Or, in the words of Indiana Senator BIRCH BAYH: "Many of those exhorting the state legislature to petition Congress for a convention say they actually do not want a convention--just an amendment. The petitions, they say, are merely intended to force Congress to act. No doubt Dr. Frankenstein felt the same way. He was conducting a legitimate experiment, yet he created a monster." As Bayh points out, most legal scholars agree that once the petitions are submitted and 34 are found to be valid, a convention must be called and nothing can stop it. The convening of a constitutional convention would, it has been said, "put the Constitution back on the drawing board where every radical crackpot or special interest group would have a chance to write the supreme law of the land." Those were words used by Howard Jarvis, the father of Proposition 13 and a man many consider something of a crackpot himself. A balanced federal budget is one issue, but calling a constitutional convention is clearly quite another. Frankly, we are more than a little frightened by the prospect of such a movement being conceived amid a panic, amid the hysteria of inflation. We would be less concerned if our political leaders were logically debating the issue instead of merely jumping aboard the bandwagon because of its political expedient to do so. [From the Journal of Commerce, Mar. 1, 1979] BALANCED BUDGET AMENDMENT SEEN UNENFORCEABLE (By Robert Solomon) WASHINGTON.- A constitutional amendment requiring that the federal budget be balanced each year would probably turn out to be ever more unenforceable than the 18th amendment, which, from 1920 to 1933, prohibited "the manufacture, sale, or transporation of intoxicating liquors" in the United States. The 18th amendment was not intrinsically unenforceable. It is possible to imagine the American public having been persuaded to give up alcoholic beverages and to respect "prohibition." Their unwillingness to alter their behavior in this way is what made the amendment unworkable and led to its repeal. Maintaining a balanced budget year in and year out is not simply a matter of changing the behavior of budget makers in the executive and legislative branches of the federal government. Even if the budget-makers wished to abide by the proposed constitutional amendment, they would find it impossible to do so as long as the economy was subject to cycles of recession and prosperity. Some observers have proposed that the balanced budget amendment contain an escape clause permitting a congressional decision to allow a deficit at times when it is desired to combat a recession. Even this type of proposal misses the main point, which is that deficits in the budget occur automatically when the economy slips into recession. Congress has no discretion over the matter. TAX-INCOME LINK Deficits occur automatically in recession because the bulk of federal tax revenues are linked to the incomes and expenditures of consumers and businesses. This is an intrinsic aspect of the structure of the economy. In a recession, those whose incomes fall-job losers, profit earners, and others also pay less taxes. This tends to create a deficit in the budget. What would happen if the federal government attempted to keep the budget in balance in these circumstances? The government would either reduce its expendi tures or raise tax rates. Such actions would reduce aggregate demand further and deepen the recession. As the recession was aggravated in this way, additional citizens would suffer income losses. This would lead to more reductions in tax revenues. Thus, the attempt to balance the budget in a recession would fail and it would drive the economy more deeply into recession. Precisely the opposite effects would occur in a period of excess demand and a booming economy. In such conditions, high incomes would generate high tax revenues. This could push the federal budget into surplus, as last happened in 1969. If it attempted to balance the budget, the government would have to increase expenditures or reduce tax rates. This would aggravate the boom, worsening inflation, and also leading to still higher income and tax revenues. Again, it would prove impossible to obey the constitutional amendment. Meanwhile, the attempt to obey it would destabilize the economy. One possible counter-argument to the analysis presented above might be that monetary policy could be used not only to combat recession and boom but also to offset the destabilizing effects of the efforts to balance the budget. One would have to be an exteme monetarist to take this view, believing that "only money matters." It is significant in this connection that Milton Friedman the father of monetarism, is reported to be opposed to the balanced budget amendment. Those who are supporting the amendment do not understand the interrelationships between the budget and the economy. Those who do understand them, even if they are of a conservative bent, are not in favor of the amendment. [From the Washington Post, Mar. 1, 1979] GOVERNORS: A DEARTH OF IDEAS ON How To CuT BUDGET A congressional committee went fishing among a pool of balanced-budget advocates yesterday for specific suggestions on how to cut federal spending, but came up with nary a nibble. At a hearing before the Joint Economic Committee, Chairman Lloyd M. Bentsen (D-Tex.) reportedly asked three governors, all supporters of a balanced federal budget, to recommend specific cuts that would help the government eliminate its deficit, estimated at about $40 billion this fiscal year. The governors-Republicans James R. Thompson of Illinois and Richard A. Snelling of Vermont, and Democrat James B. Hunt Jr. of North Carolina-had a good deal of general advice about how Washington could distribute its grants to state and local governments more wisely, but none would nominate a specific grant program that could be cut to reduce the deficit. "Your question. . . creates a practical problem," Hunt told Sen. Bentsen. “I don't think it's going to be possible to get governors to name many programs they would cut out altogether." "Right now, I'd settle for even one," Bentsen replied. "You can't call for a balanced budget, yet oppose efforts to curtail federal outlays to state govern ments." Bentsen said he was "terribly disappointed" that no specific reductions were proposed at the hearing, but his statement was the verbal equivalent of crocodile tears. By failing to suggest any cuts, the governors played right into the scenario Bentsen had in mind for the session. "I thought maybe I'd get two or three suggestions from these fellows," he said after the hearing. "But I knew there wouldn't be many. That's my point-all these people want a balanced budget, but nobody wants the cuts to come out of his own programs." Bentsen has taken a leading role in a new effort in Congress--a reaction to the nationwide campaign for a constitutional amendment mandating a balanced budget-to cut federal grants to state and local governments as a means of reducing federal outlays. He has sponsored legislation to eliminate "general" revenue-sharing grants to states. Such grants, totaling about $2.3 billion this year, are favorites of the governors because they come with no regulatory strings attached. Accordingly, the three witnesses took strong issue with Bentsen's proposal. They said Congress should focus its attention on "categorical" grants, which are provided for specific local programs and are controlled by fairly rigid federal guidelines. Snelling said that reducing the regulatory burden involved in the use of categorical grants would save money for both federal and state governments. Noting that no state government is projecting a budget deficit for fiscal 1979, Bentsen complained that "you are keeping your own operations in the black at the expense of the federal deficit." Snelling warned against such a comparison, however, saying that many states would see their surpluses "evaporate" if the economy were hit by a recession this year. After the hearing. Snelling, who heads a National Governors' Association committee dealing with budget questions, said he knew beforehand that Bentsen would use the hearing to emphasize the governor's failure to suggest specific budget reductions. "I tried to get some, you know," Snelling said. "I sent a letter to every governo asking for recommendations, but so far, we've only had a handful of replies." By this summer, he said, he will be able to give Bentsen specific proposals from the governors. Bentsen said Congress probably would not pass his bill calling for elimination of general revenue sharing, but said he did expect it to pass a bill that would effect "substantial cuts, not just 10 percent or something," in the revenue-sharing program. [From the Boston Globe, Mar. 1, 1979] SPENDING CAP: A THREAT TO LOCAL GOVERNMENT (By Kirk Scharfenberg) The nationwide demands for tax cuts, tax caps and spending limits herald a reversal of the four-decade-long growth of government at local, state and national levels. But in one very significant respect, that all seems to be enhancing one of the most salient aspects of post-war liberalism. They all have the potential for concentrating more and more government power farther and farther away from the electorate. In California, where it all began, the state using the revenues of its progressive income tax is assuming more and more responsibility for financing essentially local services. State revenues are being substituted for the property taxes lost through the enactment of Proposition 13. And nothing in the tax revolt contradicts the notion that those who supply the money ultimately retain the power to determine how it is spent. Here in Massachusetts, Gov. King has pledged that this year $500 million in local taxes will be replaced by state funds. And while all the details of that have yet to be revealed, his proposals for establishing caps on local taxing and local spending certainly constitute one of the boldest challenges ever mounted to the commonwealth's traditions of home rule rooted in the storied town meeting. If the governor's proposals are enacted intact, local communities will need the approval of a state board to increase taxes and spending that town meetings, the people themselves, were perfectly willing to sanction. And even at the federal level, the almost certain, if paradoxical, result of the campaigns for constitutional amendments to limit the growth in federal spending or to mandate a balanced budget would be a diminution of local authority. If federal spending is actually reduced radically, the brunt of that reduction will almost certainly fall on those federal programs that funnel $85 billion of aid locally to the states and localities. Certainly nothing in our history suggests that military appropriations are likely to be reduced drastically. Various federal entitlement programs, such as social security, will not be severely chopped; whittled down instead will be various programs either revenue sharing or categorical grants-that go from Washington to localities and that can often be spent with few strings attached. Of course, the balanced budget proposals do not necessitate any reduction in federal spending. As Gov. Jerry Brown, once the disciple of thinking small and now the guru of the balanced budget, has suggested, federal taxes could be raised to secure a balance. But if that were to occur, state and local taxes, which constitute the second and third bites at the tax apple, would almost surely have to be reduced. The result: greater proportionate federal power. Now it is possible to view any and all of these possibilities with some equanimity. After all, the federal tax structure is the most equitable in the nation and one could well cheer a greater reliance on it. Similarly, at the state level a greater reliance on state taxing authority, with a concurrent reduction in local property taxes, would probably result in a more progressive tax structure. And it would also facilitate the redistribution of tax monies from wealthy communities to poorer ones. Yet it's highly unlikely that most of those pressing for tax and spending cuts really want or intend such consequences from their proposals. By and large they don't seem to be members of the "social justice" school of government philosophy. Of course, nothing in their proposals mandates the results will be more eglaitarian, if less bountiful government economic programs. But the fact is that by directly or indirectly, intentionally or unintentionally, stripping local government, certainly the most responsive layer of government, of its authority and its resources, advocates of tax and spending cuts are guaranteeting that the populace will have less control than ever over the direction of government policy. By concentrating more public sector power at the higher levels of government, the "tax revolt" may at the same time enhance the influence of the most powerful interests in the private sector. Big labor and big business have the resources to lobby and influence Beacon Hill and Capitol Hill; the little guy who can make his voice heard only at City Hall will find that the folks at City Hall can't help. It is a central irony of the current "tax revolt" that, while fought under the banner of curbing big government and restraining unresponsive bureaucracies, its long-term effect may be to enhance the power of those governments and bureaucracies that are most insulated from public pressures. [From the Wall Street Journal, Mar. 5, 1979] THE BALANCED BUDGET SPECTACLE (By Jude Wanniski) What fun it is to watch the bandwagon of the balance-the-budget constitutional amendment. It rolls along festively, crowded with spirited citizens joyously heralding what seems to be a popular cause. It's a colorful red-white-and-blue event, democracy in action, California Governor Jerry Brown lashing its horses forward, his onetime foe, Howard Jarvis, at his shoulder, riding shotgun. To appreciate the scene, the spectator must stand back far enough to keep it in perspective. At a distance, there is more fascination and amusement, watching the crowd of politicians through which this bandwagon rolls. There are Senators and governors shouting anguished warnings. Others, uncertain, scramble to get out of the way. Still others, following Jerry Brown's lead, scramble to get aboard. There is something satisfying, encouraging in this hurly burly. A great issue is being joined, if only symbolically. And somehow the spectator senses that with all the excitement, with all the angry noise, the dust will eventually settle and nobody will have been hurt. Something like those staged shootouts in Disney's western towns, with sixguns popping, cowboys lurching off rooftops, horses, kicking up dust. Then, the audience applauds and the fallen black hats and white hats get up to take their bows. There is, after all, little of substance in the excited scene. There is no question but that under every hat, black and white, is a fervent desire to balance the federal budget, in principle. Look, there are Milton Friedman and Teddy Kennedy, wearing the same colors, shouting against the Brown-Jarvis bandwagon. Yet they want the budget balanced too, don't they? HOW TO DO IT? The trouble with a constitutional amendment requiring a balanced budget is that it doesn't tell us how to do it, nor do its proponents confront the issue in these terms. Surely most of those aboard the bandwagon, if asked, would tell us they would slash federal spending. But then the public-opinion polls tell us that more than 95% of the American people want federal spending reduced. This bit of information, though, is also of no value. Each individual citizen wants spending cut according to a list of priorities. Some would cut defense spending, some social spending. Urban citizens would cut rural spending, and vice versa. It's the South against the North, the West against the East, sunbelt versus snowbelt, and so forth. But these priorities are already reflected in the voting patterns of the Congress, and still the budget is out of balance and has been for decades. There are, theoretically, only four ways to balance the budget via fiscal policy. This is where the real debate is, or should be. The four ways are these: 1) Raise federal spending levels: 2) Lower spending levels: 3) Raise tax rates: 4) Lower tax rates. Much of the hulabaloo over balanced budgets has arisen at this point in history because the theoretical school that has dominated national economic policy for at least a dozen years-the Option (1) people-have had such poor success. That is, the economic theologians who have advised Democratic and Republican Presidents at least since 1967 have argued the notion that increased federal spending would ripple through the economy (a multiplier effect), thereby increasing tax revenues at the same time prosperity would automatically reduce social-support spending. The result of this dynamic scenario was supposed to be a balanced budget. "A self-supposed prophecy," according to the Nixon economists. If the budget cannot be balanced in this prophetic fashion, perhaps we might have success with Option (2), lowering federal outlays. The Option (2) school has been around a long time, but has had little success in selling its idea to policymakers who preferred to believe in the ripples and multipliers of the Option (1) school. Lower spending would presumably have a reverse, negative ripple, bringing on a recession, an increase in social welfare spending and bigger federal deficits. Besides, as pointed out earlier, the Option (2) approach has no practical value, even if true, when there is no consenus on where to cut. The next theoretical approach. Option (3) is to balance the budget by raising tax rates. President Johnson was the last President to try this method explicitly. With the encouragement of Republicans, Mr. Johnson imposed a 10% surtax to help finance the Vietnam War and his Great Society. In 1968, Richard Nixon campaigned against the surtax, won the election, then decided he needed to keep the surtax an extra year in order to balance the budget. It didn't happen. Presidents Ford and Carter have had visions of balanced budgets through a quiet, unlegislated application of Option (3). In the budget he presented in January 1976, President Ford promised to balance the budget in future years by inflating all Americans into higher tax brackets. This has also been the plan of President Carter's budgeteers. Indeed, the Carter plan was to inflate us at a pace sufficient to produce a budget surplus that would be available to help finance national health insurance. We have had all the inflation Presidents Ford and Carter counted upon, and more, in order to implement Option (3) in conjunction with Option (1). That is, we have observed strenuous attempts to balance the budget through a combination of increasing federal spending and federal tax rates. Still, the budget is not balanced. The only theoretical option left is Option (4), lowering federal tax rates. The Option (4) school contends that Options (1) and (3) are perverse and Option (2) politically impractical although theoretically correct. This school argues that the last dozen years of inflation have steadily increased real rates of taxation by pushing all Americans into higher progressive tax brackets. This, they say, has decreased the efficiency of the economy by reducing incentives to invest, save and produce, thereby contracting the tax base and revenues and expanding political demands for social spending. Thus, huge budget deficits. The Option (4) school-formed around Professor Arthur Laffer and his Curve of diminishing returns-recommends that marginal tax rates be reduced as a means of balancing the budget, on the theory that a restoration of incentives will expand the tax base and revenues while reducing political pressures for social spending. The Kemp-Roth tax reduction bill, written by Representative Kemp of New York and Senator Roth of Delaware, spins off Option (4), but is rejected by the proponents of Options (1), (2) and (3), who call it "snake oil" and "fiscal gimmickry.' WASTEFULNESS This, then, is the substantive debate over budget balancing. Which leads one to wonder about the sheer wastefulness of the bandwagon to require a balanced budget through constitutional amendment. Wastefulness in the sense that enor mous energy and time and resources are being devoted to moving the bandwagon and to halting it, when it contributes not a thing to the central economic debate. What if, after years of toil and effort, the balance-the-budget bandwagon reaches its goal, and we have written into the Constitution precisely the re quirement that Mr. Jarvis and Governor Brown desire? What of it? We are still faced with the same question, the same four options, the same debate. How much more efficient and productive it would be if we simply dispensed with this symbolic effort and slugged it out around the four options. We can see in his eye, as he lashes his horses, that Governor Brown is intent upon moving the world. His aims are no doubt worthy. But Archimedes pointed out 3 long time ago that you need not only the long lever but also the right fulerum in order to change the world. There's a lot of sound and fury in the constitutional amendment idea, but when you peel that away there's no fulcrum at all. |