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[From the U.S. News & World Report, Jan. 29, 1979]

PRO AND CON-A CONSTITUTIONAL BAN ON RED INK?

YES THE U.S. MUST "BALANCE WHAT IT PRODUCES WITH WHAT
IT SPENDS"

(Interview with Edmund G. Brown, Jr., Governor of California)

Q. Governor Brown, why do you favor a constitutional amendment prohibiting deficits in the federal budget?

A. I believe that the time has come for this nation to balance what it produces with what it spends.

Q. Many economists argue that such a ban would impose a straitjacket on government. How do you answer that?

A. The resolution pending before the California Legislature provides for excep tions in the event of national emergency such as war, a national disaster or a serious condition of unemployment. Those are matters that can be worked out as the concept is developed and refined.

My own judgment is that governments have great difficulty in controlling spending. An external force is necessary. I would point out, as an example, Proposition 13, which passed in California last June. Prior to its passage, the whole spectrum of conventional opinion in the business world, the political world, the bureaucratic world and the union world-all concluded that Proposition 13 was such a disaster that the state could not endure after its passage.

But we are enduring. We have scaled back 3 billion dollars in proposed state spending, and our programs are functioning effectively.

Q. Which proves what?

A. This strongly suggests that, with the aid of an external limit, state and local governments can increase their productivity and limit excessive spending.

What happened in California can certainly happen at the national level. The magnitude of the reductions forced by Proposition 13 is greater than the reductions that would be required under a balanced-budget constitutional amendment.

Q. What about a time when-with no national emergency or unusual unemploy ment the economy is poised on the brink of recession? Would spending cuts required by such an amendment bring on recession?

A. Many economists think the economy is now headed for a recession after years of deficit spending. So I would turn the question around and ask those who propose that we deficit-spend year in and year out, even at the paek of the business cycle: Whzt is the explanation for the recurring recessions that are sweeping this country and harming those least able to afford recessions—the poor, minorities, the elderly and people on fixed incomes?

I'm not unaware of the need for appropriate stimulus. But I believe that a balanced budget can be constructed in such a way that the investments required to make this a great country can be made and will be made by the people. The problem is that, instead of borrowing for capital investment in productive assets, we are borrowing to pay current expenses. No state or corporation can long do that. I would also point out that California is in the forefront across the broad spectrum of social and labor programs, and yet we've been able to do it with a balanced budget.

Q. Critics of the balanced-budget paln argue that cutting spending or increasing taxes when the economy is weak simply slows the economy, reduces revenues and widens deficits

A. That's the conventional widsom. It deserves consideration in the drafting of a constitutional amendment. But what concerns me is that this theory has been so distorted that deficit spending continues in periods of great economic boom and high job creation, which is where we are today.

Q. Who would declare a national emergency?

A. The Congress.

Q. And under what set of standards?

A. The California resolution calls for Congress to exercise that authority by a majority vote. There may be other ways to do it. These are matters that should be fully debated.

I am trying to get the United States to face the fact that the controlling economic theories are bankrupt, that our productive assets are not being renewed in a way to sustain historical rates of growth, that our position in the world is declining, that the spirit of our people is discouraged, and that any individual, any state, any nation must come to a balancing of accounts.

Q. We've been having frequent economic slumps. Wouldn't it be pretty unstabilizing to have to declare a national emergency to cope with recession every few years?

A. Hopefully, if we would balance our budget, we wouldn't have as many recessions, which often follow inflationary excess. The 1974-75 recession followed on the heels of some of the worst inflation we've seen in the history of our country, and also followed on the heels of heavy deficit spending. So the argument that balancing the budget creates recession flies right in the face of the fact that we've been continuously printing money-deficit spending and the result has been recurring recessions, a dramatic drop in our dollar, a dramatic slowdown in investment and a loss of confidence on the part of the American people.

Q. It is argued that a restriction like this in the Constitution is a vote of "no confidence" in representative government. Do you believe that our elected representatives are no longer to be trusted with our tax dollars?

A. That's a specious argument. The Constitution, in Article V, contains a provision that looks to the states for convening constitutional conventions or stimulating amendment proposals by Congress. I am only following the mandates of Thomas Jefferson and James Madison. What was good enough for them is certainly good enough for me and, I have a hunch, good enough for the American people.

The scare tactics and the false alarms that are being raised miss the point. Instead of fighting this movement, I suggest that the economists in Washington sit down and figure out a way that we can achieve our objectives with a balanced budget.

Today, we are not building for the future. We are stealing from it. That is cause for alarm.

NO

-"THERE ARE MANY OCCASIONS IN WHICH DEFICITS ARE APPROPRIATE AND NECESSARY"

(Interview with Gardner Ackley, Chairman, President's Council of Economic Advisers, 1964-68; now, professor of economics, University of Michigan)

Q. Professor Ackley, why do you oppose a constitutional amendment requiring a balanced federal budget?

A. First, because there are many occasions in which deficits are appropriate and necessary; and, second, because there are many occasions in which deficits are unavoidable.

Q. Many people say that printing money to finance deficit spending has been a major factor in inflation. Isn't drastic action needed to remedy that?

A. Printing money to finance a deficit is not a necessary consequence of a deficit. A deficit will add to the money supply only if the Fed chooses to let it.

I think that fairly drastic actions may be needed to deal with some of our problems, but I regard a constitutional amendment as an inappropriate action.. I'm sure many people think something needs to be done about inflation, as I do. But simply because some people think deficits are the main cause of inflation doesn't make it so.

Q. You don't believe that deficit spending has been a major cause of our inflation? A. There have been many occasions when deficits were inappropriate and did contribute to inflation. There are many other occasions in which deficits were appropriate and had no inflationary consequences.

Q. If there are times when deficits cause inflation, why not have a constitutional ban on them?

A. Because under some circumstances the attempt to eliminate deficitsthrough cutting expenditures or raising taxes would only aggravate the unsatisfactory circumstances of the economy and might not succeed in eliminating the deficit.

Think about the middle 1930's, for example, or about 1975. If we had tried to avoid a deficit by raising taxes or cutting expenditures or both, we would mainly have further depressed the economy, but we probably would not have been able to eliminate the deficit.

Q. Why?

A. Simply because the effect of cutting expenditures or raising taxes is to reduce the level of economic activity and reduce tax collections. In such cases, efforts to balance the budget would not merely be self-defeating but disastrous to the economic well-being of the entire country.

Q. Do you believe government spending can be brought under control without a constitutional amendment?

A. I don't know what "bringing government spending under control" means. As a percentage of gross national product-GNP-federal spending shows no rise over any reasonable period. It fluctuates when the growth of output slows or increases as a result of recessions and booms, but there's been no trend in it in recent years. Also, it's a lot lower than in other countries whose economic health seems to be admired by the promoters of this idea.

May I also add that those other countries have considerably larger deficits than ours -repeatedly. Any hope that merely eliminating deficits will improve our economic performance is just a dream.

Q. Most plans for a constitutional amendment call for a suspension of the ban on deficits in a national emergency. Wouldn't such a provision provide the needed flexibility?

A. I don't know exactly how a national emergency might be defined. If a constitutional ban on deficits could be suspended merely by presidential proclamation, then it would seem both harmless and meaningless.

Q. But do you think that an exception for emergencies might make the constitutional amendment workable?

A. It wouldn't make it wise. It might make it workable but meaningless. If a deficit can be had whenever a President declares a need, what's the point of the exercise?

I think this kind of amendment doesn't belong in the Constitution at all. It's a legislative matter. The Constitution ought to deal with matters of fundamental principle. This is not a fundamental matter. It may be that Congress and the Presidents have often unwisely formulated budgets-with bad consequencesbut they've also made unwise decisions about foreign policy and about everything else. You can't prevent that by just cluttering up the Constitution with ad hoc limitations on the powers of government.

Q. What is a better way to curb government spending and taxing is that's desired?

A. If the problem is regarded as government spending rather than deficits, then it ought to be defined in terms of a limit on government spending as a percentage of national income or gross national product.

Q. Would you accept a constitutional curb on spending as a percentage of GNP, with an exception for emergencies?

A. I would oppose it because, once again, it seems to me we tie our hands by an arbitrary rule in an effort to make ourselves wise. It would be better just to become wise and act wisely, taking into account of all the circumstances, rather than resorting to a blind prohibition.

Q. The arguments for this constitutional amendment are much like those for Proposition 13 in California-both are popular actions forcing government to cut spending. Has the result of Proposition 13 been good or bad?

A. If people want to limit the extent to which they tax themselves for local purposes, I suppose they have the right to do so.

That's quite different from amending the federal Constitution. State fiscal policy doesn't really affect the national economy, but the national fiscal policy does. It's an important tool of economic management, and it ought not to be arbitrarily limited.

I understand people's frustration and their desire to strike out at something that promises to solve their problems. A few months ago, some of the same people who are now advocating a constitutional amendment were advocating as a solution to all our problems a 30 percent tax cut with no reduction in expenditures. I regarded that as a disastrous and irresponsible proposal, and I regard the amendment as another disastrous and irresponsible proposal.

[From Challenge, January-February 1979]

THE PERILS OF FETTERED GOVERNMENT EXPENDITURES

(By Harold G. Vatter and John F. Walker, professors of economics, Portland State University)

One gets the impression that a very large segment of the U.S. population in 1978 favors an annually balanced federal budget and a rather severe restriction upon the growth of total government expenditures. Perhaps the most frequently suggested form of spending restraint is a ceiling set by the rate of growth of personal income.

With respect to the insistence upon a balanced budget, the implication is that the federal debt would cease to grow (or perhaps would decrease). However, a large and growing national debt is a necessary part of the government's policies to control the economy without detailed direct controls over business and labor. We can make the economy expand by fiscal policy-for example, by cutting taxes and leaving government spending constant. This enables the recipients of tax cuts-businesses and individuals to spend more and thus increase the GNP, but it also increases the national debt. This has been the logic behind most recent U.S. government tax cuts. It has the interesting characteristic of financing private sector expansion through increasing public sector debt.

The other principal economic control is monetary policy. The Federal Reserve Bank controls the quantity of money through open market operations, that is, the buying and selling of national debt instruments. To increase money in the economy, a necessary part of economic growth, the Federal Reserve buys debt from other parts of the economy and pays for it with newly created money which is multiplied by the banks into larger amounts of money.

Since the long-run goal of society is continued increases in the GNP, the longrun policy of the Federal Reserve is continued accumulation of its national debt holdings. This is a well-established pattern of its behavior. In 1950 the Federal Reserve's holdings of the national debt were $20.8 billion, which was 8 percent of the total debt. By 1977 its holdings were $104.7 billion-15 percent of the total. With a limitation preventing increases in the national debt, the Federal Reserve would soon own most of it and would have to find another tool for controlling the supply of money. Any other tool would probably involve radical change in the way the system operates, with either substantial increases in the power of the central government or the likelihood of depression.

To continue open market operations without an increasing national debt would require the Federal Reserve to buy and sell common stocks and private corporate bonds, for the New York Stock Exchange is the only organized market which is equipped to handle the volume of business the Fed needs. It seems unlikely that people like William Simon want a branch of the government to be the largest owner of all the major corporations, so he must have some other system of monetary control in mind when he proposes no further increases in debt.

The national debt is intensively used by the American business community. National debt provides business with an absolutely secure investment that pays interest. Most corporate treasurers are active traders of treasury bills. The interest on those bills minus the costs of the corporate treasurers' offices often contributes a large fraction of corporate income. So the end of growth in the national debt means a reduction in the profitability of corporations or an increase in their risks as they switch to commercial paper and other less secure short- and long-term financial investments.

State and local governments also earn substantial sums on treasury securities. Most observers agree that the property tax receipts for a year should not be put at risk by any local government. So in many states the law prohibits the investment of public funds in any other security. Therefore, an end to increases or an absolute reduction in the national debt implies either a reduction in local government services or an increase in local taxes.

Hence, cessation in the growth of the national debt would severely limit the use of both fiscal and monetary policy and would increase the riskiness of society's total financial portfolio. That is, the likelihood of financial panic would be increased, and most of the government's tools for dealing with it would be severely weakened. If the advice of the current anti-government element is heeded, Americans are likely to be forced at great cost to relearn the lessons of the 1930s.

With respect to proposed restraints upon the growth of government expenditures to, say, the growth rate of personal income, it should be immediately noted that personal income grows over the long run at roughly the same rate as GNP. This fact, together with the apparent drift of the current social consensus, suggests restriction upon the growth of government expenditure over the long run to a rate no greater than that for total production.

A century ago the German economist Adolph Wagner observed that the share of the economy going to the government grew as the economy grew. He further asserted that the trend he had observed by the 1870s could be expected to continue indefinitely into the future. This assertion has come to be known as Wagner's Law. So far there are no economically developed societies that have failed to follow the path predicted by Wagner. It is thus clear that the anti-growth-ingovernment people are radical. For they propose to break a trend in the economy that goes back more than a century and encompasses most or all of the expansion of capitalism in Europe and America.

The question raised here is: Could the U.S. economy continue to grow at its customary long-run pace of about 3.7 percent a year if total government expenditures failed to grow at a faster pace?

The first step in providing an estimated answer to this hypothetical question is to glance at the long-period record. We shall proceed in price-deflated, or real. terms. We also confine ourselves to the period of the so-called "mixed economy" (since the 1930s or 1940s) because we assume the question has to do with constraining (rather than dismantling) the contemporary economic regime of large public budgets, social security, transfer payments, etc.

The record shows that over the last four decades, ignoring the exceptional experience of World War II, government expenditures have grown notably faster than total expenditures (total production, or GNP). For example, from 1948 through 1977, total real government expenditures have risen at an annual compound rate of over 4 percent, whereas real GNP increased at only 3.5 percent. It is presumed that current proposals for restraint would arrest this trend relationship. But total demand, ignoring for simplicity the behavior of the export-import pattern, consists of private household spending (C), business investment spending (I), and government spending (G). Under the mixed economy, the growth of total demand sufficient to assure a long-run output growth of about 3.7 percent a year has occurred by means of a roughly constant gross investment share of GNP and a rising G share financed partly by deficits, which absorbed the excess private saving that business did not want for investment.

It cannot be stressed too much that the constant investment share has generated sufficient capital capacity growth to provide for the historically typical 3.7 percent GNP growth. The latter rate obtained for decades prior to the emergence of the mixed economy in the 1930s. Over the long pull, however, a billion dollars of fixed business investment of constant purchasing power has been associated with ever more capacity to produce. This long-run productivity trend forestalls the possibility of getting much if any stimulus from the demand side by transferring spending streams from G to I. Thus, all the contemporary emphasis in public policy discussion upon stimulating more investment demand, while it might, if implemented, provide a brief boost to output expansion, is actually chasing a lingering nineteenth-century rainbow. In the longer run, the massive capacity effects would overwhelm the expenditure-generating effects, excess capacity would develop, and profitability on new investment would fall. These effects would frustrate the attempt to get growth by stimulating investment spending at the expense of G growth. Put simply, increasing investment increases both the capacity to produce output at the income to buy it. But investment usually produces more capacity than spending. Too much is saved.

Indeed, it is the ceiling on I set by rising productivity that has necessitated government deficits. Such deficits have provided growth-permitting offsets to some of society's huge savings that were not offset by private investment. Hence, to try to grow at customary rates without deficits and an increase in debt is impossible.

An absolute and/or relative reduction in G, and equivalently in taxes, would, of course, induce some compensating rise in private consumption. But people save part of their increased income, so class in the principles of economics learn and taxes reduce GNP, instead of rais The current attack upon governm to the civilian-military composition that the brunt of any reductions w the civilian state and local, spend payrolls, as is already evident local level.

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But even if the inc private consumption r relative reduction in be depressive, Indeed

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