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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.) Does 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 then House Minority Leader 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 and readjust the budget as revenues misbehaved or unexpected shifts occurred in the costs of farm programs, Medicare, costs-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 vice, shoving some expenditures off into the private sector (e.g., by requiring private industry to support laid-off workers); or onto state-local governments by mandating outlays on Medicaid, pollution control, and so on, without picking up the tab, or onto consumers by relying more on higher farm price supports and acreage set-asides and less on federal deficiency payments.

So many exceptions, exclusions, and special emergency provisions would be necessary to make the amendment workable that it would no longer be meaningful. The drafters of the amendment would find that they were writing a prescription for Congressional action, not a Constitutional mandate. A meaningful amendment 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 the 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 wills of the majority. It is the job of the Constitution to protect basic human rights and define 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.

That consideration applies also to other budget limits that have been proposed. Take for example the proposal by the Committee on National Tax Limitation (and Milton Friedman) to limit federal spending to a prcentage of the immediate past Gross National Product, adjusted for inflation. Merely to put the definition of the limit into the Constitution—let alone the provisions for enforcement through the courts-has spawned draft Constitutional language that makes one despair for this Constitution that John Marshall told us was "intended to endure for ages to come."

The Friedman proposal is of the very stuff of which statutory law is made-a cutting of the budget cloth to suit the times-moving one way when an explosion of aspirations, school-age population, and public needs calls for an expansion of public services as in the 1960's and moving another way when the pendulum swings toward government austerity as in the late 1970's. (One need not even invoke the technical objections that GNP for any given period is subject to frequent and prolonged revisions and that tying spending to GNP would invite political intrusion into the definition and measurement process.)

Suppose we remove the Constitutional constraint and shift the mandate from annual balance to something approximating balance over the business cycle. That is the underlying philosophy of a proposal by Senator Proxmire, co-sponsored by several members of this Senate Budget Committee, to enact a law requiring the President to bring to Congress a balanced budget whenever the real rate of economic growth is 3 percent or more. A statute is better than a Constitutional amendment, and requiring a balanced budget only when the economy is growing at 3 percent or more is better than a balanced budget requirement through thick and thin. But it is hard to say more than that on behalf of the proposal.

Suppose that the economy is growing at 3 percent, but is running about 10 percent below its potential: would one really want a rigid balanced-budget requirement under those circumstances? In effect, it would say that fiscal policy should be restrictive whenever the economy is moving up at a rate of 3 percent or better, no matter how far below par its level of operation might be. Fiscal and monetary policy have to take account not only of the direction of the economy but its level.

And as to Senator Proxmire's call for a proposal that "will at least provide us with a balanced budget over the cycle," I would agree with the statement of the London Economist some 30 years ago. In the 1940's when the proposal to balance the budget over the business cycle, (presumed to average five years) was gaining

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a lot of attention, the Economist noted that "there is no greater sanctity in a quinquennium than in the time it takes the Earth to revolve around the Sun." That statement is no less true today than it was 30 years ago. To define the "business cycle,” identifys its various phases, and force federal spending into equality with tax revenues over that cycle would provide a bit more flexibility than an annually balanced budget rule but might well put unbearable and perverse pressures on the budgetary process and economic policy as the cycle neared its stated end.

Time and space do not permit assessment of the many other proposals that now dot the budgetary landscape. But I should like to comment quickly on two of them:

One proposal would imbed in the Constitution a provision that all "money bills”—that is, all those having to do with budget authorizations, appropriations, outlays, off-budget credits, and so on-would require a two-thirds vote by both Houses of Congress. Even leaving aside the problems of definition (and possible end runs via tax preferences), one wonders how this can be reconciled with the basic principle of majority rule that is so fundamental to American democracy. To give one-third of either House a veto power over all government programs and appropriations is to redefine the whole American concept of “the rule of the people.” Another approach to the budget problem has been suggested by those who would have the federal government set up a capital hudget permiting debt financing of capital expenditures. While originally attracted by this idea some thirty years ago, I have long since seen the error of my ways. I agree entirely with the President's Commission on Budget Concepts, which stated in its October 1967 Report (page 33) that there is "little merit' in proposals to exclude outlays for capital goods from the total of budget expenditures that is used to compute the budget surplus or deficit.” It strongly recommended against such a budget on grounds that it would lead to inappropriate fiscal policy, temptations to stretch the capital budget rules to include current expenditures, and a tilting of Congressional decisions toward debt-financed capital outlays and against tax-financed current outlays. Beyond this, there would be monumental problems of deciding what is a true capital expenditure.

Let me, in closing, come back to the public pressure and clamor to do something to cut back spending, taxes, waste, and inflation. In the face of this irresistible force, the federal budget cannot be an immovable object. Wrong-headed as the move for a rigidly balanced budget may be, it reflects a mood that demands a response.

Part of that response has already been forthcoming: both in the Congressional process and in the growing move toward budgetary pruning and restraint, one sees that response. One is even entitled to ask whether it may be pushed too far. But 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.

MEMORANDUM To: Senator Muskie. From: Jill Scheu & Lew Shuster. Date: March 1, 1979. Subject: A balanced Federal budget: Analysis of State applications and Senate

legislative proposals. Almost 50 State Petitions, bills and resolutions focused on a balanced federal budget are now under consideration in the Senate. To aid the Budget Committee's review of these matters, an analysis of those documents has been prepared. This memorandum categorizes and summarizes the constitutional convention applications from the states for a balanced federal budget and the legislative proposals for budgetary balance introduced in the Senate in the 96th Congress. Categorization is based primarily on the formula used to achieve a balanced hudget. For each category there is a brief description and analysis of the economic defects.

1. BALANCED FEDERAL BUDGET FORMULA

a. State applications

1. Four states (Florida, Georgia, North Carolina, and Oregon) have passed applications that incorporate the following wording: “to require a balanced

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ferleral budget and to make certain exceptions with respect thereto." 1 Three applications are convention calls only; the forth also requests Congress to propose an amendment.2

2. Idaho adopted the new NTU model petition which provides: "that the federal budget he balanced in the absence of a national emergency." The application also contains the following resolutions:

Congress shall propose an amendment or, alternatively, Congress shall call a convention for the specific and exclusive purpose of proposing such an amendment;

This application constitutes a continuing application until 2/3 of the legislatures have made application, but if Congress proposes an identical amendment, then this petition is no longer in effect;

This application is null and void if the convention is not so limited;

This legislature proposes that legislatures of other states similarly apply to Congress.

It is probable that Indiana and Utah, states recently adopting applications, also adopted this model.3 b. Legislation introduced in the Senate

None. . Defects

Limits the ability of the federal government to respond quickly and flexibly to changing economic conditions, particularly in periods of recession and high unemployment.

May be absolutely impossible to achieve in periods of steep economic downturn which, though severe, would be difficult to characterize as a "national emergency":

Does not define “national emergency” thus causing the likelihood of prolonged debate which would likely go on until a deep recession or depression had already occurred, thus rendering any timely federal budget response impossible.

Could lead to higher future taxes and higher future spending, since the simplest way to balance the budget in periods of economic growth is to refrain from cutting taxes.

2. APPROPRIATIONS/REVENUES FORMULA a. State applications

1. 10 states (Alabama, Kansas, Nebraska, Nevada, New Mexico, Oklahoma, Pennsylvania, South Dakota, Tennessee and Virginia) passed applications using the following formula : “In the absence of a national emergency ... the total of all federal appropriations made by the Congress for any fiscal year may not exceed the total of all estimated federal revenues for that fiscal year.'

2. Eight of these states (Alabama, Kansas, Nebraska, New Mexico, Oklahoma, Pennsylvania, South Dakota and Virginia) passed identical petitions based on the first model petition of the National Taxpayers Union which included the following resolutions:

That Congress shall submit an amendment containing this formula to the states for ratification;

That alternatively, Congress shall call a convention for the "specific and exclusive purpose” of proposing such an amendment;

That the legislatures of each of the several states shall pass similar applications.

Exceptions are not spelled out in the call. : Florida would call a convention for the "sole" purpose of proposing this amendment.

Georgia would call convention for the “specific and exclusive purpose of proposing this apiendment. In addition, the Georgia application states that it constitutes a continuing application until two-thirds of the States have submitted applications, or if Congress proposes an “identical" amendment before Jan. 1, 1977, the application will cease to be in etpet.

Oregon's application is similar to Georgia's, except that it gives Congress until Jan. 1, 197% to propose an identical amendment. It also calls on other state legislatures to pass similar petitions.

North Carolina's application imposes a time limitation so that in the event Congress proposes the amendment, the budget must be balanced within four years of the amendment's ratification,

st'opies of these applications are not yet available for actual review.

* Kansas passed a petition identical in all respects except that a time limit is imposed in the event Congress proposes the amendment, so that the budget must "balance within 5 sears of the amendment's ratification by the States.

South Dakota's petition is also identical except that it adds a clause proclaiming the petition null and voil if the constitutional convention is not limited to such exclusive purposes or if Congress proposes an amendment “identical in subject matter" to the one contained in the State's application.

The other two (Nevada and Tennessee) used the same basic formula, but only called for a convention.5

3. Four more states (Arizona, Maryland, South Carolina and Wyoming) have passed applications using the same formula, but adding a clause which excludes from total revenues all revenues derived from borrowing. b. Legislation introduced in the Senate

None. c. Defects

Goes well beyond the concept of a balanced budget; would require large budget surpluses because appropriations in recent years have run about 10 percent higher than outlays and are likely to continue to do so in an expanding economy. This would seriously slow economic growth.

Would be likely to undermine the “full funding" concept for multi-year projects under which the full cost of such projects is appropriated at the outset so that Congress and the public can see in advance the total cost.

Limits the ability of the federal government to respond quickly and flexibly to changing economic conditions, particularly in periods of recession and high unemployment.

May be absolutely impossible to achieve in periods of steep economic downturn which, though severe, would be difficult to characterize as a “national emergency.”

Does not define “national emergency” thus causing the likelihood of prolonged debate which would likely go on until a deep recession or depression had already occurred, thus rendering any timely federal budget response impossible.

Could lead to higher future taxes and higher future spending, since the simplest way to balance the budget in pericds of economic growth is to refrain from cutting taxes.

3. OUTLAYS/REVENUES FORMULA a. State applications

1. Delaware passed a convention call only, to propose an amendment requiring that the costs of operating the federal government shall not exceed its income during any fiscal year except in the event of a declared war. b. Legislation introduced in the Senate

1. Six resolutions (Talmadge, Helms, Lugar, McClure, Heflin, Byrd, H.) use simple balance-the-budget_language stating that total expenditures or outlays shall not exceed receipts. Two provide for suspension of the terms of the amendment on a vote by 23 of each House; one provides for suspension if both Houses agree to a concurrent resolution declaring an emergency. c. Defects

Limits the ability of the federal government to respond quickly and flexibly to changing economic conditions, particularly in periods of recession and high unemployment.

May be absolutely impossible to achieve in periods of steep economic downturn which, though severe, would be difficult to characterize as a national emergency.'

Does not define “national emergency” thus causing the likelihood of prolonged debate which would likely go on until a deep recession or depression has already occurred, thus rendering any timely federal budget response impossible.

Could lead to higher future taxes and higher future spending, since the simplest way to balance the budget in periods of economic growth is to refrain from cutting taxes.

5 Nevada's application is a convention call only and does not request Congress to propose an amendment. Rather, it states that the petition constitutes a continuing application until two-thirds of the other States have made similar applications. However, should con. gress propose a “similar" amendment before Jan. 1, 1981, the application will cease to be in effect.

Tennessee's petition is also a convention call only. The suspension clause is also modified so that it takes the President and two-thirds of the Congress to declare a national emergency, and the suspension applies only to one particular fiscal year. A further provision states that the application is a continuing one and will cease to be in effect only if Congress proposes such an amendment within 60 days after two-thirds of the States have made application for a convention.

In addition, Arizona's application included a clause stating the petition is to stay in effect until the will of the State to the contrary is communicated to the Congress.

Maryland, South Carolina and Wyoming include the requirement that the contention should be called for the specific and exclusive purpose of considering this amendment. In addition, all three applications contain a suspension clause which allows the President and two-thirds of all members of each House to set aside the requirement for that iscal year in cases of national emergency. All three applications also call on other State legislatures to pass similar applications.

4. BALANCED BUDGET/NATIONAL DEBT FORMULA a. State applications

1. Three states (Texas, Louisiana and Mississippi) have passed applications which deal with both a balanced budget and reducing the national debt: *** * * achievement of a balanced budget and amortization of the national debt."

While Texas simply calls for an amendment, not a convention, which would require the achievement of a balanced budget within a reasonable time after adoption and establish a procedure for amortizing the national debt, the provisions of the Louisiana and Mississippi petitions call for a convention and present the same issue in more specific terms.? b. Legislation introduced in the Senate

1. Three joint resolutions (Wallop, Thurmond and Armstrong) provide for both a balanced budget and repayment of the national debt. Two provide that 5% of the receipts shall be available only for repayment of the national debt over a twenty year period. The third requires repayment at the rate of '10 every 10 years for 100 years. All three contain clauses allowing suspension of the provision for national emergencies; one requires that any indebtedness incurred pursuant to such a suspension must be repaid within three years. c. Defects

The statement is internally inconsistent, since amortization of the national debt would require a budget surplus, not a budget balance.

Puts a further drag on economic growth.

Limits the ability of the federal government to respond quickly and flexibly to changing econcmic conditions, particularly in periods of recession and high unemployment.

May be absolutely impossible to achieve in periods of steep economic downturn which, though severe, would be difficult to characterize as a “national emergency.

Does not define “national emergency” thus causing the likelihood of prolonged debate which would likely go on until a deep recession or depression has already occurred, thus rendering any timely federal budget response impossible.

Could lead to higher future taxes and higher future spending, since the simplest way to balance the budget in periods of economic growth is to refrain from cutting taxes.

5. YEAR AND GXP LIMITATION FORMULA .a. State applications

None. b. Legislation introduced in the Senate

1. Two bills (Dole, Roth) have been introduced to amend the Budget Act by imposing limits on total outlays and revenues contained in concurrent budget resolutions to specific percentages of the GNP. The Dole bill also limits the number of budgets that may contain a deficit to not more than one every four years. In addition, any deficit must be made up within two years. Each bill provides for suspension of its provisions by a 35 vote in each House.

2. One joint resolution (Dcle) limits the number of years in which expenditures may exceed receipts to 3 out of 8 years. Each year's deficit must be made up by surpluses in the following years. Federal outlays shall not exceed 18 percent of the GXP beginning with the third year after ratification.

* Louisiana and Mississippi passed convention calls only, suggesting the following amendment :

Congress shall make no appropriation that would cause total appropriations to exceed retenues. (Section 1).

There shall be no increase in the national debt, and the existing debt shall be repaid over a 100-year period after ratification, with payments of no less than one-tenth every 10 years. (Section 2).

Where there is a national emergency declared by three-fourths of the Congress, Section 1 may be suspended, but not for longer than the two-year term of the Congress that suspended it.

If the national emergency continues, suspension of Section must be reenacted.

Nacional debt incurred pursuant to a suspension shall be repaid under the provisions of Section 2.

The amendment shall be effective for all fiscal years beginning 6 months after ratification.

The Louisiana application would strictly limit the scope of the convention. Also the application is continuing until two-thirds of the other States pass similar applications.

The Mississippi application does not limit the scope of the conventon. Also, it states that 11 ('ongress proposes an identical amendment before Jan. 1, 1976, the application expires; otherwise it is continuing until two-thirds of the other States apply.

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