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BALANCED BUDGET AMENDMENT

The American Jewish Congress is opposed to amending the United States Constitution to mandate a balanced budget. We take this position because of a variety of reasons relating to the nature of the Constitution, the uncertainty of what should be included in the Federal budget and specific objections to a balanced budget requirement.

The Constitution is the fundamental law of our nation and establishes the broad structure of our government and our basic rights. As it is meant to establish through fundamental law the organic nature of our system of government rather than specific policies, it should not be amended to incorporate a particular fiscal policy which would represent a permanent decision to limit the capacity of the Federal government to react to future conditions about which we are unaware.

To include in our Constitution a balanced budget amendment would mean the enshrinement of a specific economic policy. As Justice Holmes observed, the "Constitution is not intended to embody a particular economic theory, whether of paternalism and the organic relation of a citizen to the state or of laissez-faire.” 2

A balanced budget amendment would of necessity have to be lengthy and cumbersome in order to define the terms used and provide appropriate loopholes aimed at avoiding disasters. Some of the versions proposed are actually longer than the Bill of Rights or Article I of the Constitution which describes almost all the powers of Congress. Indeed, some proposals are so technical that if adopted it would not be long before a movement were initiated to amend them.

The proposed balanced budget amendment also raises the question of what should be included in the budget. Current practices are made up of written and unwritten rules which would not automatically be changed by the adoption of a balanced budget amendment. Indeed, one can expect the opposite to be true. The more restrictive the balanced budget amendment, the more likely that Congress and the President would attempt to adopt new practices to avoid having some expenditures included in the budget.

"Off-budget” outlays are the expenditures of Federal agencies which are entirely or partly excluded by Congress from the budget. Most off-budget outlays are spent by the Federal Financing Bank which is authorized to purchase in whole or in part any federally guaranteed obligations. When the Federal Financing Bank needs to finance its purchases, it borrows from the Treasury, which, in turn, borrows from the public. Other "off-budget” agencies include the United States Railway Association, the Postal Service Fund and the Pension Benefit Guarantee Corporation. While in the last few years efforts have been initiated to include some "off-budget" outlays in the Federal budget, these have thus far not been successful. If they were part of the budget, they would have required an additional $12 billion to be included as expenditures in fiscal 1980.

The relationship between the budget and private corporations established and chartered by the United States to perform specific public functions must also be considered. Included here would be such credit operations as the Student Loan Marketing Association and the Federal National Mortgage Association. While the securities issued by these corporations do not increase the liability of the United States government, it is commonly felt that they are similar to “moral obligation” bonds and the government would not be able to stand on the sidelines if such an enterprise failed. In fiscal 1980, they constituted outlays of up to $20 billion.

Guaranteed loans represent yet another category of Federal financial transactions that are excluded from the budget. These are loans for which the United States government is committed to pay part or the whole of the principal and/or interest where a borrower defaults.

Strict limitations on deficits or expenditures would only invite the expansion of these vehicles and the creation of additional ones for spending money that are not part of the budget. While the purpose of these would be to evade Constitutional limitations, it must also be borne in mind that such transactions are not subject to the normal political controls of regular government agencies.

The definition of outlays is yet another question that would have to be addressed if a balanced budget amendment was adopted. Since the computation of outlays can hide real budget totals, one issue that arises is how outlays are counted for budgetary purposes. For example, by counting government loans on a net basis (gross amount of loans minus repayments) as opposed to a gross basis, one would end up with a different perception of the budget.

? Lochner v. New York, 198 U.S. 45, 75 (1904).

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The major point being made here is that a Constitutional limitation by itself would not resolve such definitional and accounting issues but would require numerous statutes and regulations to spell out the Constitutional intent. This being the case, we are doubtful that a Constitutional amendment should be the vehicle to accomplish what would ultimately have to be decided in large part by laws and administrative decisions.

We believe that many of the basic assumptions in favor of balancing the budg; et—the view that deficits cause inflation, excessive government spending and reduce the rate of economic growth by absorbing private savings that would otherwise flow into investments—represent poor arguments on which to call for a major Constitutional change. While the United States has had deficits almost continually since 1929, these have not always been accompanied by inflation. Whether deficits are inflationary or not depends on a variety of factors including their size, timing and the means by which they are financed. Some believe that the linkage between debts and inflation results from the fact that the former bring about monetary expansion which is inflationary. However, it seems unclear as to whether or not deficits have been a major cause of excessive monetary expansion in the past or that they will have this impact in the future.

Even if it were clear that deficits caused monetary expansion which led to inflation, the remedy for this should be found in the monetary system rather than in the budgetary system. Moreover, if a deficit is financed by borrowing from real savings, then it will not have an inflationary impact.

Since a budget is essentially a forecast of expectations based on program objectives and judgments about the behavior of the economy for the coming fiscal year, a balanced budget amendment would make it extremely difficult for the nation to respond quickly to changing economic circumstances. For the Federal budget, as large as it is, and enacted in the knowledge of known uncertainties, a so-called balanced budget could become a truly unrealistic document. It would result in inflexibility with respect to economic policymaking at the Federal level when flexibility may really be what is required. For example, a budget balanced at the beginning of the year may be sharply askew nine months later because a threat of mild recession led to government receipts falling beneath their projected level. Under these circumstances, Congress might wish to pump more money into the economy to prevent a depression. However, under some strict definitions of a balanced budget amendment, this could not be accomplished unless an emergency were declared. The latter could lead to a long-drawn out debate since most proposals provide for a two-thirds vote for such action. By the time any action were agreed to (if it were), it might be too late to accomplish any positive results.

Moreover, there is also a question regarding what sanctions would be employed under a balanced budget amendment if expenditures exceeded revenues. Would this mean that the Supreme Court takes precedence over the daily operations of the Federal government? While many would agree that this is unlikely, no alternative mechanism is clear.

There is also an assumption that since state and local governments are required to balance their budgets, it is therefore correct to mandate this for the Federal budget. The problem with this view is that states and localities are allowed to borrow funds for capital outlays while Federal budgetary accounting places operational and capital expenses in the same pot. Balancing the Federal budget means matching total outlays with current tax revenues which is quite different from the balanced budget concept for states and localities. If the Federal government had a capital budget, it has been estimated that as much as $35 billion in President Carter's 1980 budget could have been placed in it. This would more than eliminate the deficit.

There is also another major difference between state and local and Federal budgets impacts. The states can balance their budgets by cutting spending or increasing taxes without jarring the entire American economy. The Federal budget cannot. If problems occur in our economy and the unemployment rate increases and profits decrease, the Federal budget will automatically run a deficit due to declining revenues and rising expenditures. Mandating a balanced Federal budget, which in these circumstances would require increasing taxes or cutting spending, could increase sluggishness in an already declining economy.

On the subject of the size of the Federal debt, it must be noted that since the conclusion of World War II, the Federal government's debt has grown at a slower rate than the state and local governments. In 1979, the Federal debt is 2.3 times what it was in 1950, while the state-local debt is 13 times higher, consumer installment debt is 14 times higher, mortgage debt is 16 times higher and corporate debt is a dozen times higher. These figures serve to place the Federal debt in proper perspective.

It must furthermore be recognized that over three-fourths of the Federal government's expenditures in 1980 are classified as relatively uncontrollable. This means that in the short run most of the burden for meeting a balanced budget requirement would have to be met by the so-called controllable sector of the budget. A likely target among the controllables is the defense budget which makes up over one-half of this category. Among the uncontrollables, Federal assistance to state and local governments, which in the last fiscal year totaled approximately $90 billion, may be cut. The revenue sharing program, one which the states find especially pleasing because of the minimum regulations involved, could be in danger. Its future would be in some doubt since the Federal forecast for its 1980 deficit is roughly equal to the 1978 states' surplus of $29 billion.

CONCLUSION In conclusion, we would like to reiterate our opposition to a balanced budget amendment for the reasons offered above. Our major concern is that such a step would represent a serious erosion of the lawmaking powers of the United States Congress and very likely would make it impossible for that body to respond to our nation's changing needs. Respectfully submitted,

SEYMOUR Z. Mann, Ph. D.

Chairman. Robert LEKACHMAN, Ph. D.

Cochairman.

Commission on Urban Affairs. Technical consultant:

MARTIN HOCHBAUM, Ph. D. Director, Commission on Urban Affairs.

THE AMERICAN JEWISH COMMITTEE,

Washington, D.C.

STATEMENT With the unanimous backing of its Board of Governors, the American Jewish Committee is joining the effort to block the misguided effort to call a constitutional convention to mandate a balanced Federal budget. Both the proposed procedure and the declared goal a constitutional amendment constitute frightening challenges to our form of government.

Our government must, of course, find better answers to the persistent problem of inflation. But those answers will not be found in simplistic, rigid, unrealistic, arbitrary constitutional amendments which could not possibly meet the specific exigencies of economic fluctuations. Moreover, the worst possible forum for deliberating on critical, sensitive, technical economic policy matters is the kind of constitutional convention being proposed, one which could be uncontrollable and subject to emotional and demogogic appeals. The answers to our economic social problems must and can be found through effective use of our existing political machinery and through intelligent actions on both the legislative and executive levels.

Hyman BOOKBINDER,
Washington Representative,

American Jewish Committee.

THE BALANCED BUDGET BANDWAGON: PIED PIPER AT THE WHEEL? The balanced budget bandwagon has taken to the road and before the 1980 elections no doubt it will stop in your town, play its short and simple tune, and then invite you to sing along. Tired of rising taxes, shrinking dollars, greedy oil sheiks, and Big Government, you may well be tempted to join in. The purpose here is to provide a roadmap through the legal, economic, and political terrain that that bandwagon is traversing so that your choice is made more from information and understanding than fatigue, confusion, or perhaps enchantement.

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On the legal front, the much publicized state drive to call a convention to append a balanced budget amendment (BBA) to the Constitution has its authority in an as yet untested clause of that document.

While in theory Article V provides both Congress and the states with amend. ment power, all 26 amendments have emanated from the Congress; and four previous attempts by the states to call a convention have met with failure. This time, however, 28 of the required 34 states have already passed resolutions supporting the BBA convention; and the National Taxpayers Union orchestrating the states' drive confidently predicts the requisite six more states will soon follow suit.

Proponents tout the convention as a glorious expression of states' rightsfirm check on a Congress run wild with taxpayers' money. Opponents decry it as a Pandora's Box, warning that it would be impossible to limit it to one topic and that, with Madisons and Washingtons in short supply (and Naders and Abzugs in abundance), the convention would “runaway" into other issues-abortion, the death penalty, busing.

Other unresolved issues include whether the differently worded state petitions are in fact valid and whether the voting rule should be one state one vote (as at the original convention) or an apportionment system. And one legal scholar has admonished not to “trivialize the constitution" with mechanical economic formulae.

While this legal sparring generates much heat, it sheds little light on the more basic issue of whether mandatory budgetary balance is a good idea. Economics is more useful in this regard.

With polls identifying inflation as "public concern #1", the most powerful economic argument for the BBA is that "budget deficits cause inflation". Neither history nor economic analysis substantiates this claim, however.

As Milton Friedman has pointed out, one of the most rapid inflations in the U.S. occurred in 1919–20 when the budget was in large surplus while during the depression when the budget was in deficit there was an extreme deflation. Similarly, deficits persisted through the early 1960's yet inflation rose by only 1% annually. Clearly then, the fact that we currently have a large deficit and high inflation does not necessarily mean one is the cause of the other.

Nonetheless, economists readily acknowledge some link between deficits and inflation; but whether that link is forged depends crucially on the level of employment. Specifically, unless the government pumps more purchasing power into an economy already at full employment, deficit spending will not be inflationary. And in a recession when there is high unemployment and excess capacity, increased spending or tax cuts which expand the deficit will actually stimulate recovery, not inflation.

A second major economic argument is that "deficits 'crowd out private investment.' Governor Jerry Brown-a politician, not an economist-is the leading proselyte of this view, he insisting that today's slow capital formation (and its attendant evils of low growth and lower productivity) are the direct result of Federal deficits. He is as right as he is wrong:

First, economists completely agree that when the economy is at full employment, an increase in government spending competes directly with business investment and “crowds it out". However, if the economy is slack, as in a recession, deficits act, as noted above, as a stimulus and may actually accelerate the rate of investment—what Harvard economist Benjamin Friedman calls "crowding in."

Second, Gov. Brown seems to completely ignore that, as with inflation, there are numerous other contributing factors to slow growth and falling productivity.

The most obvious culprit is, of course, higher OPEC oil prices which act as a direct tax on U.S. industry and drain off dollars previously spent on equipment. Less obvious, but with equal impact, has been the massive diversion of capital into “non-productive" investment-pollution control devices, safety gear, and other equipment mandated by the "new regulation”, which last year cost some $100 billion.

While the primary economic arguments for the BBA appear weak, the principal complaint against it, that balancing the budget would lead to a depression", is much more compelling.

Currently, when the economy goes into a downturn, countercyclical "automatic stabilizers' work to cushion and help counter the recessionary trend. Tax revenues fall off to drain less out of the economy while unemployment compensation and welfare payments rise to pump more purchasing power back in-at the cost, of course, of an enlarged deficit.

The requirement of a balanced budget would, however, act as an automatic "destabilizer”. As revenues fell and transfers rose with the recession, Congress would either have to cut government purchases, raise taxes, or cut transfers to keep the budget in balance. And any one of those actions would further reduce aggregate demand and insure the economy continued its tailspin.

While economic reasoning seems to militate against the BBA, the main political argument, that “a balanced budget will force fiscal responsibility' , appears more plausible.

Proponents point out that the deficit option provides Congressmen with the ability to overspend at the same time that re-election pressures force them to do so. As a result, and in the rush to appease special interests, discipline gets lost in the logrolling.

Opponents, however, argue persuavively that "Congress will easily evade any balanced budget requirement." The most direct form of evasion would be the expansion of expenditures on "off-budget entities”, which now include the Federal Financing Bank, the Postal Service Fund, and the U.S. Railway Association. In 1978 such entities increased federal net expenditures by $10.3 billion-an amount which, if included in the budget, would have swelled the deficit by 21%. Clearly, this loophole needs a very good plug.

Other more subtle Congressional “end runs” around the BBA have been envisioned. Higher postage rates would lower the postal subsidy. More ominously, Congress might use its authority to shift government responsibilities onto business-regulating corporate hiring and firing practices to lower the costs of unemployment or requiring expansion of company health and retirement plans to take the onus off medicare and social security.

The debate over the BBA will only grow louder in the coming months. Lawyers, lobbyists, and legislators; presidential aspirants and uneasy incumbents; essayists and economists have all joined the fray. În surveying the argumentation, we have seen, however, little to recommend the proposal.

The clear danger is that the public will perceive the BBA as a panacea and that political candidates will capitalize on this misperception to ride their way into office on the balanced budget bandwagon. That will bring a cure that promises to be worse than the disease.

PETER NAVARRO,
Doctoral Candidate, Department of Economics,

Harvard University.

EXECUTIVE COMMITTEE OF THE LEADERSHIP CONFERENCE ON Civil Rights

STATEMENT ON A BALANCED BUDGET The Executive Committee of the Leadership Conference on Civil Rights opposes the current demand for a Constitional amendment that, either by Čongressional action or by Constitution convention, would require a balanced federal budget.

Our objections are several:

Such a requirement would deprive the federal government of the flexibility it must have to deal with economic crises-recession, depression or even war.

It would saddle the government with an unobtainable, even meaningless goal. If balancing the budget requires drastic cuts in federal expenditures, widespread unemployment will almost certainly result; and the increases in unemployment insurance and welfare that would then be necessary will promptly unbalance the budget again.

Budgets are not necessarily balanced by cuts alone; a balanced budget requirement may require an increase in federal taxes.

Federal aid to states and localities in 1979 is expected to total $82 billion-more than double the projected deficit; if that aid were cut to achieve a balance, states and cities would have to raise their taxes to offset the loss.

The notion that balancing the budget will curb inflation is a cruel deception. The effect of a balanced budget on inflation would be minimal. Economists state that inflation increases by only one-tenth of one per cent for each $10 billion in federal deficit. We have experienced high levels of inflation at times when the budget was essentially in balance and a low inflation rate during periods of substantial budget deficits.

Some supporters of the constitutional amendment hope to use a mandatory balanced budget as an excuse for cutting enforcement of the federal laws protecting civil rights, health and safety, consumers and education.

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