[From Newsweek, Mar. 5, 1979]

A QUESTION OF TRUST

(By Paul J. Mishkin)

Governments can be founded on fear or on trust. Free societies rest ultimately on trust. We in this country have enjoyed a deep supply of that essential quality, but we are now in a period when confidence in government has eroded. Vietnam and Watergate have taken a heavy toll.

In these circumstances, some political forces cater to the enlarged and growing distrust, and in the process add to it. The drive for a Constitutional convention to propose a balanced-budget amendment recently adopted and invigorated by Gov. Jerry Brown, reflects this mood of distrust. It capitalizes on it and will also greatly exacerbate it.

Opponents of the drive have focused on the danger that a convention called to address budgets could produce untoward amendments on other subjects. One example often given is that such a convention might end up proposing repeal of the Bill of Rights. More realistic, perhaps, are possible amendments to outlaw abortions, or end busing for school desegregation, or to put a rigid ceiling on defense expenditures.

These risks, though often exaggerated, are real. The Constitution provides that on application by two-thirds of the state legislatures, Congress "shall call a Convention for proposing Amendments." The other procedure provided is Congress proposing amendments itself; all existing amendments have come that way. The convention method has never been used.

PRESCRIBING LIMITS

For this and other reasons, no one can be certain that Congress has the right to limit a convention to a specific subject. Further, if Congress did prescribe limits, no one can be sure that the convention would stay within them. After all, the convention which framed the original Constitution was itself a "runaway" that exceeded the strictures of its call. Finally, when the authorized agenda involves the budget, it is hard to conceive of any subject that could not plausibly be tied in. (How about "No budget appropriation shall be made to any state which allows abortions"?)

There is, then, a real risk that a convention assembled for one purpose might propose amendments on other subjects. The proposals do not, of course, become part of the Constitution unless they are ratified by three-quarters of the states, and, as we have seen with the Equal Rights Amendment, ratification is not an easy matter. At the same time, the ratification requirement does not provide absolute protection against unwise amendments; after all, the states did ratify Prohibition.

Any amendment is a serious matter. As Prohibition also demonstrates, unsound ones can cause much damage, to people and to general respect for law, before the momentum can be mounted for repeal.

If untoward amendments were the only risk in pursuing the convention route, that might well be sufficient reason to reject that route. Actually, there are other dangers, more subtle but also more likely to be seriously damaging. The convention route will inevitably precipitate issues that will strain the network of trust on which a free democratic society depends.

AN ABORTION AMENDMENT?

An example will help make the point. Assume that Congress has (in response to state applications) called a convention for a balanced-budget amendment only, but that the convention has produced also an amendment on another subject, say, on abortion. At this point, the Constitution calls for Congress to choose one of two modes of ratification: by state legislatures or state conventions. Suppose that a majority of Congress now refuses to specify a ratification method for the abortion amendment, on the ground that it goes beyond the limits of Congress's original call.

The abortion amendment would be dead. Aren't its supporters likely to see Congress's action as a subterfuge, a tactic for continued opposition on the substance of the issue and, even more, as a betrayal of trust by their opponents, Congress, and "the system"? And isn't there likely to be enough substance in their

view to persuade large numbers of their followers, at least? Whatever our view, or history's, of the rightness of the Congressional action, it would certainly incite in many people a festering suspicion of the good faith of all those whose views might differ from their own.

If Congress did submit the abortion amendment for ratification, the result would be much the same, though in mirror image. Opponents of the abortion amendment would feel betrayed both by the convention for exceeding its limits and by Congress for failing to enforce those limits. It hardly needs to be added that, in either event, the corrosion of trust would tend to be progressive, eating away at the foundations of democratic society.

This example is not an isolated one. The first of the many opportunities for cynicism has already begun to emerge. Initial reports were that 26 states had already applied for a convention on budget balancing. More recently, news stories reported that the relevant Senate subcommittee staff stated that there are only fourteen valid applications; it seemed that a number of state applications were being counted out on technicalities. If Congress invalidates some applications, are those who lobbied hard to get legislatures to act likely to credit a judgment on "technicalities"? Won't they see it rather as a trick, a betrayal that shows the infidelity of those in power who oppose them?

The uncertainties in the convention-amendment process leave no way to avoid repeatedly aggravating an existing climate of distrust, cumulatively producing dangerous loss of confidence in the democratic system and in each other.

THE RIGHT ROUTE

Our capital of trust is not unlimited. It has already been diminished and the momentum of erosion today is already high. The dangers of further exacerbating distrust are great, and when they are added to the risks of ending up with an unanticipated and unsound amendment to the Constitution, they make a strong case against the convention route for a budget amendment at this time. If the proponents of constitutional fiscal controls had already made sustained major efforts to get Congress to propose an amendment, resource to the convention-call route might be justified. But the present resort to that method seems to be far more a matter capitalizing quickly on the wave of Proposition 13 sentiment than a response to the frustration of long and hard effort. They attempt to ride the wave creates substantial risks to the long-run welfare and stability of our nation.

[From the Washington Star, Mar. 5, 1979]

MAKING BUDGET CHOICES

(By Charles Bartlett)

Those who believe Congress is paying little heed to the public eagerness fot budget-balancing can take heart from the rebuff dealt last Thursday to the nurses'

lobby.

Splendid in their starched hats and white uniforms, the nurses came to the House Appropriations Committee fully assured that the members would back them once again against the administration's contention that federal money is being wastedl in training nurses for whom there is no need.

Insisting there is a critical nurse shortage, the lobby won from Congress last year a substantial boost in training subsidies. But the president is now backed by sentiment more persuasive than special pleadings. The lades in white dresses felt the sting of an unprecedented cut as Chairman Jamie Whitten's committee vote! them down.

Rep. Ronald Dellums, D-Calif., and the Black Caucus are challenging the "faulty assumptions" of the president's budget. Labor organizations are protesting the fiscal punishment of the poor. Some liberal members say privately that only a recession will save them from the ordeal of denying their friends. They hope that is a recession comes, the lid will be off.

The pressure groups whirl in rising frustration, but most members seem grimly aware that, for this year at least, they have no options on the spending issues.

Getting cut in front of the public mood is one of their few alternatives in struggling against the necessity of having to deal with the dilemma posed by those who would amend the Constitution to require balanced budgets.

This is a happy cause for roaring conservatives or political surfers riding the waves of public sentiment. But those whose genuine concern is to make the system work better find little merit in it.

Congress can punish the states for bringing the issue to a head. The governors declined to join the majority of their legislatures in endorsing the amendment. They see the danger that Congress will cut all funds for state revenue sharing, some $2.5 billion. This may seem a reasonable slap at the heedlessness of state legislators. More to the point, Congress can, as Jimmy Carter already has, raise the specter of a wild constitutional convention, a threat to the stable underpinnings of the system. There will be no move, in the House or Senate, to act on legislation that would set procedures for this unprecedented convention.

This action would, in the opinion of the leaders, only encourage those who are promoting the amendment.

Some believe the reform, which has been slipping through state legislatures without the illumination of informed debate, will be slowed by public education. Support for it has dropped sharply since the first of the year, expert opinion is consolidating against it, and the use of it by Jerry Brown as a magic carpet to the White House will enlarge the controversy.

Ultimate avoidance of the reform, however, will depend on the resourcefulness of Congress in finding ways to propitiate the taxpayers without accepting their pressures to change the Constitution.

This is a risky game as Gov. Pierre du Pont of Delaware warns, actions that appear to thwart the will of the people and the states can precipitate a constitutional crisis.

But a promising compromise has been advanced by Barber Conable, the Republican wise man on tax issues. He urges that the president henceforth be obliged to submit twin budgets each year-a regular budget reflecting his decisions and an alternate detailing the cuts necessary to attain a balanced budget.

The beauty of this plan is that it would lay specific choices before the people. In forcing these choices, the alternate budget would puncture the delusions of those who behave as if it were possible to be for all the good things, from balanced budgets to trained nurses.

[From the Washington Post, Mar. 6, 1979]

DON'T BALANCE BUDGET, HILL WARNED

Three well-known economists warned the Senate Budget Committee yesterday that Congress should not try to balance the fiscal 1980 budget.

"This budget before you already shows a sharp move toward budgetary restraint," said Walter Heller of the University of Minnesota, a former chairman of the Council If Economic Advisers. "Pushing all the way to balance would worsen the (coming) recession."

Another former CEA chairman, Alan Greenspan of Townsend-Greenspan & Co., declared, "I don't think you could balance the budget in 1980 unless there was a huge increase in taxes." But he added, "You could do great things for 1982, possibly for 1981."

And Michael Evans, who has his own economic consulting firm, said flatly, "I'm not in favor of balancing the budget in 1980. That would mean a much

more severe recession than our model runs now predict."

The trio testified at a hearing on various proposals to require a balanced budget, such as the constitutional amendment that has been backed by 26 or so state legislatures. All three opposed the amendment.

However, Greenspan and Evans argued that there should be a better balance between federal revenues and spending.

"Wrong-headed as the move for a rigidly balanced budget may be, it reflects a mood that demands a response," Heller said. ". .. given that the constitutional approach is unwise, unworkable and unworthy of democratic self-government, one hopes that Congress will work out a statutory solution that will be responsive to the public will without imposing destructive shackles on itself."

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[From the New York Times, Mar. 11, 1979]

A BUDGET AMENDMENT COULD BE THE WRONG EASY ANSWER

(By Leonard Silk)

The nation's No. 1 problem, the double-digit inflation that last week's 1 percent wholesale price rise dramatized, is fast becoming a national neurosis, breeding & revolt against higher taxes, rising government spending and big budget deficits. The most recent, and most popular, solution the middle-class rebels have proposed is a constitutional convention to mandate a balanced Federal budget. Twentyeight states have already voted for it, and such Presidential hopefuls as the Democratic Governor of California, Jerry Brown, and Republicans Senator Robert Dole, Senator Howard H. Baker Jr. and Representative Philip M. Crane have endorsed it.

President Carter, tooling up for his 1980 campaign, has shown himself anything but immune to the lastest strain of the Proposition 13 virus. Indeed, the politically sensitive Mr. Carter anticipated it, in 1976 pledging a balanced budget by 1981 and continuously talking of his determination to shrink Government spending from 22 percent of gross national product to 21 percent or less. The real balancethe-budget zealots, however, regard his plans as mere shilly-shallying, as they do his proposal to cut the Federal deficit to $29 billion in fiscal 1980. Their contention is that politicians will not cut spending or balance the budget until not doing so is made unconstitutional.

Almost all economists, however, consider the amendment idea simplistic and unworkable. Prof. Hyman Minsky of Washington University in St. Louis calls it "the contemporary equivalent of the Scopes trial." Like William Jennings Bryan's effort to convict a Tennessee schoolmaster for teaching evolutionary theory instead of the fundamentalist version of man's creation, it strikes neo-Keynesian economists as an attempt to wipe out modern fiscal theory and policy.

They contend that the Government needs flexibility to deal with both unemployment and inflation. If the economy is depressed and joblessness is high, tax revenues fall, and the Federal budget falls into deficit. Balancing the budget by raising taxes or cutting spending, they maintain, would only aggravate the slump, and if a boom caused the Government's receipts to soar above expenditures, trying to balance the budget by cutting taxes or increasing expenditures would only intensify inflation. The prime trouble economists see with mandating a balanced budget is that is assumes that the economy is more stable than it really is and ignores the fact that the surplus or deficit in the budget is a consequence, as well as a cause, of the economy's instability.

Quite apart from restricting the Government's ability to stabilize the economy, a constitutional amendment would force shifts in Federal taxes and expenditures far greater than those most supporters of the amendment realize. The 1974-75 recession caused the fiscal year 1974 deficit to climb to $45.2 billion in fiscal 1975. To have balanced the budget in fiscal 1975, Charles L. Schultze, chairman of the Council of Economic Advisors, says, would have required raising taxes or cutting spending by $90 billion, almost surely causing the recovery to drag or abort.

Many economists also consider a budget-balancing amendment unenforceablemore so, says Robert Solomon, former adviser to the Board of Governors of the Federal Reserve System, than was the 18th Amendment. It was possible that most Americans would agree to foreswear Demon Rum-they did not-but it is not within the power of Presidents or legislators to sear off recessions or booms.

What would happen if the President was caught with an unbalanced budget in the Oval Office? Would Eliot Ness move in for a shot-out on the White House lawn? Congress would be even more of a problem, and not just because the mass roundup would beat anything seen in the sin parlors of Chicago. The legislators, in response to the pressures of interest groups and lobbyists, would find various ways of giving in, from "off-budget" expenditures to tax breaks, loans, tariffs and monopolistic protection. Already expenditures that do not show in the budget, such as mortgages issued by the Farmers Home Administration and loans to the United States Postal Service, swell the true total of Federal expenditures by well over ten billion dollars. The concealed costs of regulation come to tens of billions more. In the old days, at least the Federal deficit could be seen.

Yet such is public displeasure with huge Federal deficits and rising taxes that the campaign for a constitutional amendment to wipe them out might have some significant legislative and policy results. Variations to the budget-balancing amendment have been proposed by sophisticated economists and legislators.

The best-known was drafted by a committee headed by Milton Friedman, the conservative Chicago Nobel laureate; Paul McCracken, former chairman of President Nixon's Council of Economic Advisers, and Charls E. Walker, a Deputy Secretary of the Treasury for Mr. Nixon and now a leading tax lobbyist. It would amend the Constitution to limit any increase in spending to that of the rise in the nominal gross national product (total national spending on goods and services unadjusted for inflation) in the preceding year-with some escape hatches for national emergency. The purpose is not to balance the budget as an end in itself, but to shrink the proportion of Government spending and thus the role of Government in the economy.

Senator John Stennis, the conservative Mississippi Democrat, would impose a surtax to make up for any accidental deficit. A liberal version, proposed by Senator William Proxmire of Wisconsin, would require Congress to balance the budgeti n any year in which real economic growth exceeded 3 percent.

Although most economists are against budgetary gimmickry as a sop to a public mood, which would accomplish little or nothing and might even be counterproductive, rising inflation has eroded the reputation of conventional economic theory. Both politicians and the public are looking for a new rule as simple and plain as the Keynesian run-deficits-to-check-unemployment, run-surpluses-to-check-inflation, and that old household remedy, balance-the-budget, looks appealing. And if the public refuses to believe that the analogy between family finances and Federal finances is false, by hook or by crook, the politicians are likely to respond.

[From the Wall Street Journal, Mar. 12, 1979]

TO BALANCE OR NOT TO BALANCE

(By Herbert Stein)

The unpoetic but Hamlet-like title of this essay reflects my true uncertainty. Whether to bear the ills of the deficits we have or fly to the balanced budgets whose consequences we know not-or have forgotten?

The problem is not that there are strong arguments on each side of this question. The problem rather is that the arguments on both sides are so weak.

I will offer, dogmatically, a summary of reasons for not being dogmatic about either side of the argument.

WHY BALANCE THE BUDGET?

1. The people want the budget balanced. Polls show that a large majority of the American people "favor" a balanced budget. But this has been continuously true for the past forty-five years. During this period the budget has been balanced only eight times. The people have not elected government officials who would balance the budget, or turned out of office those who ran deficits. If the people "favor" balancing the budget, they apparently don't care very much.

2. Deficits cause inflation. But deficits don't cause inflation all the time. We have had deficits almost all the time since 1929, and haven't had inflation all that time. Whether deficits are inflationary or not depends on their size, their timing, their rate of change and how they are financed. The currently fashionable view of the connection between deficit and inflation is that deficits cause monetary expansion which is inflationary. However, it is not clear that deficits have been a major cause of excessive monetary expansion in the past, or that deficits need to have this effect in the future. And if this is the problem, the appropriate remedy may lie in the monetary system rather than in the budgetary system.

3. Deficits cause, or permit excessive government spending. The argument is that government will tend to spend too much if it does not have to count the costs of its expenditures fully, and that it would have to count the costs if it had to raise all of its funds by taxation. There are several problems with this. One is that the "discipline" argument assumes that there is a correspondence between a Congressman's perception of his constituents' aversion to higher taxes and the real costs that government spending imposes on the society. This correspondence is loose, at most.

But even at its best this is not an argument for equality of total spending and total taxes. It is an argument for balancing taxes and expenditures at the marginwhere decisions are made. For example, we may take it as given that federal expenditures will never again be under $400 billion. Then the discipline requirement