Many of the states that have joined the irresponsible stampede for a constitutional convention to balance the budget reveal their hypocrisy by demanding, at the same time, increases in revenue sharing and other federal grant-in-aid programs. INTERNATIONAL ASSOCIATION OF FIRE FIGHTERS, Washington, D.C., March 12, 1979. Mr. KEVIN O. FALEY, DEAR MR. FALEY: Enclosed please find our statement on the constitutional amendments for a balanced Federal budget. We are submitting this statement to be included in the record of your subcommittee's hearings, which began on March 12, 1979. Thank you for your attention. HAROLD A. SCHAITBERGER, PREPARED Statement of the INTERNATIONAL ASSOCIATION OF FIRE FIGHTERS, AFL-CIO-CLC This is to submit for the consideration of the Constitution Subcommittee of the Senate Judiciary Committee, the views of the International Association of Fire Fighters, representing 175,000 members nationally, on recent proposals to amend the Constitution to require a balanced Federal budget. The movement to balance the Federal budget has attracted much attention in recent months. But this serious issue, which would have the most severe and far-reaching consequences, has been given far too casual consideration. A constitutional convention or constitutional amendment, are both unworkable propositions and they have the potential for doing a great deal of harm. At the same time, these proposals provide inadequate solutions for our current fiscal problems. The first question to be faced is, could the readjustments made by a consitutional convention be limited to just one issue? Looking at our past experience, the only convention we've had to date was called to revise the Articles of Confederation. That convention ended by scrapping the entire confederate system, and building a new system in its place. We are, therefore, wary of tampering with our Constitution, since it would expose it to the prospect of substantial revision. Further, we are apprehensive about what appears to be a "quick-fix" for what are extremely complex fiscal problems. Amendments to the Constitution must always be apprached with great caution. They can not be impulsive; they must not be rushed; they must not be thought of as a simple solution to whatever problem is thought to exist. The calls for a mandated Federal budget balance are largely the result of serious and basic misperceptions on the part of its proponents. The various formulas which have been proposed for limiting spending do very little good. At the same time, they have the potential for doing a great deal of harm. The relationship between the deficit and the economy is a two-way affair. Certainly, a bad budget can unbalance the economy. But, conversely, a bad economy can also unbalance the budget. For instance, when unemployment goes up only one per centage point, the deficit increases by 20 billion dollars. In times of severe recession, as we know from recent experience, the impact on the budget can be devastating. No amendment could possibly deal with the two-way nature of this relationship between the budget and the economy. For fiscal year 1980, it would take a cut of at least 45 billion to achieve a balanced budget. Such a cut would cost more than a million American jobs. Our cities and states are drawing on the Federal government for every conceivable need. In fiscal 1980, the average state expects to receive one billion, six hundred and fifty nine million dollars. The budget cuts that would be necessary as a result of a mandated balanced budget would have a disastrous effect on the financial and social stability of all States and their cities. Perhaps, the worst result of a mandated balanced budget is that it would put the Congress and the President in a fiscal straightjacket. If the economy became weak and Federal revenues were low, the necessary Federal stimulus programs, might not be possible. If stimulus programs became inevitable, severe budget cuts would have to be made in other areas of the budget and taxes would have to be raised. Thus, a mandated balanced budget would blunt the Federal government's major weapon in the fight to maintain the national economy on an even keel. Some advocates of the balanced Federal budget hope to minimize this effect by stipulating various escape clauses, for instance, in the case of recession the balanced budget would not be required. But how should such clauses be framed? How would a recession be defined? Who would announce its arrival? More sophisticated proposals suggest that spending should be limited to a fixed percentage of the GNP. But how would we arrive at the GNP figure in such a formula? The President predicts a 3.2 percent GNP growth rate for 1980, the Congressional Budget Office says 3.9 percent, and private forecasts range from 1.3 to 4.1 percent. These and myriad other questions arise, and there are no good answers to them. Approaches such as a constitutional convention or a constitutional amendment are too simplistic. They would trivialize the Constitution and they would deny Government the flexibility needed to react to changing conditions. Their fiscal impact would be enormous. For these reasons the International Association of Fire Fighters stands in strong opposition to any form of a mandated balanced Federal budget. We thank the Subcommittee for its consideration of our views and comments on behalf of our organization and its members. NATIONAL COUNCIL OF SENIOR CITIZENS, INC., STATEMENT The National Council of Senior Citizens, its 3,800 affliated clubs and councils, and the 3.5 million senior citizens it represents, formally endorses the efforts of the Citizens for the Constitution, and pledges its full support to their effort. The NCSC and its members see the call for a constitutional amendment as a blatant attempt on the part of its supporters to gain political mileage out of a preceived trend in this country to reduce government spending. Interestingly enough is the fact that when Americans are asked whether they support reduced spending, they say yes, yet when specific service cutbacks resulting from lower government spending are mentioned, these same people say no. We believe that Americans are tired of excessive waste and fraud in government programs, but at the same time understand the underlying goals of these programs and support them. While we are fearful of what a balanced budget would mean to the aged and the poor, we have a far greater fear of the paralysis such an amendment could inflict on the government. Mandating a balanced budget assumes that deficit spending is inherently evil. And yet, during the Roosevelt Administration, deficit spending was used to pull this nation out of a devastating depression. Similarly, America's entrance into World War II required substantial borrowing from the U.S. Treasury. Any constitutional amendment seeking to require a balanced federal budget would have to be so filled with loopholes as to render it useless. Therefore we will be working with the Citizens for the Constitution in their effort to oppose the state initiatives calling for a constitutional convention. NATIONAL EDUCATION ASSOCIATION, Hon. BIRCH BAYH, DEAR CHAIRMAN BAYH: The National Education Association appreciates this opportunity to comment for the record on our firm opposition to amending the United States Constitution to require Congress to balance the federal budget. It is our opinion that neither a two-thirds affirmative vote by the Congress nor a constitutional convention is an appropriate method by which to strike a balance between the nation's revenue and spending. Amending the Constitution to mandate a balanced budget treads perilously close to crippling the federal government. The fiscal ramifications of such action could be economically devastating to the nation. State and local governments would be forced to finance those services once funded at the federal level-a direct consequence to tampering with the Constitution. If federal aid were terminated or significantly diminished, state and local governments would be forced to either increase taxes to maintain jobs, services, and programs or simply eliminate them. Those most adversely affected by efforts to bring economic parity to the federal budget would be the poor, the uneducated, the handicapped, and low- and middle-income workers. Currently, the Congress has power to “* * * lay and collect taxes pay the debts and provide for common defense and general welfare of the United States *** to borrow money on the credit of the United States." A balanced budget requirement would usurp Congress' authority to use its taxing and fiscal powers to address national needs during times of economic exigency. Effective, long-standing processes of federal budgeting and appropriations would be seriously disrupted. NEA supports the pursuit of a blanced budget, but insists that the greater goal of our society is to increase productivity. Education and training are essential to the growth of our economy. A productive, growing economy can deal constru tively and effectively with inflation. After the "quick-fix" drive for constitutional tampering has burned itself out, the need for increasing productivity, reducing unemployment, and curbing inflation will remain. Only these measures can effectively restore the health of our national economy. Sincerely, STANLEY J. MCFARLAND, Director of Government Relations. PREPARED STATEMENT OF TONY T. DECHANT, PRESIDENT NATIONAL FARMERS UNION National Farmers Union opposes the effort to hold a constitutional convention to require a balanced federal budget. Such a policy would be a dangerous attack on our Constitution and would severely limit the ability of the President and Congress to function. It proposes to use untried and inflexible methods to accomplish a short-term economic policy. The crucial issue about a federal budget is not the budget total or the budget surplus or deficit. The vital issue is how the money is used and what kind of priorities we have. We need to be concerned that money paid out is for good purposes and money taken in through taxation is levied on the ability to pay. We must be concerned that prices reflect a fair compensation for labor, management, and investment, but do not result in unjustified enrichment. A constitutional convention to balance the budget will not control escalating interest rates or profits. It will not stop rising energy or health care costs. It will not help farmers produce food and fiber for a hungry world. It will not provide jobs for those who want to work or support for those who are unable to provide for themselves. We need to address ourselves to the basic issues of employment, a stable and abundant food supply, a national health insurance program, a sound energy program, an equitable trade policy, and protection of our precious heritage of soil, air, and water that makes our nation habitable. Such a productive economy can balance the federal budget because it will increase our national wealth and the ability of our people to pay their taxes for the services they demand of government. If, instead of recession, we currently had a full-production, full-employment, and full-parity economy, the federal government would now have a $100 billion surplus instead of a $37 billion deficit. PREPARED STATEMENT OF DR. PAUL A. SAMUELSON DEPARTMENT OF ECONOMICS MASSACHUSETTS INSTITUTE OF TECHNOLOGY I have been asked to give my analysis and evaluation of the many proposals to amend the Constitution of the United States to require a balanced federal budget or to specify some other unambiguous constraint on governmental fiscal policy. Each and all of the proposals that have been made appear on analysis to entail grave dangers to the prudent operation of the modern economy. More important than my adverse opinion on this matter are the reasons for this critical evaluation, which I am prepared to discuss in detail. In summary, here are the conclusions to which analysis leads. A constitutional amendment cannot by its nature provide the flexibility for future governmental policy that is necessary in so imperfect a science as economics. There is much historical experience with laudable attempts to specify for all time the permitted parameters of economic policy both here in the United States and in many foreign countries. Without exception—whether it be the case of the automatic gold standard, the many central bank gold-reserve clauses underlying the creation of money, the pegged exchange rates of the Bretton Woods system, the frequent legal requirements at the municipality and state levels to require an annual budget balancing, the Congressional debt limit resolutions-each such attempt at permanent finetuning has resulted in specific economic crises and inefficiencies. Not only has the universal testimony of experience shown that every such attempt to freeze policy in advance has failed in its objective and led after unnecessary travail to its abandonment, but in every case the analysis of economic principle prior to enactment of the once-and-forever rules would be able to predict in advance that those tragic breakdowns would subsequently take place. Whenever it is the case that a bare or preponderant majority of the American people permanently conclude that the role of the public sector ought to be constrained in its fractional share of the total national income or in its trend rate of increase, our representative democracy is capable of translating that will of the people into effective action: the American republic is not defective in its present organizational structure to secure what are stated to be the goals of the amendment to balance the budget or the amendment to limit the share and growth trend of the public sector. There is no inherent flaw in our checks and balances and division of responsibility among the legislative, executive and judicial branch of governments that makes inevitable a process of "logrolling" designed to swell the level of expenditures and taxes beyond that truly desired by the effective majority of the electorate. Instead, the elaborated pure theory of public expenditure and of game theory more evenhandedly shows that there are countertendencies favoring realization of both less and more government expenditures than the pluralistic electorate really desire. If a temporary upsurge in resentment against taxes, expenditures and deficits that are conceived to be excessive were to culminate in a constitutional convention, and if one of the many alternative amendments were to be adopted, an economist can predict with all too weighty odds that several times in the decades to come the adopted amendment will bring on or exacerbate an economic crisis. If the adopted amendment provides escape valves so easy to invoke that the harm of the amendment can be avoided, the amendment degenerates into little more than a pious resolution, a rhetorical appendage to clutter up our magnificent historical Constitution. If no escape valves are allowed for, a breakdown in the whole economic system is threatened whenever unpredictable future events prove incompatible with the particular nostrum of 1979 that is frozen into the American charter. Analysis shows how illusory it is to dream that there is some wide middle ground of constitutional formulation, which will enable our people to have their cake and eat it too. There is no substitute for disciplined and informed choice by a democratic people of their basic economic policies. No wave of the future washes us down the road to serfdom or back to laissez faire. A government of law (and not of capricious men) involves national decisionmaking by due process: it does not call for, and indeed is incompatible with, written out 100-year economic plans or cookbook recipes for infinity. I am prepared to discuss the above conclusions, empirical data and analytical reasoning on which they are based. But before doing so, I need to make a much misunderstood point. We live in an age of stagflation. In seeking to end this deplorable condition, one must not make the mistake of believing that its basic root is to be found in overspending by government, or in over- or under-taxing by government with the chronic budget deficits thereby implied. If only the problem were as simple as that old-fashioned demand-pull inflation! You would not then need so sage an economist as Dr. Burns to head up the Federal Reserve Board in the 1970s to have given us long before now a return to price stability if only demand-pull forces had been involved. A Dr. Milton Friedman, quite without referring to fiscal policy much less constitutional amendments, could prescribe for old fashioned demand-pull inflation in a few crisp Newsweek columns. Indeed, I myself believe that the total of aggregate demand spending could be brought up to the requisite full-employment amount by a politically acceptable combination of monetary and fiscal policy if only there were such a clearly designatable requisite amount of spending for full employment without inflation. Our modern chronic dilemmas of policy have been much more complicated and they will not be resolved or significantly ameliorated by constitutional amendments. Whatever government policy does to help handle the "flation" part of our stagflation inevitably worsens in the short run the stagnation part of the problem. That stubborn reality will not go away even if 50 out of 50 states agree on some rhetorical formulation. Likewise, whatever government policy does to help handle the "stag" part of stagflation will ineluctably worsen the inflation part of stagflation. We can do better with respect to stagflation than we have been doing in the 1970s. But the task of reducing the element of stagflation in our modern mixed economy cannot be accomplished by once-and-for-all tax and spending formulas. A few concrete examples will illustrate the tremendous potential for harm implicit in use of the Constitution for freezing policy rules. Our economic system almost came to ruin in the Great Depression: suppose that the Constitution had been amended prior to 1931, requiring that Federal Reserve liabilities and printed currency notes be covered by some magic fraction of gold reserves. I believe present day experts of all schools of thought, monetarist or otherwise, would agree that the tragic reluctance of the Federal Reserve to then help preserve the banking system that was being rent asunder by bank failures would have been grossly amplified by such a rule, however wise it would have seemed to economists in 1928 and to the public at large that the amendment was a good thing. Again, during the Great Depression, Herbert Hoover's budget fell out of balance against his wishes. His rash raising of tax rates was self-defeating in its attempt to balance the budget. But that rash attempt did most definitely worsen the state of bankruptcy of the economic system. How much worse would have been the pressure on Congress and the Executive to perpetrate these follies if the Constitution itself called for such suicidal policies. The final example concerns proposals to "index" wages that were being made in the early 1970s by prominent American economists. Of course, these proponents could not predict in advance that OPEC would increase the price of oil fivefold and that a rash of harvest failures all over the world would call for a lower real wage on the part of urban workers. If anyone doubts the endless harm that would have resulted from a constitutional amendment trying to keep wages at a real level not actually attainable in the market, I have to call attention to the disastrous effect in Italy that has resulted from the legal escalating of all wage rates to match the absolute gains of the highest paid workers, a formula that informed observers blame for much of Italy's sickness in recent years. Economics is so inexact a science and the future is so unpredictable that it is an act of arrogant folly to try to specify constitutional formulas applicable for the infinite future. PAUL A. SAMUELSON. HARVARD UNIVERSITY, LAW SCHOOL, Senator BIRCH BAYH, Chairman, Subcommittee on the Constitution, Washington, D.C. DEAR SENATOR BAYH: I write in response to your request for my thoughts on S.J. Res. 126. Having studied its terms, I am persuaded that this resolution-the proposed Balanced Budget Amendment which your Subcommittee passed on December 19, 1979-powerfully illustrates the folly of attempting to enshrine s formula for fiscal austerity in the Nation's fundamental law. If the general ideal of keeping our society's receipts and expenditures in reasonable balance over substantial stretches of time-to protect future generstions and preserve the integrity of our financial structure had been expressed in the broad language appropriate for inclusion in the Constitution, the provision would of course have been too platitudinous to be worth voting out of Committee. As its proponents evidently realized, a norm like reasonable fiscal balance must be reduced to something far more specific and concrete if it is to be more than a |