Critics of the budget-balancing requirement suspect also that Congress and the President probably could find ways to get around the amendment by just not counting some spending in the total of budget outlays.

Such evasions have been used often in the past by state and local governments with balanced budget requirements. "New York City has always had a balanced budget," Michael Evans, president of Chase Econometrics, an economic forecasting subsidiary of Chase Manhattan Bank, said, "Governments can always play tricks with books."

In fact, the current federal budget has about $12.5 billion in expenditures tucked away under the category of "off-budget items." most of them stemming from the lending activities of the Federal Financing Bank, which handles credit needs of Federal agencies. Congressional Budget Office aides predict that a budgetbalancing amendment could spur Congress to see more and bigger loopholes. "Congress can do just about anything it wants," a Budget Office analyst said. Whether or not such an amendment could be effectively enforced. liberal economists challenge its basic premise the perpetual desirability of a balanced budget.

"Congress needs flexibility to make fiscal policy in the national interest," Alice Rivlin, head of the Congressional Budget Office, said. "There are some years when it's good to have a balanced budget and some years when it isn't."

When inflation is high and unemployment low, she said, the government should strive to reach a balanced budget. "But it's hard to do it in one year when the budget has been far out of balance."

Even some conservative economists agree that proponents of the amendment place too much stress on the need for eliminating budget deficits. "There are some years when it's better to have a deficit," Evans of Chase Econometrics, said. The size of the government sector is more important in terms of inflation than the budget deficit," he said. He thinks the budget-balancing amendment is "a lousy idea" and prefers an amendment to limit government spending.

Although many exonomists agree that fiscal flexibility is essential for the federal government, some contend that the Administration and Congress have abused the privilege and thus have given impetus to the state legislative drive for the budget-balancing amendment.

"All the blame can't be laid to muddle-headed thinking on the state level," John Shannon, a specialist on taxing and finance for the Advisory Commission on Intergovernmental Relations, said, "Congressmen like to jump on the bandwagon by speeding up the economy during a recession, but they hate like the devil to step on the brakes when things get good.

"The Congress has used deficit financing as a way to avoid making a tough decision."

And the government's performance in handling the economy is cited by Geoffrey Brennan, a conservative economist at Virginia Polytechnic Institute, as a good reason for supporting the budget-balancing amendment.

"One might make the argument that, for the short term, the government should have the option of running deficits. But one has to take the gains with the losses. And my decision would be that the short-run benefits of stabilizing the economy are extremely ambiguous, given the government's record, that in fact the government has not really stabilized the economy but instead created problems in terms of inflation."

The public debate over inflation and federal fiscal policy has as much to do with politics as it does with economics. Even conservative economists who prefer a limit on spending instead of the proposal that Brown endorsed are heartened by the attention that he has drawn to the overall issue.

[From the New York Times, Jan. 24, 1979]

BUDGET BALANCING

(By Bruce Bartlett)

ARLINGTON, VA.-President Carter's proposed fiscal 1980 budget, which would contain a $29 billion deficit-down from the 1979 deficit of $37 billion-shows his concern for reducing the Federal deficit and moving toward a balanced budget for 1981, Gov. Edmund G. Brown Jr. of California also seeks a balanced Federal budget, but wants to mandate it by a constitutional amendment.

Although conservatives are widely applauding these actions, the economie rationale for a balanced budget is extremely weak and there may be unforseen consequences, both political and economic.

If one looks at the economic problem, there are really only two good arguments for a balanced budget: to hold down the growth of Government spending and to control inflation. Unfortunately, a balanced budget guarantees neither.

On the surface it would appear that an amendment requiring a balanced budget would reduce Government spending to the level of budget receipts.

But the Congress could just as easily decide to maintain the same high level of spending and raise taxes instead.

If you don't think the Congress will raise taxes if necessary to keep from cutting spending, remember that the last Congress raised Social Security taxes by $227 billion despite a so-called tax revolt.

Furthermore, every state in the Union has a provision in its constitution requiring a balanced state budget, yet this has had no effect on the states' ability to increase spending.

Indeed, for many years the fastest growth of government has been in the state and local sectors, not the Federal. Consequently, it is just wishful thinking to believe that Federal spending will be reduced by a balanced-budget requirement. Nor can we expect a balanced-budget amendment to reduce inflation, because inflation is primarily caused by an expansionary monetary policy.

A budget deficit in and of itself has no inflationary impact. The only thing that matters is how that deficit is financed.

If it is monetized-that is, financed by creating more money-then there will be an inflationary impact, just as there would be from any increase in the quantity of money with or without a deficit.

But if the deficit is financed by borrowing from real savings, then there is no inflationary impact. Capital merely becomes diverted from market-directed purposes to Government-directed purposes. This may or may not be desirable on other grounds, but there won't be any inflation as a result.

Considering these facts, one wonders why conservatives are so adamant in their devotion to a balanced budget, especially when it has brought them so much political harm.

Because conservatives hate budget deficits so much, they became the liberals' tax collectors.

The liberals would win election by promising the people something for nothing via the miracle of deficit spending, and then they would let the conservatives oppose such spending or raise taxes to pay for it.

Consequently, conservatives have become associated negatively in the public's mind with those who take away their benefits without offering anything in return except the virtues of a balanced budget.

It is ironic that just when conservatives have finally begun to shake off their hopeless quest for a balanced budget and adopt the more fruitful tax-reduction approach of Proposition 13, a liberal Democrat like Governor Brown should pick up the idea and breathe new life into it.

Eventually, conservatives must understand that "deficit" is only a code word without economic significance. They must be prepared to say that it is better to have a $400 billion Federal budget with a $100 billion deficit than a $500 billion budget that is balanced. Reducing taxes and reducing spending are the proper goals.

Pursuit of a balanced budget is not the way to achieve them.

[From the New York Times, Jan. 26, 1979]

CARTER DOUBTED ON ECONOMY-MRS. RIVLIN AND MILLER CALL VIEW TOO OPTIMISTIC

(By Edward Cowan)

WASHINGTON, Jan. 25.-G. William Miller, the chairman of the Federal Reserve Board, and Alice M. Rivlin, director of the Congressional Budget Office, teld Congress today that the Administration's economic forecast for 1979 was too optimistic with respect to inflation, unemployment and economic growth.

In testimony presented to the House Budget Committee, Mrs. Rivlin forecast "a small downturn beginning in the second half of the year." Mr. Miller's prepared

statement anticipated no recession but in a colloquy with the committee members he conceded that "the risk of recession is there."

The central bank's chief labeled "a bit optimistic" the Administration's forecast of consumer price inflation of 7.4 percent in 1979, down appreciably from 9 percent in 1978. Mrs. Rivlin said her staff's "best guess" was 8 percent but that a more reliable forecast would be 7 to 9 percent.

"COULD WELL DRIFT UPWARD"

As for unemployment, which has been running at 6 percent or a bit less for several months, Mrs. Rivlin expected that by the end of 1979 it would range between 6.2 and 7.2 percent, again with the midpoint-6.7 percent-a "best guess.' The Administration forecast is 6.2 percent. Mr. Miller said unemployment "could well drift upward."

The hearings today marked the beginning of the Congressional budget-drafting process. Usually an arcane, dry exercise, it is likely to produce a lot of political conflict this year as Congress debates whether its budget should be as tight as President Carter's-or tighter and what its priorities should be, especially with regard to the military share of the budget.

Mr. Carter on Monday submitted a $532 billion budget with a deficit of $29 billion. Mr. Miller urged Congress to accept the President's recommendation for considerable restraint in spending even though it entailed "the risk of a recession."

CALLED GOOD POLICIES

A number of representatives from both parties said they agreed that holding down outlays and shrinking the deficit were good policies. Only one member, Representative Stephen J. Solarz, Democrat of Brooklyn, demurred. Saying he hesitated to contradict the conventional wisdom, Mr. Solarz asked Mr. Miller if an extra $5 billion to $6 billion for domestic programs would have significantly adverse consequences on inflation.

Mr. Miller replied that deficit spending had to be seen in a larger historical perspective. Recalling that the Federal budget has not been in the black for 10 years, since the 1969 fiscal year, Mr. Miller said, "Deficits create in themselves inflationary expectations.'

The only way to persuade business and consumers that inflation will be curbed, Mr. Miller said, was to shrink Federal spending in relation to the economy, balance the budget and produce "dividends" in the form of tax reduction. Such a prospect, he added, would create incentives for the new business investment necessary to lift the country's flagging rate of productivity growth.

Mr. Miller cautioned Congress against recommending to the states a constitutional amendment that would require a balanced budget. In a view that is like that of the Carter Administration, he said such an amendment might hurt the Government's ability to respond to an emergency. He added that it would be "somewhat of a copout on our responsibilities" for pursuing a prudent budget policy each year.

RECEIVED SKEPTICALLY BY MANY

As for the Administration's proposal for real wage insurance, Mr. Miller purported to be "neutral," saying he was "not satisfied in my own mind how it works." From the viewpoint of Congress, that meant Mr. Miller was not supporting a novel proposal that has been received skeptically by many members. Mr. Miller emphatically opposed the imposition of selective credit controls by the Federal Reserve, for which there is authority in law. To use such controls instead of interest rates to allocate credit, he said, would lead to further weakness in the dollar's value against foreign currencies, which would fuel inflation by making imports more costly.

The committee's chairman, Representative Robert N. Giaimo, Democrat of Connecticut, asked what Congress should do if the economy were to turn down. Mr. Miller said the right response would be for an easing of credit and interest rates by the Federal Reserve. The wrong response, he said, would be for Congress to pump up Federal spending.

Stressing that the economy "is in reasonably good balance," Mr. Miller argued that no sector was so weak as to require help from more Federal spending than was budgeted by Mr. Carter. In so saying, he indicated a belief that any general downturn of business activity would be mild.

APPROPRIATIONS GROWTH CITED

A third witness, Senator Lloyd Bentsen, the Texas Democrat who is chairman of the Joint Economic Committee for this Congress, drew the committee's attention to the prospect in the Carter budget that in the next five years appropriations would grow more rapidly than spending. Mr. Bentsen urged Congress to "get a better grip on this aspect of the budget" lest it unintentionally jeopardize the possibility of a balanced budget in the future.

Mr. Miller rejected the idea of indexing the Federal income tax to inflation to keep the effective tax rate from being lifted by the trend towards higher wages and salaries. A better route, he said, was "to bring Federal expenditures under control."

Mrs. Rivlin said that cutting spending was a slow way to retard inflation, and that cutting the Social Security payroll tax-which is a cost to employerswould be a faster way. But, she added, that would require some financing of Social Security from general tax revenues.

Mrs. Rivlin said that her staff had "re-estimated" the Carter 1980 budget using its own assumptions about the economy, and a somewhat different method of calculating outlays. That exercise, she added, pointed to revenues of $499 billion instead of the Administration's $503 billion, outlays of $540 billion instead of $532 billion and a deficit of almost $41 billion instead of $29 billion.

She noted that, by assuming a higher rate of inflation, her staff allowed $1 billion more for real wage insurance than the Administration's $2.5 billion.

[From Time, Jan. 29, 1979]

WHY DEFICITS REALLY MATTER

(By George J. Church)

Twenty-nine billion dollars! A mind-boggling sum. To many people, grappling with their own family budgets and worried about their own personal deficits, it is absolutely alarming that the Government proposes to spend that much more than it takes in during a single year. Yet the figure is a small fraction when compared with the total size of the U.S. economy. By the end of the budget year in September 1980, the U.S. will be producing goods and services at an annual rate of $2.6 trillion. So what does the $29 billion figure actually mean? Do deficits really matter? If so, why and how much?

That is one of the most durable and emotional questions in American political debate. As inflation has soared close to double-digit rates, with no war or speculative boom or oil shortage to blame it on, deficit spending has come to be viewed as the fiscal mortal sin leading inexorably to inflationary damnation. The legislatures of 22 states have called for a constitutional amendment that would require a balanced budget every year. Amendment or not, that would be impossible, since no Administration could predict future revenues and expenditures accurately enough. It is also undesirable. There are circumstances in which a deficit would be unavoidable, such as when a war is raising spending faster than taxes can be jacked up. There are also times when a deficit is necessary, such as when inflation is low, unemployment is high and private spending is insufficient to put people back to work.

But how does one judge whether-and how big-a deficit is appropriate? There is no simple answer, because deficits can have a variety of effects on the economy. As Arthur Burns, former Federal Reserve Board chairman, notes: "When the Government runs a budget deficit, it pumps more money into the pocketbooks of people than it takes out of their pocketbooks." That creates more demand for goods and services, which can put idle people and machines to work, or can make prices rise faster than they would if demand were lower.

All too often, alas, a deficit does both, and economists divide diametrically on which effect has predominated lately. Says Liberal Arthur Okun: "The role of the deficit in the inflation of recent years has been trivial. The only way that a deficit creates inflation is by overheating the economy, and we haven't had an overheated economy in five years." The opposing view, from Burns: "This persistence

of substantial deficits in federal finances is mainly responsible for the serious inflation that got under way in our country in the mid-'60s ... and when the deficit increases at a time of economic expansion, as it has done lately, we should not be surprised to find the rate of inflation quickening.”

Opinions differ so strongly largely because there are many ways of measuring the size of deficit, and the measure that is most easily grasped—the actual number of dollars involved is not necessarily the most important one. A great deal depends on the condition of the economy: a huge deficit may spur only a little inflation if the nation is in a severe recession, while a small deficit may be violently inflationary if demand is pushing at the limits of business's productive capacity. The Carter Administration stresses that its proposed $29 billion deficit would be only about 1 percent of the gross national product, down from 4 percent in fiscal 1976, when the deficit was $66 billion. That is a smaller proportion than in West Germany, which has a low 2.6 percent inflation rate. Two reasons why Bonn gets away with it: the rising value of the deutsche mark keeps import prices down, and rapid productivity gains combined with tough domestic and foreign competition limit industrial price boosts. Democratic Economist Walter Heller insists that the size of the deficit next year is less important than the underlying trends in spending and revenues. He points out that federal spending is rising by only 8.5 percent a year, while tax collections are growing at 12 percent, putting a squeeze on demand that he considers a bit too tight.

Conservatives reply that the official budget is far from the whole story. Alan Greenspan, former chairman of the Council of Economic Advisers, calculates that when the off-budget activities of several federally sponsored lending agencies are counted, the Government will be pumping not $29 billion but at least $60 billion in cash and credit into the economy during fiscal 1980-altogether too much. Another problem: a big deficit tempts the Federal Reserve to create huge quantities of new money so that banks can lend that money to the Treasury to cover its bills. A rapid run-up in money supply is definitely inflationary, though the effects may not be felt for 18 months or two years. The alternative is not much better: if the Fed does not cover the deficit by creating new money, the Treasury has to sell bonds that are paid for out of private savings. Less capital is then left to finance business investment that is needed to increase productivity. In practice, the Government has financed its big deficits of the 1970's by a combination of both methods. From fiscal 1970 through 1979, the total deficits have amounted to $354 billion, and all that money flooding into the economy has surely created inflation. The primary problem now is to brake the momentum that pushed prices up by 9.25 percent last year, and that cannot be done without a substantial reduction in the deficit. Even if liberals are correct in their contention that the present inflation is being caused not by excessive demand but by the spiral of wages chasing prices and prices chasing wages, adding more demand now would only make the spiral spin faster.

Beyond the strictly economic arguments, the psychological impact of the deficit is all-important. How much the Government can cut the deficit has become the supreme test of how determined the Administration and Congress are to curb inflation. President Carter has no hope of persuading labor and management to obey his wage-price guidelines unless he can demonstrate that the Government is restraining its own profligacy. Foreign bankers would take any failure to chop the deficit as a signal for them to dump dollars again, in expectation of continued U.S. inflation. A renewed slide in the dollar would fan the very inflation they fear.

Then why run any deficit? Why not balance the budget next fiscal year? That cannot be done: the nation has become too addicted to the extra demand spurred by deficit spending. Cold-turkey withdrawal could well shock the economy into a deep recession. That could reduce tax revenues so much, and raise expenditures for unemployment compensation and welfare so greatly as to perversely produce a bigger deficit than ever. Even a mild recession could splash more red ink across the budget books than the $29 billion that Carter proposes.

But a determined attempt must be made to get the deficit down. The question is whether even Carter's $29 billion target is not still too high. Surely the deficit must be reduced, and then the budget brought into balance, in the years immediately ahead. Cutting the deficit will not ensure progress against inflation. It will not by itself increase productivity or moderate wage claims or reduce costly Government regulation of business. But no real progress in any of these areas can be made without a drop in the deficit.