economy where it's easy to increase productivity, to a service-oriented economy, where it's very difficult to increase productivity.

A large part of our present inflation is caused by external shocks from the OPEC price increases and have nothing whatsoever to do with the state of the Federal budget.

I think the devaluation of the dollar, which has had a big impact on our import prices, and the price of our exports abroad, has also been an important factor.

The present inflation is a very complicated inflation and I don't think we can take a simple approach to it. I will also elaborate on the one point you made about the relation between monetary and fiscal policy. How the debt is financed is a crucial element in determining the inflationary impact of the debt. As my table 1 indicated, a lot of the deficit financing comes from borrowing money from other people's savings. Who buys the debt? If the Federal Reserve System buys the debt, this is, in effect, what they call monetizing the debt and means that monetary policy will be expansionary, and that is the process that Mr. Greenspan spelled out quite correctly. And if all of the changes in the deficit were financed in that manner, then you have both expansionary fiscal policy and expansionary monetary policy with all the consequences that he pointed out.

I should add, however, that all the debt is not bought by the Federal Reserve System. If an insurance company, a small boy taking a dime to his homeroom teacher, or other people purchased the debt, the total money supply doesn't change, it is just a switch in the control over money balances.

If an insurance company buys a bond, its checking account goes down and the Treasury Department's checking account goes up, but the total money supply hasn't changed.

Senator BAYH. Let me interrupt you just a minute.
Mr. SAUNDERS. I was just about finished.

Senator BAYH. I have sat, watched, and listened to models being assembled and describing the way we put together the whole financial system of this country.

One of the constant points or arguments, or assertions, made by those who are supporting a constitutional amendment is, and it goes back to the money supply per unit of goods, that the Federal Government in a time like this, when you have a deficit, can get out the old printing machine and print up more money.

Now, does that happen?

Mr. SAUNDERS. Recently, monetary policy has been expansionary, at least until last October, but during this time our deficits have been getting smaller. So monetary expansion has not been directly related to the Federal debt, but it has been related. I think we have had expansionary monetary policy that has contributed to inflation. But, again, as I say, this current inflation, where the unemployment rate has stayed as high as it has, and we had a lot of other things hit the economy at the same time-OPEC price increases, declining productivity, those that I mentioned before-to single out one part or one incident and say that is it, I think is a gross oversimplification. They all go together.

If we had had a less expansionary monetary policy, if more of the debt had been financed by borrowing from private individuals and insurance companies, rather than purchased by the Federal

Reserve, we probably would have less aggregate demand in the economy, perhaps less inflation, but we are likely also to have had more unemployment, a bigger deficit in the balance of payments, so I am against singling out one goal and just devoting our attention only to that.

We have many goals and we have to keep them all in mind at once. I must admit, it is sometimes confusing and complex and frustrating, but the solution to complex and frustrating problems is not likely to be so easy to come by as any one quick fix. If it were, the problems wouldn't be there in the first place. The only problems we have are the problems were there is no quick fix by definition. If there is a quick fix, there wouldn't be a problem.

Senator BAYH. Mr. Everett, would you comment on that?

Mr. EVERETT. I think, Mr. Chairman, that part of the answer is connected with the observation that Alan Greenspan made which is that Government claims, in effect, are preemptive and other things being equal, if there is a Government deficit and especially if it increases, sooner or later the Federal Reserve tends to be driven to create more money in order to make an adequate supply of money available in the rest of the economy and in fact that has happened over long stretches of time.

That is one of the reasons why I think our $300 billion accumulated deficits have in fact been inflationary. The Federal Reserve responded by permitting larger increases in the money supply, and that response was caused in good part by considerations of the consequences if they didn't do it.

Senator BAYH. So the expansionary monetary supply is not related solely to how you pay the deficit that is created by an imbalanced budget, but to provide other resources for other kinds of debt action.

Mr. EVERETT. That's right. The other question relating to inflation is a little harder to answer, although I think I know what the answer is; that is, suppose there is a limited amount of debt which can be generated without an expansion in the money supply: Would it be more productive-that is, less inflationary-were it used in the private economy or by the Government?

I think there is a rather general belief that, in terms of creating output, it would be more productive in the private economy. There may be justifications for using it through public institutions, but growth is generated privately.

Senator BAYH. Is the public debt any more inflationary than the private debt? Or are State and local debt any more

Mr. EVERETT. I am not sure there is a comprehensive answer. The reason goes back to something Mr. Saunders said. Some public expenditures are literally productive.

Senator BAYH. Are what, sir?

Mr. EVERETT. Literally productive; that is, they provide continuing services, capital investments-the same sort that might be created if we created private debt.

On the other hand, this is not true for the bulk of public expenditures. And to that extent, I would say public expenditures tend to be, almost by definition, more inflationary than private when they are financed by debt.

Mr. SAUNDERS. I would agree with that. It is not the borrowing; it is what the borrowing is spent for.

I do not want to comment on this last part. Some public spending is not productive, in the sense that it only transfers income from one group to another and the biggest increase that we are seeing now in terms of Federal budget outlays are transfer payments for the Social Security system that have been previously legislated and mandated.

I think as our population ages-it clearly is—we are going to have to, unless we go back and drastically change existing legislation, spend more money on transfer payments for the social security program.

This is a transfer kind of expenditures that while in a technical sense might not be called productive, is one that at the present time we have a commitment to meet. And unless we want to change that commitment, I do think we have to turn our attention to how we want to finance it—whether we should finance it with a payroll tax, or some other financial mechanism.

Senator BAYH. Thank you, gentlemen. You have been very helpful. Senator Heflin?

Senator HEFLIN. I have no questions.

Senator BAYH. Would it be all right if we submitted written questions to you gentlemen so we don't have to impose on you further? You have been very helpful. I must say this is a stimulating and confusing subject and I think, Mr. Everett, it was you who said, these decisions should be made by only those who have an advanced degree in economics and constitutional law. I don't know about you, Judge, but that leaves me out, which would probably make a number of people happy.

Thank you very much, gentlemen. I really appreciate your letting us have your thoughts here.

The next witness is Mr. Merlyn Carlson, the first vice president of the National Cattlemen's Association.

Senator HEFLIN. If you will, gentlemen, go ahead. I will be presiding. Senator Bayh has got to attend a matter on the floor. So go ahead. We are delighted to have you, Mr. Carlson.

TESTIMONY OF MERLYN CARLSON, FIRST VICE PRESIDENT, NATIONAL CATTLEMEN'S ASSOCIATION; ACCOMPANIED BY DON MAGDANZ, STAFF OFFICER

Mr. CARLSON. Mr. Chairman and members of the Subcommittee on the Constitution: For the record, I am Merlyn Carlson from Lodgepole, Nebr. I am first vice president of the National Cattlemen's Association. I am a cattle producer and feeder in western Nebraska.

Our organization is headquartered in Denver, Colo. My appearance here today is to represent the National Cattlemen's Association, and to present our views to the committee on the subject area for which this hearing has been scheduled.

With me is Don Magdanz, who is staff officer assigned to the project of pursuing a proposal for a constitutional amendment that would bring about a balance in our Federal budget and other fiscal requirements.

We are grateful for the opportunity to appear in person at this hearing and explain our position to the committee. We will comply with your request, Mr. Chairman, and briefly summarize our views and arguments in the next few minutes.

As has been indicated, we ask that our prepared statement on a constitutional amendment be included in the record.

Basically, the position of the National Cattlemen's Association supports a resolution that proposes an amendment to the Constitution of the United States, which amendment would change the fiscal ground rules of the Federal Government, restore fiscal responsibility, and bring about these conditions: Restraints on total Federal spending; restraints on taxes and tax rate increases; limit Federal outlays to Federal income in each fiscal year; and substantially reduce inflation. For some time, in our opinion, the Federal Government has conducted its fiscal affairs in a reckless manner. It has turned its back on basic economic principles while looking with too much favor on shortterm political solutions.

The result is a loss of faith by the public in the ability of the Government to change its ways. Thus, we feel it is absolutely necessary that limits be placed on Federal expenditures as well as Federal indebtedness through a constitutional amendment.

Our prepared statement outlines specific reasons for these views while referring to the influence of pressure groups, the use of deficit spending to minimize a recession, and the repeated attempts to modify inflation by treating the results instead of the causes.

Our written text outlines the record of Government outlays and Federal deficits showing the stunning development of an increase in the Federal debt in the past 6 peacetime years of $371 billion.

We feel we satisfactorily refute arguments made against amending the Constitution. There is every reason to keep this hallowed document up to date and, since it was originally ratified, the Constitution has been amended 25 times. Had restraints been put on Federal spending in the beginning, or at least when the income tax amendment was ratified in 1913, there would probably be no reason for us to be here today.

The real issue in public unrest is spiralling inflation and, in our opinion, the Federal Government is totally responsible for it. Continued deficit spending by the Federal Government at what we feel are astronomical rates is a major cause of inflation.

Our prepared text outlines the record of inflation including the decline in the purchasing power of the dollar, the rise in the Consumer Price Index, and the difference in Gross National Product as expressed in current and constant dollars.

Still summarizing, here is what inflation does:

It threatens our society and personal freedoms; it erodes the value of and confidence in our currency; it creates an unbearable impact on fixed incomes; it nurtures further inflation; it imposes a cruel tax through our progressive rate system; and it inflicts an inexcusable tragedy on future generations.

In further discussion, we point out the real causes of inflation. Beginning before 1940, our Government implemented so many programs designed to crank up the economy that today some 75 percent of our annual budget is considered "relatively uncontrollable" under present law.

A high percentage of the uncontrollable portion of our budget consists of social, health, welfare, education, and income security programs which are often referred to as entitlements. The money

thus received is largely spent for consumer items which creates a demand for goods and services far beyond what our static productivity makes available. As a result, we have strong inflationary pressures. The Federal Government has literally educated people to expect these entitlement programs, but it will be necessary, though challenging, to reduce their costs. At the same time, it is imperative that all waste in our Government operation be eliminated.

To be responsible, we feel called upon to mention other causes of inflation which should be dealt with in one way or another, but not necessarily through a constitutional amendment.

Basically, these are the other contributors: The substantial and continuous growth in the money supply; the horrendous overregulation of business and society; and the static, and sometimes decline, in productivity.

We are well acquainted with numerous resolutions to amend the Constitution of the United States which have been proposed by members of both the Senate and the House of Representatives. We respect these proposals and compliment the Members of Congress for their persistent efforts.

The National Catt! men's Association is sympathetic with a number of approaches that have been made, but the association does look with most favor on Senate Joint Resolution 93 by Senator Armstrong, and House Joint Resolution 408 by Congressman Rousselot. At the same time, though, we feel there should be some additions to this resolution, including several sections contained in Senate Joint Resolution 56 by Senators Heinz and Stone.

So beginning on page 10 of our statement, we list those provisions that we feel a proposal for a constitutional amendment should contain. There are 12 specific sections.

While these sections are really summarized in our statement, I'll not take the time of the committee to read them entirely, but I would like to say that they include these basic provisions:

A limit on total expenditures of the Federal Government to the amount of total revenue in a fiscal year except in a year when the United States may be at war, or when the Congress, by at least a three-fifths majority, votes to suspend the limit;

Federal expenditure would not include outlays for redemption of obligations and Federal revenue would not include money derived from the issuance of obligations, and any surplus of revenue in a fiscal year would have to be applied on the national debt;

Congress would be required to reduce the rate of taxes to offset the effects of inflation, and the measurement of inflation is so described; Taxes could not be increased without a vote of at least three-fifths of the Members of each House of Congress while the reduction of taxes could be effective with a majority vote of both Houses and the approval of the President;

The Congress would be limited in the amount it could reduce grants to States and local governments in the first 5 years following ratification; and

Enforcement of the requirements in the amendment would be through a U.S. district court in action brought by a Member of Congress.

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