approve a deficit. "If Congress judged that there was a serious recession that required an unbalanced budget, there could be one," says David Keating, an NTU budget specialist.

So the amendment, to most of its backers, would not be the absolute dictum that it would appear. It would conceivably make it more difficult to have a deficit, but it would not really prevent one.

But, then, what's a "deficit?"

In Gov. Brown's second inaugural address last week, he declared, "The nation, no less than the individual states, must eventually balance its books." The NTU has been making the same point about state constitutional requirements for balanced budgets.

Yet conveniently overlooked by both Brown and NTU is the fact that using the same accounting arithmetic as most states do the federal budget today is close to balance-rather than more than $40 billion in deficit, as currently calculated. In fact, if state accounting methods were used, the new budget that President Carter will send to Congress next week likely would show a small surplus. The catch? Most states actually have two budgets, one for day-to-day operating expenses, the other for such capital expenses as those for major construction projects. What every state except Connecticut and Vermont is required to balance is its operating budget-not its capital budget.

As the National Governors' Association remarked in its latest annual report on state finances, "Although state governments operate on balanced general fund budgets, they may still incur debt by borrowing funds through the bond market and spending the borrowed funds through separate capital budgets."

What would happen if Washington kept its books the same way, as has been suggested at various times in the past? It would be President Carter's own balanced-budget dream come true.

Of the $382.4 billion the Carter administration proposed spending for civilian purposes this fiscal year, an estimated $32.2 billion was for outlays that states might include in their capital budgets. By state standards, then, nearly that much of the federal deficit would be wiped out.

In addition, the federal budget called for $2.2 billion worth of military public works, such as family housing and other construction. By state standards, most of that sum, too, would disappear from the federal deficit, bringing the total thus eliminated to well over $30 billion.

Moreover, the keepers of the federal books could justify cutting an additional $5 billion from their reported deficit by not counting such items as secured loans for farm commodities. Even a novice accountant could make a strong case that lending a farmer money on his corn harvest, with the government getting the corn if he defaults, isn't really spending.

Thus, with the practiced sleight of hand of a budget magician, one could balance the federal budget without spending any less or taxing any more-merely by changing a definition or two.

WORRIED GOVERNORS

Would that comply with a constitutional stricture for a balanced budget? Why not?

It certainly wouldn't be the first time that changing budget definitions has, by itself, changed the federal deficit. In 1967, for the most recent example, Washington for good reason lumped the separate trust-fund budgets it had-most notably for Social Security-together with its regular budget. Without that definition change, the deficit in this year's "unified" federal budget would be $14 billion deeper. Presto.

In fact, worried about the prospect of a constitutional convention, a group of governors, led by Pennsylvania's Milton Shapp, and several state legislators met quietly last November with the director of the Office of Management and Budget, James McIntyre. They pressed McIntrye to begin to consider the meaning of "balanced" in the context of the push to adopt the amendment.

In other words, get your loopholes in order now-it might appear evasive to do so later.

What then-Gov. Shapp suggested, in particular, was that the federal government move to a capital budget. McIntyre was noncommital, according to a governors' conference source.

There are other ways for federal bookkeepers to circumvent any balancedbudget dictum. But if they ever ran out of ideas, a good place to turn for help would be the very states that are squawking about Washington's budget.

Many state constitutions, for instance, not only prohibit deficits; they also set unrealistically low limits on both state and local government debts. But that hasn't deterred imaginative state officials. Over the years they have invented independent new government units would you believe the mosquito control districts of Illinois?-to solve the problem. Each newly invented unit can draw upon the same local property values and the taxes levied upon them in order to borrow money.

At the federal level, the counterparts of the mosquito-control-district syndrome are such off-budget agencies as the U.S. Railway Association and the Federal Financing Bank. If such agencies were included in the current year's regular budget, the federal deficit would be about $10 billion deeper. It is not too difficult to imagine additional units being put off budget to get around any constitutional restriction. That would reverse recent efforts to make the federal budget as comprehensive as possible.

In short, the more stringent any balanced budget amendment might prove to be in actual practice, the more devices would be found to circumvent it.

INCREASED TAXES?

Those are just some of the illusions behind the budget-balancing bandwagon Another important one is the mistaken notion that balancing a budget necessarily means reducing spending. Why not raising taxes?

Of course, none of the rhetoric or literature about a balanced-budget amendment suggests that raising taxes might be the answer. But even a leading figure of the fiscal conservatism movement, Republican Rep. Jack Kemp of New York, fears that possibility, and he will have no truck with a balanced budget amendment. The amendment, said Kemp after Brown's endorsement of it, "might mean a tax increase." He called the idea a "static approach" and argued that there ought to be "some flexibility" in budgeting.

In present circumstances, Kemp added, if taxes were not increased, balancing the budget would require "draconian" budget cuts.

Perhaps the ultimate illusion, however, is that balancing the federal budget would automatically reduce inflation without at the same time plunging the nation into a severe recession.

However much deep deficits had to do with getting the current inflation rolling, they have had far less to do with keeping it going. Most economists believe that during the long recovery from the 1975 recession, cost pressures, not excessive demand pressures, have been pushing up prices. Except as it influences total demand in the economy, the size of the deficit has little, after all, to do with the size of union wage settlements or with the prices of oil or beef.

The deficit ballooned back in 1975 precisely because of the recession. In any recession, as individual and business incomes fall, their tax bills naturally fall, too, lowering federal income.

In such circumstances, federal spending never can be cut back as fast as revenues are dropping. If the government tried, it would only deepen the recession dramatically.

As the OMB's McIntyre sees it, it would be "practically impossible" to write a budget-balancing amendment to the Constitution that "would be totally effective" and still leave "flexibility to combat recessions and meet human and national security needs."

QUESTIONING THE MANDATE

All this assumes, of course, that Congress would respond to passage of balancedbudget resolutions by 34 states. It conceivably might not, especially because of wording differences in the resolutions.

Many of those adopted so far, for example, call for Congress to be able to declare the previously noted "emergency" and allow a deficit by a three-fourths vote. NTU's Keating, expects that any of the resolutions approved this year will set that requirement at two-thirds instead of three-fourths.

Keating says that Congress should take the resolutions simply as indicating the desire of states that a convention be called to consider only a budget-balancing amendment. Any suggested wording for the amendment itself included in the resolutions would not be binding on the convention, Keating believes. Therefore, he says, Congress ought to ignore such wording differences.

Congress, however, might not be of the same mind: Those differences could be grounds for declining to call a convention even if 34 states pass resolutions for it to do so.

All Article V itself says is that "Congress. on the application of the legislatures of two-thirds of the several states shall call a convention for proposing amendments" to the Constitution. Nothing else is specified.

An American Bar Association committee concluded in 1973, however, that it would be mandatory for Congress to call a convention if two-thirds of the states request it. The commission also contended that, based on the origins of Article V, Congress had the power to limit the subjects that a convention could consideras well as to set the terms for choosing delegates. In other words, a convention would be in control of the Congress, not the states that pass resolutions.

That might not please those who started the budget-balancing movement four years ago. The drive actually began in Washington's own backyard in 1975 when Maryland state Sen. James Clark, Jr., the Howard County Democrat who is now president of the Senate, pushed a version of the resolution through the Annapolis legislature.

At almost the same time, David Hallbrook, a member of the Mississippi House, got his legislature to approve another version. The North Dakota legislature acted that year, too. Each year since then, several states, mostly in the South and the Great Plains, have followed suit.

The resolution backers certainly have been pleased, though, by Gov. Brown's sudden about-face. NTU consultant George Snyder, who visited California recently, says he came away with no hint of Brown's new sentiments.

"It was a complete turnaround for him. Last year at the national governors' conference he opposed it," says Snyder, a marketing consultant who formerly represented Hagerstown in the Maryland Senate for 16 years and who now lives in Sarasota, Fla.

Snyder adds. "His endorsement should help in California and could have repercussions elsewhere." The former Maryland legislator regards Brown's flip-flop as "damned smart" because of the growing fiscal conservatism of the electroate.

THE PAINFUL CHOICES

If brown has now cloaked himself with the mantle of a fiscal conservative, he has done so in a way that avoids the real and painful choices that need to faced. "The issue, after all, "says Alan Greenspan, the conservative economist who was chairman of President Ford's Council of Economic Advisers, "is spending, not the deficit. We have created a situation in which the rate of growth in federal spending will, in real terms, outstrip our ability to finance it. I reluctantly envisage the need to move to a constitutional amendment to correct that."

Greenspan proposes that any amendment should somehow directly limit spending, not eliminate the possibility of a deficit. But he is not sure how one goes about doing that, either.

OMB director McIntyre attacks Brown for concentrating just on deficits. Instead, he asserts, not surprisingly, that the Carter approach in preparing the fical 1980 budget is the right one. The budget should be cut by making hundreds of "well thought out, often unpopular decisions" on specific_programs, he says.

Similarly, Otto Eckstein, head of the Data Resource, Inc., regards Brown's position as "partially dishonest. Every device, Kemp-Roth or a balanced budget amendment, they are all an attempt to do anything other than face up to the programs one at a time, says Eckstein.

Arthur Okun, a former CEA chairman under President Johnson now at the Brookings Institution, decribes the proposed amendment as "a throwback to the days of [President] McKinley, if not to the cave man." Okun offers what he considers a fitting punishment for Brown for joining the amendment bandwagon: "Jerry Brown should be in charge of implementing it."

[From the New York Times, January 18, 1979]

CARTER FAULTS PLAN TO BALANCE BUDGET

SAYS A FEDERAL AMENDMENT TO BAR DEFICITS WOULD BE DIFFICULT

(By Martin Tolchin)

WASHINGTON, Jan. 17.-President Carter today sharply questioned the wisdom of adopting a constitutional amendment to require the Federal Government to balance its budget, a proposal endorsed by Gov. Edmund G. Brown Jr. of California, who is a potential Carter rival for the Presidency in 1980.

The President said that it would be difficult "to devise a constitutional amendment prohibiting any deficit spending without adding provisos that would let us deal with unanticipated military or security needs and unanticipated needs when we have a depression" and might need money to put people to work and to feed and clothe them.

Such an amendment should be approached "very gingerly, very carefully," Mr. Carter said at his 42d news conference.

CONVENTION "EXTREMELY DANGEROUS"

Mr. Carter also said that the Soviet Union and Vietnam have been warned by the United States not to let the fighting in Cambodia pose a danger to neighboring Thailand.

The President rejected as "extremely dangerous" a proposed constitutional convention to put together an amendment on deficit spending. He said that such a convention would be "completely uncontrollable."

A constitutional convention may be called on application of the legislatures of two-thirds of the states. Amendments approved at a constitutional convention must be ratified by three-fourths of the states. This method of originating amendments has never been used.

Amendments to the Constitution may also originate in Congress, in which case a two-thirds vote of both houses is required.

President Carter also said:

The new Government in Iran has the support of the United States, and the President said that he hoped Ayatollah Ruholla Khomeini, the exiled Moslem leader, would give the new Government a chance to succeed.

The United States seeks to protect of the integrity of Thailand, whose borders, he said, are not endangered or even threatened by insurgent Vietnamese troops in Cambodia.

He invited former President Richard M. Nixon to a White House state dinner for Chinese Vice Premier Teng Hsaioping because Mr. Nixon has begun the negotiations that ultimately led to normalized relations between the two nations. He dismissed Bella S. Abzug as chairman of his women's advisory committee because of a lack of “good cooperation" between the committee and the President

"MULTITUDES OF AMENDMENTS"

The President, who appeared to have lost weight as a result of jogging seven or eight miles a day, also appeared well prepared for a number of the questions raised at the news conference. On the constitutional amendment question, he seemed intent on steering a course between Governor Brown on the right and Senator Edward M. Kennedy of Massachusetts on the left.

Mr. Carter said that a constitutional convention raised the specter of "multitudes of amendments" in a wholesale revision of the Constitution.

"It would be a radical departure from the policy of amendment of our Constitution that we have experienced for the last 200 years, and I think an amendment to our Constitution ought to be a very cautious, careful thing."

The President emphasized his commitment to a balanced budget and said that the budget he sends to Congress next week would have a deficit of about $29 billion, $1 billion less than his goal.

The President insisted, however, that he had not reduced the deficit-from $60 billion when he was running for office-at the expense of minority groups, the poor or the cities.

[From the Los Angeles Times, Jan. 22, 1979]

ECONOMISTS CITE WEAKNESSES-"BOOBY TRAP" SEEN IN BALANCED-BUDGET PLAN

(By Robert Shogan)

WASHINGTON.-The proposed constitutional amendment to require a balanced federal budget, which California's Gov. Brown endorsed this month, has the makings of a political blockbuster-but also of an economic booby trap.

The amendment's greatest political strength, its seeming simplicity, has helped it win the support of 22 state legislatures, but that same simplicity is also its most troublesome weakness, in the view of many economists, conservative as well as liberal.

54-267-80-37

"Any simple solution to inflation is bound to be wrong," Walter W. Heller, chairman of the Council of Economic Advisers under Presidents John F. Kennedy and Lyndon B. Johnson said, Heller called Brown's latest proposal "economically unsound, socially destructive and probably politically advantageous for Mr. Brown."

Criticism of the amendment by Heller and other liberals is hardly unexpected. More surprising is the lack of enthusiasm for the proposal among conservative economists, who contend that it is not the best way to slow down soaring federal spending.

Economists from left to right doubt that any amendment-shorter than a city block-could anticipate and forestall the congressional genius for creating spending loopholes.

The gist of the attack on the amendment-by liberal scholars and government analysts is that it would cripple Washington's power to deal with a recession. If the amendment should become part of the Constitution, they paint this nightmarish vista of some future economic slowdown.

With unemployment rising and corporate profits dipping, government tax revenues would decline accordingly. Meanwhile, government costs would rise because of the increase in unemployment benefit payments. A budget deficit would loom.

The Administration could follow two courses. One would be to raise taxes. But that would be hard to sell to Congress, especially in a recession. And, besides, a tax boost would be likely to make economic conditions worse by draining off buying power.

The other road would be to cut spending. But that would be much easier said than done, defense spending, for example, now makes up about one-fifth of current total federal outlays of about $500 billion and is considered sacrosanct for national security reasons.

Another huge chunk of the budget, about 40 percent, is committed to grants to individuals through such programs as Social Security, welfare payments and retirement systems. Slashing these programs would be politically painful and socially disruptive.

Yet another option would be to trim aid and grants to state and local governments, which now amount to about $85 billion a year. This might provide a touch of poetic justice because it was the state legislatures that started the agitation for the budget-balancing amendment. But drastically reducing the federal largesse would have a devasting impact on local economies and would intensify

the recession.

Finally, the government could consider cutting back on the services and operations of federal agencies. Critics always have complained of fat and waste in the bureaucracy. But many economists question whether there is enough of it to offset the loss in tax revenue and the rise in unemployment payments that would accompany a recession. And, of course, mass layoffs of federal employees would add to government costs by putting that many more workers on the unemployment rolls.

Ultimately, the economy probably would struggle to a recovery. But, Jim Annable, a fiscal analyst in the Congressional Budget Office, said, "The cost in terms of goods and services lost forever would be substantial. There are autos that wouldn't be built, pizzas that wouldn't be served, a lot of things that wouldn't be done, running into billions of dollars."

Conceivably, the Administration could avoid at least some of this loss by trying to take advantage of the escape clause that probably would be built into the amendment. Most proponents of the amendment advocate permitting the budgetbalancing requirement to be suspended in the event of a national emergency, with the approval of two-thirds or three-fourths of Congress.

But gaining such a majority in the midst of economic and political turmoil could be a long and tedious task.

For conservative economists, the chief drawback to the budget-balancing requirement is that it does not assure attainment of their cherished goal-cutting government spending.

Nobel laureate Milton Friedman, the intellectual patron saint of the tax revolution, pointed out that 48 states-all but Connecticut and Vermont-have constitutional or statutory requirements for a balanced budget. "But that hasn't prevented state spending from increasing rapidly," he said.

"If I had my choice of a federal budget of $400 billion, perfectly balanced with taxes of $400 billion, or a federal budget of $300 billion, with a $50 billion deficit, I'd rather have the second," Friedman said.