Page images



S. J. RES. 126

Proposing an amendment to the Constitution to promote fiscal responsibility.


DECEMBER 14 (legislative day, NOVEMBER 29), 1979 Mr. DECONCINI (for himself, Mr. THURMOND, Mr. Heflin, Mr. Hatch, and Mr. SIMPSON) introduced the following joint resolution; which was read twice and

referred to the Committee on the Judiciary


Proposing an amendment to the Constitution to promote fiscal



Resolved by the Senate and House of Representatives

2 of the United States of America in Congress assembled 3 (two-thirds of each House concurring therein), That the fol4 lowing article is proposed as an amendment to the Constitu

5 tion of the United States, which shall be valid to all intents

6 and purposes as part of the Constitution if ratified by the 7 legislatures of three-fourths of the several States within

8 seven years after its submission to the States for ratification:

[blocks in formation]


"SECTION 1. The Congress shall adopt for each year a

3 budget, which shall set forth the total receipts and expendi4 tures of the United States. No budget in which expenditures 5 exceed receipts shall be adopted, unless three-fifths of each

6 House of Congress approve such budget by a rollcall vote 7 directed solely to that subject. The Congress shall not pass 8 and the President shall not sign any appropriation bill which 9 would cause the total expenditures for any year to exceed the

10 expenditures in the budget for such year. 11 "SEC. 2. The receipts in any year shall not exceed, as a

12 proportion of the national income, that collected in accord

13 ance with this section in the prior year, unless a bill directed

14 solely at approving a specific increase in such proportion has 15 been passed by each House of Congress by rollcall vote and

16 such bill has become law.


"SEC. 3. The Congress may waive the provisions of

18 section 1 with respect to any single year in which a declara

19 tion of war is in effect.


"SEC. 4. Terms used in this article shall be construed in

21 accordance with their meanings on the date on which this

22 article was submitted to the States for ratification.


"SEC. 5. This article shall take effect on the first

24 day of January of the second calendar year beginning

25 after its ratification.".


OF ECONOMIC ADVISERS I cannot here provide a systematic review of the entire range of macroeconomic issues that now concern this Committee and the Congress. On some of them I am not competent to speak, or can provide only points of view or empirical assessments which your own staff, the CBO and your previous witnesses could equally well provide. Thus, I shall comment, in a rather unsystematic way, only on selected aspects or issues where I have either a dissenting point of view or a particularly firm conviction.

A RECESSION IN SIGHT? One primary concern of the Committee is obviously the outlook for the economy over the next four to six quarters. While I once followed relevant monthly and weekly data in detail, and made elaborate forecasts each quarter, I found that others were doing that as well as or better than I was, and concluded that my marginal social product must be higher in other activities so I can only give you what are really my hunches about the outlook. And I advise you not to pay much too much attention either to my hunches, or to the forecasts of so many others who regularly forecast by hunch, imagination, or ideological conviction and whose pronouncements often receive inordinate attention from the press, political opportunitists, financial analysts, and market tipsters.

My expectation is that there will not be a recession during the next four quarters—which is as far ahead as I believe that anyone can really forecast. Rather, I see real GNP increasing at an annual rate averaging around 2 or 272 percent up to that horizon. I base my expectation of no recession on an essentially qualitative reading of recent events and the current situation, and on my assumptions about future fiscal and monetary policies, including my expectation that Congress will adopt a budget not far from the President's proposals. Of course, I am fully aware that some forecasters whose work I highly respect do foresee a recession within the year; and my own subjective probability is about 25 percent that they are right. Of course,

I do not find the prospect of a 2 or 272 percent growth in real GNP over the next year a very pleasing one. Such a growth rate surely implies unemployment rising appreciably. I would not normally support policies that implied that outcome, and would find it quite unacceptable over any substantial period. I accept it only because I believe that such an outcome over the next few quarters is consistent with a determined attempt to reduce the inflation rate. Do not misunderstand me; I do not believe that merely reducing the growth rate to 2 or 272 percent, or raising the unemployment rate to 6.5 percent, will itself do very much to lower the inflation rate. Reducing inflation mainly depends on other kinds of policies, which I will discuss later. But fiscal and monetary policies consistent with slow expansion provide an economic and political posture that I believe is appropriate to the successful inauguration of such other policies.

If you should be convinced-on the basis of forecasts by economists better qualified than I, or by what happens over the next few months—that a recession is an imminent danger, then my advice is to revise the President's budget proposals so as to increase moderately their fiscal thrust. I say moderately, because the recession forecast could be mistaken; and, in today's situation, too great a stimulus should be avoided, given the many uncertainties about the exact point at which extra stimulus adds to inflationary impulses, and the need for a posture supportive of other anti-inflationary policies.

On the other hand, I would not agree with a revision of the fiscal policy proposed in the Budget that would further appreciably reduce its stimulus to expansion. The President has already done about as much as seems to me appropriate in the way of reducing fiscal stimulus. Any significant cutback of his proposed expenditure totals, or any appreciable increase of taxes could assure a recession, beginning during 1979. In my view, only if the preponderance of professional opinion were that an inflationary boom is possible or likely should the fiscal stimulus in the budget proposals be appreciably cut back. I have not heard that forecast from any analyst whose views I respect.

Some ask why we should try to avoid a recession. If it does not occur in 1979, does not that merely make it inevitable in 1980? And would it not then be the more serious for having been postponed? I see absolutely nothing which supports either premise. We will continue to have recessions in the future as in the past, as the result of exogenous events and of mistakes of private and public policies. But there is no temporal inevitability about recessions; nor is there any reason to assume that longer periods without recession necessarily produce more severe recessions when they come.

It is conceivable that there might be occasions when we would wish deliberately to produce a recession, in the belief that it could produce advantages (e.g., in the control of inflation or in the balance of payments) which would exceed its costs. There may have been times when such a calculus would have been correct; however, I do not think that it could possibly be correct today, given what we know about the impact of postwar recessions on prices, as well as on aggregate output, real incomes, business investment, unemployment, personal careers, and all else that is adversely affected by recessions—including the quality of our collective political judgments, and the attitudes of people toward each other and toward their social and political system. I am unable to understand the view that prevails in some financial circles that the prospect of a recession is good news-now or ever.

Please understand my position. I am not saying that the cost of inflation are negligible; nor do I suggest that we not make a major effort to reduce them. On the contrary, I believe that inflation has enormous costs-although most noneconomists describe these costs incorrectly. Rather, I am saying that recessions are not a cost-effective method of reducing the inflation rate.

SHOULD WE WORRY ABOUT THE DEFICIT? If the fiscal stimulus provided in the President's proposals is about right (as I think it is), should we nevertheless worry about the $29 billion deficit that the budget projects? Or about the larger deficit that would result from a recession? My answer is emphatically "no".

Recent concern about Federal deficits, per se—leading even to the serious advocacy of a constitutional amendment to forbid them—seems to me wholly psychotic. We have serious economic problems, even if some of them are incorrectly perceived or exaggerated; but deficits per se are not among them. Nor are recent deficits a significant cause of our genuine problems. Deficits resulting from a fiscal policy that is too stimulative in an economy already at full employmentfor example, the deficits of fiscal years 1966 through 1968—can have disastrous effects. Indeed, to some small extent, we still suffer from the mistaken deficits of 1966-68 and 1972. On the other hand, the giant deficits of fiscal years 1959, 1971, and 1975 through 1978 were beneficent-and largely unavoidable. I should add that surpluses at the wrong time-or efforts to produce surpluses at the wrong time—have sometimes also had costly effects, by producing avoidable recessions.

One who proposes to prohibit deficits should find pause in the statistic that the U.S. budget has been in deficit (by the budgetary accounting system then in use) in 40 of the past 50 fiscal years. Even under the more relevant accounting system used for our national income and product accounts, there have been only 14 Federal surpluses in 50 years. If deficits per se are injurious, how have we survived so long-and so very successfully? If public debt is a har to prosperity, how did we ever get through the 1950s and 1960s, when the ratio of government debt to the national product was nearly twice that it is today?

Moreover, the experience of other countries supports no presumption of the disastrous consequences of deficits per se. Consider Table 1,9 which shows that even countries whose economic performance many observers believe surpasses ours (e.g., Germany and Japan) have had deficits in every recent year-usually larger than ours as a percentage of GNP; and larger deficits than ours are forecast for 1979 in each of these countries.

Many Monetarists-or persons influenced by the Monetarists—believe that inflation arises only from an excessive rate of money creation. And they contend that deficits either automatically increase the money supply, or somehow require the Federal Reserve to increase the money supply more rapidly than it would prefer. There is simply no way in which deficits automatically increase the money supply; and I doubt that any past or present Chairman or Member of the Board of Governors of the Federal Reserve System would accept the view that the Open Market Committee was ever required to act against its better judgment. They may admit to having made mistakes of monetary policy-just as Presidents and Congresses should admit to having made mistakes of fiscal policy. But it was not because either the Fed or the Congress was somehow compelled by irresistible economic or political pressures to do the wrong thing. I think that the proposal to amend the Constitution to prohibit deficits is, among other things, a quite unwarranted insult to the intelligence and sense of responsibility of the Congress of the United States. And it could be highly damaging to our economic welfare.

1 All tables are at the end of the statement.


I have no real complaint about monetary policy during 1978 or about its present restrictive posture. However, there is a good possibility that monetary policy will need to be relaxed in 1979. The notion that an inappropriately loose monetary policy has caused the inflation of the last five years seems to me to be without basis. Even the argument that, during these years, the Fed has “accommodated" an inflation which had other proximate causes seems to me highly misleading. Only if its unwillingness to accommodate inflation would have eliminated inflation can the Fed be given the blame. In fact, failure to accommodate-at least to some extent—the rise of prices in recent years would have had little effect on the extent of inflation, but would have had disastrous effects in reducing employment, output, and incomes. The resulting automatic loss of tax receipts would, of course, have greatly swollen the Federal deficit; and the disastrous effects on employment and incomes would have required a rational President and Congress substantially to increase expenditures or to cut tax rates, further enlarging the deficit. Congress and the President would then surely have been charged with “causing," or at least “accommodating,” the inflation through its fiscal policy.

However, I think it is important to recognize that monetary policy has not fully accommodated the inflation of recent years. It has, throughout, "leaned against" inflation-not so hard as to create recession; but hard enough that no charge of accommodation can be reasonably supported. Table II presents some of the relevant evidence.

Column (1) of the table shows that “M,” has grown at an average annual rate of 5.9 percent a year since 1972, and at 6.9 percent a year since 1975. Over those same periods, the growth of GNP (column (2)) has averaged 10.3 percent and 11.3 percent respectively. The result (by definition) is that the “velocity” of M, has increased by an average annual rate of close to 4,1 percent over both periods (column (3)). This growth of velocity far exceeds its supposed 1.5 percent a year upward trend (which has in fact been closer to 242 percent) that Monetarists tell us is its normal and stable trend. I interpret these figures to mean that, because money has not been supplied as rapidly as the need for it has increased, money-holders have been required to economize on its use, further increasing its velocity.

By 1978, the "real money supply” (M, deflated by the GNP deflator) was more than 7 percent lower than in 1972. Real M, began to rise in 1976, but has risen at an average rate of only 0.7 percent a year since 1975. This rise accompanied a recovery from the deepest recession in 40 years, with real GNP expanding at an annual rate of 4.8 percent. That surely cannot be described as “accommodating' inflation-it has not even come close to accommodating the increase in real output. Essentially similar conclusions can be drawn using a broader moneysupply concept-for example, M2: its velocity-supposed to be stable—has been forced up; and real M, has risen considerably less than real output.

Monetary policy has indeed-and correctly-accommodated some part of the recent inflation; but it has not accommodated all of it by any means. Thus, monetary policy has acted as a steady and increasing drag on the growth of aggregate real demand for goods and services.

Given a fiscal policy for 1979 that is substantially less stimulative than last year or the year before, and given an economy that, at best, promises only very moderate growth of output, monetary policy should be ready to ease up quickly if growth appears about to stall. Such easing conceivably might imply a growth of some definition of the money supply in excess of some arbitrarily predetermined target rate. Even if it should, I hope, and indeed I expect, that the Fed will not hesitate to "lean" in the opposite direction: in at least modest support of expansion rather than against it. Such support, in those circumstances, would in no way be inflationary.

« EelmineJätka »