of you and Mr. Greenspan seem to concur that there were many factors involved in creating an inflationary budget. Could you just sort of give us a capsulized version of how you rate these at this particular moment, the whole energy business?

I think Dr. Greenspan said that there is one thing that almost everybody agreed upon and that was money supply per unit of goods was a determinant, or a major factor.

Give us your weighting, if you could, of why we have inflation today and where the balanced budget fits into it. I had the opportunity, and I am sure you read the more public ones, but I have seen several polls that have been basically political-oriented polls-what is the burning issue, and what are the preconceptions about what causes these things. I must say the big majority of the American people feel that the deficit is the No. 1 cause of inflation and consequently if you do away with the deficit, you do away with inflation.

Can you gentlemen give the committee your thoughts on that, please?

Mr. SAUNDERS. I will start on that.

I do agree that the present inflation has a lot of characteristics that make it unique. It's clearly not the classic type of excess demand inflation that was associated with budget deficits during World War I or World War II, for example.

I would not deny that the current deficit contributes more to the inflation than if we had a current surplus, but it is not a simple 1-to-1 cause and effect. Productivity in the American economy has declined not because people are working less hard, but because the American economy is shifting from a manufacturing and extractive type of