would be met by saying that we should collect one dollar of taxes for every dollar, by which expenditures exceed $400 billion.

4. Deficits absorb private saving that would otherwise flow into investment, and deficits therefore reduce the rate of economic growth. This argument assumes, in the first place, that private saving is given, or at least that a deficit does not generate an equal amount of private saving. This assumption has been contested by some economists. Moreover, there is no law of nature or economics which tells us that the right amount of private investment is the amount of private saving. In an economy that is rapidly becoming richer for a variety of reasons, one could argue that it is as reasonable for the government to draw funds out of the private saving-investment stream through borrowing as to draw funds out of the private consumption stream through taxing.

Also, it should be noted that if the government makes expenditures which raise the growth rate this argument would not bar financing such expenditures by deficits.

WHY NOT BALANCE THE BUDGET?

While the arguments for balancing the budget leave many uncertainties, this is also true of the arguments against balance.

1. Full employment cannot be achieved without a deficit. This persistent notion is without empirical foundation, and once it is accepted that the money supply matters at all it is without theoretical foundation, since there is always some money supply that will generate full employment, even if the budget is in balance or in large surplus.

2. The ability to run a deficit of the proper size on the proper occasions increases the government's ability to stabilize the economy. This proposition is being more and more questioned for several reasons. There is doubt whether variations in the size of the deficit or surplus affect aggregate demand, and also whether the effects on aggregate demand influence the real variables, output and employment, or only the rate of inflation. At a more pragmatic level, there is great skepticism about the ability of the government to manage its deficits and surpluses in a way that contributes to stability rather than to instability.

3. Unavoidable fluctuations in economic activity affect revenues and expenditures in such a way that even if the government plans to balance the budget a deficit may result. Of course, if the government made its tax and expenditure decisions so that there would be a large surplus under the forecast economic conditions, there would be a cushion to avoid a deficit even if the economy fell moderately below the forecast path. However, there are probably more realistic solutions to this problem.

One would be to state the budget-balancing requirement in terms of the budget plan, rather than in terms of the budget outcome. Also, the problem is less acute if the requirement is not that the budget be balanced each year but that it be balanced over several years.

4. Balancing the budget will require that we spend less and/or tax more than we would otherwise have done. This is obvious, but it is an objection only if it is true that a) there are some expenditures worth borrowing for but not worth taxing for, or b) that some taxes are "worse" than deficits. Many people take one or both of these positions. Undoubtedly there is some truth in both of them. The real question is whether the political process can be trusted to live with this proposition and not make it an excuse for irresponsible behavior.

5. A requirement that the budget be balanced would be easily and widely evaded. Government receipts and expenditures as those terms are now defined in the budget are only two of the many ways in which the government can influence the allocation of resources in the economy. "Off-budget" transactions are the most obvious among the other ways available. Probably much more important are regulations which require private parties to make expenditures of kinds specified by the government, as for environmental purposes, or requiring employers to provide certain pension or health benefits to workers, and so on. One can argue that limiting the ability of the government to exert its influence overtly through the budget will force the government's influence into less visible and less efficient forms, which would be a loss.

On the other hand, limitation of the government's options would probably reduce the total scale of its activities, and the options outside the budget are probably less inflationary than financing through the conventional deficit.

One cannot draw strong conclusions from the weak arguments I have briefly covered. Probably the strongest conclusion one can find is to make no irrevocable

commitments. This is, in my opinion, an argument against enacting a consti tutional amendment in an area about which we still know so little.

Another conslusion is that one cannot hope to achieve all desirable goals for the federal budget by operating on whether the budget is balanced or not. Even if the budget were continuously in balance, we would have to attack the problems of the expenditure level and the taxation level, and there is much room for improving policy and procedures in that regard.

However, the general negativism of the preceding argument does not mean that we are unable to find some rules for deficits or surpluses which are superior to the mixture of political expedience and economic fine-tuning by which we have been living. The combustion of inflation, low capital investment and high government expenditures yielding doubtful benefits, from which we are suffering, indicates that the need for better rules of fiscal policy if urgent. And these same conditions suggest that appropriate rules would include elements of the budgetbalancing idea in somè form.

These rules would not be simple-as "balance the budget" only seems to be→ but neither would they be incomprehensible. I believe that they might include a variant of the idea of balancing the budget at high employment, advanced by the Committee for Economic Development in 1947, and modernized primarily to take account of the fact of inflation.

However, it is not my point here to advance a specific proposal in this regard. It is only to suggest that we need to get beyond the shouting-match between the fundamentalists who keep repeating "balance the budget" and the economistpoliticians who say, "Leave it to us and we will take care of the budget." If the current furor over budget-balancing should settle down to a constructive search for a synthesis of what is valid in both viewpoints, it will have been most valuable.

[From the Wall Street Journal, Mar. 16, 1979]

BALANCED BUDGET FALLACIES

(By Walter W. Heller)

In an era of dissatisfaction with big government, high taxes, and stubborn inflation, it is not too surprising that the Gallup Poll shows a six-to-one majority favoring a balanced-budget amendment to the Constitution. And it must be a strong temptation for elected officials-if they want to be reelected—to do a Jerry Brown and embrace such a proposal.

But this is one case where the majority is simply wrong-not in seeking some curbs on government, for that is their inherent right in a democracy-but in seeking to do so by putting the federal government in a fiscal straitjacket. This is a clear-cut case where responsible political leadership consists in leading voters out of the valley of error and seeking better and sounder ways to achieve their goals.

Since the major thrust for the balanced-budget amendment (and some of its half-siblings) comes from a misinformed public, it may be useful to examine some of the fiscal fallacies that seem to underlie public thinking on this subject.

FALLACY NUMBER ONE

"Individuals, families, and households have to run a balanced-budget-so why shouldn't Uncle Sam?" People forget that typically when they buy a car or a boat, or, most obviously, a house, they are doing anything but running a balanced budget. At times, they run deficits-often huge deficits-relative to current income. So they are asking Uncle Sam to adhere to a rigid and austere standard that they don't observe themselves.

FALLACY NUMBER TWO

Closely related to the first fallacy is a second one that runs something like this: "We consumers (homeowners, corporations) pay back our debts, but Uncle Sam just keeps piling up his debts without end."

The surprising-to some even jolting-truth is that in the period since World War II, the federal debt has been the slowest growing major form of debt. As the following table shows, the federal debt today is less than three times the size it was

in 1950, while consumer installment debt is nearly 14 times, mortgage debt 16 times, corporate debt 12 times, and state-local debt 13 times.

Even with the unprecedented run-up of federal debt in the face of two recessions in the 1970s, the doubling of that debt since 1970 is just about matched by the rise of state-local debt, while corporations, consumers, and homeowners have expanded their debt at a considerably faster rate than Uncle Sam.

Sources: "Economic Reports of the President," "Economic Indicators," Federal Reserve System Flow-of-Funds estmates.

None of this is meant to justify the present level of federal deficits or debts nor to suggest that the federal debt poses no problems. But the foregoing figures do serve to put the federal debt in perspective.

FALLACY NUMBER THREE

"State and local governments have to live by the balanced-budget rule, so why shouldn't Uncle Sam?"

True, states and localities have to balance their budgets annually, except for capital outlays, for which they can borrow. But federal budgetary accounting throws current and capital outlays (as it should) into the same pot. So balancing the federal budget means matching total outlays with current tax revenues, which is quite different from the balanced-budget concept for states and localities. Let me underscore another decisive difference between state and federal budget impacts: A state or local budget can be balanced by tax hikes or spending cuts without jarring the whole U.S. economy. The federal budget cannot. If the national economy starts to slide, joblessness rises, income and profits fall, and the federal budget automatically goes into deficit as revenues shrink and spending rises. Try to balance it by boosting taxes or forcing cuts in spending, and the result will inevitably be to draw that much more purchasing power out of an already soft and sluggish economy.

This would send the economy into a deeper tailspin, thereby throwing more people out of work, further cutting tax revenues and boosting unemployment.compensation, food stamps, and similar entitlement expenditures, thus throwing the budget even more out of whack. A dog chasing its own tail comes to mind.

FALLACY NUMBER FOUR

"Unlike private and state-local deficit financing, federal deficits are a maje, perhaps even the major, source of inflation." Both analysis and evidence faii to support this proposition.

Except where federal deficits pump more purchasing power into an already prosperous or overheated economy, they do not feed inflation. When the economy is slack or in a recession, when there are idle workers and idle plants and machinery to be activated by additional demand for goods and services, tax cuts or spending hikes that enlarge the deficit help the economy get back on its feet.

In other words, there are both destructive federal deficits and constructive deficits, depending on the state of the private economy. What we should seek is fiscal discipline-avoidance of waste, inefficiency, boondoggling and unnecessar government programs-but not at the cost of strangling the federal government in its attempts to serve as a balance wheel for the national economy and an instrument for avoiding the greatest of economic wastes, namely, idle workers, machines and factories.

Even a cursory inspection of the data on deficits and inflation shows little relation between the two, for example:

-Milton Friedman reminds us that 1919-20 produced "one of the most rapid inflations" in U.S. history when the budget was running a large surplus, while 1931-33 saw "one of the most extreme deflations we had in history" when "the federal government was running a deficit."

-From 1959 to 1965, federal deficits were the order of the day, yet price inflation was little more than 1% a year.

-In the face of huge deficits in 1974-76, inflation dropped from over 12% to less than 6%.

FALLACY NUMBER FIVE

"Well, even if deficits aren't as bad as we thought, the federal budget is out of control, and the only way to get it under control is to slap some kind of a constitutional lid on it."

Once again, the facts run to the contrary. As a proportion of the gross national product, the budget is being reduced from 22.6% in 1976 to 21.2% in 1980. As against 12,2% annual increases in spending for 1973-78, the rise from 1979 to 1980 will be only 7.7%. And according to the Congressional Budget Office staff, President Carter's proposed $530 billion budget for 1980 falls $20 billion short of the amount that it would cost simply to maintain current services under current law.

Quite apart from the numbers, the popular clamor for "getting the budget under control" seems to ignore two important facts:

-For the past four years, the Congress has been operating under a new budget procedure that has brought vastly more discipline and responsibility into the budget process. In other words, the mechanism for getting the budget under control is already in place and is working.

-Both the White House and the Congress have heard and heeded the message implicit in Proposition 13, calls for constitutional budget limits, and the like. Whether one likes it or not, budget austerity is the political order of the day.

FALLACY NUMBER SIX

"The balanced-budget mandate is a simple, sure-fire way to force the White House and Congress at long last to match spending and tax revenues."

The simple truth is that this simplistic approach is beset with simply prohibitive difficulties of definition, administration and evasion.

A mandate to balance taxes and expenditures first has to define them. Does spending include outlays of Social Security and highway trust funds? (It didn't until 1968.) Noes it include lending activities? If not, moving things from expenditures into loan programs would be an inviting loophole. Imagine the Founding Fathers two centuries ago trying to draw a dividing line between "on-budget" and "off-budget" expenditures. No less an authority than House Minority Leader John Rhodes has noted that "it would be so easy to end-run it."

Administering the mandate would be a nightmare. In January each year, the President submits a budget for a fiscal year that ends eighteen months later. Given the unexpected twists and turns of the economy, revenues may well fall below the forecast path. Imagine the scramble to adjust the budget as revenues nisbehaved or unexpected shifts occurred in the costs of farm programs, Medicare, cost of living adjustments in Social Security benefits, and so on.

It does not take too much imagination to foresee Congress, caught in the balanced-budget vise, shoving some expenditures off into the private sector (e.g., by requiring private industry to support laid-off workers) or onto consumers by elying more on higher farm price supports and acreage set-asides and less on ederal deficiency payments.

So many exceptions, exclusions, and special emergency provisions would be necessary to make the amendment workable that it would no longer be meaningul. The drafters of the amendment would find that they were writing a prescripion for congressional action, not a constitutional mandate. A meaningful amendnent would not be workable, and a workable amendment would not be meaningful. Even if some magic formula could be found to hold the government's nose to he balanced budget grindstone, it would be an affront to responsible democratic government to do so. The essence of that government is to adapt economic, social, and other policies to the changing needs of the times and the changing will of the najority. It is the job of the Constitution to protect basic human rights and deine the framework of our self-governance. Taking the very stuff of democratic

self-determination out of the hands of legislative bodies and freezing them into the Constitution would not only hobble our ability to govern ourselves but dilute and cheapen the fundamental law of the land.

Ginev that the constitutional approach is unwise, unworkable and unworthy of democratic self-government, one hopes that the White House and Congress will work out a statutory solution that will be responsive to the public will without imposing destructive shackles on their ability to govern.

[From the Journal of Commerce, Mar. 20, 1979]

NO WAY TO BALANCE THE BUDGET
(An editorial)

Unexpected increases in tax receipts mean the federal deficit for the current fiscal year which ends Sept. 30 will be $33.2 billion, $4.2 billion less than projected as recently as two months ago when the president presented the budget to Congress. Good news? Hardly, for the $5.8 billion rise in revenues to $467.6 billionthere was an offsetting $1.8 billion rise in spending to $495 billion-results entirely from a bigger than expected rise in inflation.

This says quite a bit about the current efforts of some unenlightened folk to bring about a balanced budget by way of a constitutional amendment. If a 2 percentage point rise in the inflation rate will cut the budget deficit a little more than one tenth, then up the inflation rate 20 points and get rid of the deficit entirely. Absurd? No more so than the notion that a balanced budget, no matter how it is obtained, should become the be all and end all of national economic policy.

Look for a moment at the $1.6 billion rise in spending. Some $500 million is accounted for by destroyers and aircraft for Iran that it no longer will be getting. We're paying for them now. Another $600 million will be added to $500 million already in the budget's contingency fund. Almost all of this will be going to Egypt and Israel as a consequence of their peace settlement. And $500 million will go to the Small Business Administration for loans to farmers and businessmen because of the severe winter.

But no problems, it's all quite painless. We could have financed three times as many Iranian destroyers and aircraft, two more Egyptian-Israeli settlements, and two more harsh winters without feeling a thing. Or could we'? The $5.6 billion in added financial receipts is only part of the tax levied on the population by the higher rate of inflation, the direct federal take from this unlegislated-and hence, many feel, illegal-impost.

Multiply 2 percentage points by the total of all goods and services produced in the economy, the gross national product, and the result is closer to $50 billion. That is a sum that more than offsets the $19.5 billion returned to taxpayers by way of this year's reduction in personal and corporate income taxes. At some point, assuming consumers cannot continue to add to their borrowings or send more wives back to work, a tax increase of this size has to become a drag on economic activity. In other words, whether legislated or unlegislated, a sharp rise in taxes will quickly balance the budget. But it will just as quickly plunge the nation into deep recession or worse.

What is needed is not a legislative mandate requiring a balanced budget but onedenying government any benefit from the unlawful tax of inflation. It is unfortunate but true that government, which through its power to control the creation of money is solely responsible for inflation, is also one of the chief beneficiaries. Until this ends, we may have balanced budgets, but we shall continue to suffer all of our present ills and more.

[From the Boston Sunday Globe, Mar. 25, 1979]

THE BALANCE-THE BUDGET MYTH

THERE'S LITTLE UNANIMITY AMONG THE PRO-AMENDMENT FORCES

(By Thomas Oliphant)

WASHINGTON "Let me say again," the senator said the other day, "that I believe that calling a constitutional convention would require us to embark on unknown unchartered and highly perilous legal waters.